-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PpaEBh3MmcuUygQwZGFCEJnO2KQjbDKshqu94pmbrkOJXb7kpu6bsQYjklfF2nxC PFcnXq7fLnMBWIUYb+wDvQ== 0001047469-99-010389.txt : 19990319 0001047469-99-010389.hdr.sgml : 19990319 ACCESSION NUMBER: 0001047469-99-010389 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONDOR TECHNOLOGY SOLUTIONS INC CENTRAL INDEX KEY: 0001042799 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 541814931 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23635 FILM NUMBER: 99568268 BUSINESS ADDRESS: STREET 1: 170 FENNIFER ROAD STREET 2: SUITE 325 CITY: ANNAPOLIS STATE: MD ZIP: 21401 BUSINESS PHONE: 7038473290 MAIL ADDRESS: STREET 1: 1650 TYSONS BLVD STREET 2: STE 600 CITY: MCLEAN STATE: VA ZIP: 22102 FORMER COMPANY: FORMER CONFORMED NAME: CONDOR TECHNOLOGY GRP INC DATE OF NAME CHANGE: 19971014 FORMER COMPANY: FORMER CONFORMED NAME: CONDOR TECHNOLOGY GRP DATE OF NAME CHANGE: 19971003 FORMER COMPANY: FORMER CONFORMED NAME: CONDOR TECHNOLOGY GROUP INC/ FA DATE OF NAME CHANGE: 19970722 10-K 1 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, 1998 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 Identification incorporation or organization) No.) 170 JENNIFER ROAD, SUITE 325, ANNAPOLIS, 21401 MARYLAND (zip code) (Address of principal executive offices) (410) 266-8700 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE 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 / / *Registrant became subject to such requirements on February 5, 1998. 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 March 12, 1999 was $98,872,430, based on the last sale price ($9.88) of the Registrant's Common Stock, $.01 par value per share, on the Nasdaq National Market on March 12, 1999. As of March 12, 1999, 12,101,488 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Certain information called for by Part III of the Form 10-K will either be filed with the Commission under Regulation 14A under the Securities Exchange Act of 1934 or by amendment to this Form 10-K, in either case on or before April 30, 1999. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONDOR TECHNOLOGY SOLUTIONS, INC. 1998 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PAGE ----- PART I Item 1. Business....................................................................................... 2 Item 2. Properties..................................................................................... 10 Item 3. Legal Proceedings.............................................................................. 11 Item 4. Submission of Matters to a Vote of Security Holders............................................ 11 Item 4A. Executive Officers of the Registrant........................................................... 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 14 Item 6. Selected Financial Data........................................................................ 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 20 Item 8. Financial Statements and Supplementary Data.................................................... 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 42 PART III Item 10. Directors and Executive Officers of the Registrant............................................. 43 Item 11. Executive Compensation......................................................................... 43 Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 43 Item 13. Certain Relationships and Related Transactions................................................. 43 PART IV Item 14... Exhibits, Financial Statements Schedules, and Reports on Form 8-K.............................. 44
1 PART I ITEM 1. BUSINESS INTRODUCTION Condor Technology Solutions, Inc. (the "Company") provides a wide range of information technology ("IT") services and solutions to middle market organizations, Fortune 1000 companies and public sector organizations. The Company provides its customers a single source for a broad range of services, including strategic IT planning and management consulting; decision support consulting; interactive media services; custom development, integration and installation of IT systems; enterprise resource planning ("ERP") package implementation and consulting; contract staffing and recruiting; training and continuing education; call center and help-desk services; desktop systems and mainframe maintenance and support; and hardware procurement. The Company works with its clients to identify areas of their businesses where the effective deployment of technology can have the maximum impact on executing business strategies and optimizing business processes. The Company focuses on marketing its wide range of IT services to middle market organizations, Fortune 1000 companies and public sector organizations, which the Company believes typically spend from $2 million to $30 million annually on their IT needs. In order to become a single-source provider of IT services and solutions to middle market organizations, Condor acquired, in separate mergers (the "Mergers"), eight IT service providers (the "Founding Companies") in February 1998 concurrent with the closing of the Company's initial public offering (the "Offering") of shares of its Common Stock, $.01 par value per share (the "Common Stock"). The Founding Companies are: - Management Support Technology Corp. ("MST"); - Computer Hardware Maintenance Company, Inc. ("CHMC"); - Federal Computer Corporation ("Federal"); - Corporate Access, Inc. ("Corporate Access"); - Interactive Software Systems Incorporated ("ISSI"); - U.S. Communications, Inc. ("USComm"); - InVenture Group, Inc. ("InVenture"); and - MIS Technologies, Inc. ("MIS"). Since the initial public offering by the Company in February 1998, the Company has made five additional acquisitions collectively referred to as "Other Acquisitions". They are: - Decision Support Technology, Inc. ("DST"); - Louden Associates, Inc. ("Louden"); - LINC Systems Corporation ("LINC"); - PowerCrew, Inc. ("PowerCrew"); and - the assets and going business of Global Core Strategies, Inc. ("Global"). The Founding Companies and the Other Acquisitions are referred to collectively herein as "operating companies". Unless otherwise indicated, all references to the "Company" herein include Condor Technology Solutions, Inc. ("Condor") and all of the operating companies, and references herein to "Condor" mean Condor Technology Solutions, Inc. prior to the closing of the Mergers. The Company delivers comprehensive IT services to the insurance and financial services, healthcare, technology and public sector markets. These markets are typically characterized by (i) reliance on legacy systems; (ii) platform migration to client/server architectures; (iii) changing competitive dynamics, such as globalization and deregulation; and (iv) heavy dependency on database and proprietary applications. The Company believes that middle market organizations in these industry groups have been underserved by large IT vendors which, due to high cost structures, cannot address the requirements of the middle market adequately. 2 The Company is organized into three operating divisions: Consulting Services, System Services and Desktop Services. See "Item 8. Consolidated Financial Statements, Note 15. Segment Reporting". The Company markets its services through the sales forces at each of its operating divisions with oversight from the Company's corporate sales force. 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 32 offices located in 12 states across the United States and in three foreign countries. As of December 31, 1998, the Company had 1,075 employees. The Company cultivates long-term relationships with its clients and believes these long-term relationships present excellent opportunities for further marketing of its services. MARKET OPPORTUNITY Heightened competition, deregulation, globalization and rapid technological advances are forcing organizations to make fundamental changes in their business processes. These pressures have compelled organizations to improve the quality of their products and services, reduce costs and strengthen client relationships. Increasingly, organizations are addressing these issues by developing and utilizing IT services and solutions that facilitate the rapid and flexible collection, analysis and dissemination of information within the organization and among clients and suppliers. The ability of an organization to maintain and refresh its existing systems and to integrate and deploy new information technologies in a cost-effective manner has become critical to competing successfully in today's rapidly changing business environment. Although many companies have recognized the importance of IT systems and products to compete in this business climate, the process of designing, developing, procuring and implementing IT systems has become increasingly complex. Companies are continuing to migrate away from centralized mainframes running proprietary software toward decentralized, scalable architectures based on personal computers, client/server architectures, local and wide area networks, shared databases and packaged application software. These advances have greatly enhanced the ability of companies to benefit from the application of IT. Consequently, the number of companies desiring to use IT in new ways and the number of end users within these organizations is rising rapidly, yet the complexity of purchasing and implementing these systems is increasing. During this time of increasing reliance on IT, rapid technological change and other challenges, such as the need for Year 2000 conversions, have strained the capabilities of the internal departments within these organizations. At the same time, external economic factors have forced organizations to focus on core competencies and trim workforces in the IT management area. Accordingly, these organizations often lack the quantity or variety of IT skills necessary to design and develop emerging IT solutions. Consequently, businesses are increasingly looking to outsource IT services. By outsourcing IT services, companies are able to (i) focus on their core business; (ii) access specialized technical skills; (iii) implement IT solutions more rapidly; (iv) benefit from flexible staffing; and (v) reduce the cost of recruiting, training and retaining IT professionals. The IT service industry has evolved into a highly fragmented environment with a small number of large, national service providers and a large number of small-and medium-size service providers, usually only regional in scope. Large IT service providers typically address the IT needs of large organizations with substantial IT requirements for a wide range of services, whereas smaller IT service firms provide specialized services of limited scope. Consequently, middle market organizations typically rely on multiple, often specialized, providers to help implement and manage their systems. These smaller IT service providers often lack sufficient breadth and depth of services or industry knowledge to satisfy these organizations' need for comprehensive solutions. The Company believes the current reliance by middle market organizations on multiple service providers creates multiple vendor relationships that are more difficult and less cost-effective to manage, prevents the existence of a distinct responsible party and has an adverse impact on the quality and compatibility of IT solutions. In an attempt to reduce cost and 3 management complexity, many organizations are seeking to establish preferred vendor relationships with a small number of IT service providers that are able to address a broad range of IT service needs. THE CONDOR VISION The Company aims to be a leading single-source provider of a wide range of IT services and solutions to middle market organizations in select vertical markets. In response to market demand, the Company has assembled a diverse set of IT services, from planning and consulting to development, integration and installation of IT systems to desktop services. This broad range of services will enable clients to use the Company as a single provider for their IT needs, which should result in tighter integration, minimized risk and greater project management control. In addition, the Company intends to capitalize on the highly fragmented nature of the IT service industry by pursuing acquisition opportunities that complement and enhance its existing IT services. The Company believes that its expertise in providing IT services, industry experience, client relationships, geographic reach and size will enable it to capitalize on the anticipated continued growth of the IT needs of middle market organizations. STRATEGY The Company's objective is to be a leading provider of IT services to middle market organizations with a focus on select vertical markets. Key elements of the Company's strategy are presented below. LEVERAGE CONSULTING SERVICES. The Company intends to continue to leverage its high-level planning and strategic consulting services to foster long-term relationships with clients and to implement technology strategies developed by the Company. The Company believes that its ability to partner with clients to define their IT service needs and to deliver the full range of these IT services provides an attractive single-source solution for its clients. EXPAND CLIENT RELATIONSHIPS. The Company believes it can continue to increase its revenues from existing clients through integrated marketing. Each of the operating divisions specializes in specific areas of the IT service market. The Company believes that the access to and goodwill derived from its long-term relationships with its clients will continue to provide it with significant advantages in marketing additional services to existing clients. SECURE FULL-SERVICE CONTRACTS. The Company believes the broader range of IT services and geographic coverage available from the combination of its operating divisions allows it to be a single-source provider of IT services. By being a single-source provider, the Company has a competitive advantage in meeting the IT requirements of middle market organizations and provides the Company the opportunity to secure full-service contracts from a larger group of potential clients. RECRUIT, TRAIN AND RETAIN TECHNICAL PERSONNEL. The Company focuses on recruiting, training and retaining highly skilled IT professionals in response to the shortage of and significant competition for such professionals. Condor Staffing, a unit of the System Services Division, is dedicated solely to identifying, attracting and staffing IT professionals, and the Company focuses in both its System Services and Desktop Services divisions on training such professionals. While these activities will continue to be conducted primarily on behalf of the Company's clients, these capabilities enable the Company to enhance its ability to rapidly staff Company engagements as it implements its growth strategy. The Company provides competitive incentives, compensation and benefits in order to retain its IT professionals, including the use of options to purchase its Common Stock. EXPAND SERVICES AND GEOGRAPHIC REACH. The Company plans to expand its services and add new businesses in order to offer new and existing clients access to a more complete range of services. The Company intends to expand its services by addressing emerging technologies, including web-based systems, Internet, intranet and object-oriented development systems. The Company also plans to expand its geographic reach based on its clients' needs. 4 DECENTRALIZED MANAGEMENT PHILOSOPHY; ACHIEVE CENTRAL OPERATING EFFICIENCIES. The Company operates with a decentralized management structure to provide superior client service and a motivating environment for its various operating companies. The Company manages its finance, accounting, management information systems, treasury, employee benefits and certain purchasing arrangements on a centralized basis. The operating companies and any subsequently acquired businesses will continue to manage the professional services and technical aspects of their respective businesses in a manner consistent with historical practices and as dictated by local market conditions. The Company believes that this approach will enable the operating divisions and any subsequently acquired businesses to maintain their high level of client service and contact, while allowing them to draw upon the collective resources of the Company as a whole. PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. Given the highly fragmented nature of the IT service industry, the Company believes significant acquisition opportunities exist. The Company seeks to acquire IT service companies to strengthen its core competencies, to offer complementary services and to facilitate its expansion into new geographic areas. The Company believes that it will be regarded by acquisition candidates as an attractive acquiror because of: (i) the Company's integrated marketing strategy, which will offer owners of acquisition candidates significant opportunities to enhance the growth of their businesses; (ii) its decentralized management strategy; (iii) the Company's visibility and access to financial resources as a public company; and (iv) the potential for the owners of the business being acquired to participate in the Company's planned internal growth and growth through acquisitions, while at the same time realizing near-term liquidity. The Company's acquisitions are customarily paid for with a combination of cash and stock and may involve contingent consideration terms. In addition to acquisitions, the Company may seek to form strategic relationships with business partners to share technical and industry knowledge and pursue joint marketing opportunities. These relationships typically will allow the Company to gain access to training, product support and the technology developed by these partners. 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. CONSULTING SERVICES - - BUSINESS PROCESS REENGINEERING - - IT STRATEGY PLANNING - - INTERACTIVE MEDIA SERVICES - - DECISION SUPPORT PLANNING AND ANALYSIS - - SYSTEM ARCHITECTURE DEVELOPMENT - - CUSTOMER RELATIONSHIP MANAGEMENT - - TECHNOLOGY INFRASTRUCTURE DESIGN - - FUTURE TECHNOLOGY PLANNING AND REFRESHMENT - - YEAR 2000 PLANNING AND CONSULT - - STRATEGIC MARKETING SERVICES SYSTEM SERVICES - - DATAMART AND DATA WAREHOUSE DESIGN AND IMPLEMENTAION - - LAN/WAN DESIGN AND IMPLEMENTATION - - ENTERPRISE RESOURCE PLANNING PACKAGE IMPLEMENTATION AND CONSULTING 5 - - CONTRACT STAFFING AND RECRUITING - - TRAINING AND CONTINUING EDUCATION - - TECHNOLOGY INFRASTRUCTURE DESIGN - - INFORMATION ACCESS SOFTWARE DESIGN AND IMPLEMENTATION - - CLIENT/SERVER DEVELOPMENT AND INTEGRATION - - PROJECT MANAGEMENT AND RESOURCE PLANNING - - SOFTWARE APPLICATION DESIGN AND DEVELOPMENT - - CONFIGURATION, TESTING AND INSTALLATION DESKTOP SERVICES - - CALL CENTER DESIGN AND OPERATION - - SYSTEMS INSTALLATION MAINTENANCE AND SUPPORT - - HARDWARE AND SOFTWARE MAINTENANCE - - HELP-DESK OPERATIONS - - SYSTEMS TESTING AND ENGINEERING - - HARDWARE AND SOFTWARE PROCUREMENT The Company's extensive IT services are summarized in the following paragraphs. CONSULTING SERVICES 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 analysis, technology infrastructure design, future technology planning and refreshment, systems architecture development, decision support planning and analysis, business process automation and Year 2000 planning and consulting. The Company's ability to perform such strategic consulting services gives it the opportunity to deliver "follow-on" services to implement its recommended technology strategies. DECISION SUPPORT CONSULTING. The Company provides resources to integrate relevant information from across an enterprise and the external environment into a single data warehouse. Consultants analyze the types of information required and the data currently available in order to develop a prototype decision support system, and then operate and support the system. From this foundation, Condor consultants and engineers provide an automated system of data warehouses for sales, marketing and financial management to use in planning and analysis. INTERACTIVE MEDIA SERVICES. The Company provides services in integrating voice, video, text and data on the Internet. This is done through vehicles such as Web sites, intranets, customized training and Web conferencing to build new, more effective lines of communication with customers, internal work groups and suppliers. These tools can be integrated with the business and enterprise applications already used by customers to enhance management of their business. SYSTEM SERVICES 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. The Company also develops, sells and supports proprietary software for information access and delivery in the end-user, production-data 6 market, primarily under the Safari InfoTOOLS brand name. This software enables clients to manage information across virtually all types of databases, computing platforms and operating systems in a three-tiered, client/server environment. ENTERPRISE RESOURCE PLANNING. The Company offers its clients a single source for ERP focusing on the implementation and customization of ERP software packages. ERP programs automate manufacturing, financial, materials management, human resources and other infrastructure functions of companies, improving efficiency and generating data that give companies insight into the profitability of their internal operations. CONTRACT STAFFING AND RECRUITING. The Company contracts to provide both temporary and permanent personnel with highly specialized technical skills. In order to obtain the necessary technical personnel for its contract staffing business, the Company conducts extensive recruiting operations. The Company also uses these recruiting services to fulfill its internal personnel requirements. TRAINING AND CONTINUING EDUCATION. The Company offers IT training through its training facilities in Hartford, Connecticut and Annapolis, Maryland. The Company offers training courses in data modeling, Java and SilverStream programming, Microsoft NT certification courses and various other areas. The Company's services also include skills assessment, interactive learning solutions at the desktop and courseware. The Company also uses its training facilities to fulfill its internal training requirements. DESKTOP SERVICES 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, Unisys, Hewlett-Packard and Toshiba. CLIENTS AND ALLIANCE PARTNERS The Company's clients include a broad array of middle market commercial and public sector users of IT services. The Company primarily focuses on serving four vertical markets: insurance and financial services, healthcare, technology and public sector. In addition, the Company has established relationships with alliance partners that involve joint marketing, software distribution and the provision of services on a subcontractor basis. For the year ended December 31, 1998, the Company's top 10 clients accounted for 35% of the Company's unaudited pro forma combined revenues. In 1998, no single client accounted for 10% of the Company's unaudited pro forma combined revenues. 7 SALES AND MARKETING The Company's marketing efforts focus on middle market organizations, which the Company believes typically spend from $2 million to $30 million annually on their IT needs. Within these organizations, the Company specifically targets the insurance and financial services, healthcare, technology and public sector markets. The Company focuses its sales and marketing efforts around four principal goals: (i) continuing to expand the existing sales and marketing efforts of the operating divisions; (ii) integrated marketing of complementary service capabilities of the operating divisions and any subsequently acquired companies across the Company's client base; (iii) leveraging the experience and reputation of the Company's senior management to secure middle market, IT service contracts in the $10 million to $50 million range; and (iv) establishing the Company as a nationally recognized, full-service provider of IT services. The Company markets its services through each of the sales forces in the operating divisions as well as through the Company's corporate sales force. 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 has added sales and marketing personnel to assist senior executives in increasing the number of new clients and the amount of business generated from existing clients. 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, trade shows, direct telephone and mail campaigns and advertisements in trade journals. In addition, the Company leverages the experience and reputation of its senior management team within the IT service industry. The Company also has retained senior industry consultants to assist in identifying, marketing and securing large IT service contracts with middle market organizations. The Company has implemented marketing and advertising campaigns to establish the Company as a leading provider of IT offerings to middle market organizations. The Company believes these efforts will help it obtain new clients and attract and retain employees. COMPETITION The market for the Company's services is highly competitive. The Company's competitors vary in size and in the scope of the products and services that they offer. Primary competitors generally include consulting and systems integrators, "Big Five" accounting firms, applications development firms, service groups of computer equipment companies, general management consulting firms, programming companies, temporary staffing firms and other IT service providers. Traditionally, the largest service providers have principally focused on providing full-service solutions to international Fortune 500 companies. An emerging group of service companies is exploring opportunities in broader markets, including Cambridge Technology Partners, Sapient Corporation, Whitman-Hart, Inc., Perot Systems Corporation, Renaissance Worldwide and Technology Solutions Corp. There are relatively low barriers to entry into the Company's markets, and the Company expects to face competition from established and emerging companies. Increased competition may result in greater pricing pressure, which could adversely affect the Company's gross margins. In addition, many of the Company's competitors have greater financial, development, technical, marketing and sales resources than the Company. As a result, the Company's competitors may be able to adapt more quickly to new or emerging technologies and to changes in client requirements, or to devote greater resources than the Company to the development, promotion, sale and support of IT products and services. In addition, there is a risk that clients may elect to increase their internal IT resources to satisfy their IT solutions needs. The Company also intends to enter new markets and offer new services, and expects to face intense competition in these new markets from existing and new competitors, particularly since barriers to entry in the IT 8 service industry are low. There can be no assurance that the Company will continue to provide IT services and products demanded by the market or be able to compete successfully with existing or new competitors. An inability to compete in its market effectively would have a material adverse effect on the Company's results of operations, financial condition and business. 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. The Company also believes that a variety of competitive factors beyond its control, including the capabilities, resources and reputations of its competitors, may affect the Company's ability to compete effectively. EMPLOYEES The Company's success depends in large part upon its ability to attract, develop, motivate and retain highly skilled technical employees. The Company dedicates significant resources to employee recruitment and employs multiple recruiting methods, such as targeted college hiring, newspaper and technical periodical classified advertising, participation in national and regional job fair networks and the establishment of employee referral incentive programs. The Company supplements its internal recruiting efforts by using the resources of its contract staffing business, including access to a database of qualified technical professionals. Qualified technical employees are in great demand and are likely to remain a limited resource for the foreseeable future. Candidates are typically screened through detailed interviews by the Company's recruiting personnel, technical interviews by consultants and an appraisal by the Company's managers. The Company has developed programs to help train, motivate and retain its employees. For example, the Company utilizes a performance-based incentive compensation program. The Company has also developed training programs to guide technical personnel through a progression of skill and competency development programs. As another incentive measure, the Company has issued and will continue to issue options to its employees under its 1997 Long-Term Incentive Plan. Most importantly, in addition to formal programs, the Company maintains an environment that fosters creativity and recognizes technical excellence. 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. There can be no assurance the Company will be able to recruit or retain the technical personnel necessary to execute its business and growth strategy. As of December 31, 1998, the Company had 1,075 employees. None of the Company's employees 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. 9 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 Annapolis, MD................................ Two Offices/Training Center/Warehouse Andover, MA.................................. Office/Warehouse Atlanta, GA.................................. Office Avon, CT..................................... Office Baltimore, MD................................ Office Bloomfield, CT............................... Office Boston, MA................................... Office Burlington, MA............................... Office Chelmsford, MA............................... Office Denver, CO................................... Office Falls Church, VA............................. Office Framingham, MA............................... Office Hanover, Germany............................. Office Langhorne, PA................................ Office/Warehouse Malvern, PA.................................. Office McLean, VA................................... Office Mexico City, Mexico.......................... Office Nashua, NH................................... Office Norwalk, CT.................................. Office Oklahoma City, OK............................ Office Palo Alto, CA................................ Office Pittsburgh, PA............................... Office San Jose, CA................................. Office Scottsdale, AZ............................... Office Seal Beach, CA............................... Office Seattle, WA.................................. Office Stamford, CT................................. Office Utrecht, The Netherlands..................... Office Vienna, VA................................... Warehouse Waltham, MA.................................. Office Wellesley, MA................................ Office
The leases expire at various times between 1999 and 2008. The aggregate square footage of all of the Company's offices and warehouses is approximately 229,760 square feet. In order to secure its obligations under its revolving credit facility, the Company has granted to its lenders a security interest on substantially all of the Company's properties and other assets. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." ITEM 3. LEGAL PROCEEDINGS In the course of Condor's consolidation efforts, SCM LLC d/b/a The Commonwealth Group ("Commonwealth"), the promoter of the Offering, and Condor negotiated with Emtec, Inc. ("Emtec"), an IT service company based in Pennsylvania, with a view to Emtec becoming one of the Founding Companies. 10 As part of the process, Emtec's investment banker and Commonwealth executed two confidentiality agreements pursuant to which each agreed, among other things, not to disclose certain confidential information and Commonwealth agreed that it would not seek to enter into a business transaction with any companies to be introduced to it by Emtec's investment banker for a period of two years without such investment banker's prior written consent. On October 28, 1997, Emtec filed a Complaint in the United States District Court for the Eastern District of Pennsylvania against Condor, Commonwealth, J. Marshall Coleman, a Managing Director of Commonwealth and the former Chairman of the Board of Condor, and Kennard F. Hill, the Company's Chairman of the Board and Chief Executive Officer, alleging breach of contract, tortious interference with Emtec's business relationship with Corporate Access and CHMC, two of the Founding Companies, and misappropriation of a trade secret arising out of the participation of CHMC and Corporate Access in the consolidation and the Offering without Emtec's written consent. In connection with the three causes of action, Emtec demands that defendants disgorge the financial benefits that they have and will obtain as a result of their breach of contract and seeks compensatory and punitive damages. On December 31, 1997, the defendants filed an Answer, denying the allegations and asserting various affirmative defenses. The court denied Emtec's claim for unjust enrichment. A motion by Condor for partial summary judgment was granted in part to eliminate Emtec's claim for misappropriation of a trade secret. Trial of this matter could be scheduled in the near future. The Company believes that Emtec's allegations are without merit and that, in any event, the ultimate resolution of this action will not have a material adverse effect on the Company's financial position or results of operations. The Company has agreed to indemnify CHMC's directors, officers and stockholders against any liability such persons may incur as a result of any claims brought by Emtec against any of them that directly related to CHMC's participation as a Founding Company. Commonwealth has agreed to indemnify the Company with regard to any final judgment or settlement arising out of the above action or any similar action. Commonwealth's obligations under such agreement have been guaranteed by the three members of Commonwealth. The Company is a party to other legal proceedings and disputes related to the Company's day to day business operations, none of which 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, 1998, no matters were submitted to a vote of the Company's security holders. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth as of February 1, 1999, the names, ages and other information concerning those persons who are executive officers of the Company.
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- Kennard F. Hill...................................... 58 Chairman of the Board and Chief Executive Officer C. Lawrence Meador................................... 52 Vice Chairman of the Board Daniel J. Roche...................................... 37 President and Chief Operating Officer William J. Caragol................................... 31 Vice President, Chief Financial Officer and Treasurer John F. McCabe....................................... 54 Vice President, General Counsel and Secretary Robert F. Hefner..................................... 52 General Manager, System Services Division Michael G. Paglaiccetti.............................. 53 General Manager, Desktop Services Division
Kennard F. Hill has been Chief Executive Officer and a director of the Company since January 1997. Mr. Hill became Chairman of the Board of the Company upon the closing of the Offering in February 1998. From January 1997 to February 1998, Mr. Hill also served as President of the Company. Mr. Hill was Group President of I-NET, Inc., a network computing and systems integration services company, from 11 September 1995 to December 1996. From June 1993 to June 1995, Mr. Hill was President and Chief Executive Officer of Insource Technology, Inc., an IT consulting firm. From June 1992 to June 1993, Mr. Hill was a private consultant on client/server acquisition strategy in the healthcare industry. From 1988 to July 1992, Mr. Hill was Chief Executive Officer of DataLine Inc., a data processing and IT firm. From 1968 to 1988, Mr. Hill was employed by Electronic Data Systems Corporation ("EDS"), a full-service IT provider. He served as President of General Motors-EDS for North America from 1985 to 1988. At EDS, Mr. Hill also served as chief of the Healthcare Division, having previously served as its Director of Sales. Mr. Hill also was an officer of EDS's Federal Corp. subsidiary and a director of its National Heritage Insurance Corp. subsidiary, which provides healthcare underwriting for lower-income policyholders. In December 1994, Mr. Hill filed a voluntary petition in bankruptcy in order to discharge indebtedness arising out of his divorce and several partnerships in which he was a limited partner. The bankruptcy was discharged in January 1996. Mr. Hill attended the University of Texas and served two tours of duty as a United States Army pilot in Vietnam. C. Lawrence Meador has been Vice Chairman of the Board of Directors of the Company and Chief Executive Officer of MST since the closing of the Offering in February 1998. Mr. Meador is the founder and was the President of MST, a Founding Company, since 1992. From January 1996 to June 1998, Mr. Meador served, under an MST contract, as the Chief Information Officer of CIGNA Property and Casualty, an insurance company. All fees payable by CIGNA Property and Casualty in connection with Mr. Meador's services as the Chief Information Officer of CIGNA Property and Casualty are payable to MST. Mr. Meador has also been on the academic staff of the Massachusetts Institute of Technology for over 20 years, during which period he was a consultant to numerous international Fortune 1000 companies, governmental bodies and other organizations. From 1974 to 1992, Mr. Meador was the Founder, President and Chief Executive Officer of Decision Support Technology, Inc., a firm established to commercialize MIT research on Decision Support Systems. From 1985 to 1987 he served as a Co-Founder, Director and Vice Chairman of Software Productivity Research, Inc. Mr. Meador received a bachelor of science degree from the University of Texas and masters degrees in management and mechanical engineering from the Massachusetts Institute of Technology. Daniel J. Roche has been Chief Operating Officer of the Company since October 1997. He became President of the Company upon the closing of the Offering in February 1998. Mr. Roche previously served as the Chief Operating Officer and Executive Vice President of BSG, an IT service division of Medaphis Corp. that focuses on client/server and network technologies. From 1991 to May 1996, Mr. Roche was the Founder, President and Chief Executive Officer of Rapid Systems Solutions, Inc. ("RSSI"), a provider of client/server applications with competencies in database management systems, networking, communications and graphical user interfaces, which Mr. Roche founded and which Medaphis Corp. acquired in May 1996. From 1988 to 1993, Mr. Roche was an adjunct professor at the University of Maryland, Baltimore County. From 1985 to 1990, Mr. Roche held several positions at Booz-Allen & Hamilton. Mr. Roche received a bachelor of science degree in computer science from Central Michigan University, a masters degree in computer science from The Johns Hopkins University and completed the Owners and Presidents Management Program at the Harvard Graduate Business School. William J. Caragol was appointed Vice President and Chief Financial Officer in March 1998. Prior to that he was Vice President-Finance of the Company since October 1997. Prior to joining the Company, he was a Senior Manager in the High Technology Service Group of Deloitte & Touche LLP, which he joined in 1989. As a member of the High Technology Service Group, Mr. Caragol provided comprehensive accounting services to publicly-held U.S. corporations in the technology sector. Mr. Caragol is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants. He received a bachelor of science degree in accounting and business administration from Washington & Lee University. John F. McCabe was appointed Vice President, General Counsel and Secretary in June 1998. In this function, Mr. McCabe is focused on the Company's acquisition program directed at information technology services companies, corporate strategic planning, and day-to-day legal matters. He is also an advisor on 12 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. Robert F. Hefner was appointed as the General Manager of the Company's System Services Division in October, 1998. Concurrently he serves as the President of LINC Systems Corporation as he has done since September 1992. In that capacity, Mr. Hefner specializes in distributed client/server computing and relational database systems integration, custom application development, and infrastructure architecture. Prior to his work with LINC, he held positions with Source Services, EDS and Digital. Mr. Hefner is a graduate of the University of Rhode Island with a major in Finance and Insurance. He served in the United States Marine Corps with a tour of duty in Vietnam and attained the rank of Captain. Michael G. Paglaiccetti was appointed as the General Manager of the Desktop Services Division in August, 1998. Concurrently he serves as the President of Computer Hardware Maintenance Company, Inc. as he has done since 1988. Before becoming President of CHMC, Mr. Paglaiccetti served as Vice President for eight years. His experience in the information technology industry includes several years as the regional manager for Control Data Corporation, focusing on mainframe services. He also spent seven years with IBM Corporation as a custom engineer. 13 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 National Market under the symbol "CNDR." The Company completed its initial public offering of its Common Stock in February 1998 at a price of $13.00 per share. The following table sets forth, for the periods indicated, the range of high and low last reported sale prices for the Common Stock. From February 5, 1998 through March 31, 1998....................... 15.56 13.00(1) From April 1, 1998 through June 30, 1998........................... 17.75 13.00 From July 1, 1998 through September 30, 1998....................... 14.63 8.50 From October 1, 1998 through December 31, 1998..................... 13.75 9.00
- ------------------------ (1) Represents the initial public offering price. HOLDERS On March 12, 1999, the last reported sale price of the Common Stock on the Nasdaq National Market was $9.88 per share. At March 12, 1999, there were 80 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 expansion of its business and for general corporate purposes. Any payment of future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's earnings, financial position, capital requirements, level of indebtedness, contractual restrictions and other factors that the Company's Board of Directors deems relevant. In addition, the Company's revolving credit facility prohibits the payment of dividends by the Company without the lender's consent. (B) SALES OF REGISTERED AND UNREGISTERED SECURITIES On February 5, 1998, the Company registered, offered and sold 5,900,000 shares of Common Stock through an initial public offering. On March 1, 1998, the underwriters of the initial public offering exercised an overallotment option to purchase 885,000 registered shares. Net proceeds to the Company for both of these transactions were approximately $72.9 million after deducting underwriter commissions and other offering costs. On February 10, 1998, the Company issued 2,307,693 unregistered shares to purchase the Founding Companies. Effective June 4, 1998, the Company registered an additional 5,000,000 shares of common stock with the Securities and Exchange Commission on Form S-1, which may be offered and issued from time to time in connection with the merger with or acquisition by the Company of other businesses or assets. During 1998, the Company issued 9,600 unregistered shares and 1,028,186 registered shares in connection with the purchase of four Other Acquisitions. 14 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".
YEARS ENDED DECEMBER 31, --------------------- 1997 1998 --------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues............................................................. $ -- $ 168,833 Gross profit......................................................... -- 54,321 Income from operations............................................... (2,715) 11,724 Net income (loss).................................................... $ (2,715) $ 5,533 Net income (loss) per basic share.................................... $ (1.62) $ 0.54 Net income (loss) per diluted share.................................. $ (1.62) $ 0.51 Shares used in computing basic net income (loss) per share........... 1,680 10,193 Shares used in computing diluted net income (loss) per share......... 1,680 10,767
DECEMBER 31, --------------------- 1997 1998 --------- ---------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents............................................... $ 26 $ 3,053 Accounts Receivable, net................................................ -- 39,814 Goodwill and other intangibles, net..................................... -- 145,163 Total assets............................................................ 4,926 200,642 Long-term debt, net of current maturities............................... -- 24,296 Stockholders' equity (deficit).......................................... $ (255) $ 114,042
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with "Item 6. Selected Financial Data" and "Item 8. Financial Statements and Supplementary Data." A number of statements in this Annual Report on Form 10-K address activities, events or developments which the Company anticipates may occur in the future, including such matters as the Company's strategy for internal growth, additional capital expenditures (including the amount and nature thereof), acquisitions of assets and businesses, industry trends and other such matters. These statements are based on certain assumptions and analyses made by the Company in light of its perception of historical trends, current business and economic conditions and expected future developments, as well as other factors the Company believes are reasonable or appropriate. However, whether actual results and developments will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties, including: general economic, market or business conditions; the business opportunities (or lack thereof) that may be presented to and pursued by the Company; changes in laws or regulations; and other factors, many of which are beyond the control of the Company. Consequently, there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company or its business or operations. INTRODUCTION The Company earns revenues from the provision of IT services and hardware procurement. The Company recognizes IT service revenues using formulas based on time and materials, whereby revenues 15 are recognized as costs are incurred at agreed-upon billing rates. For projects billed on a fixed-price basis, revenue is recognized using the percentage of completion method. Percentage of completion is determined using total costs as a cost input measure. Revenues from license fees on proprietary software are recognized when a non-cancelable license agreement has been signed, the product has been delivered, collection is probable and all significant obligations relating to the license have been satisfied. There are no significant post-sales support obligations related to the Company's license fees. Revenues from hardware procurement are recognized upon shipment or acceptance of the equipment. When installation services are an integral component of the hardware procurement, revenue is recognized at the customer's acceptance of the equipment. Cost of revenues includes the provision of services and material directly related to the revenues, costs of acquisition of hardware resold to clients, subcontracted labor or other outside services and other direct costs associated with revenues, as well as an allocation of certain indirect costs. Selling, general and administrative costs include salaries, benefits, commissions payable to the Company's sales and marketing personnel, recruiting, finance and other general and administrative costs. In July 1996, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 97 ("SAB 97") relating to business combinations immediately prior to an initial public offering. SAB 97 requires that these combinations be accounted for using the purchase method of acquisition accounting. Condor was identified as the "accounting acquiror" for financial statement presentation purposes. RESULTS OF OPERATIONS The Company's consolidated financial statements have been prepared based on accounting for all companies acquired during 1998 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. The following table sets forth certain selected financial data for the Company on a historical basis and as a percentage of revenues for the years ended December 31, (in thousands, except percentages):
1997 1998 -------------------- --------------------- IT Service revenues........................................ $ -- --% $ 92,515 54.8% Hardware procurement revenues.............................. -- -- 76,318 45.2 --------- --------- ---------- --------- Total revenues............................................. -- -- 168,833 100.0 --------- --------- ---------- --------- Cost of IT services........................................ -- -- 45,379 49.1 Cost of hardware procurement............................... -- -- 69,133 90.6 --------- --------- ---------- --------- Total cost of revenues..................................... -- -- 114,512 67.8 --------- --------- ---------- --------- Gross profit............................................... -- -- 54,321 32.2 Selling, general and administrative........................ 2,715 -- 32,920 19.5 Depreciation and amortization.............................. -- -- 4,677 2.8 In process research and development........................ -- -- 5,000 3.0 --------- --------- ---------- --------- Income from operations..................................... $ (2,715) --% $ 11,724 6.9% --------- --------- ---------- --------- --------- --------- ---------- ---------
REVENUES. For the year ended December 31, 1998, the Company's revenues include the revenues of the Founding Companies from February 1, 1998 through December 31, 1998 and the revenues of DST, 16 Louden, LINC, PowerCrew, and Global from their respective acquisition dates of May 5, 1998, June 30, 1998, July 17, 1998, November 4, 1998 and December 10, 1998. Revenues from IT services for the year were approximately 55% of total revenues. No single customer accounts for more than 10% of the Company's consolidated revenues. IT service revenue as a percentage of total revenue has increased throughout 1998 through growth in each of the Company's divisions. Consulting Services revenue is attributable to strategic IT planning and management consulting; decision support consulting; and interactive media services. System Services revenue is attributable to custom development, integration and installation of IT systems; enterprise resource planning ("ERP") package implementation and consulting; contract staffing and recruiting; training and continuing education; and sales of the Company's Safari InfoTOOLS software licenses. Desktop services revenue is attributable to call center and help-desk services and systems and mainframe maintenance and support. Hardware procurement revenue as a percentage of total revenue has decreased throughout 1998 primarily due to a shift in the Company's focus toward higher margin IT service revenues. COST OF REVENUES. Cost of revenues was $114.5 million, or approximately 68% of sales for the year ended December 31 1998. The Company generates higher gross margins from its System and Consulting Services Divisions while the procurement component of its Desktop Service Division generates its lowest margins. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $32.9 million in 1998, which consist of salaries, benefits and commissions payable to the Company's sales and marketing personnel, recruiting, finance costs and other general and administrative costs. Expenses incurred in 1997 represent payment of salary to one officer of the Company and facilities and general and administrative costs. DEPRECIATION AND AMORTIZATION. Depreciation and amortization includes the depreciation of property and equipment, the amortization of goodwill and other intangibles from the purchase of the operating companies, internally developed software costs, and the technology license recorded in connection with a service contract. LIQUIDITY AND CAPITAL RESOURCES Condor is a holding company that conducts its operations though its subsidiaries. Accordingly, Condor's principal sources of liquidity are the cash flows of its operating companies and cash available from its credit facilities. At December 31, 1998 the Company had $3.1 million in cash and cash equivalents and $24.7 million of indebtedness outstanding, which consists primarily of borrowings on its $50 million revolving credit facility (the "Revolver"). The Company is in the process of arranging a new, larger bank facility to give it additional funding to pursue acquisition opportunities. There can be no assurance that the Company will be successful in obtaining such a new, larger facility. Net cash provided by operating activities was $5.6 million for the year ended December 31, 1998. Net cash used in investing activities was $93.7 million for the year ended December 31, 1998 which included $90.2 million, net of cash acquired, for the acquisition of the operating companies. Net cash provided by financing activities was $93.9 million for the year ended December 31, 1998 and included $72.9 million from the Company's Offering, net of costs, and borrowings of $21.0 million, net of repayments and direct costs incurred in obtaining financing. The Company intends to continue to pursue acquisition opportunities. The timing, size or success of any acquisition effort and the associated potential capital commitments are unpredictable. The Company expects to fund future acquisitions primarily through a combination of cash flow from operations and 17 borrowings, including borrowings under the Revolver, as well as issuances of additional shares of Common Stock. The Company believes that its cash flow from operations and borrowings under its credit facilities will be sufficient to fund its cash flow requirements for at least the next 12 months. To the extent that the Company is successful in consummating acquisitions, it may be necessary to finance such acquisitions through the issuance of additional equity securities, incurrence of indebtedness or both. SEASONALITY AND CYCLICALITY; POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company has experienced and expects to continue to experience variability in revenues and net income from quarter to quarter as a result of seasonality that may accompany private or public sector budget cycles. Sales of the Company's IT products and related services have historically been higher in the third and fourth calendar quarters as a result of patterns of capital spending by some clients, principally federal, state and local governments. The Company also believes that the IT industry is influenced by general economic conditions and particularly by the level of technological change. Increased levels of technological change can have a favorable impact on the Company's revenues. In general, technological change drives the need for hardware procurement and information systems services provided by the Company. The Company also believes that the industry tends to experience periods of decline and recession during economic downturns. The industry could experience sustained periods of decline in revenues in the future, and any such decline may have a material adverse effect on the Company. The Company could in the future experience quarterly fluctuations in operating results due to the factors discussed above and other factors, including the short-term nature of certain client commitments; patterns of capital spending by clients; loss of a major client; seasonality that may accompany private or governmental sector budget cycles; the timing, size and mix of service and product offerings; the timing and size of significant software sales; the timing and size of new projects; the timing and magnitude of required capital expenditures; pricing changes in response to various competitive factors; market factors affecting the availability of qualified technical personnel; timing and client acceptance of new service offerings; changes in the trends affecting the outsourcing of IT services; additional selling, general and administrative expenses to acquire and support new business; increased levels of technological change in the industry; and general economic conditions. The Company plans its operating expenditures based on revenue forecasts, and a revenue shortfall below such forecasts in any quarter would likely adversely affect the Company's operating results for that quarter. INFLATION The Company believes the effects of inflation generally do not have a material impact on its operations or financial position or cash flows. YEAR 2000 READINESS IMPACT OF THE YEAR 2000 ISSUE. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of a company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on recent assessments, the Company determined that it will be required to modify or replace portions of hardware and software so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications and replacement of some of the existing 18 hardware and software, the Year 2000 issue can be mitigated. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 issue could have a small to moderate impact on operations. The Company is currently compiling a formal Year 2000 contingency plan which is expected to be completed by July 1999. The Company's plan to resolve its Year 2000 issues involves four phases: assessment, remediation, testing, and implementation. ASSESSMENT. The Company has fully completed its assessment of all material systems and Company products that could be affected by the Year 2000 issue. The completed assessment indicated that a portion of the Company's information technology systems could be affected. That assessment also indicated that the current accounting system is at risk of not being Year 2000 compliant. If not resolved on a timely basis, this could affect the Company's ability to provide adequate and timely billing information. REMEDIATION. The Company estimates that it is 80% complete in the remediation phase of all material systems and expects to complete corporate remediation by April 1999. After completing remediation, the Company's plans include testing and implementing its information technology systems. TESTING AND IMPLEMENTATION. The Company estimates that it has completed 80% of its testing and implementation of its remediated systems. Completion of the testing phase is expected by May 1999 with all remediated systems fully implemented by July 1999. In certain cases, the remedy is a replacement of the system or software. For example, the Company plans to install an ERP accounting and management information system in 1999 which will be Year 2000 compliant. THIRD PARTIES. With respect to third parties, the Company has completed its remediation and estimates it is 80% complete with the testing phase of systems that interface directly with significant vendors. Testing of all material systems is expected to be completed no later than April 1999. Implementation is also 80% complete and is expected to be completed by July 1999. The Company is in the process of surveying its significant suppliers that do not involve system interface. The Company has no means of ensuring that these suppliers will be Year 2000 ready, and the inability of those parties to complete the Year 2000 resolution process could materially impact the Company. The effect of non-compliance by third parties, where some system interface exists, is not determinable. The Company is not aware of any problems with third parties that would materially impact results of operations, liquidity, or capital resources. To the extent that certain licensed products proprietary to the company are non-compliant, the Company is offering to provide upgrades to its customers. COST. The Company will utilize both internal and external resources to update or replace, test, and implement the affected information technology systems for Year 2000 modifications. The total cost of the Year 2000 project is estimated at $1.6 million and is being funded through operating cash flows. Expenditures to date have related to all phases of the Year 2000 project. As of December 31, 1998, the cost incurred to date was approximately $500,000 which related to hardware purchases and replacement. Remaining costs relate to the purchase of new software and operating equipment and the acquisition of external resources to complete implementation of new systems. The Company's plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources and other factors. Estimates of the status of completion and the expected completion dates are based on costs incurred to date compared to total expected costs. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Special factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. 19 NEW ACCOUNTING PRONOUNCEMENTS DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires all derivatives to be recorded on the balance sheet at fair value and establishes "special accounting" for the following three different types of hedges: hedges of changes in the fair value of assets, liabilities or firm commitments; hedges of the variable cash flows of forecasted transactions; and hedges of foreign currency exposures of net investments in foreign operations. SFAS No. 133 is effective for years beginning after June 15, 1999, with earlier adoption permitted. The Company believes that the effect of adoption of SFAS No. 133 will not be material to its 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. Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONDOR TECHNOLOGY SOLUTIONS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ----- CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants........................................................................ 21 Consolidated Balance Sheets.............................................................................. 22 Consolidated Statements of Operations.................................................................... 23 Consolidated Statement of Changes in Stockholders' Equity (Deficit)...................................... 24 Consolidated Statements of Cash Flows.................................................................... 25 Notes to Consolidated Financial Statements............................................................... 26 CONDOR TECHNOLOGY SOLUTIONS, INC. FINANCIAL STATEMENT SCHEDULES II. Valuation and Qualifying Accounts (All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.)... 42
20 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Condor Technology Solutions, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Condor Technology Solutions, Inc. and its subsidiaries at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP McLean, VA February 5, 1999 21 CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, --------------------- 1997 1998 --------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................................................ $ 26 $ 3,053 Restricted cash.......................................................................... -- 2,756 Accounts receivable, net................................................................. -- 39,814 Prepaids and other current assets........................................................ -- 3,284 Deferred offering costs.................................................................. 4,900 -- --------- ---------- Total current assets................................................................. 4,926 48,907 PROPERTY AND EQUIPMENT, NET................................................................ -- 4,329 GOODWILL AND OTHER INTANGIBLES, NET........................................................ -- 145,163 OTHER ASSETS............................................................................... -- 2,243 --------- ---------- TOTAL ASSETS......................................................................... $ 4,926 $ 200,642 --------- ---------- --------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable......................................................................... $ -- $ 13,838 Accrued expenses and other current liabilities........................................... 2,689 16,524 Amounts due to stockholder............................................................... 2,492 -- Deferred revenue......................................................................... -- 4,915 Current portion of contingent purchase liability......................................... -- 4,308 Current portion of long-term debt........................................................ -- 442 --------- ---------- Total current liabilities............................................................ 5,181 40,027 LONG-TERM DEBT............................................................................. -- 24,296 NON-CURRENT CONTINGENT PURCHASE LIABILITY.................................................. -- 20,348 OTHER LONG-TERM OBLIGATIONS................................................................ -- 1,929 --------- ---------- Total liabilities.................................................................... 5,181 86,600 COMMITMENTS AND CONTINGENCIES (Note 18).................................................... -- -- STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, $.01 par, 1,000,000 authorized; none outstanding........................ -- -- Common stock, $.01 par value; authorized 49,000,000 shares; issued and outstanding, 1,892,307 and 12,009,608 shares at December 31, 1997 and 1998, respectively............ 19 120 Additional paid-in capital............................................................... 2,441 111,278 Retained earnings (accumulated deficit).................................................. (2,715) 2,818 Accumulated other comprehensive income................................................... -- 20 Treasury stock, at cost (13,178 shares at December 31, 1998)............................. -- (194) --------- ---------- Total stockholders' equity (deficit)..................................................... (255) 114,042 --------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................................. $ 4,926 $ 200,642 --------- ---------- --------- ----------
The accompanying notes are an integral part of these consolidated financial statements. 22 CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, --------------------- 1997 1998 --------- ---------- IT service revenues........................................................................ $ -- $ 92,515 Hardware procurement revenues.............................................................. -- 76,318 --------- ---------- Total revenues............................................................................. -- 168,833 --------- ---------- Cost of IT services........................................................................ -- 45,379 Cost of hardware procurement............................................................... -- 69,133 --------- ---------- Total cost of revenues..................................................................... -- 114,512 --------- ---------- Gross profit............................................................................... -- 54,321 Selling, general and administrative expenses............................................... 2,715 32,920 Depreciation and amortization.............................................................. -- 4,677 In process research and development........................................................ -- 5,000 --------- ---------- Income (loss) from operations.............................................................. (2,715) 11,724 Interest and other income, net............................................................. -- 684 --------- ---------- Income (loss) before income taxes.......................................................... (2,715) 12,408 Provision for income taxes................................................................. -- 6,875 --------- ---------- Net income (loss).......................................................................... $ (2,715) $ 5,533 --------- ---------- --------- ---------- Net income (loss) per basic share.......................................................... $ (1.62) $ 0.54 --------- ---------- --------- ---------- Net income (loss) per diluted share........................................................ $ (1.62) $ 0.51 --------- ---------- --------- ---------- Basic shares outstanding................................................................... 1,680 10,193 --------- ---------- --------- ---------- Diluted shares outstanding................................................................. 1,680 10,767 --------- ---------- --------- ----------
The accompanying notes are an integral part of these consolidated financial statements. 23 CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
RETAINED COMMON STOCK ADDITIONAL EARNINGS CUMULATIVE STOCKHOLDERS' ------------------ PAID-IN (ACCUMULATED TRANSLATION TREASURY EQUITY SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT(1) STOCK (DEFICIT) ---------- ------ ---------- ------------ ----------- -------- ------------- BALANCE, DECEMBER 31, 1996.............. 1,413,806 $ 14 $ 73 $ -- $-- $ -- $ 87 Issuance of common stock................ 478,501 5 2,368 -- -- -- 2,373 Net loss................................ -- -- -- (2,715) -- -- (2,715) ---------- ------ ---------- ------ --- -------- ------------- BALANCE, DECEMBER 31, 1997.............. 1,892,307 19 2,441 (2,715) -- -- (255) Issuance of common stock in initial public offering, net of offering costs................................. 6,785,000 68 72,845 -- -- -- 72,913 Issuance of common stock for acquisitions.......................... 3,345,479 33 35,917 -- -- -- 35,950 Purchase of treasury stock.............. (13,178) -- -- -- -- (194) (194) Comprehensive income: Net income............................ -- -- -- 5,533 -- -- Foreign currency translation adjustment........................ -- -- -- -- 20 -- Total comprehensive income.............. 5,553 Other................................... -- -- 75 -- -- -- 75 ---------- ------ ---------- ------ --- -------- ------------- BALANCE, DECEMBER 31, 1998.............. 12,009,608 $120 $ 111,278 $2,818 $20 $(194) $114,042 ---------- ------ ---------- ------ --- -------- ------------- ---------- ------ ---------- ------ --- -------- -------------
- ------------------------ (1) Accumulated Other Comprehensive Income The accompanying notes are an integral part of these consolidated financial statements. 24 CONDOR TECHNOLOGY SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------- 1997 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income.......................................................................... $ (2,715) $ 5,533 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization............................................................ -- 4,677 In process research and development...................................................... -- 5,000 Stock compensation expense............................................................... 1,771 -- Change in valuation allowance............................................................ -- 1,032 Changes in assets and liabilities: Accounts receivable.................................................................... -- 2,846 Prepaid expenses and other assets...................................................... (4,183) (286) Accounts payable and other current liabilities......................................... 5,003 (12,541) Deferred revenue....................................................................... -- (803) Other.................................................................................... -- 102 --------- --------- Net cash (used in) provided by operating activities.................................. (124) 5,560 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment......................................................... -- (2,806) Purchase of marketable securities.......................................................... -- (36,726) Sale of marketable securities.............................................................. -- 37,924 Acquisition of subsidiaries, net of cash................................................... -- (90,168) Payment for technology license............................................................. -- (1,550) Other...................................................................................... -- (338) --------- --------- Net cash used in investing activities................................................ -- (93,664) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loans........................................................................ -- 34,000 Payments on long--term debt................................................................ -- (12,852) Proceeds from initial public offering, net of costs........................................ -- 72,913 Proceeds from issuance of common stock..................................................... 150 -- Purchase of treasury shares................................................................ -- (194) --------- --------- Net cash provided by financing activities............................................ 150 93,867 EFFECT OF EXCHANGE RATE CHANGES.............................................................. -- 20 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS.................................................... 26 5,783 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................................... -- 26 --------- --------- CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD................................. $ 26 $ 5,809 --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. 25 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL Condor Technology Solutions, Inc., a Delaware corporation ("Condor" or the "Company"), was founded in August 1996 to create a leading single-source information technology ("IT") service company to provide strategic IT business solutions to middle market organizations, Fortune 1000 companies and public sector organizations. In order to become a single-source provider of a wide range of IT services and solutions, Condor entered into agreements (the "Mergers") to acquire all of the common 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 the Mergers were completed. As of December 31, 1998, the Company had acquired five additional IT service providers. All acquisitions are reflected as of their respective acquisition dates. The Founding Companies along with the newly acquired companies are referred to herein as "operating companies". The Company intends to continue to pursue strategic acquisitions as a means to continually expand the breadth of IT services it provides. For financial statement purposes, Condor has been identified as the accounting acquiror. Accordingly, the financial statements as of December 31, 1997 include the results of Condor prior to the Offering and the Mergers. The Mergers and subsequent acquisitions were accounted for using the purchase method of accounting (see Note 3). Prior to the Offering, the Company did not conduct any significant operations, other than payment of salary to an officer and certain facility and general and administrative costs. The Company's cash balances were provided from the sale of stock to investors and advances from a founding stockholder. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING--The Company's accounting records are maintained on the accrual basis of accounting. PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the accounts of Condor and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. REVENUE RECOGNITION--The Company earns revenues from the provision of IT services and hardware procurement. IT services are comprised of strategic IT planning and management consulting; decision support consulting; interactive media services; custom development, integration and installation of IT systems; enterprise resource planning ("ERP") package implementation and consulting; contract staffing and recruiting; training and continuing education; sale of proprietary and third-party software; call center and help-desk services; and systems and mainframe maintenance and support. The Company recognizes IT service revenues using formulas based on time and materials, whereby revenues are recognized as costs are incurred at agreed-upon billing rates. For projects billed on a fixed-price basis, revenue is recognized using the percentage of completion method. Percentage of completion is determined using total costs as a cost input measure. Revenues from license fees on proprietary 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. There are no significant post-sales support obligations related to the Company's license fees. 26 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenues from hardware procurement are recognized upon shipment of the equipment. When installation services are an integral component of the hardware procurement, the installation and hardware procurement revenue is recognized upon the customer's acceptance of the equipment. Cost of revenues includes the provision of services and material directly related to the revenues, costs of acquisition of hardware resold to clients, subcontracted labor or other outside services and other direct costs associated with revenues, as well as an allocation of certain indirect costs. DEFERRED REVENUE--The Company receives advance payment on certain maintenance contracts. Such advance payments are deferred and are reflected in income together with the related costs and expenses as the services are performed. ALLOWANCE FOR DOUBTFUL ACCOUNTS--The Company provides an allowance for uncollectible accounts receivable based on experience. Although it is reasonably possible that management's estimate for uncollectible accounts could change in the near future, management is not aware of any events that would result in a change to its estimate which would be material to the Company's financial position or results of operations. At December 31, 1998, the Company had an allowance for doubtful accounts of approximately $572,000. There was no allowance at December 31, 1997. 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 has retained cash in escrow accounts related to the acquisitions of two companies. A corresponding escrow payable has been recorded in accrued expenses and other current liabilities, and the amounts will be paid in 1999 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. The Company does not believe that it is subject to any unusual credit risk beyond the normal credit risk attendant in its business. INVENTORY--Inventory is stated at the lower of cost or market. Cost is determined using the average cost method and is comprised of goods held for resale and maintenance parts and supplies. At December 31, 1998, the Company had inventory of approximately $740,000 which is 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 3-10 Furniture and fixtures years 5-10 Leasehold improvements 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 27 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) evaluates the recoverability of the goodwill based on the undiscounted cash flow projections of each business acquired. SOFTWARE COSTS--Capitalization of development costs of new software products, as well as costs incurred to enhance existing software products, begins once the technological feasibility of the product is established. Capitalization ceases when such software is ready for general release, at which time amortization of the capitalized costs begins. Amortization of capitalized internally developed software costs is computed as the greater of: (a) the amount determined by the ratio of the product's current revenue to its total expected future revenue or (b) the straight-line method over the product's estimated useful life of two to three years. Software amortization expense was approximately $77,000 for the year ended December 31, 1998. Maintenance of software products, as well as research and development costs related to new software products, are charged to expense as incurred. FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company calculates the fair value for each class of financial instruments for which it is practicable to estimate. The carrying value of current assets and current liabilities approximates fair value because of the relatively short maturities of these instruments. The carrying value of long term debt approximates fair value since it carries a fluctuating market interest rate. WARRANTY RESERVE--The Company records a warranty reserve related to certain mainframe computer sales. The reserve recorded is based on experience in warranty replacement and labor time. Warranty reserves were approximately $1,710,000 and have been included with accrued expenses and other current liabilities at December 31, 1998. INCOME TAXES--Deferred tax assets and liabilities are recognized at the applicable income tax rates based upon future tax consequences of temporary differences between the tax basis and financial reporting basis of assets and liabilities. COMPREHENSIVE INCOME--Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). This statement establishes the standards for reporting and displaying comprehensive income and its components. Comprehensive income consists of net income and foreign currency translation adjustments and is presented in the Consolidated Statement of Changes in Stockholders' Equity. The adoption of SFAS No. 130 had no impact on total stockholders' equity. No reclassifications were required to conform prior year financial statements to the SFAS No. 130 requirements. 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. Translation adjustments resulting from this process are accumulated as a separate component of stockholders' equity. Revenues, costs, and expenses are translated at average rates of exchange prevailing during the year. Gains and losses on foreign currency transactions are included in nonoperating 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 28 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 11 herein. Earnings Per Share--The Company presents basic and diluted earnings per share ("EPS") on the face of the income statement. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock that then shared in the earnings of the entity. Dilutive securities are excluded from the computation in periods in which they have an anti-dilutive effect. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications--Certain amounts in prior year financial statements have been reclassified to conform to the current year presentation. 3. 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 ALLOCATION OF DATE COMMON VALUE CONTINGENT TOTAL NET PURCHASE ACQUIRED CASH STOCK ISSUED OF SHARES CONSIDERATION CONSIDERATION ASSETS PRICE GOODWILL LIFE -------------- ------- ------------ --------- ------------- ------------- -------- ------------- -------- ---- MST Feb. 10, 1998 $ 9,750 603,846 $ 6,280 $ -- $ 16,030 $ 262 $15,768 35 CHMC Feb. 10, 1998 17,100 146,154 1,520 -- 18,620 1,847 16,773 35 Federal Feb. 10, 1998 7,500 576,923 6,000 9,000 22,500 1,886 18,659 35 1,955(C) 3.5 Corporate Access Feb. 10, 1998 5,200 200,000 2,080 -- 7,280 427 6,853 30 ISSI Feb. 10, 1998 5,000 538,462 5,600 7,356 17,956 1,641 5,000(A) 8,815 7 2,500(B) 5 USComm Feb. 10, 1998 600 46,154 480 -- 1,080 144 936 30 InVenture Feb. 10, 1998 750 57,692 600 2,000 3,350 (145) 3,495 35 MIS Feb. 10, 1998 1,200 138,462 1,440 -- 2,640 (396) 3,036 35 DST May 5, 1998 1,000 9,600 150 -- 1,150 (200) 1,350 35 Louden June 30, 1998 2,579 217,486 3,000 6,300 11,879 595 11,284 35 LINC July 17, 1998 21,545 -- -- -- 21,545 328 21,217 35 PowerCrew Nov. 4, 1998 2,763 72,522 800 -- 3,563 (146) 3,709 35 Global Dec. 10, 1998 24,000 738,178 8,000 -- 32,000 3,060 25,540 35 3,400(C) 10 ------- ------------ --------- ------------- ------------- -------- ------------- -------- $98,987 3,345,479 $35,950 $24,656 $159,593 $9,303 $12,855 $137,435 ------- ------------ --------- ------------- ------------- -------- ------------- -------- ------- ------------ --------- ------------- ------------- -------- ------------- --------
- ------------------------ (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. 29 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS (CONTINUED) Of the total cash paid for the operating companies reported above, escrow deposits of $2,750,000 are still held by the Company pending completion of final net worth adjustments for PowerCrew and Global. Interest on the escrow balance of $6,000 has been recorded as of December 31, 1998. Pursuant to contingent payment agreements entered into as part of the acquisitions, ten of the operating companies are eligible to receive contingent consideration in the form of additional common stock and cash. Such contingent consideration is based on a multiple of earnings and may be paid if these companies achieve a level of earnings in excess of projected earnings. As of December 31, 1998, the operating companies have earned approximately $24,656,000 of contingent consideration, of which $7,283,000 is payable in cash. The remaining unearned maximum consideration equals $35,494,000 covering a period from 1999 to 2001. Any additional payments made when the contingency is resolved will be accounted for as goodwill and will be amortized over the remaining estimated life of such goodwill. The Company has accounted for the acquisitions of the operating companies as purchase business combinations. The excess of purchase price over the fair values of the net assets acquired has been recorded as goodwill, which is being amortized on a straight-line basis. The purchase price allocation is subject to change as additional information becomes available. The results of operations of all operating companies have been 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):
1997 1998 ---------- ---------- Revenues.............................................................. $ 180,296 $ 227,528 Net income............................................................ 6,802 10,547 Net income per basic share............................................ $ 0.72 $ 0.88 Net income per diluted share.......................................... $ 0.72 $ 0.84
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 and benefits to the stockholders of the operating companies to which they have agreed prospectively; reductions in profit sharing distributions to stockholders of one of the operating companies to which they have agreed prospectively; interest on assumed borrowings; 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, 1997 and 1998 were approximately $1,435,000 and $7,311,000, respectively, which increase net income. The unaudited pro forma combined results of operations may not be comparable to and may not be indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of 1997 or at the beginning of 1998 or of future operations of the combined companies because the operating companies were not under common control or management and had different tax and capital structures during the periods presented. 30 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. PROPERTY AND EQUIPMENT Property and equipment were comprised of the following at December 31, (in thousands):
1997 1998 --------- --------- Computer equipment.......................................................... $ -- $ 4,044 Furniture, fixtures and equipment........................................... -- 1,158 Leasehold improvements...................................................... -- 393 --------- --------- -- 5,595 Less accumulated depreciation............................................... -- 1,266 --------- --------- $ -- $ 4,329 --------- --------- --------- ---------
Depreciation expense for the year ended December 31, 1998 was approximately $1,266,000. There was no depreciation expense in 1997. 5. GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles were comprised of the following at December 31, (in thousands):
1997 1998 --------- ---------- Goodwill on purchase of operating companies............................ $ -- $ 137,435 Acquired contract rights............................................... -- 5,355 Acquired technology.................................................... -- 2,500 Technology license..................................................... -- 3,100 Capitalized software development....................................... -- 184 --------- ---------- -- 148,574 Less accumulated amortization.......................................... -- 3,411 --------- ---------- $ -- $ 145,163 --------- ---------- --------- ----------
Amortization expense for the year ended December 31, 1998 was approximately $3,411,000. There was no amortization expense in 1997. Included in selling, general and administrative expenses for the year ended December 31, 1998 was a $5.0 million charge for purchased in-process research and development in connection with the acquisition of one of the operating companies. 6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES At December 31, 1998, accrued expenses included the payable for the escrow deposits related to PowerCrew and Global of approximately $2.8 million. Other accrued expenses were as follows: accrued salaries, vacation, payroll taxes and related employee benefits; accrued bonuses and commissions; the provision for income taxes; warranty reserves; and other miscellaneous current liabilities. At December 31, 1997, accrued expenses represented professional fees incurred prior to the Offering. 7. DEBT The Company has a $50.0 million revolving credit facility (the "Revolver") with a major commercial bank. The Revolver includes a letter of credit facility of up to $15.0 million, of which $6.65 million is 31 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. DEBT (CONTINUED) currently issued and outstanding to secure floor planning facilities with two separate lending organizations. Borrowings under the Revolver bear interest beginning at the London Interbank Offering Rate ("LIBOR") plus 150 to 250 basis points or the Base Rate, which is the greater of the Federal funds Rate plus 0.50% or the Prime rate plus 25 to 125 basis points, at the option of the Company. The interest rates are based on a pricing ratio of debt to earnings. The Company is also required to pay a commitment fee at the annual percentage rate of 0.50% as defined in the agreement. The Company must comply with various loan covenants including (i) maintenance of certain financial ratios; (ii) restrictions on additional indebtedness; (iii) restrictions on liens, guarantees, advances and dividends; and (iv) restrictions on the type, size and number of acquisitions. The Revolver, which expires in April 2001, is intended to be used for acquisitions, working capital and general corporate purposes. Borrowings on the Revolver were $24.0 million at December 31, 1998 carried at a weighted average interest rate of 6.63%. The Company has floor planning facilities of $13.75 million to support the working capital needs of the companies in its desktop services division. These facilities are secured by $6.65 million of letters of credit, issued under the Revolver and certain of the assets of the desktop service division. The primary floor planning facility requires the Company to comply with various loan covenants identical to those required under the Revolver. The facility continues until such time that either party gives 60 days written notice of termination or there is an event of default. Borrowings under the floor planning facilities are included in accounts payable at December 31, 1999. Indebtedness under both the Revolver and the primary floor planning facility are collateralized by substantially all of the assets of the Company. 8. STOCKHOLDERS' EQUITY (DEFICIT) COMMON STOCK AND PREFERRED STOCK--The Company effected a one-for-5.72568 reverse stock split effective on the day preceding the date of the final Prospectus for the Offering. In addition, on October 1, 1997, the Company increased the number of authorized shares of common stock to 49 million and authorized 1 million shares of $.01 par value preferred stock. The effects of the Common Stock split and the increase in the shares of authorized common stock have been retroactively reflected in the financial statements. In connection with the organization of the Company, during 1996 Condor issued 1,413,806 shares of Common Stock to The Commonwealth Group ("Commonwealth") and other founders in exchange for consulting, financial advisory and related services provided to Condor and, with respect to Commonwealth, its commitment to provide funds necessary to effect the Mergers and the Offering. These non-monetary assets were considered to have an aggregate value of $87,000. Amounts due to stockholder were reimbursed out of the proceeds of the Offering, together with interest on such advances at the prime rate. Subsequent to the issuance of shares to Commonwealth, such shares were distributed to its individual principals. During 1997, 255,820 of Common Stock shares were issued in exchange for services associated with the Offering that are considered to have an aggregate value of $452,031 and 39,297 shares were sold to investors for $150,000. Also during 1997, the Company issued a total of 183,384 shares of Common Stock to management. As a result, the Company recorded for financial statement purposes a non-recurring non-cash compensation charge of approximately $1,771,000 for the year ended December 31, 1997, representing the estimated fair value of the shares on the date of issuance. 32 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) On February 5, 1998, the Company sold 5,900,000 shares of Common Stock to the public at $13.00 per share ("the Offering"). The net proceeds to the Company from the Offering (after deducting underwriting commissions and other offering costs) were $62.2 million. Of this amount, $47.1 million was used to pay the cash portion of the purchase prices of the Founding Companies. In connection with the Offering, the Company granted to the underwriters an option to purchase an additional 885,000 shares at $13.00 per share. On March 1, 1998, the underwriters exercised this option. The net proceeds to the Company from this sale of shares was $10.7 million (after deducting underwriting commissions). Total shares issued for the purchase of the Founding Companies were 2,307,693 on February 10, 1998. Also during 1998, the Company issued 9,600 unregistered shares and 1,028,186 registered shares for the purchase of four Other Acquisitions as described in Note 3. 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 $194,376 and has been recorded as a separate component of stockholders' equity. 9. 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):
1997 1998 --------- --------- Weighted average common stock outstanding (basic shares outstanding)....... 1,680 10,193 Stock options, as if converted............................................. -- 85 Contingent purchase price adjustment....................................... -- 489 --------- --------- Weighted average common and common equivalent shares outstanding (diluted shares outstanding)...................................................... 1,680 10,767 --------- --------- --------- ---------
33 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES INCOME TAX PROVISION--The provision for income taxes consisted of the following amounts for the years ended December 31, (in thousands):
1997 1998 --------- --------- Provision (benefit) for income tax: Current U.S. federal............................................................. $ -- $ 6,739 State and local.......................................................... -- 1,476 --------- --------- -- 8,215 Deferred U.S. federal............................................................. (869) (242) State and local.......................................................... (163) (66) --------- --------- (1,032) (308) --------- --------- Total income tax (benefit) expense......................................... (1,032) 7,907 Valuation allowance........................................................ 1,032 (1,032) --------- --------- $ -- $ 6,875 --------- --------- --------- ---------
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,
1997 1998 --------- --------- Tax (benefit) provision at U.S. statutory rate................................. (34.0)% 35.0% State income taxes, net of federal benefit..................................... (4.0) 8.1 Net operating loss............................................................. 38.0 (7.9) Intangible amortization........................................................ -- 6.7 Research and development write-off............................................. -- 14.1 Other.......................................................................... -- (0.6) --------- --- Effective income tax expense rate.............................................. 0.0% 55.4% --------- --- --------- ---
DEFERRED INCOME TAXES Deferred tax assets (liabilities) include the following at December 31, (in thousands):
1997 1998 --------- --------- Employee benefits........................................................... $ -- $ 75 Accelerated depreciation.................................................... -- (61) Accrued liabilities not currently deductible................................ -- 108 Change in accounting method from cash to accrual for tax reporting.......... -- (285) --------- --------- $ -- $ (163) --------- --------- --------- ---------
34 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES (CONTINUED) Included in the net assets acquired through acquisitions in 1998 is approximately $471,000 of net deferred tax liabilities. Deferred tax assets and liabilities are included in prepaids and other current assets and other long-term obligations on the consolidated balance sheet as of December 31, 1998. 11. 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 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. These options have an exercise price equal to the fair market value of common stock on the date of grant and the options will expire at the earlier of 10 years after the date of grant or one year after the date the participant ceases to serve as a director of the Company. These options become exercisable one to three years after the date of grant, except that an option may be forfeited upon a participant's termination of service as a director for reasons other than death or disability if the date of termination is less than 11 months after the date of grant. During 1998, and 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 35 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. STOCK COMPENSATION (CONTINUED) 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 after termination of employment. 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 as of December 31, 1998 and changes during then year ended is presented below:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE ---------- ------------- Outstanding at the beginning of the year -- $ -- Granted 1,606,469 13.27 Exercised -- -- Forfeited (179,291) 14.58 ---------- Outstanding at the end of the year 1,427,178 $ 13.11 ---------- ---------- Options exercisable at the end of the year 53,434 $ 13.00 ---------- ---------- Weighted average fair value of options granted during the year $ 5.65 ---------- ----------
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 1998: (1) expected volatility of 58%; (2) risk free interest rate of 5.17%; and (3) expected life of three years. The following table summarizes information about stock options outstanding at December 31, 1998:
WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE REMAINING CONTRACTUAL RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE - ------------------------------------- ----------- ----------------- ----------------------- 9.00 to $14.00 1,210,734 $ 12.73 9.21 years $14.01 to $16.00 216,444 $ 15.21 9.57 years ----------- Total 1,427,178 ----------- -----------
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 and basic and diluted earnings per share for 1998 would approximate the pro forma amounts below (in thousands, except per share data):
AS REPORTED PRO FORMA ----------- ----------- Net Income.......................................................... $ 5,533 $ 4,436 Basic earnings per share............................................ $ 0.54 $ 0.44 Diluted earnings per share.......................................... $ 0.51 $ 0.41
12. 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. 36 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. EMPLOYEE STOCK PURCHASE PLAN (CONTINUED) The purchase price of shares under the plan is the lower of 85 percent of the share price on the first day of the offering period or the share price on the purchase date. All employees are eligible to participate except (i) those employed for less than 20 hours per week; (ii) employees who, as a result of participation in the ESPP, would own stock or hold options to purchase stock possessing five percent or more of the total combined voting power or value of all classes of stock of the Company; and (iii) employees whose right to purchase common stock under the ESPP accrues at a rate which exceeds $25,000 worth of stock for each calendar year in which such option is outstanding at any time. The initial offering period commenced on November 2, 1998. As of December 31, 1998, no purchases were made under the ESPP. 13. RETIREMENT PLANS During 1998, the operating companies had individual defined contribution or profit sharing retirement plans in place. The total employer contribution to these plans in 1998 was approximately $341,000. On December 31, 1998, contributions to all of the individual plans were terminated and employees became eligible to join a new company-wide retirement plan. On January 1, 1999, the Company established a defined contribution 401(k) Retirement Savings Plan (the "401(k) Plan") to provide retirement benefits for eligible employees. Employees are eligible to enter the 401(k) Plan as of the first day of the first calendar quarter occurring after they begin employment, as long as they have attained age 18. Employees are able to contribute up to 15% of their salary to the 401(k) Plan. During 1999, the Company will contribute 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. It is intended that the operating company 401(k) plans will merge into the Company 401(k) Plan. 37 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. SUPPLEMENTAL CASH FLOW INFORMATION
YEARS ENDED DECEMBER 31, --------------------- 1997 1998 --------- ---------- (IN THOUSANDS) Cash Paid during the year for: Federal income tax payments................................................................ $ -- $ 3,825 State income tax payments.................................................................. -- $ 1,036 Interest payments.......................................................................... -- 194 Supplemental disclosure of non-cash transactions: Liability incurred for technology license.................................................. $ -- $ 1,550 Business acquisitions: Cash paid for business acquisitions........................................................ $ -- $ 96,237 Less cash acquired......................................................................... -- (6,069) --------- ---------- Cash paid for business acquisitions, net................................................... -- 90,168 Liability incurred for contingent purchase liability....................................... 24,656 Purchase price in escrow................................................................... 2,750 Issuance of common stock for business acquisitions......................................... -- 35,950 --------- ---------- Total purchase price....................................................................... -- 153,524 In-process research and development........................................................ -- (5,000) Less fair value of net assets acquired, net of cash........................................ -- (3,234) --------- ---------- Excess of fair value over net assets acquired.............................................. $ -- $ 145,290 --------- ---------- --------- ----------
The excess of fair value over net assets acquired of $145.3 million includes goodwill, internally developed software and other intangibles acquired in conjunction with the acquisitions of the operating companies. 15. SEGMENT REPORTING During the fourth quarter, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information". This standard governs the way the Company reports information about its operating segments. During 1998, the Company had three reportable segments: Consulting Services, System Services and Desktop Services. Each of these three segments corresponds to the Company's existing divisional structure. The Consulting Services Division provides strategic IT planning, decision support, management consulting, and interactive media services. These services involve the development of near and long-term technology plans that help clients achieve specific strategic business objectives and include IT needs analysis, technology infrastructure design, future technology planning and refreshment, systems architecture development, decision support planning and analysis, business process automation and Year 2000 consulting. The System Services Division 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. 38 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. SEGMENT REPORTING (CONTINUED) The division's services include custom application development, enterprise resource planning, software package implementation, contract staffing and recruiting, sale and implementation of the Safari InfoTOOLS report writer software and training and continuing education The Desktop Services Division provides call-center development and support services, 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 accounting policies of the reportable segments are the same as those described in Note 2. The Company evaluates the performance of its operating segments based on operating income after intercompany transactions have been eliminated. Summarized financial information concerning the Company's reportable segments at December 31, 1998 is shown in the following table (in thousands). There were no segment operations prior to the Mergers with the Founding Companies. The "Other" column includes corporate related items.
CONSULTING SYSTEM DESKTOP OTHER CONSOLIDATED ---------- ------- ------- ----------- ------------ IT service revenues........... $17,602 $53,140 $21,773 $ -- $ 92,515 Hardware procurement revenues.................... -- -- 76,318 -- 76,318 ---------- ------- ------- ----------- ------------ Total revenues................ 17,602 53,140 98,091 -- 168,833 Income from operations........ 3,462 6,308 6,954 (5,000)(1) 11,724 Depreciation & amortization... 933 2,774 970 -- 4,677 Total assets.................. 42,759 119,062 36,509 2,312 200,642 Capital expenditures.......... $ 386 $ 1,177 $ 635 $ 608 $ 2,806
- ------------------------ (1) Represents a charge of $5 million for in-process research and development recorded in the first quarter of 1998. 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. 16. NEW ACCOUNTING PRONOUNCEMENTS DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires all derivatives to be recorded on the balance sheet at fair value and establishes "special accounting" for the following three different types of hedges: hedges of changes in the fair value of assets, liabilities or firm commitments; hedges of the variable cash flows of forecasted transactions; and hedges of foreign currency exposures of net investments in foreign operations. SFAS No. 133 is effective for years beginning after June 15, 1999, with earlier adoption permitted. The Company believes that the effect of adoption of SFAS No. 133 will not be material to its financial position or results of operations. 39 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. RELATED PARTY TRANSACTIONS As of December 31, 1997, a founding stockholder had advanced the Company approximately $2.5 million for the payment of Offering and Merger-related costs. At December 31, 1997, the Company had deferred these costs, and they were offset against the proceeds from the Offering in 1998. Such costs were reimbursed, plus interest at the prime rate, subsequent to the Offering. The Company has a management services agreement with an ERP software license reseller to provide implementation services related to that company's sale of SAP R/3 licenses to middle market customers in New England. This agreement has a term of ten years. The reseller is owned by the former owner of Global Core Strategies, Inc., who is a consultant to the Company. 18. COMMITMENTS AND CONTINGENCIES LAWSUIT--In the course of Condor's consolidation efforts, SCM LLC d/b/a The Commonwealth Group ("Commonwealth"), the promoter of the Offering, and Condor negotiated with Emtec, Inc. ("Emtec"), an IT service company based in Pennsylvania, with a view to Emtec becoming one of the Founding Companies. As part of the process, Emtec's investment banker and Commonwealth executed two confidentiality agreements pursuant to which each agreed, among other things, not to disclose certain confidential information and Commonwealth agreed that it would not seek to enter into a business transaction with any companies to be introduced to it by Emtec's investment banker for a period of two years without such investment banker's prior written consent. On October 28, 1997, Emtec filed a Complaint in the United States District Court for the Eastern District of Pennsylvania against Condor, Commonwealth, J. Marshall Coleman, a Managing Director of Commonwealth and the former Chairman of the Board of Condor, and Kennard F. Hill, the Company's Chairman of the Board and Chief Executive Officer, alleging breach of contract, tortious interference with Emtec's business relationship with Corporate Access and CHMC, two of the Founding Companies, and misappropriation of a trade secret arising out of the participation of CHMC and Corporate Access in the consolidation and the Offering without Emtec's written consent. In connection with the three causes of action, Emtec demands that the defendants disgorge the financial benefits that they have and will obtain as a result of their breach of contract and seeks compensatory and punitive damages. On December 31, 1997, the defendants filed an Answer, denying the allegations and asserting various affirmative defenses. The court denied Emtec's claim for unjust enrichment. A motion by Condor for partial summary judgment was granted in part to eliminate Emtec's claim for misappropriation of a trade secret. Trial of this matter could be scheduled in the near future. The Company believes that Emtec's allegations are without merit and that, in any event, the ultimate resolution of this action will not have a material adverse effect on the Company's financial position or results of operations. The Company has agreed to indemnify CHMC's directors, officers and stockholders against any liability such persons may incur as a result of any claims brought by Emtec against any of them that directly related to CHMC's participation as a Founding Company. Commonwealth has agreed to indemnify the Company with regard to any final judgment or settlement arising out of the above action or any similar action. Commonwealth's obligations under such agreement have been guaranteed by the three members of Commonwealth. The Company is a party to other legal proceedings and disputes related to the Company's day to day business operations, none of which are material to the financial position or results of operations of the Company. 40 CONDOR TECHNOLOGY SOLUTIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. COMMITMENTS AND CONTINGENCIES (CONTINUED) OPERATING LEASES--The Company leases certain equipment and office space under operating lease arrangements expiring through 2008. Future minimum rental payments under non-cancelable operating leases at December 31, 1998 were as follows (in thousands): 1999....................................................... $ 3,242 2000....................................................... 2,782 2001....................................................... 2,147 2002....................................................... 1,533 2003....................................................... 1,015 Thereafter................................................. 1,279 --------- $ 11,998 --------- ---------
Rent expense for the years ended December 31, 1997 and 1998 was approximately $49,000 and $2,243,000, respectively. 41 SCHEDULE II CONDOR TECHNOLOGY SOLUTIONS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------- 1997 1998 --------- --------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Balance at beginning of period................................................................... $ -- $ -- Additions: Charged to expense............................................................................. -- 314 Charged to other accounts: Investment in operating companies............................................................ -- 497 Deductions:.................................................................................. -- (239) --------- --------- Balance at end of period......................................................................... $ -- $ 572(1) --------- --------- --------- ---------
- ------------------------ (1) Included in accounts receivable, net ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 42 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to Item 4A of Part I hereof for certain information required by this Item 10. Additional information required by this item is hereby incorporated by reference from the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders to be filed with the Commission under Section 14(a) of the Securities Exchange Act of 1934 on or before April 30, 1999. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is hereby incorporated by reference from the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders to be filed with the Commission under Section 14(a) of the Securities Exchange Act of 1934 on or before April 30, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is hereby incorporated by reference from the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders to be filed with the Commission under Section 14(a) of the Securities Exchange Act of 1934 on or before April 30, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is hereby incorporated by reference from the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders to be filed with the Commission under Section 14(a) of the Securities Exchange Act of 1934 on or before April 30, 1999. 43 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 Report of Independent Accountants............................................... 21 Consolidated Balance Sheets..................................................... 22 Consolidated Statements of Operations........................................... 23 Consolidated Statement of Changes in Stockholders' Equity (Deficit)............. 24 Consolidated Statements of Cash Flows........................................... 25 Notes to Consolidated Financial Statements...................................... 26 (a)(2) The following Financial Statement Schedules are filed as a part of the Annual Report: II. Valuation and Qualifying Accounts........................................... 42 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)).
44
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 10.2* -- Employment Agreement between the Company and Kennard F. Hill (Incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 10.3* -- Employment Agreement between the Company and C. Lawrence Meador (Incorporated by reference to Exhibit 10.3 of the Registrant's Report on Form 10-K for the year ended December 31, 1997 (Registration No. 0-23635)). 10.4* -- Employment Agreement between the Company and Daniel J. Roche (Incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)).
45
EXHIBIT NUMBER DESCRIPTION - --------- -------------------------------------------------------------------------------------------------------- 10.5* -- Employment Agreement between the Company and William J. Caragol, Jr. (Incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)) and Amendment No. 1 to Employment Agreement between the Company and William J. Caragol, Jr. (Incorporated by reference to Exhibit 10.6.2 to the Registrant's Quarterly Report on Form 10-Q for the three months ended June 30, 1998). 10.6 -- Indemnification Agreement by and between SCM LL.C d/b/a The Commonwealth Group and the Company (Incorporated by reference to Exhibit 10.8 to Amendment No. 2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 10.7 -- Business Loan and Security Agreement between the Company and First Union Commercial Corporation and related Stock Purchase Agreement and Revolving Promissory Note (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 1998) and First Modification to Business Loan and Security Agreement between the Company and First Union Commercial Corporation and related ancillary documents (Incorporated by reference to Exhibit 10.1.1 to the Registrant's Form 8-K/A Current Report as of February 22, 1998 (Registration No. 0-23635)). 10.8 -- Agreement for Wholesale Financing between Deutsche Financial Service Corporation and Computer Hardware Maintenance Company, Inc., Corporate Access, Inc., and U.S. Communications, Inc. and related Guaranty and Addendum to Guaranty and Agreement for Wholesale Financing (Incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 1998). 10.9* -- 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). 10.10 -- 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). 10.11 -- 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)). 10.12* -- Employment Agreement between LINC Systems Corporation and Robert F. Hefner 10.13* -- Employment Agreement between Computer Hardware Maintenance Company and Michael G. Paglaiccetti 21 -- List of Subsidiaries of the Company. 23 -- Consent of PricewaterhouseCoopers LLP 24 -- Power of Attorney (on signature page hereof). 27 -- Financial Data Schedule.
(b) Reports on Form 8-K: The Company filed a Form 8-K Current Report on December 22, 1998 (as amended on February 22, 1998) related to the Acquisition of Global Core Strategies Acquisition, Inc. 46 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/ KENNARD F. HILL ----------------------------------------- Kennard F. Hill Chief Executive Officer Date: March 18, 1999 POWER OF ATTORNEY Each person whose signature appears below hereby authorizes and constitutes Kennard F. Hill and Daniel J. Roche, 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 - ------------------------------ --------------------------- ------------------- Chairman of the Board and /s/ KENNARD F. HILL Chief Executive Officer - ------------------------------ (Principal Executive March 16, 1999 Kennard F. Hill Officer) /s/ DANIEL J. ROCHE President and Chief - ------------------------------ Operating Officer March 16, 1999 Daniel J. Roche Vice President and Chief /s/ WILLIAM J. CARAGOL Financial Officer - ------------------------------ (Principal Financial and March 16, 1999 William J. Caragol Accounting Officer) /s/ C. LAWRENCE MEADOR Vice Chairman of the Board - ------------------------------ March 16, 1999 C. Lawrence Meador /s/ PETER T. GARAHAN Director - ------------------------------ March 13, 1999 Peter T. Garahan /s/ ANN TORRE GRANT Director - ------------------------------ March 13, 1999 Ann Torre Grant /s/ WILLIAM E. HUMMEL Director - ------------------------------ March 13, 1999 William E. Hummel /s/ DENNIS E. LOGUE Director - ------------------------------ March 13, 1999 Dennis E.Logue /s/ EDWARD J. MATHIAS Director - ------------------------------ March 13, 1999 Edward J. Mathias /s/ WILLIAM M. NEWPORT Director - ------------------------------ March 15, 1999 William M. Newport 47 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)).
48
EXHIBIT NUMBER DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 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 10.2* -- Employment Agreement between the Company and Kennard F. Hill (Incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 10.3* -- Employment Agreement between the Company and C. Lawrence Meador (Incorporated by reference to Exhibit 10.3 of the Registrant's Report on Form 10-K for the year ended December 31, 1997 (Registration No. 0-23635)). 10.4* -- Employment Agreement between the Company and Daniel J. Roche (Incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 10.5* -- Employment Agreement between the Company and William J. Caragol, Jr. (Incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)) and Amendment No. 1 to Employment Agreement between the Company and William J. Caragol, Jr. (Incorporated by reference to Exhibit 10.6.2 to the Registrant's Quarterly Report on Form 10-Q for the three months ended June 30, 1998). 10.6 -- Indemnification Agreement by and between SCM LL.C d/b/a The Commonwealth Group and the Company (Incorporated by reference to Exhibit 10.8 to Amendment No. 2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)). 10.7 -- Business Loan and Security Agreement between the Company and First Union Commercial Corporation and related Stock Purchase Agreement and Revolving Promissory Note (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 1998) and First Modification to Business Loan and Security Agreement between the Company and First Union Commercial Corporation and related ancillary documents (Incorporated by reference to Exhibit 10.1.1 to the Registrant's Form 8-K/A Current Report as of February 22, 1998 (Registration No. 0-23635)). 10.8 -- Agreement for Wholesale Financing between Deutsche Financial Service Corporation and Computer Hardware Maintenance Company, Inc., Corporate Access, Inc., and U.S. Communications, Inc. and related Guaranty and Addendum to Guaranty and Agreement for Wholesale Financing (Incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 1998).
49
EXHIBIT NUMBER DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 10.9* -- 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). 10.10 -- 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). 10.11 -- 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)). 10.12* -- Employment Agreement between LINC Systems Corporation and Robert F. Hefner 10.13* -- Employment Agreement between Computer Hardware Maintenance Company and Michael G. Paglaiccetti 21 -- List of Subsidiaries of the Company. 23 -- Consent of PricewaterhouseCoopers LLP 24 -- Power of Attorney (on signature page hereof). 27 -- Financial Data Schedule.
50 EX-10.1-1 2 EX-10.1.1 Exhibit 10.1.1 AMENDED AND RESTATED CONDOR TECHNOLOGY SOLUTIONS, INC. 1997 LONG-TERM INCENTIVE PLAN 1. PURPOSE. The purpose of this 1997 Long-Term Incentive Plan (the "Plan") of Condor Technology Solutions, Inc., a Delaware corporation (the "Company"), is to advance the interests of the Company and its stockholders by providing a means to attract, retain, motivate and reward executive officers, key employees, directors and consultants of and service providers to the Company and its subsidiaries (including consultants and others providing services of substantial value) and to enable such persons to acquire or increase their proprietary interest in the Company, thereby promoting a closer identity of interests between such persons and the Company's stockholders. 2. DEFINITIONS. The definitions of awards under the Plan, including Options, SARs (including Limited SARs), Restricted Stock, Deferred Stock, Stock granted as a bonus in lieu of other awards, Dividend Equivalents and Other Stock-Based Awards are set forth in Section 6 of the Plan. Such awards, together with any other right or interest granted to a Participant under the Plan, are termed "Awards." for purposes of the Plan, the following additional terms shall be defined as set forth below: (a) "Award Agreement" means any written agreement, contract, notice or other instrument or document evidencing an Award. (b) "Beneficiary" shall mean the person, persons, trust or trusts which have been designated by a Participant in his or her most recent written beneficiary designation filed with the Committee to receive the benefits specified under the Plan upon such Participant's death or, if there is no designated Beneficiary or surviving designated Beneficiary, then the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive such benefits. (c) "Beneficial Owner" and related terms shall have the meaning ascribed under Section 13(d) of the Exchange Act, including Rule 13d-3, and any successor thereto. (d) "Board" means the Board of Directors of the Company. (e) A "Change in Control" shall be deemed to have occurred if: 1 (i) any person, other than the Company or an employee benefit plan of the Company, acquires a voting security of the company and thereafter is, directly or indirectly, the Beneficial Owner of voting securities representing 50 percent or more of the total voting power of all of the then-outstanding voting securities of the Company; (ii) the following individuals no longer constitute a majority of the members of the Board: (a) the individuals who, as of the closing date of the Initial Public Offering, constitute the board (the "Original Directors"); (B) the individuals who thereafter are elected to the Board and whose election, or nomination for election, to the Board was approved by a vote of at least two-thirds (2/3) of the Original Directors then still in office (such directors becoming "Additional Original Directors" immediately following their election); and (C) the individuals who are elected to the Board and whose election, or nomination for election, to the Board was approved by a vote of at least two-thirds (2/3) of the Original Directors and Additional Original Directors then still in office (such directors also becoming "Additional Original Directors" immediately following their election); (iii) the stockholders of the Company approve a merger, consolidation, recapitalization or reorganization of the Company, or a reverse stock split of outstanding voting securities, or consummation of any such transaction if stockholder approval is not obtained, other than any such transaction which would result in at least 75 percent of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being Beneficially Owned by at least 75 percent of the holders of outstanding voting securities of the Company immediately prior to the transaction, with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time. References to any provision of the Code shall be deemed to include regulations thereunder and successor provisions and regulations thereto. (g) "Committee" means the Compensation Committee of the Board, or such other Board committee as may be designated by the Board to administer the Plan; PROVIDED, HOWEVER, that the Committee shall consist solely 2 of two or more directors. In appointing members of the Committee, the Board will consider whether each member will qualify as a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) and as an "outside director" within the meaning of Treasury Regulation 1.162-27(e)(3) under Code Section 162(m), but such members are not required to so qualify at the time of appointment or during their term of service on the Committee. (h) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. References to any provision of the Exchange Act shall be deemed to include rules thereunder and successor provisions and rules thereto. (i) "Fair Market Value" means, with respect to Stock, Awards or other property, the fair market value of such Stock, Awards or other property determined by such methods or procedures as shall be established from time to time by the Committee; PROVIDED, HOWEVER, that (i) if the Stock is listed on a national securities exchange or quoted in an interdealer quotation system, the Fair Market Value of such Stock on a given date shall be based upon the last sales price or, if unavailable, the average of the closing bid and asked prices per share of the Stock on such date (or, if there was no trading or quotation in the Stock on such date, on the next preceding date on which there was trading or quotation) as reported in the WALL STREET JOURNAL (or other reporting service approved by the Committee), (ii) the "Fair Market Value" of Stock subject to Options granted effective upon commencement of the Initial Public Offering shall be the Initial Public Offering price of the shares so issued and sold in the Initial Public Offering, as set forth in the first final prospectus used in such offering (the provisions of clause (i) notwithstanding) and (iii) the "Fair Market Value" of Stock prior to the date of the Initial Public Offering shall be as determined by the Board of Directors. (j) "Initial Public Offering" shall mean the Company's first public offering of shares of Stock in a firm commitment underwriting registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended. (k) "ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code. (l) "Non-Employee Director" means a director of the Company who is not, at the time an Option is to be granted under Section 8(a) or (b) (or, in the case of an Option granted under Section 8(a)(i) in connection with the Initial Public Offering, who is not at the date the Initial Public Offering is closed), an employee of the Company or any subsidiary of the Company. 3 (m) "Non-Employee Director Initial Option" or "Annual Option" means an Option to purchase the number of shares specified in or under Section 8(a) or (b), subject to adjustment as provided in Section 4(c), granted to a Non-Employer Director. (n) "Participant" means a person who, at a time when eligible under Section 5 hereof, has been granted an Award under the Plan. (o) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and applicable to the Plan and Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act. (p) "Stock" means the Common Stock, $.01 par value, of the Company and such other securities as may be substituted or resubstituted for Stock pursuant to Section 4. 3. ADMINISTRATION (a) AUTHORITY OF THE COMMITTEE. Except as otherwise provided below, the Plan shall be administered by the Committee. The Committee shall have full and final authority to take the following actions, in each case subject to and consistent with the provisions of the Plan: (i) to select persons to whom Awards may be granted; (ii) to determine the type or types of Awards to be granted to each such person; (iii) to determine the number of Awards to be granted, the number of shares of Stock to which an Award will relate, the terms and conditions of any Award granted under the Plan (including, but not limited to, any exercise price, grant price or purchase price, any restriction or condition, any schedule for lapse of restrictions or conditions relating to transferability or forfeiture, exercisability or settlement of an Award, and waivers or accelerations thereof, performance conditions relating to an Award (including waivers and modifications thereof), based in each case on such considerations as the Committee shall determine), and all other matters to be determined in connection with an Award; (iv) to determine whether, to what extent and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Stock, other Awards or other property, or an Award may be cancelled, forfeited or surrendered; 4 (v) to determine whether, to what extent and under what circumstances cash, Stock, other Awards or other property payable with respect to an Award will be deferred either automatically, at the election of the Committee or at the election of the Participant; (vi) to prescribe the form of each Award Agreement, which need not be identical for each Participant; (vii) to adopt, amend, suspend, waive and rescind such rules and regulations and appoint such agents as the Committee may deem necessary or advisable to administer the Plan; (viii) to correct any defect or supply any omission or reconcile any inconsistency in the Plan and to construe and interpret the Plan and any Awards, rules and regulations, Award Agreement or other instrument hereunder; and (ix) to make all other decisions and determinations as may be required under the terms of the Plan or as the Committee may deem necessary or advisable for the administration of the Plan. Other provisions of the Plan notwithstanding, the Board shall perform the functions of the Committee for purposes of granting Awards (subject to the Section 8, which provides for certain automatic grants) to Non-Employee Directors, and the Board may perform any function of the Committee under the Plan for any other purpose, including without limitation for the purpose of ensuring that transactions under the Plan by Participants who are then subject to Section 16 of the Exchange Act in respect of the Company are exempt under Rule 16b-3. In any case in which the Board is performing a function of the Committee under the Plan, each reference to the Committee herein shall be deemed to refer to the Board, except where the context otherwise requires. (b) MANNER OF EXERCISE OF COMMITTEE AUTHORITY. Any action of the Committee with respect to the Plan shall be final, conclusive and binding on all persons, including the Company, subsidiaries of the Company, Participants, any person claiming any rights under the Plan from or through any Participant and stockholders, except to the extent the Committee may subsequently modify, or take further action not consistent with, its prior action. If not specified in the Plan, the time at which the Committee must or may make any determination shall be determined by the Committee, and any such determination may thereafter be modified by the Committee (subject to Section 9(e)). The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to officers or managers of the 5 Company or any subsidiary of the Company the authority, subject to such terms as the Committee shall determine, to perform such functions as the Committee may determine, to the extent permitted under applicable law. (c) LIMITATION OF LIABILITY. Each member of the Committee shall be entitled to, in good faith, rely or act upon any report or other information furnished to him by any officers or other employee of the Company or any subsidiary, the Company's independent certified public accounts or any executive compensation consultant, legal counsel or other professional retained by the Company to assist in the administration of the Plan. No member of the Committee, or any officer or employee of the Company acting on behalf of the Committee, shall be personally liable for any action, determination or interpretation taken or made in good faith with respect to the Plan, and all members of the Committee and any officer or employee of the Company acting on its behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination or interpretation. 4. STOCK SUBJECT TO PLAN. (a) AMOUNT OF STOCK RESERVED. The total amount of Stock that may be subject to outstanding Awards, determined as of the time immediately after the grant of any Award, shall not exceed 15% of the total number of shares of Stock then outstanding, minus the number of shares previously issued pursuant to awards granted under the Plan. The foregoing notwithstanding, the number of shares that may be delivered upon the exercise of ISOs shall not exceed 1,000,000 (subject to adjustment as provided in Section 4(c)), PROVIDED, HOWEVER, that shares subject to ISOs, Restricted Stock or Deferred Stock Awards shall not be deemed delivered if such Awards are forfeited, expire or otherwise terminate without delivery of shares to the Participant. If an Award valued by reference to Stock may only be settled in cash, the number of shares to which such Award relates shall be deemed to be Stock subject to such Award for purposes of this Section 4(a). Any shares of Stock delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued shares, treasury shares or shares acquired in the market for a Participant's Account. (b) ANNUAL PER-PARTICIPANT LIMITATIONS. During any calendar year, no Participant may be granted Options and SARs exercisable for more than 400,000 shares of Stock and Awards other than Options and SARs that may be settled by delivery of more than 200,000 shares of Stock, subject to adjustment as provided in Section 4(c). In addition, with respect to Awards that may be settled in cash (in whole or in part), no Participant may be paid during any calendar year cash amounts relating to such Awards that exceed the greater of the Fair Market Value of the shares of Stock at the date of grant or the date of 6 settlement of Award. This provision sets forth separate limitations, so that Awards that may be settled solely by delivery of Stock will not operate to reduce the amount of cash-only Awards, and vice versa; nevertheless, Awards that may be settled in Stock or cash must not exceed any applicable limitation. (c) ADJUSTMENTS. In the event that the Committee shall determine that any recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or exchange of Stock or other securities, Stock dividend or other special, large and non-recurring dividend or distribution (whether in the form of cash, securities or other property), liquidation, dissolution or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Participants under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares of Stock reserved and available for Awards under Section 4(a), including shares reserved for ISOs and Restricted and Deferred Stock, (ii) the number and kind of shares of Stock specified in the Annual Per-Participant Limitations under Section 4(b), (iii) the number and kind of shares of Stock to be subject to Non-Employee Director Initial and Annual Options thereafter granted, (iv) the number and kind of shares of outstanding Restricted Stock or other outstanding Award in connection with which shares have been issued, (v) the number and kind of shares that may be issued in respect of other outstanding Awards and (vi) the exercise price, grant price or purchase price relating to any Award (or, if deemed appropriate, the Committee may make provision for a cash payment with respect to any outstanding Award). In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, events described in the preceding sentence) affecting the Company or any subsidiary or the financial statements of the Company or any subsidiary, or in response to changes in applicable laws, regulations, or accounting principles. The foregoing notwithstanding, no adjustments shall be authorized under this Section 4(c) with respect to ISOs or SARs in tandem therewith to the extent that such authority would cause the Plan to fail to comply with Section 422(b)(1) of the Code. 5. ELIGIBILITY. Executive officers and key employees of the Company and its subsidiaries, including any director or officer who is also such an executive officer or key employee, directors of the Company, and persons who provide consulting or other services to the Company deemed by the Committee to be of substantial value to the Company, are eligible to be granted Awards under the Plan. In addition, a person who has been offered employment by the Company or its subsidiaries or agreed to become a director of the Company (including as provided in Section 8(a)(i) is eligible to be granted an Award under the Plan; PROVIDED, HOWEVER, that such Award shall be 7 cancelled if such person fails to commence such employment or service as a director, and no payment of value may be made in connection with such Award until such person has commenced such employment or service. 6. SPECIFIC TERMS OF AWARDS. (a) GENERAL. Awards may be granted on the terms and conditions set forth in this Section 6. In addition, the Committee may impose on any Award or the exercise thereof such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms requiring forfeiture of Awards in the event of termination of employment or service of the Participant. The Committee shall retain full power and discretion to accelerate, waive or modify, at any time, any term or condition of an Award that is not mandatory under the Plan. Except as expressly provided by the Committee (including for purposes of complying with requirements of the Delaware General Corporation Law relating to lawful consideration for issuance of shares), no consideration other than services will be required for the grant (but not the exercise) of any Award. (b) OPTIONS. The Committee is authorized to grant Options (including "reload" options automatically granted to offset specified exercises of Options) on the following terms and conditions ("Options"): (i) EXERCISE PRICE. The exercise price per share of Stock purchasable under an Option shall be determined by the Committee; PROVIDED, HOWEVER, that, except as provided in Section 7(a), such exercise price shall be no less than the Fair Market Value of a share on the date of grant of such Option. (ii) TIME AND METHOD OF EXERCISE. The Committee shall determine the time or times at which an Option may be exercised in whole or in part, the methods by which such exercise price may be paid or deemed to be paid, the form of such payment, including, without limitation, cash, Stock, other Awards or awards granted under other Company plans or other property (including notes or other contractual obligations of Participants to make payment on a deferred basis, such as through "cashless exercise" arrangements, to the extent permitted by applicable law), and the methods by which Stock will be delivered or deemed to be delivered to Participants. (iii) ISOS. The terms of any ISO granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, including but not limited to the requirement that no ISO shall be 8 granted more than 10 years after the effective date of the Plan. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to ISOs shall be interpreted, amended, or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify either the Plan or any ISO under Section 422 of the Code, unless requested by the affected Participant. (c) STOCK APPRECIATION RIGHTS. The Committee is authorized to grant SARs on the following terms and conditions ("SARs"): (i) RIGHT TO PAYMENT. An SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise (or, if the Committee shall so determine in the case of any such right other than one related to an ISO, the Fair Market Value of one share at any time during a specified period before or after the date of exercise), over (B) the grant price of the SAR as determined by the Committee as of the date of grant of the SAR, which, except as provided in Section 7(a), shall be not less than the Fair Market Value of one share of Stock on the date of grant. (ii) OTHER TERMS. The Committee shall determine the time or times at which an SAR may be exercised in whole or in part, the method of exercise, method of settlement, form of consideration payable in settlement, method by which Stock will be delivered or deemed to be delivered to Participants, whether or not an SAR shall be in tandem with any other Award, and any other terms and conditions of any SAR. Limited SARs that may only be exercised upon the occurrence of a Change in Control may be granted on such terms, not inconsistent with this Section 6(c), as the Committee may determine. Limited SARs may be either freestanding or in tandem with other Awards. (d) RESTRICTED STOCK. The Committee is authorized to grant Restricted Stock on the following terms and conditions ("Restricted Stock"): (i) GRANTS AND RESTRICTIONS. Restricted Stock shall be subject to such restrictions on transferability and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise, as the Committee may determine. Except to the extent restricted under the terms of 9 the Plan and any Award Agreement relating to the Restricted Stock, a Participant granted Restricted Stock shall have all of the rights of a stockholder including, without limitation, the right to vote Restricted Stock or the right to receive dividends thereon. (ii) FORFEITURE. Except as otherwise determined by the Committee, upon termination of employment or service (as determined under criteria established by the Committee) during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company; PROVIDED, HOWEVER, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of termination resulting from specified causes. (iii) CERTIFICATES FOR STOCK. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the Participant, such certificates may bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, the Company may retain physical possession of the certificate, in which case the Participant shall be required to have delivered a stock power to the Company, endorsed in blank, relating to the Restricted Stock. (iv) DIVIDENDS. Dividends paid on Restricted Stock shall be either paid at the dividend payment date in cash or in shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or the payment of such dividends shall be deferred and/or the amount or value thereof automatically reinvested in additional Restricted Stock, other Awards, or other investment vehicles, as the Committee shall determine or permit the Participant to elect. Stock distributed in connection with a Stock split or Stock dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or other property has been distributed, unless otherwise determined by the Committee. (c) DEFERRED STOCK. The Committee is authorized to grant Deferred Stock subject to the following terms and conditions ("Deferred Stock"): 10 (i) AWARD AND RESTRICTIONS. Delivery of Stock will occur upon expiration of the deferral period specified for an Award of Deferred Stock by the Committee (or, if permitted by the Committee, as elected by the Participant). In addition, Deferred Stock shall be subject to such restrictions as the Committee may impose, if any, which restrictions may lapse at the expiration of the deferral period or at earlier specified times, separately or in combination, in installments or otherwise, as the Committee may determine. (ii) FORFEITURE: Except as otherwise determined by the Committee, upon termination of employment or service (as determined under criteria established by the Committee) during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award Agreement evidencing the Deferred Stock), all Deferred Stock that is at that time subject to such forfeiture conditions shall be forfeited; PROVIDED, HOWEVER, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Deferred Stock will be waived in whole or in part in the event of termination resulting from specified causes. (f) BONUS STOCK AND AWARDS IN LIEU OF CASH OBLIGATIONS. The Committee is authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu of Company obligations to pay cash under other plans or compensatory arrangements. (g) DIVIDEND EQUIVALENTS. The Committee is authorized to grant Dividend Equivalents entitling the Participant to receive cash, Stock, other Awards or other property equal in value to dividends paid with respect to a specified number of shares of Stock ("Dividend Equivalents"). Dividend Equivalents may be awarded on a free-standing basis or in connection with another Award. The Committee may provide that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Stock, Awards or other investment vehicles, and subject to such restrictions on transferability and risks of forfeiture, as the Committee may specify. (h) OTHER STOCK-BASED AWARDS. The Committee is authorized, subject to limitations under applicable law, to grant such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock and factors that may influence the value of Stock, as deemed by the Committee to be consistent with the purposes of the Plan, including, without limitation, convertible or exchangeable debt 11 securities, other rights convertible or exchangeable into Stock, purchase rights for Stock, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee and Awards valued by reference to the book value of Stock or the value of securities of or the performance of specified subsidiaries ("Other Stock-Based Awards"). The Committee shall determine the terms and conditions of such Awards. Stock issued pursuant to an Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Stock, other Awards or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, may be granted pursuant to this Section 6(h). 7. CERTAIN PROVISIONS APPLICABLE TO AWARDS. (a) STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with or in substitution for any other Award granted under the Plan or any award granted under any other plan of the Company, any subsidiary or any business entity to be acquired by the Company or a subsidiary, or any other right of a Participant to receive payment from the Company or any subsidiary. Awards granted in addition to or in tandem with other Awards or awards may be granted either as of the same time as or a different time from the grant of such other Awards or awards. (b) TERM OF AWARDS. The term of each Award shall be for such period as may be determined by the Committee; PROVIDED, HOWEVER, that in no event shall the term of any ISO or an SAR granted in tandem therewith exceed a period of ten years from the date of its grant (or such shorter period as may be applicable under Section 422 of the Code). (c) FORM OF PAYMENT UNDER AWARDS. Subject to the terms of the Plan and any applicable Award Agreement, payments to be made by the Company or a subsidiary upon the grant, exercise or settlement of an Award may be in such forms as the Committee shall determine, including, without limitation, cash, Stock, other Awards or other property, and may be made in a single payment or transfer, in installments or on a deferred basis. Such payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents in respect of installment or deferred payments denominated in Stock. (d) RULE 16B-3 COMPLIANCE. 12 (i) SIX-MONTH HOLDING PERIOD. Unless a Participant could otherwise dispose of equity securities, including derivative securities, acquired under the Plan without incurring liability under Section 16(b) of the Exchange Act, equity securities acquired under the Plan must be held for a period of six months following the date of such acquisition, provided that this condition shall be satisfied with respect to a derivative security if at least six months elapse from the date of acquisition of the derivative security to the date of disposition of the derivative security (other than upon exercise or conversion) or its underlying equity security. (ii) OTHER COMPLIANCE PROVISIONS. With respect to a Participant who is then subject to Section 16 of the Exchange Act in respect of the Company, the Committee shall implement transactions under the Plan and administer the Plan in a manner that will ensure that each transaction by such a Participant is exempt from liability under Rule 16b-3, except that such a Participant may be permitted to engage in a non-exempt transaction under the Plan if written notice has been given to the Participant regarding the non-exempt nature of such transaction. The Committee may authorized the Company to repurchase any Award or shares of Stock resulting from any Award in order to prevent a Participant who is subject to Section 16 of the Exchange Act from incurring liability under Section 16(b). Unless otherwise specified by the Participant, equity securities, including derivative securities, acquired under the Plan which are disposed of by a Participant shall be deemed to be disposed of in the order acquired by the Participant. (e) LOAN PROVISIONS. With the consent of the Committee, and subject at all times to, and only to the extent, if any, permitted under and in accordance with, laws and regulations and other binding obligations or provisions applicable to the Company, the Company may make, guarantee or arrange for a loan or loans to a Participant with respect to the exercise of any Option or other payment in connection with any Award, including the payment by a Participant of any or all federal, state or local income or other taxes due in connection with any Award. Subject to such limitations, the Committee shall have full authority to decide whether to make a loan or loans hereunder and to determine the amount, terms and provisions of any such loan or loans, including 13 the interest rate to be charged in respect of any such loan or loans, whether the loan or loans are to be with or without recourse against the borrower, the terms on which the loan is to be repaid and conditions, if any, under which the loan or loans may be forgiven. (f) PERFORMANCE-BASED AWARDS. The Committee may, in its discretion, designate any Award the exercisability or settlement of which is subject to the achievement of performance conditions as a performance-based Award subject to this Section 7(f). The performance objectives for an Award subject to this Section 7(f) shall consist of one or more business criteria and a targeted level or levels of performance with respect to such criteria, as specified by the Committee. Such levels of performance may be expressed in absolute or relative levels. Achievement of performance objectives with respect to such Awards shall be measured over a period of not less than one year nor more than five years, as the Committee may specify. Performance objectives may differ for such Awards to different Participants. The Committee shall specify the weighting to be given to each performance objective for purposes of determining the final amount payable with respect to any such Award. The Committee may, in its discretion, reduce the amount of a payout otherwise to be made in connection with an Award subject to this Section 7(f), and the Committee may consider other performance criteria in exercising such discretion. All determinations by the Committee as to the achievement of performance objectives shall be in writing. (g) ACCELERATION UPON A CHANGE OF CONTROL. Notwithstanding anything contained herein to the contrary, unless otherwise provided by the Committee in an Award Agreement, all conditions and restrictions relating to an Award, including limitations on exercisability, risks of forfeiture, deferral periods and conditions and restrictions requiring the continued performance of services or the achievement of performance objectives with respect to the exercisability or settlement of such Award, shall immediately lapse upon a Change in Control. 8. OPTIONS GRANTED AUTOMATICALLY TO NON-EMPLOYEE DIRECTORS. (a) INITIAL OPTION GRANTS. A Non-Employee Director Initial Option will be automatically granted (i) at the commencement of the Initial Public Offering to each Non-Employee Director at that date and to each other person who has agreed to become a director and who, if he or she were serving at the date of commencement of the Initial Public Offering, would qualify as a Non-Employee Director at that date, and (ii), after the Initial Public Offering, at the effective date of any other director's initial election to the Board of Directors if he or she qualifies as a Non-Employee Director at that date. The 14 foregoing notwithstanding, any Initial Option granted at the commencement of the Initial Public Offering shall be cancelled and forfeited if the Initial Public Offering is not consummated or if, in the case of an Initial Option granted to a person who has agreed to become a director, such person does not commence serving as a Non-Employee Director at or promptly following the closing of the Initial Public Offering. (b) ANNUAL OPTION GRANTS. A Non-Employee Director Annual Option will be automatically granted, at the close of business on the date of final adjournment of each annual meeting of stockholders of the Company, to each member of the Board of Directors who then qualifies as a Non-Employee Director. The foregoing notwithstanding, any person who has been automatically granted a Non-Employee Director Initial Option under Section 8(a)(ii) shall not be automatically granted a Non-Employee Director Annual Option at the first annual meeting of stockholders following such grant of the Initial Option if such annual meeting takes place within three months after the effective date of such grant of the Initial Option. (c) NUMBER OF SHARES SUBJECT TO AUTOMATIC OPTION GRANTS. In the case of any Initial or Annual Option granted on or before the date of the first annual meeting of stockholders following the Initial Public Offering, the number of shares of Stock to be subject to each Initial Option shall be 10,000, and the number of shares of Stock to be subject to each Annual Option shall be 5,000, in each case subject to adjustment as provided in Section 4(c). In the case of any Initial or Annual Option granted thereafter, the number of shares of Stock to be subject to each Initial and Annual Option shall be the applicable number specified in the preceding sentence or, if so determined by the Board, such other number of shares specified in the most recent resolution of the Board adopted on or prior to the date of the annual meeting of stockholders that coincides with or most recently precedes the date of grant of the Option. (d) OTHER NON-EMPLOYEE DIRECTOR INITIAL AND ANNUAL OPTION TERMS. Other terms of Initial and Annual Options shall be as follows: (i) The exercise price per share of Stock purchasable upon exercise of a Non-Employee Director Initial or Annual Option will be equal to 100% of the Fair Market Value of a share of Stock on the date of grant of the Option. 15 (ii) A Non-Employee Director Initial or Annual Option will expire at the earlier of (A) 10 years after the date of grant or (B) one year after the date the Participant ceases to serve as a director of the Company for any reason. (iii) Each Non-Employee Director Initial or Annual Option may be exercised, prior to its expiration, commencing one year after the date of grant, or at such earlier date as may be specified by the Board of Directors; PROVIDED, HOWEVER, that an Option may be exercised following a Participant's termination of service as a director for reasons other than death or disability only if the director served for at least 11 months after the date of grant or the option was otherwise exercisable at the date of termination of service. (e) METHOD OF EXERCISE. A Participant may exercise a Non-Employee Director Initial or Annual Option, in whole or in part, at such time as it is exercisable and prior to its expiration, by giving written notice of exercise to the Secretary of the Company, specifying the Option to be exercised and the number of shares to be purchased, and paying in full the exercise price in cash (including by check) or by surrender of shares already owned by the Participant (except for shares acquired from the Company by exercise of an option less than six months before the date of surrender) having a Fair Market Value at the time of exercise equal to the exercise price, or by a combination of cash and shares. (f) AVAILABILITY OF SHARES. If an automatic grant of Options authorized under Section 8(a) or (b) cannot be made in full due to the limitation set forth in Section 4(a), such grant shall be made (together with other automatic grants to occur at the same time) to the greatest extent then permitted under Section 4(a). 9. GENERAL PROVISIONS. (a) COMPLIANCE WITH LAWS AND OBLIGATIONS. The Company shall not be obligated to issue or deliver Stock in connection with any Award or take any other action under the Plan in a transaction subject to the registration requirements of the Securities Act of 1933, as amended, or any other federal or state securities law, any requirement under any listing agreement between the Company and any national securities exchange or automated quotation system or any other law, regulation or contractual obligation of the Company until the Company is satisfied that such laws, regulations and other obligations of the Company have been complied with in full. Certificates representing shares of Stock issued under the Plan will be subject to such stop-transfer orders and other restrictions as may be applicable under such laws, regulations and other 16 obligations of the Company, including any requirement that a legend or legends be placed thereon. (b) LIMITATIONS ON TRANSFERABILITY. Awards and other rights under the Plan will not be transferable by a Participant except by will or the laws of descent and distribution or to a Beneficiary in the event of the Participant's death, shall not be pledged, mortgaged, hypothecated or otherwise encumbered, or otherwise subject to the claims of creditors, and, in the case of ISOs and SARs in tandem therewith, shall be exercisable during the lifetime of a Participant only by such Participant or his guardian or legal representative; provided, however, that such Awards and other rights (other than ISOs and SARs in tandem therewith) may be transferred to one or more transferees during the lifetime of the Participant to the extent and on such terms as then may be permitted by the Committee. (c) NO RIGHT TO CONTINUED EMPLOYMENT OR SERVICE. Neither the Plan nor any action taken hereunder shall be construed as giving any employee, director or other person the right to be retained in the employ or service of the Company or any of its subsidiaries, nor shall it interfere in any way with the right of the Company or any of its subsidiaries to terminate any employee's employment or other person's service at any time or with the right of the Board or stockholders to remove any director. (d) TAXES. The Company and any subsidiary is authorized to withhold from any Award granted or to be settled, any delivery of Stock in connection with an Award, any other payment relating to an Award or any payroll or other payment to a Participant amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Participant's tax obligations. (e) CHANGES TO THE PLAN AND AWARDS. The Board may amend, alter, suspend, discontinue or terminate the Plan or the Committee's authority to grant Awards under the Plan without the consent of stockholders or Participants, except that any such action shall be subject to the approval of the Company's stockholders at or before the next annual meeting of stockholders for which the record date is after such Board action if such stockholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Stock may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such 17 changes to the Plan to stockholders for approval; PROVIDED, HOWEVER, that, without the consent of an affected Participant, no such action may materially impair the rights of such Participant under any Award theretofore granted to him. The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue, or terminate, any Award theretofore granted and any Award Agreement relating thereto; PROVIDED, HOWEVER, that, without the consent of an affected Participant, no such action may materially impair the rights of such Participant under such Award. (f) NO RIGHTS TO AWARDS; NO STOCKHOLDER RIGHTS. No Participant or employee shall have any claim to be granted any Award under the Plan (except for a director who has become entitled to Options under Section 8), and there is no obligation for uniformity of treatment of Participants and employees. No Award shall confer on any Participant any of the rights of a stockholder of the Company unless and until Stock is duly issued or transferred and delivered to the Participant in accordance with the terms of the Award or, in the case of an Option, the Option is duly exercised. (g) UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; PROVIDED, HOWEVER, that the Committee may authorized the creation of trusts or make other arrangements to meet the Company's obligations under the Plan to deliver cash, Stock, other Awards or other property pursuant to any Award, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant. (h) NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the board nor any submission of the Plan or amendments thereto to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other compensatory arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. (i) NO FRACTIONAL SHARES. No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. 18 (j) GOVERNING LAW. The validity, construction and effect of the Plan, any rules and regulations relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of laws, and applicable federal law. (k) EFFECTIVE DATE; PLAN TERMINATION. The Plan shall become effective as of the date of its adoption by the Board, subject to stockholder approval prior to the commencement of the Initial Public Offering, and shall continue in effect until terminated by the Board. 19 EX-10.12 3 EXHIBIT-10.12 Exhibit 10.12 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT is made this 16th day of July, 1998, between LINC SYSTEMS CORPORATION, a Connecticut corporation (the "Company"), and ROBERT HEFNER (the "Executive"). WHEREAS, the Company is a wholly-owned subsidiary of Condor Technology Solutions, Inc., a Delaware corporation ("Condor"). WHEREAS, the parties hereto wish to enter into an employment agreement to employ the Executive and to set forth certain additional agreements between the Executive and the Company. NOW, THEREFORE, in consideration of the mutual covenants and representations contained herein, the parties hereto agree as follows: 1. TERM. The Company will employ the Executive, and the Executive will serve the Company, under the terms of this Agreement for the period set forth on SCHEDULE A attached hereto, commencing on the date hereof (the "Term"). Upon expiration of the Term, this Agreement maybe extended by mutual consent of the parties, upon terms and conditions to be determined by mutual agreement. Notwithstanding the foregoing, the Executive's employment hereunder may be earlier terminated as provided in Section 4 hereof and as set forth in SCHEDULE A attached hereto. The period of time between the commencement and the termination of the Executive's employment hereunder shall be referred to herein as the "Employment Period." 2. EMPLOYMENT. (a) POSITION AND REPORTING. The Company hereby employs the Executive for the Employment Period to serve in the office or position of the Company set forth on SCHEDULE A attached hereto on the terms and conditions set forth in this Agreement. (b) AUTHORITY AND DUTIES. In addition to such objectives as are set forth on SCHEDULE A attached hereto (if any), the Executive shall exercise such authority, perform such duties and functions and discharge such responsibilities as are reasonably associated with the Executive's position, commensurate with the authority vested in the Executive's position, pursuant to this Agreement and consistent with the By-Laws of the Company. During the Employment Period, the Executive shall devote his full business time, skill and efforts to the business of the Company. Notwithstanding the foregoing, the Executive may (i) make and manage passive personal business investments of his choice (in the case of publicly-held corporations, not to exceed five percent (5%) of the outstanding voting stock) and serve in any capacity with any civic, educational or charitable organization, or any trade association, without seeking or obtaining approval by the Board of Directors of the Company (the "Board"), provided such activities and service do not materially interfere or conflict with the performance of his duties hereunder and (ii) with the approval of the Board, which shall not be unreasonably withheld, serve on the boards of directors of other corporations. 3. COMPENSATION AND BENEFITS. (a) SALARY. During the Employment Period, the Company shall pay to the Executive, as compensation for the performance of his duties and obligations under this Agreement, a base salary at the per annum rate set forth on SCHEDULE A attached hereto, payable in arrears not less frequently than monthly in accordance with the normal payroll practices of the Company. Such base salary shall be subject to review each year for possible increase by the Board, but shall in no event be decreased from its then-existing level during the Employment Period. (b) ANNUAL BONUS. During the Employment Period, the Executive shall have the opportunity to earn an annual bonus in accordance with a Company annual bonus program to be established by the Board for senior executives of the company and its subsidiaries. The payment of any annual bonus under any such program shall be contingent upon the achievement of certain corporate and/or individual performance goals established by the Board in its discretion. (c) OTHER BENEFITS. During the Employment Period, the Executive shall be entitled to participate in all of the employee benefit plans, programs and arrangements in effect during the Employment Period that are generally available to senior executives of the Company, subject to and on a basis consistent with the terms, conditions and overall administration of such plans, programs and arrangements. In addition, during the Employment Period, the Executive shall be entitled to fringe benefits and perquisites comparable to those of other senior executives of the Company. (d) BUSINESS EXPENSES. During the Employment Period, the Company shall reimburse the Executive for all documented reasonable business expenses incurred by the Executive in the performance of his duties under this Agreement, in accordance with the Company's and Condor's policies. (e) INDEMNIFICATION. During the Employment Period and thereafter, the Company shall indemnify the Executive to the fullest extent permitted by applicable law, with respect to all costs, charges and expenses, including attorneys' fees, whatsoever incurred or sustained by the Executive in connection with any action, suit or proceeding (other than any action, suit or proceeding brought by or in the name of the Company against the Executive) to which he may be made party by reason of being or having been a director, officer or employee of the Company or his serving or having served any other enterprise as a director, officer or employee at the request of the Company, and the Executive shall be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of the directors and officers of the Company. 4. TERMINATION OF EMPLOYMENT. (a) TERMINATION FOR CAUSE. The Company may terminate the Executive's employment hereunder with or without cause, subject to the obligations of the Company under Section 5 hereof in the event of the termination of the Executive without cause. For purposes of this Agreement, the Company shall have "cause" to terminate the Executive's employment hereunder if such termination shall be the result of: 2 (i) willful fraud or dishonesty in connection with the Executive's performance hereunder that results in material harm to the Company; (ii) the Executive's continued failure to substantially perform his duties with the Company (other than such failure resulting from his incapacity due to physical or mental illness) after written demand for substantial performance is delivered to the Executive by the Company specifically identifying the manner in which the Company believes the Executive has not substantially performed his duties; or (iii) the conviction for, or plea of nolo contendere to, a charge of commission of a felony. (b) TERMINATION UPON DEATH OR PERMANENT AND TOTAL DISABILITY. The Employment Period shall be terminated by the death of the Executive. The Employment Period may be terminated by the Company if the Executive shall be rendered incapable of performing his duties to the Company by reason of a "disability," defined as either (i) any medically determined physical or mental impairment that can be expected to result in death or that can be expected to last for a period of six or more consecutive months from the first date of the Executive's absence, or (ii) due to a total and permanent "disability" that can be expected to last for a period of six or more consecutive months from the first date of the Executive's absence, as such term is defined in the Company's or Condor's long term disability insurance policy or contract as may be in effect from time to time for the benefit of employees of the Company (either, a "Disability"). If the Employment Period is terminated by reason of the Disability of the Executive, the Company shall give 30 days' advance written notice to that effect to the Executive. If the existence of a Disability hereunder is in dispute, it shall be resolved by two physicians, one appointed by the Executive and one appointed by the Company. If the two physicians so selected cannot agree as to whether or not the Executive has a Disability, the two physicians so selected shall designate a third physician and a majority of the three physicians so selected shall determine whether or not the Executive has a Disability. (c) TERMINATION FOR FAILURE TO ACHIEVE OBJECTIVES. If the Term of Executive's employment is more than one (1) year, then the Employment Period may be terminated upon thirty (30) days' written notice, AND such termination shall be effective as of a date during the thirty (30) day period following the first anniversary of the date hereof, if the Executive fails to make reasonable progress towards satisfying the objectives, if any, set forth on SCHEDULE A attached hereto. 5. CONSEQUENCES OF TERMINATION. (a) TERMINATION WITHOUT CAUSE. In the event of termination of the Executive's employment hereunder by the Company without "cause" (other than upon death or Disability) (defined in Section 4 hereof), the Executive shall be entitled to the following severance pay and benefits: (i) Severance Pay - severance payments in the form of continuation of the Executive's base salary as in effect immediately prior to such termination over the longer of: (A) the then-remaining Term hereof; or (B) six months (the "Severance Period"); and (ii) Benefits Continuation - continuation for the Severance Period of coverage under the group medical care, disability and life insurance benefit plans or arrangements in which the Executive is participating at the time of termination; provided, however, that the Company's obligation to provide or 3 cause to be provided such coverages shall be terminated if the Executive obtains comparable substitute coverage from another employer at any time during the Severance Period. The Executive shall be entitled, at the expiration of the Severance Period, to elect continued medical coverage in accordance with section 4980B of the Internal Revenue Code of 1986, as amended (or any successor provision thereto); and (b) OTHER TERMINATIONS. In the event of termination of the Executive's employment hereunder for any reason other than those specified in Section 5(a) hereof, including but not limited to Executive's voluntary termination or termination for failure to achieve objectives, the Executive shall not be entitled to any severance pay, benefits continuation or stock option rights contemplated by the foregoing, except as may otherwise be provided under the applicable benefit plans or award agreements relating to the Executive. (c) ACCRUED RIGHTS. Notwithstanding the foregoing provisions of this Section 5, in the event of termination of the Executive's employment hereunder for any reason, the Executive shall be entitled to payment of any unpaid portion of his base salary through the effective date of termination, and payment of any accrued but unpaid rights solely in accordance with the terms of any incentive bonus, stock option or employee benefit plan or program of the Company. 6. CONFIDENTIALITY. The Executive agrees that he will not at any time during the Term hereof or at any time thereafter for any reason, in any fashion, form or manner, either directly or indirectly, divulge, disclose or communicate to any person, firm, corporation or other business entity, in any manner whatsoever, any confidential information or trade secrets concerning the business of Condor, the Company or any other subsidiaries of Condor, including, without limiting the generality of the foregoing, the techniques, methods or systems of operation or management, or any information regarding financial matters, plans or other material data. The provisions of this Section 6 shall not apply to (i) information that is public knowledge other than as a result of disclosure by Executive in breach of this Section 6; (ii) information disseminated by the Company, Condor or any of Condor's other subsidiaries to third parties in the ordinary course of business; (iii) information lawfully received by the Executive from a third party who, based upon inquiry by the Executive, is not bound by a confidential relationship to Condor, the Company or any of Condor's other subsidiaries; or (iv) information disclosed under a requirement of law or as directed by applicable legal authority having jurisdiction over the Executive. 7. INVENTIONS. The Executive is hereby retained in a capacity such that the Executive's responsibilities include the making of technical and managerial contributions of value to Condor and the Company. The Executive hereby assigns to the Company all right, title and interest in such contributions and inventions made or conceived by the Executive alone or jointly with others during the Employment Period that relate to the business of the Company, Condor or any of Condor's other subsidiaries. This assignment shall include (a) the right to file and prosecute patent applications on such inventions in any and all countries, (b) the patent applications filed and patents issuing thereon, and (c) the right to obtain copyright, trademark or trade name protection for any such work product. The Executive shall promptly and fully disclose all such contributions and inventions to the Company and assist the Company in obtaining and protecting the rights 4 therein (including patents thereon) in any and all countries; provided, however, that said contributions and inventions will be the property of the Company, whether or not patented or registered for copyright, trademark or trade name protection, as the case may be. The Executive hereby agrees to execute any documentation requested by the Company to be so executed if such request is made in order to carry out the purpose and terms of this paragraph. Inventions conceived by the Executive that are not related to the business of the Company or any of its subsidiaries will remain the property of the Executive. 8. NON-COMPETITION. The Executive agrees that he shall not, from the date hereof until the later to occur of (a) two (2) years after the date hereof, or (b) one (1) year after the expiration of the Executive's employment hereunder for any reason (the "Restricted Term"), directly or indirectly, alone or as principal, partner, joint venturer, officer, director, employee, consultant, agent, independent contractor or stockholder (other than as provided below) of any company or business, engage in any "Competitive Business" within the United States. For purposes of the foregoing, the term "Competitive Business" shall mean any business involved in providing information technology solutions, including, but not limited to, desktop services, software development, systems design and integration, large scale survey research, recruiting and comprehensive marketing and sales, which is in direct competition with (x) the Company, or (y) a "Restricted Entity" (defined below) in any community in which such Restricted Entity is doing business. For the purposes hereof, "Restricted Entity" shall mean Condor and/or any of Condor's subsidiaries, to the extent that the Executive has had significant contacts or involvement with, or obtained knowledge of or had access to proprietary or confidential information or trade secrets of, such entity. Notwithstanding the foregoing, the Executive shall not be prohibited during the Restricted Term from acting as a passive investor where he owns not more than five percent (5%) of the issued and outstanding capital stock of any publicly-held company. During the Restricted Term, the Executive shall not solicit or encourage any employee of the Company or any current or future subsidiary or affiliate thereof to terminate his or her employment. 9. NON-SOLICITATION OF EMPLOYEES. The Executive agrees that he shall not during Restricted Term, directly or indirectly, alone or as principal, partner, joint venturer, officer, director, employee, consultant, agent, independent contractor or stockholder, or in any other capacity whatsoever, employ, retain, or enter into any employment, agency, consulting or other similar arrangement with, any person who, within the twelve-month period prior to the termination of the Executive's employment by the Company, was an employee of the Company or of any of Condor's other subsidiaries, or, induce or attempt to induce such person to terminate his employment with the Company or such subsidiary. 10. NON-SOLICITATION OF CLIENTS OR CUSTOMERS. The Executive agrees that he shall not during the Restricted Term, directly or indirectly, alone or as principal, partner, joint venturer, officer, director, employee, consultant, agent, independent contractor or stockholder, or in any other capacity whatsoever, directly or indirectly, for his or her own account, or for the account of others, solicit orders for services of a kind or nature like or similar to services performed by the Company or any of Condor's other subsidiaries as of the date of the termination of the Executive's employment by the Company, from any party that was a customer or client of the Company or such 5 subsidiary, or which the Company or any of Condor's other subsidiaries was soliciting to be a customer or client, during the twelve (12) month period preceding the termination of the Executive's employment. 11. BREACH OF RESTRICTIVE COVENANTS. The parties agree that a breach or violation of Section 6, 7, 8, 9 or 10 hereof may result in immediate and irreparable injury and harm to the innocent party, which party shall have, in addition to any and all remedies of law and other consequences under this Agreement, the right to an injunction, specific performance or other equitable relief to prevent the violation of the obligation hereunder. 12. NOTICES. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Company, to: LINC SYSTEMS CORPORATION 310 West Newberry Road Bloomfield, CT 06002 with a copy to: CONDOR TECHNOLOGY SOLUTIONS, INC. Annapolis Office Plaza 170 Jennifer Road Suite 325 Annapolis, Maryland 21401 (b) If to the Executive, to the address set forth on SCHEDULE A attached hereto; or to such other address as a party hereto shall designate to the other party by like notice, provided that notice of a change of address shall be effective only upon receipt thereof. 13. ARBITRATION: LEGAL FEES. Except as provided in Section 11 hereof, any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Hartford, Connecticut in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The Company shall reimburse the Executive for all reasonable legal fees and costs and other fees and expenses that the Executive may incur in respect of any dispute or controversy arising against the Company under or in connection with this Agreement; provided, however, that the Company shall not reimburse any such fees, costs and expenses if the fact 6 finder determines that an action brought by the Executive was substantially without merit or the Executive is otherwise unsuccessful in such an action. 14. WAIVER OF BREACH. Any waiver of any breach of the Agreement shall not be construed to be a continuing waiver or consent to any subsequent breach on the part of either the Executive or of the Company. 15. NON-ASSIGNMENT: SUCCESSORS. Neither part hereto may assign his or its rights or delegate his or its duties under this Agreement without prior written consent of the other party; provided, however, that (i) this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company upon any sale of all or substantially all of the Company's assets, or upon any merger, consolidation or reorganization of the Company with or into any other corporation, all as though such successors and assigns of the Company and their respective successors and assigns were the Company; and (ii) this Agreement shall inure to the benefit of and be binding upon the heirs, assigns or designees of the Executive to the extent of any payments due to the Executive hereunder. As used in this Agreement, the term "Company" shall be deemed to refer to any such successor or assign of the Company referred to in the preceding sentence. 16. WITHHOLDING OF TAXES. All payments required to be made by the Company to the Executive under this Agreement shall be subject to the withholding of such amounts, if any, relating to tax, and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. 17. SEVERABILITY. To the extent any provision of this Agreement or portion thereof shall be invalid or unenforceable, it shall be considered deleted therefrom and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. 18. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 19. GOVERNING LAW. This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of Maryland. 20. ENTIRE AGREEMENT. 7 This Agreement constitutes the entire agreement by the Company and the Executive with respect to the subject matter hereof and supersedes any and all prior agreements or understandings between the Executive and the Company with respect to the subject matter hereof, whether written or oral. This Agreement may be amended or modified only by a written instrument executed by the Executive and the Company. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK] 8 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. LINC SYSTEMS CORPORATION By: /s/ Michael A. Kehse, Vice President ------------------------------------- Michael A. Kehse, Vice President THE EXECUTIVE /s/ Robert Hefner ------------------------------------ Robert Hefner 1144384.V3 9 SCHEDULE A TO EMPLOYMENT AGREEMENT BETWEEN LINC SYSTEMS CORPORATION AND ROBERT HEFNER A. TERM: Two (2) years B. EARLY TERMINATION PROVISIONS (IN ADDITION TO SECTION 4): None. C. THE EXECUTIVE SHALL SERVE IN THE FOLLOWING OFFICE(S) AND/OR POSITION(S) OF THE COMPANY: President and Chief Executive Officer. D. BASE SALARY: $200,000. In addition, Condor has granted to the Executive options to purchase 30,000 shares of Condor's common stock, as set forth in an Option Grant Certificate of even date herewith. E. OBJECTIVES: In addition to serving as an officer of the Company, the Executive shall also lead the Systems Services Division of Condor. F. RESIDENCE ADDRESS OF EXECUTIVE FOR NOTICES: 38 High Farms Road West Hartford, CT 06107 10 EX-10.13 4 EXHIBIT-10.13 Exhibit 10.13 EMPLOYMENT AGREEMENT --------------------- THIS EMPLOYMENT AGREEMENT is made this 10th day of February, 1998, between Computer Hardware Maintenance Company, Inc., a Pennsylvania corporation (the "Company"), and Michael Paglaiccetti (the "Executive"). WHEREAS, the Executive is currently employed by the Company; and WHEREAS, as a result of the proposed business combination pursuant to that certain Agreement and Plan of Organization among Condor Technology Solutions, Inc. ("Condor"), its acquisition subsidiary, the Company and its stockholders (the "Business Combination"), the Company will become a wholly-owned subsidiary of Condor; and WHEREAS, the parties hereto wish to enter into an employment agreement to employ the Executive as the President and Chief Executive Officer of the Company following the Business Combination, and to set forth certain additional agreements between the Executive and the Company. NOW, THEREFORE, in consideration of the mutual covenants and representations contained herein, the parties hereto agree as follows: 1. TERM. The Company will employ the Executive, and the Executive will serve the Company, under the terms of this Agreement for an initial term of three (3) years, commencing on the closing date of Condor's initial public offering of Common Stock (which also is intended to be the effective date of the Business Combination). Effective as of the expiration of such initial three-year term and as of each anniversary date thereof, the term of this Agreement shall be extended for an additional 12-month period unless, not later than two months prior to each such respective date, either party shall have given notice to the other party that the term shall not be so extended. Notwithstanding the foregoing, the Executive's employment hereunder may be earlier terminated, as provided in Section 4 hereof. The term of this Agreement, as in effect from time to time in accordance with the foregoing, shall be referred to herein as the "Term." The period of time between the commencement and the termination of the Executive's employment hereunder shall be referred to herein as the "Employment Period." 2. EMPLOYMENT. (a) POSITION AND REPORTING. The Company hereby employs the Executive for the Employment Period as its President and Chief Executive Officer on the terms and conditions set 1 forth in this Agreement. (b) AUTHORITY AND DUTIES. The Executive shall exercise such authority, perform such executive duties and functions and discharge such responsibilities as are reasonably associated with the Executive's position, commensurate with the authority vested in the Executive's position, pursuant to this Agreement and consistent with the By-Laws of the Company. Without limiting the generality of the foregoing, the Executive shall report directly and be responsible to the President and Chief Executive Officer of Condor and the Board of Directors of the Company (the "Board"). During the Employment Period, the Executive shall devote his full business time, skill and efforts to the business of the Company. Notwithstanding the foregoing, the Executive may (i) make and manage passive personal business investments of his choice (in the case of publicly-held corporations, not to exceed one percent (1%) of the outstanding voting stock) and serve in any capacity with any civic, educational or charitable organization, or any trade association, without seeking or obtaining approval by the Board, provided such activities and service do not materially interfere or conflict with the performance of his duties hereunder and (ii) with the approval of the Board, which shall not be unreasonably be withheld, serve on the boards of directors of other corporations. 3. COMPENSATION AND BENEFITS. (a) SALARY. During the Employment Period, the Company shall pay to the Executive, as compensation for the performance of his duties and obligations under this Agreement, a base salary at the rate of $220,000 per annum, payable in arrears not less frequently than monthly in accordance with the normal payroll practices of the Company. Such base salary shall be subject to review each year for possible increase by the Board of the Company, but shall in no event be decreased from its then-existing level during the Employment Period. (b) ANNUAL BONUS. During the Employment Period, the Executive shall have the opportunity to earn an annual bonus in accordance with an annual bonus program to be established by the Board of Directors of Condor for senior executives of Condor and its subsidiaries, including the Company. The payment of any annual bonus under any such program shall be contingent upon the achievement of certain corporate and/or individual performance goals established by the Board of Directors of Condor in its discretion and shall not exceed an amount equal to the Executive's base salary. (c) OTHER BENEFITS. During the Employment Period, the Executive shall be entitled to participate in all of the employee benefit plans, programs and arrangements in effect during the Employment Period that are generally available to senior executives of the Company, subject to and on a basis consistent with the terms, conditions and overall administration of such plans, programs and arrangements. In addition, during the Employment Period, the Executive shall be entitled to fringe benefits and perquisites comparable to those of other senior executives of the Company, including, but not limited to, four (4) weeks of paid vacation per year. 2 (d) BUSINESS EXPENSES. During the Employment Period, the Company shall reimburse the Executive for all documented reasonable business expenses incurred by the Executive in the performance of his duties under this Agreement, in accordance with the Company's policies. (e) INDEMNIFICATION. During the Employment Period and thereafter, the Company or Condor shall indemnify the Executive to the fullest extent permitted by applicable law, and the Executive shall be entitled to the protection of any insurance policies the Company or Condor may elect to maintain generally for the benefit of the directors and officers of the Company, with respect to all costs, charges and expenses, including attorneys' fees, whatsoever incurred or sustained by the Executive in connection with any action, suit or proceeding (other than any action, suit or proceeding brought by or in the name of the Company or Condor against the Executive) to which he may be made a party by reason of being or having been a director, officer or employee of the Company or Condor or his serving or having served any other enterprise as a director, officer or employee at the request of the Company or Condor. 4. TERMINATION OF EMPLOYMENT. (a) TERMINATION FOR CAUSE. The Company may terminate the Executive's employment hereunder for cause. For purposes of this Agreement and subject to the Executive's opportunity to cure as provided in Section 4 (c) hereof, the Company shall have "cause" to terminate the Executive's employment hereunder if such termination shall be the result of: (i) willful fraud or dishonesty in connection with the Executive's performance hereunder that results in material harm to the Company or Condor; (ii) the failure by the Executive to substantially perform his duties hereunder that results in material harm to the Company or Condor; or (iii) the conviction for, or plea of NOLO CONTENDERE to, a charge of commission of a felony. (b) TERMINATION FOR GOOD REASON. The Executive shall have the right at any time to terminate his employment with the Company at any time and for any good reason. For purposes of this Agreement and subject to the Company's opportunity to cure as provided in Section 4 ( c) hereof, the Executive shall have "good reason" to terminate his employment hereunder if such termination shall be the result of: (i) a material diminution during the Employment Period in the Executive's duties or responsibilities as set forth in Section 2 hereof; 3 (ii) a material breach by the Company of the compensation and benefits provisions set forth in Section 3 hereof; (iii) a notice of termination by the Executive under Section 4 (c) hereof within 12 months following the occurrence of a Change in Control (as defined in Section 4 (e) hereof); (iv) a material breach by the Company of any other term of this Agreement; or (v) Condor shall cause the Company, without the consent of the Executive, to relocate the Executive's principal work location to an area which is more than 50 miles outside the greater Langhorne, Pennsylvania area. (c) NOTICE AND OPPORTUNITY TO CURE. Notwithstanding the foregoing, it shall be a condition precedent to the Company's right to terminate the Executive's employment for "cause" and the Executive's right to terminate his employment for "good reason" that (1) the party seeking the termination shall first have given the other party written notice stating with specificity the reason for the termination ("breach"); (2) if the Executive is terminated for "cause," the Company provides the Executive an opportunity to appear before the Board to answer such grounds for termination; and (3) if such breach is susceptible of cure or remedy, a period of 30 days from and after the giving of such notice shall have elapsed without the breaching party having effectively cured or remedied such breach during such 30-day period, unless such breach cannot be cured or remedied within 30 days, in which case the period for remedy or cure shall be extended for a reasonable time (not to exceed an additional 30 days), provided the breaching party has made and continues to make a diligent effort to effect such remedy or cure. (d) TERMINATION UPON DEATH OR PERMANENT AND TOTAL DISABILITY. The Employment Period shall be terminated by the death of the Executive. The Employment Period may be terminated by the Company if the Executive shall be rendered incapable of performing his duties to the Company by reason of a "disability," defined as either (i) any medically determined physical or mental impairment that can be expected to result in death or that can be expected to last for a period of six or more consecutive months from the first date of the Executive's absence, or (ii) due to a total and permanent "disability" that can be expected to last for a period of six or more consecutive months from the first date of the Executive's absence, as such term is defined in the Company's long term disability insurance policy or contract as may be in effect from time to time for the benefit of employees of the Company (either, a "Disability"). If the Employment Period is terminated by reason of a Disability of the Executive, the Company shall give 30 days' advance written notice to that effect to the Executive. If the existence of a Disability hereunder is in dispute, it shall be resolved by two physicians, one appointed by the Executive and one appointed by the Company. If the two physicians 4 so selected cannot agree as to whether or not the Executive has a Disability, the two physicians so selected shall designate a third physician and a majority of the three physicians so selected shall determine whether or not the Executive has a Disability. (e) DEFINITION OF CHANGE IN CONTROL. A "Change in Control" shall be deemed to have occurred if: (i) there shall be consummated any consolidation or merger of Condor in which Condor is not the continuing or surviving corporation or pursuant to which shares of Condor's capital stock are converted into cash, securities or other property other than a consolidation or merger of Condor in which the holders of Condor's voting stock immediately prior to the consolidation or merger shall, upon consummation of the consolidation or merger, own at least 50% of the voting stock of the surviving corporation, or any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of Condor; or (ii) any person (as such term is used in Sections 13(d) and 14 (d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") ) shall after the date hereof become the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of securities of Condor representing 35% or more of the voting power of all then outstanding securities of Condor having the right under ordinary circumstances to vote in an election of the Board (including, without limitation, any securities of Condor that any such person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, which shall be deemed beneficially owned by such person); or (iii) individuals who at the date hereof constitute the entire Board and any new directors whose election by the Board, or whose nomination for election by Condor's stockholders, shall have been approved by a vote of at least a majority of the directors then in office who either were directors at the date hereof or whose election or nomination for election shall have been so approved (the "Continuing Directors") shall cease for any reason to constitute a majority of the members of the Board; or (iv) the sale by Condor of the majority of the capital stock of the Company or all or substantially all of the assets of the Company, or the liquidation or dissolution of the Company. 5. CONSEQUENCES OF TERMINATION. (a) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. In the event of termination of the Executive's employment hereunder by the Company without "cause" (other than upon death or Disability) or by the Executive for "good reason" (each as defined in Section 4 hereof), the Executive shall be entitled to the following severance pay and benefits: 5 (i) SEVERANCE PAY - severance payments in the form of continuation of the Executive's base salary as in effect immediately prior to such termination over the longer of: (A) the then-remaining Term hereof; or (B) 12 months (the "Severance Period"). (ii) BENEFITS CONTINUATION - continuation for the Severance Period of coverage under the group medical care, disability and life insurance benefit plans or arrangements in which the Executive is participating at the time of termination; PROVIDED, HOWEVER, that the Company's obligation to provide such coverages shall be terminated if the Executive obtains comparable substitute coverage from another employer at any time during the Severance Period. The Executive shall be entitled, at the expiration of the Severance Period, to elect continued medical coverage in accordance with section 4980B of the Internal Revenue Code of 1986, as amended (or any successor provision thereto); and (iii) STOCK OPTIONS - all options to purchase shares of Condor's Common Stock held by the Executive immediately prior to termination of employment shall become immediately vested and exercisable and, subject to the terms of Condor's 1997 Long-Term Incentive Plan, shall remain exercisable for the duration of the Severance Period. (b) OTHER TERMINATIONS. In the event of termination of the Executive's employment hereunder for any reason other than those specified in Section 5(a) hereof, the Executive shall not be entitled to any severance pay, benefits continuation or stock option rights contemplated by the foregoing, except as may otherwise be provided under the applicable benefit plans or award agreements relating to the Executive. (c) ACCRUED RIGHTS. Notwithstanding the foregoing provisions of this Section 5, in the event of termination of the Executive's employment hereunder for any reason, the Executive shall be entitled to payment of any unpaid portion of his base salary through the effective date of termination, and payment of any accrued but unpaid rights solely in accordance with the terms of any incentive bonus, stock option or employee benefit plan or program of the Company. 6. CONFIDENTIALITY. The Executive agrees that he will not at any time during the Term hereof or at any time thereafter for any reason, in any fashion, form or manner, either directly or indirectly, divulge, disclose or communicate to any person, firm, corporation or other business entity, in any manner whatsoever, any confidential information or trade secrets concerning the business of the Company or Condor, including, without limiting the 6 generality of the foregoing, the techniques, methods or systems of its operation or management, any information regarding its financial matters, or any other material information concerning the business of the Company or Condor, its manner of operation, its plans or other material data. The provisions of this Section 6 shall not apply to (i) information that is public knowledge other than as a result of disclosure by the Executive in breach of this Section 6; (ii) information disseminated by the Company or Condor to third parties in the ordinary course of business; (iii) information lawfully received by the Executive from a third party who, based upon inquiry by the Executive, is not bound by a confidential relationship to the Company or Condor; or (iv) information disclosed under a requirement of law or as directed by applicable legal authority having jurisdiction over the Executive. 7. INVENTIONS. The Executive is hereby retained in a capacity such that the Executive's responsibilities include the making of technical and managerial contributions of value to Company or Condor. The Executive hereby assigns to the Company all right, title and interest in such contributions and inventions made or conceived by the Executive alone or jointly with others during the Employment Period that relate to the business of the Company or Condor. This assignment shall include (a) the right to file and prosecute patent applications on such inventions in any and all countries, (b) the patent applications filed and patents issuing thereon, and (c) the right to obtain copyright, trademark or trade name protection for any such work product. The Executive shall promptly and fully disclose all such contributions and inventions to the Company and assist the Company and Condor in obtaining and protecting the rights therein (including patents thereon) in any and all countries; PROVIDED, HOWEVER, that said contributions and inventions will be the property of the Company, whether or not patented or registered for copyright, trademark or trade name protection, as the case may be. The Executive hereby agrees to execute any documentation requested by the Company or Condor to be so executed if such request is made in order to carry out the purpose and terms of this paragraph. Inventions conceived by the Executive that are not related to the business of the Company or Condor will remain the property of the Executive. 8. NON-COMPETITION. The Executive agrees that he shall not during the Employment Period and, if applicable, the Severance Period, without the approval of the Board, directly or indirectly, alone or as partner, joint venturer, officer, director, employee, consultant, agent, independent contractor or stockholder (other than as provided below) of any company or business, engage in any "Competitive Business" within the United States. For purposes of the foregoing, the term "Competitive Business" shall mean any business involved in providing information technology solutions, including, but not limited to, desktop services, software development, systems design and integration, large scale survey research, recruiting and comprehensive marketing and sales, which is in direct competition with the Company or Condor in any community in which the 7 Company or Condor is doing business. Notwithstanding the foregoing, the Executive shall not be prohibited during the non-competition period applicable above from acting as a passive investor where he owns not more than one percent (1%) of the issued and outstanding capital stock of any publicly-held company. During the period that the above non-competition restriction applies, the Executive shall not, without the written consent of Condor, solicit or encourage any employee of the Company or Condor or any current or future subsidiary or affiliate thereof to terminate his or her employment. 9. BREACH OF RESTRICTIVE COVENANTS. The parties agree that a breach or violation of Section 6, 7 or 8 hereof will result in immediate and irreparable injury and harm to the innocent party, which party shall have, in addition to any and all remedies of law and other consequences under this Agreement, the right to an injunction, specific performance or other equitable relief to prevent the violation of the obligation hereunder. 10. NOTICES. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Company, to: COMPUTER HARDWARE MAINTENANCE COMPANY, INC. 2010 CABOT BOULEVARD WEST P.O. BOX 2025 LANGHORNE, PA 19047-1811 (b) If to the Executive, to: MICHAEL PAGLAICCETTI 1010 GRENOBLE ROAD IVYLAND, PA 18974 or to such other address as a party hereto shall designate to the other party by like notice, provided that notice of a change of address shall be effective only upon receipt thereof. 8 11. ARBITRATION: LEGAL FEES. Except as provided in Section 9 hereof, any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in McLean, Virginia in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The Company shall reimburse the Executive for all reasonable legal fees and costs and other fees and expenses that the Executive may incur in respect of any dispute or controversy arising against the Company under or in connection with this Agreement; PROVIDED, HOWEVER, that the Company shall not reimburse any such fees, costs and expenses if the fact finder determines that an action brought by the Executive was substantially without merit or the Executive is otherwise unsuccessful in such an action. 12. WAIVER OF BREACH. Any waiver of any breach of the Agreement shall not be construed to be a continuing waiver or consent to any subsequent breach on the part of either the Executive or of the Company. 13. NON-ASSIGNMENT: SUCCESSORS. Neither party hereto may assign his or its rights or delegate his or its duties under this Agreement without the prior written consent of the other party; PROVIDED, HOWEVER, that (i) subject to the rights of the Executive under Section 4(b) hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company upon any sale of all or substantially all of the assets of the Company, or upon any merger, consolidation or reorganization of the Company with or into any other corporation, all as though such successors and assigns of the Company and their respective successors and assigns were the Company; (ii) this Agreement shall inure to the benefit of and be binding upon the heirs, assigns or designees of the Executive to the extent of any payments due to the Executive hereunder; and (iii) this Agreement shall inure to the benefit of Condor. As used in this Agreement, the term "Company" shall be deemed to refer to any such successor or assign or the Company referred to in the preceding sentence. 14. WITHHOLDING OF TAXES. All payments required to be made by the Company to the Executive under this Agreement shall be subject to the withholding of such amounts, if any, relating to tax, and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. 15. SEVERABILITY. To the extent any provision of this Agreement or portion thereof shall be invalid or 9 unenforceable, it shall be considered deleted therefrom and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. GOVERNING LAW. This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of Virginia. 18. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement by the Company and the Executive with respect to the subject matter hereof and supersedes any and all prior agreements or understandings between the Executive and the Company with respect to the subject matter hereof, whether written or oral. This Agreement may be amended or modified only by a written instrument executed by the Executive and the Company. 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of February 4., 1998. COMPUTER HARDWARE MAINTENANCE COMPANY, INC. By: -------------------------- Name: Title: THE EXECUTIVE /s/ Michael Paglaiccetti ------------------------- Name: Michael Paglaiccetti 11 EX-21 5 EXHIBIT 21 Exhibit 21 LIST OF SUBSIDIARIES OF THE COMPANY Management Support Technology Corp. Computer Hardware Maintenance Company, Inc. Federal Computer Corporation Corporate Access, Inc. Interactive Software Systems Incorporated U.S. Communications, Inc. InVenture Group, Inc. MIS Technologies, Inc. Decision Support Technology, Inc. Louden Associates, Inc. LINC Systems Corporation PowerCrew, Inc. Global Core Strategies Acquisition, Inc. EX-23 6 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-57413, 333-64505. and 333-73055) of Condor Technology Solutions, Inc. of our report dated February 5, 1999, relating to the consolidated financial statements of Condor Technology Solutions, Inc. appearing on page 21 of this Annual Report on Form 10-K. PricewaterhouseCoopers LLP McLean, VA March 17, 1999 EX-27 7 EX-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1998 CONSOLIDATED FINANCIAL STATEMENTS. 1,000 YEAR YEAR DEC-31-1997 DEC-31-1998 JAN-1-1997 JAN-1-1998 DEC-31-1997 DEC-31-1998 26 5,809 0 0 0 40,386 0 (572) 0 740 4,926 48,907 0 9,918 0 (5,589) 4,926 200,642 5,181 40,027 0 0 0 0 0 0 19 120 (274) 113,922 4,926 200,642 0 76,318 0 168,833 0 69,133 0 114,512 2,715 42,688 0 314 0 (593) (2,715) 12,408 0 6,875 (2,715) 5,533 0 0 0 0 0 0 (2,175) 5,533 (1.62) 0.54 (1.62) 0.51
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