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
November 16, 2000.
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 October 17, 2000.
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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........................................... 21
Use of Proceeds......................................................... 25
Capitalization.......................................................... 25
Selected Historical Consolidated Financial Data......................... 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................. 28
Business................................................................ 44
Management.............................................................. 60
Executive Compensation.................................................. 62
Security Ownership of Beneficial Owners and Management.................. 66
Relationships and Related Party Transactions............................ 68
Description of Credit Facility.......................................... 71
Description of Notes.................................................... 72
The Exchange Offer...................................................... 108
Material United States Tax Consequences of the Exchange Offer........... 116
Plan of Distribution.................................................... 116
Legal Matters........................................................... 116
Experts................................................................. 116
Where You Can Find More Information..................................... 117
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,
1999, we generated contract revenues, EBITDA, as we define on page 9, and a net
loss of $95.9 million, $3.9 million and $13.0 million, respectively. In
addition, our funded backlog at December 31, 1999 was $55.9 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 78.9% of our contract revenues for the year ended December
31, 1999 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 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 $66.4
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 61.3% 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
o derivative products
o proprietary upgrades
o significant recurring high margin spare parts revenue
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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 for the United States, Europe, Canada, Asia
Pacific, Middle East and Latin America, which includes virtually all
defense-related products and systems that permit gathering, analyzing and
countering electronically generated signals, is a $3.5 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 and the Kosovo crisis, 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
electronic warfare market for the United States, Europe, Canada, Asia Pacific,
Middle East and Latin America is projected to grow from an estimated $3.5
billion in 2000 to an estimated $4.1 billion in 2005, representing a compound
annual growth rate of 3.0%. In addition, the market niches in which we compete,
which include electronic warfare excluding fighter/attack and rotary-wing
aircraft, are forecasted to grow from an estimated $1.0 billion in 2000 to an
estimated $1.3 billion in 2005, a compound annual growth rate of 5.5%. Our
market niches are projected to grow domestically from an estimated $0.2 billion
in 2000 to an estimated $0.3 billion in 2005, a compound annual growth rate of
8.0%.
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
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
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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 in April 1999 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 credit facility. The holders of
these old notes are entitled to liquidated damages because this registration
statement was not declared effective by October 12, 1999 pursuant to the
registration rights agreement. The liquidated damages aggregated $0.4 million as
of June 30, 2000, of which approximately $0.2 million has been paid to the
holders of the old notes. For more information on the acquisition and financing
and the liquidated damages, you should read the section called "The Acquisition
and Financing" and "Description of Notes."
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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
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 November 16, 2000 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
November 16, 2000. 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 "Material 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
123 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 exchange. Accordingly, we
will not recognize any gain or loss related to
this exchange.
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:
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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.
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 80, 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 credit facility
o rank equally with any of our future
senior subordinated indebtedness
o rank senior to any of our future
subordinated indebtedness
o effectively rank junior to all of
the liabilities of our subsidiaries
other than CEI Systems, Inc.
As of June 30, 2000, the notes rank junior
to $0.0 of outstanding liabilities,
excluding guarantees of the credit facility
and intercompany obligations of our
subsidiaries other than CEI Systems, Inc.
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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 credit
facility
o rank senior in right of payment
to any future subordinated
indebtedness of CEI Systems, Inc.
Restrictive 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 CONSOLIDATED FINANCIAL DATA
The table below sets forth our summary historical 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 information contained in this table
should be read in conjunction with "The Acquisition and Financing," "Selected
Historical Consolidated Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements and the notes thereto included elsewhere in this prospectus.
<TABLE>
Years Ended Six Months Ended
December 31, June 30,
---------------------------------- -----------------
1997 1998 1999 1999 2000
---------------------------------- ------------------
(dollars in millions) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Contract revenues...................................... $79.6 $101.0 $95.9 $37.1 $48.7
Gross margin........................................... 26.5 39.4 34.1 15.8 18.5
Operating income (loss)................................ 0.2 11.7 1.0 (4.6) 4.5
Net income (loss)...................................... (3.2) 2.6 (13.0) (11.0) (2.2)
Balance Sheet Data:
Cash and cash equivalents............................ 0.7 4.3 6.0 1.9 4.4
Restricted cash(1)..................................... -- 4.0 2.0 -- 1.1
Working capital........................................ 25.1 29.0 28.1 29.9 32.1
Total assets........................................... 64.7 67.9 90.4 74.0 97.3
Short-term borrowings.................................. -- -- 17.1 -- 16.0
Total long-term debt
(including current maturities)(2)................... 61.0 55.8 100.0 100.0 100.0
Redeemable preferred stock............................. -- -- -- -- 9.7
Shareholders' deficit.................................. (15.9) (13.0) (53.5) (51.5) (55.5)
Net Cash Provided by (used in):
Operating activities................................... 2.4 12.1 (16.8) (9.5) (5.0)
Investing activities................................... (21.4) (2.5) (4.8) (2.7) (6.7)
Financing activities................................... 15.4 (6.0) 23.2 9.8 10.2
Other Financial Data:
Ratio of earnings to fixed
charges(3).......................................... -- 1.5x -- -- --
EBITDA(4).............................................. $3.0 $16.6 $3.9 $(3.4) $ 6.8
EBITDA margin.......................................... 3.8% 16.4% 4.1% (9.1)% 14.1%
Depreciation and amortization(5)....................... 2.8 4.9 2.9 1.2 2.3
Capital expenditures................................... 1.7 2.5 1.2 0.7 0.6
Other Operating Data:
Contract awards(6)..................................... $89.9 $104.2 $88.9 $28.0 $76.0
Funded backlog at end of period(7)..................... 59.7 62.9 55.9 53.8 83.3
</TABLE>
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(1) Restricted cash of $4.0 million at December 31, 1998 was used to
collateralize our outstanding letters of credit. At December 31, 1999, we
were required to maintain $2.0 million in restricted cash in connection
with the net issuances of standby letters of credit during negotiations
with the banks. The banks released the restrictions on February 9, 2000.
The credit facility currently provides enough capacity such that these
letters of credit are not required to be cash collateralized. Restricted
cash of $1.1 million at June 30, 2000 was related to the acquisition of
SciComm, Inc.
(2) Total long-term debt is defined as long-term debt, including current
portion, net of unamortized discount related to stock warrants.
(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 years ended December 31,
1997 and 1999 and for the six months ended June 30, 1999 and 2000, earnings
were insufficient to cover fixed charges by $5.4 million, $10.8 million,
$9.2 million and $3.6 million, respectively.
(4) 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
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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.
(5) Reflects depreciation and amortization of plant and equipment, goodwill and
other intangible assets. Excludes $0.4 million, $0.9 million, $0.6 million,
$0.4 million and $0.2 million of amortization of deferred financing costs
and debt discounts for the years ended December 31, 1997, 1998 and 1999,
and the six months ended June 30, 1999 and 2000, respectively, as they are
recorded in interest expense.
(6) 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."
(7) 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."
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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, 2000, we had: (a) total consolidated indebtedness of
approximately $116.0 million; and (b) $25.8 million in standby letters of
credit, subject to customary conditions. In addition, subject to the
restrictions in our 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 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.
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 " -- The
notes will be subordinated to other debt and holders of senior debt must be paid
before you receive payments under the notes."
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Restrictive covenants in our indenture and 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 credit facility contains other and more restrictive
covenants and prohibits us from prepaying our subordinated indebtedness,
including the notes. Our 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 credit facility and/or
the notes. Upon the occurrence of an event of default under our credit facility,
the lenders could elect to declare all amounts outstanding under our 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 credit facility. If the lenders under our
credit facility accelerate the repayment of borrowings, we cannot assure you
that we will have sufficient assets to repay our credit facility and our other
indebtedness, including the notes.
On February 9, 2000, we entered into an amendment of our credit facility to
modify some of the financial covenant requirements through 2001 and to make some
other changes related to the operation of the credit facility. These changes
created additional restrictions on the utilization of the credit facility and
limited the availability of loans under the credit facility to a borrowing base.
As of June 30, 2000, we were in compliance with all of the covenant requirements
of both our notes and credit facility.
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 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
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.
In addition, we cannot make any cash payments to you if we have failed to
make payments to holders of 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 some 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, 2000, such subsidiaries had $0.0 of outstanding
liabilities, excluding guarantees of the credit facility and intercompany
obligations of our subsidiaries other than CEI Systems, Inc.
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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 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 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 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 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 credit
facility. In such circumstances, the subordination of the notes to the 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 65.5% of our contract revenues in 1999 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 10.3% of
contract revenues for the year ended December 31, 1999, and no other program
represented more than 8.2% 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 June 30, 2000, our performance had been delayed on three
of our domestic contracts with an aggregate contract value of approximately $5.4
million and two of our international contracts with an aggregate contract value
of approximately $34.1 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.
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, 2000, the U.S. Government is
claiming adjustments in an aggregate amount of $1.2 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 financing costs, goodwill, portions of research and development costs
and marketing expenses may not be reimbursable under U.S. Government contracts.
Further, as a government
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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.
Similar to other defense contractors, we have been receiving increased
scrutiny and experiencing delays in the processing of our export license
requests by U.S. government agencies. These delays and additional inquiries
could cause delays in new contract awards and may impact the timing of our
contract performance.
The Department of Defense may withdraw its decision that we will not be under
foreign ownership as a result of our acquisition
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 as
a result of the acquisition. However, we cannot assure you that this
determination will not be subsequently withdrawn by the Department of Defense in
the event that it concludes that we were or came 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.
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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 95.9% of our contract revenues for the year ended December 31,
1999. 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. During the third quarter of 1999, we increased
our cost estimates for these development programs again. We are nearing the
completion of these development programs and had substantially completed these
development programs by the end of the second quarter of 2000.
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 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 June 30, 2000, we had funded backlog of $83.3 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 evaluating other
potential acquisitions. We recently completed the purchase of the electronic
warfare assets of ArgoSystems, and substantially all of the assets of Signal
Sciences, Inc. and Andrew SciComm, Inc. 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.
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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, 1998 and 1999 and the six months ended
June 30, 2000, international contract revenues comprised approximately 34.1%,
34.5% and 37.2%, 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
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 are denominated in U.S. dollars, and
we intend to continue to predominately 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 June 30, 2000, our performance continues to be
delayed on two of our international contracts, which have an aggregate contract
value of approximately $34.1 million. Performance delays constitute defaults
under those contracts. However, none of our customers has 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.
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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. As further described in "Management," we have experienced some
turnover in our senior management. We could be adversely affected if any of our
current management 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--Employee and Severance Benefit
Agreements."
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., 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 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
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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;
(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
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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.
Our actual results may be different from our 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
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, our actual results may be
significantly different from the forward-looking statements in this prospectus
and the future events or circumstances that we predict may not occur. Given
these uncertainties, you should not unduly rely on the forward-looking
information or 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.
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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.
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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.
The acquisition enabled us to liquidate a significant portion of our
existing shareholders' investment and provided us with capital as well as
continuing financial support for growth and the pursuit of our acquisition
strategy. it also provided incentives to management and employees by offering
additional equity ownership.
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
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
21
<PAGE>
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, which
we refer to as 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 "Relationships and Related Party Transactions."
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
22
<PAGE>
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 as the administrative
agent. At that time, we did not borrow under the 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 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
==========
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.
23
<PAGE>
(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.
24
<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, credit facility
borrowings and consolidated capitalization of Condor as of June 30, 2000
(unaudited) 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."
As of June
30, 2000
--------------
(dollars in
millions)
Cash, cash equivalents and restricted cash....................... $ 5.6
==========
Credit facility(1)............................................... 16.0
Long-term debt:
Notes......................................................... 100.0
----------
Total debt................................................ 116.0
----------
Redeemable preferred stock(2).................................... $ 9.7
Total shareholders' deficit...................................... $ (55.5)
----------
Total capitalization......................................... $ 70.2
==========
-------------------
(1) Consists of borrowings under a revolving credit facility of $50.0 million,
under which, as of June 30, 2000, we also had approximately $25.8 million
in standby letters of credit.
(2) Net of unamortized original discount of $0.7 million related to the
issuance of warrants to acquire 3.1 million shares of Class C common stock.
25
<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, 1999 is derived from
Condor's audited consolidated financial statements and the notes thereto. The
Statement of Operations Data for the years ending December 31, 1997, 1998 and
1999 and the Balance Sheet Data for the years ended December 31, 1998 and 1999
are derived from our audited financial statements included elsewhere in this
prospectus. The Statement of Operations Data for the years ending December 31,
1995 and 1996 and the Balance Sheet Data for the years ended December 31, 1995,
1996 and 1997 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, 1999 and 2000 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 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" and our consolidated financial
statements and the notes thereto included elsewhere in this prospectus.
<TABLE>
Years Ended Six Months Ended
December 31, June 30,
------------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
(dollars in millions) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Contract revenues.......... $ 60.2 $ 67.5 $ 79.6 $ 101.0 $ 95.9 $ 37.1 $ 48.7
Contract costs............. 38.7 43.8 53.1 61.6 61.8 21.3 30.2
------- ------- ------- -------- ------- ------- -------
Gross margin............. 21.5 23.7 26.5 39.4 34.1 15.8 18.5
Technology related costs:
Research and
development............. 2.2 1.7 1.0 4.4 4.9 2.3 2.5
Amortization of
purchased technology.... -- -- 0.6 2.5 0.0 -- 0.5
Write-off of in-process
technology.............. -- -- 8.4 -- -- -- --
Selling, general and
administrative........... 13.3 14.1 16.1 20.3 18.1 8.4 9.5
Other charges:
Recapitalization costs... -- 15.7 -- -- 8.8 8.8 --
Restructuring and
plant closure costs..... -- 5.9 -- -- 1.0 0.9 1.5
Abandoned
acquisitions costs...... -- -- 0.2 0.5 0.3 -- --
------- ------- ------- -------- ------- ------- -------
Operating income
(loss).................. 6.0 (13.7) 0.2 11.7 1.0 (4.6) 4.5
Interest and other income 0.1 -- 0.1 0.3 0.3 0.2 0.0
Interest expense........... (0.8) (1.3) (5.7) (7.7) (12.1) (4.8) (8.1)
------- ------- ------- -------- ------- ------- -------
Income (loss) before
income taxes and
extraordinary item...... 5.3 (15.0) (5.4) 4.3 (10.8) (9.2) (3.6)
Provision for (benefit of)
income taxes............. 1.9 (3.5) (2.2) 1.7 (1.4) (1.6) (1.4)
------- ------- ------- -------- ------- ------- -------
Income (loss) before
extraordinary item...... 3.4 (11.5) (3.2) 2.6 (9.4) (7.6) (2.2)
------- ------- ------- -------- ------- ------- -------
Extraordinary loss on
debt repurchase, net of
income tax............... -- -- -- -- 3.6 3.4 --
Net income (loss).......... 3.4 (11.5) (3.2) 2.6 (13.0) (11.0) (2.2)
======= ======= ======= ======== ======= ======= =======
Balance Sheet Data:
Cash and cash equivalents.. 2.3 4.2 0.7 4.3 6.0 1.9 4.4
Restricted cash(1)......... -- -- -- 4.0 2.0 -- 1.1
Working capital............ 13.9 18.2 25.1 29.0 28.1 29.9 32.1
Total assets............... 32.6 50.1 64.7 67.9 90.4 74.0 97.3
26
<PAGE>
Years Ended Six Months Ended
December 31, June 30,
------------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
(dollars in millions) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term borrowings..... -- 3.0 -- -- 17.1 -- 16.0
Total long-term debt
(including current
maturities)(2)........... 5.3 43.0 61.0 55.8 100.0 100.0 100.0
Redeemable preferred stock. -- -- -- -- -- -- 9.7
Shareholders' equity
(deficit)................ 14.7 (13.7) (15.9) (13.0) (53.5) (51.5) (55.5)
Net Cash Provided by (used in)
Operating activities....... 6.3 (13.7) 2.4 12.1 (16.8) (9.5) (5.0)
Investing activities....... (7.3) (1.4) (21.4) (2.5) (4.8) (2.7) (6.7)
Financing activities....... (0.1) 16.9 15.4 (6.0) 23.2 9.8 10.2
Other Financial Data:
Ratio of earnings to fixed
charges(3)............... 5.0x -- -- 1.5x -- -- --
EBITDA(4).................. $ 8.0 $ (11.5) $ 3.0 $ 16.6 $ 3.9 $ 3.4 $ 6.8
EBITDA margin.............. 13.3% (17.0%) 3.8% 16.4% 4.1% -9.1% 14.1%
Depreciation and
amortization(5).......... 1.9 2.2 2.8 4.9 2.9 1.2 2.3
Capital expenditures....... 1.6 1.4 1.7 2.5 1.2 0.7 0.6
Other Operating Data:
Contract awards(6)......... $ 63.2 $ 77.3 $ 89.9 $ 104.2 $ 88.9 $ 28.0 $ 76.0
Funded backlog at end of
period(7)................ 39.6 49.4 59.7 62.9 55.9 53.8 83.3
</TABLE>
--------------------------
(1) Restricted cash of $4.0 million at December 31, 1998 was used to
collateralize our outstanding letters of credit. At December 31, 1999, we
were required to maintain $2.0 million in restricted cash in connection
with the net issuance of standby letters of credits during negotiations
with the banks. The banks released the restrictions on February 9, 2000.
The credit facility currently provides enough capacity such that these
letters of credit are not required to be cash collateralized. Restricted
cash of $1.1 million at June 30, 2000 was related to the acquisition of
SciComm, Inc.
(2) Total long-term debt is defined as long-term debt, including current
portion, net of unamortized discount related to stock warrants.
(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 years ended December 31,
1996, 1997 and 1999 and the six months ended June 30, 1999 and 2000,
earnings were insufficient to cover fixed charges by $15.0 million, $5.4
million, $10.8 million, $9.2 million and $3.6 million, respectively.
(4) 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.
(5) Reflects depreciation and amortization of plant and equipment, goodwill and
other intangible assets. Excludes $0.4 million, $0.9 million, $0.6 million,
$0.4 million and $0.2 million of amortization of deferred financing costs
and debt discounts for the years ended December 31, 1997, 1998 and 1999 and
the six months ended June 30, 1999 and 2000, respectively, as they are
recorded in interest expense.
(6) 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."
(7) 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."
27
<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, 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 Andrew SciComm, Inc., a subsidiary of Andrew Corporation (March 2000)
for a purchase price of $4.5 million plus an additional $1.5 million
upon the receipt of export licenses for two international contracts.
In addition, the seller will be entitled to royalty payments equal to
5% of the annual contract payments received in excess of $8.0 million
during 2000 and 2001.
o Signal Sciences, Inc., a subsidiary of Allen Telecom, (October 1999)
for a purchase price of $1.4 million plus royalty payments of at least
$0.3 million on future sales related to some acquired technology.
o the electronic warfare assets, a product line of ArgoSystems, Inc., a
subsidiary of Boeing, (June 1999) for a purchase price of $2.0 million
plus a commission on two specified contract awards if they are awarded
in 1999 or 2000.
o the Electronic Systems division of Whittaker Corporation (1997) for a
purchase price of $19.7 million.
o the Microwave Surveillance Systems division of the Watkins-Johnson
Company (1995) for a purchase price of $5.8 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
28
<PAGE>
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.
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 technologies and designs developed during
the initial development program, which are nonetheless generally customized to
our customers' specifications.
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 15% 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 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.
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.
Results of Operations
The following table sets forth our results of operations based on the
percentage relationship of the items listed below to contract revenues during
the periods shown.
<TABLE>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------ ------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(unaudited)
Contract revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------
Costs and operating expenses:
Contract costs........................... 66.7 61.0 64.4 57.6 62.0
------ ------ ------ ------ ------
Gross margin............................. 33.3 39.0 35.6 42.4 38.0
29
<PAGE>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------ ------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(unaudited)
Technology related costs:
Research and development................. 1.3 4.3 5.2 6.1 5.1
Amortization of purchased technology..... 0.8 2.5 0.0 -- 1.0
Write-off of in-process technology....... 10.6 -- -- -- --
Selling, general and administrative....... 20.1 20.1 18.9 22.6 19.5
Other charges:
Recapitalization costs................... -- -- 9.1 23.6 --
Restructuring and plant closure costs.... -- -- 1.0 2.5 3.1
Abandoned acquisition costs.............. 0.3 0.5 0.3 -- --
------ ------ ------ ------ ------
Operating income (loss).................. 0.2 11.6 1.1 (12.4) 9.3
Interest and other income................. 0.1 0.3 0.3 0.5 (0.1)
Interest expense.......................... (7.1) (7.6) (12.6) (12.9) (16.6)
------ ------ ------ ------ ------
Income (loss) before income taxes and
extraordinary item..................... (6.8) 4.3 (11.2) (24.8) (7.4)
Provision for (benefit of) income taxes... (2.8) 1.7 (1.4) 4.3 (2.9)
------ ------ ------ ------ ------
Income (loss) before extraordinary item.. (4.0) 2.6 (9.8) (20.5) (4.5)
------ ------ ------ ------ ------
Extraordinary loss on debt purchase, net
of income tax.......................... -- -- 3.8 -- --
------ ------ ------ ------ ------
Net income (loss)......................... (4.0)% 2.6% (13.6)% (20.5)% (4.5)%
====== ====== ====== ====== ======
</TABLE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Contract Awards
Contract awards for the six months ended June 30, 2000 were $76.0 million,
compared to $28.0 million for the six months ended June 30, 1999, an increase of
$48.0 million, or 171.4%. We are typically 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. This increase in
contract awards in the first six months of 2000 compared to the first six months
of 1999 is primarily due to an increase in Ground and Range Systems, Ocean
Systems and Specialized Electric Countermeasures Systems and Antenna, Spares and
Repairs contract awards. These increases were only partially offset by a
decrease in Airborne Electronic Intelligence Systems and Airborne Electronic
Support Measures Systems contract awards.
The percentage of contract awards derived from international awards was
approximately 33.5% and 41.1% of the total contract awards for the six months of
1999 and 2000, respectively. The percentage in international awards increased
primarily due to significant Ocean Systems and Ground and Range Systems contract
awards during the first six months of 2000.
Backlog
We had funded backlog at June 30, 2000 of $83.3 million compared to funded
backlog of $53.8 million at June 30, 1999. Approximately 61.0% and 52.6% of our
backlog for the six months ended June 30, 2000 and the six months ended June 30,
1999, respectively, was derived from domestic contracts. The increase in backlog
from 1999 reflects the increase in the amount of new contract awards and
fluctuations in the timing of the receipt of new contract awards.
Contract Revenues
Contract revenues for the six months ended June 30, 2000 were $48.7 million
compared to $37.1 million for the six months ended June 30, 1999, an increase of
$11.6 million, or 31.3%. The increase in contract revenues was primarily due to
increased contract revenues from our Ocean Systems, Specialized Electronic
Countermeasures Systems, Airborne Electronic Intelligence Systems, Ground and
Range Systems and Antennas and Spares and Repairs contract revenues that were
only partially offset by a decrease in Airborne Electronic Support Measures
Systems contract revenues. The increase in contract revenues is also a
reflection of the higher level of contract awards that were received during the
third and fourth quarters of 1999.
30
<PAGE>
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 the first six months of 2000
and 1999 was approximately 79.7% and 68.3%, respectively. The increase was
primarily due to increased activities on our Ocean Systems programs. 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, 2000 and the six
months ended June 30, 1999 was approximately 37.2% and 43.4%, respectively.
During the first six months of 2000 and 1999, approximately 94.9% 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. The decrease is due to our acquisition of
Signal Sciences since a significant portion of its business is based on time and
material contracts.
During the first six months of 2000, our largest program represented
approximately 11.2% of contract revenues and no other program represented more
than 10.3% of contract revenues for the six months of 2000. By comparison, in
the first six months of 1999, our largest program represented approximately
13.9% of contract revenues and no other program represented more than 9.5% of
contract revenues for the six months of 1999. These program concentrations will
fluctuate from quarter to quarter due to the timing of manufacturing and
delivery of products under various contracts. On an annual basis, we expect that
the program concentrations will be consistent with prior years.
Gross Margin
Gross margin for the six months ended June 30, 2000 was $18.5 million
compared to $15.8 million for the six months ended June 30, 1999, an increase of
$2.7 million, or 17.1%. Gross margin as a percentage of contract revenues
decreased from 42.4% in the first six months of 1999 to 38.0% in the first six
months of 2000. The decrease reflects the impact of our increased level of
effort on major development programs in 2000 as compared to 1999.
Our gross margin will continue to fluctuate in the future due to factors
inherent in our 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
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 during the
six months ended June 30, 1999 and 2000 is summarized as follows:
Six months ended
June 30,
1999 2000
(dollars in millions)
Research and development............................. $2.3 $2.5
Amortization of purchased technology................. -- 0.5
Contract related research and development expenses... 5.4 6.9
--- ---
Total research and development activities............ 7.7 9.9
--- ---
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Six months ended
June 30,
1999 2000
---- ----
Percent of contract revenues........ 20.8% 20.2%
==== ====
Internally funded research and development increased slightly from $2.3 million
for the first quarter in 1999 to $2.5 million for the first six months in 2000.
The spending is primarily as a result of development costs in connection with
our New Technology Electronic Support Measures Systems. The amortization of
purchased technology in the first six months of 2000 is primarily related to the
signal processing systems acquired from Allen Telecom in 1999. 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, 2000 were $9.5 million compared to $8.4 million for the six months ended
June 30, 1999. Selling, general and administrative expenses as a percentage of
contract revenues decreased to 19.5% in the first six months of 2000 from 22.6%
in the first six months of 1999. The dollar level of selling, general and
administrative expenses increased due to increases in certain incentive
compensation accruals and marketing costs. The percentage decrease is primarily
attributable to higher contract revenues for the first six months of 2000.
Other Charges
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. During the fourth
quarter of 1999, we reclassified $0.2 million of our provision that was related
to the contractual claims to contract costs. We closed the facility in 1999 and
anticipate that all significant costs will be settled during 2000.
In April 1999, we consummated the 1999 recapitalization. In connection with
the recapitalization, we incurred various costs and expenses that aggregated
approximately $21.4 million (pre-tax), 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 was capitalized as deferred financing costs. These
deferred financing costs will be amortized over ten years, the term of the
notes. In addition to these fees and expenses, we have charged approximately
$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 terminated stock options 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 have been reflected as an extraordinary item in the financial statements.
In addition, we had recorded a $0.5 million charge during the fourth quarter of
1998 related to abandoned acquisition costs.
On February 23, 2000, the Board of Directors elected to terminate the
employment agreement of our then president and chief executive officer, without
cause. Pursuant to the terms of our employment agreement with him, we recognized
approximately $1.5 million in severance related costs during the first quarter
of 2000. The severance package will be paid over a two-year period commencing
July 1, 2000.
Interest and Other Income
Interest and other income were $0.2 million in the six months ended June
30, 1999 while interest income and other expense aggregated $0.0 million in the
six months ended June 30, 2000. The amounts primarily reflect the investment
income derived from the short-term investment of our cash balances.
Interest Expense
Interest expense for the six months ended June 30, 2000 was $8.1 million
compared to $4.8 million for the six months ended June 30, 1999. Interest
expense as a percentage of contract revenues increased from 12.9% in the first
six months of 1999 to 16.6% in the first six months of 2000. This increase is
primarily due to increased levels in our
32
<PAGE>
outstanding debt primarily as a result of the 1999 recapitalization, increased
usage of our credit facility and penalty interest associated with the notes.
Provision for Income Taxes
The benefit that we recognized for income taxes in the six months ended
June 30, 2000 was $1.4 million compared to a benefit of $1.6 million for the six
months ended June 30, 1999.
Our effective tax benefit was 39.8% for the first six months of 2000 while
our effective tax rate was 17.3% for the first six months of 1999. Our effective
tax benefit for the first three months of 2000 is higher than the federal
statutory rate due to a valuation allowance for investment tax credits released
by operating loss carry backs that approximates the state tax benefit. Our
effective tax benefit rate for the first six months of 1999 is lower than the
federal statutory rate primarily due to the 1999 recapitalization costs. A
substantial portion of these costs are not deductible for tax purposes.
We have substantial tax credit and operating loss carry forwards as of
December 31, 1999. We have recognized the benefit of the operating loss carry
forwards for financial statements purposes. However, we have provided a
valuation allowance for the federal and state tax credit carry forwards for
financial statement purposes because we anticipate that we will be limited in
the use of these tax credit carry forwards due to minimum tax and credit
limitations. As a result, we anticipate that we will continue to have cash
requirements for our taxes even though these carry forwards exist.
Net Income (Loss)
Our net loss decreased $8.8 million to $2.2 million for the first six
months of 2000 compared to a net loss of $11.0 million for the first six months
of 1999. The decrease in the net loss was primarily due to increases in our
contract revenues and gross margin and decreases in other charges that were
partially offset by increases in our interest expense.
1999 Compared To 1998
Contract Awards
Contract awards for the twelve months ended December 31, 1999, were $88.9
million, compared to $104.2 million for the twelve months ended December 31,
1998, a decrease of $15.3 million, or 14.7%. The 1999 results include the
contract awards of ARGOSystems and Signal Sciences subsequent to the dates of
acquisition of $10.3 million, including acquired backlog of $5.5 million. The
decline in contract awards is primarily due to customer delays in ordering our
products due to unanticipated funding and contract bottlenecks, export license
delays and, to a lesser extent, system delivery delays on certain key programs.
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 interim or annual period.
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 the Shortstop Electronic Protection System. Subsequent to the completion of
the development, we have received $9.3 and $18.3 million in production awards
during 1998 and 1999, respectively. We are continuing to develop our next
generation of New Technology Electronic Support Measures Systems and
multi-channel processor systems. While we had not yet completed development of
these products, during 1999, we received $2.9 and $11.5 million of production
awards for the New Technology Electronic Support Measures System and multi-
channel processor systems, respectively. We expect that the level of awards for
these new systems will continue to grow in the near future. In addition to these
new systems, we also experienced increases in our Catalog, Spares and Repairs
contract awards. However, these increases were offset by decreases in Ocean
Systems, Airborne Electronic Support Measures Systems, Airborne Electronic
Intelligence Systems and Ground and Range Systems.
The percentage of contract awards derived from international awards was
approximately 41.9% and 28.6% of the total contract awards for the twelve months
ended December 31, 1998 and 1999, respectively. This percentage decrease of
international awards resulted primarily from the absence of the significant New
Technology Electronic Support Measures Systems development award that we
received in 1998 and delays in production awards that we anticipated in 1999.
33
<PAGE>
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, 1999 of $55.9 million compared to
funded backlog of $62.9 million at December 31, 1998. Approximately 58.1% and
44.8% of our backlog for 1999 and 1998, respectively, was derived from domestic
contracts. Approximately 77.9% of our backlog at December 31, 1998 was realized
as contract revenues during the year ended December 31, 1999. The decrease in
backlog from 1998 reflects the decrease in the amount of new contract awards and
fluctuations in the timing of the receipt of new contract awards previously
described.
Contract Revenues
Contract revenues for the twelve months ended December 31, 1999 were $95.9
million compared to $101.0 million for the twelve months ended December 31,
1998, a decrease of $5.1 million, or 5.0%. The 1999 results include the contract
revenues of ARGOSystems and Signal Sciences subsequent to the dates of
acquisition of $2.6 million. The decrease in contract revenues is a reflection
of the delay in the contract awards previously described and continued efforts
on development programs. The decreases were primarily from our Airborne
Electronic Intelligence Systems, Ground and Range Systems and Specialized
Electronic Countermeasures that were substantially offset by increases in
Airborne Electronic Support Measures Systems, Ocean Systems and Antennas and
Spares and Repairs 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 the twelve months ended
December 31, 1999 and 1998 was approximately 78.9 % and 77.1%, respectively. The
percentage of sole source contract revenues remained relatively stable due to a
decline in our contract awards in the international marketplace where the
majority of contracts are subject to competitive bidding. We expect that the
percentage of sole source revenues will continue to decline slightly in the
future as a result of our continued efforts in the international marketplace.
The percentage of contract revenues that were derived from international sales
for 1999 and 1998 was approximately 34.5% and 34.1%, respectively.
During the twelve months ended December 31, 1999 and 1998, approximately
95.9% and 97.2%, 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 anticipate that the percentage of
fixed price contracts may decline slightly in the future due to the acquisition
of Signal Sciences. A significant portion of their business is based on time and
material contracts.
For the twelve months ended December 31, 1999, our largest program
represented approximately 10.3% of contract revenues and no other program
represented more than 8.2% of contract revenues for those twelve months. By
comparison, for the twelve months ended December 31, 1998, our largest program
represented approximately 6.7% of contract revenues and no other program
represented more than 6.6% of contract revenues for those twelve months. These
program concentrations 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 these program concentrations will remain relatively
consistent.
Gross Margin
Gross margin for the twelve months ended December 31, 1999 was $34.1
million compared to $39.4 million for the twelve months ended December 31, 1998,
a decrease of $5.3 million, or 13.5%. Gross margin as a percentage of contract
revenues decreased from 39.0% in 1998 to 35.6% in 1999. Historically, our
program mix has included approximately 20.0% in development programs and
generated a gross margin as a percentage of contract revenues of between 34.0%
and 36.0%. Our development programs are typically unprofitable or break-even
after allocating overhead, administrative and other indirect costs.
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<PAGE>
The 1999 results include the gross margin of ARGOSystems and Signal
Sciences subsequent to the dates of acquisition of $1.2 million. The gross
margin percentage on their contract revenues of 46.0% reflects the initial cost
savings derived from the rationalization of ARGOSystems that were partially
offset by the lower margins of Signal Sciences.
In addition to the impact of the acquisitions, the gross margin in 1999
reflects a moderation in the leveraging of our fixed overhead costs over our
contract revenue base and changes in our program mix. The contract revenues from
development programs were approximately 19.6% and 11.6% in 1999 and 1998,
respectively. We believe that the percentage of contract revenues represented by
development programs was unusually low in 1998 and expect that such contract
revenues from development programs will return to historical levels in future
years. The reduction of our gross margin in 1999 is also the result of $5.3
million in increased cost revisions related to software development costs on
certain development programs. These programs involve significantly more complex
development efforts that our prior programs. We are nearing the completion of
these development programs and anticipate completion by the second quarter of
2000. The higher gross margins for the twelve months ended December 31, 1998
reflect the concentration of efforts on production programs that have higher
gross margins than development programs, but also the absence of any significant
upward cost revisions to our cost estimates for any development programs.
Research and Development
The aggregate expense for research and development activities for the
twelve months ended December 31, 1998 and 1999 is summarized as follows:
<TABLE>
1998 1999
---- ----
<S> <C> <C>
(dollars in millions)
Research and development............................. $4.4 $4.9
Amortization of purchase technology.................. 2.5 --
Contract related research and development expenses... 10.0 12.4
---- ----
Total research and development activities............ 16.9 17.3
==== ====
Percent of contract revenues......................... 16.7% 18.0%
</TABLE>
Internally funded research and development increased from $4.4 million for
the twelve months ended December 31, 1998 to $4.9 million for the twelve months
ended December 31, 1999, primarily as a result of development costs incurred for
our New Technology Electronic Support Systems. During 1998, we completed
development of the Shortstop Electronic Protection Systems. The amortization of
purchased technology in 1998 related to the command and control and
communication systems acquired from the Whittaker Corporation while the
amortization of purchased technology in 1999 related to signal processing
systems acquired from Allen Telecom. 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 future.
Selling, General and Administrative
Selling, general and administrative expenses for the twelve months ended
December 31, 1999 were $18.1 million compared to $20.3 million for the twelve
months ended December 31, 1998, a decrease of $2.2 million, or 10.8%. Selling,
general and administrative expenses as a percentage of contract revenues
declined to 18.9% in the twelve months ended December 31, 1999 from 20.1% in the
twelve months ended December 31, 1998. The dollar and percentage decrease in
selling, general and administrative expenses is primarily attributable to higher
spending levels in 1998 related to systems development work associated with our
Year 2000 compliance program as well as reductions in certain incentive
compensation accruals and discretionary spending in 1999.
Other Charges
In October 1998, we executed an asset purchase agreement to acquire the
assets of the Applied Technology Division of Litton Industries, Inc. for
approximately $120 million. We conducted our due diligence and financing efforts
until January 1999. In January 1999, we allowed the agreement to terminate due
to changes in certain conditions. We charged approximately $0.5 million to
operations for costs incurred in connection with our evaluation of Applied
Technology Division.
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<PAGE>
In January 1999, we announced a decision to close our facilities located in
Sterling, Virginia. We 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. During the fourth
quarter of 1999, we reclassified $0.2 million of our provision that was related
to the contractual claims to contract costs. We closed the facility in 1999 and
anticipate that all significant costs will be settled during 2000.
In April 1999, we consummated the 1999 recapitalization. In connection with
the recapitalization, we incurred various costs and expenses that aggregated
approximately $21.4 million (pre-tax), 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 was capitalized as deferred financing costs. These
deferred financing costs will be amortized over ten years, the term of the
notes. In addition to these fees and expenses, we have charged approximately
$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 terminated stock options 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 have been reflected as an extraordinary item in the financial statements.
In addition, we had recorded a $0.5 million charge during the fourth quarter of
1998 related to abandoned acquisition costs.
During the third quarter of 1999, we incurred various costs and expenses
that approximated $0.3 million for our due diligence and other acquisition
related activities that related to several potential acquisitions, the largest
of which was the government based business units of Stanford Telecommunications,
Inc. We terminated our letters of intent with the acquisition targets due to
various operating and financing considerations. We have charged the related
costs to operations during the third quarter of 1999.
In November 1999, we announced a decision to restructure the organization
and operation of our marketing, engineering and program management units. We
recognized approximately $0.3 million for severance related costs during the
fourth quarter of 1999. We completed the restructuring in 1999 and anticipate
that all significant claims will be settled during 2000.
Interest and Other Income
Interest and other income increased to $0.3 million for the twelve months
ended December 31, 1999 from $0.2 million for the twelve months ended December
31, 1998. This increase reflects the investment income derived from the
short-term investment of our cash balances.
Interest Expense
Interest expense for the twelve months ended December 31, 1999 was $12.1
million compared to $7.7 million for the twelve months ended December 31, 1998.
Interest expense as a percentage of contract revenues increased from 7.6% in
1998 to 12.6% in 1999. This increase is primarily due to increased levels in our
outstanding debt primarily as a result of the 1999 recapitalization and related
financing. We expect that interest expense will continue to increase
substantially in the future.
Provision for Income Taxes
The benefit that we recognized for income taxes in the twelve months ended
December 31, 1999 was $1.9 million compared to a provision of $1.7 million for
the twelve months ended December 31, 1998. Approximately $0.5 million of the
1999 benefit was allocated to the extraordinary loss on debt retirement.
Our effective tax benefit was 12.8% in 1999 while our effective tax rate
was 39.0% in 1998. Our effective tax benefit for 1999 is lower than the federal
statutory rate due to nondeductible recapitalization expenses and a valuation
allowance for investment tax credits released by operating loss carry backs that
exceed the state tax benefit. Our effective tax rate for 1998 is higher than the
federal statutory rate due to state income tax provisions that exceeded the
benefit recognized for research and development tax credits.
We have substantial tax credit and operating loss carry forwards as of
December 31, 1999. We have recognized the benefit of the operating loss carry
forwards for financial statements purposes. However, we have provided a
valuation allowance for the federal and state tax credit carry forwards for
financial statement purposes because we anticipate that we will be limited in
the use of these tax credit carry forwards due to minimum tax and credit
36
<PAGE>
limitations. As a result, we anticipate that we will continue to have cash
requirements for our taxes even though these carry forwards exist.
Net Income (Loss)
Our net loss increased $15.6 million to $13.0 million in 1999 compared to
net income of $2.6 million. This increase was primarily due to decreases in
contract revenues and gross margin, other charges related to the 1999
recapitalization and an increase in interest expense.
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 million in 1998.
This decline in contract awards was offset by increases in Ocean and Range
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.
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
37
<PAGE>
in the future as we continue to expand our activities in the international
marketplace where the 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.
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. A
substantial portion of these cost savings were 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.
Research and Development
The aggregate expense for research and development activities during 1997
and 1998 is summarized as follows:
<TABLE>
1997 1998
---- ----
(dollars in millions)
<S> <C> <C>
Research and development............................ $1.0 $4.4
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%
</TABLE>
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,
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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 of Litton Industries, Inc. 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 the Applied Technology Division.
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 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
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 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.
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.
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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. This increase was primarily due to increases in
contract awards and related revenues, increases in our gross margins and the
absence of the write-off of in-process technology in 1998.
Financial Condition and Liquidity
Our principal sources of liquidity are cash flow from operations and
borrowings under the senior secured credit facility. Our principal uses of cash
are debt service requirements, capital expenditures, working capital
requirements and acquisitions. We can also use our available borrowings under
the senior secured credit facility to support our letter of credit obligations
related to international contracts.
In connection with the 1999 recapitalization, we issued an aggregate of
$100.0 million of 11 7/8% Series A senior subordinated notes that are due in
full in May 2009. The notes are unsecured obligations that are junior to the
senior secured credit facility and any other senior indebtedness. Interest on
the notes is payable semi-annually in May and November. The notes contain
customary covenants and events of default, including covenants that limit our
ability to incur additional indebtedness or leases, create liens, pay dividends,
purchase or redeem capital stock, make certain investments, sell assets or
effect a merger or consolidation. The note holders may require us to purchase
the notes if there is a change in control. In addition, we may elect to redeem
these notes under certain circumstances.
In connection with the 1999 recapitalization, we entered into a senior
secured credit facility that has a total capacity of $50.0 million, provides for
loans and letters of credit and has a five-year term to April 2004. Through
February 9, 2000, the loans under the senior secured credit facility bore
interest, at our option, at the alternate base rate plus 2.25% or the reserve
adjusted LIBOR rate plus 3.50% while the standby and performance letter of
credit fees were 3.50%, trade letter of credit fees were 1.75% and the
commitment fee was 1.50% per annum on the daily average unused portion of the
facility.
As described earlier, we experienced a decline in contract awards due to
unanticipated funding and contracting bottlenecks, export license delays and
system delivery delays on certain key programs during 1999. This decline in
contract awards, system delivery delays on certain key programs and the upward
revisions of our cost estimates for some of our development programs have all
contributed to a decrease in contract revenues and the related gross margins
during 1999. We believe that these factors will continue to impact our
profitability through the year 2000. As a result, while we believed that we
would be able to continue to meet our regularly scheduled debt service
obligations, working capital requirements and capital expenditures, we
anticipated that we would not comply with certain financial covenants of our
senior secured credit facility primarily related to our leverage ratios at
December 31, 1999. We further anticipated that we would not comply with these
financial ratio requirements through the year 2000.
We commenced negotiations to amend the revolving credit facility with our
lenders during 1999 and concluded those negotiations on February 9, 2000.
Pursuant to the amendment, subsequent to February 9, 2000, the applicable
margins over the prime rate and LIBOR increased to 2.75% and 4.0%, respectively,
while the standby and performance letters of credit increased to 4.0%, trade
letter of credit fees increased to 2.0% while the commitment fee on the unused
portion of the revolving credit facility increased to 2.0% per annum. These
increased margins and commitment fees can decrease based upon reduction in net
funded indebtedness leverage ratios. In addition, we agreed to additional
restrictions on the utilization of the revolving credit facility for acquisition
financing and to limit the availability of cash borrowing under the revolving
credit facility to a borrowing base. We were in compliance with all of the
covenant requirements, as amended, as of December 31, 1999 and June 30, 2000.
We had approximately $16.0 million in loans outstanding and additional cash
borrowing availability of $8.2 million under the $50.0 million senior secured
credit facility at June 30, 2000. We have reduced our borrowings since December
31, 1999, since we were required to utilize $10.0 million in proceeds from the
issuance of a new series of preferred stock to pay down the loans outstanding
under the revolving credit facility. In addition, we had standby letters of
credit outstanding that aggregated approximately $25.8 million at June 30, 2000.
On February 9, 2000, concurrent with the amendment of our revolving credit
facility, we, DLJ and Behrman entered into a preferred stock subscription
agreement. Under the terms of this subscription agreement, DLJ and Behrman
invested an additional $10.0 million in us through the purchase of a new series
of preferred stock. As described earlier, the proceeds were used to pay down the
senior secured credit facility. This preferred stock is non- voting, redeemable
in 2010 and pay dividends at an annual rate of 15%. For the first five years,
these dividends may
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be paid in stock and thereafter the dividends are to be paid in cash. In
addition, each preferred stock investor will receive their pro-rata right to
detachable warrants for an aggregate of 3,100 shares of Class C common stock.
These warrants have an exercise price of $0.01 per share through 2010. The other
shareholders were offered the opportunity to purchase their pro-rata portion of
the preferred stock offering. This second subscription agreement closed during
the second quarter of 2000. We raised an additional $.4 million in proceeds from
this second subscription.
We anticipate that we will spend approximately $1.5 million on capital
expenditures in 2000, which is generally in line with our historical spending
levels. The senior secured credit facility contains restrictions on our ability
to make capital expenditures. Based on current estimates, we believe that the
amount of capital expenditures permitted under the senior secured 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.
We anticipate that interest expense will increase substantially as a result
of the 1999 recapitalization and the financing costs associated with future
acquisitions. We are actively considering acquisitions that complement or expand
our business or that will enable us to expand into new markets. On February 29,
2000, we acquired substantially all of the assets of Andrew SciComm, Inc., a
subsidiary of the Andrew Corporation, for a purchase price of $4.5 million plus
an additional $1.5 million upon the receipt of export license for two
international contracts. We utilized the proceeds from borrowings under the
senior secured credit facility to consummate this transaction.
Additional acquisitions may cause us to lose our small business status
under the Federal Acquisition Regulations. Under these regulations, we are
deemed to be a small business as long as we continue to maintain fewer than 750
employees and principally sell products that are classified under the Standard
Industrial Classification Code 3812. The primary benefit that we receive from
the small business status relates to certain financing advantages in that we are
allowed to bill U.S. customers for 90% of our incurred costs as progress
payments, whereas a large business can only bill 75% of their costs as progress
payments. Given our strategy of continuing to pursue acquisitions, we expect
that we will lose our small business status within the next two years. The loss
of this advantage will negatively impact our liquidity and increase our working
capital requirements. Based on our current estimates, our working capital
requirements for 1999 would have increased by approximately $4.8 million if we
had not had this advantage during 1999.
We anticipate that our operating cash flow, together with borrowings under
the senior secured 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 principal payments, to
refinance our indebtedness and to satisfy our other debt obligations will depend
upon our future operating performance. General economic, financial, competitive,
legislative, regulatory, business and other factors beyond our control may
affect our future operating performance.
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.
Working capital was $32.1 million at June 30, 2000, compared to $28.1
million at December 31, 1999. We believe that we will continue to require
working capital consistent with past experience and that the current levels of
working capital, together with borrowings available under the senior secured
credit facility, will be sufficient to meet expected liquidity needs in the near
term.
We utilized $5.0 million in operating cash flow for the six months ended
June 30, 2000 compared to $9.5 million in operating cash flow for the six months
ended June 30, 1999. The level of our contract receivables has increased by
approximately $2.3 million as compared to December 31, 1999 and $13.8 million as
compared to June 30, 1999. This increase in contract receivable principally
relates to our acquisitions, system delivery delays and continued delays in
certain development programs. The level of contract receivables began to
moderate during the first quarter of 2000, leveled off in the second quarter of
2000 and we anticipate will begin to return to lower levels during the third
quarter of 2000 as we complete certain programs that have significant milestone
payments and complete system deliveries. We utilized $16.8 million in operating
cash flow for the twelve months ended December 31, 1999 while we generated $12.1
million and $2.4 million in operating cash flow for the twelve months ended
December 31, 1998 and 1997, respectively. The fluctuations in our operating cash
flow are primarily the result of
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changes in the levels of our contract receivables, gross margins, other charges
and increases in our financing costs from 1997 to 1999. We utilized a
significant amount of operating cash in the second quarter of 1999 due to the
fees and expenses associated with the 1999 recapitalization. These fees and
expenses aggregated approximated $21.4 million, and utilized approximately $19.2
million in cash flow, after tax benefits.
We utilized $6.7 million in investing activities for the six months ended
June 30, 2000 compared to $2.7 million for the six months ended June 30, 1999.
We utilized $4.8 million in investing activities for the twelve months ended
December 31, 1999 compared to $2.5 million and $21.4 million for the twelve
months ended December 31, 1998 and 1997, respectively. These investing
activities primarily related to capital expenditures and acquisitions. The
investing levels primarily change from year to year as the result of spending on
acquisitions. We acquired SciComm in the first quarter of 2000, ARGOSystems and
Signal Sciences were acquired in 1999 and Whittaker was acquired in 1997. There
were not any significant capital commitments at March 31, 2000. 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 $10.2 million in the six months
ended June 30, 2000 compared to $9.8 million in the six months ended June 30,
1999. The cash provided by financing transactions in 2000 is primarily related
to the proceeds from the preferred stock offering and bank borrowings, increases
in customer advances and decreases in the restricted cash needed to support our
letter of credit obligations. These sources of financing were partially offset
by the repurchase of common stock and a pay down of our bank borrowings. The
cash provided by financing activities in 1999 is primarily related to the 1999
recapitalization and increases in restricted cash that was partially offset by
decreases in contract advances. Cash provided by financing activities was $23.2
million in the twelve months ended December 31, 1999 compared to the cash used
by financing activities of $6.0 million in the twelve months ended December 31,
1998 and cash provided by financing activities of $15.4 million in the twelve
months ended December 31, 1997. The cash provided by financing transactions in
1999 is primarily related to the 1999 recapitalization, bank borrowings and
decreases in the restricted cash needed to support our letter of credit
obligations. These sources of financing were partially offset by the reduction
in our contract advances. The cash utilized by financing activities in 1998 is
primarily related to the retirement of long-term debt and increases in
restricted cash that was offset by increases in our contract advances. The cash
provided by financing activities in 1997 is primarily related to borrowings
utilized to finance the acquisition of Whittaker and increases in our contract
advances offset by the retirement of long-term debt.
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 1997, 1998 and 1999, an average of 60.4% of contract revenues,
and 60.7% of EBITDA was generated in the third and fourth quarters, in each case
with significantly greater portions in the fourth quarter.
Year 2000 Compliance
Our year 2000 compliance plan was completed at a total cost of
approximately $1.9 million. We did not experience any significant problems as a
result of year 2000 issues.
Market Risk
We have financial instruments that are subject to interest rate risk,
principally cash equivalent investments and debt obligations issued at a fixed
rate. Historically, we have not experienced material gains or losses due to
interest rate changes when selling cash equivalent investments. Based on the
current holdings of cash equivalent investments
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at June 30, 2000, the exposure to interest rate risk is not material. The fixed
rate debt obligations that we have issued are generally not redeemable until
maturity.
We are also subject to foreign currency exchange rate risk relating to
receipts from customers and payments to suppliers in foreign currencies. As of
June 30, 2000, the amount of receipts and expenditures that are conducted in
foreign currencies, and the market risk exposure relating to currency exchange,
is not material.
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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,
1999, we generated contract revenues, EBITDA and a net loss of $95.9 million,
$3.9 million and $13.0 million, respectively. In addition, our funded backlog at
December 31, 1999 was $55.9 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 78.9% of our contract revenues for the year ended December
31, 1999 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 $66.4
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 61.3% 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 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 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 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.
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The Electronic Warfare Industry
Overview
The electronic warfare industry for the United States, Europe, Canada,
Asia-Pacific, Middle East and Latin America, which includes virtually all
defense-related products and systems that permit gathering, analyzing and
countering electronically generated signals, is a $3.5 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 and the Kosovo crisis, 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.
The worldwide electronic warfare market for the United States, Europe,
Canada, Asia-Pacific, Middle East and Latin America, is projected to grow from
an estimated $3.5 billion in 2000 to an estimated $4.1 billion in 2005,
representing a compound annual growth rate of 3.0%. In addition, the market
niches in which we compete, which include electronic warfare excluding
fighter/attack and rotary-wing aircraft, are forecasted to grow from an
estimated $1.0 billion in 2000 to an estimated $1.3 billion in 2005, a compound
annual growth rate of 5.5%. Our market niches are projected to grow domestically
from an estimated $0.2 billion in 2000 to an estimated $0.3 billion in 2005, a
compound annual growth rate of 8.0%.
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 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.
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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:
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
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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.
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 28.6% of our total contract awards for the year ended December 31,
1999 was derived from international programs. During 1999, we participated in
over 30 programs, of which our largest program represented approximately 10.3%
of contract revenues and no other program represented more than 8.2% 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 a
number of 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 $60.2 million in 1995 to $95.9 million in 1999, a compound
annual growth rate of 12.4%. Our EBITDA has grown from $8.0 million in 1995 to
$14.1 million in 1999 (adjusted for the non-recurring charges of $10.2 million),
a compound annual growth rate of 15.2%. In addition, we have increased EBITDA
margin from 13.3% in 1995 to 14.7% in 1999 (adjusted for the non-recurring
charges of $10.2 million) through cost reductions, productivity enhancements,
leveraging of fixed costs and successfully integrating four strategic
acquisitions. Our funded backlog has grown from $39.6 million at December 31,
1995 to $55.9 million at December 31, 1999, a compound annual growth rate of
9.0%.
Without giving effect to our four acquisitions, contract revenues would
have increased from $52.1 million in 1995 to $70.1 million in 1999, a compounded
annual growth rate of 7.7%. 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.
While we have historically generated significant growth and profitability
on a year to year basis prior to 1999, we experienced no growth in contract
revenues in 1999 and a decline in our profitability and cash flow generated from
operations. We anticipate that we will experience modest growth in our contract
revenues in 2000 and an improvement in our profitability and cash flow generated
from operations. We expect that this trend will continue to improve in future
years.
Experienced Management Team. Our senior management team has extensive
experience in the defense 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
47
<PAGE>
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 has successfully grown the business
through the declining defense budgets of the 1990s, secured our current strong
market positions, integrated five strategic acquisitions and positioned us for
growth for the future.
More recently we have commenced a transition in our management team due to
departures and anticipated retirements. We currently anticipate a smooth
transition as the new members of the management team have extensive experience
in their respective areas. With the exception of the new chief executive
officer, the new members have been our employees for several years.
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
five businesses. The following table sets forth information concerning our
recent acquisitions.
<TABLE>
Date of Purchase
Transaction(1) Target Principal Products and Technologies Price(2)
-------------- ------ ----------------------------------- --------
(dollars in
millions)
<S> <C> <C> <C>
March 2000 Andrew SciComm, Inc. Signal collection products $ 6.0
October 1999 Signal Sciences, Inc. Communication intelligence equipment and 1.4
advanced research and development studies
June 1999 Argo Sciences, Inc. Signal collection and electronic countermeasure 2.0
products
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
</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.
(2) The purchase price for Andrew SciComm excludes royalty payments equal to 5%
of the annual contract payments received in excess of $8.0 million during
2000 and 2001. The purchase price for Signal Sciences excludes liabilities
of approximately $0.1 million and royalty payments on the sales derived
from certain acquired technologies. There is a minimum royalty payment of
$0.3 million. 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
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<PAGE>
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:
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
78.9% of our contract revenues for the year ended December 31, 1999 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
1995 to 1999, our international contract revenues grew from $15.9 million, or
26.5% of contract revenues, to $33.1 million, or 34.5% of contract revenues,
respectively. We have also expanded the number of our major international
programs from nine in 1995 to 17 in 1999. 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.
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<PAGE>
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 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. In March
2000, we completed the acquisition of Andrew SciComm, Inc. a subsidiary of
Andrew Corporation for a purchase price of $4.5 million plus an additional $1.5
million upon the receipt of export licenses for two international contracts and
royalty payments of 5% of the annual contract payments received in excess of $8
million during 2000 and 2001. In October 1999, we completed the acquisition of
Signal Sciences, Inc., a subsidiary of Allen Telecom, for approximately $1.4
million plus a minimum of $0.3 million in royalties on certain future sales. We
also completed the purchase of the electronic warfare assets, a product line, 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 borrowings from our senior secured facility to fund the SciComm
acquisition and we used cash from operations to fund the Signal Sciences and
Argo Systems acquisitions.
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.
50
<PAGE>
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 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, 1999, the contract revenues for this
program category were $4.2 million and funded backlog at December 31, 1999 was
$6.3 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, 1999, the contract revenues for this program category
were $23.0 million and funded backlog at December 31, 1999 was $5.6 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, 1999, the contract revenues for this program category were
$3.8 million and funded backlog at December 31, 1999 was $1.7 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
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, 1999, the contract revenues for this program category
were $35.3 million and funded backlog at December 31, 1999 was $20.3 million.
Key programs include:
51
<PAGE>
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, 1999, the contract revenues
for this program category were $18.1 million and funded backlog at December 31,
1999 was $14.3 million.
In addition, catalog antennas, spares and repairs and other products
accounted for $11.5 million of contract revenues for the year ended December 31,
1999 and funded backlog at December 31, 1999 was $7.7 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 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.
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<PAGE>
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>
System Products and
Technologies What Is It? What Does It Do? Where Is It Used?
------------------------------------------------------ --------------------------------------------------------------
<S> <C> <C> <C>
Special Signal o Refers to Condor o Provides direct digital o Can be added to all of our
Processing developed hardware and detection of signals systems.
propriety software and without hardware based o Is an available upgrade to
algorithms that allow signal measurement. all signal processors.
"all-digital" precision o Provides precision
processing of radar and measurement of radar
non-communication signals.
signals.
------------------------------------------------------ --------------------------------------------------------------
New Technology o Is a new type of electronic o Provides fast and accurate o Is currently being built in
Electronic Support support measures system situational awareness and two versions--a compact
Measures Systems that uses a Condor warning for small to configuration for
patented Autohet phase medium sized ships and submarines and a full
receiver that measures the submarines. featured configuration for
phase of antenna outputs. o Provides "wideopen" shipboard installations.
o Provides superior frequency coverage and o Is our premiere entry in
accuracy, but costs less "wideopen" angular the international
than traditional electronic coverage--100% submarine and small ship
support measures systems. probability of intercept for electronic support
any signal at any measures marketplace.
frequency--no "scanning"
or "switching."
------------------------------------------------------ --------------------------------------------------------------
Multi-Channel, o Provides the ability to o Enables multiple operators o Three different system
Multi-Operator process more signals more to simultaneously process configurations are
Signals Intelligence quickly in an increasingly multiple signals--typical currently in production for
Systems crowded and complex systems have between U.S. Navy submarine and
signal environment. 4-16 channels. airborne applications.
o We have developed o Both automatic search
proprietary system control (acquisition, recognition
and display software and and library matching) and
processing technology to precision manual
support multiple receiver electronic intelligence
channels and multiple analysis functions are fully
operators. supported.
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 and U.S. Army's Blackhawk
Electronic Support processor. 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.
------------------------------------------------------ --------------------------------------------------------------
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<PAGE>
System Products and
Technologies What Is It? What Does It Do? Where Is It Used?
------------------------------------------------------ --------------------------------------------------------------
Shortstop o Is a portable system that o Predetonates proximity o Personal units carried by
Electronic creates an electronic fuses on incoming artillery ground soldiers.
Protection System umbrella over the and mortar rounds. o Can be installed in a
battlefield. o "Lifesaving" technology. variety of ground vehicles
o Is our premiere entry into and fixed-site platforms.
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
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, 1999, our
domestic sales and marketing department consists of nine in-house personnel and
is supplemented by three representatives and 13 independent consultants. Our
international sales and marketing department consists of ten 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 Applied Technology Division
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,
except that Lockheed Martin exceeded 10% of our contract revenues in 1999.
Typically, only the U.S. Government or its agencies and international
governments such as Sweden and Norway exceed 10% of our contract revenues.
Approximately 65.5% of our contract revenues in 1999 were to the U.S. Government
or to prime contractors that identified the U.S. Government as the ultimate
purchaser.
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<PAGE>
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. Typically, over the
last decade, we have increased our international revenue base and devoted
significant resources to pursuing additional new business.
Backlog
As of December 31, 1999, we had funded backlog of approximately $55.9
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, 1999 to be earned as contract revenues by the end of
2000, 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. For a discussion of research and development
expenditures over the past three fiscal years, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Research and
Development."
Intellectual Property
Our intellectual property 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 78.9% of our total contract revenues for the year ended
December 31, 1999 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 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)
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 21.1% of our total contract revenues for the year ended
December 31, 1999 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
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<PAGE>
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, 1999, approximately 65.5% 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, 1.3%
of our contract revenues in 1999 resulted from the U.S. Government's Foreign
Military Sales 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 95.9% of our contract revenues in 1999.
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 cost,
quality, schedule and performance. Cost plus contracts accounted for
approximately 4.1% of our contract revenues in 1999.
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 the Foreign Military Sales program, 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
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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 and the Foreign Military Sales program. In a
direct foreign sales program, the contractor sells directly to the foreign
country and assumes all risks in the transaction. In a Foreign Military Sales
program 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 direct foreign sales exports from the
U.S. of nearly all of our products. Some of our products may not be exported to
other 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.
Employees
As of December 31, 1999, we had 499 employees, of whom 6 were executive
officers, 212 were in engineering and our program office, 19 were in sales and
marketing, 148 were in manufacturing operations, 30 were in quality assurance
and 84 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 8/2005
Engineering and Operations
San Jose, CA Engineering and Operations 6,754 7/2001
Electronic Systems Division..... Simi Valley, CA Engineering and Operations 43,000 3/2005
Signal Services................. Santa Clara, CA Engineering and Operations 27,947 12/2001
Storage Facility................ San Jose, CA Offsite Storage 6,100 3/2001
</TABLE>
----------
(1) In addition to the facilities listed, we have three domestic sales offices
and one international sales office.
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.
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<PAGE>
Legal Matters
We are not a party to any material legal proceedings, other than ordinary
routine litigation incidental to our business which is not 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 as of June 30, 2000.
<TABLE>
Name Age Position
----- --- --------
<S> <C> <C>
Kent E. Hutchinson.................... 60 President and Chief Executive Officer, Chairman of the Board
Vernon A. Dale........................ 57 Vice President, EW Systems
David J. Klingler..................... 46 Vice President, Advanced Systems
Charles H. Leber...................... 43 Vice President, Engineering
Terry J. Schmidt...................... 51 Vice President, Manufacturing
John L. Taft.......................... 51 Chief Financial Officer and Secretary
Dr. Robert J. Hermann................. 65 Director
Dr. Paul G. Kaminski.................. 56 Director
R. Noel Longuemare.................... 67 Director
William M. Matthes.................... 38 Director
</TABLE>
Kent E. Hutchinson has been President and Chief Executive Officer since
March 1, 2000. From 1997 to 2000, he was Executive Vice President of Kaman
Corporation, a large technology company focused on the aerospace, parts and
equipment distribution and musical instrument market. From 1991 to 1997, he held
various positions, including President, at Norden Systems, a UTC Company. From
1983 to 1991, he was Vice President of Customer Requirements and Program
Management for Northrop Defense Systems. He held various positions at
Westinghouse from 1996 to 1983 and prior to that he was a Naval Flight Officer.
Vernon A. Dale assumed responsibility for our EW Systems business unit in
November 1999 and had 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 assumed responsibility for our Advanced Systems business
unit in November 1999 and had 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.
Charles H. Leber has been Vice President of Engineering since 1999 and had
been Director of Product Development since 1997. From 1990 to 1997 he served as
Manager of the Digital Signal Processing Department. Mr. Leber joined Condor in
1987.
Terry J. Schmidt has been Vice President of Manufacturing since 1999 and
had been Director of Manufacturing Operations since 1993. Mr. Schmidt had joined
Condor in 1992 as Director of Material. Prior to that, Mr. Schmidt had worked fo
the Applied Technology Division of Litton Industries Inc. as Director of
Material.
John L. Taft has been Chief Financial Officer and Secretary since 1999.
From 1996 to 1999, he served as Vice President, Finance and Administration. For
the two years prior to joining Condor, Mr. Taft formed and operated the Maxima
Group LLC, a management consulting firm. From 1973 to 1995, Mr. Taft held
various positions at Coopers & Lybrand LLP and was a partner of the firm from
1983 to 1995. Mr. Taft's responsibilities included management of the firm's
financial consulting practice in Southern California and Arizona.
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
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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 1999 and
the five other most highly compensated executive officers of Condor, which we
refer to as the "named executive officers", whose salary and bonus exceeded
$100,000 for the fiscal year ended December 31, 1999, is set forth in the
following table:
1999 Summary Compensation Table
<TABLE>
Restricted Securities All Other
Stock Underlying Compensation
Name and Principal Position Salary Bonus Award(s) Options ($)(1)
--------------------------- ------ ----- -------- ------- ------
<S> <C> <C> <C> <C> <C>
Robert E. Young II, President and
Chief Executive Officer (2)............ $332,885 $0 -- -- $36,689
John L. Barnum, Senior Vice
President and Chief Technical
Officer (3)............................ 210,846 0 -- -- 21,562
Vernon A. Dale, Vice President,
Business Development................... 182,192 0 -- -- 6,000
David J. Klingler, Vice President,
Advanced Program Development........... 182,192 0 -- -- 6,000
Thomas A. Michalski, Vice
President, Business
Operations (3)......................... 176,883 0 -- -- 8,308
Gary M. Viljoen, Chief Financial
Officer (4)............................ 195,777 50,000 -- -- 7,345
</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.
(2) Terminated effective February 29, 2000.
(3) Elected part-time status effective April 1, 2000.
(4) Resigned effective October 31, 1999.
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.
Stock Option Plan
We established a new stock option plan (the "Management Incentive
Compensation Plan") for management and other key employees in April 1999. Under
the terms of the Management Incentive Compensation Plan, we may grant a
combination of time vesting, performance vesting and super performance vesting
options of the Company's Class A Common Stock at prices and with vesting
provisions determined by the Board of Directors. The time vesting stock options
will generally vest over a two-year period while the performance options will
generally vest over a four-year period, provided that the Company attains
certain earnings targets for those periods. Super performance options will vest
in their entirety upon a liquidation event, including (a) a sale of Condor or
(b) an initial public offering of Condor, provided that the Company attains
certain minimum values per share in connection with such change in control.
These options will expire, if not exercised, within a maximum of ten years from
the date of grant. At December 31, 1999 there were 4,500,000 shares available
for grant and no options outstanding under the plan.
We established the 1999 Employee Stock Incentive Plan (the "1999 Employee
Plan") in December 1999. Under the terms of the 1999 Employee Plan, we may grant
stock options, stock appreciation rights and restricted shares of the Company's
Class A Common Stock at prices determined by the Board of Directors, as of the
date of grant. These stock options will generally vest over a four-year period.
These options will expire, if not exercised, within a maximum of ten years from
the date of grant. At December 31, 1999, there were 2,850,000 shares available
for grant and no options outstanding under the 1999 Employee Plan.
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<PAGE>
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.
We entered into an employment agreement with Robert E. Young II, effective
as of the date of the recapitalization. The Young employment agreement was for a
term of three years with automatic one-year extensions, unless 30 days prior
notice of non-renewal was given by either Mr. Young or us. Under the Young
employment agreement, Mr. Young was to 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 the achievement of
annual performance goals by both Condor and Mr. Young. The Young employment
agreement contained 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 contained 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 terminated his employment with good reason, which definition
includes termination because of a change of control (as defined therein), or if
we terminated his employment without cause, Mr. Young was entitled to the
greater of 200% times his current base salary plus his most recently paid bonus,
or $1.4 million. This severance payment was to 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.
On February 23, 2000, the Board of Directors elected to terminate the
employment agreement of Mr. Young without cause. Pursuant to the terms of his
employment agreement, we have recorded a pre-tax charge of approximately $1.5
million for severance related costs during the first quarter of 2000. Prior to
Mr. Young's termination, the Board of Directors conducted a search and
identified a candidate for Mr. Young's position. Effective March 1, 2000, we
employed Kent E. Hutchinson as our new President and Chief Executive Officer.
We entered into an employment agreement with Kent E. Hutchinson effective
as of March 1, 2000. The Hutchinson 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. Hutchinson or us. Under the Hutchinson
employment agreement, Mr. Hutchinson is to 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 the
achievement of annual performance goals by both Condor and Mr. Hutchinson. The
Hutchinson 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 Hutchinson 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. Hutchinson terminates his employment with good reason, which
definition includes termination because of a change of control (as defined
therein), or if we terminate his employment without cause, Mr. Hutchinson 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. Hutchinson in eight equal
installments over the next eight fiscal quarters.
We entered into an employment agreement with John L. Barnum effective as of
the date of the acquisition and that will 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. Effective April 1, 2000, Mr.
Barnum exercised his option to become a part-time employee, 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 our competitors 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 our
competitors as long as such consulting does not interfere with his employment by
us.
If we terminate 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 us at
the current rate for the remaining term of the Barnum employment agreement.
63
<PAGE>
We entered into an employment agreement with Vernon A. Dale, effective as
of the date of the recapitalization. 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 us. 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 if
we terminate 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.
We entered into an employment agreement with David J. Klingler, effective
as of the date of the recapitalization. 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 us. 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 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 if we terminate 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.
We entered into an employment agreement with Thomas A. Michalski, effective
as of the date of the recapitalization and that will 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. Effective
April 1, 2000, Mr. Michalski exercised his option to become a part-time
employee, 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 our competitors
until two years after the conclusion of the Michalski employment agreement. As a
part-time employee, Mr. Michalski will be able to consult for companies which
are not our competitors as long as such consulting does not interfere with his
employment by us.
If we terminate 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 us at the current rate for the remaining term of the Michalski
employment agreement.
On April 6, 2000, we entered into an employment agreement with John L.
Taft. The Taft 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. Taft or us. Under the Taft employment agreement, Mr. Taft will
receive (1) a base salary of $195,000, 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. Taft. The Taft 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 Taft 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. Taft terminates his employment with good reason, which definition
includes termination because of a change of control (as defined therein), or if
we terminate his employment without cause, Mr. Taft 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. Taft in eight equal installments over the next
eight fiscal quarters.
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On April 6, 2000, we entered into an employment agreement with Terrance J.
Schmidt. The Schmidt 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. Schmidt or us. Under the Schmidt employment agreement, Mr.
Schmidt will receive (1) a base salary of $165,000, 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. Schmidt. The Schmidt 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 Schmidt 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. Schmidt terminates his employment with good reason, which definition
includes termination because of a change of control (as defined therein), or if
we terminate his employment without cause, Mr. Schmidt 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. Schmidt in eight equal installments over
the next eight fiscal quarters.
On April 6, 2000, we entered into an employment agreement with Charles H.
Leber. The Leber 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. Leber or us. Under the Leber employment agreement, Mr. Leber will
receive (1) a base salary of $175,000, 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. Leber. The Leber 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 Leber 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. Leber terminates his employment with good reason, which definition
includes termination because of a change of control (as defined therein), or if
we terminate his employment without cause, Mr. Leber 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. Leber in eight equal installments over the next
eight fiscal quarters.
GTP and 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 be granted
stock options to purchase 50,000 shares of Class A Common Stock at a price of $1
per share. These options will vest uniformly over a five year period.
We have also agreed to grant partners of GTP an aggregate of 1,782,000
non-qualified stock options of the Company's Class A common shares at a price of
$1 per share. These stock options will generally vest over a three- year period,
subject to acceleration if DLJ sells any of their shares of Class C common
stock. These options will expire, if not exercised, within a maximum of ten
years from the date of grant at December 31, 1999 these options had not been
issued.
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SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of Condor common stock as of March 31, 2000 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>
Percentage of
Shares Outstanding Percentage of
Beneficially Class of Common Voting
Name of Beneficial Owner: Owned 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% --
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%
Kent E. Hutchinson.................................. -- -- -- --
Vernon A. Dale...................................... 739,999 A 1.5% 1.5%
David J. Klingler................................... 615,445 A 1.2% 1.2%
Charles H. Leber.................................... 214,486 A * *
Terry J. Schmidt.................................... 140,767 A * *
John L. Taft........................................ 50,155 A * *
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%
William M. Matthes.................................. -- -- 0.0% 0.0%
All directors and officers as a group (10 persons).. 3,510,973 A, B 6.9% 27.9%
</TABLE>
-------------------
* 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 have voting
rights equal in the aggregate to the sum of the shares held by Global
Technology 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. 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 "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")
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")
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o DLJ ESC II L.P. ("DLJ ESC II")
See "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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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. We, as successor to WDC Acquisition Corp., have agreed
to engage DLJSC as its exclusive financial advisor for a period of five years
beginning upon the closing of the merger. We 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. We
expect that any such arrangement will include provisions for the indemnification
of DLJSC against specified liabilities, including liabilities under the federal
securities laws.
We have agreed to engage BCMC to provide financial advisory services in
connection with each future acquisition by us 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. We expect that any such arrangement will include provisions for the
indemnification of BCMC against specified liabilities.
Incentive Payments. Pursuant to the merger agreement, we are obligated to
make cash payments limited to a maximum aggregate amount of $7.0 million (the
"Incentive Payments") to all of our existing shareholders, 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 the Applied Technology Division
whether by merger or acquisition of all or substantially all the
assets of the Applied Technology Division, or otherwise
o an acquisition by any Condor Entity of a business, other than the
Applied Technology Division, 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
Applied Technology Division acquisition if consummated, which have
been the subject of acquisitions by Condor Entities since the
effectiveness of the acquisition, equals or exceeds $100 million
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
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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. 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 our 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 our shares, one director to be appointed by Behrman and the final
director to be our 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 some 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 our 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 our 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, we have 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 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. We are expected to enter into an
agreement with Global Technology Partners or the members thereof pursuant to
which we will grant options to Global Technology Partners to purchase an
aggregate of 1,782,000 shares, representing up to 2.2% of our common stock 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:
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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 specific 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
Preferred Stock Subscription Agreement
Pursuant to a preferred stock subscription agreement dated as of February
9, 2000 among Condor, DLJ and Behrman, DLJ and Behrman invested an additional
$10.0 million in Condor through the purchase of a new series of preferred stock.
The proceeds were used to pay down the senior secured credit facility. The
preferred stock is non- voting, redeemable in 2010 and pay dividends at an
annual rate of 15%. For the first five years, these dividends may be paid in
stock and thereafter the dividends are to be paid in cash. In addition, each
preferred stock investor will receive their pro-rata right to detachable
warrants for an aggregate of 3,100 shares of Class C common stock. These
warrants have an exercise price of $0.01 per share through 2010. The other
shareholders were offered the opportunity to purchase their pro-rata portion of
the preferred stock offering. This second subscription agreement is scheduled to
close during the second quarter of 2000.
Other Transactions with Officers and Directors
We have entered into standard indemnity agreements with many of its
directors and a number of officers.
As part of the recapitalization in 1996, we forgave a loan to Gary M.
Viljoen, Condor's Chief Financial Officer through October 15, 1999, in the
amount of $75,000. On February 10, 2000, we acquired all of the shares held by
Gary M. Viljoen for $250,000 as a part of an agreement to settle all claims
related to the termination of his employment agreement.
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DESCRIPTION OF CREDIT FACILITY
The credit facility has been provided by a syndicate of financial
institutions led by Bank of America National Trust & Savings Association as
administrative agent, each such financial institution being a "lender" and,
collectively, the "lenders". The 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 April 15, 2004.
During 1999, we entered into a new revolving credit facility. This
revolving credit facility has a total capacity of $50.0 million that provides
for loans and letters of credit and has a five-year term to April 2004. This
revolving credit facility replaced a revolving note facility that was entered
into during 1997 and that had a total capacity of $18.1 million that could be
used for either cash borrowings or standby letter of credit commitments.
Through February 9, 2000, the loans under the revolving credit facility
bore interest, at our option, at the prime rate plus 2.25% or LIBOR plus 3.50%
(11.00% and 9.32%, respectively, at December 31, 1999) while the standby and
performance letter of credit fees were 3.50%, trade letter of credit fees were
1.75% and the commitment fee on the unused portion of the revolving credit
facility was 1.50% per annum. On February 9, 2000, we entered into an amendment
of the revolving credit facility to modify some of the financial covenant
requirements through 2001 and to make some other changes related to the
operation of the facility. Pursuant to the amendment, the applicable margins
over the prime rate and LIBOR increased to 2.75% and 4.0%, respectively while
the standby and performance letter of credit fees increased to 4.0%, trade
letter of credit fees increased to 2.0% and the commitment fee on the unused
portion of the revolving credit facility increased to 2.0% per annum.
These increased margins and commitment fees can decrease based upon
reductions in net funded indebtedness leverage ratios defined in the facility.
In addition, we agreed to additional restrictions on the utilization of the
revolving credit facility for acquisition financing and to limit the
availability of cash borrowings under the revolving credit facility to a
borrowing base.
All of our domestic subsidiaries are guarantors of the credit facility. Our
obligations under the 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 credit facility contains customary covenants and restrictions on our
ability to engage in some 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 credit facility also contains financial covenants requiring us 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 credit facility are
subject to conditions, including compliance with financial ratios and the
absence of any material adverse change. As of June 30, 2000, we had
approximately $16.0 million in loans outstanding and additional loan
availability of $8.2 million. In addition, we had standby letter of credit
outstanding that aggregated approximately $25.8 million at June 30, 2000. 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 dated as of April 15, 1999 among Condor, CEI Systems, Inc. (the
"Guarantor") and State Street Bank and Trust Company, as 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 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, since the registration statement
relating to this exchange offer was not declared effective by October 12, 1999,
holders of old notes that have complied with their obligations under the
registration rights agreement are 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. These
liquidated damages aggregated $0.4 million as of June 30, 2000, of which
approximately $0.2 million has been paid.
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 "--Defined Terms." 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 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
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
As of June 30, 2000, Condor and the Guarantor had outstanding approximately
$41.8 million of Senior Indebtedness, of which approximately $25.8 million
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 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
"--Restrictive Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock."
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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 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:
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(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 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 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 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, 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
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.
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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 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 "--Restrictive Covenants--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 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
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(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;
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
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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.
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 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 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
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
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(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 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 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
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(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.
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.
Restrictive 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
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(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
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:
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(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;
(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 "Relationships and Related Party
Transactions", the Acquisition Financing, the Offering, the 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;
(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;
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(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;
(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 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
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such Restricted Subsidiaries thereunder, then classified as having
been incurred in reliance upon this clause (1) that remains
outstanding under the 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 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;
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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.
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 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 "--Restrictive 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;
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(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;
(2) the 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:
(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:
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(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 "Relationships and Related Party
Transactions", and the Acquisition Financing, the 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:
(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."
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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.
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," "Restrictive
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
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(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) 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 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 Indebtedness permitted to be
incurred pursuant to the credit facility shall be outstanding, such acceleration
shall not be effective until the earlier of:
(1) an acceleration of any such Indebtedness under the credit facility; or
(2) five business days after receipt by Condor and the administrative
agent under the 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 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
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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 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
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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:
(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.
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,
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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 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
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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.
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.
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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,
(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.
Defined Terms
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
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(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 some of its subsidiaries of
the 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.
"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.
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"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.
"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 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 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.
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"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 "Relationships and Related Party Transactions", and Acquisition
Financing, the 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
(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
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(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 "--Restrictive
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.
"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 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.
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"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
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 "--Restrictive
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 Condor to Global
Technology Partners of its common stock and the granting by Condor to Global
Technology Partners of options to purchase shares of its common stock.
"Global Technology Partners Loans" means one or more loans by Condor 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
Condor.
"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.
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"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
(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;
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(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,
(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 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.
"Credit facility" means that Credit Agreement, dated as of April 15, 1999
among Condor, 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 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 "--Restrictive
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:
(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
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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
"--Restrictive 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
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:
(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.
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"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
(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
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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;
(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 "--Restrictive
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 "--Restrictive 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 "--Restrictive 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:
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(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.
"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, since we failed to satisfy
our registration obligations under the registration rights agreement, we are
required to pay liquidated damages with respect to the first 90-day period
immediately following our failure to fulfill any of our obligations described
above in an amount equal to $0.05 per week per $1,000 principal amount of notes
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.
o the exchange offer expires at 5:00 p.m., New York City time, on
November 16, 2000; 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 November 16, 2000 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.
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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 "--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 "--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 "--Resale
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.
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.
109
<PAGE>
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
(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.
110
<PAGE>
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 "--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.
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:
111
<PAGE>
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.
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.
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.
112
<PAGE>
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.
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:
113
<PAGE>
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: Susan Lavey Attn: Susan Lavey
Telephone: (617) 662-1544 Telephone: (617) 662-1544
Facsimile: (617) 662-1452 Facsimile: (617) 662-1452
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
(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.
114
<PAGE>
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.
115
<PAGE>
MATERIAL 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 some 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 financial statements of Condor Systems, Inc. as of
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999 included in this prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
116
<PAGE>
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.
117
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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 Shareholders' 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-1
<PAGE>
Condensed Statements of Operations
<TABLE>
Six months ended June 30, 2000
---------------------------------------------
Parent Guarantor Consolidated
Company Subsidiary Total
------- ---------- -----
(unaudited)
<S> <C> <C> <C>
Contract revenues............................................... $ 39,658 $ 9,012 $ 48,670
Contract costs.................................................. 25,796 4,359 30,155
Technology related costs:
Research and development....................................... 2,242 242 2,484
Amortization of purchased technology........................... 506 -- 506
Selling, general and administrative............................. 7,327 2,159 9,486
Other charges:
Recapitalization costs......................................... -- --
Product line and plant closure costs........................... 1,500 -- 1,500
Abandoned acquisitions costs................................... -- --
---------- -------- ----------
Operating income (loss)...................................... 2,287 2,252 4,539
Interest and other income....................................... 14 (61) (47)
Interest expense................................................ (8,112) -- (8,112)
---------- -------- ----------
Income (loss) before income taxes and extraordinary loss....... (5,811) 2,191 (3,620)
Provision for (benefit of) income taxes......................... (2,316) 876 (1,440)
---------- -------- ----------
Income (loss) before extraordinary loss........................ $ (3,495) $ 1,315 $ (2,180)
---------- -------- ----------
Extraordinary loss.............................................. -- --
Net income (loss).............................................. $ (3,495) $ 1,315 $ (2,180)
========= ======== =========
</TABLE>
<TABLE>
Year ended December 31, 1999
---------------------------------------------
Parent Guarantor Consolidated
Company Subsidiary Total
------- ---------- -----
(unaudited)
<S> <C> <C> <C>
Contract revenues............................................... $ 77,904 $ 18,002 $ 95,906
Contract costs.................................................. 51,830 9,978 61,808
Technology related costs:
Research and development....................................... 4,628 311 4,939
Amortization of purchased technology........................... 25 -- 25
Selling, general and administrative............................. 14,548 3,577 18,125
Other charges:
Recapitalization costs......................................... 8,754 -- 8,754
Product line and plant closure costs........................... 975 -- 975
Abandoned acquisitions costs................................... 250 -- 250
---------- -------- ----------
Operating income (loss)...................................... (3,106) 4,136 1,030
Interest and other income (loss)................................ 341 (11) 330
Interest expense................................................ (12,121) -- (12,121)
---------- -------- ----------
Income (loss) before income taxes and extraordinary loss....... (14,886) 4,125 (10,761)
Provision for (benefit of) income taxes......................... (2,985) 1,609 (1,376)
---------- -------- ----------
Income (loss) before extraordinary loss........................ $ (11,901) $ 2,516 $ (9,385)
---------- -------- ----------
Extraordinary loss.............................................. 3,652 -- 3,652
Net income (loss).............................................. $ (15,553) $ 2,516 $ (13,037)
========== ======== ==========
</TABLE>
F-2
<PAGE>
<TABLE>
Year ended December 31, 1998
--------------------------------------------------
Parent Guarantor Consolidated
Company Subsidiary Total
------- ---------- -----
(unaudited)
<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
======== ====== ========
Year ended December 31, 1997
---------------------------------------------------
Parent Guarantor Consolidated
Company Subsidiary (1) Total
------- -------------- -----
(unaudited)
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 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............................. 8,983 (8,796) 187
Interest and other income....................... 94 -- 94
Interest expense................................ (5,688) -- (5,688)
-------- --------- ---------
Income before income taxes..................... 3,389 (8,796) (5,407)
Provision for income taxes...................... 1,392 (3,613) (2,221)
-------- --------- ---------
Net income..................................... $ 1,997 $ (5,183) $ (3,186)
======== ========= =========
</TABLE>
----------
(1) For the period from October 1, 1997 (date of acquisition) to December 31,
1997.
Condensed Statements of Cash Flows
<TABLE>
F-3
<PAGE>
Six months ended June 30, 2000
-----------------------------------------------
Parent Guarantor Consolidated
Company Subsidiary Total
------- ---------- -----
(unaudited)
<S> <C> <C> <C>
Net income (loss)................................................. $ (3,495) $1,315 $(2,180)
Adjustments to reconcile net income to net cash provided by
operating activities............................................. (2,723) (83) (2,806)
--------- ------ -------
Net cash provided by (used in) operating activities............... (6,218) 1,232 (4,986)
--------- ------ -------
Net cash provided by (used in) investing activities............... (6,529) (209) (6,738)
--------- ------ -------
Net cash provided by (used in) financing activities............... 10,155 -- 10,155
--------- ------ -------
Net increase (decrease) in cash................................... (2,592) 1,023 (1,569)
Cash, beginning of period......................................... 5,701 299 6,000
--------- ------ -------
Cash, end of period............................................... $ 3,109 $1,322 $4,431
========= ====== ======
</TABLE>
<TABLE>
Year ended December 31, 1999
-------------------------------------------------
Parent Guarantor Consolidated
Company Subsidiary Total
------- ---------- -----
(unaudited)
<S> <C> <C> <C>
Net income (loss)................................................. $ (15,553) $ 2,516 $ (13,037)
Adjustments to reconcile net income to net cash provided by
operating activities............................................. (3,436) (279) (3,715)
---------- -------- ----------
Net cash provided by (used in) operating activities............... (18,989) 2,237 (16,752)
---------- -------- ----------
Net cash provided by (used in) investing activities............... (2,679) (2,080) (4,759)
---------- -------- ----------
Net cash provided by (used in) financing activities............... 23,211 -- 23,211
---------- -------- ----------
Net increase (decrease) in cash................................... 1,543 157 1,700
Cash, beginning of year........................................... 4,158 142 4,300
---------- -------- ----------
Cash, end of year................................................. $ 5,701 $ 299 $ 6,000
========== ======== ==========
</TABLE>
<TABLE>
Year ended December 31, 1998
--------------------------------------------------
Parent Guarantor Consolidated
Company Subsidiary Total
------- ---------- -----
(unaudited)
<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>
Year ended December 31, 1997
--------------------------------------------------
Parent Guarantor Consolidated
Company Subsidiary (1) Total
------- -------------- -----
(unaudited)
<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 year............................................... 4,218 -- 4,218
-------- --------- ---------
F-4
<PAGE>
Year ended December 31, 1997
--------------------------------------------------
Parent Guarantor Consolidated
Company Subsidiary (1) Total
------- -------------- -----
(unaudited)
<S> <C> <C> <C>
Cash, end of year..................................................... $ 397 $ 282 $ 679
======== ========= =========
</TABLE>
(1) For the period from October 1, 1997 (date of acquisition) to December 31,
1997.
F-5
<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
-----------------------
October 17, 2000
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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
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