10-K 1 a2053523z10-k.txt 10-K -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to Commission file number 0-23635 CONDOR TECHNOLOGY SOLUTIONS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 54-1814931 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 170 JENNIFER ROAD, SUITE 325, ANNAPOLIS, MARYLAND 21401 (Address of principal executive offices) (zip code)
(410) 266-8700 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED --------------------------------------- ------------------------------------ None None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of voting stock held by non-affiliates of the Registrant as of June 25, 2001 was $508,086 based on the last sale price ($0.04) of the Registrant's Common Stock, $.01 par value per share, on the Nasdaq OTC Pink Sheets on June 25, 2001. As of June 25, 2001, 15,299,486 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: None -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- CONDOR TECHNOLOGY SOLUTIONS, INC. 2000 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PAGE -------- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 4 Item 3. Legal Proceedings........................................... 4 Item 4. Submission of Matters to a Vote of Security Holders......... 4 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 5 Item 6. Selected Financial Data..................................... 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 6 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 14 Item 8. Financial Statements and Supplementary Data................. 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 50 PART III Item 10. Directors and Executive Officers of the Registrant.......... 51 Item 11. Executive Compensation...................................... 54 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 55 Item 13. Certain Relationships and Related Transactions.............. 55 PART IV Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.................................................... 56
PART I ITEM 1. BUSINESS INTRODUCTION Condor Technology Solutions, Inc. (the "Company") provides Internet and eBusiness development, interactive communications and technology solutions to commercial and government clients. The Company provides its customers a single source for a broad range of services, including strategic IT planning and management consulting; interactive media services; custom development, integration and installation of IT systems; enterprise resource planning ("ERP") package implementation and consulting; contract staffing and recruiting; call center and help-desk services; desktop systems maintenance and support; and hardware procurement. The Company works with its clients to identify areas of their businesses where the effective deployment of technology can have the maximum impact on executing business strategies and optimizing business processes. In order to become an end-to-end provider of a wide range of IT services and solutions, Condor acquired, in separate mergers, eight IT service providers (the "Founding Companies") in February 1998 concurrent with the closing of the Company's initial public offering of shares of its Common Stock, $.01 par value per share (the "Common Stock"). Since the initial public offering by the Company in February 1998, the Company has made seven additional acquisitions collectively referred to as "Other Acquisitions". The assets and going business of Interactive Software Systems Incorporated (the "Safari Solutions unit"), a Founding Company, were sold on June 30, 2000. The Company sold its membership interest in Dimensional Systems LLC in October 2000. In the fourth quarter of 2000, the Company shut down the operations of MIS Technologies, Inc. The assets and going businesses of U.S. Communications, Inc. and Corporate Access, Inc., two of the Founding Companies, were sold to separate buyers in October 1999, and Management Support Technology Corp., another Founding Company, was shut down and its remaining personnel transferred to other Operating Companies by the end of 1999. The Founding Companies and the Other Acquisitions are referred to collectively herein as "Operating Companies". Unless otherwise indicated, all references to the "Company" herein include Condor Technology Solutions, Inc. ("Condor") and all of the Operating Companies. The Company delivers comprehensive IT services to the insurance and financial services, manufacturing, technology and public sector markets. These markets are typically characterized by (i) reliance on legacy systems; (ii) platform migration to client/server architectures; (iii) changing competitive dynamics, such as globalization and deregulation; and (iv) heavy dependency on database and proprietary applications. The Company is organized into four operating divisions: Consulting Solutions, System Support Solutions, Government Solutions, and Enterprise Performance Solutions ("EPS"). See "Item 8. Consolidated Financial Statements, Note 18 Segment Reporting". The Company markets its services through the sales forces at each of its operating divisions with oversight from the Company's senior management. This approach allows the Company to market its services independently or in combination to provide a solution to a client's specific IT needs. The Company provides IT services through 12 offices located in 7 states across the United States. As of December 31, 2000, the Company had 483 employees. SERVICES The Company offers its clients a single source for a broad range of IT services. The Company delivers each of these services independently or in combination to provide a solution for a client's specific IT needs. The Company's IT services are summarized in the following paragraphs. 1 CONSULTING SOLUTIONS DEVELOPMENT, INTEGRATION AND INSTALLATION OF IT SYSTEMS. The Company offers its clients a single source for a wide range of IT services required to successfully design, develop and implement integrated IT solutions in diverse computing environments. The Company's services include client/ server development and integration; LAN and WAN design and implementation; project management and resource planning; hardware and software selection; information access software design and installation; systems migration planning and implementation; configuration, testing and installation; and software application design and development. The Company integrates servers, mini-computers and mainframe systems, workstations, terminals and communication gateways into single integrated networks. STRATEGIC IT PLANNING AND MANAGEMENT CONSULTING. The Company's consultants provide strategic IT planning and management consulting to senior management, typically through a client's chief executive officer, chief financial officer or chief information officer. These services involve the development of long-term technology plans that help the client to achieve specific strategic business objectives and include IT needs assessment, technology infrastructure design, future technology planning and refreshment, systems architecture development, decision support planning and analysis, and business process automation. The Company's ability to perform such strategic consulting services gives it the opportunity to deliver "follow-on" services to implement its recommended technology strategies. SYSTEM SUPPORT SOLUTIONS CALL CENTER SUPPORT. The Company contracts to provide single source call center and help-desk staffing solutions for handling hardware problem solving, standard and customer software applications, shipping and tracking questions as well as other services. This service allows a client to assess its effectiveness and develop new strategies and enables access to information on a real time basis. SYSTEMS MAINTENANCE AND SUPPORT. The Company provides a complete array of desktop systems maintenance and support services to its clients, including hardware and software maintenance, and systems testing and engineering. These services, which are provided both on-site and on a remote basis, allow clients to make efficient use of their technology tools by minimizing network disruptions and downtime through the Company's rapid response to applications inquiries. PROCUREMENT. The Company resells hardware and software as part of its desktop services. The Company maintains a dedicated procurement infrastructure to manage the acquisition process through purchasing arrangements with distributors, aggregators and manufacturers. The Company is a certified reseller of products of leading hardware and software manufacturers, including Microsoft, IBM, Novell, NEC, 3Com, Compaq, Hewlett-Packard and Toshiba. GOVERNMENT SOLUTIONS CONSULTING AND INTERACTIVE MEDIA SERVICES. The Company provides interactive marketing and communications solutions, including consulting, research and services in integrating voice, video, text and data on the Internet. This is done through vehicles such as Web sites, intranets, customized training and Web conferencing to build new, more effective lines of communication with customers, internal work groups and suppliers. These tools can be integrated with the business and enterprise applications already used by customers to enhance management of their business. ENTERPRISE PERFORMANCE SOLUTIONS ENTERPRISE RESOURCE PLANNING. The Company offers its clients a single source for ERP focusing on the implementation and customization, as well as license, of SAP software. ERP programs automate manufacturing, financial, materials management, human resources and other infrastructure functions of 2 companies, improving efficiency and generating data that give companies insight into the profitability of their internal operations. CLIENTS AND ALLIANCE PARTNERS The Company's clients include a broad array of middle market commercial and public sector users of IT services. The Company primarily focuses on serving four vertical markets: insurance and financial services, manufacturing, technology and public sector. In addition, the Company has established relationships with alliance partners that involve joint marketing, software distribution and the provision of services on a subcontractor basis. The Government Solutions division's business is primarily derived from contracts with agencies of the United States Government. The contracts are generally subject to termination at the convenience of the Government. If so terminated, the Company may be entitled to receive payment for work completed and allowable termination costs. For the year ended December 31, 2000, the Company's top 10 clients accounted for 37% of the Company's combined revenues. In 2000, no single client accounted for more than 7% of the Company's combined revenues. SALES AND MARKETING The Company generates sales leads through referrals from clients and management consultants, responses to requests for proposals, strategic alliances with complementary companies, the Company's Internet web site and associated links, industry seminars and trade shows. Additionally, the Company leverages the experience and reputation of its senior management team within the IT service industry. COMPETITION The market for the Company's services is highly competitive. The Company's competitors vary in size and in the scope of the products and services that they offer. Primary competitors generally include consulting and systems integrators, "Big Five" accounting firms, application development firms, service groups of computer equipment companies, general management consulting firms, programming companies and other IT service providers. Traditionally, the largest service providers have principally focused on providing full-service solutions to international Fortune 500 companies. The Company believes that the principal competitive factors in the IT service industry include quality of service, availability of qualified technical personnel, responsiveness to client requirements and needs, price, ability to deliver on large multi-year contracts, breadth of product and service offerings, timely completion of projects, adherence to industry technical standards, capital resources and general market reputation. EMPLOYEES As of December 31, 2000, the Company had 483 employees, none of which is represented by a collective bargaining agreement. Although most consultants are Company employees, the Company does engage consultants as independent contractors from time to time. The Company considers its relations with its employees to be good. The Company is dependent upon its ability to attract, hire and retain technical personnel who possess the skills and experience necessary to meet the staffing requirements of its clients and the Company's own personnel needs. Competition for individuals with proven technical skills is intense. 3 ITEM 2. PROPERTIES The Company's headquarters are located in Annapolis, Maryland. In addition to its headquarters, the Company leases office space and warehouse space as follows:
LOCATION TYPE -------- ---- Allentown, PA........................ Office/Warehouse Baltimore, MD........................ Office Bloomfield, CT....................... Office Edison, NJ........................... Office Falls Church, VA..................... Office Langhorne, PA........................ Office/Warehouse Nashua, NH........................... Office Norwalk, CT.......................... Office Pittsburgh, PA....................... Office Vienna, VA........................... Warehouse Waltham, MA.......................... Office
The leases expire at various times between 2001 and 2005. The aggregate square footage of all of the Company's offices and warehouses is approximately 143,000 square feet. In order to secure its obligations under its credit facility, the Company has granted to its lenders a security interest on substantially all of the Company's property and other assets. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." ITEM 3. LEGAL PROCEEDINGS On September 29, 2000, the Company was served with a Summons and Complaint in the action, George R. Blick, Charles F. Crowe, Louis J. Fisher, R. Joseph Market, William E. Hummel and Hartland Group LLC v. Condor Technology Solutions, Inc., U. S. District Court, District of Maryland. The Complaint alleges breach of contract and requests damages in the aggregate of approximately $4,500,000, plus interest and costs. This litigation relates to the Company's obligations with respect to a purchase liability under the agreement to purchase Federal Computer Corporation, one of the Founding Companies. The Company is a party to other legal proceedings and disputes related to the Company's day to day business operations, none of which, in the opinion of management, are material to the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the year ended December 31, 2000, no matters were submitted to a vote of the Company's security holders. 4 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION The Company's Common Stock trades on the Nasdaq OTC Pink Sheets under the symbol "CNDRE." The following table sets forth, for the periods indicated, the range of high and low last reported sale prices for the Common Stock.
HIGH LOW -------- -------- From January 1, 1999 through March 31, 1999................. $12.75 $8.69 From April 1, 1999 through June 30, 1999.................... 10.81 4.25 From July 1, 1999 through September 30, 1999................ 4.69 2.19 From October 1, 1999 through December 31, 1999.............. 2.75 1.00 From January 1, 2000 through March 31, 2000................. 1.94 0.75 From April 1, 2000 through June 30, 2000.................... 0.81 0.38 From July 1, 2000 through September 30, 2000................ 0.53 0.28 From October 1, 2000 through December 31, 2000.............. 0.38 0.06 From January 1, 2001 through March 31, 2001................. 0.17 0.06 From April 1, 2001 through June 25, 2001.................... 0.09 0.03
HOLDERS On June 25, 2001, the last reported sale price of the Common Stock on the Nasdaq OTC Pink Sheets was $0.04 per share. At June 25, 2001, there were 270 holders of record of the Company's Common Stock, although the Company believes the number of beneficial holders is substantially greater. DIVIDENDS The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future and intends to retain its earnings, if any, to finance the operations of its business and for general corporate purposes. Any payment of future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's earnings, financial position, capital requirements, level of indebtedness, contractual restrictions and other factors that the Company's Board of Directors deems relevant. In addition, the Company's revolving credit facility prohibits the payment of dividends by the Company without the lender's consent. (b) SALES OF REGISTERED AND UNREGISTERED SECURITIES Effective September 29, 1999, the Company registered 325,000 shares of Common Stock with the Securities and Exchange Commission on Form S-8, in connection with the Company's 1998 Employee Stock Purchase Plan. During 2000, 88,540 shares were issued under this plan. During 2000, the Company issued 132,082 unregistered restricted shares, net of forfeitures, to selected employees. 5 ITEM 6. SELECTED FINANCIAL DATA The financial information set forth below is qualified by reference to the consolidated financial statements and notes thereto included in "Item 8". The Company did not have operations prior to 1997.
YEARS ENDED DECEMBER 31, ----------------------------------------- 2000 1999 1998 1997 -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues............................................. $116,189 $200,206 $168,833 $ -- Gross profit......................................... 34,565 61,246 54,321 -- Income (loss) from operations........................ (13,612) (89,320) 11,724 (2,715) Net income (loss) before extraordinary item.......... $(20,219) $(91,819) $ 5,533 $(2,715) Net income (loss) per basic share before extraordinary item................................. $ (1.32) $ (6.81) $ 0.54 $ (1.62) Net income (loss) per diluted share before extraordinary item................................. $ (1.32) $ (6.81) $ 0.51 $ (1.62) Shares used in computing basic net income (loss) per share.............................................. 15,277 13,481 10,193 1,680 Shares used in computing diluted net income (loss) per share.......................................... 15,277 13,481 10,767 1,680
DECEMBER 31, ----------------------------------------- 2000 1999 1998 1997 -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.......................... $ 2,028 $ 3,137 $ 3,053 $ 26 Accounts receivable, net........................... 15,215 29,281 39,814 -- Goodwill and other intangibles, net................ 56,819 66,422 145,163 -- Total assets....................................... 83,349 119,920 200,642 4,926 Current obligations(1)............................. 7,434 47,893 4,750 -- Long-term obligations(2)........................... 41,849 9,393 46,573 -- Stockholders' equity (deficit)..................... $ 15,776 $ 33,815 $114,042 $ (255)
------------------------ (1) Includes current portion of long-term debt and current portion of purchase liability. (2) Includes long-term debt, non-current portion of purchase liability and other long-term obligations. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with "Item 6. Selected Financial Data" and "Item 8. Financial Statements and Supplementary Data." A number of statements in this Annual Report on Form 10-K address activities, events or developments which the Company anticipates may occur in the future, including such matters as the Company's strategy for internal growth, additional capital expenditures (including the amount and nature thereof), acquisitions and dispositions of assets and businesses, industry trends and other such matters. These statements are based on certain assumptions and analyses made by the Company in light of its perception of historical trends, current business and economic conditions and expected future developments, as well as other factors the Company believes are reasonable or appropriate. However, whether actual results and developments will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties, including: general economic, market or business conditions; the business opportunities (or lack thereof) that may be presented to and pursued by the Company; changes in laws or regulations; and other factors, many of which are beyond the control of the Company. Consequently, there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company or its business or operations. 6 INTRODUCTION The Company earns revenues from providing IT services and from the sale of hardware and software products. IT services are comprised of strategic IT planning and management consulting; interactive media services; custom development, integration and installation of IT systems; enterprise resource planning ("ERP") package implementation and consulting; contract staffing and recruiting; call center and help-desk services; and desktop systems maintenance and support. The Company recognizes IT service revenues on time and materials type contracts based on time charged, whereby revenues are recognized as costs are incurred at agreed-upon billing rates. For projects billed on a fixed-price basis, revenue is recognized using the percentage of completion method. Percentage of completion is determined using total costs, primarily labor, as a cost input measure. Revenues from hardware procurement and sales of proprietary and third-party software are recognized at the later of shipment or acceptance of the equipment. When installation services are an integral component of the hardware procurement, revenue is recognized at the customer's acceptance of the equipment. Revenues from license fees on proprietary and third-party software are recognized when a non-cancelable license agreement has been signed, the product has been delivered, collection is probable and all significant obligations relating to the license have been satisfied. Agreements for post contract customer support on proprietary software sales are bundled with the license fee in the first year and sold separately thereafter. In the first year, the Company allocates the total revenue between the license fee and the post contract customer support fee based on vendor specific objective evidence of fair value. This is determined based upon the renewal rate of post contract customer support, separately priced and sold to customers. The post contract customer support fees are recorded as deferred revenue and recognized ratably over the support service period in IT service revenue. Training and consulting services are not essential to the Company's software products and are priced separately. Revenue is recorded as services are performed and included in IT service revenue. For the years ended December 31, 2000, 1999 and 1998, respectively, approximately $10,439,000, $10,498,000, and $12,907,000 of software license sales were included in product revenues. Cost of revenues includes the provision of services and material directly related to the revenues, costs of acquisition of hardware and software resold to clients, subcontracted labor or other outside services and other direct costs associated with revenues, as well as an allocation of certain indirect costs. Selling, general and administrative costs include salaries, benefits, commissions payable to the Company's sales and marketing personnel, recruiting, finance and other general and administrative costs. In July 1996, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 97 ("SAB 97") relating to business combinations immediately prior to an initial public offering. SAB 97 requires that these combinations be accounted for using the purchase method of acquisition accounting. Condor was identified as the "accounting acquiror" for financial statement presentation purposes. RESULTS OF OPERATIONS The Company's consolidated financial statements have been prepared based on accounting for all companies acquired using the purchase method of acquisition accounting. All Operating Companies that previously used fiscal year financial reporting basis have converted to a calendar year financial reporting basis and because all individual Operating Companies are now included in the consolidated tax return of Condor, all have converted their tax status to be taxed under subchapter C of the Internal Revenue Code of 1986, as amended. The financial statements include operations of the Operating Companies from their respective dates of acquisition. Financial statement audits of the Founding Companies were completed through January 31, 1998. As there were no significant transactions from February 1, 1998 to the February 10, 1998 closing of the 7 mergers with the Founding Companies, January 31, 1998 is considered to represent the pre-merger closing balance sheet. On February 1, 1998 (the date of the post-merger balance sheet), Condor began reporting on a consolidated basis. As a result, for the year ended December 31, 1998, Condor's consolidated operating results include the Founding Companies' operations for only eleven months. The following table sets forth certain selected financial data for the Company and as a percentage of revenues for the years ended December 31, (in thousands, except percentages):
2000 1999 1998 ------------------- ------------------- ------------------- IT service revenues.................. $ 77,770 66.9% $126,869 63.4% $ 79,608 47.2% Product revenues..................... 38,419 33.1% 73,337 36.6% 89,225 52.8% -------- -------- -------- -------- -------- ------- Total revenues....................... 116,189 100.0% 200,206 100.0% 168,833 100.0% -------- -------- -------- -------- -------- ------- Cost of IT services.................. 51,361 66.0% 77,157 60.8% 41,399 52.0% Cost of products..................... 30,263 78.8% 61,803 84.3% 73,113 81.9% -------- -------- -------- Total cost of revenues............... 81,624 70.3% 138,960 69.4% 114,512 67.8% -------- -------- -------- Gross profit......................... 34,565 29.7% 61,246 30.6% 54,321 32.2% Selling, general and administrative..................... 37,181 32.0% 54,330 27.1% 32,920 19.5% Depreciation and amortization........ 6,676 5.7% 8,053 4.0% 4,677 2.8% In-process research and development........................ -- --% -- --% 5,000 3.0% Impairment of long-lived assets...... 5,406 4.6% 83,236 41.6% -- --% Gain on sale of subsidiaries, net.... (4,427) (3.8)% -- --% -- --% Other costs.......................... 3,341 2.9% 4,947 2.5% -- --% -------- -------- -------- -------- -------- ------- Income (loss) from operations........ (13,612) (11.7)% (89,320) (44.6)% 11,724 6.9% Interest and other income (expense), net................................ (6,312) (5.4)% (6,756) (3.4)% 684 0.4% -------- -------- -------- -------- -------- ------- Income (loss) before income taxes.... $(19,924) (17.1)% $(96,076) (48.0)% $ 12,408 7.3% ======== ======== ======== ======== ======== =======
COMPARISON OF CONSOLIDATED RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 REVENUES. Revenue decreased $84.0 million or 42.0%, from $200.2 million for the year ended December 31, 1999 to $116.2 million for the year ended December 31, 2000. IT service revenue decreased approximately $49.1 million, or 38.7%, and product revenue decreased $34.9 million, or 47.6%. IT service revenue decreased in all of the Company's divisions. The Government Solutions division revenue decline of $6.0 million was primarily attributable to reduced maintenance revenue as well as a reprocurement of a large government contract at a reduced scope of work and accordingly a lower overall contract price. The EPS division revenue decline of $13.8 million was caused by a reduction in billable consultants headcount accompanied by a decline in the ERP market beginning in the second half of 1999 and a slowing in the economy in the latter part of 2000. The Consulting Solutions division revenue decline of $14.3 million was primarily attributable to the shut down of MST's operations during the second quarter of 1999 which represented $3.6 million of the decline as well as a reduction in billable consultants headcount and a decline in contract staffing and recruiting placement. The System Solutions division revenue decrease of $8.3 million was primarily the result of the reprocurement of a large call center contract for a five year period at a reduced scope and overall contract price. Additionally, the Safari Solutions unit was sold as of June 30, 2000 which resulted in a reduction of IT service revenue of approximately $6 million from 1999. The decrease in product revenue was primarily attributable to the sale of U.S. Communications, Inc. and Corporate Access, Inc. in October 1999 which resulted in a reduction of approximately $25 million in product revenue. In addition, fluctuations in product delivery and a 8 continued shift in the Company's focus from hardware and software procurement to higher margin IT service revenues caused a reduction in the Government Solutions and Systems Support divisions. COST OF REVENUES. Cost of revenues decreased $57.3 million or 41.3% from $138.9 million for the year ended December 31, 1999 to $81.6 million for the year ended December 31, 2000. This decrease is primarily attributable to the revenue decline discussed above. Cost of revenues as a percentage of revenues increased from 69.4% of revenues for the year ended December 31, 1999 to 70.3% for the year ended December 31, 2000. This increase was primarily a result of the sale of the Safari Solutions unit whose business was primarily high margin proprietary software sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased $17.1 million or 31.6%, from $54.3 million to $37.2 million for the years ended December 31, 1999 and 2000, respectively. This decrease is a result of the sale of two Operating Companies and the shutdown of MST in 1999 and the sale of the Safari Solutions unit as of June 30, 2000 which represent a consolidated decrease of approximately $8 million. In addition, the Company realized the effect of cost reduction programs initiated in 1999 and 2000 including reduction of employees and employee related expenses and facilities costs as described further in Other costs below. Selling, general and administrative costs increased from 27.1% of revenues to 32.0% of revenues for the years ended December 31, 1999 and 2000, respectively. This increase is primarily the result of the decrease in revenue as described above even with the reduction of selling, general and administrative expenses during 2000. DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased $1.4 million or 17.1%, from $8.1 million for the year ended December 31, 1999 to $6.7 million for the year ended December 31, 2000. The decrease is primarily attributable to a reduction in amortization expense related to the impairment of goodwill recorded in 1999 and 2000. IMPAIRMENT OF LONG-LIVED ASSETS. Impairment of long-lived assets includes a write down of intangible assets during 2000 based on measurement in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." In the fourth quarter of 2000, the Company recorded an impairment loss on the goodwill and other long-term assets for LINC Systems, Inc. and Decision Support Technology, Inc. of $3.8 million as a result of continuing operating losses within those companies. In the fourth quarter of 2000, the Company decided to cease operations of MIS Technology, Inc. ("MIS") as a part of its strategy to reduce the Company's lower margin staffing and recruiting business and focus on higher margin consulting projects. The Company evaluated the remaining long-lived assets consisting primarily of goodwill for impairment based on future cash flows and recorded an impairment charge of $1.6 million to reduce the goodwill balance related to MIS to $0 as of December 31, 2000. OTHER COSTS. During 2000, the Company incurred $3.3 million in retention and other special costs. Retention costs of $2.4 million represent compensation expense on approximately 1.2 million shares of restricted stock, a majority of which vest on December 31, 2000 and January 1, 2001. Voluntary severance and employment contract settlements of $0.7 million costs provide for a reduction of approximately 30 employees for streamlining operations related to cost reduction initiatives. Facility closures of $0.2 million represent estimated losses in closing facilities. The Company expects to realize annual cost savings of approximately $4 million from the actions taken, including reductions in employees and employee related expenses and facilities costs. GAIN ON SALE OF SUBSIDIARIES, NET. The Company consummated a transaction for the sale of the assets of the Safari Solutions business unit to an independent third party on June 30, 2000. The total sales price was approximately $12.3 million which was composed of $4.3 million in cash received at closing and $8.0 million in payments contingent upon revenue generated from the product sales of the Safari Solutions unit. The Company incurred approximately $0.8 million in direct costs related to the sale. The net gain on the sale of the Safari Solutions unit was $4.8 million at June 30, 2000. The 9 Company sold its membership interest in Dimensional Systems LLC in October 2000 to its former owners for $1,000. The Company realized a net loss on the sale of $0.3 million in the fourth quarter of 2000. INTEREST AND OTHER EXPENSE, NET. Interest and other expense decreased $0.4 million or 6.6%, from $6.7 million to $6.3 million for the years ended December 31, 1999 and 2000, respectively. The decrease occurred primarily in interest expense on the Company's credit facility which was lower due to principle payments of approximately $8 million made during 2000. COMPARISON OF CONSOLIDATED RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 REVENUES. Revenue increased $31.4 million or 18.6%, from $168.8 million for the year ended December 31, 1998 to $200.2 million for the year ended December 31, 1999. This increase is partly a result of the inclusion of only eleven of the twelve months of operations of the Founding Companies in 1998 compared to the year ended December 31, 1999. All of the Operating Companies' revenues were included for the year ended December 31, 1999 except Titan Technologies Group LLC and Dimensional Systems LLC whose revenues were included from their respective acquisition dates in April and September 1999. The increase is also the result of organic revenue growth and the acquisition of seven additional Operating Companies subsequent to the initial public offering. IT service revenue grew approximately $47.3 million, or 59.4%, while hardware procurement revenue decreased $15.9 million, or 17.8%. IT service revenue increased through almost all of the Company's divisions. The Consulting Solutions division revenue growth of $1.5 million was primarily attributable to increases in consulting and planning services within the division and the acquisition of LINC Systems Corporation in July 1998 and is offset by a decrease as a result of the shut down of MST during 1999 due to loss of its most significant customer. The System Solutions division revenue growth of $3.8 million was primarily attributable to growth in the Company's customer management solutions, call center, help desk and support services. The Government Solutions division revenue growth of $6.5 million was primarily attributable to the acquisition of Louden Associates, Inc. in June 1998. The EPS division includes operations of PowerCrew, Inc. and Global Core Strategies, Inc. which were acquired in the fourth quarter of 1998 and Titan Technologies Group, LLC which was acquired in April 1999, which combined represented an increase of $35.1 million from 1998. The decrease in product revenue was primarily attributable to a shift in the Company's focus from hardware procurement to higher margin IT service revenues as well as fluctuations in product delivery in the System Solutions and Government Solutions divisions. Corporate Access, Inc. and U.S. Communications, Inc., two of the Company's hardware resale subsidiaries, were sold during October 1999 which contributed to a $4 million decrease from 1998. In addition, Safari Solutions experienced a decrease in sales of the Company's SafariTools software product line during 1999 as a result of operating and financial difficulties experienced by its largest sales channel partner. COST OF REVENUES. Cost of revenues increased $24.4 million or 21.3% from $114.5 million for the year ended December 31, 1998 to $139.0 million for the year ended December 31, 1999. This increase is primarily attributable to the revenue growth discussed above. Cost of revenues as a percentage of revenues increased from 67.8% of revenues for the year ended December 31, 1998 to 69.4% for the year ended December 31, 1999. This increase was primarily a result of lower utilization and lower average billing rates due to delays in spending in the IT service market. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $21.4 million, or 65.0%, from $32.9 million to $54.3 million for the years ended December 31, 1998 and 1999, respectively. Selling, general and administrative costs increased from 19.5% of revenues to 27.1% of revenues for the years ended December 31, 1998 and 1999, respectively. The increase is attributable to the inclusion of only eleven of the twelve months of operations of the Founding Companies in 1998; 10 the acquisitions of the additional seven Operating Companies subsequent to the initial public offering; the hiring of additional sales and marketing staff and administrative personnel; and costs of recruiting in the Consulting Solutions and EPS services areas in anticipation of future revenue growth. The Company increased its provision for bad debts primarily because of an overall deterioration in the accounts receivable aging in its ERP Division. The deterioration was attributable to a number of factors including changes in the financial condition of certain customers affecting their ability to pay in full for services performed, disputes between the contractor and customer involving costs overruns on several projects where the Company was a subcontractor on the projects, and turnover in project management that resulted in delays in dealing with customer satisfaction issues. In order to settle with these customers, the Company agreed to accept less than the full amount of certain receivable balances. As a result, the Company recorded an additional provision for bad debt. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $3.4 million, or 72.2%, from $4.7 for the year ended December 31, 1998 to $8.1 million for the year ended December 31, 1999. The increase is attributable to the amortization of goodwill of the Founding Companies beginning at the time of the Mergers which included only eleven of the twelve months in 1998; an increase in goodwill and other intangible amortization associated with the acquisitions of the additional seven Operating Companies subsequent to the Mergers; additional amortization on goodwill related to the contingent purchase consideration earned at December 31, 1998; and the increase of property and equipment. IMPAIRMENT OF LONG-LIVED ASSETS. Impairment of long-lived assets includes a write down of intangible assets during 1999 based on measurement in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." As a part of its strategy to reduce the amount of computer hardware resale, the Company decided to sell two of its Operating Companies, Corporate Access, Inc. and U.S. Communications, Inc. The Company's focus shifted away from hardware procurement, as there had been a downward trend in margins on hardware resale, to higher margin IT service and consulting. As a result, the Company recorded losses of $7.6 million to reduce the assets of these companies, including intangible assets of $7.4 million, to their estimated net realizable value. The client that provided substantially all of the revenue to the Management Support Technology Corp. ("MST") consulting business was acquired, and the acquiring company expressed its desire not to renew any projects after all current projects were completed. As a result the decision was made to shut down MST's continuing operations and the Company recorded an impairment charge of $15.1 million for MST. The Company's Safari Solutions business through its Interactive Software Systems ("ISSI") business unit experienced significant revenue and profit degradation in the sale of its Safari product line as a result of operating and financial difficulties being experienced by its largest sales channel partner, an international ERP software company which informed ISSI of its intention to no longer promote its Safari products in the second quarter of 1999. As a result, the Company recorded an impairment charge of $8.0 million for ISSI. During the fourth quarter of 1999, the Company recognized an additional impairment of its long-lived assets of $52.5 million as discussed in "Item 8. Financial Statements and Supplementary Data Note 4". OTHER COSTS. On June 15, 1999, the Company's Board of Directors authorized management to take action to discontinue certain operations, reduce overhead expenses and reassign or reduce personnel. As a result, management took action to restructure the Company into four primary lines of business to better align the business units with the markets that they serve as well as to consolidate accounting and administrative functions. During 1999, the Company incurred restructuring and other special charges of $4.9 million. Retention costs of $1.6 million represent compensation expense on approximately 1.4 million shares of restricted stock issued in 1999. Involuntary severance and employment contract settlements of $1.4 million and voluntary severance benefits of $0.3 million provide for a reduction of approximately 120 employees for streamlining operations related to cost reduction initiatives. The 11 Company experienced a reduction in force in response to underutilized employees from the softening in the IT service market, especially in the ERP implementation market and the IT consulting market. Contract losses of $0.8 million are comprised of employee time and expenses in order to complete a fixed price contract at MST. Facility closure costs of $0.4 million represent estimated losses in closing facilities. In addition, there was $0.4 million in other costs. The Company expected to realize annual cost savings of approximately $10 million from the actions taken, including reductions in employees and employee related expenses and facilities costs. During 2000, the Company realized the cost savings that it estimated when it announced the restructuring actions. INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income (expense) decreased $7.4 million from income of $0.7 million to expense of ($6.7) million for the years ended December 31, 1998 and 1999, respectively. This is primarily due to interest expense on net borrowings of $45 million, substantially all of which occurred from December 1998 to July 1999, and amortization of deferred financing costs related to the renegotiation of the Company's Credit Facility in April 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity are the cash flows of its operating divisions and cash available from its credit facilities. At December 31, 2000, the Company had $2.0 million in cash and cash equivalents and $43.2 million of indebtedness outstanding, of which $38.2 million represents borrowings on its credit facility (the "Credit Facility") and $4.8 million represents indebtedness to Marbury Manor LLC. Effective April 1, 2001, the Company and the Lender Group reached agreement in principle to a restructuring of the Company's credit facility (the "Credit Facility"). The restructuring will include a four year credit facility, consisting of four notes. Note A is a $15 million note bearing interest at the Prime rate plus 0.5%. Quarterly principal payments of $250,000 begin on September 30, 2001, increase to $400,000 per quarter on March 31, 2002 and to $525,000 per quarter on March 31, 2003 with a balloon payment on March 31, 2005. In addition, Note A allows for amortization payments made by the Company to be available as a revolving credit facility up to $500,000. Note B is a $12 million note which is interest free until February 28, 2003 at which time interest will accrue at a rate of 15% with the first interest payment due on April 1, 2003. A balloon payment of $12 million is due on Note B on March 31, 2005. Note C represents a continuation of a $5 million letter of credit for trade suppliers which expires March 31, 2005. Note D represents the remaining principal balance plus accrued interest through April 1, 2001 under the previous credit facility, or approximately $12.1 million, as a note due January 2, 2002. Note D will be cancelled upon approval of stockholders to a recapitalization of the Company and the issuance of equity to a trust established by the Lender Group. Effective April 1, 2001, the Company and Marbury Manor LLC ("Marbury") reached agreement in principle, subject to final documentation, to a restructuring of the purchase liability due to Marbury. The total liability of $4.8 million has been restructured in a format similar to the Credit Facility with two notes for $1.87 million and $1.5 million which have terms comparable to the Note A and B, respectively, of the Credit Facility. The remaining portion of the purchase liability will be converted to equity based upon approval of the stockholders to a recapitalization of the Company. In addition, the Company believes, based on current discussions, that a portion or all of the remaining purchase obligations will also be restructured as part of the foregoing restructuring and recapitalization. Management believes that the shareholders will approve a recapitalization of the Company in order to satisfy the requirements of Note D of the Credit Facility and Marbury agreement. The new Credit Facility and restructuring of purchase obligations allows for the Company to extend payment of its remaining debt and maintain its working capital to support current operations. Net cash provided by operating activities was $3.4 million for the year ended December 31, 2000. Net cash provided by investing activities was $3.3 million for the year ended December 31, 2000 which 12 included $4.3 million provided by the sale of the Safari Solutions unit and $0.6 million by the sale of equity securities, offset by $1.1 million for purchases of property, equipment and other costs. Net cash used in financing activities was $9.0 million for the year ended December 31, 2000 which is comprised of debt repayments of $8.1 million and outflows for deferred financing costs of $0.9 million related to the Company's Credit Facility. SEASONALITY AND CYCLICALITY; POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company has experienced and expects to continue to experience variability in revenues and net income from quarter to quarter as a result of seasonality that may accompany private or public sector budget cycles. Sales of the Company's IT products and related services have historically been higher in the third and fourth calendar quarters as a result of patterns of capital spending by some clients, principally federal, state and local governments. The Company also believes that the IT industry is influenced by general economic conditions and particularly by the level of technological change. Increased levels of technological change can have a favorable impact on the Company's revenues. In general, technological change drives the need for hardware procurement and information systems services provided by the Company. The Company also believes that the industry tends to experience periods of decline and recession during economic downturns. The industry could experience sustained periods of decline in revenues in the future, and any such decline may have a material adverse effect on the Company. The Company could in the future experience quarterly fluctuations in operating results due to the factors discussed above and other factors, including the short-term nature of certain client commitments; patterns of capital spending by clients; loss of a major client; seasonality that may accompany private or governmental sector budget cycles; the timing, size and mix of service and product offerings; the timing and size of significant software sales; the timing and size of new projects; the timing and magnitude of required capital expenditures; pricing changes in response to various competitive factors; market factors affecting the availability of qualified technical personnel; timing and client acceptance of new service offerings; changes in the trends affecting the outsourcing of IT services; additional selling, general and administrative expenses to acquire and support new business; increased levels of technological change in the industry; and general economic conditions. The Company plans its operating expenditures based on revenue forecasts, and a revenue shortfall below such forecasts in any quarter would likely adversely affect the Company's operating results for that quarter. INFLATION The Company believes the effects of inflation generally do not have a material impact on its operations or financial position or cash flows. NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 which summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Staff Accounting Bulletin was effective for the year beginning January 1, 2000. The adoption of this guidance did not have a material impact on the Company's results of operations or financial position. In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB No. 25 for (a) the definition of employee for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 13 was effective July 2, 2000 but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The Company believes that adoption of FIN 44 did not have an effect on the financial statements but may impact the accounting for grants or awards in future periods. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair market value. Under certain circumstances, a portion of the derivative gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into income when the transaction affects earnings. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS 133 is effective for fiscal quarters of years beginning after June 15, 2000 and requires application prospectively. Presently, the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the adoption of SFAS 133 had no impact on the financial position or results of operations. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS Statements in this Form 10-K based on current expectations that are not strictly historical statements, such as the Company's or management's intentions, hopes, beliefs, expectations, strategies, or predictions, are forward-looking statements. Such statements, or any other variation thereof regarding the Company's future activities or other future events or conditions within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, are intended to be covered by the safe harbors for forward-looking statements created thereby. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the sufficiency of the Company's working capital and the ability of the Company to realize benefits from consolidating certain general and administrative functions, to pursue strategic acquisitions and alliances, to retain management and to implement its focused business strategy, to leverage consulting services, secure full-service contracts, to expand client relationships, successfully recruit, train and retain personnel, expand services and geographic reach and successfully defend itself in ongoing and future litigation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. MARKET RISK. The Company is exposed to market risk from adverse changes in interest rates and foreign currency exchange rates. INTEREST RATE RISKS. The Company is exposed to risk from changes in interest rates as a result of its borrowing activities. At December 31, 2000, the Company had total debt of $43.2 million of which $38.2 million represents borrowings on its Credit Facility and $4.8 million represents indebtedness to Marbury Manor LLC, both of which are at a variable interest rate. Interest on the Company's Credit Facility is directly affected by changes in the prime interest rate, and therefore fluctuations may have a material impact on the Company's financial results. FOREIGN CURRENCY EXCHANGE RISK. The Company's international operations are subject to foreign exchange rate fluctuations. The Company derived approximately 1% of its revenue for the year ended December 31, 2000 from services performed in the Netherlands, the United Kingdom, Germany and Mexico. All foreign operations were sold or shut down in 2000. Management does not believe that the Company's exposure to foreign currency rate fluctuations is material. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONDOR TECHNOLOGY SOLUTIONS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE -------- CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Accountants........................ 16-17 Consolidated Balance Sheets............................... 18 Consolidated Statements of Operations..................... 19 Consolidated Statements of Changes in Stockholders' Equity (Deficit)............................................... 20 Consolidated Statements of Cash Flows..................... 21 Notes to Consolidated Financial Statements................ 22 CONDOR TECHNOLOGY SOLUTIONS, INC. FINANCIAL STATEMENT SCHEDULES Reports of Independent Accountants on Financial Statement Schedules............................................... 47-48 Schedule II. Valuation and Qualifying Accounts (All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.)........................... 49
15 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Condor Technology Solutions, Inc. Annapolis, Maryland We have audited the accompanying consolidated balance sheet of Condor Technology Solutions, Inc. and subsidiaries as of December 31, 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Condor Technology Solutions, Inc. and subsidiaries at December 31, 2000 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. BDO Seidman LLP Washington, D.C. April 2, 2001 16 REPORT OF INDEPENDENT ACCOUNTANTS To Board of Directors and Shareholders of Condor Technology Solutions, Inc: In our opinion, the consolidated balance sheet as of December 31, 1999 and the related consolidated statements of operations, of changes in stockholders' equity (deficit), and of cash flows for each of the two years in the period ended December 31, 1999 (appearing on pages 18 through 46 of the Condor Technology Solutions, Inc. Form 10-K for the year ended December 31, 2000) present fairly, in all material respects, the financial position, results of operations and cash flows of Condor Technology Solutions, Inc. and its subsidiaries at December 31, 1999 and for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. We have not audited the consolidated financial statements of Condor Technology Solutions, Inc. for any period subsequent to December 31, 1999. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8 to the financial statements, the Company is operating pursuant to a forbearance amendment to its loan agreement. This condition raises substantial doubt about the Company's ability to continue as a going concern. Management's overall business plan in regard to this matter is described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP McLean, Virginia March 30, 2000 17 CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA HISTORICAL DECEMBER 31, DECEMBER 31, -------------- -------------------- 2000 (NOTE 23) 2000 1999 -------------- --------- -------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $ 2,028 $ 2,028 $ 3,137 Restricted cash......................................... 1,364 1,364 2,584 Accounts receivable (net of allowance of $4,394, $4,394 and $3,867)........................................... 15,215 15,215 29,281 Prepaids and other current assets....................... 1,618 1,618 8,235 --------- --------- -------- Total current assets.................................. 20,225 20,225 43,237 PROPERTY AND EQUIPMENT, NET............................... 4,882 4,882 8,235 GOODWILL AND OTHER INTANGIBLES, NET....................... 56,308 56,819 66,422 OTHER ASSETS.............................................. 1,423 1,423 2,026 --------- --------- -------- TOTAL ASSETS............................................ $ 82,838 $ 83,349 $119,920 ========= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................ $ 7,701 $ 7,701 $ 9,908 Accrued expenses and other current liabilities.......... 8,232 8,232 13,775 Deferred revenue........................................ 2,357 2,357 5,136 Current portion of purchase liability................... 5,500 5,500 2,388 Current portion of long-term debt....................... 1,934 1,934 45,505 --------- --------- -------- Total current liabilities............................. 25,724 25,724 76,712 LONG-TERM DEBT............................................ 37,300 41,218 178 NON-CURRENT PURCHASE LIABILITY............................ -- -- 7,912 OTHER LONG-TERM OBLIGATIONS............................... 631 631 1,303 --------- --------- -------- Total liabilities..................................... 63,655 67,573 86,105 COMMITMENTS AND CONTINGENCIES (Note 22)................... -- -- -- STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 1,000,000 authorized; none outstanding...................................... -- -- -- Common stock, $.01 par value; authorized 49,000,000 shares; issued and outstanding, 15,299,486 and 15,078,864 shares at December 31, 2000 and 1999, respectively.......................................... 114 153 151 Additional paid-in capital.............................. 125,782 125,009 123,142 Accumulated deficit..................................... (106,731) (109,404) (89,185) Accumulated other comprehensive income (loss)........... 18 18 (99) Treasury stock, at cost (13,178 shares at December 31, 1999)................................................. -- -- (194) --------- --------- -------- Total stockholders' equity............................ 19,183 15,776 33,815 --------- --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $ 82,838 $ 83,349 $119,920 ========= ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 18 CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- IT service revenues......................................... $ 77,770 $126,869 $ 79,608 Product revenues............................................ 38,419 73,337 89,225 -------- -------- -------- Total revenues.............................................. 116,189 200,206 168,833 -------- -------- -------- Cost of IT services......................................... 51,361 77,157 41,399 Cost of products............................................ 30,263 61,803 73,113 -------- -------- -------- Total cost of revenues...................................... 81,624 138,960 114,512 -------- -------- -------- Gross profit................................................ 34,565 61,246 54,321 Selling, general and administrative expenses................ 37,181 54,330 32,920 Depreciation and amortization............................... 6,676 8,053 4,677 In-process research and development......................... -- -- 5,000 Impairment of long-lived assets............................. 5,406 83,236 -- Gain on sale of subsidiaries, net........................... (4,427) -- -- Other costs................................................. 3,341 4,947 -- -------- -------- -------- Income (loss) from operations............................... (13,612) (89,320) 11,724 Interest and other income (expense), net.................... (6,312) (6,756) 684 -------- -------- -------- Income (loss) before income taxes and extraordinary item.... (19,924) (96,076) 12,408 Income tax (benefit)........................................ 295 (4,257) 6,875 -------- -------- -------- Net income (loss) before extraordinary item................. (20,219) (91,819) 5,533 Extraordinary item, net of taxes of $122.................... -- (184) -- -------- -------- -------- Net income (loss)........................................... $(20,219) $(92,003) $ 5,533 ======== ======== ======== Basic shares outstanding.................................... 15,277 13,481 10,193 ======== ======== ======== Diluted shares outstanding.................................. 15,277 13,481 10,767 ======== ======== ======== Income (loss) per basic share before extraordinary item..... $ (1.32) $ (6.81) $ 0.54 ======== ======== ======== Income (loss) per diluted share before extraordinary item... $ (1.32) $ (6.81) $ 0.51 ======== ======== ======== Loss per basic & diluted share from extraordinary item...... $ -- $ (0.01) $ -- ======== ======== ======== Net income (loss) per basic share........................... $ (1.32) $ (6.82) $ 0.54 ======== ======== ======== Net income (loss) per diluted share......................... $ (1.32) $ (6.82) $ 0.51 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 19 CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
RETAINED ACCUMULATED COMMON STOCK ADDITIONAL EARNINGS OTHER STOCKHOLDERS' --------------------- PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY EQUITY SHARES AMOUNT CAPITAL DEFICIT) INCOME STOCK (DEFICIT) ---------- -------- ---------- ------------ -------------- -------- ------------- BALANCE, DECEMBER 31, 1997........ 1,892,307 $ 19 $ 2,441 $ (2,715) $ -- $ -- $ (255) Issuance of common stock in initial public offering, net of offering costs.................. 6,785,000 68 72,845 -- -- -- 72,913 Issuance of common stock for acquisitions.................... 3,345,479 33 35,917 -- -- -- 35,950 Purchase of treasury stock........ (13,178) -- -- -- -- (194) (194) Comprehensive income: Net income...................... -- -- -- 5,533 -- -- Foreign currency translation adjustment.................... -- -- -- -- 20 -- Total comprehensive income........ 5,553 Other............................. -- -- 75 -- -- -- 75 ---------- ---- -------- --------- ---- ----- -------- BALANCE, DECEMBER 31, 1998........ 12,009,608 120 111,278 2,818 20 (194) 114,042 Payment of contingent purchase liability....................... 1,251,689 13 7,456 -- -- -- 7,469 Issuance of restricted stock...... 1,273,875 13 1,195 -- -- -- 1,208 Issuance of common stock for acquisitions.................... 296,682 3 2,327 -- -- -- 2,330 Employee stock purchase plan...... 236,307 2 794 -- -- -- 796 Issuance of common stock for equity investment............... 10,703 -- 120 -- -- -- 120 Comprehensive income: Net loss........................ -- -- -- (92,003) -- -- Foreign currency translation adjustment.................... -- -- -- -- (119) -- Total comprehensive income........ (92,122) Other............................. -- -- (28) -- -- -- (28) ---------- ---- -------- --------- ---- ----- -------- BALANCE, DECEMBER 31, 1999........ 15,078,864 151 123,142 (89,185) (99) (194) 33,815 Issuance of restricted stock, net of forfeitures.................. 132,082 1 1,963 -- -- -- 1,964 Employee Stock Purchase Plan...... 88,540 1 98 -- -- -- 99 Cancellation of treasury shares... -- -- (194) -- -- 194 -- Comprehensive income: Net loss........................ -- -- -- (20,219) -- -- Foreign currency translation adjustment.................... -- -- -- -- 117 -- Total comprehensive income........ (20,102) ---------- ---- -------- --------- ---- ----- -------- BALANCE, DECEMBER 31, 2000........ 15,299,486 $153 $125,009 $(109,404) $ 18 $ -- $ 15,776 ========== ==== ======== ========= ==== ===== ========
The accompanying notes are an integral part of these consolidated financial statements. 20 CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $(20,219) $(92,003) $ 5,533 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization......................... 6,676 8,053 4,677 Impairment of long-lived assets....................... 5,406 83,236 -- Gain on sale of subsidiaries, net..................... (4,427) -- -- Provision for doubtful accounts....................... 4,302 3,427 314 In-process research and development................... -- -- 5,000 Writeoff of deferred financing costs.................. 878 2,853 -- Stock compensation expense............................ 1,964 1,208 -- Change in valuation allowance......................... -- -- 1,032 Changes in assets and liabilities: Accounts receivable................................. 9,712 3,532 2,532 Prepaid expenses and other assets................... 6,275 (5,989) (286) Accounts payable and other current liabilities...... (6,896) (6,230) (12,541) Deferred revenue and other non-current liabilities....................................... (174) (1,048) (803) Other................................................. (74) 405 102 -------- -------- -------- Net cash provided by (used in) operating activities...................................... 3,423 (2,556) 5,560 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment........................ (1,110) (5,235) (2,806) Purchase of marketable securities......................... -- -- (36,726) Sale of marketable securities............................. -- 8 37,924 Sale of investment securities............................. 621 -- -- Acquisition of subsidiaries, net of cash.................. -- (5,447) (90,168) Payment of purchase liability............................. -- (7,000) -- Sale of subsidiaries...................................... 4,251 1,400 -- Payment for technology license............................ (546) (234) (1,550) Employee Stock Purchase Plan.............................. 99 796 -- Other..................................................... 21 (120) (338) -------- -------- -------- Net cash provided by (used in) investing activities...................................... 3,336 (15,832) (93,664) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt........................................ -- 29,600 34,000 Payments on debt.......................................... (8,098) (9,022) (11,556) Proceeds from initial public offering, net of costs....... -- -- 72,913 Deferred financing costs.................................. (939) (2,159) (1,296) Repurchase of treasury shares............................. -- -- (194) -------- -------- -------- Net cash provided by (used in) financing activities...................................... (9,037) 18,419 93,867 EFFECT OF EXCHANGE RATE CHANGES............................. (51) (119) 20 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (2,329) (88) 5,783 CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD.................................................... 5,721 5,809 26 -------- -------- -------- CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD.................................................... $ 3,392 $ 5,721 $ 5,809 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 21 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL Condor Technology Solutions, Inc., a Delaware corporation (the "Company"), was founded in August 1996. The Company provides Internet and eBusiness development, interactive communications and technology solutions to commercial and government clients. In order to become an end-to-end provider of a wide range of IT services and solutions, Condor entered into the agreements (the "Mergers") to acquire all of the outstanding stock of eight established IT service providers (the "Founding Companies") and concurrently completed an initial public offering (the "Offering") of its common stock (the "Common Stock"). On February 5, 1998 and February 10, 1998, respectively, the Offering and Mergers were completed. Since February 10, 1998, the Company has acquired seven additional IT service providers. The Founding Companies along with the additional acquisitions are referred to herein as "Operating Companies". All acquisitions have been accounted for using the purchase method of accounting and are reflected as of their respective acquisition dates. During 1999, the Company sold two of its Operating Companies and shut down another one. During 2000, the Company sold two additional Operating Companies and shut down another. Unless otherwise indicated, all references to the "Company" herein include Condor Technology Solutions, Inc. ("Condor") and all of the Operating Companies, and references herein to "Condor" mean Condor Technology Solutions, Inc. prior to the closing of the Mergers. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING The Company's accounting records are maintained on the accrual basis of accounting. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Condor and its controlled subsidiaries all of which are wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. REVENUE RECOGNITION The Company earns revenues from providing IT services and the sale of hardware and software products. IT services are comprised of strategic IT planning and management consulting; interactive media services; custom development, integration and installation of IT systems; enterprise resource planning ("ERP") package implementation and consulting; contract staffing and recruiting; call center and help-desk services; and systems and mainframe maintenance and support. The Company recognizes IT service revenues on time and materials type contracts based on time charged, whereby revenues are recognized as costs are incurred at agreed-upon billing rates. For projects billed on a fixed-price basis, revenue is recognized using the percentage of completion method. Percentage of completion is determined using total costs, primarily labor, as a cost input measure. Revenues from hardware procurement and the sale of proprietary and third-party software are recognized at the later of shipment or acceptance of the equipment. When installation services are an integral component of hardware procurement, revenue is recognized at the customer's acceptance of the equipment. Revenues from license fees on proprietary and third-party software are recognized when a non-cancelable license agreement has been signed, the product has been delivered, collection is 22 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) probable and all significant obligations relating to the license have been satisfied. Agreements for post contract customer support on proprietary software sales are bundled with the license fee in the first year and sold separately thereafter. In the first year, the Company allocates the total revenue between the license fee and the post contract customer support fee based on vendor specific objective evidence of fair value. This is determined based upon the renewal rate of post contract customer support, separately priced and sold to customers. The post contract customer support fees are recorded as deferred revenue and recognized ratably over the support service period in IT service revenue. Training and consulting services are not essential to the Company's software products and are priced separately. Revenue is recorded as services are performed in IT service revenue. For the years ended December 31, 2000, 1999 and 1998, respectively, approximately $10,439,000, $10,498,000, and $12,907,000 of software license sales were included in product revenues. Cost of revenues includes the provision of services and material directly related to the revenues, costs of acquisition of hardware resold to clients, subcontracted labor or other outside services and other direct costs associated with revenues, as well as an allocation of certain indirect costs. DEFERRED REVENUE The Company receives advance payment on certain maintenance contracts. Such advance payments are deferred and are reflected in income together with the related costs and expenses as the services are performed. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company provides an allowance for uncollectible accounts receivable based on experience. Although it is reasonably possible that management's estimate for uncollectible accounts could change in the near future, management is not aware of any events that would result in a change to its estimate which would be material to the Company's financial position or results of operations. At December 31, 2000 and 1999, respectively, the Company had an allowance for doubtful accounts of approximately $4,394,000 and $3,867,000. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. RESTRICTED CASH The Company retains cash in an escrow account related to the acquisition of one of the Operating Companies. A corresponding escrow payable has been recorded in accrued expenses and other current liabilities. Remaining amounts will be paid in 2001 as required based on the purchase agreements. CONCENTRATION OF CREDIT RISK The Company maintains cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. In addition, there were no customers that individually 23 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) comprised more than 10% of revenue or accounts receivable. The Company does not believe that it is subject to any unusual credit risk beyond the normal credit risk attendant in its business. INVENTORY Inventory is stated at the lower of cost or market. Cost is determined using the average cost method and is comprised of goods held for resale and maintenance parts and supplies. At December 31, 2000 and 1999, respectively, the Company had inventory of approximately $653,000 and $762,000 which were included in prepaids and other current assets. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Improvements which substantially increase the useful lives of assets are capitalized. Maintenance and repairs are expensed as incurred. Upon retirement or disposal, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is recorded. Depreciation is computed on the straight-line method based on the following estimated useful lives: Computer equipment and machinery............................ 3-7 years Furniture and fixtures...................................... 3-10 years Leasehold improvements...................................... 5-10 years
GOODWILL Goodwill represents the excess of consideration over the net assets acquired resulting from acquisitions of companies accounted for by the purchase method. These amounts are amortized on a straight-line basis over periods ranging from 7 to 35 years. At each balance sheet date, management evaluates the recoverability of the goodwill based on the undiscounted cash flow projections of each business acquired. LONG-LIVED ASSETS Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," requires impairment losses to be recorded on long-lived assets used in operations when indications of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Long-lived assets to be held and used are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The future cash flows expected to result from the use of the assets includes the expected cash flow from their eventual disposition. The Company will review long-lived assets for impairment when one or more of the following events have occurred: a. Current or immediate (future twelve months) short-term projected cash flows are significantly less than the most recent historical cash flows. 24 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) b. Loss of or scheduled completion of a major positive cash flow generating contract in the next six months without the realistic expectation of sufficient contract replacement within six-to-nine months. c. A significant, extraordinary loss of billable professionals without the realistic expectation of an in-kind replacement within three months. d. The unplanned departure of the original founder of an acquired entity, where the founder is critical to large customer relationship(s) and/or development and maintenance of existing technology. e. A significant adverse change in legal factors or in the business climate that could affect the value of the goodwill or other long-lived assets or an adverse action or assessment by a regulator. f. Significant adverse changes in technology that could affect the Company's ability to win contracts or result in termination of existing contracts. As of December 31, 2000 and 1999, the Company has recorded impairment losses related to a portion of the Company's long-lived asset balances. See Note 4. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company calculates the fair value for each class of financial instruments for which it is practicable to estimate. The carrying value of current assets and current liabilities approximates fair value because of the relatively short maturities of these instruments. The carrying value of long-term debt approximates fair value since it carries a fluctuating market interest rate. WARRANTY RESERVE The Company records a warranty reserve related to certain mainframe computer sales. The reserve recorded is based on experience in warranty replacement and labor time. Warranty reserves were approximately $787,000 and $359,000, respectively, at December 31, 2000 and 1999 and have been included with accrued expense and other current liabilities for the current portion and other long-term liabilities for the non-current portion. INCOME TAXES The Company follows Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes"("SFAS 109"). Under the asset and liability method of SFAS 109, deferred income taxes are recognized for the expected future tax consequences of temporary differences by applying enacted statutory tax rates, in effect for the year in which the differences are expected to reverse, to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Valuation allowances are provided if it is anticipated that some or all of the deferred tax asset may not be realized. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" establishes the standards for reporting and displaying comprehensive income and its components. 25 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Comprehensive income consists of net income and foreign currency translation adjustments and is presented in the Consolidated Statement of Changes in Stockholders' Equity. FOREIGN CURRENCIES Assets and liabilities recorded in foreign currencies on the books of foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs, and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are accumulated as a separate component of stockholders' equity. Gains and losses on foreign currency transactions are included in non-operating expenses. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123") provides a fair value based method of accounting for employee stock options or similar equity instruments, however this statement allows companies to continue to utilize the intrinsic value based measure of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Companies electing to remain with the accounting provided in APB No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been applied. The Company accounts for stock based compensation pursuant to the requirements of APB No. 25 and provides pro forma disclosure of net income and earnings per share, pursuant to the requirements of SFAS No. 123 as applicable, in Note 14 herein. EARNINGS PER SHARE The Company presents basic and diluted earnings per share ("EPS") on the face of the income statement. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock that then shared in the earnings of the entity. Dilutive securities are excluded from the computation in periods in which they have an anti-dilutive effect. DERIVATIVE INSTRUMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair market value. Under certain circumstances, a portion of the derivative gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into income when the transaction affects earnings. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS 133 is effective for fiscal quarters of years beginning after June 15, 2000 and requires application prospectively. Presently, the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the adoption of SFAS 133 had no impact on the financial position or results of operations. 26 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain amounts in prior year financial statements have been reclassified to conform to the current year presentation. 3. LIQUIDITY Effective April 1, 2001, the Company and the Lender Group reached agreement in principle to a restructuring of the Company's credit facility (the "Credit Facility"). (See Note 8, Debt.) The restructuring will include a four year credit facility, consisting of four notes. Note A is a $15 million note bearing interest at the Prime rate plus 0.5%. Quarterly principal payments of $250,000 begin on September 30, 2001, increase to $400,000 per quarter on March 31, 2002 and to $525,000 per quarter on March 31, 2003 with a balloon payment on March 31, 2005. In addition, Note A allows for amortization payments made by the Company to be available as a revolving credit facility up to $500,000. Note B is a $12 million note which is interest free until February 28, 2003 at which time interest will accrue at a rate of 15% with the first interest payment due on April 1, 2003. A balloon payment of $12 million is due on Note B on March 31, 2005. Note C represents a continuation of a $5 million letter of credit for trade suppliers which expires March 31, 2005. Note D represents the remaining principal balance plus accrued interest through April 1, 2001 under the previous credit facility, or approximately $12.1 million, as a note due January 2, 2002. Note D will be cancelled upon approval of stockholders to a recapitalization of the Company and the issuance of equity to a trust established by the Lender Group. (See Note 23, Subsequent Events.) Effective April 1, 2001, the Company and Marbury Manor LLC ("Marbury") reached agreement in principle, subject to final documentation, to a restructuring of the purchase liability due to Marbury. The total liability of $4.8 million has been restructured in a format similar to the Credit Facility with two notes for $1.87 million and $1.5 million which have terms comparable to the Note A and B, respectively, of the Credit Facility. The remaining portion of the purchase liability will be converted to equity based upon approval of the stockholders to a recapitalization of the Company. In addition, the Company believes, based on current discussions, that a portion or all of the remaining purchase obligations will also be restructured as part of the foregoing restructuring and recapitalization. This new Credit Facility and restructuring of purchase obligations allows for the Company to extend payment of its remaining debt and maintain its working capital to support current operations. 4. IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER COSTS During 2000 and 1999, respectively, the Company recorded a $5.4 million and $83.2 million charge for the impairment of goodwill and other long-lived assets. In 2000, the impairment charge relates to 27 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER COSTS (CONTINUED) the winding down of operations of one Operating Company and impairment of long-lived assets to be held and used. In 1999, the impairment charge consists of $7.6 million relating to the loss on the sale of two Operating Companies; $15.1 million relating to the shutdown of one Operating Company; and $60.5 million relating to the impairment of long lived assets held and used. In addition, during 2000 and 1999, respectively, other costs of $3.3 million and $4.9 million were recorded primarily associated with retention costs, involuntary severance benefits and employment contract settlements, facility closure costs, voluntary severance benefits, estimated contract losses and other charges. ASSETS DISPOSED OF In the fourth quarter of 2000, management formalized a plan to shut down operations of MIS Technology, Inc. ("MIS") based on key management turnover, declining revenue and the Company's strategy to focus on higher margin consulting projects rather than lower margin contract staffing and recruiting business. The Company's plan included elimination of selling and administrative functions and the continuation of current projects until their completion using other divisional infrastructure. The Company evaluated the remaining long-lived assets consisting primarily of goodwill for impairment based on future undiscounted cash flows and recorded an impairment charge of $1.6 million to reduce the goodwill balance related to MIS to $0 as of December 31, 2000. Net revenues for MIS for the years ended December 31, 2000 and 1999 were $7.0 million and $11.3 million, respectively. Income from operations for the years ended December 31, 2000 and 1999 were approximately $0.1 million and $31,000. As part of its overall business plan to settle the Credit Facility obligation, the Company consummated a transaction for the sale of the assets of the Safari Solutions business unit to an independent third party on June 30, 2000. The total sales price was approximately $12.3 million which was composed of $4.3 million in cash received at closing and $8.0 million in payments contingent upon revenue generated from the product sales of the Safari Solutions unit. The contingent portion of the purchase price has been pledged to the bank. The Company incurred approximately $0.8 million in direct costs related to the sale. At June 30, 2000, the acquired technology balance in goodwill and other intangible assets related to the Safari Solutions unit was reduced to $0 upon closing of the transaction. The net gain on the sale of ISSI was $4.8 million at June 30, 2000. Net revenues for the Safari Solutions unit for the years ended December 31, 2000 and 1999 were $5.3 million and $13.4 million, respectively. Loss from operations for the years ended December 31, 2000 and 1999 were approximately ($0.2) million and ($0.1) million. During the second quarter of 1999, the client that provided substantially all of the revenue of the Company's Management Support Technology Corp. ("MST") consulting business was acquired, and the acquiring company expressed its desire not to renew any projects with MST after all current projects were completed. As of December 31, 1999, all projects were completed. As a result of this and management's determination that MST was no longer a viable part of the Company's business plan, MST's continuing operations were shut down. The Company has measured the carrying value of MST's long-lived assets consisting primarily of goodwill and recorded an impairment charge of $15.1 million to reduce the goodwill balance related to MST to $0 as of June 30, 1999. 28 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER COSTS (CONTINUED) Net revenues for MST for the years ended December 31, 1999 and 1998 were $3.6 million and $8.6 million, respectively. MST's income (losses) from operations for the years ended December 31, 1999 and 1998 were ($0.9) million and $2.3 million, respectively. As part of its strategy to migrate its revenue base from hardware sales to higher margin IT service revenues, the Company, in mid 1999, initiated a plan to sell two of its Operating Companies, Corporate Access, Inc. ("Corporate Access") and U.S. Communications, Inc. ("USComm"). As of October 18, 1999, the Company sold the assets of both Corporate Access and USComm for a sales price of $2.3 million of cash and equity securities of the purchaser as well as additional funds related to the liquidation of accounts receivable. Both companies had significant computer hardware revenue concentrations and were included in the Company's System Support division. Pursuant to SFAS 121, the Company recorded losses of $7.6 million, of which $7.4 million was a write off of the net goodwill balance, which was included in impairment of intangible assets in 1999. Combined net revenues for Corporate Access and USComm for the years ended December 31, 1999 and 1998 through the date of the sale were $25.5 million and $30.4 million, respectively. Combined income from operations for these companies for the years ended December 31, 1999 and 1998 through the date of the sale were approximately $0.5 million and $0.6 million, respectively. ASSETS HELD AND USED During the fourth quarter of 2000, continuing losses in several of the Operating Companies triggered an impairment review of the Company's long-lived assets. Based on a review of the undiscounted cash flows in each of the Operating Companies, including the estimated fair market value of certain long-lived assets, management determined that the long-lived assets of LINC Systems, Inc. and Decision Support Technologies were impaired. Based on this analysis, the Company recorded an impairment write-down of $3.8 million. During the fourth quarter of 1999, the Company committed to an overall business plan that included the potential disposition of one or more of the Operating Companies in an orderly and systematic fashion. In accordance with the Company's policy, this business plan, which was in response to the Fifth Amendment Agreement with the Bank, and continuing losses in several of the Operating Companies, triggered an impairment review of the Company's long-lived assets as of December 31, 1999. Based on a review of the undiscounted cash flows in each of the Operating Companies for the estimated remaining operating period through the end of February 2001, including the estimated residual fair market value of certain long-lived assets, management determined that certain of the Company's long-lived assets were impaired. Based on this analysis, the Company recorded an impairment write-down of goodwill of $52.5 million. During the second quarter of 1999, the Company's Interactive Software Systems ("ISSI") business unit experienced significant revenue and profit reduction related to its Safari product line. These changes were the result of operating and financial difficulties experienced by its largest sales channel partner, an international ERP software company which informed ISSI of its intention to discontinue promotion of ISSI's Safari products. Consequently, the Company measured the goodwill and other long-lived assets of this business unit and recorded an impairment charge of $8.0 million to reduce the goodwill related to ISSI to $0 as of June 30, 1999. 29 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER COSTS (CONTINUED) RESTRUCTURING AND OTHER COSTS During 2000 and 1999, the Company recorded restructuring and other special charges of approximately $3.3 million and $4.9 million, respectively, which are included in other costs on the statement of operations. Included in this total for 2000 are employee retention costs of $2.4 million, voluntary severance benefits and employment contract settlements of $0.7 million and facility closures of $0.2 million. Included in this total for 1999 are employee retention costs of $1.6 million, involuntary severance benefits and employment contract settlements of $1.4 million, contract losses of $0.8 million, facility closures of $0.4 million, voluntary severance benefits of $0.3 million and other charges of $0.4 million. The Company anticipates that substantially all of the remaining restructuring and other special charges will be paid in 2001. The severance and other employee related costs provide for a reduction of approximately 30 and 120 employees during 2000 and 1999, respectively, for streamlining operations related to cost reduction initiatives. The facility closure costs represent estimated losses in closing facilities. Contract losses are comprised of employee time and expenses in order to complete a contract at MST. 5. ACQUISITIONS The following table sets forth the consideration paid in cash and in shares of Common Stock to the stockholders of each of the Operating Companies (in thousands, except share data):
SHARES OF ADJUSTED DATE COMMON VALUE CONTINGENT TOTAL NET ACQUIRED CASH STOCK ISSUED OF SHARES CONSIDERATION CONSIDERATION ASSETS --------------- -------- ------------ --------- ------------- ------------- -------- MST Feb. 10, 1998 $ 9,750 603,846 $ 6,280 $ -- $ 16,030 $ 262 CHMC Feb. 10, 1998 17,100 146,154 1,520 -- 18,620 1,847 Federal Feb. 10, 1998 7,500 576,923 6,000 9,000 22,500 1,886 Corporate Access Feb. 10, 1998 5,200 200,000 2,080 -- 7,280 427 ISSI Feb. 10, 1998 5,000 538,462 5,600 7,036 17,636 1,631 USComm Feb. 10, 1998 600 46,154 480 -- 1,080 134 InVenture Feb. 10, 1998 750 57,692 600 2,000 3,350 (145) MIS Feb. 10, 1998 1,200 138,462 1,440 -- 2,640 (396) DST May 5, 1998 1,000 9,600 150 -- 1,150 (200) Louden June 30, 1998 2,579 217,486 3,000 6,769 12,348 595 LINC July 17, 1998 21,545 -- -- -- 21,545 328 PowerCrew Nov. 4, 1998 2,663 72,522 800 -- 3,463 (187) Global Dec. 10, 1998 24,000 738,178 8,000 -- 32,000 2,712 Titan April 1, 1999 6,650 245,264 2,200 -- 8,850 (402) Dimensional Sept. 30, 1999 130 51,418 130 -- 260 (405) -------- --------- ------- ------- -------- ------ $105,667 3,642,161 $38,280 $24,805 $168,752 $8,087 ======== ========= ======= ======= ======== ====== ALLOCATION OF PURCHASE PRICE GOODWILL LIFE ------------- -------- -------- MST $15,768 35 CHMC 16,773 35 Federal 18,659 35 1,955(C) 3.5 Corporate Access 6,853 30 ISSI 5,000(A) 8,505 7 2,500(B) 5 USComm 946 30 InVenture 3,495 35 MIS 3,036 35 DST 1,350 35 Louden 11,753 35 LINC 21,217 35 PowerCrew 3,650 35 Global 25,888 35 3,400(C) 10 Titan 9,252 35 Dimensional 365 10 300(D) 5 ------- -------- $13,155 $147,510 ======= ========
---------------------------------- (A) Represents amount allocated to in-process research and development. (B) Represents amount allocated to existing technology. (C) Represents amount allocated to management services agreement. (D) Represents amount allocated to equipment (included in property and equipment on consolidated balance sheets). 30 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. ACQUISITIONS (CONTINUED) Of the total cash paid for the operating companies reported above, an escrow deposit of $1.4 million was held by the Company pending completion of final net worth adjustments for Global at December 31, 2000. Pursuant to contingent payment agreements entered into as part of the acquisitions of the Operating Companies, the Company paid $7 million in cash and $7.5 million of Common Stock (1,251,689 shares) related to accrued contingent consideration as of December 31, 1999. Additionally, approximately $3.5 and $6.8 million in cash and stock, respectively, was earned and accrued under contingent payment provisions of certain purchase agreements, as amended. Of the total accrued, approximately $7.9 million is past due as of December 31, 2000. As to the share portion of the contingent purchase agreement which is past due (the equivalent of $4.8 million in value), one of the purchase agreements calls for valuation of the shares based on certain NASDAQ National Market prices in March 2000. Assuming the use of the closing prices of the Common Stock on the OTC bulletin board for this purpose, 1,469,800 shares of Common Stock would be issuable as contingent consideration under that agreement. Another purchase agreement calls for valuing the shares using NASDAQ National Market prices or if not applicable, an appraiser. Assuming the appraiser appraised the value of such shares as of March 30, 2000 (the date set for issuance) and that the appraiser used the closing price of the Common Stock on the OTC bulletin board, 2,952,637 shares of Common Stock would be issuable as contingent consideration. With respect to the cash portion of the contingent consideration which is past due ($3.1 million in aggregate), the Company has notified the recipients that it is unable to pay such amount at this time. The Company accounted for the acquisitions of the Operating Companies as purchase business combinations. The excess of purchase price over the fair values of the net assets acquired has been recorded as goodwill, which is being amortized on a straight-line basis and periodically reviewed for impairment. The results of operations of all Operating Companies are reflected in the financial statements as of their respective acquisition dates. The following table reflects unaudited pro forma combined results of operations of the Operating Companies on the basis that the acquisitions of all of the Operating Companies had taken place at the beginning of the fiscal year for the years ended December 31, (in thousands, except per share amounts):
1999 1998 -------- -------- Revenues.................................................... $202,353 $239,456 Net income (loss) before extraordinary item................. (92,342) 10,506 Net income (loss)........................................... (92,526) 10,506 Net income (loss) per basic share before extraordinary item...................................................... $ (6.80) $ 0.86 Net income (loss) per diluted share before extraordinary item...................................................... $ (6.80) $ 0.82 Net income (loss) per basic share........................... $ (6.81) $ 0.86 Net income (loss) per diluted share......................... $ (6.81) $ 0.82
The unaudited pro forma amounts reflect the results of operations for all of the Operating Companies as well as the following purchase accounting adjustments for the periods presented: reductions in salaries, bonuses, profit sharing and other benefits to the stockholders of the Operating Companies to which they have agreed prospectively; interest on assumed borrowings; a reduction for 31 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. ACQUISITIONS (CONTINUED) in-process research and development, elimination of revenues and cost of revenues on transactions between Operating Companies occurring prior to the acquisition by the Company; amortization of goodwill recorded as a result of the acquisitions; income taxes on S-corporation income; and the estimated income tax effect on the pro forma adjustments. Total pro forma adjustments included as of December 31, 1999 and 1998 were approximately $150,000, and $6,472,000 respectively, which resulted in a net increase to net income. There were no pro forma adjustments in 2000. The unaudited pro forma combined results of operations may not be comparable to and may not be indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of the periods presented or of future operations of the combined companies because the companies were not under common control or management and had different tax and capital structures during the periods presented. 6. PROPERTY AND EQUIPMENT Property and equipment were comprised of the following at December 31, (in thousands):
2000 1999 -------- -------- Computer equipment......................................... $4,955 $ 6,731 Internal use software...................................... 2,198 2,352 Furniture, fixtures and equipment.......................... 973 1,719 Leasehold improvements..................................... 691 693 ------ ------- 8,817 11,495 Less accumulated depreciation.............................. 3,935 3,260 ------ ------- $4,882 $ 8,235 ====== =======
Depreciation expense for the years ended December 31, 2000, 1999 and 1998 was approximately $3,275,000, $2,064,000 and $1,266,000, respectively. 7. GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles were comprised of the following at December 31, (in thousands):
2000 1999 -------- -------- Goodwill on purchase of Operating Companies............. $147,510 $147,510 Acquired contract rights................................ 5,355 5,355 Acquired technology..................................... 2,500 2,500 Technology license...................................... 3,100 3,100 Capitalized software development........................ 510 510 -------- -------- 158,975 158,975 Less accumulated impairment of long-lived assets........ 89,355 83,153 Less accumulated amortization........................... 12,801 9,400 -------- -------- $ 56,819 $ 66,422 ======== ========
32 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. GOODWILL AND OTHER INTANGIBLES (CONTINUED) Amortization expense for the years ended December 31, 2000, 1999 and 1998 was approximately $3,401,000, $5,989,000 and $3,411,000, respectively. For the years ended December 31, 2000 and 1999, the Company recorded a $5.4 million and $83.2 million charge for the impairment of intangible assets as discussed in Note 4. For the year ended December 31, 1998, the Company recorded a $5.0 million charge for purchased in-process research and development in connection with the acquisition of one of the Operating Companies. 8. DEBT In April 1999, the Company entered into a $100 million syndicated credit facility underwritten and arranged by a major commercial bank (the "Bank") which replaced the Company's $50 million revolving credit facility. This $100 million credit facility included a three-year, $75 million revolving line of credit (the "Revolver") and a five-year, $25 million term loan (the "Term Loan"). The Term Loan included repayments of principal in quarterly installments with the final payment due March 31, 2004. Interest accrued on the Term Loan at the Base Rate (which is the greater of Prime Rate or the Federal Funds Rate plus 0.50%) plus 1.5% or the London Interbank Offering Rate ("LIBOR") plus 3.0%, at the option of the Company. Borrowings under the Revolver bear interest beginning at the Base Rate plus 0.50% to 1.50% or the LIBOR Rate plus 1.75% to 2.75% at the option of the Company. The Company is also required to pay a commitment fee based on the unused portion of the Revolver at an annual percentage rate ranging from 0.50% to 0.75%, as defined in the agreement. The outstanding balance on the Credit Facility at December 31, 2000 and 1999, respectively, was $37.4 and $45.1 million at an interest rate of 12.25% and 10.25%. In July 1999, the Company and the Bank entered into a forbearance agreement with respect to the Company's noncompliance with certain financial covenants of its $100 million credit facility. As of March 1, 2000, the Company and the Bank entered a Fifth Amendment in which the Bank extended their agreement of forbearance of their rights and remedies under the credit facility through February 28, 2001. As of May 15, 2000, the Company and the Bank entered a First Amendment to the Fifth Amendment. The Fifth Amendment and First Amendment to the Fifth Amendment set forth certain permanent debt reduction requirements on or before certain dates prior to February 28, 2001. The Company was required to pay $8 million by August 1, 2000, $10 million by December 31, 2000, $50,000 each month from June to August 2000, $125,000 each month beginning September 2000 and thereafter, and an extension fee of $650,000. On July 27, 2000 the Bank agreed to accept a cash payment of $2.7 million and the assignment of the contingent payments related to the sale of the Safari Solutions unit (see Note 4) in lieu of the $8.0 million payment due on August 1, 2000. The Company did not make any principal payments under the schedule after the December 1, 2000 scheduled payment. In addition, the Company did not pay interest from November 1, 2000 through April 1, 2001, nor did it make the final portion of the extension fee payment of $175,000 due on February 28, 2001. Effective April 1, 2001, the Company and the Lender Group reached agreement in principle to a restructuring of the Company's debt. The contemplated restructuring will include a four year credit facility as further discussed in Note 23, Subsequent Events. In addition, the Company reached agreement in principle to a restructuring of the purchase liability due to Marbury Manor LLC of $4.8 million as further discussed in Note 23, Subsequent Events. 33 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. DEBT (CONTINUED) Debt was comprised of the following as December 31, (in thousands):
2000 1999 -------- -------- Borrowings on Credit Facility............................. $38,217 $45,113 Indebtedness to Marbury Manor LLC......................... 4,800 -- Capital Leases............................................ 135 570 ------- ------- 43,152 45,683 Less current portion of long-term debt.................... 1,934 45,505 ------- ------- $41,218 $ 178 ======= =======
As of December 31, 2000 and 1999, respectively, the Company wrote off approximately $1.5 million and $3.0 million of deferred financing and other costs related to the renegotiation of the Company's Credit Facility which is included in interest and other expense on the statement of operations. The Company has a floor planning facility of $5.0 million to support the working capital needs of the System Solutions division. This facility is secured by $5.0 million of letters of credit, issued under the Credit Facility. Borrowings under the floor planning facility are included in accounts payable at December 31, 2000 and 1999. Indebtedness under both the Credit Facility and the floor planning facility are collateralized by substantially all of the assets of the Company. 9. RETENTION COSTS During 2000 and 1999, the Company granted restricted stock awards to certain key employees to purchase shares of the Company's Common Stock at a purchase price of $0.01 per share. During 2000 and 1999, respectively, restricted stock awards for 20,000 and 1,387,800 shares were issued which vest in installments over 18 to 24 months. Fair value of these shares is the value of Common Stock on the date of grant. The weighted average fair value at grant date for restricted stock awards at December 31, 2000 and 1999, respectively, was $0.66 and $2.98. During 2000 and 1999, respectively, approximately 208,000 and 110,000 shares of unvested, restricted shares were forfeited by employees upon their separation from the Company. The Company records compensation expense ratably over the vesting period of the individual issues based on the value of the Common Stock at the date the restricted shares were granted. During the years ended December 31, 2000 and 1999, the Company recorded retention costs of approximately $2.4 million and $1.6 million related to employee retention plans. 10. EXTRAORDINARY ITEM In April 1999, the Company entered into a new $100 million credit facility which replaced the existing $50 million facility. As a result, the Company recognized an extraordinary loss to write off the unamortized balance of deferred financing costs from the original facility. The extraordinary loss recorded was approximately $184,000, net of income taxes of $122,000, for the year ended December 31, 1999. 34 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. STOCKHOLDERS' EQUITY COMMON STOCK AND PREFERRED STOCK On February 5, 1998, the Company sold 5,900,000 shares of Common Stock to the public at $13.00 per share ("the Offering"). The net proceeds to the Company from the Offering (after deducting underwriting commissions and other offering costs) were $62.2 million. Of this amount, $47.1 million was used to pay the cash portion of the purchase prices of the Founding Companies. In connection with the Offering, the Company granted to the underwriters an option to purchase an additional 885,000 shares at $13.00 per share. On March 1, 1998, the underwriters exercised this option. The net proceeds to the Company from this sale of shares was $10.7 million (after deducting underwriting commissions). Total shares issued for the purchase of the Founding Companies were 2,307,693 on February 10, 1998. Also during 1998, the Company issued 9,600 unregistered shares and 1,028,186 registered shares for the purchase of four Operating Companies as described in Note 5. During 1999, the Company issued 296,682 unregistered shares for the purchase of two Operating Companies as well as 1,251,689 unregistered shares issued for payment of contingent purchase liability as described in Note 5. TREASURY STOCK In February 1998, the Company repurchased 13,178 shares of Common Stock from one of the founding investors in the Company. The Common Stock was repurchased for approximately $194,000 and has been recorded as a separate component of stockholders' equity. In November 2000, the Company cancelled its Treasury shares. 12. EARNINGS PER SHARE The Company calculates and presents earnings per share ("EPS") on both a basic and diluted basis. Dilutive securities are excluded from the computation in periods which they have an anti-dilutive effect. Net income available to common stockholders and common equivalent stockholders is equal to net income for all periods presented. The following tables represent reconciliations between the weighted average common stock outstanding used in basic EPS and the weighted average common and common equivalent shares outstanding used in diluted EPS for the years ended December 31, (in thousands):
2000 1999 1998 -------- -------- -------- Weighted average common stock outstanding (basic shares outstanding)........................ 15,277 13,481 10,193 Stock options, as if converted...................... -- -- 85 Contingent purchase price adjustment................ -- -- 489 ------ ------ ------ Weighted average common and common equivalent shares outstanding (diluted shares outstanding).......... 15,277 13,481 10,767 ====== ====== ======
35 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. INCOME TAXES INCOME TAX PROVISION The provision for income taxes consisted of the following amounts for the years ended December 31, (in thousands):
2000 1999 1998 -------- -------- -------- Provision (benefit) for income tax: Current U.S. federal................................... $ -- $(4,114) $ 6,739 State and local................................ -- -- 1,476 Foreign........................................ 295 -- -- -------- ------- ------- 295 (4,114) 8,215 Deferred U.S. federal................................... (17,764) (12,883) (242) State and local................................ (3,135) (2,342) (66) -------- ------- ------- (20,899) (15,225) (308) -------- ------- ------- Total income tax (benefit) expense............... (20,604) (19,339) 7,907 Valuation allowance.............................. 20,899 15,082 (1,032) -------- ------- ------- $ 295 $(4,257) $ 6,875 ======== ======= =======
At December 31, 2000, the Company had $18.7 million of new operating loss carryforwards which expire, if unused, in 2020 and $395,000 of alternative minimum tax credits which are not subject to expiration. The Company believes that it is more likely than not that these carryforwards will be available to reduce future taxable income. A reconciliation of the tax provision at the U.S. statutory rate to the effective income tax expense rate as reported is as follows for the years ended December 31,
2000 1999 1998 -------- -------- -------- Tax (benefit) provision at U.S. statutory rate..... (35.0)% (35.0)% 35.0% State income taxes, net of federal benefit......... (6.4) (3.4) 8.1 Net operating loss utilization..................... -- -- (7.9) Intangible amortization............................ 15.7 17.1 6.7 Valuation allowance................................ 29.2 15.7 -- Research and development write-off................. -- -- 14.1 Other.............................................. (2.0) 1.2 (0.6) ----- ----- ---- Effective income tax expense (benefit) rate........ 1.5% (4.4)% 55.4% ===== ===== ====
36 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. INCOME TAXES (CONTINUED) DEFERRED INCOME TAXES Deferred tax assets (liabilities) include the following at December 31, (in thousands):
2000 1999 -------- -------- Employee benefits....................................... $ 160 $ 104 Accelerated depreciation and intangible amortization.... 10,585 12,169 Accrued liabilities not currently deductible............ 796 877 Receivable reserves..................................... 2,667 1,142 Loss carryforwards...................................... 6,500 737 Other................................................... 191 53 -------- -------- Gross deferred tax asset................................ 20,899 15,082 Valuation allowance..................................... (20,899) (15,082) -------- -------- $ -- $ -- ======== ========
14. STOCK COMPENSATION In October 1997, the Board of Directors and the Company's stockholders approved the Company's 1997 Long-Term Incentive Plan (the "Plan"). The purpose of the Plan is to provide a means by which the Company can attract and retain executive officers, key employees, directors, consultants and other service providers and to compensate such persons in a way that provides additional incentives and enables such persons to increase their ownership interests in the Company. Individual awards under the Plan may take the form of one or more of: (i) either incentive stock options ("ISOs") or non-qualified stock options ("NQSOs"); (ii) stock appreciation rights ("SARs"); (iii) restricted or deferred stock; (iv) dividend equivalents; (v) bonus shares and awards in lieu of Company obligations to pay cash compensation, and (vi) other awards not otherwise provided for, the value of which is based in whole or in part upon the value of the Common Stock of the Company. The maximum number of shares of Common Stock that may be subject to outstanding awards under the Plan will not exceed 15% of the aggregate number of shares of Common Stock outstanding, minus the number of shares previously issued pursuant to awards granted under the Plan. The number of shares deliverable upon the exercise of ISOs is limited to 1,000,000. The Plan also provides that no participant may be granted, in any calendar year, options or SARs for more than 400,000 shares or other awards settleable by delivery of more than 200,000 shares and limits cash awards in any calendar year to an amount equal to the fair market value of the number of shares at the date of grant or the date of settlement, whichever is greater. In addition to authorizing grants of awards to eligible persons, the Plan authorizes automatic grants of NQSOs to non-employee directors. Under these provisions, each person serving or who has agreed to serve as a non-employee director at the commencement of the initial public offering was granted automatically an initial option to purchase 10,000 shares, and thereafter each person who becomes a non-employee director will be granted automatically an initial option to purchase 10,000 shares upon such person's initial election as a director. In addition, these provisions authorize the automatic annual grant to each non-employee director of an option to purchase 5,000 shares at each annual meeting of stockholders following the Offering, provided, however, that a director will not be granted an annual option if he or she was granted an initial option during the preceding three months. 37 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. STOCK COMPENSATION (CONTINUED) These options have an exercise price equal to the fair market value of common stock on the date of grant and the options will expire at the earlier of 10 years after the date of grant or one year after the date the participant ceases to serve as a director of the Company. These options become exercisable one to three years after the date of grant, except that an option may be forfeited upon a participant's termination of service as a director for reasons other than death or disability if the date of termination is less than 11 months after the date of grant. During 2000 and 1999, and in addition to the options automatically granted to non-employee directors, options in the form of NQSOs to purchase shares of the Company's Common Stock were granted to the executive officers and employees of the Company. Each of the foregoing options has an exercise price equal to the fair market value on the date of grant, and vests ratably over two to three years after the date of grant as determined by the grant. These options will not be exercisable until they are vested, and unvested options generally will be forfeited upon a termination of employment that is voluntary by the participant. Upon a change of control of the Company, vesting of all options will be accelerated. The options generally will expire on the earlier of 10 years after the date of grant, or three months or thirty days after termination of employment, as noted in the Stock Option Agreement. 38 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. STOCK COMPENSATION (CONTINUED) The Company has elected to use the intrinsic value method to account for its stock-based compensation plans. Pro forma disclosures as if the Company adopted the fair value recognition requirements follow. A summary of the status of the Company's stock options is presented below:
WEIGHTED NUMBER OF AVERAGE SHARES EXERCISE PRICE --------- -------------- Outstanding at December 31, 1997................... -- $ -- Granted............................................ 1,606,469 13.27 Exercised.......................................... -- -- Forfeited.......................................... (179,291) 14.58 --------- ------ Outstanding at December 31, 1998................... 1,427,178 13.11 Granted............................................ 829,000 6.24 Exercised.......................................... -- -- Forfeited.......................................... (891,538) 12.41 --------- ------ Outstanding at December 31, 1999................... 1,364,640 9.39 Granted............................................ 772,000 0.28 Exercised.......................................... -- -- Forfeited.......................................... (680,309) 9.69 --------- ------ Outstanding at December 31, 2000................... 1,456,331 $ 4.42 ========= ====== Options exercisable at: December 31, 1998................................ 53,434 $13.00 ========= ====== December 31, 1999................................ 363,838 $12.99 ========= ====== December 31, 2000................................ 386,588 $10.38 ========= ====== Weighted average fair value of options: Granted during 1998.............................. $ 5.65 ====== Granted during 1999.............................. $ 7.20 ====== Granted during 2000.............................. $ 0.22 ======
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 2000, 1999 and 1998, respectively: (1) expected volatility of 99%, 98% and 58%; (2) risk free interest rate of 6.17%, 6.41% 39 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. STOCK COMPENSATION (CONTINUED) and 5.17%; and (3) expected life of five, five and three years. The following table summarizes information about stock options outstanding at December 31, 2000:
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE REMAINING CONTRACTUAL LIFE ------------------------ ----------- ---------------- -------------------------- $ 0.27 to $ 7.00 1,005,250 $ 0.76 8.92 years $ 7.01 to $14.00 366,581 $11.99 7.50 years $14.01 to $16.00 84,500 $15.03 7.42 years --------- Total............... 1,456,331 =========
If compensation cost of the Company's grants for stock-based compensation plans had been determined using the fair value method, the Company's net income (loss) and basic and diluted earnings (loss) per share would approximate the pro forma amounts below for the years ended December 31, (in thousands, except per share data):
2000 1999 1998 -------- -------- -------- Net income As reported............................................... $(20,219) $(92,003) $5,533 Pro forma................................................. (20,336) (92,893) 4,436 Basic earnings per share As reported............................................... $ (1.32) $ (6.82) $ 0.54 Pro forma................................................. (1.33) (6.89) 0.44 Diluted earnings per share As reported............................................... $ (1.32) $ (6.82) $ 0.51 Pro forma................................................. (1.33) (6.89) 0.41
15. EMPLOYEE STOCK PURCHASE PLAN On September 24, 1998, the stockholders of the Company approved the adoption of the 1998 Employee Stock Purchase Plan ("ESPP") to provide employees of the Company with the right to purchase common stock at a discount from the market price through payroll deductions. A total of 325,000 shares are authorized for issuance under the ESPP. The purchase price of shares under the plan is the lower of 85 percent of the share price on the first day of the offering period or the share price on the purchase date. All employees are eligible to participate except: (i) those employed for less than 20 hours per week; (ii) employees who, as a result of participation in the ESPP, would own stock or hold options to purchase stock possessing five percent or more of the total combined voting power or value of all classes of stock of the Company; and (iii) employees whose right to purchase common stock under the ESPP accrues at a rate which exceeds $25,000 worth of stock for each calendar year in which such option is outstanding at any time. The initial offering period commenced on November 2, 1998. In 2000 and 1999, respectively, 88,540 and 236,307 shares were purchased under the ESPP. At December 31, 2000, the maximum number of shares had been issued under the Plan; therefore, there will be no additional shares issued. On May 16, 2000, the stockholders of the Company approved the adoption of the 2000 Employee Stock Purchase Plan. There have been no shares issued under this plan. 40 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. RETIREMENT PLANS On January 1, 1999, the Company established a defined contribution 401(k) Retirement Savings Plan (the "401(k) Plan") to provide retirement benefits for eligible employees. Employees are eligible to enter the 401(k) Plan as of the first day of the first calendar quarter occurring after they begin employment, as long as they have attained age 18. Employees are able to contribute up to 15% of their salary to the 401(k) Plan. During 2000 and 1999, the Company contributed 100% of the first 3% and 50% of the next 3% contributed by the employee. Employer contributions vest ratably over 5 years. All non-vested employer contributions are forfeited upon the employee's termination. For the years ended December 31, 2000 and 1999, the total employer contribution to the 401(k) Plan were approximately $699,000 and $1,857,000. 17. SUPPLEMENTAL CASH FLOW INFORMATION
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Cash Paid during the year for: Federal income tax payments............................... $ -- $2,725 $ 3,825 State income tax payments................................. 48 1,121 1,036 Interest payments......................................... 4,160 3,798 194 Supplemental disclosure of non-cash transactions: Liability incurred for technology license................. $ -- $ -- $ 1,550 Cancellation of treasury shares........................... 194 -- -- Business acquisitions: Cash paid for business acquisitions....................... $ -- $6,680 $ 96,237 Less cash acquired........................................ -- (1,203) (6,069) ------ ------ -------- Cash paid for business acquisitions, net.................. -- 5,477 90,168 Liability incurred for contingent purchase liability...... -- -- 24,656 Purchase price in escrow.................................. -- -- 2,750 Issuance of common stock for business acquisitions........ -- 2,330 35,950 ------ ------ -------- Total purchase price...................................... -- 7,807 153,524 In-process research and development....................... -- -- (5,000) Less fair value of net assets acquired, net of cash....... -- 1,700 (3,234) ------ ------ -------- Excess of fair value over net assets acquired............. $ -- $9,507 $145,290 ====== ====== ========
The excess of fair value over net assets acquired includes goodwill, internally developed software and other intangibles acquired in conjunction with the acquisitions of the Operating Companies. 18. SEGMENT REPORTING The Company has four reporting segments: Consulting Solutions; System Support Solutions; Government Solutions; and Enterprise Performance Solutions ("EPS"). These four segments correspond to the Company's divisional structure. The Consulting Solutions division provides custom application development, software package implementation, and contract staffing and recruiting. These services involve the development of near and long-term technology plans that help clients achieve specific strategic business objectives and 41 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SEGMENT REPORTING (CONTINUED) include IT needs analysis, technology infrastructure design, future technology planning and refreshment, systems architecture development, and business process automation. The System Solutions division provides customer management solutions and support services, call center and help-desk operations, as well as a complete array of desktop systems maintenance and support services to its clients, including hardware and software maintenance, systems testing and engineering, and hardware procurement. The Government Solutions division offers its public sector clients a variety of management consulting services, interactive media services, system maintenance and hardware procurement. The EPS division offers its clients a single source for enterprise resource planning and e-commerce solutions focusing on implementation and consulting related to the SAP software package. The Division focuses on the following service lines: installation, business process design, configuration and implementation, and staff augmentation. The accounting policies of the reporting segments are the same as those described in Note 2. The Company evaluates the performance of its operating segments based on operating income (excluding the effects of intercompany transactions). The "Other" column includes the operating results of the Safari Solutions unit, which was sold on June 30, 2000, and corporate related items not allocated to the divisions. For the years ended December 31, 1999 and 1998, the operations of two Operating Companies sold in October, 1999 have been reclassified into "Other". Selling, general and administrative costs incurred by the Company's corporate office have been allocated to the divisions and "Other" proportionately, based on total revenue and total assets. Summarized financial information concerning the Company's reportable segments is shown in the following tables (in thousands). For the year ended December 31, 2000:
CONSULTING SYSTEM GOVERNMENT SOLUTIONS SOLUTIONS SOLUTIONS EPS OTHER CONSOLIDATED ---------- --------- ---------- -------- -------- ------------ IT service revenues.................. $18,890 $14,810 $18,882 $23,279 $ 1,909 $ 77,770 Product revenues..................... -- 28,304 2,670 4,076 3,369 38,419 ------- ------- ------- ------- -------- -------- Total revenues....................... $18,890 $43,114 $21,552 $27,355 $ 5,278 $116,189 ------- ------- ------- ------- -------- -------- Depreciation and Amortization........ $ 1,182 $ 1,267 $ 2,149 $ 1,624 $ 454 $ 6,676 ------- ------- ------- ------- -------- -------- Income (loss) from operations........ $(8,737) $ 382 $ (732) $(5,005) $ 480(a) $(13,612) ------- ------- ------- ------- -------- -------- Total Assets......................... $ 3,175 $21,530 $38,508 $17,652 $ 2,484 $ 83,349 ======= ======= ======= ======= ======== ========
------------------------ (a) Includes impairment of long-lived assets and other costs of $3.3 million, gain on the sale of subsidiaries of $4.4 million and operating losses from "Other" segment of $0.6 million. 42 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SEGMENT REPORTING (CONTINUED) For the year ended December 31, 1999:
CONSULTING SYSTEM GOVERNMENT SOLUTIONS SOLUTIONS SOLUTIONS EPS OTHER CONSOLIDATED ---------- --------- ---------- -------- -------- ------------ IT service revenues................. $ 33,205 $23,097 $24,872 $ 37,123 $ 8,572 $126,869 Product revenues.................... 40 31,684 9,541 1,764 30,308 73,337 -------- ------- ------- -------- -------- -------- Total revenues...................... $ 33,245 $54,781 $34,413 $ 38,887 $ 38,880 $200,206 -------- ------- ------- -------- -------- -------- Depreciation and Amortization....... $ 1,841 $ 806 $ 1,694 $ 1,915 $ 1,797 $ 8,053 -------- ------- ------- -------- -------- -------- Income (loss) from operations....... $(41,351) $ 4,950 $ 4,867 $(36,265) $(21,521)(b) $(89,320) -------- ------- ------- -------- -------- -------- Total Assets........................ $ 13,479 $25,455 $39,391 $ 23,293 $ 18,302 $119,920 ======== ======= ======= ======== ======== ========
------------------------ (b) Includes impairment of long-lived assets and loss on sale of assets to be disposed of and other costs of $20.5 million and operating losses from "Other" segment of $1.0 million. For the year ended December 31, 1998:
CONSULTING SYSTEM GOVERNMENT SOLUTIONS SOLUTIONS SOLUTIONS EPS OTHER CONSOLIDATED ---------- --------- ---------- -------- -------- ------------ IT service revenues................. $ 31,683 $19,257 $18,366 $ 2,071 $ 8,231 $ 79,608 Product revenues.................... 100 29,408 21,213 46 38,458 89,225 -------- ------- ------- -------- -------- -------- Total revenues...................... $ 31,783 $48,665 $39,579 $ 2,117 $ 46,689 $168,833 -------- ------- ------- -------- -------- -------- Depreciation and Amortization....... $ 1,530 $ 612 $ 985 $ 100 $ 1,450 $ 4,677 -------- ------- ------- -------- -------- -------- Income (loss) from operations....... $ 1,987 $ 6,372 $ 5,639 $ (560) $ (1,714)(c) $ 11,724 -------- ------- ------- -------- -------- -------- Total Assets........................ $ 49,990 $24,880 $45,407 $ 40,264 $ 40,101 $200,642 ======== ======= ======= ======== ======== ========
------------------------ (c) Includes a charge of $5.0 million for in-process research and development and operating income from "Other" segment of $3.3 million. Information about geographic areas has not been included as revenue and long-lived assets attributable to countries outside of the United States are not material to the financial statements taken as a whole. There were no customers that individually comprised more than 10% of revenue. 43 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. QUARTERLY FINANCIAL DATA (UNAUDITED): Summarized quarterly financial data for 2000 and 1999 is as follows:
MARCH 30, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 Net Sales...................................... $36,356 $31,515 $26,643 $ 21,675 Gross Profit................................... 11,599 10,428 7,110 5,428 Net income (loss) before extraordinary item.... (4,592) 2,039 (1,465) (16,201) Net income (loss).............................. (4,592) 2,039 (1,465) (16,201) Net income (loss) per basic share before extraordinary item........................... $ (0.30) $ 0.13 $ (0.10) $ (1.06) Net income (loss) per diluted share before extraordinary item........................... $ (0.30) $ 0.13 $ (0.10) $ (1.06) 1999 Net Sales...................................... $59,690 $53,444 $49,453 $ 37,619 Gross Profit................................... 19,591 16,264 14,672 10,719 Net income (loss) before extraordinary item.... 3,003 (32,275) (4,327) (58,220) Net income (loss).............................. 3,003 (32,459) (4,327) (58,220) Net income (loss) per basic share before Extraordinary item........................... $ 0.25 $ (2.49) $ (0.31) $ (3.87) Net income (loss) per diluted share before extraordinary item........................... $ 0.22 $ (2.49) $ (0.31) $ (3.87)
20. RESTATEMENT OF SECOND QUARTER RESULTS For the second quarter of 2000, the Company, on the advice of its independent accountants, has revised its accounting for the sale of the Safari Solutions business unit. Originally, the value of the purchase price received and the book value of the net liabilities sold were recorded as a reduction to the Company's existing goodwill balance. The goodwill balance was reduced by approximately $5.7 million at June 30, 2000. Under the revised accounting treatment, the Company has reduced the acquired technology balance in goodwill and other intangible assets by $0.9 million and recorded a net gain on the sale of the Safari Solutions business unit of $4.8 million. Application of the revised accounting policy resulted in the following as of June 30 and September 30, 2000:
THREE MONTHS SIX MONTHS NINE MONTHS ENDED ENDED ENDED JUNE 30, 2000 JUNE 30, 2000 SEPTEMBER 30, 2000 ------------- ------------- ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Loss as originally reported...................... $(2,751) $(7,343) $(8,808) Effect of restatement............................ 4,790 4,790 4,790 ------- ------- ------- Restated net income (loss)....................... $ 2,039 $(2,553) $(4,018) ======= ======= ======= Loss per share as originally reported............ $ (0.18) $ (0.48) $ (0.58) Effect of restatement............................ 0.31 0.31 0.31 ------- ------- ------- Restated income (loss) per common share.......... $ 0.13 $ (0.17) $ (0.27) ======= ======= =======
44 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 21. RELATED PARTY TRANSACTIONS The Company has a management services agreement with an ERP software license reseller to provide financial reporting, payroll and employee benefit administration and general management. This agreement has a term of ten years. The reseller is owned by the former owner of Global Core Strategies, Inc. ("Global"), who was a consultant to the Company until May 2000. During 2000 and 1999, respectively, the Company paid $79,800 and $210,000 in consulting fees to the former owner of Global. During the years ended December 31, 2000 and 1999, respectively, management fees were due to the Company of $604,000 and $332,000 for management services. At December 31, 2000 and 1999, respectively, the balance due to the Company from this reseller was approximately $310,000 and $346,000. 22. COMMITMENTS AND CONTINGENCIES LAWSUIT On September 29, 2000, the Company was served with a Summons and Complaint in the action, George R. Blick, Charles F. Crowe, Louis J. Fisher, R. Joseph Market, William E. Hummel and Hartland Group LLC v. Condor Technology Solutions, Inc., U. S. District Court, District of Maryland. The Complaint alleges breach of contract and requests damages in the aggregate of approximately $4,500,000, plus interest and costs. This litigation relates to the Company's obligations with respect to a purchase liability under the agreement to purchase Federal Computer Corporation, one of the Founding Companies. The Company is a party to other legal proceedings and disputes related to the Company's day to day business operations, none of which, in the opinion of management, are material to the financial position or results of operations of the Company. OPERATING LEASES The Company leases certain equipment and office space under operating lease arrangements expiring through 2005. Future minimum rental payments net of inflows from sublease payments under non-cancelable operating leases at December 31, 2000 were as follows (in thousands): 2001...................................................... $1,594 2002...................................................... 1,618 2003...................................................... 937 2004...................................................... 418 2005...................................................... 65 ------ $4,632 ======
Rent expense net of sublease income for the years ended December 31, 2000, 1999 and 1998 was approximately $2,547,000, $3,753,000 and $2,243,000, respectively. 23. SUBSEQUENT EVENTS Effective April 1, 2001, the Company and the Lender Group reached agreement in principle to a restructuring of the Company's credit facility (the "Credit Facility"). The restructuring is subject to completion of definative agreements and will include a four year credit facility, consisting of four notes. Note A is a $15 million note bearing interest at the Prime rate plus 0.5%. Quarterly principal payments 45 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 23. SUBSEQUENT EVENTS (CONTINUED) of $250,000 begin on September 30, 2001, increase to $400,000 per quarter on March 31, 2002 and to $525,000 per quarter on March 31, 2003 with a balloon payment on March 31, 2005. In addition, Note A allows for amortization payments made by the Company to be available as a revolving credit facility up to $500,000. Note B is a $12 million note which is interest free until February 28, 2003 at which time interest will accrue at a rate of 15% with the first interest payment due on April 1, 2003. A balloon payment of $12 million is due on Note B on March 31, 2005. Note C represents a continuation of a $5 million letter of credit for trade suppliers which expires March 31, 2005. Note D represents the remaining principal balance plus accrued interest through April 1, 2001 under the previous credit facility, or approximately $12.1 million, as a note due January 2, 2002. Note D will be cancelled upon approval of stockholders to a recapitalization of the Company and the issuance of equity to a trust established by the Lender Group. Effective April 1, 2001, the Company and Marbury Manor LLC ("Marbury") reached agreement in principle, subject to final documentation, to a restructuring of the purchase liability due to Marbury. The total liability of $4.8 million has been restructured in a format similar to the Credit Facility with two notes for $1.87 million and $1.5 million which have terms comparable to the Note A and B, respectively, of the Credit Facility. The remaining portion of the purchase liability will be converted to equity based upon approval of the stockholders to a recapitalization of the Company. The unaudited pro forma balance sheet gives effect to the restructuring transactions as if these agreements were executed on December 31, 2000 and accordingly reflect the application of SFAS 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." Accumulated deficit in the pro forma balance sheet has been credited for an estimated pro forma gain of $2.7 million based on the difference between the carrying value of the existing debt plus accrued interest at December 31, 2000 less the future principle and interest payments and estimated value of the equity to be granted to the Lender Group and Marbury under the restructured Credit Facility. The pro forma gain is based on the available information and certain assumptions that may be revised upon the final execution of the Credit Facility and Marbury purchase liability. While the final documents have not been executed, management expects there will not be significant changes from the terms as discussed above. The pro forma financial data do not purport to represent what the Company's financial position would actually have been if such transaction in fact had occurred on December 31, 2000 and is not necessarily representative of the Company's financial position at any future date. 46 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES Condor Technology Solutions, Inc. The audit referred to in our report to Condor Technology Solutions, Inc. dated April 2, 2001, which is contained in Item 8 of this Form 10-K, includes the audit of the financial statement schedule listed in the accompanying index for the year ended December 31. 2000. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audit. In our opinion, such schedule presents fairly, in all material respects, the information set forth therein. BDO Seidman, LLP Washington, D.C. April 2, 2001 47 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Condor Technology Solutions, Inc. Our audits of the consolidated financial statements referred to in our report dated March 30, 2000, relating to the consolidated financial statements, appearing in Condor Technology Solutions, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1999, also included an audit of the financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICEWATERHOUSECOOPERS LLP McLean, Virginia March 30, 2000 48 SCHEDULE II CONDOR TECHNOLOGY SOLUTIONS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO BEGINNING OF COSTS AND CHARGED TO OTHER BALANCE AT DESCRIPTION YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR ---------------------------------- ------------ ---------- ---------------- ---------- ----------- Year Ended December 31, 1998 Allowance for doubtful accounts...................... $ -- $ 314 $ 497(1) $ (239)(2) $ 572 Deferred tax valuation allowance..................... 1,032 (1,032) -- -- -- Warranty reserve................ -- 380 3,093(1) (1,763) 1,710 Year Ended December 31, 1999 Allowance for doubtful accounts...................... 572 3,427 471(1) (603)(2) 3,867 Deferred tax valuation allowance..................... -- 15,082 -- -- 15,082 Warranty reserve................ 1,710 267 -- (1,618) 359 Year Ended December 31, 2000 Allowance for doubtful accounts...................... 3,867 4,302 -- (3,775)(2) 4,394 Deferred tax valuation allowance..................... 15,082 5,817 -- -- 20,899 Warranty reserve................ $ 359 $ 610 $ -- $ (182) $ 787
------------------------ (1) Amounts recorded through Investment in Operating Companies. (2) Amounts are write-offs of uncollectible accounts receivable. 49 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On August 9, 2000, the Company filed a Form 8-K disclosing that it had dismissed PricewaterhouseCoopers LLP on August 3, 2000 and changed its independent accountants from PricewaterhouseCoopers LLP to BDO Seidman LLP, effective with the filing of the Company's Form 10-Q for the quarter ended June 30, 2000. Through August 14, 2000, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make reference thereto in their report on the financial statements for the two most recent fiscal years. At the Company's request, PricewaterhouseCoopers LLP has furnished the Company with a letter addressed to the SEC stating whether or not it agrees with the above statements. A copy of such letter, dated August 14, 2000, is filed by reference as Exhibit 16. 50 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth as of June 11, 2001, the names, ages and other information concerning those persons who are the directors and executive officers of the Company.
NAME AGE POSITION ---- -------- -------- J.L. Huitt, Jr......................... 50 President and Chief Executive Officer Peter T. Garahan....................... 54 Chairman of the Board Michael Louden......................... 44 Executive Vice President W. M. Robbins.......................... 54 Vice President and Chief Financial Officer John F. McCabe......................... 56 Vice President, General Counsel and Secretary Ann Torre Grant........................ 43 Director Dennis Logue........................... 57 Director William M. Newport..................... 65 Director
J.L. Huitt, Jr. was appointed President and Chief Operating Officer ("COO") on February 27, 2001 and Chief Executive Officer ("CEO") on March 2, 2001. He has over 20 years experience as an operating executive and management consultant to companies facing financial and operating challenges. Mr. Huitt received his bachelor's degree in economics from Ohio State University. He received his masters degree in business administration from Duke University Fuqua School of Business, and his juris doctor from Duke University School of Law. He previously served as president and CEO of Cemisco Resources, Inc. and prior to that as president and CEO of Frederick Trading Company. Additionally, he is past president of the Business Workout Council, is a member and a former director of the Turnaround Management Association and is a member of the Association of Certified Turnaround Professionals. Peter T. Garahan has been a director of the Company since February 1998 and Chairman of the Board since March 2, 2001. Mr. Garahan has been a principal of The Ryegate Group, a strategic and financing consulting firm, since January 1997. From December 1997 through December 1999, Mr. Garahan was Chief Operating Officer of Amteva Technologies, an Enhanced Voice Services Software Company. From March 1995 to December 1996, Mr. Garahan was Executive Vice President--Sales and Marketing of Mitchell International, an IT company servicing the automotive industry and a subsidiary of the Thomson Corporation, a major publishing and information company. From May 1992 through December 1996, Mr. Garahan was President of Mitchell Medical, formerly Medical Decision Systems, a software company specializing in automotive medical insurance claims analysis. Mr. Garahan serves on the board of directors of Celeris Corporation. Mr. Garahan received a bachelor of arts degree from the State University of New York at Stony Brook and a masters degree in business administration from Cornell University and is a veteran of the United States Navy. W. M. Robbins was appointed Vice President and Chief Financial Officer ("CFO") in February 2000. Prior to joining the Company, Mr. Robbins was the CFO for State Street Shipping Agency. From 1995 to 1999, Mr. Robbins was a Senior Vice President at Inchcape Shipping Services where he directed financial services for customers in North and South America. From 1992 to 1995, he served as Senior Vice President and General Manager for Krispy Kreme Doughnut Corporation. Prior to this Mr. Robbins spent four years at Price Waterhouse as a Senior Manager in their consulting practice and sixteen years with R.J. Reynolds Industries, Inc. in various financial positions. Mr. Robbins received a bachelors in business administration with a major in accounting from the University of Cincinnati. John F. McCabe was appointed Vice President, General Counsel and Secretary in June 1998. In this function, Mr. McCabe is the chief legal officer of the Company and is focused on the Company's acquisition and divestiture program, corporate level agreements and transactions, and day-to-day legal 51 matters. He is also an advisor on corporate infrastructure development. From 1989 to 1998, Mr. McCabe was Corporate Vice President, General Counsel and Secretary of BDM International, Inc., a Fortune 1000 information technology company, where he headed the company's legal department. Mr. McCabe received a masters degree in business administration from the Kellogg Graduate School of Management at Northwestern University and a juris doctor degree from Fordham University Law School. Michael Louden was appointed Vice President of the Government Solutions Division in March 1999 and Executive Vice President on June 11, 2001. Mr. Louden founded Louden Associates, Inc. ("LAI"), one of the Operating Companies, and has served as the company's President for the past thirteen years. Prior to forming LAI, Mr. Louden served as a management consultant in industrial relations for the Ford Aerospace & Communications Corporation in Hanover, Maryland. His professional accolades include the Distinguished Public Service Award from the U.S. Department of Veterans Affairs. Mr. Louden received a masters degree in business administration from Loyola College. Ann Torre Grant has been a director of the Company since March 1998. Ms. Grant has been a strategic and financial consultant since December 1997. Ms. Grant was Executive Vice President, Chief Financial Officer and Treasurer of NHP, Incorporated ("NHP"), a multifamily property management company, from February 1995 until the sale of NHP in December 1997. From 1989 to February 1995, Ms. Grant held various corporate finance positions with US Airways, serving as Vice President and Treasurer from 1991 to 1995. From 1983 to 1988, Ms. Grant held various corporate finance positions with American Airlines. Ms. Grant is a director of USA Education, Inc., of the Franklin Mutual Series Funds and of U S A Floral Products, Inc. Ms. Grant received a bachelor of arts in business administration from the University of Notre Dame and a masters in business administration from Cornell University. Dennis E. Logue has been a director of the Company since March 1998. Mr. Logue has held various faculty positions at the Amos Tuck School of Business Administration at Dartmouth College since 1974, including Professor of Management since July 1985 and Associate Dean from July 1989 to June 1993. From January 1994 to January 1995, Mr. Logue was the Economic Advisor to the Governor of New Hampshire. Prior to joining the faculty at the Amos Tuck School in 1974, Mr. Logue taught at Indiana University and worked at the U.S. Treasury as a senior research economist. In addition, Mr. Logue has been a visiting professor at the University of California at Berkeley, the University of Virginia and Georgetown University. Mr. Logue was a founder and has served on the board of directors of Ledyard National Bank since 1991. He also serves on the board of directors of Sallie Mae (GSE), Promontory Software Technology, and Synergy Innovations, Inc. Mr. Logue is also a Trustee of the Josiah Bartlett Center for Public Policy and former President of the Board of Trustees of Crossroads Academy. Mr. Logue received a bachelor of arts degree in English and philosophy from Fordham University, a masters degree in business administration from Rutgers University and a Ph.D. in managerial economics from Cornell University. William M. Newport has been a director of the Company since February 1998. Mr. Newport has been a Director and Chairman of the Audit Committee of the Corporation for National Research Initiatives, a non-profit national information infrastructure research and development organization, since 1990. Mr. Newport has been a director of Authentix Network, Inc., a privately held company engaged in providing roaming fraud prevention services and wireless e-mail to the wireless telecommunications industry, since July 1996. Mr. Newport has been the Chairman of the Board of Ursus Telecom Corporation, a public international telecommunications service company, since April 1998. Mr. Newport retired from Bell Atlantic Corporation in December 1992 as Vice President of Strategic Planning and a member of the Office of the Chairman after 36 years in the telecommunications industry. Mr. Newport was the President and Chief Executive of AT&T's cellular subsidiary from 1981 to 1983 when he joined the newly formed Bell Atlantic Corporation. Mr. Newport 52 received a bachelor of science degree in electrical engineering from Purdue University and a masters of science degree in management from the Sloan School of Business at the Massachusetts Institute of Technology, which he attended as a Sloan Fellow. All officers serve at the discretion of the Board of Directors. BOARD CLASSIFICATION The Board of Directors is divided into three classes of directors, with directors serving staggered three-year terms, expiring at the annual meeting of stockholders in 2001, 2002 and 2003, respectively. At each annual meeting of stockholders, one class of directors will be elected for a full term of three years to succeed that class of directors whose terms are expiring. The director whose term expires in 2001 is Mr. Garahan; the director whose term expires in 2002 is Mr. Logue; and the directors whose terms expire in 2003 are Ms. Grant and Mr. Newport. COMPENSATION OF DIRECTORS Directors who are also officers or employees of the Company do not receive additional compensation for serving as directors. Each director who is not an officer or employee of the Company receives an annual retainer fee of $14,000, plus $1,000 per day or any portion of a day for attendance at meetings of the Board of Directors and any Committee of the Board, $500 for each telephonic meeting of the Board or Committee of the Board; and $250 per hour for services requested by the Company. In addition, Mr. Garahan receives a fee of $5,000 per month for his services as Chairman of the Board. In addition, under the Company's 1997 Long-Term Incentive Plan, each non-employee director will be granted, subject to certain exceptions, an annual option to acquire 5,000 shares at the first meeting of the Board of Directors immediately following an annual meeting of the Company's stockholders at which such director is re-elected or remains a director. In addition, each person who becomes a non-employee director in the future will be granted automatically an option to acquire 10,000 shares upon such person's initial election as a director. Each such option will have an exercise price equal to the fair market value per share of Common Stock on the date of grant. Directors are also reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or committees thereof, and visiting the Company's offices and other specified locations in their capacity as directors. BOARD OF DIRECTORS' MEETINGS AND COMMITTEES During 2000, the Board of Directors held 11 meetings, the Audit Committee held six meetings and the Compensation Committee held eight meetings. Each incumbent director of the Company attended 75% or more of all Board meetings and 75% or more of all meetings of each committee on which such director served. The Board of Directors has established an Audit Committee, a Compensation Committee and a Finance Committee. The Audit Committee reviews the results and scope of the audit and other services provided by the Company's independent accountants and consists of Ms. Grant (Chair) and Messrs. Garahan, Logue and Newport. The Compensation Committee approves salaries and certain incentive compensation for management and key employees of the Company, administers the 1997 Long-Term Incentive Plan, administers the 2000 Employee Stock Purchase Plan, reviews executive benefit plans and health and welfare plans, and consists of Messrs. Garahan (Chair), Logue and Newport, and Ms. Grant. The Finance Committee advises the Company on financing alternatives and arrangements, approves credit agreements and consists of Ms. Grant (Chair) and Mr. Garahan. 53 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information regarding compensation for the years ended December 31, 2000, 1999, and 1998 of the Company's Chief Executive Officer and the other four most highly compensated executive officers during 2000 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ----------------------- ANNUAL COMPENSATION SECURITIES RESTRICTED ------------------- UNDERLYING STOCK OTHER YEAR SALARY BONUS(1) OTHER(2) OPTIONS AWARDS(3) COMPENSATION(4) -------- -------- -------- -------- ---------- ---------- --------------- Kennard F. Hill(6).............. 2000 $435,537 $ -- $45,300 -- $ -- $ 7,404 Former Chairman of the Board, 1999 446,446 -- 41,525 25,000(5) 175,959 9,688 President and Chief Executive 1998 289,500 80,000 40,734 150,000(5) 19,980 7,711 Officer Michael Louden(6)............... 2000 231,042 294,000 -- -- -- 5,528 Executive Vice President 1999 178,750 -- -- 10,000(5) 10,055 7,301 1998 68,750 -- -- -- -- 3,094 John F. McCabe(6)............... 2000 177,692 85,000 -- -- -- 3,523 Vice President and General 1999 174,417 35,000 -- 20,000(5) 150,174 3,619 Counsel 1998 74,846 -- -- 30,000(5) -- 3,095 Michael G. Paglaiccetti(6)...... 2000 249,599 334,000 -- -- -- 5,051 Former Vice President and 1999 220,000 -- -- -- 75,411 3,000 Chief Operating Officer 1998 232,308 60,000 -- 75,000(5) 74,925 10,757 W. Michael Robbins(6)........... 2000 352,000(7) 35,000 -- -- -- -- Vice President and Chief Financial Officer
------------------------ 1. Bonus amounts are reflected in the year to which they are attributable and not the year in which they are paid. 2. Fringe benefit amounts are omitted to the extent the aggregate value of such benefits is less than 10% of salary and bonus or $50,000. The amount shown for Mr. Hill reflects a housing allowance. 3. Restricted stock awards were granted to certain members of management under which restricted Common Stock was acquired at a price of $.01 per share. Ownership of this restricted Common Stock vested ratably over 18 to 24 months. The amounts shown represent the full dollar value of the shares of Common Stock based on the closing market price on the date of grant, less the $.01 per share exercise price. 4. Consists of matching contributions under a defined contribution 401(k) or profit sharing plan and the dollar value of insurance premiums paid by the Company with respect to term life insurance for the benefit of the Named Executive Officer. 5. During August 1999, these options were cancelled at the request of the Named Executive Officer. 6. Mr. Hill retired from the Company and from the Board of Directors on March 2, 2001. Mr. Louden joined the Company on June 30, 1998. Mr. McCabe joined the Company on June 15, 1998. Mr. Paglaiccetti joined the Company on February 10, 1998, and voluntarily terminated his employment effective January 2, 2001. Mr. Robbins joined the Company on February 2, 2000. 54 7. Mr. Robbins was engaged as a consultant through Carl Marks Consulting Group LLC. All amounts were paid to Carl Marks. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Common Stock of the Company as of May 31, 2001 by (i) each person known to beneficially own more than 5% of the outstanding shares of Common Stock; (ii) each of the Company's directors; (iii) each named executive officer; and (iv) all executive officers and directors as a group. Unless otherwise indicated, all persons listed have an address in care of the Company's principal executive offices and have sole voting and investment power with respect to their shares.
NAME NUMBER PERCENT ---- --------- -------- Michael Louden(1)........................................... 728,286 4.7% Kennard F. Hi11(2).......................................... 229,493 1.5 Michael G. Paglaiccetti..................................... 70,162 * John F. McCabe.............................................. 53,977 * Ann Torre Grant(3).......................................... 19,000 * Dennis E. Logue(3).......................................... 15,200 * William M. Newport(3)....................................... 15,000 * Peter T. Garahan(3)......................................... 15,000 * W. Michael Robbins.......................................... -- * All directors and executive officers as a group (9 persons)............................................... 1,146,118 7.4%
------------------------ * less than 1.0% 1. Of this total, 600,000 shares are held by Marbury Manor LLC, of which Mr. Louden has voting control. 2. Of this total, 155,000 shares are owned of record by the Hill-Craft Irrevocable Family Trust, of which Mr. Hill and his spouse, Shirley Craft, are trustees and share voting power and investment power with respect to such shares. 3. The amount shown includes options to purchase 15,000 shares of Common Stock that are currently exercisable. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In connection with the acquisition of Louden Associates, Inc. ("LAI") by the Company, and as consideration for his interest in LAI, Mr. Louden, who is an executive officer of the Company, received 217,486 shares of Common Stock and approximately $2.6 million in cash. Additionally, pursuant to an arrangement in the purchase agreement, Mr. Louden has earned contingent consideration of approximately $6.8 million in cash and Common Stock, which consists of $2.0 million paid in April 1999 and $4.8 million which is currently accrued. 55 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K The following documents are being filed as part of this Report: (a)(1) The following financial statements are included in Part II, Item 8 of this Report:
PAGE -------- CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Accountants.......................... 16-17 Consolidated Balance Sheets................................. 18 Consolidated Statements of Operations....................... 19 Consolidated Statements of Changes in Stockholders' Equity (Deficit)................................................. 20 Consolidated Statements of Cash Flows....................... 21 Notes to Consolidated Financial Statements.................. 22 (a)(2) The following Financial Statement Schedules are filed as a part of the Annual Report: II. Valuation and Qualifying Accounts....................... 49 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. (a)(3) The following Exhibits are filed as part of this Annual Report on Form 10-K as required by Item 601 of Regulation S-K. The Exhibits designated by an asterisk are management contracts and compensatory plans and arrangements required to be filed as Exhibits to this Annual Report on Form 10-K.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MST Acquisition Corp., Management Support Technology Corporation and the Stockholders named therein (Incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 2.2 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, CHMC Acquisition Corp., Computer Hardware Maintenance Company, Inc. and the Stockholders named therein (Incorporated by reference to Exhibit 2.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 2.3 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Federal Acquisition Corp., Federal Computer Corporation and the Stockholders named therein (Incorporated by reference to Exhibit 2.3 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 2.4 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Access Acquisition Corp., Corporate Access, Inc. and the Stockholders named therein (Incorporated by reference to Exhibit 2.4 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 2.5 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Interactive Acquisition Corp., Interactive Software Systems Incorporated and the Stockholders named therein (Incorporated by reference to Exhibit 2.5 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)).
56
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.6 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, US Comm Acquisition Corp., U.S. Communications, Inc. and the Stockholders named therein (Incorporated by reference to Exhibit 2.6 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 2.7 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, InVenture Acquisition Corp., InVenture Group, Inc. and the Stockholders named therein (Incorporated by reference to Exhibit 2.7 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 2.8 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MIS Acquisition Corp., MIS Technologies, Inc. and the Stockholders named therein (Incorporated by reference to Exhibit 2.8 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 3.1 Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 3.1A Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1A to Amendment No. 4 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 3.2 By-Laws of the Company as amended (Incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 4 Form of Certificate Evidencing Ownership of Common Stock of the Company (Incorporated by reference to Exhibit 4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 4.1 Condor Technology Solutions, Inc. Employee Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (Registration No. 333-64505)). 4.2 Condor Technology Solutions, Inc. 401(k) Retirement Saving Plan (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (Registration No. 333-73055)). 10.1* 1997 Long-Term Incentive Plan of the Company (Incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 10.1.1* 1997 Long-Term Incentive Plan of the Company As Amended and Restated (Incorporated by reference to Exhibit 10.1.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998). 10.8* Employment Agreement between the Company and John F. McCabe (Incorporated by reference to Exhibit 10.10 to the Registrant's Quarterly Report on From 10-Q for the three months ended June 30, 1998). 10.8.1* Executive Management Severance Agreement between the Company and John F. McCabe 10.9 Stock Purchase Agreement, dated as of July 16, 1998, by and among the Company and the stockholders of LINC Systems Corporation (Incorporated by reference to Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the three months ended June 30, 1998).
57
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.10 Purchase Agreement, among Condor Technology Solutions, Inc., Global Core Strategies, Inc., and Jerry Ward, dated December 10, 1998 (Incorporated by reference to Exhibit 2.2 to the Registrant's Form 8-K Current Report as of December 22, 1998 (Registration No. 0-23635)). 10.11* Employment Agreement between Louden Associates, Inc. and Michael Louden (Incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 10.13 Credit Agreement by and among the Company and First Union National Bank, as Issuing Lender, Collateral Agent and Administrative Agent, and First Union Commercial Corporation as Swingline Lender and Lender and related ancillary documents (Incorporated by reference to Exhibit 10.14 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 1999). 10.14 Purchase Agreement dated as of April 1, 1999, by and among the Company and Interest Holders of Titan Technologies Group, LLC (Incorporated by reference to Exhibit 10.15 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 1999). 10.15 Third Amendment to Forbearance Letter Agreement and Amendment Agreement dated as of August 27, 1999 (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report as of August 27, 1999 (Registration No. 0-23635)). 10.16 Fourth Amendment to Forbearance Letter Agreement and Amendment Agreement dated as of November 15, 1999 (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report as of November 15, 1999 (Registration No. 0-23635)). 10.17 Fifth Amendment Agreement dated as of March 1, 2000 (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report as of March 1, 2000 (Registration No. 0-23635)). 10.18 First Amendment to Fifth Amendment Agreement dated as of May 15, 2000 (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report as of May 15, 2000 (Registration No. 0-23635)). 10.19 Asset Purchase Agreement dated as of June 30, 2000, by and among the Company and Allen Systems Group, Inc. for the sale of Interactive Software Systems, Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report as of June 30, 2000 (Registration No. 0-23635)). 10.20 Letter Agreement dated as of July 27, 2000, by and among the Company and First Union National Bank related to the Company's Credit Agreement (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report as of July 27, 2000 (Registration No. 0-23635)). 10.21 2000 Employee Stock Purchase Plan (Incorporated by reference to Exhibit A to the Registrant's Schedule 14A Proxy statement as of April 10, 2000). 10.22 Consulting agreement between the Company and McShane Group 10.23 Letter Agreement dated as of April 11, 2001, by and among the Company and First Union National Bank related to debt restructuring and recapitalization with Term Sheet 10.24 Letter of understanding dated as of April 13, 2001, by and among the Company and Michael Louden related to employment and restructuring of earn-out obligations 10.25 Consulting agreement between the Company and Carl Marks Consulting Group LLC
58
EXHIBIT NUMBER DESCRIPTION ------- ----------- 16 Letter regarding change in certified public accountant as of August 14, 2000 (Incorporated by reference to Exhibit 16.1 to the Registrant's Form 8-K/A Current Report as of August 14, 2000 (Registration No. 0-23635)). 21 List of Subsidiaries of the Company. 23 Consent of BDO Seidman, LLP 23.1 Consent of PricewaterhouseCoopers LLP 24 Power of Attorney (on signature page hereof).
(b) Reports on Form 8-K: The Company did not file any Form 8-K Current Reports during the quarter ending December 31, 2000. 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CONDOR TECHNOLOGY SOLUTIONS, INC. By: /s/ J. L. HUITT, JR. ----------------------------------------- J. L. Huitt, Jr. Date: July 2, 2001 President and Chief Executive Officer
POWER OF ATTORNEY Each person whose signature appears below hereby authorizes and constitutes J. L. Huitt, Jr. and W. M. Robbins, and each of them singly, his true and lawful attorneys-in-fact with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities to sign and file any and all amendments to this report with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and he or she hereby ratifies and confirms all that said attorneys-in-fact or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE --------- ------------------------ ---- /s/ J. L. HUITT, JR. President and Chief Executive ------------------------------------ Officer (Principal Executive July 2, 2001 J. L. Huitt, Jr. Officer) /s/ W. M. ROBBINS Vice President and Chief Financial ------------------------------------ Officer (Principal Financial and July 2, 2001 W. M. Robbins Accounting Officer) /s/ PETER T. GARAHAN ------------------------------------ Chairman of the Board and Director July 2, 2001 Peter T. Garahan /s/ ANN TORRE GRANT ------------------------------------ Director July 2, 2001 Ann Torre Grant /s/ DENNIS E. LOGUE ------------------------------------ Director July 2, 2001 Dennis E. Logue /s/ WILLIAM M. NEWPORT ------------------------------------ Director July 2, 2001 William M. Newport
60 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 2.1 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MST Acquisition Corp., Management Support Technology Corporation and the Stockholders named therein (Incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 2.2 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, CHMC Acquisition Corp., Computer Hardware Maintenance Company, Inc. and the Stockholders named therein (Incorporated by reference to Exhibit 2.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 2.3 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Federal Acquisition Corp., Federal Computer Corporation and the Stockholders named therein (Incorporated by reference to Exhibit 2.3 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 2.4 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Access Acquisition Corp., Corporate Access, Inc. and the Stockholders named therein (Incorporated by reference to Exhibit 2.4 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 2.5 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Interactive Acquisition Corp., Interactive Software Systems Incorporated and the Stockholders named therein (Incorporated by reference to Exhibit 2.5 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 2.6 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, US Comm Acquisition Corp., U.S. Communications, Inc. and the Stockholders named therein (Incorporated by reference to Exhibit 2.6 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 2.7 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, InVenture Acquisition Corp., InVenture Group, Inc. and the Stockholders named therein (Incorporated by reference to Exhibit 2.7 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 2.8 Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MIS Acquisition Corp., MIS Technologies, Inc. and the Stockholders named therein (Incorporated by reference to Exhibit 2.8 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 3.1 Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 3.1A Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1A to Amendment No. 4 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 3.2 By-Laws of the Company as amended (Incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 4 Form of Certificate Evidencing Ownership of Common Stock of the Company (Incorporated by reference to Exhibit 4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)).
EXHIBIT NUMBER DESCRIPTION ------ ----------- 4.1 Condor Technology Solutions, Inc. Employee Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (Registration No. 333-64505)). 4.2 Condor Technology Solutions, Inc. 401(k) Retirement Saving Plan (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (Registration No. 333-73055)). 10.1* 1997 Long-Term Incentive Plan of the Company (Incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 10.1.1* 1997 Long-Term Incentive Plan of the Company As Amended and Restated (Incorporated by reference to Exhibit 10.1.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998). 10.8* Employment Agreement between the Company and John F. McCabe (Incorporated by reference to Exhibit 10.10 to the Registrant's Quarterly Report on From 10-Q for the three months ended June 30, 1998). 10.8.1* Executive Management Severance Agreement between the Company and John F. McCabe 10.9 Stock Purchase Agreement, dated as of July 16, 1998, by and among the Company and the stockholders of LINC Systems Corporation (Incorporated by reference to Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the three months ended June 30, 1998). 10.10 Purchase Agreement, among Condor Technology Solutions, Inc., Global Core Strategies, Inc., and Jerry Ward, dated December 10, 1998 (Incorporated by reference to Exhibit 2.2 to the Registrant's Form 8-K Current Report as of December 22, 1998 (Registration No. 0-23635)). 10.11* Employment Agreement between Louden Associates, Inc. and Michael Louden (Incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 10.13 Credit Agreement by and among the Company and First Union National Bank, as Issuing Lender, Collateral Agent and Administrative Agent, and First Union Commercial Corporation as Swingline Lender and Lender and related ancillary documents (Incorporated by reference to Exhibit 10.14 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 1999). 10.14 Purchase Agreement dated as of April 1, 1999, by and among the Company and Interest Holders of Titan Technologies Group, LLC (Incorporated by reference to Exhibit 10.15 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 1999). 10.15 Third Amendment to Forbearance Letter Agreement and Amendment Agreement dated as of August 27, 1999 (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report as of August 27, 1999 (Registration No. 0-23635)). 10.16 Fourth Amendment to Forbearance Letter Agreement and Amendment Agreement dated as of November 15, 1999 (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report as of November 15, 1999 (Registration No. 0-23635)). 10.17 Fifth Amendment Agreement dated as of March 1, 2000 (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report as of March 1, 2000 (Registration No. 0-23635)). 10.18 First Amendment to Fifth Amendment Agreement dated as of May 15, 2000 (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report as of May 15, 2000 (Registration No. 0-23635)).
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.19 Asset Purchase Agreement dated as of June 30, 2000, by and among the Company and Allen Systems Group, Inc. for the sale of Interactive Software Systems, Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report as of June 30, 2000 (Registration No. 0-23635)). 10.20 Letter Agreement dated as of July 27, 2000, by and among the Company and First Union National Bank related to the Company's Credit Agreement (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report as of July 27, 2000 (Registration No. 0-23635)). 10.21 2000 Employee Stock Purchase Plan (Incorporated by reference to Exhibit A to the Registrant's Schedule 14A Proxy statement as of April 10, 2000). 10.22 Consulting agreement between the Company and McShane Group 10.23 Letter Agreement dated as of April 11, 2001, by and among the Company and First Union National Bank related to debt restructuring and recapitalization with Term Sheet 10.24 Letter of understanding dated as of April 13, 2001, by and among the Company and Michael Louden related to employment and restructuring of earn-out obligations 10.25 Consulting agreement between the Company and Carl Marks Consulting Group LLC 16 Letter regarding change in certified public accountant as of August 14, 2000 (Incorporated by reference to Exhibit 16.1 to the Registrant's Form 8-K/A Current Report as of August 14, 2000 (Registration No. 0-23635)). 21 List of Subsidiaries of the Company. 23 Consent of BDO Seidman, LLP 23.1 Consent of PricewaterhouseCoopers LLP 24 Power of Attorney (on signature page hereof).