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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-23635
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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
incorporation or organization) No.)
170 JENNIFER ROAD, SUITE 325, ANNAPOLIS, 21401
MARYLAND (zip code)
(Address of principal executive offices)
(410) 266-8700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01 PER SHARE
(Title of Class)
------------------------
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 / / *Registrant became
subject to such requirements on February 5, 1998.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 12, 1999 was $98,872,430, based on the last sale price
($9.88) of the Registrant's Common Stock, $.01 par value per share, on the
Nasdaq National Market on March 12, 1999.
As of March 12, 1999, 12,101,488 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain information called for by Part III of the Form 10-K will either be
filed with the Commission under Regulation 14A under the Securities Exchange Act
of 1934 or by amendment to this Form 10-K, in either case on or before April 30,
1999.
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CONDOR TECHNOLOGY SOLUTIONS, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business....................................................................................... 2
Item 2. Properties..................................................................................... 10
Item 3. Legal Proceedings.............................................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............................................ 11
Item 4A. Executive Officers of the Registrant........................................................... 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 14
Item 6. Selected Financial Data........................................................................ 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 20
Item 8. Financial Statements and Supplementary Data.................................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 42
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 43
Item 11. Executive Compensation......................................................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 43
Item 13. Certain Relationships and Related Transactions................................................. 43
PART IV
Item 14... Exhibits, Financial Statements Schedules, and Reports on Form 8-K.............................. 44
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Condor Technology Solutions, Inc. (the "Company") provides a wide range of
information technology ("IT") services and solutions to middle market
organizations, Fortune 1000 companies and public sector organizations. The
Company provides its customers a single source for a broad range of services,
including strategic IT planning and management consulting; decision support
consulting; interactive media services; custom development, integration and
installation of IT systems; enterprise resource planning ("ERP") package
implementation and consulting; contract staffing and recruiting; training and
continuing education; call center and help-desk services; desktop systems and
mainframe maintenance and support; and hardware procurement. The Company works
with its clients to identify areas of their businesses where the effective
deployment of technology can have the maximum impact on executing business
strategies and optimizing business processes.
The Company focuses on marketing its wide range of IT services to middle
market organizations, Fortune 1000 companies and public sector organizations,
which the Company believes typically spend from $2 million to $30 million
annually on their IT needs. In order to become a single-source provider of IT
services and solutions to middle market organizations, Condor acquired, in
separate mergers (the "Mergers"), eight IT service providers (the "Founding
Companies") in February 1998 concurrent with the closing of the Company's
initial public offering (the "Offering") of shares of its Common Stock, $.01 par
value per share (the "Common Stock"). The Founding Companies are:
- Management Support Technology Corp. ("MST");
- Computer Hardware Maintenance Company, Inc. ("CHMC");
- Federal Computer Corporation ("Federal");
- Corporate Access, Inc. ("Corporate Access");
- Interactive Software Systems Incorporated ("ISSI");
- U.S. Communications, Inc. ("USComm");
- InVenture Group, Inc. ("InVenture"); and
- MIS Technologies, Inc. ("MIS").
Since the initial public offering by the Company in February 1998, the
Company has made five additional acquisitions collectively referred to as "Other
Acquisitions". They are:
- Decision Support Technology, Inc. ("DST");
- Louden Associates, Inc. ("Louden");
- LINC Systems Corporation ("LINC");
- PowerCrew, Inc. ("PowerCrew"); and
- the assets and going business of Global Core Strategies, Inc. ("Global").
The Founding Companies and the Other Acquisitions are referred to
collectively herein as "operating companies". Unless otherwise indicated, all
references to the "Company" herein include Condor Technology Solutions, Inc.
("Condor") and all of the operating companies, and references herein to "Condor"
mean Condor Technology Solutions, Inc. prior to the closing of the Mergers.
The Company delivers comprehensive IT services to the insurance and
financial services, healthcare, technology and public sector markets. These
markets are typically characterized by (i) reliance on legacy systems; (ii)
platform migration to client/server architectures; (iii) changing competitive
dynamics, such as globalization and deregulation; and (iv) heavy dependency on
database and proprietary applications. The Company believes that middle market
organizations in these industry groups have been underserved by large IT vendors
which, due to high cost structures, cannot address the requirements of the
middle market adequately.
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The Company is organized into three operating divisions: Consulting
Services, System Services and Desktop Services. See "Item 8. Consolidated
Financial Statements, Note 15. Segment Reporting". The Company markets its
services through the sales forces at each of its operating divisions with
oversight from the Company's corporate sales force. This approach allows the
Company to market its services independently or in combination to provide a
solution to a client's specific IT needs. The Company provides IT services
through 32 offices located in 12 states across the United States and in three
foreign countries. As of December 31, 1998, the Company had 1,075 employees. The
Company cultivates long-term relationships with its clients and believes these
long-term relationships present excellent opportunities for further marketing of
its services.
MARKET OPPORTUNITY
Heightened competition, deregulation, globalization and rapid technological
advances are forcing organizations to make fundamental changes in their business
processes. These pressures have compelled organizations to improve the quality
of their products and services, reduce costs and strengthen client
relationships. Increasingly, organizations are addressing these issues by
developing and utilizing IT services and solutions that facilitate the rapid and
flexible collection, analysis and dissemination of information within the
organization and among clients and suppliers. The ability of an organization to
maintain and refresh its existing systems and to integrate and deploy new
information technologies in a cost-effective manner has become critical to
competing successfully in today's rapidly changing business environment.
Although many companies have recognized the importance of IT systems and
products to compete in this business climate, the process of designing,
developing, procuring and implementing IT systems has become increasingly
complex. Companies are continuing to migrate away from centralized mainframes
running proprietary software toward decentralized, scalable architectures based
on personal computers, client/server architectures, local and wide area
networks, shared databases and packaged application software. These advances
have greatly enhanced the ability of companies to benefit from the application
of IT. Consequently, the number of companies desiring to use IT in new ways and
the number of end users within these organizations is rising rapidly, yet the
complexity of purchasing and implementing these systems is increasing.
During this time of increasing reliance on IT, rapid technological change
and other challenges, such as the need for Year 2000 conversions, have strained
the capabilities of the internal departments within these organizations. At the
same time, external economic factors have forced organizations to focus on core
competencies and trim workforces in the IT management area. Accordingly, these
organizations often lack the quantity or variety of IT skills necessary to
design and develop emerging IT solutions. Consequently, businesses are
increasingly looking to outsource IT services. By outsourcing IT services,
companies are able to (i) focus on their core business; (ii) access specialized
technical skills; (iii) implement IT solutions more rapidly; (iv) benefit from
flexible staffing; and (v) reduce the cost of recruiting, training and retaining
IT professionals.
The IT service industry has evolved into a highly fragmented environment
with a small number of large, national service providers and a large number of
small-and medium-size service providers, usually only regional in scope. Large
IT service providers typically address the IT needs of large organizations with
substantial IT requirements for a wide range of services, whereas smaller IT
service firms provide specialized services of limited scope. Consequently,
middle market organizations typically rely on multiple, often specialized,
providers to help implement and manage their systems. These smaller IT service
providers often lack sufficient breadth and depth of services or industry
knowledge to satisfy these organizations' need for comprehensive solutions. The
Company believes the current reliance by middle market organizations on multiple
service providers creates multiple vendor relationships that are more difficult
and less cost-effective to manage, prevents the existence of a distinct
responsible party and has an adverse impact on the quality and compatibility of
IT solutions. In an attempt to reduce cost and
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management complexity, many organizations are seeking to establish preferred
vendor relationships with a small number of IT service providers that are able
to address a broad range of IT service needs.
THE CONDOR VISION
The Company aims to be a leading single-source provider of a wide range of
IT services and solutions to middle market organizations in select vertical
markets. In response to market demand, the Company has assembled a diverse set
of IT services, from planning and consulting to development, integration and
installation of IT systems to desktop services. This broad range of services
will enable clients to use the Company as a single provider for their IT needs,
which should result in tighter integration, minimized risk and greater project
management control. In addition, the Company intends to capitalize on the highly
fragmented nature of the IT service industry by pursuing acquisition
opportunities that complement and enhance its existing IT services. The Company
believes that its expertise in providing IT services, industry experience,
client relationships, geographic reach and size will enable it to capitalize on
the anticipated continued growth of the IT needs of middle market organizations.
STRATEGY
The Company's objective is to be a leading provider of IT services to middle
market organizations with a focus on select vertical markets. Key elements of
the Company's strategy are presented below.
LEVERAGE CONSULTING SERVICES. The Company intends to continue to leverage
its high-level planning and strategic consulting services to foster long-term
relationships with clients and to implement technology strategies developed by
the Company. The Company believes that its ability to partner with clients to
define their IT service needs and to deliver the full range of these IT services
provides an attractive single-source solution for its clients.
EXPAND CLIENT RELATIONSHIPS. The Company believes it can continue to
increase its revenues from existing clients through integrated marketing. Each
of the operating divisions specializes in specific areas of the IT service
market. The Company believes that the access to and goodwill derived from its
long-term relationships with its clients will continue to provide it with
significant advantages in marketing additional services to existing clients.
SECURE FULL-SERVICE CONTRACTS. The Company believes the broader range of IT
services and geographic coverage available from the combination of its operating
divisions allows it to be a single-source provider of IT services. By being a
single-source provider, the Company has a competitive advantage in meeting the
IT requirements of middle market organizations and provides the Company the
opportunity to secure full-service contracts from a larger group of potential
clients.
RECRUIT, TRAIN AND RETAIN TECHNICAL PERSONNEL. The Company focuses on
recruiting, training and retaining highly skilled IT professionals in response
to the shortage of and significant competition for such professionals. Condor
Staffing, a unit of the System Services Division, is dedicated solely to
identifying, attracting and staffing IT professionals, and the Company focuses
in both its System Services and Desktop Services divisions on training such
professionals. While these activities will continue to be conducted primarily on
behalf of the Company's clients, these capabilities enable the Company to
enhance its ability to rapidly staff Company engagements as it implements its
growth strategy. The Company provides competitive incentives, compensation and
benefits in order to retain its IT professionals, including the use of options
to purchase its Common Stock.
EXPAND SERVICES AND GEOGRAPHIC REACH. The Company plans to expand its
services and add new businesses in order to offer new and existing clients
access to a more complete range of services. The Company intends to expand its
services by addressing emerging technologies, including web-based systems,
Internet, intranet and object-oriented development systems. The Company also
plans to expand its geographic reach based on its clients' needs.
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DECENTRALIZED MANAGEMENT PHILOSOPHY; ACHIEVE CENTRAL OPERATING
EFFICIENCIES. The Company operates with a decentralized management structure to
provide superior client service and a motivating environment for its various
operating companies. The Company manages its finance, accounting, management
information systems, treasury, employee benefits and certain purchasing
arrangements on a centralized basis. The operating companies and any
subsequently acquired businesses will continue to manage the professional
services and technical aspects of their respective businesses in a manner
consistent with historical practices and as dictated by local market conditions.
The Company believes that this approach will enable the operating divisions and
any subsequently acquired businesses to maintain their high level of client
service and contact, while allowing them to draw upon the collective resources
of the Company as a whole.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. Given the highly fragmented
nature of the IT service industry, the Company believes significant acquisition
opportunities exist. The Company seeks to acquire IT service companies to
strengthen its core competencies, to offer complementary services and to
facilitate its expansion into new geographic areas. The Company believes that it
will be regarded by acquisition candidates as an attractive acquiror because of:
(i) the Company's integrated marketing strategy, which will offer owners of
acquisition candidates significant opportunities to enhance the growth of their
businesses; (ii) its decentralized management strategy; (iii) the Company's
visibility and access to financial resources as a public company; and (iv) the
potential for the owners of the business being acquired to participate in the
Company's planned internal growth and growth through acquisitions, while at the
same time realizing near-term liquidity. The Company's acquisitions are
customarily paid for with a combination of cash and stock and may involve
contingent consideration terms.
In addition to acquisitions, the Company may seek to form strategic
relationships with business partners to share technical and industry knowledge
and pursue joint marketing opportunities. These relationships typically will
allow the Company to gain access to training, product support and the technology
developed by these partners.
SERVICES
The Company offers its clients a single source for a broad range of IT
services. The Company delivers each of these services independently or in
combination to provide a solution for a client's specific IT needs.
CONSULTING SERVICES
- - BUSINESS PROCESS REENGINEERING
- - IT STRATEGY PLANNING
- - INTERACTIVE MEDIA SERVICES
- - DECISION SUPPORT PLANNING AND ANALYSIS
- - SYSTEM ARCHITECTURE DEVELOPMENT
- - CUSTOMER RELATIONSHIP MANAGEMENT
- - TECHNOLOGY INFRASTRUCTURE DESIGN
- - FUTURE TECHNOLOGY PLANNING AND REFRESHMENT
- - YEAR 2000 PLANNING AND CONSULT
- - STRATEGIC MARKETING SERVICES
SYSTEM SERVICES
- - DATAMART AND DATA WAREHOUSE DESIGN AND IMPLEMENTAION
- - LAN/WAN DESIGN AND IMPLEMENTATION
- - ENTERPRISE RESOURCE PLANNING PACKAGE IMPLEMENTATION AND CONSULTING
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- - CONTRACT STAFFING AND RECRUITING
- - TRAINING AND CONTINUING EDUCATION
- - TECHNOLOGY INFRASTRUCTURE DESIGN
- - INFORMATION ACCESS SOFTWARE DESIGN AND IMPLEMENTATION
- - CLIENT/SERVER DEVELOPMENT AND INTEGRATION
- - PROJECT MANAGEMENT AND RESOURCE PLANNING
- - SOFTWARE APPLICATION DESIGN AND DEVELOPMENT
- - CONFIGURATION, TESTING AND INSTALLATION
DESKTOP SERVICES
- - CALL CENTER DESIGN AND OPERATION
- - SYSTEMS INSTALLATION MAINTENANCE AND SUPPORT
- - HARDWARE AND SOFTWARE MAINTENANCE
- - HELP-DESK OPERATIONS
- - SYSTEMS TESTING AND ENGINEERING
- - HARDWARE AND SOFTWARE PROCUREMENT
The Company's extensive IT services are summarized in the following
paragraphs.
CONSULTING SERVICES
STRATEGIC IT PLANNING AND MANAGEMENT CONSULTING. The Company's consultants
provide strategic IT planning and management consulting to senior management,
typically through a client's chief executive officer, chief financial officer or
chief information officer. These services involve the development of long-term
technology plans that help the client to achieve specific strategic business
objectives and include IT needs analysis, technology infrastructure design,
future technology planning and refreshment, systems architecture development,
decision support planning and analysis, business process automation and Year
2000 planning and consulting. The Company's ability to perform such strategic
consulting services gives it the opportunity to deliver "follow-on" services to
implement its recommended technology strategies.
DECISION SUPPORT CONSULTING. The Company provides resources to integrate
relevant information from across an enterprise and the external environment into
a single data warehouse. Consultants analyze the types of information required
and the data currently available in order to develop a prototype decision
support system, and then operate and support the system. From this foundation,
Condor consultants and engineers provide an automated system of data warehouses
for sales, marketing and financial management to use in planning and analysis.
INTERACTIVE MEDIA SERVICES. The Company provides services in integrating
voice, video, text and data on the Internet. This is done through vehicles such
as Web sites, intranets, customized training and Web conferencing to build new,
more effective lines of communication with customers, internal work groups and
suppliers. These tools can be integrated with the business and enterprise
applications already used by customers to enhance management of their business.
SYSTEM SERVICES
DEVELOPMENT, INTEGRATION AND INSTALLATION OF IT SYSTEMS. The Company offers
its clients a single source for a wide range of IT services required to
successfully design, develop and implement integrated IT solutions in diverse
computing environments. The Company's services include client/server development
and integration; LAN and WAN design and implementation; project management and
resource planning; hardware and software selection; information access software
design and installation; systems migration planning and implementation;
configuration, testing and installation; and software application design and
development. The Company integrates servers, mini-computers and mainframe
systems, workstations, terminals and communication gateways into single
integrated networks. The Company also develops, sells and supports proprietary
software for information access and delivery in the end-user, production-data
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market, primarily under the Safari InfoTOOLS brand name. This software enables
clients to manage information across virtually all types of databases, computing
platforms and operating systems in a three-tiered, client/server environment.
ENTERPRISE RESOURCE PLANNING. The Company offers its clients a single
source for ERP focusing on the implementation and customization of ERP software
packages. ERP programs automate manufacturing, financial, materials management,
human resources and other infrastructure functions of companies, improving
efficiency and generating data that give companies insight into the
profitability of their internal operations.
CONTRACT STAFFING AND RECRUITING. The Company contracts to provide both
temporary and permanent personnel with highly specialized technical skills. In
order to obtain the necessary technical personnel for its contract staffing
business, the Company conducts extensive recruiting operations. The Company also
uses these recruiting services to fulfill its internal personnel requirements.
TRAINING AND CONTINUING EDUCATION. The Company offers IT training through
its training facilities in Hartford, Connecticut and Annapolis, Maryland. The
Company offers training courses in data modeling, Java and SilverStream
programming, Microsoft NT certification courses and various other areas. The
Company's services also include skills assessment, interactive learning
solutions at the desktop and courseware. The Company also uses its training
facilities to fulfill its internal training requirements.
DESKTOP SERVICES
CALL CENTER SUPPORT. The Company contracts to provide single source call
center and help-desk staffing solutions for handling hardware problem solving,
standard and customer software applications, shipping and tracking questions as
well as other services. This service allows a client to assess its effectiveness
and develop new strategies and enables access to information on a real time
basis.
SYSTEMS MAINTENANCE AND SUPPORT. The Company provides a complete array of
desktop systems maintenance and support services to its clients, including
hardware and software maintenance, and systems testing and engineering. These
services, which are provided both on-site and on a remote basis, allow clients
to make efficient use of their technology tools by minimizing network
disruptions and downtime through the Company's rapid response to applications
inquiries.
PROCUREMENT. The Company resells hardware and software as part of its
desktop services. The Company maintains a dedicated procurement infrastructure
to manage the acquisition process through purchasing arrangements with
distributors, aggregators and manufacturers. The Company is a certified reseller
of products of leading hardware and software manufacturers, including Microsoft,
IBM, Novell, NEC, 3Com, Compaq, Unisys, Hewlett-Packard and Toshiba.
CLIENTS AND ALLIANCE PARTNERS
The Company's clients include a broad array of middle market commercial and
public sector users of IT services. The Company primarily focuses on serving
four vertical markets: insurance and financial services, healthcare, technology
and public sector. In addition, the Company has established relationships with
alliance partners that involve joint marketing, software distribution and the
provision of services on a subcontractor basis.
For the year ended December 31, 1998, the Company's top 10 clients accounted
for 35% of the Company's unaudited pro forma combined revenues. In 1998, no
single client accounted for 10% of the Company's unaudited pro forma combined
revenues.
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SALES AND MARKETING
The Company's marketing efforts focus on middle market organizations, which
the Company believes typically spend from $2 million to $30 million annually on
their IT needs. Within these organizations, the Company specifically targets the
insurance and financial services, healthcare, technology and public sector
markets.
The Company focuses its sales and marketing efforts around four principal
goals: (i) continuing to expand the existing sales and marketing efforts of the
operating divisions; (ii) integrated marketing of complementary service
capabilities of the operating divisions and any subsequently acquired companies
across the Company's client base; (iii) leveraging the experience and reputation
of the Company's senior management to secure middle market, IT service contracts
in the $10 million to $50 million range; and (iv) establishing the Company as a
nationally recognized, full-service provider of IT services.
The Company markets its services through each of the sales forces in the
operating divisions as well as through the Company's corporate sales force. This
approach allows the Company to market its services independently or in
combination to provide a solution to a client's specific IT needs. The Company
has added sales and marketing personnel to assist senior executives in
increasing the number of new clients and the amount of business generated from
existing clients.
The Company generates sales leads through referrals from clients and
management consultants, responses to requests for proposals, strategic alliances
with complementary companies, the Company's Internet web site and associated
links, industry seminars, trade shows, direct telephone and mail campaigns and
advertisements in trade journals. In addition, the Company leverages the
experience and reputation of its senior management team within the IT service
industry. The Company also has retained senior industry consultants to assist in
identifying, marketing and securing large IT service contracts with middle
market organizations.
The Company has implemented marketing and advertising campaigns to establish
the Company as a leading provider of IT offerings to middle market
organizations. The Company believes these efforts will help it obtain new
clients and attract and retain employees.
COMPETITION
The market for the Company's services is highly competitive. The Company's
competitors vary in size and in the scope of the products and services that they
offer. Primary competitors generally include consulting and systems integrators,
"Big Five" accounting firms, applications development firms, service groups of
computer equipment companies, general management consulting firms, programming
companies, temporary staffing firms and other IT service providers.
Traditionally, the largest service providers have principally focused on
providing full-service solutions to international Fortune 500 companies. An
emerging group of service companies is exploring opportunities in broader
markets, including Cambridge Technology Partners, Sapient Corporation,
Whitman-Hart, Inc., Perot Systems Corporation, Renaissance Worldwide and
Technology Solutions Corp.
There are relatively low barriers to entry into the Company's markets, and
the Company expects to face competition from established and emerging companies.
Increased competition may result in greater pricing pressure, which could
adversely affect the Company's gross margins. In addition, many of the Company's
competitors have greater financial, development, technical, marketing and sales
resources than the Company. As a result, the Company's competitors may be able
to adapt more quickly to new or emerging technologies and to changes in client
requirements, or to devote greater resources than the Company to the
development, promotion, sale and support of IT products and services. In
addition, there is a risk that clients may elect to increase their internal IT
resources to satisfy their IT solutions needs. The Company also intends to enter
new markets and offer new services, and expects to face intense competition in
these new markets from existing and new competitors, particularly since barriers
to entry in the IT
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service industry are low. There can be no assurance that the Company will
continue to provide IT services and products demanded by the market or be able
to compete successfully with existing or new competitors. An inability to
compete in its market effectively would have a material adverse effect on the
Company's results of operations, financial condition and business.
The Company believes that the principal competitive factors in the IT
service industry include quality of service, availability of qualified technical
personnel, responsiveness to client requirements and needs, price, ability to
deliver on large multi-year contracts, breadth of product and service offerings,
timely completion of projects, adherence to industry technical standards,
capital resources and general market reputation. The Company also believes that
a variety of competitive factors beyond its control, including the capabilities,
resources and reputations of its competitors, may affect the Company's ability
to compete effectively.
EMPLOYEES
The Company's success depends in large part upon its ability to attract,
develop, motivate and retain highly skilled technical employees. The Company
dedicates significant resources to employee recruitment and employs multiple
recruiting methods, such as targeted college hiring, newspaper and technical
periodical classified advertising, participation in national and regional job
fair networks and the establishment of employee referral incentive programs. The
Company supplements its internal recruiting efforts by using the resources of
its contract staffing business, including access to a database of qualified
technical professionals. Qualified technical employees are in great demand and
are likely to remain a limited resource for the foreseeable future. Candidates
are typically screened through detailed interviews by the Company's recruiting
personnel, technical interviews by consultants and an appraisal by the Company's
managers.
The Company has developed programs to help train, motivate and retain its
employees. For example, the Company utilizes a performance-based incentive
compensation program. The Company has also developed training programs to guide
technical personnel through a progression of skill and competency development
programs. As another incentive measure, the Company has issued and will continue
to issue options to its employees under its 1997 Long-Term Incentive Plan. Most
importantly, in addition to formal programs, the Company maintains an
environment that fosters creativity and recognizes technical excellence.
The Company is dependent upon its ability to attract, hire and retain
technical personnel who possess the skills and experience necessary to meet the
staffing requirements of its clients and the Company's own personnel needs.
Competition for individuals with proven technical skills is intense. There can
be no assurance the Company will be able to recruit or retain the technical
personnel necessary to execute its business and growth strategy.
As of December 31, 1998, the Company had 1,075 employees. None of the
Company's employees is represented by a collective bargaining agreement.
Although most consultants are Company employees, the Company does engage
consultants as independent contractors from time to time. The Company considers
its relations with its employees to be good.
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ITEM 2. PROPERTIES
The Company's headquarters are located in Annapolis, Maryland. In addition
to its headquarters, the Company leases office space and warehouse space as
follows:
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Location Type
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Allentown, PA................................ Office/Warehouse
Annapolis, MD................................ Two Offices/Training Center/Warehouse
Andover, MA.................................. Office/Warehouse
Atlanta, GA.................................. Office
Avon, CT..................................... Office
Baltimore, MD................................ Office
Bloomfield, CT............................... Office
Boston, MA................................... Office
Burlington, MA............................... Office
Chelmsford, MA............................... Office
Denver, CO................................... Office
Falls Church, VA............................. Office
Framingham, MA............................... Office
Hanover, Germany............................. Office
Langhorne, PA................................ Office/Warehouse
Malvern, PA.................................. Office
McLean, VA................................... Office
Mexico City, Mexico.......................... Office
Nashua, NH................................... Office
Norwalk, CT.................................. Office
Oklahoma City, OK............................ Office
Palo Alto, CA................................ Office
Pittsburgh, PA............................... Office
San Jose, CA................................. Office
Scottsdale, AZ............................... Office
Seal Beach, CA............................... Office
Seattle, WA.................................. Office
Stamford, CT................................. Office
Utrecht, The Netherlands..................... Office
Vienna, VA................................... Warehouse
Waltham, MA.................................. Office
Wellesley, MA................................ Office
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The leases expire at various times between 1999 and 2008. The aggregate
square footage of all of the Company's offices and warehouses is approximately
229,760 square feet.
In order to secure its obligations under its revolving credit facility, the
Company has granted to its lenders a security interest on substantially all of
the Company's properties and other assets. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations-Liquidity and
Capital Resources."
ITEM 3. 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.
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<PAGE>
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, alleging breach of contract, tortious interference with Emtec's
business relationship with Corporate Access and CHMC, two of the Founding
Companies, and misappropriation of a trade secret arising out of the
participation of CHMC and Corporate Access in the consolidation and the Offering
without Emtec's written consent. In connection with the three causes of action,
Emtec demands that defendants disgorge the financial benefits that they have and
will obtain as a result of their breach of contract and seeks compensatory and
punitive damages. On December 31, 1997, the defendants filed an Answer, denying
the allegations and asserting various affirmative defenses. The court denied
Emtec's 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. Trial of this matter could be scheduled in the near future. The
Company 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. The Company is a party to other legal
proceedings and disputes related to the Company's day to day business
operations, none of which are material to the financial position or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1998, no matters
were submitted to a vote of the Company's security holders.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth as of February 1, 1999, the names, ages and
other information concerning those persons who are executive officers of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Kennard F. Hill...................................... 58 Chairman of the Board and Chief Executive Officer
C. Lawrence Meador................................... 52 Vice Chairman of the Board
Daniel J. Roche...................................... 37 President and Chief Operating Officer
William J. Caragol................................... 31 Vice President, Chief Financial Officer and Treasurer
John F. McCabe....................................... 54 Vice President, General Counsel and Secretary
Robert F. Hefner..................................... 52 General Manager, System Services Division
Michael G. Paglaiccetti.............................. 53 General Manager, Desktop Services Division
</TABLE>
Kennard F. Hill has been Chief Executive Officer and a director of the
Company since January 1997. Mr. Hill became Chairman of the Board of the Company
upon the closing of the Offering in February 1998. From January 1997 to February
1998, Mr. Hill also served as President of the Company. Mr. Hill was Group
President of I-NET, Inc., a network computing and systems integration services
company, from
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<PAGE>
September 1995 to December 1996. From June 1993 to June 1995, Mr. Hill was
President and Chief Executive Officer of Insource Technology, Inc., an IT
consulting firm. From June 1992 to June 1993, Mr. Hill was a private consultant
on client/server acquisition strategy in the healthcare industry. From 1988 to
July 1992, Mr. Hill was Chief Executive Officer of DataLine Inc., a data
processing and IT firm. From 1968 to 1988, Mr. Hill was employed by Electronic
Data Systems Corporation ("EDS"), a full-service IT provider. He served as
President of General Motors-EDS for North America from 1985 to 1988. At EDS, Mr.
Hill also served as chief of the Healthcare Division, having previously served
as its Director of Sales. Mr. Hill also was an officer of EDS's Federal Corp.
subsidiary and a director of its National Heritage Insurance Corp. subsidiary,
which provides healthcare underwriting for lower-income policyholders. In
December 1994, Mr. Hill filed a voluntary petition in bankruptcy in order to
discharge indebtedness arising out of his divorce and several partnerships in
which he was a limited partner. The bankruptcy was discharged in January 1996.
Mr. Hill attended the University of Texas and served two tours of duty as a
United States Army pilot in Vietnam.
C. Lawrence Meador has been Vice Chairman of the Board of Directors of the
Company and Chief Executive Officer of MST since the closing of the Offering in
February 1998. Mr. Meador is the founder and was the President of MST, a
Founding Company, since 1992. From January 1996 to June 1998, Mr. Meador served,
under an MST contract, as the Chief Information Officer of CIGNA Property and
Casualty, an insurance company. All fees payable by CIGNA Property and Casualty
in connection with Mr. Meador's services as the Chief Information Officer of
CIGNA Property and Casualty are payable to MST. Mr. Meador has also been on the
academic staff of the Massachusetts Institute of Technology for over 20 years,
during which period he was a consultant to numerous international Fortune 1000
companies, governmental bodies and other organizations. From 1974 to 1992, Mr.
Meador was the Founder, President and Chief Executive Officer of Decision
Support Technology, Inc., a firm established to commercialize MIT research on
Decision Support Systems. From 1985 to 1987 he served as a Co-Founder, Director
and Vice Chairman of Software Productivity Research, Inc. Mr. Meador received a
bachelor of science degree from the University of Texas and masters degrees in
management and mechanical engineering from the Massachusetts Institute of
Technology.
Daniel J. Roche has been Chief Operating Officer of the Company since
October 1997. He became President of the Company upon the closing of the
Offering in February 1998. Mr. Roche previously served as the Chief Operating
Officer and Executive Vice President of BSG, an IT service division of Medaphis
Corp. that focuses on client/server and network technologies. From 1991 to May
1996, Mr. Roche was the Founder, President and Chief Executive Officer of Rapid
Systems Solutions, Inc. ("RSSI"), a provider of client/server applications with
competencies in database management systems, networking, communications and
graphical user interfaces, which Mr. Roche founded and which Medaphis Corp.
acquired in May 1996. From 1988 to 1993, Mr. Roche was an adjunct professor at
the University of Maryland, Baltimore County. From 1985 to 1990, Mr. Roche held
several positions at Booz-Allen & Hamilton. Mr. Roche received a bachelor of
science degree in computer science from Central Michigan University, a masters
degree in computer science from The Johns Hopkins University and completed the
Owners and Presidents Management Program at the Harvard Graduate Business
School.
William J. Caragol was appointed Vice President and Chief Financial Officer
in March 1998. Prior to that he was Vice President-Finance of the Company since
October 1997. Prior to joining the Company, he was a Senior Manager in the High
Technology Service Group of Deloitte & Touche LLP, which he joined in 1989. As a
member of the High Technology Service Group, Mr. Caragol provided comprehensive
accounting services to publicly-held U.S. corporations in the technology sector.
Mr. Caragol is a Certified Public Accountant and a member of the American
Institute of Certified Public Accountants. He received a bachelor of science
degree in accounting and business administration from Washington & Lee
University.
John F. McCabe was appointed Vice President, General Counsel and Secretary
in June 1998. In this function, Mr. McCabe is focused on the Company's
acquisition program directed at information technology services companies,
corporate strategic planning, and day-to-day legal matters. He is also an
advisor on
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<PAGE>
corporate infrastructure development. From 1989 to 1998, Mr. McCabe was
Corporate Vice President, General Counsel and Secretary of BDM International,
Inc., a Fortune 1000 information technology company, where he headed the
company's legal department. Mr. McCabe received a masters degree in business
administration from the Kellogg Graduate School of Management at Northwestern
University and a juris doctor degree from Fordham University Law School.
Robert F. Hefner was appointed as the General Manager of the Company's
System Services Division in October, 1998. Concurrently he serves as the
President of LINC Systems Corporation as he has done since September 1992. In
that capacity, Mr. Hefner specializes in distributed client/server computing and
relational database systems integration, custom application development, and
infrastructure architecture. Prior to his work with LINC, he held positions with
Source Services, EDS and Digital. Mr. Hefner is a graduate of the University of
Rhode Island with a major in Finance and Insurance. He served in the United
States Marine Corps with a tour of duty in Vietnam and attained the rank of
Captain.
Michael G. Paglaiccetti was appointed as the General Manager of the Desktop
Services Division in August, 1998. Concurrently he serves as the President of
Computer Hardware Maintenance Company, Inc. as he has done since 1988. Before
becoming President of CHMC, Mr. Paglaiccetti served as Vice President for eight
years. His experience in the information technology industry includes several
years as the regional manager for Control Data Corporation, focusing on
mainframe services. He also spent seven years with IBM Corporation as a custom
engineer.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "CNDR." The Company completed its initial public offering of its Common
Stock in February 1998 at a price of $13.00 per share. The following table sets
forth, for the periods indicated, the range of high and low last reported sale
prices for the Common Stock.
<TABLE>
<S> <C> <C>
From February 5, 1998 through March 31, 1998....................... 15.56 13.00(1)
From April 1, 1998 through June 30, 1998........................... 17.75 13.00
From July 1, 1998 through September 30, 1998....................... 14.63 8.50
From October 1, 1998 through December 31, 1998..................... 13.75 9.00
</TABLE>
- ------------------------
(1) Represents the initial public offering price.
HOLDERS On March 12, 1999, the last reported sale price of the Common Stock
on the Nasdaq National Market was $9.88 per share. At March 12, 1999, there were
80 holders of record of the Company's Common Stock, although the Company
believes the number of beneficial holders is substantially greater.
DIVIDENDS The Company does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future and intends to retain its earnings, if
any, to finance the expansion of its business and for general corporate
purposes. Any payment of future dividends will be at the discretion of the Board
of Directors and will depend upon, among other things, the Company's earnings,
financial position, capital requirements, level of indebtedness, contractual
restrictions and other factors that the Company's Board of Directors deems
relevant. In addition, the Company's revolving credit facility prohibits the
payment of dividends by the Company without the lender's consent.
(B) SALES OF REGISTERED AND UNREGISTERED SECURITIES
On February 5, 1998, the Company registered, offered and sold 5,900,000
shares of Common Stock through an initial public offering. On March 1, 1998, the
underwriters of the initial public offering exercised an overallotment option to
purchase 885,000 registered shares. Net proceeds to the Company for both of
these transactions were approximately $72.9 million after deducting underwriter
commissions and other offering costs. On February 10, 1998, the Company issued
2,307,693 unregistered shares to purchase the Founding Companies.
Effective June 4, 1998, the Company registered an additional 5,000,000
shares of common stock with the Securities and Exchange Commission on Form S-1,
which may be offered and issued from time to time in connection with the merger
with or acquisition by the Company of other businesses or assets.
During 1998, the Company issued 9,600 unregistered shares and 1,028,186
registered shares in connection with the purchase of four Other Acquisitions.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The financial information set forth below is qualified by reference to the
consolidated financial statements and notes thereto included in "Item 8".
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
<S> <C> <C>
1997 1998
--------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................................. $ -- $ 168,833
Gross profit......................................................... -- 54,321
Income from operations............................................... (2,715) 11,724
Net income (loss).................................................... $ (2,715) $ 5,533
Net income (loss) per basic share.................................... $ (1.62) $ 0.54
Net income (loss) per diluted share.................................. $ (1.62) $ 0.51
Shares used in computing basic net income (loss) per share........... 1,680 10,193
Shares used in computing diluted net income (loss) per share......... 1,680 10,767
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1997 1998
--------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ 26 $ 3,053
Accounts Receivable, net................................................ -- 39,814
Goodwill and other intangibles, net..................................... -- 145,163
Total assets............................................................ 4,926 200,642
Long-term debt, net of current maturities............................... -- 24,296
Stockholders' equity (deficit).......................................... $ (255) $ 114,042
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Item 6.
Selected Financial Data" and "Item 8. Financial Statements and Supplementary
Data." A number of statements in this Annual Report on Form 10-K address
activities, events or developments which the Company anticipates may occur in
the future, including such matters as the Company's strategy for internal
growth, additional capital expenditures (including the amount and nature
thereof), acquisitions of assets and businesses, industry trends and other such
matters. These statements are based on certain assumptions and analyses made by
the Company in light of its perception of historical trends, current business
and economic conditions and expected future developments, as well as other
factors the Company believes are reasonable or appropriate. However, whether
actual results and developments will conform with the Company's expectations and
predictions is subject to a number of risks and uncertainties, including:
general economic, market or business conditions; the business opportunities (or
lack thereof) that may be presented to and pursued by the Company; changes in
laws or regulations; and other factors, many of which are beyond the control of
the Company. Consequently, there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations.
INTRODUCTION
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
15
<PAGE>
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 during 1998 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.
The following table sets forth certain selected financial data for the
Company on a historical basis and as a percentage of revenues for the years
ended December 31, (in thousands, except percentages):
<TABLE>
<CAPTION>
1997 1998
-------------------- ---------------------
<S> <C> <C> <C> <C>
IT Service revenues........................................ $ -- --% $ 92,515 54.8%
Hardware procurement revenues.............................. -- -- 76,318 45.2
--------- --------- ---------- ---------
Total revenues............................................. -- -- 168,833 100.0
--------- --------- ---------- ---------
Cost of IT services........................................ -- -- 45,379 49.1
Cost of hardware procurement............................... -- -- 69,133 90.6
--------- --------- ---------- ---------
Total cost of revenues..................................... -- -- 114,512 67.8
--------- --------- ---------- ---------
Gross profit............................................... -- -- 54,321 32.2
Selling, general and administrative........................ 2,715 -- 32,920 19.5
Depreciation and amortization.............................. -- -- 4,677 2.8
In process research and development........................ -- -- 5,000 3.0
--------- --------- ---------- ---------
Income from operations..................................... $ (2,715) --% $ 11,724 6.9%
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
REVENUES. For the year ended December 31, 1998, the Company's revenues
include the revenues of the Founding Companies from February 1, 1998 through
December 31, 1998 and the revenues of DST,
16
<PAGE>
Louden, LINC, PowerCrew, and Global from their respective acquisition dates of
May 5, 1998, June 30, 1998, July 17, 1998, November 4, 1998 and December 10,
1998. Revenues from IT services for the year were approximately 55% of total
revenues. No single customer accounts for more than 10% of the Company's
consolidated revenues.
IT service revenue as a percentage of total revenue has increased throughout
1998 through growth in each of the Company's divisions. Consulting Services
revenue is attributable to strategic IT planning and management consulting;
decision support consulting; and interactive media services. System Services
revenue is attributable to custom development, integration and installation of
IT systems; enterprise resource planning ("ERP") package implementation and
consulting; contract staffing and recruiting; training and continuing education;
and sales of the Company's Safari InfoTOOLS software licenses. Desktop services
revenue is attributable to call center and help-desk services and systems and
mainframe maintenance and support.
Hardware procurement revenue as a percentage of total revenue has decreased
throughout 1998 primarily due to a shift in the Company's focus toward higher
margin IT service revenues.
COST OF REVENUES. Cost of revenues was $114.5 million, or approximately 68%
of sales for the year ended December 31 1998. The Company generates higher gross
margins from its System and Consulting Services Divisions while the procurement
component of its Desktop Service Division generates its lowest margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $32.9 million in 1998, which consist of salaries,
benefits and commissions payable to the Company's sales and marketing personnel,
recruiting, finance costs and other general and administrative costs. Expenses
incurred in 1997 represent payment of salary to one officer of the Company and
facilities and general and administrative costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization includes the
depreciation of property and equipment, the amortization of goodwill and other
intangibles from the purchase of the operating companies, internally developed
software costs, and the technology license recorded in connection with a service
contract.
LIQUIDITY AND CAPITAL RESOURCES
Condor is a holding company that conducts its operations though its
subsidiaries. Accordingly, Condor's principal sources of liquidity are the cash
flows of its operating companies and cash available from its credit facilities.
At December 31, 1998 the Company had $3.1 million in cash and cash equivalents
and $24.7 million of indebtedness outstanding, which consists primarily of
borrowings on its $50 million revolving credit facility (the "Revolver"). The
Company is in the process of arranging a new, larger bank facility to give it
additional funding to pursue acquisition opportunities. There can be no
assurance that the Company will be successful in obtaining such a new, larger
facility.
Net cash provided by operating activities was $5.6 million for the year
ended December 31, 1998. Net cash used in investing activities was $93.7 million
for the year ended December 31, 1998 which included $90.2 million, net of cash
acquired, for the acquisition of the operating companies.
Net cash provided by financing activities was $93.9 million for the year
ended December 31, 1998 and included $72.9 million from the Company's Offering,
net of costs, and borrowings of $21.0 million, net of repayments and direct
costs incurred in obtaining financing.
The Company intends to continue to pursue acquisition opportunities. The
timing, size or success of any acquisition effort and the associated potential
capital commitments are unpredictable. The Company expects to fund future
acquisitions primarily through a combination of cash flow from operations and
17
<PAGE>
borrowings, including borrowings under the Revolver, as well as issuances of
additional shares of Common Stock.
The Company believes that its cash flow from operations and borrowings under
its credit facilities will be sufficient to fund its cash flow requirements for
at least the next 12 months. To the extent that the Company is successful in
consummating acquisitions, it may be necessary to finance such acquisitions
through the issuance of additional equity securities, incurrence of indebtedness
or both.
SEASONALITY AND CYCLICALITY; POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING
RESULTS
The Company has experienced and expects to continue to experience
variability in revenues and net income from quarter to quarter as a result of
seasonality that may accompany private or public sector budget cycles. Sales of
the Company's IT products and related services have historically been higher in
the third and fourth calendar quarters as a result of patterns of capital
spending by some clients, principally federal, state and local governments.
The Company also believes that the IT industry is influenced by general
economic conditions and particularly by the level of technological change.
Increased levels of technological change can have a favorable impact on the
Company's revenues. In general, technological change drives the need for
hardware procurement and information systems services provided by the Company.
The Company also believes that the industry tends to experience periods of
decline and recession during economic downturns. The industry could experience
sustained periods of decline in revenues in the future, and any such decline may
have a material adverse effect on the Company.
The Company could in the future experience quarterly fluctuations in
operating results due to the factors discussed above and other factors,
including the short-term nature of certain client commitments; patterns of
capital spending by clients; loss of a major client; seasonality that may
accompany private or governmental sector budget cycles; the timing, size and mix
of service and product offerings; the timing and size of significant software
sales; the timing and size of new projects; the timing and magnitude of required
capital expenditures; pricing changes in response to various competitive
factors; market factors affecting the availability of qualified technical
personnel; timing and client acceptance of new service offerings; changes in the
trends affecting the outsourcing of IT services; additional selling, general and
administrative expenses to acquire and support new business; increased levels of
technological change in the industry; and general economic conditions. The
Company plans its operating expenditures based on revenue forecasts, and a
revenue shortfall below such forecasts in any quarter would likely adversely
affect the Company's operating results for that quarter.
INFLATION
The Company believes the effects of inflation generally do not have a
material impact on its operations or financial position or cash flows.
YEAR 2000 READINESS
IMPACT OF THE YEAR 2000 ISSUE. The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of a company's 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
18
<PAGE>
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 operations. The Company
is currently compiling a formal Year 2000 contingency plan which is expected to
be completed by July 1999.
The Company's plan to resolve its 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 the
current accounting system is at risk of not being Year 2000 compliant. If not
resolved on a timely basis, this could affect the Company's ability to provide
adequate and timely billing information.
REMEDIATION. The Company estimates that it is 80% complete in the
remediation phase of all material systems and expects to complete corporate
remediation by April 1999. After completing remediation, the Company's plans
include testing and implementing its information technology systems.
TESTING AND IMPLEMENTATION. The Company estimates that it has completed 80%
of its testing and implementation of its remediated systems. Completion of the
testing phase is expected by May 1999 with all remediated systems fully
implemented by July 1999. In certain cases, the remedy is a replacement of the
system or software. For example, the Company plans to install an ERP accounting
and management information system in 1999 which will be Year 2000 compliant.
THIRD PARTIES. With respect to third parties, the Company has completed its
remediation and estimates it is 80% complete with the testing phase of systems
that interface directly with significant vendors. Testing of all material
systems is expected to be completed no later than April 1999. Implementation is
also 80% complete and is expected to be completed by July 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 some 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. To the extent that certain licensed products proprietary to
the company are non-compliant, the Company is offering to provide upgrades to
its customers.
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 $1.6 million and is being funded through operating cash flows.
Expenditures to date have related to all phases of the Year 2000 project. As of
December 31, 1998, the cost incurred to date was approximately $500,000 which
related to hardware purchases and replacement. Remaining costs relate to the
purchase of new software and operating equipment and the acquisition of external
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 of 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.
19
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and for Hedging Activities"
("SFAS No. 133"). SFAS No. 133 requires all derivatives to be recorded on the
balance sheet at fair value and establishes "special accounting" for the
following three different types of hedges: hedges of changes in the fair value
of assets, liabilities or firm commitments; hedges of the variable cash flows of
forecasted transactions; and hedges of foreign currency exposures of net
investments in foreign operations. SFAS No. 133 is effective for years beginning
after June 15, 1999, with earlier adoption permitted. The Company believes that
the effect of adoption of SFAS No. 133 will not be material to its financial
position or results of operations.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Form 10-K 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONDOR TECHNOLOGY SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................................................................ 21
Consolidated Balance Sheets.............................................................................. 22
Consolidated Statements of Operations.................................................................... 23
Consolidated Statement of Changes in Stockholders' Equity (Deficit)...................................... 24
Consolidated Statements of Cash Flows.................................................................... 25
Notes to Consolidated Financial Statements............................................................... 26
CONDOR TECHNOLOGY SOLUTIONS, INC. FINANCIAL STATEMENT SCHEDULES
II. Valuation and Qualifying Accounts (All other schedules are omitted because they are
not applicable or the required information is shown in the financial statements or notes thereto.)... 42
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Condor Technology Solutions, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Condor Technology Solutions, Inc. and its subsidiaries at
December 31, 1997 and 1998, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
McLean, VA
February 5, 1999
21
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1997 1998
--------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................ $ 26 $ 3,053
Restricted cash.......................................................................... -- 2,756
Accounts receivable, net................................................................. -- 39,814
Prepaids and other current assets........................................................ -- 3,284
Deferred offering costs.................................................................. 4,900 --
--------- ----------
Total current assets................................................................. 4,926 48,907
PROPERTY AND EQUIPMENT, NET................................................................ -- 4,329
GOODWILL AND OTHER INTANGIBLES, NET........................................................ -- 145,163
OTHER ASSETS............................................................................... -- 2,243
--------- ----------
TOTAL ASSETS......................................................................... $ 4,926 $ 200,642
--------- ----------
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable......................................................................... $ -- $ 13,838
Accrued expenses and other current liabilities........................................... 2,689 16,524
Amounts due to stockholder............................................................... 2,492 --
Deferred revenue......................................................................... -- 4,915
Current portion of contingent purchase liability......................................... -- 4,308
Current portion of long-term debt........................................................ -- 442
--------- ----------
Total current liabilities............................................................ 5,181 40,027
LONG-TERM DEBT............................................................................. -- 24,296
NON-CURRENT CONTINGENT PURCHASE LIABILITY.................................................. -- 20,348
OTHER LONG-TERM OBLIGATIONS................................................................ -- 1,929
--------- ----------
Total liabilities.................................................................... 5,181 86,600
COMMITMENTS AND CONTINGENCIES (Note 18).................................................... -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par, 1,000,000 authorized; none outstanding........................ -- --
Common stock, $.01 par value; authorized 49,000,000 shares; issued and outstanding,
1,892,307 and 12,009,608 shares at December 31, 1997 and 1998, respectively............ 19 120
Additional paid-in capital............................................................... 2,441 111,278
Retained earnings (accumulated deficit).................................................. (2,715) 2,818
Accumulated other comprehensive income................................................... -- 20
Treasury stock, at cost (13,178 shares at December 31, 1998)............................. -- (194)
--------- ----------
Total stockholders' equity (deficit)..................................................... (255) 114,042
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................................. $ 4,926 $ 200,642
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
<S> <C> <C>
1997 1998
--------- ----------
IT service revenues........................................................................ $ -- $ 92,515
Hardware procurement revenues.............................................................. -- 76,318
--------- ----------
Total revenues............................................................................. -- 168,833
--------- ----------
Cost of IT services........................................................................ -- 45,379
Cost of hardware procurement............................................................... -- 69,133
--------- ----------
Total cost of revenues..................................................................... -- 114,512
--------- ----------
Gross profit............................................................................... -- 54,321
Selling, general and administrative expenses............................................... 2,715 32,920
Depreciation and amortization.............................................................. -- 4,677
In process research and development........................................................ -- 5,000
--------- ----------
Income (loss) from operations.............................................................. (2,715) 11,724
Interest and other income, net............................................................. -- 684
--------- ----------
Income (loss) before income taxes.......................................................... (2,715) 12,408
Provision for income taxes................................................................. -- 6,875
--------- ----------
Net income (loss).......................................................................... $ (2,715) $ 5,533
--------- ----------
--------- ----------
Net income (loss) per basic share.......................................................... $ (1.62) $ 0.54
--------- ----------
--------- ----------
Net income (loss) per diluted share........................................................ $ (1.62) $ 0.51
--------- ----------
--------- ----------
Basic shares outstanding................................................................... 1,680 10,193
--------- ----------
--------- ----------
Diluted shares outstanding................................................................. 1,680 10,767
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS CUMULATIVE STOCKHOLDERS'
------------------ PAID-IN (ACCUMULATED TRANSLATION TREASURY EQUITY
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT(1) STOCK (DEFICIT)
---------- ------ ---------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.............. 1,413,806 $ 14 $ 73 $ -- $-- $ -- $ 87
Issuance of common stock................ 478,501 5 2,368 -- -- -- 2,373
Net loss................................ -- -- -- (2,715) -- -- (2,715)
---------- ------ ---------- ------ --- -------- -------------
BALANCE, DECEMBER 31, 1997.............. 1,892,307 19 2,441 (2,715) -- -- (255)
Issuance of common stock in initial
public offering, net of offering
costs................................. 6,785,000 68 72,845 -- -- -- 72,913
Issuance of common stock for
acquisitions.......................... 3,345,479 33 35,917 -- -- -- 35,950
Purchase of treasury stock.............. (13,178) -- -- -- -- (194) (194)
Comprehensive income:
Net income............................ -- -- -- 5,533 -- --
Foreign currency translation
adjustment........................ -- -- -- -- 20 --
Total comprehensive income.............. 5,553
Other................................... -- -- 75 -- -- -- 75
---------- ------ ---------- ------ --- -------- -------------
BALANCE, DECEMBER 31, 1998.............. 12,009,608 $120 $ 111,278 $2,818 $20 $(194) $114,042
---------- ------ ---------- ------ --- -------- -------------
---------- ------ ---------- ------ --- -------- -------------
</TABLE>
- ------------------------
(1) Accumulated Other Comprehensive Income
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.......................................................................... $ (2,715) $ 5,533
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating
activities:
Depreciation and amortization............................................................ -- 4,677
In process research and development...................................................... -- 5,000
Stock compensation expense............................................................... 1,771 --
Change in valuation allowance............................................................ -- 1,032
Changes in assets and liabilities:
Accounts receivable.................................................................... -- 2,846
Prepaid expenses and other assets...................................................... (4,183) (286)
Accounts payable and other current liabilities......................................... 5,003 (12,541)
Deferred revenue....................................................................... -- (803)
Other.................................................................................... -- 102
--------- ---------
Net cash (used in) provided by operating activities.................................. (124) 5,560
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......................................................... -- (2,806)
Purchase of marketable securities.......................................................... -- (36,726)
Sale of marketable securities.............................................................. -- 37,924
Acquisition of subsidiaries, net of cash................................................... -- (90,168)
Payment for technology license............................................................. -- (1,550)
Other...................................................................................... -- (338)
--------- ---------
Net cash used in investing activities................................................ -- (93,664)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans........................................................................ -- 34,000
Payments on long--term debt................................................................ -- (12,852)
Proceeds from initial public offering, net of costs........................................ -- 72,913
Proceeds from issuance of common stock..................................................... 150 --
Purchase of treasury shares................................................................ -- (194)
--------- ---------
Net cash provided by financing activities............................................ 150 93,867
EFFECT OF EXCHANGE RATE CHANGES.............................................................. -- 20
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................................... 26 5,783
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................................... -- 26
--------- ---------
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD................................. $ 26 $ 5,809
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Condor Technology Solutions, Inc., a Delaware corporation ("Condor" or the
"Company"), was founded in August 1996 to create a leading single-source
information technology ("IT") service company to provide strategic IT business
solutions to middle market organizations, Fortune 1000 companies and public
sector organizations. In order to become a single-source provider of a wide
range of IT services and solutions, Condor entered into agreements (the
"Mergers") to acquire all of the common stock of eight established IT service
providers (the "Founding Companies") and concurrently completed an initial
public offering (the "Offering") of its common stock (the "Common Stock"). On
February 5, 1998 and February 10, 1998, respectively, the Offering and the
Mergers were completed. As of December 31, 1998, the Company had acquired five
additional IT service providers. All acquisitions are reflected as of their
respective acquisition dates. The Founding Companies along with the newly
acquired companies are referred to herein as "operating companies". The Company
intends to continue to pursue strategic acquisitions as a means to continually
expand the breadth of IT services it provides.
For financial statement purposes, Condor has been identified as the
accounting acquiror. Accordingly, the financial statements as of December 31,
1997 include the results of Condor prior to the Offering and the Mergers. The
Mergers and subsequent acquisitions were accounted for using the purchase method
of accounting (see Note 3).
Prior to the Offering, the Company did not conduct any significant
operations, other than payment of salary to an officer and certain facility and
general and administrative costs. The Company's cash balances were provided from
the sale of stock to investors and advances from a founding stockholder.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING--The Company's accounting records are maintained on the
accrual basis of accounting.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of Condor and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
REVENUE RECOGNITION--The Company earns revenues from the provision of IT
services and hardware procurement.
IT services are comprised of strategic IT planning and management
consulting; decision support consulting; interactive media services; custom
development, integration and installation of IT systems; enterprise resource
planning ("ERP") package implementation and consulting; contract staffing and
recruiting; training and continuing education; sale of proprietary and
third-party software; call center and help-desk services; and systems and
mainframe maintenance and support. 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 and third-party 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.
26
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues from hardware procurement are recognized upon shipment of the
equipment. When installation services are an integral component of the hardware
procurement, the installation and hardware procurement revenue is recognized
upon 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.
DEFERRED REVENUE--The Company receives advance payment on certain
maintenance contracts. Such advance payments are deferred and are reflected in
income together with the related costs and expenses as the services are
performed.
ALLOWANCE FOR DOUBTFUL ACCOUNTS--The Company provides an allowance for
uncollectible accounts receivable based on experience. Although it is reasonably
possible that management's estimate for uncollectible accounts could change in
the near future, management is not aware of any events that would result in a
change to its estimate which would be material to the Company's financial
position or results of operations. At December 31, 1998, the Company had an
allowance for doubtful accounts of approximately $572,000. There was no
allowance at December 31, 1997.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
RESTRICTED CASH--The Company has retained cash in escrow accounts related to
the acquisitions of two companies. A corresponding escrow payable has been
recorded in accrued expenses and other current liabilities, and the amounts will
be paid in 1999 as required based on the purchase agreements.
CONCENTRATION OF CREDIT RISK--The Company maintains cash in bank deposit
accounts, which, at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash. The Company does not believe that it is
subject to any unusual credit risk beyond the normal credit risk attendant in
its business.
INVENTORY--Inventory is stated at the lower of cost or market. Cost is
determined using the average cost method and is comprised of goods held for
resale and maintenance parts and supplies. At December 31, 1998, the Company had
inventory of approximately $740,000 which is included in prepaids and other
current assets.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Improvements which substantially increase the useful lives of assets are
capitalized. Maintenance and repairs are expensed as incurred. Upon retirement
or disposal, the related cost and accumulated depreciation are removed from the
respective accounts and any gain or loss is recorded. Depreciation is computed
on the straight-line method based on the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and machinery 3-7 years
3-10
Furniture and fixtures years
5-10
Leasehold improvements years
</TABLE>
GOODWILL--Goodwill represents the excess of consideration over the net
assets acquired resulting from acquisitions of companies accounted for by the
purchase method. These amounts are amortized on a straight-line basis over
periods ranging from 7 to 35 years. At each balance sheet date, management
27
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
evaluates the recoverability of the goodwill based on the undiscounted cash flow
projections of each business acquired.
SOFTWARE COSTS--Capitalization of development costs of new software
products, as well as costs incurred to enhance existing software products,
begins once the technological feasibility of the product is established.
Capitalization ceases when such software is ready for general release, at which
time amortization of the capitalized costs begins.
Amortization of capitalized internally developed software costs is computed
as the greater of: (a) the amount determined by the ratio of the product's
current revenue to its total expected future revenue or (b) the straight-line
method over the product's estimated useful life of two to three years. Software
amortization expense was approximately $77,000 for the year ended December 31,
1998.
Maintenance of software products, as well as research and development costs
related to new software products, are charged to expense as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company calculates the fair value
for each class of financial instruments for which it is practicable to estimate.
The carrying value of current assets and current liabilities approximates fair
value because of the relatively short maturities of these instruments. The
carrying value of long term debt approximates fair value since it carries a
fluctuating market interest rate.
WARRANTY RESERVE--The Company records a warranty reserve related to certain
mainframe computer sales. The reserve recorded is based on experience in
warranty replacement and labor time. Warranty reserves were approximately
$1,710,000 and have been included with accrued expenses and other current
liabilities at December 31, 1998.
INCOME TAXES--Deferred tax assets and liabilities are recognized at the
applicable income tax rates based upon future tax consequences of temporary
differences between the tax basis and financial reporting basis of assets and
liabilities.
COMPREHENSIVE INCOME--Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This statement establishes the standards for reporting
and displaying comprehensive income and its components. Comprehensive income
consists of net income and foreign currency translation adjustments and is
presented in the Consolidated Statement of Changes in Stockholders' Equity. The
adoption of SFAS No. 130 had no impact on total stockholders' equity. No
reclassifications were required to conform prior year financial statements to
the SFAS No. 130 requirements.
Foreign Currencies--Assets and liabilities recorded in foreign currencies on
the books of foreign subsidiaries are translated at the exchange rate on the
balance sheet date. Translation adjustments resulting from this process are
accumulated as a separate component of stockholders' equity. Revenues, costs,
and expenses are translated at average rates of exchange prevailing during the
year. Gains and losses on foreign currency transactions are included in
nonoperating expenses.
STOCK-BASED COMPENSATION--Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") provides a fair
value based method of accounting for employee stock options or similar equity
instruments, however this statement allows companies to continue to utilize the
intrinsic value based measure of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
Companies electing to remain with the accounting provided in APB No. 25 must
make pro forma disclosures of net income and
28
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
earnings per share as if the fair value method of accounting had been applied.
The Company accounts for stock based compensation pursuant to the requirements
of APB No. 25 and provides pro forma disclosure of net income and earnings per
share, pursuant to the requirements of SFAS No. 123 as applicable, in Note 11
herein.
Earnings Per Share--The Company presents basic and diluted earnings per
share ("EPS") on the face of the income statement. Basic EPS excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
that then shared in the earnings of the entity. Dilutive securities are excluded
from the computation in periods in which they have an anti-dilutive effect.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications--Certain amounts in prior year financial statements have
been reclassified to conform to the current year presentation.
3. ACQUISITIONS
The following table sets forth the consideration paid in cash and in shares
of Common Stock to the stockholders of each of the operating companies (in
thousands, except share data):
<TABLE>
<CAPTION>
SHARES OF ADJUSTED ALLOCATION OF
DATE COMMON VALUE CONTINGENT TOTAL NET PURCHASE
ACQUIRED CASH STOCK ISSUED OF SHARES CONSIDERATION CONSIDERATION ASSETS PRICE GOODWILL LIFE
-------------- ------- ------------ --------- ------------- ------------- -------- ------------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MST Feb. 10, 1998 $ 9,750 603,846 $ 6,280 $ -- $ 16,030 $ 262 $15,768 35
CHMC Feb. 10, 1998 17,100 146,154 1,520 -- 18,620 1,847 16,773 35
Federal Feb. 10, 1998 7,500 576,923 6,000 9,000 22,500 1,886 18,659 35
1,955(C) 3.5
Corporate
Access Feb. 10, 1998 5,200 200,000 2,080 -- 7,280 427 6,853 30
ISSI Feb. 10, 1998 5,000 538,462 5,600 7,356 17,956 1,641 5,000(A) 8,815 7
2,500(B) 5
USComm Feb. 10, 1998 600 46,154 480 -- 1,080 144 936 30
InVenture Feb. 10, 1998 750 57,692 600 2,000 3,350 (145) 3,495 35
MIS Feb. 10, 1998 1,200 138,462 1,440 -- 2,640 (396) 3,036 35
DST May 5, 1998 1,000 9,600 150 -- 1,150 (200) 1,350 35
Louden June 30, 1998 2,579 217,486 3,000 6,300 11,879 595 11,284 35
LINC July 17, 1998 21,545 -- -- -- 21,545 328 21,217 35
PowerCrew Nov. 4, 1998 2,763 72,522 800 -- 3,563 (146) 3,709 35
Global Dec. 10, 1998 24,000 738,178 8,000 -- 32,000 3,060 25,540 35
3,400(C) 10
------- ------------ --------- ------------- ------------- -------- ------------- --------
$98,987 3,345,479 $35,950 $24,656 $159,593 $9,303 $12,855 $137,435
------- ------------ --------- ------------- ------------- -------- ------------- --------
------- ------------ --------- ------------- ------------- -------- ------------- --------
</TABLE>
- ------------------------
(A) Represents amount allocated to in-process research and development.
(B) Represents amount allocated to existing technology.
(C) Represents amount allocated to management services agreement.
29
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
Of the total cash paid for the operating companies reported above, escrow
deposits of $2,750,000 are still held by the Company pending completion of final
net worth adjustments for PowerCrew and Global. Interest on the escrow balance
of $6,000 has been recorded as of December 31, 1998.
Pursuant to contingent payment agreements entered into as part of the
acquisitions, ten of the operating companies are eligible to receive contingent
consideration in the form of additional common stock and cash. Such contingent
consideration is based on a multiple of earnings and may be paid if these
companies achieve a level of earnings in excess of projected earnings. As of
December 31, 1998, the operating companies have earned approximately $24,656,000
of contingent consideration, of which $7,283,000 is payable in cash. The
remaining unearned maximum consideration equals $35,494,000 covering a period
from 1999 to 2001. 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.
The Company has accounted for the acquisitions of the operating companies as
purchase business combinations. The excess of purchase price over the fair
values of the net assets acquired has been recorded as goodwill, which is being
amortized on a straight-line basis. The purchase price allocation is subject to
change as additional information becomes available.
The results of operations of all 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 fiscal year for the years
ended December 31, (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Revenues.............................................................. $ 180,296 $ 227,528
Net income............................................................ 6,802 10,547
Net income per basic share............................................ $ 0.72 $ 0.88
Net income per diluted share.......................................... $ 0.72 $ 0.84
</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 and benefits to the
stockholders of the operating companies to which they have agreed prospectively;
reductions in profit sharing distributions to stockholders of one of the
operating companies to which they have agreed prospectively; interest on assumed
borrowings; 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 December 31, 1997 and
1998 were approximately $1,435,000 and $7,311,000, respectively, which increase
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 1997 or at the beginning
of 1998 or of future operations of the combined companies because the operating
companies were not under common control or management and had different tax and
capital structures during the periods presented.
30
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment were comprised of the following at December 31, (in
thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Computer equipment.......................................................... $ -- $ 4,044
Furniture, fixtures and equipment........................................... -- 1,158
Leasehold improvements...................................................... -- 393
--------- ---------
-- 5,595
Less accumulated depreciation............................................... -- 1,266
--------- ---------
$ -- $ 4,329
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the year ended December 31, 1998 was approximately
$1,266,000. There was no depreciation expense in 1997.
5. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles were comprised of the following at December
31, (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Goodwill on purchase of operating companies............................ $ -- $ 137,435
Acquired contract rights............................................... -- 5,355
Acquired technology.................................................... -- 2,500
Technology license..................................................... -- 3,100
Capitalized software development....................................... -- 184
--------- ----------
-- 148,574
Less accumulated amortization.......................................... -- 3,411
--------- ----------
$ -- $ 145,163
--------- ----------
--------- ----------
</TABLE>
Amortization expense for the year ended December 31, 1998 was approximately
$3,411,000. There was no amortization expense in 1997. Included in selling,
general and administrative expenses for the year ended December 31, 1998 was a
$5.0 million charge for purchased in-process research and development in
connection with the acquisition of one of the operating companies.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
At December 31, 1998, accrued expenses included the payable for the escrow
deposits related to PowerCrew and Global of approximately $2.8 million. Other
accrued expenses were as follows: accrued salaries, vacation, payroll taxes and
related employee benefits; accrued bonuses and commissions; the provision for
income taxes; warranty reserves; and other miscellaneous current liabilities. At
December 31, 1997, accrued expenses represented professional fees incurred prior
to the Offering.
7. DEBT
The Company has a $50.0 million revolving credit facility (the "Revolver")
with a major commercial bank. The Revolver includes a letter of credit facility
of up to $15.0 million, of which $6.65 million is
31
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
currently issued and outstanding to secure floor planning facilities with two
separate lending organizations. Borrowings under the Revolver bear interest
beginning at the London Interbank Offering Rate ("LIBOR") plus 150 to 250 basis
points or the Base Rate, which is the greater of the Federal funds Rate plus
0.50% or the Prime rate plus 25 to 125 basis points, at the option of the
Company. The interest rates are based on a pricing ratio of debt to earnings.
The Company is also required to pay a commitment fee at the annual percentage
rate of 0.50% as defined in the agreement. The Company must comply with various
loan covenants including (i) maintenance of certain financial ratios; (ii)
restrictions on additional indebtedness; (iii) restrictions on liens,
guarantees, advances and dividends; and (iv) restrictions on the type, size and
number of acquisitions. The Revolver, which expires in April 2001, is intended
to be used for acquisitions, working capital and general corporate purposes.
Borrowings on the Revolver were $24.0 million at December 31, 1998 carried at a
weighted average interest rate of 6.63%. The Company has floor planning
facilities of $13.75 million to support the working capital needs of the
companies in its desktop services division. These facilities are secured by
$6.65 million of letters of credit, issued under the Revolver and certain of the
assets of the desktop service division. The primary floor planning facility
requires the Company to comply with various loan covenants identical to those
required under the Revolver. The facility continues until such time that either
party gives 60 days written notice of termination or there is an event of
default. Borrowings under the floor planning facilities are included in accounts
payable at December 31, 1999.
Indebtedness under both the Revolver and the primary floor planning facility
are collateralized by substantially all of the assets of the Company.
8. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK AND PREFERRED STOCK--The Company effected a one-for-5.72568
reverse stock split effective on the day preceding the date of the final
Prospectus for the Offering. In addition, on October 1, 1997, the Company
increased the number of authorized shares of common stock to 49 million and
authorized 1 million shares of $.01 par value preferred stock. The effects of
the Common Stock split and the increase in the shares of authorized common stock
have been retroactively reflected in the financial statements.
In connection with the organization of the Company, during 1996 Condor
issued 1,413,806 shares of Common Stock to The Commonwealth Group
("Commonwealth") and other founders in exchange for consulting, financial
advisory and related services provided to Condor and, with respect to
Commonwealth, its commitment to provide funds necessary to effect the Mergers
and the Offering. These non-monetary assets were considered to have an aggregate
value of $87,000. Amounts due to stockholder were reimbursed out of the proceeds
of the Offering, together with interest on such advances at the prime rate.
Subsequent to the issuance of shares to Commonwealth, such shares were
distributed to its individual principals.
During 1997, 255,820 of Common Stock shares were issued in exchange for
services associated with the Offering that are considered to have an aggregate
value of $452,031 and 39,297 shares were sold to investors for $150,000. Also
during 1997, the Company issued a total of 183,384 shares of Common Stock to
management. As a result, the Company recorded for financial statement purposes a
non-recurring non-cash compensation charge of approximately $1,771,000 for the
year ended December 31, 1997, representing the estimated fair value of the
shares on the date of issuance.
32
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
On February 5, 1998, the Company sold 5,900,000 shares of Common Stock to
the public at $13.00 per share ("the Offering"). The net proceeds to the Company
from the Offering (after deducting underwriting commissions and other offering
costs) were $62.2 million. Of this amount, $47.1 million was used to pay the
cash portion of the purchase prices of the Founding Companies.
In connection with the Offering, the Company granted to the underwriters an
option to purchase an additional 885,000 shares at $13.00 per share. On March 1,
1998, the underwriters exercised this option. The net proceeds to the Company
from this sale of shares was $10.7 million (after deducting underwriting
commissions).
Total shares issued for the purchase of the Founding Companies were
2,307,693 on February 10, 1998. Also during 1998, the Company issued 9,600
unregistered shares and 1,028,186 registered shares for the purchase of four
Other Acquisitions as described in Note 3.
TREASURY STOCK--In February 1998, the Company repurchased 13,178 shares of
Common Stock from one of the founding investors in the Company. The Common Stock
was repurchased for $194,376 and has been recorded as a separate component of
stockholders' equity.
9. EARNINGS PER SHARE
The Company calculates and presents earnings per share ("EPS") 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 tables represent reconciliations between the weighted average
common stock outstanding used in basic EPS and the weighted average common and
common equivalent shares outstanding used in diluted EPS for the years ended
December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Weighted average common stock outstanding (basic shares outstanding)....... 1,680 10,193
Stock options, as if converted............................................. -- 85
Contingent purchase price adjustment....................................... -- 489
--------- ---------
Weighted average common and common equivalent shares outstanding (diluted
shares outstanding)...................................................... 1,680 10,767
--------- ---------
--------- ---------
</TABLE>
33
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
INCOME TAX PROVISION--The provision for income taxes consisted of the
following amounts for the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Provision (benefit) for income tax:
Current
U.S. federal............................................................. $ -- $ 6,739
State and local.......................................................... -- 1,476
--------- ---------
-- 8,215
Deferred
U.S. federal............................................................. (869) (242)
State and local.......................................................... (163) (66)
--------- ---------
(1,032) (308)
--------- ---------
Total income tax (benefit) expense......................................... (1,032) 7,907
Valuation allowance........................................................ 1,032 (1,032)
--------- ---------
$ -- $ 6,875
--------- ---------
--------- ---------
</TABLE>
A reconciliation of the tax provision at the U.S. statutory rate to the
effective income tax expense rate as reported is as follows for the years ended
December 31,
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Tax (benefit) provision at U.S. statutory rate................................. (34.0)% 35.0%
State income taxes, net of federal benefit..................................... (4.0) 8.1
Net operating loss............................................................. 38.0 (7.9)
Intangible amortization........................................................ -- 6.7
Research and development write-off............................................. -- 14.1
Other.......................................................................... -- (0.6)
--------- ---
Effective income tax expense rate.............................................. 0.0% 55.4%
--------- ---
--------- ---
</TABLE>
DEFERRED INCOME TAXES
Deferred tax assets (liabilities) include the following at December 31, (in
thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Employee benefits........................................................... $ -- $ 75
Accelerated depreciation.................................................... -- (61)
Accrued liabilities not currently deductible................................ -- 108
Change in accounting method from cash to accrual for tax reporting.......... -- (285)
--------- ---------
$ -- $ (163)
--------- ---------
--------- ---------
</TABLE>
34
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Included in the net assets acquired through acquisitions in 1998 is
approximately $471,000 of net deferred tax liabilities. Deferred tax assets and
liabilities are included in prepaids and other current assets and other
long-term obligations on the consolidated balance sheet as of December 31, 1998.
11. STOCK COMPENSATION
In October 1997, the Board of Directors and the Company's stockholders
approved the Company's 1997 Long-Term Incentive Plan (the "Plan"). The purpose
of the Plan is to provide a means by which the Company can attract and retain
executive officers, key employees, directors, consultants and other service
providers and to compensate such persons in a way that provides additional
incentives and enables such persons to increase their ownership interests in the
Company. Individual awards under the Plan may take the form of one or more of:
(i) either incentive stock options ("ISOs") or non-qualified stock options
("NQSOs"); (ii) stock appreciation rights ("SARs"); (iii) restricted or deferred
stock; (iv) dividend equivalents; (v) bonus shares and awards in lieu of Company
obligations to pay cash compensation, and (vi) other awards not otherwise
provided for, the value of which is based in whole or in part upon the value of
the common stock of the Company.
The maximum number of shares of Common Stock that may be subject to
outstanding awards under the Plan will not exceed 15% of the aggregate number of
shares of Common Stock outstanding, minus the number of shares previously issued
pursuant to awards granted under the Plan. The number of shares deliverable upon
the exercise of ISOs is limited to 1,000,000. The Plan also provides that no
participant may be granted, in any calendar year, options or SARs for more than
400,000 shares or other awards settleable by delivery of more than 200,000
shares and limits cash awards in any calendar year to an amount equal to the
fair market value of the number of shares at the date of grant or the date of
settlement, whichever is greater.
In addition to authorizing grants of awards to eligible persons, the Plan
authorizes automatic grants of NQSOs to non-employee directors. Under these
provisions, each person serving or who has agreed to serve as a non-employee
director at the commencement of the Offering was granted automatically an
initial option to purchase 10,000 shares, and thereafter each person who becomes
a non-employee director will be granted automatically an initial option to
purchase 10,000 shares upon such person's initial election as a director. In
addition, these provisions authorize the automatic annual grant to each
non-employee director of an option to purchase 5,000 shares at each annual
meeting of stockholders following the Offering, provided, however, that a
director will not be granted an annual option if he or she was granted an
initial option during the preceding three months. These options have an exercise
price equal to the fair market value of common stock on the date of grant and
the options will expire at the earlier of 10 years after the date of grant or
one year after the date the participant ceases to serve as a director of the
Company. These options become exercisable one to three years after the date of
grant, except that an option may be forfeited upon a participant's termination
of service as a director for reasons other than death or disability if the date
of termination is less than 11 months after the date of grant.
During 1998, and in addition to the options automatically granted to
non-employee directors, options in the form of NQSOs to purchase shares of the
Company's Common Stock were granted to the executive officers and employees of
the Company. Each of the foregoing options has an exercise price equal to the
fair market value on the date of grant, and vests ratably over two to three
years after the date of grant as determined by the grant. These options will not
be exercisable until they are vested, and unvested options generally will be
forfeited upon a termination of employment that is voluntary by the participant.
Upon a
35
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK COMPENSATION (CONTINUED)
change of control of the Company, vesting of all options will be accelerated.
The options generally will expire on the earlier of 10 years after the date of
grant or three months after termination of employment.
The Company has elected to use the intrinsic value method to account for its
stock-based compensation plans. Pro forma disclosures as if the Company adopted
the fair value recognition requirements follow. A summary of the status of the
Company's stock options as of December 31, 1998 and changes during then year
ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- -------------
<S> <C> <C>
Outstanding at the beginning of the year -- $ --
Granted 1,606,469 13.27
Exercised -- --
Forfeited (179,291) 14.58
----------
Outstanding at the end of the year 1,427,178 $ 13.11
----------
----------
Options exercisable at the end of the year 53,434 $ 13.00
----------
----------
Weighted average fair value of options granted during the year $ 5.65
----------
----------
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for 1998: (1) expected volatility of 58%; (2) risk free interest
rate of 5.17%; and (3) expected life of three years. The following table
summarizes information about stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER WEIGHTED AVERAGE REMAINING CONTRACTUAL
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE
- ------------------------------------- ----------- ----------------- -----------------------
<S> <C> <C> <C>
9.00 to $14.00 1,210,734 $ 12.73 9.21 years
$14.01 to $16.00 216,444 $ 15.21 9.57 years
-----------
Total 1,427,178
-----------
-----------
</TABLE>
If compensation cost of the Company's grants for stock-based compensation
plans had been determined using the fair value method, the Company's net income
and basic and diluted earnings per share for 1998 would approximate the pro
forma amounts below (in thousands, except per share data):
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Net Income.......................................................... $ 5,533 $ 4,436
Basic earnings per share............................................ $ 0.54 $ 0.44
Diluted earnings per share.......................................... $ 0.51 $ 0.41
</TABLE>
12. EMPLOYEE STOCK PURCHASE PLAN
On September 24, 1998, the stockholders of the Company approved the adoption
of the 1998 Employee Stock Purchase Plan ("ESPP") to provide employees of the
Company with the right to purchase common stock at a discount from the market
price through payroll deductions. A total of 325,000 shares are authorized for
issuance under the ESPP.
36
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
The purchase price of shares under the plan is the lower of 85 percent of
the share price on the first day of the offering period or the share price on
the purchase date. All employees are eligible to participate except (i) those
employed for less than 20 hours per week; (ii) employees who, as a result of
participation in the ESPP, would own stock or hold options to purchase stock
possessing five percent or more of the total combined voting power or value of
all classes of stock of the Company; and (iii) employees whose right to purchase
common stock under the ESPP accrues at a rate which exceeds $25,000 worth of
stock for each calendar year in which such option is outstanding at any time.
The initial offering period commenced on November 2, 1998. As of December 31,
1998, no purchases were made under the ESPP.
13. RETIREMENT PLANS
During 1998, the operating companies had individual defined contribution or
profit sharing retirement plans in place. The total employer contribution to
these plans in 1998 was approximately $341,000. On December 31, 1998,
contributions to all of the individual plans were terminated and employees
became eligible to join a new company-wide retirement plan.
On January 1, 1999, the Company established a defined contribution 401(k)
Retirement Savings Plan (the "401(k) Plan") to provide retirement benefits for
eligible employees. Employees are eligible to enter the 401(k) Plan as of the
first day of the first calendar quarter occurring after they begin employment,
as long as they have attained age 18. Employees are able to contribute up to 15%
of their salary to the 401(k) Plan. During 1999, the Company will contribute
100% of the first 3% and 50% of the next 3% contributed by the employee.
Employer contributions vest ratably over 5 years. All non-vested employer
contributions are forfeited upon the employee's termination. It is intended that
the operating company 401(k) plans will merge into the Company 401(k) Plan.
37
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1997 1998
--------- ----------
<S> <C> <C>
(IN THOUSANDS)
Cash Paid during the year for:
Federal income tax payments................................................................ $ -- $ 3,825
State income tax payments.................................................................. -- $ 1,036
Interest payments.......................................................................... -- 194
Supplemental disclosure of non-cash transactions:
Liability incurred for technology license.................................................. $ -- $ 1,550
Business acquisitions:
Cash paid for business acquisitions........................................................ $ -- $ 96,237
Less cash acquired......................................................................... -- (6,069)
--------- ----------
Cash paid for business acquisitions, net................................................... -- 90,168
Liability incurred for contingent purchase liability....................................... 24,656
Purchase price in escrow................................................................... 2,750
Issuance of common stock for business acquisitions......................................... -- 35,950
--------- ----------
Total purchase price....................................................................... -- 153,524
In-process research and development........................................................ -- (5,000)
Less fair value of net assets acquired, net of cash........................................ -- (3,234)
--------- ----------
Excess of fair value over net assets acquired.............................................. $ -- $ 145,290
--------- ----------
--------- ----------
</TABLE>
The excess of fair value over net assets acquired of $145.3 million includes
goodwill, internally developed software and other intangibles acquired in
conjunction with the acquisitions of the operating companies.
15. SEGMENT REPORTING
During the fourth quarter, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information". This standard governs the way the Company reports
information about its operating segments.
During 1998, the Company had three reportable segments: Consulting Services,
System Services and Desktop Services. Each of these three segments corresponds
to the Company's existing divisional structure.
The Consulting Services Division provides strategic IT planning, decision
support, management consulting, and interactive media services. 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,
business process automation and Year 2000 consulting.
The System Services Division offers its clients a single source for a wide
range of IT services required to successfully design, develop and implement
integrated IT solutions in diverse computing environments.
38
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT REPORTING (CONTINUED)
The division's services include custom application development, enterprise
resource planning, software package implementation, contract staffing and
recruiting, sale and implementation of the Safari InfoTOOLS report writer
software and training and continuing education
The Desktop Services Division provides call-center development 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 accounting policies of the reportable 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.
Summarized financial information concerning the Company's reportable
segments at December 31, 1998 is shown in the following table (in thousands).
There were no segment operations prior to the Mergers with the Founding
Companies. The "Other" column includes corporate related items.
<TABLE>
<CAPTION>
CONSULTING SYSTEM DESKTOP OTHER CONSOLIDATED
---------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
IT service revenues........... $17,602 $53,140 $21,773 $ -- $ 92,515
Hardware procurement
revenues.................... -- -- 76,318 -- 76,318
---------- ------- ------- ----------- ------------
Total revenues................ 17,602 53,140 98,091 -- 168,833
Income from operations........ 3,462 6,308 6,954 (5,000)(1) 11,724
Depreciation & amortization... 933 2,774 970 -- 4,677
Total assets.................. 42,759 119,062 36,509 2,312 200,642
Capital expenditures.......... $ 386 $ 1,177 $ 635 $ 608 $ 2,806
</TABLE>
- ------------------------
(1) Represents a charge of $5 million for in-process research and development
recorded in the first quarter of 1998.
Information about geographic areas has not been included as revenue and
long-lived assets attributable to countries outside of the United States are not
material to the financial statements taken as a whole.
There were no customers that individually comprised more than 10% of
revenue.
16. NEW ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and for Hedging Activities"
("SFAS No. 133"). SFAS No. 133 requires all derivatives to be recorded on the
balance sheet at fair value and establishes "special accounting" for the
following three different types of hedges: hedges of changes in the fair value
of assets, liabilities or firm commitments; hedges of the variable cash flows of
forecasted transactions; and hedges of foreign currency exposures of net
investments in foreign operations. SFAS No. 133 is effective for years beginning
after June 15, 1999, with earlier adoption permitted. The Company believes that
the effect of adoption of SFAS No. 133 will not be material to its financial
position or results of operations.
39
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. RELATED PARTY TRANSACTIONS
As of December 31, 1997, a founding stockholder had advanced the Company
approximately $2.5 million for the payment of Offering and Merger-related costs.
At December 31, 1997, the Company had deferred these costs, and they were offset
against the proceeds from the Offering in 1998. Such costs were reimbursed, plus
interest at the prime rate, subsequent to the Offering.
The Company has a management services agreement with an ERP software license
reseller to provide implementation services related to that company's sale of
SAP R/3 licenses to middle market customers in New England. This agreement has a
term of ten years. The reseller is owned by the former owner of Global Core
Strategies, Inc., who is a consultant to the Company.
18. COMMITMENTS AND CONTINGENCIES
LAWSUIT--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, alleging breach of contract, tortious interference with Emtec's
business relationship with Corporate Access and CHMC, two of the Founding
Companies, and misappropriation of a trade secret arising out of the
participation of CHMC and Corporate Access in the consolidation and the Offering
without Emtec's written consent. In connection with the three causes of action,
Emtec demands that the defendants disgorge the financial benefits that they have
and will obtain as a result of their breach of contract and seeks compensatory
and punitive damages. On December 31, 1997, the defendants filed an Answer,
denying the allegations and asserting various affirmative defenses. The court
denied Emtec's 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. Trial of this matter could be scheduled in
the near future. The Company 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. The Company is a
party to other legal proceedings and disputes related to the Company's day to
day business operations, none of which are material to the financial position or
results of operations of the Company.
40
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES--The Company leases certain equipment and office space
under operating lease arrangements expiring through 2008. Future minimum rental
payments under non-cancelable operating leases at December 31, 1998 were as
follows (in thousands):
<TABLE>
<S> <C>
1999....................................................... $ 3,242
2000....................................................... 2,782
2001....................................................... 2,147
2002....................................................... 1,533
2003....................................................... 1,015
Thereafter................................................. 1,279
---------
$ 11,998
---------
---------
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998 was
approximately $49,000 and $2,243,000, respectively.
41
<PAGE>
SCHEDULE II
CONDOR TECHNOLOGY SOLUTIONS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at beginning of period................................................................... $ -- $ --
Additions:
Charged to expense............................................................................. -- 314
Charged to other accounts:
Investment in operating companies............................................................ -- 497
Deductions:.................................................................................. -- (239)
--------- ---------
Balance at end of period......................................................................... $ -- $ 572(1)
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Included in accounts receivable, net
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
42
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to Item 4A of Part I hereof for certain information
required by this Item 10. Additional information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement for the
1999 Annual Meeting of Shareholders to be filed with the Commission under
Section 14(a) of the Securities Exchange Act of 1934 on or before April 30,
1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference
from the Company's definitive proxy statement for the 1999 Annual Meeting of
Shareholders to be filed with the Commission under Section 14(a) of the
Securities Exchange Act of 1934 on or before April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference
from the Company's definitive proxy statement for the 1999 Annual Meeting of
Shareholders to be filed with the Commission under Section 14(a) of the
Securities Exchange Act of 1934 on or before April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference
from the Company's definitive proxy statement for the 1999 Annual Meeting of
Shareholders to be filed with the Commission under Section 14(a) of the
Securities Exchange Act of 1934 on or before April 30, 1999.
43
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are being filed as part of this Report:
<TABLE>
<CAPTION>
(a)(1) The following financial statements are included in Part II, Item 8 of this
Report:
PAGE
-----
<S> <C> <C>
CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants............................................... 21
Consolidated Balance Sheets..................................................... 22
Consolidated Statements of Operations........................................... 23
Consolidated Statement of Changes in Stockholders' Equity (Deficit)............. 24
Consolidated Statements of Cash Flows........................................... 25
Notes to Consolidated Financial Statements...................................... 26
(a)(2) The following Financial Statement Schedules are filed as a part of the Annual
Report:
II. Valuation and Qualifying Accounts........................................... 42
All other schedules are omitted because they are not applicable or the required information
is shown in the financial statements or the notes thereto.
(a)(3) The following Exhibits are filed as part of this Annual Report on Form 10-K as required by
Item 601 of Regulation S-K. The Exhibits designated by an asterisk are management contracts
and compensatory plans and arrangements required to be filed as Exhibits to this Annual
Report on Form 10-K.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
2.1 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MST
Acquisition Corp., Management Support Technology Corporation and the Stockholders named therein
(Incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-37179)).
2.2 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, CHMC
Acquisition Corp., Computer Hardware Maintenance Company, Inc. and the Stockholders named therein
(Incorporated by reference to Exhibit 2.2 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-37179)).
2.3 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Federal
Acquisition Corp., Federal Computer Corporation and the Stockholders named therein (Incorporated by
reference to Exhibit 2.3 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
2.4 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Access
Acquisition Corp., Corporate Access, Inc. and the Stockholders named therein (Incorporated by
reference to Exhibit 2.4 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
2.5 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
Interactive Acquisition Corp., Interactive Software Systems Incorporated and the Stockholders named
therein (Incorporated by reference to Exhibit 2.5 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-37179)).
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
2.6 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, US Comm
Acquisition Corp., U.S. Communications, Inc. and the Stockholders named therein (Incorporated by
reference to Exhibit 2.6 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
2.7 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, InVenture
Acquisition Corp., InVenture Group, Inc. and the Stockholders named therein (Incorporated by
reference to Exhibit 2.7 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
2.8 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MIS
Acquisition Corp., MIS Technologies, Inc. and the Stockholders named therein (Incorporated by
reference to Exhibit 2.8 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
3.1 -- Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to
Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)).
3.1A -- Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1A to Amendment No. 4 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-37179)).
3.2 -- By-Laws of the Company as amended (Incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (Registration No. 333-37179)).
4 -- Form of Certificate Evidencing Ownership of Common Stock of the Company (Incorporated by reference to
Exhibit 4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
4.1 -- Condor Technology Solutions, Inc. Employee Stock Purchase Plan (Incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-8 (Registration No. 333-64505)).
4.2 -- Condor Technology Solutions, Inc. 401(k) Retirement Saving Plan (Incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-8 (Registration No. 333-73055)).
10.1* -- 1997 Long-Term Incentive Plan of the Company (Incorporated by reference to Exhibit 10.1 to Amendment
No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)).
10.1.1* -- 1997 Long-Term Incentive Plan of the Company As Amended and Restated
10.2* -- Employment Agreement between the Company and Kennard F. Hill (Incorporated by reference to Exhibit
10.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)).
10.3* -- Employment Agreement between the Company and C. Lawrence Meador (Incorporated by reference to Exhibit
10.3 of the Registrant's Report on Form 10-K for the year ended December 31, 1997 (Registration No.
0-23635)).
10.4* -- Employment Agreement between the Company and Daniel J. Roche (Incorporated by reference to Exhibit
10.4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.5* -- Employment Agreement between the Company and William J. Caragol, Jr. (Incorporated by reference to
Exhibit 10.7 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration
No. 333-37179)) and Amendment No. 1 to Employment Agreement between the Company and William J.
Caragol, Jr. (Incorporated by reference to Exhibit 10.6.2 to the Registrant's Quarterly Report on
Form 10-Q for the three months ended June 30, 1998).
10.6 -- Indemnification Agreement by and between SCM LL.C d/b/a The Commonwealth Group and the Company
(Incorporated by reference to Exhibit 10.8 to Amendment No. 2 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-37179)).
10.7 -- Business Loan and Security Agreement between the Company and First Union Commercial Corporation and
related Stock Purchase Agreement and Revolving Promissory Note (Incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 1998) and
First Modification to Business Loan and Security Agreement between the Company and First Union
Commercial Corporation and related ancillary documents (Incorporated by reference to Exhibit 10.1.1
to the Registrant's Form 8-K/A Current Report as of February 22, 1998 (Registration No. 0-23635)).
10.8 -- Agreement for Wholesale Financing between Deutsche Financial Service Corporation and Computer
Hardware Maintenance Company, Inc., Corporate Access, Inc., and U.S. Communications, Inc. and related
Guaranty and Addendum to Guaranty and Agreement for Wholesale Financing (Incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31,
1998).
10.9* -- Employment Agreement between the Company and John F. McCabe (Incorporated by reference to Exhibit
10.10 to the Registrant's Quarterly Report on From 10-Q for the three months ended June 30, 1998).
10.10 -- Stock Purchase Agreement, dated as of July 16, 1998, by and among the Company and the stockholders of
LINC Systems Corporation (Incorporated by reference to Exhibit 10.11 to the Registrant's Quarterly
Report on Form 10-Q for the three months ended June 30, 1998).
10.11 -- Purchase Agreement, among Condor Technology Solutions, Inc., Global Core Strategies, Inc., and Jerry
Ward, dated December 10, 1998 (Incorporated by reference to Exhibit 2.2 to the Registrant's Form 8-K
Current Report as of December 22, 1998 (Registration No. 0-23635)).
10.12* -- Employment Agreement between LINC Systems Corporation and Robert F. Hefner
10.13* -- Employment Agreement between Computer Hardware Maintenance Company and Michael G. Paglaiccetti
21 -- List of Subsidiaries of the Company.
23 -- Consent of PricewaterhouseCoopers LLP
24 -- Power of Attorney (on signature page hereof).
27 -- Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K:
The Company filed a Form 8-K Current Report on December 22, 1998 (as amended
on February 22, 1998) related to the Acquisition of Global Core Strategies
Acquisition, Inc.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BY: /S/ KENNARD F. HILL
-----------------------------------------
Kennard F. Hill
Chief Executive Officer
Date: March 18, 1999
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and constitutes
Kennard F. Hill and Daniel J. Roche, and each of them singly, his true and
lawful attorneys-in-fact with full power of substitution and resubstitution, for
him or her and in his or her name, place and stead, in any and all capacities to
sign and file any and all amendments to this report with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, and he or she hereby ratifies and confirms all that said
attorneys-in-fact or any of them, or their substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board and
/s/ KENNARD F. HILL Chief Executive Officer
- ------------------------------ (Principal Executive March 16, 1999
Kennard F. Hill Officer)
/s/ DANIEL J. ROCHE President and Chief
- ------------------------------ Operating Officer March 16, 1999
Daniel J. Roche
Vice President and Chief
/s/ WILLIAM J. CARAGOL Financial Officer
- ------------------------------ (Principal Financial and March 16, 1999
William J. Caragol Accounting Officer)
/s/ C. LAWRENCE MEADOR Vice Chairman of the Board
- ------------------------------ March 16, 1999
C. Lawrence Meador
/s/ PETER T. GARAHAN Director
- ------------------------------ March 13, 1999
Peter T. Garahan
/s/ ANN TORRE GRANT Director
- ------------------------------ March 13, 1999
Ann Torre Grant
/s/ WILLIAM E. HUMMEL Director
- ------------------------------ March 13, 1999
William E. Hummel
/s/ DENNIS E. LOGUE Director
- ------------------------------ March 13, 1999
Dennis E.Logue
/s/ EDWARD J. MATHIAS Director
- ------------------------------ March 13, 1999
Edward J. Mathias
/s/ WILLIAM M. NEWPORT Director
- ------------------------------ March 15, 1999
William M. Newport
47
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
2.1 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MST
Acquisition Corp., Management Support Technology Corporation and the Stockholders named therein
(Incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-37179)).
2.2 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, CHMC
Acquisition Corp., Computer Hardware Maintenance Company, Inc. and the Stockholders named therein
(Incorporated by reference to Exhibit 2.2 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-37179)).
2.3 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Federal
Acquisition Corp., Federal Computer Corporation and the Stockholders named therein (Incorporated by
reference to Exhibit 2.3 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
2.4 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Access
Acquisition Corp., Corporate Access, Inc. and the Stockholders named therein (Incorporated by
reference to Exhibit 2.4 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
2.5 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
Interactive Acquisition Corp., Interactive Software Systems Incorporated and the Stockholders named
therein (Incorporated by reference to Exhibit 2.5 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-37179)).
2.6 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, US Comm
Acquisition Corp., U.S. Communications, Inc. and the Stockholders named therein (Incorporated by
reference to Exhibit 2.6 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
2.7 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, InVenture
Acquisition Corp., InVenture Group, Inc. and the Stockholders named therein (Incorporated by
reference to Exhibit 2.7 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
2.8 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MIS
Acquisition Corp., MIS Technologies, Inc. and the Stockholders named therein (Incorporated by
reference to Exhibit 2.8 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
3.1 -- Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to
Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)).
3.1A -- Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1A to Amendment No. 4 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-37179)).
3.2 -- By-Laws of the Company as amended (Incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (Registration No. 333-37179)).
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
4 -- Form of Certificate Evidencing Ownership of Common Stock of the Company (Incorporated by reference to
Exhibit 4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
4.1 -- Condor Technology Solutions, Inc. Employee Stock Purchase Plan (Incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-8 (Registration No. 333-64505)).
4.2 -- Condor Technology Solutions, Inc. 401(k) Retirement Saving Plan (Incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-8 (Registration No. 333-73055)).
10.1* -- 1997 Long-Term Incentive Plan of the Company (Incorporated by reference to Exhibit 10.1 to Amendment
No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)).
10.1.1 -- 1997 Long-Term Incentive Plan of the Company As Amended and Restated
10.2* -- Employment Agreement between the Company and Kennard F. Hill (Incorporated by reference to Exhibit
10.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)).
10.3* -- Employment Agreement between the Company and C. Lawrence Meador (Incorporated by reference to Exhibit
10.3 of the Registrant's Report on Form 10-K for the year ended December 31, 1997 (Registration No.
0-23635)).
10.4* -- Employment Agreement between the Company and Daniel J. Roche (Incorporated by reference to Exhibit
10.4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
10.5* -- Employment Agreement between the Company and William J. Caragol, Jr. (Incorporated by reference to
Exhibit 10.7 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration
No. 333-37179)) and Amendment No. 1 to Employment Agreement between the Company and William J.
Caragol, Jr. (Incorporated by reference to Exhibit 10.6.2 to the Registrant's Quarterly Report on
Form 10-Q for the three months ended June 30, 1998).
10.6 -- Indemnification Agreement by and between SCM LL.C d/b/a The Commonwealth Group and the Company
(Incorporated by reference to Exhibit 10.8 to Amendment No. 2 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-37179)).
10.7 -- Business Loan and Security Agreement between the Company and First Union Commercial Corporation and
related Stock Purchase Agreement and Revolving Promissory Note (Incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 1998) and
First Modification to Business Loan and Security Agreement between the Company and First Union
Commercial Corporation and related ancillary documents (Incorporated by reference to Exhibit 10.1.1
to the Registrant's Form 8-K/A Current Report as of February 22, 1998 (Registration No. 0-23635)).
10.8 -- Agreement for Wholesale Financing between Deutsche Financial Service Corporation and Computer
Hardware Maintenance Company, Inc., Corporate Access, Inc., and U.S. Communications, Inc. and related
Guaranty and Addendum to Guaranty and Agreement for Wholesale Financing (Incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31,
1998).
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
10.9* -- Employment Agreement between the Company and John F. McCabe (Incorporated by reference to Exhibit
10.10 to the Registrant's Quarterly Report on From 10-Q for the three months ended June 30, 1998).
10.10 -- Stock Purchase Agreement, dated as of July 16, 1998, by and among the Company and the stockholders of
LINC Systems Corporation (Incorporated by reference to Exhibit 10.11 to the Registrant's Quarterly
Report on Form 10-Q for the three months ended June 30, 1998).
10.11 -- Purchase Agreement, among Condor Technology Solutions, Inc., Global Core Strategies, Inc., and Jerry
Ward, dated December 10, 1998 (Incorporated by reference to Exhibit 2.2 to the Registrant's Form 8-K
Current Report as of December 22, 1998 (Registration No. 0-23635)).
10.12* -- Employment Agreement between LINC Systems Corporation and Robert F. Hefner
10.13* -- Employment Agreement between Computer Hardware Maintenance Company and Michael G. Paglaiccetti
21 -- List of Subsidiaries of the Company.
23 -- Consent of PricewaterhouseCoopers LLP
24 -- Power of Attorney (on signature page hereof).
27 -- Financial Data Schedule.
</TABLE>
50
<PAGE>
Exhibit 10.1.1
AMENDED AND RESTATED
CONDOR TECHNOLOGY SOLUTIONS, INC.
1997 LONG-TERM INCENTIVE PLAN
1. PURPOSE. The purpose of this 1997 Long-Term Incentive Plan (the
"Plan") of Condor Technology Solutions, Inc., a Delaware corporation (the
"Company"), is to advance the interests of the Company and its stockholders by
providing a means to attract, retain, motivate and reward executive officers,
key employees, directors and consultants of and service providers to the Company
and its subsidiaries (including consultants and others providing services of
substantial value) and to enable such persons to acquire or increase their
proprietary interest in the Company, thereby promoting a closer identity of
interests between such persons and the Company's stockholders.
2. DEFINITIONS. The definitions of awards under the Plan, including
Options, SARs (including Limited SARs), Restricted Stock, Deferred Stock, Stock
granted as a bonus in lieu of other awards, Dividend Equivalents and Other
Stock-Based Awards are set forth in Section 6 of the Plan. Such awards, together
with any other right or interest granted to a Participant under the Plan, are
termed "Awards." for purposes of the Plan, the following additional terms shall
be defined as set forth below:
(a) "Award Agreement" means any written agreement, contract, notice
or other instrument or document evidencing an Award.
(b) "Beneficiary" shall mean the person, persons, trust or trusts
which have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or, if there is no
designated Beneficiary or surviving designated Beneficiary, then the person,
persons, trust or trusts entitled by will or the laws of descent and
distribution to receive such benefits.
(c) "Beneficial Owner" and related terms shall have the meaning
ascribed under Section 13(d) of the Exchange Act, including Rule 13d-3, and any
successor thereto.
(d) "Board" means the Board of Directors of the Company.
(e) A "Change in Control" shall be deemed to have occurred if:
1
<PAGE>
(i) any person, other than the Company or an employee benefit
plan of the Company, acquires a voting security of the company and
thereafter is, directly or indirectly, the Beneficial Owner of voting
securities representing 50 percent or more of the total voting power of
all of the then-outstanding voting securities of the Company;
(ii) the following individuals no longer constitute a majority
of the members of the Board: (a) the individuals who, as of the closing
date of the Initial Public Offering, constitute the board (the "Original
Directors"); (B) the individuals who thereafter are elected to the Board
and whose election, or nomination for election, to the Board was approved
by a vote of at least two-thirds (2/3) of the Original Directors then
still in office (such directors becoming "Additional Original Directors"
immediately following their election); and (C) the individuals who are
elected to the Board and whose election, or nomination for election, to
the Board was approved by a vote of at least two-thirds (2/3) of the
Original Directors and Additional Original Directors then still in office
(such directors also becoming "Additional Original Directors" immediately
following their election);
(iii) the stockholders of the Company approve a merger,
consolidation, recapitalization or reorganization of the Company, or a
reverse stock split of outstanding voting securities, or consummation of
any such transaction if stockholder approval is not obtained, other than
any such transaction which would result in at least 75 percent of the
total voting power represented by the voting securities of the surviving
entity outstanding immediately after such transaction being Beneficially
Owned by at least 75 percent of the holders of outstanding voting
securities of the Company immediately prior to the transaction, with the
voting power of each such continuing holder relative to other such
continuing holders not substantially altered in the transaction; or
(iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets.
(f) "Code" means the Internal Revenue Code of 1986, as amended
from time to time. References to any provision of the Code shall be deemed to
include regulations thereunder and successor provisions and regulations thereto.
(g) "Committee" means the Compensation Committee of the Board, or
such other Board committee as may be designated by the Board to administer the
Plan; PROVIDED, HOWEVER, that the Committee shall consist solely
2
<PAGE>
of two or more directors. In appointing members of the Committee, the Board will
consider whether each member will qualify as a "Non-Employee Director" within
the meaning of Rule 16b-3(b)(3) and as an "outside director" within the meaning
of Treasury Regulation 1.162-27(e)(3) under Code Section 162(m), but such
members are not required to so qualify at the time of appointment or during
their term of service on the Committee.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time. References to any provision of the Exchange Act shall
be deemed to include rules thereunder and successor provisions and rules
thereto.
(i) "Fair Market Value" means, with respect to Stock, Awards or
other property, the fair market value of such Stock, Awards or other property
determined by such methods or procedures as shall be established from time to
time by the Committee; PROVIDED, HOWEVER, that (i) if the Stock is listed on a
national securities exchange or quoted in an interdealer quotation system, the
Fair Market Value of such Stock on a given date shall be based upon the last
sales price or, if unavailable, the average of the closing bid and asked prices
per share of the Stock on such date (or, if there was no trading or quotation in
the Stock on such date, on the next preceding date on which there was trading or
quotation) as reported in the WALL STREET JOURNAL (or other reporting service
approved by the Committee), (ii) the "Fair Market Value" of Stock subject to
Options granted effective upon commencement of the Initial Public Offering shall
be the Initial Public Offering price of the shares so issued and sold in the
Initial Public Offering, as set forth in the first final prospectus used in such
offering (the provisions of clause (i) notwithstanding) and (iii) the "Fair
Market Value" of Stock prior to the date of the Initial Public Offering shall be
as determined by the Board of Directors.
(j) "Initial Public Offering" shall mean the Company's first
public offering of shares of Stock in a firm commitment underwriting registered
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
(k) "ISO" means any Option intended to be and designated as an
incentive stock option within the meaning of Section 422 of the Code.
(l) "Non-Employee Director" means a director of the Company who is
not, at the time an Option is to be granted under Section 8(a) or (b) (or, in
the case of an Option granted under Section 8(a)(i) in connection with the
Initial Public Offering, who is not at the date the Initial Public Offering is
closed), an employee of the Company or any subsidiary of the Company.
3
<PAGE>
(m) "Non-Employee Director Initial Option" or "Annual Option"
means an Option to purchase the number of shares specified in or under Section
8(a) or (b), subject to adjustment as provided in Section 4(c), granted to a
Non-Employer Director.
(n) "Participant" means a person who, at a time when eligible
under Section 5 hereof, has been granted an Award under the Plan.
(o) "Rule 16b-3" means Rule 16b-3, as from time to time in effect
and applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(p) "Stock" means the Common Stock, $.01 par value, of the Company
and such other securities as may be substituted or resubstituted for Stock
pursuant to Section 4.
3. ADMINISTRATION
(a) AUTHORITY OF THE COMMITTEE. Except as otherwise provided
below, the Plan shall be administered by the Committee. The Committee shall have
full and final authority to take the following actions, in each case subject to
and consistent with the provisions of the Plan:
(i) to select persons to whom Awards may be granted;
(ii) to determine the type or types of Awards to be granted to
each such person;
(iii) to determine the number of Awards to be granted, the
number of shares of Stock to which an Award will relate, the terms and
conditions of any Award granted under the Plan (including, but not limited to,
any exercise price, grant price or purchase price, any restriction or condition,
any schedule for lapse of restrictions or conditions relating to transferability
or forfeiture, exercisability or settlement of an Award, and waivers or
accelerations thereof, performance conditions relating to an Award (including
waivers and modifications thereof), based in each case on such considerations as
the Committee shall determine), and all other matters to be determined in
connection with an Award;
(iv) to determine whether, to what extent and under what
circumstances an Award may be settled, or the exercise price of an Award may be
paid, in cash, Stock, other Awards or other property, or an Award may be
cancelled, forfeited or surrendered;
4
<PAGE>
(v) to determine whether, to what extent and under what
circumstances cash, Stock, other Awards or other property payable with respect
to an Award will be deferred either automatically, at the election of the
Committee or at the election of the Participant;
(vi) to prescribe the form of each Award Agreement, which need
not be identical for each Participant;
(vii) to adopt, amend, suspend, waive and rescind such rules
and regulations and appoint such agents as the Committee may deem necessary or
advisable to administer the Plan;
(viii) to correct any defect or supply any omission or
reconcile any inconsistency in the Plan and to construe and interpret the Plan
and any Awards, rules and regulations, Award Agreement or other instrument
hereunder; and
(ix) to make all other decisions and determinations as may be
required under the terms of the Plan or as the Committee may deem necessary or
advisable for the administration of the Plan.
Other provisions of the Plan notwithstanding, the Board shall perform the
functions of the Committee for purposes of granting Awards (subject to the
Section 8, which provides for certain automatic grants) to Non-Employee
Directors, and the Board may perform any function of the Committee under the
Plan for any other purpose, including without limitation for the purpose of
ensuring that transactions under the Plan by Participants who are then subject
to Section 16 of the Exchange Act in respect of the Company are exempt under
Rule 16b-3. In any case in which the Board is performing a function of the
Committee under the Plan, each reference to the Committee herein shall be deemed
to refer to the Board, except where the context otherwise requires.
(b) MANNER OF EXERCISE OF COMMITTEE AUTHORITY. Any action of the
Committee with respect to the Plan shall be final, conclusive and binding on all
persons, including the Company, subsidiaries of the Company, Participants, any
person claiming any rights under the Plan from or through any Participant and
stockholders, except to the extent the Committee may subsequently modify, or
take further action not consistent with, its prior action. If not specified in
the Plan, the time at which the Committee must or may make any determination
shall be determined by the Committee, and any such determination may thereafter
be modified by the Committee (subject to Section 9(e)). The express grant of any
specific power to the Committee, and the taking of any action by the Committee,
shall not be construed as limiting any power or authority of the Committee. The
Committee may delegate to officers or managers of the
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Company or any subsidiary of the Company the authority, subject to such terms as
the Committee shall determine, to perform such functions as the Committee may
determine, to the extent permitted under applicable law.
(c) LIMITATION OF LIABILITY. Each member of the Committee shall be
entitled to, in good faith, rely or act upon any report or other information
furnished to him by any officers or other employee of the Company or any
subsidiary, the Company's independent certified public accounts or any executive
compensation consultant, legal counsel or other professional retained by the
Company to assist in the administration of the Plan. No member of the Committee,
or any officer or employee of the Company acting on behalf of the Committee,
shall be personally liable for any action, determination or interpretation taken
or made in good faith with respect to the Plan, and all members of the Committee
and any officer or employee of the Company acting on its behalf shall, to the
extent permitted by law, be fully indemnified and protected by the Company with
respect to any such action, determination or interpretation.
4. STOCK SUBJECT TO PLAN.
(a) AMOUNT OF STOCK RESERVED. The total amount of Stock that may
be subject to outstanding Awards, determined as of the time immediately after
the grant of any Award, shall not exceed 15% of the total number of shares of
Stock then outstanding, minus the number of shares previously issued pursuant to
awards granted under the Plan. The foregoing notwithstanding, the number of
shares that may be delivered upon the exercise of ISOs shall not exceed
1,000,000 (subject to adjustment as provided in Section 4(c)), PROVIDED,
HOWEVER, that shares subject to ISOs, Restricted Stock or Deferred Stock Awards
shall not be deemed delivered if such Awards are forfeited, expire or otherwise
terminate without delivery of shares to the Participant. If an Award valued by
reference to Stock may only be settled in cash, the number of shares to which
such Award relates shall be deemed to be Stock subject to such Award for
purposes of this Section 4(a). Any shares of Stock delivered pursuant to an
Award may consist, in whole or in part, of authorized and unissued shares,
treasury shares or shares acquired in the market for a Participant's Account.
(b) ANNUAL PER-PARTICIPANT LIMITATIONS. During any calendar year,
no Participant may be granted Options and SARs exercisable for more than 400,000
shares of Stock and Awards other than Options and SARs that may be settled by
delivery of more than 200,000 shares of Stock, subject to adjustment as provided
in Section 4(c). In addition, with respect to Awards that may be settled in cash
(in whole or in part), no Participant may be paid during any calendar year cash
amounts relating to such Awards that exceed the greater of the Fair Market Value
of the shares of Stock at the date of grant or the date of
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settlement of Award. This provision sets forth separate limitations, so that
Awards that may be settled solely by delivery of Stock will not operate to
reduce the amount of cash-only Awards, and vice versa; nevertheless, Awards that
may be settled in Stock or cash must not exceed any applicable limitation.
(c) ADJUSTMENTS. In the event that the Committee shall determine
that any recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase or exchange of Stock or other
securities, Stock dividend or other special, large and non-recurring dividend or
distribution (whether in the form of cash, securities or other property),
liquidation, dissolution or other similar corporate transaction or event,
affects the Stock such that an adjustment is appropriate in order to prevent
dilution or enlargement of the rights of Participants under the Plan, then the
Committee shall, in such manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares of Stock reserved and available for Awards
under Section 4(a), including shares reserved for ISOs and Restricted and
Deferred Stock, (ii) the number and kind of shares of Stock specified in the
Annual Per-Participant Limitations under Section 4(b), (iii) the number and kind
of shares of Stock to be subject to Non-Employee Director Initial and Annual
Options thereafter granted, (iv) the number and kind of shares of outstanding
Restricted Stock or other outstanding Award in connection with which shares have
been issued, (v) the number and kind of shares that may be issued in respect of
other outstanding Awards and (vi) the exercise price, grant price or purchase
price relating to any Award (or, if deemed appropriate, the Committee may make
provision for a cash payment with respect to any outstanding Award). In
addition, the Committee is authorized to make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events (including, without limitation, events described in the
preceding sentence) affecting the Company or any subsidiary or the financial
statements of the Company or any subsidiary, or in response to changes in
applicable laws, regulations, or accounting principles. The foregoing
notwithstanding, no adjustments shall be authorized under this Section 4(c) with
respect to ISOs or SARs in tandem therewith to the extent that such authority
would cause the Plan to fail to comply with Section 422(b)(1) of the Code.
5. ELIGIBILITY. Executive officers and key employees of the Company and
its subsidiaries, including any director or officer who is also such an
executive officer or key employee, directors of the Company, and persons who
provide consulting or other services to the Company deemed by the Committee to
be of substantial value to the Company, are eligible to be granted Awards under
the Plan. In addition, a person who has been offered employment by the Company
or its subsidiaries or agreed to become a director of the Company (including as
provided in Section 8(a)(i) is eligible to be granted an Award under the Plan;
PROVIDED, HOWEVER, that such Award shall be
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cancelled if such person fails to commence such employment or service as a
director, and no payment of value may be made in connection with such Award
until such person has commenced such employment or service.
6. SPECIFIC TERMS OF AWARDS.
(a) GENERAL. Awards may be granted on the terms and conditions set
forth in this Section 6. In addition, the Committee may impose on any Award or
the exercise thereof such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Committee shall determine, including terms
requiring forfeiture of Awards in the event of termination of employment or
service of the Participant. The Committee shall retain full power and discretion
to accelerate, waive or modify, at any time, any term or condition of an Award
that is not mandatory under the Plan. Except as expressly provided by the
Committee (including for purposes of complying with requirements of the Delaware
General Corporation Law relating to lawful consideration for issuance of
shares), no consideration other than services will be required for the grant
(but not the exercise) of any Award.
(b) OPTIONS. The Committee is authorized to grant Options
(including "reload" options automatically granted to offset specified exercises
of Options) on the following terms and conditions ("Options"):
(i) EXERCISE PRICE. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee;
PROVIDED, HOWEVER, that, except as provided in Section 7(a), such exercise
price shall be no less than the Fair Market Value of a share on the date
of grant of such Option.
(ii) TIME AND METHOD OF EXERCISE. The Committee shall determine
the time or times at which an Option may be exercised in whole or in part,
the methods by which such exercise price may be paid or deemed to be paid,
the form of such payment, including, without limitation, cash, Stock,
other Awards or awards granted under other Company plans or other property
(including notes or other contractual obligations of Participants to make
payment on a deferred basis, such as through "cashless exercise"
arrangements, to the extent permitted by applicable law), and the methods
by which Stock will be delivered or deemed to be delivered to
Participants.
(iii) ISOS. The terms of any ISO granted under the Plan shall
comply in all respects with the provisions of Section 422 of the Code,
including but not limited to the requirement that no ISO shall be
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granted more than 10 years after the effective date of the Plan. Anything
in the Plan to the contrary notwithstanding, no term of the Plan relating
to ISOs shall be interpreted, amended, or altered, nor shall any
discretion or authority granted under the Plan be exercised, so as to
disqualify either the Plan or any ISO under Section 422 of the Code,
unless requested by the affected Participant.
(c) STOCK APPRECIATION RIGHTS. The Committee is authorized to
grant SARs on the following terms and conditions ("SARs"):
(i) RIGHT TO PAYMENT. An SAR shall confer on the Participant to
whom it is granted a right to receive, upon exercise thereof, the excess
of (A) the Fair Market Value of one share of Stock on the date of exercise
(or, if the Committee shall so determine in the case of any such right
other than one related to an ISO, the Fair Market Value of one share at
any time during a specified period before or after the date of exercise),
over (B) the grant price of the SAR as determined by the Committee as of
the date of grant of the SAR, which, except as provided in Section 7(a),
shall be not less than the Fair Market Value of one share of Stock on the
date of grant.
(ii) OTHER TERMS. The Committee shall determine the time or
times at which an SAR may be exercised in whole or in part, the method of
exercise, method of settlement, form of consideration payable in
settlement, method by which Stock will be delivered or deemed to be
delivered to Participants, whether or not an SAR shall be in tandem with
any other Award, and any other terms and conditions of any SAR. Limited
SARs that may only be exercised upon the occurrence of a Change in Control
may be granted on such terms, not inconsistent with this Section 6(c), as
the Committee may determine. Limited SARs may be either freestanding or in
tandem with other Awards.
(d) RESTRICTED STOCK. The Committee is authorized to grant
Restricted Stock on the following terms and conditions ("Restricted Stock"):
(i) GRANTS AND RESTRICTIONS. Restricted Stock shall be subject
to such restrictions on transferability and other restrictions, if any, as
the Committee may impose, which restrictions may lapse separately or in
combination at such times, under such circumstances, in such installments,
or otherwise, as the Committee may determine. Except to the extent
restricted under the terms of
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the Plan and any Award Agreement relating to the Restricted Stock, a
Participant granted Restricted Stock shall have all of the rights of a
stockholder including, without limitation, the right to vote Restricted
Stock or the right to receive dividends thereon.
(ii) FORFEITURE. Except as otherwise determined by the
Committee, upon termination of employment or service (as determined under
criteria established by the Committee) during the applicable restriction
period, Restricted Stock that is at that time subject to restrictions
shall be forfeited and reacquired by the Company; PROVIDED, HOWEVER, that
the Committee may provide, by rule or regulation or in any Award
Agreement, or may determine in any individual case, that restrictions or
forfeiture conditions relating to Restricted Stock will be waived in whole
or in part in the event of termination resulting from specified causes.
(iii) CERTIFICATES FOR STOCK. Restricted Stock granted under
the Plan may be evidenced in such manner as the Committee shall determine.
If certificates representing Restricted Stock are registered in the name
of the Participant, such certificates may bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to such
Restricted Stock, the Company may retain physical possession of the
certificate, in which case the Participant shall be required to have
delivered a stock power to the Company, endorsed in blank, relating to the
Restricted Stock.
(iv) DIVIDENDS. Dividends paid on Restricted Stock shall be
either paid at the dividend payment date in cash or in shares of
unrestricted Stock having a Fair Market Value equal to the amount of such
dividends, or the payment of such dividends shall be deferred and/or the
amount or value thereof automatically reinvested in additional Restricted
Stock, other Awards, or other investment vehicles, as the Committee shall
determine or permit the Participant to elect. Stock distributed in
connection with a Stock split or Stock dividend, and other property
distributed as a dividend, shall be subject to restrictions and a risk of
forfeiture to the same extent as the Restricted Stock with respect to
which such Stock or other property has been distributed, unless otherwise
determined by the Committee.
(c) DEFERRED STOCK. The Committee is authorized to grant Deferred
Stock subject to the following terms and conditions ("Deferred Stock"):
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(i) AWARD AND RESTRICTIONS. Delivery of Stock will occur upon
expiration of the deferral period specified for an Award of Deferred Stock
by the Committee (or, if permitted by the Committee, as elected by the
Participant). In addition, Deferred Stock shall be subject to such
restrictions as the Committee may impose, if any, which restrictions may
lapse at the expiration of the deferral period or at earlier specified
times, separately or in combination, in installments or otherwise, as the
Committee may determine.
(ii) FORFEITURE: Except as otherwise determined by the
Committee, upon termination of employment or service (as determined under
criteria established by the Committee) during the applicable deferral
period or portion thereof to which forfeiture conditions apply (as
provided in the Award Agreement evidencing the Deferred Stock), all
Deferred Stock that is at that time subject to such forfeiture conditions
shall be forfeited; PROVIDED, HOWEVER, that the Committee may provide, by
rule or regulation or in any Award Agreement, or may determine in any
individual case, that restrictions or forfeiture conditions relating to
Deferred Stock will be waived in whole or in part in the event of
termination resulting from specified causes.
(f) BONUS STOCK AND AWARDS IN LIEU OF CASH OBLIGATIONS. The
Committee is authorized to grant Stock as a bonus, or to grant Stock or other
Awards in lieu of Company obligations to pay cash under other plans or
compensatory arrangements.
(g) DIVIDEND EQUIVALENTS. The Committee is authorized to grant
Dividend Equivalents entitling the Participant to receive cash, Stock, other
Awards or other property equal in value to dividends paid with respect to a
specified number of shares of Stock ("Dividend Equivalents"). Dividend
Equivalents may be awarded on a free-standing basis or in connection with
another Award. The Committee may provide that Dividend Equivalents shall be paid
or distributed when accrued or shall be deemed to have been reinvested in
additional Stock, Awards or other investment vehicles, and subject to such
restrictions on transferability and risks of forfeiture, as the Committee may
specify.
(h) OTHER STOCK-BASED AWARDS. The Committee is authorized, subject
to limitations under applicable law, to grant such other Awards that may be
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on, or related to, Stock and factors that may influence the
value of Stock, as deemed by the Committee to be consistent with the purposes of
the Plan, including, without limitation, convertible or exchangeable debt
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securities, other rights convertible or exchangeable into Stock, purchase rights
for Stock, Awards with value and payment contingent upon performance of the
Company or any other factors designated by the Committee and Awards valued by
reference to the book value of Stock or the value of securities of or the
performance of specified subsidiaries ("Other Stock-Based Awards"). The
Committee shall determine the terms and conditions of such Awards. Stock issued
pursuant to an Award in the nature of a purchase right granted under this
Section 6(h) shall be purchased for such consideration, paid for at such times,
by such methods, and in such forms, including, without limitation, cash, Stock,
other Awards or other property, as the Committee shall determine. Cash awards,
as an element of or supplement to any other Award under the Plan, may be granted
pursuant to this Section 6(h).
7. CERTAIN PROVISIONS APPLICABLE TO AWARDS.
(a) STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS. Awards
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with or in substitution for any other
Award granted under the Plan or any award granted under any other plan of the
Company, any subsidiary or any business entity to be acquired by the Company or
a subsidiary, or any other right of a Participant to receive payment from the
Company or any subsidiary. Awards granted in addition to or in tandem with other
Awards or awards may be granted either as of the same time as or a different
time from the grant of such other Awards or awards.
(b) TERM OF AWARDS. The term of each Award shall be for such
period as may be determined by the Committee; PROVIDED, HOWEVER, that in no
event shall the term of any ISO or an SAR granted in tandem therewith exceed a
period of ten years from the date of its grant (or such shorter period as may be
applicable under Section 422 of the Code).
(c) FORM OF PAYMENT UNDER AWARDS. Subject to the terms of the Plan
and any applicable Award Agreement, payments to be made by the Company or a
subsidiary upon the grant, exercise or settlement of an Award may be in such
forms as the Committee shall determine, including, without limitation, cash,
Stock, other Awards or other property, and may be made in a single payment or
transfer, in installments or on a deferred basis. Such payments may include,
without limitation, provisions for the payment or crediting of reasonable
interest on installment or deferred payments or the grant or crediting of
Dividend Equivalents in respect of installment or deferred payments denominated
in Stock.
(d) RULE 16B-3 COMPLIANCE.
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(i) SIX-MONTH HOLDING PERIOD. Unless a Participant could
otherwise dispose of equity securities, including derivative securities,
acquired under the Plan without incurring liability under Section 16(b) of
the Exchange Act, equity securities acquired under the
Plan must be held for a period of six months following the date of such
acquisition, provided that this condition shall be satisfied with respect
to a derivative security if at least six months elapse from the date of
acquisition of the derivative security to the date of disposition of the
derivative security (other than upon exercise or conversion) or its
underlying equity security.
(ii) OTHER COMPLIANCE PROVISIONS. With respect to a Participant
who is then subject to Section 16 of the Exchange Act in respect of the
Company, the Committee shall implement transactions under the Plan and
administer the Plan in a manner that will ensure that each transaction by
such a Participant is exempt from liability under Rule 16b-3, except that
such a Participant may be permitted to engage in a non-exempt transaction
under the Plan if written notice has been given to the Participant
regarding the non-exempt nature of such transaction. The Committee may
authorized the Company to repurchase any Award or shares of Stock
resulting from any Award in order to prevent a Participant who is subject
to Section 16 of the Exchange Act from incurring liability under Section
16(b). Unless otherwise specified by the Participant, equity securities,
including derivative securities, acquired under the Plan which are
disposed of by a Participant shall be deemed to be disposed of in the
order acquired by the Participant.
(e) LOAN PROVISIONS. With the consent of the Committee, and
subject at all times to, and only to the extent, if any, permitted under and in
accordance with, laws and regulations and other binding obligations or
provisions applicable to the Company, the Company may make, guarantee or arrange
for a loan or loans to a Participant with respect to the exercise of any Option
or other payment in connection with any Award, including the payment by a
Participant of any or all federal, state or local income or other taxes due in
connection with any Award. Subject to such limitations, the Committee shall have
full authority to decide whether to make a loan or loans hereunder and to
determine the amount, terms and provisions of any such loan or loans, including
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the interest rate to be charged in respect of any such loan or loans, whether
the loan or loans are to be with or without recourse against the borrower, the
terms on which the loan is to be repaid and conditions, if any, under which the
loan or loans may be forgiven.
(f) PERFORMANCE-BASED AWARDS. The Committee may, in its
discretion, designate any Award the exercisability or settlement of which is
subject to the achievement of performance conditions as a performance-based
Award subject to this Section 7(f). The performance objectives for an Award
subject to this Section 7(f) shall consist of one or more business criteria and
a targeted level or levels of performance with respect to such criteria, as
specified by the Committee. Such levels of performance may be expressed in
absolute or relative levels. Achievement of performance objectives with respect
to such Awards shall be measured over a period of not less than one year nor
more than five years, as the Committee may specify. Performance objectives may
differ for such Awards to different Participants. The Committee shall specify
the weighting to be given to each performance objective for purposes of
determining the final amount payable with respect to any such Award. The
Committee may, in its discretion, reduce the amount of a payout otherwise to be
made in connection with an Award subject to this Section 7(f), and the Committee
may consider other performance criteria in exercising such discretion. All
determinations by the Committee as to the achievement of performance objectives
shall be in writing.
(g) ACCELERATION UPON A CHANGE OF CONTROL. Notwithstanding
anything contained herein to the contrary, unless otherwise provided by the
Committee in an Award Agreement, all conditions and restrictions relating to an
Award, including limitations on exercisability, risks of forfeiture, deferral
periods and conditions and restrictions requiring the continued performance of
services or the achievement of performance objectives with respect to the
exercisability or settlement of such Award, shall immediately lapse upon a
Change in Control.
8. OPTIONS GRANTED AUTOMATICALLY TO NON-EMPLOYEE DIRECTORS.
(a) INITIAL OPTION GRANTS. A Non-Employee Director Initial
Option will be automatically granted (i) at the commencement
of the Initial Public Offering to each Non-Employee Director
at that date and to each other person who has agreed to
become a director and who, if he or she were serving at the
date of commencement of the Initial Public Offering, would
qualify as a Non-Employee Director at that date, and (ii),
after the Initial Public Offering, at the effective date of
any other director's initial election to the Board of
Directors if he or she qualifies as a Non-Employee Director
at that date. The
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foregoing notwithstanding, any Initial Option granted at the
commencement of the Initial Public Offering shall be
cancelled and forfeited if the Initial Public Offering is
not consummated or if, in the case of an Initial Option
granted to a person who has agreed to become a director,
such person does not commence serving as a Non-Employee
Director at or promptly following the closing of the Initial
Public Offering.
(b) ANNUAL OPTION GRANTS. A Non-Employee Director Annual Option
will be automatically granted, at the close of business on
the date of final adjournment of each annual meeting of
stockholders of the Company, to each member of the Board of
Directors who then qualifies as a Non-Employee Director. The
foregoing notwithstanding, any person who has been
automatically granted a Non-Employee Director Initial Option
under Section 8(a)(ii) shall not be automatically granted a
Non-Employee Director Annual Option at the first annual
meeting of stockholders following such grant of the Initial
Option if such annual meeting takes place within three
months after the effective date of such grant of the Initial
Option.
(c) NUMBER OF SHARES SUBJECT TO AUTOMATIC OPTION GRANTS. In the
case of any Initial or Annual Option granted on or before
the date of the first annual meeting of stockholders
following the Initial Public Offering, the number of shares
of Stock to be subject to each Initial Option shall be
10,000, and the number of shares of Stock to be subject to
each Annual Option shall be 5,000, in each case subject to
adjustment as provided in Section 4(c). In the case of any
Initial or Annual Option granted thereafter, the number of
shares of Stock to be subject to each Initial and Annual
Option shall be the applicable number specified in the
preceding sentence or, if so determined by the Board, such
other number of shares specified in the most recent
resolution of the Board adopted on or prior to the date of
the annual meeting of stockholders that coincides with or
most recently precedes the date of grant of the Option.
(d) OTHER NON-EMPLOYEE DIRECTOR INITIAL AND ANNUAL OPTION TERMS.
Other terms of Initial and Annual Options shall be as
follows:
(i) The exercise price per share of Stock purchasable
upon exercise of a Non-Employee Director Initial or
Annual Option will be equal to 100% of the Fair Market
Value of a share of Stock on the date of grant of the
Option.
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(ii) A Non-Employee Director Initial or Annual Option
will expire at the earlier of (A) 10 years after the
date of grant or (B) one year after the date the
Participant ceases to serve as a director of the
Company for any reason.
(iii) Each Non-Employee Director Initial or Annual
Option may be exercised, prior to its expiration,
commencing one year after the date of grant, or at such
earlier date as may be specified by the Board of
Directors; PROVIDED, HOWEVER, that an Option may be
exercised following a Participant's termination of
service as a director for reasons other than death or
disability only if the director served for at least 11
months after the date of grant or the option was
otherwise exercisable at the date of termination of
service.
(e) METHOD OF EXERCISE. A Participant may exercise a Non-Employee
Director Initial or Annual Option, in whole or in part, at such time as it is
exercisable and prior to its expiration, by giving written notice of exercise to
the Secretary of the Company, specifying the Option to be exercised and the
number of shares to be purchased, and paying in full the exercise price in cash
(including by check) or by surrender of shares already owned by the Participant
(except for shares acquired from the Company by exercise of an option less than
six months before the date of surrender) having a Fair Market Value at the time
of exercise equal to the exercise price, or by a combination of cash and shares.
(f) AVAILABILITY OF SHARES. If an automatic grant of Options
authorized under Section 8(a) or (b) cannot be made in full due to the
limitation set forth in Section 4(a), such grant shall be made (together with
other automatic grants to occur at the same time) to the greatest extent then
permitted under Section 4(a).
9. GENERAL PROVISIONS.
(a) COMPLIANCE WITH LAWS AND OBLIGATIONS. The Company shall not be
obligated to issue or deliver Stock in connection with any Award or take any
other action under the Plan in a transaction subject to the registration
requirements of the Securities Act of 1933, as amended, or any other federal or
state securities law, any requirement under any listing agreement between the
Company and any national securities exchange or automated quotation system or
any other law, regulation or contractual obligation of the Company until the
Company is satisfied that such laws, regulations and other obligations of the
Company have been complied with in full. Certificates representing shares of
Stock issued under the Plan will be subject to such stop-transfer orders and
other restrictions as may be applicable under such laws, regulations and other
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obligations of the Company, including any requirement that a legend or legends
be placed thereon.
(b) LIMITATIONS ON TRANSFERABILITY. Awards and other rights under
the Plan will not be transferable by a Participant except by will or the laws of
descent and distribution or to a Beneficiary in the event of the Participant's
death, shall not be pledged, mortgaged, hypothecated or otherwise encumbered, or
otherwise subject to the claims of creditors, and, in the case of ISOs and SARs
in tandem therewith, shall be exercisable during the lifetime of a Participant
only by such Participant or his guardian or legal representative; provided,
however, that such Awards and other rights (other than ISOs and SARs in tandem
therewith) may be transferred to one or more transferees during the lifetime of
the Participant to the extent and on such terms as then may be permitted by the
Committee.
(c) NO RIGHT TO CONTINUED EMPLOYMENT OR SERVICE. Neither the Plan
nor any action taken hereunder shall be construed as giving any employee,
director or other person the right to be retained in the employ or service of
the Company or any of its subsidiaries, nor shall it interfere in any way with
the right of the Company or any of its subsidiaries to terminate any employee's
employment or other person's service at any time or with the right of the Board
or stockholders to remove any director.
(d) TAXES. The Company and any subsidiary is authorized to
withhold from any Award granted or to be settled, any delivery of Stock in
connection with an Award, any other payment relating to an Award or any payroll
or other payment to a Participant amounts of withholding and other taxes due or
potentially payable in connection with any transaction involving an Award, and
to take such other action as the Committee may deem advisable to enable the
Company and Participants to satisfy obligations for the payment of withholding
taxes and other tax obligations relating to any Award. This authority shall
include authority to withhold or receive Stock or other property and to make
cash payments in respect thereof in satisfaction of a Participant's tax
obligations.
(e) CHANGES TO THE PLAN AND AWARDS. The Board may amend, alter,
suspend, discontinue or terminate the Plan or the Committee's authority to grant
Awards under the Plan without the consent of stockholders or Participants,
except that any such action shall be subject to the approval of the Company's
stockholders at or before the next annual meeting of stockholders for which the
record date is after such Board action if such stockholder approval is required
by any federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which the Stock may then be listed or quoted, and
the Board may otherwise, in its discretion, determine to submit other such
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<PAGE>
changes to the Plan to stockholders for approval; PROVIDED, HOWEVER, that,
without the consent of an affected Participant, no such action may materially
impair the rights of such Participant under any Award theretofore granted to
him. The Committee may waive any conditions or rights under, or amend, alter,
suspend, discontinue, or terminate, any Award theretofore granted and any Award
Agreement relating thereto; PROVIDED, HOWEVER, that, without the consent of an
affected Participant, no such action may materially impair the rights of such
Participant under such Award.
(f) NO RIGHTS TO AWARDS; NO STOCKHOLDER RIGHTS. No Participant or
employee shall have any claim to be granted any Award under the Plan (except for
a director who has become entitled to Options under Section 8), and there is no
obligation for uniformity of treatment of Participants and employees. No Award
shall confer on any Participant any of the rights of a stockholder of the
Company unless and until Stock is duly issued or transferred and delivered to
the Participant in accordance with the terms of the Award or, in the case of an
Option, the Option is duly exercised.
(g) UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant
pursuant to an Award, nothing contained in the Plan or any Award shall give any
such Participant any rights that are greater than those of a general creditor of
the Company; PROVIDED, HOWEVER, that the Committee may authorized the creation
of trusts or make other arrangements to meet the Company's obligations under the
Plan to deliver cash, Stock, other Awards or other property pursuant to any
Award, which trusts or other arrangements shall be consistent with the
"unfunded" status of the Plan unless the Committee otherwise determines with the
consent of each affected Participant.
(h) NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan
by the board nor any submission of the Plan or amendments thereto to the
stockholders of the Company for approval shall be construed as creating any
limitations on the power of the Board to adopt such other compensatory
arrangements as it may deem desirable, including, without limitation, the
granting of stock options otherwise than under the Plan, and such arrangements
may be either applicable generally or only in specific cases.
(i) NO FRACTIONAL SHARES. No fractional shares of Stock shall be
issued or delivered pursuant to the Plan or any Award. The Committee shall
determine whether cash, other Awards or other property shall be issued or paid
in lieu of such fractional shares or whether such fractional shares or any
rights thereto shall be forfeited or otherwise eliminated.
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(j) GOVERNING LAW. The validity, construction and effect of the
Plan, any rules and regulations relating to the Plan and any Award Agreement
shall be determined in accordance with the laws of the State of Delaware,
without giving effect to principles of conflicts of laws, and applicable federal
law.
(k) EFFECTIVE DATE; PLAN TERMINATION. The Plan shall become
effective as of the date of its adoption by the Board, subject to stockholder
approval prior to the commencement of the Initial Public Offering, and shall
continue in effect until terminated by the Board.
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Exhibit 10.12
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made this 16th day of July, 1998, between
LINC SYSTEMS CORPORATION, a Connecticut corporation (the "Company"), and ROBERT
HEFNER (the "Executive").
WHEREAS, the Company is a wholly-owned subsidiary of Condor Technology
Solutions, Inc., a Delaware corporation ("Condor").
WHEREAS, the parties hereto wish to enter into an employment agreement
to employ the Executive and to set forth certain additional agreements between
the Executive and the Company.
NOW, THEREFORE, in consideration of the mutual covenants and
representations contained herein, the parties hereto agree as follows:
1. TERM.
The Company will employ the Executive, and the Executive will serve
the Company, under the terms of this Agreement for the period set forth on
SCHEDULE A attached hereto, commencing on the date hereof (the "Term"). Upon
expiration of the Term, this Agreement maybe extended by mutual consent of
the parties, upon terms and conditions to be determined by mutual agreement.
Notwithstanding the foregoing, the Executive's employment hereunder may be
earlier terminated as provided in Section 4 hereof and as set forth in
SCHEDULE A attached hereto. The period of time between the commencement and
the termination of the Executive's employment hereunder shall be referred to
herein as the "Employment Period."
2. EMPLOYMENT.
(a) POSITION AND REPORTING. The Company hereby employs the Executive
for the Employment Period to serve in the office or position of the Company set
forth on SCHEDULE A attached hereto on the terms and conditions set forth in
this Agreement.
(b) AUTHORITY AND DUTIES. In addition to such objectives as are set
forth on SCHEDULE A attached hereto (if any), the Executive shall exercise such
authority, perform such duties and functions and discharge such responsibilities
as are reasonably associated with the Executive's position, commensurate with
the authority vested in the Executive's position, pursuant to this Agreement and
consistent with the By-Laws of the Company. During the Employment Period, the
Executive shall devote his full business time, skill and efforts to the business
of the Company. Notwithstanding the foregoing, the Executive may (i) make and
manage passive personal business investments of his choice (in the case of
publicly-held corporations, not to exceed five percent (5%) of the outstanding
voting stock) and serve in any capacity with any civic, educational or
charitable organization, or any trade association, without seeking or obtaining
approval by the Board of Directors of the Company (the "Board"), provided such
activities and service do not materially interfere or conflict with the
performance of his duties hereunder and (ii) with the approval of the Board,
which shall not be unreasonably withheld, serve on the boards of directors of
other corporations.
<PAGE>
3. COMPENSATION AND BENEFITS.
(a) SALARY. During the Employment Period, the Company shall pay to
the Executive, as compensation for the performance of his duties and
obligations under this Agreement, a base salary at the per annum rate set
forth on SCHEDULE A attached hereto, payable in arrears not less frequently
than monthly in accordance with the normal payroll practices of the Company.
Such base salary shall be subject to review each year for possible increase
by the Board, but shall in no event be decreased from its then-existing level
during the Employment Period.
(b) ANNUAL BONUS. During the Employment Period, the Executive shall
have the opportunity to earn an annual bonus in accordance with a Company
annual bonus program to be established by the Board for senior executives of
the company and its subsidiaries. The payment of any annual bonus under any
such program shall be contingent upon the achievement of certain corporate
and/or individual performance goals established by the Board in its
discretion.
(c) OTHER BENEFITS. During the Employment Period, the Executive
shall be entitled to participate in all of the employee benefit plans,
programs and arrangements in effect during the Employment Period that are
generally available to senior executives of the Company, subject to and on a
basis consistent with the terms, conditions and overall administration of
such plans, programs and arrangements. In addition, during the Employment
Period, the Executive shall be entitled to fringe benefits and perquisites
comparable to those of other senior executives of the Company.
(d) BUSINESS EXPENSES. During the Employment Period, the Company
shall reimburse the Executive for all documented reasonable business expenses
incurred by the Executive in the performance of his duties under this
Agreement, in accordance with the Company's and Condor's policies.
(e) INDEMNIFICATION. During the Employment Period and thereafter,
the Company shall indemnify the Executive to the fullest extent permitted by
applicable law, with respect to all costs, charges and expenses, including
attorneys' fees, whatsoever incurred or sustained by the Executive in
connection with any action, suit or proceeding (other than any action, suit
or proceeding brought by or in the name of the Company against the Executive)
to which he may be made party by reason of being or having been a director,
officer or employee of the Company or his serving or having served any other
enterprise as a director, officer or employee at the request of the Company,
and the Executive shall be entitled to the protection of any insurance
policies the Company may elect to maintain generally for the benefit of the
directors and officers of the Company.
4. TERMINATION OF EMPLOYMENT.
(a) TERMINATION FOR CAUSE. The Company may terminate the Executive's
employment hereunder with or without cause, subject to the obligations of the
Company under Section 5 hereof in the event of the termination of the
Executive without cause. For purposes of this Agreement, the Company shall
have "cause" to terminate the Executive's employment hereunder if such
termination shall be the result of:
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(i) willful fraud or dishonesty in connection with the
Executive's performance hereunder that results in material harm to the Company;
(ii) the Executive's continued failure to substantially perform
his duties with the Company (other than such failure resulting from his
incapacity due to physical or mental illness) after written demand for
substantial performance is delivered to the Executive by the Company
specifically identifying the manner in which the Company believes the
Executive has not substantially performed his duties; or
(iii) the conviction for, or plea of nolo contendere to, a charge
of commission of a felony.
(b) TERMINATION UPON DEATH OR PERMANENT AND TOTAL DISABILITY. The
Employment Period shall be terminated by the death of the Executive. The
Employment Period may be terminated by the Company if the Executive shall be
rendered incapable of performing his duties to the Company by reason of a
"disability," defined as either (i) any medically determined physical or
mental impairment that can be expected to result in death or that can be
expected to last for a period of six or more consecutive months from the
first date of the Executive's absence, or (ii) due to a total and permanent
"disability" that can be expected to last for a period of six or more
consecutive months from the first date of the Executive's absence, as such
term is defined in the Company's or Condor's long term disability insurance
policy or contract as may be in effect from time to time for the benefit of
employees of the Company (either, a "Disability"). If the Employment Period
is terminated by reason of the Disability of the Executive, the Company shall
give 30 days' advance written notice to that effect to the Executive. If the
existence of a Disability hereunder is in dispute, it shall be resolved by
two physicians, one appointed by the Executive and one appointed by the
Company. If the two physicians so selected cannot agree as to whether or not
the Executive has a Disability, the two physicians so selected shall
designate a third physician and a majority of the three physicians so
selected shall determine whether or not the Executive has a Disability.
(c) TERMINATION FOR FAILURE TO ACHIEVE OBJECTIVES. If the Term of
Executive's employment is more than one (1) year, then the Employment Period may
be terminated upon thirty (30) days' written notice, AND such termination shall
be effective as of a date during the thirty (30) day period following the first
anniversary of the date hereof, if the Executive fails to make reasonable
progress towards satisfying the objectives, if any, set forth on SCHEDULE A
attached hereto.
5. CONSEQUENCES OF TERMINATION.
(a) TERMINATION WITHOUT CAUSE. In the event of termination of the
Executive's employment hereunder by the Company without "cause" (other than
upon death or Disability) (defined in Section 4 hereof), the Executive shall
be entitled to the following severance pay and benefits:
(i) Severance Pay - severance payments in the form of
continuation of the Executive's base salary as in effect immediately prior to
such termination over the longer of: (A) the then-remaining Term hereof; or (B)
six months (the "Severance Period"); and
(ii) Benefits Continuation - continuation for the Severance
Period of coverage under the group medical care, disability and life insurance
benefit plans or arrangements in which the Executive is participating at the
time of termination; provided, however, that the Company's obligation to provide
or
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cause to be provided such coverages shall be terminated if the Executive
obtains comparable substitute coverage from another employer at any time during
the Severance Period. The Executive shall be entitled, at the expiration of the
Severance Period, to elect continued medical coverage in accordance with section
4980B of the Internal Revenue Code of 1986, as amended (or any successor
provision thereto); and
(b) OTHER TERMINATIONS. In the event of termination of the Executive's
employment hereunder for any reason other than those specified in Section
5(a) hereof, including but not limited to Executive's voluntary termination
or termination for failure to achieve objectives, the Executive shall not be
entitled to any severance pay, benefits continuation or stock option rights
contemplated by the foregoing, except as may otherwise be provided under the
applicable benefit plans or award agreements relating to the Executive.
(c) ACCRUED RIGHTS. Notwithstanding the foregoing provisions of this
Section 5, in the event of termination of the Executive's employment
hereunder for any reason, the Executive shall be entitled to payment of any
unpaid portion of his base salary through the effective date of termination,
and payment of any accrued but unpaid rights solely in accordance with the
terms of any incentive bonus, stock option or employee benefit plan or
program of the Company.
6. CONFIDENTIALITY.
The Executive agrees that he will not at any time during the Term hereof
or at any time thereafter for any reason, in any fashion, form or manner,
either directly or indirectly, divulge, disclose or communicate to any
person, firm, corporation or other business entity, in any manner whatsoever,
any confidential information or trade secrets concerning the business of
Condor, the Company or any other subsidiaries of Condor, including, without
limiting the generality of the foregoing, the techniques, methods or systems
of operation or management, or any information regarding financial matters,
plans or other material data. The provisions of this Section 6 shall not
apply to (i) information that is public knowledge other than as a result of
disclosure by Executive in breach of this Section 6; (ii) information
disseminated by the Company, Condor or any of Condor's other subsidiaries to
third parties in the ordinary course of business; (iii) information lawfully
received by the Executive from a third party who, based upon inquiry by the
Executive, is not bound by a confidential relationship to Condor, the Company
or any of Condor's other subsidiaries; or (iv) information disclosed under a
requirement of law or as directed by applicable legal authority having
jurisdiction over the Executive.
7. INVENTIONS.
The Executive is hereby retained in a capacity such that the Executive's
responsibilities include the making of technical and managerial contributions
of value to Condor and the Company. The Executive hereby assigns to the
Company all right, title and interest in such contributions and inventions
made or conceived by the Executive alone or jointly with others during the
Employment Period that relate to the business of the Company, Condor or any
of Condor's other subsidiaries. This assignment shall include (a) the right
to file and prosecute patent applications on such inventions in any and all
countries, (b) the patent applications filed and patents issuing thereon, and
(c) the right to obtain copyright, trademark or trade name protection for any
such work product. The Executive shall promptly and fully disclose all such
contributions and inventions to the Company and assist the Company in
obtaining and protecting the rights
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therein (including patents thereon) in any and all countries; provided,
however, that said contributions and inventions will be the property of the
Company, whether or not patented or registered for copyright, trademark or
trade name protection, as the case may be. The Executive hereby agrees to
execute any documentation requested by the Company to be so executed if such
request is made in order to carry out the purpose and terms of this
paragraph. Inventions conceived by the Executive that are not related to the
business of the Company or any of its subsidiaries will remain the property
of the Executive.
8. NON-COMPETITION.
The Executive agrees that he shall not, from the date hereof until the
later to occur of (a) two (2) years after the date hereof, or (b) one (1)
year after the expiration of the Executive's employment hereunder for any
reason (the "Restricted Term"), directly or indirectly, alone or as
principal, partner, joint venturer, officer, director, employee, consultant,
agent, independent contractor or stockholder (other than as provided below)
of any company or business, engage in any "Competitive Business" within the
United States. For purposes of the foregoing, the term "Competitive Business"
shall mean any business involved in providing information technology
solutions, including, but not limited to, desktop services, software
development, systems design and integration, large scale survey research,
recruiting and comprehensive marketing and sales, which is in direct
competition with (x) the Company, or (y) a "Restricted Entity" (defined
below) in any community in which such Restricted Entity is doing business.
For the purposes hereof, "Restricted Entity" shall mean Condor and/or any of
Condor's subsidiaries, to the extent that the Executive has had significant
contacts or involvement with, or obtained knowledge of or had access to
proprietary or confidential information or trade secrets of, such entity.
Notwithstanding the foregoing, the Executive shall not be prohibited during
the Restricted Term from acting as a passive investor where he owns not more
than five percent (5%) of the issued and outstanding capital stock of any
publicly-held company. During the Restricted Term, the Executive shall not
solicit or encourage any employee of the Company or any current or future
subsidiary or affiliate thereof to terminate his or her employment.
9. NON-SOLICITATION OF EMPLOYEES.
The Executive agrees that he shall not during Restricted Term,
directly or indirectly, alone or as principal, partner, joint venturer,
officer, director, employee, consultant, agent, independent contractor or
stockholder, or in any other capacity whatsoever, employ, retain, or enter
into any employment, agency, consulting or other similar arrangement with,
any person who, within the twelve-month period prior to the termination of
the Executive's employment by the Company, was an employee of the Company or
of any of Condor's other subsidiaries, or, induce or attempt to induce such
person to terminate his employment with the Company or such subsidiary.
10. NON-SOLICITATION OF CLIENTS OR CUSTOMERS.
The Executive agrees that he shall not during the Restricted Term,
directly or indirectly, alone or as principal, partner, joint venturer,
officer, director, employee, consultant, agent, independent contractor or
stockholder, or in any other capacity whatsoever, directly or indirectly, for
his or her own account, or for the account of others, solicit orders for
services of a kind or nature like or similar to services performed by the
Company or any of Condor's other subsidiaries as of the date of the
termination of the Executive's employment by the Company, from any party that
was a customer or client of the Company or such
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subsidiary, or which the Company or any of Condor's other subsidiaries was
soliciting to be a customer or client, during the twelve (12) month period
preceding the termination of the Executive's employment.
11. BREACH OF RESTRICTIVE COVENANTS.
The parties agree that a breach or violation of Section 6, 7, 8, 9 or 10
hereof may result in immediate and irreparable injury and harm to the
innocent party, which party shall have, in addition to any and all remedies
of law and other consequences under this Agreement, the right to an
injunction, specific performance or other equitable relief to prevent the
violation of the obligation hereunder.
12. NOTICES.
For the purposes of this Agreement, notices, demands and all other
communications provided for in this Agreement shall be in writing and shall
be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return
receipt requested, postage prepaid, addressed as follows:
(a) If to the Company, to:
LINC SYSTEMS CORPORATION
310 West Newberry Road
Bloomfield, CT 06002
with a copy to:
CONDOR TECHNOLOGY SOLUTIONS, INC.
Annapolis Office Plaza
170 Jennifer Road
Suite 325
Annapolis, Maryland 21401
(b) If to the Executive, to the address set forth on SCHEDULE A attached
hereto;
or to such other address as a party hereto shall designate to the other party
by like notice, provided that notice of a change of address shall be
effective only upon receipt thereof.
13. ARBITRATION: LEGAL FEES.
Except as provided in Section 11 hereof, any dispute or controversy
arising under or in connection with this Agreement shall be settled
exclusively by arbitration in Hartford, Connecticut in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction. The
Company shall reimburse the Executive for all reasonable legal fees and costs
and other fees and expenses that the Executive may incur in respect of any
dispute or controversy arising against the Company under or in connection
with this Agreement; provided, however, that the Company shall not reimburse
any such fees, costs and expenses if the fact
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finder determines that an action brought by the Executive was substantially
without merit or the Executive is otherwise unsuccessful in such an action.
14. WAIVER OF BREACH.
Any waiver of any breach of the Agreement shall not be construed to be a
continuing waiver or consent to any subsequent breach on the part of either
the Executive or of the Company.
15. NON-ASSIGNMENT: SUCCESSORS.
Neither part hereto may assign his or its rights or delegate his or its
duties under this Agreement without prior written consent of the other party;
provided, however, that (i) this Agreement shall inure to the benefit of and
be binding upon the successors and assigns of the Company upon any sale of
all or substantially all of the Company's assets, or upon any merger,
consolidation or reorganization of the Company with or into any other
corporation, all as though such successors and assigns of the Company and
their respective successors and assigns were the Company; and (ii) this
Agreement shall inure to the benefit of and be binding upon the heirs,
assigns or designees of the Executive to the extent of any payments due to
the Executive hereunder. As used in this Agreement, the term "Company" shall
be deemed to refer to any such successor or assign of the Company referred to
in the preceding sentence.
16. WITHHOLDING OF TAXES.
All payments required to be made by the Company to the Executive under
this Agreement shall be subject to the withholding of such amounts, if any,
relating to tax, and other payroll deductions as the Company may reasonably
determine it should withhold pursuant to any applicable law or regulation.
17. SEVERABILITY.
To the extent any provision of this Agreement or portion thereof shall
be invalid or unenforceable, it shall be considered deleted therefrom and the
remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect.
18. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
19. GOVERNING LAW.
This Agreement shall be construed, interpreted and enforced in
accordance with the laws of the State of Maryland.
20. ENTIRE AGREEMENT.
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This Agreement constitutes the entire agreement by the Company and the
Executive with respect to the subject matter hereof and supersedes any and
all prior agreements or understandings between the Executive and the Company
with respect to the subject matter hereof, whether written or oral. This
Agreement may be amended or modified only by a written instrument executed by
the Executive and the Company.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
LINC SYSTEMS CORPORATION
By: /s/ Michael A. Kehse, Vice President
-------------------------------------
Michael A. Kehse, Vice President
THE EXECUTIVE
/s/ Robert Hefner
------------------------------------
Robert Hefner
1144384.V3
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SCHEDULE A
TO
EMPLOYMENT AGREEMENT
BETWEEN
LINC SYSTEMS CORPORATION
AND
ROBERT HEFNER
A. TERM: Two (2) years
B. EARLY TERMINATION PROVISIONS (IN ADDITION TO SECTION 4): None.
C. THE EXECUTIVE SHALL SERVE IN THE FOLLOWING OFFICE(S) AND/OR POSITION(S)
OF THE COMPANY: President and Chief Executive Officer.
D. BASE SALARY: $200,000. In addition, Condor has granted to the Executive
options to purchase 30,000 shares of Condor's common stock, as set
forth in an Option Grant Certificate of even date herewith.
E. OBJECTIVES: In addition to serving as an officer of the Company, the
Executive shall also lead the Systems Services Division of Condor.
F. RESIDENCE ADDRESS OF EXECUTIVE FOR NOTICES:
38 High Farms Road
West Hartford, CT 06107
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Exhibit 10.13
EMPLOYMENT AGREEMENT
---------------------
THIS EMPLOYMENT AGREEMENT is made this 10th day of February, 1998, between
Computer Hardware Maintenance Company, Inc., a Pennsylvania corporation (the
"Company"), and Michael Paglaiccetti (the "Executive").
WHEREAS, the Executive is currently employed by the Company; and
WHEREAS, as a result of the proposed business combination pursuant to that
certain Agreement and Plan of Organization among Condor Technology Solutions,
Inc. ("Condor"), its acquisition subsidiary, the Company and its stockholders
(the "Business Combination"), the Company will become a wholly-owned
subsidiary of Condor; and
WHEREAS, the parties hereto wish to enter into an employment agreement to
employ the Executive as the President and Chief Executive Officer of the
Company following the Business Combination, and to set forth certain
additional agreements between the Executive and the Company.
NOW, THEREFORE, in consideration of the mutual covenants and representations
contained herein, the parties hereto agree as follows:
1. TERM.
The Company will employ the Executive, and the Executive will serve the
Company, under the terms of this Agreement for an initial term of three (3)
years, commencing on the closing date of Condor's initial public offering of
Common Stock (which also is intended to be the effective date of the Business
Combination). Effective as of the expiration of such initial three-year term
and as of each anniversary date thereof, the term of this Agreement shall be
extended for an additional 12-month period unless, not later than two months
prior to each such respective date, either party shall have given notice to
the other party that the term shall not be so extended. Notwithstanding the
foregoing, the Executive's employment hereunder may be earlier terminated, as
provided in Section 4 hereof. The term of this Agreement, as in effect from
time to time in accordance with the foregoing, shall be referred to herein as
the "Term." The period of time between the commencement and the termination
of the Executive's employment hereunder shall be referred to herein as the
"Employment Period."
2. EMPLOYMENT.
(a) POSITION AND REPORTING. The Company hereby employs the Executive for
the Employment Period as its President and Chief Executive Officer on the
terms and conditions set
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forth in this Agreement.
(b) AUTHORITY AND DUTIES. The Executive shall exercise such authority,
perform such executive duties and functions and discharge such
responsibilities as are reasonably associated with the Executive's position,
commensurate with the authority vested in the Executive's position, pursuant
to this Agreement and consistent with the By-Laws of the Company. Without
limiting the generality of the foregoing, the Executive shall report directly
and be responsible to the President and Chief Executive Officer of Condor and
the Board of Directors of the Company (the "Board"). During the Employment
Period, the Executive shall devote his full business time, skill and efforts
to the business of the Company. Notwithstanding the foregoing, the Executive
may (i) make and manage passive personal business investments of his choice
(in the case of publicly-held corporations, not to exceed one percent (1%) of
the outstanding voting stock) and serve in any capacity with any civic,
educational or charitable organization, or any trade association, without
seeking or obtaining approval by the Board, provided such activities and
service do not materially interfere or conflict with the performance of his
duties hereunder and (ii) with the approval of the Board, which shall not be
unreasonably be withheld, serve on the boards of directors of other
corporations.
3. COMPENSATION AND BENEFITS.
(a) SALARY. During the Employment Period, the Company shall pay to the
Executive, as compensation for the performance of his duties and obligations
under this Agreement, a base salary at the rate of $220,000 per annum,
payable in arrears not less frequently than monthly in accordance with the
normal payroll practices of the Company. Such base salary shall be subject to
review each year for possible increase by the Board of the Company, but shall
in no event be decreased from its then-existing level during the Employment
Period.
(b) ANNUAL BONUS. During the Employment Period, the Executive shall have
the opportunity to earn an annual bonus in accordance with an annual bonus
program to be established by the Board of Directors of Condor for senior
executives of Condor and its subsidiaries, including the Company. The payment
of any annual bonus under any such program shall be contingent upon the
achievement of certain corporate and/or individual performance goals
established by the Board of Directors of Condor in its discretion and shall
not exceed an amount equal to the Executive's base salary.
(c) OTHER BENEFITS. During the Employment Period, the Executive shall be
entitled to participate in all of the employee benefit plans, programs and
arrangements in effect during the Employment Period that are generally
available to senior executives of the Company, subject to and on a basis
consistent with the terms, conditions and overall administration of such
plans, programs and arrangements. In addition, during the Employment Period,
the Executive shall be entitled to fringe benefits and perquisites comparable
to those of other senior executives of the Company, including, but not
limited to, four (4) weeks of paid vacation per year.
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(d) BUSINESS EXPENSES. During the Employment Period, the Company shall
reimburse the Executive for all documented reasonable business expenses
incurred by the Executive in the performance of his duties under this
Agreement, in accordance with the Company's policies.
(e) INDEMNIFICATION. During the Employment Period and thereafter, the
Company or Condor shall indemnify the Executive to the fullest extent
permitted by applicable law, and the Executive shall be entitled to the
protection of any insurance policies the Company or Condor may elect to
maintain generally for the benefit of the directors and officers of the
Company, with respect to all costs, charges and expenses, including
attorneys' fees, whatsoever incurred or sustained by the Executive in
connection with any action, suit or proceeding (other than any action, suit
or proceeding brought by or in the name of the Company or Condor against the
Executive) to which he may be made a party by reason of being or having been
a director, officer or employee of the Company or Condor or his serving or
having served any other enterprise as a director, officer or employee at the
request of the Company or Condor.
4. TERMINATION OF EMPLOYMENT.
(a) TERMINATION FOR CAUSE. The Company may terminate the Executive's
employment hereunder for cause. For purposes of this Agreement and subject to
the Executive's opportunity to cure as provided in Section 4 (c) hereof, the
Company shall have "cause" to terminate the Executive's employment hereunder
if such termination shall be the result of:
(i) willful fraud or dishonesty in connection with the Executive's
performance hereunder that results in material harm to the Company or
Condor;
(ii) the failure by the Executive to substantially perform his
duties hereunder that results in material harm to the Company or Condor; or
(iii) the conviction for, or plea of NOLO CONTENDERE to, a charge of
commission of a felony.
(b) TERMINATION FOR GOOD REASON. The Executive shall have the right at
any time to terminate his employment with the Company at any time and for any
good reason. For purposes of this Agreement and subject to the Company's
opportunity to cure as provided in Section 4 ( c) hereof, the Executive shall
have "good reason" to terminate his employment hereunder if such termination
shall be the result of:
(i) a material diminution during the Employment Period in the
Executive's duties or responsibilities as set forth in Section 2 hereof;
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(ii) a material breach by the Company of the compensation and
benefits provisions set forth in Section 3 hereof;
(iii) a notice of termination by the Executive under Section 4 (c)
hereof within 12 months following the occurrence of a Change in Control
(as defined in Section 4 (e) hereof);
(iv) a material breach by the Company of any other term of this
Agreement; or
(v) Condor shall cause the Company, without the consent of the
Executive, to relocate the Executive's principal work location to an
area which is more than 50 miles outside the greater Langhorne,
Pennsylvania area.
(c) NOTICE AND OPPORTUNITY TO CURE. Notwithstanding the foregoing, it
shall be a condition precedent to the Company's right to terminate the
Executive's employment for "cause" and the Executive's right to terminate his
employment for "good reason" that (1) the party seeking the termination shall
first have given the other party written notice stating with specificity the
reason for the termination ("breach"); (2) if the Executive is terminated for
"cause," the Company provides the Executive an opportunity to appear before
the Board to answer such grounds for termination; and (3) if such breach is
susceptible of cure or remedy, a period of 30 days from and after the giving
of such notice shall have elapsed without the breaching party having
effectively cured or remedied such breach during such 30-day period, unless
such breach cannot be cured or remedied within 30 days, in which case the
period for remedy or cure shall be extended for a reasonable time (not to
exceed an additional 30 days), provided the breaching party has made and
continues to make a diligent effort to effect such remedy or cure.
(d) TERMINATION UPON DEATH OR PERMANENT AND TOTAL DISABILITY. The
Employment Period shall be terminated by the death of the Executive. The
Employment Period may be terminated by the Company if the Executive shall be
rendered incapable of performing his duties to the Company by reason of a
"disability," defined as either (i) any medically determined physical or
mental impairment that can be expected to result in death or that can be
expected to last for a period of six or more consecutive months from the
first date of the Executive's absence, or (ii) due to a total and permanent
"disability" that can be expected to last for a period of six or more
consecutive months from the first date of the Executive's absence, as such
term is defined in the Company's long term disability insurance policy or
contract as may be in effect from time to time for the benefit of employees
of the Company (either, a "Disability"). If the Employment Period is
terminated by reason of a Disability of the Executive, the Company shall give
30 days' advance written notice to that effect to the Executive. If the
existence of a Disability hereunder is in dispute, it shall be resolved by
two physicians, one appointed by the Executive and one appointed by the
Company. If the two physicians
4
<PAGE>
so selected cannot agree as to whether or not the Executive has a Disability,
the two physicians so selected shall designate a third physician and a
majority of the three physicians so selected shall determine whether or not
the Executive has a Disability.
(e) DEFINITION OF CHANGE IN CONTROL. A "Change in Control" shall be
deemed to have occurred if:
(i) there shall be consummated any consolidation or merger of Condor in
which Condor is not the continuing or surviving corporation or pursuant to
which shares of Condor's capital stock are converted into cash, securities or
other property other than a consolidation or merger of Condor in which the
holders of Condor's voting stock immediately prior to the consolidation or
merger shall, upon consummation of the consolidation or merger, own at least
50% of the voting stock of the surviving corporation, or any sale, lease,
exchange or other transfer (in one transaction or a series of transactions
contemplated or arranged by any party as a single plan) of all or
substantially all of the assets of Condor; or
(ii) any person (as such term is used in Sections 13(d) and 14 (d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") ) shall
after the date hereof become the beneficial owner (as defined in Rules 13d-3
and 13d-5 under the Exchange Act), directly or indirectly, of securities of
Condor representing 35% or more of the voting power of all then outstanding
securities of Condor having the right under ordinary circumstances to vote in
an election of the Board (including, without limitation, any securities of
Condor that any such person has the right to acquire pursuant to any
agreement, or upon exercise of conversion rights, warrants or options, or
otherwise, which shall be deemed beneficially owned by such person); or
(iii) individuals who at the date hereof constitute the entire Board and
any new directors whose election by the Board, or whose nomination for
election by Condor's stockholders, shall have been approved by a vote of at
least a majority of the directors then in office who either were directors at
the date hereof or whose election or nomination for election shall have been
so approved (the "Continuing Directors") shall cease for any reason to
constitute a majority of the members of the Board; or
(iv) the sale by Condor of the majority of the capital stock of the
Company or all or substantially all of the assets of the Company, or the
liquidation or dissolution of the Company.
5. CONSEQUENCES OF TERMINATION.
(a) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. In the event of
termination of the Executive's employment hereunder by the Company without
"cause" (other than upon death or Disability) or by the Executive for "good
reason" (each as defined in Section 4 hereof), the Executive shall be
entitled to the following severance pay and benefits:
5
<PAGE>
(i) SEVERANCE PAY - severance payments in the form of continuation of
the Executive's base salary as in effect immediately prior to such
termination over the longer of: (A) the then-remaining Term hereof; or (B) 12
months (the "Severance Period").
(ii) BENEFITS CONTINUATION - continuation for the Severance
Period of coverage under the group medical care, disability and life
insurance benefit plans or arrangements in which the Executive is
participating at the time of termination; PROVIDED, HOWEVER, that the
Company's obligation to provide such coverages shall be terminated if
the Executive obtains comparable substitute coverage from another
employer at any time during the Severance Period. The Executive shall
be entitled, at the expiration of the Severance Period, to elect
continued medical coverage in accordance with section 4980B of the
Internal Revenue Code of 1986, as amended (or any successor provision
thereto); and
(iii) STOCK OPTIONS - all options to purchase shares of
Condor's Common Stock held by the Executive immediately prior to
termination of employment shall become immediately vested and
exercisable and, subject to the terms of Condor's 1997 Long-Term
Incentive Plan, shall remain exercisable for the duration of the
Severance Period.
(b) OTHER TERMINATIONS. In the event of termination of the Executive's
employment hereunder for any reason other than those specified in Section
5(a) hereof, the Executive shall not be entitled to any severance pay,
benefits continuation or stock option rights contemplated by the foregoing,
except as may otherwise be provided under the applicable benefit plans or
award agreements relating to the Executive.
(c) ACCRUED RIGHTS. Notwithstanding the foregoing provisions of this
Section 5, in the event of termination of the Executive's employment
hereunder for any reason, the Executive shall be entitled to payment of any
unpaid portion of his base salary through the effective date of termination,
and payment of any accrued but unpaid rights solely in accordance with the
terms of any incentive bonus, stock option or employee benefit plan or
program of the Company.
6. CONFIDENTIALITY.
The Executive agrees that he will not at any time during the Term hereof or
at any time thereafter for any reason, in any fashion, form or manner, either
directly or indirectly, divulge, disclose or communicate to any person, firm,
corporation or other business entity, in any manner whatsoever, any
confidential information or trade secrets concerning the business of the
Company or Condor, including, without limiting the
6
<PAGE>
generality of the foregoing, the techniques, methods or systems of its
operation or management, any information regarding its financial matters, or
any other material information concerning the business of the Company or
Condor, its manner of operation, its plans or other material data. The
provisions of this Section 6 shall not apply to (i) information that is
public knowledge other than as a result of disclosure by the Executive in
breach of this Section 6; (ii) information disseminated by the Company or
Condor to third parties in the ordinary course of business; (iii) information
lawfully received by the Executive from a third party who, based upon inquiry
by the Executive, is not bound by a confidential relationship to the Company
or Condor; or (iv) information disclosed under a requirement of law or as
directed by applicable legal authority having jurisdiction over the Executive.
7. INVENTIONS.
The Executive is hereby retained in a capacity such that the Executive's
responsibilities include the making of technical and managerial contributions
of value to Company or Condor. The Executive hereby assigns to the Company
all right, title and interest in such contributions and inventions made or
conceived by the Executive alone or jointly with others during the Employment
Period that relate to the business of the Company or Condor. This assignment
shall include (a) the right to file and prosecute patent applications on such
inventions in any and all countries, (b) the patent applications filed and
patents issuing thereon, and (c) the right to obtain copyright, trademark or
trade name protection for any such work product. The Executive shall promptly
and fully disclose all such contributions and inventions to the Company and
assist the Company and Condor in obtaining and protecting the rights therein
(including patents thereon) in any and all countries; PROVIDED, HOWEVER, that
said contributions and inventions will be the property of the Company,
whether or not patented or registered for copyright, trademark or trade name
protection, as the case may be. The Executive hereby agrees to execute any
documentation requested by the Company or Condor to be so executed if such
request is made in order to carry out the purpose and terms of this
paragraph. Inventions conceived by the Executive that are not related to the
business of the Company or Condor will remain the property of the Executive.
8. NON-COMPETITION.
The Executive agrees that he shall not during the Employment Period and, if
applicable, the Severance Period, without the approval of the Board, directly
or indirectly, alone or as partner, joint venturer, officer, director,
employee, consultant, agent, independent contractor or stockholder (other
than as provided below) of any company or business, engage in any
"Competitive Business" within the United States. For purposes of the
foregoing, the term "Competitive Business" shall mean any business involved
in providing information technology solutions, including, but not limited to,
desktop services, software development, systems design and integration, large
scale survey research, recruiting and comprehensive marketing and sales,
which is in direct competition with the Company or Condor in any community in
which the
7
<PAGE>
Company or Condor is doing business. Notwithstanding the foregoing, the
Executive shall not be prohibited during the non-competition period
applicable above from acting as a passive investor where he owns not more
than one percent (1%) of the issued and outstanding capital stock of any
publicly-held company. During the period that the above non-competition
restriction applies, the Executive shall not, without the written consent of
Condor, solicit or encourage any employee of the Company or Condor or any
current or future subsidiary or affiliate thereof to terminate his or her
employment.
9. BREACH OF RESTRICTIVE COVENANTS.
The parties agree that a breach or violation of Section 6, 7 or 8 hereof will
result in immediate and irreparable injury and harm to the innocent party,
which party shall have, in addition to any and all remedies of law and other
consequences under this Agreement, the right to an injunction, specific
performance or other equitable relief to prevent the violation of the
obligation hereunder.
10. NOTICES.
For the purposes of this Agreement, notices, demands and all other
communications provided for in this Agreement shall be in writing and shall
be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return
receipt requested, postage prepaid, addressed as follows:
(a) If to the Company, to:
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
2010 CABOT BOULEVARD WEST
P.O. BOX 2025
LANGHORNE, PA 19047-1811
(b) If to the Executive, to:
MICHAEL PAGLAICCETTI
1010 GRENOBLE ROAD
IVYLAND, PA 18974
or to such other address as a party hereto shall designate to the other party
by like notice, provided that notice of a change of address shall be
effective only upon receipt thereof.
8
<PAGE>
11. ARBITRATION: LEGAL FEES.
Except as provided in Section 9 hereof, any dispute or controversy arising
under or in connection with this Agreement shall be settled exclusively by
arbitration in McLean, Virginia in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. The Company shall
reimburse the Executive for all reasonable legal fees and costs and other
fees and expenses that the Executive may incur in respect of any dispute or
controversy arising against the Company under or in connection with this
Agreement; PROVIDED, HOWEVER, that the Company shall not reimburse any such
fees, costs and expenses if the fact finder determines that an action brought
by the Executive was substantially without merit or the Executive is
otherwise unsuccessful in such an action.
12. WAIVER OF BREACH.
Any waiver of any breach of the Agreement shall not be construed to be a
continuing waiver or consent to any subsequent breach on the part of either
the Executive or of the Company.
13. NON-ASSIGNMENT: SUCCESSORS.
Neither party hereto may assign his or its rights or delegate his or its
duties under this Agreement without the prior written consent of the other
party; PROVIDED, HOWEVER, that (i) subject to the rights of the Executive
under Section 4(b) hereof, this Agreement shall inure to the benefit of and
be binding upon the successors and assigns of the Company upon any sale of
all or substantially all of the assets of the Company, or upon any merger,
consolidation or reorganization of the Company with or into any other
corporation, all as though such successors and assigns of the Company and
their respective successors and assigns were the Company; (ii) this Agreement
shall inure to the benefit of and be binding upon the heirs, assigns or
designees of the Executive to the extent of any payments due to the Executive
hereunder; and (iii) this Agreement shall inure to the benefit of Condor. As
used in this Agreement, the term "Company" shall be deemed to refer to any
such successor or assign or the Company referred to in the preceding sentence.
14. WITHHOLDING OF TAXES.
All payments required to be made by the Company to the Executive under this
Agreement shall be subject to the withholding of such amounts, if any,
relating to tax, and other payroll deductions as the Company may reasonably
determine it should withhold pursuant to any applicable law or regulation.
15. SEVERABILITY.
To the extent any provision of this Agreement or portion thereof shall be
invalid or
9
<PAGE>
unenforceable, it shall be considered deleted therefrom and the
remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect.
16. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together will constitute
one and the same instrument.
17. GOVERNING LAW.
This Agreement shall be construed, interpreted and enforced in accordance
with the laws of the State of Virginia.
18. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement by the Company and the
Executive with respect to the subject matter hereof and supersedes any and
all prior agreements or understandings between the Executive and the Company
with respect to the subject matter hereof, whether written or oral. This
Agreement may be amended or modified only by a written instrument executed by
the Executive and the Company.
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
February 4., 1998.
COMPUTER HARDWARE MAINTENANCE
COMPANY, INC.
By:
--------------------------
Name:
Title:
THE EXECUTIVE
/s/ Michael Paglaiccetti
-------------------------
Name: Michael Paglaiccetti
11
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES OF THE COMPANY
Management Support Technology Corp.
Computer Hardware Maintenance Company, Inc.
Federal Computer Corporation
Corporate Access, Inc.
Interactive Software Systems Incorporated
U.S. Communications, Inc.
InVenture Group, Inc.
MIS Technologies, Inc.
Decision Support Technology, Inc.
Louden Associates, Inc.
LINC Systems Corporation
PowerCrew, Inc.
Global Core Strategies Acquisition, Inc.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-57413, 333-64505. and 333-73055) of Condor
Technology Solutions, Inc. of our report dated February 5, 1999, relating to
the consolidated financial statements of Condor Technology Solutions, Inc.
appearing on page 21 of this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
McLean, VA
March 17, 1999
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1998 CONSOLIDATED FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
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