<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
(MARK ONE)
<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 0-23635
--------------------------
CONDOR TECHNOLOGY SOLUTIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 54-1814931
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
170 JENNIFER ROAD, SUITE 325, ANNAPOLIS, 21401
MARYLAND
(Address of principal executive offices) (zip code)
</TABLE>
(410) 266-8700
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
</TABLE>
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 / /
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. /X/
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 20, 2000 was $9,974,620, based on the last sale price
($1.13) of the Registrant's Common Stock, $.01 par value per share, on the
Nasdaq OTC Bulletin Board on March 20, 2000.
As of March 20, 2000, 15,146,763 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 29, 2000.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 7
Item 4A. Executive Officers of the Registrant........................ 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 17
Item 8. Financial Statements and Supplementary Data................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 49
Item 11. Executive Compensation...................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 49
Item 13. Certain Relationships and Related Transactions.............. 49
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on
Form 8-K.................................................... 50
</TABLE>
1
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
Condor Technology Solutions, Inc. (the "Company") is an information
technology ("IT") services and e-commerce solutions provider to middle market
companies, Fortune 1000 firms and government agencies. 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.
In order to become an end-to-end provider of a wide range of IT services and
solutions, Condor acquired, in separate mergers, eight IT service providers (the
"Founding Companies") in February 1998 concurrent with the closing of the
Company's initial public offering of shares of its Common Stock, $.01 par value
per share (the "Common Stock"). Since the initial public offering by the Company
in February 1998, the Company has made seven additional acquisitions
collectively referred to as "Other Acquisitions". Five of the Other Acquisitions
occurred in 1998.
During 1999, the Company purchased Titan Technologies Group, LLC ("Titan")
and Dimensional Systems LLC ("Dimensional"). The assets and going businesses of
Corporate Access, Inc. and U.S. Communications, Inc., two of the Founding
Companies, were sold to separate buyers in October 1999. In addition, Management
Support Technology Corp., another Founding Company, was shut down and its
remaining personnel transferred to other Operating Companies by the end of 1999.
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.
The Company is organized into five operating divisions: Consulting
Solutions, Government Solutions, System Support Solutions, Enterprise
Performance Solutions ("EPS") and Safari Solutions. See "Item 8. Consolidated
Financial Statements, Note 19 Segment Reporting". The Company markets its
services through the sales forces at each of its operating divisions with
oversight from the Company's senior management. 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 24 offices located in 13 states
across the United States and in two foreign countries. As of December 31, 1999,
the Company had 855 employees.
2
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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. The
Company's IT services are summarized in the following paragraphs.
CONSULTING SOLUTIONS
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.
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 assessment, technology infrastructure design,
future technology planning and refreshment, systems architecture development,
decision support planning and analysis, and business process automation. 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,
the Company's consultants and engineers provide an automated system of data
warehouses for sales, marketing and financial management to use in planning and
analysis.
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.
TRAINING AND CONTINUING EDUCATION. The Company offers IT training through
its training facilities in Hartford, Connecticut. 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.
GOVERNMENT SOLUTIONS
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 SUPPORT SOLUTIONS
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,
3
<PAGE>
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.
ENTERPRISE PERFORMANCE SOLUTIONS
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.
SAFARI SOLUTIONS
DESIGN OF IT SYSTEMS. The Company also develops, sells and supports
proprietary software for information access and delivery in the end-user,
production-data market, primarily under the Safari InfoTOOLS brand 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.
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.
The Government Solutions division's business is primarily derived from
contracts with agencies of the United States Government. The contracts are
generally subject to termination at the convenience of the Government. If so
terminated, the Company may be entitled to receive payment for work completed
and allowable termination costs.
For the year ended December 31, 1999, the Company's top 10 clients accounted
for 32% of the Company's combined revenues. In 1999, no single client accounted
for more than 6% of the Company's combined revenues.
SALES AND MARKETING
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 and trade shows. Additionally, the Company leverages
the experience and reputation of its senior management team within the IT
service industry. The Company has retained senior industry consultants to assist
in identifying, marketing and securing large IT service contracts with middle
market organizations.
4
<PAGE>
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. 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.
EMPLOYEES
As of December 31, 1999, the Company had 855 employees, none of which 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. 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.
5
<PAGE>
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:
<TABLE>
<CAPTION>
LOCATION TYPE
- - -------- ----------------
<S> <C>
Allentown, PA............................................. Office/Warehouse
Baltimore, MD............................................. Office
Bloomfield, CT............................................ Office
Boston, MA................................................ Office
Cambridge, MA............................................. Office
Dallas, TX................................................ Office
Denver, CO................................................ Office
Edison, NJ................................................ Office
Falls Church, VA.......................................... Office
Langhorne, PA............................................. Office/Warehouse
Malvern, PA............................................... Office
Mexico City, Mexico....................................... Office
Nashua, NH................................................ Office
New York, NY.............................................. Office
Norwalk, CT............................................... Office
Oklahoma City, OK......................................... Office
Pittsburgh, PA............................................ Office
San Jose, CA.............................................. Office
Scottsdale, AZ............................................ Office
Utrecht, The Netherlands.................................. Office
Vienna, VA................................................ Warehouse
Waltham, MA............................................... Office
Woburn, MA................................................ Office
</TABLE>
The leases expire at various times between 2000 and 2005. The aggregate
square footage of all of the Company's offices and warehouses is approximately
197,000 square feet.
In order to secure its obligations under its 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. 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
6
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Access") and Computer Hardware Maintenance Corporation ("CHMC"), two of the
Founding Companies, and misappropriation of a trade secret arising out of the
participation of CHMC and Corporate Access in the consolidation and the Offering
without Emtec's written consent. In connection with the three causes of action,
Emtec demands that the defendants disgorge the financial benefits that they have
and will obtain as a result of their alleged breach of contract and seeks
compensatory and punitive damages. On December 31, 1997, the defendants filed an
Answer, denying the allegations and asserting various affirmative defenses. The
court denied Emtec's motion to amend the complaint to add a claim of unjust
enrichment. A motion by Condor for partial summary judgment was granted in part
to eliminate Emtec's claim for misappropriation of a trade secret and later
Emtec stipulated to a dismissal of its claim of tortuous interference with
business relations, and to the removal of both Mr. Coleman and Mr. Hill as
defendants in the suit. Trial of this matter could be scheduled in the next six
months. Condor believes that Emtec's allegations are without merit and that, in
any event, the ultimate resolution of this action will not have a material
adverse effect on the Company's financial position or results of operations.
Commonwealth has agreed to indemnify the Company with regard to any final
judgment or settlement arising out of the above action or any similar action.
Commonwealth's obligations under such agreement have been guaranteed by the
three members of Commonwealth.
On or about July 1, 1999, an action was commenced against the Company and
its Chief Executive Officer in the United States District Court for the District
of Maryland, captioned GORDON V. CONDOR TECHNOLOGY SOLUTIONS, INC., ET AL.,
Civil AMD-99-1952. The plaintiff purported to bring the action on behalf of a
class consisting of all persons (other than the defendants and their affiliates)
who purchased Common Stock in the Company between February 3, 1999 and June 8,
1999 (the "Alleged Class Period"). The plaintiff contended that, during the
Alleged Class Period, the defendants made false and misleading statements about
the future impact of the "Year 2000" issue on the Company's business and on the
concentration of the Company's business with certain customers. The Company
believes that the statements challenged by the plaintiff were accurate, and that
the plaintiff's allegations of wrongdoing were baseless. On November 4, 1999,
the Court issued an Order dismissing the class action lawsuit against the
Company and its officer.
The Company is a party to other legal proceedings and disputes related to
the Company's day to day business operations, none of which, in the opinion of
management, are material to the financial position or results of operations of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1999, no matters
were submitted to a vote of the Company's security holders.
7
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth as of March 1, 2000, 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........................... 59 Chairman of the Board, President and Chief
Executive Officer
C. Lawrence Meador........................ 54 Vice Chairman of the Board
Michael G. Paglaiccetti................... 54 Vice President and Chief Operating Officer
W. M. Robbins............................. 53 Vice President and Chief Financial Officer
John F. McCabe............................ Vice President, General Counsel and
55 Secretary
Michael Louden............................ Vice President, Government Solutions
43 Division
</TABLE>
Kennard F. Hill has been Chief Executive Officer and a director of the
Company since January 1997 and President since October 30, 1999. 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 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. Mr. Hill
serves on the board of directors of Employee Solutions, Inc. 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 since the closing of the Offering in February 1998. Mr. Meador was the
founder and 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. 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.
Michael G. Paglaiccetti was appointed Vice President and Chief Operating
Officer of the Company in February 2000. He has also served as Vice President of
the System Support Division since August 1998. Concurrently he serves as the
President of Computer Hardware Maintenance Company, Inc. ("CHMC") 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
8
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manager for Control Data Corporation, focusing on mainframe services. He also
spent seven years with IBM Corporation as a custom engineer. Mr. Paglaiccetti
attended Rider College.
W. M. Robbins was appointed Vice President and Chief Financial Officer
("CFO") in February 2000. Prior to joining the Company, Mr. Robbins was the CFO
for State Street Shipping Agency. From 1995 to 1999, Mr. Robbins was a Senior
Vice President at Inchcape Shipping Services where he directed financial
services for customers in North and South America. From 1992 to 1995, he served
as Senior Vice President and General Manager for Krispy Kreme Doughnut
Corporation. Prior to this Mr. Robbins spent four years at Price Waterhouse as a
Senior Manager in their consulting practice and sixteen years with R.J.
Reyonolds Industries, Inc. in various financial positions. Mr. Robbins received
a bachelors in business administration with a major in accounting from the
University of Cincinnati.
John F. McCabe was appointed Vice President, General Counsel and Secretary
in June 1998. In this function, Mr. McCabe is the chief legal officer of the
Company and is focused on the Company's acquisition and divestiture program,
corporate level agreements and transactions, and day-to-day legal matters. He is
also an advisor on 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.
Michael Louden was appointed Vice President of the Government Solutions
Division in March 1999. Mr. Louden founded Louden Associates, Inc. ("Louden"),
one of the Operating Companies, and has served as the company's President for
the past thirteen years. Prior to forming Louden, Mr. Louden served as a
management consultant in industrial relations for the Ford Aerospace &
Communications Corporation in Hanover, Maryland. His professional accolades
include the Distinguished Public Service Award from the US Department of
Veterans Affairs. Mr. Louden received a masters degree in business
administration from Loyola College.
9
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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 OTC Bulletin Board 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>
<CAPTION>
HIGH LOW
-------- --------
<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
From January 1, 1999 through March 31, 1999................. 12.75 8.69
From April 1, 1999 through June 30, 1999.................... 10.81 4.25
From July 1, 1999 through September 30, 1999................ 4.69 2.19
From October 1, 1999 through December 31, 1999.............. 2.75 1.00
</TABLE>
- - ------------------------
(1) Represents the initial public offering price.
HOLDERS On March 20, 2000, the last reported sale price of the Common Stock
on the Nasdaq OTC Bulletin Board was $1.13 per share. At March 20, 2000, there
were 249 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 operations 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 over allotment 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.
Effective September 29, 1999, the Company registered an additional 325,000
shares of Common Stock with the Securities and Exchange Commission on Form S-8,
in connection with the Company's Employee Stock Purchase Plan.
Effective February 26, 1999, the Company registered an additional 125,000
shares of Common Stock with the Securities and Exchange Commission on Form S-8,
in connection with the offering of a Company stock fund investment under the
Company's 401(k) plan.
10
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During 1998, the Company issued 9,600 unregistered shares and 1,028,186
registered shares in connection with the purchase of four Other Acquisitions.
During 1999, the Company issued 296,682 unregistered shares for the purchase of
two Operating Companies as well as 1,251,689 unregistered shares issued for
payment of contingent purchase liabilities.
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,
--------------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................ $ -- $168,833 $200,206
Gross profit............................................ -- 54,321 61,246
Income (loss) from continuing operations................ (2,715) 11,724 (89,320)
Net income (loss) before extraordinary item............. $(2,715) $ 5,533 $(91,819)
Net income (loss) per basic share from continuing
operations............................................ $ (1.62) $ 0.54 $ (6.81)
Net income (loss) per diluted share from continuing
operations............................................ $ (1.62) $ 0.51 $ (6.81)
Shares used in computing basic net income (loss) per
share................................................. 1,680 10,193 13,481
Shares used in computing diluted net income (loss) per
share................................................. 1,680 10,767 13,481
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1997 1998 1999
-------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 26 $ 3,053 $ 3,137
Accounts receivable, net............................... -- 39,814 29,281
Goodwill and other intangibles, net.................... -- 145,163 66,422
Total assets........................................... 4,926 200,642 119,920
Current portion of long-term debt...................... -- 442 45,505
Long-term debt, net of current maturities.............. -- 24,296 178
Stockholders' equity................................... $ (255) $114,042 $33,815
</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
11
<PAGE>
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 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. All Operating Companies that previously used fiscal year financial
reporting basis have converted to a calendar year financial reporting basis and
because all individual Operating Companies are now included in the consolidated
tax return of Condor, all have converted their tax status to be taxed under
subchapter C of the Internal Revenue Code of 1986, as amended. The financial
statements include operations of the Operating Companies from their respective
dates of acquisition.
Financial statement audits of the Founding Companies were completed through
January 31, 1998. As there were no significant transactions from February 1,
1998 to the February 10, 1998 closing of the mergers with the Founding
Companies, January 31, 1998 is considered to represent the pre-merger closing
balance sheet. On February 1, 1998 (the date of the post-merger balance sheet),
Condor began reporting on a consolidated basis. As a result, for the year ended
December 31, 1998, Condor's consolidated operating results include the Founding
Companies' operations for only eleven months.
12
<PAGE>
The following table sets forth certain selected financial data for the
Company and as a percentage of revenues for the years ended December 31, (in
thousands, except percentages):
<TABLE>
<CAPTION>
1997 1998 1999
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
IT service revenues......................... $ -- --% $92,515 54.8% $137,367 68.6%
Hardware procurement revenues............... -- --% 76,318 45.2% 62,839 31.4%
------- ----- ------- ----- -------- -----
Total revenues.............................. -- --% 168,833 100.0% 200,206 100.0%
------- ----- ------- ----- -------- -----
Cost of IT services......................... -- --% 45,379 49.1% 82,139 59.8%
Cost of hardware procurement................ -- --% 69,133 90.6% 56,821 90.4%
------- ------- --------
Total cost of revenues...................... -- --% 114,512 67.8% 138,960 69.4%
------- ------- --------
Gross profit................................ -- --% 54,321 32.2% 61,246 30.6%
Selling, general and administrative......... 2,715 --% 32,920 19.5% 54,330 27.1%
Depreciation and amortization............... -- --% 4,677 2.8% 8,053 4.0%
In process research and development......... -- --% 5,000 3.0% -- --%
Impairment of intangible assets............. -- --% -- --% 83,236 41.6%
Other costs................................. -- --% -- --% 4,947 2.5%
------- ----- ------- ----- -------- -----
Income (loss) from operations............... $(2,715) --% $11,724 6.9% $(89,320) (44.6)%
======= ===== ======= ===== ======== =====
</TABLE>
REVENUES. Revenue increased $31.4 million or 18.6%, from $168.8 million for
the year ended December 31, 1998 to $200.2 million for the year ended
December 31, 1999. This increase is partly a result of the inclusion of only
eleven of the twelve months of operations of the Founding Companies in 1998
compared to the year ended December 31, 1999. All of the Operating Companies'
revenues were included for the year ended December 31, 1999 except Titan
Technologies Group LLC and Dimensional Systems LLC whose revenues were included
from their respective acquisition dates in April and September 1999. The
increase is also the result of organic revenue growth and the acquisition of
seven additional Operating Companies subsequent to the initial public offering.
IT service revenue grew approximately $44.9 million, or 48.5%, while hardware
procurement revenue decreased $13.5 million, or 17.7%.
IT service revenue increased through almost all of the Company's divisions.
The Consulting Solutions division revenue growth was primarily attributable to
increases in consulting and planning services within the division and the
acquisition of LINC Systems Corporation in July 1998 and is offset by a decrease
as a result of the shut down of MST during 1999 due to loss of its most
significant customer. The System Solutions division revenue growth was primarily
attributable to growth in the Company's customer management solutions, call
center, help desk and support services. The Government Solutions division
revenue growth was primarily attributable to the acquisition of Louden
Associates, Inc. in June 1998. The EPS division includes operations of
PowerCrew, Inc. and Global Core Strategies, Inc. which were acquired in the
fourth quarter of 1998 and Titan Technologies Group, LLC which was acquired in
April 1999. Safari Solutions has experienced a decrease in sales of the
Company's Safari software product line during 1999 as a result of operating and
financial difficulties experienced by its largest sales channel partner.
The decrease in hardware procurement revenue was primarily attributable to a
shift in the Company's focus from hardware procurement to higher margin IT
service revenues as well as fluctuations in product delivery. In addition,
Corporate Access, Inc. and U.S. Communications, Inc., two of the Company's
hardware resale subsidiaries, were sold during October 1999.
COST OF REVENUES. Cost of revenues increased $24.4 million or 21.3% from
$114.5 million for the year ended December 31, 1998 to $139.0 million for the
year ended December 31, 1999. This increase is
13
<PAGE>
primarily attributable to the revenue growth discussed above. Cost of revenues
as a percentage of revenues increased from 67.8% of revenues for the year ended
December 31, 1998 to 69.4% for the year ended December 31, 1999. This increase
was primarily a result of lower utilization and lower average billing rates due
to delays in spending in the IT service market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $21.4 million, or 65.0%, from $32.9 million to
$54.3 million for the years ended December 31, 1998 and 1999, respectively.
Selling, general and administrative costs increased from 19.5% of revenues to
27.1% of revenues for the years ended December 31, 1998 and 1999, respectively.
The increase is attributable to the inclusion of only eleven of the twelve
months of operations of the Founding Companies in 1998; the acquisitions of the
additional seven Operating Companies subsequent to the initial public offering;
the hiring of additional sales and marketing staff and administrative personnel;
and costs of recruiting in the Consulting Solutions and EPS services areas in
anticipation of future revenue growth. Expenses incurred in 1997 represent
payment of salary to one officer of the Company and facilities and general and
administrative costs prior to the initial public offering.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$3.4 million, or 72.2%, from $4.7 for the year ended December 31, 1998 to
$8.1 million for the year ended December 31, 1999. The increase is attributable
to the amortization of goodwill of the Founding Companies beginning at the time
of the Mergers which included only eleven of the twelve months in 1998; an
increase in goodwill and other intangible amortization associated with the
acquisitions of the additional seven Operating Companies subsequent to the
Mergers; additional amortization on goodwill related to the contingent purchase
consideration earned at December 31, 1998; and the increase of property and
equipment.
IMPAIRMENT OF INTANGIBLE ASSETS. Impairment of intangible assets includes a
write down of intangible assets during 1999 based on measurement in accordance
with Statement of Financial Accounting Standards No. 121 "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." As
a part of its strategy to reduce the amount of computer hardware resale, the
Company decided to sell two of its Operating Companies, Corporate Access, Inc.
and U.S. Communications, Inc. The Company recorded losses of $7.6 million to
reduce the assets of these companies, including intangible assets, to their
estimated net realizable value. The client that provided substantially all of
the revenue to the Management Support Technology Corp. ("MST") consulting
business was acquired, and the acquiring company expressed its desire not to
renew any projects after all current projects were completed. As a result the
decision was made to shut down MST's continuing operations and the Company
recorded an impairment charge of $15.1 million for MST. The Company's Safari
Solutions business through its Interactive Software Systems ("ISSI") business
unit experienced significant revenue and profit degradation in the sale of its
Safari product line as a result of operating and financial difficulties being
experienced by its largest sales channel partner, an international ERP software
company which informed ISSI of its intention to no longer promote its Safari
products in the second quarter of 1999. As a result, the Company recorded an
impairment charge of $8.0 million for ISSI. During the fourth quarter of 1999,
the Company recognized an additional impairment of its long-lived assets of
$52.5 million as discussed in "Item 8. Financial Statements and Supplementary
Data Note 3".
OTHER COSTS. Other costs include restructuring and other special charges of
$4.9 million. Included in this total are retention costs of $1.6 million,
involuntary severance benefits and employment contract settlements of
$1.4 million, contract losses of $0.8 million, facility closures of
$0.4 million, voluntary severance benefits of $0.3 million, and other charges 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 December 31, 1999 the Company had $3.1 million in cash and cash
equivalents
14
<PAGE>
and $45.7 million of indebtedness outstanding, which consists primarily of
borrowings on its credit facility (the "Credit Facility"), which was entered in
April 1999.
In accordance with its Credit Facility, the Company must comply with various
loan covenants including: (i) maintenance of certain financial performance
ratios; (ii) limits on capital expenditures; (iii) restrictions on additional
indebtedness; (iv) restrictions on liens, guarantees, advances and dividends;
and (v) restrictions on the type, size and number of acquisitions.
At June 30, 1999, September 30, 1999 and December 31, 1999, the Company was
not in compliance with the financial covenants of its Credit Facility. On
August 27, 1999, the Company and the Banks entered into a Third Amendment to
Forbearance Letter Agreement and Amendment Agreement (the "Third Amendment")
pursuant to which, among other things, the Banks agreed to a forbearance of
their rights and remedies under the Credit Facility and prior forbearance
agreements through November 15, 1999. As of November 15, 1999, the Company and
the Banks entered a Fourth Amendment to Forbearance Letter Agreement and
Amendment Agreement (the "Fourth Amendment") by which the Banks extended their
agreement to forbear, together with the maturity of the Credit Facility, through
February 15, 2000. The Fourth Amendment, among other things, effected a
permanent reduction of the Company's credit limit to about $51 million and
required the Company to pay certain extension fees. Except as noted above, the
terms of the Fourth Amendment are substantially consistent with the terms of the
Third Amendment. As of March 1, 2000, the Company and the Banks entered a Fifth
Amendment Agreement (the "Fifth Amendment") in which the Banks extended their
agreement to forbear through February 28, 2001. The Fifth Amendment sets 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,
$125,000 each month beginning September 2000, 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, 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 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.
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 by operating activities was $2.6 million for the year ended
December 31, 1999. Net cash used in investing activities was $15.8 million for
the year ended December 31, 1999 which included $7.0 million for payment of
contingent purchase liabilities, $5.4 million for the acquisition of
subsidiaries and $5.2 million for purchases of property, equipment and the costs
of licensing and developing the Company's internal use ERP system.
Net cash provided by financing activities was $18.4 million for the year
ended December 31, 1999 which is comprised of net borrowings of debt and is
offset by outflows for deferred financing costs related to the Company's Credit
Facility.
15
<PAGE>
SEASONALITY AND CYCLICALITY; POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING
RESULTS
The Company has experienced and expects to continue to experience
variability in revenues and net income from quarter to quarter as a result of
seasonality that may accompany private or 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 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.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 which summarizes certain of the SEC staff's
views in applying generally accepted
16
<PAGE>
accounting principles to revenue recognition in financial statements. The Staff
Accounting Bulletin is effective for the year beginning January 1, 2000. The
initial adoption of this guidance is not anticipated to have a material impact
on the Company's results of operations or financial position, however, the
guidance may impact the way in which the Company will account for future
transactions.
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.
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 December 31, 1999,
the Company had total debt of $45.7 million of which $45.1 million represents
borrowings on its Credit Facility at a variable interest rate. Management does
not believe that the Company's exposure to interest rate fluctuations is
material.
FOREIGN CURRENCY EXCHANGE RISK. The Company's international operations are
subject to foreign exchange rate fluctuations. The Company derived less than 2%
of its revenue for the year ended December 31, 1999 from services performed in
the Netherlands, the United Kingdom, Germany and Mexico. Management does not
believe that the Company's exposure to foreign currency rate fluctuations is
material.
17
<PAGE>
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......................... 19
Consolidated Balance Sheets............................... 20
Consolidated Statements of Operations..................... 21
Consolidated Statements of Changes in Stockholders' Equity
(Deficit)............................................... 22
Consolidated Statements of Cash Flows..................... 23
Notes to Consolidated Financial Statements................ 24
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.)........................... 47
</TABLE>
18
<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, 1998 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company is in not in compliance with certain covenants
of its loan agreement and is operating pursuant to a forbearance amendment to
its loan agreement that expires on February 28, 2001. This condition raises
substantial doubt about the Company's ability to continue as a going concern.
Management's overall business plan in regard to this matter is also described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
March 30, 2000
19
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,053 $ 3,137
Restricted cash........................................... 2,756 2,584
Accounts receivable, net.................................. 39,814 29,281
Prepaids and other current assets......................... 3,284 8,235
-------- --------
Total current assets.................................... 48,907 43,237
PROPERTY AND EQUIPMENT, NET................................. 4,329 8,235
GOODWILL AND OTHER INTANGIBLES, NET......................... 145,163 66,422
OTHER ASSETS................................................ 2,243 2,026
-------- --------
TOTAL ASSETS............................................ $200,642 $119,920
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 13,838 $ 9,908
Accrued expenses and other current liabilities............ 16,524 13,775
Deferred revenue.......................................... 4,915 5,136
Current portion of contingent purchase liability.......... 4,308 2,388
Current portion of long-term debt......................... 442 45,505
-------- --------
Total current liabilities............................... 40,027 76,712
LONG-TERM DEBT.............................................. 24,296 178
NON-CURRENT CONTINGENT PURCHASE LIABILITY................... 20,348 7,912
OTHER LONG-TERM OBLIGATIONS................................. 1,929 1,303
-------- --------
Total liabilities....................................... 86,600 86,105
COMMITMENTS AND CONTINGENCIES (Note 21)..................... -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 authorized;
none outstanding........................................ -- --
Common stock, $.01 par value; authorized 49,000,000
shares; issued and outstanding, 12,009,608 and
15,078,864 shares at December 31, 1998 and 1999,
respectively............................................ 120 151
Additional paid-in capital................................ 111,278 123,142
Retained earnings (accumulated deficit)................... 2,818 (89,185)
Accumulated other comprehensive income.................... 20 (99)
Treasury stock, at cost (13,178 shares at December 31,
1998 and 1999).......................................... (194) (194)
-------- --------
Total stockholders' equity.............................. 114,042 33,815
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $200,642 $119,920
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
IT service revenues......................................... $ -- $92,515 $137,367
Hardware procurement revenues............................... -- 76,318 62,839
------- ------- --------
Total revenues.............................................. -- 168,833 200,206
------- ------- --------
Cost of IT services......................................... -- 45,379 82,139
Cost of hardware procurement................................ -- 69,133 56,821
------- ------- --------
Total cost of revenues...................................... -- 114,512 138,960
------- ------- --------
Gross profit................................................ -- 54,321 61,246
Selling, general and administrative expenses................ 2,715 32,920 54,330
Depreciation and amortization............................... -- 4,677 8,053
In process research and development......................... -- 5,000 --
Impairment of intangible assets............................. -- -- 83,236
Other costs................................................. -- -- 4,947
------- ------- --------
Income (loss) from operations............................... (2,715) 11,724 (89,320)
Interest and other income (expense), net.................... -- 684 (6,756)
------- ------- --------
Income (loss) before income taxes and extraordinary item.... (2,715) 12,408 (96,076)
Income tax (benefit)........................................ -- 6,875 (4,257)
------- ------- --------
Net income (loss) before extraordinary item................. (2,715) 5,533 (91,819)
Extraordinary item, net of taxes of $122.................... -- -- (184)
------- ------- --------
Net income (loss)........................................... $(2,715) $ 5,533 $(92,003)
======= ======= ========
Basic shares outstanding.................................... 1,680 10,193 13,481
======= ======= ========
Diluted shares outstanding.................................. 1,680 10,767 13,481
======= ======= ========
Income (loss) per basic share from continuing operations.... $ (1.62) $ 0.54 $ (6.81)
======= ======= ========
Income (loss) per diluted share from continuing
operations................................................ $ (1.62) $ 0.51 $ (6.81)
======= ======= ========
Loss per basic & diluted share from extraordinary item...... $ -- $ -- $ (0.01)
======= ======= ========
Net income (loss) per basic share........................... $ (1.62) $ 0.54 $ (6.82)
======= ======= ========
Net income (loss) per diluted share......................... $ (1.62) $ 0.51 $ (6.82)
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER STOCKHOLDERS'
--------------------- PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY EQUITY
SHARES AMOUNT CAPITAL DEFICIT) INCOME 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
Payment of contingent
purchase liability..... 1,251,689 13 7,456 -- -- -- 7,469
Issuance of restricted
stock.................. 1,273,875 13 1,195 -- -- -- 1,208
Issuance of common stock
for acquisitions....... 296,682 3 2,327 -- -- -- 2,330
Employee stock purchase
plan................... 236,307 2 794 -- -- -- 796
Issuance of common stock
for equity
investment............. 10,703 -- 120 -- -- -- 120
Comprehensive income:
Net loss............... -- -- -- (92,003) -- --
Foreign currency
translation
adjustment........... -- -- -- -- (119) --
Total comprehensive
income................. (92,122)
Other.................... -- -- (28) -- -- -- (28)
---------- ---- -------- -------- ----- ------- -------
BALANCE, DECEMBER 31,
1999................... 15,078,864 $151 $123,142 $(89,185) $ (99) $ (194) $33,815
========== ==== ======== ======== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $(2,715) $ 5,533 $(92,003)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization........................... -- 4,677 8,053
Impairment of intangible assets......................... -- -- 83,236
In-process research and development..................... -- 5,000 --
Writeoff of deferred financing costs.................... -- -- 2,853
Stock compensation expense.............................. 1,771 -- 1,208
Change in valuation allowance........................... -- 1,032 --
Changes in assets and liabilities:
Accounts receivable................................... -- 2,846 6,959
Prepaid expenses and other assets..................... (4,183) (286) (5,989)
Accounts payable and other current liabilities........ 5,003 (12,541) (6,230)
Deferred revenue and other non-current liabilities.... -- (803) (1,048)
Other................................................... -- 102 405
------- ------- --------
Net cash (used in) provided by operating
activities........................................ (124) 5,560 (2,556)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ -- (2,806) (5,235)
Purchase of marketable securities......................... -- (36,726) --
Sale of marketable securities............................. -- 37,924 8
Acquisition of subsidiaries, net of cash.................. -- (90,168) (5,447)
Payment of contingent purchase liability.................. -- -- (7,000)
Sale of subsidiary........................................ -- -- 1,400
Payment for technology license............................ -- (1,550) (234)
Employee Stock Purchase Plan.............................. -- -- 796
Other..................................................... -- (338) (120)
------- ------- --------
Net cash used in investing activities............... -- (93,664) (15,832)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt........................................ -- 34,000 29,600
Payments on long-term debt................................ -- (11,556) (9,022)
Proceeds from initial public offering, net of costs....... -- 72,913 --
Deferred financing costs.................................. -- (1,296) (2,159)
Other..................................................... 150 (194) --
------- ------- --------
Net cash provided by financing activities........... 150 93,867 18,419
EFFECT OF EXCHANGE RATE CHANGES............................. -- 20 (119)
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 26 5,783 (88)
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF
PERIOD.................................................... -- 26 5,809
------- ------- --------
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF
PERIOD.................................................... $ 26 $ 5,809 $ 5,721
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
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 as discussed in Note 4. 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.
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 5). Prior to the Offering, the Company did not conduct
any significant operations, other than payment of a 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 providing 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 software are recognized when
a non-cancelable license agreement has been signed, the product has been
delivered, collection is probable and all
24
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 and 1999, respectively, the Company had an allowance for
doubtful accounts of approximately $572,000 and $3,867,000.
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 retains cash in an escrow account related to the acquisition of
one of the Operating Companies. A corresponding escrow payable has been recorded
in accrued expenses and other current liabilities. Remaining amounts will be
paid in 2000 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. In addition, there were no customers that individually comprised more than
10% of revenue or accounts receivable. 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 and 1999, the Company had
inventory of approximately $740,000 and $762,000 which were included in prepaids
and other current assets.
25
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
Furniture and fixtures 3-10 years
Leasehold improvements 5-10 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 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 and $31,000, respectively, for
the years ended December 31, 1998 and 1999. Maintenance of software products, as
well as research and development costs related to new software products, are
charged to expense as incurred.
LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," requires impairment losses to be recorded on long-lived assets
used in operations when indications of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Long-lived assets to be held and used are grouped
at the lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. The future cash flows
expected to result from the use of the assets includes the expected cash flow
from their eventual disposition. All estimates of cash flows are reduced for a
proportionate share of the Company's net interest payments.
26
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company will review long-lived assets for impairment when one or more of
the following events have occurred:
a. Current or immediate (future twelve months) short-term projected cash
flows are significantly less than the most recent historical cash flows.
b. Loss of or scheduled completion of a major positive cash flow generating
contract in the next six months without the realistic expectation of
sufficient contract replacement within six-to-nine months.
c. A significant, extraordinary loss of billable professionals without the
realistic expectation of an in-kind replacement within three months.
d. The unplanned departure of the original founder of an acquired entity,
where the founder is critical to large customer relationship(s) and/or
development and maintenance of existing technology.
e. A significant adverse change in legal factors or in the business climate
that could affect the value of the goodwill or other long-lived assets or
an adverse action or assessment by a regulator.
f. Significant adverse changes in technology that could affect the
Company's ability to win contracts or result in termination of existing
contracts.
As of December 31, 1999, the Company has recorded impairment losses related
to a portion of the Company's goodwill and other intangibles balance. See
Note 4.
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 $359,000,
respectively, and have been included with accrued expenses and other current
liabilities at December 31, 1998 and 1999.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability method
of SFAS 109, deferred income taxes are recognized for the expected future tax
consequences of temporary differences by applying enacted statutory tax rates,
in effect for the year in which the differences are expected to reverse, to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities. Valuation allowances are provided if it is
anticipated that some or all of the deferred tax asset may not be realized.
27
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" 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.
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. Revenues, costs, and expenses are translated at average rates of exchange
prevailing during the year. Translation adjustments resulting from this process
are accumulated as a separate component of stockholders' equity. Gains and
losses on foreign currency transactions are included in non-operating 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 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 15 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.
28
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 9. As part of the Credit Facility, the
Company must comply with various loan covenants. At December 31, 1999, the
Company had an outstanding balance of $45.1 million borrowed under the credit
facility.
Since June 30, 1999, the Company has not been in compliance with two of its
financial covenants 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. Under the terms and
conditions of 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, 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, 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. IMPAIRMENT OF GOODWILL AND OTHER COSTS
During 1999, the Company recorded an $83.2 million charge for the impairment
of goodwill. The impairment charge consists of $7.6 million relating to the loss
on the sale of two Operating Companies; $15.1 million relating to the shutdown
of one Operating Company; and $60.5 million relating to the impairment of long
lived assets held and used. In addition, during 1999 other costs of
$4.9 million were recorded primarily associated with involuntary severance
benefits and employment contract settlements, facility closure costs, voluntary
severance benefits, estimated contract losses and other charges.
ASSETS HELD AND USED
During the fourth quarter of 1999, the Company committed to an overall
business plan that includes the potential disposition of one or more of the
Operating Companies in an orderly and systematic fashion (as discussed in
Note 3). This business plan and the Fifth Amendment Agreement with the Bank
triggered an impairment review of the Company's long-lived assets. Based on a
review of the company-wide or enterprise-level undiscounted cash flows,
including the estimated fair market value of the long-lived assets projected
through the end of February 2001, management determined that the Company's
long-lived assets were impaired. Accordingly, the Company recorded an impairment
write-down of goodwill of $52.5 million.
29
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. IMPAIRMENT OF GOODWILL AND OTHER COSTS (CONTINUED)
During the second quarter of 1999, the Company's Interactive Software
Systems ("ISSI") business unit experienced significant revenue and profit
reduction related to its Safari product line. These changes were the result of
operating and financial difficulties experienced by its largest sales channel
partner, an international ERP software company which informed ISSI of its
intention to discontinue promotion of ISSI's Safari products. Consequently, the
Company measured the goodwill and other long-lived assets of this business unit
and recorded an impairment charge of $8.0 million to reduce the goodwill related
to ISSI to $0 as of June 30, 1999.
ASSETS DISPOSED OF
During the second quarter of 1999, the client that provided substantially
all of the revenue of the Company's Management Support Technology Corp. ("MST")
consulting business was acquired, and the acquiring company expressed its desire
not to renew any projects with MST after all current projects were completed. As
of December 31, 1999, all projects were completed. As a result, MST's continuing
operations were shut down and the Company has measured the carrying value of
MST's long-lived assets consisting primarily of goodwill and recorded an
impairment charge of $15.1 million to reduce the goodwill balance related to MST
to $0 as of June 30, 1999.
Net revenues for MST for the years ended December 31, 1998 and 1999 were
$8.6 million and $3.6 million, respectively. MST's income (losses) from
operations for the years ended December 31, 1998 and 1999 were $2.3 million and
($0.9) million, respectively.
As part of its strategy to migrate its revenue base from hardware sales to
higher margin IT service revenues, the Company, in mid 1999, initiated a plan to
sell two of its Operating Companies, Corporate Access, Inc. ("Corporate Access")
and U.S. Communications, Inc. ("USComm"). As of October 18, 1999, the Company
sold the assets of both Corporate Access and USComm for a sales price of
$2.3 million of cash and equity securities of the purchaser as well as
additional funds related to the liquidation of accounts receivable. Both
companies had significant computer hardware revenue concentrations and were
included in the Company's System Support division. Pursuant to SFAS 121, the
impairment of intangible assets charge in 1999 included losses of $7.6 million.
Combined net revenues for Corporate Access and USComm for the years ended
December 31, 1998 and 1999 through the date of the sale were $30.4 million and
$25.5 million, respectively. Combined income from operations for these companies
for the years ended December 31, 1998 and 1999 through the date of the sale were
approximately $0.6 million and $0.5 million, respectively.
RESTRUCTURING AND OTHER COSTS
During the year, the Company recorded restructuring and other special
charges of approximately $4.9 million, which are included in other costs on the
statement of operations. Included in this total are employee retention costs of
$1.6 million as discussed in Note 10, involuntary severance benefits and
employment contract settlements of $1.4 million, contract losses of
$0.8 million, facility closures of $0.4 million, voluntary severance benefits of
$0.3 million and other charges of $0.4 million. As of December 31, 1999,
payments of approximately $1.0 million have been made for severance benefits.
The Company anticipates that substantially all of the remaining restructuring
and other special charges will be paid in 2000.
The severance and other employee related costs provide for a reduction of
approximately 120 employees during 1999 for streamlining operations related to
cost reduction initiatives. The facility closure
30
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. IMPAIRMENT OF GOODWILL AND OTHER COSTS (CONTINUED)
costs represent estimated losses in closing facilities. Contract losses are
comprised of employee time and expenses in order to complete a large contract at
MST.
5. 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
COMMON
DATE STOCK VALUE CONTINGENT TOTAL
ACQUIRED CASH ISSUED OF SHARES CONSIDERATION CONSIDERATION
-------------- -------- ------------ ------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
MST.................. Feb. 10, 1998 $ 9,750 603,846 $ 6,280 $ -- $ 16,030
CHMC................. Feb. 10, 1998 17,100 146,154 1,520 -- 18,620
Federal.............. Feb. 10, 1998 7,500 576,923 6,000 9,000 22,500
Corporate Access..... Feb. 10, 1998 5,200 200,000 2,080 -- 7,280
ISSI................. Feb. 10, 1998 5,000 538,462 5,600 7,036 17,636
USComm............... Feb. 10, 1998 600 46,154 480 -- 1,080
InVenture............ Feb. 10, 1998 750 57,692 600 2,000 3,350
MIS.................. Feb. 10, 1998 1,200 138,462 1,440 -- 2,640
DST.................. May 5, 1998 1,000 9,600 150 -- 1,150
Louden............... June 30, 1998 2,579 217,486 3,000 6,769 12,348
LINC................. July 17, 1998 21,545 -- -- -- 21,545
PowerCrew............ Nov. 4, 1998 2,663 72,522 800 -- 3,463
Global............... Dec. 10, 1998 24,000 738,178 8,000 -- 32,000
Titan................ April 1, 1999 6,650 245,264 2,200 -- 8,850
Dimensional.......... Sept. 30, 1999 130 51,418 130 -- 260
-------- ------- ------- ------- --------
$105,667 3,642,161 $38,280 $24,805 $168,752
======== ======= ======= ======= ========
<CAPTION>
ALLOCATION
ADJUSTED OF
NET PURCHASE UNAMORTIZED
ASSETS PRICE GOODWILL LIFE
----------- ------------ ---------------- --------
<S> <C> <C> <C> <C>
MST.................. $ 262 $ 15,768 35
CHMC................. 1,847 16,773 35
Federal.............. 1,886 18,659 35
1,955(C) 3.5
Corporate Access..... 427 6,853 30
ISSI................. 1,631 5,000(A) 8,505 7
2,500(B) 5
USComm............... 134 946 30
InVenture............ (145) 3,495 35
MIS.................. (396) 3,036 35
DST.................. (200) 1,350 35
Louden............... 595 11,753 35
LINC................. 328 21,217 35
PowerCrew............ (187) 3,650 35
Global............... 2,712 25,888 35
3,400(C) 10
Titan................ (402) 9,252 35
Dimensional.......... (405) 365 10
300(D) 5
------ -------- --------
$8,087 $ 13,155 $147,510
====== ======== ========
</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.
(D) Represents amount allocated to equipment (included in property and equipment
on consolidated balance sheets).
Of the total cash paid for the operating companies reported above, an escrow
deposit of $2.5 million plus earned interest was held by the Company pending
completion of final net worth adjustments for Global at December 31, 1999.
Pursuant to contingent payment agreements entered into as part of the
acquisitions of the Operating Companies, the Company paid $7 million in cash and
$7.5 million of Common Stock (1,251,689 shares) related to accrued contingent
consideration as of December 31, 1999. At December 31, 1999, approximately $2.9
and $7.4 million in cash and stock, respectively, of contingent consideration
was accrued, which will be paid in 2000 and 2001 in accordance with the original
purchase agreements.
The Company 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 are 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
31
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS (CONTINUED)
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>
1998 1999
-------- --------
<S> <C> <C>
Revenues................................................ $239,456 $202,353
Net income (loss) before extraordinary item............. 10,506 (92,342)
Net income (loss)....................................... 10,506 (92,526)
Net income (loss) per basic share before extraordinary
item.................................................. $ 0.86 $ (6.80)
Net income (loss) per diluted share before extraordinary
item.................................................. $ 0.82 $ (6.80)
Net income per basic share.............................. $ 0.86 $ (6.81)
Net income per diluted share............................ $ 0.82 $ (6.81)
</TABLE>
The unaudited pro forma amounts reflect the results of operations for all of
the Operating Companies as well as the following purchase accounting adjustments
for the periods presented: reductions in salaries, bonuses, profit sharing and
other benefits to the stockholders of the Operating Companies to which they have
agreed prospectively; interest on assumed borrowings; a reduction for in-process
research and development, elimination of revenues and cost of revenues on
transactions between Operating Companies occurring prior to the acquisition by
the Company; amortization of goodwill recorded as a result of the acquisitions;
income taxes on S-corporation income; and the estimated income tax effect on the
pro forma adjustments. Total pro forma adjustments included as of December 31,
1998 and 1999 were approximately $6,472,000 and $150,000, respectively, which
resulted in a net increase to net income.
The unaudited pro forma combined results of operations may not be comparable
to and may not be indicative of the actual results that would have occurred had
the acquisitions been consummated at the beginning of the periods presented or
of future operations of the combined companies because the companies were not
under common control or management and had different tax and capital structures
during the periods presented.
6. PROPERTY AND EQUIPMENT
Property and equipment were comprised of the following at December 31, (in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Computer equipment.......................................... $4,044 $6,731
Internal use software....................................... -- 2,352
Furniture, fixtures and equipment........................... 1,158 1,719
Leasehold improvements...................................... 393 693
------ ------
5,595 11,495
Less accumulated depreciation............................... 1,266 3,260
------ ------
$4,329 $8,235
====== ======
</TABLE>
Depreciation expense for the years ended December 31, 1998 and 1999 was
approximately $1,266,000 and $2,064,000, respectively.
32
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles were comprised of the following at
December 31, (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Goodwill on purchase of Operating Companies............. $137,435 $147,510
Acquired contract rights................................ 5,355 5,355
Acquired technology..................................... 2,500 2,500
Technology license...................................... 3,100 3,100
Capitalized software development........................ 184 510
-------- --------
148,574 158,975
Less impairment of intangible assets.................... -- 83,153
Less accumulated amortization........................... 3,411 9,400
-------- --------
$145,163 $ 66,422
======== ========
</TABLE>
Amortization expense for the years ended December 31, 1998 and 1999 was
approximately $3,411,000 and $5,989,000, respectively. For the year ended
December 31, 1999, the Company recorded an $83.2 million charge for the
impairment of intangible assets as discussed in Note 4. For the year ended
December 31, 1998, the Company recorded a $5.0 million charge for purchased
in-process research and development in connection with the acquisition of one of
the Operating Companies.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
At December 31, 1998 and 1999, accrued expenses included a payable for the
escrow deposits related to the acquisitions of Operating Companies of
approximately $2.8 million and $2.6 million, respectively. 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.
9. DEBT
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") which replaced the Company's $50 million revolving credit
facility. The new Credit Facility included a three-year, $75 million revolving
line of credit (the "Revolver") and a five-year, $25 million term loan (the
"Term Loan"). The Term Loan included repayments of principal in quarterly
installments with the final payment due March 31, 2004. Interest accrued on the
Term Loan at the Base Rate (which is the greater of Prime Rate or the Federal
Funds Rate plus 0.50%) plus 1.5% or the London Interbank Offering Rate ("LIBOR")
plus 3.0%, at the option of the Company. Borrowings under the Revolver bear
interest beginning at the Base Rate plus 0.50% to 1.50% or the LIBOR Rate plus
1.75% to 2.75% at the option of the Company. The Company is also required to pay
a commitment fee based on the unused portion of the Revolver at an annual
percentage rate ranging from 0.50% to 0.75%, as defined in the agreement. The
Credit Facility was intended to be used to finance acquisitions, refinance
existing indebtedness and fund working capital requirements. The outstanding
balance on the Credit Facility at December 31, 1999 was $45.1 million at an
interest rate of 10.25%. Borrowings at December 31, 1998 were $24.0 million
carried at a weighted average interest rate of 6.63%.
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;
33
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DEBT (CONTINUED)
(iv) restrictions on liens, guarantees, advances and dividends; and
(v) restrictions on the type, size and number of acquisitions.
At June 30, 1999, September 30, 1999 and December 31, 1999, the Company was
not in compliance with the financial covenants of its Credit Agreement. On
August 27, 1999, the Company and the Banks entered into a Third Amendment to
Forbearance Letter Agreement and Amendment Agreement (the "Third Amendment")
pursuant to which, among other things, the Banks agreed to a forbearance of
their rights and remedies under the Credit Agreement and prior forbearance
agreements through November 15, 1999. As of November 15, 1999, the Company and
the Banks reached agreement as to the terms and conditions of a Fourth Amendment
to Forbearance Letter Agreement and Amendment Agreement (the "Fourth Amendment")
by which the Banks extended their agreement to forbear, together with the
maturity of the Credit Facility, through February 15, 2000. The Fourth
Amendment, among other things, effected a permanent reduction of the Company's
credit limit to about $51 million and required the Company to pay certain
extension fees. Except as noted above, the terms of the Fourth Amendment are
substantially consistent with the terms of the Third Amendment. As of March 1,
2000, the Company and the Banks entered a Fifth Amendment Agreement (the "Fifth
Amendment") in which the Banks extended their agreement to forbear through
February 28, 2001. The Fifth Amendment sets forth certain permanent debt
reduction requirements on or before certain dates prior to February 28, 2001.
The Company is required, among other things, to pay $8 million by August 2000,
$125,000 each month beginning September 2000, 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 See discussion in
Note 3.
As of December 31, 1999, the Company wrote off approximately $3.0 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.
The Company has floor planning facilities of $5.0 million to support the
working capital needs of the companies in its System Solutions division. These
facilities are secured by $5.0 million of letters of credit, issued under the
Credit Facility. The primary floor planning facility requires the Company to
comply with various loan covenants identical to those required under the Credit
Facility. The floor planning 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, 1998 and 1999.
Indebtedness under both the Credit Facility and the primary floor planning
facility are collateralized by substantially all of the assets of the Company.
34
<PAGE>
'
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RETENTION COSTS
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. On January 1, 1999, restricted stock awards for 58,500
shares were issued which vest in four installments every six months beginning
June 30, 1999. On August 12, 1999, restricted stock awards for approximately
1.3 million shares were issued which vest in three installments every six months
beginning January 1, 2000. On October 26, 1999, restricted stock awards for
27,500 shares were issued which vest in three installments every six months
beginning June 1, 2000. During 1999, approximately 110,000 shares of unvested,
restricted shares were forfeited by employees upon their separation from the
Company. As of December 31, 1999, there were approximately 1.3 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 year ended December 31, 1999, the Company recorded retention costs of
approximately $1.6 million related to employee retention plans.
11. EXTRAORDINARY ITEM
In April 1999, the Company entered into a new $100 million credit facility
as discussed in Note 9 which replaced the existing $50 million facility. As a
result, the Company recognized an extraordinary loss to write off the
unamortized balance of deferred financing costs from the original facility. The
extraordinary loss recorded was approximately $184,000, net of income taxes of
$122,000, for the year ended December 31, 1999.
12. STOCKHOLDERS' EQUITY
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.
35
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (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
Operating Companies as described in Note 5. During 1999, the Company issued
296,682 unregistered shares for the purchase of two Operating Companies as well
as 1,251,689 unregistered shares issued for payment of contingent purchase
liability as described in Note 5.
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 approximately $194,000 and has been recorded as a separate component of
stockholders' equity.
13. 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 1999
-------- -------- --------
<S> <C> <C> <C>
Weighted average common stock outstanding (basic
shares outstanding)................................ 1,680 10,193 13,481
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 13,481
===== ====== ======
</TABLE>
36
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. 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 1999
-------- -------- --------
<S> <C> <C> <C>
Provision (benefit) for income tax:
Current
U.S. federal..................................... $ -- $6,739 $(4,114)
State and local.................................. -- 1,476 --
------ ------ -------
-- 8,215 (4,114)
Deferred
U.S. federal..................................... (869) (242) (12,883)
State and local.................................. (163) (66) (2,342)
------ ------ -------
(1,032) (308) (15,225)
------ ------ -------
Total income tax (benefit) expense................. (1,032) 7,907 (19,339)
Valuation allowance................................ 1,032 (1,032) 15,082
------ ------ -------
$ -- $6,875 $(4,257)
====== ====== =======
</TABLE>
The Company's current benefit at December 31, 1999 is fully refundable based
on net operating loss carrybacks.
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 1999
-------- -------- --------
<S> <C> <C> <C>
Tax (benefit) provision at U.S. statutory rate...... (34.0)% 35.0% (35.0)%
State income taxes, net of federal benefit.......... (4.0) 8.1 (3.4)
Net operating loss.................................. 38.0 (7.9) --
Intangible amortization............................. -- 6.7 17.1
Valuation allowance................................. -- -- 15.7
Research and development write-off.................. -- 14.1 --
Other............................................... -- (0.6) 1.2
----- ---- -----
Effective income tax expense (benefit) rate......... 0.0% 55.4% (4.4)%
===== ==== =====
</TABLE>
37
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES (CONTINUED)
DEFERRED INCOME TAXES
Deferred tax assets (liabilities) include the following at December 31, (in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Employee benefits........................................... $ 75 $ 104
Accelerated depreciation and intangible amortization........ (61) 12,169
Accrued liabilities not currently deductible................ 108 877
Change in accounting method from cash to accrual for tax
reporting................................................. (285) --
Receivable reserves......................................... -- 1,142
Loss carryforward........................................... -- 737
Other....................................................... -- 53
----- -------
Gross deferred tax asset (liability)...................... (163) 15,082
Valuation allowance......................................... -- (15,082)
----- -------
$(163) $ --
===== =======
</TABLE>
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 accrued
expenses and other current liabilities on the consolidated balance sheets.
15. 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 initial public offering was granted
38
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK COMPENSATION (CONTINUED)
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 1999, 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 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 or thirty days after termination of
employment, as noted in the Stock Option Agreement.
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 is presented below:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1997..................... -- $ --
Granted.............................................. 1,606,469 13.27
Exercised............................................ -- --
Forfeited............................................ (179,291) 14.58
--------- ------
Outstanding at December 31, 1998..................... 1,427,178 13.11
Granted.............................................. 829,000 6.24
Exercised............................................ -- --
Forfeited............................................ (891,538) 12.41
--------- ------
Outstanding at December 31, 1999..................... 1,364,640 $ 9.39
========= ======
Options exercisable at:
December 31, 1998.................................... 53,434 $13.00
========= ======
December 31, 1999.................................... 363,838 $12.99
========= ======
Weighted average fair value of options:
Granted during 1998.................................. $ 5.65
======
Granted during 1999.................................. $ 7.20
======
</TABLE>
39
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK COMPENSATION (CONTINUED)
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 and 1999, respectively: (1) expected volatility of 58% and
98%; (2) risk free interest rate of 5.17% and 6.41%; and (3) expected life of
three and five years. The following table summarizes information about stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE REMAINING CONTRACTUAL LIFE
- - ------------------------ ----------- ---------------- --------------------------
<C> <C> <C> <S>
2.00$to $7.00....... 421,750 $ 2.33 9.60 years
7.01$to $14.00...... 798,714 $12.08 8.48 years
14.0$1 to $16.00..... 144,176 $15.13 8.51 years
---------
Total............... 1,364,640
=========
</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
(loss) and basic and diluted earnings (loss) per share would approximate the pro
forma amounts below for the years ended December 31, (in thousands, except per
share data):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Net income
As reported............................................. $5,533 $(92,003)
Pro forma............................................... 4,436 (92,893)
Basic earnings per share
As reported............................................. $ 0.54 $ (6.82)
Pro forma............................................... 0.44 (6.89)
Diluted earnings per share
As reported............................................. $ 0.51 $ (6.82)
Pro forma............................................... 0.41 (6.89)
</TABLE>
16. 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.
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,
1999, the total number of shares purchased under the ESPP was 236,307.
40
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. RETIREMENT PLANS
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 contributed 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. For the year ended December 31,
1999, the total employer contribution to the 401(k) Plan was approximately
$1,857,000.
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 the new company-wide retirement plan. It is intended
that the Operating Company 401(k) plans will merge into the Company 401(k) Plan.
18. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Paid during the year for:
Federal income tax payments................................. $ -- $ 3,825 $2,725
State income tax payments................................... -- 1,036 1,121
Interest payments........................................... -- 194 3,798
Supplemental disclosure of non-cash transactions:
Liability incurred for technology license................... $ -- $ 1,550 $ --
Business acquisitions:
Cash paid for business acquisitions......................... $ -- $ 96,237 $6,680
Less cash acquired.......................................... -- (6,069) (1,203)
------ -------- ------
Cash paid for business acquisitions, net.................... -- 90,168 5,477
Liability incurred for contingent purchase liability........ -- 24,656 --
Purchase price in escrow.................................... -- 2,750 --
Issuance of common stock for business acquisitions.......... -- 35,950 2,330
------ -------- ------
Total purchase price........................................ -- 153,524 7,807
In-process research and development......................... -- (5,000) --
Less fair value of net assets acquired, net of cash......... -- (3,234) 1,700
------ -------- ------
Excess of fair value over net assets acquired............... $ -- $145,290 $9,507
====== ======== ======
</TABLE>
The excess of fair value over net assets acquired includes goodwill,
internally developed software and other intangibles acquired in conjunction with
the acquisitions of the Operating Companies.
41
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. 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 1998 has been
conformed to the new divisional structure.
The Consulting Solutions division provides decision support, custom
application development, software package implementation, and contract staffing
and recruiting. These services involve the development of near and long-term
technology plans that help clients achieve specific strategic business
objectives and include IT needs analysis, technology infrastructure design,
future technology planning and refreshment, systems architecture development,
decision support planning and analysis, and business process automation.
The System Support division provides customer management solutions and
support services, call center and help-desk operations, as well as a complete
array of desktop systems maintenance and support services to its clients,
including hardware and software maintenance, systems testing and engineering,
and hardware procurement.
The Government Solutions division offers its public sector clients a variety
of management consulting services, interactive media services, system
maintenance and hardware procurement.
The EPS division offers its clients a single source for enterprise resource
planning and e-commerce solutions focusing on implementation and consulting
related to the SAP, Peoplesoft, Trilogy, BAAN, and Made2Manage software
packages. The Division focuses on the following service lines: installation,
business process design, configuration and implementation, and staff
augmentation.
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 Solutions operating unit and
corporate related items not allocated to the divisions. Safari's sales and
services include the sale and implementation of the Safari software product
lines, training and continuing education. Corporate selling, general and
administrative costs have been allocated to the divisions and Safari based on a
three factor formula based on total revenue, operating income and total assets.
In addition, the impairment of intangible assets as discussed in Note 4 has been
allocated to the consulting solutions, system support, EPS and other segments.
Summarized financial information concerning the Company's reportable
segments is shown in the following tables (in thousands).
42
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SEGMENT REPORTING (CONTINUED)
For the year ended December 31, 1999:
<TABLE>
<CAPTION>
CONSULTING SYSTEM GOVERNMENT
SOLUTIONS SUPPORT SOLUTIONS EPS OTHER CONSOLIDATED
---------- -------- ----------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
IT service revenues........................ $ 33,245 $25,989 $ 25,851 $ 38,887 $ 13,395 $137,367
Hardware procurement revenues.............. -- 54,277 8,562 -- -- 62,839
-------- ------- -------- -------- -------- --------
Total revenues............................. $ 33,245 $80,266 $ 34,413 $ 38,887 $ 13,395 $200,206
-------- ------- -------- -------- -------- --------
Income (loss) from operations.............. $(39,409) $(4,661) $ 2,785 $(34,725) $(13,310)(a) $(89,320)
-------- ------- -------- -------- -------- --------
Total Assets............................... $ 13,259 $25,455 $ 39,391 $ 22,945 $ 18,870 $119,920
-------- ------- -------- -------- -------- --------
</TABLE>
For the year ended December 31, 1998:
<TABLE>
<CAPTION>
CONSULTING SYSTEM GOVERNMENT
SOLUTIONS SUPPORT SOLUTIONS EPS OTHER CONSOLIDATED
---------- -------- ----------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
IT service revenues.......................... $31,783 $21,773 $20,616 $ 2,071 $16,272 $ 92,515
Hardware procurement revenues................ -- 57,309 18,963 46 -- 76,318
------- ------- ------- ------- ------- ---------
Total revenues............................... $31,783 $79,082 $39,579 $ 2,117 $16,272 $ 168,833
------- ------- ------- ------- ------- ---------
Income (loss) from operations................ $ 2,096 $ 6,302 $ 5,471 $ (392) $(1,753)(b) $ 11,724
------- ------- ------- ------- ------- ---------
Total Assets................................. $49,990 $37,510 $45,407 $40,264 $27,471 $ 200,642
------- ------- ------- ------- ------- ---------
</TABLE>
- - ------------------------------
(a) Includes Other costs of $4.9 million.
(b) Includes a charge of $5 million for in-process research and development.
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.
20. RELATED PARTY TRANSACTIONS
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.
21. 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
43
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Coleman, a Managing Director of Commonwealth and the former Chairman of the
Board of Condor, and Kennard F. Hill, the Company's Chairman of the Board and
Chief Executive Officer, captioned EMTEC, INC. V. CONDOR TECHNOLOGY
SOLUTIONS, INC., SCM LLC, ET AL., Civil No. 97-6652. The complaint alleges
breach of contract, tortuous interference with Emtec's business relationship
with Corporate Access, Inc. ("Corporate Access") and Computer Hardware
Maintenance Corporation ("CHMC"), two of the Founding Companies, and
misappropriation of a trade secret arising out of the participation of CHMC and
Corporate Access in the consolidation and the Offering without Emtec's written
consent. In connection with the three causes of action, Emtec demands that the
defendants disgorge the financial benefits that they have and will obtain as a
result of their alleged breach of contract and seeks compensatory and punitive
damages. On December 31, 1997, the defendants filed an Answer, denying the
allegations and asserting various affirmative defenses. The court denied Emtec's
motion to amend the complaint to add a claim of unjust enrichment. A motion by
Condor for partial summary judgment was granted in part to eliminate Emtec's
claim for misappropriation of a trade secret and later Emtec stipulated to a
dismissal of its claim of tortuous interference with business relations, and to
the removal of both Mr. Coleman and Mr. Hill as defendants in the suit. Trial of
this matter could be scheduled in the next six months. Condor believes that
Emtec's allegations are without merit and that, in any event, the ultimate
resolution of this action will not have a material adverse effect on the
Company's financial position or results of operations. Commonwealth has agreed
to indemnify the Company with regard to any final judgment or settlement arising
out of the above action or any similar action. Commonwealth's obligations under
such agreement have been guaranteed by the three members of Commonwealth.
On or about July 1, 1999, an action was commenced against the Company and
its Chief Executive Officer in the United States District Court for the District
of Maryland, captioned GORDON V. CONDOR TECHNOLOGY SOLUTIONS, INC., ET AL.,
Civil AMD-99-1952. The plaintiff purported to bring the action on behalf of a
class consisting of all persons (other than the defendants and their affiliates)
who purchased common stock in the Company between February 3, 1999 and June 8,
1999 (the "Alleged Class Period"). The plaintiff contended that, during the
Alleged Class Period, the defendants made false and misleading statements about
the future impact of the "Y2K" issue on the Company's business and on the
concentration of the Company's business with certain customers. The Company
believes that the statements challenged by the plaintiff were accurate, and that
the plaintiff's allegations of wrongdoing were baseless. On November 4, 1999,
the Court issued an Order dismissing the class action lawsuit against the
Company and its officer.
The Company is a party to other legal proceedings and disputes related to
the Company's day to day business operations, none of which, in the opinion of
management, are material to the financial position or results of operations of
the Company. Therefore, there is no reserve for legal contingency recorded at
December 31, 1999.
44
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES
The Company leases certain equipment and office space under operating lease
arrangements expiring through 2005. Future minimum rental payments under
non-cancelable operating leases at December 31, 1999 were as follows (in
thousands):
<TABLE>
<S> <C>
2000........................................................ $2,836
2001........................................................ 2,267
2002........................................................ 1,906
2003........................................................ 1,280
2004........................................................ 403
Thereafter.................................................. 46
------
$8,738
======
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $49,000, $2,243,000, and $3,753,000, respectively.
45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Condor Technology Solutions, Inc.
Our audits of the consolidated financial statements referred to in our
report dated March 30, 2000, relating to the consolidated financial statements,
appearing in Condor Technology Solutions, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1999, also included an audit of the financial
statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion,
these financial statement schedules present fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
March 30, 2000
46
<PAGE>
SCHEDULE II
CONDOR TECHNOLOGY SOLUTIONS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO BALANCE AT END
DESCRIPTION YEAR EXPENSES OTHER ACCOUNTS DEDUCTIONS OF YEAR
- - ----------- ------------ ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Allowance for doubtful
accounts....................... $ -- -- -- -- $ --
Deferred tax valuation
allowance...................... -- 1,032 -- -- 1,032
Year Ended December 31, 1998
Allowance for doubtful
accounts....................... -- 314 497(1) (239)(2) 572
Deferred tax valuation
allowance...................... 1,032 (1,032) -- -- --
Year Ended December 31, 1999
Allowance for doubtful
accounts....................... 572 3,427 471(1) (603)(2) 3,867
Deferred tax valuation
allowance...................... $ -- 15,082 -- -- $15,082
</TABLE>
- - ------------------------
(1) Amounts recorded through Investment in Operating Companies.
(2) Amounts are write-offs of uncollectibe accounts receivable.
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
<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
2000 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 29,
2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference
from the Company's definitive proxy statement for the 2000 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 29, 2000.
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 2000 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 29, 2000.
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 2000 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 29, 2000.
49
<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:
(a)(1) The following financial statements are included in Part II, Item 8 of
this Report:
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Accountants........................... 19
Consolidated Balance Sheets................................. 20
Consolidated Statements of Operations....................... 21
Consolidated Statements of Changes in Stockholders' Equity
(Deficit)................................................... 22
Consolidated Statements of Cash Flows....................... 23
Notes to Consolidated Financial Statements.................. 24
The following Financial Statement Schedules are filed as a
(a)(2) part of the Annual Report:
II. Valuation and Qualifying Accounts....................... 47
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes
thereto.
The following Exhibits are filed as part of this Annual Report on Form
(a)(3) 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
- - ------- ------------------------------------------------------------
<C> <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>
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- ------------------------------------------------------------
<C> <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 (Incorporated by reference to Exhibit 10.1.1 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998).
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 William J.
Caragol, Jr. (Incorporated by reference to Exhibit 10.7 to
Amendment No. 1 to the Registrant's Registration
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- ------------------------------------------------------------
<C> <S> <C>
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).
10.5 -- 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)).
10.6 -- 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)).
10.7 -- 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).
10.8* -- 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).
10.9 -- 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).
10.10 -- 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)).
10.11* -- Employment Agreement between Louden Associates, Inc. and
Michael Louden
10.12* -- Employment Agreement between Computer Hardware Maintenance
Company and Michael G. Paglaiccetti (Incorporated by
reference to Exhibit 10.13 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998).
10.13 -- Credit Agreement by and among the Company and First Union
National Bank, as Issuing Lender, Collateral Agent and
Administrative Agent, and First Union Commercial Corporation
as Swingline Lender and Lender and related ancillary
documents (Incorporated by reference to Exhibit 10.14 to the
Registrant's Quarterly Report on Form 10-Q for the three
months ended March 31, 1999).
10.14 -- Purchase Agreement dated as of April 1, 1999, by and among
the Company and Interest Holders of Titan Technologies
Group, LLC (Incorporated by reference to Exhibit 10.15 to
the Registrant's Quarterly Report on Form 10-Q for the three
months ended March 31, 1999).
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- ------------------------------------------------------------
<C> <S> <C>
10.15 -- Third Amendment to Forbearance Letter Agreement and
Amendment Agreement dated as of August 27, 1999
(Incorporated by reference to Exhibit 10.1 to the
Registrant's Form 8-K Current Report as of August 27, 1999
(Registration No. 0-23635)).
10.16 -- Fourth Amendment to Forbearance Letter Agreement and
Amendment Agreement dated as of November 15, 1999
(Incorporated by reference to Exhibit 10.1 to the
Registrant's Form 8-K Current Report as of November 15, 1999
(Registration No. 0-23635)).
10.17 -- Fifth Amendment Agreement dated as of March 1, 2000
(Incorporated by reference to Exhibit 10.1 to the
Registrant's Form 8-K Current Report as of March 1, 2000
(Registration No. 0-23635)).
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 November 15, 1999 related to
the Fourth Amendment to Forbearance Letter Agreement and Amendment Agreement.
53
<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.
<TABLE>
<S> <C> <C>
CONDOR TECHNOLOGY SOLUTIONS, INC.
By: /s/ KENNARD F. HILL
-----------------------------------------
Kennard F. Hill
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Date: March 30, 2000
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and constitutes
Kennard F. Hill and W. M. Robbins, 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.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
--------- ------------------------ ----
<C> <S> <C>
Chairman of the Board,
/s/ KENNARD F. HILL President, and Chief
------------------------------------------- Executive Officer (Principal March 30, 2000
Kennard F. Hill Executive Officer)
MICHAEL G. PAGLAICCETTI
------------------------------------------- Vice President and Chief March 27, 2000
Michael G. Paglaiccetti Operating Officer
Vice President and Chief
W.M. ROBBINS Financial Officer (Principal
------------------------------------------- Financial and Accounting March 29, 2000
W.M. Robbins Officer)
C. LAWRENCE MEADOR
------------------------------------------- Vice Chairman of the Board March 29, 2000
C. Lawrence Meador
PETER T. GARAHAN
------------------------------------------- Director March 29, 2000
Peter T. Garahan
ANN TORRE GRANT
------------------------------------------- Director March 29, 2000
Ann Torre Grant
WILLIAM E. HUMMEL
------------------------------------------- Director March 29, 2000
William E. Hummel
DENNIS E. LOGUE
------------------------------------------- Director March 25, 2000
Dennis E. Logue
WILLIAM M. NEWPORT
------------------------------------------- Director March 27, 2000
William M. Newport
</TABLE>
54
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- ------------------------------------------------------------
<C> <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)).
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>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- ------------------------------------------------------------
<C> <S> <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 (Incorporated by reference to Exhibit 10.1.1 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.)
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 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).
10.5 -- 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)).
10.6 -- 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)).
10.7 -- 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>
56
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- ------------------------------------------------------------
<C> <S> <C>
10.8* -- 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).
10.9 -- 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).
10.10 -- 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)).
10.11* -- Employment Agreement between Louden Associates, Inc. and
Michael Louden
10.12* -- Employment Agreement between Computer Hardware Maintenance
Company and Michael G. Paglaiccetti (Incorporated by
reference to Exhibit 10.13 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998.)
10.13 -- Credit Agreement by and among the Company and First Union
National Bank, as Issuing Lender, Collateral Agent and
Administrative Agent, and First Union Commercial Corporation
as Swingline Lender and Lender and related ancillary
documents (Incorporated by reference to Exhibit 10.14 to the
Registrant's Quarterly Report on Form 10-Q for the three
months ended March
31, 1999).
10.14 -- Purchase Agreement dated as of April 1, 1999, by and among
the Company and Interest Holders of Titan Technologies
Group, LLC (Incorporated by reference to Exhibit 10.15 to
the Registrant's Quarterly Report on Form 10-Q for the three
months ended March 31, 1999).
10.15 -- Third Amendment to Forbearance Letter Agreement and
Amendment Agreement dated as of August 27, 1999
(Incorporated by reference to Exhibit 10.1 to the
Registrant's Form 8-K Current Report as of August 27, 1999
(Registration No. 0-23635)).
10.16 -- Fourth Amendment to Forbearance Letter Agreement and
Amendment Agreement dated as of November 15, 1999
(Incorporated by reference to Exhibit 10.1 to the
Registrant's Form 8-K Current Report as of November 15, 1999
(Registration No. 0-23635)).
10.17 -- Fifth Amendment Agreement dated as of March 1, 2000
(Incorporated by reference to Exhibit 10.1 to the
Registrant's Form 8-K Current Report as of March 1, 2000
(Registration No. 0-23635)).
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>
57
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made this 30th day of June, 1998, between
LOUDEN ASSOCIATES, INC., a Maryland corporation (the "Company"), and MICHAEL
LOUDEN (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 as the President and Chief Executive Officer of the
Company 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 a term of two (2) years,
commencing on the date hereof (the "Initial Term"). Upon expiration of the
Initial 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. 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 the President and Chief Executive Officer of the
Company on the terms and conditions set 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. 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 rate of $150,000 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, 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, 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, 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.
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:
2
<PAGE>
(i) willful fraud or dishonesty in connection with the
Executive's performance hereunder that results in material harm to the Company;
(ii) the failure by the Executive to substantially perform his
duties hereunder that results in material harm to the Company; 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.
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 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, the
Executive shall not be entitled to any severance pay, benefits continuation or
3
<PAGE>
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 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.
4
<PAGE>
8. NON-COMPETITION.
The Executive agrees that he shall not, from the date hereof until the
later to occur of (a) three (3) 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 Condor, the Company or any of
Condor's other subsidiaries in any community in which Condor, the Company or any
of Condor's other subsidiaries are doing business. 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 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 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.
5
<PAGE>
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:
LOUDEN ASSOCIATES, INC.
8730 Marburg Manor Drive
Lutherville, Maryland 21093
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:
Michael Louden
8730 Marburg Manor Drive
Lutherville, Maryland 21093
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 Baltimore, Maryland 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.
6
<PAGE>
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.
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
7
<PAGE>
Agreement may be amended or modified only by a written instrument executed by
the Executive and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
LOUDEN ASSOCIATES, INC.
By: /s/ Michael Louden
-------------------------------
Name: Michael Louden
Title: President
THE EXECUTIVE
/s/ Michael Louden
----------------------------------
Michael Louden
8
<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.
Titan Technologies Group, LLC
Dimensional Systems, LLC
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (SEC file Nos. 333-57413, 333-64505. and 333-73055) of
Condor Technology Solutions, Inc. of our report dated March 30, 2000, relating
to the Annual Report of Condor Technology Solutions, Inc. which appears in
this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
March 30, 2000
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER
31, 1999 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 5,721 5,809
<SECURITIES> 0 0
<RECEIVABLES> 33,148 40,386
<ALLOWANCES> (3,867) (572)
<INVENTORY> 762 740
<CURRENT-ASSETS> 43,237 48,907
<PP&E> 11,495 5,595
<DEPRECIATION> (3,260) (1,266)
<TOTAL-ASSETS> 119,920 200,642
<CURRENT-LIABILITIES> 76,712 40,027
<BONDS> 0 0
0 0
0 0
<COMMON> 151 120
<OTHER-SE> 33,664 113,922
<TOTAL-LIABILITY-AND-EQUITY> 119,920 200,642
<SALES> 62,839 76,318
<TOTAL-REVENUES> 200,206 168,833
<CGS> 56,821 69,133
<TOTAL-COSTS> 138,960 114,512
<OTHER-EXPENSES> 149,865 42,688
<LOSS-PROVISION> 3,427 314
<INTEREST-EXPENSE> 4,030 (593)
<INCOME-PRETAX> (96,076) 12,408
<INCOME-TAX> (4,257) 6,875
<INCOME-CONTINUING> (91,819) 5,533
<DISCONTINUED> 0 0
<EXTRAORDINARY> (184) 0
<CHANGES> 0 0
<NET-INCOME> (92,003) 5,533
<EPS-BASIC> (6.82) 0.54
<EPS-DILUTED> (6.82) 0.51
</TABLE>
