<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 0-23635
CONDOR TECHNOLOGY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1814931
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
170 Jennifer Road, Suite 325, Annapolis, Maryland 21401
(Address of principal executive offices) (Zip Code)
(410) 266-8700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding as of
Class May 8, 2000
----- -----------
Common Stock, $.01 par value 15,218,085
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets................................................1
Consolidated Statements of Operations......................................2
Consolidated Condensed Statements of Cash Flows............................3
Notes to Consolidated Financial Statements...............................4-9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................10-13
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK......................................................14
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.........................................................15
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ................................16
Item 3. DEFAULTS UPON SENIOR SECURITIES...........................................16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................16
Item 5. OTHER INFORMATION.........................................................16
Item 6. EXHIBITS AND REPORTS ON FORM 8-K..........................................16
SIGNATURES..................................................................................17
EXHIBIT INDEX...............................................................................18
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,137 $ 2,325
Restricted cash 2,584 1,469
Accounts receivable, net 29,281 26,405
Prepaids and other current assets 8,235 8,020
------------ ------------
Total current assets 43,237 38,219
PROPERTY AND EQUIPMENT, NET 8,235 8,021
GOODWILL AND OTHER INTANGIBLES, NET 66,422 65,550
OTHER ASSETS 2,026 1,984
------------ ------------
TOTAL ASSETS $ 119,920 $ 113,774
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,908 $ 10,317
Accrued expenses and other current liabilities 13,775 11,720
Deferred revenue 5,136 5,288
Current portion of contingent purchase liability 2,388 3,055
Current portion of long-term debt 45,505 44,814
------------ ------------
Total current liabilities 76,712 75,194
LONG-TERM DEBT 178 143
NON-CURRENT CONTINGENT PURCHASE LIABILITY 7,912 7,245
OTHER LONG-TERM OBLIGATIONS 1,303 1,248
------------ ------------
Total liabilities 86,105 83,830
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par, 1,000,000 authorized; none outstanding - -
Common stock, $.01 par value; authorized 49,000,000 shares;
issued and outstanding, 15,078,864 shares at December 31, 1999
and 15,196,904 shares at March 31, 2000 151 152
Additional paid-in capital 123,142 123,912
Accumulated deficit (89,185) (93,777)
Accumulated other comprehensive loss (99) (149)
Treasury stock, at cost (13,178 shares at December 31, 1999 and
March 31, 2000) (194) (194)
------------ ------------
Total stockholders' equity 33,815 29,944
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 119,920 $ 113,774
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
IT service revenues $ 38,749 $ 27,342
Hardware procurement revenues 20,941 9,014
------------ ------------
Total revenues 59,690 36,356
Cost of IT services 21,319 16,783
Cost of hardware procurement 18,780 7,974
------------ ------------
Total cost of revenues 40,099 24,757
------------ ------------
Gross profit 19,591 11,599
Selling, general and administrative expenses 11,645 12,312
Depreciation and amortization 2,159 1,471
Other costs - 1,083
------------ ------------
Income (loss) from operations 5,787 (3,267)
Interest and other expense, net (425) (1,325)
------------ ------------
Income (loss) before income taxes 5,362 (4,592)
Provision for taxes 2,359 -
------------ ------------
Net income (loss) $ 3,003 $ (4,592)
============ ============
Basic shares outstanding 12,043 15,133
============ ============
Diluted shares outstanding 13,563 15,133
============ ============
Net income (loss) per basic share $ 0.25 $ (0.30)
============ ============
Net income (loss) per diluted share $ 0.22 $ (0.30)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
( in thousands )
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 2000
---------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,003 $ (4,592)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,159 1,471
Writeoff of deferred financing costs - 159
Stock compensation expense - 672
Changes in assets and liabilities (2,792) 1,567
Other 241 -
---------- ----------
Net cash provided by (used in) operating activities 2,611 (723)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,656) (357)
Sale of equity securities - 402
Employee Stock Purchase Plan - 98
Payment for technology license - (43)
Other (257) (27)
---------- ----------
Net cash provided by (used in) investing activities (1,913) 73
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt, net (1,119) (726)
Deferred financing costs (42) (501)
---------- ----------
Net cash used in financing activities (1,161) (1,227)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES (104) (50)
NET DECREASE IN CASH AND CASH EQUIVALENTS
AND RESTRICTED CASH (567) (1,927)
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH,
BEGINNING OF PERIOD 5,809 5,721
---------- ----------
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH,
END OF PERIOD $ 5,242 $ 3,794
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Condor Technology Solutions, Inc., a Delaware corporation (the
"Company"), was founded in August 1996. The Company is an information
technology ("IT") and e-commerce solutions provider to middle market
companies, Fortune 1000 firms and government agencies. In order to become
an end-to-end provider of a wide range of IT services and solutions,
Condor entered into the agreements (the "Mergers") to acquire all of the
outstanding stock of eight established IT service providers (the
"Founding Companies") and concurrently completed an initial public
offering (the "Offering") of its common stock (the "Common Stock"). On
February 5, 1998 and February 10, 1998, respectively, the Offering and
Mergers were completed.
Since February 10, 1998, the Company has acquired seven additional IT
service providers. The Founding Companies along with the additional
acquisitions are referred to herein as "Operating Companies". All
acquisitions have been accounted for using the purchase method of
accounting and are reflected as of their respective acquisition dates.
During 1999, the Company sold two of its Operating Companies and shut
down another one.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial reporting and Securities and Exchange Commission
regulations. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
financial statements reflect all adjustments (of a normal and recurring
nature) which are necessary to present fairly the financial position,
results of operations and cash flows for the interim periods. The results
for the three months ended March 31, 2000 are not necessarily indicative
of the results that may be expected for the year ending December 31,
2000.
The financial statements should be read in conjunction with the Company's
audited consolidated financial statements included in the Company's most
recently filed Form 10-K.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For a description of the Company's accounting policies, refer to the
Notes to the Financial Statements of the Company included in the
Company's most recently filed Form 10-K.
(3) UNCERTAINTY OF MEETING FUTURE COMMITMENTS
In April 1999, the Company entered into a $100 million syndicated credit
facility (the "Credit Facility") underwritten and arranged by a major
commercial bank (the "Bank") as discussed in Note 8. As part of the
Credit Facility, the Company must comply with various loan covenants. At
March 31, 2000, the Company had an outstanding balance of $44.5 million
borrowed under the Credit Facility.
Since June 30, 1999, the Company has not been in compliance with certain
financial covenants of the Credit Facility and has been operating under
several forbearance arrangements since that date. On March 1, 2000, the
Company and the Bank entered into the Fifth Amendment Agreement (the
"Fifth Amendment") extending the terms and conditions of forbearance
though February 28, 2001. As of May 12, 2000, the Company and the Bank
reached agreement as to the terms and conditions of a First Amendment to
the Fifth Amendment Agreement (the "First Amendment to the Fifth
Amendment"). Under the terms and conditions of the Fifth Amendment and
the First Amendment to the Fifth Amendment, the Company is required to
permanently reduce the outstanding principal balance by various amounts
on or before certain dates and prior to February 28, 2001. In addition,
4
<PAGE>
the Company must provide the Bank, on or before January 31, 2001, with a
commitment letter evidencing a refinancing, an asset sale, an equity
infusion or some other transaction generating sufficient cash proceeds to
repay the Bank in full on or prior to February 28, 2001.
In order to address the requirements of the Fifth Amendment and the First
Amendment to the Fifth Amendment, the Company is actively pursuing an
overall business plan, which was fully developed in the fourth quarter of
1999, that includes the potential disposition of one or more of the
Operating Companies in an orderly and systematic fashion. The intended
consequence of this business plan is the settlement of the Credit
Facility obligation. The implementation of this business plan may result
in one or more of the following: (1) the disposal of the equity stock or
assets of individual Operating Companies; (2) the disposal of assets of
partial and/or entire divisions; and (3) the refinancing of the Company's
remaining Credit Facility obligation. Management intends to complete this
business plan no later than the end of February 2001. Accordingly,
substantial doubt currently exists about the Company's ability to meet
its obligations under the Fifth Amendment.
If unable to fully implement this business plan or obtain replacement
financing, the Company may experience material adverse financial effects
and its ability to continue as a going concern will depend upon its
ability to renegotiate its Credit Facility arrangement.
(4) OTHER COSTS
During the three months ended March 31, 2000, the Company recorded other
special charges of approximately $1.1 million, which are included in
other costs on the consolidated statement of operations. Included in this
total are employee retention costs for restricted stock of $0.7 million
as discussed in Note 5 and voluntary severance benefits of $0.4 million.
The Company will pay all of these severance benefits in 2000.
(5) RESTRICTED STOCK
During 1999, the Company granted restricted stock awards to certain key
employees to purchase shares of the Company's Common Stock at a purchase
price of $0.01 per share. During the three months ended March 31, 2000,
approximately 106,000 shares of unvested, restricted shares were
forfeited by employees upon their separation from the Company, and there
were approximately 1.2 million shares of restricted stock still
outstanding.
The Company records compensation expense ratably over the vesting period
of the individual issues based on the current fair value of the Common
Stock. During the three months ended March 31, 2000, the Company recorded
retention costs of approximately $0.7 million related to restricted
stock.
(6) EARNINGS PER SHARE
The Company calculates 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 (loss)
available to common stockholders and common equivalent stockholders is
equal to net income (loss) for all periods presented.
5
<PAGE>
The following table represents 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 each of the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 2000
----------- -----------
(in thousands)
<S> <C> <C>
Weighted average common stock outstanding 12,043 15,133
Stock options, as if converted 3 -
Contingent purchase price adjustment 1,517 -
---------- ----------
Weighted average common and common
Equivalent shares outstanding 13,563 15,133
========== ==========
</TABLE>
(7) COMPREHENSIVE INCOME
Comprehensive income includes net income and foreign currency translation
adjustments and is detailed as follows for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
1999 2000
------------------ -------------------
(in thousands)
<S> <C> <C>
Net income (loss) $ 3,003 $ (4,592)
Foreign currency translation adjustments (84) (50)
------------------ -------------------
Comprehensive income $ 2,919 $ (4,642)
================== ===================
</TABLE>
(8) DEBT
At March 31, 2000, the Company was not in compliance with certain
financial covenants of its Credit Facility. As of March 1, 2000, the
Company and the Bank entered a Fifth Amendment in which the Bank extended
their agreement of forbearance of their rights and remedies under the
Credit Facility through February 28, 2001. As of May 12, 2000, the
Company and the Bank reached agreement as to the terms and conditions of
a First Amendment to the Fifth Amendment. The Fifth Amendment and First
Amendment to the Fifth Amendment set forth certain permanent debt
reduction requirements on or before certain dates prior to February 28,
2001. The Company is required to pay $8 million by August 2000, $10
million by December 31, 2000, $50,000 each month from June to August
2000, $125,000 each month beginning September 2000 and thereafter, and an
extension fee of $650,000. In addition, the Company's ability to obtain
additional advances under the Credit Facility will be limited during the
forbearance period.
As of March 31, 2000, the Company wrote off approximately $0.2 million of
deferred financing costs related to the renegotiation of the Company's
credit facility which is included in interest and other expense on the
statement of operations.
6
<PAGE>
(9) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
1999 2000
----------------- ----------------
(in thousands)
<S> <C> <C>
Cash paid during the year for:
Federal income tax payments $ 1,475 $ -
State income tax payments 723 6
Interest payments 99 1,206
</TABLE>
(10) SEGMENT REPORTING
The Company has four reporting segments: Consulting Solutions; System
Support Solutions; Government Solutions; and Enterprise Performance
Solutions ("EPS"). The Company's Safari software related business
("Safari") is not included in these segments and is included in "Other".
These four segments correspond to the Company's divisional structure
which was changed in the second quarter of 1999. The financial
information reported below for the three months ended March 31, 1999 has
been conformed to the new divisional structure.
The Consulting Solutions division provides decision support, custom
application development, software package implementation, and contract
staffing and recruiting. These services involve the development of near
and long-term technology plans that help clients achieve specific
strategic business objectives and include IT needs analysis, technology
infrastructure design, future technology planning and refreshment,
systems architecture development, decision support planning and analysis,
and business process automation.
The System Support division provides customer management solutions and
support services, call center and help-desk operations, as well as a
complete array of desktop systems maintenance and support services to its
clients, including hardware and software maintenance, systems testing and
engineering, and hardware procurement.
The Government Solutions division offers its public sector clients a
variety of management consulting services, interactive media services,
system maintenance and hardware procurement.
The EPS division offers its clients a single source for enterprise
resource planning and e-commerce solutions focusing on implementation and
consulting related to the SAP, Peoplesoft and Trilogy software packages.
The Division focuses on the following service lines: installation,
business process design, configuration and implementation, and staff
augmentation.
The accounting policies of the reporting segments are the same as those
described in Note 2. The Company evaluates the performance of its
operating segments based on operating income after intercompany
transactions have been eliminated. The "Other" column includes the Safari
operating unit and corporate related items not allocated to the
divisions. Safari's sales and services include the sale and
implementation of the Safari software product lines, training and
continuing education. For the three months ended March 31, 1999, other
includes the operations of two operating companies sold in October, 1999
and one operating company shut down in the second quarter of 1999.
Corporate selling, general and administrative costs have been allocated
to the divisions and Safari based on a three factor formula based on
total revenue, operating income and total assets. In addition, the
impairment of intangible assets recorded in 1999 has been allocated to
the Consulting Solutions, System Support, EPS and other segments for the
three months ended March 31, 2000.
Summarized financial information concerning the Company's reportable
segments is shown in the following tables (in thousands).
7
<PAGE>
For the three months ended March 31, 2000:
<TABLE>
<CAPTION>
CONSULTING SYSTEM GOVERNMENT
SOLUTIONS SUPPORT SOLUTIONS EPS OTHER CONSOLIDATED
---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
IT service revenues $ 5,960 $ 5,525 $ 5,676 $ 7,476 $ 2,705 $ 27,342
Hardware procurement
revenues - 8,995 19 - - 9,014
---------- ---------- ----------- ---------- ---------- -----------
Total revenues $ 5,960 $ 14,520 $ 5,695 $ 7,476 $ 2,705 $ 36,356
---------- ---------- ----------- ---------- ---------- -----------
---------- ---------- ----------- ---------- ---------- -----------
Income (loss) from
operations $ (2,471) $ 2,306 $ 1,641 $ (3,264) $ (1,479)(a) $ (3,267)
---------- ---------- ----------- ---------- ---------- -----------
Total assets $ 12,725 $ 25,188 $ 38,176 $ 20,936 $ 16,749 $ 113,774
---------- ---------- ----------- ---------- ---------- -----------
---------- ---------- ----------- ---------- ---------- -----------
For the three months ended March 31, 1999:
<CAPTION>
CONSULTING SYSTEM GOVERNMENT
SOLUTIONS SUPPORT SOLUTIONS EPS OTHER CONSOLIDATED
---------- ---------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
IT service revenues $ 8,233 $ 6,847 $ 7,801 $ 10,311 $ 5,557 $ 38,749
Hardware procurement
revenues - 8,041 5,662 - 7,238 20,941
---------- ---------- ---------- --------- ---------- ------------
Total revenues $ 8,233 $ 14,888 $ 13,463 $ 10,311 $ 12,795 $ 59,690
---------- ---------- ---------- --------- ---------- ------------
---------- ---------- ---------- --------- ---------- ------------
Income (loss) from
operations $ 77 $ 2,364 $ 2,901 $ 827 $ (382) $ 5,787
---------- ---------- ---------- --------- ---------- ------------
Total assets $ 34,855 $ 27,165 $ 46,551 $ 44,600 $ 53,590 $ 206,761
---------- ---------- ---------- --------- ---------- ------------
---------- ---------- ---------- --------- ---------- ------------
</TABLE>
- -------------
(a) Includes Other costs of $1.1 million.
(11) COMMITMENTS AND CONTINGENCIES
In the course of Condor's consolidation efforts, SCM LLC d/b/a The
Commonwealth Group ("Commonwealth"), the promoter of the Offering, and
Condor negotiated with Emtec, Inc. ("Emtec"), an IT service company based
in Pennsylvania, with a view to Emtec becoming one of the Founding
Companies. As part of the process, Emtec's investment banker and
Commonwealth executed two confidentiality agreements pursuant to which
each agreed, among other things, not to disclose certain confidential
information and Commonwealth agreed that it would not seek to enter into
a business transaction with any companies to be introduced to it by
Emtec's investment banker for a period of two years without such
investment banker's prior written consent. On October 28, 1997, Emtec
filed a Complaint in the United States District Court for the Eastern
District of Pennsylvania against Condor, Commonwealth, J. Marshall
Coleman, a Managing Director of Commonwealth and the former Chairman of
the Board of Condor, and Kennard F. Hill, the Company's Chairman of the
Board and Chief Executive Officer, captioned EMTEC, INC. V. CONDOR
TECHNOLOGY SOLUTIONS, INC., SCM LLC, ET AL., Civil No. 97-6652. The
complaint alleges breach of contract, tortuous interference with Emtec's
business relationship with Corporate Access, Inc. ("Corporate Access")
and Computer Hardware Maintenance Corporation ("CHMC"), two of the
Founding Companies, and misappropriation of a trade secret arising out of
the participation of CHMC and Corporate Access in the consolidation and
the Offering without Emtec's written consent. In connection with the
three causes of action, Emtec demands that the defendants disgorge the
financial benefits that they have and will obtain as a result of their
alleged breach of contract and seeks compensatory and punitive damages.
On December 31, 1997, the defendants filed an Answer, denying the
allegations and asserting various affirmative defenses. The court denied
Emtec's motion to amend the complaint to add a claim of unjust
enrichment. A motion by Condor for partial summary judgment was granted
in part to eliminate Emtec's claim for misappropriation of a trade secret
and later Emtec stipulated to a dismissal of its claim of tortuous
interference with business relations, and to the removal of both Mr.
Coleman and Mr. Hill as defendants in the suit. Trial of this matter
could be scheduled in the next six months. Condor believes that Emtec's
allegations are
8
<PAGE>
without merit and that, in any event, the ultimate resolution of this
action will not have a material adverse effect on the Company's financial
position or results of operations. Commonwealth has agreed to indemnify
the Company with regard to any final judgment or settlement arising out
of the above action or any similar action. Commonwealth's obligations
under such agreement have been guaranteed by the three members of
Commonwealth.
The Company is a party to other legal proceedings and disputes related to
the Company's day to day business operations, none of which, in the
opinion of management, are material to the financial position or results
of operations of the Company. Therefore, there is no reserve for legal
contingency recorded at March 31, 2000.
(12) SUBSEQUENT EVENT
The Company is obligated to issue shares of Common Stock and pay cash
under the contingent payment provisions of certain purchase
agreements, as amended, related to the acquisition of three of the
Operating Companies. As to the share portion which is currently due
($4,845,000 in aggregate), one of the purchase agreements calls for
valuation of the shares based on certain NASDAQ National Market prices
in March 2000. Assuming the use of the closing prices of the Common
Stock on the OTC bulletin board for this purpose, 1,469,800 shares of
Common Stock would be issuable as contingent consideration under that
agreement. Another purchase agreement calls for valuing the shares
using NASDAQ National Market prices or in their absence, an appraiser.
Assuming the appraiser appraised the value of such shares as of
March 30, 2000 (the date set for issuance) and that the appraiser
used the closing price of the Common Stock on the OTC bulletin board,
2,952,637 shares of Common Stock would be issuable as contingent
consideration. With respect to the cash portion of the contingent
consideration which is currently due ($3.1 million in aggregate),
the Company has notified the recipients that it is unable to pay such
amount at this time.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by reference to and
should be read in conjunction with the Annual Report on Form 10-K of the
Company for its fiscal year ended December 31, 1999 (the "Form 10-K"). A
number of statements in this Quarterly Report on Form 10-Q address
activities, events or developments which the Company anticipates may
occur in the future, including such matters as the Company's strategy for
internal growth, additional capital expenditures (including the amount
and nature thereof), acquisitions of assets and businesses, industry
trends and other such matters. For a discussion of important factors
which could cause actual results to differ materially from the
forward-looking statements see "Special Note Regarding Forward Looking
Statements."
INTRODUCTION
The Company earns revenues from providing IT services and hardware
procurement. The Company recognizes IT service revenues using formulas
based on time and materials, whereby revenues are recognized as costs are
incurred at agreed-upon billing rates. For projects billed on a
fixed-price basis, revenue is recognized using the percentage of
completion method. Percentage of completion is determined using total
costs as a cost input measure. Revenues from license fees on proprietary
software are recognized when a non-cancelable license agreement has been
signed, the product has been delivered, collection is probable and all
significant obligations relating to the license have been satisfied.
There are no significant post-sales support obligations related to the
Company's license fees. Revenues from hardware procurement are recognized
upon shipment or acceptance of the equipment. When installation services
are an integral component of the hardware procurement, revenue is
recognized at the customer's acceptance of the equipment.
Cost of revenues includes the provision of services and material directly
related to the revenues, costs of acquisition of hardware resold to
clients, subcontracted labor or other outside services and other direct
costs associated with revenues, as well as an allocation of certain
indirect costs.
Selling, general and administrative costs include salaries, benefits,
commissions payable to the Company's sales and marketing personnel,
recruiting, finance and other general and administrative costs.
In July 1996, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 97 ("SAB 97") relating to business combinations
immediately prior to an initial public offering. SAB 97 requires that
these combinations be accounted for using the purchase method of
acquisition accounting. Condor was identified as the "accounting
acquiror" for financial statement presentation purposes.
RESULTS OF OPERATIONS
The Company's consolidated financial statements have been prepared based
on accounting for all companies acquired using the purchase method of
acquisition accounting. The financial statements include operations of
the Operating Companies from their respective dates of acquisition.
10
<PAGE>
UNAUDITED CONSOLIDATED RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2000
AND 1999
The following table sets forth certain selected financial data for the
Company and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------------------------------
1999 2000
--------------------------- --------------------------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
IT service revenues $ 38,749 64.9% $ 27,342 75.2%
Hardware procurement revenues 20,941 35.1% 9,014 24.8%
----------- ------------ ----------- -----------
Total revenues 59,690 100.0% 36,356 100.0%
----------- ------------ ----------- -----------
Cost of IT services 21,319 55.0% 16,783 61.4%
Cost of hardware procurement 18,780 89.7% 7,974 88.5%
----------- -----------
Total cost of revenues 40,099 67.2% 24,757 68.1%
----------- -----------
Gross profit 19,591 32.8% 11,599 31.9%
Selling, general and administrative expenses 11,645 19.5% 12,312 33.9%
Depreciation and amortization 2,159 3.6% 1,471 4.0%
Other costs - -% 1,083 3.0%
----------- ------------ ----------- -----------
Income (loss) from operations $ 5,787 9.7% $ (3,267) (8.9)%
=========== ============ =========== ===========
</TABLE>
REVENUES. Revenue decreased $23.3 million or 39.1%, from $59.7 million
for the three months ended March 31, 1999 to $36.4 million for the three
months ended March 31, 2000. The decrease is the result of the sale of
two Operating Companies and the shut down of another during 1999,
fluctuations in product delivery and the carryover effect of delays in
spending in the IT service market from 1999. IT service revenue decreased
approximately $11.4 million, or 29.4%, and hardware procurement revenue
decreased $11.9 million, or 57.0%.
IT service revenue decreased through all of the Company's divisions. The
Government Solutions division revenue decline was primarily attributable
to a significant one-time implementation engagement in the first quarter
of 1999 as well as a reprocurement of a large government contract at a
reduced revenue rate. The EPS division experienced a decline in revenue
as a result of the carryover effect of 1999 delays in IT spending for
system implementation and consulting. The Consulting Solutions division
revenue decline was primarily attributable to the shut down of MST's
operations due to the loss of a large insurance client during the second
quarter of 1999 as well as a decline in contract staffing and recruiting
placement. The System Solutions Division revenue decrease was primarily
the result of the reprocurement of a large call center contract for a
five year period at a reduced revenue rate. Additionally, the Safari
Solutions unit has experienced a decrease in sales of the Company's
Safari software licenses.
The decrease in hardware procurement revenue was primarily attributable
to the sale of U.S. Communications, Inc. and Corporate Access, Inc. in
October 1999, fluctuations in product delivery and the shift in the
Company's focus from hardware procurement to higher margin IT service
revenues.
COST OF REVENUES. Cost of revenues decreased $15.3 million or 38.3% from
$40.1 million for the three months ended March 31, 1999 to $24.8 million
for the three months ended March 31, 2000. This decrease is primarily
attributable to the revenue decline discussed above. Cost of revenues as
a percentage of revenues increased from 67.2% of revenues for the three
months ended March 31, 1999 to 68.1% for the three months ended March 31,
2000. This increase was primarily a result of lower utilization due to
the carryover of 1999 delays in spending in the IT service market.
11
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.7 million, or 5.7%, from $11.6
million to $12.3 million for the three months ended March 31, 1999 and
2000, respectively. Selling, general and administrative costs increased
from 19.5 % of revenues to 33.9% of revenues for the three months ended
March 31, 1999 and 2000, respectively. This increase is primarily the
result of costs of recruiting and retention in the Consulting Solutions
division during the first quarter of 2000 and an increase in reserve
balances from the first quarter of 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
$0.7 million or 31.9%, from $2.2 million for the three months ended March
31, 1999 to $1.5 million for the three months ended March 31, 2000. The
decrease is primarily attributable to a reduction in amortization expense
related to the impairment of goodwill recorded in 1999.
OTHER COSTS. Other costs include restructuring and other special charges
of $1.1 million. Included in this total are retention costs of $0.7
million and voluntary severance of $0.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Condor is a holding company that conducts its operations though its
subsidiaries. Accordingly, the Company's principal sources of liquidity
are the cash flows of its operating divisions and cash available from its
credit facilities. At March 31, 2000 the Company had $2.3 million in cash
and cash equivalents and $45.0 million of indebtedness outstanding, which
consists primarily of borrowings on its credit facility (the "Credit
Facility").
In accordance with its Credit Facility, the Company must comply with
various loan covenants including: (i) maintenance of certain financial
performance ratios; (ii) limits on capital expenditures; (iii)
restrictions on additional indebtedness; (iv) restrictions on liens,
guarantees, advances and dividends; and (v) restrictions on the type,
size and number of acquisitions.
At March 31, 2000, the Company was not in compliance with certain
financial covenants of its Credit Facility. As of March 1, 2000, the
Company and the Bank entered a Fifth Amendment in which the Bank extended
their agreement of forbearance of their rights and remedies under the
Credit Facility through February 28, 2001. As of May 12, 2000, the
Company and the Bank reached agreement as to the terms and conditions of
a First Amendment to the Fifth Amendment. The Fifth Amendment and First
Amendment to the Fifth Amendment set forth certain permanent debt
reduction requirements on or before certain dates prior to February 28,
2001. The Company is required to pay $8 million by August 2000, $10
million by December 31, 2000, $50,000 each month from June to August
2000, $125,000 each month beginning September 2000 and thereafter, and an
extension fee of $650,000. In addition, the Company's ability to obtain
additional advances under the Credit Facility will be limited during the
forbearance period.
In order to address the requirements of the Fifth Amendment and the First
Amendment to the Fifth Amendment, the Company is actively pursuing an
overall business plan, which was fully developed in the fourth quarter of
1999, that includes the potential disposition of one or more of the
Operating Companies in an orderly and systematic fashion. The intended
consequence of this business plan is the settlement of the Credit
Facility obligation. The implementation of this business plan may result
in one or more of the following: (1) the disposal of the equity stock or
assets of individual Operating Companies; (2) the disposal of assets of
partial and/or entire divisions; and (3) the refinancing of the Company's
remaining Credit Facility obligation. Management intends to complete this
business plan no later than the end of February 2001.
If unable to fully implement this business plan or negotiate a new
agreement with existing lenders or obtain replacement financing, the
Company may experience material adverse financial effects and its ability
to continue as a going concern may be impaired.
12
<PAGE>
In December 1999, the Company's Common Stock was delisted by the Nasdaq
National Market. Currently the Company's Common Stock is being quoted on
the Nasdaq OTC Bulletin Board.
Net cash used in operating activities was $0.7 million for the three
months ended March 31, 2000. Net cash provided by investing activities
was $0.1 million for the three months ended March 31, 2000 which included
$0.4 million provided by the sale of equity securities offset by $0.4
million used for purchases of property, equipment and the costs of
developing the Company's internal use ERP system.
Net cash used financing activities was $1.2 million for the three months
ended March 31, 2000 which is comprised of debt repayments of $0.7
million and outflows for deferred financing costs of $0.5 related to the
Company's Credit Facility.
YEAR 2000 ISSUE UPDATE
The Company did not experience any significant malfunctions or errors in
its operating or business systems when the date changed from 1999 to
2000. Based on operations since January 1, 2000, the Company does not
expect any significant impact to its on-going business as a result of the
"Year 2000 issue." However, it is possible that the full impact of the
date change, which was of concern due to computer programs that use two
digits instead of four digits to define years, has not been fully
recognized. The Company believes that any such problems are likely to be
minor and correctable. The Company currently is not aware of any
significant Year 2000 or similar problems that have arisen for its
customers and suppliers.
The Company expended $1.8 million on Year 2000 readiness efforts during
1999. These efforts included costs of implementing the Company's Year
2000 compliant ERP accounting and management system, replacing some
outdated, non-compliant hardware and non-compliant software as well as
identifying and remediating Year 2000 problems.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Form 10-Q based on current expectations that are not
strictly historical statements, such as the Company's or management's
intentions, hopes, beliefs, expectations, strategies, or predictions, are
forward-looking statements. Such statements, or any other variation
thereof regarding the Company's future activities or other future events
or conditions within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934, as amended, are
intended to be covered by the safe harbors for forward-looking statements
created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation,
the sufficiency of the Company's working capital and the ability of the
Company to realize benefits from consolidating certain general and
administrative functions, to pursue strategic acquisitions and alliances,
to retain management and to implement its focused business strategy, to
leverage consulting services, secure full-service contracts, to expand
client relationships, successfully recruit, train and retain personnel,
expand services and geographic reach and successfully defend itself in
ongoing and future litigation.
13
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. The Company is exposed to market risk from adverse changes
in interest rates and foreign currency exchange rates.
INTEREST RATE RISKS. The Company is exposed to risk from changes in
interest rates as a result of its borrowing activities. At March 31,
2000, the Company had total debt of $45.0 million of which $44.5 million
represents borrowings on its Credit Facility at a variable interest rate.
Management does not believe that the Company's exposure to interest rate
fluctuations is material.
FOREIGN CURRENCY EXCHANGE RISK. The Company's international operations
are subject to foreign exchange rate fluctuations. The Company derived
approximately 2% of its revenue for the three months ended March 31, 2000
from services performed in the Netherlands, Germany and Mexico.
Management does not believe that the Company's exposure to foreign
currency rate fluctuations is material.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the course of Condor's consolidation efforts, SCM LLC d/b/a The
Commonwealth Group ("Commonwealth"), the promoter of the Offering, and
Condor negotiated with Emtec, Inc. ("Emtec"), an IT service company based
in Pennsylvania, with a view to Emtec becoming one of the Founding
Companies. As part of the process, Emtec's investment banker and
Commonwealth executed two confidentiality agreements pursuant to which
each agreed, among other things, not to disclose certain confidential
information and Commonwealth agreed that it would not seek to enter into
a business transaction with any companies to be introduced to it by
Emtec's investment banker for a period of two years without such
investment banker's prior written consent. On October 28, 1997, Emtec
filed a Complaint in the United States District Court for the Eastern
District of Pennsylvania against Condor, Commonwealth, J. Marshall
Coleman, a Managing Director of Commonwealth and the former Chairman of
the Board of Condor, and Kennard F. Hill, the Company's Chairman of the
Board and Chief Executive Officer, captioned EMTEC, INC. V. CONDOR
TECHNOLOGY SOLUTIONS, INC., SCM LLC, ET AL., Civil No. 97-6652. The
complaint alleges breach of contract, tortuous interference with Emtec's
business relationship with Corporate Access, Inc. ("Corporate Access")
and Computer Hardware Maintenance Corporation ("CHMC"), two of the
Founding Companies, and misappropriation of a trade secret arising out of
the participation of CHMC and Corporate Access in the consolidation and
the Offering without Emtec's written consent. In connection with the
three causes of action, Emtec demands that the defendants disgorge the
financial benefits that they have and will obtain as a result of their
alleged breach of contract and seeks compensatory and punitive damages.
On December 31, 1997, the defendants filed an Answer, denying the
allegations and asserting various affirmative defenses. The court denied
Emtec's motion to amend the complaint to add a claim of unjust
enrichment. A motion by Condor for partial summary judgment was granted
in part to eliminate Emtec's claim for misappropriation of a trade secret
and later Emtec stipulated to a dismissal of its claim of tortuous
interference with business relations, and to the removal of both Mr.
Coleman and Mr. Hill as defendants in the suit. Trial of this matter
could be scheduled in the next six months. Condor believes that Emtec's
allegations are without merit and that, in any event, the ultimate
resolution of this action will not have a material adverse effect on the
Company's financial position or results of operations. Commonwealth has
agreed to indemnify the Company with regard to any final judgment or
settlement arising out of the above action or any similar action.
Commonwealth's obligations under such agreement have been guaranteed by
the three members of Commonwealth.
The Company is a party to other legal proceedings and disputes related to
the Company's day to day business operations, none of which, in the
opinion of management, are material to the financial position or results
of operations of the Company.
15
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote by security holders during the
three months ended March 31, 2000.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (see index on page 18)
(b) Reports on Form 8-K:
The Company filed the following:
(1) Form 8-K Current Report on March 1, 2000 related to the Fifth
Amendment Agreement.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONDOR TECHNOLOGY SOLUTIONS, INC.
Date MAY 12, 2000 By: /s/ KENNARD F. HILL
-------------------------- ---------------------------------
Kennard F. Hill
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date MAY 12, 2000 By: /s/ W. M. ROBBINS
------------------------- ---------------------------------
W. M. Robbins
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
17
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule for the three months ended
March 31, 2000.
18
<TABLE> <S> <C>
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
2000 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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