As submitted to the Securities and Exchange Commission on September 1, 1999
Registration No. 333-78901-01
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Condor Systems, Inc.
(Exact name of Co-Registrant as specified in its charter)
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California 3812 94-2623793
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.
Gary M. Viljoen
Chief Financial Officer and Secretary
2133 Samaratin Drive Condor Systems, Inc.
San Jose, California 95124 2133 Samaratin Drive
(408) 371-9580 San Jose, California 95124
(408) 371-9580
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including area code, of telephone mumber, including area code,
Co-Registrant's principal executive offices) of agent for service)
CEI Systems, Inc.
(Exact name of Co-Registrant as specified in its charter)
Delaware 3812 77-0466448
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
Gary M. Viljoen
Secretary
2133 Samaratin Drive CEI Systems, Inc.
San Jose, California 95124 2133 Samaratin Drive
(408) 371-9580 San Jose, California 95124
(408) 371-9580
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including area code, of telephone mumber, including area code,
Co-Registrant's principal executive offices) of agent for service)
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Copies to:
Steven D. Rubin, Esq.
Richard D. Truesdell, Jr., Esq. Eugene F. Cowell III, Esq.
Davis Polk & Wardwell Weil, Gotshal & Manges LLP
450 Lexington Avenue 700 Louisiana, Suite 1600
New York, New York 10017 Houston, Texas 77002
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Approximate date of commencement of proposed sale to the public: From
time to time after the effective date.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement for the same offering.
|_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earliest effective registration statement for the
same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
The Co-Registrants hereby amend this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Co-Registrants shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the SEC, acting pursuant to
said Section 8(a), may determine.
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EXPLANATORY NOTE
This Registration Statement covers the registration of an aggregate
principal amount of $100,000,000 of 11 7/8% Series B Notes due 2009 of Condor
Systems, Inc. ("Condor") guaranteed by CEI Systems, Inc. (the "new notes")
that may be exchanged (the "exchange offer") for equal principal amounts of
Condor's outstanding 11 7/8% Series A Notes due 2009 guaranteed by CEI Systems,
Inc. (the "old notes"). This Registration Statement also covers the
registration of the new notes for resale by Donaldson, Lufkin & Jenrette
Securities Corporation in market-making transactions. The complete prospectus
relating to the exchange offer (the "exchange offer prospectus") follows
immediately after this Explanatory Note. Following the exchange offer
prospectus are certain pages relating solely to such market-making
transactions (the "market-making prospectus"), including alternate front and
back cover pages, an alternate "Risk Factors--No public trading market for the
new notes exist" section, an alternate "Use of Proceeds" section and an
alternate "Plan of Distribution" section. In addition, the market-making
prospectus will include references merely to "notes" instead of to "old notes"
and "new notes" and the following captions (or the information set forth under
such captions) in the exchange offer prospectus: "Summary--The Exchange
Offer," "Summary--Consequences of Exchanging Old Notes pursuant to the
Exchange Offer," "The Exchange Offer" and "Certain United States Tax
Consequences of the Exchange Offer." All other sections of the exchange offer
prospectus will be included in the market-making prospectus.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 1999
PROSPECTUS
Condor Systems, Inc.
Offers to Exchange
11 7/8% Series A Senior Subordinated Notes Due 2009 for
11 7/8% Series B Senior Subordinated Notes Due 2009
which have been registered under the Securities Act of 1933
We are offering to exchange an aggregate principal amount of up to
$100,000,000 of our new 11 7/8% Series B Senior Subordinated Notes due 2009
guaranteed by CEI Systems, Inc., which have been registered under the
Securities Act of 1933 for our existing 11 7/8% Series A Senior Subordinated
Notes due 2009 guaranteed by CEI Systems, Inc.
The terms of the new notes are identical in all material respects to the
terms of the old notes, except that the new notes have been registered under
the Securities Act, and the transfer restrictions and registration rights
relating to the old notes do not apply to the new notes.
To exchange your old notes for new notes:
o You must complete and send the letter of transmittal that
accompanies this prospectus to the exchange agent by 5:00 p.m., New
York time, on , 1999.
o If your old notes are held in book-entry form at The Depository
Trust Company, you must instruct The Depository Trust Company
through your signed letter of transmittal that you wish to exchange
your old notes for new notes. When the exchange offer closes, your
Depository Trust Company account will be changed to reflect your
exchange of old notes for new notes.
o You should read the section called "The Exchange Offer" for
additional information on how to exchange your old notes for new
notes.
See "Risk Factors" beginning on page 10 for a discussion of risk factors
that should be considered by you prior to tendering your old notes in the
exchange offer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
The date of this prospectus is , 1999.
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TABLE OF CONTENTS
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PAGE
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Summary............................................................... 1
Risk Factors.......................................................... 10
The Acquisition and Financing......................................... 22
Use of Proceeds....................................................... 26
Capitalization........................................................ 26
Selected Historical and Unaudited Pro Forma Consolidated
Financial Data................................................... 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 30
Business.............................................................. 47
Management............................................................ 65
Executive Compensation................................................ 67
Security Ownership of Certain Beneficial Owners and Management........ 70
Certain Relationships and Related Party Transactions.................. 72
Description of New Credit Facility.................................... 75
Description of Notes.................................................. 76
The Exchange Offer.................................................... 119
Certain United States Tax Consequences of the Exchange Offer.......... 127
Plan of Distribution.................................................. 127
Legal Matters......................................................... 127
Independent Accountants............................................... 127
Where You Can Find More Information................................... 129
Unaudited Pro Forma Condensed Consolidated Financial Statements....... P-1
Index to Consolidated Financial Statements............................ F-1
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SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary may not contain all of the information that you
should consider before deciding to invest in the notes. We urge you to read
this entire prospectus carefully, including the "Risk Factors" section and the
consolidated financial statements and the notes to those statements.
CONDOR SYSTEMS, INC.
Overview
We are one of the world's leading providers of technologically advanced
signal collection and specialized electronic countermeasure products and
systems in the electronic warfare industry. We supply a complete line of
integrated systems, subsystems and products. These systems are used to
intercept, identify, locate and analyze radar signals for a variety of
military needs, including intelligence, reconnaissance, surveillance,
precision targeting, situational awareness and threat warning. Our systems
provide critical information in support of intelligence collection, tactical
operations and the protection of personnel and other high value military
assets. For the year ended December 31, 1998, we generated contract revenues,
EBITDA (as we define on page 9) and net income of $101.0 million, $16.6
million and $2.6 million, respectively. In addition, our funded backlog at
December 31, 1998 was $62.9 million.
We have established long-term relationships with a wide variety of
customers and supply our products and systems to all of the U.S. intelligence
and military services, and a number of foreign governments in countries such
as Japan, Norway, Sweden and Taiwan. We also supply the major domestic prime
defense contractors such as Lockheed Martin Corporation, Raytheon Company and
The Boeing Company and other defense contractors worldwide. Our products and
systems are used on high profile airborne, shipboard and ground based
platforms.
Approximately 78.1% of our contract revenues for the year ended December
31, 1998 was derived from sole source business, which we define on page 47.
Our ability to capture this sole source business is principally a result of
our:
o taking steps to retain proprietary rights to our superior products
and technologies
o aggressively bidding on competitive development programs
o large installed base of products
Our plan is to further secure our strong market positions and grow our
business by developing next generation and complementary products and systems
and by selectively acquiring businesses that will expand our capabilities.
Over the last five years, we have spent a total of approximately $53.1
million on research and development projects, including research and
development purchased through acquisitions, to maintain and enhance our
competitive position within the electronic warfare market. Approximately 59.3%
of this spending was incurred in connection with long-term development
contracts, a substantial portion of which was effectively funded by our
customers. We also form strategic alliances with other industry participants
to maximize the potential for success by sharing expertise to minimize risk
and costs associated with developing new technology. We have pursued a
market-driven research and development strategy which focuses on identifying a
customer's needs and developing cost-effective solutions that we believe will
ultimately generate:
o long-term production contracts
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o derivative products
o proprietary upgrades
o significant recurring high margin spare parts revenue
In addition, we have enhanced our market position by opportunistically
acquiring and integrating five businesses during the past five years. These
acquisitions have broadened our technological capabilities and product
offerings and have strengthened our ability to offer fully integrated
electronic warfare systems to meet the growing needs of our domestic and
international customers. For example, our acquisitions of Whittaker Electronic
Systems in 1997 and ArgoSystems in 1999 have expanded our presence into
complementary markets, including electronic countermeasures and command and
control and communications systems.
The Electronic Warfare Industry
The electronic warfare industry, which includes virtually all
defense-related products and systems that permit gathering, analyzing and
countering electronically generated signals, is a $4.8 billion industry. The
electronic warfare industry is composed of four major areas: signals
intelligence, electronic support measures, electronic countermeasures and
threat warning. We primarily compete in the niche electronic intelligence
segment, a subcategory of signals intelligence, and the electronic support
measures segment of the industry with secondary capabilities in the electronic
countermeasures segment.
Our management believes that electronic warfare has become a critical
component of national defense spending for military organizations worldwide.
As was demonstrated in Operation Desert Storm, the ability to understand and
control the electronic signal environment is essential to dominance of the
battlespace in modern warfare. As a result, there has been an increasing
demand worldwide for electronic warfare systems which can support intelligence
collection, precision targeting, tactical operations and the protection of
personnel and other high value military assets. In addition to this trend,
older technology in the international installed base has created incremental
demand overseas for advanced and proven electronic warfare products and
systems.
According to Frost & Sullivan, a leading defense industry expert, the
worldwide electronic warfare market is projected to grow from an estimated
$4.8 billion in 1998 to an estimated $6.9 billion in 2005, representing a
compound annual growth rate of 5.3%. In addition, the market niches in which
we compete, which include electronic warfare excluding fighter/attack and
rotary-wing aircraft, are forecasted by Frost & Sullivan to grow worldwide
from an estimated $848 million in 1998 to an estimated $1.3 billion in 2005, a
compound annual growth rate of 6.8%. Our market niches are projected to grow
domestically from an estimated $183 million in 1998 to an estimated $321
million in 2005, a compound annual growth rate of 8.4%.
Competitive Strengths
We believe that we are well positioned to take advantage of the current
trends and expected growth in the electronic warfare industry. We have a
number of competitive strengths, including:
o a leading position in niche markets
o superior products and technologies
o long-standing customer relationships
o a diversified revenue base
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o strong historical financial performance and predictable cash flow
o an experienced management team
For more complete information on our competitive strengths, you should
read the section called "Business--Competitive Strengths."
Business Strategy
Our principal strategy is to strengthen and expand our strong positions
in niche segments of the electronic warfare industry. We seek to achieve our
objectives while maintaining a balance between domestic and international
business. Specifically, our business strategy combines the following elements:
o continue market-driven product investment strategy
o capitalize on incumbent sole source position on key programs
o broaden our international presence
o pursue additional strategic acquisitions
o maintain and enhance customer service orientation
For more complete information on our business strategy, you should read
the section called "Business--Business Strategy."
The Acquisition and Financing
We were acquired by affiliates of DLJ Merchant Banking Partners II, L.P.
and other parties for approximately $134.0 million, including debt refinanced
and related fees and expenses. The acquisition was financed with the proceeds
from the offering of the old notes and $50.9 million in equity investment by
affiliates of DLJ Merchant Banking Partners II, L.P., affiliates of Global
Technology Partners, LLC, affiliates of Behrman Capital, L.P. and management.
We also entered into a $50.0 million new credit facility. For more complete
information on the acquisition and financing, you should read the section
called "The Acquisition and Financing."
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Our principal executive offices are located at 2133 Samaritan Drive, San
Jose, California 95124. Our telephone number is (408) 371-9580. We were
incorporated in 1980.
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THE EXCHANGE OFFER
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Securities Offered................................... We are offering up to $100,000,000 aggregate principal
amount of 11 7/8% Series B Senior Subordinated Notes
due 2009, which have been registered under the
Securities Act. The terms of the new notes are identical
in all material respects to the terms of the old notes,
except that the new notes have been registered under the
Securities Act. In addition, transfer restrictions and
registration rights relating to the old notes do not apply to
the new notes.
The Exchange Offer................................... We are offering to issue the new notes in exchange for a
like principal amount of your old notes. We are offering
to issue the new notes to satisfy our obligations contained
in the registration rights agreement entered into when the
old notes were sold in transactions pursuant to Rule 144A
and Regulation S under the Securities Act and therefore
not registered with the SEC. For procedures for
tendering, see "The Exchange Offer."
Tenders, Expiration Date, Withdrawal................. The exchange offer will expire at 5:00 p.m. New York
City time on , 1999 unless it is extended. If
you decide to exchange your old notes for new notes, you
must acknowledge that you are not engaging in, and do
not intend to engage in, a distribution of the new notes. If
you decide to tender your old notes pursuant to the
exchange offer, you may withdraw them at any time prior
to , 1999. If we decide for any reason not to accept
any old notes for exchange, your old notes will be
returned to you without expense promptly after the
exchange offer expires.
Federal Income Tax Consequences...................... Your exchange of old notes for new notes pursuant to the
exchange offer will not result in any income, gain or loss
to you for Federal income tax purposes. See "Certain
United States Federal Income Tax Consequences of the
Exchange Offer."
Use of Proceeds...................................... We will not receive any proceeds from the issuance of the
new notes pursuant to the exchange offer.
Exchange Agent....................................... State Street Bank and Trust Company is the exchange
agent for the exchange offer. See page 122 for
information on how to contact the exchange agent.
Accounting Treatment................................. We intend to account for the exchange offer based on the
historical basis of accounting for the old notes. As a
result, we will report the new notes at face value; the
same carrying value as the old notes on the date of the
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exchange. Accordingly, we will not recognize any gain
or loss related to this exchange.
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CONSEQUENCES OF EXCHANGING OLD NOTES
PURSUANT TO THE EXCHANGE OFFER
Based on interpretations by the SEC's staff in no-action letters issued
to third parties, we believe that new notes issued in exchange for old notes
pursuant to the exchange offer may be offered for resale, resold or otherwise
transferred by you without registering the new notes under the Securities Act
or delivering a prospectus so long as each of the following applies to you:
o you are not one of our "affiliates", which is defined in Rule 405 of
the Securities Act
o you acquire the new notes in the ordinary course of your business
o either you are a broker-dealer or you do not have any arrangement
with any person to participate in the distribution of such new notes
Unless you are a broker-dealer, you must acknowledge both that:
o you are not engaged in, and do not intend to engage in, a
distribution of the new notes
o you have no arrangement or understanding to participate in a
distribution of the new notes
If you are an affiliate of Condor, or you are engaged in, intend to
engage in or have any arrangement or understanding with respect to, the
distribution of new notes acquired in the exchange offer, you (1) should not
rely on our interpretations of the position of the SEC's staff and (2) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
If you are a broker-dealer and receive new notes for your own account
pursuant to the exchange offer:
o you must acknowledge that you will deliver a prospectus in
connection with any resale of such new notes. The letter of
transmittal states that by acknowledging and delivering a
prospectus, you will not be deemed to admit that you are an
"underwriter" within the meaning of the Securities Act
o you may use this prospectus, as it may be amended or supplemented
from time to time, in connection with the resale of new notes
received in exchange for old notes acquired by you as a result of
market-making or other trading activities
For a period of 90 days after the expiration of the exchange offer, we
will make this prospectus available to any broker-dealer for use in connection
with any such resale.
In addition, you may offer or sell the new notes in some jurisdictions
only if they have been registered or qualified for sale there, or an exemption
from registration or qualification is available and is complied with. Subject
to the limitations specified in the registration rights agreement, we will
register or qualify the new notes for offer or sale under the securities laws
of any jurisdictions that you reasonably request in writing. Unless you
request that the sale of the new notes be registered or qualified in a
jurisdiction, we currently do not intend to register or qualify the sale of
the new notes in any jurisdiction. If you do not comply with such requirement,
you could incur liability under the Securities Act, and we will not indemnify
you in such circumstances.
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SUMMARY DESCRIPTION OF THE NOTES
The terms of the new notes and the old notes are identical in all
material respects, except that the new notes have been registered under the
Securities Act, and transfer restrictions and registration rights relating to
old notes do not apply to the new notes. We use "notes" to refer to both the
old notes and the new notes.
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Maturity Date........................................ May 1, 2009.
Interest Payment Dates............................... Every May 1 and November 1, commencing November
1, 1999.
Optional Redemption.................................. We may redeem any of the notes at any time on or after
May 1, 2004, in whole or in part, in cash at the
redemption prices set forth on page 81, plus accrued
interest. In addition, on or before May 1, 2002, we may
redeem up to 35% of the aggregate principal amount of
notes originally issued from time to time only:
o at a redemption price of 111.875%, plus accrued
interest
o with the net cash proceeds of a public equity
offering
o provided that at least 65% of the aggregate
principal amount of notes originally issued from
time to time remains outstanding
Change of Control.................................... Upon the occurrence of change of control events
specified in the indenture governing the notes, you may
require us to repurchase your notes at 101% of their
principal amount, plus accrued interest. We cannot
assure you that we will have sufficient resources to
satisfy our repurchase obligation in such circumstances.
See "Risk Factors--We may be unable to purchase the
notes upon a change of control, which could result in a
default under the indenture" and "Description of Notes."
Ranking.............................................. The notes:
o rank junior to all of our existing and future senior
indebtedness and secured indebtedness, including any
borrowings and reimbursement obligations with respect
to letters of credit under our new credit facility
o rank equally with any of our future senior
subordinated indebtedness
o rank senior to any of our future subordinated
indebtedness
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o effectively rank junior to all of the liabilities
of our subsidiaries other than CEI Systems, Inc.
As of June 30, 1999, the notes rank junior to $0.0 of
outstanding liabilities, excluding guarantees of the
new credit facility and intercompany obligations of our
subsidiaries other than CEI Systems, Inc.
Guarantees........................................... The notes are fully and unconditionally guaranteed on a
senior subordinated basis by CEI Systems, Inc., our only
material subsidiary. The guarantees:
o are general unsecured obligations of CEI Systems,
Inc.
o are subordinated in right of payment to all existing and
future senior indebtedness of CEI Systems, Inc.,
including obligations under our new credit facility
o rank senior in right of payment to any future subordinated
indebtedness of CEI Systems, Inc.
Certain Covenants.................................... The indenture governing the notes contains covenants
limiting or prohibiting our ability and the ability of our
guarantor subsidiary to:
o incur additional indebtedness
o create liens
o engage in sale-leaseback transactions
o pay dividends or make other equity distributions
o purchase or redeem capital stock
o make investments
o sell assets
o engage in transactions with affiliates
o effect a consolidation or merger
However, these limitations are subject to a number
of important qualifications and exceptions.
Use of Proceeds...................................... We will not receive any proceeds from the exchange of
new notes for old notes.
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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA
The table below sets forth our summary historical and unaudited pro forma
consolidated financial data. The summary historical consolidated financial
data is derived from our audited consolidated financial statements and the
notes thereto, which are included elsewhere in this prospectus. The summary
unaudited pro forma consolidated financial data is derived from our historical
financial data and gives effect to the transactions described in "Unaudited
Pro Forma Condensed Consolidated Financial Statements" included elsewhere in
this prospectus. The summary unaudited pro forma consolidated financial data
is presented for illustrative purposes only and is not necessarily indicative
of our financial position or results of operations if such transactions had
actually occurred on such dates, and is not necessarily indicative of our
future results of operations or financial position. The information contained
in this table should be read in conjunction with "The Acquisition and
Financing," "Selected Historical and Unaudited Pro Forma Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Unaudited Pro Forma Condensed Consolidated
Financial Statements" and our consolidated financial statements and the notes
thereto included elsewhere in this prospectus.
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Pro Forma
Pro Forma Six Months
Years Ended Year Ended Six Months Ended Ended
December 31, December 31, June 30, June 30,
------------------------------- ----------- -------------------- ----------
1996 1997 1998 1998 1998 1999 1999
------ ------ ------ ----------- ------ ------ ----------
(dollars in millions)
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Statement of Operations Data:
Contract revenues............. $ 67.5 $ 79.6 $101.0 $101.0 $ 41.0 $ 37.1 $ 37.1
Gross margin.................. 23.7 26.5 39.4 39.4 17.3 15.7 15.7
Operating income (loss)....... (13.7) 0.2 11.7 11.7 3.8 (4.6) 4.2
Net income (loss)............. (11.5) (3.2) 2.6 (1.1) -- (11.0) (1.4)
Other Financial Data:
EBITDA(1)..................... $(11.5) $ 3.0 $ 16.6 $ 16.6 $ 6.3 $ (3.4) $ 5.4
EBITDA margin................. (17.0%) 3.8% 16.4% 16.4% 15.4% (9.2%) 14.6%
Depreciation and
amortization(2)............. 2.2 2.8 4.9 4.9 2.4 1.2 1.2
Capital expenditures.......... 1.4 1.7 2.5 2.5 1.4 0.7 0.7
Ratio of earnings to fixed
charges(3).................. -- 0.1x 1.5x 0.9x 1.0x -- --
Net Cash Provided by (used in):
Operating activities.......... (13.7) 2.4 12.1 8.4 6.6 (10.0) (12.0)
Investing activities.......... (1.4) (21.4) (2.5) (2.5) (1.4) (2.7) (2.7)
Financing activities.......... 16.9 15.4 (6.0) (6.0) 2.0 10.3 10.3
Certain Pro Forma Data:
Cash interest expense......... -- -- -- $ 12.9 -- -- --
Ratio of net debt to EBITDA... -- -- -- 5.6x -- -- --
Ratio of EBITDA to cash
interest expense............ -- -- -- 1.3x -- -- --
Ratio of EBITDA less capital
expenditures to cash
interest expense............ -- -- -- 1.1x -- -- --
Other Operating Data:
Contract awards(4)............ $ 77.3 $ 89.9 $104.2 $104.2 $ 53.2 $ 28.0 $ 28.0
Funded backlog at end of
period(5)................... 49.4 59.7 62.9 62.9 76.2 53.8 53.8
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At December At June 30,
31, 1998 1999
----------- ----------
(dollars in millions)
Balance Sheet Data:
Cash and cash equivalents........................ $ 4.3 $ 1.9
Restricted cash(6)............................... 4.0 --
Working capital.................................. 29.0 29.9
Total assets..................................... 67.9 74.0
Total long-term debt (including current
maturities)(7)................................. 55.8 100.0
Shareholders' deficit............................ (13.0) (51.5)
- -------------------
(1) EBITDA is defined as operating income (loss) plus depreciation and
amortization. EBITDA is a key financial measure but should not be
construed as an alternative to operating income or cash flow from
operating activities as determined in accordance with generally accepted
accounting principles. We believe EBITDA is a useful supplement to net
income (loss) and other consolidated income statement data in
understanding cash flows generated from operations that are available
for taxes, debt service and capital expenditures. However, our method of
computation may or may not be comparable to other similarly titled
measures of other companies. Our credit facility requires that we
maintain financial leverage and interest coverage ratios as well as
comply with other covenants. These covenants include restrictions on
dividends and capital expenditures. As a result of these limitations and
our debt service requirements, a substantial portion of our EBITDA is
not available for discretionary use.
(2) Reflects depreciation and amortization of plant and equipment, goodwill
and other intangible assets. Excludes $0.4 million, $0.9 million, $0.4
million and $0.4 million of amortization of deferred financing costs and
debt discounts for the years ended December 31, 1997 and 1998, and the
six months ended June 30, 1998 and 1999, respectively, as they are
recorded in interest expense.
(3) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent net income (loss) before income taxes plus fixed
charges. Fixed charges consist of (a) interest, whether expensed or
capitalized; (b) amortization of debt expense and discount or premium
relating to indebtedness, whether expensed or capitalized; and (c) that
portion of lease rental expense representative of interest, which is
deemed to be one-third of lease rental expense. For the year ended
December 31, 1996, and the six months ended June 30, 1999, earnings were
insufficient to cover fixed charges by $13.2 and $4.1 million,
respectively.
(4) Contract awards represent the total dollar value of contract awards
received during the period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(5) Contracts awards are generally subject to termination for convenience by
the customer prior to shipment. The level of backlog at any given date
during the year will be materially affected by the timing of our receipt
of contract awards and the recognition of contract revenues. See
"Business -- Backlog."
(6) Restricted cash of $4.0 million at December 31, 1998 was used to
collateralize our outstanding letters of credit. As of June 30, 1999,
$34.2 million of our new credit facility was used to provide back-to-back
letters of credit for our outstanding letters of credit. The new credit
facility currently provides enough capacity such that these letters of
credit are not required to be cash collateralized.
(7) Total long-term debt is defined as long-term debt, including current
portion, net of unamortized discount related to stock warrants.
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RISK FACTORS
In addition to the other matters described in this prospectus, you should
carefully consider the following risk factors.
Risks relating to our debt
We have a significant amount of debt, which could limit our growth and our
ability to respond to changing conditions
Our substantial indebtedness could limit our growth and our ability to
respond to changing conditions, which could potentially affect our ability to
make payments on your notes. We have incurred a significant amount of
indebtedness in connection with the acquisition of our company. The level of
our indebtedness could have important consequences, including:
o limiting cash flow available for general corporate purposes,
including acquisitions, because a substantial portion of our cash
flow from operations must be dedicated to servicing our debt
o limiting our ability to obtain additional debt financing in the
future for working capital, capital expenditures or acquisitions
o limiting our flexibility in reacting to competitive and other changes
in our industry and economic conditions generally
o restricting our ability to obtain letters of credit which are
necessary to support our international business
o otherwise impairing our ability to obtain contract awards from
customers concerned about our leverage
As of June 30, 1999, we had: (a) total consolidated indebtedness of
approximately $100.0 million; and (b) approximately $46.6 million of
borrowings available under our $50.0 million new credit facility, less $34.2
million in standby letters of credit, subject to customary conditions. In
addition, subject to the restrictions in our new credit facility and the
indenture, we may incur significant additional indebtedness, which may be
secured, from time to time.
We may not be able to service our debt and you may not receive interest or
principal payments on the notes
Our ability to make interest and principal payments on our indebtedness
and borrow additional funds will depend upon our future operating performance,
which will be affected by general economic, financial, competitive,
legislative, regulatory, business and other factors beyond our control.
We anticipate that our operating cash flow, together with money we can
borrow under our new credit facility, will be sufficient to meet anticipated
future operating expenses, to fund capital expenditures and to service our
debt as it becomes due. The notes currently have an annual debt service
requirement of approximately $11.9 million in interest payments. The notes
mature on May 1, 2009. If we were unable to meet our debt service obligations,
we could attempt to restructure or refinance our indebtedness or seek
additional equity capital. We cannot assure you that we will be able to
accomplish such actions on satisfactory terms, if at all.
In addition, subject to the restrictions and limitations contained in our
debt agreements, we may incur significant additional indebtedness to finance
future acquisitions, which could adversely affect our operating cash flows and
our ability to service indebtedness.
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If we are unable to service our debt, you may not receive interest or
principal payments on the notes in a timely manner, or at all. If we fail to
make an interest payment for 30 days when it becomes due, the holders of at
least 25% of the outstanding aggregate principal amount of the notes may
direct the trustee to declare the notes due and payable in full. The trustee
may institute a judicial proceeding to recover any interest or principal due
on the notes. Since the notes are subordinated to other debt, any claim by the
trustee would be subject to the prior satisfaction of senior debtholders. See
"Risk Factors -- The notes will be subordinated to other debt and holders of
senior debt must be paid before you receive payments under the notes."
Restrictive covenants in our indenture and new credit facility may adversely
affect us by limiting the types of transactions we can enter into and
potentially leading to a default and an acceleration of our indebtedness
The indenture governing the notes contains various covenants that limit
our ability to engage in many types of transactions, including mergers, asset
sales and the incurrence of additional indebtedness.
In addition, our new credit facility contains other and more restrictive
covenants and prohibits us from prepaying our subordinated indebtedness,
including the notes. Our new credit facility also requires us to maintain
specified financial ratios and satisfy other financial condition tests. Our
ability to meet those financial ratios and tests can be affected by events
beyond our control, and we cannot assure you that we will meet those tests. A
breach of any of these covenants could result in a default under our new
credit facility and/or the notes. Upon the occurrence of an event of default
under our new credit facility, the lenders could elect to declare all amounts
outstanding under our new credit facility to be immediately due and payable,
terminate all commitments to extend further credit and require us to cash
collateralize outstanding letters of credit. If we were unable to repay those
amounts, the lenders could proceed against the collateral granted to them to
secure that indebtedness. We have pledged substantially all of our assets,
other than assets of our foreign subsidiaries, as security under our new
credit facility. If the lenders under our new credit facility accelerate the
repayment of borrowings, we cannot assure you that we will have sufficient
assets to repay our new credit facility and our other indebtedness, including
the notes.
The notes will be subordinated to other debt and holders of senior debt must
be paid before you receive payments under the notes
The notes rank junior to all of our existing and future senior
indebtedness, including all indebtedness under our new credit facility and
therefore you cannot receive any payment on the notes until the holders of
senior indebtedness have been paid in full. The full and unconditional
guarantees of the notes by CEI Systems, Inc. will be subordinated to the prior
payment in full of all senior indebtedness of CEI Systems, Inc., including the
guarantee of our new credit facility by CEI Systems, Inc., to the same extent
the notes are subordinated to our senior indebtedness.
As a result of the subordination of the notes, if any of the following
events occur:
o we become insolvent or enter into a bankruptcy or similar proceeding
o we fail to make a payment when due on senior indebtedness
o any senior indebtedness is accelerated
then the holders of our senior indebtedness and of the senior indebtedness of
our guarantor, CEI Systems, Inc., must be paid in full before you are paid, in
which case you may not receive any payment at all. If we or CEI Systems, Inc.
incur any additional debt that ranks equally with the notes and the
guarantees, the holders of such debt will be entitled to share ratably with
you in any proceeds distributed in connection with any insolvency,
liquidation, reorganization, dissolution or other winding-up of our company or
CEI Systems, Inc. This may have the effect of reducing the amount of proceeds
paid to you or you may not receive any payment at all.
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In addition, we cannot make any cash payments to you if we have failed to
make payments to holders of certain senior indebtedness. Under some
circumstances, we cannot make any payments to you for a period of up to 179
days if we have defaulted, other than failures to make payments, under certain
of our senior indebtedness covenants.
Holders of indebtedness and other liabilities of our subsidiaries other
than CEI Systems, Inc. will effectively be senior to your claims against such
subsidiaries. As of June 30, 1999, such subsidiaries had $0.0 of outstanding
liabilities, excluding guarantees of the new credit facility and intercompany
obligations of our subsidiaries other than CEI Systems, Inc.
We may be unable to purchase the notes upon a change of control, which could
result in a default under the indenture
Upon the occurrence of change of control events specified in the
indenture governing the notes, you may require us to purchase your notes at
101% of their principal amount, plus accrued interest. The terms of our new
credit facility limit our ability to purchase your notes in such
circumstances. Any of our future debt agreements may contain similar
restrictions and provisions. Accordingly, we may not be able to satisfy our
obligations to purchase your notes unless we are able to refinance or obtain
waivers under the new credit facility and other indebtedness. We cannot assure
you that we will have the financial resources to purchase your notes,
particularly if such change of control event triggers a similar repurchase
requirement for, or results in the acceleration of, other indebtedness. Our
new credit facility currently provides that some change of control events will
constitute a default and could result in the acceleration of our indebtedness
under the new credit facility. If we are unable to repurchase your notes after
a change of control it would constitute an event of default under the
indenture, which would in turn constitute a default under the new credit
facility. In such circumstances, the subordination of the notes to the new
credit facility would limit the amount of payment, if any, you received for
the notes.
The definition of change of control in the indenture includes a phrase
relating to the sale, lease, transfer, conveyance or other disposition of "all
or substantially all" of our assets and our subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of notes to require
us to repurchase such notes as a result of a sale, lease, transfer, conveyance
or other disposition of less than all of our assets and our subsidiaries taken
as a whole to another person or group may be uncertain.
Further reductions or changes in military expenditures may adversely affect our
ability to obtain new contracts
The U.S. defense budget has declined significantly in the 1990s,
resulting in reduced revenues, increased pressure on operating margins and, in
some cases, net losses for many defense-related contractors. During this
period, our contract revenues from agencies of, and contractors to, the U.S.
Government have increased. Approximately 64.5% of our contract revenues in
1998 were to the U.S. Government or to prime contractors that identified the
U.S. Government as the ultimate purchaser. Our largest program contributed
approximately 6.6% of contract revenues for the year ended December 31, 1998,
and no other program represented more than 5.6% of contract revenues for this
period. We believe our continued development and success in the future will
depend, in part, upon the continued willingness of the U.S. Government to
commit substantial resources to military spending and, in particular, upon
continued purchases of our products. A significant decline in U.S. military
expenditures generally, the loss or significant cutback of a large program in
which we participate, or a change in focus of defense spending that
de-emphasizes electronic warfare could materially adversely affect our future
contract revenues and earnings and thus our ability to meet our financial
obligations.
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Risks relating to our government contracts
Our contracts may be terminated or adjusted by the U.S. government
Companies engaged primarily in supplying defense-related equipment and
services to government agencies are subject to business risks peculiar to the
defense industry. These risks include the ability of the U.S. Government to:
o insist on strict compliance with the contract terms
o prosecute us for knowing failures to comply with contract terms or
procurement laws and regulations
o obtain treble damages and penalties for knowing or reckless failures
to comply with contract terms or procurement laws and regulations
o suspend us from receiving new contracts pending resolution of alleged
violations of procurement laws or regulations
o terminate existing contracts
o audit our contract-related costs and fees, including allocated
indirect costs
Contracts with the U.S. Government are subject to a complex set of
regulations and laws and the U.S. Government has available a wide variety of
criminal penalties, treble damage remedies and civil penalties to enforce
those requirements. The U.S. Government may challenge positions we have taken
with respect to those regulations, such as whether we qualify as a small
business. We believe we currently qualify as a small business. If the U.S.
Government finds that we have violated any of its requirements, our contracts
may be terminated or adjusted or we may be subject to criminal investigation
and prosecution and may face civil damages provisions and penalties.
All of our contracts involving U.S. Government programs, including
contracts involving sales to prime contractors or subcontractors, can be
terminated by the U.S. Government either for its convenience or if we default.
Termination for convenience provisions provide only for our recovery of costs
incurred or committed, settlement expenses and profit on work completed prior
to termination. Termination for default provisions require return of
unliquidated progress payments for unaccepted work and provide that we would
be liable for excess costs incurred by the U.S. Government in procuring
undelivered items from another source. As of December 31, 1998, our
performance had been delayed on eleven of our domestic contracts with an
aggregate contract value of approximately $36.3 million and three of our
international contracts with an aggregate contract value of approximately
$37.2 million. Performance delays constitute defaults under those contracts.
However, none of our customers has ever invoked the default provisions because
of performance delays. In addition, none of our customers has terminated these
contracts for this reason, although we may incur additional costs as we work
with our customers to revise their contract schedules.
In addition to the right of the U.S. Government to terminate, U.S.
Government contracts are conditioned upon the continuing approval by Congress
of the necessary spending. Congress usually appropriates funds for a given
program on a fiscal-year basis even though contract performance may take more
than one year. Consequently, at the beginning of a major program, the contract
is usually partially funded, and additional monies are normally committed to
the contract only if, as and when appropriations are made by Congress for
future fiscal years. Foreign defense contracts generally contain similar
provisions relating to termination at the convenience of the government.
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The U.S. Government may claim adjustments to our contract prices
The U.S. Government may review our costs and performance on their
contracts, as well as our accounting and general business practices. Under the
Truth in Negotiations Act, for any contract in excess of $500,000, the U.S.
Government may reduce the contract price by the amount by which it was
overstated as a result of not providing current, accurate or complete cost or
pricing data. Based on the results of these audits, historically we have not
had to fund any material adjustments. As of June 30, 1999, the U.S. Government
is claiming adjustments in an aggregate amount of $1.7 million for three
contracts. We have responded to these claims and are working with the U.S.
Government to resolve these matters. We believe that the resolution of these
claims will not have a material adverse effect on our financial condition and
results of operations. However, we cannot assure you that any claims for
future audit adjustments will not have a material adverse effect on our
business. In addition, under U.S. Government purchasing regulations, some of
our costs, including certain financing costs, goodwill, portions of research
and development costs and certain marketing expenses may not be reimbursable
under U.S. Government contracts. Further, as a government contractor, we are
subject to investigation, legal action and/or liability that would not apply
to a commercial company.
Our contracts are subject to additional risks related to the bidding and
procurement process and U.S. government licensing requirements which could
affect our ability to obtain new contracts
Risks related to the way we obtain our military contracts could affect
our ability to obtain new contracts and affect the profitability of those
contracts. We obtain military contracts through the process of competitive
bidding and through sole source negotiations. While most of our historical
contract revenues have been derived from sole source negotiations, as our
international business increases we expect to derive a greater portion of our
contract revenues through competitive bidding. In addition, while our domestic
production programs are predominately sole source, some of our development
programs are competitively bid. We cannot assure you that we will continue to
be successful in having our bids accepted or, if accepted, that awarded
contracts will generate sufficient contract revenues to result in
profitability. In particular, we often aggressively compete on development
programs by pursuing a low price bidding strategy. Accordingly, such
development programs are typically unprofitable or break-even after allocating
overhead, administrative and other indirect costs. Although we pursue such
development programs because we expect to profit from the follow-on sole
source business, we cannot assure you that we will obtain such follow-on
business. Also, the U.S. Government may in the future determine to shift
programs historically awarded to us on a sole source basis to a competitive
bidding process. This may reduce the profit margin on these contracts.
We are also subject to risks associated with the military procurement and
development process which affect the profitability of our contracts. These
risks include:
o the frequent need to bid on programs in advance of the completion of
their design, which may result in unforeseen software development or
other technological difficulties and/or cost overruns
o the substantial time and effort required for relatively unproductive
design and development
o design complexity and obsolescence
o the constant need for design improvement
In addition, many of our products and systems require licenses from U.S.
Government agencies for export from the United States, and some of our
products are not permitted to be exported. We cannot be sure of our ability to
gain any licenses required to export our products, and failure to receive
required licenses could materially reduce our ability to sell our products
outside the United States.
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Our acquisition required Department of Defense approval
Since we perform work on classified U.S. Government contracts, we had to
submit the acquisition to review by the Department of Defense because of the
change in control effected by the acquisition. DLJ Merchant Banking Partners
II, L.P., one of our equity investors, is indirectly majority owned by a
holding company incorporated in France. We have received a decision from the
Department of Defense that we will not be under foreign ownership, control or
influence once the acquisition is consummated. However, we cannot assure you
of that this determination will not be subsequently withdrawn by the
Department of Defense in the event that it concludes that we were or became
under foreign ownership, control or influence because of DLJ Merchant
Banking's equity ownership in us. Should the Department of Defense ever reach
such a conclusion, in order for us to maintain our ability to perform work on
classified U.S. Government contracts, we may be required to implement methods
to mitigate such foreign ownership, control or influence. These mitigating
methods may include placing control of our board of directors in the hands of
independent outside directors with no relationship to any of our shareholders,
eliminating or modifying some of the approval rights that DLJ Merchant Banking
will have over actions by our board of directors or implementing prior
approval requirements regarding communications between us and DLJ Merchant
Banking.
Our fixed price contracts can be subject to cost overruns which may affect the
profitability of the contract
The risks of long-term fixed price contracts include the difficulty of
forecasting costs and development or production schedules and obtaining
contract revenues that are sufficient to recover the cost of the contract
performance in accordance with the contract specifications, and the
possibility of the obsolescence of procured parts or subassemblies in
connection with long-term procurements. Our failure to anticipate technical
problems, estimate costs accurately or control costs during the performance of
a fixed price contract may reduce our profitability or cause a loss. We
provide our products and services primarily through fixed price contracts.
Fixed price contracts constituted approximately 97.7% of our contract revenues
for the year ended December 31, 1998. We record revenues and profits on our
long-term fixed price contracts by using the percentage-of-completion
cost-to-cost method of accounting. As a result, revisions made to our
estimates of costs and profits are reflected in the period in which the
conditions that require such revisions become known and can be estimated.
Although we believe that adequate provisions for losses for our fixed price
contracts are reflected in our financial statements, as required under U.S.
generally accepted accounting principles, we cannot assure you that these
estimates and provisions are adequate or that losses on fixed price contracts
will not occur in the future.
In addition, as our business has evolved from individual products to
complex systems requiring sophisticated software development, we are
increasingly exposed to the risks associated with software development,
including time delays and unplanned costs. During 1997 we made significant
upward revisions to our cost estimates on our two largest development programs
partially due to our decision to incorporate more advanced software into those
systems. These programs involved significantly more complex software
development efforts than our prior programs.
Our operations involve keeping up with technological change and the failure to
do so could limit our ability to obtain future contracts
If we fail to keep up with technological changes, our profitability and
ability to obtain new contracts may be affected. Changes in technology are a
key feature of the electronic warfare industry. To succeed in the future, we
will need to design, develop, manufacture, assemble, test, market and support
new products and enhancements on a timely and cost-effective basis.
Historically, our technology has been developed through research and
development incurred in connection with long-term development contracts, a
substantial portion of which was effectively funded by our customers, as well
as through acquisitions and from internally funded research and development.
We cannot assure you that we will be able to maintain the same level of
customer funding for research and development incurred in connection with
long-term development contracts in the future. In addition, when we work on
such a
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contract, we seek to protect our proprietary technologies by taking steps to
maintain ownership of data rights for our "core" technologies, source codes
and other developments. We keep records of our data rights in order to claim
these rights as our proprietary technology, but generally we do not make
specific delineations in our government contracts of ideas which we developed
under these rights prior to entering into such contracts. We cannot assure you
that our customers will not challenge our data rights as technology that was
developed with government funds or in the performance of their contracts.
Our contracts associated with funded backlog could be terminated
At December 31, 1998 we had funded backlog of $62.9 million. The U.S.
Government and foreign governments may unilaterally modify or terminate the
contracts associated with our funded backlog. Accordingly, most of our funded
backlog could be modified or terminated by the U.S. Government or foreign
governments. We cannot assure you that our funded backlog will result in
contract revenues. Further, we cannot assure you that any contract included in
funded backlog will be profitable.
Our acquisition strategy entails risks which could affect our operational and
financial performance
We have historically pursued a targeted acquisition strategy and, as part
of our ongoing strategy to promote growth, we are currently in negotiations
with respect to other potential acquisitions. We recently completed the
purchase of the electronic warfare assets of ARGOSystems. Our failure to
manage growth effectively could have a material adverse effect on us. We also
cannot assure you that suitable acquisition candidates will be available or
that acquisitions can or will be completed on reasonable terms or any
anticipated benefits will be realized. There are various risks associated with
pursuing a growth strategy of this nature.
o Any future growth will require us to manage our expanding domestic
and international operations, integrate new businesses and adapt our
operational and financial systems to respond to changes in our
business environment, while maintaining a competitive cost
structure. This is particularly important to us because under some
of our government contracts many of the cost savings obtained
through acquisitions must be passed through to our customers over
time
o The acquisition strategy will continue to place demands on our
management to improve our operational, financial and management
information systems, to develop further the management skills of our
managers and supervisors, and to continue to retain, train, motivate
and effectively manage our employees as we continue to grow, which
takes away management's focus on obtaining new contracts
o We may not be able to generate sufficient cash flow or obtain
financing on acceptable terms to fund any acquisition. Our ability
to obtain financing may be limited by our debt agreements, and we
may not be able to acquire attractive candidates which fit our
business strategy as a result of these limits
Our international business is subject to additional risks related to export
controls and other factors which could affect our ability to obtain or perform
future contracts
For the years ended December 31, 1997 and 1998, international contract
revenues comprised approximately 27.2% and 35.5%, respectively, of our total
contract revenues. We believe that international contracts offer us
significant growth opportunities. International contract revenues are subject
to numerous risks, including:
o costs of complying with a wide variety of international and U.S.
export laws and regulatory requirements
o inconsistent product regulation by foreign agencies or governments
o political and economic instability in foreign markets
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o restrictive trade policies of foreign governments
o imposition of product tariffs and burdens
International military contracts are subject to more risks than other
commercial contracts because of the importance U.S. and foreign governments
place on military technologies. Our international sales require export
licenses for some of our products and systems. We cannot assure you that we
will be able to continue to obtain the necessary export licenses. The failure
to receive required licenses could materially reduce our ability to sell our
products outside the United States. It may also constitute a default under a
contract where the failure to receive an export license precludes our
performance. Additionally, we cannot assure you that we will be able to
compete successfully in international markets or that our international sales
will be profitable. Substantially all of our contract revenues in 1998 were
denominated in U.S. dollars, and we intend to continue to enter into U.S.
dollar-denominated contracts. Accordingly, we do not, and believe that in the
future we will not, have significant exposure to fluctuations in currency.
Nevertheless, fluctuations in currency could adversely affect our customers,
which may lead to delays in the timing and execution of contract awards.
We typically receive one or more advance payments from our international
customers during the initial phase of the contract, which advances range from
approximately 20% to 60% of the total contract value. We generally provide
letters of credit to guarantee our performance of the contract. The customer
may draw down on the letters of credit if we default under the contract. A
number of our foreign contracts also give our customers the right to receive
liquidated damages ranging from 5% to 15% of the aggregate value of the items
not delivered or performed on schedule. As of December 31, 1998, our
performance had been delayed on three of our international contracts, which
have an aggregate contract value of approximately $37.2 million. Performance
delays constitute defaults under those contracts. However, none of our
customers has ever invoked the default provisions because of performance
delays. In addition, none of our customers has attempted to draw down on our
letters of credit or sought liquidated damages in any material amount,
although we may incur additional costs as we work with our customers to revise
their contract schedules.
We operate in a competitive industry and many of our competitors have greater
resources than us
The electronic warfare industry is highly competitive. The defense
industry in general has experienced substantial consolidation due to declining
defense budgets and increasing pressures for cost reductions. Many of our
competitors are larger than us and have substantially greater financial and
other resources than we have, including Lockheed Martin, Raytheon and Boeing.
Our ability to compete for electronic warfare contracts largely depends on the
following factors:
o the effectiveness and innovations of our research and development
programs
o our ability to offer better performance than our competitors at a
lower cost
o the readiness of our facilities, equipment and personnel to undertake
the programs for which we compete
We are dependent on key personnel to implement our business strategy
Our success depends to a significant extent on the continued services of
our senior management and other members of management because our growth
strategy will require substantial management expertise to implement
successfully. Our senior management has extensive expertise in the electronic
warfare industry. We could be adversely affected if any of these persons were
unwilling or unable to continue in our employ. We have taken steps to minimize
these risks by executing employment agreements with key executive officers as
described in "Management--Employment and Severance Benefit Agreements."
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We are controlled by a small group of shareholders whose interests may
conflict with your interests as a noteholder
Circumstances may occur in which the interests of our principal
shareholders could be in conflict with your interests as a holder of the
notes. Our shareholders may have an interest in pursuing transactions that, in
their judgment, enhance the value of their equity investment in us, even
though those transactions may involve risks to you.
All of our outstanding shares of common stock are held by affiliates of
Global Technology Partners LLC, affiliates of Behrman Capital L.P., certain
members of management and investment funds of DLJ Merchant Banking Partners
II, L.P. All of these stockholders are subject to an investors' agreement
which, among other things, sets the number of our directors at five and gives
Global Technology Partners the right to appoint three directors and Behrman
the right to appoint one, with the Chief Executive Officer as the final
director. The shares of common stock held by the Global Technology Partners
shareholders initially has 11.564 votes per share. Behrman's common stock, and
that of the management shareholders, has one vote per share. Although DLJ
Merchant Banking's shares of common stock does not have any voting rights, DLJ
Merchant Banking's consent is required prior to implementing decisions of our
board of directors relating to, among other things, financings and
acquisitions. As a result of their stock ownership and the shareholders
agreement, these principal shareholders control us and have the power to elect
all of our directors and approve any action requiring the approval of the
holders of common stock, including adopting amendments to our certificate of
incorporation and approving acquisitions or sales of all or substantially all
of our assets.
The general partners of each of the DLJ Merchant Banking funds are
affiliates or employees of Donaldson, Lufkin & Jenrette, Inc. Donaldson,
Lufkin & Jenrette Securities Corporation, which was an initial purchaser of
the old notes, is also an affiliate of Donaldson, Lufkin & Jenrette, Inc.
Our business may be disrupted by Year 2000 problems
The year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. Thus, as the turn of
the century approaches, computer programs may be unable to distinguish between
the year 1900 and the year 2000. The inability to recognize or properly treat
the year 2000 may cause computer systems to process critical data incorrectly.
During 1997, we implemented a year 2000 compliance plan to assess our year
2000 risks, update our internal hardware and software systems and assess
whether any substantial issues exist concerning products sold to customers.
We are uncertain as to the extent our customers and vendors may be
affected by year 2000 issues that require commitment of significant resources
and may cause disruptions in the customers' and vendors' businesses. Moreover,
year 2000 issues present a number of risks that are beyond our reasonable
control, such as:
o the failure of utility companies to deliver electricity
o the failure of telecommunications companies to provide voice and data
services
o the failure of financial institutions to process transactions and
transfer funds
o the failure of vendors to deliver materials or perform services
required by us
o the collateral effects on us of the effects of year 2000 issues on
the economy in general or on our customers in particular
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We have developed contingency plans to attempt to minimize the impact on
our systems and operations in the event any of our major customers and vendors
are seriously affected by year 2000 problems or assert claims against us for
damages resulting from the failure of installed products produced by us or our
predecessors to be year 2000 compliant. We cannot assure you that such
contingency plans will successfully mitigate any adverse effects that the year
2000 issue may have on our business, financial condition or results of
operations.
Our intellectual property is important to our business and may not be
sufficiently protected
Our ability to compete for new contracts will depend, in part, on our
ability to obtain and enforce intellectual property protection for our
technology in the United States and internationally. The failure to protect
our intellectual property could have a material adverse on our financial
condition and results of operations.
Although we hold several U.S. patents, we currently rely primarily on a
combination of trade secret and trademark laws and employee and third-party
nondisclosure agreements. We also limit access to and distribution of
proprietary information. Trade secret laws, however, afford limited protection
because they cannot be used to prevent third parties from reverse engineering
and reproducing our products. We cannot assure you that our methods for
protecting proprietary information will be adequate to prevent
misappropriation of our technology or to preclude competitors from
independently developing such technology. We cannot assure you that the
obligations to maintain the confidentiality of our proprietary technology will
prevent disclosure of such information. In addition, trade secret protection
of our proprietary technology may be unavailable or limited in some foreign
countries. Litigation may be necessary for us to defend against claims of
infringement or to protect our proprietary technology. Additionally, we cannot
assure you that third parties will not assert infringement claims against us
or, as described above, that our customers will not challenge our data rights
in our proprietary technology as constituting technology that was developed in
the performance of their contracts.
Fraudulent transfer statutes may limit your rights as a noteholder
Federal or state fraudulent transfer laws may permit a court to
o avoid all or a portion of our obligations to you
o subordinate our obligations to you to our other existing and future
indebtedness, entitling other creditors to be paid in full before
any payment is made on the notes
o take other action detrimental to you, including, in some
circumstances, invalidating the notes
If a court were to take any of those actions, we cannot assure you that
you would ever be repaid. Moreover, if the payments to some of our
stockholders made pursuant to the merger agreement with the proceeds of the
notes were determined to have violated the financial requirements in the
California corporations statute, you will not be entitled under such law to
recover these payments from either the stockholders or the members of our
board of directors that authorized these payments.
Under federal and state fraudulent transfer laws, in order to take any of
those actions, courts will typically need to find that, at the time the notes
were issued, we:
(1) issued the notes with the intent of hindering, delaying or
defrauding current or future creditors; or
(2) received less than fair consideration or reasonably equivalent
value for incurring the indebtedness represented by the notes
and
(a) were insolvent or were rendered insolvent by reason of the
issuance of the notes;
19
<PAGE>
(b) were engaged, or about to engage, in a business or
transaction for which our assets were unreasonably small;
or
(c) intended to incur, or believed, or should have believed,
we would incur, debts beyond our ability to pay as such
debts mature, as all of the foregoing terms are defined in
or interpreted under such fraudulent transfer statutes.
Different jurisdictions define "insolvency" differently. However, we
generally would be considered insolvent at the time we incurred the
indebtedness constituting the notes if:
(1) the fair market value, or fair saleable value, of our assets is
less than the amount required to pay our total existing debts
and liabilities, including the probable liability related to
contingent liabilities, as they become absolute or matured; or
(2) we were incurring debts beyond our ability to pay as such debts
mature.
We cannot assure you as to what standard a court would apply in order to
determine whether we were "insolvent" as of the date the notes were issued,
and we cannot assure you that, regardless of the method of valuation, a court
would not determine that we were insolvent on that date. Nor can we assure you
that a court would not determine, regardless of whether we were insolvent on
the date the notes were issued, that the payments constituted fraudulent
transfers on another ground.
The guarantees of the notes by our guarantor, CEI Systems, Inc., also may
be subject to review under various laws for the protection of creditors,
including federal and state fraudulent conveyance and fraudulent transfer
laws, if a bankruptcy case or a lawsuit, including in circumstances where
bankruptcy is not involved, is commenced by or on behalf of any creditor of
CEI Systems, Inc. or a representative of any such creditor. In such a case,
the analysis described above would generally apply, except that the guarantees
could also by subject to the claim that, since the guarantees were incurred
for our benefit, and only indirectly for the benefit of CEI Systems, Inc., the
obligations of CEI Systems, Inc. under the guarantees were incurred for less
than reasonably equivalent value or fair consideration. A court could void CEI
Systems, Inc.'s obligations under the guarantees, subordinate the guarantees
to other indebtedness of CEI Systems, Inc., direct that you return any amounts
paid under the guarantees to CEI Systems, Inc., or to a fund for the benefit
of its creditors, or take other action detrimental to you. In addition, the
liability of CEI Systems, Inc. under the indenture will be limited to the
amount that will result in its guarantees of the notes not constituting a
fraudulent conveyance and we cannot assure you as to what standard a court
would apply in making a determination as to what would be the maximum
liability of CEI Systems, Inc.
You may not be able to rely on forward-looking statements
The information contained in this prospectus includes some
forward-looking statements that involve a number of risks and uncertainties. A
number of factors could cause our actual results, performance, achievements or
industry results to be very different from the results, performance or
achievements expressed or implied by such forward-looking statements. These
factors include, but are not limited to:
o the competitive environment in our industry in general and in our
specific market areas
o defense spending
o economic conditions in general and in our specific market areas
o changes in or our failure to comply with federal, state, local or
foreign laws and government regulations
20
<PAGE>
o liability and other claims asserted against our company
o changes in operating strategy or development plans
o the ability to attract and retain qualified personnel
o our significant indebtedness
o changes in our acquisition and capital expenditure plans
o technology shifts away from our technological strengths
o unforeseen interruptions with our largest customers
o our ability to integrate acquired businesses
o our ability to compete internationally
o the increased working capital required if we lose our U.S. Government
small business designation
o other factors we refer to in this prospectus
In addition, forward-looking statements depend upon assumptions,
estimates and dates that may not be correct or precise and involve known and
unknown risks, uncertainties and other factors. Accordingly, a forward-looking
statement in this prospectus is not a prediction of future events or
circumstances and those future events or circumstances may not occur. Given
these uncertainties, you are warned not to rely on the forward-looking
statements. A forward-looking statement is usually identified by our use of
terminology including "believes," "expects," "may," "will," "should," "seeks,"
"pro forma," "anticipates" or "intends" or by discussions of strategy or
intentions.
-----------------------
Some of the titles and logos of our products referred to in this
prospectus are our trademarks. Each trade name, trademark or servicemark of
any other company appearing in this prospectus is the property of its holder.
21
<PAGE>
THE ACQUISITION AND FINANCING
Prior to the acquisition, Behrman Capital, L.P., Behrman Capital "B" L.P.
and Strategic Entrepreneur Fund, L.P. owned all of our outstanding shares of
Series A preferred stock. Some of our management and employees owned all of our
outstanding shares of Series B common stock.
DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities
formed WDC Acquisition Corp. and WDC Stock Acquisition Corp., both California
corporations wholly owned by DLJ Merchant Banking, for the purpose of
acquiring our company. As of March 8, 1999:
o WDC Acquisition Corp. entered into a merger agreement with us, Behrman
Capital, L.P. and related entities and some of our management
o WDC Stock Acquisition Corp. entered into two agreements as follows:
o a stock purchase and consent agreement with us and some of our
shareholders in which Behrman, some of our management and
employees provided written consents to approve the acquisition
o a stock purchase agreement with our employee stock ownership plan
The Purchase and Investment of Shares. Pursuant to an equity commitment
letter dated March 8, 1999, common stock of WDC Acquisition Corp. was
purchased by:
o DLJ Merchant Banking Partners and related entities purchased 671,238
shares for $671,238, all of which were non-voting
o Global Technology Partners, LLC or its members purchased 2,551,053
shares for $2,551,053, which have voting rights equal in the
aggregate to the sum of the shares held by Global Technology
Partners and DLJ Merchant Banking Partners and related entities, or
initially 11.564 votes per share
o affiliates of Behrman Capital, L.P. purchased 15,000,000 shares for
$15,000,000, each share had one vote
Global Technology Partners paid for its shares of WDC Acquisition Corp.
(1) partly in cash, (2) partly by cancellation of a fee payable in connection
with the acquisition and (3) partly with the proceeds of non-recourse loans
from Condor. The non-recourse loans are secured by shares of WDC Acquisition
Corp. common stock and by securities received in other equity investments
Global Technology Partners has made or will make with DLJ Merchant Banking.
Pursuant to the stock purchase agreements, WDC Stock Acquisition Corp.
purchased common stock of Condor as follows:
o 1,922,467 shares of Class A common stock at $4.57785979 per share
from:
o Condor employees who continued to own common stock of Condor,
including management, at the effectiveness of the acquisition
o Condor employees who ceased to own common stock of Condor at the
effectiveness of the acquisition
o 3,371,837 shares of Class A common stock at $4.57785979 per
share from the Condor employee stock ownership plan
22
<PAGE>
o 12,819,341 shares of Class B common stock at $0.15922254 per
share from Condor employees
Immediately before the acquisition was consummated, WDC Stock Acquisition
Corp. assigned its rights and obligations under the stock purchase agreements
to DLJ Merchant Banking and related entities, who purchased the shares.
Immediately following the purchase, DLJ Merchant Banking and related entities
held 5,294,304 shares of Class A common stock and 12,819,341 shares of Class B
common stock. After completing the purchase, DLJ Merchant Banking and related
entities held a majority of the Class A common stock of Condor. DLJ Merchant
Banking and related entities approved the merger, the merger agreement and the
related transactions.
The Merger. Under the terms of the merger agreement, WDC Acquisition
Corp. was merged with and into Condor and Condor became the surviving
corporation. Upon the effectiveness of the merger on April 15, 1999:
(1) each share of common stock of WDC Acquisition Corp. was converted
into and became a share of common stock of Condor, with the same
voting rights as previously attached to the common stock of WDC
Acquisition Corp.
(2) each share of Class A common stock and Class B common stock
purchased by DLJ Merchant Banking and related entities was converted
into and became 26,277,709 non-voting shares of common stock of
Condor, and DLJ Merchant Banking and related entities received cash
for fractional shares
(3) each share of Class A common stock and Class B common stock held by
the employees who continued to own shares was converted into and
became 6,407,891 shares of common stock of Condor, each of which has
one vote per share, and they received cash for fractional shares
(4) each share of Class A common stock no longer held by employees or
DLJ Merchant Banking and related entities was converted into the
right to receive $4.57785979 per share
(5) each share of Series A preferred stock of Condor, all of which were
held by Behrman Capital, L.P. and related entities, was converted
into the right to receive $3.47924725 per share
(6) outstanding warrants to purchase 19,148,940 shares of Class B common
stock of Condor outstanding were converted into the right to receive
$0.15922254 per share minus the exercise price of the warrant (what
we call the "warrant consideration").
We refer to the cash amounts described in (4) and (5) above collectively
as the "merger consideration."
At or immediately prior to the merger, each outstanding stock option to
purchase shares of Class B common stock of Condor was canceled and each holder
of an option, whether or not then vested or exercisable, was paid a cash
payment equal to:
(a) $0.15922254 per share multiplied by the number of shares of Class B
common stock that would have been issuable upon the exercise of such
option, reduced by
(b) the aggregate exercise price for the shares of Class B common stock
then issuable upon exercise of such option (we call such net amount
in the aggregate, the "option consideration").
In addition, the merger agreement required us to make incentive payments
limited to a maximum aggregate amount of $7.0 million to our existing
shareholders, option holders and warrantholders if we conduct a public equity
offering, sell our business or make substantial acquisitions within eight
years after the acquisition. See "Certain Relationships and Related Party
Transactions."
23
<PAGE>
The Financing. In order to
(a) fund:
o the merger consideration
o the option consideration
o the warrant consideration
o the amounts paid by the DLJ entities pursuant to the stock purchase
agreements, including the fees and expenses of employees involved in
the merger of approximately $7.1 million
o the non-recourse loans we provided to Global Technology Partners in
the amount of $1.2 million to fund the purchase by Global Technology
Partners of the shares of WDC Acquisition Corp. common stock
(b) refinance and/or retire our outstanding indebtedness; and
(c) pay related fees and expenses in connection therewith, as of April
15, 1999:
o we issued and sold the old notes in the aggregate principal amount of
$100.0 million
o we received a new equity investment in the amount of $44.5 million
o employees converted their existing shares to shares of Condor in the
amount of $6.4 million
o we used cash on our balance sheet
At the consummation of the acquisition, we entered into a $50.0 million
syndicated senior secured loan facility with a group of financial
institutions, with Bank of America National Trust & Savings Association
("BAC") as the administrative agent. At that time, we did not borrow under the
new credit facility, although $18.8 million, the amount of letters of credit
outstanding as of April 15, 1999, of the revolving credit availability was
used to provide back-to-back letters of credit for our outstanding letters of
credit held by international customers. We may use the borrowing availability
under the new credit facility to fund our working capital requirements,
subject to conditions, including the absence of any material adverse change.
We refer to the investment and purchase of shares pursuant to the equity
commitment letter and the stock purchase agreements and the related
transactions, and the consummation of the merger and the related transactions
collectively as the "acquisition".
The following table sets forth the sources and uses of funds for the
acquisition, the related financing and related fees and expenses as of April
15, 1999:
(dollars in
millions)
Sources
Notes............................................................ $ 100.0
New equity investment(1)......................................... 44.5
Rollover management equity(2).................................... 6.4
Cash on balance sheet............................................ 6.7
----------
Total Sources................................................. $ 157.6
==========
24
<PAGE>
(dollars in
millions)
Uses
Acquisition consideration........................................ $ 79.0
Rollover management equity(2).................................... 6.4
Refinance existing debt(3)....................................... 55.7
Excess cash...................................................... 6.8
Transaction fees and expenses(4)................................. 9.7
-----------
Total Uses.................................................... $ 157.6
===========
- -------------------
(1) Includes $18.2 million paid under the equity commitment letter to WDC
Acquisition Corp. and $26.3 million paid under the stock purchase
agreements to some of our previous stockholders.
(2) Rollover management equity consists of the outstanding shares of Class B
and some shares of Class A common stock held by employees who continue to
hold shares which were converted into and became 6,407,891 shares of
common stock of Condor upon consummation of the acquisition.
(3) Includes the repayment of $50.7 million of indebtedness outstanding under
the Note and Warrant Purchase Agreement dated as of November 15, 1996 and
related notes among Condor, Nomura Holding America Inc., Antares
Leveraged Capital Corp. and First Union Bank of Connecticut, shown net of
$0.7 million of unamortized debt discount related to stock warrants on
the April 15, 1999 balance sheet, and $5.0 million of Condor's
subordinated notes due December 2004.
(4) Includes transaction fees and expenses of $10.8 million less $0.7 million
of transaction fees and expenses and $0.5 million of abandoned
acquisition costs paid prior to April 15, 1999.
The acquisition enabled us to liquidate a significant portion of our initial
shareholders' investment and provided us with capital and continuing financial
support for growth and the pursuit of our acquisition strategy. It also
provided additional incentive to management and employees by offering equity
ownership.
25
<PAGE>
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes
being offered. New notes will be exchanged for old notes as described in this
prospectus on our receipt of old notes in like principal amount. We will
retire and cancel all of the old notes surrendered in exchange for the new
notes.
Our net proceeds from the sale of the old notes, after deducting expenses
of the offering, including discounts to the initial purchasers, were
approximately $96.2 million. We used the net proceeds, together with our new
equity investment and cash on our balance sheet, to fund the acquisition
consideration, to repay our existing indebtedness which had interest rates
ranging from 9.0% to 9.5% and to pay fees and expenses related to the
acquisition. The remaining net proceeds were used for general corporate
purposes and were initially temporarily invested in short-term securities.
CAPITALIZATION
The following table sets forth cash and cash equivalents and consolidated
capitalization of Condor as of June 30, 1999 that gives effect to the
acquisition and the related financing. This table should be read in
conjunction with our consolidated financial statements and the notes thereto
included elsewhere herein, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "The Acquisition and Financing."
<TABLE>
<CAPTION>
As of June
30, 1999
------------
Historical
------------
(dollars in
millions)
<S> <C>
Cash and cash equivalents.................... $ 1.9
======
Long-term debt:
New Credit Facility(1)...................... --
Notes....................................... 100.0
Total long-term debt..................... 100.0
------
Total shareholders' deficit................. (51.5)
------
Total capitalization....................... $ 48.5
======
</TABLE>
- -------------------
(1) Consists of a revolving credit facility of up to $50.0 million, under
which, as of June 30, 1999, we had approximately $46.6 million of
borrowings available (less $34.2 million in standby letters of credit),
subject to customary conditions.
26
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data of Condor
for each of the five years in the period ended December 31, 1998 is derived
from Condor's audited consolidated financial statements and the notes thereto.
The Statement of Operations Data for the years ending December 31, 1996, 1997
and 1998 and the Balance Sheet Data for the years ended December 31, 1997 and
1998 are derived from our audited financial statements included elsewhere in
this prospectus. The Statement of Operations Data for the years ending
December 31, 1994 and 1995 and the Balance Sheet Data for the years ended
December 31, 1994, 1995 and 1996 are derived from our audited financial
statements not included in this prospectus. The selected historical financial
data as of and for the six months ended June 30, 1998 and 1999 were derived
from the unaudited historical financial statements of Condor included
elsewhere in this prospectus and, in the opinion of management of Condor,
include all adjustments consisting only of normal and recurring adjustments
necessary to present fairly the financial position and results of operations
for the periods presented. The results of operations for interim periods are
not necessarily indicative of results of operations for the full year.
The selected unaudited pro forma consolidated financial data is derived
from our historical financial data and gives effect to the transactions
described in "Unaudited Pro Forma Condensed Consolidated Financial Statements"
included elsewhere in this prospectus. The selected unaudited pro forma
consolidated financial data is presented for illustrative purposes only and is
not necessarily indicative of our financial position or results of operations
if such transactions had actually occurred on such dates, and is not
necessarily indicative of our future results of operations or financial
position. The information contained in this table should be read in
conjunction with "The Acquisition and Financing," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Unaudited Pro
Forma Condensed Consolidated Financial Statements" and our consolidated
financial statements and the notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Six Months
Years Ended Year Ended Six Months Ended Ended
December 31, December 31, June 30, June 30,
----------------------------------------------------- ------------ ---------------- --------
1994 1995 1996 1997 1998 1998 1998 1999 1999
------- ------- ------- ------- ------- ------- ------ ------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Contract revenues.......... $ 41.0 $ 60.2 $ 67.5 $ 79.6 $ 101.0 $ 101.0 $ 41.0 $ 37.1 $ 37.1
Contract costs............. 26.2 38.7 43.8 53.1 61.6 61.6 23.7 21.4 21.4
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross margin............. 14.8 21.5 23.7 26.5 39.4 39.4 17.3 15.7 15.7
Technology related costs:
Research and
development............. 0.9 2.2 1.7 1.0 4.4 4.4 1.9 2.3 2.3
Amortization of
purchased technology.... -- -- -- 0.6 2.5 2.5 1.2 -- --
Write-off of in-process
technology.............. -- -- -- 8.4 -- -- -- -- --
Selling, general and
administrative........... 10.3 13.3 14.1 16.1 20.3 20.3 10.4 8.4 8.4
Other charges:
Recapitalization costs... -- -- 15.7 -- -- -- -- 8.7 --
Product line and plant
closure costs........... -- -- 5.9 -- -- -- -- 0.9 0.9
Abandoned
acquisitions costs...... -- -- -- 0.2 0.5 0.5 -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss).................. 3.6 6.0 (13.7) 0.2 11.7 11.7 3.8 (4.6) 4.2
Interest and other income..... 0.1 0.1 -- 0.1 0.3 0.2 0.1 0.2 0.2
Interest expense........... (0.6) (0.8) (1.3) (5.7) (7.7) (13.7) (3.9) (4.8) (6.7)
------- ------- ------- ------- ------- ------- ------- ------- -------
27
<PAGE>
Pro Forma
Pro Forma Six Months
Years Ended Year Ended Six Months Ended Ended
December 31, December 31, June 30, June 30,
----------------------------------------------------- ------------ ---------------- --------
1994 1995 1996 1997 1998 1998 1998 1999 1999
------- ------- ------- ------- ------- ------- ------ ------- --------
(dollars in millions)
Income (loss) before
income taxes and
extraordinary item...... 3.1 5.3 (15.0) (5.4) 4.3 (1.8) -- (9.2) (2.4)
Provision for (benefit of)
income taxes............. 0.8 1.9 (3.5) (2.2) 1.7 (0.7) -- (1.6) (1.0)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary item...... $ 2.3 3.4 (11.5) (3.2) 2.6 (1.1) -- (7.6) (1.4)
------- ------- ------- ------- ------- ------- ------- ------- -------
Extraordinary loss on
debt repurchase, net of
income tax............... (3.4) --
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).......... 2.3 3.4 (11.5) (3.2) 2.6 (1.1) -- (11.0) (1.4)
======= ======= ======= ======= ======= ======= ======= ======= =======
Other Financial Data:
EBITDA(1).................. $ 5.2 $ 8.0 $ (11.5) $ 3.0 $ 16.6 $ 16.6 6.3 (3.4) 5.4
EBITDA margin.............. 12.7% 13.3% (17.0%) 3.8% 16.4% 16.4% 15.4% (9.2%) 14.6%
Depreciation and
amortization(2).......... 1.6 1.9 2.2 2.8 4.9 4.9 2.4 1.2 1.2
Capital expenditures....... 0.6 1.6 1.4 1.7 2.5 2.5 1.4 0.7 0.7
Ratio of earnings to fixed
charges(3)............... 3.7x 5.0x -- 0.1x 1.5x 0.9x 1.0x -- --
Net Cash Provided by (used in)
Operating activities....... 2.2 6.3 (13.7) 2.4 12.1 8.4 6.6 (10.0) (12.0)
Investing activities....... (2.7) (7.3) (1.4) (21.4) (2.5) (2.5) (1.4) (2.7) (2.7)
Financing activities....... (2.6) (0.1) 16.9 15.4 (6.0) (6.0) 2.0 10.3 10.3
Certain Pro Forma Data:
Cash interest expense...... -- -- -- -- -- $ 12.9 -- -- --
Ratio of net debt to
EBITDA................... -- -- -- -- -- 5.6x -- -- --
Ratio of EBITDA to cash
interest expense......... -- -- -- -- -- 1.3x -- -- --
Ratio of EBITDA less
capital expenditures to
cash interest expense.... -- -- -- -- -- 1.1x -- -- --
Other Operating Data:
Contract awards(4)......... $ 50.4 $ 63.2 $ 77.3 $ 89.9 $ 104.2 $ 104.2 53.2 28.0 28.0
Funded backlog at end of
period(5)................ 36.6 39.6 49.4 59.7 62.9 62.9 76.2 53.8 53.8
Balance Sheet Data:
Cash and cash equivalents.. 3.5 2.3 4.2 0.7 4.3 5.0 1.9 1.9
Restricted cash(6)......... -- -- -- -- 4.0 2.9 -- --
Working capital............ 12.8 13.9 18.2 25.1 29.0 25.4 29.9 29.9
Total assets............... 25.8 32.6 50.1 64.7 67.9 64.1 74.0 74.0
Short-term borrowings..... -- -- 3.0 -- -- -- -- --
Total long-term debt
(including current
maturities)(7)........... 7.2 5.3 43.0 61.0 55.8 (55.7) 100.0 100.0
Shareholders' equity
(deficit)................ 10.6 14.7 (13.7) (15.9) (13.0) (15.6) (51.5) (51.5)
</TABLE>
- -------------------
(1) EBITDA is defined as operating income (loss) plus depreciation and
amortization. EBITDA is a key financial measure but should not be
construed as an alternative to operating income or cash flow from
operating activities as determined in accordance with generally
28
<PAGE>
accepted accounting principles. We believe EBITDA is a useful supplement
to net income (loss) and other consolidated income statement data in
understanding cash flows generated from operations that are available for
taxes, debt service and capital expenditures. However, our method of
computation may or may not be comparable to other similarly titled
measures of other companies. Our credit facility requires that we
maintain financial leverage and interest coverage ratios as well as
comply with other covenants. These covenants include restrictions on
dividends and capital expenditures. As a result of these limitations and
our debt service requirements, a substantial portion of our EBITDA is not
available for discretionary use.
(2) Reflects depreciation and amortization of plant and equipment, goodwill
and other intangible assets. Excludes $0.4 million, $0.9 million, $0.4
million and $0.4 million of amortization of deferred financing costs and
debt discounts for the years ended December 31, 1997 and 1998, and the
six months ended June 30, 1998 and 1999, respectively, as they are
recorded in interest expense.
(3) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent net income (loss) before income taxes plus fixed
charges. Fixed charges consist of (a) interest, whether expensed or
capitalized; (b) amortization of debt expense and discount or premium
relating to indebtedness, whether expensed or capitalized; and (c) that
portion of lease rental expense representative of interest, which is
deemed to be one-third of lease rental expense. For the year ended
December 31, 1996 and the six months ended June 30, 1999, earnings were
insufficient to cover fixed charges by $13.2 million and $4.1 million,
respectively.
(4) Contract awards represent the total dollar value of contract awards
received during the period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(5) Contract awards are generally subject to termination for convenience by
the customer prior to shipment. The level of backlog at any given date
during the year will be materially affected by the timing of our receipt
of contract awards and the recognition of contract revenues. See
"Business -- Backlog."
(6) Restricted cash of $4.0 million at December 31, 1998 and $2.9 million at
June 30, 1998, was used to collateralize our outstanding letters of
credit. As of June 30, 1999, $34.2 million of our new credit facility was
used to provide back-to-back letters of credit for our outstanding
letters of credit. The new credit facility currently provides enough
capacity such that these letters of credit are not required to be cash
collateralized.
(7) Total long-term debt is defined as long-term debt, including current
portion, net of unamortized discount related to stock warrants.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and our Unaudited Pro Forma Condensed
Consolidated Financial Statements, including the notes thereto, included
elsewhere in this prospectus.
This discussion contains forward-looking statements which involve risks
and uncertainties. Our actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in "Risk
Factors."
Overview
We are one of the world's leading providers of technologically advanced
signal collection and specialized electronic countermeasure products and
systems in the electronic warfare industry. We supply a complete line of
integrated systems, subsystems and products. These systems are used to
intercept, identify, locate and analyze radar signals for a variety of
military needs, including intelligence, reconnaissance, surveillance,
precision targeting, situational awareness and threat warning. Our products
and systems are used on high profile airborne, shipboard and ground based
platforms. We have established long-term relationships with a wide variety of
customers and supply our products and systems to all of the U.S. intelligence
and military services, and a number of foreign governments in countries such
as Japan, Norway, Sweden and Taiwan. We also supply the major domestic prime
defense contractors such as Lockheed Martin, Raytheon and Boeing and other
defense contractors worldwide. Our products and systems are used in the
following program categories:
o Airborne Electronic Intelligence Systems
o Airborne Electronic Support Measures Systems
o Ground and Range Systems
o Ocean Systems
o Specialized Electronic Countermeasures.
The electronic warfare market is highly fragmented, with 32 significant
industry participants, only six of whom have more than a 5% market share. In
addition, there are numerous other acquisition candidates in the electronic
warfare industry, as well as in other segments of the defense electronics
industry. In response to overall defense industry trends in the 1990s, one
component of our business strategy has been to focus on strategic
acquisitions. In recent years, we have acquired:
o the electronic warfare assets from ARGOSystems, Inc., a subsidiary
of Boeing, for a purchase price of $2.0 million plus a commission on
two specified contract awards if they are awarded in 1999 and 2000
o the Electronic Systems division of Whittaker Corporation (1997) for a
purchase price of $19.7 million (the "Whittaker Acquisition")
o the Microwave Surveillance Systems division of the Watkins-Johnson
Company (1995) for a purchase price of $5.8 million
o Electronics Support Systems, Inc. (1994) for a purchase price, net of
cash acquired, of $2.3 million
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<PAGE>
o SCOPE, Inc. (1994) for a purchase price of $0.4 million
All of these acquisitions were accounted for under the purchase
accounting method. These acquisitions provide us with opportunities to market
complementary products, expand our installed base and achieve significant cost
savings by spreading our overhead over a larger base of contracts. Since the
pricing of our domestic sole source contracts is partially based on our costs,
we expect to pass on a portion of these cost savings to our customers over
time. However, we believe this reduction in our costs will make us more price
competitive for our future contracts.
Substantially all of our products and systems are sold under multi-year
development and production programs to agencies of the U.S. Government, to
foreign government agencies or to prime contractors or subcontractors thereof.
U.S. Government contracts are awarded either on a competitive bid basis or on
a negotiated sole source procurement basis. Contracts awarded on a competitive
bid basis, which are typically development programs, involve several
competitors bidding on the same program with the contract usually being
awarded based upon such factors as price, technical program management
capabilities and performance. In order to further leverage our existing
programs, secure new programs and grow our business by developing next
generation systems, we often aggressively compete on development programs by
pursuing a low price bidding strategy. Accordingly, such development programs
are typically unprofitable or break-even after allocating overhead,
administrative and other indirect costs. From 1994 to 1998, the direct costs
associated with a development program having a contract value in excess of
$.25 million have never exceeded 100% of total contract revenues for such
program. In addition, such development programs generally provide future
opportunities for higher margin follow-on sole source business. Negotiated
sole source procurement, which comprises most of our domestic contracts, is
used if we are deemed by the customer to have developed proprietary equipment
not available from other parties or where there is a very stringent delivery
schedule. For production contracts we deliver products based on established
technologies and designs, which are nonetheless generally customized for our
customers' specifications.
Most of the contracts that we enter into are fixed price. This means that
we are exposed to cost overruns if we encounter difficulties in meeting the
contractual delivery schedule or technical specifications for our systems or
experience variances in actual costs from our estimates. Conversely, we
benefit from any cost underruns if we experience positive variances in actual
costs from our estimates or encounter less difficulties than expected in
meeting the contractual delivery schedule or technical specifications.
Revenues for long-term contracts are accounted for under the
percentage-of-completion (cost-to-cost) method. Under this method, all
contract costs are charged to operations as incurred and revenues are
recognized based on costs incurred plus the estimated contract profit margins.
These estimated contract profit margins are determined on a
contract-by-contract basis based on our estimates of total contract revenues
and cost at completion for each contract. These estimates are reviewed and
revised periodically throughout the lives of the contracts, and adjustments to
profits resulting from such revisions are recorded in the accounting period in
which the revisions are made. Losses on contracts are recorded in full as they
are identified.
Under all of our U.S. Government contracts we are allowed to charge a
portion of our costs to the customer as such costs are incurred and receive
progress payments for those billed costs. We receive the remainder of our
costs and all of our profit as we complete delivery of our products under the
contract.
Our international contracts are primarily awarded on a competitive basis
rather than sole source. We typically receive one or more advance payments
from our international customers during the initial phase of the contract,
which advances range from approximately 20% to 60% of the total contract
value. The advance payments are recorded as liabilities on our balance sheet
as customer contract advances and reduced as work is performed. We generally
provide letters of credit to guarantee our performance of the contracts. The
customer may draw down on the letters of credit if we default on the contract.
As we reach performance-based milestones negotiated in the
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contracts, the letters of credit are reduced by negotiated amounts. We receive
the remaining contract payments as we meet the remaining milestones specified
in the contract.
Subsequent Events
In January 1999, we announced a decision to close our facilities located
in Sterling, Virginia. We have recognized approximately $0.9 million of other
costs during the first quarter of 1999. This provision includes severance,
facility costs, closure costs and other potential contractual claims. We
anticipate that the closure of the facility and settlement of all significant
claims will be concluded during 1999. We expect to realize annual savings of
approximately $0.6 million beginning in the second quarter of 1999.
In June 1999, we acquired certain electronic warfare assets from
ARGOSystems, Inc., a subsidiary of Boeing, for a purchase price of $2.0
million plus a commission on two specified future contract awards, if they are
awarded in 1999 and 2000. ARGOSystems currently estimates that the commission
may aggregate up to $3.8 million. We used cash from operations to fund this
acquisition.
In April 1999, we incurred various costs and expenses that aggregated
approximately $21.5 million (pre-tax) in connection with the acquisition,
including $18.0 million of total fees and expenses. Approximately $10.9
million was due to general fees and expenses and $7.1 million was related to
fees and expenses of shareholders. Of the total fees and expenses, $10.0
million was expensed during the second quarter of 1999 and the remaining $8.0
million will be amortized over ten years, the term of the notes. In addition,
$2.0 million of deferred financing costs, $0.7 million of unamortized debt
discount related to stock warrants and $0.8 million of stock compensation
costs related to options was charged to operations during the second quarter
of 1999. As a result, we recorded pre-tax charges of $8.8 million for
recapitalization costs and $4.2 million for debt repurchase costs during the
second quarter of 1999. The costs associated with the early extinguishment of
debt has been reflected as an extraordinary item. In addition, of the total
fees and expenses, we had recorded a $0.5 million pre-tax charge during the
fourth quarter of 1998 related to abandoned acquisition costs.
Results of Operations
The following table sets forth our results of operations based on the
percentage relationship of certain items to contract revenues during the
periods shown.
<TABLE>
Year Ended December 31, Six Months Ended June 30,
---------------------------------- -------------------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Contract revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Costs and operating expenses:..................
Contract costs.............................. 64.9 66.7 61.0 57.7 57.6
----- ----- ----- ----- -----
Gross margin................................ 35.1 33.3 39.0 42.3 42.4
Technology related costs:
Research and development.................... 2.5 1.3 4.3 4.6 6.1
Amortization of purchased technology........ -- 0.8 2.5 3.0 --
Write-off of in-process technology.......... -- 10.6 -- -- --
Selling, general and administrative............ 20.9 20.1 20.1 25.4 22.6
Other charges:
Recapitalization costs...................... 23.3 -- -- -- 23.6
Product line and plant closure costs........ 8.7 -- -- -- 2.5
Abandoned acquisition costs................. -- 0.3 0.5 -- --
----- ----- ----- ----- -----
Operating income (loss)..................... (20.3) 0.2 11.6 9.3 (12.4)
Interest and other income...................... -- 0.1 0.3 0.2 0.5
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<PAGE>
Year Ended December 31, Six Months Ended June 30,
---------------------------------- -------------------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
Interest expense............................... (1.9) (7.1) (7.6) (9.5) (12.9)
----- ----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item....................... (22.2) (6.8) 4.3 -- (24.8)
Provision for (benefit of) income taxes........ (5.2) (2.8) 1.7 -- (4.3)
----- ----- ----- ----- -----
Income (loss) before extraordinary item..... (17.0) (4.0) 2.6 -- (20.5)
----- ----- ----- ----- -----
Extraordinary loss on debt purchase, net
of income tax............................ -- -- -- -- (9.1)
----- ----- ----- ----- -----
Net income (loss).............................. (17.0)% (4.0)% 2.6% -- (29.7)%
===== ===== ===== ===== =====
</TABLE>
Six months ended June 30, 1999 compared to six months ended June 30, 1998
Contract Awards
Contract awards for the six months ended June 30, 1999 were $28.0
million, compared to $53.2 million for the six months ended June 30, 1998, a
decrease of $25.2 million, or 47.4%. We typically are awarded a few
significant contracts during the course of the year and the timing of these
awards can cause significant fluctuations in the results of any one quarter or
six month period. This decline in contract awards is primarily due to the
higher than usual contract awards in the first quarter of 1998 that were
related to Shortstop Electronic Protection System and Ocean Systems as well as
a decline in contract awards for our Airborne Signals Intelligence systems.
These decreases were only partially offset by increases in Airborne Electronic
Support Measures Systems and Catalog Antenna contract awards.
During the six months ended June 30, 1998, we had completed development
of the Shortstop Electronic Protection System and received our first
production contract awards from the U.S. Army for $9.3 million. In addition,
we were awarded our first development contracts related to New Technology
Electronic Support Measures System from the Swedish Navy for an aggregate
amount of $23.9 million. We did not receive any comparable awards during the
six months ended June 30, 1999. We have recently concluded negotiations with
the U.S. Army for a follow-on Shortstop Electronic Protection System
production award. We anticipate this contract will be formalized and awarded
during the third quarter of 1999 for approximately $9 million. In addition, as
a result of Congressional approval of supplemental budget requests prompted by
U.S. military actions in Kosovo, Condor believes that the Army will exercise
some of its options for additional units under this contract during the third
or fourth quarter of 1999. The exercise of some of these options may increase
the award by approximately $9 million, although there can be no assurance that
we will obtain this contract in the time or under the terms we anticipate or
at all. During the six months ended June 30, 1999, we substantially completed
the development contracts related to our new multi-channel, multi-operator
Signals Intelligence systems and are currently in negotiations with the U.S.
Navy for our first production contract awards. We anticipate these contracts
will be awarded during the third quarter of 1999 for approximately $8 million,
although there can be no assurance that we will obtain this contract in the
time or under the terms we anticipate or at all.
The percentage of contract awards derived from international awards was
approximately 39.6 and 33.5% of the total contract awards for the six months
ended June 30, 1998 and 1999, respectively. This percentage decrease of
international awards resulted primarily from the New Technology Electronic
Support Measures System program and the significant awards that we received
from the Swedish Navy in 1998. In addition, our efforts to sell the New
Technology Electronic Support Measures System program to the Australian Navy
during the first half of 1999 were not successful.
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<PAGE>
Backlog
We had funded backlog at June 30, 1999 of $53.8 million compared to
funded backlog of $76.2 million at June 30, 1998. Approximately 52.6% and
50.8% of our backlog for 1999 and 1998, respectively, was derived from
domestic contracts. The decrease in backlog from 1998 reflects the differences
caused by the fluctuations in the timing of new contract awards.
Contract Revenues
Contract revenues for the six months ended June 30, 1999 were $37.1
million compared to $41.0 million for the six months ended June 30, 1998, a
decrease of $3.9 million, or 9.5%. The decrease in contract revenues was
primarily due to decreased contract revenues from our Airborne Signals
Intelligence and Ground and Range Systems that were substantially offset by
increases in Ocean Systems contract revenues. Historically, we report low
revenues during the first half of each year. The reduction in contract
revenues is also a reflection of the delays in contract awards in 1999. See
"--Effect of Inflation; Seasonality".
The percentage of contract revenues that were derived from sole source
contracts for the six months ended June 30, 1999 and 1998 was approximately
68.3% and 86.3%, respectively. The percentage of sole source contract revenues
declined primarily due to our focused activities on the New Technology
Electronic Support Measures Systems programs which had been subject to
competitive bidding. On an annual basis, we expect that the percentage of sole
source revenues will decline slightly from prior years. The percentage of
contract revenues that were derived from international sales for the six
months ended June 30, 1999 and 1998 was approximately 43.4% and 29.9%,
respectively.
For the six months ended June 30, 1998 and 1999, approximately 96.5% and
97.6%, respectively, of contract revenues were derived from fixed price
contracts. The remaining contracts were primarily time and material and, to a
lesser extent, cost plus contracts.
For the six months ended June 30, 1999, our largest program represented
approximately 13.9% of contract revenues and no other program represented more
than 9.5% of contract revenues for that period. By comparison, for the six
months ended June 30, 1998, our largest program represented approximately
14.3% of contract revenues and no other program represented more than 9.8% of
contract revenues for that period. These concentration percentages are higher
during any interim period due to the timing of manufacturing and delivery of
products under various contracts. On an annual basis, we expect that the
concentration percentages will be consistent with prior years.
Gross Margin
Gross margin for the six months ended June 30, 1999 was $15.7 million
compared to $17.3 million for the six months ended June 30, 1998, a decrease
of $1.6 million, or 9.2%. Gross margin as a percent of contract revenues
increased from 42.3% for the six months ended June 30, 1998 to 42.4% for the
six months ended June 30, 1999.
The percentage of contract revenues derived from development programs for
the six months ended June 30, 1998 and 1999 was approximately 10.3% and 18.2%,
respectively. The margins for the six months ended June 30, 1999 and 1998
reflect the concentration of efforts on production programs that have higher
gross margins than development programs. The development programs in 1998 had
lower gross margins than those development programs in 1999. As a result, they
had a more significant impact on gross margins in 1998. We anticipate that the
level of effort on development programs will increase throughout the year and
that gross margin as a percentage of contract revenues will decrease in the
second six months of 1999 to be consistent with prior years.
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<PAGE>
Our gross margin will continue to fluctuate in the future due to factors
inherent in the government contracting business. These factors include the
timing of the incurrence of direct costs and the leveraging of fixed overhead
costs over a greater volume of contract revenues and the mix of production and
development programs. In addition, our acquisitions may cause our gross
margins to fluctuate due to inherent differences in the cost structures of the
acquired companies and their programs and our ability to integrate these
businesses.
Research and Development
We provide our customers with high-performance, cost effective products
that are based upon state-of-the-art technology. We are committed to
maintaining leading technology through a sustained investment in new product
development as well as the enhancement of existing applications. Historically,
our technology has been developed through research and development incurred in
connection with long-term development contracts, a substantial portion of
which was effectively funded by our customers, as well as through acquisitions
and from internally funded research and development.
The aggregate expense for research and development activities for the six
months ended June 30, 1998 and 1999 is summarized as follows:
1998 1999
------ ------
(dollars in millions)
Research and development............................... $1.9 $2.3
Amortization of purchased technology................... 1.2 --
Contract-related research and development expense...... 5.2 5.4
---- ----
Total research and development activities........ 8.3 7.7
==== ====
Percent of contract revenues..................... 20.2% 20.8%
Internally funded research and development increased from $1.9 million
for the six months ended June 30, 1998 to $2.3 million for the six months
ended June 30, 1999, primarily as a result of development costs in connection
with our new New Technology Electronic Support Measures System product. The
increase in research and development expense incurred in connection with
long-term fixed price contracts, which is reflected in contract costs,
primarily relates to development of multi-channel processor systems. We
anticipate that we will continue to allocate substantial funds to research and
development activities in the near future.
Selling, General and Administrative
Selling, general and administrative expenses for the six months ended
June 30, 1999 were $8.4 million compared to $10.4 million for the six months
ended June 30, 1998, a decrease of $2.0 million, or 19.3%. Selling, general
and administrative expenses as a percentage of contract revenues declined from
25.4% for the six months ended June 30, 1998 to 22.6% for the six months ended
June 30, 1999. The dollar and percentage decrease in selling, general and
administrative expenses is primarily attributable to higher than normal
spending levels in the first six months of 1998 related to systems development
work associated with our Year 2000 compliance program.
Other Charges and Extraordinary Item
In January 1999, we announced a decision to close our facilities located
in Sterling, Virginia. We have recognized approximately $0.9 million of other
costs during the first quarter of 1999. This provision includes severance,
facility costs, closure costs and other potential contractual claims. We
anticipate that the closure of the facility and settlement of all significant
claims will be concluded during 1999. We expect to realize annual savings of
approximately $0.6 million beginning in the second quarter of 1999.
35
<PAGE>
In April 1999, we incurred various costs and expenses that aggregated
approximately $21.5 million pre-tax in connection with the acquisition,
including $18.0 million of total fees and expenses. Approximately $10.9
million was due to general fees and expenses and $7.1 million was related to
fees and expenses of shareholders. Of the total fees and expenses, $10.0
million was expensed during the second quarter of 1999 and the remaining $8.0
million will be amortized over ten years, the term of the notes. In addition,
$2.0 million of deferred financing costs, $0.7 million of unamortized debt
discount related to stock warrants and $0.8 million of stock compensation
costs related to options was charged to operations during the second quarter
of 1999.
As a result, we recorded pre-tax charges of $8.7 million for
recapitalization costs and $4.2 million of debt repurchase costs during the
second quarter of 1999. The costs associated with the early extinguishment of
debt has been reflected as an extraordinary item. In addition to these charges
of the total fees and expenses, we had recorded a $0.5 million pre-tax charge
during the fourth quarter of 1998 related to abandoned acquisition costs.
Interest Expense, Net of Interest and Other Income
Interest and other income increased to $0.2 million for the six months
ended June 30, 1999 from $0.1 million for the six months ended June 30, 1998.
This increase reflects the investment income derived from the short-term
investment of our cash balances. Interest expense for the six months ended
June 30, 1999 was $4.8 million compared to $3.9 million for the six months
ended June 30, 1998. Interest expense as a percentage of contract revenues
increased from 9.5% for the six months ended June 30, 1998 to 12.9% for the
six months ended June 30, 1999. This increase is due to the increase in our
outstanding debt as a result of the acquisition and related financing. We
expect interest expense to increase significantly as a result of the
acquisition and related financing.
Provision for (Benefit of) Income Taxes
We recorded a benefit of income taxes before extraordinary item for the six
months ended June 30, 1999 of $1.6 million compared to a benefit of $0.0 million
for the six months ended June 30, 1998. Our effective tax rate was 39.2% in the
six months ended June 30, 1998 and 17.3% in the six months ended June 30, 1999.
Our effective tax benefit rate in 1998 is higher than the federal statutory rate
primarily due to anticipated state income tax benefits. Our effective tax
benefit rate in 1999 is lower than the federal statutory tax rate primarily due
to the 1999 recapitalization costs. A substantial portion of these costs are not
deductible for tax purposes. We had substantial federal and state tax credit and
state operating loss carryforwards as of December 31, 1998. We have not
recognized the benefit of these carryforwards for financial statement purposes
because we anticipate that we will continue to be limited on the use of these
carryforwards due to alternative minimum tax and research and development tax
credit limitations. We do not anticipate that the limitations related to the
change of control contemplated by the acquisition will further restrict the
utilization of these carryforwards.
Net Income (Loss)
Our net loss increased $11.0 million to $11.0 million for the first six
months of 1999 compared to 1998. The increase is a result of the reasons
stated above.
1998 compared to 1997
Contract Awards
Contract awards for the year ended December 31, 1998 were $104.2 million,
compared to $89.9 million for the year ended December 31, 1997, an increase of
$14.3 million, or 15.9%. These results include the contract awards of the
Whittaker Acquisition in the fourth quarter of 1997, including acquired
backlog of $14.9 million. The contract awards related to the Whittaker
Electronic Systems division declined from $19.5 million in 1997 to $15.2
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<PAGE>
million in 1998. This decline in contract awards was offset by increases in
Ocean Systems and Airborne Electronic Support Measures Systems contract
awards.
As part of our business strategy, we continually invest in development
programs and proprietary research and development efforts to develop next
generation systems to grow our business. During 1998, we completed development
of Shortstop Electronic Protection System and received our first production
contract awards from the U.S. Army for $9.3 million. Since 1995, we have been
developing our next generation of electronic support measures applications
based on our patented New Technology Electronic Support Measures System.
During 1998, we were awarded our first development contracts related to New
Technology Electronic Support Measures System from the Swedish Navy for an
aggregate amount of $23.9 million. Consistent with our investment strategy in
development programs, we expect these contracts to break even after allocating
overhead, administrative and other indirect costs.
During the last five years, we have significantly expanded our activities
in the international marketplace. A substantial portion of this growth has
come from Scandinavian countries and to a lesser extent Pacific Rim countries.
The percentage of contract awards derived from international awards was
approximately 35.6% and 41.6% of the total contract awards for 1997 and 1998,
respectively. This percentage increase of international awards resulted
primarily from the New Technology Electronic Support Measures System program,
which was partially offset by declines in our international Airborne
Electronic Support Measures Systems.
We anticipate that we will continue to increase our annual contract
awards principally through expansion into new market segments that result from
our acquisition strategy and to a lesser extent from growth in current market
segments. The growth in our current market segments will continue to be
dependent upon strong customer relationships and the introduction of new high
performance and cost effective products that are based on state-of-the-art
technology.
Backlog
We had funded backlog at December 31, 1998 of $62.9 million compared to
funded backlog of $59.7 million at December 31, 1997. Approximately 56.0% and
46.2% of our backlog for 1997 and 1998, respectively, was derived from
domestic contracts. Approximately 91.4% of our backlog at December 31, 1997
was realized as contract revenues during the year ended December 31, 1998. The
increase in backlog from 1997 reflects an increase in the receipt of new
contract awards.
Contract Revenues
Contract revenues for the year ended December 31, 1998 were $101.0
million compared to $79.6 million for the year ended December 31, 1997, an
increase of $21.4 million, or 26.9%. These results include the contract
revenues of the Electronic Systems division of Whitaker Corporation. The
contract revenues from this division represented approximately $18.1 million
of the increase in contract revenues from 1997 to 1998. The additional
increase in contract revenues was primarily due to increased contract revenues
from our Ocean Systems and Airborne Electronic Support Measures Systems,
partially offset by decreases in Ground and Range Systems contract revenues.
As a result of our investments in development programs, proprietary
research and development efforts and strong customer relationships, our
products are utilized in a number of mission critical programs that have
generated significant follow-on business. Typically, as the incumbent, we are
awarded this follow-on business on a sole source basis. The percentage of
contract revenues that were derived from sole source contracts for 1997 and
1998 was approximately 78.7% and 78.1%, respectively. We believe that the
percentage of sole source contracts may decline in the future as we continue
to expand our activities in the international marketplace where the
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<PAGE>
majority of contracts are subject to competitive bidding. The percentage of
contract revenues that were derived from international sales for 1997 and 1998
was approximately 27.2% and 35.5%, respectively.
During 1997 and 1998, approximately 93.8% and 97.7%, respectively, of
contract revenues were derived from fixed price contracts. The remaining
contracts were primarily time and material and, to a lesser extent, cost plus
contracts.
We have developed a diverse program and customer base. During 1998, our
largest program represented approximately 6.6% of contract revenues and no
other program represented more than 5.6% of contract revenues for the year. By
comparison, in 1997 our largest program represented approximately 10.3% of
contract revenues and no other program represented more than 6.7% of contract
revenues for the year.
Gross Margin
Gross margin for the year ended December 31, 1998 was $39.4 million
compared to $26.5 million for the year ended December 31, 1997, an increase of
$12.9 million, or 48.7%. Gross margin as a percent of contract revenues
increased from 33.3% in 1997 to 39.0% in 1998.
The increased 1998 gross margin reflects, in part, the initial cost savings
derived from the acquisition and rationalization of the Whittaker Acquisition.
We anticipate that some of the cost savings will be passed to the U.S.
Government in 1999.
In addition to the impact of the acquisitions, the gross margin reflects
continued improvement in the leveraging of fixed overhead costs over a greater
volume of contract revenues and changes in program mix. The percentage of
contract revenues deriving from development programs for 1997 and 1998 was
approximately 23.3% and 11.6%, respectively. We believe that the percentage of
contract revenues represented by development contracts in 1998 was unusually
low and expect such contract revenues from development contracts to return to
historical levels in future years. The increased margin in 1998 reflects not
only the decreased percentage of contract revenues derived from development
programs, which are typically unprofitable or break-even after allocating
overhead, administrative and other indirect costs, but also the absence during
1998 of increased program costs we experienced during 1997 on our two largest
development programs. These increased program costs resulted from significant
upward revisions of our cost estimates for these programs, which were
partially due to our decision to incorporate more advanced software into those
systems. These programs involved significantly more complex software
development efforts than our prior programs. The 1997 gross margin percentage
was also slightly reduced by the completion of lower margin electronic
countermeasures programs by the Electronic Systems division during the
transition period immediately following the Whittaker Acquisition.
Our gross margin will continue to fluctuate in the future due to factors
inherent in the government contracting business. These factors include the
timing of the incurrence of direct costs and the leveraging of fixed overhead
costs over a greater volume of contract revenues and the mix of production and
development programs. In addition, our acquisitions may cause our gross
margins to fluctuate due to inherent differences in the cost structures of the
acquired companies and their programs and our ability to integrate these
businesses.
Research and Development
The aggregate expense for research and development activities during 1997
and 1998 is summarized as follows:
1997 1998
------ ------
(dollars in millions)
Research and development............................... $ 1.0 $ 4.4
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<PAGE>
1997 1998
------ ------
(dollars in millions)
Amortization of purchased technology................... 0.6 2.5
Write-off of in-process technology..................... 8.4 --
Contract-related research and development expense...... 7.9 10.0
----- -----
Total research and development activities ............ $17.9 $16.9
===== =====
Percent of contract revenues ......................... 22.5% 16.7%
Internally funded research and development increased from $1.0 million
for the year ended December 31, 1997 to $4.4 million for the year ended
December 31, 1998, primarily as a result of development costs in connection
with two new products, Shortstop Electronic Protection System and New
Technology Electronic Support Measures System. The amortization of purchased
technology relates to existing command and control and communication systems
acquired in connection with the Whittaker acquisition. The write-off of
in-process technology in 1997 relates to Shortstop Electronic Protection
Systems development program acquired in connection with the Whittaker
acquisition. While there had been substantial development efforts prior to the
acquisition in 1997, the technological feasibility of this program had not
been established at the time of the acquisition. Subsequent to the
acquisition, Condor continued development of the threat analysis and power
amplification features of the systems. Both of these features were critical to
successful development of the systems. These efforts were substantially
completed in the second quarter of 1998. The increase in research and
development expense incurred in connection with long-term fixed price
contracts, which is reflected in contract costs, primarily relates to
development of multi-channel processor systems. We anticipate that we will
continue to allocate substantial funds to research and development activities
in the near future.
Selling, General and Administrative
Selling, general and administrative expenses for the year ended December
31, 1998 were $20.3 million compared to $16.1 million for the year ended
December 31, 1997, an increase of $4.2 million, or 26.1%. Selling, general and
administrative expenses as a percentage of contract revenues remained constant
at 20.1% in 1997 and 1998. The dollar increase in selling, general and
administrative expenses is primarily attributable to the impact of the
Whittaker Acquisition in the fourth quarter of 1997 as well as the continued
investment in international marketing efforts.
Other Charges
In October 1998, we executed an asset purchase agreement to acquire the
assets of the Applied Technology Division ("ATD") of Litton Industries, Inc.
("Litton") for approximately $120.0 million. We conducted our due diligence
and financing efforts until January 1999. In January 1999, we allowed the
agreement to terminate due to changed conditions. For the year ended December
31, 1998, we charged approximately $0.5 million to operations for costs
incurred in connection with our evaluation of ATD.
During 1997, we executed letters of intent to acquire the assets of two
private companies. We later terminated these letters of intent based on the
results of our due diligence. As a result, we charged approximately $0.2
million to operations for costs incurred in connection with our evaluation of
these two companies.
Interest Expense, Net of Interest and Other Income
Interest and other income increased from $0.1 million in 1997 to $0.2
million in 1998. This increase reflects the investment income derived from the
short-term investment of our cash balances.
Interest expense for the year ended December 31, 1998 was $7.7 million
compared to $5.7 million for the year ended December 31, 1997. Interest
expense as a percentage of contract revenues increased from 7.1% in 1997 to
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7.6% in 1998. This increase is primarily due to the increased debt levels
resulting from the Whittaker Acquisition and to a lesser extent the working
capital required to support our internal growth. We expect interest expense to
increase significantly as a result of the acquisition and related financing.
Provision for (Benefit of) Income Taxes
Our provision for income taxes for the year ended December 31, 1998 was
$1.7 million compared to a benefit of $2.2 million of income tax benefits
accrued for the year ended December 31, 1997.
Our effective tax rate was 39.0% in 1998 and the effective benefit was
41.1% in 1997. For 1998, our effective tax rate was higher than the federal
statutory rate primarily due to state income tax provisions that exceeded the
benefit recognized for research and development tax credits. For 1997, our
effective tax rate with respect to the tax benefit was higher than the federal
statutory tax rate primarily due to the benefits recognized from state income
taxes and research and development tax credits.
We had substantial federal and state tax credits and state operating loss
carryforwards as of December 31, 1998. The benefit of these carryforwards has
not been recognized for financial statement purposes because we anticipate
that we will continue to be limited in the use of these carryforwards due to
alternative minimum tax and research and development credit limitations. As a
result, we anticipate that we will continue to have cash requirements for our
taxes. We do not anticipate that the limitations related to the change in
control contemplated by the acquisition will further restrict the utilization
of these carryforwards.
Net Income (Loss)
Our net income increased $5.8 million to $2.6 million for 1998 compared to
loss of $3.2 million in 1997. The increase is a result of the reasons stated
above.
1997 compared to 1996
Contract Awards
Contract awards for the year ended December 31, 1997 were $89.9 million,
compared to $77.3 million for the year ended December 31, 1996, an increase of
$12.6 million, or 16.3%. The growth in contract awards is primarily
attributable to the awards and acquired backlog related to the Whittaker
Acquisition, which we acquired in the fourth quarter of 1997, including
acquired backlog of $14.9 million. The growth is also due to increases in
Ground and Range Systems and Ocean Systems contract awards, partially offset
by declines in Airborne Electronic Intelligence and Electronic Support
Measures Systems contract awards.
During the last five years, we have significantly expanded our activities
in the international marketplace. The percentage of contract awards derived
from international customers was approximately 29.4% and 35.6% of the total
contract awards for 1996 and 1997, respectively.
Backlog
We had funded backlog at December 31, 1997 of $59.7 million compared to
$49.4 million at December 31, 1996. Approximately 67.7% and 56.0% of our
backlog for 1996 and 1997, respectively, represents domestic contracts.
Approximately 92.2% of our backlog at December 31, 1996 was realized as
contract revenues during the year ended December 31, 1997. The increase in
backlog from 1996 reflects an increase in the receipt of new contract awards
and backlog acquired through the Whittaker Acquisition.
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Contract Revenues
Contract revenues for the year ended December 31, 1997 were $79.6 million
compared to $67.5 million for the year ended December 31, 1996, an increase of
$12.1 million, or 18.0%. These results include the contract revenues related
to the Whittaker Acquisition, representing approximately $4.3 million of the
growth from 1996 to 1997. This growth is also attributable to increases in
Ground and Range Systems and Airborne Electronic Intelligence and Electronic
Support Measures Systems contract revenues, partially offset by a decrease in
Ocean Systems contract revenues.
As a result of prior developmental efforts, we generated significant sole
source follow-on business in 1996 and 1997. The percentage of contract
revenues that were derived from sole source contracts for 1996 and 1997 was
approximately 71.6% and 78.7%, respectively. The lower percentage of sole
source contract revenues in 1996 resulted mainly from our participation in a
larger number of competitive development contracts in 1996.
The percentage of contract revenues deriving from international sales for
1996 and 1997 was approximately 35.3% and 27.2%, respectively. This decrease
was due to typical fluctuations related to the timing of international
contract awards.
During 1996 and 1997, approximately 86.9% and 93.8%, respectively, of
contract revenues were derived from fixed price contracts. The remaining
contracts were primarily time and material and, to a lesser extent, cost plus
contracts. During 1997, our largest program represented approximately 10.3% of
contract revenues and no other program represented more than 6.7% of contract
revenues for the year. By comparison, in 1996 our largest program represented
approximately 12.3% of contract revenues and no other program represented more
than 7.5% of contract revenues for the year.
Gross Margin
Gross margin for the year ended December 31, 1997 was $26.5 million
compared to $23.7 million for the year ended December 31, 1996, an increase of
$2.8 million, or 11.8%. Gross margin as a percent of contract revenues
decreased from 35.1% in 1996 to 33.3% in 1997.
Since Condor was active in acquisitions in 1994 and 1995, the 1996 and
1997 gross margins began to reflect the pass back of these consolidation
benefits to the U.S. Government. In addition to the impact of the
acquisitions, the gross margin reflects continued improvement in the
leveraging of fixed overhead costs over a greater volume of contract revenues
and changes in program mix. The percentage of contract revenues that were
derived from programs with significant development efforts for 1996 and 1997
was approximately 42.1% and 23.3%, respectively. During 1997 and, to a lesser
extent, 1996, the improvement in gross margin due to volume increases was more
than offset by increased program costs on our two largest development
programs. These increased program costs resulted from significant upward
revisions of our cost estimates for these programs, which were partially due
to our decision to incorporate more advanced software into those systems.
These programs involved significantly more complex software development
efforts than our prior programs. The 1997 gross margin percentage was also
slightly reduced by the completion of lower margin electronic countermeasures
programs by the Electronic Systems division during the transition period
immediately following the Whittaker Acquisition.
Research and Development
The aggregate expense for research and development activities during 1996
and 1997 is summarized as follows:
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1996 1997
------ ------
(dollars in millions)
Research and development............................. $ 1.7 $ 1.0
Amortization of purchased technology................. -- 0.6
Write-off of in-process technology................... -- 8.4
Contract-related research and development expense.... 5.8 7.9
----- -----
Total research and development activities........... $ 7.5 $17.9
===== =====
Percent of contract revenues........................ 11.1% 22.5%
The amortization of purchased technology relates to existing command and
control and communication systems acquired in connection with the Whittaker
acquisition. The write-off of in-process technology in 1997 relates to the
Shortstop Electronic Protection Systems development program acquired in
connection with the Whittaker acquisition. While there had been substantial
development efforts prior to the acquisition in 1997, the technological
feasibility of this program had not been established at the time of the
acquisition. Subsequent to the acquisition, Condor continued development of
the threat analysis and power amplification features of the systems. Both of
these features were critical to successful development of the systems. These
efforts were substantially completed in the second quarter of 1998. The
increase in research and development expense incurred in connection with
long-term fixed price contracts, which is reflected in contract costs,
primarily relates to development of multi-channel processor systems. We
anticipate that we will continue to allocate substantial funds to research and
development activities in the near future.
Selling, General and Administrative
Selling, general and administrative expenses for the year ended December
31, 1997 were $16.1 million compared to $14.1 million for the year ended
December 31, 1996, an increase of $2.0 million, or 14.2%. The growth in
selling, general and administrative expenses reflects the impact of the
Whittaker Acquisition in the fourth quarter of 1997, as well as our continued
investment in international marketing efforts.
Selling, general and administrative expenses as a percentage of contract
revenues decreased from 20.9% in 1996 to 20.1% in 1997, due primarily to our
ability to achieve improved operating leverage.
Other Charges
During 1997, we executed letters of intent to acquire the assets of two
private companies. We later terminated these letters of intent based on the
results of our due diligence. As a result, we charged approximately $0.2
million to operations for costs incurred in connection with our evaluation of
these two companies.
During 1996 we consummated a recapitalization. The recapitalization
enabled us to accomplish the following goals:
o to obtain capital and continuing financial support for our growth and
pursuit of acquisitions
o to provide additional incentives to management and employees by
offering equity ownership and an opportunity to share in our future
appreciation
o to provide our shareholders an opportunity to liquidate a significant
portion of their investment
For the year ended December 31, 1996, we recorded a $15.7 million charge
to reflect $12.6 million of compensation related to the shareholder
distributions and $3.1 million in transaction costs related to the
recapitalization.
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Concurrent with the recapitalization, we exited further commercial
development of our geolocation technology to concentrate on our core
capabilities serving military markets. We incurred $5.9 million in costs
during 1996 related to the exit from this commercial development. These costs
included $3.6 million related to the write-off of our acquisition of AirWave
Technology, Inc. and $2.3 million in severance, facility costs, contractual
obligations and other potential claims. The closure of these operations and
settlement of all significant claims were concluded in 1997.
Interest Expense, Net of Interest and Other Income
Interest expense for the year ended December 31, 1997 was $5.7 million
compared to $1.3 million in 1996. Interest expense as a percentage of contract
revenues increased from 1.9% in 1996 to 7.1% in 1997, primarily due to the
increased debt levels resulting from the recapitalization.
Provision for (Benefit of) Income Taxes
Income tax benefit for the year ended December 31, 1997 was $2.2 million
compared to $3.5 million for the year ended December 31, 1996.
Our effective tax benefit rate was 23.4% in 1996 and 41.1% in 1997. For
1997, our effective tax benefit rate was higher than the federal statutory tax
rate primarily due to the benefits recognized from state income taxes and
research and development tax credits. For 1996, our effective tax benefit rate
was lower than the federal statutory rate primarily due to non-deductible costs
associated with the recapitalization and product line closure costs that
exceeded the benefits recognized from state income taxes and research and
development tax credits.
Net Income (Loss)
Our net loss increased $8.3 million to $3.2 million for 1997 compared to
a net loss of $11.5 million for 1996. The increase is a result of the reasons
stated above.
Financial Condition and Liquidity
Post-Acquisition and Financing
Following the acquisition and the related financing, our principal
sources of liquidity are cash flow from operations and borrowings under the
new credit facility. Our principal uses of cash will be debt service
requirements to service our debt described below, capital expenditures,
working capital requirements and acquisitions. We can use up to all of our
available borrowings under the new credit facility to support our letter of
credit obligations related to international contracts.
As of June 30, 1999, we had:
o total consolidated indebtedness of approximately $100.0 million
o approximately $46.6 million of borrowings available under our $50.0
million new credit facility, less $34.2 million in standby letters of
credit described above, subject to customary conditions.
The level of standby letters of credit at June 30, 1999 was unusually
high due to duplicate standby letters of credit issued during the transition
to the new credit facility. We expect the amount of the standby letters of
credit will decrease during the third quarter of 1999 to approximately $20
million.
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Our significant debt service obligations could have material consequences
to our security holders. See "Risk Factors."
The new credit facility includes a revolving credit facility of up to
$50.0 million. Loans under the new credit facility initially bear interest, at
Condor's option, at the alternate base rate plus 2.25% or the reserve adjusted
LIBOR rate plus 3.50%. We pay commitment fees at a rate equal to 1.50% per
annum on the daily average unused portion of the new credit facility.
Beginning approximately six months after the closing date of the new credit
facility, the applicable margins and commitment fees will be determined based
on the ratio of consolidated net funded debt to consolidated EBITDA (as
defined in the new credit facility) of us and our subsidiaries.
Our obligations under the new credit facility are guaranteed by all of
our existing and future domestic subsidiaries and are secured by substantially
all of our assets and the assets of our subsidiary guarantors, including a
pledge of the capital stock of all existing and future subsidiaries of Condor,
provided that no more than 65% of the voting stock of any foreign subsidiary
shall be pledged. The new credit facility contains customary covenants and
events of default.
The notes mature in 2009. Interest on the notes is payable semi-annually
in cash. The notes contain customary covenants and events of default,
including covenants that limit our ability to incur debt, pay dividends and
make investments.
We anticipate that we will spend approximately $2.5 to 2.9 million on
capital expenditures in 1999, which is generally in line with our historical
spending levels. The new credit facility contains restrictions on our ability
to make capital expenditures. Based on current estimates, management believes
that the amount of capital expenditures permitted to be made under the new
credit facility will be adequate to grow our business according to our
business strategy and to maintain the properties and businesses of our
continuing operations.
Working capital totaled $29.9 million at June 30, 1999. Management
believes that we will continue to require working capital consistent with past
experience and that current levels of working capital, together with
borrowings available under the new credit facility, will be sufficient to meet
expected liquidity needs in the near term.
We are actively considering acquisitions that complement or expand our
business or that will enable us to expand into new markets. We anticipate that
interest expense will increase substantially as a result of the acquisition
and the related financing and as a result of the financing costs associated
with future acquisitions.
Some of the acquisitions we are considering and may undertake would cause
us to lose our small business status under Standard Industrial Classification
Code 3812, for which we are eligible as a company with fewer than 750
employees. The U.S. Government provides contract set-asides for small
businesses, but we currently do not have any contract awards obtained through
set-asides. We do, however, benefit from financing advantages in that we are
allowed to bill the customer for 90% of our incurred costs as progress
payments, whereas larger businesses can bill only 75% of their costs. Given
our strategy of continuing to pursue acquisitions, we expect that we will lose
our small business status within the next two years. In addition, consummation
of the acquisition may cause us to lose our small business status if the U.S.
Government determines that employees of DLJ Merchant Banking and its
affiliates should be included in our employment figures. The loss of this
advantage will negatively impact our liquidity and increase our working
capital requirements. Based on our estimates, our working capital requirements
for 1998 would have increased by approximately $5.3 million if we had not
enjoyed this advantage during 1998.
We anticipate that our operating cash flow, together with borrowings
under the new credit facility, will be sufficient to meet our anticipated
future operating expenses, capital expenditures and debt service obligations
as they become due. However, our ability to make scheduled payments of
principal of, to pay interest on or to refinance our indebtedness and to
satisfy our other debt obligations will depend upon our future operating
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performance, which will be affected by general economic, financial, competitive,
legislative, regulatory, business and other factors beyond our control. See
"Risk Factors."
From time to time we will continue to explore additional auxiliary
financing methods and other means to lower our cost of capital which could
include stock issuance or debt financing and the application of the proceeds
therefrom to the repayment of bank debt or other indebtedness. In addition, in
connection with any future acquisitions, we may require additional funding
which may be provided in the form of additional debt or equity financing or a
combination thereof. There can be no assurance that any such additional
financing will be available to us on acceptable terms.
Historical
Our liquidity and working capital requirements depend on a number of
factors relative to the timing of production and deliveries under our U.S.
Government and international contracts. For domestic contracts we receive
regular progress payments based on our costs as they are incurred. For
international contracts we typically receive one or more advance payments
during the initial phase of the contract, which advances range from
approximately 20% to 60% of the total contract value. The advance payments are
recorded as liabilities on our balance sheet as customer contract advances and
reduced as work is performed. We generally provide letters of credit to
guarantee our performance of the contract. The customer may draw down on the
letters of credit if we default on the contract. We have never had a
significant draw down on any of our letters of credit. As we reach
performance-based milestones negotiated in the contracts, we receive payments,
offset those payments against our unbilled receivables and reduce the letters
of credit by negotiated amounts. Unbilled receivables represent the difference
between cumulative revenues recognized under the percentage-of-completion
(cost-to-cost) accounting method and the cumulative amounts billed. We receive
the remaining contract payments as we meet the remaining milestones specified
in the contract.
Working capital was $29.9 million at June 30, 1999, compared to $25.4
million at June 30, 1998. The growth in working capital was primarily due to
cash generated from operating activities.
We utilized $10.0 million in operating cash flow for the six months ended
June 30, 1999 compared to generating $6.6 million in operating cash flow for
the six months ended June 30, 1998. The level of our unbilled receivables
continues to moderate as it did in 1998. We anticipate that the relationship
between operating cash flow and operating results will approach historical
relationships during 1999. We utilized a significant amount of operating cash
in the second quarter of 1999 due to the other charges related to the
acquisition. These other charges approximated $21.5 million, and utilized
approximately $19.0 million in cash flow, after tax benefits. We generated
$12.1 million in operating cash flow during 1998 compared to $2.4 million in
1997 and the utilization of $13.7 million in operating activities in 1996. The
net cash generated by operating activities increased by $9.7 million in 1998
compared to 1997 after having increased by $16.1 million in 1997 compared to
1996. The utilization of cash in 1996 was principally due to the other charges
related to the recapitalization and product line closures. These other charges
amounted to $21.6 million, which utilized approximately $14.9 million in cash
flow, after tax benefits. In addition to the other charges, the operating cash
flow generated in 1997 and 1996 compared to 1998 is lower primarily due to the
growth in unbilled receivables described earlier. Operating cash flow is also
impacted by the growth in financing costs from 1996 to 1998. We anticipate
that the level of unbilled receivables will continue to moderate as it did in
1998 and that the relationship between operating cash flow and operating
results will return to historical relationships.
We utilized $2.7 million compared to $1.4 million in investing activities
for the six months ended June 30, 1999 and June 30, 1998, respectively, which
relate primarily to capital expenditures and the ARGOSystems transaction that
closed in the second quarter of 1999. There were not any significant capital
commitments at June 30, 1999. We utilized $2.5 million in investing activities
in 1998 compared to $21.4 million in 1997 and $1.4 million in 1996. The
investing levels primarily change from year to year as the result of spending
on acquisitions.
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The increase in 1997 primarily relates to the Whittaker Acquisition. Capital
expenditures were approximately $1.4 million, $1.7 million and $2.5 million in
fiscal 1996, 1997 and 1998, respectively. We continually monitor our capital
spending in relation to current and anticipated business needs. Our operations
typically do not require large capital expenditures, and we anticipate that
capital spending will remain relatively consistent except for requirements
related to acquisitions.
Cash provided by financing activities was $10.3 million for the six
months ended June 30, 1999, compared to cash provided by financing activities
of $2.0 million for the six months ended June 30, 1998. The cash provided by
financing transactions in the first six months of 1999 is primarily related to
the acquisition and was partially offset by reductions in the restricted cash
needed to support our letter of credit obligations and the reduction in
customer advances. The cash provided by financing activities in 1998 is
primarily related to increases in our customer advances and was partially used
to repay long-term debt. We utilized $6.0 million in financing activities in
1998, while cash provided by financing activities was $15.4 million in 1997
and $16.9 million in 1996. The utilization of cash in 1998 is primarily
related to the retirement of long term debt. During 1997, we repaid our cash
borrowings under a revolving note facility and we are currently using that
facility solely for letters of credit. The cash provided by financing
activities in 1997 and 1996 was primarily related to the financing of
acquisitions and the recapitalization.
Effect of Inflation; Seasonality
We do not believe that inflation has had a material impact on our
financial position or results of operations.
Our operating performance frequently varies significantly from period to
period, depending on the contract type, export sales and, in particular, the
award or expiration of one or more contracts and the timing of manufacturing
and delivery of products under such contracts. As a result, period-to-period
comparisons may show substantial increases and decreases in contract revenues
which are not necessarily representative of the underlying business activity
and results for any given period, and may not be indicative of longer term
results.
Our business is seasonal, in part, as a result of U.S. Government
spending patterns, with most U.S. Government contract awards being received in
the third and fourth quarters. The timing of the receipt of domestic awards
has a corresponding impact on the timing of contract performance and contract
revenues. There is not a significant seasonality trend in international
contract awards. During 1996, 1997 and 1998, an average of 61.5% of contract
revenues, before cost savings from plant closure, was generated in the third
and fourth quarters, in each case with significantly greater portions in the
fourth quarter.
Year 2000 Compliance
The year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. Thus, as the turn of
the century approaches, computer programs may be unable to distinguish between
the year 1900 and the year 2000. The inability to recognize or properly treat
the year 2000 may cause computer systems to process critical data incorrectly.
During 1997, we implemented a year 2000 compliance plan to assess our year
2000 risks, update our internal hardware and software systems and assess
whether any substantial issues exist concerning products sold to customers.
Our compliance plan is now substantially complete and cost a total of
approximately $1.7 million as of the year ended December 31, 1998. We expect
to spend an additional $0.2 million in 1999. We believe that our internal
information systems and infrastructure are currently year 2000 compliant. We
have surveyed all of our vendors regarding their compliance efforts. In
addition to these surveys, we have also received certification of year 2000
compliance from all of our major software vendors. We have also evaluated our
systems and products, including some older systems sold by our predecessors.
This evaluation has included testing that we have performed independently or
in conjunction with our customers. Our systems and products do not operate in
a time sensitive
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environment; as a result, we believe that any failure of such equipment to be
year 2000 compliant will not have any material adverse effect on the operation
of such equipment for its intended purpose.
We have obtained written assurances from our major vendors and software
suppliers as to their year 2000 compliance. We also performed tests on some of
our systems with a few of our customers. This testing may have involved
testing the client's entire system to ensure year 2000 compliance with the
systems we provided. However, we cannot assure you as to the extent our major
customers and vendors may be affected by year 2000 issues that may require
commitment of significant resources and may cause disruptions in the
customers' and vendors' businesses. Moreover, year 2000 issues present a
number of risks that are beyond our reasonable control.
We have developed contingency plans to attempt to minimize the impact on
our systems and operations in the event our major customers and vendors are
seriously affected by year 2000 problems or assert claims against us for
damages resulting from the failure of installed products produced by us or our
predecessors to be year 2000 compliant. There can be no assurance that such
contingency plans will successfully mitigate any adverse effects that the year
2000 issue may have on our business, financial condition or results of
operations.
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BUSINESS
Overview
We are one of the world's leading providers of technologically advanced
signal collection and specialized electronic countermeasure products and
systems in the electronic warfare industry. We supply a complete line of
integrated systems, subsystems and products. These systems are used to
intercept, identify, locate and analyze radar signals for a variety of
military needs, including intelligence, reconnaissance, surveillance,
precision targeting, situational awareness and threat warning. Our systems
provide critical information in support of intelligence collection, tactical
operations and the protection of personnel and other high value military
assets. For the year ended December 31, 1998, we generated contract revenues,
EBITDA and net income of $101.0 million, $16.6 million and $2.6 million,
respectively. In addition, our funded backlog at December 31, 1998 was $62.9
million.
We have established long-term relationships with a wide variety of
customers and supply our products and systems to all of the U.S. intelligence
and military services, and a number of foreign governments in countries such
as Japan, Norway, Sweden and Taiwan. We also supply the major domestic prime
defense contractors such as Lockheed Martin, Raytheon and Boeing and other
defense contractors worldwide. Our products and systems are used on high
profile airborne, shipboard and ground based platforms, including:
o the U.S. Air Force's B-52H bomber, RC-135 reconnaissance aircraft and
Special Operations C-130 aircraft
o U.S. Navy, Japanese and Norwegian P-3 aircraft
o the U.S. Army's RC-12 Guardrail reconnaissance aircraft and EH-60
Blackhawk helicopters
o the U.S. Navy's Aegis class ships and the Los Angeles class and New
Attack Submarines
o the Swedish Navy's stealth ships
o the U.S. Marine Corps' Mobile Electronic Warfare Support Systems
o the U.S. Army's Shortstop Electronic Protection System Program.
Approximately 78.1% of our contract revenues for the year ended December
31, 1998 was derived from sole source business. Sole source business means
that our customers did not obtain bids from other competitors before awarding
the contract to us. Our customers are typically required to justify not
obtaining at least three bids for most contract awards. That justification may
include such considerations as superior product design and technology, quick
response time and other unique capabilities. Our ability to capture this
sole-source business is principally as a result of our strategies of taking
steps to retain proprietary rights to our superior products and technologies
and aggressively bidding on competitive development programs, as well as our
large installed base of products. Our plan is to further secure our strong
market positions and grow our business by developing next generation and
complementary products and systems and by selectively acquiring businesses
that will expand our capabilities.
Over the last five years, we have spent a total of approximately $53.1
million on research and development projects, including research and
development purchased through acquisitions, to maintain and enhance our
competitive position within the electronic warfare market. Approximately 59.3%
of this spending was incurred in connection with long-term development
contracts, a substantial portion of which was effectively funded by our
customers. We also form strategic alliances with other industry participants
to maximize the potential for success by sharing expertise to minimize risk
and costs associated with developing new technology. We have pursued a
market-driven research and development strategy which focuses on identifying a
customer's needs and developing
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cost-effective solutions that we believe will ultimately generate long-term
production contracts, derivative products, proprietary upgrades and
significant recurring high margin spare parts revenue.
In addition, we have enhanced our market position by opportunistically
acquiring and integrating four businesses during the past five years. These
acquisitions have broadened our technological capabilities and product
offerings and have strengthened our ability to offer fully integrated
electronic warfare systems to meet the growing needs of our domestic and
international customers. For example, our acquisition of Whittaker Electronic
Systems in 1997 and ArgoSystems in 1999 expanded our presence into
complementary markets, including electronic countermeasures and command and
control and communications systems.
The Electronic Warfare Industry
Overview
The electronic warfare industry, which includes virtually all
defense-related products and systems that permit gathering, analyzing and
countering electronically generated signals, is a $4.8 billion industry. The
electronic warfare industry is composed of four major areas: signals
intelligence, electronic support measures, electronic countermeasures and
threat warning. We primarily compete in the niche electronic intelligence
segment, a subcategory of signals intelligence, and the electronic support
measures segment of the industry with secondary capabilities in the electronic
countermeasures segment. Signals intelligence refers to the detailed gathering
and analysis of electronic signals to assess technical capabilities and map
locations in an area of interest. electronic intelligence systems focus on
radar signal types, providing sophisticated semi-automatic measurement,
collection and classification of signal transmission and location analysis
from target radar equipment. Electronic support measures systems focus on
rapid real-time assessment of the entire radar signal environment by gathering
and analyzing target radar signals to help an operator determine the precise
nature, location and classification of all radar signals being emitted in an
area of interest. Electronic countermeasures systems transmit radio frequency
signals to deceive, decoy or jam signal transmissions associated with threats.
Our management believes that electronic warfare has become a critical
component of national defense spending for military organizations worldwide.
As was demonstrated in Operation Desert Storm, the ability to understand and
control the electronic signal environment is essential to dominance of the
battlespace in modern warfare. As a result, there has been an increasing
demand worldwide for electronic warfare systems which can support intelligence
collection, precision targeting, tactical operations and the protection of
personnel and other high value military assets. In addition to this trend,
older technology in the international installed base has created incremental
demand overseas for advanced and proven electronic warfare products and
systems.
According to Frost & Sullivan, a leading defense industry expert, the
worldwide electronic warfare market is projected to grow from an estimated
$4.8 billion in 1998 to an estimated $6.9 billion in 2005, representing a
compound annual growth rate of 5.3%. In addition, the market niches in which
we compete, which include electronic warfare excluding fighter/attack and
rotary-wing aircraft, are forecasted by Frost & Sullivan to grow worldwide
from an estimated $848 million in 1998 to an estimated $1.3 billion in 2005, a
compound annual growth rate of 6.8%. Our market niches are projected to grow
domestically from an estimated $183 million in 1998 to an estimated $321
million in 2005, a compound annual growth rate of 8.4%.
Industry Trends
We believe that several key trends affecting the electronic intelligence
and electronic support measures segments of the electronics warfare market
will benefit us, including:
Increasing Defense Spending on Electronic Warfare Modernization. Spending
on electronic warfare equipment is anticipated to grow over the next 10 years
as governments increasingly focus on installing the most
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advanced electronic warfare capabilities on various military platforms.
Management believes that the value of advanced electronic warfare capabilities
has been demonstrated in each of the recent conflicts around the world,
including the Persian Gulf War and the peacekeeping operations in Bosnia and
Kosovo. Based on this field experience, governments are increasingly focusing
their defense spending on electronic warfare technology for new military
platforms and upgrades of existing platforms. Over the past two years, we have
been awarded contracts on almost all of the major new electronic intelligence
and electronic support measures development programs.
Emphasis on "Lifesaving" Technologies. As the overall military force
structure has decreased over the past 10 years, governments have sought to
protect their remaining platforms and reduced military forces by emphasizing
"lifesaving" technologies. We have recently developed two technologies to
address this industry trend. Our Non-Cooperative Target Recognition technology
helps prevent fratricide by identifying radar intercepts of airborne targets
as friendly or hostile. In addition, our Shortstop Electronic Protection
System protects soldiers and other high value military assets by creating an
electronic umbrella over the battlefield that pre-detonates proximity fuses on
incoming artillery and mortar rounds. Proximity fuses are fuses that are set
to detonate upon reaching a preset distance from the surface. This feature
dramatically increases the effectiveness of the munitions against ground
troops and other high value military assets by increasing the area over which
shrapnel is dispersed. The principal types of proximity fused munitions are
mortar and artillery shells.
Greater Demand for Non Development Items and Commercial Off-the-Shelf
Solutions. As the U.S. Government has reduced its overall defense spending in
recent years, the government has focused on controlling costs through the
increasing use of non-development items, which are products previously built
for a military specification which can also be used in other systems without
new engineering, and commercial off-the-shelf solutions, which are commercial
products that can be adopted with few if any changes, thereby reducing
development costs. Our overall strategy emphasizes low cost production, the
use of existing Condor-proprietary designs where possible, and the use of
commercial components in order to maximize our ability to win new contract
awards and generate profitability. We also create modular designs with
reusable hardware and software for multiple applications.
Shift from "Black Box" Procurement to Integrated Systems. In connection
with the U.S. Government's recent emphasis on controlling program costs, the
responsibility for obtaining critical subsystems has shifted to the major
platform prime contractors. Management believes that the prime contractors
have increased the outsourcing of subsystem manufacturing and systems
integration to smaller subcontractors such as us in order to limit the prime
manufacturer's risks and costs. We have successfully addressed this industry
trend by increasing our systems integration capability through acquisitions,
internal developments and offering integrated electronic intelligence and
electronic support measures systems to prime contractors and government
agencies.
Continuing Consolidation Among Electronic Warfare Subcontractors.
Although industry observers have concluded that defense industry consolidation
among major prime contractors, such as Lockheed Martin, Boeing and Raytheon,
is substantially complete, management believes that there is significant
consolidation opportunity in the second tier of defense contractors, such as
the electronic warfare segment of the defense electronics industry. The
electronic warfare market is fragmented, with approximately 32 significant
industry participants, only six of whom have more than a 5% market share. The
top three competitors, GEC-Marconi, Raytheon E-Systems and Lockheed Martin,
hold a collective 30% market share. Management believes that economies of
scale and the opportunity to acquire synergistic technologies and enter new
markets will drive the consolidation trend among second and third tier
electronic warfare suppliers.
Competitive Strengths
We believe that we are well positioned to take advantage of the current
trends and expected growth in the electronic warfare industry as a result of
the following competitive strengths:
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<PAGE>
Leading Position in Niche Markets. We have successfully established
strong positions in several specialized niches in the electronic warfare
industry. We are recognized worldwide for our superior product designs and
technology, quality workmanship, responsive customer support and overall
commitment to customer satisfaction. We are the sole source supplier of
turnkey systems to a number of nationally significant electronic intelligence
and electronic support measures programs in the U.S., including the U.S. Air
Force's RC-135 reconnaissance electronic intelligence program, the U.S. Navy's
Anti-Surface Warfare Improvement electronic support measures program and the
New Attack Submarine electronic support measures program. We believe we are
the world's largest supplier of broadband microwave receivers for electronic
intelligence and electronic support measures applications. In addition, we are
the only manufacturer of Shortstop Electronic Protection System, a specialized
electronic countermeasures system which creates an electronic umbrella over a
battlefield to protect soldiers and military assets by predetonating proximity
fuses on incoming artillery and mortar rounds.
Superior Products and Technologies. Our electronic intelligence,
electronic support measures and specialized electronic countermeasures systems
are leading edge, innovative, reliable, cost effective and primarily based on
proprietary technology which management believes will help protect our
numerous sole source positions. Our strategy focuses on identifying customer
needs and developing cost-effective solutions that will generate near-term
business and position us to benefit from spares, repairs, proprietary upgrades
and derivative product opportunities over the long term. We take steps to
protect our proprietary technologies by seeking to maintain ownership of data
rights for key elements of almost all of our products and anticipating future
upgrades as new technologies become available. We also design our products to
fulfill the requirements of various platform types, which significantly
decreases our costs related to development, production and, most importantly,
total life cycle support. We have developed a number of advanced technologies
to secure our leading position within the electronic intelligence, electronic
support measures and specialized electronic countermeasures markets. Some of
our key technologies include:
o Special Signal Processing provides unique emitter identification
capabilities. This refers to the ability of the hardware, software and
algorithms we developed to digitally process radar and other non-
communication signals to precisely measure and identify the source of
the emissions
o New Technology Electronic Support Measures System, which offers
affordable, high performance electronic support measures systems for
small to medium sized ships and submarines
o Multi-Channel/Multi-Operator Electronic Intelligence, which features
modular system architecture and advanced electronic intelligence
signal processing
o Shortstop Electronic Protection System, which is a unique "lifesaving"
technology offering protection against proximity-fused munitions on
the battlefield
Long-Standing Customer Relationships. We have established numerous
long-term relationships with the U.S. intelligence agencies and military
services, the domestic prime defense contractors, other defense contractors
and several foreign governments. We have been a key supplier of electronic
warfare products and systems to the U.S. Navy since 1986, including working on
the EP-3 reconnaissance aircraft program. We have also developed strong
relationships with the three major domestic prime contractors, Lockheed
Martin, Raytheon and Boeing. For example, we have been involved with the U.S.
Air Force's RC-135 program through Raytheon since 1988. Our other significant
domestic and international defense contractor customers include Marconi
Electronic Systems, TRW, Celsius Tech Naval Systems, Sumitomo and Racal
Defense Systems. In addition, we have developed strong relationships with a
number of foreign governments in countries such as Japan, Norway, Sweden and
Taiwan. For example, we have secured business from the government of Taiwan
since our founding in 1980, and we have provided our products and systems to
the government of Norway since 1985.
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<PAGE>
Diversified Revenue Base. We have significantly expanded our sales and
marketing efforts in recent years to obtain a more balanced mix between
domestic and international business across a greater number of customers and
programs. Approximately 41.6% of our total contract awards for the year ended
December 31, 1998 was derived from international programs. During 1998, we
participated in over 35 programs, of which our largest program represented
approximately 6.6% of contract revenues and no other program represented more
than 5.6% of contract revenues for the year. We believe our large installed
product base of proven equipment in use by the U.S. Government and our strong
relationships with certain foreign governments provide significant
opportunities for future growth and further diversification of our program and
customer base.
Strong Historical Financial Performance and Predictable Cash Flow. We
have generated significant growth in revenue and profitability. Our contract
revenues have increased from $41.0 million in 1994 to $101.0 million in 1998,
a compound annual growth rate of 25.3%. Our EBITDA has grown from $5.2 million
in 1994 to $16.6 million in 1998, a compound annual growth rate of 33.6%. In
addition, we have increased EBITDA margin from 12.7% in 1994 to 16.4% in 1998
through cost reductions, productivity enhancements, leveraging of fixed costs
and successfully integrating four strategic acquisitions. Our net income has
increased from $2.3 million in 1994 to $2.6 million in 1998, a compound annual
growth rate of 3.1%. Our funded backlog has grown from $36.7 million at
December 31, 1994 to $62.9 million at December 31, 1998, a compound annual
growth rate of 14.5%.
Without giving effect to our four acquisitions, contract revenues would
have increased from $36.7 million in 1994 to $72.2 million in 1998, a
compounded annual growth rate of 18.4%. We have integrated three of these
acquisitions into existing facilities and have not determined the EBITDA or
net income attributable solely to these acquisitions. However, we believe that
these acquisitions have provided incremental improvement in our EBITDA margin
and net income through cost reductions, productivity enhancements and
increased leveraging of our fixed costs.
Historically, we have enjoyed predictable cash flow due to our strong
funded backlog position. For example, over the last three years approximately
90% of the backlog at the beginning of each year became contract revenues in
the following year.
Experienced Management Team. Our senior management team has extensive
experience in the defense industry, with an average tenure of over ten years
at Condor and over 24 years in the industry. Our senior management team has
successfully transformed Condor from a supplier of electronic warfare products
to a leading supplier of integrated electronic intelligence/electronic support
measures systems. When we commenced operations in the early 1980s we initially
provided individual pieces of custom hardware that were primarily used by the
intelligence agencies in covert operations. Our management team has since
evolved our product lines from the sale of the individual pieces of custom
hardware to integrated electronic intelligence/electronic support measures
systems. These systems typically incorporate operator workstations, receivers,
signal processors, digitizers, demodulators, R F switching units, antennas and
signal analysis software to create a custom system configuration to meet a
customer's specific requirements.
In addition, the senior management team, led by our chief executive
officer Robert Young, has successfully grown the business through the
declining defense budgets of the 1990s, secured our current strong market
positions, integrated four strategic acquisitions and positioned us for growth
for the future.
Acquisition History
Recognizing the inevitable consolidation of the U.S. defense supplier
base, management embarked on a strategy in the early 1990s to secure our
position in the electronic warfare market by selectively acquiring businesses
that would strengthen our market position and enable us to provide fully
integrated systems to our customers. Since that time, we have successfully
acquired and integrated four businesses. The following table sets forth
information concerning our recent acquisitions.
52
<PAGE>
<TABLE>
<CAPTION>
Date of Purchase
Transaction(1) Target Principal Products and Technologies Price(2)
- --------------- ------ ----------------------------------- ----------
(dollars in
millions)
<S> <C> <C> <C>
October 1997 Whittaker Electronic Systems Shortstop Electronic Protection System and $19.7
command and control and communication products
May 1995 Watkins-Johnson Microwave Microwave antenna, receiver and
Surveillance processor products 5.8
April 1994 Electronic Support Systems Signal processing capabilities 2.3
March 1994 Scope, Inc. Non-Cooperative Target Recognition and 0.4
Special Signals Processing
June 1999 Argo Systems, Inc. Signal collection and electronic countermeasure 2.0
products
</TABLE>
- -------------------
(1) Excludes the $3.6 million acquisition of AirWave Technology, Inc. in 1996
that had been intended to enable us to extend our geolocation technology
to commercial uses. In connection with our 1996 recapitalization, we
renewed focus on our core electronic warfare business and terminated our
commercial application efforts. See Note 18 to our Consolidated Financial
Statements.
(2) The purchase price of ArgoSystems does not include a commission on two
specified future contract awards if they are awarded in 1999 and 2000.
ArgoSystems currently estimates that the commission may aggregate up to
$3.8 million. The purchase price related to the acquisition of
Watkins-Johnson excludes billed receivables and accounts payable in the
net amount of $1.2 million. In connection with the purchase of Whittaker
Electronic Systems, the seller retained current liabilities of
approximately $3.0 million. In addition, approximately $4.5 million of
the purchase price was allocated to an unbilled receivable related to a
specific program for which the seller had completed substantially all of
the work under the contract.
Management's proven track record of identifying high-quality acquisition
targets and successfully integrating acquired businesses has enabled us to
strengthen our market position, gain access to an existing installed product
base, improve profitability, and expand our capabilities to become a supplier
of fully integrated electronic intelligence/electronic support measures
systems. Management believes that the following factors will lead to numerous
additional attractive acquisition opportunities:
o fragmentation of the electronic warfare supplier base
o demonstrable consolidation economics
o lack of liquidity for many small to medium size defense electronics
companies
o increasing competition for new business
o continued customer pressures for larger integrated suppliers or one
stop shopping
o limited access to capital for development expenditures
Management has identified numerous prospective acquisition candidates and
maintains active dialogue with many of these parties.
Business Strategy
Our principal strategy is to strengthen and expand our strong positions
in niche segments of the electronic warfare industry. We seek to achieve our
objectives while maintaining a balance between domestic and international
business. Specifically, our business strategy combines the following elements:
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<PAGE>
Continue Market-Driven Product Investment Strategy. We intend to continue
our proven strategy of aggressively bidding on development programs that
provide opportunities for sole source, follow-on production contracts or new
products and capabilities. This strategy is often coupled with alliances with
other companies in the industry to expand our access to technologies and
markets. In addition, substantially all of our products are based on a modular
"open architecture" design, which allows us to leverage our existing
"standardized" products and offer significant value to our customers. For
example, we have successfully leveraged an existing electronic
intelligence/electronic support measures system used for the U.S. Navy's
reconnaissance aircraft fleet to win several contract awards to supply similar
electronic intelligence/electronic support measures systems for the New Attack
Submarine and the upgrade of its existing Los Angeles class submarines.
Capitalize on Incumbent Sole Source Position on Key Programs.
Approximately 78.1% of our contract revenues for the year ended December 31,
1998 was derived from sole source business. Our major sole source programs
include:
o the U.S. Air Force's B-52H bomber, RC-135 reconnaissance aircraft and
Special Operations C-130 aircraft
o U.S. Navy, Japanese and Norwegian P-3 aircraft
o the U.S. Army's RC-12 Guardrail reconnaissance aircraft and EH-60
Blackhawk helicopters
o the U.S. Navy's Aegis class ships and the Los Angeles class and New
Attack Submarines
o the U.S. Marine Corps' Mobile Electronic Warfare Support Systems
o the U.S. Army's Shortstop Electronic Protection System program
These programs have provided sustained production, high margin support
business, including spares, repairs, test equipment and training, and
significant upgrade and derivative product opportunities. In addition, we
intend to leverage these "core" sole source programs to offer cost-effective
product solutions for other domestic and international programs.
Broaden International Presence. The expanding global market for
electronic warfare systems offers us significant growth opportunities, and we
believe our extensive proven installed base of products and systems in the
U.S. and our strong relationships with several foreign governments and
agencies have positioned us to capitalize on existing and new opportunities.
We are also able to leverage our proven core domestic products across a number
of international programs. Our international marketing efforts are focused
primarily on countries which we believe will generate long-term business at
attractive margins. From 1994 to 1998, our international contract revenues
grew from $5.9 million, or 14.4% of contract revenues, to $35.8 million, or
35.5% of contract revenues, respectively. We have also expanded the number of
our major international programs from eight in 1994 to 14 in 1998. We believe
that the international arena offers significant growth opportunities as
countries continue to reduce overall defense spending and possess older
technology which will require replacements or upgrades, each of which
magnifies the importance of sophisticated electronic warfare systems.
Pursue Additional Strategic Acquisitions. The electronic warfare market
is highly fragmented, with 32 significant industry participants, only six of
whom have more than a 5% market share. In addition, there are numerous other
acquisition candidates in the electronic warfare industry, as well as in other
segments of the defense electronics industry. Management believes that
economies of scale and the opportunity to acquire synergistic technologies and
enter new markets will drive the consolidation trend among second and third
tier electronic warfare suppliers and provide numerous additional attractive
acquisition opportunities for us. We pursue a targeted acquisition strategy
which focuses on those companies that offer strategic value such as economies
of scale, product
54
<PAGE>
line extensions, access to a large and attractive installed product base, new
customer relationships or technology/market synergies. We are continually
engaged in discussions with potential acquisition candidates and have
identified a number of potential future acquisition opportunities. We recently
completed the purchase of the electronic warfare assets of ARGOSystems for a
purchase price of approximately $2.0 million plus a commission on two
specified future contract awards, if they are awarded in 1999 and 2000.
ARGOSystems currently estimates that the commissions may aggregate up to $3.8
million. We used cash from operations to fund this acquisition.
In addition, we believe that our association with Global Technology
Partners, LLC, one of our equity investors, will assist us in identifying
attractive acquisition candidates. Global Technology Partners is a specialized
group of professionals with extensive private and public sector experience
which has a strategic partnership with DLJ Merchant Banking Partners II, L.P.
to invest in technology, defense, aerospace and related businesses. Global
Technology Partners is comprised of five former recent officials in the
Department of Defense and two retired senior executives from the United
Technologies Corporation. The seven founding partners of Global Technology
Partners are:
o Dr. William J. Perry, former Secretary of Defense
o Dr. John M. Deutch, former Undersecretary of Energy and former
Director of Central Intelligence
o Dr. John P. White, former Deputy Secretary of Defense
o Dr. Paul G. Kaminski, former Undersecretary of Defense
o Dr. Ashton B. Carter, former Assistant Secretary of Defense
o Dr. Robert J. Hermann, former Senior Vice President for Science and
Technology at United Technologies and also former head of the
National Reconnaissance Office
o Irving B. Yoskowitz, former Executive Vice President and General
Counsel of United Technologies.
Drs. Kaminiski and Hermann are members of our board of directors.
Maintain and Enhance Customer Service Orientation. Responsive customer
service is critical to maintaining and developing sole source or strong
competitive positions on existing programs and positioning us for follow-on
business. We have a dedicated customer service organization which focuses
proactively on meeting our customers' needs. In addition, our marketing and
business area teams are organized around key customer groups, and we appoint
program managers to monitor the life cycle of a particular program to
completion. We also maintain a continuous improvement program focused on
quality management of the customer service organizations and processes.
Program Categories
We are one of the world's leading suppliers of electronic intelligence
and electronic support measures products and systems. Management believes that
the reliability, superior capabilities and cost-competitiveness of our systems
and products will protect our numerous sole source positions. We further
solidify our competitive position by consistently upgrading our product
offerings and developing new, innovative, state-of-the-art products that meet
our customers' specific operational requirements.
Our products and systems are used in the following program categories:
o Airborne Electronic Intelligence Systems
55
<PAGE>
o Airborne Electronic Support Measures Systems
o Ground and Range Systems
o Ocean Systems
o Specialized Electronic Countermeasures Systems
In addition, we provide customer support through recurring spares and
repairs work and sales of our broad line of antennas that are not related to
specific programs. Within each of these program categories, we participate on
numerous significant programs.
Our Airborne Electronic Intelligence Systems are highly specialized and
technologically advanced systems designed to intercept, identify, locate and
perform detailed analysis on radar signals. These systems feature high
sensitivity reception, precision measurement and extensive signal analysis
capabilities. Products include a variety of antennas, receivers, processors
and electronic intelligence subsystems. Key programs include:
o the U.S. Air Force's RC-135 reconnaissance aircraft
o the U.S. Navy's EP-3 reconnaissance aircraft
o the U.S. Army's RC-12 Guardrail Common Sensor electronic intelligence
systems
For the year ended December 31, 1998, the contract revenues for this
program category were $23.2 million and funded backlog at December 31, 1998
was $2.0 million.
Our Airborne Electronic Support Measures Systems perform a combination of
situational awareness, sensor cueing and threat warning functions against
advanced radar systems. These modern electronic support measures systems
provide rapid response and are characterized by the ability to operate
instantaneously over a full 360-degree field of view and over a wide-open
range of frequencies. Our electronic support measures systems also incorporate
many of the precision measurement capabilities of our electronic intelligence
systems for improved performance in today's increasingly complex radar signal
environments. For the year ended December 31, 1998, the contract revenues for
this program category were $14.8 million and funded backlog at December 31,
1998 was $15.4 million. Key programs include:
o the U.S. Air Force's B-52H bomber and AC-130/MC-130 electronic
support measures programs
o the U.S. Navy's P-3C electronic support measures upgrade program
Our Ground and Range Systems program category provides electronic
intelligence and electronic support measures products and systems for ground
mobile and fixed platforms, as well as some helicopter platforms. For the year
ended December 31, 1998, the contract revenues for this program category were
$9.6 million and funded backlog at December 31, 1998 was $2.5 million. Key
programs include:
o the U.S. Marine Corps' Mobile electronic warfare Support System
o the White Sands Missile Range Frequency Surveillance System
o Canada's TRILS light armored vehicles
56
<PAGE>
Our Ocean Systems program category provides electronic intelligence and
electronic support measures products and systems for use on surface and
subsurface vessels. Over the last two years, we have been awarded significant
roles on all of the new U.S. surface ship and submarine electronic
intelligence and electronic support measures development and production
programs. For the year ended December 31, 1998, the contract revenues for this
program category were $22.8 million and funded backlog at December 31, 1998
was $32.4 million. Key programs include:
o the U.S. Navy's Advanced Integrated Electronic Warfare System for the
next generation surface ship
o the New Attack Submarine and Los Angeles class submarine electronic
support measures systems
o Seasearch, a shipboard electronic intelligence system for our
international customers.
In addition, we have recently developed the New Technology Electronic
Support Measures System for the small to medium sized ship and submarine
market for which we have already received an initial production contract from
Sweden.
Our Specialized Electronic Countermeasures Systems refer to Shortstop
Electronic Protection System. Other products included within this category
consist of advanced command and control and communications systems for
friendly foreign nations and Wide-Band Secure Voice Encryption equipment for
non-NATO airborne platforms. For the year ended December 31, 1998, the
contract revenues for this program category were $22.4 million and funded
backlog at December 31, 1998 was $8.0 million.
In addition, catalog antennas, spares and repairs and other products
accounted for $8.2 million of contract revenues for the year ended December
31, 1998 and funded backlog at December 31, 1998 was $2.6 million.
Overview of Key Technologies and System Products
System Product Offerings
We offer a complete line of antennas, receivers, signal processors,
high-speed digitizers, signal analysis software and integrated electronic
intelligence and electronic support measures systems. Our receiving systems
are characterized by high sensitivity, minimum signal distortion and high
dynamic range for operation in dense signal environments. Our products are
designed with "open architecture" and maximum use of commercial off-the-shelf
components. We use the latest analog, digital and processing technologies
available today, but structure the system to allow for future upgrades. Faster
processors and new technology can be readily inserted into our systems as they
become available.
Although we increasingly provide customers with complete integrated
systems, we continue to support our core technology in antennas, receivers,
processors and digitizers through internally funded research and development.
Core products and technology give us a competitive advantage over typical
"rack and stack" system integrators which are totally dependent on outside
suppliers. Our core products, consisting of antennas, tuners, demodulators, RF
switching units, digitizers and signal processors, are a family of system
building blocks. A key to our system success is using these standardized
building blocks to create custom system configurations that exactly meet a
customer's specific requirements with minimal additional expenses.
Key Technologies
Our ongoing technology development is an enabling tool that allows us to
produce cost effective systems to meet evolving customer needs. By integrating
new developments with our existing inventory of core products we can offer
state-of-the-art systems that solve real world customer problems in the modern
electronic warfare
57
<PAGE>
environment. An active development and technology insertion strategy combined
with a core product base using Non-development items products enables us to
maintain competitive pricing and performance in the marketplace.
Recent technology developments include:
o Special Signal Processing
o New Technology Electronic Support Measures System
o Multi-Channel, Multi-Operator Signals Intelligence Systems
o Single Channel Electronic Intelligence/electronic Support Measures
Systems
o Shortstop Electronic Protection System.
These new developments give us a competitive advantage in meeting present
and future requirements with state-of-the-art, yet cost effective, system
solutions. Special Signal Processing and the Shortstop Electronic Protection
System, in particular, allow us to offer technical capability not currently
available from our competitors.
The table below provides a summary of our key technologies and system
products.
<TABLE>
<CAPTION>
System Products and
Technologies What Is It? What Does It Do? Where Is It Used?
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Special Signal o SSP refers to Condor o SSP provides direct digital o SSP can be added to all of
Processing ("SSP") developed hardware and detection of signals our systems.
propriety software and without hardware based o SSP is an available
algorithms that allow signal measurement. upgrade to all signal
"all-digital" precision o SSP provides precision processors.
processing of radar and measurement of radar
non-communication signals.
signals.
- -----------------------------------------------------------------------------------------------------------------------------------
New Technology o NTES is a new type of o NTES provides fast and o NTES is currently being
Electronic Support electronic support accurate situational built in two versions--a
Measures Systems measures system that uses awareness and warning for compact configuration for
("NTES") a Condor patented small to medium sized submarines and a full
Autohet phase receiver that ships and submarines. featured configuration for
measures the phase of o NTES provides shipboard installations.
antenna outputs. "wideopen" frequency o NTES is our premiere
o NTES provides superior coverage and "wideopen" entry in the international
accuracy, but costs less angular coverage--100% submarine and small ship
than traditional electronic probability of intercept for electronic support
support measures systems. any signal at any measures marketplace.
frequency--no "scanning"
or "switching."
- -----------------------------------------------------------------------------------------------------------------------------------
Multi-Channel, o Multi-Channel, o Enables multiple operators o Three different system
Multi-Operator Multi-Operator Signals to simultaneously process configurations are
Signals Intelligence Intelligence systems multiple signals--typical currently in production for
Systems provide the ability to systems have between U.S. Navy submarine and
process more signals more 4-16 channels. airborne applications.
quickly in an increasingly o Both automatic search
crowded and complex (acquisition, recognition
- -----------------------------------------------------------------------------------------------------------------------------------
58
<PAGE>
System Products and
Technologies What Is It? What Does It Do? Where Is It Used?
- -----------------------------------------------------------------------------------------------------------------------------------
signal environment. and library matching) and
o We have developed precision manual
proprietary system control electronic intelligence
and display software and analysis functions are
processing technology to fully supported.
support multiple receiver
channels and multiple
operators.
o Family of systems--each
is comprised of building
block units, including
tuners, demodulators and
signal processors, that can
easily be configured to
match specific customer
system requirements.
- -----------------------------------------------------------------------------------------------------------------------------------
Single Channel o Consists of three modular o Used for electronic o Ideally suited to airborne
Electronic units: an antenna/radome intelligence signal applications such as the
Intelligence / assembly, tuner and signal collection and analysis U.S. Army's Blackhawk
Electronic Support processor. and for tactical situation helicopter and land mobile
Measures Systems awareness. applications such as
o Omni-directional antenna Canada's TRILS and the
provides high probability U.S. Marine Corps'
of intercept. MEWS, where size and
o High gain directional weight are critical.
antenna provides excellent o Very competitive in the
sensitivity and direction international marketplace;
finding accuracy. systems have been sold
for airborne applications
in South America.
- -----------------------------------------------------------------------------------------------------------------------------------
Shortstop o SEPS is a portable system o SEPS predetonates o Personal units carried by
Electronic that creates an electronic proximity fuses on ground soldiers.
Protection System umbrella over the incoming artillery and o Can be installed in a
("SEPS") battlefield. mortar rounds. variety of ground vehicles
o "Lifesaving" technology. and fixed-site platforms.
o SEPS is our premiere
entry into the electronic
countermeasures market
segment.
</TABLE>
Sales & Marketing
Our sales and marketing strategy is to help maintain our core program
business, continuously introduce product upgrades, leverage new products
through existing platforms and identify and pursue new product development
opportunities. The sales and marketing team is responsible for identifying
customer needs and collaborating with the research and development department
to develop cost effective solutions that will generate near-term business as
well as position us to benefit from spares, repairs, proprietary upgrades and
derivative product opportunities over the long term. Our sales and marketing
team also assists in creating new business opportunities by working with and
educating customers on the value of our products, including communicating our
59
<PAGE>
superior technology base, "open architecture" designs, cost savings potential
from cross-platform applications and total life cycle support costs.
Our sales and marketing efforts are divided between domestic and
international activities. Domestically, we have an extremely strong program
base and long history of close customer relationships. As of December 31,
1998, our domestic sales and marketing department consists of seven in-house
personnel and is supplemented by three representatives and 13 independent
consultants. Our international sales and marketing department consists of six
in-house personnel and is supplemented by a network of 33 independent
representatives and consultants covering Europe, Asia, South America, the
Middle East and Australia/New Zealand. Our independent foreign sales
representatives have extensive industry experience, company specific knowledge
and an established track record.
Domestic and International Customers
We have developed a high-quality, diversified customer base and continue
to capitalize on our long-term customer relationships. Our customers include
all of the U.S. intelligence agencies and military services, the major
domestic prime contractors, numerous other defense contractors worldwide and
many foreign governments. We interface with the domestic prime defense
contractors primarily through several divisions of Lockheed Martin, several
divisions of Raytheon and Boeing. Other significant domestic and international
defense contractor customers include:
o Marconi Electronic Systems
o GTE
o TRW-ASG
o Litton ATD
o Celsius Tech
o Mitsubishi Electric Company
o Racal Defense Systems
o FR Aviation-UK
None of the customers listed above represent 10% of our contract
revenues. Only the U.S. Government or its agencies and international
governments such as Sweden and Norway exceed 10% of our contract revenues.
Approximately 64.5% of our contract revenues in 1998 were to the U.S.
Government or to prime contractors that identified the U.S. Government as the
ultimate purchaser.
Our primary international government customers consist of various
agencies within the governments of Japan, Norway, Sweden and Taiwan. We have
also established close relationships with the governments of Australia,
Brazil, Canada, Egypt, Finland, Korea and the United Kingdom, and management
believes that these relationships offer significant future potential. Over the
last decade, we have increased our international revenue base and devoted
significant resources to pursuing additional new business.
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Backlog
As of December 31, 1998, we had funded backlog of approximately $62.9
million, including numerous contracts from many critical U.S. programs. Funded
backlog does not include unexercised contract options which represent the
amount of revenues which would be recognized from the performance of contract
options that may be exercised by customers under existing contracts and from
purchase orders to be issued under indefinite quantity contracts or basic
ordering agreements. Based on our past experience, we expect approximately 90%
of our backlog at December 31, 1998 to be earned as contract revenues by the
end of 1999, although we cannot assure you that we will earn the amount of
backlog as contract revenues that we currently anticipate.
Research and Development
Our electronic intelligence and electronic support measures technology is
among the most advanced, innovative and reliable in the world. Our strategy
focuses on identifying customer needs and developing cost-effective solutions
that will generate near term business as well as position ourselves to benefit
from spares, repairs, proprietary upgrades and derivative product
opportunities over the long term. We take steps to protect our proprietary
technologies by seeking to maintain ownership of data rights for key elements
of almost all of our products and anticipating future upgrades as new
technologies become available. Whenever possible, we participate in research
and development projects incurred in connection with fixed price long-term
development contracts, a substantial portion of which is effectively funded by
our customers; however we also form strategic alliances with other industry
participants to maximize the potential for success by sharing expertise to
minimize risk and costs associated with developing new technology. We have
formed key strategic alliances with Lockheed Martin, Raytheon, AIL, Marconi
Electronic Systems, ManTech and the Southwest Research Institute.
We focus on spending development dollars efficiently to create the
greatest return for the long term by thoroughly evaluating upgrade and
derivative product potential. Management coordinates research and development
efforts with our marketing department to understand customer requirements and
the potential market demand for new products. We invest in unique "enabling"
technologies to differentiate our products and emphasize "open architecture"
designs to allow for future upgrades incorporating the latest analog, digital
and processing technologies available. Our products are also designed to
fulfill the requirements of multiple platforms which significantly decreases
the costs related to development, production and, most importantly, total life
cycle support. In addition, we maximize the use of commercial off-the-shelf
solutions products and non-development items to capitalize on advanced
commercial technology and to minimize costs.
Intellectual Property
Our intellectual property ("IP") includes, but is not limited to:
o algorithms
o designs
o developments
o documentation
o engineering details
o ideas
o inventions
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o software (both object code and source code)
o patents
o trade secrets
o trademarks
o service marks
o know-how
Our ability to compete will depend, in part, on our ability to obtain and
enforce intellectual property protection for our technology in the United
States and internationally. Although we hold several U.S. patents, we
currently rely primarily on a combination of trade secret and trademark laws
and employee and third-party nondisclosure agreements. We also limit access to
and distribution of proprietary information. Generally, our patents expire
from 2012 to 2014 and our trademarks expire from 1999 to 2006.
Competition
Approximately 78.1% of our total contract revenues for the year ended
December 31, 1998 was derived from sole source business. This strong sole
source position is reflective of our leading position in the U.S. electronic
intelligence and electronic support measures markets for aircraft, ships,
submarines and ground based platforms.
With respect to the domestic business, our primary competitors are:
o Lockheed Martin Federal Systems
o Litton Amecom
o several divisions of Raytheon
o several divisions of Boeing
o Andrews SciCom
o Sensys Technology
In the international market, our competitors include all of the above
domestic competitors as well as the major international electronic warfare
manufacturers, including:
o Marconi Electronic Systems (UK)
o Racal (UK)
o Thomson CSF (France)
o ELTA (Israel)
o Elisra (Israel)
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We often team with one or more of the above competitors on large
opportunities where product, technology or marketing synergies can improve our
competitive position. The Shortstop Electronic Protection System product
offerings, which are currently focused on the domestic market and have
received a great deal of support from Congress, have no known competitors. We
compete on the basis of product offerings, price, product and systems quality,
technology and ongoing customer service and support.
Approximately 21.9% of our total contract revenues for the year ended
December 31, 1998 were derived from awards that we won through a competitive
bidding process. We believe that we compete effectively based on price,
technical requirements, schedule, program management, past performance and
terms and conditions. For larger opportunities, however, we frequently
determine that we can compete more effectively through entering into a teaming
arrangement with one of our competitors or large prime contractors due to
potential limitations of our own resources. These teaming arrangements
generally provide us access to more products technology or marketing synergies
that can improve our competitive position. Many of our competitors are larger
than us and have substantially greater financial and other resources than we
have.
Manufacturing and Assembly
The focus of our manufacturing operations is on assembly and test of our
electronic intelligence and electronic support measures systems. Depending on
the product, manufacturing lead times can be as short as three months or as
long as twelve months. We take every opportunity to outsource contract
manufacturing for subassemblies. This limits the need for capital equipment to
perform these operations and also eliminates our exposure to environmental
regulations governing the processes required for such manufacturing. Our
assembly and test emphasis is placed on the integration of subassemblies at
the top assembly level and the testing and delivery of products to our
customers.
We run two full assembly and test shifts at the present time and have the
flexibility to add a third shift as the need arises.
Raw Materials
Since we outsource most of the manufacturing of subassemblies, we do not
use significant amounts of raw materials. We purchase manufactured component
parts for our assemblies from various suppliers. We are not dependent on any
one supplier and maintain back-up suppliers for all our critical components.
However, any delay in our ability to obtain necessary component parts may
affect our ability to meet customer production needs.
Government Contracts; Regulatory Matters
For the year ended December 31, 1998, approximately 64.5% of our contract
revenues resulted from contracts with the U.S. Government or prime contractors
that identified the U.S. Government as the ultimate purchaser. In addition,
3.9% of our contract revenues in 1998 resulted from the U.S. Government's
Foreign Military Sales ("FMS") program. Our U.S. Government business is
performed under firm fixed price contracts and cost plus contracts.
Under firm fixed price contracts, we agree to perform work for a fixed
price and, accordingly, realize all the benefit or detriment resulting from
decreases or increases in the cost of performing the contract. Fixed price
contracts accounted for approximately 97.7% of our contract revenues in 1998.
Cost plus fixed fee contracts provide for reimbursement of costs, to the
extent that such costs are allowable, and the payment of a fixed "fee," which
is essentially the profit negotiated between the contractor and the U.S.
Government. Cost plus incentive fee and cost plus award fee contracts provide
for increases or decreases in the contract fee, within specified limits, based
upon actual results as compared to contractual targets for such factors as
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<PAGE>
cost, quality, schedule and performance. Cost plus contracts accounted for
approximately 2.3% of our contract revenues in 1998.
Under U.S. Government regulations, some costs, including financing costs,
portions of research and development costs, lobbying expenses, types of legal
expenses and marketing expenses related to the preparation of bids and
proposals and FMS sales, are not allowed for pricing purposes and calculation
of contract reimbursement rates under flexibly priced contracts. The U.S.
Government also regulates the methods under which costs are allocated to U.S.
Government contracts.
U.S. Government contracts are, by their terms, subject to termination by
the U.S. Government either for its convenience or default by the contractor.
Fixed price contracts provide for payment upon termination for items delivered
to and accepted by the U.S. Government, and, if the termination is for
convenience, for payment of fair compensation of work performed plus the costs
of settling and paying claims by terminated subcontractors, other settlement
expenses, and a reasonable profit on the costs incurred. Cost plus contracts
provide that, upon termination, the contractor is entitled to reimbursement of
its allowable costs, and if the termination is for convenience, a total fee
proportionate to the percentage of the work completed under the contract. If a
contract termination is for default, however,
o the contractor is paid an amount agreed upon for completed and
partially completed products and services accepted by the U.S.
Government
o the U.S. Government is not liable for the contractor's costs with
respect to unaccepted items, and is entitled to repayment of advance
payments and progress payments, if any, related to the terminated
portion of the contract
o the contractor may be liable for excess costs incurred by the U.S.
Government in procuring undelivered items from another source
To date, none of our contracts has been terminated for default.
In addition to the right of the U.S. Government to terminate, U.S.
Government contracts are conditioned upon the continuing availability of
Congressional appropriations. Congress usually appropriates funds for a given
program on a September 30 fiscal year basis, even though contract performance
may take many years. Consequently, at the outset of a major program, the
contract is usually partially funded and additional monies are normally
committed to the contract by the procuring agency only as appropriations are
made by Congress for future fiscal years.
There are two principal contracting methods used to export defense
equipment, Direct Foreign Sales ("DFS") and FMS. In a DFS, the contractor
sells directly to the foreign country and assumes all risks in the
transaction. In a FMS sale, the sale is funded for, contracted by and made to
the U.S. Government which in turn sells the product to the foreign country.
Licenses are required from U.S. Government agencies for DFS exports from the
U.S. of nearly all of our products. Some of our products may not be exported
to certain countries.
Similar to other companies which derive a substantial portion of their
sales from contracts with the U.S. Government for defense related products, we
are subject to business risks, including changes in governmental
appropriations, national defense policies or regulations and availability of
funds. Any of these factors could materially adversely affect our business
with the U.S. Government in the future.
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<PAGE>
Employees
As of December 31, 1998, we had 506 employees, of whom 6 were executive
officers, 202 were in engineering and program office, 22 were in sales and
marketing, 156 were in manufacturing operations, 31 were in quality assurance
and 89 were in finance and administration. None of our employees are subject
to a collective bargaining agreement, and we have not experienced any material
business interruption as a result of labor disputes.
We believe that we have a good relationship with our employees.
Facilities
The following chart provides summary information on our facilities. We
lease all of our facilities.
<TABLE>
Building Lease
Facility(1) Location Description Sq. Feet Expiration
- ----------- ----------- -------------- --------- ----------
<S> <C> <C> <C> <C>
Corporate Headquarters............. San Jose, CA Corporate Headquarters, 110,500 8/2000
Engineering and Operations
Electronic Systems Division........ Simi Valley, CA Engineering and Operations 43,000 3/2005
Condor Systems East(2)............. Sterling, VA Engineering and Operations 13,400 11/1999
Storage Facility................... San Jose, CA Offsite Storage 6,100 3/1999
</TABLE>
- -------------------
(1) In addition to the facilities listed, we have three domestic sales offices
and one international sales office.
(2) In January 1999, we announced a decision to close our facilities located
in Sterling, Virginia by the end of the year
Environmental Matters
Although our operations do not include any activities which result in
material environmental issues, all owners and operators of real property could
have liability for environmental issues at such properties, regardless of
fault. Based on current information, however, we are aware of no liabilities
under environmental laws which would be expected to have a material adverse
effect on our business, results of operations or financial condition. In the
past two years we have not incurred any material costs related to
environmental compliance.
Legal Matters
We are not a party to any material legal proceedings, other than ordinary
routine litigation incidental to our business which is not otherwise material
to our business or financial condition.
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MANAGEMENT
The following table sets forth the name, age and position of each person
who is an executive officer or director of Condor.
<TABLE>
Name Age Position
- ----- --- --------
<S> <C> <C>
Robert E. Young II.................... 52 President and Chief Executive Officer, Chairman of the Board
John L. Barnum........................ 55 Senior Vice President and Chief Technical Officer
Vernon A. Dale........................ 57 Vice President, Business Development
David J. Klingler..................... 46 Vice President, Advanced Program Development
Thomas A. Michalski................... 63 Vice President, Business Operations
Gary M. Viljoen....................... 42 Chief Financial Officer
Dr. Robert J. Hermann................. 65 Director
Dr. Paul G. Kaminski.................. 56 Director
R. Noel Longuemare.................... Director
William M. Matthes.................... 38 Director
</TABLE>
Robert E. Young, II has been President and Chief Executive Officer since
1994. From 1989 to 1994 he served as President and Chief Operating Officer.
From 1985 to 1988 he served as Executive Vice President and Chief Operating
Officer. He joined Condor as Vice President and Chief Financial Officer in
1985. Prior to joining Condor, Mr. Young was the Chief Financial Officer at EM
Systems with direct responsibility for Finance, Accounting, Contracts, and
Management Information Systems. Mr. Young also worked as Director of Finance
with Solfan Systems, which was a high technology electronics company that
specialized in aerospace systems and products. Manager Financial Planning and
Analysis with FMC, Manager Finance and Contracts with Ford Aerospace and
Senior Financial Analyst with Bendix Corporation, which was an advanced
technology and manufacturing company that specialized in aerospace and
automotive products that eventually merged into Allied Signal.
John L. Barnum has been Senior Vice President and Chief Technical
Officer since 1989. From 1987 to 1989 he served as Senior Vice President,
Engineering. He joined Condor as Vice President, Engineering in 1983. Prior to
joining Condor, Mr. Barnum worked with Watkins-Johnson Microwave Surveillance
Systems for 15 years, during which he played a key role in the conception,
detail design and development of a wide range of highly successful and
innovative microwave receiving systems.
Vernon A. Dale has been Vice President, Business Development since 1990.
Prior to joining Condor, Mr. Dale held positions as Vice President of Business
Development, Vice President of Engineering, and General Manager at Technology
for Communications, Inc. from 1985 to 1990. Prior to that, Mr. Dale served in
the capacity of Vice President of Engineering at EM Systems from 1980 to 1985,
as Navy Business Area Manager for ARGOSystems from 1975 to 1980, and as
Manager of the Navy Surveillance Section at GTE Sylvania from 1967 to 1975.
David J. Klingler has been Vice President, Advanced Program Development
since 1992. From 1985 to 1991 he served as Director of Business Development
and Director of Systems Engineering. From 1981 to 1985, Mr. Klingler was
Manager of the Advanced Electronic Intelligence Systems Department at ESL (now
TRW). Prior to that, Mr. Klingler worked for the Recon Division of
Watkins-Johnson where he was Manager of the Software Development Special
Programs organization from 1977 to 1981.
Thomas A. Michalski has been Vice President, Business Operations since
1992. From 1986 to 1990, Mr. Michalski was the President and General Manager
of the Applied Technology Division of Litton Industries Inc. Litton Industries
is a high technology electronics company that provided advanced electronic,
defense, marine and information systems and products. Prior to joining Litton,
Mr. Michalski worked for Loral from 1984 to 1986. Prior to joining Loral-Narda
Western Operations, Mr. Michalski held various positions of responsibility at
California Microwave, Inc.
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Gary M. Viljoen has been Chief Financial Officer since 1989. From 1988 to
1989 he served as Controller. From 1978 to 1983 Mr. Viljoen held various
positions with Coopers & Lybrand.
Dr. Robert J. Hermann has been a Senior Partner of Global Technology
Partners since April 1998. Dr. Hermann most recently served as Senior Vice
President for Science and Technology at United Technologies Corporation and
has served in various other capacities at United Technologies since 1982.
Prior to joining United Technologies, Dr. Hermann spent twenty years with the
National Security Agency and in 1977 was appointed Principal Deputy Assistant
Secretary of Defense for Communications, Command, Control and Intelligence. In
1979, he was named Assistant Secretary of the Air Force for Research,
Development and Logistics and in parallel was Director of the National
Reconnaissance Office. Dr. Hermann is a member of the President's Foreign
Intelligence Advisory Board, the Defense Science Board and the National
Academy of Engineering, and is Chairman of the Board of both the American
National Standards Institute and Draper Laboratory. He is also a visiting
scholar at Harvard University and a director of DeCrane Aircraft Holdings.
Dr. Paul G. Kaminski has been a Senior Partner of Global Technology
Partners since March 1998. Dr. Kaminski most recently served as U.S.
Undersecretary of Defense for Acquisition and Technology from 1994 to 1997.
Dr. Kaminski currently serves as Chief Executive Officer of Technovation,
Inc., a consulting firm focusing on business strategy and advanced technology.
Dr. Kaminski is a former Chairman of the Defense Science Board and is
currently a member of the Senate Select Committee on Intelligence -- Technical
Advisory Group, the NRO Advisory Council and the National Academy of
Engineering. He is a Fellow of the Institute for Electrical and Electronic
Engineering and an Associate Fellow of the American Institute of Aeronautics
and Astronautics. Dr. Kaminski is a director of General Dynamics, Dyncorp,
Eagle-Picher Technologies, DeCrane Aircraft Holdings Veridian, Anteon Corp.,
Software Engineering Institute and several privately held technology
companies.
R. Noel Longuemare has been a private consultant since 1997. From 1993 to
1997 Mr. Longuemare served as U.S. Principal Deputy Undersecretary of Defense
for Acquisition and Technology. Mr. Longuemare was also appointed as the U.S.
Acting Undersecretary of Defense for Acquisition and Technology in 1994 and
again in 1997. Previously Mr. Longuemare was Vice President and General
Manager of the Systems Development and Technology Divisions at the
Westinghouse Electronic Systems Group in Baltimore, Maryland, a company he
joined in 1952. He has also served as a member of the Defense Science Board
and the Air Force Scientific Advisory Board. He was a Fellow in both the
Institute of Electrical and Electronic Engineers and the American Association
for the Advancement of Sciences.
William M. Matthes has been a Managing Partner with Behrman Capital where
he has worked since 1996. From 1994 to 1996, Mr. Matthes was Chief Operating
Officer of Holsted Marketing, Inc., a direct marketing company. Previously Mr.
Matthes spent seven years as a General Partner at Brentwood Associates, a
leveraged buyout and venture capital firm. Mr. Matthes is a director of
several companies, including Starwood Financial Trust.
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EXECUTIVE COMPENSATION
The aggregate remuneration of the Chief Executive Officer during 1998 and
the five other most highly compensated executive officers of Condor
(collectively the "Named Executive Officers") whose salary and bonus exceeded
$100,000 for the fiscal year ended December 31, 1998, is set forth in the
following table:
<TABLE>
<CAPTION>
1998 Summary Compensation Table
Restricted Securities All Other
Stock Underlying Compensation
Name and Principal Position Salary Bonus Award(s) Options ($)(1)
- --------------------------- -------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Robert E. Young II.............. $336,538 $500,000 -- -- $ 5,870
John L. Barnum.................. 217,692 100,000 -- -- 14,249
Vernon A. Dale.................. 181,154 100,000 -- -- 6,000
David J. Klingler............... 181,154 100,000 -- -- 6,000
Thomas A. Michalski............. 181,154 100,000 -- -- 8,492
Gary M. Viljoen................. 181,154 150,000 -- -- 8,653
</TABLE>
- -------------------
(1) Other compensation includes amounts paid by Condor for automobile leases
and other automobile-related expenses and imputed medical insurance
benefits provided by Condor for the benefit of the Named Executive
Officers.
Stock Options
No stock options to purchase shares of Condor's common stock were granted
in 1998 to the Named Executive Officers under the 1997 Stock Option and
Restricted Share Plan. All options under the 1997 Stock Option and Restricted
Share Plan were canceled in the acquisition in exchange for the consideration
related to the options.
New Stock Option Plan
Condor intends to implement a new stock option plan (the "Management
Incentive Compensation Plan") for Management and other Condor employees. The
Management Incentive Compensation Plan is expected to include options to
purchase up to 10.25% of the common stock of Condor on a fully diluted basis.
The options will be divided into performance options and super performance
options. Performance options shall vest uniformly over a five-year period with
20% vesting each year, based on EBITDA targets. Super performance options
shall vest in their entirety upon a liquidation event (the "Liquidation
Event"), including (a) a sale of Condor that achieves a minimum value per
diluted common share or (b) an initial public offering of Condor that results
in a minimum average trading price per diluted common share over the 30-day
period following the offering. The minimum common share value or price levels
necessary for the vesting of the super performance options will be based on
the period of time between the consummation of the acquisition and the related
financing and the Liquidation Event.
Employee and Severance Benefit Agreements
We have entered into employment agreements with several members of
management, copies of which are filed as exhibits to the registration
statement of which this prospectus forms a part.
On April 6, 1999, Condor entered into an employment agreement with Robert
E. Young II, effective as of the effectiveness of the acquisition. The Young
employment agreement is for a term of three years with automatic one-year
extensions, unless 30 days prior notice of non-renewal is given by either Mr.
Young or Condor. Under the Young employment agreement, Mr. Young will receive
(1) a base salary of $350,000, which is subject to annual review and increase,
but not decrease; and (2) an annual bonus of up to 200% of the base salary
depending upon
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<PAGE>
the achievement of annual performance goals by both Condor and Mr. Young. The
Young employment agreement contains a non-competition provision until two
years after termination of employment, or one year in the case of termination
for cause (as defined therein) or resignation for good reason (as defined
therein). In addition, the Young employment agreement contains provision
preventing the solicitation of any Condor employees, suppliers or customers
until one year after termination, or six months if terminated without cause.
If Mr. Young terminates his employment with good reason, which definition
includes termination because of a change of control (as defined therein), or
Condor terminates his employment without cause, Mr. Young is entitled to the
greater of 200% times his current base salary plus his most recently paid
bonus, or $1.4 million. This severance payment will be made in a lump sum to
an escrow account and paid to Mr. Young in eight equal installments over the
next eight fiscal quarters.
Condor has entered into an employment agreement with John L. Barnum
effective as of the effectiveness of the acquisition and to expire on March
31, 2005. Under the Barnum employment agreement, Mr. Barnum will receive a
base salary of $220,000, which is subject to adjustment based on annual merit
reviews, plus any discretionary bonuses for which he may be eligible. As of
April 1, 2000 until the expiration of the Barnum employment agreement, Mr.
Barnum has the option of becoming a part-time employee of Condor, working up
to a maximum of 10 hours per week on average each year, at a salary of at
least $60,000 per year, subject to annual adjustment for inflation. Mr. Barnum
is prohibited from consulting with competitors of Condor until two years after
the conclusion of the Barnum employment agreement. As a part-time employee of
Condor, Mr. Barnum will be able to consult for companies which are not
competitors of Condor as long as such consulting does not interfere with his
employment with Condor.
If Condor terminates Mr. Barnum's full-time employment without Cause (as
defined therein) prior to March 31, 2000, Condor will pay Mr. Barnum $300,000.
If Condor terminates Mr. Barnum's part-time employment prior to the expiration
of the Barnum employment agreement, Mr. Barnum is entitled to receive, in a
lump sum, the amount he would have received if he had continued to consult for
Condor at the current rate for the remaining term of the Barnum employment
agreement.
On April 6, 1999, Condor entered into an employment agreement with Vernon
A. Dale, effective as of the effectiveness of the acquisition. The Dale
employment agreement is for a term of two years with automatic one-year
extensions, unless 30 days prior notice of non-renewal is given by either Mr.
Dale or Condor. Under the Dale employment agreement, Mr. Dale will receive (1)
a base salary of $185,000, which is subject to annual review and possible
increase; and (2) an annual bonus of up to 100% of the base salary depending
upon the achievement of annual performance goals by both Condor and Mr. Dale.
The Dale employment agreement contains a non-competition provision until two
years after termination of employment, or one year in the case of termination
for cause (as defined therein) or resignation for good reason (as defined
therein). In addition, the Dale employment agreement contains provision
preventing the solicitation of any Condor employees, suppliers or customers
until one year after termination, or six months if terminated without Cause.
If Mr. Dale terminates his employment with good reason, which definition
includes termination because of a change of control (as defined therein), or
Condor terminates his employment without cause, Mr. Dale is entitled to a
severance payment of $500,000. This severance payment will be made in a lump
sum to an escrow account and paid to Mr. Dale in eight equal installments over
the next eight fiscal quarters.
On April 6, 1999, Condor entered into an employment agreement with David
J. Klingler, effective as of the effectiveness of the acquisition. The
Klingler employment agreement is for a term of two years with automatic
one-year extensions, unless 30 days prior notice of non-renewal is given by
either Mr. Klingler or Condor. Under the Klingler employment agreement, Mr.
Klingler will receive (1) a base salary of $185,000, which is subject to
annual review and possible increase; and (2) an annual bonus of up to 100% of
the base salary depending upon the achievement of annual performance goals by
both Condor and Mr. Klingler. The Klingler employment agreement
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<PAGE>
contains a non-competition provision until two years after termination of
employment, or one year in the case of termination for cause (as defined
therein) or resignation for good reason (as defined therein). In addition, the
Klingler employment agreement contains provision preventing the solicitation
of any Condor employees, suppliers or customers until one year after
termination, or six months if terminated without cause.
If Mr. Klingler terminates his employment with good reason, which
definition includes termination because of a change of control (as defined
therein), or Condor terminates his employment without cause, Mr. Klingler is
entitled to a severance payment of $500,000. This severance payment will be
made in a lump sum to an escrow account and paid to Mr. Klingler in eight
equal installments over the next eight fiscal quarters.
Condor has entered into an employment agreement with Thomas A. Michalski,
effective as of the effectiveness of the acquisition and to expire on March
31, 2003. Under the Michalski employment agreement, Mr. Michalski will receive
a base salary of $185,000, which is subject to adjustment based on annual
merit reviews, plus any discretionary bonuses for which he may be eligible. As
of April 1, 2000 until the expiration of the Michalski employment agreement,
Mr. Michalski has the option of becoming a part-time employee of Condor,
working up to a maximum of 10 hours per week on average each year, at a salary
of at least $60,000 per year, subject to annual adjustment for inflation. Mr.
Michalski is prohibited from consulting with competitors of Condor until two
years after the conclusion of the Michalski employment agreement. As a
part-time employee of Condor, Mr. Michalski will be able to consult for
companies which are not competitors of Condor as long as such consulting does
not interfere with his employment with Condor.
If Condor terminates Mr. Michalski's full-time employment without cause
(as defined therein) prior to March 31, 2000, Condor will pay Mr. Michalski
$300,000. If Condor terminates Mr. Michalski's part-time employment prior to
the expiration of the Michalski employment agreement, Mr. Michalski is
entitled to receive, in a lump sum, the amount he would have received if he
had continued to consult for Condor at the current rate for the remaining term
of the Michalski employment agreement.
On April 6, 1999, Condor entered into an employment agreement with Gary
M. Viljoen, effective as of the effectiveness of the acquisition. The Viljoen
employment agreement is for a term of two years with automatic one-year
extensions, unless 30 days prior notice of non-renewal is given by either Mr.
Viljoen or Condor. Under the Viljoen employment agreement, Mr. Viljoen will
receive (1) a base salary of $200,000, which is subject to annual review and
possible increase; and (2) an annual bonus of up to 100% of the base salary
depending upon the achievement of annual performance goals by both Condor and
Mr. Viljoen. The Viljoen employment agreement contains a non-competition
provision until two years after termination of employment, or one year in the
case of termination for cause (as defined therein) or resignation for good
reason (as defined therein). In addition, the Viljoen employment agreement
contains provision preventing the solicitation of any Condor employees,
suppliers or customers until one year after termination, or six months if
terminated without cause.
If Mr. Viljoen terminates his employment with good reason, which
definition includes termination because of a change of control (as defined
therein), or Condor terminates his employment without cause, Mr. Viljoen is
entitled to a severance payment of $500,000. This severance payment will be
made in a lump sum to an escrow account and paid to Mr. Viljoen in eight equal
installments over the next eight fiscal quarters.
Directors Compensation
We currently have one independent director that will receive (a) $10,000
per year and (b) $1,250 per meeting. In addition, such director will receive
stock options that will vest uniformly over a five year period in the amount of
$50,000.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of Condor common stock immediately following the consummation of the
acquisition by (a) any person or group who beneficially owns more than five
percent of Condor common stock, (b) each of our directors and executive
officers and (c) all directors and officers as a group.
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding Percentage of
Owned after the Class of Common Voting
Name of Beneficial Owner: Acquisition(1) Common Stock Stock Securities(2)
- ------------------------- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
DLJ Merchant Banking Partners II, L.P. and
related
investors(3)...................................... 26,948,947 C 52.9% 0.0%
Behrman Capital L.P. and related investors(4)...... 15,000,000 A 29.5% 29.5%
Non-director partners of Global Technology
Partners(5)........................................ 1,540,930 B 3.0% 35.0%
Robert E. Young II................................. 1,852,855 A 3.6% 3.6%
John L. Barnum..................................... 499,999 A 1.0% 1.0%
Vernon A. Dale..................................... 739,999 A 1.5% 1.5%
David J. Klingler.................................. 615,445 A 1.2% 1.2%
Thomas A. Michalski................................ 239,999 A * *
Gary M. Viljoen.................................... 542,088 A 1.1% 1.1%
Dr. Paul G. Kaminski, a Global Technology
Partners partner(6)................................ 584,719 B 1.1% 13.3%
Dr. Robert J. Hermann, a Global Technology
Partners partner(6)................................ 425,404 B * 9.7%
R. Noel Longuemare ................................ 0 - 0.0% 0.0%
William M. Matthes................................. 0 - 0.0% 0.0%
All directors and officers as a group (10 persons). 5,500,508 A,B,C 10.8% 31.8%
</TABLE>
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* less than 1%.
(1) Under the SEC's rules, each person or entity is deemed to be a beneficial
owner with the power to vote and direct the disposition of these shares.
(2) Shares of common stock held by Global Technology Partners partners have
voting rights equal in the aggregate to the sum of the shares held by
Global Technology Partners partners and DLJ Merchant Banking and its
related investors, or initially 11.564 votes per share. Thus, the
percentage of voting securities held by Global Technology Partners
partners will be equal to the sum of the percentage of the outstanding
common stock held by DLJ Merchant Banking and related investors and the
Global Technology Partners partners. Shares of common stock held by
Behrman and management have one vote per share. Thus, the percentage of
voting securities held by each of Behrman and management is equal to
their respective percentage of outstanding common stock. Although DLJ
Merchant Banking's shares of common stock does not have any voting
rights, DLJ Merchant Banking's consent is required prior to implementing
decisions of our board of directors relating to, among other things,
financings, acquisitions and dispositions. See "Certain Relationships and
Related Party Transactions-- Investors' Agreement."
(3) Consists of shares held directly by DLJ Merchant Banking and the following
related investors:
o DLJ Merchant Banking Partners II-A, L.P. ("DLJMBIIA")
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o DLJ Offshore Partners II, C.V. ("Offshore")
o DLJ Diversified Partners, L.P. ("Diversified")
o DLJ Diversified Partners-A, L.P. ("Diversified A")
o DLJ Millennium Partners, L.P. ("Millennium")
o DLJ Millennium Partners-A, L.P. ("Millennium A")
o DLJMB Funding II, Inc. ("Funding")
o DLJ First ESC L.P. ("DLJ First ESC")
o UK Investment Plan 1997 Partners, Inc. ("UK Partners")
o DLJ EAB Partners, L.P. ("EAB")
o DLJ ESC II L.P. ("DLJ ESC II")
See "Certain Relationships and Related Party Transactions" and "Plan of
Distribution." The address of each of DLJ Merchant Banking, DLJMBIIA,
Diversified, Diversified A, Millennium, Millennium A, Funding, DLJ First
ESC, EAB and DLJ ESC II is 277 Park Avenue, New York, New York 10172. The
address of Offshore is John B. Gorsiraweg 14, Willemstad, Curacao,
Netherlands Antilles. The address of UK Partners is 2121 Avenue of the
Stars, Fox Plaza, Suite 3000, Los Angeles, California 90067.
(4) Consists of shares held directly by Behrman Capital II, L.P. and
Strategic Entrepreneur Fund II L.P. (the "Behrman Investors"). The
address of the Behrman Investors is 126 East 56th Street, New York, New
York 10022.
(5) Consists of shares held by individual partners of Global Technology
Partners, LLC who are not directors of Condor (the "Global Technology
Partners Investors"). The address of the Global Technology Partners
Investors is c/o Global Technology Partners, LLC, 1300 I Street, N.W.,
Washington, D.C. 20005. Each Global Technology Partners Investor
disclaims beneficial ownership as to the shares held by the other Global
Technology Partners Investors.
(6) Drs. Kaminski and Hermann are partners of Global Technology Partners and
directors of Condor. Share data shown for such individuals excludes
shares shown as held by the Global Technology Partners Investors, as to
which Drs. Kaminski and Hermann disclaim beneficial ownership.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Relationships and Related Party Transactions in connection with our Acquisition
Financial Advisory Fees and Agreements. In connection with the merger on
April 15, 1999, Behrman Capital Management Corp. ("BCMC"), an affiliate of
Behrman, received a financial advisory fee of $2.5 million and Condor's
employee stock ownership plan received an additional payment of $0.4 million.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"), an
affiliate of DLJ Merchant Banking, acted as financial advisor to WDC
Acquisition Corp. and as an initial purchaser of the old notes. WDC
Acquisition Corp. paid customary fees to DLJSC as compensation for its
services as financial advisor and initial purchaser. The aggregate amount of
all fees paid to DLJSC in connection with the acquisition and the related
financing was approximately $3.6 million plus out-of-pocket-expenses. Condor,
as successor to WDC Acquisition Corp., has agreed to engage DLJSC as its
exclusive financial advisor for a period of five years beginning upon the
closing of the merger. Condor and its subsidiaries may from time to time enter
into financial advisory or other investment banking relationships with DLJSC
or one of its affiliates pursuant to which DLJSC or its affiliates will
receive customary fees and will be entitled to reimbursement for all
reasonable disbursements and out-of-pocket expenses incurred in connection
therewith. Condor expects that any such arrangement will include provisions
for the indemnification of DLJSC against specified liabilities, including
liabilities under the federal securities laws.
Condor has agreed to engage BCMC to provide financial advisory services
in connection with each future acquisition by Condor or any of its
subsidiaries of a business, whether by merger, stock purchase, acquisition of
assets or otherwise, for a fee of 2.0% of the enterprise value of the business
being acquired up to the earlier of the eighth anniversary of the
effectiveness of such acquisition and the payment of $4.0 million in aggregate
amount. BCMC will be entitled to reimbursement for reasonable disbursements
and out-of-pocket expenses incurred in connection therewith. Condor expects
that any such arrangement will include provisions for the indemnification of
BCMC against specified liabilities.
Incentive Payments. Pursuant to the merger agreement, Condor is obligated
to make cash payments limited to a maximum aggregate amount of $7.0 million
(the "Incentive Payments") to all existing shareholders of Condor, including
employees, upon consummation of any of the following events prior to the
eighth anniversary of the closing date of the merger:
o an underwritten public offering of common stock, or of a security
convertible for or exchangeable into such common stock, of Condor,
any successor to Condor or any of its subsidiaries or parent company
(the "Condor Entities")
o a sale, recapitalization, merger, change in control or similar
transaction involving any Condor Entity in which any DLJ Entity or
its permitted transferees receives consideration, other than equity
securities in any Condor Entity, in respect of its equity securities
in such Condor Entity, which, when aggregated with all other such
consideration received by all DLJ Entities and any permitted
transferees in respect of their equity securities in all Condor
Entities, exceeds their aggregate purchase price for all such equity
securities
o an acquisition by any Condor Entity of ATD whether by merger or
acquisition of all or substantially all the assets of ATD, or
otherwise
o an acquisition by any Condor Entity of a business, other than ATD,
whether by merger or acquisition of all or substantially all of the
assets of such business or otherwise and the cumulative enterprise
value of all businesses, including the ATD acquisition if
consummated, which have been the subject of acquisitions by Condor
Entities since the effectiveness of the acquisition, equals or
exceeds $100 million
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The maximum aggregate amount of the Incentive Payments is $7.0 million.
As to acquisitions:
o the Incentive Payments are made only when the aggregate enterprise
value of completed acquisitions exceeds $100.0 million
o once the aggregate enterprise value of completed acquisitions
exceeds $100.0 million but is less than or equal to $200.0 million,
$5.0 million of Incentive Payments will be payable in increments
based on a percentage of the amount over $100.0 million
o an additional $2.0 million becomes payable immediately when the
aggregate enterprise value of completed acquisitions exceeds $200.0
million
Investors' Agreement. Condor, DLJ Merchant Banking, Behrman, Global
Technology Partners and Management (the "Condor Investors") entered into an
investors' agreement at the effectiveness of the acquisition (the "Investors'
Agreement"). If DLJ Merchant Banking is in the future permitted to control
Condor directly by holding voting stock, DLJ Merchant Banking may elect to
have both its shares of Condor common stock and Global Technology Partners's
shares of Condor common stock converted into shares with one vote per share.
The Investors' Agreement provides that the Condor board of directors
shall consist of five members with three of the members to be appointed by
Global Technology Partners, at least two members to be partners of Global
Technology Partners who directly own shares of Condor, one director to be
appointed by Behrman and the final director to be Condor's chief executive
officer, who is appointed by the board of directors. As long as DLJ Merchant
Banking has non-voting shares and maintains at least 10% of its initial
ownership stake, Condor's board of directors cannot take certain actions
without DLJ Merchant Banking's approval. These actions include:
o the sale or disposal of all of Condor's assets, or a substantial part
thereof
o pledges, mortgages, or other encumbrances of Condor's assets, other
than for obtaining working capital or funds for capital improvements
o the issuance or redemption of debt or equity securities, including
options and other equity-based compensation
o mergers, consolidations, reorganizations and acquisitions
o Condor's dissolution, sale or liquidation, or a change of control
o the filing of a bankruptcy petition or the winding-down of the
business
o a change in our independent auditors
o a change in our corporate charter
o extraordinary compensation actions
Shares of Condor common stock held by Management, Global Technology
Partners and Behrman cannot be transferred except pursuant to the terms of the
Investors' Agreement. DLJ Merchant Banking and Condor have a right of first
offer on any shares of Condor common stock which Global Technology Partners
may propose to sell and DLJ Merchant Banking has a right of first offer, and
to the extent DLJ Merchant Banking does not exercise such right, Condor has a
right of first offer, on any shares of Condor common stock which Behrman may
propose to sell. Behrman, Global Technology Partners and Management may
participate in specified sales of shares of
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Condor common stock by DLJ Merchant Banking, and DLJ Merchant Banking may
require Behrman, Global Technology Partners and Management to sell their
shares of Condor common stock should DLJ Merchant Banking elect to sell its
shares of Condor common stock.
The Condor Investors have registration rights related to their shares of
Condor common stock. DLJ Merchant Banking is entitled to request five demand
registrations with respect to the shares of Condor common stock it owns. These
demand registration rights are immediately exercisable subject to customary
deferral and cutback provisions. Behrman also has demand registration rights
under some circumstances. Each Condor Investor has piggyback registration
rights, subject to customary cutback provisions.
Global Technology Partners Options. Condor is expected to enter into an
agreement with Global Technology Partners or the members thereof pursuant to
which Condor will grant options to Global Technology Partners to purchase an
aggregate of 1,272,700 shares, representing up to 2.2% of the common stock of
Condor on a fully diluted basis, which options will vest over a three-year
period, subject to acceleration if the DLJ Entities sell any of their shares
of Condor common stock, and will be exercisable at an exercise price equal to
$1.00.
Existing Agreements, Warrants and Options Terminated. At the
effectiveness of the acquisition:
o The Registration Rights Agreement dated October 1996 among Condor
and the Behrman Funds relating to the Behrman Funds' rights to cause
their Condor shares to be registered in certain circumstances was
terminated
o The Shareholders' Agreement dated as of October 15, 1996 among
Condor, the Behrman Funds and the parties named therein relating to
shareholders' rights, including rights of first offer, was
terminated
o Pursuant to a Termination Agreement dated as of March 8, 1999,
warrants to purchase Class B common stock of Condor outstanding were
converted into the right to receive the Warrant Consideration
o Pursuant to Stock Option Termination Agreements, all of the Company
Options were canceled, and the holders thereof were paid the Option
Consideration
Other Transactions with Officers and Directors
Condor has entered into standard indemnity agreements with many of its
directors and a number of officers.
As part of the recapitalization in 1996, Condor forgave a loan to Gary M.
Viljoen, Condor's Chief Financial Officer, in the amount of $75,000.
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DESCRIPTION OF NEW CREDIT FACILITY
The new credit facility has been provided by a syndicate of financial
institutions led by BAC as administrative agent. Each such financial
institution being a "Lender" and, collectively, the "Lenders". The new credit
facility consists of a $50.0 million revolving credit facility which provides
for loans and the issuance of letters of credit and has a maturity of five
years after the closing date of the new credit facility (the "Closing Date").
Loans under the new credit facility initially bear interest, at Condor's
option, at the alternate base rate plus 2.25% or the reserve adjusted LIBOR
rate plus 3.50%. Condor pays commitment fees at a rate equal to 1.50% per
annum on the daily average unused portion of the new credit facility.
Beginning approximately six months after the Closing Date, the applicable
margins and commitment fees will be determined based on the ratio of
consolidated net funded debt to consolidated EBITDA of Condor and its
subsidiaries.
Condor pays a letter of credit fee on the outstanding undrawn amounts of
letters of credit issued under the new credit facility at a rate per annum
equal to (a) the margin applicable to LIBOR loans with respect to standby and
performance letters of credit and (b) 50% of the margin applicable to LIBOR
loans with respect to trade letters of credit.
All of the domestic subsidiaries of Condor are guarantors of the new
credit facility. Condor's obligations under the new credit facility are also
secured by:
o substantially all existing and after-acquired assets of Condor and
the subsidiary guarantors, including a pledge of all of the stock of
all of Condor's existing or future subsidiaries, provided that no
more than 65% of the voting stock of any of Condor's foreign
subsidiaries shall be pledged
o a negative pledge on all of Condor's and its subsidiaries' assets, in
each case subject to specified exceptions
The new credit facility contains customary covenants and restrictions on
our ability to engage in certain activities, including, but not limited to:
o limitations on other indebtedness, liens and investments
o restrictions on dividends and redemptions and pre-payments of
subordinated debt
o restrictions on mergers and acquisitions and sales of assets
The new credit facility also contains financial covenants requiring
Condor to maintain minimum coverage of fixed charges and not exceed a maximum
total leverage ratio, senior leverage ratio or level of capital expenditures.
Borrowings and issuances of letters of credit under the new credit facility
are subject to conditions, including compliance with financial ratios and the
absence of any material adverse change. As of June 30, 1999, Condor's
borrowing availability under the new credit facility is approximately $46.6
million, less $34.2 million in outstanding letters of credit. See "Risk
Factors -- Risks relating to our debt."
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DESCRIPTION OF NOTES
General
The old notes were issued, and the new notes will be issued, pursuant to
an indenture (the "indenture") dated as of April 15, 1999 among Condor, CEI
Systems, Inc. (the "Guarantor") and State Street Bank and Trust Company, as
trustee (the "trustee"). The terms of the notes include those stated in the
indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939, (the "Trust Indenture Act"). The notes are subject to
all such terms, and holders of notes are referred to the indenture and the
Trust Indenture Act for a statement thereof. Copies of the indenture are
available as set forth below under "--Additional Information."
The terms of the new notes are identical in all material respects to the
terms of the old notes, except for transfer restrictions and registration
rights relating to the old notes and except that, if the registration
statement relating to this exchange offer is not declared effective by October
12, 1999, holders of old notes that have complied with their obligations under
the registration rights agreement will be entitled, subject to exceptions, to
liquidated damages in an amount equal to $0.05 per week per $1,000 principal
amount of notes held by such holder until January 11, 2000 and increasing
every 90 days thereafter up to a maximum amount equal to $0.25 per week per
$1,000 principal amount of notes until the registration statement is declared
effective.
The following description is a summary and highlights the material terms
of the indenture, but does not contain all of the information that is included
in the indenture. We urge you to read the entire indenture, including the
definitions of terms used below. We have filed a copy of the indenture as an
exhibit to the registration statement of which this prospectus forms a part.
The definitions of terms used in the following summary are set forth
below under "--Certain Definitions." For purposes of this summary, the term
"Condor" refers only to Condor Systems, Inc. and not to any of its
Subsidiaries.
The notes will:
o be general unsecured obligations of Condor
o rank junior in right of payment to all existing and future Senior
Indebtedness of Condor, including borrowings or letter of credit
reimbursement obligations under the new credit facility
o rank equally in right of payment with any future senior subordinated
Indebtedness of Condor
o rank senior in right of payment to all future subordinated
Indebtedness of Condor
o be effectively junior to all liabilities of Condor's subsidiaries
other than the Guarantor
The notes will be fully and unconditionally guaranteed (the "Note
Guarantees") on a senior subordinated basis by the Guarantor. The Note
Guarantees will:
o be general unsecured obligations of the Guarantor
o rank junior in right of payment to all existing and future Senior
Indebtedness of the Guarantor, including the guarantee under the new
credit facility
o rank equally in right of payment with any future senior subordinated
Indebtedness of the Guarantor
o rank senior in right of payment to any future subordinated
Indebtedness of the Guarantor
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As of June 30, 1999, Condor and the Guarantor had outstanding
approximately $34.2 million of Senior Indebtedness, of which substantially all
constituted contingent reimbursement obligations in respect of standby letters
of credit. Condor's subsidiary, other than the Guarantor, had $0.0 of
outstanding liabilities, including trade payables but excluding guarantees of
the new credit facility and intercompany obligations. The indenture will
permit Condor and its Subsidiaries to incur additional Indebtedness, including
Senior Indebtedness, in the future. See "Risk Factors--Subordination" and
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock."
As of the date of the indenture, all of Condor's Subsidiaries will be
Restricted Subsidiaries. However, under specified circumstances, Condor will
be permitted to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to the restrictive
covenants set forth in the indenture.
Principal, Maturity and Interest
The notes will initially be limited in aggregate principal amount to
$100.0 million and will mature on May 1, 2009. Interest on the notes will
accrue at the rate of 11 7/8% per annum and, subject to the subordination
provision described below, will be payable semi-annually in cash in arrears on
May 1 and November 1, commencing on November 1, 1999, to holders of record on
the immediately preceding April 15 and October 15. Interest on the notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of, premium, if any, and interest and Liquidated Damages, if
any, on the notes will be payable at the office or agency of Condor maintained
for such purpose within the City and State of New York or, at the option of
Condor, payment of interest and Liquidated Damages may be made by check mailed
to the holders of the notes at their respective addresses set forth in the
register of holders of notes; provided that all payments of principal,
premium, interest and Liquidated Damages with respect to notes represented by
one or more permanent global notes will be paid by wire transfer of
immediately available funds to the account of the Depository Trust Company or
any successor thereto. Until otherwise designated by Condor, Condor's office
or agency in New York will be the office of the trustee maintained for such
purpose. The notes will be issued in denominations of $1,000 and integral
multiples thereof.
Subject to the covenants described below, Condor may issue additional
notes under the indenture having the same terms in all respects as the notes,
or similar in all respects except for the payment of interest on the notes (1)
scheduled and paid prior to the date of issuance of such notes or (2) payable
on the first Interest Payment Date following such date of issuance. The notes
offered hereby and any such additional notes would be treated as a single
class for all purposes under the indenture.
Subordination
The payment of Subordinated Note Obligations will be subordinated in
right of payment, as set forth in the indenture, to the prior payment in full
in cash or cash equivalents of all Senior Indebtedness, whether outstanding on
the date of the indenture or thereafter incurred.
Upon any distribution to creditors of Condor in a liquidation or
dissolution of Condor or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to Condor or its property, an
assignment for the benefit of creditors or any marshaling of Condor's assets
and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full in cash or cash equivalents of all Obligations due in
respect of such Senior Indebtedness, including interest after the commencement
of any such proceeding at the rate specified in the applicable Senior
Indebtedness, before the holders of notes will be entitled to receive any
payment with respect to the Subordinated Note Obligations, except that holders
of notes may receive and retain Permitted Junior Securities
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and payments made from the trust described under "--Legal Defeasance and
Covenant Defeasance." Until all Obligations with respect to Senior
Indebtedness are paid in full in cash or cash equivalents, any distribution to
which the holders of notes would be entitled shall be made to the holders of
Senior Indebtedness, except as noted above.
Condor also may not make any payment upon or in respect of the
Subordinated Note Obligations, except in Permitted Junior Securities or from
the trust described under "--Legal Defeasance and Covenant Defeasance," until
all obligations with respect to Senior Indebtedness have been paid in full in
cash or cash equivalents if:
(1) a default in the payment of the principal, including reimbursement
obligations in respect of letters of credit, of, premium, if any, or
interest on or commitment, letter of credit or administrative fees
relating to, Designated Senior Indebtedness occurs and is continuing
beyond any applicable period of grace; or
(2) any other default occurs and is continuing with respect to
Designated Senior Indebtedness that permits holders of the
Designated Senior Indebtedness as to which such default relates to
accelerate its maturity and the trustee receives a notice of such
default (a "Payment Blockage Notice") from Condor or the holders of
any Designated Senior Indebtedness.
Payments on the notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which such default
is cured or waived; and
(2) in case of a nonpayment default, the earlier of the date on which
such nonpayment default is cured or waived or 179 days after the
date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Indebtedness has been
accelerated.
No new period of payment blockage may be commenced unless and until 360
days have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice. No nonpayment default that existed or was continuing on the
date of delivery of any Payment Blockage Notice to the trustee shall be, or be
made, the basis for a subsequent Payment Blockage Notice unless such default
shall have been waived or cured for a period of not less than 90 days.
"Designated Senior Indebtedness" means:
(1) any Indebtedness outstanding under the new credit facility; and
(2) any other Senior Indebtedness permitted under the indenture the
principal amount of which is $25.0 million or more and that has been
designated by Condor in writing to the trustee as "Designated Senior
Indebtedness."
"Permitted Junior Securities" means Equity Interests in Condor or debt
securities of Condor that are subordinated to all Senior Indebtedness, and any
debt securities issued in exchange for Senior Indebtedness, to substantially
the same extent as, or to a greater extent than, the notes are subordinated to
Senior Indebtedness.
"Senior Indebtedness" means, with respect to any Person:
(1) all Obligations of such Person outstanding under the new credit
facility and all Hedging Obligations payable to a lender or an
Affiliate thereof or to a Person that was a lender or an Affiliate
thereof at the time the contract was entered into under the new
credit facility or any of its Affiliates, including, without
limitation, interest accruing subsequent to the filing of, or which
would have accrued but for the filing of,
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a petition for bankruptcy, whether or not such interest is an
allowable claim in such bankruptcy proceeding;
(2) any other Indebtedness, unless the instrument under which such
Indebtedness is incurred expressly provides that it is subordinated
in right of payment to any other Senior Indebtedness of such Person;
and
(3) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior
Indebtedness will not include:
(a) any liability for federal, state, local or other taxes;
(b) any Indebtedness of such Person, other than pursuant to the new
credit facility, to any of its Subsidiaries or other
Affiliates;
(c) any trade payables; or
(d) any Indebtedness that is incurred in violation of the indenture.
"Subordinated Note Obligations" means all obligations with respect to the
notes, including, without limitation, principal, premium, if any, interest and
Liquidated Damages, if any, payable pursuant to the terms of the notes,
including upon the acceleration or redemption thereof, together with and
including any amounts received or receivable upon the exercise of rights of
rescission or other rights of action, including claims for damages, or
otherwise.
The indenture will further require that Condor promptly notify holders of
Senior Indebtedness if payment of the notes is accelerated because of an Event
of Default. As a result of the subordination provisions described above, in
the event of a liquidation or insolvency, holders of notes may recover less
ratably than creditors of Condor who are holders of Senior Indebtedness.
Note Guarantees
The Note Guarantees will be subordinated to the prior payment in full in
cash or cash equivalents of all Senior Indebtedness of the Guarantor,
including the Guarantor's guarantee of the new credit facility, to the same
extent that the notes are subordinated to Senior Indebtedness of Condor. The
obligations of the Guarantor under the Note Guarantees will be limited so as
not to constitute a fraudulent conveyance under applicable law.
The indenture will provide that the Guarantor may not consolidate with or
merge with or into, whether or not the Guarantor is the surviving Person,
another Person or entity whether or not affiliated with the Guarantor unless:
(1) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger, if other
than the Guarantor or Condor, unconditionally assumes all the
obligations of the Guarantor pursuant to a supplemental indenture in
form and substance reasonably satisfactory to the trustee under the
indenture, the Note Guarantees and the registration rights
agreement;
(2) immediately after giving effect to such transaction, no Default or
Event of Default exists;
(3) Condor (a) would, at the time of such transaction and after giving
pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the covenant described
under the caption "--Certain Covenants--Incurrence of Indebtedness
and Issuance of
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Preferred Stock," or (b) would, together with its Restricted
Subsidiaries, have a higher Fixed Charge Coverage Ratio immediately
after such transaction, after giving pro forma effect thereto as if
such transaction had occurred at the beginning of the applicable
four-quarter period, than the Fixed Charge Coverage Ratio of Condor
and its Restricted Subsidiaries immediately prior to such
transaction.
The requirements of clause (3) above will not apply in the case of (x) a
consolidation with or merger into Condor or (y) a merger of any Person into
the Guarantor or the consolidation of any Person with the Guarantor if the
Guarantor is the surviving Person.
The indenture will provide that, in the event of a sale or other
disposition of all of the assets of the Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
capital stock of the Guarantor, the Guarantor, in the event of a sale or other
disposition, by way of such a merger, consolidation or otherwise, or a sale or
other disposition of all of the capital stock of the Guarantor, will be
released and relieved of any obligations under the Note Guarantees; provided
that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the indenture. See "--Repurchase
at the Option of holders--Asset Sales."
Optional Redemption
Except as provided below, the notes will not be redeemable at Condor's
option prior to May 1, 2004. Thereafter, the notes will be subject to
redemption at any time at the option of Condor, in whole or in part, upon not
less than 30 nor more than 60 days' notice, in cash at the redemption prices,
expressed as percentages of principal amount, set forth below, plus accrued
and unpaid interest and Liquidated Damages, if any, thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on May 1
of the years indicated below:
Year Percentage
- ----- ----------
2004.............................................................. 105.938%
2005.............................................................. 103.958%
2006.............................................................. 101.979%
2007 and thereafter............................................... 100.000%
Notwithstanding the foregoing, on or prior to May 1, 2002, Condor may
redeem up to 35% of the aggregate principal amount of notes from time to time
originally issued under the indenture in cash at a redemption price of
111.875% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the redemption date, with the net cash
proceeds of one or more Public Equity Offerings; provided that:
(1) at least 65% of the aggregate principal amount of notes from time to
time originally issued under the indenture remains outstanding
immediately after the occurrence of any such redemption; and
(2) such redemption shall occur within 90 days of the date of the closing
of any such Public Equity Offering.
Selection and Notice
If less than all of the notes are to be redeemed at any time, the trustee
will select the notes for redemption as follows:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the notes are listed; or
(2) if the notes are not so listed, on a pro rata basis, by lot or by
such method as the trustee shall deem fair and appropriate;
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provided that no notes of $1,000 or less shall be redeemed in part.
Notices of redemption shall be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address. Notices of redemption may not be
conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to such note shall state the portion of the principal amount thereof
to be redeemed. A new note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original note. Notes called for redemption become due on the date fixed
for redemption. On and after the redemption date, interest ceases to accrue on
notes or portions of them called for redemption.
Mandatory Redemption
Condor is not required to make mandatory redemption of, or sinking fund
payments with respect to, the notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each holder of notes will
have the right to require Condor to repurchase all or any part equal to $1,000
or an integral multiple thereof of such holder's notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of
repurchase (the "Change of Control Payment"). Within 60 days following any
Change of Control, Condor will, or will cause the trustee to, mail a notice to
each holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase notes on the date specified in
such notice, which date shall be no earlier than 30 days and no later than 60
days from the date such notice is mailed (the "Change of Control Payment
Date"), pursuant to the procedures required by the indenture and described in
such notice. Condor will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the
provisions of the indenture relating to such Change of Control Offer, Condor
will comply with the applicable securities laws and regulations and shall not
be deemed to have breached their obligations described in the indenture by
virtue thereof.
On the Change of Control Payment Date, Condor will, to the extent lawful:
(1) accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all notes or portions thereof so
tendered; and
(3) deliver or cause to be delivered to the trustee the notes so
accepted together with an Officers' Certificate stating the
aggregate principal amount of notes or portions thereof being
purchased by Condor.
The Paying Agent will promptly mail to each holder of notes so tendered
the Change of Control Payment for such notes, and the trustee will promptly
authenticate and mail, or cause to be transferred by book-entry, to each
holder a new note equal in principal amount to any unpurchased portion of the
notes surrendered, if any; provided that each such new note will be in a
principal amount of $1,000 or an integral multiple thereof.
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The indenture will provide that, prior to complying with the provisions
of this covenant, but in any event within 90 days following a Change of
Control, Condor will either repay all outstanding Senior Indebtedness or
obtain the requisite consents, if any, under all agreements governing
outstanding Senior Indebtedness to permit the repurchase of notes required by
this covenant. The indenture requires Condor to publicly announce the results
of the Change of Control Offer on or as soon as practicable after the Change
of Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the holders of the notes to require that Condor
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
The new credit facility will prohibit Condor from purchasing any notes
and also will provide that some change of control events, which may include
events not otherwise constituting a Change of Control under the indenture,
with respect to Condor would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Indebtedness to which
Condor becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when Condor is prohibited from
purchasing notes, Condor could seek the consent of its lenders to the purchase
of notes or could attempt to refinance the borrowings that contain such
prohibition. If Condor does not obtain such a consent or repay such
borrowings, Condor will remain prohibited from purchasing notes. In such case,
Condor's failure to purchase tendered notes would constitute an Event of
Default under the indenture, which would, in turn, constitute a default under
the new credit facility. In such circumstances, the subordination provisions
in the indenture would likely restrict payments to the holders of notes.
Condor will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the indenture applicable to a Change of Control Offer made by Condor
and purchases all notes validly tendered and not withdrawn under such Change
of Control Offer.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition, other
than by way of merger or consolidation, in one or a series of
related transactions, of all or substantially all of the assets of
Condor and its Subsidiaries, taken as a whole, to any "person" or
"group", as such terms are used in Section 13(d) of the Exchange
Act, other than the Principals and their Related Parties;
(2) the adoption of a plan for the liquidation or dissolution of Condor;
(3) the consummation of any transaction (including, without limitation,
any merger or consolidation) the result of which is that any
"person" or "group", as such terms are used in Section 13(d) of the
Exchange Act, other than the Principals and their Related Parties,
becomes the "beneficial owner", as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act, directly or indirectly
through one or more intermediaries, of 50% or more of the voting
power of the outstanding voting stock of Condor; or
(4) the first day on which a majority of the members of the board of
directors of Condor are not Continuing Members.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the assets of Condor and its Subsidiaries taken as a
whole. Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of notes to require
Condor to repurchase
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such notes as a result of a sale, lease, transfer, conveyance or other
disposition of less than all of the assets of Condor and its Subsidiaries
taken as a whole to another Person or group may be uncertain.
"Continuing Members" means, as of any date of determination, any member
of the board of directors of Condor who:
(1) was a member of such board of directors immediately after
consummation of the acquisition and the Acquisition Financing; or
(2) was nominated for election or elected to such board of directors
with the approval of, or whose election to the board of directors
was ratified by, at least a majority of the Continuing Members who
were members of such board of directors at the time of such
nomination or election or was proposed by DLJ Merchant Banking.
Asset Sales
The indenture will provide that Condor will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) Condor or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold
or otherwise disposed of; and
(2) at least 75% of the consideration therefor received by Condor or such
Restricted Subsidiary is in the form of:
(a) cash or Cash Equivalents; or
(b) property or assets that are used or useful in a Permitted
Business, or the Capital Stock of any Person engaged in a
Permitted Business if, as a result of the acquisition by Condor
or any Restricted Subsidiary thereof, such Person becomes a
Restricted Subsidiary. For the purposes of this provision, each
of the following shall be deemed to be cash:
(x) any liabilities, as shown on Condor's or such Restricted
Subsidiary's most recent balance sheet, of Condor or any
Restricted Subsidiary, other than contingent liabilities
and liabilities that are by their terms subordinated to
the notes or any guarantee thereof, that are assumed by
the transferee of any such assets pursuant to a customary
novation agreement that releases Condor or such Restricted
Subsidiary from further liability;
(y) any securities, notes or other obligations received by
Condor or such Restricted Subsidiary from such transferee
that are contemporaneously, subject to ordinary settlement
periods, converted by Condor or such Restricted Subsidiary
into cash or Cash Equivalents, to the extent of the cash
or Cash Equivalents received; and
(z) any Designated Noncash Consideration received by Condor or
any of its Restricted Subsidiaries in such Asset Sale
having an aggregate fair market value, taken together with
all other Designated Noncash Consideration received
pursuant to this clause (z) that is at that time
outstanding, not to exceed 15% of Total Assets at the time
of the receipt of such Designated Noncash Consideration,
with the fair market value of each
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item of Designated Noncash Consideration being measured at
the time received and without giving effect to subsequent
changes in value;
provided that the 75% limitation referred to in clause (2) above will not
apply to any Asset Sale in which the cash or Cash Equivalents portion of the
consideration received therefrom, determined in accordance with subclauses
(x), (y) and (z) above, is equal to or greater than what the after-tax
proceeds would have been had such Asset Sale complied with the aforementioned
75% limitation.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Condor or such Restricted Subsidiary, as the case may be, shall apply such Net
Proceeds, at its option, or to the extent Condor is required to apply such Net
Proceeds pursuant to the terms of the new credit facility, to:
(1) repay or purchase Senior Indebtedness or Pari Passu Indebtedness of
Condor or any Indebtedness of any Restricted Subsidiary, as the case
may be, provided that if Condor shall so repay or purchase Pari
Passu Indebtedness of Condor;
(a) it will equally and ratably reduce Indebtedness under the notes
if the notes are then redeemable; or
(b) if the notes may not then be redeemed, Condor shall make an
offer, in accordance with the procedures set forth below for an
Asset Sale Offer, to all holders of notes to purchase at a
purchase price equal to 100% of the principal amount of the
notes, plus accrued and unpaid interest and Liquidated Damages,
if any, thereon to the date of purchase, the notes that would
otherwise be redeemed; or
(2) an investment in property, the making of a capital expenditure or
the acquisition of assets that are used or useful in a Permitted
Business, or Capital Stock of any Person primarily engaged in a
Permitted Business if:
(a) as a result of the acquisition by Condor or any Restricted
Subsidiary thereof, such Person becomes a Restricted
Subsidiary; or
(b) the investment in such Capital Stock is permitted by clause (6)
of the definition of Permitted Investments.
Pending the final application of any such Net Proceeds, Condor may
temporarily reduce Indebtedness or otherwise invest such Net Proceeds in any
manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0
million, Condor will be required to make an offer to all holders of notes (an
"Asset Sale Offer") to purchase the maximum principal amount of notes that may
be purchased out of the Excess Proceeds, at an offer price in cash in an
amount equal to 100% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase, in
accordance with the procedures set forth in the indenture.
To the extent that any Excess Proceeds remain after consummation of an
Asset Sale Offer, Condor may use such Excess Proceeds for any purpose not
otherwise prohibited by the indenture. If the aggregate principal amount of
notes surrendered by holders thereof in connection with an Asset Sale Offer
exceeds the amount of Excess Proceeds, the trustee shall select the notes to
be purchased as set forth under "--Selection and Notice." Upon completion of
such offer to purchase, the amount of Excess Proceeds shall be reset at zero.
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Condor will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent
such laws and regulations are applicable in connection with the repurchase of
the notes pursuant to an Asset Sale Offer. To the extent that the provisions
of any securities laws or regulations conflict with the provisions of the
indenture relating to such Asset Sale Offer, Condor will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations described in the indenture by virtue thereof.
Certain Covenants
Restricted Payments
The indenture will provide that Condor will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of Condor's or any of its Restricted
Subsidiaries' Equity Interests, other than dividends or
distributions payable in Equity Interests (other than Disqualified
Stock) of Condor or dividends or distributions payable to Condor or
any Wholly Owned Restricted Subsidiary of Condor;
(2) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of Condor, any of its Restricted Subsidiaries or any other
Affiliate of Condor, other than any such Equity Interests owned by
Condor or any Restricted Subsidiary of Condor;
(3) make any principal payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value, any
Indebtedness of Condor that is subordinated in right of payment to
the notes, except in accordance with the mandatory redemption or
repayment provisions set forth in the original documentation
governing such Indebtedness, but not pursuant to any mandatory offer
to repurchase upon the occurrence of any event; or
(4) make any Restricted Investment
all such payments and other actions set forth in clauses (1) through (4)
above being collectively referred to as "Restricted Payments",
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(2) Condor would, immediately after giving pro forma effect thereto as
if such Restricted Payment had been made at the beginning of the
applicable four-quarter period, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant
described under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(3) such Restricted Payment, together with:
o the aggregate amount of all other Restricted Payments made by
Condor and its Restricted Subsidiaries after the date of the
indenture but
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o excluding Restricted Payments permitted by clauses (1), to the
extent that the declaration of any dividend referred to therein
reduces amounts available for Restricted Payments pursuant to this
clause (3), (2) through (7), (9), (10), (13), (14) and (16) of the
next succeeding paragraph, is less than the sum, without
duplication, of:
(a) 50% of the Consolidated Net Income of Condor for the period,
taken as one accounting period, commencing July 1, 1999 to the
end of Condor's most recently ended fiscal quarter for which
internal financial statements are available at the time of such
Restricted Payment; or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit; plus
(b) 100% of the Qualified Proceeds received by Condor on or after
the date of the indenture from contributions to Condor's
capital or from the issue or sale on or after the date of the
indenture of Equity Interests of Condor or of Disqualified
Stock or convertible debt securities of Condor to the extent
that they have been converted into such Equity Interests other
than:
o Equity Interests, Disqualified Stock or convertible debt
securities sold to a Subsidiary of Condor
o Disqualified Stock or convertible debt securities that have
been converted into Disqualified Stock; plus
(c) the amount equal to the net reduction in Investments in Persons
after the date of the indenture who are not Restricted
Subsidiaries, other than Permitted Investments, resulting from:
(x) Qualified Proceeds received as a dividend, repayment of a
loan or advance or other transfer of assets, valued at the
fair market value thereof, to Condor or any Restricted
Subsidiary from such Persons;
(y) Qualified Proceeds received upon the sale or liquidation of
such Investment; and
(z) the redesignation of Unrestricted Subsidiaries, excluding
any increase in the amount available for Restricted
Payments pursuant to clause (8) or (12) below arising from
the redesignation of such Unrestricted Subsidiary, whose
assets are used or useful in, or which is engaged in, one
or more Permitted Business as Restricted Subsidiaries,
valued (proportionate to Condor's equity interest in such
Subsidiary) at the fair market value of the net assets of
such Subsidiary at the time of such redesignation.
The foregoing provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment
would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of
Condor in exchange for, or out of the net cash proceeds of the
substantially concurrent sale, other than to a Subsidiary of Condor,
of other Equity Interests of Condor other than any Disqualified
Stock, provided that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (3)(b)
of the preceding paragraph;
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(3) the defeasance, redemption, repurchase, retirement or other
acquisition of subordinated Indebtedness of Condor with the net cash
proceeds from an incurrence of, or in exchange for, Permitted
Refinancing Indebtedness;
(4) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Condor held by any member of
Condor's, or any of its Restricted Subsidiaries', management
pursuant to any management equity subscription agreement or stock
option agreement provided that:
(a) the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed:
(x) $2.0 million in any calendar year, with unused amounts in
any calendar year being carried over to succeeding
calendar years subject to a maximum without giving effect
to the following clause (y) of $4.0 million in any
calendar year; plus
(y) the aggregate net cash proceeds received by Condor during
such calendar year from any reissuance of Equity Interests
by Condor to members of management of Condor and its
Restricted Subsidiaries, provided that the amount of any
such net cash proceeds that are used to permit an
acquisition or retirement for value pursuant to this
clause (4) shall be excluded from clause (3)(b) of the
preceding paragraph; and
(b) no Default or Event of Default shall have occurred and be
continuing immediately after such transaction;
(5) payments and transactions in connection with the acquisition,
including any purchase price adjustment or any other payments made
pursuant to the merger agreement or the financial advisory
agreements with BCMC or DLJSC or the warrant and stock option
termination agreements described under "Certain Relationships and
Related Party Transactions", the Acquisition Financing, the
Offering, the new credit facility, including commitment, syndication
and arrangement fees payable thereunder, and the application of the
proceeds thereof, and the payment of fees and expenses with respect
thereto; provided, that the Qualified Proceeds of any offering of
Equity Securities that results in an "IPO" incentive payment
pursuant to the merger agreement shall be excluded from clause
(3)(b) of the preceding paragraph to the extent of the amount of
such incentive payment;
(6) the payment of dividends by a Restricted Subsidiary on any class of
common stock of such Restricted Subsidiary if:
(a) such dividend is paid pro rata to all holders of such class of
common stock; and
(b) at least 51% of such class of common stock is held by Condor or
one or more of its Restricted Subsidiaries;
(7) the repurchase of any class of common stock of a Restricted
Subsidiary if:
(a) such repurchase is made pro rata with respect to such class of
common stock; and
(b) at least 51% of such class of common stock is held by Condor or
one or more of its Restricted Subsidiaries;
(
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(8) any other Restricted Investment made in a Permitted Business which,
together with all other Restricted Investments made pursuant to this
clause (8) since the date of the indenture, does not exceed $15.0
million, in each case, after giving effect to all subsequent
reductions in the amount of any Restricted Investment made pursuant
to this clause (8), either as a result of:
(a) the repayment or disposition thereof for cash or
(b) the redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary, valued proportionate to Condor's equity interest in such
Subsidiary at the time of such redesignation, at the fair market
value of the net assets of such Subsidiary at the time of such
redesignation,
in the case of clause (a) and (b), not to exceed the amount of such
Restricted Investment previously made pursuant to this clause (8); provided
that no Default or Event of Default shall have occurred and be continuing
immediately after making such Restricted Investment;
(9) the declaration and payment of dividends to holders of any class or
series of Disqualified Stock of Condor or any Restricted Subsidiary
issued on or after the date of the indenture in accordance with the
covenant described under the caption "--Incurrence of Indebtedness
and Issuance of Preferred Stock"; provided that no Default or Event
of Default shall have occurred and be continuing immediately after
making such Restricted Payment;
(10) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the
exercise price of such options;
(11) the payment of dividends or distributions on Condor's common stock,
following the first public offering of Condor's common stock after
the date of the indenture, of up to 6.0% per annum of the net
proceeds received by Condor from such public offering of its common
stock other than with respect to public offerings with respect to
Condor's common stock registered on Form S-8; provided that no
Default or Event of Default shall have occurred and be continuing
immediately after any such payment of dividends or distributions;
(12) any other Restricted Payment which, together with all other
Restricted Payments made pursuant to this clause (12) since the date
of the indenture, does not exceed $1.0 million, in each case, after
giving effect to all subsequent reductions in the amount of any
Restricted Investment made pursuant to this clause 12 either as a
result of:
(a) the repayment or disposition thereof for cash or
(b) the redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary, valued proportionate to Condor's equity interest in such
Subsidiary at the time of such redesignation, at the fair market
value of the net assets of such Subsidiary at the time of such
redesignation,
in the case of clause (a) and (b), not to exceed the amount of such
Restricted Investment previously made pursuant to this clause (12); provided
that no Default or Event of Default shall have occurred and be continuing
immediately after making such Restricted Payment;
(13) the pledge by Condor of the Capital Stock of an Unrestricted
Subsidiary of Condor to secure Non-Recourse Debt of such
Unrestricted Subsidiary;
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(14) the purchase, redemption or other acquisition or retirement for
value of any Equity Interests of any Restricted Subsidiary issued
after the date of the indenture, provided that the aggregate price
paid for any such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed the sum of:
(a) the amount of cash and Cash Equivalents received by such
Restricted Subsidiary from the issue or sale thereof; and
(b) any accrued dividends thereon the payment of which would be
permitted pursuant to clause (9) above;
(15) any Investment in an Unrestricted Subsidiary that is funded by
Qualified Proceeds received by Condor on or after the date of the
indenture from contributions to Condor's capital or from the issue
and sale on or after the date of the indenture of Equity Interests
of Condor or of Disqualified Stock or convertible debt securities to
the extent they have been converted into such Equity Interests,
other than Equity Interests, Disqualified Stock or convertible debt
securities sold to a Subsidiary of Condor and other than
Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock, in an amount, measured at the
time such Investment is made and without giving effect to subsequent
changes in value, that does not exceed the amount of such Qualified
Proceeds, excluding any such Qualified Proceeds to the extent
utilized to permit a prior "Restricted Payment" pursuant to clause
(3)(b) of the preceding paragraph; and
(16) distributions or payments of Receivables Fees.
The board of directors of Condor may designate any Restricted Subsidiary
to be an Unrestricted Subsidiary if such designation would not cause a
Default. For purposes of making such designation, all outstanding Investments
by Condor and its Restricted Subsidiaries, except to the extent repaid in
cash, in the Subsidiary so designated will be deemed to be Restricted Payments
at the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Restricted Investments in
an amount equal to the greater of (1) the net book value of such Investments
at the time of such designation and (2) the fair market value of such
Investments at the time of such designation. Such designation will only be
permitted if such Restricted Investment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of (1) all Restricted Payments, other than cash, shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by Condor or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment and (2)
Qualified Proceeds, other than cash, shall be the fair market value on the
date of receipt thereof by Condor of such Qualified Proceeds. The fair market
value of any non-cash Restricted Payment shall be determined by the board of
directors of Condor whose resolution with respect thereto shall be delivered
to the trustee. Not later than the date of making any Restricted Payment,
Condor shall deliver to the trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed.
Incurrence of Indebtedness and Issuance of Preferred Stock
The indenture will provide that:
(1) Condor will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur")
any Indebtedness, including Acquired Indebtedness;
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(2) Condor will not, and will not permit any of its Restricted
Subsidiaries to, issue any shares of Disqualified Stock; and
(3) Condor will not permit any of its Restricted Subsidiaries to issue
any shares of preferred stock;
provided that Condor or any Restricted Subsidiary may incur Indebtedness,
including Acquired Indebtedness, or issue shares of Disqualified Stock if the
Fixed Charge Coverage Ratio for Condor's most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred or such
Disqualified Stock is issued would have been at least 2.0 to 1 if such
four-quarter period ended on or prior to December 31, 2001 and 2.25 to 1
thereafter, determined on a consolidated pro forma basis, including a pro
forma application of the net proceeds therefrom, as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
(1) the incurrence by Condor and its Restricted Subsidiaries of
Indebtedness under the new credit facility and the Foreign Credit
Facilities; provided that the aggregate principal amount of all
Indebtedness, with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of Condor
and such Restricted Subsidiaries thereunder, then classified as
having been incurred in reliance upon this clause (1) that remains
outstanding under the new credit facility and the Foreign Credit
Facilities after giving effect to such incurrence does not exceed an
amount equal to $70.0 million;
(2) the incurrence by Condor and its Restricted Subsidiaries of Existing
Indebtedness;
(3) the incurrence by Condor of Indebtedness represented by the notes
and the indenture and by the Guarantor of Indebtedness represented
by the indenture and the Note Guarantees;
(4) the incurrence by Condor or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Expenditure Indebtedness,
Capital Lease Obligations or other obligations, in each case, the
proceeds of which are used solely for the purpose of financing all
or any part of the purchase price or cost of construction or
improvement of property, plant or equipment, including acquisitions
of Capital Stock of a Person that becomes a Restricted Subsidiary to
the extent of the fair market value of the property, plant or
equipment so acquired, used in the business of Condor or such
Restricted Subsidiary, in an aggregate principal amount, or accreted
value, as applicable, not to exceed $10.0 million outstanding after
giving effect to such incurrence;
(5) Indebtedness arising from agreements of Condor or any Restricted
Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a
Subsidiary, other than guarantees of Indebtedness incurred by any
Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition;
provided that:
(a) such Indebtedness is not reflected on the balance sheet of
Condor or any Restricted Subsidiary, contingent obligations
referred to in a footnote or footnotes to financial statements
and not otherwise reflected on the balance sheet will not be
deemed to be reflected on such balance sheet for purposes of
this clause (a); and
(b) the maximum assumable liability in respect of such Indebtedness
shall at no time exceed the gross proceeds including non-cash
proceeds, the fair market value of such non-cash proceeds
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being measured at the time received and without giving effect
to any subsequent changes in value, actually received by Condor
and/or such Restricted Subsidiary in connection with such
disposition;
(6) the incurrence by Condor or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace
Indebtedness, other than intercompany Indebtedness, that was
permitted by the indenture to be incurred;
(7) the incurrence by Condor or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Condor and/or any of its
Restricted Subsidiaries; provided that:
(a) if Condor is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in
full in cash of all obligations with respect to the notes; and
(b) (x) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person
other than Condor or a Restricted Subsidiary thereof and (y)
any sale or other transfer of any such Indebtedness to a Person
that is not either Condor or a Restricted Subsidiary thereof
shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by Condor or such Restricted Subsidiary, as
the case may be, that was not permitted by this clause (7);
(8) the incurrence by Condor or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or
hedging;
(a) interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of this indenture
to be outstanding; and
(b) exchange rate risk with respect to agreements or Indebtedness
of such Person payable denominated in a currency other than
U.S. dollars;
provided that such agreements do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities
and compensation payable thereunder;
(9) the guarantee by Condor or any of its Restricted Subsidiaries of
Indebtedness of Condor or a Restricted Subsidiary of Condor that was
permitted to be incurred by another provision of this covenant;
(10) the incurrence by Condor or any of its Restricted Subsidiaries of
Indebtedness in connection with an acquisition in an aggregate
principal amount, or accreted value, as applicable, not to exceed
$10.0 million outstanding after giving effect to such incurrence;
(11) obligations in respect of performance and surety bonds and
completion guarantees, including related letters of credit, provided
by Condor or any Restricted Subsidiary in the ordinary course of
business; and
(12) the incurrence by Condor or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount, or
accreted value, as applicable, outstanding after giving effect to
such incurrence, including all Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any Indebtedness incurred
pursuant to this clause (12), not to exceed $10.0 million.
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For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Indebtedness described in clauses (1) through (12)
above or is entitled to be incurred pursuant to the first paragraph of this
covenant, Condor shall, in its sole discretion, classify such item of
Indebtedness in any manner that complies with this covenant and such item of
Indebtedness will be treated as having been incurred pursuant to only one of
such clauses or pursuant to the first paragraph hereof. In addition, Condor
may, at any time, change the classification of an item of Indebtedness, or any
portion thereof, to any other clause or to the first paragraph hereof provided
that Condor would be permitted to incur such item of Indebtedness, or such
portion thereof, pursuant to such other clause or the first paragraph hereof,
as the case may be, at such time of reclassification. Accrual of interest,
accretion or amortization of original issue discount will not be deemed to be
an incurrence of Indebtedness for purposes of this covenant.
All Indebtedness under the new credit facility and the Foreign Credit
Facilities outstanding on April 15, 1999, the date on which notes were first
issued and authenticated under the indenture, shall be deemed to have been
incurred on such date in reliance on the first paragraph of the covenant
described under the caption "--Certain Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock." As a result, Condor will be permitted to
incur significant additional secured indebtedness under clause (1) of the
definition of "Permitted Indebtedness." See "Risk Factors."
Liens
The indenture will provide that Condor will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any lien, other than a Permitted Lien, that secures
obligations under any Pari Passu Indebtedness or subordinated Indebtedness of
Condor on any asset or property now owned or hereafter acquired by Condor or
any of its Restricted Subsidiaries, or any income or profits therefrom or
assign or convey any right to receive income therefrom, unless the notes are
equally and ratably secured with the obligations so secured until such time as
such obligations are no longer secured by a lien; provided that, in any case
involving a lien securing subordinated Indebtedness of Condor, such lien is
subordinated to the lien securing the notes to the same extent that such
subordinated Indebtedness is subordinated to the notes.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The indenture will provide that Condor will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to:
(1) (a) pay dividends or make any other distributions to Condor or
any of its Restricted Subsidiaries (x) on its Capital Stock or
(y) with respect to any other interest or participation in, or
measured by, its profits; or
(b) pay any Indebtedness owed to Condor or any of its Restricted
Subsidiaries;
(2) make loans or advances to Condor or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to Condor or any of its
Restricted Subsidiaries.
However, the foregoing restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the indenture;
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(2) the new credit facility as in effect as of the date of the
indenture, and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or
refinancings thereof;
(3) the indenture and the notes;
(4) applicable law and any applicable rule, regulation or order;
(5) any agreement or instrument of a Person acquired by Condor or any of
its Restricted Subsidiaries as in effect at the time of such
acquisition, except to the extent created in contemplation of such
acquisition, which encumbrance or restriction is not applicable to
any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired,
provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the indenture to be incurred;
(6) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(7) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described
in clause (5) above on the property so acquired;
(8) contracts for the sale of assets, including, without limitation,
customary restrictions with respect to a Subsidiary pursuant to an
agreement that has been entered into for the sale or disposition of
all or substantially all of the Capital Stock or assets of such
Subsidiary;
(9) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are, in the good faith judgment of Condor's board of
directors, not materially less favorable, taken as a whole, to the
holders of the notes than those contained in the agreements
governing the Indebtedness being refinanced;
(10) secured Indebtedness otherwise permitted to be incurred pursuant to
the covenants described under "--Incurrence of Indebtedness and
Issuance of Preferred Stock" and "--Liens" that limit the right of
the debtor to dispose of the assets securing such Indebtedness;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business;
(12) other Indebtedness or Disqualified Stock of Restricted Subsidiaries
permitted to be incurred subsequent to the Issuance Date pursuant to
the provisions of the covenant described under "--Incurrence of
Indebtedness and Issuance of Preferred Stock";
(13) customary provisions in joint venture agreements and other similar
agreements entered into in the ordinary course of business; and
(14) restrictions created in connection with any Receivables Facility
that, in the good faith determination of the board of directors of
Condor, are necessary or advisable to effect such Receivables
Facility.
Merger, Consolidation, or Sale of Assets
The indenture will provide that Condor may not consolidate or merge with
or into, whether or not Condor is the surviving corporation, or sell, assign,
transfer, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions to, another Person
unless:
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(1) Condor is the surviving corporation or the Person formed by or
surviving any such consolidation or merger, if other than Condor, or
to which such sale, assignment, transfer, conveyance or other
disposition shall have been made is a corporation organized or
existing under the laws of the United States, any state thereof or
the District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger,
if other than Condor, or the Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made
assumes all the obligations of Condor under the registration rights
agreement, the notes and the indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) Condor or the Person formed by or surviving any such consolidation
or merger, if other than Condor, or to which such sale, assignment,
transfer, conveyance or other disposition shall have been made
(a) will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted
to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock"
or
(b) would, together with its Restricted Subsidiaries, have a higher
Fixed Charge Coverage Ratio immediately after such transaction,
after giving pro forma effect thereto as if such transaction
had occurred at the beginning of the applicable four-quarter
period, than the Fixed Charge Coverage Ratio of Condor and its
Restricted Subsidiaries immediately prior to such transaction.
The foregoing clause (4) will not prohibit the merger or:
(a) a merger between Condor and a Wholly Owned Restricted Subsidiary;
or
(b) a merger between Condor and an Affiliate incorporated solely
for the purpose of reincorporating Condor in another State of
the United States so long as, in each case, the amount of
Indebtedness of Condor and its Restricted Subsidiaries is not
increased thereby.
The indenture will provide that Condor will not lease all or
substantially all of its assets to any Person.
Transactions with Affiliates
The indenture will provide that Condor will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate of Condor (each of the foregoing,
an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable to
Condor or such Restricted Subsidiary than those that would have been
obtained in a comparable transaction by Condor or such Restricted
Subsidiary with an unrelated Person; and
(2) Condor delivers to the trustee, with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $7.5 million, either:
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(a) a resolution of the board of directors set forth in an
Officers' Certificate certifying that such Affiliate
Transaction complies with clause (1) above and that such
Affiliate Transaction has been approved by a majority of the
disinterested members of the board of directors; or
(b) an opinion as to the fairness to the holders of such Affiliate
Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national
standing.
Notwithstanding the foregoing, the following items shall not be deemed to
be Affiliate Transactions:
(1) customary directors' fees, indemnification or similar arrangements
or any employment agreement or other compensation plan or
arrangement entered into by Condor or any of its Restricted
Subsidiaries in the ordinary course of business, including ordinary
course loans to employees not to exceed (a) $5.0 million outstanding
in the aggregate at any time and (b) $2.0 million to any one
employee, and consistent with the past practice of Condor or such
Restricted Subsidiary;
(2) transactions between or among Condor and/or its Restricted
Subsidiaries;
(3) payments of customary fees by Condor or any of its Restricted
Subsidiaries to DLJ Merchant Banking and its Affiliates made for any
financial advisory, financing, underwriting or placement services or
in respect of other investment banking activities, including,
without limitation, in connection with acquisitions or divestitures
which are approved by a majority of the board of directors in good
faith;
(4) any agreement as in effect on the date of the indenture or any
amendment thereto, so long as such amendment is not disadvantageous
to the holders of the notes in any material respect, or any
transaction contemplated thereby;
(5) payments and transactions in connection with the acquisition,
including any purchase price adjustment or any other payments made
pursuant to the merger agreement or the financial advisory
agreements with BCMC or DLJSC or the warrant and stock option
termination agreements described under "Certain Relationships and
Related Party Transactions", and the Acquisition Financing, the new
credit facility, including commitment, syndication and arrangement
fees payable thereunder, and the Offering, including underwriting
discounts and commissions in connection therewith, and the
application of the proceeds thereof, and the payment of the fees and
expenses with respect thereto;
(6) Restricted Payments that are permitted by the provisions of the
indenture described under the caption "--Restricted Payments" and
any Permitted Investments;
(7) payments and transactions in connection with any Global Technology
Partners Investment or Global Technology Partners Loan, and the
payment of fees and expenses with respect thereto;
(8) any issuance of capital stock of Condor to Global Technology Partners
other than Disqualified Stock; and
(9) sales of accounts receivable, or participations therein, in
connection with any Receivables Facility.
Sale and Leaseback Transactions
The indenture will provide that Condor will not, and will not permit any
of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that Condor or any Restricted Subsidiary may enter into
a sale and leaseback transaction if:
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(1) Condor or such Restricted Subsidiary, as the case may be, could have:
(a) incurred Indebtedness in an amount equal to the Attributable
Indebtedness relating to such sale and leaseback transaction
pursuant to the Fixed Charge Coverage Ratio test set forth in
the first paragraph of the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock";
and
(b) incurred a lien to secure such Indebtedness pursuant to the
covenant described under the caption "--Liens";
(2) the gross cash proceeds of such sale and leaseback transaction are
at least equal to the fair market value of the property that is the
subject of such sale and leaseback transaction; and
(3) the transfer of assets in such sale and leaseback transaction is
permitted by, and Condor applies the proceeds of such transaction in
compliance with, the covenant described under the caption
"Repurchase at the Option of Holders--Asset Sales."
No Senior Subordinated Indebtedness
The indenture will provide that Condor will not incur any Indebtedness
that is subordinated or junior in right of payment to any Senior Indebtedness
and senior in right of payment to the notes and the Guarantor will not incur
any Indebtedness that is subordinated or junior in right of payment to any
Senior Indebtedness and senior in right of payment to the Note Guarantees.
Reports
The indenture will provide that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any notes are outstanding, Condor will furnish to the holders of
notes:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms
10-Q and 10-K if Condor were required to file such forms, including
a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information
only, a report thereon by Condor's certified independent
accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if Condor were required to file such reports,
in each case, within the time periods specified in the Commission's
rules and regulations.
In addition, following the consummation of the exchange offer, whether or
not required by the rules and regulations of the Commission, Condor will file
a copy of all such information and reports referred to in clauses (1) and (2)
above with the Commission for public availability within the time periods
specified in the Commission's rules and regulations, unless the Commission
will not accept such a filing, and make such information available to
securities analysts and prospective investors upon request. In addition,
Condor and the Guarantor have agreed that, for so long as any notes remain
outstanding, it will furnish to the holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
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Events of Default and Remedies
The indenture will provide that each of the following constitutes an
Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the notes, whether or not
prohibited by the subordination provisions of the indenture;
(2) default in payment when due of the principal of or premium, if any,
on the notes, whether or not prohibited by the subordination
provisions of the indenture;
(3) failure by Condor or any of its Restricted Subsidiaries for 30 days
after receipt of notice from the trustee or holders of at least 25%
in principal amount of the notes then outstanding to comply with the
provisions described under the captions "Repurchase at the Option of
Holders--Change of Control--Asset Sales," "Certain
Covenants--Restricted Payments," "--Incurrence of Indebtedness and
Issuance of Preferred Stock" or "Merger, Consolidation or Sale of
Assets";
(4) failure by Condor for 60 days after notice from the trustee or the
holders of at least 25% in principal amount of the notes then
outstanding to comply with any of its other agreements in the
indenture or the notes;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by Condor or any of its
Restricted Subsidiaries, or the payment of which is guaranteed by
Condor or any of its Restricted Subsidiaries, whether such
Indebtedness or guarantee now exists, or is created after the date
of the indenture, which default:
(a) is caused by a failure to pay Indebtedness at its stated final
maturity, after giving effect to any applicable grace period
provided in such Indebtedness (a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
stated final maturity and, in each case, the principal amount
of any such Indebtedness, together with the principal amount of
any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more;
(6) failure by Condor or any of its Restricted Subsidiaries to pay final
judgments aggregating in excess of $10.0 million, net of any amounts
with respect to which a reputable and creditworthy insurance company
has acknowledged liability in writing, which judgments are not paid,
discharged or stayed for a period of 60 days;
(7) except as permitted by the indenture, the Note Guarantees are held
in any judicial proceeding to be unenforceable or invalid or cease
for any reason to be in full force and effect or the Guarantor, or
any Person acting on behalf of the Guarantor, denies or disaffirms
its obligations under the Note Guarantees; and
(8) certain events of bankruptcy or insolvency with respect to Condor or
any of its Restricted Subsidiaries that is a Significant Subsidiary.
If any Event of Default, other than an Event of Default specified in
clause (8) above with respect to certain events of bankruptcy or insolvency
with respect to Condor or any Restricted Subsidiary that is a Significant
Subsidiary, occurs and is continuing, the holders of at least 25% in principal
amount of the then outstanding notes may direct the trustee to declare all the
notes to be due and payable immediately; provided that, so long as any
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Indebtedness permitted to be incurred pursuant to the new credit facility
shall be outstanding, such acceleration shall not be effective until the
earlier of:
(1) an acceleration of any such Indebtedness under the new credit
facility; or
(2) five business days after receipt by Condor and the administrative
agent under the new credit facility of written notice of such
acceleration.
Upon any such declaration, the notes shall become due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
specified in clause (8) above with respect to certain events of bankruptcy or
insolvency with respect to Condor or any Restricted Subsidiary that is a
Significant Subsidiary, all outstanding notes will become due and payable
without further action or notice. Holders of the notes may not enforce the
indenture or the notes except as provided in the indenture.
The holders of a majority in aggregate principal amount of the then
outstanding notes by written notice to the trustee may on behalf of all of the
holders rescind an acceleration and its consequences if the rescission would
not conflict with any judgment or decree and if all existing Events of
Default, except nonpayment of principal, interest or premium or Liquidated
Damages, if any, that has become due solely because of the acceleration, have
been cured or waived, provided that, in the event of a declaration of
acceleration of the notes because an Event of Default has occurred and is
continuing as a result of the acceleration of any Indebtedness described in
clause (5) of the third preceding paragraph, the declaration of acceleration
of the notes shall be automatically annulled if the holders of any
Indebtedness described in such clause (5) have rescinded the declaration of
acceleration in respect of such Indebtedness within 30 days of the date of
such declaration and if:
(1) the annulment of the acceleration of the notes would not conflict
with any judgment or decree of a court of competent jurisdiction;
and
(2) all existing Events of Default, except non-payment of principal or
interest on the notes that became due solely because of the
acceleration of the notes, have been cured or waived.
Subject to limitations, holders of a majority in principal amount of the
then outstanding notes may direct the trustee in its exercise of any trust or
power. The trustee may withhold from holders of the notes notice of any
continuing Default or Event of Default, except a Default or Event of Default
relating to the payment of principal or interest, if it determines that
withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of
the notes waive any existing Default or Event of Default and its consequences
under the indenture except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the notes.
Condor is required to deliver to the trustee annually a statement
regarding compliance with the indenture, and Condor is required upon becoming
aware of any Default or Event of Default to deliver to the trustee a statement
specifying such Default or Event of Default.
No Personal Liability of Member, Directors, Officers, Employees and
Stockholders; Consent to Shareholder Payment
No member, director, officer, employee, incorporator or stockholder of
Condor or the Guarantor, as such, shall have any liability for any obligations
of Condor or the Guarantor under the notes or the indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each holder of notes, by accepting a note, waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the
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notes. Such waiver may not be effective to waive liabilities under the federal
securities laws, and it is the view of the Commission that such a waiver is
against public policy.
The indenture and the notes provide that each holder of a note, by
accepting such note, shall be deemed to have consented to the payment of the
Merger Consideration to former Condor stockholders pursuant to the merger
agreement (the "Shareholder Payment"). Subject to conditions, creditors
holding claims arising prior to the making of payments by a California
corporation to its shareholders are entitled under provisions of the
California General Corporation Law ("CGCL") to recover such amounts on behalf
of the corporation from such stockholders or the directors authorizing such
payments, if such payments were made in violation of financial limitations
specified in the CGCL. Consequently, to the extent all or a portion of the
Shareholder Payment was determined to have been made in violation of the CGCL
and if the debt of the holders of notes was deemed to have arisen prior to the
Shareholder Payment, the foregoing consent would have the effect of
eliminating any right such a holder may otherwise have pursuant to such
provisions of the CGCL to recover such portion of the Shareholder Payment from
such stockholders or the members of the Condor board of directors authorizing
the Shareholder Payment.
Legal Defeasance and Covenant Defeasance
Condor may, at its option and at any time, elect to have all of its and
the Guarantor's obligations discharged with respect to the outstanding notes,
the Note Guarantees and the indenture ("Legal Defeasance") except for:
(1) the rights of holders of outstanding notes to receive payments in
respect of the principal of, premium, if any, and interest and
Liquidated Damages, if any, on such notes when such payments are due
from the trust referred to below;
(2) Condor's obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for
payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and Condor's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, Condor may, at its option and at any time, elect to have its
obligations released with respect to several of the covenants that are
described in the indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the notes. In the event Covenant Defeasance occurs,
several of the events, not including non-payment with respect to the notes,
bankruptcy, receivership, rehabilitation and insolvency events, described
under "Events of Default and Remedies" will no longer constitute an Event of
Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(1) Condor must irrevocably deposit with the trustee, in trust, for the
benefit of the holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in
such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest and Liquidated Damages,
if any, on the outstanding notes on the stated maturity or on the
applicable redemption date, as the case may be, and Condor must
specify whether the notes are being defeased to maturity or to a
particular redemption date;
(2) in the case of Legal Defeasance, Condor shall have delivered to the
trustee an opinion of counsel in the United States reasonably
acceptable to the trustee confirming that:
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(a) Condor has received from, or there has been published by, the
Internal Revenue Service a ruling; or
(b) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm
that, subject to customary assumptions and exclusions, the
holders of the outstanding notes will not recognize income,
gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not
occurred;
(3) in the case of Covenant Defeasance, Condor shall have delivered to
the trustee an opinion of counsel in the United States reasonably
acceptable to the trustee confirming that, subject to customary
assumptions and exclusions, the holders of the outstanding notes
will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Covenant
Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit, other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit, or, insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on
the 123rd day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under, any material
agreement or instrument, other than the indenture, to which Condor
or any of its Subsidiaries is a party or by which Condor or any of
its Subsidiaries is bound;
(6) Condor must have delivered to the trustee an opinion of counsel to
the effect that, subject to customary assumptions and exclusions,
after the 123rd day following the deposit, the trust funds will not
be subject to the effect of Section 547 of the United States
Bankruptcy Code or any analogous New York State law provision or any
other applicable federal or New York bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights
generally;
(7) Condor must deliver to the trustee an Officers' Certificate stating
that the deposit was not made by Condor with the intent of
preferring the holders of notes over the other creditors of Condor
with the intent of defeating, hindering, delaying or defrauding
creditors of Condor or others; and
(8) Condor must deliver to the trustee an Officers' Certificate and an
opinion of counsel, which opinion may be subject to customary
assumptions and exclusions, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
Transfer and Exchange
A holder may transfer or exchange notes in accordance with the indenture.
The Registrar and the trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and Condor may require
a holder to pay any taxes and fees required by law or permitted by the
indenture. Condor is not required to transfer or exchange any note selected
for redemption. Also, Condor is not required to transfer or exchange any note
for a period of 15 days before a selection of notes to be redeemed. The
registered holder of a note will be treated as the owner of it for all
purposes.
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Amendment, Supplement and Waiver
Except as provided below, the indenture, the Note Guarantees and the
notes may be amended or supplemented with the consent of the holders of at
least a majority in principal amount of the notes then outstanding, including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, notes, and any existing default or
compliance with any provision of the indenture, the Note Guarantees or the
notes may be waived with the consent of the holders of a majority in principal
amount of the then outstanding notes, including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, notes.
Without the consent of each holder affected, an amendment or waiver may
not, with respect to any notes held by a non-consenting holder:
(1) reduce the principal amount of notes whose holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes,
other than the provisions described under the caption "--Repurchase
at the Option of Holders";
(3) reduce the rate of or extend the time for payment of interest on any
note;
(4) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest or Liquidated Damages, if any, on
the notes, except a rescission of acceleration of the notes by the
holders of at least a majority in aggregate principal amount of the
notes and a waiver of the payment default that resulted from such
acceleration;
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults;
(7) waive a redemption payment with respect to any note, other than the
provisions described under the caption "--Repurchase at the Option
of Holders";
(8) release the Guarantor from its obligations under the Note Guarantees
or the indenture, except in accordance with the terms of the
indenture; or
(9) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, any
(1) amendment to or waiver of the covenant described under the caption
"--Repurchase at the Option of Holders--Change of Control"; and
(2) amendment to Article 10 of the indenture, which relates to
subordination
will require the consent of the holders of at least two-thirds in aggregate
principal amount of the notes then outstanding if such amendment would
materially adversely affect the rights of holders of notes.
Notwithstanding the foregoing, without the consent of any holder of
notes, Condor, the Guarantor and the trustee may amend or supplement the
indenture, the Note Guarantees or the notes to cure any ambiguity, defect or
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inconsistency, to provide for uncertificated notes in addition to or in place
of certificated notes, to provide for the assumption of Condor's or the
Guarantor's obligations to holders of notes in the case of a merger or
consolidation or sale of all or substantially all of the assets of Condor or
the Guarantor, to make any change that would provide any additional rights or
benefits to the holders of notes or that does not materially adversely affect
the legal rights under the indenture of any such holder, or to comply with
requirements of the Commission in order to effect or maintain the
qualification of the indenture under the Trust Indenture Act or to provide for
additional guarantees of the notes.
Concerning the Trustee
The indenture contains limitations on the rights of the trustee, should
it become a creditor of Condor, to obtain payment of claims in some cases, or
to realize on property received in respect of any such claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue or
resign.
The holders of a majority in principal amount of the then outstanding
notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the trustee, subject to
exceptions. The indenture provides that in case an Event of Default shall
occur, which shall not be cured, the trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request of any holder of notes, unless such holder shall have offered to the
trustee security and indemnity satisfactory to it against any loss, liability
or expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the indenture and
Registration Rights Agreement without charge by writing to Condor at 2133
Samaritan Drive, San Jose, California 95124, Attention: Chief Financial
Officer, (408) 371-9580.
Book-Entry, Delivery and Form
The certificates representing the new notes will be issued in fully
registered form, without coupons. Except as described below, the new notes
will be deposited with, or on behalf of, The Depository Trust Company, New
York, New York ("DTC"), and registered in the name of Cede & Co. as DTC's
nominee, in the form of a global note (the "global registered note").
The Global Registered Note. Condor expects that pursuant to procedures
established by DTC (a) upon deposit of the global registered note, DTC or its
custodian will credit on its internal system interests in the global
registered note to the accounts of persons who have accounts with DTC
("Participants") and (b) ownership of the global registered note will be shown
on, and the transfer of ownership thereof will be effected only through,
records maintained by DTC or its nominee, with respect to interests of
Participants, and the records of Participants with respect to interests of
persons other than Participants. Ownership of beneficial interests in the
global registered note will be limited to Participants or persons who hold
interests through Participants.
So long as DTC or its nominee is the registered owner or holder of the
new notes, DTC or such nominee will be considered the sole owner or holder of
the new notes represented by the global registered note for all purposes under
the indenture. No beneficial owner of an interest in the global registered
note will be able to transfer such interest except in accordance with DTC's
procedures, in addition to those provided for under the indenture with respect
to the new notes.
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Payments of the principal of, or premium and interest on, the global
registered note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of Condor, the trustee or any paying agent
under the indenture will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in the global registered note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
We expect that DTC or its nominee, upon receipt of any payment of the
principal of or premium and interest on the global registered note, will
credit Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such global
registered note as shown on the records of DTC or its nominee. We also expect
that payments by Participants to owners of beneficial interests in the global
registered note held through such Participants will be governed by standing
instructions and customary practice as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of a certificated exchange note for any reason,
including to sell new notes to persons in states which require physical
delivery of the new notes or to pledge such securities, such holder must
transfer its interest in the global registered note in accordance with the
normal procedures of DTC and with the procedures set forth in the indenture.
DTC has advised us that DTC will take any action permitted to be taken by
a holder of new notes, including the presentation of new notes for exchange as
described below, only at the direction of one or more Participants to whose
account at DTC interests in the global registered note are credited and only
in respect of such portion of the aggregate principal amount of new notes as
to which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the indenture, DTC will
exchange the global registered note for certificated new notes, which it will
distribute to its Participants.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for its
Participants and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in
accounts of its Participants, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and other organizations.
Indirect access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interest in the global registered notes among
Participants, it is under no obligation to perform such procedures, and such
procedures may be discontinued at any time. Neither Condor nor the trustee
will have any responsibility for the performance by DTC or its Participants or
Indirect Participants of their respective obligations under the rules and
procedures governing their operations.
Certificated Notes. Interests in the global registered note will be
exchangeable or transferable, as the case may be, for certificated notes if
(1) DTC (a) notifies us that it is unwilling or unable to continue as
depositary for the global registered note and we fail to appoint a
successor depositary or (b) has ceased to be a clearing agency
registered under the Exchange Act,
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(2) We, at our option, notify the trustee in writing that we elect to
cause the issuance of the notes in certificated form or
(3) there shall have occurred and be continuing to occur a Default or
an Event of Default with respect to the notes.
In addition, beneficial interests in the global registered note may be
exchanged for certificated notes upon request but only upon at least 20 days'
prior written notice given to the trustee by or on behalf of DTC in accordance
with customary procedures. In all cases, certificated notes delivered in
exchange for the global registered note or beneficial interest therein will be
registered in the names, and issued in any approved denominations, requested
by or on behalf of the depositary, in accordance with its customary
procedures.
Same Day Settlement And Payment
The indenture will require that payments in respect of the notes
represented by the global registered note, including principal, premium, if
any, interest and Liquidated Damages, if any, be made by wire transfer of
immediately available next day funds to the accounts specified by the holder.
With respect to certificated notes, Condor will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available funds to the accounts specified by the
holders thereof or, if no such account is specified, by mailing a check to
each such holder's registered address. Condor expects that secondary trading
in certificated notes will also be settled in immediately available funds.
Certain Definitions
Set forth below are defined terms used in the indenture. Reference is
made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Accounts Receivable Subsidiary" means an Unrestricted Subsidiary of
Condor to which Condor or any of its Restricted Subsidiaries sells any of its
accounts receivable pursuant to a Receivables Facility.
"Acquired Indebtedness" means, with respect to any specified Person,
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such
specified Person, including, without limitation, Indebtedness
incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such
specified Person; and
(2) Indebtedness secured by a lien encumbering an asset acquired by such
specified Person at the time such asset is acquired by such
specified Person.
"Acquisition" means the acquisition of Condor by the Principals and their
Related Parties pursuant to the terms of the merger agreement.
"Acquisition Financing" means;
(1) the issuance and sale by Condor of the notes; and
(2) the execution and delivery by Condor and certain of its subsidiaries
of the new credit facility and the borrowing of loans, if any, and
issuance of letters of credit thereunder to fund the acquisition and
related transactions, including without limitation, the payment of
fees and expenses and the refinancing of outstanding indebtedness of
Condor and its subsidiaries.
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"Affiliate" of any specified Person means any other Person which,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, such specified Person. For purposes of this
definition, "control," when used with respect to any Person, means the power
to direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Sale" means:
(1) the sale, lease, conveyance, disposition or other transfer (a
"disposition") of any properties, assets or rights, including,
without limitation, by way of a sale and leaseback, provided that
the sale, lease, conveyance or other disposition of all or
substantially all of the assets of Condor and its Subsidiaries taken
as a whole will be governed by the provisions of the indenture
described under the caption "--Change of Control" and/or the
provisions described under the caption "--Merger, Consolidation or
Sale of Assets" and not by the provisions of the Asset Sale
covenant; and
(2) the issuance, sale or transfer by Condor or any of its Restricted
Subsidiaries of Equity Interests of any of Condor's Restricted
Subsidiaries, in the case of either clause (1) or (2), whether in a
single transaction or a series of related transactions,
(a) that have a fair market value in excess of $2.0 million; or
(b) for net proceeds in excess of $2.0 million.
Notwithstanding the foregoing, the following items shall not be deemed to
be Asset Sales:
(1) dispositions in the ordinary course of business;
(2) a disposition of assets by Condor to a Restricted Subsidiary or by a
Restricted Subsidiary to Condor or to another Restricted Subsidiary;
(3) a disposition of Equity Interests by a Restricted Subsidiary to
Condor or to another Restricted Subsidiary;
(4) the sale and leaseback of any assets within 90 days of the
acquisition thereof;
(5) foreclosures on assets;
(6) any exchange of like property pursuant to Section 1031 of the Internal
Revenue Code of 1986, for use in a Permitted Business;
(7) any sale of Equity Interests in, or Indebtedness or other securities
of, an Unrestricted Subsidiary;
(8) a Permitted Investment or a Restricted Payment that is permitted by
the covenant described under the caption "--Restricted Payments";
and
(9) sales of accounts receivable, or participations therein, in
connection with any Receivables Facility.
"Attributable Indebtedness" in respect of a sale and leaseback
transaction means, at the time of determination, the present value, discounted
at the rate of interest implicit in such transaction, determined in accordance
with GAAP, of the obligation of the lessee for net rental payments during the
remaining term of the lease included in such sale and leaseback transaction,
including any period for which such lease has been extended or may, at the
option of the lessor, be extended.
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"Behrman Capital" means Behrman Capital L.P. and its affiliated funds.
"Capital Expenditure Indebtedness" means Indebtedness incurred by any
Person to finance the purchase or construction or any property or assets
acquired or constructed by such Person which have a useful life or more than
one year so long as:
(1) the purchase or construction price for such property or assets is
included in "addition to property, plant or equipment" in accordance
with GAAP;
(2) the acquisition or construction of such property or assets is not
part of any acquisition of a Person or line of business; and
(3) such Indebtedness is incurred within 90 days of the acquisition or
completion of construction of such property or assets.
"Capital Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents,
however designated, of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests, whether general or limited; and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"Cash Equivalents" means;
(1) Government Securities;
(2) any certificate of deposit maturing not more than 365 days after the
date of acquisition issued by, or demand deposit or time deposit of,
an Eligible Institution or any lender under the new credit facility;
(3) commercial paper maturing not more than 365 days after the date of
acquisition of an issuer, other than an affiliate of Condor, with a
rating, at the time as of which any investment therein is made, of
"A-3" or higher according to S&P or "P-2" or higher according to
Moody's or carrying an equivalent rating by a nationally recognized
rating agency if both of the two named rating agencies cease
publishing ratings of investments;
(4) any bankers acceptances of money market deposit accounts issued by an
Eligible Institution;
(5) any fund investing exclusively in investments of the types described
in clauses (1) through (4) above; and
(6) in the case of any Subsidiary organized or having its principal
place of business outside the United States, investments denominated
in the currency of the jurisdiction in which such Subsidiary is
organized or has
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its principal place of business which are similar to the items
specified in clauses (1) through (5) above, including without
limitation any deposit with a bank that is a lender to any
Restricted Subsidiary.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person and its Restricted
Subsidiaries for such period plus, to the extent deducted in computing
Consolidated Net Income,
(1) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period;
(2) Fixed Charges of such Person for such period;
(3) depreciation, amortization, including amortization of goodwill and
other intangibles, and all other non-cash charges, excluding any
such non-cash charge, other than the First Quarter Plant Closing
Charge, to the extent that it represents an accrual of or reserve
for cash expenses in any future period or amortization of a prepaid
cash expense that was paid in a prior period, of such Person and its
Restricted Subsidiaries for such period;
(4) net periodic post-retirement benefits;
(5) other income or expense net as set forth on the face of such Person's
statement of operations;
(6) expenses and charges of Condor related to the acquisition, including
any purchase price adjustment or any other payments made pursuant to
the merger agreement or the financial advisory agreements with BCMC
or DLJSC or the warrant and stock option termination agreements
described under "Certain Relationships and Related Party
Transactions", and Acquisition Financing, the new credit facility
and the application of the proceeds thereof; and
(7) any non-capitalized transaction costs incurred in connection with
actual, proposed or abandoned financings, acquisitions or
divestitures, including, but not limited to, financing and
refinancing fees and costs incurred in connection with the
acquisition and Acquisition Financing, in each case, on a
consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes based on the
income or profits of, the Fixed Charges of, and the depreciation and
amortization and other non-cash charges of, a Restricted Subsidiary of a
Person shall be added to Consolidated Net Income to compute Consolidated Cash
Flow only to the extent and in the same proportion that Net Income of such
Restricted Subsidiary was included in calculating the Consolidated Net Income
of such Person.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication,
(1) the interest expense of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance
with GAAP, including amortization of original issue discount,
non-cash interest payments, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments, if any, pursuant to Hedging
Obligations; provided that in no event shall any amortization of
deferred financing costs be included in Consolidated Interest
Expense; and
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(2) the consolidated capitalized interest of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued;
provided, however, that Receivables Fees shall be deemed not to
constitute Consolidated Interest Expense.
Notwithstanding the foregoing, the Consolidated Interest Expense with
respect to any Restricted Subsidiary that is not a Wholly Owned Restricted
Subsidiary shall be included only to the extent and in the same proportion
that the net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that
(1) the Net Income (or loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the referent Person or a
Restricted Subsidiary thereof;
(2) the Net Income (or loss) of any Restricted Subsidiary other than a
Subsidiary organized or having its principal place of business
outside the United States shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that
Restricted Subsidiary of that Net Income (or loss) is not at the
date of determination permitted without any prior governmental
approval that has not been obtained or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary;
(3) the Net Income (or loss) of any Person acquired in a pooling of
interests transaction for any period prior to the date of such
acquisition shall be excluded; and
(4) the cumulative effect of a change in accounting principles shall be
excluded.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Designated Noncash Consideration" means the fair market value of
non-cash consideration received by Condor or one of its Restricted
Subsidiaries in connection with an Asset Sale that is so designated as
Designated Noncash Consideration pursuant to an Officers' Certificate, setting
forth the basis of such valuation, executed by the principal executive officer
and the principal financial officer of Condor, less the amount of cash or Cash
Equivalents received in connection with a sale of such Designated Noncash
Consideration.
"Disqualified Stock" means any Capital Stock that, by its terms, or by
the terms of any security into which it is convertible, or for which it is
exchangeable, or upon the happening of any event, other than any event solely
within the control of the issuer thereof, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, is
exchangeable for Indebtedness, except to the extent exchangeable at the option
of such Person subject to the terms of any debt instrument to which such
Person is a party or redeemable at the option of the holder thereof, in whole
or in part, on or prior to the date on which the notes mature; provided that
any Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require Condor to repurchase such Capital
Stock upon the occurrence of a Change of Control or an Asset Sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
Condor may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described under the caption "--Certain Covenants--Restricted Payments," and
provided further that, if such Capital Stock is issued to any plan for the
benefit of employees of Condor or its Subsidiaries or by any such plan to such
employees, such Capital Stock shall not constitute Disqualified Stock solely
because it may be required to be repurchased by Condor in order to satisfy
applicable statutory or regulatory obligations.
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"DLJ Merchant Banking" means DLJ Merchant Banking Partners II, L.P. and
its Affiliates.
"Domestic Subsidiary" means a Subsidiary that is organized under the laws
of the United States or any State, district or territory thereof.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus not less than $100.0 million or its equivalent in
foreign currency, whose short-term debt is rated "A-3" or higher according to
Standard & Poor's Ratings Group ("S&P") or "P-2" or higher according to
Moody's Investor Services, Inc. ("Moody's") or carrying an equivalent rating
by a nationally recognized rating agency if both of the two named rating
agencies cease publishing ratings of investments.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"Existing Indebtedness" means Indebtedness of Condor and its Restricted
Subsidiaries, other than Indebtedness under the new credit facility, in
existence on the date of the indenture, until such amounts are repaid.
"First Quarter Plant Closing Charge" means the $0.9 million charge
recorded in connection with Condor's decision to close its facilities located
in Sterling, Virginia.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of,
(1) the Consolidated Interest Expense of such Person for such period; and
(2) all dividend payments on any series of preferred stock of such
Person, other than dividends payable solely in Equity Interests that
are not Disqualified Stock,
in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such
period, exclusive of amounts attributable to discontinued operations, as
determined in accordance with GAAP, or operations and businesses disposed of
prior to the Calculation Date (as defined), to the Fixed Charges of such
Person for such period, exclusive of amounts attributable to discontinued
operations, as determined in accordance with GAAP, or operations and
businesses disposed of prior to the Calculation Date. In the event that the
referent Person or any of its Subsidiaries incurs, assumes, guarantees or
redeems any Indebtedness, other than revolving credit borrowings or issues or
redeems preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio
is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall
be calculated giving pro forma effect to such incurrence, assumption,
guarantee or redemption of Indebtedness, or such issuance or redemption of
preferred stock and the use of the proceeds therefrom, as if the same had
occurred at the beginning of the applicable four-quarter reference period. In
addition, for purposes of making the computation referred to above, the
acquisition, the Sterling Plant Closure and acquisitions that have been made
by Condor or any of its Subsidiaries, including all mergers or consolidations
and any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the
Calculation Date shall be deemed to have occurred on the first day of the
four-quarter reference period and Consolidated Cash Flow for such reference
period shall be calculated to include the Consolidated Cash Flow of the
acquired entities on a pro forma basis after giving effect to cost savings
reasonably expected to be realized in connection with such acquisition, as
determined in good faith by an officer of Condor, regardless of whether such
cost savings could then be reflected in pro forma financial statements under
GAAP, Regulation S-X promulgated by the Commission or any other regulation or
policy of the
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Commission, and without giving effect to clause (3) of the proviso set forth
in the definition of Consolidated Net Income.
"Foreign Credit Facilities" means any Indebtedness of a Restricted
Subsidiary organized or having its principal place of business outside the
United States. Indebtedness under the Foreign Credit Facilities outstanding on
the date on which the notes are first issued and authenticated under the
indenture shall be deemed to have been incurred on such date in reliance on
the first paragraph of the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the indenture.
"Global Technology Partners" means Global Technology Partners, LLC and its
Affiliates.
"Global Technology Partners Investment" means the sale by the Company to
Global Technology Partners of its common stock and the granting by the Company
to Global Technology Partners of options to purchase shares of its common
stock.
"Global Technology Partners Loans" means one or more loans by the Company
to Global Technology Partners to the extent the proceeds are used or deemed
used solely to finance Global Technology Partners's purchase of capital stock
of the Company.
"Guarantee" means a guarantee, other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner, including, without limitation, letters of credit or
reimbursement agreements in respect thereof, of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (a) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (b) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of
such Person in respect of borrowed money or evidenced by bonds, notes,
debentures or similar instruments or letters of credit, or reimbursement
agreements in respect thereof, or banker's acceptances or representing Capital
Lease Obligations or the balance deferred and unpaid of the purchase price of
any property or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense, trade payable or customer contract
advances, if and to the extent any of the foregoing Indebtedness, other than
letters of credit and Hedging Obligations, would appear as a liability upon a
balance sheet of such Person prepared in accordance with GAAP, as well as all
Indebtedness of others secured by a Lien on any asset of such Person, whether
or not such Indebtedness is assumed by such Person, and, to the extent not
otherwise included, the guarantee by such Person of any Indebtedness of any
other Person, provided that Indebtedness shall not include the pledge by
Condor of the Capital Stock of an Unrestricted Subsidiary of Condor to secure
Non-Recourse Debt of such Unrestricted Subsidiary.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, together with any interest thereon that
is more than 30 days past due, in the case of any Indebtedness that
does not require current payments of interest; and
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(2) the principal amount thereof, in the case of any other Indebtedness
provided that the principal amount of any Indebtedness that is
denominated in any currency other than United States dollars shall
be the amount thereof, as determined pursuant to the foregoing
provision, converted into United States dollars at the Spot Rate in
effect on the date that such Indebtedness was incurred or, if such
indebtedness was incurred prior to the date of the indenture, the
Spot Rate in effect on the date of the indenture.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons, including Affiliates, in the forms of direct or
indirect loans, including guarantees by the referent Person of, and Liens on
any assets of the referent Person securing, Indebtedness or other obligations
of other Persons, advances or capital contributions, excluding commission,
travel and similar advances to officers and employees made in the ordinary
course of business, purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP, provided that an investment by Condor for consideration
consisting of common equity securities of Condor shall not be deemed to be an
Investment other than for purposes of clause (3) of the definition of
"Qualified Proceeds".
If Condor or any Restricted Subsidiary of Condor sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of Condor such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of Condor, Condor shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Restricted
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described under the caption "--Restricted
Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code or equivalent statutes of any
jurisdiction.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
(1) any gain (or loss), together with any related provision for taxes on
such gain (or loss), realized in connection with:
(a) any Asset Sale, including, without limitation, dispositions
pursuant to sale and leaseback transactions; or
(b) the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries;
(2) any extraordinary or nonrecurring gain (or loss), together with any
related provision for taxes on such extraordinary or nonrecurring
gain (or loss); and
(3) in the event that Condor's consolidated financial statements are
ever restated to reverse a write-off of in-process technology
recorded prior to July 1, 1999, the amortization of purchased
technology.
"Net Proceeds" means the aggregate cash proceeds received by Condor or
any of its Restricted Subsidiaries in respect of any Asset Sale, including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale, net of, without
duplication,
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(1) the direct costs relating to such Asset Sale, including, without
limitation, legal, accounting and investment banking fees, and sales
commissions, recording fees, title transfer fees and appraiser fees
and cost of preparation of assets for sale, and any relocation
expenses incurred as a result thereof;
(2) taxes paid or payable as a result thereof, after taking into account
any available tax credits or deductions and any tax sharing
arrangements;
(3) amounts required to be applied to the repayment of Indebtedness,
other than revolving credit Indebtedness incurred pursuant to the
new credit facility, secured by a Lien on the asset or assets that
were the subject of such Asset Sale; and
(4) any reserve established in accordance with GAAP or any amount placed
in escrow, in either case for adjustment in respect of the sale
price of such asset or assets until such time as such reserve is
reversed or such escrow arrangement is terminated, in which case Net
Proceeds shall include only the amount of the reserve so reversed or
the amount returned to Condor or its Restricted Subsidiaries from
such escrow arrangement, as the case may be.
"New credit facility" means that Credit Agreement, dated as of April 15,
1999 among Condor, certain subsidiaries of Condor from time to time party
thereto as guarantors, various financial institutions party thereto, and Bank
of America National Trust and Savings Association as administrative agent,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and, in each case, as amended,
modified, renewed, refunded, replaced or refinanced from time to time,
including any agreement:
(1) extending or shortening the maturity of any Indebtedness incurred
thereunder or contemplated thereby;
(2) adding or deleting borrowers or guarantors thereunder;
(3) increasing the amount of Indebtedness incurred thereunder or
available to be borrowed thereunder, provided that on the date such
Indebtedness is incurred it would not be prohibited by clause (1) of
the second paragraph of the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock"; or
(4) otherwise altering the terms and conditions thereof. Indebtedness
under the new credit facility outstanding on the date on which notes
are first issued and authenticated under the indenture shall be
deemed to have been incurred on such date in reliance on the first
paragraph of the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock."
"Non-Recourse Debt" means Indebtedness,
(1) no default with respect to, which, including any rights that the
holders thereof may have to take enforcement action against an
Unrestricted Subsidiary, would permit, upon notice, lapse of time or
both, any holder of any other Indebtedness of Condor or any of its
Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; and
(2) as to which the lenders have been notified in writing that they will
not have any recourse to the stock, other than the stock of an
Unrestricted Subsidiary pledged by Condor to secure debt of such
Unrestricted Subsidiary, or assets of Condor or any of its
Restricted Subsidiaries;
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provided that in no event shall Indebtedness of any Unrestricted Subsidiary
fail to be Non-Recourse Debt solely as a result of any default provisions
contained in a guarantee thereof by Condor or any of its Restricted
Subsidiaries if Condor or such Restricted Subsidiary was otherwise permitted
to incur such guarantee pursuant to the indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Offering" means the offering of the notes by Condor.
"Pari Passu Indebtedness" means Indebtedness of Condor that ranks pari
passu in right of payment to the notes.
"Permitted Business" means the manufacture, sale, distribution or service
of electronic defense products or systems or any business reasonably related,
incidental or ancillary thereto or the manufacture, sale, distribution or
service of products using similar technologies.
"Permitted Investments" means:
(1) any Investment in Condor or in a Restricted Subsidiary of Condor;
(2) any Investment in cash or Cash Equivalents;
(3) any Investment by Condor or any Restricted Subsidiary of Condor in a
Person, if as a result of such Investment,
(a) such Person becomes a Restricted Subsidiary of Condor; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets
to, or is liquidated into, Condor or a Wholly Owned Restricted
Subsidiary of Condor;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described under the caption
"--Repurchase at the Option of Holders--Asset Sales";
(5) any Investment acquired solely in exchange for Equity Interests other
than Disqualified Stock of Condor;
(6) any Investment in a Person engaged in a Permitted Business, other
than an Investment in an Unrestricted Subsidiary, having an
aggregate fair market value, taken together with all other
Investments made pursuant to this clause (6) that are at that time
outstanding, not to exceed the greater of (a) $20.0 million and (b)
15% of Total Assets at the time of such Investment, with the fair
market value of each Investment being measured at the time made and
without giving effect to subsequent changes in value;
(7) Investments relating to any special purpose Wholly Owned Subsidiary
of Condor organized in connection with a Receivables Facility that,
in the good faith determination of the board of directors of Condor,
are necessary or advisable to effect such Receivables Facility; and
(8) the Global Technology Partners Loans.
"Permitted Liens" means:
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(1) liens on property of a Person existing at the time such Person is
merged into or consolidated with Condor or any Restricted
Subsidiary, provided that such Liens were not incurred in
contemplation of such merger or consolidation and do not secure any
property or assets of Condor or any Restricted Subsidiary other than
the property or assets subject to the Liens prior to such merger or
consolidation;
(2) liens existing on the date of the indenture;
(3) liens securing Indebtedness consisting of Capitalized Lease
Obligations, purchase money Indebtedness, mortgage financings,
industrial revenue bonds or other monetary obligations, in each case
incurred solely for the purpose of financing all or any part of the
purchase price or cost of construction or installation of assets
used in the business of Condor or its Restricted Subsidiaries, or
repairs, additions or improvements to such assets, provided that:
(a) such liens secure Indebtedness in an amount not in excess of
the original purchase price or the original cost of any such
assets or repair, additional or improvement thereto, plus an
amount equal to the reasonable fees and expenses in connection
with the incurrence of such Indebtedness;
(b) such liens do not extend to any other assets of Condor or its
Restricted Subsidiaries (and, in the case of repair, addition
or improvements to any such assets, such Lien extends only to
the assets, and improvements thereto or thereon, repaired,
added to or improved);
(c) the Incurrence of such Indebtedness is permitted by "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock"; and
(d) such liens attach within 365 days of such purchase,
construction, installation, repair, addition or improvement;
(4) liens to secure any refinancings, renewals, extensions, modification
or replacements (collectively, "refinancing") or successive
refinancings, in whole or in part, of any Indebtedness secured by
liens referred to in the clauses above so long as such lien does not
extend to any other property, other than improvements thereto;
(5) liens securing letters of credit entered into in the ordinary course
of business and consistent with past business practice;
(6) liens on and pledges of the capital stock of any Unrestricted
Subsidiary securing Non-Recourse Debt of such Unrestricted
Subsidiary;
(7) liens securing Indebtedness, including all Obligations, under the
new credit facility or any Foreign Credit Facility; and
(8) other liens securing Indebtedness that is permitted by the terms of
the indenture to be outstanding having an aggregate principal amount
at any one time outstanding not to exceed $20.0 million.
"Permitted Refinancing Indebtedness" means any Indebtedness of Condor or
any of its Restricted Subsidiaries issued within 60 days after repayment of,
in exchange for, or the net proceeds of which are used to extend, refinance,
renew, replace, defease or refund other Indebtedness of Condor or any of its
Restricted Subsidiaries; provided that:
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(1) the principal amount, or accreted value, if applicable, of such
Permitted Refinancing Indebtedness does not exceed the principal
amount of, or accreted value, if applicable, plus premium, if any,
and accrued interest on the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded, plus the amount of
reasonable expenses incurred in connection therewith;
(2) such Permitted Refinancing Indebtedness has a final maturity date no
earlier than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life
to Maturity of, the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the
notes, such Permitted Refinancing Indebtedness is subordinated in
right of payment to, the notes on terms at least as favorable, taken
as a whole, to the holders of notes as those contained in the
documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Principals" means DLJ Merchant Banking, Global Technology Partners and
Behrman Capital.
"Public Equity Offering" means any issuance of common stock by Condor,
other than Disqualified Stock, that is registered pursuant to the Securities
Act, other than issuances registered on Form S-8 and issuances registered on
Form S-4, excluding issuances of common stock pursuant to employee benefit
plans of Condor or otherwise as compensation to employees of Condor.
"Qualified Proceeds" means any of the following or any combination of the
following:
(1) cash;
(2) Cash Equivalents;
(3) assets, other than Investments, that are used or useful in a
Permitted Business; and
(4) the Capital Stock of any Person engaged in a Permitted Business if,
in connection with the receipt by Condor or any Restricted
Subsidiary of Condor of such Capital Stock,
(a) such Person becomes a Restricted Subsidiary of Condor or any
Restricted Subsidiary of Condor; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets
to, or is liquidated into, Condor or any Restricted Subsidiary
of Condor.
"Receivables Facility" means one or more receivables financing
facilities, as amended from time to time, pursuant to which Condor or any of
its Restricted Subsidiaries sells its accounts receivable to an Accounts
Receivable Subsidiary.
"Receivables Fees" means distributions or payments made directly or by
means of discounts with respect to any participation interests issued or sold
in connection with, and other fees paid to a Person that is not a Restricted
Subsidiary in connection with, any Receivables Facility.
"Related Party" means, with respect to any Principal,
(1) any controlling stockholder or partner of such Principal on the date
of the indenture; or
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(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons
beneficially holding, directly or through one or more Subsidiaries,
a 51% or more controlling interest of which consist of the
Principals and/or such other Persons referred to in the immediately
preceding clauses (1) or (2).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such regulation is in effect on
the date hereof.
"Spot Rate" means, for any currency, the spot rate at which such currency
is offered for sale against United States dollars as determined by reference
to the New York foreign exchange selling rates, as published in The Wall
Street Journal on such date of determination for the immediately preceding
business day or, if such rate is not available, as determined in any publicly
available source of similar market data.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Sterling Plant Closure" means Condor's closing of its facilities in
Sterling, Virginia.
"Subsidiary" means, with respect to any Person,
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock
entitled, without regard to the occurrence of any contingency to
vote in the election of directors, managers or trustees thereof is
at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person or a
combination thereof; and
(2) any partnership or limited liability company,
(a) the sole general partner or the managing general partner or
managing member of which is such Person or a Subsidiary of such
Person; or
(b) the only general partners or managing members of which are such
Person or of one or more Subsidiaries of such Person, or any
combination thereof.
"Total Assets" means the total consolidated assets of Condor and its
Restricted Subsidiaries, as shown on the most recent balance sheet, excluding
the footnotes thereto, of Condor.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
board of directors as an Unrestricted Subsidiary pursuant to a board
resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
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(2) is not party to any agreement, contract, arrangement or
understanding with Condor or any Restricted Subsidiary of Condor
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to Condor or such Restricted
Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of Condor;
(3) is a Person with respect to which neither Condor nor any of its
Restricted Subsidiaries has any direct or indirect obligation,
(a) to subscribe for additional Equity Interests, other than
Investments described in clause (7) of the definition of
Permitted Investments; or
(b) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels, of operating
results; and
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of Condor or any of its
Restricted Subsidiaries.
Any such designation by the board of directors shall be evidenced to the
trustee by filing with the trustee a certified copy of the board resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions and was permitted by
the covenant described under the caption entitled "--Certain
Covenants--Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as a Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
indenture and any Indebtedness of such Subsidiary shall be deemed to be
incurred by a Restricted Subsidiary of Condor as of such date, and, if such
Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption entitled "--Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock," Condor shall be in default
of such covenant.
The board of directors of Condor may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of Condor of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if:
(1) such Indebtedness is permitted under the covenant described under
the caption entitled "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(2) no Default or Event of Default would be in existence following such
designation.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying,
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof; by
(b) the number of years, calculated to the nearest one-twelfth,
that will elapse between such date and the making of such
payment; by
(2) the then outstanding principal amount of such Indebtedness.
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"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all the outstanding Capital Stock or other ownership
interests of which, other than directors' qualifying shares, shall at the time
be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries
of such Person or by such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which,
other than directors' qualifying shares, shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person.
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THE EXCHANGE OFFER
Pursuant to a registration rights agreement between Condor and the Initial
Purchasers, we agreed
(1) to file a registration statement on or prior to 90 days after the
closing of the offering of the old notes with respect to an offer to
exchange the old notes for new debt securities of Condor registered
under the Securities Act, with terms identical in all material
respects to those of the old notes and
(2) to use our reasonable best efforts to cause the registration
statement to be declared effective by the SEC on or prior to 180
days after the closing of the old notes, April 15, 1999. In some
circumstances, we will be required to provide a shelf registration
statement to cover resales of the old notes by the holders thereof.
The registration rights agreement provides that, in the event we fail to
satisfy our registration obligations under the registration rights agreement,
we will be required to pay liquidated damages in an amount equal to $0.05 per
week per $1,000 principal amount of notes until , 1999 and increasing every 90
days thereafter up to a maximum amount equal to $0.25 per week per $1,000
principal amount of notes until the registration statement is declared
effective. Upon consummation of the exchange offer or the effectiveness of a
registration statement, the provision for liquidated damages on the old notes
shall cease.
The new notes have been registered under the Securities Act and transfer
restrictions and registration rights relating to the old notes do not apply to
the new notes. If you fail to exchange your old notes in the exchange offer,
your notes will remain subject to transfer restrictions.
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of old notes in any jurisdiction in which the exchange
offer or the acceptance thereof would not be in compliance with the securities
or blue sky laws of such jurisdiction. Each holder of old notes that wishes to
exchange old notes for new notes is required to make the representations
described below under "--Resale of the New Notes."
Terms of the Exchange Offer; Period for Tendering Old Notes
This prospectus and the accompanying letter of transmittal contain the
terms and conditions of the exchange offer. Upon the terms and subject to the
conditions included in this prospectus and in the accompanying letter of
transmittal, which together constitute the exchange offer, we will accept for
exchange old notes which are properly tendered on or prior to the expiration
date, unless you have withdrawn them as permitted below:
o when you tender to us old notes as provided below, our acceptance of
the old notes will constitute a binding agreement between you and us
upon the terms and subject to the conditions in this prospectus and
in the accompanying letter of transmittal.
o for each $1,000 principal amount of old notes surrendered to us
pursuant to the exchange offer, we will give you $1,000 principal
amount of new notes. Interest on each new note will accrue from the
date of issuance of the old note for which the new note is exchanged
or from the date of the last periodic payment of interest on such
old note, whichever is later. No additional interest will be paid on
old notes tendered and accepted for exchange.
o we will keep the exchange offer open for not less than 30 days, or
longer if required by applicable law, after the date that we first
mail notice of the exchange offer to the holders of the old notes.
We are sending this prospectus, together with the letter of
transmittal, on or about the date of this prospectus to all of the
registered holders of old notes at their addresses listed in the
trustee's security register with respect to old notes.
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o the exchange offer expires at 5:00 p.m., New York City time, on ,
1999; provided, however, that we, in our sole discretion, may extend
the period of time for which the exchange offer is open. The term
"expiration date" means , 1999 or, if extended by us, the latest
time and date to which the exchange offer is extended.
o as of the date of this prospectus, $100,000,000 in aggregate
principal amount of the old notes were outstanding. The exchange
offer is not conditioned upon any minimum principal amount of old
notes being tendered.
o our obligation to accept old notes for exchange pursuant to the
exchange offer is subject to conditions that we describe in the
section below called "--Certain Conditions to the Exchange Offer".
o we expressly reserve the right, at any time, to extend the period of
time during which the exchange offer is open, and thereby delay
acceptance of any old notes, by giving oral or written notice of
such extension to the exchange agent and notice of such extension to
the holders as described below. During any such extension, all old
notes previously tendered will remain subject to the exchange offer
and may be accepted for exchange by us. Any old notes not accepted
for exchange for any reason will be returned without expense to the
tendering holder thereof as promptly as practicable after the
expiration or termination of the exchange offer.
o we expressly reserve the right to amend or terminate the exchange
offer, and not to accept for exchange any old notes that we have not
yet accepted for exchange, upon the occurrence of any of the
conditions of the exchange offer specified below under "--Certain
Conditions to the Exchange Offer."
o we will give oral or written notice of any extension, amendment,
termination or non-acceptance described above to holders of the old
notes as promptly as practicable. If we extend the expiration date,
we will give notice by means of a press release or other public
announcement no later than 9:00 a.m., New York City Time, on the
business day after the previously scheduled expiration date. Without
limiting the manner in which we may choose to make any public
announcement and subject to applicable law, we will have no
obligation to publish, advertise or otherwise communicate any such
public announcement other than by issuing a release to the Dow Jones
News Service.
o holders of old notes do not have any appraisal or dissenters' rights
in connection with the exchange offer.
o old notes which are not tendered for exchange or are tendered but
not accepted in connection with the exchange offer will remain
outstanding and be entitled to the benefits of the indenture, but
will not be entitled to any further registration rights under the
registration rights agreement.
o we intend to conduct the exchange offer in accordance with the
applicable requirements of the Exchange Act and the rules and
regulations of the SEC thereunder.
o by executing, or otherwise becoming bound by, the letter of
transmittal, you will be making representations to us. See
"--Resales of the New Notes."
Important rules concerning the exchange offer
You should note that:
o we will determine all questions as to the validity, form,
eligibility, including time of receipt, and acceptance of old notes
tendered for exchange in our sole discretion, which determination
shall be final and binding.
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o we reserve the absolute right to reject any and all tenders of any
particular old notes not properly tendered or to not accept any
particular old notes which acceptance might, in our judgment or the
judgment of our counsel, be unlawful.
o we also reserve the absolute right to waive any defects or
irregularities or conditions of the exchange offer as to any
particular old notes either before or after the expiration date,
including the right to waive the ineligibility of any holder who
seeks to tender old notes in the exchange offer. Unless we agree to
waive any defect or irregularity in connection with the tender of
old notes for exchange, such waiver must be cured within such
reasonable period of time as we shall determine.
o our interpretation of the terms and conditions of the exchange offer
as to any particular old notes either before or after the expiration
date, including the letter of transmittal and the instructions
thereto, shall be final and binding on all parties.
o neither Condor, the exchange agent nor any other person shall be
under any duty to give notification of any defect or irregularity
with respect to any tender of old notes for exchange, nor shall any
of them incur any liability for failure to give such notification.
Procedures for Tendering Old Notes
What to submit and how
If you, as the registered holder of an old note, wish to tender your old
notes for exchange pursuant to the exchange offer, you must transmit a
properly completed and duly executed letter of transmittal, including all
other documents required by such letter of transmittal, to State Street Bank
and Trust Company at the address set forth below under "Exchange Agent" on or
prior to the expiration date.
In addition,
(1) certificates for such old notes must be received by the exchange
agent along with the letter of transmittal, or
(2) a timely confirmation of a book-entry transfer (what we call a
"book-entry confirmation") of such old notes, if such procedure is
available, into the exchange agent's account at DTC pursuant to the
procedure for book-entry transfer described below, must be received
by the exchange agent prior to the expiration date or
(3) you must comply with the guaranteed delivery procedures described
below.
The method of delivery of old notes, letters of transmittal and all other
required documents is at your election and risk. If such delivery is by mail,
we recommend that registered mail, properly insured, with return receipt
requested, be used. In all cases, sufficient time should be allowed to assure
timely delivery. No letters of transmittal or old notes should be sent to
Condor.
How to sign your letter of transmittal and other documents
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the old notes surrendered for exchange
pursuant thereto are tendered
(1) by a registered holder of the old notes who has not completed the
box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal or
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<PAGE>
(2) for the account of an Eligible Institution (as defined below).
If signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantees must be by an
eligible institution that is:
o a member of or participant in the Securities Transfer Agents
Medallion Program or the New York Stock Exchange Medallion Signature
Program, or
o an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution").
If old notes are registered in the name of a person other than the person
signing the letter of transmittal, the old notes surrendered for exchange must
be endorsed by, or be accompanied by, a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by us in our sole
discretion, duly executed by the registered holder with the signature thereon
guaranteed by an Eligible Institution.
If the letter of transmittal is signed by a person or persons other than
the registered holder or holders of old notes, such old notes must be endorsed
or accompanied by appropriate powers of attorney, in either case signed
exactly as the name or names of the registered holder or holders that appear
on the old notes.
If the letter of transmittal or any old notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers or corporations or others acting in a fiduciary or representative
capacity, such person should so indicate when signing and, unless waived by
Condor, proper evidence satisfactory to Condor of its authority to so act must
be submitted.
Acceptance of Old Notes for Exchange; Delivery of New Notes
Upon satisfaction or waiver of all of the conditions to the exchange
offer, we will accept, promptly after the expiration date, all old notes
properly tendered and will issue the new notes promptly after acceptance of
the old notes. See "--Certain Conditions to the Exchange Offer" below. For
purposes of the exchange offer, we shall be deemed to have accepted properly
tendered old notes for exchange when, as and if we have given oral or written
notice thereof to the Exchange Agent.
In all cases, we will only issue new notes in exchange for old notes that
are accepted for exchange after timely receipt by the exchange agent of:
o certificates for such old notes or
o a timely book-entry confirmation of such old notes into the
exchange agent's account at DTC pursuant to the book-entry
transfer procedures described below, and
o a properly completed and duly executed letter of transmittal and
all other required documents.
If we do not accept any tendered old notes for any reason included in the
terms and conditions of the exchange offer or if you submit certificates
representing old notes in a greater principal amount than you wish to
exchange, we will return such unaccepted or non-exchanged old notes without
expense to the tendering holder or, in the case of old notes tendered by
book-entry transfer into the exchange agent's account at DTC pursuant to the
book-entry transfer procedures described below, such non-exchanged old notes
will be credited to an account maintained with DTC as promptly as practicable
after the expiration or termination of the exchange offer.
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Book-Entry Transfer
The exchange agent will make a request to establish an account with
respect to the old notes at DTC for purposes of the exchange offer promptly
after the date of this prospectus. Any financial institution that is a
Participant in DTC's systems may make book-entry delivery of old notes by
causing DTC to transfer such old notes into the exchange agent's account in
accordance with DTC's Automated Tender Offer Program ("ATOP") procedures for
transfer. However, the exchange for the old notes so tendered will only be
made after timely confirmation of such book-entry transfer of old notes into
the exchange agent's account, and timely receipt by the exchange agent of an
Agent's Message (as defined in the next sentence) and any other documents
required by the letter of transmittal. The term "Agent's Message" means a
message, transmitted by DTC and received by the exchange agent and forming a
part of a Book-Entry Confirmation, which states that DTC has received an
express acknowledgment from a Participant tendering old notes that are the
subject of such Book-Entry Confirmation that such Participant has received and
agrees to be bound by the terms of the letter of transmittal, and that we may
enforce such agreement against such Participant. Although delivery of old
notes may be effected through book-entry transfer into the exchange agent's
account at DTC, the letter of transmittal, or facsimile thereof, properly
completed and duly executed, with any required signature guarantees and any
other required documents, must in any case be delivered to and received by the
exchange agent at its address set forth under "--Exchange Agent" on or prior
to the expiration date, or the guaranteed delivery procedure set forth below
must be complied with.
Delivery of documents to DTC in accordance with its procedures does not
constitute delivery to the exchange agent.
Guaranteed Delivery Procedures
If you are a registered holder of old notes and you want to tender such
old notes but your old notes are not immediately available, or time will not
permit your old notes or other required documents to reach the exchange agent
before the expiration date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if
(1) the tender is made through an Eligible Institution,
(2) prior to the expiration date, the exchange agent receives from such
Eligible Institution a properly completed and duly executed letter
of transmittal, or a facsimile thereof, and notice of guaranteed
delivery, substantially in the form provided by us by facsimile
transmission, mail or hand delivery, stating:
o the name and address of the holder of old notes
o the amount of old notes tendered
o the tender is being made by delivering such notice and
guaranteeing that within five New York Stock Exchange
trading days after the date of execution of the notice of
guaranteed delivery, the certificates of all physically
tendered old notes, in proper form for transfer, or a
book-entry confirmation, as the case may be, and any other
documents required by the letter of transmittal will be
deposited by that Eligible Institution with the exchange
agent and
(3) the certificates for all physically tendered old notes, in proper
form for transfer, or a book-entry confirmation, as the case may
be, and all other documents required by the letter of transmittal,
are received by the exchange agent within five New York Stock
Exchange trading days after the date of execution of the notice of
guaranteed delivery.
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Withdrawal Rights
You can withdraw your tender of old notes at any time prior to the
expiration date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent at one of the addresses listed below under
"--Exchange Agent." Any such notice of withdrawal must specify:
o the name of the person having tendered the old notes to be withdrawn.
o the old notes to be withdrawn, including the principal amount of such
old notes.
o if certificates for old notes have been delivered to the exchange
agent, the name in which such old notes are registered, if different
from that of the withdrawing holder.
o if certificates for old notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of such
certificates, you must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of
withdrawal with signatures guaranteed by an Eligible Institution
unless you are an Eligible Institution.
o if old notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at DTC to be credited
with the withdrawn old notes and otherwise comply with the
procedures of such facility.
Please note that all questions as to the validity, form and eligibility,
including time of receipt, of such notices of withdrawal will be determined by
us, and our determination shall be final and binding on all parties. Any old
notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the exchange offer.
If you have properly withdrawn old notes and wish to re-tender them, you
may do so by following one of the procedures described under "--Procedures for
Tendering Old Notes" above at any time on or prior to the expiration date.
Certain Conditions to the Exchange Offer
Notwithstanding any other provisions of the exchange offer, we will not
be required to accept for exchange, or to issue new notes in exchange for, any
old notes and may terminate or amend the exchange offer, if at any time before
the acceptance of such old notes for exchange or the exchange of the new notes
for such old notes, such acceptance or issuance would violate applicable law
or any interpretation of the staff of the SEC.
The foregoing condition is for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to such condition. Our failure at
any time to exercise the foregoing rights shall not be deemed a waiver by us
of any such right and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time.
In addition, we will not accept for exchange any old notes tendered, and
no new notes will be issued in exchange for any such old notes, if at such
time any stop order shall be threatened or in effect with respect to the
exchange offer of which this prospectus constitutes a part or the
qualification of the indenture under the Trust Indenture Act.
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<PAGE>
Exchange Agent
State Street Bank and Trust Company has been appointed as the exchange
agent for the exchange offer. All executed letters of transmittal should be
directed to the exchange agent at one of the addresses set forth below.
Questions and requests for assistance, requests for additional copies of this
prospectus or of the letter of transmittal and requests for notices of
guaranteed delivery should be directed to the exchange agent, addressed as
follows:
Deliver To:
By Overnight Courier or Hand: By Registered or Certified Mail:
State Street Bank and Trust Company State Street Bank and Trust Company
Corporate Trust Department Corporate Trust Department
Two International Place P.O. Box 778
Boston, Massachusetts 02102-0078 Boston, Massachusetts 02102-0078
Fourth Floor Fourth Floor
Attn: Kellie Mullen Attn: Kellie Mullen
Telephone: (617) 664-5587 Telephone: (617) 664-5587
Facsimile: (617) 664-5290 Facsimile: (617) 664-5290
Delivery to an address other than as listed above or transmission of
instructions via facsimile other than as listed above does not constitute a
valid delivery.
Fees and Expenses
The principal solicitation is being made by mail; however, additional
solicitation may be made by telegraph, telephone or in person by our officers,
regular employees and affiliates. We will not pay any additional compensation
to any such officers and employees who engage in soliciting tenders. We will
not make any payment to brokers, dealers, or others soliciting acceptances of
the exchange offer. However, we will pay the exchange agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith.
The estimated cash expenses to be incurred in connection with the
exchange offer will be paid by us and are estimated in the aggregate to be
$.4 million
Transfer Taxes
Holders who tender their old notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who
instruct us to register new notes in the name of, or request that old notes
not tendered or not accepted in the exchange offer be returned to, a person
other than the registered tendering holder will be responsible for the payment
of any applicable transfer tax thereon.
Resale of the New Notes
Under existing interpretations of the staff of the SEC contained in
several no-action letters to third parties, the new notes would in general be
freely transferable after the exchange offer without further registration
under the Securities Act. However, any purchaser of old notes who is an
"affiliate" of Condor or who intends to participate in the exchange offer for
the purpose of distributing the new notes
(1) will not be able to rely on the interpretation of the staff of the
SEC,
(2) will not be able to tender its old notes in the exchange offer and
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(3) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or
transfer of the notes unless such sale or transfer is made pursuant
to an exemption from such requirements.
By executing, or otherwise becoming bound by, the letter of transmittal,
each holder of the old notes, other than specified holders, will represent
that:
(1) it is not our "affiliate";
(2) any new notes to be received by it were acquired in the ordinary
course of its business; and
(3) it has no arrangement with any person to participate in the
distribution, within the meaning of the Securities Act, of the new
notes.
In addition, in connection with any resales of new notes, any broker-dealer
participating in the exchange offer who acquired notes for its own account as
a result of market-making or other trading activities must deliver a
prospectus meeting the requirements of the Securities Act. The SEC has taken
the position that participating broker-dealers may fulfill their prospectus
delivery requirements with respect to the new notes, other than a resale of an
unsold allotment from the original sale of the old notes, with this
prospectus. Under the registration rights agreement, we are required to allow
participating broker-dealers and other persons, if any, subject to similar
prospectus delivery requirements to use this prospectus as it may be amended
or supplemented from time to time, in connection with the resale of such new
notes.
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CERTAIN UNITED STATES TAX CONSEQUENCES OF THE EXCHANGE OFFER
The exchange of old notes for new notes pursuant to the exchange offer
will not result in any United States federal income tax consequences to
holders. When a holder exchanges an old note for a new note pursuant to the
exchange offer, the holder will have the same adjusted basis and holding
period in the new note as in the old note immediately before the exchange.
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. We have agreed that we will make this prospectus, as
amended or supplemented, available to any participating broker-dealer for use
in connection with any such resale and participating broker-dealers shall be
authorized to deliver this prospectus for a period not exceeding 90 days after
the exchange offer expiration date.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the new notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer or the purchasers of any such new notes. Any
broker-dealer that resells new notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of new notes and any commission or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 90 days after the exchange offer expiration date, we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any Participating Broker-Dealer that requests
such documents in the letter of transmittal. See "The Exchange Offer." We have
agreed to pay all expenses incident to the exchange offer and will indemnify
holders of the old notes (including any broker-dealers) against some
liabilities, including certain liabilities under the Securities Act.
LEGAL MATTERS
The validity of the notes offered hereby will be passed upon for Condor
and CEI by Davis Polk & Wardwell, New York, New York.
EXPERTS
The consolidated balance sheets of Condor Systems, Inc. as of December
31, 1997 and 1998 and the consolidated statements of operations, cash flows
and shareholders' equity (deficit) for each of the three years in the period
ended December 31, 1998, included in this prospectus, have been included
herein in reliance on the
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report of PricewaterhouseCoopers LLP, independent accountants, given authority
of that firm as experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to our offering of the new notes. This prospectus
does not contain all the information included in the registration statement
and the related exhibits and schedules. You will find additional information
about us and the new notes in the registration statement. The registration
statement and the related exhibits and schedules may be inspected and copied
at the public reference facilities maintained by the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
public reference facilities of the SEC's Regional Offices: New York Regional
Office, Seven World Trade Center, Suite 1300, New York, New York 10048; and
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of this material may also be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. You can obtain information on the operation of the public
reference facilities by calling 1-800- SEC-0330. The SEC also maintains a site
on the World Wide Web (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, including
Condor, that file electronically with the SEC. Statements made in this
prospectus about legal documents may not necessarily be complete and you
should read the documents which are filed as exhibits or schedules to the
registration statement or otherwise filed with the SEC. We believe, however,
that all information that is material to an investment decision has been
included in this prospectus.
We are required under the indenture governing the notes to furnish the
holders of notes with all quarterly and annual financial information that
would be required to be contained in a filing with the SEC on forms 10-Q and
10- K if Condor were required to file such Forms, including, without
limitation, (a) "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by Condor's certified independent accountants, and (b) all
current reports that would be required to be filed with the SEC on Form 8-K if
Condor were required to file such reports, in each case, within the time
periods specified in the SEC's rules and regulations. In addition, we and CEI
Systems, Inc. have agreed that, for so long as any notes remain outstanding,
we and CEI Systems, Inc. will furnish to the holders of the notes and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act during any period in which Condor or CEI Systems, Inc.,
respectively, is not subject to Section 13 or 15(d) of the Exchange Act.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements have been derived by the application of pro forma adjustments to
Condor's historical consolidated financial data included elsewhere herein. The
pro forma condensed consolidated statement of operations for the year ending
December 31, 1998 and the six months ending June 30, 1999, gives effect to the
acquisition and related financing as if they had occurred on January 1, 1998.
The pro forma adjustments described in the accompanying notes are based upon
available information and assumptions that Condor believes are reasonable. In
the opinion of management, all adjustments necessary to fairly present the pro
forma information have been made. The unaudited pro forma condensed
consolidated financial statements are provided for informational purposes only
and are not necessarily indicative of the results that would have been
reported had such events actually occurred on the dates specified, nor are
they necessarily indicative of Condor's future results. The unaudited pro
forma condensed consolidated financial statements should be read in
conjunction with "Selected Historical and Unaudited Pro Forma Consolidated
Financial Data" and the related notes thereto and the consolidated financial
statements and the notes thereto included elsewhere in this prospectus.
The acquisition was accounted for as a recapitalization under generally
accepted accounting principles for financial reporting purposes. Under
recapitalization accounting, the historical values of assets and liabilities
continue to be reported by Condor.
P-1
<PAGE>
CONDOR SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
For the year ended December 31, 1998
and the six months ended June 30, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Six Months Ended June 30, 1999
---------------------------------------- ---------------------------------------
Pro Forma Pro Forma
Actual Adjustments Pro Forma Actual Adjustments Pro Forma
-------- ----------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Contract revenues........................... $101,042 $101,042 $37,094 $37,094
-------- -------- -------- -------
Costs and operating expenses:
Contract costs............................. 61,660 61,660 21,355 21,355
Technology related costs:
Research and development................. 4,360 4,360 2,262 2,262
Amortization of purchased
technology............................... 2,489 2,489 -- --
Selling, general and administrative........ 20,341 20,341 8,391 8,391
Other charges:
Recapitalization costs................... -- -- -- $ 8,754 $(8,754)(b) --
Product line and plant closure costs..... -- -- 925 925
Abandoned acquisitions costs............. 513 513 -- --
-------- -------- -------- ------- -------
89,363 89,363 41,687 (8,754) 32,933
-------- -------- -------- ------- -------
Operating income......................... 11,679 11,679 (4,593) (8,754) 4,161
Interest and other income................... 237 237 174 174
Interest expense............................ (7,654) $(6,014)(a) (13,668) (4,783) $(1,944)(a) (6,727)
-------- -------- -------- ------- -------
Income (loss) before income taxes
and extraordinary item................. 4,262 (6,014) (1,752) (9,202) 6,810 (2,392)
Provision for (benefit of) income taxes..... 1,662 (2,363)(c) (701) (1,592) (635)(c) (957)
-------- -------- -------- ------- -------
Income (loss) before extraordinary
item................................... 2,600 $(3,651) $(1,051) $ (7,610) 6,175 $(1,435)
-------- -------- -------- ------- -------
Extraordinary loss on debt repurchased, net
of income tax benefit of $708.............. -- -- -- 3,387 (3,387)(b) --
-------- ------- -------- -------- ------- -------
Net income (loss)........................ $ 2,600 $(3,651) $ (1,051) $(10,997) $ 9,562 $(1,435)
======== ======= ======== ======== ======= =======
</TABLE>
P-2
<PAGE>
NOTES TO CONDOR SYSTEMS UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(a) The pro forma adjustment to interest expense reflects (1) the
elimination of historical interest expense, line of credit fees and
amortization of deferred financing fees under existing borrowings,
(2) the incurrence of interest expense of $11,875 related to the
issuance of $100,000 aggregate principal amount of senior
subordinated notes at an interest rate of 11.875%, (3) the
incurrence of financing costs of $990 related to $19,500 of
back-to-back standby letters of credit and the commitment fees
related to unused commitments under the new credit facility and (4)
amortization of deferred financing fees of $803 and $200 during the
years ended December 31, 1998 and the six months ended June 30,
1999.
(b) The pro forma adjustments reflect (1) the elimination of a $8,754
charge related to recapitalization costs and (2) the elimination of
the extraordinary loss on debt repurchased of $3,387, net of tax
benefit of $708 during the six months ended June 30, 1999.
Following is a summary of the net change:
December 31, June 30,
1998 1999
------------ --------
Interest expense and amortization of deferred
financing fees -- new debt........................... $13,668 $6,727
Interest expense and amortization of deferred
financing fees -- old debt........................... (7,654) (4,783)
------- ------
Net interest expense adjustment.................... $ 6,014 $1,944
======= ======
(c) The pro forma adjustment related to income taxes is calculated based
on a statutory tax rate of 40%.
P-3
<PAGE>
CONDOR SYSTEMS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Report of Independent Accountants......................................................................F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999.........................F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and
the six months ended June 30, 1998 and 1999.......................................................F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1996,
1997 and 1998 and the six months ended June 30, 1999..............................................F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and
the six months ended June 30, 1998 and 1999.......................................................F-6
Notes to Consolidated Financial Statements.............................................................F-7
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors
and Shareholders of
Condor Systems, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial
position of Condor Systems, Inc. and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
February 19, 1999, except as to
Note 19 for which the date is June 28, 1999 and Note 20 for which the date is
April 8, 1999
F-2
<PAGE>
CONDOR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
--------------------- -----------
1997 1998 1999
------ ------- -----------
<S> <C> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents.................................................. $ 679 $ 4,300 $ 1,947
Restricted cash............................................................ -- 3,975 --
Contracts receivable....................................................... 43,486 42,853 42,793
Inventories................................................................ 2,485 1,772 3,544
Deferred income taxes...................................................... 3,297 3,910 3,910
Other current assets....................................................... 1,048 629 3,091
------- ------- -------
Total current assets..................................................... 50,995 57,439 55,285
Property and equipment, net................................................. 4,890 5,021 7,873
Purchased technology rights, net of accumulated amortization of $618 in
1997 and $3,107 in 1998.................................................... 2,489 -- --
Deferred income taxes....................................................... 3,162 2,268 2,268
Other assets, net........................................................... 3,212 3,195 8,527
------- ------- -------
Total assets............................................................. $64,748 $67,923 $73,953
------- ------- -------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt.......................................... $ 6,220 $ 3,400 --
Accounts payable........................................................... 9,454 11,405 10,691
Accrued expenses........................................................... 8,863 8,575 11,962
Income taxes payable....................................................... 821 1,143 --
Customer contract advances................................................. 552 3,944 2,759
------- ------- -------
Total current liabilities................................................ 25,910 28,467 25,412
Long-term debt, less current portion........................................ 49,743 47,432 100,000
Subordinated notes.......................................................... 5,000 5,000 --
------- ------- -------
Total liabilities........................................................ 80,653 80,899 125,412
------- ------- -------
Commitments and contingencies (Notes 11 and 14)
Preferred stock, par value $0.001:
Authorized: 30,000 shares;
Series A: Designated 22,000 shares
Issued and outstanding shares: 11,000 in 1997 and 1998 (Aggregate
liquidation value: $12,000 in 1997 and 1998)........................... 12,000 12,000 --
Common stock, par value $0.001 in 1997 and 1998:
Authorized: 170,000 shares in 1997 and 1998;
Class A: Designated 10,000 shares in 1997 and 1998
Issued and outstanding shares: 6,000 in 1997 and 6,125 in 1998
(Aggregate liquidation value: $13,086 in 1997 and
$13,411 in 1998)....................................................... 13,086 13,411 --
Class B: Designated 150,000 shares in 1997 and 1998
Issued and outstanding shares: 45,000 in 1997 and 1998................... 1,857 1,999 --
The accompanying notes are an integral part of these consolidated financial statements.
F-3
<PAGE>
CONDOR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31, June 30,
--------------------- -----------
1997 1998 1999
------ ------- -----------
Common stock, par value $1.00 in 1999:
Authorized: 130,000 shares in 1999;
Class A: Designated 60,000 shares in 1999
Issued and outstanding shares: none in 1997 and 1998, 21,408
at June 30, 1999....................................................... -- -- 21,408
Class B: Designated 10,000 shares in 1999
Issued and outstanding shares: none in 1997 and 1998, 2,551
at June 30, 1999....................................................... -- -- 2,551
Class C: Designated 60,000 shares in 1999
Issued and outstanding shares: none in 1997 and 1998, 26,949
at June 30, 1999....................................................... -- -- 26,949
Notes receivable for common stock........................................... -- -- (1,179)
Deferred stock compensation................................................. -- (138) --
Retained earnings (accumulated deficit)..................................... (429) 2,171 (11,073)
Distribution in excess of net book value (Note 1)........................... (42,419) (42,419) (90,115)
------- ------- -------
Total shareholders' deficit.............................................. (15,905) (12,976) (51,459)
------- ------- -------
Total liabilities and shareholders' deficit.............................. $64,748 $67,923 73,953
======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
CONDOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
---------------------------------- ---------------------
1996 1997 1998 1998 1999
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(unaudited)
Contract revenues.................................... $ 67,506 $79,630 $101,042 $ 40,993 $ 37,094
-------- ------- -------- -------- --------
Costs and operating expenses:
Contract costs...................................... 43,817 53,143 61,660 23,654 21,355
Technology related costs:
Research and development.......................... 1,696 1,039 4,360 1,877 2,262
Amortization of purchased technology.............. -- 618 2,489 1,253 --
Write-off of in-process technology................ -- 8,421 -- -- --
Selling, general and administrative................. 14,108 16,037 20,341 10,394 8,391
Other charges:
Recapitalization costs............................ 15,700 -- -- -- 8,754
Product line and plant closure costs.............. 5,896 -- -- -- 925
Abandoned acquisitions costs...................... -- 185 513 -- --
-------- ------- -------- -------- --------
81,217 79,443 89,363 37,178 41,687
-------- ------- -------- -------- --------
Operating income (loss)......................... (13,711) 187 11,679 3,815 (4,593)
Interest and other income............................ 48 94 237 96 174
Interest expense..................................... (1,287) (5,688) (7,654) (3,921) (4,783)
-------- ------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item.............................. (14,950) (5,407) 4,262 (10) (9,202)
Provision for (benefit of) income taxes.............. (3,493) (2,221) 1,662 (4) (1,592)
-------- ------- -------- -------- --------
Income (loss) before extraordinary item........... (11,457) (3,186) 2,600 (6) (7,610)
-------- ------- -------- -------- --------
Extraordinary loss on debt repurchase, net of income
tax benefit of $708................................ -- -- -- -- 3,387
-------- ------- -------- -------- --------
Net income (loss)............................... $(11,457) $(3,186) $ 2,600 $ (6) $(10,997)
======== ======= ======== -------- --------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
CONDOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Retained
Preferred Stock Common Stock Notes Deferred Earnings Distribution
----------------- ------------------ Receivable Stock (Accumulated In Excess of
Shares Amount Shares Amount for Stock Compensation Deficit) Net Value Total
------- -------- ------- ------- --------- ------------ ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1999 7,413 $11,038 $(2,663) $ 6,296 $14,671
Issuance of common
stock.............. 1,416 3,815 (1,302) 2,513
Repurchase of common
stock.............. (336) (362) (362)
Issuance of Class A
preferred stock.... 11,000 $ 12,000 12,000
Issuance of Class A
common stock....... 6,000 13,086 13,086
Issuance of Series B
common stock....... 45,000 900 900
Reorganization and
distributions
to shareholders.... (8,493) (14,512) 830 7,918 $(42,419) (48,183)
Payment on notes
receivable......... 3,135 3,135
Income tax benefit
from common
stock transactions. 21 21
Net loss............. (11,457) (11,457)
------- -------- ------- ------- -------- ------- ------ ------- -------
Balances, December 31,
1996.............. 11,000 12,000 51,000 13,986 -- -- 2,757 (42,419) (13,676)
Issuance of
warrants........... 957 957
Net loss............. (3,186) (3,186)
------- -------- ------- ------- -------- ------- ------ ------- -------
Balances, December 31,
1997............... 11,000 12,000 51,000 14,943 -- -- (429) (42,419) (15,905)
Issuance of Class A
common stock....... 125 325 325
Deferred stock
compensation....... 142 $ (142) --
Amortization of
deferred stock
compensation....... 4 4
Net income.............. 2,600 2,600
------- -------- ------- ------- -------- ------- ------ ------- -------
Balances, December 31,
1998............... 11,000 12,000 51,125 15,410 -- (138) 2,171 (42,419) (12,976)
Issuance of Class A
common stock....... 2,551 2,551 (1,179) 1,372
Issuance of Class B
common stock....... 21,408 21,408 21,408
Issuance of Class C
common stock....... 26,949 26,949 26,949
Reorganization and
distributions to
shareholders....... (11,000) (12,000) (51,125) (15,410) 138 (2,247) (47,696) (77,215)
Net loss................ (10,997) (10,997)
------- -------- ------- ------- -------- ------- ------ ------- -------
Balances, June 30, 1999
(unaudited).......... -- $ -- 50,908 $50,908 $ (1,179) -- $(11,073) $(90,115) $(51,459)
======= ======= ======= ======= ======== ======= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
CONDOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
----------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(unaudited)
Cash flows from operating activities:
Net income (loss)................................... $(11,457) $(3,186) $ 2,600 $ (6) $(10,997)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 2,199 2,538 3,291 1,636 1,598
Amortization of purchased technology.............. -- 618 2,489 1,253 --
Write-off of in-process technology................ -- 8,421 -- -- --
Write-off of deferred financing costs............. -- -- -- -- 2,010
Non-cash compensation charge related to
common stock...................................... 3,333 -- -- 325 138
Deferred taxes.................................... (1,369) (3,024) 281 (224) --
Loss on disposal of property and equipment........ -- 193 -- -- --
Changes in assets and liabilities:
Contracts receivable............................ (10,595) (5,670) 633 7,037 2,520
Inventories..................................... 712 (58) 713 (493) (1,522)
Other assets.................................... 130 (439) (241) 278 (198)
Accounts payable................................ 3,491 (1,006) 1,951 (1,832) (714)
Accrued expenses................................ 3,547 1,014 37 (402) 626
Income taxes payable and receivable............. (3,607) 3,044 322 (935) (3,444)
-------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities.................................... (13,616) 2,445 12,076 6,637 (9,983)
-------- ------- ------- ------- -------
Cash flows from investing activities:
Acquisition......................................... -- (19,673) -- -- (2,000)
Additions to property and equipment................. (1,420) (1,744) (2,503) (1,439) (678)
Proceeds from sale of property and equipment........ 52 2 1 -- --
-------- ------- ------- ------- -------
Net cash used in investing activities............. (1,368) (21,415) (2,502) (1,439) (2,678)
-------- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from sale of preferred stock............... 5,539 -- -- -- --
Proceeds from sale of common stock.................. 80 -- -- -- 49,729
Repurchase of preferred stock.................. -- -- -- -- (12,000)
Repurchase of common stock..................... -- -- -- -- (15,410)
Distributions to shareholders....................... (33,031) -- -- -- (49,943)
Proceeds from sale of Class A common stock.......... 9,034 -- -- -- --
Proceeds from notes receivable...................... 3,135 -- -- -- --
Net proceeds from long-term debt.................... 40,187 24,000 -- -- 100,000
Payments of debt issuance costs..................... (2,500) (760) -- -- (7,630)
Payments on long-term debt.......................... (3,548) (5,125) (5,370) (5,360) (50,880)
Payments on subordinated debt....................... (3,900) (5,000)
Proceeds from revolving line of credit and
revolving notes..................................... 21,322 -- 2,000 2,000 --
Payments on revolving line of credit................ (18,322) (3,000) (2,000) (2,000) --
Increase (decrease) in restricted cash.............. -- -- (3,975) -- 3,975
Increase (decrease) in customer contract advances... (1,121) 316 3,392 7,346 (2,533)
-------- ------- ------- ------- -------
The accompanying notes are an integral part of these consolidated financial statements.
F-7
<PAGE>
CONDOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share amounts)
Years Ended December 31, Six Months Ended June 30,
----------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) financing
activities....................................... 16,875 15,431 (5,953) 1,986 10,308
Net increase (decrease) in cash and cash equivalents. 1,891 (3,539) 3,621 7,184 (2,353)
Cash and cash equivalents, beginning of year......... 2,327 4,218 679 679 4,300
------ ------- ------ ------ ------
Cash and cash equivalents, end of year............... $4,218 $ 679 $4,300 $7,863 $1,947
====== ======= ====== ====== ======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.......................................... $907 $4,349 $6,733 $2,143 $1,875
Income taxes paid (refunded)...................... $1,586 $(2,237) $949 -- --
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-8
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
Note 1. Description of Business:
Condor Systems, Inc. (the Company) is a leading provider of
technologically advanced signal collection and specialized electronic
countermeasure products and systems in the electronic warfare industry. The
Company supplies a complete line of integrated systems, subsystems and
products that are used to intercept, identify, locate and analyze radar
signals for a variety of military needs, including intelligence,
reconnaissance, surveillance, precision targeting, situational awareness and
threat warning.
The Company operates in a single industry segment encompassing the
electronic intelligence, electronic support measures, and specialized
electronic countermeasures market niches in the electronic warfare industry.
This industry is closely tied to the military defense budgets of the U.S.
Government and its allies. Any significant changes in the funding of certain
programs, platforms or the overall level of the military defense budgets could
impact the Company. In addition, the international markets are subject to
additional risks including political instability, restrictive trade policies
and U.S. export laws and regulations.
1996 Recapitalization:
In November 1996, the Company consummated a recapitalization and merger
of the Company (the 1996 Recapitalization). In connection with the 1996
Recapitalization, the Company entered into a new senior secured credit
facility of up to $75,000 and issued $5,000 in subordinated notes payable,
11,000 shares of Series A preferred stock, 6,000 shares of Class A common
stock and 45,000 shares of Class B common stock. Utilizing $38,000 from its
new senior secured credit facility and the proceeds from the issuance of the
subordinated notes payable and new series of stock, the Company retired all of
the existing long-term debt, subordinated notes payable and common stock of
the Company, including all outstanding stock options.
The transaction has been accounted for as a recapitalization, and
accordingly, no change in the accounting basis of the Company's assets has
been made in the accompanying financial statements. The amount of cash paid
and securities issued to the shareholders of the Company exceeded the
Company's net assets on the date of the transaction and has been recorded in
the equity section as distributions in excess of net book value.
Note 2. Summary of Significant Accounting Policies:
Basis of Consolidation:
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All inter-company
transactions and balances have been eliminated in consolidation.
Fair Value of Financial Instruments:
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, contracts receivable, accounts payable
and accrued expenses approximate fair value. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its debt obligations approximates fair value.
F-9
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
Cash and Cash Equivalents:
Cash and cash equivalents include all highly liquid investments with an
original maturity of three months or less at the date of purchase.
Substantially all of the Company's cash and cash equivalents are deposited
with a single bank.
Inventories:
Inventoried costs related to government and commercial long-term
contracts are composed of the direct costs of manufacturing and engineering,
tooling and allocated overhead cost. These overhead costs include general and
administrative expenses that are allowable in accordance with government
procurement practices. Inventories are stated at the lower of average cost or
market.
Property and Equipment:
Property and equipment are stated at cost and are depreciated on a
straight-line basis over their expected useful lives of 3-5 years. Leasehold
improvements are amortized on a straight-line basis over the estimated useful
life of the asset or the lease term, if shorter.
Purchased Technology Rights:
Purchased technology rights for which technological feasibility has not
been established and that have no alternative future use are charged to
operations when acquired. Purchased technology rights for which technological
feasibility has been established are amortized to operations over the
estimated useful life of the product or the related programs.
Other Assets:
Other assets include approximately $2,883 and $2,548 of deferred
financing costs as of December 31, 1997 and 1998, respectively. These costs
are being amortized on an effective interest rate basis over the term of the
related notes.
Accounting for the Impairment of Long Lived Assets:
Long lived assets and intangible assets are reviewed for impairment when
events or changes in circumstances indicate the carrying amount of an asset
may not be recoverable. In the event that the sum of the expected undiscounted
future cash flows resulting from the use of the asset is less than the
carrying amount of the asset, an impairment loss equal to the excess of the
asset's carrying value over its fair value is recorded.
Comprehensive Income:
The Company has adopted the Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130) effective December 31,
1998. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components for general-purpose financial
statements. Comprehensive income is defined as net income plus all revenues,
expenses, gains and losses that are excluded from net income in accordance
with generally accepted accounting principles. For the years ended December
31, 1996, 1997 and 1998, there are no material differences between
comprehensive income and net income.
F-10
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
Contracts and Contract Revenue Recognition:
Most of the contracts that the Company enters into are fixed price. This
means the Company is exposed to cost overruns if it encounter difficulties in
meeting the contractual delivery schedule or technical specifications for its
systems, or experiences variances in its actual costs from its estimates.
Conversely, the Company benefits from any cost under runs if it experiences
positive variances in its actual costs from its estimates or encounters less
difficulties than expected in meeting the contractual delivery schedule or
technical specifications.
Revenues for long-term contracts are accounted for under the
percentage-of-completion (cost-to-cost) method. Under this method, all
contract costs are charged to operations as incurred and revenues are
recognized based on costs incurred plus the estimated contract profit margins.
These estimated contract profit margins are determined on a contract by
contract basis based on the Company's estimates of total revenue and cost at
completion for each contract. These estimates are reviewed and revised
periodically throughout the lives of the contracts, and adjustments to profits
resulting from such revisions are recorded in the accounting period in which
the revisions are made using the cumulative catch-up method. For the years
ended December 31, 1996, 1997 and 1998, contract estimate revisions did not
have a material effect on the statement of operations. Losses on contracts are
recorded in full as they are identified.
Research and Development:
Research and development expenditures are charged to operations as
incurred.
Income Taxes:
Income taxes are recorded using the liability method. Under this method,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions may affect the reported amounts
of assets and liabilities and 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.
Unaudited Interim Financial Information
The accompanying interim consolidated balance sheet as of June 30, 1999
and the consolidated statements of operations and cash flows for the six
months ended June 30, 1998 and 1999 together with the related notes are
unaudited but include all adjustments, consisting of only normal recurring
adjustments, which the Company considers necessary to present fairly, in all
material respects, the consolidated financial position as of June 30, 1999 and
the results of operations, cash flows and shareholders' equity (deficit) for
the six months ended June 30, 1998 and 1999. Results for the six months ended
June 30, 1999 are not necessarily indicative of the results for the entire
year or for any other future period.
F-11
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
Reclassifications:
Reclassifications have been made to prior year financial statements to
conform to current year classifications.
Note 3. Acquisitions:
In September 1997, the Company acquired the assets of the Electronic
Systems Division of Whittaker Corporation ("ESD"). Bank financing was used to
acquire the ESD. The acquisition has been accounted for under the purchase
method and the ESD's operating results have been included in the Company's
financial statements from the date of acquisition. The purchase price was
allocated based on the estimated fair value of the ESD's tangible assets, net
of assumed liabilities. The net assets purchased comprised:
Purchased technology rights ......................................... $ 3,107
In-process technology ............................................... 8,421
Contracts receivable ................................................ 6,513
Inventories ......................................................... 971
Other current assets ................................................ 628
Property and equipment, net ......................................... 1,436
Accounts payable .................................................... (567)
Accrued expenses .................................................... (836)
--------
$ 19,673
========
The amounts allocated to purchased technology and in-process technology
were determined based on the income approach that represents future cash flows
discounted at a rate of return that is commensurate with the inherent risk and
expected growth. This is a valuation technique commonly used in the
high-technology industry. The purchased technology relates to command and
control and communication systems. The in-process technology relates to the
Shortstop Electronic Protection Systems development program. The most
significant assumptions utilized in the valuation was the anticipated future
contract revenues. Management was responsible for estimating the fair value of
these technology rights and the related assumptions. The technological
feasibility of the in-process technology had not been established and there
were not any other alternative future uses. Accordingly, the entire $8,421
related to the in-process technology was charged to operations in 1997. The
amounts allocated to purchased technology rights have been amortized on a
straight-line basis over 15 months, the estimated useful life of the products
or the related programs.
Following is the unaudited pro forma results of operations assuming that
the acquisition of ESD had occurred on January 1, 1996 after giving effect to
adjustments for amortization of purchased technology and imputed interest
expense and excluding the write-off of in-process technology:
<TABLE>
<CAPTION>
1996 1997
--------------------- ---------------------
Actual Pro Forma Actual Pro Forma
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Contract revenues....... $67,506 $90,649 $79,630 $90,498
Operating income (loss). (13,711) (22,612) 187 1,347
Net income (loss)....... (11,457) (16,798) (3,186) (2,490)
</TABLE>
F-12
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
Note 4. Contracts Receivable:
Contracts receivable are summarized as follows:
December 31,
-----------------
1997 1998
---- ----
Prime U.S. Government contractors and foreign governments .. $ 8,463 $ 4,814
U.S. Government ............................................ 8,545 11,002
Unreimbursed costs and accrued profits to be billed ........ 26,478 27,037
------- -------
$43,486 $42,853
======= =======
Unreimbursed costs and accrued profits to be billed represent
revenues recognized for which billings have not been presented. Substantially
all amounts, billed and unbilled, are expected to be collected within one year,
including contract retentions.
Note 5. Inventories:
Inventories are summarized as follows:
December 31,
------------------
1997 1998
---- ----
Raw materials .............................................. $ 519 $ 501
Work in progress ........................................... 1,966 1,271
------- -------
$ 2,485 $ 1,772
======= =======
Note 6. Property and Equipment:
Property and equipment are summarized as follows:
December 31,
------------------
1997 1998
---- ----
Manufacturing and office equipment ...................... $10,992 $12,333
Test equipment .......................................... 7,116 7,389
Leasehold improvements .................................. 1,071 1,771
------- -------
19,179 21,493
Less accumulated depreciation and amortization .......... (14,289) (16,472)
------- -------
$ 4,890 $ 5,021
======= =======
Note 7. Revolving Note Agreement:
During 1997, the Company entered into a new revolving note
facility. This revolving note facility has a total capacity of $18,100 and
expires in September 2002. This revolving note facility replaced the revolving
note facility that was entered into in connection with the Recapitalization,
and may be used for either cash borrowings or
F-13
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
standby letter of credit commitments. Outstanding standby letters of credit
reduce the Company's ability to draw down the revolving note facility.
Borrowings under the revolving note facility bear interest at prime plus
1.25% (9.75% and 9.00% at December 31, 1997 and 1998, respectively), and the
unused portion of the credit facility bears interest of 0.35% per annum.
Interest on the revolving notes is payable monthly.
Outstanding letters of credit relate to staged standby letter of credit
commitments for several of the Company's contracts in favor of the customers.
Increases to the standby letter of credit commitments correspond to advance
payments paid to the Company by certain foreign customers and decreases
correspond to the completion of contractual milestones. Upon completion of the
contracts, the requirement to maintain the standby letter of credit
commitments will terminate. As of December 31, 1997 and 1998, outstanding
letters of credit amounted to $11,249 and $21,713, respectively. Outstanding
standby letters of credit bear interest at 2.5% per annum.
As of December 31, 1998, the outstanding standby letters of credit
exceeded the capacity of the Company's revolving credit facility. As a result,
the Company is required to maintain restricted cash balances with the lenders.
These restricted cash balances aggregated $3,975 at December 31, 1998.
Under the terms of the revolving note facility, the Company is required
to maintain certain levels of cash availability, as defined therein. This
requirement was approximately $1,000 at December 31, 1997 and 1998.
Note 8. Accrued Expenses:
Accrued expenses are summarized as follows:
December 31,
-----------------
1997 1998
---- ----
Accrued salaries and employee benefits....... $5,123 $4,932
Accrued interest............................. 1,022 1,018
Other accruals............................... 2,718 2,625
------ ------
$8,863 $8,575
====== ======
Note 9. Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
December 31,
Total --------------------
Facility 1997 1998
-------- ---- ----
<S> <C> <C> <C>
Senior secured Term A Notes bearing interest at prime plus 1.25%
(9.00% at December 31, 1998), payable through September 2002............... $17,000 $17,000 $16,150
Senior secured Term B Notes bearing interest at prime plus 1.25%
(9.00% at December 31, 1998), payable through September 2002............... 13,000 13,000 13,000
Senior secured Acquisition Notes bearing interest at prime plus 1.75%
(9.50% at December 31, 1998), payable through September 2002............... 27,000 26,900 22,400
Capital lease obligations through June 1998 bearing interest at 6.5%........ 20
------- ------- -------
</TABLE>
F-14
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
<TABLE>
December 31,
Total --------------------
Facility 1997 1998
-------- ---- ----
<S> <C> <C> <C>
$57,000 56,920 51,550
=======
Less: Unamortized discount related to stock warrants........................ (957) (718)
Current portion............................................................ (6,220) (3,400)
------- -------
$49,743 $47,432
======= =======
</TABLE>
Aggregate payments on long-term debt at December 31, 1998 are as follows:
1999 ................................. $ 3,400
2000 ................................. 9,270
2001 ................................. 16,620
2002 ................................. 22,260
-------
$51,550
=======
Substantially all of the Company's assets are pledged as collateral for
the senior secured credit facility. The Company is required to maintain
certain financial leverage and interest coverage ratios as well as comply with
certain other covenants. These covenants include requirements for minimum
levels of working capital, EBITDA and net worth, as defined therein. These
covenants also restrict dividends and capital expenditures.
Note 10. Subordinated Notes:
In connection with the 1996 Recapitalization, the Company issued $5,000
of subordinated notes. These notes bear interest at 10% per annum and require
annual interest payments. The outstanding principal and any accrued interest
are due in November 2004. These notes are subordinated and junior to the
senior secured credit facilities. In the event of certain defaults under the
senior secured credit facilities, the Company may not be permitted to pay
principal or interest on the subordinated notes. Additionally, except as it
relates to certain permitted transfers, any holders of the subordinated notes
are restricted from transferring the notes.
Note 11. Commitments:
Operating Leases:
The Company leases its manufacturing and office facilities under
non-cancelable operating leases, which expire between November 1999 and March
2005.
The future minimum lease payments under operating lease obligations at
December 31, 1998 are:
1999............................................. $ 1,954
2000............................................. 1,364
2001............................................. 640
2002............................................. 616
2003............................................. 521
Thereafter....................................... 530
-------
$ 5,625
=======
F-15
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
Rental expense under all operating leases for the years ended December
31, 1996, 1997 and 1998 was $1,256, $1,350 and $1,714, respectively.
Note 12. Shareholders' Equity (Deficit):
Capital Stock:
The following table summarizes the voting percentage, liquidation
preference and percentage of equity ownership for each class or series of
capital stock as of December 31, 1998:
<TABLE>
<CAPTION>
Class or Series of Stock Voting Percentage Liquidation Preference Equity Ownership
- ---------------------------------- ------------------ ---------------------- ----------------
<S> <C> <C> <C>
Series A preferred stock.......... 55.0% 12,000 50.6%
Class A common stock.............. 30.0% 13,411 28.2%
Class B common stock.............. 15.0% -- 21.2%
</TABLE>
The rights, preferences and terms of the Company's capital stock are as
follows:
Governance and Voting Rights:
The series of preferred stock and classes of common stock vote together
on all matters, except for directors and as required by law. Each of the
series and classes of stock are entitled to their respective total voting
power that is summarized in the preceding table. Within each series and
class of stock, the individual shareholders are entitled to a
proportionate share of the voting power based upon the number of shares
held. With respect to directors, the Series A preferred stock has the
right to elect three directors and the Class A common stock has the right
to elect one director. All other directors are to be elected by all of
the series of preferred and classes of common stock voting together.
Conversion Rights:
All series of preferred stock and classes of common stock are required to
convert into Class B common stock (which will then be titled common
stock) in the event of an underwritten public offering under the
Securities Act of 1933 that has aggregate proceeds that equals or exceeds
$20,000. The number of common stock shares that each of the series and
classes of stock will convert into is based upon a formula. This formula
states that each series and class of stock is entitled to their
proportionate share of the common stock based upon: i) their then
outstanding liquidation preference and ii) their equity ownership
interest in excess of the then outstanding liquidation preference. The
proportionate share of equity ownership will be adjusted to reflect the
issuance of any additional Class A or Class B common stock; however,
there will be no adjustment to reflect the issuance of any additional
Series A preferred stock.
Liquidation:
In the event of a liquidation or merger that involves a change in control
of the Company, the Series A preferred stock and Class A common stock
will be entitled to receive all of the proceeds from the liquidation or
merger until the Series A preferred stock and Class A common stock have
received an amount equal to their then outstanding liquidation
preference. These proceeds will be shared between the Series A preferred
stock
F-16
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
and Class A common stock in proportion to their then outstanding
liquidation preference. Any proceeds received in excess of the
liquidation preferences of Series A preferred stock and Class A common
stock will then be distributed to all series and classes of stock based
upon their respective equity ownership interest.
Dividends:
The Company's senior secured credit facility restricts dividends and
other distributions to shareholders. In the event that such dividends or
distributions do occur, they shall be paid only to the Series A preferred
stock and Class A common stock so long as these classes of stock remain
outstanding. Any such dividend or distributions shall be allocated
between the two classes in proportion to their respective then
outstanding liquidation preferences and shall reduce the outstanding
liquidation preference.
Repurchase and Transfer Rights:
In the event that an employee terminates, whether voluntarily or
otherwise, or upon disability or death, the Company has the right to
repurchase any or all shares of all classes of stock held by that
employee. The purchase price for all vested shares shall be the fair
market value on the date of termination. The purchase price for all
unvested shares related to certain restricted stock grants of Class B
Common Shares shall be the original issuance price. At December 31, 1997
and 1998, there were approximately 35,250 and 26,250 shares of Class B
Common Shares outstanding that were not vested. Additionally, except as
it relates to certain permitted transfers, any holders of stock are
restricted from transferring any interest in such stock without the
consent of the Board of Directors. Commencing 18 months after the
Recapitalization, holders of the Series A preferred stock have the right
to compel certain management shareholders to sell their stock to a third
party.
Registration Rights:
Commencing 180 days after an initial public offering of the Company's
stock, the holders of Series A preferred stock have the right to cause
the Company to register their shares under the Securities Act, subject to
certain limitations. The holders of Class A common stock and certain
other shareholders have "piggyback" rights on registered offerings of the
Company, subject to certain limitations.
Warrants:
The Company has granted the lenders that provided the senior secured
financing warrants to purchase 19,149 shares of Class B common stock. The
warrants are exercisable at a purchase price of $0.000667 per share at any
time prior to the earlier of an initial public offering or November 21, 2006.
The warrants issued had a fair value of approximately $957 at the time of
issuance based on a calculation using the Black Scholes valuation method. The
fair value of these warrants has been recorded as additional consideration for
Class B Common Stock and a discount on the long-term debt. This discount is
being amortized to interest expense on an effective interest rate basis over
the term of the long-term debt.
Stock Option Plans:
In October 1993, the Company established the 1993 Non-Qualified Stock
Option Plan (the "1993 Plan"). Options generally vested over a period of four
to a maximum of ten years. Options expired, if not exercised, within a maximum
of ten years from the date of grant. In November 1996, the 1993 Plan was
terminated and all of the Company's outstanding options were canceled as part
of the Recapitalization. A summary of transactions relating to this option
plan for the year ended December 31, 1996 is set forth below:
F-17
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Stock Option Outstanding Weighted
------------------------ Average
Available Price Per Exercise
For Grant Shares Share Amount Price
--------- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995...... 325 2,660 $1.04-$3.45 $6,111 $2.30
Authorized...................... 573
Granted......................... (426) 426 $3.36-$4.70 1,929 $4.53
Exercised....................... (902) $1.04-$4.70 (1,400) $1.55
Terminated...................... (472) (2,184) $1.04-$4.70 (6,640) $3.04
---- ------ ------
Balances, December 31, 1996...... -- -- $ --
==== ====== ======
</TABLE>
In May 1997, the Company established the 1997 Stock Option and Restricted
Share Plan (the "1997 Plan"). Under the terms of the 1997 Plan, the Company
may grant stock options, stock appreciation rights or restricted shares of the
Company's Class B common stock at prices determined by the Board of Directors,
as of the date of grant. Options under the 1997 Plan generally vest over a
period of five years. Options expire, if not exercised, within a maximum of
ten years from the date of grant.
A summary of transactions relating to the 1997 Plan is set forth below:
<TABLE>
<CAPTION>
Stock Options Outstanding
------------------------- Weighted
Available Average
For Price Per Exercise
Grant Shares Share Amount Price
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Authorized....................... 4,800
Granted.......................... (3,233) 3,233 $ 0.02 $65 $0.02
------ ----- ---
Balances, December 31, 1997...... 1,567 3,233 $ 0.02 $65 $0.02
Terminated....................... 320 (320) $ .02-.05 $(7) $0.02
Granted.......................... (1,887) 1,887 $ .02-.05 $81 $0.04
------ ----- ---
Balances, December 31, 1998...... -- 4,800 $ .02-.05 $139 $0.03
====== ===== ===
</TABLE>
A summary of the stock options outstanding at December 31, 1998 follows:
<TABLE>
Stock Options Outstanding Stock Options Exercisable
----------------------------------------------------------- --------------------------------------
Weighted Average
Range of Exercise Remaining Weighted Average Weighted Average
Price Number of Shares Contractual Life Exercise Price Number of Shares Exercise Price
- ----------------- ---------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
$0.02 3,398 8.9 $0.02 600 $0.02
$0.05 1,402 9.8 $0.05 -- --
</TABLE>
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation" requires the measurement of the fair
value of stock-based compensation to be included in the statement of operations
or disclosed in the notes to financial statements. The Company has elected the
disclosure-only alternative under SFAS No. 123 and will continue to account for
stock-based compensation for employees under APB Opinion No. 25.
F-18
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
The Company has recognized compensation cost of $9,928 in 1996 and $4 in
1998 related to the Company's stock option plans. The stock compensation costs
recognized in 1996 relate to the reacquisition of specific shares and the
termination of the 1993 Plan as a part of the 1996 Recapitalization. The stock
compensation costs recognized in 1998 relate to certain stock options that
were issued during the last six months of 1998 with exercise prices that were
lower than fair market value based on the terms of the proposed 1999
Recapitalization that is described in Note 19. The Company has recorded
deferred stock compensation cost of approximately $142 as a reduction of
shareholders' equity (deficit) and will recognize the unamortized portion of
$138 at December 31, 1998 ratably over the remaining vesting period.
SFAS 123 requires pro forma information regarding net income. This
information is required to be determined as if the Company had accounted for
its employee stock options based on its fair value accounting provisions. The
fair value of stock options granted in 1996, 1997 and 1998 reported in the pro
forma information below has been estimated at the date of grant using a Black
Scholes option pricing model with the following weighted average assumptions:
1996 1997 1998
---- ---- ----
Fair value of stock options granted. $1.17 $0.01 $0.11
Assumption utilized in determination
Expected life (in years)............ 5.0 5.0 5.0
Risk free interest rates............ 6.21% 5.71% 4.54%
Volatility.......................... -- -- --
Dividend yield...................... $0.0 $0.0 $0.0
For purposes of the pro forma disclosures, the estimated fair value of the
stock options is amortized to expense over the option's vesting periods. The
Company's pro forma information follows:
1996 1997 1998
---- ---- ----
Net income (loss), as reported...... $(11,457) $(3,186) $2,600
Net income (loss), pro forma........ (11,495) (3,188) 2,592
Note 13. Employee Benefit Plans:
The Company has established an Employee Stock Ownership Plan ("ESOP") for
all eligible employees. The Company contributed $300 and $325 to the ESOP for
the years ended December 31, 1996 and 1997, respectively. In connection with
the 1996 Recapitalization, the ESOP sold 1,453 shares of common stock for
$8,987 and the ESOP purchased 3,247 shares of Class A common stock. At
December 31, 1997 and 1998, there were 3,247 and 3,372 shares of Class A
common stock held by the ESOP, respectively.
The Company has established a 401(k) Deferred Compensation Plan (the
"401K Plan") for all qualifying employees. The 401K Plan qualifies under
Sections 401(a) and 401(k) of the Internal Revenue Code. The 401K Plan is a
defined contribution plan funded by pretax contributions on a percentage
formula basis made by participating employees. In 1994, the 401K Plan was
amended to allow for employer contributions. The Company contributed $300,
$325 and $850 to the 401K Plan for the years ended December 31, 1996, 1997 and
1998, respectively. The 401K Plan is subject to the Employee Retirement Income
Security Act of 1974 (ERISA).
If the 1999 Recapitalization is completed, the ESOP intends to sell its
shares of Class A common stock. The Company will then take the steps necessary
to merge the ESOP into the Company's 401K Plan. See Note 19 for information
regarding the 1999 Recapitalization.
F-19
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
One executive of the Company has a five year employment agreement that
provides for salary and benefits that he would become entitled to upon his
death, disability or involuntary termination, or merger, as defined.
Note 14. Contingencies:
As a government contractor, the Company is subject to government
oversight. The Government routinely audits and reviews the Company's business
and accounting practices and its proposals, contract performance and cost
accounting. If it is determined that the Company did not comply with the U. S.
Government procurement regulations and practices, the Company could be subject
to claims, fines or suspension from eligibility to bid on new government
contracts. Historically, the Company has been in compliance with the U.S.
Government procurement regulations and practices, successfully defended its
actions or settled any claims, fines or inquiries without material adverse
effect to its financial results or condition. The Company believes there are
no pending audits or reviews that are likely to have a material adverse effect
upon its financial results or condition.
The Company is also involved in other routine legal and administrative
proceedings that arise from the normal conduct of business. Management
believes that the ultimate disposition of these matters will not have a
material adverse effect on the financial results or condition of the Company.
Note 15. Income Taxes:
The provision for (benefit of) income taxes for the years ended December
31, 1996, 1997 and 1998 comprise:
1996 1997 1998
---- ---- ----
Current:
Federal ................... $(2,087) $ 803 $ 872
State ..................... 399
------- ------- ------
(2,087) 803 1,271
------- ------- ------
Deferred:
Federal ................... (964) (2,494) 281
State ..................... (442) (530) 110
------- ------- ------
(1,406) (3,024) 391
------- ------- ------
$(3,493) $(2,221) $1,662
======= ======= ======
Deferred tax assets and liabilities for the years ended
December 31, 1996, 1997 and 1998 comprise:
1996 1997 1998
---- ---- ----
Deferred Tax Liabilities
State taxes ........................ $ (225) $ (844) $ (506)
------- ------- ------
(225) (844) (506)
Deferred Tax Assets
Depreciable and amortizable assets 257 4,181 3,103
Credit and loss carryforward 190 1,294 2,162
Contract and inventory related costs. 700 1,901 2,331
Accrued expenses .................... 2,705 1,221 1,250
------- ------- ------
3,852 8,597 8,846
F-20
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
1996 1997 1998
---- ---- ----
Valuation allowance.......................... (190) (1,294) (2,162)
------ -------- ---------
Net deferred tax assets...................... $3,437 $ 6,459 $ 6,178
====== ======== =========
The provision for income taxes differs from the amount of income tax
determined by applying the applicable statutory federal tax to the income
(loss) before income taxes as a result of the following differences for the
years ended December 31, 1996, 1997 and 1998:
1996 1997 1998
---- ---- ----
Income tax (benefit) at U.S. statutory rates..... $ (5,083) $ (1,838) $ 1,449
State taxes, net of federal benefit.............. (292) (350) 336
Research and development credits................. (111) (33) (123)
1996 Recapitalization expenses................... 1,054
Product line and plant closure costs.............
939
------- ------- -------
Income tax at effective rates.................... $ (3,493) $ (2,221) $ 1,662
======= ======== =======
The Company has approximately $890 of federal tax credit carry forwards,
$1,140 of state tax credit carry forwards and $1,930 of state net operating
loss carry forwards at December 31, 1998. These carry forwards expire in
varying amounts through 2013. The Company has not recognized the benefits of
these carry forwards for financial statement purposes because the Company
anticipates that it will continue to be limited on the use of these carry
forwards due to alternative minimum tax and research and development credit
limitations. The Company does not believe that the future utilization of these
carry forwards will be limited further due to the change in control as defined
in the Internal Revenue Code that will result from the potential 1999
Recapitalization described in Note 19.
The Company's federal tax returns for the years 1994 and 1995 are
presently under examination by the Internal Revenue Service. While the Company
has not received any final proposed adjustments, the Company believes that
adequate provisions have been provided for any adjustments that may result
from the years under examination.
Note 16. Segment Information:
The Company has adopted the Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131) effective December 31, 1998. SFAS 131 establishes standards for
disclosure about operating segments and related disclosures about products and
services, geographic areas and major customers. Comparative information has
been provided for prior years.
The Company operates in one business segment. The Company designs,
develops, manufactures and markets technologically advanced signal collection
and specialized electronic counter measure products and systems in the
electronic warfare industry. The Company supplies a complete line of
integrated systems, subsystems and products that are used to intercept,
identify, locate and analyze radar signals for a variety of military needs,
including intelligence, reconnaissance, surveillance, situational awareness
and threat warning. The Company's systems, sub systems and products are used
on various platforms including personnel, airborne, shipboard, ground vehicles
and fixed sites by the military and intelligence communities of the United
States and its allies.
The Company sells its products and systems directly to various agencies
of the U.S. Government, prime contractors and foreign governments. The
Company's principal markets are in the United States, Europe and the
F-21
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
Pacific Rim with the United States, Scandinavian countries and the Pacific
Rim, to a lesser extent, being the prime markets served. Following is a
summary of the geographic information related to contract revenues and
information related to significant customers for the years ended December 31,
1996, 1997 and 1998:
1996 1997 1998
---- ---- ----
Revenues
Domestic.................. $43,695 $57,986 $65,219
International............. 23,811 21,644 35,823
------- ------- --------
$67,506 $79,630 $101,042
======= ======= ========
Significant Customers
Customer A................ $33,658 $38,287 $49,609
Customer B................ 8,339 3,851 1,482
Customer C................ 4,802 14,143 6,900
The Company's assets are located in the United States. The Company does
not segregate information related to operating income generated by its export
sales.
Note 17. Non-cash Investing and Financing Activities:
The following is a summary of non-cash investing and financing activities
for the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Issuance of warrants in connection with the issuance of Acquisition Notes........ $ 957
Net payments of full recourse notes settled by exchange of common stock.......... $830
Common stock redeemed with notes payable......................................... 5,000
Issuance of Class A common stock in exchange for common stock.................... 4,052
Issuance of Series A preferred stock in exchange for common stock................ 6,461
Payment for exercise of stock options by exchange of common stock................ 27
Issuance of common stock in exchange for notes receivable........................ 1,302
Income tax benefit from common stock transactions................................ 21
Contribution of Class A common stock to ESOP..................................... $ 325
</TABLE>
Note 18. Other Charges:
Recapitalization Expenses:
In November 1996, the Company consummated the 1996 Recapitalization. In
connection with this Recapitalization, the Company recognized approximately
$15,700 in Recapitalization related expenses. These expenses included
approximately $12,600 of employee compensation related to the repurchase of
vested and unvested stock options and the issuance of Class B common stock,
and $3,100 of transaction related costs.
Product Line and Plant Closure Costs:
In August 1996, in conjunction with the proposed 1996 Recapitalization, the
Company exited further development of the commercial application of its
geo-location technology to concentrate on its growth through acquisition
strategy for its core product lines. The Company recognized $5,896 in product
line closure costs. This
F-22
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
provision included approximately $3,600 related to the write-off of certain
technologies acquired from Airwave Technology, Inc. and $2,296 in severance,
facility costs, contractual obligations and other potential claims. The
closure of these operations and settlement of all significant claims were
concluded in 1997.
Abandoned Acquisition Costs:
During 1997, the Company executed letters of intent to acquire the assets
of two private companies. The Company later terminated these letters of intent
due to its due diligence findings and wrote-off approximately $185 of costs
incurred in connection with its evaluation of these companies.
In October 1998, the Company executed an asset purchase agreement to
acquire the assets of the Applied Technology Division ("ATD") of Litton
Industries, Inc. ("Litton") for approximately $120,000. The Company conducted
its due diligence and financing efforts until January 1999. In January 1999,
the Company allowed the agreement to terminate due to changes in certain
conditions. The Company has charged approximately $513 to operations for costs
incurred in connection with its evaluation of ATD.
Note 19. Subsequent Events:
In January 1999, the Company announced its decision to close its
facilities located in Sterling, Virginia. The Company will record a charge to
the first quarter of 1999 of approximately $925 for plant closure costs. This
provision includes severance, facility costs, closure costs and other
potential contractual claims. The Company anticipates that the closure of the
facility and settlement of all significant claims will be concluded during
1999.
In June 1999, the Company acquired certain assets from ARGOSystems, Inc.,
a subsidiary of the Boeing Company. Under the terms of the acquisition
agreement, the Company acquired the electronic warfare assets of ARGOSystems,
Inc., excluding cash and billed receivables, and assumed obligations under
existing contracts and outstanding proposals. As consideration, the Company
paid $2,000 in cash plus a commission on two specified future contract awards,
if they are awarded in 1999 and 2000.
In April 1999, the Company, the ESOP, Behrman Capital (the majority
shareholder), certain executives and key employees, Donaldson, Lufkin and
Jenrette Merchant Banking Partners II, Inc. ("DLJ Merchant Banking"), and
Global Technology Partners LLC ("GTP") entered into agreements to effect a
recapitalization of the Company ("the 1999 Recapitalization"). The Company
accounted for this transaction as a recapitalization and the historical basis
of the Company's assets and liabilities was not adjusted. In connection with
the 1999 Recapitalization, the Company issued $100,000 of 117/8% senior
subordinated notes (the "Notes") and entered into a $50,000 revolving senior
credit facility. The proceeds of the 1999 Recapitalization were used to retire
all existing long-term debt, subordinated notes payable and capital stock of
the Company. After completion of the 1999 Recapitalization, DLJ Merchant
Banking owned a majority interest in the Company while Behrman Capital, GTP
and certain executives and employees owned the remaining interest.
Note 20. Condensed Consolidating Financial Information:
In contemplation of the offering of the Notes, the following summarized
condensed consolidating financial information is presented for the Company,
segregating CEI Systems, Inc., the subsidiary which will guarantee the Notes
(the "Guarantor"). The accompanying financial information in the "Guarantor
Subsidiary" column reflects the financial position, results of operations and
cash flows for the Guarantor. The Guarantor is a wholly-owned subsidiary of
the Company and the guarantees will be full and unconditional. Separate
financial statements of the Guarantor are not presented because management
believes that such financial statements would not be material to
F-23
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
investors. The financial information related to non-guarantor subsidiaries is
not presented as they are collectively immaterial.
The investments in the Guarantor in the following condensed consolidating
financial information are accounted for under the equity method of accounting.
The consolidating eliminations include the elimination of the investment in
the Guarantor and elimination of intercompany accounts.
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------
Parent Guarantor Consolidating Consolidated
Company Subsidiary Eliminations Total
------- ---------- ------------ ------------
Assets
<S> <C> <C> <C> <C>
Current assets
Cash, cash equivalents and restricted cash.............. $8,133 $142 $ -- $8,275
Other current assets.................................... 42,989 6,175 -- 49,164
Intercompany receivable................................. -- 11,895 (11,895) --
------- ------- -------- -------
Total current assets................................. 51,122 18,212 (11,895) 57,439
Property and equipment, net............................. 3,512 1,509 -- 5,021
Investment in subsidiary................................ 19,673 -- (19,673) --
Other assets, net....................................... 5,365 98 -- 5,463
------- ------- -------- -------
Total assets.......................................... $79,672 $19,819 $(31,568) $67,923
======= ======= ======== =======
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable and other current liabilities.......... $20,464 $4,603 $ -- $25,067
Intercompany payable.................................... 11,895 -- (11,895) --
Current portion of long-term debt....................... 3,400 -- -- 3,400
------- ------- -------- -------
Total current liabilities............................. 35,759 4,603 (11,895) 28,467
Long-term debt, less current portion..................... 52,432 -- -- 52,432
------- ------- -------- -------
Total liabilities..................................... 88,191 4,603 (11,895) 80,899
------- ------- -------- -------
Total shareholders' equity (deficit)............... (8,519) 15,216 (19,673) (12,976)
------- ------- -------- -------
Total liabilities and shareholders' equity (deficit) $79,672 $19,819 $(31,568) $67,923
======= ======= ======== =======
</TABLE>
F-24
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
Condensed Balance Sheets (Continued)
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------
Parent Guarantor Consolidating Consolidated
Company Subsidiary Eliminations Total
------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents............................... $397 $282 $ -- $679
Other current assets.................................... 41,203 9,113 -- 50,316
Intercompany receivable................................. 3,047 4,024 (7,071) --
------- ------- ---------- -------
Total current assets................................. 44,647 13,419 (7,071) 50,995
Property and equipment, net.............................. 3,753 1,137 -- 4,890
Investment in subsidiary................................. 19,673 -- (19,673) --
Other assets, net........................................ 5,920 2,943 -- 8,863
------- ------- ---------- -------
Total assets.......................................... $73,993 $17,499 $(26,744) $64,748
======= ======= ========== =======
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable and other current liabilities.......... $16,681 $3,009 $ -- $19,690
Intercompany payable.................................... 7,071 -- (7,071) --
Current portion of long-term debt....................... 6,220 -- -- 6,220
------- ------- ---------- -------
Total current liabilities............................. 29,972 3,009 (7,071) 25,910
Long-term debt, less current portion..................... 54,743 -- -- 54,743
------- ------- ---------- -------
Total liabilities..................................... 84,715 3,009 (7,071) 80,653
------- ------- ---------- -------
Total shareholders' equity (deficit).................. (10,722) 14,490 (19,673) (15,905)
------- ------- ---------- -------
Total liabilities and shareholders' equity (deficit).. $73,993 $17,499 $ (26,744) $64,748
======= ======= ========== =======
</TABLE>
F-25
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
Condensed Statements of Operations
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------
Parent Guarantor Consolidated
Company Subsidiary Total
------- ---------- -----------
<S> <C> <C> <C>
Contract revenues..................... $78,687 $22,355 $101,042
Contract costs........................ 48,490 13,170 61,660
Technology related costs:
Research and development............. 3,782 578 4,360
Amortization of purchased technology. -- 2,489 2,489
Selling, general and administrative... 15,436 4,905 20,341
Other charges:
Abandoned acquisitions costs......... 513 -- 513
------ ------ ------
Operating income................... 10,466 1,213 11,679
Interest and other income............. 237 -- 237
Interest expense...................... (7,654) -- (7,654)
------ ------ ------
Income before income taxes........... 3,049 1,213 4,262
Provision for income taxes............ 1,175 487 1,662
------ ------ ------
Net income........................... $1,874 $726 $2,600
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------
Parent Guarantor Consolidated
Company Subsidiary (1) Total
------- -------------- ------------
<S> <C> <C> <C>
Contract revenues..................... $75,329 $4,301 $79,630
Contract costs........................ 50,336 2,807 53,143
Technology related costs:
Research and development............. 856 183 1,039
Amortization of purchased technology. -- 618 618
Write-off of in process technology... -- 8,421 8,421
Selling, general and administrative... 14,969 1,068 16,037
Other charges:
Abandoned acquisitions costs......... 185 -- 185
------ ------- -------
Operating income (loss)............ 8,983 (8,796) 187
Interest and other income............. 94 -- 94
Interest expense...................... (5,688) -- (5,688)
------ ------- -------
Income (loss) before income taxes.... 3,389 (8,796) (5,407)
Provision (benefit for) for income
taxes................................ 1,392 (3,613) (2,221)
------ ------- -------
Net income (loss).................... $1,997 $(5,183) $(3,186)
====== ======= =======
</TABLE>
(1) For the period from October 1, 1997 (date of acquisition) to December 31,
1997.
F-26
<PAGE>
CONDOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(in thousands, except per share amounts)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------
Parent Guarantor Consolidated
Company Subsidiary Total
------- ---------- -----------
<S> <C> <C> <C>
Net income........................................................ $1,874 $726 $2,600
Adjustments to reconcile net income to net cash provided by
operating activities............................................. 1,717 7,759 9,476
------ ------ ------
Net cash provided by operating activities......................... 3,591 8,485 12,076
------ ------ ------
Net cash provided by (used in) investing activities............... 6,123 (8,625) (2,502)
------ ------ ------
Net cash used in financing activities............................. (5,953) -- (5,953)
------ ------ ------
Net increase (decrease) in cash................................... 3,761 (140) 3,621
Cash, beginning of year........................................... 397 282 679
------ ------ ------
Cash, end of year................................................. $4,158 $142 $4,300
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------
Parent Guarantor Consolidated
Company Subsidiary (1) Total
------- ---------- -----------
<S> <C> <C> <C>
Net income............................................................ $5,234 $(8,420) $(3,186)
------ ------- -------
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities....................................... (3,882) 9,513 5,631
------ ------- -------
Net cash provided by operating activities............................. 1,352 1,093 2,445
------ ------- -------
Net cash used in investing activities................................. (20,604) (811) (21,415)
------ ------- -------
Net cash provided by financing activities............................. 15,431 -- 15,431
------ ------- -------
Net increase (decrease) in cash....................................... (3,821) 282 (3,539)
Cash, beginning of period............................................. 4,218 -- 4,218
------ ------- -------
Cash, end of period................................................... $397 $282 $679
====== ======= =======
</TABLE>
- ----------
(1) For the period from October 1, 1997 (date of acquisition) to December 31,
1997.
<PAGE>
Offer to Exchange
All Outstanding
11 7/8% Series A Senior Subordinated Notes due 2009
for
11 7/8% Series B Senior Subordinated Notes due 2009
Condor Systems, Inc.
-----------
PROSPECTUS
-----------
, 1999
- ------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as
to matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the
company have not changed since the date hereof.
- ------------------------------------------------------------------------------
<PAGE>
[ALTERNATE FRONT COVER FOR MARKET-MAKING PROSPECTUS]
SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 1999
Condor Systems, Inc.
$100,000,000
11 7/8% Senior Subordinated Notes due 2009
PROSPECTUS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Condor Systems, Inc: The Notes:
o We are one of the world's leading o Interest Payments: semi-annually in
providers of technologically advanced cash in arrears on May 1 and November
signal collection and specialized 1, commencing on November 1, 1999.
electronic countermeasure products and o Redemption: the senior subordinated
systems in the electronic warfare industry. notes will be redeemable on or after
May 1, 2004. Up to 35% of the senior
o Condor Systems, Inc. subordinated notes will be redeemable
2133 Samaritan Drive prior to May 1, 2002, with the net
San Jose, CA 95124 proceeds of a public equity offering.
(408) 371-9580
o Ranking of Senior Subordinated Notes:
o We were acquired in April 1999 by a general unsecured obligations, junior to
group of investors including DLJ senior obligations and secured
Merchant Banking Partners II, L.P. and obligations, including any borrowings
certain members of management. and reimbursement obligations with
respect to letters of credit under our
The Original Offering: new credit facility.
o We issued the notes in August __,
1999, in an exchange offer registered The Guarantees:
under the Securities Act of 1933
pursuant to which the notes were o Guarantees: fully and unconditionally
exchanged for otherwise identical notes guaranteed on a senior subordinated
originally issued in a private offering basis by CEI Systems, Inc., our only
on April 15, 1999. material subsidiary. The guarantees
will be general unsecured obligations of
o We used the net proceeds of the private CEI Systems, Inc.
offering, together with an equity
investment of $50.9 million, to fund the
acquisition, to repay existing
indebtedness and to pay fees and
expenses related to the acquisition. The
remaining net proceeds were used for
general corporate purposes and initially
were temporarily invested in short-term
securities.
</TABLE>
This investment involves risk. See Risk Factors beginning on page 10.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
This prospectus will be used by Donaldson, Lufkin & Jenrette Securities
Corporation in connection with offers and sales in market-making transactions
at negotiated prices related to prevailing market prices. There is currently
no public market for the notes. We do not intend to list the notes on any
securities exchange or to seek admission thereof to trading in the National
Association of Securities Dealers Automated Quotation System. Donaldson,
Lufkin & Jenrette Securities Corporation has advised us that it is currently
making a market in the notes; however, it is not obligated to do so and may
stop at any time. Donaldson, Lufkin & Jenrette Securities Corporation may act
as principal or agent in any such transaction. We will not receive the
proceeds of the sale of the notes but will bear the expenses of registration.
- -------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
The date of this Prospectus is , 1999.
<PAGE>
[ALTERNATE SECTIONS FOR MARKET-MAKING PROSPECTUS]
No public trading market for the notes exists
There is no existing trading market for the notes, and we
cannot assure you about the future development of a market for the notes or
your ability to sell the notes or the price at which you may be able to sell
your notes. If such market were to develop, the notes could trade at prices
that may be higher or lower than the initial offering price of the notes
depending on many factors, including prevailing interest rates, our operating
results and the market for similar securities. Although it is not obligated to
do so, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC") intends
to make a market in the notes. Any such market-making activity may be
discontinued at any time, for any reason, without notice at the sole
discretion of DLJSC. We do not intend to list the notes on any securities
exchange or to seek admission thereof to trading in the National Association of
Securities Dealers Automated Quotation System. No assurance can be given as
to the liquidity of or the trading market for the notes.
DLJSC may be deemed to be our "affiliate" (as defined in the
Securities Act) and, as such, may be required to deliver a prospectus in
connection with its market-making activities in the notes. Pursuant to the
registration rights agreement that we signed with DLJSC in connection with the
initial sale of the new notes, we have agreed to use our best efforts to file
and maintain a registration statement that would allow DLJSC to engage in
market-making transactions in the notes for a period ending no sooner than the
date on which DLJSC is no longer deemed to be such an "affiliate." We have
agreed to bear substantially all the costs and expenses related to
registration.
USE OF PROCEEDS
This prospectus is delivered in connection with the sale of the
notes by DLJSC in market-making transactions. We will not receive any of the
proceeds from such transactions.
PLAN OF DISTRIBUTION
This prospectus is to be used by DLJSC in connection with
offers and sales of the new notes in market-making transactions effected from
time to time. DLJSC may act as a principal or agent in such transactions,
including as agent for the counterparty when acting as principal or as agent
for both counterparties, and may receive compensation in the form of discounts
and commissions, including from both counterparties when it acts as agent for
both. Such sales will be made at prevailing market prices at the time of sale,
at prices related thereto or at negotiated prices.
DLJ Merchant Banking, an affiliate of DLJSC, and some of its
affiliates beneficially own approximately 52.9% of the common stock of Condor.
DLJSC acted as financial advisor to WDC Acquisition Corp., a predecessor to
Condor in the acquisition, and as an initial purchaser of the old notes. WDC
Acquisition Corp. paid customary fees to DLJSC as compensation for its
services as financial advisor and initial purchaser. The aggregate amount of
all fees paid to DLJSC in connection with the acquisition and the related
financing was approximately $3.6 million plus out-of-pocket-expenses. Condor,
as successor to WDC Acquisition Corp., has agreed to engage DLJSC as its
exclusive financial advisor for a period of five years beginning upon the
closing of the merger. Condor and its subsidiaries may from time to time enter
into financial advisory or other investment banking relationships with DLJSC
or one of its affiliates pursuant to which DLJSC or its affiliates will
receive customary fees and will be entitled to reimbursement for all
reasonable disbursements and out-of-pocket expenses incurred in connection
therewith. Condor expects that any such arrangement will include provisions
for the indemnification of DLJSC against certain liabilities, including
liabilities under the federal securities laws. See "Certain Relationships and
Related Party Transactions."
<PAGE>
DLJSC has informed Condor that it does not intend to confirm
sales of the new notes to any accounts over which it exercises discretionary
authority without the prior specific written approval of such transactions by
the customer.
Condor has been advised by DLJSC that, subject to applicable
laws and regulations, DLJSC currently intends to make a market in the new
notes following completion of the exchange offer. However, DLJSC is not
obligated to do so and any such market-making may be interrupted or
discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act. There can be no assurance that an active trading market will
develop or be sustained. See "Risk Factors--No public market for the new notes
exists."
DLJSC and Condor have entered into the Registration Rights
Agreement with respect to the use by DLJSC of this prospectus. Pursuant to
such agreement, Condor agreed to bear all registration expenses incurred under
such agreement, and Condor agreed to indemnify DLJSC against certain
liabilities, including liabilities under the Securities Act.
<PAGE>
[BACK COVER FOR MARKET-MAKING PROSPECTUS]
===============================================================================
11 7/8% Series B Senior Subordinated Notes due 2009
Condor Systems, Inc.
-----------
PROSPECTUS
-----------
Donaldson, Lufkin & Jenrette
, 1999
- -------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as
to matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Condor
have not changed since the date hereof.
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all estimated expenses incurred or
expected to be incurred by the Registrants in connection with the issuance and
distribution of the securities being registered hereby, other than underwriting
discounts and commissions.
<TABLE>
<CAPTION>
Item Amount
- ---- --------
<S> <C>
SEC Registration Fee............................ $ 27,800
Printing and Engraving Costs.................... 50,000
Trustee Fees.................................... 8,000
Legal Fees and Expenses......................... 200,000
Accounting Fees and Expenses.................... 100,000
Miscellaneous................................... 50,000
--------
Total.......................................... $435,000
========
</TABLE>
- --------------
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 204 of the General Corporation Law of the State of California (
"California Law") authorizes a corporation to adopt a provision in its
articles of incorporation eliminating the personal liability of directors to
corporation and their shareholders for monetary damages for breach of alleged
breach of directors' duties. Following the adoption of such a provision by a
California corporation, its directors are not liable to corporations and their
shareholders for monetary damages for conduct constituting negligence or gross
negligence in the exercise of their fiduciary duties, but directors remain
subject to equitable remedies such as injunction or rescission. Under
California Law, directors remain liable, even for monetary damages, for (1)
acts or omissions not in good faith or involving intentional misconduct,
knowing violations of the law, reckless disregard for the best interests of a
corporation or its shareholders or that constitute such a pattern of
inattention that there is an abdication of the director's duty, (2) illegal
payments of dividends and (3) approval of any transaction from which a
director derives an improper personal benefit. The adoption of this provision
in the articles of incorporation also does not limit directors' liability for
violations of the federal securities laws.
Section 317 of California Law makes provision for the indemnification of
officers, directors and other corporate agents in terms sufficiently broad to
indemnify such persons, under certain circumstances, for liabilities
(including reimbursement for expenses incurred) arising under the Securities
Act of 1933. Indemnification under Section 317 is not exclusive of other
indemnifications authorized in a corporation's articles of incorporation.
Condor has adopted provisions in its Articles of Incorporation which
eliminate the personal liability of its directors to the fullest extent
permissible under California Law and indemnify its officers, directors and
other agents to the fullest extent permissible under California Law.
Condor provides insurance from commercial carriers against certain
liabilities incurred by the directors and officers of Condor.
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In November 1996, the Registrant consummated a recapitalization and
merger. In connection with the 1996 recapitalization, the Registrant sold
11 million shares of Series A preferred stock and 6 million shares of Class A
common stock and 45 million shares of Class B common stock in a private
placement in reliance on Section 4(2) under the Securities Act, to Behrman
Capital L.P. and its affiliates, an employee savings plan and certain existing
shareholders for approximately $26.0 million. In connection with the
recapitalization, the Registrant also granted the lenders under the Note and
Warrant Purchase Agreement dated as of November 15, 1996 among Condor, Nomura
Holding America Inc., Antares Leveraged Capital Corp. and First Union Bank of
Connecticut warrants to purchase 19,149 shares of Class B common stock. On
April 1999, the Registrant consummated a recapitalization and merger. In
connection with the 1999 recapitalization consummated as part of the
acquisition, the Registrant (a) sold 26,277,709 shares of common stock in a
private placement in reliance on Section 4(2) under the Securities Act, to DLJ
Merchant Banking Partners II, L.P. and its affiliates, (b) repurchased all of
its Series A preferred stock, some of its Class A common stock, outstanding
warrants to purchase its Class B common stock, and (c) converted its remaining
Class A common stock and Class B common stock into common stock. On April 15,
1999, the Registrant sold $100,000,000 in aggregate principal amount of its
11(7)/(8)% notes due 2009 (the "old notes") to Donaldson, Lufkin & Jenrette
Securities Corporation and NationsBanc Montgomery Securities LLC (the "initial
purchasers") in a private placement in reliance on Section 4(2) under the
Securities Act, at an offering price of $970 per $1,000 principal amount at
maturity. The old notes were immediately resold by the initial purchasers in
transactions not involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<S> <C>
Exhibit
Number
- -------
1.1* Registration Rights Agreement, dated as of April 15, 1999, between Condor and Donaldson,
Lufkin & Jenrette Securities Corporation and NationsBanc Montgomery Securities LLC, as
Initial Purchasers.
2.1* Agreement and Plan of Merger, dated as of March 8, 1999, among Condor, WDC Acquisition
Corp. and Condor shareholders listed therein.
2.2* Equity Commitment Letter, dated as of March 8, 1999, among the DLJ Merchant Banking
Investors (as defined therein), the Behrman Investors (as defined therein), the Global
Technology Partners Investors (as defined therein), WDC Acquisition Corp. and WDC Stock
Acquisition Corp.
2.3* Stock Purchase and Consent Agreement, dated as of March 8, 1999, among Condor, WDC
Stock Acquisition Corp. and Condor shareholders named therein.
2.4* ESOP Stock Purchase Agreement, dated as of March 8, 1999, among Condor, WDC Stock
Acquisition Corp. and Wells Fargo Bank, N.A., as Trustee under the Condor Employee Stock
ownership Trust.
3.1.1* Certificate of Incorporation of Condor Systems, Inc.
3.1.2* By laws of Condor Systems, Inc.
3.1.3* Certificate of Incorporation of CEI Systems, Inc.
3.1.4* By laws of CEI Systems, Inc.
4.1* Investors' Agreement, dated as of April 15, 1999, among Condor and the shareholders named
therein.
4.2* Indenture, dated as of April 15, 1999 among Condor, CEI Systems, Inc. and the Trustee.
4.3* Form of new note (included in Exhibit 4.2)
5.1** Opinion of Davis Polk & Wardwell with respect to the new notes.
5.2** Opinion of Seyfarth Shaw Fairweather LLP with respect to the new notes.
10.2.1* Employment Agreement of Robert E. Young II
<PAGE>
10.2.2* Employment Agreement of John L. Barnum
10.2.3* Employment Agreement of Vernon A. Dale
10.2.4* Employment Agreement of David J. Klingler
10.2.5* Employment Agreement of Thomas A. Michalski
10.2.6* Employment Agreement of Gary M. Viljoen
10.3* Credit Agreement, dates as of April 15, 1999, among Condor and a syndicate of banks and
other financial institutions led by Bank of America National Trust and Savings Association, as
Administrative Agent.
10.5* Purchase Agreement between Condor and Donaldson, Lufkin & Jenrette Securities Corporation
and NationsBanc Montgomery Securities LLC, as Initial Purchasers.
12.1** Computation of Ratio of Earnings to Fixed Charges
21.1* Subsidiaries of Condor
23.1** Consent of Davis Polk & Wardwell (contained in their opinion filed as Exhibit 5.1).
23.2** Consent of PricewaterhouseCoopers LLP.
23.3** Consent of Seyfarth Shaw Fairweather LLP (contained in their opinion filed as Exhibit 5.2)
24.1* Power of Attorney (Included in Part II of this Registration Statement under the caption
"Signatures").
25.1* Statement of Eligibility of State Street Bank and Trust Company on Form T-1.
27.1* Financial Data Schedule for Condor Systems, Inc.
27.2* Financial Data Schedule for CEI Systems, Inc.
99.1** Form of Letter of Transmittal
99.2** Form of Notice of Guaranteed Delivery
99.3** Form of Letter to Clients
99.4** Form of Letter to Nominees
99.5** Form of Instructions to Registered Holder and/or Book-Entry Transfer Participant from Owner
</TABLE>
- --------------
* Previously filed
** Filed herewith.
(b) Financial Statement Schedules.
Schedule II Valuation and Qualifying Accounts
Other schedules are omitted because they are not applicable.
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(x) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(y) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement.
(z) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post- effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item
510 of Regulation S-K, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person
of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment to the registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of San Jose, State
of California, on September 1, 1999.
CONDOR SYSTEMS, INC.
By: /s/ Gary M. Viljoen
-----------------------------------
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President and Chief Executive Officer August 31 , 1999
- ----------------------- (Principal Executive Officer)
Robert E. Young II
/s/ Gary M. Viljoen
- ----------------------- Chief Financial Officer (Principal September 1, 1999
Gary M. Viljoen Financial Officer)
* Vice President, Finance and
- ----------------------- Administration (Principal Accounting August 31 , 1999
John L. Taft Officer)
* Director September 1, 1999
- -----------------------
Dr. Robert J. Hermann
* Director September 1, 1999
- -----------------------
Dr. Paul G. Kaminski
* Director September 1, 1999
- -----------------------
R. Noel Longuemare
* Director September 1, 1999
- -----------------------
William M. Matthes
</TABLE>
*By: /s/ Gary M. Viljoen
--------------------
Gary M. Viljoen
Attorney-in-fact
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Jose,
State of California, on September 1, 1999.
CEI SYSTEMS, INC.
By: /s/ Gary M. Viljoen
---------------------------------------
Secretary
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following persons on
behalf of the Co-Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President and Director (Principal September 1, 1999
- ------------------------ Executive Officer)
Robert E. Young II
/s/ Gary M. Viljoen
- ------------------------
Gary M. Viljoen Secretary (Principal Financial Officer) September 1, 1999
* Vice President (Principal Accounting August 31 , 1999
- ------------------------ Officer)
John L. Taft
*By: /s/ Gary M. Viljoen
--------------------
Gary M. Viljoen
Attorney-in-fact
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------------------------------------------------------
(1) - (2) -
Balance at Charged to Charged to Balance at
beginning costs and other end of
of period expenses accounts Describe Deductions Describe period
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the year ended
December 31, 1998
Allowance for
Doubtful
Accounts.......... 75 No Activity 75
- ---------------------------------------------------------------------------------------------------------------------------------
For the year ended
December 31, 1997
allowance for
Doubtful CESD Purchase
Accounts.......... 0 75 Price Allocation 75
- ---------------------------------------------------------------------------------------------------------------------------------
For the year ended
December 31, 1996
Allowance for
Doubtful
Accounts.......... 0 No Activity 0
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTS ON FINANCIAL STATEMENT SCHEDULE
To The Board of Directors
and Shareholders of Condor Systems, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated February 19, 1999, except as to Note 19 for which the date is June 28,
1999 and Note 20 for which the date is April 8, 1999, appearing on page F-2 of
this Form S-1 also included an audit of the financial statement schedule
listed under item 16(b) of this Form S-1. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 19, 1999
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Exhibit
Number Description
------- -----------
1.1* Registration Rights Agreement, dated as of April 15, 1999, between Condor and Donaldson,
Lufkin & Jenrette Securities Corporation and NationsBanc Montgomery Securities LLC, as Initial
Purchasers.
2.1* Agreement and Plan of Merger, dated as of March 8, 1999, among Condor, WDC Acquisition
Corp. and Condor shareholders listed therein.
2.2* Equity Commitment Letter, dated as of March 8, 1999, among the DLJ Merchant Banking
Investors (as defined therein), the Behrman Investors (as defined therein), the Global Technology
Partners Investors (as defined therein), WDC Acquisition Corp. and WDC Stock Acquisition Corp.
2.3* Stock Purchase and Consent Agreement, dated as of March 8, 1999, among Condor, WDC Stock
Acquisition Corp. and Condor shareholders named therein.
2.4* ESOP Stock Purchase Agreement, dated as of March 8, 1999, among Condor, WDC Stock
Acquisition Corp. and Wells Fargo Bank, N.A., as Trustee under the Condor Employee Stock
ownership Trust.
3.1.1* Certificate of Incorporation of Condor Systems, Inc.
3.1.2* By laws of Condor Systems, Inc.
3.1.3* Certificate of Incorporation of CEI Systems, Inc.
3.1.4* By laws of CEI Systems, Inc.
4.1* Investors' Agreement, dated as of April 15, 1999, among Condor and the shareholders named
therein.
4.2* Indenture, dated as of April 15, 1999 among Condor, CEI Systems, Inc. and the Trustee.
4.3* Form of new note (included in Exhibit 4.2)
5.1* Opinion of Davis Polk & Wardwell with respect to the new notes.
5.2** Opinion of Seyfarth Shaw Fairweather LLP with respect to the new notes.
10.2.1* Employment Agreement of Robert E. Young II
10.2.2* Employment Agreement of John L. Barnum
10.2.3* Employment Agreement of Vernon A. Dale
10.2.4* Employment Agreement of David J. Klingler
10.2.5* Employment Agreement of Thomas A. Michalski
10.2.6* Employment Agreement of Gary M. Viljoen
10.3* Credit Agreement, dated as of April 15, 1999, among Condor and a syndicate of banks and other
financial institutions led by Bank of America National Trust and Savings Association, as
Administrative Agent.
10.5* Purchase Agreement between Condor and Donaldson, Lufkin & Jenrette Securities Corporation
and NationsBanc Montgomery Securities LLC, as Initial Purchasers.
12.1** Computation of Ratio of Earnings to Fixed Charges
21.1* Subsidiaries of Condor
23.1** Consent of Davis Polk & Wardwell (contained in their opinion filed as Exhibit 5.1).
23.2** Consent of PricewaterhouseCoopers LLP.
23.3** Consent of Seyfarth Shaw Fairweather LLP (contained in their opinion filed as Exhibit 5.2).
24.1* Power of Attorney (Included in Part II of this Registration Statement under the caption
"Signatures").
25.1* Statement of Eligibility of State Street Bank and Trust Company on Form T-1.
27.1** Financial Data Schedule for Condor Systems, Inc.
27.2** Financial Data Schedule for CEI Systems, Inc.
99.1** Form of Letter of Transmittal
99.2** Form of Notice of Guaranteed Delivery
<PAGE>
99.3** Form of Letter to Clients
99.4** Form of Letter to Nominees
99.5** Form of Instructions to Registered Holder and/or Book-Entry Transfer Participant from Owner
</TABLE>
- --------------
* Previously filed.
** Filed herewith.
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NY 10017
212-450-4000
August 31, 1999
Condor Systems, Inc.
2133 Samaritan Drive
San Jose, CA 95124
Ladies and Gentlemen:
We have acted as counsel for Condor Systems, Inc., a California
corporation (the "Company") and CEI Systems, Inc., a Delaware corporation (the
"Guarantor") in connection with the Company's offer (the "Exchange Offer") to
exchange its 11 7/8% Series B Senior Subordinated Notes guaranteed by the
Guarantor due 2009 (the "New Notes") for any and all of its outstanding 11 7/8%
Series A Senior Subordinated Notes due 2009 guaranteed by the Guarantor (the
"Old Notes").
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records, certificates of public
officials and other instruments as we have deemed necessary for the purposes of
rendering this opinion. We have assumed the capacity of all natural persons and
the genuineness of all signatures.
Based upon the foregoing, we are of the opinion that:
(i) Assuming the New Notes have been duly authorized by the Company,
when executed and authenticated in accordance with the Exchange Offer, the
New Notes will be valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms, except (x)
as such enforcement may be limited by bankruptcy, insolvency, fraudulent
conveyance, or similar laws affecting creditors' rights generally, (y) as
such enforcement is subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at
<PAGE>
Condor Systems, Inc. 2 August 31, 1999
law) and (z) to the extent that a waiver of rights under any usury or stay
law may be unenforceable; we express no opinion, however, as to the
applicability (and, if applicable, the effect) of Section 548 of the
United States Bankruptcy Code or any comparable provision of state law to
the questions addressed above or on the conclusions expressed with respect
thereto.
(ii) The guarantees of the New Notes provided by the Guarantor (the
"New Note Guarantees") have been duly authorized by the Guarantor and,
assuming the New Notes have been duly authorized by the Company, the New
Note Guarantees will be valid and binding obligations of the Guarantor,
enforceable against the Guarantor in accordance with their terms except
(x) as such enforcement may be limited by bankruptcy, insolvency,
fraudulent conveyance, or similar laws affecting creditors' rights
generally, (y) as such enforcement is subject to general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law) and (z) to the extent that a waiver of
rights under any usury or stay law may be unenforceable; we express no
opinion, however, as to the applicability (and, if applicable, the effect)
of Section 548 of the United States Bankruptcy Code or any comparable
provision of state law to the questions addressed above or on the
conclusions expressed with respect thereto.
We are members of the Bar of the State of New York and the foregoing
opinion is limited to the laws of the State of New York, the federal laws of
the United States of America and the General Corporation Law of the State of
Delaware.
We hereby consent to the filing of this opinion as an exhibit to the
registration statement relating to the Exchange Offer. We also consent to the
reference to us under the caption "Legal Matters" in the prospectus contained
in such registration statement.
Very truly yours,
/s/ Davis Polk & Wardwell
EXHIBIT 5.2
[LETTERHEAD OF SEYFARTH, SHAW, FAIRWEATHER & GERALDSON]
May 20, 1999
Condor Systems, Inc.
2133 Samaritan Drive
San Jose, CA 95124
Re: 11 7/8% Series A and Series B Senior Subordinated Notes
Ladies and Gentlemen:
We have acted as counsel for Condor Systems, Inc., a California
corporation (the "Company"), in connection with the Company's issuance of its
11 7/8% Series A Senior Subordinated Notes due 2009 (the "Old Notes"), and its
11 7/8% Series B Senior Subordinated Notes due 2009 (the "New Notes"), which
are to be offered in exchange for the Old Notes (the "Exchange Offer").
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of such documents, corporate records, certificates of
public officials and other instruments as we have deemed necessary for the
purposes of rendering this opinion. We have assumed the capacity of all natural
persons and the genuineness of all signatures.
Based upon the foregoing, we are of the opinion that the New Notes have
been duly authorized by the Company.
We are members of the bar of the States of Illinois and New York and we
express no opinion as to any laws, or the effect or applicability of any laws,
other than (i) the federal laws of the United States, (ii) the laws of the
State of Illinois and New York (but not including any statutes, ordinances,
administrative decisions, rules or regulations of counties, towns,
municipalities and special political subdivisions, or any judicial decisions
to the extent that they deal with any of the foregoing), and (iii) the
California General Corporation Law.
We hereby consent to the filing of this opinion as an exhibit to the
registration statement relating to the Exchange Offer, filed under the
Securities Act of 1933, as amended (the "Act"). We also consent to the
reference to us under the caption "Legal Matters" in the prospectus contained in
<PAGE>
Condor Systems
Page 2
May 20, 1999
such registration statement. In giving this consent, we do not thereby admit
that we are included in the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Securities and Exchange
Commission.
Very truly yours,
/s/ Seyfarth Shaw Fairweather & Geraldson
TEC/RFW
CONDOR SYSTEMS INC.
Ratio of Earnings to Fixed Charges
Pursuant to Item 503
Regulation S-K
<TABLE>
Pro Pro Forma
Forma Six
Year Months
Ended Ended
Years Ended December 31, 1998 December 31, Six Months Ended June 30, June 30,
----------------------------------------------- ------------ ------------------------- --------
Description 1994 1995 1996 1997 1998 1998 1998 1999 1999
- ----------- ----- ----- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Income (loss) before income
taxes 3,127 5,266 (14,950) (5,407) 4,262 (1,752) (10) (9,202) (11,146)
Interest 597 813 1,287 5,311 6,734 13,668 3,480 4,397 6,727
Amortization of deferred
financing costs - - - 377 681 - 381 338 -
Amortization of debt
discount - - - - 239 - 60 48 -
Lease rental expense
representative of
interest 582 492 419 450 571 571 283 275 275
----- ----- ------- ------ ------ ------ ------ ------ ------
Earnings before fixed charges 4,306 6,571 (13,244) 731 12,487 12,487 4,194 (4,144) (4,144)
===== ===== ======= ====== ====== ====== ===== ====== ======
Fixed Charges
Interest expense 597 813 1,287 5,311 6,734 13,668 3,480 4,397 6,727
Amortization of deferred
financing costs - - - 377 681 - 381 338 -
Amortization of debt discount - - - - 239 - 60 48 -
Lease rental expense
representative of
interest 582 492 419 450 571 571 283 275 275
----- ----- ------- ------ ------ ------ ------ ------ ------
Total Fixed Charges 1,179 1,305 1,706 6,138 8,225 14,239 4,204 5,058 7,002
===== ===== ===== ===== ===== ====== ===== ===== =====
Ratio of earnings to fixed
charges 3.7 5.0 N/A 0.1 1.5 0.9 1.0 N/A N/A
Deficiency in earnings (13,244) (4,144) (4,144)
</TABLE>
<PAGE>
Condor Systems Inc.
Ratio of Net Debt to EBITDA
Pursuant to Item 503
Regulation S-K
<TABLE>
<CAPTION>
Pro Pro Forma
Forma Six
Year Months
Ended Ended
Years Ended December 31, 1998 December 31, Six Months Ended June 30, June 30,
----------------------------------------------- ------------ ------------------------- --------
Description 1994 1995 1996 1997 1998 1998 1998 1999 1999
- ----------- ----- ----- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in
thousands)
Operating Income (loss) 0 0 0 0 0 11,679 0 0 0
Depreciation and amortization 2,372
Amortization of purchased
technolog 2,489
----- ----- ------- ------ ------ ------ ------ ------ ------
EBITDA 0 0 0 0 0 16,540 0 0 0
===== ===== ======= ====== ====== ====== ====== ====== ======
Total Debt (including current
maturities) - - - - - 100,000 - - -
Less Cash and cash equivalents (7,216)
----- ----- ------- ------ ------ ------ ------ ------ ------
Net Debt - - - - - 92,784 - - -
===== ===== ======= ====== ====== ====== ====== ====== ======
Ratio of Net Debt to EBITDA N/A N/A N/A N/A N/A 5.6 N/A N/A N/A
</TABLE>
2
<PAGE>
Condor Systems Inc.
Ratio of EBITDA to Cash Interest
Pursuant to Item 503
Regulation S-K
<TABLE>
<CAPTION>
Pro Pro Forma
Forma Six
Year Months
Ended Ended
Years Ended December 31, 1998 December 31, Six Months Ended June 30, June 30,
----------------------------------------------- ------------ ------------------------- --------
Description 1994 1995 1996 1997 1998 1998 1998 1999 1999
- ----------- ----- ----- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in
thousands)
Operating Income (loss) - - - - - 11,679 - - -
Depreciation and amortization 2,372
Amortization of purchased
technolog 2,489
----- ----- ------- ------ ------ ------ ------ ------ ------
EBITDA - - - - - 16,540 - - -
===== ===== ======= ====== ====== ====== ====== ====== ======
Interest Expense
Subordinated Notes 0 0 0 0 0 11,875 0 0 0
New Senior Credit Facility - - - - - 990 - - -
----- ----- ------- ------ ------ ------ ------ ------ ------
Cash Interest Expense 0 0 0 0 0 12,865 0 0 0
===== ===== ======= ====== ====== ====== ====== ====== ======
Ratio of EBITDA to Cash Interest N/A N/A N/A N/A N/A 1.3 N/A N/A N/A
</TABLE>
3
<PAGE>
Condor Systems Inc.
Ratio of EBITDA Less Capital Expenditures to Cash Interest
Pursuant to Item 503
Regulation S-K
<TABLE>
<CAPTION>
Pro Pro Forma
Forma Six
Year Months
Ended Ended
Years Ended December 31, 1998 December 31, Six Months Ended June 30, June 30,
----------------------------------------------- ------------ ------------------------- --------
Description 1994 1995 1996 1997 1998 1998 1998 1999 1999
- ----------- ----- ----- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in
thousands)
Operating Income (loss) - - - - - 11,679 - - -
Depreciation and amortization 2,372
Amortization of purchased
technology 2,489
EBITDA - - - - - 16,540 - - -
Capital Expenditures 2,503
----- ----- ------- ------ ------ ------ ------ ------ ------
EBITDA Less Capital Expenditures - - - - - 14,037 - - -
===== ===== ======= ====== ====== ====== ====== ====== ======
Interest Expense
Subordinated Notes 0 0 0 0 0 11,875 0 0 0
New Senior Credit Facility - - - - - 990 - - -
----- ----- ------- ------ ------ ------ ------ ------ ------
Cash Interest Expense 0 0 0 0 0 12,865 0 0 0
===== ===== ======= ====== ====== ====== ====== ====== ======
Ratio of EBITDA to Cash Interest N/A N/A N/A N/A N/A 1.1 N/A N/A N/A
</TABLE>
4
We consent to the inclusion in this registration statement on Form S-1 of our
report dated February 19, 1999, except as to Note 19 for which the date is
June 28, 1999 and Note 20 for which the date is April 8, 1999, on our audits
of the consolidated financial statements and financial statement schedule of
Condor Systems, Inc. We also consent to the references to our firm under the
caption "Experts."
PricewaterhouseCoopers LLP
San Jose, California
August 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000779033
<NAME> CONDOR SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 JUN-30-1999
<PERIOD-START> JAN-1-1998 JAN-1-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 4,300 1,947
<SECURITIES> 0 0
<RECEIVABLES> 42,928 42,793
<ALLOWANCES> (75) (75)
<INVENTORY> 1,772 3,544
<CURRENT-ASSETS> 57,439 55,285
<PP&E> 21,493 25,560
<DEPRECIATION> (16,472) (17,687)
<TOTAL-ASSETS> 67,923 73,953
<CURRENT-LIABILITIES> 28,467 25,412
<BONDS> 52,432 100,000
0 0
12,000 0
<COMMON> 15,410 50,908
<OTHER-SE> (40,386) (102,367)
<TOTAL-LIABILITY-AND-EQUITY> 67,923 73,953
<SALES> 101,042 37,094
<TOTAL-REVENUES> 101,042 37,094
<CGS> 61,660 21,355
<TOTAL-COSTS> 89,363 41,687
<OTHER-EXPENSES> 27,703 20,332
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7,654 4,612
<INCOME-PRETAX> 4,262 (9,202)
<INCOME-TAX> 1,662 (718)
<INCOME-CONTINUING> 11,679 (8,484)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 2,513
<CHANGES> 0 0
<NET-INCOME> 2,600 (10,997)
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001086557
<NAME> CEI SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 JUN-30-1999
<PERIOD-START> JAN-1-1998 JAN-1-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 142 (23)
<SECURITIES> 0 0
<RECEIVABLES> 5,671 8,718
<ALLOWANCES> (75) (75)
<INVENTORY> 537 842
<CURRENT-ASSETS> 14,975 26,927
<PP&E> 1,969 1,995
<DEPRECIATION> (460) (683)
<TOTAL-ASSETS> 16,582 28,339
<CURRENT-LIABILITIES> 4,603 5,682
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 11,979 22,657
<TOTAL-LIABILITY-AND-EQUITY> 16,582 28,339
<SALES> 22,355 7,915
<TOTAL-REVENUES> 22,355 7,915
<CGS> 13,170 3,587
<TOTAL-COSTS> 11,142 1,682
<OTHER-EXPENSES> 7,972 1,845
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,213 6,233
<INCOME-TAX> 487 1,793
<INCOME-CONTINUING> 1,213 6,233
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 726 4,440
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
EXHIBIT 99.01
LETTER OF TRANSMITTAL
CONDOR SYSTEMS, INC.
Offer to Exchange Its
11 7/8% Series B Senior Subordinated Notes due 2009
(Registered Under The Securities Act of 1933)
For Any and All of Its Outstanding
11 7/8% Series A Senior Subordinated Notes due 2009
Pursuant to the Prospectus
Dated ______ __, 1999
- -------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON , 1999, UNLESS THE OFFER IS EXTENDED.
- -------------------------------------------------------------------------------
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
CONDOR SYSTEMS, INC.
By Registered or Certified Mail: By Overnight Delivery or Hand:
State Street Bank and Trust Company. State Street Bank and Trust Company.
Corporate Trust Department Corporate Trust Department
Two International Place Two International Place
Fourth Floor Fourth Floor
Boston, MA 02102-0078 Boston, MA 02102-0078
Contact: Kellie Mullen Contact: Kellie Mullen
To Confirm by Telephone Facsimile Transmissions:
or for Information: (617-664-5290)
(617-664-5587)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A
NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
This Letter of Transmittal is to be completed by holders of Old Notes (as
defined below) if Old Notes are to be forwarded herewith. If tenders of Old
Notes are to be made by book-entry transfer to an account maintained by State
Street Bank and Trust Company (the "Exchange Agent") at The Depository Trust
Company ("DTC") pursuant to the procedures set forth in "The Exchange
Offer--Book-Entry Transfer" in the Prospectus and in accordance with the
<PAGE>
Automated Tender Offer Program ("ATOP") established by DTC, a tendering holder
will become bound by the terms and conditions hereof in accordance with the
procedures established under ATOP.
Holders of Old Notes whose certificates (the "certificates") for such Old
Notes are not immediately available or who cannot deliver their certificates
and all other required documents to the Exchange Agent on or prior to the
expiration date (as defined in the Prospectus) or who cannot complete the
procedures for book-entry transfer on a timely basis, must tender their Old
Notes according to the guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures" in the Prospectus. SEE
INSTRUCTION 1. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
2
<PAGE>
<TABLE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
ALL TENDERING HOLDERS COMPLETE THIS BOX:
- ----------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES TENDERED
- ----------------------------------------------------------------------------------------------------------
Name(s) and address(es) of Registered Holder(s) Old Notes Tendered
(Please fill in, if blank) (attach additional list if necessary)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Principal Amount of
Certificate Principal Amount Old Notes Tendered
Number(s)* of Old Notes* (if less than all)**
--------------------------------------------------------
--------------------------------------------------------
--------------------------------------------------------
--------------------------------------------------------
--------------------------------------------------------
Total Amount
Tendered
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders.
** Old Notes may be tendered in whole or in part in denominations of $1,000
and integral multiples thereof. All Old Notes held shall be deemed
tendered unless a lesser number is specified in this column.
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC
AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
--------------------------------------------
DTC Account Number
--------------------------------------------------------
Transaction Code Number
---------------------------------------------------
[ ] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY
IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name of Registered Holder(s)
----------------------------------------------
Window Ticket Number (if any)
--------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
------------------------
Name of Institution which Guaranteed
-------------------------------------
If Guaranteed Delivery is to be made By Book-Entry Transfer:
Name of Tendering Institution
--------------------------------------------
DTC Account Number
-------------------------------------------------------
Transaction Code Number
--------------------------------------------------
[ ] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OLD
NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH
ABOVE.
3
<PAGE>
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES
OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
---------------------------------------------------------------------
Address:
------------------------------------------------------------------
------------------------------------------------------------------
4
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Condor Systems, Inc., a California
corporation (the "Company"), the principal amount of the Company's 11 7/8%
Series A Senior Subordinated Notes due 2009 (the "Old Notes") specified above
in exchange for a like aggregate principal amount of the Company's 11 7/8%
Series B Senior Subordinated Notes due 2009 (the "New Notes"), upon the terms
and subject to the conditions set forth in the Prospectus dated _____ _, 1999
(as the same may be amended or supplemented from time to time, the
"Prospectus"), receipt of which is acknowledged, and in this Letter of
Transmittal (which, together with the Prospectus, constitute the "Exchange
Offer"). The Exchange Offer has been registered under the Securities Act of
1933, as amended (the "Securities Act").
Subject to and effective upon the acceptance for exchange of all or any
portion of the Old Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Old Notes as are being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent as its agent and attorney-in-fact (with full knowledge that
the Exchange Agent is also acting as agent of the Company in connection with
the Exchange Offer) with respect to the tendered Old Notes, with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest), subject only to the right of withdrawal described
in the Prospectus, to (i) deliver certificates for Old Notes to the Company
together with all accompanying evidences of transfer and authenticity to, or
upon the order of, the Company, upon receipt by the Exchange Agent, as the
undersigned's agent, of the New Notes to be issued in exchange for such Old
Notes, (ii) present certificates for such Old Notes for transfer, and to
transfer the Old Notes on the books of the Company, and (iii) receive for the
account of the Company all benefits and otherwise exercise all rights of
beneficial ownership of such Old Notes, all in accordance with the terms and
conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS
FULL POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE
OLD NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE,
THE COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE
AND CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE
OLD NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES.
THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL
DOCUMENTS DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY OR
DESIRABLE TO COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE OLD NOTES
TENDERED HEREBY, AND THE UNDERSIGNED WILL COMPLY WITH ITS OBLIGATIONS UNDER
THE REGISTRATION RIGHTS AGREEMENT. THE UNDERSIGNED HAS READ AND AGREES TO ALL
OF THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Old Notes
tendered hereby should be printed above, if they are not already set forth
above, as they appear on the certificates representing such Old Notes. The
certificate number(s) and the Old Notes that the undersigned wishes to tender
should be indicated in the appropriate boxes above.
If any tendered Old Notes are not exchanged pursuant to the Exchange
Offer for any reason, or if certificates are submitted for more Old Notes than
are tendered or accepted for exchange, certificates for such unaccepted or
nonexchanged Old Notes will be returned (or, in the case of Old Notes tendered
by book-entry transfer, such Old Notes will be credited to an account
maintained at DTC), without expense to the tendering holder, promptly
following the expiration or termination of the Exchange Offer.
The undersigned understands that tenders of Old Notes pursuant to any one
of the procedures described in "The Exchange Offer--Procedures for Tendering
Old Notes" in the Prospectus and in the instructions hereto will, upon the
Company's acceptance for exchange of such tendered Old Notes, constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer. In all cases in which a
Participant elects to accept the Exchange Offer by transmitting an express
acknowledgment in accordance with the established ATOP procedures, such
Participant shall be bound by all of the terms and conditions of this Letter
of Transmittal. The undersigned recognizes that, under certain circumstances
set forth in the Prospectus, the Company may not be required to accept for
exchange any of the Old Notes tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby directs that the New Notes be
issued in the name(s) of the undersigned or, in the case of a book-entry
transfer of Old Notes, that such New Notes be credited to the account
indicated above maintained at DTC. If applicable, substitute certificates
representing Old Notes not exchanged or not accepted for exchange will be
issued to the undersigned or, in the case of a book-entry transfer of Old
Notes, will be credited to the account indicated above maintained at DTC.
Similarly, unless otherwise indicated under "Special Delivery Instructions,"
please deliver New Notes to the undersigned at the address shown below the
undersigned's signature.
5
<PAGE>
By tendering Old Notes and executing, or otherwise becoming bound by,
this letter of transmittal, the undersigned hereby represents and agrees that
(i) the undersigned is not an "affiliate" of the Company,
(ii) any New Notes to be received by the undersigned are being acquired
in the ordinary course of its business, and
(iii) the undersigned has no arrangement or understanding with any person
to participate in a distribution (within the meaning of the securities act) of
such New Notes.
By tendering Old Notes pursuant to the exchange offer and executing, or
otherwise becoming bound by, this letter of transmittal, a holder of Old Notes
which is a broker-dealer represents and agrees, consistent with certain
interpretive letters issued by the staff of the Division of Corporation
Finance of the Securities and Exchange Commission to third parties, that (a)
such Old Notes held by the broker-dealer are held only as a nominee, or (b)
such Old Notes were acquired by such broker-dealer for its own account as a
result of market-making activities or other trading activities and it will
deliver the prospectus (as amended or supplemented from time to time) meeting
the requirements of the securities act in connection with any resale of such
New Notes (provided that, by so acknowledging and by delivering a prospectus,
such broker-dealer will not be deemed to admit that it is an "underwriter"
within the meaning of the securities act).
The Company has agreed that, subject to the provisions of the
Registration Rights Agreement, the prospectus, as it may be amended or
supplemented from time to time, may be used by a participating broker-dealer
(as defined below) in connection with resales of New Notes received in
exchange for Old Notes, where such Old Notes were acquired by such
participating broker-dealer for its own account as a result of market-making
activities or other trading activities, for a period ending 90 days after the
expiration date (subject to extension under certain limited circumstances) or,
if earlier, when all such New Notes have been disposed of by such
participating broker-dealer. In that regard, each broker dealer who acquired
Old Notes for its own account as a result of market-making or other trading
activities (a "participating broker-dealer"), by tendering such Old Notes and
executing, or otherwise becoming bound by, this letter of transmittal, agrees
that, upon receipt of notice from the Company of the occurrence of any event
or the discovery of any fact which makes any statement contained in the
prospectus untrue in any material respect or which causes the prospectus to
omit to state a material fact necessary in order to make the statements
contained therein, in light of the circumstances under which they were made,
not misleading or of the occurrence of certain other events specified in the
Registration Rights Agreement, such participating broker-dealer will suspend
the sale of New Notes pursuant to the prospectus until the Company has amended
or supplemented the prospectus to correct such misstatement or omission and
has furnished copies of the amended or supplemented prospectus to the
participating broker-dealer or the Company has given notice that the sale of
the New Notes may be resumed, as the case may be. If the Company gives such
notice to suspend the sale of the New Notes, it shall extend the 90-day period
referred to above during which participating broker-dealers are entitled to
use the prospectus in connection with the resale of New Notes by the number of
days during the period from and including the date of the giving of such
notice to and including the date when participating broker-dealers shall have
received copies of the supplemented or amended prospectus necessary to permit
resales of the New Notes or to and including the date on which the Company has
given notice that the sale of New Notes may be resumed, as the case may be.
All authority herein conferred or agreed to be conferred in this Letter
of Transmittal shall survive the death or incapacity of the undersigned and
any obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives successors and assigns of the undersigned. Except as
stated in the Prospectus, this tender is irrevocable.
6
<PAGE>
HOLDER(S) SIGN HERE
(See Instructions 2, 5 and 6)
(Note: Signature(s) Must be Guaranteed if Required by Instruction 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
certificate(s) for the Old Notes hereby tendered or on a security position
listing, or by any person(s) authorized to become the registered holder(s) by
endorsements and documents transmitted herewith. If signature is by an
attorney-in-fact, executor, administrator, trustee, guardian, officer of a
corporation or another acting in a fiduciary or representative capacity,
please set forth the signer's full title. See Instruction 5.
- -------------------------------------------------------------------------------
(Signature(s) of Holder(s))
Date
-----------------------------------------------------------------------, 1998
Name(s)
-------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Please Print)
Capacity:
-----------------------------------------------------------------------
(Include Full Title)
Address
-------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number
--------------------------------------------------
- -------------------------------------------------------------------------------
(Tax Identification or Social Security Number(s))
GUARANTEE OF SIGNATURE(S)
(See Instructions 2 and 5)
Authorized Signature
------------------------------------------------------------
Name
----------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Please Print)
Date
----------------------------------------------------------------------, 1998
Capacity or Title
---------------------------------------------------------------
Name of Firm
--------------------------------------------------------------------
Address
-------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number
--------------------------------------------------
7
<PAGE>
<TABLE>
<S> <C>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 5 and 6) (See Instructions 1, 5 and 6)
To be completed ONLY if the New Notes are to To be completed ONLY if New Notes are to be
be issued in the name of someone other than the sent to someone other than the registered holder of
registered holder of the Old Notes whose name(s) the Old Notes whose name(s) appear(s) above, or to
appear(s) above. such registered holder(s) at an address other than
that shown above.
Issue New Notes to: Mail New Notes To:
Name_______________________________________________ Name__________________________________________________
(Please Print) (Please Print)
___________________________________________________ ______________________________________________________
Address____________________________________________ Address_______________________________________________
___________________________________________________ ______________________________________________________
___________________________________________________ ______________________________________________________
(Include Zip Code) (Include Zip Code)
___________________________________________________ ______________________________________________________
(Taxpayer Identification or (Taxpayer Identification or
Social Security Number) Social Security Number)
8
</TABLE>
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Exchange Offer
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES. This Letter of Transmittal is to be completed if certificates are
to be forwarded herewith. If tenders are to be made pursuant to the procedures
for tender by book-entry transfer set forth in "The Exchange Offer--Book-
Entry Transfer" in the Prospectus and in accordance with ATOP established by
DTC, a tendering holder will become bound by the terms and conditions hereof
in accordance with the procedures established under ATOP. Certificates, or
timely confirmation of a book-entry transfer of such Old Notes into the
Exchange Agent's account at DTC, as well as this Letter of Transmittal (or
facsimile thereof), if required, properly completed and duly executed, with
any required signature guarantees, and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at one of its
addresses set forth herein on or prior to the expiration date. Old Notes may
be tendered in whole or in part in the principal amount of $1,000 and integral
multiples of $1,000.
Holders who wish to tender their Old Notes and (i) whose Old Notes are
not immediately available or (ii) who cannot deliver their Old Notes, this
Letter of Transmittal and all other required documents to the Exchange Agent
on or prior to the expiration date or (iii) who cannot complete the procedures
for delivery by book-entry transfer on a timely basis, may tender their Old
Notes by properly completing and duly executing a Notice of Guaranteed
Delivery pursuant to the guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures" in the Prospectus. Pursuant to
such procedures: (i) such tender must be made by or through an Eligible
Institution (as defined below); (ii) a properly completed and duly executed
Letter of Transmittal (or facsimile) thereof and Notice of Guaranteed
Delivery, substantially in the form made available by the Company, must be
received by the Exchange Agent on or prior to the expiration date; and (iii)
the certificates (or a book-entry confirmation (as defined in the Prospectus))
representing all tendered Old Notes, in proper form for transfer, together
with any other documents required by this Letter of Transmittal, must be
received by the Exchange Agent within five New York Stock Exchange trading
days after the date of execution of such Notice of Guaranteed Delivery, all as
provided in "The Exchange Offer--Guaranteed Delivery Procedures" in the
Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by telegram, telex, facsimile or mail to the Exchange Agent, and must include
a guarantee by an Eligible Institution in the form set forth in such Notice.
For Old Notes to be properly tendered pursuant to the guaranteed delivery
procedure, the Exchange Agent must receive a Notice of Guaranteed Delivery on
or prior to the expiration date. As used herein and in the Prospectus,
"Eligible Institution" means a firm which is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. or a commercial bank or trust company having an office or
correspondent in the United States.
THE METHOD OF DELIVERY OF OLD NOTES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE TENDERING HOLDER.
IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL WITH
RETURN RECEIPT REQUESTED, PROPERLY INSURED, BE USED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR
OLD NOTES SHOULD BE SENT TO THE COMPANY.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), or any Agent's Message in lieu thereof, waives any right
to receive any notice of the acceptance of such tender.
2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of
Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder
(which term, for purposes of this document, shall include any participant
in DTC whose name appears on a security position listing as the owner of
the Old Notes) of Old Notes tendered herewith, unless such holder(s) has
completed either the box entitled "Special Issuance Instructions" or the
box entitled "Special Delivery Instructions" above, or
9
<PAGE>
(ii) such Old Notes are tendered for the account of a firm that is an
Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box captioned
"Description of Old Notes" is inadequate, the certificate number(s) and/or the
principal amount of Old Notes and any other required information should be
listed on a separate signed schedule which is attached to this Letter of
Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Old Notes will be
accepted only in the principal amount of $1,000 and integral multiples
thereof. If less than all the Old Notes evidenced by any certificate submitted
are to be tendered, fill in the principal amount of Old Notes which are to be
tendered in the box entitled "Principal Amount of Old Notes Tendered (if less
than all)." In such case, new certificate(s) for the remainder of the Old
Notes that were evidenced by your old certificate(s) will only be sent to the
holder of the Old Note, promptly after the expiration date. All Old Notes
represented by certificates delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Old Notes may be
withdrawn at any time on or prior to the expiration date. In order for a
withdrawal to be effective on or prior to that time, a written notice of
withdrawal must be timely received by the Exchange Agent at one of its
addresses set forth above or in the Prospectus on or prior to the expiration
date. Any such notice of withdrawal must specify the name of the person who
tendered the Old Notes to be withdrawn, identify the Old Notes to be withdrawn
(including the principal amount of such Old Notes) and (where certificates for
Old Notes have been transmitted) specify the name in which such Old Notes are
registered, if different from that of the withdrawing holder. If certificates
for the Old Notes have been delivered or otherwise identified to the Exchange
Agent, then prior to the release of such certificates, the withdrawing holder
must submit the serial numbers of the particular certificates for the Old
Notes to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an Eligible Institution, unless such holder is an Eligible
Institution. If Old Notes have been tendered pursuant to the procedures for
book-entry transfer set forth in the Prospectus under "The Exchange
Offer--Book-Entry Transfer," any notice of withdrawal must specify the name
and number of the account at DTC to be credited with the withdrawal of Old
Notes and otherwise comply with the procedures of such facility. Old Notes
properly withdrawn will not be deemed validly tendered for purposes of the
Exchange Offer, but may be retendered at any time on or prior to the
expiration date by following one of the procedures described in the Prospectus
under "The Exchange Offer--Procedures for Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes which
have been tendered for exchange but which are not exchanged for any reason
will be returned to the holder thereof without cost to such holder (or, in the
case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at DTC pursuant to the book-entry procedures described in the
Prospectus under "The Exchange Offer--Book-Entry Transfer" such Old Notes will
be credited to an account maintained with DTC for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS.
If this Letter of Transmittal is signed by the registered holder(s) of the Old
Notes tendered hereby, the signature(s) must correspond exactly with the
name(s) as written on the face of the certificate(s) without alteration,
enlargement or any change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal (or facsimiles thereof) as there are different
registrations of certificates.
10
<PAGE>
If this Letter of Transmittal or any certificates or powers of attorney
are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing and,
unless waived by the Company, proper evidence satisfactory to the Company of
such persons' authority to so act must be submitted.
When this Letter of Transmittal is signed by the registered holder(s) of
the Old Notes listed and transmitted hereby, no endorsement(s) of
certificate(s) or written instrument or instruments of transfer or exchange
are required unless New Notes are to be issued in the name of a person other
than the registered holder(s). Signature(s) on such certificate(s) or written
instrument or instruments of transfer or exchange must be guaranteed by an
Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Old Notes listed, the certificates must be
endorsed or accompanied by a written instrument or instruments of transfer or
exchange, in satisfactory form as determined by the Company in its sole
discretion and executed by the registered holder(s), in either case signed
exactly as the name or names of the registered holder(s) appear(s) on the
certificates. Signatures on such certificates or written instrument or
instruments of transfer or exchange must be guaranteed by an Eligible
Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If New Notes are to be
issued in the name of a person other than the signer of this Letter of
Transmittal, or if New Notes are to be sent to someone other than the signer
of this Letter of Transmittal or to an address other than that shown above,
the appropriate boxes on this Letter of Transmittal should be completed.
Certificates for Old Notes not exchanged will be returned by mail or, if
tendered by book-entry transfer, by crediting the account indicated above
maintained at DTC. See Instruction 4.
7. IRREGULARITIES. The Company will determine, in its sole discretion,
all questions as to the form, validity, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes, which
determination shall be final and binding. The Company reserves the absolute
right to reject any and all tenders of any particular Old Notes not properly
tendered or to not accept any particular Old Notes which acceptance might, in
the judgment of the Company or its counsel, be unlawful. The Company also
reserves the absolute right, in its sole discretion, to waive any defects or
irregularities or conditions of the Exchange Offer as to any particular Old
Notes either before or after the expiration date (including the right to waive
the ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
as to any particular Old Notes either before or after the expiration date
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects
or irregularities in connection with the tender of Old Notes for exchange must
be cured within such reasonable period of time as the Company shall determine.
Neither the Company, the Exchange Agent nor any other person shall be under
any duty to give notification of any defect or irregularity with respect to
any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions
and requests for assistance may be directed to the Exchange Agent at its
address and telephone number set forth on the front of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and the Letter of Transmittal may be obtained from the Exchange Agent
or from your broker, dealer, commercial bank, trust company or other nominee.
9. LOST, DESTROYED OR STOLEN CERTIFICATES. If any certificate(s)
representing Old Notes have been lost, destroyed or stolen, the holder should
promptly notify the Exchange Agent. The holder will then be instructed as to
the steps that must be taken in order to replace the certificate(s). This
Letter of Transmittal and related documents cannot be processed until the
procedures for replacing lost, destroyed or stolen certificate(s) have been
followed.
10. SECURITY TRANSFER TAXES. Holders who tender their Old Notes for
exchange will not be obligated to pay any transfer taxes in connection
therewith, except that holders who instruct the Company to register New Notes
in the name of or request that Old Notes not tendered or not accepted in the
Exchange Offer to be returned to, a person other than the registered tendering
holder will be responsible for the payment of any applicable transfer tax
thereon.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF),
11
<PAGE>
OR AN AGENT'S MESSAGE IN LIEU THEREOF, AND ALL OTHER REQUIRED
DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT
ON OR PRIOR TO THE EXPIRATION DATE.
12
EXHIBIT 99.02
NOTICE OF GUARANTEED DELIVERY
For Tender Of
11 7/8% Series A Senior Subordinated Notes due 2009
of
Condor Systems, Inc.
This Notice of Guaranteed Delivery or one substantially equivalent
hereto must be used to accept the Exchange Offer (as defined below) if (i)
certificates for the Company's (as defined below) 11 7/8% Series A Senior
Subordinated Notes due 2009 (the "Old Notes") are not immediately available,
(ii) Old Notes and any other documents required by the Letter of Transmittal
cannot be delivered to State Street Bank and Trust Company (the "Exchange
Agent") on or prior to the Expiration Date (as defined in the Prospectus
referred to below) or (iii) the procedures for book-entry transfer cannot be
completed on a timely basis. This Notice of Guaranteed Delivery may be
delivered by hand or sent by facsimile transmission, overnight courier, telex,
telegram or mail to the Exchange Agent. See "The Exchange Offer - Guaranteed
Delivery Procedures" in the Prospectus dated ____ _, 1999 (which, together
with the related Letter of Transmittal, constitutes the "Exchange Offer") of
Condor Systems, Inc., a California corporation (the "Company").
<TABLE>
The Exchange Agent for the Exchange Offer is:
STATE STREET BANK AND TRUST COMPANY.
<S> <C> <C>
By Hand or Overnight Delivery: Facsimile Transmissions: By Registered Or Certified Mail:
(Eligible Institutions Only)
State Street Bank and Trust State Street Bank and Trust
Company. (617-664-5290) Company.
Corporate Trust Department Corporate Trust Department
Two International Place To Confirm by Telephone Two International Place
Fourth Floor or for Information Call: Fourth Floor
Boston, MA 02102-0078 Boston, MA 02102-0078
Contact: Kellie Mullen (617-664-5587) Contact: Kellie Mullen
</TABLE>
<PAGE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER
THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY
VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL
NOT CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED ON THE LETTER
OF TRANSMITTAL.
2
<PAGE>
THE FOLLOWING GUARANTEE MUST BE COMPLETED
GUARANTEE OF DELIVERY
(Not to be used for Signature Guarantee)
The undersigned, a firm which is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. or a commercial bank or trust company having an office or
correspondent in the United States, hereby guarantees to deliver to the
Exchange Agent, at one of its addresses set forth above, either the
certificates for all physically tendered Old Notes, in proper form for
transfer, or confirmation of the book-entry transfer of such Old Notes to the
Exchange Agent's account at The Depository Trust Company ("DTC"), pursuant to
the procedures for book-entry transfer set forth in the Prospectus, in either
case together with any other documents required by the Letter of Transmittal,
within five New York Stock Exchange trading days after the date of execution
of this Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Old Notes
tendered hereby to the Exchange Agent within the time period set forth above
and that failure to do so could result in a financial loss to the undersigned.
Name of Firm:___________________________ ____________________________________
(Authorized Signature)
Address:________________________________ Title:______________________________
________________________________________ Name:_______________________________
(Zip Code) (Please type or print)
Area Code and Telephone Number: Date:_______________________________
________________________________________
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. ACTUAL
SURRENDER OF OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A
PROPERLY COMPLETED AND FULLY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER
REQUIRED DOCUMENTS.
3
EXHIBIT 99.03
Offer to Exchange
11 7/8% Series B Senior Subordinated Notes due 2009
(Registered Under The Securities Act of 1933)
for Any and All Outstanding
11 7/8% Series A Senior Subordinated Notes due 2009
of
CONDOR SYSTEMS, INC.
To Our Clients:
Enclosed is a Prospectus, dated _____ _, 1999, of Condor Systems,
Inc., a California corporation (the "Company"), and a related Letter of
Transmittal (which together constitute the "Exchange Offer") relating to the
offer by the Company to exchange its 11 7/8% Series B Senior Subordinated Notes
due 2009 (the "New Notes"), pursuant to an offering registered under the
Securities Act of 1933, as amended (the "Securities Act"), for a like
principal amount of its issued and outstanding 11 7/8% Series A Senior
Subordinated Notes due 2009 (the "Old Notes") upon the terms and subject to
the conditions set forth in the Exchange Offer.
Please note that the Exchange Offer will expire at 5:00 p.m., New
York City time, on ______, 1999, unless extended.
The Exchange Offer is not conditioned upon any minimum number of Old
Notes being tendered.
We are the holder of record and/or participant in the book-entry
transfer facility of Old Notes held by us for your account. A tender of such
Old Notes can be made only by us as the record holder and/or participant in
the book-entry transfer facility and pursuant to your instructions. The Letter
of Transmittal is furnished to you for your information only and cannot be
used by you to tender Old Notes held by us for your account.
We request instructions as to whether you wish to tender any or all
of the Old Notes held by us for your account pursuant to the terms and
conditions of the Exchange Offer. We also request that you confirm that we may
on your behalf make the representations contained in the Letter of
Transmittal.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the holder is not an "affiliate" of the
Company, (ii) any New Notes to be received by it are being acquired in the
ordinary course of its business, and (iii) the holder has no arrangement or
understanding with any
<PAGE>
person to participate in a distribution (within the meaning of the Securities
Act) of such New Notes. If the tendering holder is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes, you will
represent on behalf of such broker-dealer that the Old Notes to be exchanged
for the New Notes were acquired by it as a result of market-making activities
or other trading activities, and acknowledge on behalf of such broker-dealer
that it will deliver a prospectus meeting the requirements of the Securities
Act in connection with any resale of such New Notes. By acknowledging that it
will deliver and by delivering a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes, such
broker-dealer is not deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
Very truly yours,
2
EXHIBIT 99.04
Offer to Exchange
11 7/8% Series B Senior Subordinated Notes due 2009
(Registered under the Securities Act of 1933)
for Any and All Outstanding
11 7/8% Series A Senior Subordinated Notes due 2009
of
CONDOR SYSTEMS, INC.
To Registered Holders and The Depository
Trust Company Participants:
We are enclosing herewith the material listed below relating to the
offer by Condor Systems, Inc., a California corporation (the "Company"), to
exchange its 11 7/8% Series B Senior Subordinated Notes due 2009 (the "New
Notes"), pursuant to an offering registered under the Securities Act of 1933,
as amended (the "Securities Act"), for a like principal amount of its issued
and outstanding 11 7/8% Series A Senior Subordinated Notes due 2009 (the "Old
Notes") upon the terms and subject to the conditions set forth in the
Company's Prospectus, dated _______ __, 1999, and the related Letter of
Transmittal (which together constitute the "Exchange Offer").
Enclosed herewith are copies of the following documents:
1. Prospectus dated _____ __, 1999;
2. Letter of Transmittal;
3. Notice of Guaranteed Delivery;
4. Instruction to Registered Holder and/or Book-Entry Transfer
Participant from Owner; and
5. Letter which may be sent to your clients for whose account you
hold Old Notes in your name or in the name of your nominee, to
accompany the instruction form referred to above, for obtaining
such client's instruction with regard to the Exchange Offer.
We urge you to contact your clients promptly. Please note that the
Exchange Offer will expire at 5:00 p.m., New York City time, on ______ __,
1999 unless extended.
<PAGE>
The Exchange Offer is not conditioned upon any minimum number of Old
Notes being tendered.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the holder is not an "affiliate" of the
Company, (ii) any New Notes to be received by it are being acquired in the
ordinary course of its business, and (iii) the holder has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes. If the tendering holder is a
broker-dealer that will receive New Notes for its own account in exchange for
Old Notes, you will represent on behalf of such broker-dealer that the Old
Notes to be exchanged for the New Notes were acquired by it as a result of
market-making activities or other trading activities, and acknowledge on
behalf of such broker-dealer that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. By acknowledging that it will deliver and by delivering a prospectus
meeting the requirements of the Securities Act in connection with any resale
of such New Notes, such broker-dealer is not deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The enclosed Instruction to Registered Holder and/or Book-Entry
Transfer Participant from Owner contains an authorization by the beneficial
owners of the Old Notes for you to make the foregoing representations.
The Company will not pay any fee or commission to any broker or
dealer or to any other persons (other than the Exchange Agent) in connection
with the solicitation of tenders of Old Notes pursuant to the Exchange Offer.
The Company will pay or cause to be paid any transfer taxes payable on the
transfer of Old Notes to it, except as otherwise provided in Instruction 10 of
the enclosed Letter of Transmittal.
Additional copies of the enclosed material may be obtained from the
undersigned.
Very truly yours,
STATE STREET BANK AND TRUST COMPANY
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU THE
AGENT OF CONDOR SYSTEMS, INC. OR STATE STREET BANK AND TRUST COMPANY OR
AUTHORIZE YOU TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON THEIR BEHALF IN
CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH
AND THE STATEMENTS CONTAINED THEREIN.
2
EXHIBIT 99.05
INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM OWNER
OF
CONDOR SYSTEMS, INC.
11 7/8% Series A Senior Subordinated Notes due
2009 (the "Old Notes")
To Registered Holder and/or Participant of the Book-Entry Transfer
Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated
_____ __, 1999 (the "Prospectus") of Condor Systems, Inc., a California
corporation (the "Company"), and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), that together constitute the Company's offer (the
"Exchange Offer"). Capitalized terms used but not defined herein have the
meanings ascribed to them in the Prospectus or the Letter of Transmittal.
This will instruct you, the registered holder and/or book-entry
transfer facility participant, as to the action to be taken by you relating to
the Exchange Offer with respect to the Old Notes held by you for the account
of the undersigned.
The aggregate face amount of the Old Notes held by you for the
account of the undersigned is (fill in amount):
$___________ of the 11 7/8% Series A Senior Subordinated Notes due
2009
With respect to the Exchange Offer, the undersigned hereby instructs
you (check appropriate box):
|_| To TENDER the following Old Notes held by you for the account of
the undersigned (insert principal amount of Old Notes to be tendered, if any):
$___________ of the 11 7/8% Series A Senior Subordinated Notes due
2009
|_| NOT to TENDER any Old Notes held by you for the account of the
undersigned.
<PAGE>
If the undersigned instructs you to tender the Old Notes held by you
for the account of the undersigned, it is understood that you are authorized
to make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representations and warranties contained in
the Letter of Transmittal that are to be made with respect to the undersigned
as a beneficial owner, including but not limited to the representations, that
(i) the holder is not an "affiliate" of the Company, (ii) any New Notes to be
received by the holder are being acquired in the ordinary course of its
business, and (iii) the holder has no arrangement or understanding with any
person to participate in a distribution (within the meaning of the Securities
Act) of such New Notes. If the undersigned is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes, it represents
that such Old Notes were acquired as a result of market-making activities or
other trading activities, and it acknowledges that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resale of such New Notes. By acknowledging that it will deliver and by
delivering a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes, such broker-dealer is not deemed
to admit that it is an "underwriter" within the meaning of the Securities Act
of 1933, as amended.
2
<PAGE>
SIGN HERE
Name of beneficial owner(s):
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Signature(s):
------------------------------------------------------------------
Name(s) (please print):
--------------------------------------------------------
Address:
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- -------------------------------------------------------------------------------
Telephone Number:
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Taxpayer Identification or Social Security Number:
------------------------------
- -------------------------------------------------------------------------------
Date:
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