PARADIGM HOLDINGS, INC.
5,662,350 SHARES OF COMMON STOCK
This Prospectus relates to the sale of up to 5,662,350 shares of Paradigm
Holdings' common stock by certain persons who are stockholders of Paradigm
Holdings. The selling stockholders consist of:
o Raymond A. Huger, our Chairman of the Board of Directors and Chief
Executive Officer, who intends to sell up to 962,500 shares of
common stock previously issued to him.
o Harry Kaneshiro, an Executive Vice President of Paradigm Solutions
Corporation, our wholly-owned subsidiary, who intends to sell up to
962,500 shares of common stock previously issued to him.
o Samar Ghadry, former Senior Vice President of Paradigm Solutions
Corporation, our wholly-owned subsidiary, who intends to sell up to
1,575,000 shares of common stock previously issued to her.
o J. Paul Consulting, Shortline Equity Partners, Inc. and Ultimate
Investments Corp., which intend to sell up to 1,054,411 and 500,000
and 607,939 shares of common stock. All shares presently owned by
these entities were fully paid for prior to the reverse merger in
November 2004. J. Paul Consulting, Shortline Equity Partners, Inc
and Ultimate Investments Corp. are considered to be statutory
underwriters within the meaning of the Securities Act of 1933 in
connection with the sale of their shares.
Please refer to "Selling Stockholders" beginning on page 13.
Paradigm Holdings is not selling any shares of common stock in this offering and
therefore will not receive any proceeds from this offering. All costs associated
with this registration will be borne by us.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board during
the term of this offering. These prices will fluctuate based on the demand for
the shares of common stock. On January 12, 2006, the last reported sales price
of our common stock was $1.90 per share.
Brokers or dealers effecting transactions in these shares should confirm that
the shares are registered under applicable state law or that an exemption from
registration is available.
Our common stock is quoted on the Over-the-Counter Bulletin Board under the
symbol "PDHO."
These securities are speculative and involve a high degree of risk. Please refer
to "Risk Factors" beginning on page 5.
With the exception of J. Paul Consulting, Shortline Equity Partners, Inc and
Ultimate Investments Corp., no underwriter or person has been engaged to
facilitate the sale of shares of common stock in this offering. This offering
will terminate 24 months after the accompanying registration statement is
declared effective by the Securities and Exchange Commission. None of the
proceeds from the sale of stock by the selling stockholder will be placed in
escrow, trust or any similar account.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this Prospectus is January 27, 2006
TABLE OF CONTENTS
PROSPECTUS SUMMARY..................................................................................1
THE OFFERING........................................................................................5
SUMMARY CONSOLIDATED FINANCIAL INFORMATION..........................................................6
SUPPLEMENTARY FINANCIAL INFORMATION.................................................................9
RISK FACTORS.......................................................................................11
RISKS RELATED TO THIS OFFERING.....................................................................20
FORWARD-LOOKING STATEMENTS.........................................................................21
SELLING STOCKHOLDERS...............................................................................23
USE OF PROCEEDS....................................................................................25
PLAN OF DISTRIBUTION...............................................................................26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............28
DESCRIPTION OF BUSINESS............................................................................38
MANAGEMENT.........................................................................................54
FISCAL YEAR END OPTIONS/SAR VALUES.................................................................59
DESCRIPTION OF PROPERTY............................................................................63
LEGAL PROCEEDINGS..................................................................................64
PRINCIPAL SHAREHOLDERS.............................................................................65
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................67
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS......68
DESCRIPTION OF SECURITIES..........................................................................71
EXPERTS............................................................................................72
LEGAL MATTERS......................................................................................72
AVAILABLE INFORMATION..............................................................................72
FINANCIAL STATEMENTS................................................................................i
PART II.............................................................................................1
Our audited financial statements for the fiscal year December 31, 2004 were
contained in our Annual Report on Form 10-K.
i
PROSPECTUS SUMMARY
The following Prospectus Summary contains the most material information on
Paradigm Holdings, Inc. You should read the entire Prospectus carefully,
including "Risk Factors" and our Financial Statements and the notes to the
Financial Statements before making any investment decision.
OUR COMPANY
Paradigm Holdings Inc. ("PDHO") (website: www.paradigmsolutions.com) provides
information technology and business continuity solutions to government and
commercial customers. Headquartered in Rockville, Maryland, the company was
founded on the philosophy of high standards of business performance, integrity,
customer satisfaction, and employee morale. With an established core foundation
of experienced executives, the Company rapidly grew from six employees in 1996
to the current level of approximately 300 personnel. Revenues grew from $51
million in 2003 to over $61 million by the end of 2004. During this period of
growth, Paradigm remained centered on information technology services and
solutions.
Paradigm Holdings Inc. consists of two subsidiary companies: Paradigm Solutions
Corporation (PSC), which was incorporated in 1996 to deliver information
technology Infrastructure Support Services, Software Engineering Support and
Business Continuity Planning Services to Federal Agencies, and Paradigm
Solutions International (PSI), which was incorporated in 2004 to deliver
Business Continuity Planning and Emergency Management Services and software to
commercial clients.
Paradigm Solutions Corporation provides support for mission-critical systems in
key federal agencies such as the Departments of Justice, Treasury and Homeland
Security.
Paradigm Holdings formed the PSI subsidiary company to produce a
fully-integrated solution for protecting businesses from "all hazard"
interruptions. A customized methodology was developed to provide clients with a
comprehensive picture of the risks to their operations, facilities and people.
The software tool, OpsPlanner(TM) is one of the first tool sets to encompass
continuity planning, emergency management and automated notification in one
easy-to-use platform. From inception, this platform was developed as an
integrated application--unlike the prevailing competitors which developed
continuity planning, emergency management and automated notification as separate
software modules. This technology, when implemented with Paradigm's methods,
offers a superior solution in the continuity of operations planning and risk
management area. The release of this Software tool was made in January of 2005
and no significant revenue was recognized in 2004.
Paradigm has achieved significant accomplishments including the launch of the
Continuous Paradigm Process and Product Improvement (CP(3)I), the continued
evolution of Paradigm's ISO 9001:2000 Quality Management Office, the
establishment of strategic Mentor Protege relationships, and success in building
a backlog of business over the last year. Additionally, Paradigm has won over
45% of its pursued competitive procurements, greatly exceeding the industry
standard win rate of 30% to 40%. The Company not only won new business with the
Department of Treasury in 2004, but it also won numerous recompetes of existing
contracts including three with the Office of the Comptroller of the Currency,
four with the National Technical Information Service, and one with the
Department of Housing and Urban Development. Paradigm won several GWAC
(Government Wide Acquisition Contracts) vehicles including the Department of
Justice ITSS III and State of Maryland MCS. The Company also successfully
penetrated the DOD arena by gaining access to multiple GWACs such as DISA
Encore, Army MADD-1, Army CONUS Support Base Services (CSBS), and MATOC Naval
Research Systems Integration.
The strength of our service offerings and information technology expertise has
resulted in extensive government and commercial client relationships, including
the Departments of Treasury, Homeland Security, Justice, Commerce, Housing and
Urban Development, the Small Business Administration, IBM, Lockheed Martin, EDS,
Aventis, and the World Bank.
On November 3, 2004, Paradigm Holdings Inc., entered into an Agreement and Plan
of Reorganization with Paradigm Solutions Merger Corp., a Delaware corporation
and wholly-owned subsidiary of Paradigm Holdings (the "Merger Sub"), Paradigm
Solutions Corporation, a Maryland corporation and the shareholders of Paradigm
Solutions Corporation, pursuant to which Paradigm Holdings acquired a reporting
shell pursuant to a reverse merger. Pursuant to the Agreement and Plan of
Reorganization, the Merger Sub was merged with and into Paradigm Solutions
Corporation, which at the time was a reporting shell and the surviving
corporation and continues its existence under the laws of the State of Maryland
and is a wholly-owned subsidiary of Paradigm Holdings Inc. In consideration of
the Merger, the Paradigm Solutions Corporation shareholders exchanged 13,699
shares of common stock of Paradigm Solutions Corporation, which was 100% of the
issued and outstanding capital stock of Paradigm Solutions Corporation, for
17,500,000 shares of common stock of Paradigm Holdings Inc. Cheyenne Resources,
Inc. was incorporated under the laws of the State of Wyoming on November 17,
1970. Cheyenne Resources, prior to the reverse merger with Paradigm Solutions
Merger Sub operated principally in one industry segment, the exploration for and
sale of oil and gas.
1
Cheyenne Resources held oil and gas interests and was involved with producing
and selling oil, gas and other mineral substances. Cheyenne Resources did not
engage in refining or retail marketing operations; rather its activities had
been restricted to acquiring and disposing of mineral properties, and to
producing and selling oil and gas from its wells.
Prior Principal activities of Cheyenne Resources involved buying leases, filing
on federal and state open land leases as well as the acquiring and trading of
oil, gas, and other mineral properties, primarily in the Rocky mountain area and
Oklahoma.
Cheyenne Resources' oil and gas activities included the acquisition of whole or
partial interests in oil and gas leases and the farming out or resale of all or
part of its interests in these leases. In connection with farmouts and resales,
Cheyenne Resources attempted to retain an overriding royalty or a working or
carried interest.
In 1999, Cheyenne Resources entered into a memorandum of understanding to obtain
a 25% interest in Cayenne Records, Inc., which has a 75% interest in NL Records
of Nashville, Tennessee. This transaction was rescinded in 2000 due to the
inability of the seller to produce records and data. No value was recorded in
the financial statements. Cheyenne Resources issued 11,473,711 shares of common
stock for this interest.
In 1999, Cheyenne Resources entered into an Agreement with Tiger Exploration to
acquire the Dixie Gas Field and interests in the Stephens and Lick Creeds Fields
for 12,000,000 shares of common stock. Title and production data could not be
verified or produced, consequently, no value of assets could be carried.
In June 2000, Cheyenne Resources rescinded its memorandum of understanding with
Cayenne Records, Inc. In June 2000, Cheyenne Resources also rescinded its
memorandums of understanding to acquire Dixie Gas Field and interests in
Stephens and Lick Creek Fields. No value was recorded in this financial
statement for these acquisitions. Of the 23,473,711 shares issued for the above
referenced transactions, all but 2,623,838 shares were returned.
In January 2004, Skye Blue Ventures, an entity beneficially owned by Mr. Dennis
Iler, purchased a controlling interest in Paradigm Holdings, formerly Cheyenne
Resources, Inc. Skye Blue Ventures purchased 2,350,000 shares of common stock of
Cheyenne Resources, Inc. from the former directors of Cheyenne Resources, Inc.
for $75,000 and purchased 23,000,000 shares of common stock directly from
Cheyenne Resources, Inc. for $50,000. Cheyenne Resources issued 21,300,000
shares out of the 23,000,000 as it only had 21,300,000 available under its
then-current authorized common stock. Mr. Iler, former President and a Director
of Cheyenne Resources, Inc. and the then-beneficial owner of Skye Blue Ventures,
brought Cheyenne Resources current in its securities filings, settled its
outstanding debt, and assisted in having the company listed on the
Over-the-Counter Bulletin Board. In August 2004, J. Paul Consulting, Shortline
Equity Investments and Ultimate Investments purchased Skye Blue Ventures'
ownership interest in Cheyenne Resources, Inc. and subscribed for an aggregate
of 10,000,000 shares of common stock of Cheyenne Resources, Inc. for $200,000.
RECENT DEVELOPMENTS
An evaluation was carried out during December 2005 under the supervision and
with the participation of our management, including our Chief Executive Officer
and new Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act). The Chief
Executive Officer and new Chief Financial Officer concluded that these
disclosure controls and procedures were not effective for the quarters ended
December 31, 2004, March 31, 2005, June 30, 2005 and September 30, 2005 as a
result of a material weakness in internal controls as of September 30, 2005.
As a result of the material weakness, the company has restated certain financial
statements to resolve the following items:
o Break-out expenses previously reported as "Other Operating Costs and
Expenses" into Cost of Revenue and Selling, General and
Administrative expenses. Although there is no impact on total
revenue, net income or earnings-per-share, the gross margin for each
year reported has changed.
2
o For the year ended December 31, 2004, the Company restated Revenue
and Cost of Revenue balances for our federal maintenance contracts
and federal service contracts. The adjustment had no impact on total
revenue, net income or earnings-per-share.
o Reflect the decrease in Revenue, Gross Margin and Net Income
attributable to changing the Company's revenue recognition as it
relates to software licenses. In accordance with its revised
interpretation of SOP 97-2, the Company will recognize software
license revenue over the contract term until it establishes VSOE.
The adjustment impacted only the quarters ended March 31 and June
30, 2005.
o The Company restated the results of the first, second and third
quarters of 2004, as reported in the Company's SB-2 filing on
February 11, 2005, to recognize revenue in the proper periods on the
Department of Treasury LTMCC contract.
In addition to controls and procedures consistent with prior practices, we have
developed and are implementing remediation plans. We anticipate the material
weakness will be remediated by December 31, 2005.
On October 14, 2005, Paradigm Holdings, Inc., a Wyoming corporation ("Paradigm
Holdings"), Paradigm Solutions International, Inc., a Maryland corporation and
wholly-owned subsidiary of Paradigm Holdings ("PSI"), Blair Management Services,
Inc. t/d/b/a Blair Technology Group, a Pennsylvania corporation ("Blair") and
the shareholders of Blair (collectively, the "Shareholders") consummated a
merger transaction pursuant to the terms of that certain Merger Agreement (the
"Merger Agreement"), whereby Blair was merged with and into PSI. PSI is the
surviving corporation and will continue its corporate existence under the laws
of the State of Maryland as a wholly-owned subsidiary of Paradigm Holdings.
Pursuant to the Merger Agreement, the Shareholders exchanged all of the issued
and outstanding capital stock of Blair in exchange for (i) One Million Dollars
(US $1,000,000) and (ii) five hundred thousand shares of common stock, par value
$0.001 per share, of Paradigm Holdings (the "Shares"). Pursuant to the Merger
Agreement and an Escrow Agreement entered into by the parties, sixty thousand
(60,000) of the Shares will be held in escrow for a period of one (1) year from
the date of closing subject to the terms and conditions of the Merger Agreement.
In addition, under the terms of the Merger Agreement, Paradigm Holdings will
issue to the Shareholders up to an additional 350,000 shares of common stock of
Paradigm Holdings pursuant to an earn-out provision.
At the October 14, 2005 share price of $3.00, the transaction has a total
purchase price of $3,550,000 assuming all earn-out provisions are achieved.
Blair Technology Group was founded in 1992. The Company has provided business
continuity and information technology security solutions to over 300 commercial
customers in a variety of industries including finance, healthcare and energy.
The acquisition of Blair Technology Group allows Paradigm Holdings to combine
the OpsPlanner software suite with Blair's extensive credentials in the business
continuity arena. Paradigm Holdings can now offer our customers a comprehensive
business continuity solution. The acquisition also allows Paradigm Holdings to
expand its presence in the commercial marketplace. For the year ended December
31, 2004, Blair generated $4.6 million in revenue and $0.4 million in net
income.
At the closing of the merger, PSI entered into employment agreements with
Messrs. Kristofco, Duffy and Fochler.
3
ABOUT US
Our principal place of business is located at 2600 Tower Oaks Boulevard, Suite
500, Rockville, Maryland 20852, and our telephone number at that address is
(301) 468-1200.
4
THE OFFERING
This offering relates to the sale of common stock by certain persons who are
stockholders. The selling stockholders consist of:
o Raymond A. Huger, our Chairman of the Board of Directors and Chief
Executive Officer, who intends to sell up to 962,500 shares of
common stock previously issued to him.
o Harry Kaneshiro, an Executive Vice President of Paradigm Solutions
Corporation, our wholly-owned subsidiary, who intends to sell up to
962,500 shares of common stock previously issued to him.
o Samar Ghadry, former Senior Vice President of Paradigm Solutions
Corporation, our wholly-owned subsidiary, who intends to sell up to
1,575,000 shares of common stock previously issued to her.
o J. Paul Consulting, Shortline Equity Partners, Inc. and Ultimate
Investments Corp., intend to sell up to 1,054,411, 500,000 and
607,939 shares of common stock. All shares presently owned by these
entities were fully paid for prior to the reverse merger in November
2004. J. Paul Consulting, Shortline Equity Partners, Inc and
Ultimate Investments Corp. are considered to be statutory
underwriters within the meaning of the Securities Act of 1933 in
connection with the sale of their shares.
Common Stock Offered 5,662,350 shares
Offering Price Market price
Common Stock Outstanding Before The
Offering(1) 20,503,368
Common Stock Outstanding After The
Offering(2) 20,503,368
Use Of Proceeds We will not receive any of the
proceeds from the sale of stock
by the selling stockholder. See
"Use of Proceeds."
Risk Factors The securities offered hereby
involve a high degree of risk
and immediate substantial
dilution and should not be
purchased by investors who
cannot afford the loss of their
entire investment. See "Risk
Factors" and "Dilution."
Dividend Policy We do not intend to pay
dividends on our common stock.
We plan to retain any earnings
for use in the operation of our
business and to fund future
growth.
Over-The-Counter Bulletin Board Symbol PDHO
(1) Based on shares outstanding as of January 12, 2006.
(2) Assumes that all shares of common stock underlying options, which are
offered under this Prospectus, are issued.
5
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following is a summary of our Financial Statements, which are included
elsewhere in this Prospectus. You should read the following data together with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this Prospectus as well as with our Financial Statements,
and the notes therewith. Effective November 5, 2004, we revoked our
S-Corporation status and became a C Corporation. After the revocation of the S
election, we will be responsible for income taxes generated as a result of
reporting taxable income. The financial statements as of December 31, 2004,
2003, 2002, 2001 and 2000 include both our audited financial statements and
pro-forma adjustments to provide for an income tax provision (benefit) and a
deferred income tax liability for each year presented as if we had been a C
Corporation during these periods of operation. We assumed an effective tax rate
of 38.6% which reflects Federal taxes at 34% and state taxes, net of the Federal
benefit. There are no significant permanent differences in any of the periods
presented.
The company has restated certain financial statements to resolve the following
items:
o Break-out expenses previously reported as "Other Operating Costs and
Expenses" into Cost of Revenue and Selling, General and
Administrative expenses. Although there is no impact on total
revenue, net income or earnings-per-share, the gross margin for each
year reported has changed.
o For the year ended December 31, 2004, the Company restated Revenue
and Cost of Revenue balances for our federal maintenance contracts
and federal service contracts. The adjustment had no impact on total
revenue, net income or earnings-per-share.
o Reflect the decrease in Revenue, Gross Margin and Net Income
attributable to changing the Company's revenue recognition as it
relates to software licenses. In accordance with its revised
interpretation of SOP 97-2, the Company will recognize software
license revenue over the contract term until it establishes VSOE.
The adjustment impacted only the quarters ended March 31 and June
30, 2005.
o The Company restated the results of the first, second and third
quarters of 2004, as reported in the Company's SB-2 filing on
February 11, 2005, to recognize revenue in the proper periods on the
Department of Treasury LTMCC contract.
6
***********************************RESTATED**********************************
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
STATEMENT OF OPERATION DATA: 2004 2003 2002 2001 2000
- ---------------------------- ------------ ------------ ------------ ------------ ------------
Contract revenue
Service contracts $ 39,487,603 $ 36,091,375 $ 26,656,972 $ 16,102,170 $ 13,532,720
Repair and maintenance contracts 22,268,698 15,114,617 11,016,120 11,085,549 2,822,388
------------ ------------ ------------ ------------ ------------
Total contract revenue 61,756,301 51,205,992 37,673,092 27,187,719 16,355,108
------------ ------------ ------------ ------------ ------------
Cost of revenue
Service contracts 33,950,665 32,675,562 23,023,558 13,797,834 11,582,421
Repair and maintenance contracts 20,594,289 13,134,103 9,396,121 9,590,929 2,413,089
------------ ------------ ------------ ------------ ------------
Total cost of revenue 54,544,954 45,809,665 32,419,679 23,388,763 13,995,510
------------ ------------ ------------ ------------ ------------
Gross margin 7,211,347 5,396,327 5,253,413 3,798,956 2,359,598
Selling, General & Administrative 8,994,477 4,950,853 2,889,944 2,443,815 1,675,445
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (1,783,130) 445,474 2,363,469 1,355,141 684,153
Total other (expense) income (49,391) 21,402 31,963 38,718 53,014
------------ ------------ ------------ ------------ ------------
Net income (loss) before income taxes (1,832,521) 466,876 2,395,432 1,393,859 737,167
Income tax provision 1,934,380 35,125 7,529 5,306 2,300
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (3,766,901) $ 431,751 $ 2,387,903 $ 1,388,553 $ 734,867
============ ============ ============ ============ ============
Basic and diluted net income (loss)
per common share ($ 0.21) $ 0.03 $ 0.14 $ 0.08 $ 0.04
Weighted average common shares
outstanding 17,896,709 17,500,000 17,500,000 17,500,000 17,500,000
Pro-forma income tax provision
(benefit) (707,353) 180,214 924,636 541,287 285,959
------------ ------------ ------------ ------------ ------------
Pro-forma net income (loss) $ (1,125,168) $ 286,662 $ 1,470,796 $ 852,572 $ 451,208
============ ============ ============ ============ ============
Pro-forma basic and diluted net
income (loss) per common share ($ 0.06) $ 0.02 $ 0.08 $ 0.05 $ 0.03
Pro-forma weighted average common
shares outstanding 17,896,709 17,500,000 17,500,000 17,500,000 17,500,000
7
December 31, December 31, December 31, December 31, December 31,
BALANCE SHEET DATA: 2004 2003 2002 2001 2000
-----------------------------------------------------------------------------
Current assets
Cash $ 179,389 $ 17,890 $ 630,847 $ 52,300 $ 30,401
Accounts receivable - contracts 11,478,901 14,494,968 8,511,109 6,343,525 3,385,008
Inventory, net 616,020 540,005 -- -- --
Current portion of notes
receivable - stockholder -- -- 20,861 19,453 18,141
Prepaid expenses and other
current assets 4,329,660 2,238,405 1,383,962 737,153 80,547
------------ ------------ ------------ ------------ ------------
Total current assets 16,603,970 17,291,268 10,546,779 7,152,431 3,514,097
------------ ------------ ------------ ------------ ------------
Total property and equipment 1,511,535 1,219,424 274,806 166,247 129,228
Less: accumulated depreciation (504,348) (204,690) (119,324) (71,323) (40,386)
------------ ------------ ------------ ------------ ------------
Net property and equipment 1,007,187 1,014,734 155,482 94,924 88,842
Total other assets 77,182 76,207 45,717 62,105 79,350
------------ ------------ ------------ ------------ ------------
Total assets $ 17,688,339 $ 18,382,209 $ 10,747,978 $ 7,309,460 $ 3,682,289
============ ============ ============ ============ ============
Current liabilities
Bank overdraft $ 1,046,160 $ 695,980 $ 1,331,365 $ 418,223 $ 449,316
Note payable - line of credit 3,220,072 3,000,000 358,819 529,965 383,166
Accounts payable 5,476,967 4,514,721 2,550,592 2,518,155 548,539
Deferred revenue 1,749,410 2,328,690 -- -- --
Accrued wages and payroll taxes 1,812,545 1,601,297 812,444 536,262 382,967
Deferred income taxes 527,000 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total current liabilities 13,832,154 12,140,688 5,053,220 4,002,605 1,763,988
Long-term liabilities
Deferred rent 144,435 115,012 -- -- --
Deferred income tax, net current
portion 1,356,000 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total liabilities $ 15,332,589 $ 12,255,700 $ 5,053,220 $ 4,002,605 $ 1,763,988
============ ============ ============ ============ ============
Total stockholders' equity $ 2,355,750 $ 6,126,509 $ 5,694,758 $ 3,306,855 $ 1,918,301
============ ============ ============ ============ ============
Total liabilities and
stockholders' equity $ 17,688,339 $ 18,382,209 $ 10,747,978 $ 7,309,460 $ 3,682,289
============ ============ ============ ============ ============
Pro-forma adjustment to add
deferred income tax liability -- $ 2,591,353 $ 2,411,139 $ 1,489,408 $ 953,836
============ ============ ============ ============ ============
Pro-forma total liabilities(1) $ 15,332,589 $ 14,847,053 $ 7,464,359 $ 5,492,013 $ 2,717,824
============ ============ ============ ============ ============
Pro-forma adjustment to reduce
retained earnings for effect of
addition to deferred income tax
liability $ -- $ (2,591,353) $ (2,411,139) $ (1,489,408) $ (953,836)
============ ============ ============ ============ ============
Pro-forma total stockholders' equity(2) $ 2,355,750 $ 3,535,156 $ 3,283,619 $ 1,817,447 $ 964,465
============ ============ ============ ============ ============
(1) Proforma total liabilities includes an adjustment to account for
deferred income taxes as if we had been a C Corporation since the
beginning of the periods presented. The deferred income tax liability
results from timing differences between the book basis and the income
tax basis of the Company's assets and liabilities at each balance sheet
date. The effective income tax rate was 38.6%, which included no
significant permanent differences.
(2) Proforma total stockholders' equity includes an adjustment to retained
earnings to account for the effect of the change in the proforma
deferred income tax liability from the previous to the current period.
8
SUPPLEMENTARY FINANCIAL INFORMATION
The following tables present Paradigm Holdings, Inc. and Subsidiaries condensed
operating results for quarters ending September 30, 2005, June 30, 2005, March
31, 2005 and each of the eight fiscal quarters between the periods ended
December 31, 2004 and 2003. The information for each of these quarters is
unaudited. In the opinion of management, all necessary adjustments, which
consist only of normal and recurring accruals, have been included to fairly
present the unaudited quarterly results. This data should be read together with
Paradigm Holdings, Inc. and Subsidiaries consolidated financial statements and
the notes thereto, the Independent Auditors Report and Management's Discussions
and Analysis of Financial Condition and Results of Operations.
Effective November 5, 2004, we revoked our S-Corporation status and became a C
Corporation. After the revocation of the election, we will be responsible for
income taxes generated as a result of reporting taxable income. The pro-forma
adjustments provide for an income tax provision (benefit) for each period
presented as if we had been a C Corporation during these periods of operation.
We assumed an effective tax rate of 38.6% which reflects federal taxes of 34%
and state taxes, net of the federal benefit. There are no significant permanent
differences in any of the periods presented.
THREE MONTHS ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA)
RESTATED RESTATED RESTATED RESTATED RESTATED RESTATED
SEP 30, JUN 30, MAR 31, DEC 31, SEP 30, JUN 30, MAR 31,
2005 2005 2004 2004 2004 2004 2003
------------ ------------ ------------ ------------ ------------ ------------ ------------
Current revenue $ 15,543 $ 15,630 $ 15,046 $ 15,780 $ 16,593 $ 15,272 $ 14,111
Net income (loss)
before income
taxes 379 428 259 (1,311) (230) (143) (149)
Income tax 132 130 101 1,904 26 0 4
provision (benefit)
Net income (loss) $ 247 $ 298 $ 158 $ (3,215) $ (256) $ (143) $ (153)
Basic and diluted
net income (loss)
per common share $ .01 $ .01 $ .01 $ (.17) $ (.02) $ (.01) $ (.01)
Weighted average
common shares
outstanding 20,003 20,003 20,003 19,078 17,500 17,500 17,500
Pro-forma income
tax provision
(benefit) 132 130 101 (524) (73) (55) (56)
Pro-forma net
income (loss) 247 298 158 (787) (157) (88) (93)
Pro-forma basic and
diluted net
income (loss) per
common share .01 .01 .01 (.04) (.01) -- --
Pro-forma weighted
average common
shares outstanding 20,003 20,003 20,003 19,078 17,500 17,500 17,500
9
RESTATED RESTATED RESTATED RESTATED
DEC 31, SEP 30, JUN 30, MAR 31,
2003 2003 2003 2003
------------ ------------ ------------ ------------
Current revenue $ 14,037 $ 12,282 $ 14,287 $ 10,600
Net income (loss)
before income
taxes (60) (175) 752 (50)
Income tax 25 (2) 0 12
provision (benefit)
Net income (loss) $ (85) $ (173) $ 752 $ (62)
Basic and diluted
net income (loss)
per common share $ (.01) $ (.01) $ .04 $ --
Weighted average
common shares
outstanding 17,500 17,500 17,500 17,500
Pro-forma income
tax provision
(benefit) (28) (69) 290 (12)
Pro-forma net
income (loss) (32) (106) 462 (38)
Pro-forma basic and
diluted net
income (loss) per
common share -- (.01) .03 --
Pro-forma weighted
average common
shares outstanding 17,500 17,500 17,500 17,500
10
RISK FACTORS
This risk factor section discusses all material risks to the potential investor.
As part of your evaluation of us, you should take into account not solely our
business approach and strategy, but also the special risks we face in our
business. Because our business is substantially dependent upon contracts with
the U.S. federal government, we are subject to a number of risks that arise from
the way in which the U.S. federal government conducts business. For example, as
a government contractor, our operations are subject to shifts in government
spending priorities. Our business is also subject to complex government
procurement laws and regulations and may be adversely affected by government
imposed contract provisions that are more favorable to the government than those
in normal commercial contracts. Also, our operations are subject to government
audits.
For more information about these and other risks, see "Risk Related to Our
Business". You should carefully consider all of the risk factors together with
all of the other information included in this prospectus when making a decision
to invest in our Company. If any of these risks or uncertainties actually
occurs, our business, financial condition or operating results could be
materially harmed. In that case, the trading price of our common stock could
decline and you could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
We may need to raise additional capital to finance operations
We have relied on significant external financing to fund our operations. As of
September 30, 2005 and September 30, 2004, we had $1,131,176 and $655,741,
respectively, in cash and our total current assets were $15.1 million and $12.1
million, respectively. As of December 31, 2004 and December 31, 2003, we had
$179,389 and $17,890, respectively, in cash and our total current assets were
$16.6 million and $17.3 million, respectively. We will need to raise additional
capital to fund our anticipated operating expenses and future expansion. Among
other things, external financing may be required to cover our operating costs.
If we do not maintain profitable operations, it is unlikely that we will be able
to secure additional financing from external sources. The sale of our common
stock to raise capital may cause dilution to our existing shareholders. Any of
these events would be materially harmful to our business and may result in a
lower stock price. Our inability to obtain adequate financing may result in the
need to curtail business operations and you could lose your entire investment.
Our financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Our common stock may be affected by limited trading volume and may fluctuate
significantly
Our common stock is traded on the Over-the-Counter Bulletin Board. Prior to this
offering, there has been a limited public market for our common stock and there
can be no assurance that an active trading market for our common stock will
develop. As a result, this could adversely affect our shareholders' ability to
sell our common stock in short time periods, or possibly at all. Our common
stock is thinly traded compared to larger, more widely known companies in the
information technology services industry. Thinly traded common stock can be more
volatile than common stock traded in an active public market. The average daily
trading volume of our common stock for the three months ended December 31, 2005
was approximately 360 shares per day. Our common stock has experienced, and is
likely to experience in the future, significant price and volume fluctuations,
which could adversely affect the market price of our common stock without regard
to our operating performance. In addition, we believe that factors such as
quarterly fluctuations in our financial results and changes in the overall
economy or the condition of the financial markets could cause the price of our
common stock to fluctuate substantially.
All of our revenues would be substantially threatened if our relationships with
agencies of the federal government were harmed
Our largest clients, Department of Treasury and Department of Justice, are
agencies of the federal government. If the federal government in general, or any
significant government agency, uses less of our services or terminates its
relationship with us, our revenues could decline substantially. We could be
forced to curtail or cease our business operations. Contracts with the federal
government accounted for 99% of our revenues for the year ended December 31,
2004 and nine months ended September 30, 2005. Our five largest clients, all
agencies of the federal government, generated approximately 99% and 98% of our
revenues for the year ended December 31, 2004 and nine months ended September
30, 2005, respectively. We believe that federal government contracts are likely
to continue to account for a significant portion of our revenues for the
foreseeable future. The volume of work that we perform for a specific client,
however, is likely to vary from year to year, and a significant client in one
year may not use our services as extensively, or at all, in a subsequent year.
11
We may encounter risk in maintaining our current U.S. Small Business
Administration (SBA) 8(a) revenue in the future
As of October 2004, Paradigm Solutions Corporation began competing solely in the
open marketplace for federal business. Due to our graduation from the Small
Business Administration 8(a) Business Development Program, we are no longer
classified as a small disadvantaged business by the federal government.
Accordingly, we will no longer have access to contract vehicles set aside for
8(a) businesses. The backlog of federal business under this program will
continue until the contracts end, after which we will pursue several avenues to
maintain the business we believe is important to our strategy in this
marketplace. This includes either migrating this work to other government
contract vehicles, if allowed by the customer, or taking on a subcontract role
when the business comes up for re-compete and teaming with a SBA business who
would be the prime contractor. SBA 8(a) contracts generated 55% and 50% of of
our revenue for the year ended December 31, 2004 and nine months ended September
30, 2005, respectively. As of September 30, 2005, SBA 8(a) contracts which
provide 8%, 64% and 28% of our current SBA 8(a) revenues will come up for
renewal in 2005, 2006 and 2007, respectively. Failure to migrate the 8(a)
backlog business to other government contract vehicles or take a subcontractor
role when the business comes up for re-compete could significantly impact our
future revenue.
The calculation of our backlog is subject to numerous uncertainties and we may
not receive the full amounts of revenue estimated under the contracts included
in our backlog, which could reduce our revenue in future periods.
Backlog is our estimate of the amount of revenue we expect to realize over the
remaining life of the signed contracts and task orders we have in hand as of the
measurement date. Our total backlog consists of funded and unfunded backlog. In
the case of government contracts, we define funded backlog as estimated future
revenues under government contracts and task orders for which funding has been
appropriated by Congress and authorized for expenditure by the applicable agency
under our contracts. Unfunded backlog is the difference between total backlog
and funded backlog. Our total backlog does not include estimates of backlog from
GWAC or GSA schedules beyond signed, funded task orders, but does include
estimated backlog beyond signed, funded task orders for other types of ID/IQ
contracts. Backlog also includes an estimate of future revenues we expect to
realize from commercial contracts.
The calculation of backlog is highly subjective and is subject to numerous
uncertainties and estimates and there can be no assurance that we will in fact
receive the amounts we have included in our backlog. Our assessment of a
contract's potential value is based upon factors such as historical trends,
competition and budget availability. In the case of contracts which may be
renewed at the option of the applicable agency, we generally calculate backlog
by assuming that the agency will exercise all of its renewal options; however,
the applicable agency may elect not to exercise its renewal options. In
addition, federal contracts typically are only partially funded at any point
during their term. All or some of the work to be performed under a contract may
remain unfunded unless and until Congress makes subsequent appropriations and
the procuring agency allocates funding to the contact. Our estimate of the
portion of backlog from which we expect to recognize revenues in fiscal 2005 or
any future period is likely to be inaccurate because the receipt and timing of
any of these revenues is dependent upon subsequent appropriation and allocation
of funding and is subject to various contingencies, such as timing of task
orders, many of which are beyond our control. In addition, we may never receive
revenues from some of the engagements that are included in our backlog and this
risk is greater with respect to unfunded backlog. The actual receipt of revenues
on engagements included in backlog may never occur or may change because a
program schedule could change, the program could be canceled, the governmental
agency could elect not to exercise renewal options under a contract or could
select other contractors to perform services, or a contract could be reduced,
modified or terminated. Additionally, the maximum contract value specified under
a government contract or task order awarded to us is not necessarily indicative
of the revenues that we will realize under that contract. We also derive
revenues from ID/IQ contracts, which typically do not require the government to
purchase a specific amount of goods or services under the contract other than a
minimum quantity which is generally very small. If we fail to realize revenue
included in our backlog, our revenues and operating results for the then current
fiscal year as well as future reporting periods may be materially harmed.
Our government contracts may be terminated or adversely modified prior to
completion, which could adversely affect our business
We derive substantially all of our revenues from government contracts that
typically are awarded through competitive processes and span a one year base
period and one or more option years. The unexpected termination or non-renewal
of one or more of our significant contracts could result in significant revenue
shortfalls. Our clients generally have the right not to exercise the option
periods. In addition, our contracts typically contain provisions permitting an
agency to terminate the contract on short notice, with or without cause.
Following termination, if the client requires further services of the type
provided in the contract, there is frequently a competitive re-bidding process.
We may not win any particular re-bid or be able to successfully bid on new
contracts to replace those that have been terminated. Even if we do win the
re-bid, we may experience revenue shortfalls in periods where we anticipated
revenues from the contract rather than its termination and subsequent
re-bidding. These revenue shortfalls could harm operating results for those
periods and have a material adverse effect on our business, prospects, financial
condition and results of operations.
12
We may have difficulty identifying and executing future acquisitions on
favorable terms, which may adversely affect our results of operations and stock
price.
We cannot assure you that we will be able to identify and execute acquisitions
in the future on terms that are favorable to us, or at all. One of our key
growth strategies will be to selectively pursue acquisitions. Through
acquisitions, we plan to expand our base of federal government and commercial
clients, increase the range of solutions we offer to our clients and deepen our
penetration of existing clients. Without acquisitions, we may not grow as
rapidly as the market expects, which could cause our actual results to differ
materially from those anticipated. We may encounter other risks in executing our
acquisition strategy, including:
o increased competition for acquisitions which may increase the price
of our acquisitions;
o our failure to discover material liabilities during the due
diligence process, including the failure of prior owners of any
acquired businesses or their employees to comply with applicable
laws, such as the Federal Acquisition Regulation and health, safety,
employment and environmental laws, or their failure to fulfill their
contractual obligations to the Federal Government or other clients;
and o acquisition financing may not be available on reasonable
terms, or at all.
In connection with any future acquisitions, we may decide to consolidate the
operations of any acquired business with our existing operations or to make
other changes with respect to the acquired business, which could result in
special charges or other expenses. Our results of operations also may be
adversely affected by expenses we incur in making acquisitions and, in the event
that any goodwill resulting from present or future acquisitions is found to be
impaired, by goodwill impairment charges.
In addition, our ability to make future acquisitions may require us to obtain
additional financing and we may be materially adversely affected if we cannot
obtain additional financing for any future acquisitions. To the extent that we
seek to acquire other businesses in exchange for our common stock, fluctuations
in our stock price could have a material adverse effect on our ability to
complete acquisitions and the issuance of common stock to acquire other
businesses could be dilutive to our stockholders. To the extent that we use
borrowings to acquire other businesses, our debt service obligations could
increase substantially and relevant debt instruments may, among other things,
impose additional restrictions on our operations, require us to comply with
additional financial covenants or require us to pledge additional assets to
secure our borrowings.
Any future acquisitions we make could disrupt our business and seriously harm
our financial condition. We intend to consider investments in complementary
companies, products and technologies. While we have no current agreements to do
so, we anticipate buying businesses, products and/or technologies in the future
in order to fully implement our business strategy. In the event of any future
acquisitions, we may:
o issue stock that would dilute our current stockholders' percentage
ownership;
o incur debt;
o assume liabilities;
o incur amortization expenses related to goodwill and other intangible
assets; or
o incur large and immediate write-offs.
The use of debt or leverage to finance our future acquisitions should allow us
to make acquisitions with an amount of cash in excess of what may be currently
available to us. If we use debt to leverage up our assets, we may not be able to
meet our debt obligations if our internal projections are incorrect or if there
is a market downturn. This may result in a default and the loss in foreclosure
proceedings of the acquired business or the possible bankruptcy of our business.
13
Our operation of any acquired business will also involve numerous risks,
including:
o integration of the operations of the acquired business and its
technologies or products;
o unanticipated costs;
o diversion of management's attention from our core business;
o adverse effects on existing business relationships with suppliers
and customers;
o risks associated with entering markets in which we have limited
prior experience; and
o potential loss of key employees, particularly those of the purchased
organizations.
The success of our acquisition strategy will depend upon our ability to
successfully integrate any businesses we may acquire in the future. The
integration of these businesses into our operations may result in unforeseen
events or operating difficulties, absorbtion significant management attention
and may require significant financial resources that would otherwise be
available for the ongoing development of our business. These integration
difficulties could include the integration of personnel with disparate business
backgrounds, the transition to new information systems, coordination of
geographically dispersed organizations, loss of key employees of acquired
companies and reconciliation of different corporate cultures. For these or other
reasons, we may be unable to retain key clients or to retain or renew contracts
of acquired companies. Moreover, any acquired business may fail to generate the
revenue or net income we expected or produce the efficiencies or cost-savings
that we anticipated. Any of these outcomes could materially adversely affect our
operating results.
Failing to maintain strong relationships with prime contractors could result in
a decline in our revenues
Our subcontractor relationships with prime contractors, who hold the prime
contract with end-clients, generated 5% and 6% of our revenues during the twelve
months ended December 31, 2004 and nine months ended September 30, 2005,
respectively. We project that over the next few years the percentage of
subcontractor revenue will increase significantly. If any of these prime
contractors eliminate or reduce their engagements with us, or have their
engagements eliminated or reduced by their end-clients, we will lose this source
of revenues, which, if not replaced, could force us to curtail our business
operations.
Our relatively fixed operating expenses expose us to greater risk of incurring
losses
We incur costs based on our expectations of future revenues. Our operating
expenses are relatively fixed and cannot be reduced on short notice to
compensate for unanticipated variations in the number or size of engagements in
progress. These factors make it difficult for us to predict our revenues and
operating results. If we fail to predict our revenues accurately, it may
seriously harm our financial condition and we could be forced to curtail or
cease our business operations.
A reduction in, or the termination of, our services could lead to
underutilization of our employees and could harm our operating results
Our employee compensation expenses are relatively fixed. Therefore, if a client
defers, modifies or cancels an engagement or chooses not to retain us for
additional phases of a project, our operating results will be harmed unless we
can rapidly redeploy our employees to other engagements in order to minimize
underutilization. If we fail to redeploy our employees, we could be forced to
curtail or cease our business operations.
If we experience difficulties collecting receivables, it could cause our actual
results to differ materially from those anticipated
As of September 30, 2005, 82% of our total assets were in the form of accounts
receivable, thus, we depend on the collection of our receivables to generate
cash flow, provide working capital, pay debt and continue our business
operations. If the federal government, any of our other clients or any prime
contractor for whom we are a subcontractor fails to pay or delays the payment of
their outstanding invoices for any reason, our business and financial condition
may be materially adversely affected. The government may fail to pay outstanding
invoices for a number of reasons, including lack of appropriated funds or lack
of an approved budget.
14
We must recruit and retain qualified professionals to succeed in our labor
intensive business
Our future success depends in large part on our ability to recruit and retain
qualified professionals skilled in complex information technology services and
solutions. Such personnel as Java developers and other hard-to-find information
technology professionals are in great demand and are likely to remain a limited
resource in the foreseeable future. Competition for qualified professionals is
intense. Any inability to recruit and retain a sufficient number of these
professionals could hinder the growth of our business. The future success of
Paradigm Holdings will depend on our ability to attract, train, retain and
motivate direct sales, customer support and highly skilled management and
technical employees. We may not be able to successfully expand our direct sales
force, which would limit our ability to expand our customer base. Further, we
may not be able to hire highly trained consultants and support engineers which
would make it difficult to meet our clients' demands. If we cannot successfully
identify and integrate new employees into our business, we will not be able to
manage our growth effectively and we could be forced to curtail our business
operations. Because a significant component of our growth strategy relates to
increasing our revenue from sales of our services and software, our growth
strategy will be adversely affected if we are unable to develop and maintain an
effective sales force to market our services to our federal and commercial
customers. A key component of our growth strategy is the recruitment of
additional sales executives. Our effort to build an effective sales force may
not be successful and, therefore, we could be forced to curtail our business
operations.
We may lose money, or generate less than anticipated profits, if we do not
accurately estimate the cost of an engagement which is conducted on a
fixed-price basis
We perform a significant portion of our engagements on a fixed-price basis. We
derived 52% of our total revenue in fiscal year 2004 and 58% of our total
revenue for the nine months ended September 30, 2005, from fixed-price
contracts. Fixed-price contracts require us to price our contracts by predicting
our expenditures in advance. In addition, some of our engagements obligate us to
provide ongoing maintenance and other supporting or ancillary services on a
fixed-price basis or with limitations on our ability to increase prices. Many of
our engagements are also on a time-and-material basis. While these types of
contracts are generally subject to less uncertainty than fixed-price contracts,
to the extent that our actual labor costs are higher than the contract rates,
our actual results could differ materially from those anticipated and we could
be forced to curtail or cease our business operations.
When making proposals for engagements on a fixed-price basis, we rely on our
estimates of costs and timing for completing the projects. These estimates
reflect our best judgment regarding our capability to complete the task
efficiently. Any increased or unexpected costs or unanticipated delays in
connection with the performance of fixed-price contracts, including delays
caused by factors outside our control, could make these contracts less
profitable or unprofitable. From time to time, unexpected costs and
unanticipated delays have caused us to incur losses on fixed-price contracts,
primarily in connection with state government clients. On rare occasions, these
losses have been significant. In the event that we encounter such problems in
the future, our actual results could differ materially from those anticipated.
We could lose revenues and clients and expose our company to liability if we
fail to meet client expectations
We create, implement and maintain technology solutions that are often critical
to our clients' operations. If our technology solutions or other applications
have significant defects or errors or fail to meet our clients' expectations, we
may:
o lose revenues due to adverse client reaction;
o be required to provide additional remediation services to a client
at no charge;
o receive negative publicity, which could damage our reputation and
adversely affect our ability to attract or retain clients; or
o suffer claims for substantial damages against us, regardless of our
responsibility for the failure.
While many of our contracts limit our liability for damages that may arise from
negligent acts, errors, mistakes or omissions in rendering services to our
clients, we cannot be sure that these contractual provisions will protect us
from liability for damages if we are sued. Furthermore, our general liability
insurance coverage may not continue to be available on reasonable terms or in
sufficient amounts to cover one or more large claims or the insurer may disclaim
coverage as to any future claim. The successful assertion of any large claim
against us could force us to curtail or cease our business operations. Even if
not successful, such claims could result in significant legal and other costs
and may be a distraction to management.
15
Security breaches in sensitive government systems could result in the loss of
clients and negative publicity
Some of the systems we develop involve managing and protecting information
involved in sensitive government functions. A security breach in one of these
systems could cause serious harm to our business, or result in negative
publicity and could prevent us from having further access to such critically
sensitive systems or other similarly sensitive areas for other government
clients, which could force us to curtail or cease our business operations.
Losses that we could incur from such a security breach could exceed the policy
limits that we are currently putting in place under the "errors and omissions"
liability insurance.
If we cannot obtain the necessary security clearances, we may not be able to
perform classified work for the government and we could be forced to curtail or
cease our business operations
Government contracts require us, and some of our employees, to maintain security
clearances. If we lose or are unable to obtain security clearances, the client
can terminate the contract or decide not to renew it upon its expiration. As a
result, to the extent we cannot obtain the required security clearances for our
employees working on a particular engagement, we may not derive the revenue
anticipated from the engagement, which, if not replaced with revenue from other
engagements, could force us to curtail or cease our business operations.
We depend on our senior management team and the loss of any member may adversely
affect our ability to obtain and maintain clients
We believe that our success depends on the continued employment of our senior
management team. We have key executive life insurance policies for each member
of the team for up to $1 million. This includes Raymond Huger, Chairman & CEO
and Frank Jakovac, President & COO. Their employment is particularly important
to our business because personal relationships are a critical element of
obtaining and maintaining client engagements. If one or more members of our
senior management team were unable or unwilling to continue in their present
positions, such persons would be difficult to replace and our business could be
seriously harmed. Furthermore, clients or other companies seeking to develop
in-house capabilities may attempt to hire some of our key employees. Employee
defections to clients or competitors would not only result in the loss of key
employees but could also result in the loss of a client relationship or a new
business opportunity. Any losses of client relationships could seriously harm
our business and force us to curtail or cease our business operations.
Richard Sawchak was hired as Vice President and Chief Financial Officer
effective September 19, 2005. Mr. Sawchak replaces Mark Serway, who resigned
effective August 15, 2005.
Audits of our government contracts may result in a reduction in the revenue we
receive from those contracts or may result in civil or criminal penalties that
could harm our reputation
Federal government agencies routinely audit government contracts. These agencies
review a contractor's performance on its contract, pricing practices, cost
structure and compliance with applicable laws, regulations and standards. An
audit could result in a substantial adjustment to our revenues because any costs
found to be improperly allocated to a specific contract will not be reimbursed,
while improper costs already reimbursed must be refunded. If a government audit
uncovers improper or illegal activities, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of contracts,
forfeiture of profits, suspension of payments, fines and suspension or debarment
from doing business with federal government agencies. In addition, if
allegations of impropriety were made against us we could be forced to curtail or
cease our business operations.
We may be liable for penalties under a variety of procurement rules and
regulations,and changes in government regulations could slow our growth or
reduce our profitability
We must comply with and are affected by federal government regulations relating
to the formation, administration and performance of government contracts. These
regulations affect how we do business with our clients and may impose added
costs on our business. Any failure to comply with applicable laws and
regulations could result in contract termination, price or fee reductions or
suspension or debarment from contracting with the federal government, which
could force us to curtail or cease our business operations. Further, the federal
government may reform its procurement practices or adopt new contracting methods
relating to the GSA Schedule or other government-wide contract vehicles. If we
are unable to successfully adapt to those changes, our business could be
seriously harmed.
16
Our failure to adequately protect our confidential information and proprietary
rights may harm our competitive position and force us to curtail or cease our
business operations
While our employees execute confidentiality agreements, we cannot guarantee that
this will be adequate to deter misappropriation of our confidential information.
In addition, we may not be able to detect unauthorized use of our intellectual
property in order to take appropriate steps to enforce our rights. If third
parties infringe or misappropriate our copyrights, trademarks or other
proprietary information, our competitive position could be seriously harmed,
which could force us to curtail or cease our business operations. In addition,
other parties may assert infringement claims against us or claim that we have
violated their intellectual property rights. Such claims, even if not true,
could result in significant legal and other costs and may be a distraction to
management.
Risks related to the information technology solutions and services market
competition could result in price reductions, reduced profitability and loss of
market share
Competition in the federal marketplace for information technology solutions and
services is intense. If we are unable to differentiate our offerings from those
of our competitors, our revenue growth and operating margins may decline, which
could force us to curtail or cease our business operations. Many of our
competitors are larger and have greater financial, technical, marketing and
public relations resources, larger client bases and greater brand or name
recognition than Paradigm. Our larger competitors may be able to provide clients
with additional benefits, including reduced prices. We may be unable to offer
prices at those reduced rates, which may cause us to lose business and market
share. Alternatively, we could decide to offer the lower prices, which could
harm our profitability. If we fail to compete successfully, our business could
be seriously harmed, which could force us to curtail or cease our business
operations.
Our current competitors include, and may in the future include, information
technology services providers and large government contractors such as QSS
Group, Pragmatics, Computer & Hi-Tech Management, Inc., Booz-Allen & Hamilton,
Computer Sciences Corporation, RSIS, SRA, ATS, Electronic Data Systems, PEC
Solutions, Science Applications International Corporation, and Lockheed Martin.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address client needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
services that are superior to, or have greater market acceptance than, the
services that we offer.
If a viable market for government information technology services is not
sustained, we could be forced to curtail or cease our business operations
We cannot be certain that a viable government market for technology services
will be sustainable. If this market is not sustained and we are unable to
refocus our services on the private sector or other in-demand technologies, our
growth would be negatively affected.
Although government agencies have recently increased focus on and funding for
technology initiatives, we cannot be certain that these initiatives will
continue in the future. Budget cutbacks or political changes could result in a
change of focus or reductions in funding for technology initiatives, which could
force us to curtail or cease our business operations.
Risks related to the ownership of our common stock, quarterly revenues and
operating results could be volatile and may cause our stock price to fluctuate
The rate at which the federal government procures technology may be negatively
by changes in presidential administrations and senior government officials. As a
result, our operating results could be volatile and difficult to predict, and
period-to-period comparisons of our operating results may not be a good
indication of our future performance.
A significant portion of our operating expenses, such as personnel and
facilities costs, are fixed in the short term. Therefore, any failure to
generate revenues according to our expectations in a particular quarter could
result in reduced income in the quarter. In addition, our quarterly operating
results may not meet the expectations of securities analysts or investors, which
in turn may have an adverse affect on the market price of our common stock.
17
Our common stock is deemed to be "penny stock," which may make it more difficult
for investors to sell their shares due to suitability requirements
Our common stock is deemed to be "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are
stock:
o with a price of less than $5.00 per share;
o that are not traded on a "recognized" national exchange;
o whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ listed stock must still have a price of not less than $5.00
per share); or
o in issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last
three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
We have identified a material weakness in internal control over our financial
reporting, primarily related to the lack of technical accounting and reporting
expertise. Our inability to provide such expertise may result in inadequate or
deficient financial reporting.
We are responsible for establishing and maintaining adequate internal control
over financial reporting of our company. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of our company are being made only in accordance with
authorizations of management and directors of our company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our company's assets that could have a
material effect on our financial statements.
We conducted an evaluation of the design and effectiveness of internal control
over financial reporting. Based on this evaluation, we concluded that our
internal control over financial reporting was not effective as of December 31,
2004, March 31, 2005, June 30, 2005 and September 30, 2005. We identified an
internal control deficiency that represented a material weakness in internal
control over the financial statement close process. The control deficiency
related to our limited resources and internal level of technical accounting and
reporting expertise. This material weakness affects our ability to prepare and
properly review interim and annual financial statements and accompanying
footnote disclosures in accordance with generally accepted accounting principles
and the rules and regulations of the SEC. A material weakness in internal
controls is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements would not be prevented or detected on a
timely basis. The foregoing material weakness resulted in restatements to our
financial statements and related disclosures. As we have not completed the
testing of all aspects of our internal control over financial reporting, it is
possible that additional deficiencies could be determined to be individually or
in the aggregate a material weakness. Significant deficiencies could lead to
inaccurate financial statements and further restatements of those financial
statements, which could erode investor confidence and have an adverse effect on
the market price of our common stock.
In order to address and correct the deficiency identified above, our corrective
actions included: (i) Hired a Chief Financial Officer with the requisite
experience on September 19, 2005; (ii) Hired a corporate controller with the
requisite experience and CPA designation on November 16, 2005; (iii) Hired an
assistant controller with the requisite experience and CPA designation to assist
and work directly with our corporate controller on October 15, 2005; and (iv)
Created an additional position to assist with the financial reporting process
and hired an individual for this position on May 16, 2005. Our ability to retain
skilled finance professionals may impact our ability to remediate our material
weakness by December 31, 2005.
18
Investors should not rely on an investment in our stock for the payment of cash
dividends
We have not paid any cash dividends on our capital stock and we do not
anticipate paying cash dividends in the future. Investors should not make an
investment in our common stock if they require dividend income. Any return on an
investment in our common stock will be as a result of appreciation, if any, in
our stock price.
Substantially all of our assets are pledged to secure certain debt obligations,
which we could fail to repay
Pursuant to our Loan and Security Agreement, dated July 28, 2005, with Chevy
Chase Bank, we were required to secure our repayment obligations with a first
priority lien on substantially all of the assets of Paradigm, excluding
intellectual property and real estate. Under the Loan and Security Agreement,
our line of credit is due on demand and interest is payable monthly depending on
our leverage ratio at the LIBOR rate plus the applicable spread which ranges
from 2.25% and 3.00%. In the event we are unable to timely repay any amounts
owed under the Loan and Security Agreement, we could lose substantially all of
our assets and be forced to curtail or cease our business operations. In
addition, because our debt obligations with Chevy Chase Bank are secured with a
first priority lien, it may make it more difficult for us to obtain additional
debt financing from another lender, or obtain new debt financing on terms
favorable to us, because such new lender may have to be willing to be
subordinate to Chevy Chase Bank.
19
RISKS RELATED TO THIS OFFERING
Future sales by our stockholders may adversely affect our stock price and our
ability to raise funds in new stock offerings
Sales of our common stock in the public market following this offering could
lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Some
of our shareholders, including officers and directors, are the holders of
"restricted securities". These restricted securities may be resold in the public
market only if registered or pursuant to an exemption from registration. Some of
these shares may be resold under Rule 144. As of January 12, 2006, approximately
20,000,000 shares of our common stock are deemed restricted. Five million six
hundred sixty-two thousand three hundred fifty (5,662,350) of these shares of
common stock may be immediately resold in the public market upon effectiveness
of the accompanying registration statement.
The selling stockholders intend to sell their shares of common stock in the
market, which may cause our stock price to decline
The selling stockholders intend to sell in the public market the shares of
common stock being registered in this offering. That means that up to 5,662,350
shares of common stock, the number of shares being registered in this offering,
or 27.6% of our issued and outstanding shares of common stock as of January 12,
2006, may be sold. Such sales may cause our stock price to decline.
The sale of material amounts of common stock under the accompanying registration
statement could encourage short sales by third parties
The significant downward pressure on our stock price caused by the sale of a
significant number of shares registered in the accompanying registration
statement could cause our stock price to decline, thus allowing short sellers of
our stock an opportunity to take advantage of any decrease in the value of our
stock. The presence of short sellers in our common stock may further depress the
price of our common stock.
The price you pay in this offering will fluctuate
The price in this offering will fluctuate based on the prevailing market price
of the common stock on the Over-the-Counter Bulletin Board. Accordingly, the
price you pay in this offering may be higher or lower than the prices paid by
other people participating in this offering.
20
FORWARD-LOOKING STATEMENTS
Risks Associated With Forward-Looking Statements
This Prospectus contains certain forward-looking statements regarding
management's plans and objectives for future operations including plans and
objectives relating to our planned marketing efforts and future economic
performance. The forward-looking statements and associated risks set forth in
this Prospectus include or relate to, among other things, (a) our projected
sales and profitability, (b) our growth strategies, (c) anticipated trends in
our industry, (d) our ability to obtain and retain sufficient capital for future
operations, and (e) our anticipated needs for working capital. These statements
may be found under "Management's Discussion and Analysis or Plan of Operations"
and "Business," as well as in this Prospectus generally. Actual events or
results may differ materially from those discussed in forward-looking statements
as a result of various factors, including, without limitation, the risks
outlined under "Risk Factors" and matters described in this Prospectus
generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this Prospectus will in fact
occur.
The forward-looking statements herein are based on current expectations that
involve a number of risks and uncertainties. Such forward-looking statements are
based on assumptions that there will be no material adverse competitive or
technological change in conditions in our business, that demand for our products
will significantly increase, that our President and Chief Executive Officer will
remain employed as such, that our forecasts accurately anticipate market demand,
and that there will be no material adverse change in our operations or business
or in governmental regulations affecting us or our manufacturers and/or
suppliers. The foregoing assumptions are based on judgments with respect to,
among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Accordingly, although we
believe that the assumptions underlying the forward-looking statements are
reasonable, any such assumption could prove to be inaccurate and therefore there
can be no assurance that the results contemplated in forward-looking statements
will be realized. In addition, as disclosed elsewhere in the "Risk Factors"
section of this prospectus, there are a number of other risks inherent in our
business and operations which could cause our operating results to vary markedly
and adversely from prior results or the results contemplated by the
forward-looking statements. Growth in absolute and relative amounts of cost of
goods sold and selling, general and administrative expenses or the occurrence of
extraordinary events could cause actual results to vary materially from the
results contemplated by the forward-looking statements. Management decisions,
including budgeting, are subjective in many respects and periodic revisions must
be made to reflect actual conditions and business developments, the impact of
which may cause us to alter marketing, capital investment and other
expenditures, which may also materially adversely affect our results of
operations. In light of significant uncertainties inherent in the
forward-looking information included in this prospectus, the inclusion of such
information should not be regarded as a representation by us or any other person
that our objectives or plans will be achieved.
Some of the information in this prospectus contains forward-looking statements
that involve substantial risks and uncertainties. Any statement in this
prospectus and in the documents incorporated by reference into this prospectus
that is not a statement of an historical fact constitutes a "forward-looking
statement". Further, when we use the words "may", "expect", "anticipate",
"plan", "believe", "seek", "estimate", "internal", and similar words, we intend
to identify statements and expressions that may be forward- looking statements.
We believe it is important to communicate certain of our expectations to our
investors. Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions that could cause our future
results to differ materially from those expressed in any forward-looking
statements. Many factors are beyond our ability to control or predict. You are
accordingly cautioned not to place undue reliance on such forward-looking
statements. Important factors that may cause our actual results to differ from
such forward-looking statements include, but are not limited to, the risk
factors discussed below. Before you invest in our common stock, you should be
aware that the occurrence of any of the events described under "Risk Factors"
below or elsewhere in this Prospectus could have a material adverse effect on
our business, financial condition and results of operation. In such a case, the
trading price of our common stock could decline and you could lose all or part
of your investment.
Backlog is our estimate of the amount of future revenue we expect to realize
over the remaining life of signed contracts and task orders we have in hand as
of the measurement date. All statements regarding the amount of our backlog are
forward-looking statements and are subject to the risks and uncertainties
described above and elsewhere in this prospectus.
21
In addition, this prospectus contains forecasts and estimates regarding the
information technology market and federal government's spending and workforce
and related matters, including estimates regarding projected growth in the
federal government's information technology spending, projected federal
government appropriations for homeland security, intelligence, national defense
and similar matters, the projected increase in outsourcing by the federal
government, the aging of the federal government's civilian workforce and
employee turnover rates at other companies in our industry. These forecasts and
estimates have been derived from publicly available information, industry
publications and data compiled by independent market research firms. Although we
believe this information is reliable, we have not independently verified this
information and we cannot assure you that it is accurate or that the forecasts
will prove correct.
22
SELLING STOCKHOLDERS
The following table presents information regarding the selling stockholders. A
description of each selling shareholder's relationship to Paradigm Holdings and
how each selling shareholder acquired the shares to be sold in this offering is
detailed in the information immediately following this table.
Percentage of Percentage of
Shares Beneficially Outstanding Shares Shares Outstanding Shares
Owned Before Beneficially Owned to be Sold in the Beneficially Owned
Selling Stockholder Offering Before Offering(1) Offering After Offering
- ------------------- ------------------- ------------------ ----------------- ------------------
Raymond Huger 12,775,000 62.31% 962,500 57.61%
Harry Kaneshiro 3,150,000 15.36% 962,500 10.67%
Samar Ghadry 1,575,000 7.68% 1,575,000 0%
J. Paul Consulting 1,054,411 5.14% 1,054,411 0%
Shortline Equity Partners, Inc. 500,000 2.44% 500,000 0%
Ultimate Investments Corp. 607,939 2.97% 607,939 0%
------------
TOTAL 5,662,350
============
* Less than 1%.
(1) Applicable percentage of ownership is based on 20,503,368 shares of common
stock outstanding as of January 12, 2006, together with securities exercisable
or convertible into shares of common stock within 60 days of January 12, 2006,
for each stockholder. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject to
securities exercisable or convertible into shares of common stock that are
currently exercisable or exercisable within 60 days of January 12, 2006 are
deemed to be beneficially owned by the person holding such securities for the
purpose of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person. Note that affiliates are subject to Rule 144 and Insider
trading regulations - percentage computation is for form purposes only.
J. Paul Consulting, Shortline Equity Partners, Inc and Ultimate Investments
Corp. are considered to be statutory underwriters within the meaning of the
Securities Act of 1933 in connection with the sale of their shares.
The following information contains a description of each selling shareholder's
relationship to Paradigm Holdings and how each selling shareholder acquired the
shares to be sold in this offering. None of the selling stockholders have held a
position or office, or had any other material relationship, with Paradigm
Holdings, except as follows:
Raymond Huger, our Chairman of the Board of Directors and Chief Executive
Officer, received his shares as a result of the tax free exchange among Paradigm
Holdings, Paradigm Solutions Merger Corp., Paradigm Solutions Corporation and
the shareholders of Paradigm Solutions Corporation on November 3, 2004.
Harry Kaneshiro, an Executive Vice President of Paradigm Solutions Corporation,
our wholly-owned subsidiary, received his shares as a result of the tax free
exchange among Paradigm Holdings, Paradigm Solutions Merger Corp., Paradigm
Solutions Corporation and the shareholders of Paradigm Solutions Corporation on
November 3, 2004.
Samar Ghadry, former Senior Vice President of Paradigm Solutions Corporation,
our wholly-owned subsidiary, received her shares as a result of the tax free
exchange among Paradigm Holdings, Paradigm Solutions Merger Corp., Paradigm
Solutions Corporation and the shareholders of Paradigm Solutions Corporation on
November 3, 2004.
23
J. Paul Consulting received its shares through private placement. All investment
decisions of J. Paul Consulting are made by Jeff Ploen. On August 27, 2004, J.
Paul Consulting subscribed for 2,500,000 shares of common stock from Paradigm
Holdings, formerly Cheyenne Resources, Inc., in a private placement transaction
for $50,000 or $0.02 per share. In addition, on August 27, 2004, J. Paul
Consulting purchased 2,500,000 shares of restricted common stock of Paradigm
Holdings from Skye Blue Ventures for $50,000 or $0.02 per share. Skye Blue
Ventures had purchased a controlling interest in Cheyenne Resources, Inc., in
January 2004, when Cheyenne Resources was delinquent in its filing under the
Securities Exchange Act of 1934 and had accumulated significant debt. Mr. Dennis
Iler, former President and a Director of Cheyenne Resources and the
then-beneficial owner of Skye Blue Ventures, brought Cheyenne Resources current
in its securities filings and settled its outstanding debt. J. Paul Consulting,
Shortline Equity partners, Inc. and Ultimate Investment Corporation purchased
control of Cheyenne Resources in August of 2004 with the intent to merge with an
operating company. Mr. Jeff Ploen became the sole officer and Director of
Paradigm Holdings when J. Paul Consulting, Shortline Equity Partners, Inc. and
Ultimate Investments purchased a controlling interest in Paradigm Holdings in
August 2004. On November 3, 2004, when Paradigm Holdings entered into an
Agreement and Plan of Reorganization with Paradigm Solutions Merger Corp., a
Delaware corporation and wholly-owned subsidiary of Paradigm Holdings, Paradigm
Solutions Corporation, a Maryland corporation and the shareholders of Paradigm
Solutions Corporation, Mr. Ploen resigned his position as an officer and
director of Paradigm Holdings.
Shortline Equity Partners, Inc. and Ultimate Investments Corp. received its
shares through private placement. All investment decisions of Shortline Equity
Partners, Inc. and Ultimate Investments Corp. are made by Lance Baller. On
August 27, 2004, Shortline Equity Partners, Inc. subscribed for 2,500,000 shares
of common stock from Paradigm Holdings, formerly Cheyenne Resources, Inc, in a
private placement transaction for $50,000 or $0.02 per share. In August of 2004,
Ultimate Investments Corp. purchased 5,000,000 shares of restricted common stock
of Paradigm Holdings from Skye Blue Ventures for $100,000 or $0.02 per share. In
addition, on August 27, 2004, J. Paul Consulting purchased 2,500,000 shares of
restricted common stock of Paradigm Holdings from Skye Blue Ventures for $50,000
or $0.02 per share. Skye Blue Ventures had purchased a controlling interest in
Cheyenne Resources, Inc. in January 2004, when Cheyenne Resources, Inc. was
delinquent in its filings under the Securities Exchange Act of 1934 and had
accumulated significant debt. Mr. Dennis Iler, former President and a Director
of Cheyenne Resources, Inc. and the then-beneficial owner of Skye Blue Ventures,
brought Cheyenne Resources, Inc. current in its securities filings and settled
its outstanding debt. J. Paul Consulting, Shortline Equity Partners, Inc. and
Ultimate Investment Corporation purchased control of Cheyenne Resources, Inc. in
August of 2004 with the intent to merge with an operating company.
24
USE OF PROCEEDS
This Prospectus relates to shares of our common stock that may be offered and
sold from time to time by certain persons, who are, or will become, shareholders
of Paradigm Holdings. There will be no proceeds to us from the sale of shares of
common stock in this offering.
25
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution of
Paradigm Holdings' common stock owned by the selling stockholders may be
effected directly to purchasers by the selling stockholders or by pledgees,
transferees or other successors in interest, as principals or through one or
more underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on the
over-the-counter market or in any other market on which the price of Paradigm
Holdings' shares of common stock are quoted or (ii) in transactions otherwise
than on the over-the-counter market or in any other market on which the price of
Paradigm Holdings' shares of common stock are quoted. Any transferees and
pledges will be identified by a post-effective amendment to the accompanying
registration statement. Any of such transactions may be effected at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at varying prices determined at the time of sale or at negotiated
or fixed prices, in each case as determined by a selling stockholder or by
agreement between a selling stockholder and underwriters, brokers, dealers or
agents, or purchasers. If the selling stockholders effect such transactions by
selling their shares of Paradigm Holdings' common stock to or through
underwriters, brokers, dealers or agents, such underwriters, brokers, dealers or
agents may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders or commissions from purchasers of
common stock for whom they may act as agent (which discounts, concessions or
commissions as to particular underwriters, brokers, dealers or agents may be in
excess of those customary in the types of transactions involved). Any brokers,
dealers or agents that participate in the distribution of the common stock may
be deemed to be underwriters, and any profit on the sale of common stock by them
and any discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
Under the securities laws of certain states, the shares of common stock may be
sold in such states only through registered or licensed brokers or dealers. The
selling stockholders are advised to ensure that any underwriters, brokers,
dealers or agents effecting transactions on behalf of the selling stockholders
are registered to sell securities in all fifty states. In addition, in certain
states the shares of common stock may not be sold unless the shares have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
Our common stock is deemed to be "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are
stock: (i) with a price of less than $5.00 per share; (ii) that are not traded
on a "recognized" national exchange; (iii) whose prices are not quoted on the
NASDAQ automated quotation system (NASDAQ listed stock must still have a price
of not less than $5.00 per share); or (iv) in issuers with net tangible assets
less than $2.0 million (if the issuer has been in continuous operation for at
least three years) or $5.0 million (if in continuous operation for less than
three years), or with average revenues of less than $6.0 million for the last
three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
We will pay all the expenses incident to the registration, offering and sale of
the shares of common stock to the public hereunder other than commissions, fees
and discounts of underwriters, brokers, dealers and agents. We estimate that the
expenses of the offering to be borne by us will be approximately $82,500. The
estimated offering expenses consist of: a SEC registration fee of $2,000,
printing expenses of $5,000, accounting fees of $25,000, legal fees of $50,000
and miscellaneous expenses of $500. We will not receive any proceeds from the
sale of any of the shares of common stock by the selling stockholders.
The selling stockholders should be aware that the anti-manipulation provisions
of Regulation M under the Exchange Act will apply to purchases and sales of
shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Registration M, the selling stockholders or their agents
may not bid for, purchase, or attempt to induce any person to bid for or
purchase, shares of common stock of Paradigm Holdings while such selling
stockholder is distributing shares covered by this Prospectus. Accordingly,
except as noted below, the selling stockholders are not permitted to cover short
sales by purchasing shares while the distribution is taking place. The selling
stockholders are advised that if a particular offer of common stock is to be
made on terms constituting a material change from the information set forth
above with respect to the Plan of Distribution, then, to the extent required, a
post-effective amendment to the accompanying registration statement must be
filed with the Securities and Exchange Commission.
26
J. Paul Consulting, Shortline Equity Partners, Inc and Ultimate Investments
Corp. are considered to be statutory underwriters within the meaning of the
Securities Act of 1933 in connection with the sale of their shares.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF PARADIGM HOLDINGS AND THE NOTES THERETO APPEARING
ELSEWHERE IN THIS FILING. STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION AND ELSEWHERE IN THIS PROSPECTUS, THAT ARE NOT
STATEMENTS OF HISTORICAL OR CURRENT FACT, CONSTITUTE "FORWARD-LOOKING
STATEMENTS."
Overview
General
Paradigm Holdings Inc. is an information technology and business solutions
provider specializing in information technology infrastructure and software
engineering support services, business continuity planning and emergency
management services and software to government and commercial clients. Paradigm
Holdings, Inc. is comprised of two operating subsidiaries, Paradigm Solutions
Corporation and Paradigm Solutions International.
Paradigm Solutions Corporation is the federal subsidiary whose core competencies
are in mission critical systems that focus on key federal agencies such as
Justice, Treasury and Homeland Security. Paradigm Solutions International is the
newly formed commercial subsidiary whose core competencies are developing and
delivering continuity and information technology security/risk management
consulting for both commercial businesses and government agencies. Our
innovations in business continuity development, planning, and information
technology security have positioned us to become a leader in the fragmented
business continuity and continuity of operations industry.
We derive substantially all of our revenues from fees for information technology
solutions and services. We generate these fees from contracts with various
payment arrangements, including time and materials contracts, fixed-price
contracts and cost-reimbursable contracts. We typically issue invoices monthly
to manage outstanding accounts receivable balances. We recognize revenues on
time and materials contracts as the services are provided. We recognize revenues
on fixed-price contracts using the percentage of completion method as services
are performed over the life of the contract, based on the costs we incur in
relation to the total estimated costs. We recognize and make provisions for any
anticipated contract losses at the time we know and can estimate them.
Fixed-price contracts are attractive to clients and, while subject to increased
risks, provide opportunities for increased margins. We recognize revenues on
cost-reimbursable contracts as services are provided. These revenues are equal
to the costs incurred in providing these services plus a proportionate amount of
the fee earned. We have historically recovered all of our costs on
cost-reimbursable contracts, which means we have lower risk and our margins are
lower on these contracts. For the nine months ended September 30, 2005, our
business was comprised of 58% fixed price, 27% time and material, and 15%
cost-reimbursable contracts.
Our historical revenue growth is attributable to various factors, including an
increase in the size and number of projects for existing and new clients. During
the nine months ended September 30, 2005, contracts with the federal government
and contracts with prime contractors of the federal government accounted for
approximately 99% of our revenues. During that same period, our five largest
clients generated approximately 98% of our revenues. In most of these
engagements, we retain full responsibility for the end-client relationship and
direct and manage the activities of our contract staff.
Paradigm Solutions Corporation utilized the Small Business Administration (SBA)
8(a) Business Development Program to access the federal marketplace starting in
October of 1995 and graduated from the program in October of 2004. The term
"graduate" is used to refer to a Participant's exit from the 8(a) BD Program at
the expiration of the Participant's term, thus the business is no longer
considered 8(a). The 8(a) program allowed the business to build a base of
business with various federal civilian agencies. The backlog of federal business
under this program will continue until the contracts end, after which we will
pursue several avenues to maintain the business we believe is important to our
strategy in this marketplace. This includes either migrating this work to other
government contract vehicles, if allowed by the customer, or taking on a
subcontract role when the business comes up for re-compete and teaming with a
SBA business who would be the prime. As of September 30, 2005, SBA 8(a)
contracts which provide 8%, 64% and 28% of our current SBA 8(a) revenues will
come up for renewal in 2005, 2006 and 2007, respectively.
28
Due to our graduation from the Small Business Administration 8(a) Business
Development Program, we are no longer classified as a small disadvantaged
business by the federal government. Accordingly, we will no longer have access
to contract vehicles set aside for 8(a) businesses. As of October 2004, Paradigm
Solutions Corporation began competing solely in the open marketplace for federal
business. We have a history of winning contracts in "full and open"
competitions, including contracts at the Department of Housing and Urban
Development, Department of Treasury and the Department of Commerce. Paradigm
Solutions will continue to aggressively pursue opportunities in the federal and
commercial marketplace. We believe we can mitigate the impact of transitioning
from the 8(a) program through the acquisition of new contract vehicles and the
expansion of work with current customers.
Our most significant expense is direct costs, which consist primarily of direct
labor, subcontractors, materials, equipment, travel and an allocation of
indirect costs including fringe. The number of subcontract and consulting
employees assigned to a project will vary according to the size, complexity,
duration and demands of the project.
Selling, general and administrative expenses consist primarily of costs
associated with our executive management, finance and administrative groups,
human resources, marketing and business development resources, employee
training, occupancy costs, R&D expenses, depreciation and amortization, travel,
and all other corporate costs.
Other income and expense consists primarily of interest income earned on our
cash and cash equivalents and interest payable on our revolving credit facility.
Description Of Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and judgments that affect the
reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates including those related to
contingent liabilities, revenue recognition, and other intangible assets.
Management bases its estimates on historical experience and on various other
factors that are believed to be reasonable at the time the estimates are made.
Actual results may differ from these estimates under different assumptions or
conditions. Management believes that our critical accounting policies which
require more significant judgments and estimates in the preparation of our
consolidated financial statements are revenue recognition, costs of revenues,
and property and equipment.
Revenue Recognition
Services are performed under contracts that may be categorized into three
primary types: time and materials, cost-plus reimbursement and firm fixed price.
Revenue for time and materials contracts is recognized as labor is incurred at
fixed hourly rates, which are negotiated with the customer, plus the cost of any
allowable material costs and out-of-pocket expenses. Time and materials
contracts are typically more profitable than cost-plus contracts because of our
ability to negotiate rates and manage costs on those contracts. Revenue is
recognized under cost-plus contracts on the basis of direct and operating costs
and expenses incurred plus a negotiated profit calculated as a percentage of
costs or as performance-based award fee. Cost-plus type contracts provide
relatively less risk than other contract types because we are reimbursed for all
direct costs and certain operating costs and expenses, such as overhead and
general and administrative expenses, and are paid a fee for work performed. For
certain cost plus type contracts, which are referred to as cost-plus award fee
type contracts, we recognize the expected fee to be awarded by the customer at
the time such fee can be reasonably estimated, based on factors such as our
prior award experience, communications with the customer regarding our
performance, including any interim performance evaluations rendered by the
customer or our average historical award fee rate for the company. The Company
has two basic categories of fixed price contract: fixed unit price and fixed
price-level of effort. Revenues on fixed unit price contracts, where specific
units of output under service agreements are delivered, are recognized as units
are delivered based on the specific price per unit. Revenue on fixed price
maintenance contracts is recognized on a pro-rata basis over the length of the
service period. Revenue for the fixed price level of effort contacts is
recognized based upon the number of units of labor actually delivered multiplied
by the agreed rate for each unit of labor.
29
Contract revenue recognition inherently involves estimation. Examples of such
estimates include the level of effort needed to accomplish the tasks under the
contract, the cost of those efforts, and a continual assessment of our progress
toward the completion of the contract. From time to time, circumstances may
arise which require us to revise our estimated total revenue or costs.
Typically, these revisions relate to contractual changes. To the extent that a
revised estimate affects contract revenue or profit previously recognized, we
record the cumulative effect of the revision in the period in which it becomes
known. In addition, the full amount of an anticipated loss on any type of
contract is recognized in the period in which it becomes known. We may be
exposed to variations in profitability if we encounter variances from estimated
fees earned under cost plus-award fee contracts and estimated costs under fixed
price contracts. Software revenue recognition is in accordance with AICPA
Statement of Position 97-2. Since the Company has not established VSOE,
recognition of revenue from the sale of licenses is over the term of the
contract.
Costs Of Revenues
Our costs are categorized as direct or selling, general & administrative
expenses. Direct costs are those that can be identified with and allocated to
specific contracts and tasks. They include labor, subcontractor costs,
consultant fees, travel expenses, materials and an allocation of indirect costs.
Indirect costs consist primarily of fringe benefits (vacation time,
medical/dental, 401K plan matching contribution, tuition assistance, employee
welfare, worker's compensation and other benefits), intermediate management and
certain other non-direct costs which are necessary to provide direct labor.
Indirect costs, to the extent that they are allowable, are allocated to
contracts and tasks using appropriate government-approved methodologies. Costs
determined to be unallowable under the Federal Acquisition Regulations cannot be
allocated to projects. Our principal unallowable costs are interest expense and
certain general and administrative expenses. A key element to be successful in
our business is our ability to control indirect and unallowable costs, enabling
us to profitably execute our existing contracts and successfully bid for new
contracts. Costs of revenues are considered to be a critical accounting policy
because of the direct relationship to revenue recognized.
Property And Equipment
Property and equipment are recorded at the original cost to the corporation and
are depreciated using straight-line methods over established useful lives of
three to seven years. Software is recorded at original cost and depreciated on
the straight-line basis over three years. Leasehold improvements are recorded at
the original cost and are depreciated on the straight-line over the life of the
lease.
Recent Accounting Pronouncements
New accounting pronouncements that have a current or future potential impact on
our financial statements are as follows:
Summary of Statement No. 123 (Revised 2004)
Share-Based Payment
This Statement is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance.
Scope of this Statement
This Statement establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This Statement focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. This
Statement does not change the accounting guidance for share-based payment
transactions with parties other than employees provided in Statement 123 as
originally issued and EITF Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." This Statement does not address the accounting for
employee share ownership plans, which are subject to AICPA Statement of Position
93-6, Employers' Accounting for Employee Stock Ownership Plans. The Company does
not believe that FASB Statement No. 123R will have a material effect on its
financial statements.
30
Results of Operations
The following tables set forth the relative percentages that certain items of
expense and earnings bear to revenue.
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in Restated Restated Restated Restated
thousands) 2005 2004 2005 2004 2005 2004 2005 2004
------- ------- ------ ------- ------- ------- ------ -------
Revenue $15,543 $16,593 100.0% 100.0% $46,219 $45,975 100.0% 100.0%
Cost of 13,118 14,597 84.4 88.0 39,132 40,356 84.7 87.8
Revenue
------- ------- ------ ------ ------- ------- ------ ------
Gross 2,425 1,996 15.6 12.0 7,087 5,619 15.3 12.2
Margin
Selling, General & Administrative
1,996 2,217 12.8 13.3 5,876 6,106 12.7 13.3
------- ------- ------ ------ ------- ------- ------ ------
Income (loss) from
Operations 429 (221) 2.8 (1.3) 1,211 (487) 2.6 (1.1)
Other (expense) income (51) (9) (0.3) (0.0) (145) (35) (0.3) (0.0)
Income tax (benefit)provision
131 (73)* 0.9 (0.4) 362 (183)* 0.8 (0.4)
------- ------- ------ ------ ------- ------- ------ ------
Net Income (loss) $247 ($157)* 1.6% (0.9%) $704 ($339)* 1.5% (0.7%)
* proforma
The table below sets forth, for the periods indicated the service mix in revenue
with related percentages of total revenue.
-------------------------------------- ---------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) Restated Restated Restated Restated
2005 2004 2005 2004 2005 2004 2005 2004
------- ------- ------ ------ ------- ------- ------ ------
Federal Service Contracts $10,366 $10,149 66.7% 61.2% $31,140 $29,731 67.4% 64.7%
Federal Repair & Maintenance
Contracts 5,019 6,444 32.3 38.8 14,528 16,234 31.4 35.3
Commercial Contracts 158 0 1.0 0.0 551 10 1.2 0.0
------- ------- ------ ------ ------- ------- ------ ------
Total $15,543 $16,593 100.0% 100.0% $46,219 $45,975 100.0% 100.0%
Revenue
Our revenues and operating results may be subject to significant variation from
quarter to quarter depending on a number of factors, including the progress of
contracts, revenues earned on contracts, the number of billable days in a
quarter, the timing of the pass-through of their direct costs, the commencement
and completion of contracts during any particular quarter, the schedule of the
government agencies for awarding contracts, the term of each contract that we
have been awarded and general economic conditions. Because a significant portion
of our expenses, such as personnel and facilities costs, are fixed in the short
term, successful contract performance and variation in the volume of activity as
well as in the number of contracts commenced or completed during any quarter may
cause significant variations in operating results from quarter to quarter.
The Federal Government's fiscal year ends September 30. If a budget for the next
fiscal year has not been approved by that date, our clients may have to suspend
engagements that we are working on until a budget has been approved. Such
suspensions may cause us to realize lower revenues in the fourth quarter of the
year. Further, a change in presidential administrations and in senior government
officials may negatively affect the rate at which the Federal Government
purchases technology.
31
As a result of the factors above, period-to-period comparisons of our revenues
and operating results may not be meaningful. You should not rely on these
comparisons as indicators of future performance as no assurances can be given
that quarterly results will not fluctuate, causing a possible material adverse
effect on our operating results and financial condition.
Comparison of the Three Months Ended September 30, 2005 and 2004
Revenue. For the three months ended September 30, 2005, our revenues decreased
9.4% to $15.5 million from $16.6 million for the same period in 2004. The
decrease in revenue was due to hardware and software purchases related to a
system upgrade during the three months ended September 30, 2004 by our federal
repair and maintenance customer. We did not experience, nor do we expect,
additional system upgrade activity during the fiscal year ended December 31,
2005 for our federal repair and maintenance customer. The decrease in federal
repair and maintenance revenue was partially off-set by slightly higher revenue
from our federal service contracts business of $0.2 million and commercial
business revenue of $0.2 million.
Cost of Revenue. Cost of revenue includes direct labor, materials, subcontracts
and an allocation of indirect costs. Generally, changes in cost of revenue are
correlated to changes in revenue as resources are consumed in the production of
that revenue. For the three months ended September 30, 2005, cost of revenue
decreased 10.0% to $13.1 million from $14.6 million for the same period in 2004.
As a percentage of revenue, cost of revenue was 84.4% for the three months ended
September 30, 2005 as compared to 88.0% for the three months ended September 30,
2004. The decrease in cost of revenue was primarily attributable to the decrease
in federal repair and maintenance revenue related to system upgrades performed
in 2004.
Gross Margin. For the three months ended September 30, 2005, gross margin
increased 21.5% to $2.4 million from $2.0 million for the same period in 2004.
Gross margin as a percentage of revenues increased to 15.6% for the three months
ended September 30, 2005 from 12.0% for the three months ended September 30,
2004. Gross margin, as it relates to our federal service contract business,
increased 20.2% to $2.1 million from $1.8 million for the same period in 2004.
The increase was primarily due to lower operating expenses on our fixed price
federal service contracts and a slight increase in overall federal service
revenue. Gross margin, as it relates to our federal maintenance contracts,
increased 31.3% to $0.3 million from $0.2 million for the same period in 2004.
The increase in gross margin is primarily attributable to lower expenses as we
have outsourced a portion of our maintenance efforts to a third party vendor
effective July 1, 2005.
Selling, General & Administrative Expenses. For the three months ended September
30, 2005, selling, general and administrative expenses decreased by 10.0% to
$2.0 million from $2.2 million for the same period in 2004. As a percentage of
revenue, selling, general and administrative expenses decreased to 12.8% from
13.3% for the same period in 2004. The decrease is primarily attributable to
$0.2 million in expenses incurred during the three months ended September 30,
2004 related to the acquisition of Cheyenne Resources.
Net Income. For the three months ended September 30, 2005, net income increased
to $0.2 million from pro-forma ($0.2) million for the same period in 2004. This
increase was due to the increases in gross margin and decreased selling, general
and administrative expenses as discussed above.
Comparison of the Nine Months Ended September 30, 2005 and 2004
Revenue. For the nine months ended September 30, 2005, our revenues increased
0.5% to $46.2 million from $46.0 million for the same period in 2004. This
increase is due to additional task order work from our Housing and Urban
Development client of $1.5 million, new revenue from sales of our OpsPlanner
software and services of $0.6 million, which was partially off-set by a decrease
of $1.7 million in our maintenance and repair business with our Internal Revenue
Service client.
Cost of Revenue. Cost of revenue includes direct labor, materials, subcontracts
and an allocation of indirect costs. Generally, changes in cost of revenue are
correlated to changes in revenue as resources are consumed in the production of
that revenue. For the nine months ended September 30, 2005, cost of revenue
decreased 3.0% to $39.1 million from $40.4 million for the same period in 2004.
As a percentage of revenue, cost of revenue was 84.7% for the nine months ended
September 30, 2005 as compared to 87.8% for the nine months ended September 30,
2004. Cost as a percentage of revenue decreased due to lower operating expenses
on our fixed price federal service contracts and an increase in our commercial
software and services revenue, which has higher gross margins than our federal
business. The decreases in cost as a percentage of revenue attributable to our
federal service contracts and commercial business were partially off-set by
incremental hardware expense on our federal service and repair and maintenance
business.
32
Gross Margin. For the nine months ended September 30, 2005, gross margin
increased 26.1% to $7.1 million from $5.6 million for the same period in 2004.
Gross margin as a percentage of revenues increased to 15.3% for the nine months
ended September 30, 2005 from 12.2% for the nine months ended September 30,
2004. Gross Margin, as it relates to our federal service contracts, increased
42.7% to $6.1 million from $4.3 million for the same period in 2004. This
increase is due to lower operating expenses on our fixed price federal service
contracts and an increase in our total federal services revenue. Gross Margin,
as it relates to our federal maintenance contracts, decreased 26.2% to $1.0
million from $1.4 million for the same period in 2004. The decrease in gross
margin is due to incremental hardware expense during the quarters ended March 31
and June 30, 2005 and the overall decrease in federal maintenance contract
revenue.
Selling, General & Administrative Expenses. For the nine months ended September
30, 2005, selling, general and administrative expenses decreased 3.8% to $5.9
million from $6.1 million for the same period in 2004. As a percentage of
revenue, selling, general and administrative expenses decreased to 12.7% for the
nine months ended September 30, 2005 from 13.3% for the same period in 2004. The
decrease is primarily attributable to $0.2 million in expenses incurred during
the three months ended September 30, 2004 related to the acquisition of Cheyenne
Resources.
Net Income. For the nine months ended September 30, 2005, net income increased
to $0.7 million from pro-forma ($0.3) million for the same period in 2004. This
increase was due to the increase in gross margin and decrease in selling,
general and administrative expenses as discussed above.
(Dollars in thousands except for the percentages)
-------------------------------------------------------------------------------
Twelve Months Ended December 31,
Restated Restated Restated Restated Restated Restated
FY04 FY03 FY02 FY04 FY03 FY02
-------- -------- -------- -------- -------- --------
Revenue $61,756 $51,206 $37,673 100.0% 100.0% 100.0%
Cost of Revenue 54,545 45,810 32,420 88.3 89.5 86.0
Gross Margin 7,211 5,396 5,253 11.7 10.5 14.0
Selling, general & administrative 8,994 4,951 2,890 14.6 9.6 7.7
Income (loss) from Operations (1,783) 445 2,363 (2.9) 0.9 6.3
Total other (expense) income (49) 21 32 (0.0) 0.0 0.1
Proforma Income tax (benefit)
provision (707) 180 925 (1.1) 0.3 2.5
Proforma Net Income (loss) ($1,125) $287 $1,471 (1.8%) 0.6% 3.9%
The table below sets forth, for the periods indicated, the service mix in
revenue with related percentages of total revenue and the year-to-year change in
dollars and percent.
Year-to-Year Change
-----------------------------------
Year - % of Total FY 04 to FY 03 FY03 to FY02
-------------------------------------------------------- --------------- ---------------
Restated Restated Restated Restated Restated Restated Restated Restated Restated Restated
2004 % 2003 % 2002 % $ % $ %
------- ------ ------ ------ ------- ------ ------- ------ ------- ------
Federal Service
Contracts 39,428 63.8% 36,082 70.5% 26,657 70.8% 3,346 9.3% 9,425 35.4%
Federal Repair &
Maintenance Contracts 22,269 36.1% 15,115 29.5% 11,016 29.2% 7,154 47.3% 4,099 37.2%
Commercial Service
Contracts 59 0.1% 9 0.0% -- 0.0% 50 555.6% 9 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total Revenue 61,756 100.0% 51,206 100.0% 37,673 100.0% 10,550 20.6% 13,533 35.9%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
33
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
Revenue. Revenue increased 20.6% to $61.8 million for 2004 from $51.2 million
for 2003. The $3.3 million increase in federal services revenue was driven by a
full year of revenue on a four year Department of Housing and Urban Development
contract awarded in March of 2003. The $3.6 million increase attributable to
this project was partially off-set by a decrease in task-order work with another
civilian agency client. The 47.3% increase in federal repair and maintenance
contracts was a result of organic growth with our Department of Treasury
customer, which included a full year of revenue on a five year printer
maintenance contract with the IRS that was awarded in July of 2003. The entire
growth of commercial revenue came from business continuity services in the area
of risk assessment and business impact analysis with two new commercial
customers, Greenhill and Aventis.
Cost of Revenue. Cost of revenue increased 19.1% to $54.5 million for 2004 from
$45.8 million for 2003. The increase was due primarily to an increase in
hardware and software delivered to our Department of Treasury customer, which
was $5.5 million of the $8.7 million increase. In addition, our increase in
federal project personnel to 255 as of December 31, 2004, as compared to 237 as
of December 31, 2003 resulted in an additional $1.7 million in expense. The
company also continued its investment in the launch of the commercial continuity
business, which resulted in $1.5 million in expense versus $0.6 million for the
same period in 2003. The remaining $0.6 million increase was a result of other
direct costs associated with our increased revenues.
Gross Margin. Gross margin increased 33.6% to $7.2 million for 2004 from $5.4
million in 2003. This $1.8 million in growth is associated with the $10.6
million growth in revenue. Overall gross margin as a percentage of revenues
increased to 11.7% in 2004 from 10.5% in 2003. Service contract gross margin
increased by 81.8% to 14.0% in 2004 from 9.5% in 2003 due to increased employee
utilization and operational cost efficiencies as our contracts awarded in 2003
graduated from the start-up phase. Repair and maintenance contract gross margin
decreased by 49.5% to 7.5% in 2004 from 13.1% in 2003 as a result of incremental
costs on the IRS LTMCC contract.
Selling, General & Administrative. Selling, general & administrative (SG&A)
expenses increased 80.2% to $9.0 million from $5.0 million for the same period
in 2003. As a percentage of revenue, SG&A expenses increased to 14.6% for the
twelve months ended December 31, 2004 from 9.6% for the same period in 2003. The
increase was attributable to additional compensation related expenses from
increased staffing of $1.2 million, research and development costs associated
with the design and launch of our OpsPlanner product of $1.0 million, additional
bid and proposal expenses of $0.2 million, additional facilities expenses of
$0.4 million due to a full year of expense for our Rockville headquarters,
expenses of $0.4 to acquire Cheyenne Resources and an additional $0.4 million in
3rd party fees including legal, consulting and audit support related to the
acquisition.
Net Income. Net income as reported in the pro-forma table in the selected
financial data section, decreased to a loss of $1.1 million for 2004 from income
of $0.3 million in 2003. This decrease was associated with the incremental
selling, general and administrative expenses discussed above, which was offset
by the income tax benefit of $0.7 million.
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Revenue. Revenues increased 35.9% to $51.2 million for 2003 from $37.7 million
for 2002. The $13.5 million increase in revenue primarily reflects an increase
in organic growth with our existing clients which included $3 million with the
Department of Treasury and $4 million with the Department of Justice. We define
organic growth as the increase in revenues excluding the revenues associated
with acquisitions, divestitures and closures of businesses in comparable
periods. Two new contract awards also contributed to the increase in revenue in
2003, including a four year Housing and Urban Development Community Planning and
Development (HUD-CPD) contract awarded in March of 2003 which contributed $6
million and a five year printer maintenance contract with the IRS that was
awarded in July of 2003 which contributed $0.5 million.
Cost of Revenue. Cost of revenue increased 41.4% to $45.8 million for 2003 from
$32.4 million for 2002. The increase in cost of revenues was due in part to the
corresponding growth in revenues resulting from organic growth and the increase
in employee headcount. Project personnel headcount grew to 237 as of December
31, 2003, as compared to 174 as of December 31, 2002. As a percentage of
revenue, cost of revenue increased to 89.5% for the twelve months ended December
31, 2003 versus 86.0% for the same period in 2002. The increase in costs as a
percentage of revenue was primarily attributable to the investment made in the
commercial continuity business of $0.6 million, increased facilities expense
related to the opening of our new headquarters office in Rockville and our new
customer site location in Washington, DC of $0.5 million and start-up related
costs related to the new HUD-CPD and IRS Print maintenance contracts of $0.5
million.
34
Gross Margin. Gross margin increased 2.7% to $5.4 million for 2003 from $5.3
million in 2002. Gross margin as a percentage of revenues decreased to 10.5% in
2003 from 14.0% in 2002. The decrease in gross margin was attributable to the
investment in the commercial continuity business, start-up costs related to our
new HUD-CPD and IRS Print contracts and increased facility costs as stated above
in cost of revenue.
Selling, General & Administrative. Selling, general & administrative (SG&A)
expenses increased 71.3% to $5.0 million from $2.9 million for the same period
in 2003. As a percentage of revenue, SG&A expenses increased to 9.6% for the
twelve months ended December 31, 2003 from 7.7% for the same period in 2002. Our
total sales, general and administrative headcount increased to 32 employees as
of December 31, 2003 compared to 27 employees as of December 31, 2002. The
increase in expenses was attributable to research and development costs related
to the OpsPlanner software product of $0.6 million and additional compensation
expenses related to the increased staffing and management bonuses.
Net Income. Net income as reported in the pro-forma table in the selected
financial data section decreased to $0.3 million for 2003 from $1.5 million for
2002. The decrease was attributable to the investments made in the business plus
the incremental selling, general and administrative expenses as discussed above.
This was off-set by a decrease in the pro-forma tax provision of $0.7 million.
Liquidity and Capital Resources
Our primary sources of liquidity are our existing cash, cash generated from
operations and cash available from borrowings under our revolving credit
facility. We expect our principal uses of cash to be working capital, capital
equipment and the continued enhancement of our OpsPlanner software suite. During
Fiscal 2005, we intend to spend approximately $0.5 million for capital
equipment, mainly technology refreshes of existing equipment plus enhancements
to our existing infrastructure systems. We also intend on spending $0.8 million
for software enhancements to our existing OpsPlanner tool. Based upon the
current level of operations, we believe that cash flow from operations, together
with borrowings available from our existing revolving credit facility, are
adequate to meet our future liquidity needs for the next twelve months.
For the nine months ended September 30, 2005 and for the fiscal year ended
December 31, 2004, we funded working capital requirements, our investment in
business continuity, and the expense of going public primarily through
internally generated operating cash flow and funds borrowed under our existing
revolving credit facility.
For the nine months ended September 30, 2005 the Company generated $1.0 million
in cash and cash equivalents versus $0.6 million for the same period in 2004.
For the nine months ended September 30, 2005, net cash provided by operations
was $0.6 million compared to $4.6 million for the same period in 2004. The
lesser amount of net cash from operations of $4.0 million was primarily due to
the increase in accounts receivable mainly related to our Department of Treasury
client, partially offset by a reduction in prepaid expenses mainly related to
our IRS LTMCC customer contract and lesser decreases in deferred revenues and
accounts payable as compared to the same period in 2004.
Accounts receivable increased by $1.8 million for the nine months ended
September 30, 2005 versus a decrease of $4.3 million for the same period in
2004. The increase in 2005 is primarily attributable to the timing of invoice
payments related to our Department of Treasury and Homeland Security client. The
Company believes accounts receivables balances for both customers will return to
normal levels during the three months ended December 31, 2005. The decrease in
accounts receivable for 2004 was attributable to increased concentration on the
collection of receivables during the three months ended September 30, 2004.
Prepaid expenses, which are primarily associated with our IRS LTMCC contract,
decreased by $4.1 million versus a decrease of $1.6 million in 2004 as the
Company fulfilled the obligations of the contract.
Deferred revenue for the nine months ended September 30, 2005 decreased by $1.3
million compared to an increase of $0.2 million for the same period in 2004. The
decrease is primarily related to the Company's IRS LTMCC and Aventis contracts.
The deferred revenue for IRS LTMCC is associated with the amortization of
software maintenance revenue related to system upgrades and annual software
maintenance contracts purchased in October 2003 and 2004. Software maintenance
contracts are purchased annually by our client during the three months ending
December 31 and amortized over the contract period. The timing and amount of
deferred revenue will be dependent on the customer's installed base and the
timing of additional purchases related to system upgrades outside of the normal
purchasing cycle. At this time, we do not anticipate additional upgrades for the
fiscal year ended December 31, 2005. It is the Company's practice to invoice the
full contract value at project inception for our commercial contracts. Aventis,
our largest commercial contract, was invoiced during the three months ended
September 30, 2004. Deferred revenue has decreased due to the fulfillment of
services during the nine months ended September 30, 2005.
35
Accounts payable decreased by $1.0 million for the nine months ended September
30, 2005 versus a decrease of $2.2 million for the same period in 2004. The
decrease is due to system upgrade and software maintenance related invoices
associated with our IRS LTMCC contract, which were accrued during the three
months ending December 31 but paid during the nine months ended September 30 of
2004 and 2005.
Net cash used by investing activities was $0.0 million for the nine months ended
September 30, 2005 versus $0.3 million for the same period in 2004. The use of
cash relates to the purchase of capital equipment in support of operations. The
Company received proceeds from the sale of assets of $0.3 million during the
nine months ended September 30, 2005.
Net cash provided by financing activities was $0.4 million for the nine months
ended September 30, 2005, which relates to proceeds from the line of credit to
fund operations. Net cash used of $3.7 million for the same period in 2004 was
related to payments on the Company's line of credit
For the year ended December 31, 2004, the corporation generated an increase in
net cash flow of $161 thousand whereas, the prior year ended with a net decrease
in cash flow of $613 thousand. The main contributing factors were an overall
reduction of accounts receivable, as well as an increase in accounts payable and
accrued expenses. The corporation's accounts receivable decreased $3.0 million
to $11.5 million for the year ended December 31, 2004, as compared to an
increase of $6.0 million for the year ended December 31, 2003. The decrease was
primarily a result of internal process enhancements related to collections.
Accounts receivable at the end of 2004 represented 64.9% of total assets,
compared to 78.9% at the end of 2003. Prepaid expense increased to $4.3 million
for year ended December 31, 2004 versus $2.2 million for year ended December 31,
2003. The $2.1 million increase was primarily due to year-end hardware and
software maintenance purchases associated with our IRS LTMCC contract. Although
the purchase of the maintenance contracts is an annual event, we anticipate
prepaid expenses will return to 2003 levels for year ending December 31, 2005
due to a reduction in the term of the required maintenance contracts from 12
months to 6 months. The corporation funded this incremental purchase with
operating cash flow and utilization of our existing credit facility. Effective
November 5, 2004, PSC revoked its S-Corporation status. At that date, the
Corporation had net income which has been recognized for financial reporting
purposes, but not for income tax purposes of approximately $6.6 million. This
net deferred income will be recognized for income tax purposes equally over four
years beginning with the year ending December 31, 2004. The revocation of the
S-Corporation status resulted in a deferred income tax liability that was
recorded on the date of revocation of approximately $2.6 million. Net income for
the year ending December 31, 2004 and retained earnings were reduced by this
amount.
For the year ended December 31, 2004, net cash used by operations was $117
thousand, which was attributable to the decrease in accounts receivable off-set
by the net loss and increase in prepaid expenses. Cash used by operations was
$1.6 million for the year ended December 31, 2003, which was attributable to
increases in accounts receivable and prepaid expenses off-set by increases in
accounts payable and deferred revenue.
Cash used for investing was $292 thousand during 2004 and $995 thousand in 2003,
which was attributable to the purchase of property and equipment to support
operations. Equipment acquisition during 2003 was significantly higher than
2004, as a result of capital investments made by the corporation relating to the
start-up of the HUD-CPD and IRS printer maintenance contracts, technology
refresh of computers, build-out of our internal innovation center at our
headquarter location, and the investment associated with a web-based
time-keeping system.
Cash provided by financing was $570 thousand for the year ended December 31,
2004, compared to $2.0 million as of December 31, 2003. Both were comprised of
transactions under the corporations existing line of credit and banking activity
with SunTrust Bank.
The Company had a line of credit arrangement with SunTrust Bank which expired on
June 30, 2005. Subsequently, on June 22, 2005 we received an extension of the
line of credit arrangement through September 30, 2005. Under the terms of the
latest agreement, the Corporation had to maintain: (1) minimum tangible net
worth of $2,650,000 beginning on and as of June 30, 2005; (2) debt coverage
ratio of not more than 5.0 to 1.0 beginning on and as of June 30, 2005; (3)
minimum quarterly net income of $1.00 for the quarters ending June 30 and
September 30, 2005. The Corporation was in compliance with the line of credit
agreement covenants as of June 30, 2005.
36
The Company terminated its line of credit agreement with SunTrust Bank effective
September 1,2005.
On July 28, 2005, the Company entered into a two year Loan and Security
Agreement with Chevy Chase Bank that provides for a revolving line of credit
facility of up to $9 million. The agreement became effective August 4, 2005. The
revolving line of credit will be used to borrow funds for working capital and
general corporate purposes.
The revolving loans under the Chevy Chase Bank Loan and Security Agreement are
secured by a first priority lien on substantially all of the assets of the
Company, excluding intellectual property and real estate. Under the agreement,
the line is due on demand and interest is payable monthly depending on the
Corporation's leverage ratio at the LIBOR rate plus the applicable spread which
ranges from 2.25% to 3.00%. Under the terms of the agreement, the Corporation
may borrow up to the lesser of $9,000,000 or 90% of eligible U.S. Government
receivables plus 80% of eligible commercial receivables plus 75% of the
aggregate amount of billable but unbilled accounts to a maximum of $3,000,000.
The Loan and Security Agreement requires that the Company maintain the following
covenants and ratios: (1) minimum tangible net worth of $2,000,000 plus 50% of
Company's net income for each fiscal year beginning with fiscal year ending
December 31, 2005; (2) debt coverage ratio of not less than 1.500 to 1.000; (3)
maximum leverage ratio of 5.50 to 1.00, which will be decreased to 5.25 to 1.00
by December 31, 2005 and 4.00 to 1.00 by December 31, 2006. All working capital,
as it relates to these covenants and ratios requirements will be evaluated as of
quarter-end. The Company was in compliance with all covenant requirements as of
September 30, 2005.
The Loan and Security Agreement contains events of default that include among
other things, non-payment of principal, interest or fees, violation of
covenants, inaccuracy of representations and warranties, cross default to
certain other indebtedness, bankruptcy and insolvency events, change of control
and material judgments. Upon occurrence of an event of default, Chevy Chase Bank
is entitled to, among other things, accelerate all obligations of the Company
and sell the Company's assets to satisfy the Company's obligations under the
Loan and Security Agreement.
In the event we require additional funds, whether for acquisitions or otherwise,
we may seek additional equity or debt financing. Such financing may not be
available to us on terms that are acceptable to us, if at all, and any equity
financing may be dilutive to our stockholders. To the extent that we obtain
additional debt financing, our debt service obligations will increase and the
relevant debt instruments may, among other things, impose additional
restrictions on our operations, require us to comply with additional financial
covenants or require us to pledge assets to secure our borrowings.
In the event cash flows are not sufficient to fund operations at the present
level and we are unable to obtain additional financing, we would attempt to take
appropriate actions to tailor our activities to our available financing,
including revising our business strategy and future growth plans to accommodate
the amount of financing available to us.
The following summarizes our obligations associated with leases and other
commitments at December 31, 2004, and the effect such obligations are expected
to have on our liquidity and cash flow in future periods:
Less Than One to Three to More than
(Amounts in Thousands) Total One Year Three Years Five Years Five Years
---------- ---------- ----------- ---------- ----------
Contractual Obligations:
Operating Leases $3,975,941 $ 927,804 $1,474,364 $ 905,445 $ 668,328
Notes Payable - Line of Credit $3,220,072 $3,220,072 $ 0 $ 0 $ 0
---------- ---------- ---------- ---------- ----------
Total $7,196,013 $4,147,876 $1,474,364 $ 905,445 $ 668,328
========== ========== ========== ========== ==========
37
DESCRIPTION OF BUSINESS
Company Overview
Paradigm Holdings Inc. ("PDHO"; website: - www.paradigmsolutions.com) provides
information technology and business continuity solutions to government and
commercial customers. Headquartered in Rockville, Maryland, the company was
founded on the philosophy of high standards of performance, honesty, integrity,
and customer satisfaction and employee morale. With an established core
foundation of experienced executives, the Company rapidly grew from six
employees in 1996 to the current level of approximately 300 personnel. Revenues
grew from $51 million in 2003 to over $61 million by the end of 2004. During
this period of growth, Paradigm remained centered on information technology
services and solutions.
Paradigm Holdings Inc. consists of two subsidiary companies: Paradigm Solutions
Corporation (PSC), which was incorporated in 1996 to deliver information
technology Infrastructure Support Services and Software Engineering Support
Services to Federal Agencies, and Paradigm Solutions International (PSI), which
was incorporated in 2004 to deliver Business Continuity Planning and Emergency
Management Services and software to commercial and government clients.
Paradigm Solutions Corporation provides support for mission-critical systems in
key federal agencies such as the Departments of Justice, Treasury and Homeland
Security.
Paradigm Holdings formed the PSI subsidiary company to produce a
fully-integrated solution for protecting businesses from "all hazard"
interruptions. A customized methodology was developed to provide clients with a
comprehensive picture of the risks to their operations, facilities and people.
The software tool, OpsPlanner(TM) is one of the first tool sets to encompass
continuity planning, emergency management and automated notification in one
easy-to-use platform. From inception, this platform was developed as an
integrated application--unlike the prevailing competitors which developed
continuity planning, emergency management and automated notification as separate
software modules. This technology, when implemented with Paradigm's methods,
offers a superior solution in the continuity of operations planning and risk
management area. The release of this Software tool was made in January of 2005
and no material revenue was recognized in 2004.
Paradigm has achieved significant accomplishments including the launch of the
Continuous Paradigm Process and Product Improvement (CP(3)I), the continued
evolution of Paradigm's ISO 9001:2000 Quality Management Office, the
establishment of strategic Mentor Protege relationships, and success in building
a backlog of business over the last year. Additionally, Paradigm has won over
45% of its pursued competitive procurements, greatly exceeding the industry
standard win rate of 30% to 40%. The Company not only won new business with the
Department of Treasury in 2004, but it also won numerous recompetes of existing
contracts including three with the Office of the Comptroller of the Currency,
four with the National Technical Information Service, and one with the
Department of Housing and Urban Development. Paradigm won several GWAC
(Government Wide Acquisition Contracts) vehicles including the Department of
Justice ITSS III and State of Maryland MCS. The Company also successfully
penetrated the DOD arena by gaining access to multiple GWACs such as DISA
Encore, Army MADD-1, Army CONUS Support Base Services (CSBS), and MATOC Naval
Research Systems Integration.
Paradigm has also achieved success providing information technology services to
many government and commercial clients, including the Departments of Homeland
Security, Treasury, Justice, Commerce, Housing and Urban Development, the Small
Business Administration, IBM, Lockheed Martin, EDS, and the World Bank. Through
a careful analysis of its current marketing practices, Paradigm has determined
that its strategic marketing knowledge and concepts are sound and will continue
to produce desirable results in both the federal and commercial sectors. The
Company will maximize revenue through continued growth in its core client base
and through selected acquisitions that strengthen and expand its ability to help
government and commercial clients achieve effective disaster recovery and
business continuity.
Paradigm's dedication to its customers is reflected in the numerous customer and
industry awards it has received:
o United States Secret Service Certificate of Appreciation - 2004
o Department of Treasury Small Business Partner of the Year - 2004
o Internal Revenue Service - Nominated as the IRS Small Business
Partner of the Year - 2003 and 2002
38
o Inc. 500 Fastest Growing Private Companies - 2003
o Washington Technology Fast 50 - 2003 and 2002
o VAR Business Top 500 National Solutions Provider - 2004, 2003 and
2002
o Washington Technology Top 25 8(a) Contractors - 2004, 2003 and 2002
o Government Computer News Industry Information Technology Award -
2003
o Strategic Airport Security Rollout (SASR) Certificate of Recognition
- 2002
Corporate Organization
On November 3, 2004, Paradigm Holdings Inc., entered into an Agreement and Plan
of Reorganization with Paradigm Solutions Merger Corp., a Delaware corporation
and wholly-owned subsidiary of Paradigm Holdings (the "Merger Sub"), Paradigm
Solutions Corporation, a Maryland corporation and the shareholders of Paradigm
Solutions Corporation. Pursuant to the Agreement and Plan of Reorganization, the
Merger Sub was merged with and into Paradigm Solutions Corporation, the
surviving corporation and continues its existence under the laws of the State of
Maryland and is a wholly-owned subsidiary of Paradigm Holdings Inc. In
consideration of the Merger, the Paradigm Solutions Corporation shareholders
exchanged 13,699 shares of common stock of Paradigm Solutions Corporation, which
was 100% of the issued and outstanding capital stock of Paradigm Solutions
Corporation, for 17,500,000 shares of common stock of Paradigm Holdings Inc.
Cheyenne Resources, Inc. was incorporated under the laws of the State of Wyoming
on November 17, 1970. Cheyenne Resources, prior to the reverse merger with
Paradigm Solutions Merger Sub, operated principally in one industry segment, the
exploration for and sale of oil and gas.
Cheyenne Resources held oil and gas interests and was involved with producing
and selling oil, gas and other mineral substances. Cheyenne Resources did not
engage in refining or retail marketing operations; rather its activities had
been restricted to acquiring and disposing of mineral properties, and to
producing and selling oil and gas from its wells.
Prior Principal activities of Cheyenne Resources involved buying leases, filing
on federal and state open land leases as well as the acquiring and trading of
oil, gas, and other mineral properties, primarily in the Rocky mountain area and
Oklahoma.
Cheyenne Resources' oil and gas activities included the acquisition of whole or
partial interests in oil and gas leases and the farming out or resale of all or
part of its interests in these leases. In connection with farmouts and resales,
Cheyenne Resources attempted to retain an overriding royalty or a working or
carried interest.
In 1999, Cheyenne Resources entered into a memorandum of understanding to obtain
a 25% interest in Cayenne Records, Inc., which has a 75% interest in NL Records
of Nashville, Tennessee. This transaction was rescinded in 2000 due to the
inability of the seller to produce records and data. No value was recorded in
the financial statements. Cheyenne Resources issued 11,473,711 shares of common
stock for this interest.
In 1999, Cheyenne Resources entered into an Agreement with Tiger Exploration to
acquire the Dixie Gas Field and interests in the Stephens and Lick Creeks Fields
for 12,000,000 shares of common stock. Title and production data could not be
verified or produced, and so no value of assets could be carried.
In June 2000, Cheyenne Resources rescinded its memorandum of understanding with
Cayenne Records, Inc. In June 2000, Cheyenne Resources also rescinded its
memorandums of understanding to acquire Dixie Gas Field and interests in
Stephens and Lick Creek Fields. No value was recorded in this financial
statement for these acquisitions. Of the 23,473,711 shares issued for the above
referenced transactions, all but 2,623,838 shares were returned.
In January 2004, Skye Blue Ventures, an entity beneficially owned by Mr. Dennis
Iler, purchased a controlling interest in Paradigm Holdings, formerly Cheyenne
Resources, Inc. Skye Blue Ventures purchased 2,350,000 shares of common stock of
Cheyenne Resources, Inc. from the former directors of Cheyenne Resources, Inc.
for $75,000 and purchased 23,000,000 shares of common stock directly from
Cheyenne Resources, Inc. for $50,000. Cheyenne Resources issued 21,300,000
shares out of the 23,000,000 as it only had 21,300,000 available under its
then-current authorized common stock. Mr. Iler, former President and a Director
of Cheyenne Resources, Inc. and the then-beneficial owner of Skye Blue Ventures,
brought Cheyenne Resources current in its securities filings, settled its
outstanding debt, and assisted in having the company listed on the
Over-the-Counter Bulletin Board. In August 2004, J. Paul Consulting, Shortline
Equity Investments and Ultimate Investments purchased Skye Blue Ventures'
ownership interest in Cheyenne Resources, Inc. and subscribed for an aggregate
of 10,000,000 shares of common stock of Cheyenne Resources, Inc. for $200,000.
39
On October 14, 2005, Paradigm Holdings, Inc., a Wyoming corporation ("Paradigm
Holdings"), Paradigm Solutions International, Inc., a Maryland corporation and
wholly-owned subsidiary of Paradigm Holdings ("PSI"), Blair Management Services,
Inc. t/d/b/a Blair Technology Group, a Pennsylvania corporation ("Blair") and
the shareholders of Blair (collectively, the "Shareholders") consummated a
merger transaction pursuant to the terms of that certain Merger Agreement (the
"Merger Agreement"), whereby Blair was merged with and into PSI. PSI is the
surviving corporation and will continue its corporate existence under the laws
of the State of Maryland as a wholly-owned subsidiary of Paradigm Holdings.
Pursuant to the Merger Agreement, the Shareholders exchanged all of the issued
and outstanding capital stock of Blair in exchange for (i) One Million Dollars
(US $1,000,000) and (ii) five hundred thousand shares of common stock, par value
$0.001 per share, of Paradigm Holdings (the "Shares"). Pursuant to the Merger
Agreement and an Escrow Agreement entered into by the parties, sixty thousand
(60,000) of the Shares will be held in escrow for a period of one (1) year from
the date of closing subject to the terms and conditions of the Merger Agreement.
In addition, under the terms of the Merger Agreement, Paradigm Holdings will
issue to the Shareholders up to an additional 350,000 shares of common stock of
Paradigm Holdings pursuant to an earn-out provision.
At the October 14, 2005 share price of $3.00, the transaction has a total
purchase price of $3,550,000 assuming all earn-out provisions are achieved.
Blair Technology Group was founded in 1992. The Company has provided business
continuity and information technology security solutions to over 300 commercial
customers in a variety of industries including finance, healthcare and energy.
The acquisition of Blair Technology Group allows Paradigm Holdings to combine
the OpsPlanner software suite with Blair's extensive credentials in the business
continuity arena. Paradigm Holdings can now offer our customers a comprehensive
business continuity solution. The acquisition also allows Paradigm Holdings to
expand its presence in the commercial marketplace. For the year ended December
31, 2004, Blair generated $4.6 million in revenue and $0.4 million in net
income.
At the closing of the merger, PSI entered into employment agreements with
Messrs. Kristofco, Duffy and Fochler.
40
Common Stock Listing
On May 12, 2005, we filed an application for our common stock to be listed on
the Pacific Exchange/ArcaEx. The cost of the listing application was $10,000.
Paradigm has been advised by Pacific Exchange / ArcaEx that it will qualify for
listing under their "Tier Two Basic Standards" when its Registration statement
is effective. Paradigm will incur a one-time listing fee of $20,000 and a yearly
fee of $2,000.
- --------------------------------------------------------------------------------------------------------------
Requirements Tier I Tier II
--------------------------------------------------------------
Basic Alternate Basic Alternate
- --------------------------------------------------------------------------------------------------------------
Net Tangible Assets (1) $2,000,000
- --------------------------------------------------------------------------------------------------------------
Net Worth (2) $4,000,000 $12,000,000 $8,000,000
- --------------------------------------------------------------------------------------------------------------
Pre-Tax Income $750,000
- --------------------------------------------------------------------------------------------------------------
Net Income (3) $100,000 (4)
- --------------------------------------------------------------------------------------------------------------
Public Float (Shares) 500,000 1,000,000 500,000 1,000,000
- --------------------------------------------------------------------------------------------------------------
Market Value of Float $3,000,000 $15,000,000 $1,500,000 $2,000,000
- --------------------------------------------------------------------------------------------------------------
Bid Price (5) $5 $3 (6) $3 $1 (6)
- --------------------------------------------------------------------------------------------------------------
Public Beneficial Holders 800/400 (7) 400 500 500
- --------------------------------------------------------------------------------------------------------------
Operating History 3 years 3 years
- --------------------------------------------------------------------------------------------------------------
Audit Committee Yes Yes Yes Yes
- --------------------------------------------------------------------------------------------------------------
1. Net tangible assets means the amount of funds remaining after
deducting intangible assets (including goodwill) from stockholders'
equity.
2. Net worth means total assets (excluding goodwill) less total
liabilities.
3. Net income excludes non-recurring and extraordinary items.
4. The issuer must meet the $100,000 net income requirement which
excludes non-recurring and extraordinary items in the past fiscal
year, two of the past three fiscal years, or have total net tangible
assets of $2,500,000.
5. For securities that are already publicly traded, the qualifying bid
price must have been held for the majority of the most recent six
month period prior to, and at the date of application.
6. To be considered for listing under Tier I, an IPO must have an
offering price of at least $5 and to be considered for a Tier II
listing, an IPO must have an offering price of at least $3.
7. 800 beneficial holders if the issuer has between 500,000 and
1,000,000 shares publicly held, or 400 beneficial holders if the
issuer has either:
a. More than 1,000,000 shares publicly held
b. More than 500,000 shares publicly held and average daily
volume in excess of 2,000 shares for the six months preceding
the date of the application
41
Summary of principal continued listing requirements for common stock:
- --------------------------------------------------------------------------------
Tier I Tier II
- --------------------------------------------------------------------------------
Net tangible assets $500,000
- --------------------------------------------------------------------------------
Net worth $2,000,000 or $4,000,000* $2,000,000
- --------------------------------------------------------------------------------
Pre-tax income
- --------------------------------------------------------------------------------
Net income
- --------------------------------------------------------------------------------
Public float (shares) 200,000 300,000
- --------------------------------------------------------------------------------
Market value of float $1,000,000 $500,000
- --------------------------------------------------------------------------------
Bid price** $3 $1
- --------------------------------------------------------------------------------
Public beneficial holders 400 or at least 300 holders of 100 250
shares or more
- --------------------------------------------------------------------------------
Corporate governance Yes Yes
- --------------------------------------------------------------------------------
* Net worth of $2,000,000 if issuer has sustained losses from
continuing operations and/or net losses in two of the last three
fiscal years; or $4,000,000 if the issuer has sustained losses from
continuing operations and/or net losses in three of the four last
fiscal years.
** In accordance with Pacific Exchange/ArcaEx rules, Pacific
Exchange/ArcaEx may waive the minimum share price requirements based
on consideration of market conditions, the issuer's capitalization,
the number of outstanding and publicly held shares and any other
factors that PCX considers appropriate.
Our Strategy
We have implemented the following strategies to position the business to capture
additional revenue in the federal information technology and business continuity
markets:
o Maintain and expand our existing client relationships. We maintain
relationships with our existing clients by adhering to our culture
of respect and providing exceptional performance. We believe this
helps us win renewals of our engagements. In addition, we use our
knowledge of our clients' needs to identify additional opportunities
and cross-sell new services to them. Paradigm believes that its
customer focus is the foundation of its success to date. This focus
is critical for the creation of long-term value. The Company does
not intend to compromise its customer focus, nor any of its core
values for short-term economic gain.
o Leverage our existing client base to win new clients. We believe
satisfied clients are one of our most effective marketing tools. The
Federal Acquisition Streamlining Act (FASA) of 1994 simplified the
federal acquisition process by removing all restrictions on
purchases less than $100,000. Since FASA 94 went into effect, client
referrals have become a crucial component of this expedited
procurement process on small federal opportunities within our
existing client base. Since we focus on technology infrastructure
improvement, we are able to transfer our skills readily from client
to client. We plan to continue building a network of clients and
leveraging these relationships to gain access to new clients. We
also plan to build our relationships with other systems integrators,
so that we can expand our partnership opportunities (both prime and
subcontractor) for future business. We believe that favorable client
referrals are strategically important to our winning these
opportunities.
42
o Strategic acquisitions. Currently, we have no pending acquisitions
planned. In the future, we plan to pursue acquisitions that will
position us with strategically important technical skills for our
existing federal customers, access to new federal clients and
agencies, and expand our geographical reach. Our commercial
acquisition strategy will focus on selective regional consulting
firms with pre-existing customer relationships and business
development professionals in the business continuity space in
addition to other support service companies who can be effectively
integrated into the Paradigm Solutions International business model.
This future growth strategy will require the business to secure the
additional funds either through additional equity or debt financing.
o Strengthen Sales & Business Development Workforce. Add experienced
sales professionals, consultants, and sales engineers in targeted
federal agencies and commercial geographic markets. We anticipate
the cash flow from operations and borrowings from the credit
facility will be sufficient to meet this need over the next twelve
months.
o Organizational Development. Create an organizational culture that
provides clear, consistent, and strategic leadership, incentives,
and growth opportunities for employees.
o Product Enhancement. Continue to enhance the product capabilities of
the OpsPlanner(TM) software suite to deliver the most comprehensive,
easy-to-use continuity preparedness tools and risk management
services for both federal and commercial customers. We anticipate
the cash flow from operations and borrowings from the credit
facility will be sufficient to meet this need over the next twelve
months.
Paradigm Solutions Corporation (PSC)
Paradigm Solutions Corporation is steadfast in its commitment to best practices
in meeting changing requirements and providing cutting-edge innovations to
advance our client's mission. We focus on delivering high-quality information
technology services on-time and within budget through seamless transitions,
program stability, and effective contract implementation and administration.
Government Reform is Driving Growth in Technology Spending
We believe that political pressures and budgetary constraints are forcing
government agencies at all levels to improve their processes and services and to
operate more like commercial enterprises. Organizations throughout the federal,
state and local governments are investing heavily in information technology to
improve effectiveness, enhance productivity and extend new services in order to
deliver increasingly responsive and cost-effective public services.
Changes over the mid to late 1990's in federal government contract procurement
and compliance regulations have streamlined the government's buying practices,
resulting in a more commercial approach to the procurement and management of
technologies and services. As a result, procurement lead times have decreased
and government buyers now have greater flexibility to purchase services on the
basis of distinguishing corporate capabilities and successful past performance.
Federal government entities are now able to award contracts based on factors
other than price alone, if they judge that the government would receive a
greater value. In addition, the General Services Administration's (GSA)
extension of basic government-wide contract vehicles for procuring technology
components and services, the GSA Schedules, makes purchasing technology services
easier and faster. Federal government buyers can now order services directly
from pre-approved providers instead of using a time-consuming bid solicitation
process. Historically, these changes have improved our ability to expedite the
procurement of new business in the government market. There are currently no
proposed changes to government procurement regulations that we believe will
materially affect our business in the immediate future.
Government's Need to Outsource Technology Programs
Government organizations rely heavily on outside contractors to provide skilled
resources to accomplish technology programs. We believe that this reliance will
continue to intensify due to political and budgetary pressures in many
government agencies and due to the difficulties facing governments in recruiting
and retaining highly skilled technology professionals in a competitive labor
market. In concert with its transition to more commercial practices, government
is increasingly outsourcing technology programs as a means of simplifying the
implementation and management of the technology, so that government workers can
focus on their mission.
43
Our Areas of Practice
We provide information technology services through two broad areas that address
the needs and particular challenges of the evolving government market. This
includes infrastructure and software engineering support services.
Infrastructure Support Services
Paradigm Solutions provides comprehensive information technology infrastructure
support services including design, implementation, maintenance, and
administration. We work with our clients to determine the best outsourcing
solution to meet their requirements while maximizing their return on investment.
Our project managers and technical teams collaborate with our clients to define
the scope, deliverables, and milestones for each project. For example, to one of
our Department of Treasury clients, we provide a full range of IT services such
as enterprise infrastructure support, network support, e-mail services,
directory services, internet and intranet access and services, software
distribution and upgrades, disaster recovery services, help desk, LAN/WAN
support and information assurance/computer network defense services.
Infrastructure support services include all aspects of project planning,
facilities build-out, implementation, and operations. Our services encompass the
following critical areas:
- ---------------------------------------------------------------------------------------------------------------------
Service / Solution Description
- ---------------------------------------------------------------------------------------------------------------------
Infrastructure Design and Implementation For network, mainframe and telecommunications
environments
- ---------------------------------------------------------------------------------------------------------------------
Service Center Solutions Including 24/7 nationwide network support for mission
critical systems
- ---------------------------------------------------------------------------------------------------------------------
Data Center Operations Multiple 24/7 mainframe operations support for mission
critical systems
- ---------------------------------------------------------------------------------------------------------------------
Network Operations Center Support Provide corrective and adaptive hardware support for large
Information Technology equipment including printers and
other peripheral systems.
- ---------------------------------------------------------------------------------------------------------------------
Network Security and Management Including 24/7 nationwide network support for mission
critical systems in an windows environment
- ---------------------------------------------------------------------------------------------------------------------
Desktop Support and Administration Managing and administration of network and application
security
- ---------------------------------------------------------------------------------------------------------------------
Telecommunications Tier I and II support for desktop and laptop computing
systems
- ---------------------------------------------------------------------------------------------------------------------
Depot Maintenance Communications support including switch installation
and implementation, phone support, cabling and routers.
- ---------------------------------------------------------------------------------------------------------------------
Disaster Recovery Support Receipt, repair and distribution of Personal Computers
- ---------------------------------------------------------------------------------------------------------------------
Information Security Solutions Leverage our Security Assessment towards building an
effective Information Security Program
- ---------------------------------------------------------------------------------------------------------------------
Database Administration Maintenance, administration, and engineering of
Infrastructure support databases
- ---------------------------------------------------------------------------------------------------------------------
Paradigm manages projects proactively with aggressive risk management, complete
planning, and continual status reporting to ensure project success. We employ
automation, management, and administration tools through strategic partnerships
with innovative vendors. These partnerships provide our clients with readily
accessible solutions that meet their critical needs in a timely and
cost-effective manner.
Software Engineering Support Services
With many years of experience in software, systems, and database design and
development for numerous clients, Paradigm Solutions has developed the expertise
and methodologies required to provide software engineering support services for
all phases of the development lifecycle. Our software engineering experts are
available to augment an existing development team or support outsourcing of any
portion of a development effort. For example, for one of our Department of
Housing and Urban Development clients, we are responsible for change request
initiation and identification, independent testing, regression testing, security
evaluation, solution and impact analysis, quality assessment, change request
implementation, configuration management, user acceptance testing, solution
acceptance and solution installation.
44
Software engineering support services consist of new development, maintenance
and support, as well as migration of legacy systems to modern platforms. Our
services encompass the following critical areas:
- ----------------------------------------------------------------------------------------------------------------------
Service / Solution Description
- ----------------------------------------------------------------------------------------------------------------------
Requirements Engineering Provide full spectrum of Requirements Analysis utilizing best
commercial practices including COTS products.
Basis for all re-engineering and maintenance software activities.
- ----------------------------------------------------------------------------------------------------------------------
Configuration Management Provide CM support for customer base and internal software
engineering activities to ensure version control for
SW and documentation
- ----------------------------------------------------------------------------------------------------------------------
Software Quality Assurance Provide complete spectrum of Testing on software development
solutions including, unit test, end to end test,
regressions testing. Utilize host of COTS products to
accomplish internal and external mandated testing requirements.
- ----------------------------------------------------------------------------------------------------------------------
Independent Verification and Validation Provide IV&V for customer for companies developing new
products to be integrated into customer production site.
- ----------------------------------------------------------------------------------------------------------------------
Application Development for Web, Client/Server, Full Software Development Life Cycle (SDLC) for all aspects of
and Mainframe Platforms application support. Technologies include, but not limited to:
Visual Basic, J2EE, Powerbuilder, .NET, HTML, Java Script.
- ----------------------------------------------------------------------------------------------------------------------
Legacy Systems Migration and Data Conversion Converting legacy systems to meet customer based Enterprise
Architecture requirements. Some conversions include IBM
CICS COBOL to J2EE, Powerbuilder to J2EE.
- ----------------------------------------------------------------------------------------------------------------------
Database Design and Development Design and engineering of databases for applications development.
- ----------------------------------------------------------------------------------------------------------------------
Data Warehousing and Data Mining Implementation of data warehouses for multiple clientele
- ----------------------------------------------------------------------------------------------------------------------
Application Security Engineering of security is wrapped into corrective, adaptive and
perfective application development efforts.
- ----------------------------------------------------------------------------------------------------------------------
Our seasoned project managers and experienced technical teams collaborate with
our clients to define the scope, deliverables, and milestones for each project
to ensure our clients' expectations are realized. Our project managers ensure
projects stay on track using aggressive risk management and iterative planning,
with continuous status reporting to our clients.
Help Desk Support
Challenge: Develop and implement a more efficient, responsive, and better
managed computer support system.
Results: As essential personnel, our staff operates the client Help Desk 24/7.
Computer support had been conducted originally by customer personnel without a
massive call center, tracking system, or call response procedures. Paradigm's
program manager reviewed the method in which computer support was being provided
and recommended a full-fledged Help Desk operated by highly-technical contractor
support staff capable of providing onsite 24/7 support to all headquarters and
field office personnel. A year after implementation of the new Help Desk call
center with support being provided by both customer and Paradigm personnel, the
customer recognized Paradigm's success in operating the Help Desk by entrusting
the team with more high-level responsibility and reducing the original
contractor-to-federal employee ratio for operating the Help Desk. The Help Desk
is now fully staffed by Paradigm, and the support has expanded to include
mainframes, some accounting and human resource system support, and support for
other secret information. Using Front Range System's HEAT, Paradigm records an
average of 1,600 help desk specific calls per month. Many of these calls are
resolved over the phone through providing step-by-step instruction or through
remote access to the user's workstation. Calls that cannot be resolved over the
phone are assigned to other support groups for resolution or to outside
contractors to resolve user issues. Our use of the Front Range System has been
so effective that Front Range describes our process as part of their marketing
promotion of best use of the system. Within the first year, Paradigm's control
of the Help Desk saved the customer more than $2 million.
45
Data Warehousing
Challenge: Develop and implement a data mart to replace the existing, but
limited, HR system.
Results: Paradigm maintains a centralized data warehouse that supports a
customer base extending to 2,800+ users. Overall, as a result of the procedures
and practices that Paradigm employees (staff of 4) have established, the daily
operation of the data warehouse has significantly improved data integrity and
availability. A specific task entailed developing a data mart to support the HR
department, one that needed to outperform existing, but limited, data marts.
Because Paradigm's time-tested methodology and carefully-documented development
process ensured no steps would be omitted, we could guarantee the quality of the
finished product. The process included extensive requirements analysis, data
modeling, data collection, data mart construction, prototyping, testing, and
other carefully documented steps. Paradigm rolled out a solution so beneficial
to the customer's work environment that the customer requested a number of other
data marts to meet their information needs. We followed up by delivering a
personal benefits data mart, accessible through an intranet, that replaced the
customer's manual method, which had inherent security risks as well as other
problems. This follow-on project was accomplished in 1 1/2 months.
Disaster Recovery - Mainframe Support
Challenge: Establish secure telecommunications from the customer's headquarters
and mirror the server and all headquarters services at an undisclosed location
to support continuity of operations in the case of a national disaster.
Results: The Paradigm team devised a mode of operation and established the
telecommunications lines for full control of the remote site. Within the context
of two sites, we control what is done at site A from site B, without human
hands-on intervention. The Paradigm Team transfers data daily and ensures that
if one server is shut down, the remote server will pick up and continue all
activity in a seamless manner. Paradigm saved the customer money and resources
by establishing secure telecommunications from headquarters without the need for
personnel to be positioned at both sites as had been the case previously.
Existing Contract Profiles
We currently have a portfolio of more than 27 active contracts. Our contract mix
for the nine months ended September 30, 2005 was 58% fixed price contracts, 27%
time and materials contracts, and 15% cost-plus contracts.
Under a fixed price contract, the contractor agrees to perform the specified
work for a firm fixed price. To the extent that actual costs vary from the price
negotiated we may generate more or less than the targeted amount of profit or
even incur a loss. We generally do not pursue fixed price software development
work that may create material financial risk. We do, however, execute some fixed
price labor hour and fixed price level of effort contracts which represent
similar levels of risk as time and materials contracts. The substantial majority
of these fixed price contracts involve a defined number of hours or a defined
category of personnel. We refer to such contracts as "level of effort"
contracts.
Under a time and materials contract, the contractor is paid a fixed hourly rate
for each direct labor hour expended and is reimbursed for direct costs. To the
extent that actual labor hour costs vary significantly from the negotiated rates
under a time and materials contract, we may generate more or less than the
targeted amount of profit.
Cost-plus contracts provide for reimbursement of allowable costs and the payment
of a fee which is the contractor's profit. Cost-plus fixed fee contracts specify
the contract fee in dollars or as a percentage of allowable costs. Cost-plus
incentive fee and cost-plus award fee contracts provide for increases or
decreases in the contract fee, within specified limits, based upon actual
results as compared to contractual targets for factors such as cost, quality,
schedule and performance.
46
Our historical contract mix is summarized in the table below.
Contract Type 2004 2003 2002
------------- ---- ---- ----
Fixed Price (FFP) 52% 57% 54%
Time and Materials (T&M) 29% 31% 45%
Cost-Plus (CP) 19% 12% 1%
Listed below are our top programs by 2004 revenue, including single award and
multiple award contracts. We are a prime contractor on each of these programs.
Top Programs /Contracts by 2004 Revenue
($ in millions)
Estimated
Remaining
Contract
Period of 2004 Value as of Contract
Programs Customer Performance Revenue 12/31/04 Type
- -------- -------- ----------- ------- -------- ----
Long Term Maintenance of Department of Treasury - IRS
Computing Center 6/01 - 4/06 $ 18.2 $ 9.9 FFP
Alcohol, Tobacco & Firearms Department of Justice 2/02 - 2/07 10.6 18.6 CP
Community Planning & Housing and Urban
Development Development 3/03 - 3/07 7.0 19.7 FFP
United States Secret Service Department of Homeland
Security 9/99 - 03/06 5.0 5.0 T&M
Description of Major Programs / Contracts:
Department of the Treasury - Internal Revenue Service, Long Term Maintenance of
Computing Centers (LTMCC)
Paradigm provides computing center hardware maintenance and software
administration support to the IRS main Tax Reporting Systems in Detroit,
Michigan and Martinsburg, West Virginia. At the IRS Detroit Computing Center
(DCC), Paradigm currently responds to hardware remedial and preventive
maintenance and we administer the software that resides on the IBM z990,
2084-302 mainframe. Paradigm's staff of technicians supports the Enterprise
Computing Center at Martinsburg with more than 1,425 IBM/IBM compatible
peripherals and higher maintenance items in place at the IRS that include
sophisticated tape drives, monitors, and printers. We have established a
technical support center to resolve problems on a 24x7x365 basis.
Department of Justice - Alcohol Tobacco, Firearms and Explosives
Paradigm provides software development and corrective, perfective and adaptive
software maintenance services in support of the Tax and Trade Bureau tax
collection mission. Paradigm's staff utilizes JAVA J2EE and Swing technologies
along with the Oracle 9i suite consisting of Forms, Reports, Discoverer,
Designer application server and Database. Paradigm also maintains legacy
applications developed in PowerBuilder. The staff is responsible for supporting
the full Systems Development Life Cycle utilizing a variety of industry
best-of-breed tools including Caliber-RM Requirements Management, Serena PVCS
Configuration Management, JDeveloper and the Mercury Test suite.
Housing and Urban Development - Community Planning and Development (CPD)
Paradigm provides Corrective, Adaptive and Re-engineering software development
services in support of CPD's Grants Management Systems. This includes upgrades,
minor enhancements and legacy system migration to HUD's enterprise architecture.
Software engineering services include J2EE, Powerbuilder, Cobol CICS II and
Visual Basic with SQL Server, DB2 and Oracle backends.
47
Department of Homeland Security - United States Secret Service (USSS)
Paradigm provides a technically sound and cost-effective Facilities Management
environment with emphasis placed on quality services to support the USSS's
critical mission. Paradigm staff provides IBM 7060-H50 Mainframe, EMC disk
storage, and StorageTek tape silo Mainframe Hardware and Computer Operations
Support. The Paradigm Team also provides OS-390 Systems Programming, WAN/LAN
Administration, Database Administration of Oracle and CA-IDMS databases, Help
Desk support utilizing Front Range System's HEAT Help Desk Suite CA-IDMS
Software Development, and Business Continuity Planning services.
Backlog
Backlog is our estimate of the amount of revenue we expect to realize over the
remaining life of awarded contracts and task orders we have in hand as of the
measurement date. Our total backlog consists of funded and unfunded backlog. We
define funded backlog as estimated future revenue under government contracts and
task orders for which funding has been appropriated by Congress and authorized
for expenditure by the applicable agency, plus our estimate of the future
revenue we expect to realize from our commercial contracts. Unfunded backlog is
the difference between total backlog and funded backlog. Unfunded backlog
reflects our estimate of future revenue under awarded government contracts and
task orders for which either funding has not yet been appropriated or
expenditure has not yet been authorized. Our total backlog does not include
estimates of revenue from government-wide acquisition contracts, or GWAC
contracts, or General Services Administration, or GSA, schedules beyond awarded
or funded task orders, but our unfunded backlog does include estimates of
revenue beyond awarded or funded task orders for other types of indefinite
delivery, indefinite quantity, or ID/IQ, contracts.
Our total backlog as of September 30, 2005 was approximately $102 million, of
which approximately $26 million was funded as compared to approximately $119
million, of which approximately $16 million was funded as of September 30, 2004.
However, there can be no assurance that we will receive the amounts we have
included in our backlog or that we will ultimately recognize the full amount of
our funded backlog as of September 30, 2005 that we estimate will be recognized
as revenue during fiscal 2005 or thereafter.
We believe that backlog is not necessarily indicative of the future revenue that
we will actually receive from contract awards that are included in calculating
our backlog. We assess the potential value of contracts for purposes of backlog
based upon several subjective factors. These subjective factors include our
judgments regarding historical trends (i.e., how much revenue we have received
from similar contracts in the past), competition (i.e., how likely are we to
successfully keep all parts of the work to be performed under the contract) and
budget availability (i.e., how likely is it that the entire contract will
receive the necessary funding). If we do not accurately assess each of these
factors, or if we do not include all of the variables that affect the revenue
that we recognize from our contracts, the potential value of our contracts, and
accordingly, our backlog, will not reflect the actual revenue received from
contracts and task orders. As a result, there can be no assurance that we will
receive amounts included in our backlog or that monies will be appropriated by
Congress or otherwise made available to finance contracts and task orders
included in our backlog. Many factors that affect the scheduling of projects
could alter the actual timing of revenue on projects included in backlog. There
is always the possibility that the contracts could be adjusted or cancelled. We
adjust our backlog on a quarterly basis to reflect modifications to or renewals
of existing contracts.
Competitive Analysis
We operate in markets that are highly competitive and include a large number of
participants. We compete with many companies, both large and small, for our
contracts. We do not have a consistent number of competitors against whom we
repeatedly compete. If we anticipate that our combined resources may create a
competitive advantage, we may team with other companies to perform work under
contracts. These and other companies in our market may compete more effectively
than we can because they are larger, have greater financial and other resources,
have better or more extensive relationships with governmental officials involved
in the procurement process and have greater brand or name recognition.
PSC also competed with businesses under the Small Business Administration (SBA)
8(a) Business Development Program, named for a section of the Small Business
Act. This business development program was created to help small disadvantaged
businesses compete in the American economy and access the federal procurement
market. PSC utilized this program to access the federal marketplace in October
of 1995 and graduated from the program in October of 2004. The term "graduate"
is used to refer to a Participant's exit from the 8(a) BD Program at the
expiration of the Participant's term. This program, allowed the business to
build a base of business with various federal civilian agencies. Currently, we
have a backlog of business that will continue under this program until the
contracts end after which we will pursue several avenues to maintain the
businesses we believe are important to our strategy in this marketplace. This
includes either migrating this work to other government contract vehicles if
allowed by the customer or taking on a subcontractor role when the business
comes up for re-compete and teaming with a SBA business who would be the prime
contractor.
48
As a result of the diverse requirements of the Federal Government and our
commercial clients, we frequently form teams with the companies in our markets
in order to compete for large procurements, while bidding against them in other
situations.
In each of our practice areas, we generally bid against companies of varying
sizes and specialties, from small businesses to multi-billion dollar
corporations. Because of the current industry trend toward consolidation, some
of these companies may emerge better able to compete with us. Therefore, it is
essential that we differentiate ourselves from these companies. We believe that
our technical abilities, client relationships, past performance, cost
containment, reputation and ability to provide quality personnel give us a
strong presence in the markets we serve. In addition, we believe that our
culture of respect for and commitment to our clients and business partners
greatly aids our business.
While we believe these factors help to set us apart from other companies in our
markets, we may not be able to continue to maintain our competitive position, as
new companies enter the marketplace and alliances and consolidations among
competitors emerge. Some companies in our markets have longer operating
histories, greater financial and technological capabilities, greater brand or
name recognition and/or larger client bases than we have.
Business Development Summary
Paradigm Solutions Corporation's business development plans include the
following:
o Implementation of a highly structured approach to federal
opportunity identification, qualification and capture.
o Rapid solutions integration and prototyping through the Company's
Innovation Center for Excellence (iCenter) to meet federal
customers' highly specific requirements.
o Additional sales force based on Paradigm's federal core competencies
and client needs in specific application areas.
o Enhanced pool of subject matter experts in the application areas of
Enterprise Resource Planning (ERP), Enterprise Applications (EA),
and Call Center technology.
o Leveraging iCenter subject matter expert's role in business
development to increase contract award and shorten bid response
times.
o Implementation of Level 2 CMMI processes to increase contract award
opportunities.
iCenter
The Innovation Center of Excellence (iCenter) is a corporate initiative focused
on providing reliable, practical, and innovative technical solutions to Paradigm
and its clients. The iCenter is a leading-edge technology facility located at
Paradigm Headquarters. It maintains an independent computing infrastructure
specifically designed to accommodate research and development activities for
current and future client needs, with emphasis on rapid prototyping and product
demonstrations.
The iCenter has identified Areas of Excellence in which to develop its core
competencies based on their strategic importance to Paradigm and its clients.
Our iCenter engineers keep current with technology trends and best practices
through advanced training, professional certifications, and cross-training.
Technical Areas Of Interest Include:
o Remote Systems Management
o Network Architecture
49
o Network Operations and Management
o Project Management
o Training and Seminars
o Software Development Methodologies
o Software Quality Assurance and Metrics
o Help Desk Technology and Best Practices
o Wireless Technologies
o Information Security
Paradigm Solutions International (PSI)
Paradigm Solutions International is our newly formed subsidiary of Paradigm
Holdings, Inc., incorporated in December of 2004, engaged in the development and
delivery of continuity and information technology security/risk management
services. The focus is on improving the ways commercial businesses prepare to
respond to and recover from "all hazard" interruptions to their operations.
PSI's innovations in business continuity development, planning, and information
technology security will position it as a leader in the fragmented Business
Continuity and Continuity of Operations industry.
OpsPlanner(TM) software, which was released in 2005, was developed to be the
first completely integrated logical system for the preparation for, management
of, and continuous improvement of an organization's ability to withstand and
recover from "all hazards" to their operations. The purpose of Business
Continuity Planning (BCP) is to enable organizations to prepare for emergencies
and disruptions such as natural disasters from hurricanes and floods as well as
blackouts, fires, terrorist attacks and cyber attacks. Crisis Management is a
related discipline that deals with real-time management of emergencies and
recovery from damage. These business practices have received a great deal of
attention following the 911 terrorist attacks on the U.S. In fact, the 911
Commission has explicitly stressed the need for BCP as a key aspect of private
sector preparedness.
Several vendors provide a variety of products to help organizations with BCP and
crisis management. Such products fall into the following categories:
1. Risk Assessment and Business Impact Analysis: Enables the process of
understanding risks and assessing impact of potential disruptions.
2. BCP: Makes creation and update of BC (Business Continuity) plans productive
and efficient.
3. Incident Management: Puts BCP into action during emergencies and tracks
progress against plans.
4. Crisis Communication: Used to mobilize and communicate with emergency teams
during a crisis.
Collectively, these categories form the Business Continuity market.
Increasingly, vendors are offering products that integrate one or more of the
above categories into a single package. Paradigm Solutions International is in
the forefront of this trend having understood this need prior to the beginning
of development.
Market Drivers
During the last year, several factors have combined to greatly increase
awareness of the need for good information technology Risk and Business
Continuity Management (BCM). These factors are outlined as follows:
o Increased regulatory requirements (Sarbanes-Oxley (SOX), corporate
governance).
50
o Improved overall risk management, as in the emergence of enterprise
risk management.
o The recent blackouts in several cities have almost certainly acted
as the most significant catalysts outside financial services, the
public sector and those areas immediately affected by the events of
September 11, 2001.
o The continued threat of terrorism.
o Employee errors and sabotage.
o Cyber attacks.
o Homeland Security Commission 911 Report standardization on how to
measure preparedness and NFPA 1600 Requirements from credit
companies and insurance agencies that help companies prepare for
insurance requirements.
o Demands from large enterprises that their supply chain suppliers
have business continuity plans in place as a prerequisite for doing
business.
o Natural disasters like hurricanes, floods and tornados.
Product/Service(s) Description
OpsPlanner (TM) Business Continuity / Emergency Management and Notification
Software
Plan Manager: Business Continuity Planning makes the creation, maintenance, and
update of plans productive and efficient.
Recovery Manager: Helps organizations activate their plans in an emergency and
track their recovery against the plans. Included in this module is the
notification feature which is used to mobilize and communicate with emergency
teams, suppliers, employees and government agencies during a crisis.
Business Continuity and Information Technology Security Professionals
o Full-time Certified Business Continuity Professionals (CBCPs).
o Certified Network and Security Consultants/Engineers (CISSP,
Security+, etc.).
Paradigm Solutions International has acquired Blair Management Services to
provide our Business Continuity services. The acquisition enables Paradigm
Solutions International to combine Blair Management Services Business Continuity
credentials and service delivery expertise with our OpsPlanner software
capabilities. The combined entity will offer a complete Business Continuity
solution to our customers.
Business Continuity Planning Services
o Plan Audit, Risk Assessment, and Business Impact Analysis.
o Continuity Plan Development and Testing.
o Organizational Awareness and Improvement.
o Evaluation of Required Application Systems and Services.
o Workflow Analysis.
51
Information Technology Security Offerings
o Objective Information Technology Security Vulnerability Assessment.
o Information Technology Security Program and Policy Development.
o Information Technology Security Solution Implementation and
Integration.
Competitive Analysis
Paradigm Solutions International faces competition from a small number of
software vendors that are not as well capitalized as Paradigm Holdings Inc. Due
to the integrated nature of the OpsPlanner(TM) software suite, we also face
competition from notification vendors and emergency management software
companies that compete against part of our software solution. In the area of
business continuity services, we compete against large companies such as IBM,
Bearing Point and others. In most cases, our services are competitively priced
to allow PSI to act either independently or as a subcontractor to these large
competitors.
Business Development Summary
Paradigm Solutions International's business development plans include the
following:
o Recruit, train, and deploy a highly motivated, professional business
development team.
o Selectively add sales and professional delivery resources, deployed
in a broader geographic area.
o Achieve rapid growth through organic growth and strategic
acquisitions.
o Remain deep and narrow in service offerings.
o Place Paradigm Solutions International offices in key US Cities.
o Continue to focus its efforts for marketing, sales and service
delivery within the following geographic areas:
o Mid-Atlantic states
o Eastern seaboard states
o Disaster-prone locations: Florida, Texas, California, etc.
o High concentration of population and targeted vertical market
organizations in the following cities: Washington, Baltimore, New
York, Philadelphia, Pittsburgh, Atlanta, Boston, Dallas, Los
Angeles, Chicago.
o Increase the number of vendor channel partnerships.
Culture, People and Recruiting
We have developed a corporate culture that promotes excellence in job
performance, respect for the ideas and judgment of our colleagues, and
recognition of the value of the unique skills and capabilities of our
professional staff. We seek to attract highly qualified and ambitious staff. We
strive to establish an environment in which all employees can make their best
personal contribution and have the satisfaction of being part of a unique team.
We believe that we have successfully attracted and retained highly skilled
employees because of the quality of our work environment, the professional
challenge of our assignments, and the financial and career advancement
opportunities we make available to our staff.
We occupy state-of-the-art facilities that are conducive to highly technical and
collaborative work, while providing individual privacy. In our Innovation
Center, we configure leading-edge equipment and software, and provide our
engineers and developers with advanced tools to evaluate and apply new
technologies.
52
As of September 30, 2005, we had 320 personnel (full time, part time, and
consultants). Of our total personnel, 277 were Paradigm Solutions Corporation IT
service delivery professionals and consultants, and 43 were management and
administrative personnel performing corporate marketing, human resources,
finance, accounting, legal, internal information systems and administrative
functions. None of our personnel is represented by a collective bargaining unit.
Website Access to Reports
Our filings with the U.S. Securities and Exchange Commission (the "SEC") and
other information, including our Ethics Policy, can be found on the Paradigm
Solutions website (www.paradigmsolutions.com ). Information on our website does
not constitute part of this report. We make available free of charge, on or
through our Internet website, as soon as reasonably practicable after they are
electronically filed or furnished to the SEC, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act of 1934.
53
MANAGEMENT
Directors and Executive Officers
Our directors, executive officers and key employees as of January 12, 2006, are
as follows:
Name Age Position with the Company Date First Elected or Appointed
- ---- --- ------------------------- -------------------------------
Raymond Huger 59 Chief Executive Officer, November 4, 2004
Chairman of the Board of Directors
Frank Jakovac 56 President, Chief Operating Officer November 4, 2004
Richard Sawchak 31 Vice President, Chief Financial Officer September 19, 2005
Frank Ryan 53 Director November 30, 2004
John A. Moore 52 Director April 15, 2005
Edwin Mac Avery 57 Director April 15, 2005
Mark Serway served as Chief Financial Officer until his resignation from the
company effective August 15, 2005.
Set forth below is a brief description of the background and business experience
of each of our executive officers and directors for the past five years:
Raymond A. Huger, Chief Executive Officer and Chairman of the Board - Mr. Huger
has more than 30 years of experience in business management, information
technology, sales/marketing and technical support services. He established
Paradigm Solutions in 1991 following a very successful 25-year career with IBM,
beginning as a Field Engineer and holding a variety of challenging technical
support, sales/marketing and executive management positions. Prior to his early
retirement from IBM, he was a Regional Manager, responsible for the successful
operations of several IBM Branch offices that generated over $500 million
dollars in annual revenue. His experience and understanding of technology
allowed him to develop solid business value propositions for Paradigm Solutions
and its Paradigm Solutions International Division. Mr. Huger has a Bachelor's
Degree (BA) from Bernard Baruch College and a Master's Degree (MBA) from Fordham
University.
Mr. Huger's Prior Five Year History: 2004 - Present, Chairman & CEO,
Paradigm Holdings, Inc.
1991 - 2004, President & CEO,
Paradigm Solutions Corporation
Frank J. Jakovac, President and Chief Operating Officer - Mr. Jakovac has over
25 years experience leading organizations through every phase of their
lifecycle: from start-up to change and revitalization, to turnaround and
accelerated growth. His background includes cross-functional expertise and
experience in areas including business development, leadership, management,
corporate governance, and regulatory issues. Mr. Jakovac built a highly
successful entrepreneurial venture from start-up to $300 million in only four
years and built another privately held venture from start-up to $100 million in
assets within five years. In addition, he has participated in successful mergers
and restructuring ventures and has nurtured working relationships with Fortune
500 CEOs. His more recent successes include the founding of Adriatic Ventures in
1998 (which commercialized and managed projects ranging from information
technology to land development) and his tenure as president and CEO of Avid
Sportswear & Golf Corp. Mr. Jakovac graduated with a Bachelor of Science from
Edinboro University and completed the Executive Extended Master Program in
Business Administration, University of Pittsburgh.
54
Mr. Jakovac's Prior Five Year History: 2004 - Present, Chairman & COO,
Paradigm Holdings, Inc.
1998 - 2001, President & CEO,
Adriatic Ventures, Inc.
Richard Sawchak, Vice President and Chief Financial Officer - Mr. Sawchak has
extensive experience in financial management, corporate financing and executing
and integrating acquisitions in a public company environment. From September
2003 to September 2005, he served as Director of Global Financial Planning &
Analysis at GXS, Inc. At GXS, he was responsible for managing a global finance
organization focused on improving business performance. From August 2000 to
August 2003, he was the Director of Finance and Investor Relations at Multilink
Technology Corporation. He was instrumental in the company's successful IPO and
eventual sale at a premium. Mr. Sawchak has also held senior management
positions at Lucent Technologies, Inc. and graduated in the top of his class
from Lucent's financial leadership program. He holds a Master's Degree from
Babson College and a Bachelor's Degree in Finance from Boston College, where he
graduated Summa Cum Laude.
Mr. Sawchak's Prior Five Year History: 2005 - Present, Vic President &
Chief Financial Officer,
Paradigm Holdings, Inc.
2003 - 2005, Director of Global
Financial Planning & Analysis,
GXS, Inc.
2000 - 2003, Director of Finance
and Investor Relations,
Multilink Technology Corporation
Francis X. Ryan, Board Member - Mr. Ryan has over twenty years experience in
managing public companies at the Executive level. Currently he is President of
F. X. Ryan & Assoc. Management Consulting firm specializing in turnarounds,
workouts, crisis management, strategic planning, and working capital management.
He has extensive experience in business process redesign. Prior to joining the
Paradigm Holdings Inc. board, Mr. Ryan was the Central Command Special
Operations Officer for Operation Enduring Freedom. Mr. Ryan has also been
assigned to SOCCENT and served in Afghanistan. Mr. Ryan is a highly regarded
expert speaker in the fields of Corporate Governance and Sarbanes-Oxley
regulations. Mr. Ryan has held positions as Chief Operating Officer and
Executive Vice President, and Chief Financial Officer for manufacturers and high
technology companies. Mr. Ryan currently serves as a board member for the
following organizations: St. Agnes Hospital, Baltimore, MD; Good Shepherd
Center, Baltimore, MD, and Fawn Industries. Mr. Ryan received his M. B. A.
Finance, from the University of Maryland, and holds a B.S. in Economics from Mt.
St. Mary's College, where he graduated summa cum laude. Mr. Ryan also holds a C.
P. A. from the State of Pennsylvania.
Mr. Ryan's Prior Five Year History: 1991 - Present,
President, F.X. Ryan & Associates
John A. Moore, Board Member - Mr. Moore has more than 30 years experience in
public company management for information technology firms. He is the former
Executive Vice President and CFO of ManTech International and was directly
involved in taking ManTech public in 2002 as well as facilitating a secondary
offering. Mr. Moore has extensive experience in strategic planning, corporate
compliance, proposal preparation and pricing and SEC reporting. He has a deep
knowledge of federal government contracting and financial management. Mr. Moore
has served on the Boards of Directors for ManTech International (MANT) and GSE
Systems Inc. (GVP). Mr. Moore is a current member of the Board of Advisors for
the University of Maryland's Smith School. Mr. Moore has an MBA from the
University of Maryland and a B.S. in accounting from LaSalle University.
Mr. Moore's Prior Five Year History: 1994 - 2003, EVP & CFO ManTech
International Corporation
55
Edwin Mac Avery, Board Member - Mr. Avery has 30 years of diverse experience in
leading organizations through every lifecycle phase: form start-up to change and
revitalization, to turnaround and accelerated growth. His background includes
expertise in business development, finance, capital management and regulatory
issues. As the Managing Partner of Avery and Company, a client services firm
specializing in project design, management, funding and mergers and acquisitions
in the energy and technology sectors, he directed minerals leasing of over
50,000 acres of land in seven western states. Mr. Avery initiated or
participated in oil and gas operations in six states with over 50 wells drilled.
He also represented US energy companies, from small area operators to majors, in
over $40 million of divestitures, and mergers and acquisitions activities. Mr.
Avery has served as a corporate member on the Boards of Directors of the
following corporations: TangibleData Inc., Duplication Technology Inc., Horizon
Petroleum Corporation, Pioneer Resources, Inc. and Lincoln Investment
Corporation.
Mr. Avery's Prior Five Year History: 2002- 2004, Assistant to Vice
Chancellor, University of
Colorado
1999 - 2001, Corporate
Development Officer,
TangibleData, Inc.
1991 - 1999, Managing
Partner, Avery & Company
Mark Serway resigned from the Company effective August 15, 2005.
Family Relationships
There are no family relationships between any of our officers or directors.
Directors
Our Board of Directors consists of seven (7) seats, of which, 5 have been filled
as of January 12, 2006. Directors serve for a term of one year and stand for
election at our annual meeting of stockholders. Pursuant to our Bylaws, a
majority of directors may appoint a successor to fill any vacancy on the Board
of Directors.
Term of Office
Our directors hold office until the next annual meeting of the shareholders and
until their successors have been elected and qualified. Our officers hold office
until their death, or until they shall resign or have been removed from office.
Committees of The Board Of Directors
Currently, we have an Audit Committee and Compensation Committee. Our Audit
Committee consists of Mr. Francis X. Ryan, Mr. John Moore and Mr. Mac Avery,
with Mr. Ryan serving as Chairman of the Audit Committee. Our Compensation
Committee consists of Mr. Francis X. Ryan, Mr. John Moore and Mr. Mac Avery,
with Mr. Moore serving as the Chairman of the Compensation Committee.
Audit Committee Financial Expert
Mr. Francis X. Ryan is our Audit Committee financial expert.
Code of Ethics
We adopted a Code of Ethics applicable to our Chief Executive Officer, Chief
Financial Officer, Corporate Controller and certain other finance executives,
which is a "code of ethics" as defined by applicable rules of the SEC. Our Code
of Ethics is attached to the accompanying registration statement. If we make any
amendments to our Code of Ethics other than technical, administrative, or other
non-substantive amendments, or grant any waivers, including implicit waivers,
from a provision of our Code of Ethics to our Chief Executive Officer, Chief
Financial Officer, or certain other finance executives, we will disclose the
nature of the amendment or waiver, its effective date and to whom it applies in
a Current Report on Form 8-K filed with the SEC.
56
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Exchange Act of 1934 requires our executive officers and
directors, and persons who beneficially own more than ten percent of our equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and greater than ten
percent shareholders are required by SEC regulation to furnish us with copies of
all Section 16(a) forms they file. Based on information provided to Paradigm
Holdings, we believe that all of the Company's directors, executive officers and
persons who own more than 10% of our common stock were in compliance with
Section 16(a) of the Exchange act of 1934 during the last fiscal year, except as
follows: Form 3's for Messrs. Huger, Jakovac, Ryan, Serway, Moore and Avery were
not timely filed.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows all the cash compensation paid by Paradigm Holdings,
as well as certain other compensation paid or accrued, during the fiscal years
ended December 31, 2005, 2004, 2003 and 2002 to Paradigm Holdings' named
executive officers. No restricted stock awards, long-term incentive plan payouts
or other types of compensation, other than the compensation identified in the
chart below, were paid to these executive officers during these fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
--------------------------------------------------------------------------------
Other All
Annual Restricted Option LTIP Other
Compen- Stock #/* Payouts Compen-
Name Title Year Salary Bonus sation Awarded SARs (#) ($) sation
- ------------------------------------------------------------------------------------------------------------------------------------
Raymond Huger Chief Executive Officer 2005 $430,907 $ 20,188 $17,185 -- -- -- --
Chairman of the Board of 2004 $384,243 $231,679 -- -- -- -- --
Directors 2003 $250,193 $405,476 -- -- -- -- --
2002 $219,702 $345,093 -- -- -- -- --
Frank Jakovac(1) President, 2005 $394,465 $ 17,813 $ 6,204 -- 800,000 -- --
Chief Operating Officer 2004 $181,365 $ -- -- -- -- -- --
and Director 2003 $ -- $ -- -- -- -- -- --
2002 $ -- $ -- -- -- -- -- --
Rich Sawchak(4) Vice President, 2005 $ 51,503 $ -- -- -- 200,000 -- --
Chief Financial Officer 2004 $ -- $ -- -- -- -- -- --
2003 $ -- $ -- -- -- -- -- --
2002 $ -- $ -- -- -- -- -- --
Mark Serway(2) Former Senior Vice President, 2005 $362,868 $ 40,500 $ 4,913 -- -- -- --
Chief Financial Officer 2004 $196,150 $ 39,700 -- -- -- -- --
and Director 2003 $ 43,578 $ 5,600 -- -- -- -- --
2002 $ -- $ -- -- -- -- -- --
Harry M. Kaneshiro Executive Vice President, 2005 $349,947 $ 16,625 $14,527 -- 100,000 -- --
Paradigm Solutions Corp. 2004 $403,367 $181,995 -- -- -- -- --
2003 $500,913 $309,589 -- -- -- -- --
2002 $422,764 $270,090 -- -- -- -- --
Samar Ghadry(3) Former Senior Vice President, 2005 $328,077 $ -- $11,444 -- -- -- --
Paradigm Solutions Corp. 2004 $497,929 $104,693 -- -- -- -- --
2003 $672,933 $136,802 -- -- -- -- --
2002 $571,123 $119,307 -- -- -- -- --
(1) Frank Jakovac was hired on May 11, 2004.
(2) Mark Serway resigned from the Company effective August 15, 2005.
(3) Samar Ghadry's employment with Paradigm Solutions Corporation ended
effective as of April 1, 2005.
(4) Richard Sawchak was hired on September 19, 2005
57
The following table contains information regarding options granted during the
year ended December 31, 2005 to Paradigm Holdings' named executive officer.
OPTION/SAR GRANTS TABLE
% Total
Options/SARs Potential
Granted to Realized Value at
No. of Employees in Assumed Annual
Securities year ended Rates of Stock Price
Underlying December 31 Exercise or Appreciation
Options/SARs 2005 Base Price Expiration for Option Term
Name Title Granted (#) (%) ($ per Share) Date 5%($) 10%($)
- ------------------ ---------------------------- ------------ ------------- ------------- ---------- ---------- ----------
Raymond Huger Chief Executive Officer, -- -- -- -- -- --
and Chairman of the Board
of Directors
Frank Jakovac President, 800,000 37.7% $1.70 12/14/15 $ 855,297 $2,167,490
Chief Operating Officer
and Director
Richard Sawchak Vice President, 200,000 9.4% $1.70 12/14/15 $ 213,824 $ 541,872
Chief Financial Officer
Mark Serway(1) Former Senior Vice -- -- -- -- -- --
President, Chief Financial
Officer and Director
Harry M. Kaneshiro Executive Vice President 100,000 4.7% $1.70 12/14/15 $ 106,912 $ 270,936
Paradigm Solutions Corp.
Samar Ghadry(2) Former Senior Vice President -- -- -- -- -- --
Paradigm Solutions Corp.
(1) Mark Serway resigned from the Company effective August 15, 2005.
(2) Samar Ghadry's employment with Paradigm Solutions Corporation ended
effective as of April 1, 2005.
58
The following table contains information regarding options exercised in the year
ended December 31, 2005, and the number of shares of common stock underlying
options held as of December 31, 2005, by Paradigm Holdings' named executive
officer.
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTIONS/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired at FY-End at FY-End
on Value -------------------------- --------------------------
Exercise Realized (#) ($)
-------- -------- ----------- ------------- ----------- -------------
Name Title (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------------------- -------- -------- ----------- ------------- ----------- -------------
Raymond Huger Chief Executive Officer, -- -- -- -- -- --
Chairman of the
Board of Directors
Frank Jakovac President, -- -- -- 800,000 -- $160,000
Chief Operating
Officer And Director
Richard Sawchak Vice President -- -- -- 200,000 -- $ 40,000
Chief Financial
Officer
Mark Serway(1) Former Senior Vice -- -- -- -- -- --
President, Chief
Financial Officer
and Director
Harry M. Kaneshiro Executive Vice -- -- -- 100,000 -- $ 20,000
President
Paradigm Solutions
Corp.
Samar Ghadry(2) Former Senior -- -- -- -- -- --
Vice President
Paradigm Solutions
Corp.
(1) Mark Serway resigned from the Company effective August 15, 2005.
(2) Samar Ghadry's employment with Paradigm Solutions Corporation ended
effective as of April 1, 2005.
Stock Option Grants In The Past Fiscal Year
Effective as of December 15, 2005, the Board of Directors of Paradigm Holdings,
Inc., a Wyoming corporation (the "Company") granted options (the "Options") to
acquire shares of the Company's common stock, par value $0.01 per share to the
below listed individuals. The options were vested as of December 15, 2005, have
an exercise price equal to $1.70 per share, and expire on December 14, 2015. The
Options shall not be exercisable unless a registration statement with respect to
the Options is effective or Paradigm Holdings has determined that such
registration is unnecessary. The Options are not intended to be incentive stock
Options under Section 422 of the Internal Revenue Code of 1986, as amended and
will be interpreted accordingly.
NAME TITLE OPTIONS
- --------------------- ----------------------------------------------- ----------
Francis Ryan Director 40,000
John Moore Director 40,000
Edwin Avery Director 40,000
Frank Jakovac President, Chief Operating Officer and Director 800,000
Richard Sawchak Chief Financial Officer 200,000
Harry Kaneshiro Executive Vice-President 100,000
Stephen Murray Senior Vice-President 100,000
Robert Valli Vice-President, Business Development 75,000
Russell Blackwell Vice-President, Product and Professional Services 75,000
Lori Ermi Vice-President 75,000
In addition, the Company granted an aggregate of 577,000 Options to 34 other
employees of the Company.
59
Employment Arrangements
Effective November 4, 2004, Raymond Huger and Paradigm Holdings entered into an
Employment Agreement. Pursuant to the agreement, Mr. Huger serves as Chief
Executive Officer. The agreement has a term of three years and is renewable for
additional terms of one (1) year unless either party provides the other with
notice at least ninety (90) days prior to the date the employment term would
otherwise renew. Paradigm Holdings can terminate the agreement at any time on or
after November 4, 2004, by providing at least thirty (30) days' advance written
notice to Mr. Huger. In the event that Paradigm Holdings terminates the
agreement, other than in connection with a change of control of Paradigm
Holdings and other than for cause, Paradigm Holdings shall, not withstanding
such termination, in consideration for all the undertakings and covenants of Mr.
Huger contained in the Employment Agreement, continue to pay Mr. Huger's base
salary and benefits for a period that is the greater of: (i) the remainder of
the initial employment term or (ii) twelve (12) months from the date of
termination. In addition, in the event Paradigm Holdings terminates the
agreement, other than in connection with a change of control or for cause, any
and all options granted to Mr. Huger will become automatically and immediately
vested and exercisable. Under the agreement, Mr. Huger receives $395,200 in
annual salary and is entitled to participate in any health insurance, accident
insurance, hospitalization insurance, life insurance, pension, or any other
similar plan or benefit provided by Paradigm Holdings to its executives or
employees generally, including any stock option plan. Paradigm Holdings may
terminate the Employment Agreement at any time on or after November 4, 2004, by
providing at least thirty (30) days written notice to Mr. Huger.
Effective November 4, 2004, Frank Jakovac and Paradigm Holdings entered into an
Employment Agreement. Pursuant to the agreement, Mr. Jakovac serves as Chief
Operating Officer. The agreement has a term of three years and is renewable for
additional terms of one (1) year unless either party provides the other with
notice at least ninety (90) days prior to the date the employment term would
otherwise renew. Paradigm Holdings can terminate the agreement at any time on or
after November 4, 2004, by providing at least thirty (30) days' advance written
notice to Mr. Jakovac. In the event that Paradigm Holdings terminates the
agreement, other than in connection with a change of control of Paradigm
Holdings and other than for cause, Paradigm Holdings shall, not withstanding
such termination, in consideration for all the undertakings and covenants of Mr.
Jakovac contained in the Employment Agreement, continue to pay Mr. Jakovac's
base salary and benefits for a period that is the greater of: (i) the remainder
of the initial employment term or (ii) twelve (12) months from the date of
termination. In addition, in the event Paradigm Holdings terminates the
agreement, other than in connection with a change of control or for cause, any
and all options granted to Mr. Jakovac will become automatically and immediately
vested and exercisable. Under the agreement, Mr. Jakovac receives $365,250 in
annual salary and is entitled to participate in any health insurance, accident
insurance, hospitalization insurance, life insurance, pension, or any other
similar plan or benefit provided by Paradigm Holdings to its executives or
employees generally, including any stock option plan.
Effective November 4, 2004, Mark Serway and Paradigm Holdings entered into an
Employment Agreement. Pursuant to the agreement, Mr. Serway serves as Chief
Financial Officer. The agreement has a term of three years and is renewable for
additional terms of one (1) year unless either party provides the other with
notice at least ninety (90) days prior to the date the employment term would
otherwise renew. Paradigm Holdings can terminate the agreement at any time on or
after November 4, 2004, by providing at least thirty (30) days' advance written
notice to Mr. Serway. In the event that Paradigm Holdings terminates the
agreement, other than in connection with a change of control of Paradigm
Holdings and other than for cause, Paradigm Holdings shall, not withstanding
such termination, in consideration for all the undertakings and covenants of Mr.
Serway contained in the Employment Agreement, continue to pay Mr. Serway's base
salary and benefits for a period that is the greater of: (i) the remainder of
the initial employment term or (ii) twelve (12) months from the date of
termination. In addition, in the event Paradigm Holdings terminates the
agreement, other than in connection with a change of control or for cause, any
and all options granted to Mr. Serway will become automatically and immediately
vested and exercisable. Under the agreement, Mr. Serway receives $315,175 in
annual salary and is entitled to participate in any health insurance, accident
insurance, hospitalization insurance, life insurance, pension, or any other
similar plan or benefit provided by Paradigm Holdings to its executives or
employees generally, including any stock option plan.
Mark Serway resigned from the Company effective August 15, 2005.
On September 28, 2005, Mr. Sawchak and Paradigm Holdings entered into an
Employment Agreement with an effective date of September 19, 2005. The agreement
has a term of two years and is renewable for additional terms of one (1) year
unless either party provides the other with notice at least ninety (90) days
prior to the date the employment term would otherwise renew. Paradigm Holdings
can terminate the agreement by providing at least thirty (30) days' advance
written notice to Mr. Sawchak. In the event that Paradigm Holdings terminates
the agreement, other than in connection with a change of control of Paradigm
Holdings and other than for cause, Paradigm Holdings is obligated to continue to
pay Mr. Sawchak's base salary and benefits for a period that is the greater of:
(i) the remainder of the initial employment term or (ii) twelve (12) months from
the date of termination. In addition, in the event Paradigm Holdings terminates
the agreement, other than in connection with a change of control or for cause,
any and all options granted to Mr. Sawchak will become automatically and
immediately vested and exercisable. Under the agreement, Mr. Sawchak receives
$200,000 in annual salary and is entitled to participate in any health
insurance, accident insurance, hospitalization insurance, life insurance,
pension, or any other similar plan or benefit provided by Paradigm Holdings to
its executives or employees generally, including any stock option plan.
60
Effective April 1, 2005, Samar Ghadry and Paradigm Solutions Corporation, a
wholly-owned subsidiary of Paradigm Holdings, entered into a Letter Agreement
pursuant to which Ms. Ghadry and Paradigm Solutions Corporation agreed and
acknowledged that Ms. Ghadry's employment with Paradigm Solutions Corporation
ended effective April 1, 2005. Pursuant to the terms of the Letter Agreement,
Paradigm Solutions Corporation agreed to pay Ms. Ghadry severance pay in an
amount equal to Ms. Ghadry's base pay for nine months in accordance with
Paradigm Solutions Corporation's normal payroll practices. Paradigm Solutions
Corporation agreed to pay Ms. Ghadry a bonus for the first quarter of 2005 equal
to $20,250. In addition, Paradigm Holdings agreed to register 1,575,000 shares
of commons tock owned by Ms. Ghadry in the accompanying registration statement.
Further, Ms. Ghadry agreed that she will not, except with the prior written
approval of Paradigm Holdings, engage in a disposition with respect to 100% of
these shares until the earlier to occur of: (i) the date of the closing of a
financing through the sale of debt or equity securities in which Paradigm
Holdings receives in one or a series of transactions gross proceeds in an amount
equal to at least $3 million or (ii) September 30, 2005. Ms. Ghadry also agreed
that, when she is able to sell her shares of common stock, that she will not
sell more than 2,000 shares in any single business day; however, in the event
the average daily volume of the shares of Paradigm Holdings' common stock
exceeds 10,000 shares for a period of 5 consecutive business days, Ms. Ghadry
may sell up to an aggregate of 4,000 shares per day, commencing on the first
business day thereafter and continuing so long as the average 5-day daily volume
continues to exceed 10,000 shares. Ms. Ghadry and Paradigm Holdings agreed that,
to the extent allowed by law and with the express written approval of the
President and Chief Operating Officer of Paradigm Holdings, Ms. Ghadry may sell
her shares to a bona fide purchaser in a private placement provided such
purchaser agrees to be subject to the terms of the Letter Agreement. Ms. Ghadry
was not employed by Paradigm Solutions Corporation pursuant to a written
employment agreement.
Other Employment Arrangements
On October 12, 2005, Thomas J. Kristofco and Paradigm Solutions International, a
wholly owned subsidiary of Paradigm Holdings, entered into an Employment
Agreement with an effective date of October 16, 2005. The agreement has a term
of three years and is renewable for additional terms of one (1) year unless
either party provides the other with notice at least ninety (90) days prior to
the date the employment term would otherwise renew. Paradigm Solutions
International can terminate the agreement by providing at least thirty (30)
days' advance written notice to Mr. Kristofco. In the event that Paradigm
Solutions International terminates the agreement, other than in connection with
a change of control of Paradigm Solutions International and other than for
cause, Paradigm Solutions International is obligated to continue to pay Mr.
Kristofco's base salary and benefits for a period that is the greater of: (i)
the remainder of the initial employment term or (ii) twelve (12) months from the
date of termination. In addition, in the event Paradigm Solutions International
terminates the agreement, other than in connection with a change of control or
for cause, any and all options granted to Mr. Kristofco will become
automatically and immediately vested and exercisable. Under the agreement, Mr.
Kristofco shall receive an annual salary of $200,000 for the period of October
16, 2005 through October 15, 2006, $220,000 for the period of October 16, 2006
through October 15, 2007, and $242,000 for the period of October 16, 2007
through October 15, 2008. Mr. Kristofco is entitled to participate in any health
insurance, accident insurance, hospitalization insurance, life insurance,
pension, or any other similar plan or benefit provided by Paradigm Solutions
International to its executives or employees generally, including any stock
option plan. Mr. Kristofco is eligible for bonus compensation as a result of the
business unit's operations. Mr. Kristofco shall receive a pool of money equal to
one fourth of the amount, if any, by which the business unit's EBITDA exceed the
budgeted amounts of EBITDA for each of the three, 12 month periods ended on
October 31, 2008. The three measurement periods and their respective EBITDA
budgeted amounts are $600,000 for the period November 1, 2005 through October
31, 2006, $750,000 for the period November 1, 2006 through October 31, 2007 and
$900,000 for the period November 1, 2007 through October 31, 2008. Such bonus
compensation pool will be divided among those of the three former principals of
Blair Technology Group then employed by the Company in proportion to their
respective individual base salary in relation to total combined base salary of
all such principals who are then still employed by the Company at the end of the
respective measurement period; provided, however, that if Mr. Kristofco is not
employed by the Company at the end of the applicable measurement period, he
shall share in the bonus pool, on a pro rata basis based on the portion of the
measurement period that he was so employed, unless he was terminated for cause
or voluntarily resigned without good reason, in either of which events he shall
not share in the bonus pool.
61
On October 12, 2005, Robert J. Duffy and Paradigm Solutions International, a
wholly owned subsidiary of Paradigm Holdings, entered into an Employment
Agreement with an effective date of October 16, 2005. The agreement has a term
of three years and is renewable for additional terms of one (1) year unless
either party provides the other with notice at least ninety (90) days prior to
the date the employment term would otherwise renew. Paradigm Solutions
International can terminate the agreement by providing at least thirty (30)
days' advance written notice to Mr. Duffy. In the event that Paradigm Solutions
International terminates the agreement, other than in connection with a change
of control of Paradigm Solutions International and other than for cause,
Paradigm Solutions International is obligated to continue to pay Mr. Duffy's
base salary and benefits for a period that is the greater of: (i) the remainder
of the initial employment term or (ii) twelve (12) months from the date of
termination. In addition, in the event Paradigm Solutions International
terminates the agreement, other than in connection with a change of control or
for cause, any and all options granted to Mr. Duffy will become automatically
and immediately vested and exercisable. Under the agreement, Mr. Duffy shall
receive an annual salary of $180,000 for the period of October 16, 2005 through
October 15, 2006, $198,000 for the period of October 16, 2006 through October
15, 2007, and $218,000 for the period of October 16, 2007 through October 15,
2008. Mr. Duffy is entitled to participate in any health insurance, accident
insurance, hospitalization insurance, life insurance, pension, or any other
similar plan or benefit provided by Paradigm Solutions International to its
executives or employees generally, including any stock option plan. Mr. Duffy is
eligible for bonus compensation as a result of the business unit's operations.
Mr. Duffy shall receive a pool of money equal to one fourth of the amount, if
any, by which the business unit's EBITDA exceed the budgeted amounts of EBITDA
for each of the three, 12 month periods ended on October 31, 2008. The three
measurement periods and their respective EBITDA budgeted amounts are $600,000
for the period November 1, 2005 through October 31, 2006, $750,000 for the
period November 1, 2006 through October 31, 2007 and $900,000 for the period
November 1, 2007 through October 31, 2008. Such bonus compensation pool will be
divided among those of the three former principals of Blair Technology Group
then employed by the Company in proportion to their respective individual base
salary in relation to total combined base salary of all such principals who are
then still employed by the Company at the end of the respective measurement
period; provided, however, that if Mr. Duffy is not employed by the Company at
the end of the applicable measurement period, he shall share in the bonus pool,
on a pro rata basis based on the portion of the measurement period that he was
so employed, unless he was terminated for cause or voluntarily resigned without
good reason, in either of which events he shall not share in the bonus pool.
On October 12, 2005, Stephen M. Fochler and Paradigm Solutions International, a
wholly owned subsidiary of Paradigm Holdings, entered into an Employment
Agreement with an effective date of October 16, 2005. The agreement has a term
of three years and is renewable for additional terms of one (1) year unless
either party provides the other with notice at least ninety (90) days prior to
the date the employment term would otherwise renew. Paradigm Solutions
International can terminate the agreement by providing at least thirty (30)
days' advance written notice to Mr. Fochler. In the event that Paradigm
Solutions International terminates the agreement, other than in connection with
a change of control of Paradigm Solutions International and other than for
cause, Paradigm Solutions International is obligated to continue to pay Mr.
Fochler's base salary and benefits for a period that is the greater of: (i) the
remainder of the initial employment term or (ii) twelve (12) months from the
date of termination. In addition, in the event Paradigm Solutions International
terminates the agreement, other than in connection with a change of control or
for cause, any and all options granted to Mr. Sawchak will become automatically
and immediately vested and exercisable. Under the agreement, Mr. Fochler shall
receive an annual salary of $120,000 for the period of October 16, 2005 through
October 15, 2006, $132,000 for the period of October 16, 2006 through October
15, 2007, and $145,000 for the period of October 16, 2007 through October 15,
2008. Mr. Fochler is entitled to participate in any health insurance, accident
insurance, hospitalization insurance, life insurance, pension, or any other
similar plan or benefit provided by Paradigm Solutions International to its
executives or employees generally, including any stock option plan. Mr. Fochler
is eligible for bonus compensation as a result of the business unit's
operations. Mr. Fochler shall receive a pool of money equal to one fourth of the
amount, if any, by which the business unit's EBITDA exceed the budgeted amounts
of EBITDA for each of the three, 12 month periods ended on October 31, 2008. The
three measurement periods and their respective EBITDA budgeted amounts are
$600,000 for the period November 1, 2005 through October 31, 2006, $750,000 for
the period November 1, 2006 through October 31, 2007 and $900,000 for the period
November 1, 2007 through October 31, 2008. Such bonus compensation pool will be
divided among those of the three former principals of Blair Technology Group
then employed by the Company in proportion to their respective individual base
salary in relation to total combined base salary of all such principals who are
then still employed by the Company at the end of the respective measurement
period; provided, however, that if Mr. Fochler is not employed by the Company at
the end of the applicable measurement period, he shall share in the bonus pool,
on a pro rata basis based on the portion of the measurement period that he was
so employed, unless he was terminated for cause or voluntarily resigned without
good reason, in either of which events he shall not share in the bonus pool.
62
DESCRIPTION OF PROPERTY
Our principal Paradigm offices are located at three locations: Our PDHO and PSC
headquarters' location are at 2600 Tower Oaks Boulevard, Suite 500, Rockville,
Maryland 20852. This principal office consists of 14,318 square feet, with a
monthly lease cost of $33,409 and is leased until May 31, 2011. Our client
office, which is in support of our HUD customer, is located at: 15th and H
Streets, N.W., Washington, DC 20005. This principal office consists of 16,364
square feet, with a monthly lease cost of $35,210 and is leased until June 30,
2007. The third office location, which is our PSI headquarters, is at 6110
Executive Boulevard, Suite 508, Rockville, Maryland, 20852, with a monthly lease
cost of $4,611 and is leased until July 31, 2006.
63
LEGAL PROCEEDINGS
Paradigm is involved in litigation, both potential and actual, arising from a
contractual agreement between Paradigm and Norvergence, Inc. Paradigm entered
into an agreement with Norvergence for the provision of telecommunication
equipment and services in June, 2003. Under the agreement, Norvergence promised
to supply all of Paradigm's telecommunication needs for a period of 60 months
for the sum of $2,152 per month. Soon after executing the agreement with
Paradigm, Norvergence sold a portion of the rights to those payments to a third
party, CIT Technology Financial Services, Inc. ("CIT"). In July, 2004,
Norvergence was forced into bankruptcy by its creditors and, soon thereafter,
Paradigm's telecommunication services provided under the Norvergence agreement
were terminated. Paradigm has taken the position that Norvergence utilized fraud
and deception to obtain the agreement from Paradigm and has ceased paying either
Norvergence or CIT.
Paradigm has filed an unsecured claim in the Norvergence bankruptcy in the
amount of $314,573 plus interest and attorney's fees. The claim is based upon
claims under the N.J.S.A. 56:8-1 et. seq. (which provides for treble damages),
common law fraud and breach of contract. At this juncture of the bankruptcy
proceeding, it seems unlikely that Paradigm will recover a significant portion
of its claim or any interest or attorney's fees. Paradigm also has potential
exposure to a lawsuit from CIT. Paradigm has calculated that it may be liable to
CIT for the sum of $59,300 plus interest and attorney's under the agreement
assigned to CIT by Norvergence. CIT has not yet sued Paradigm, but has
threatened to do so. Paradigm intends to vigorously contest any suit against it
by CIT. This potential liability was accrued for in 2004.
On May 27, 2005, the company received a settlement letter from the CIT Group
concerning this matter which is a fully executed release from this liability in
the amount of $3,948. On June 24, 2005, the company finalized this settlement
with CIT in the amount of $3,948.
64
PRINCIPAL SHAREHOLDERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information about the beneficial ownership of our
common stock as of January 12, 2006, by (i) each person who we know is the
beneficial owner of more than 5% of the outstanding shares of common stock (ii)
each of our directors or those nominated to be directors, and executive
officers, and (iii) all of our directors and executive officers as a group.
Amount and Nature
Name and Address of Beneficial Percentage
Title of Class of Beneficial Owner Ownership of Common Stock(1)
- -------------- ---------------------------------- ----------------- ------------------
Common Stock Raymond Huger 12,775,000 62.31%
2600 Tower Oaks Blvd.
Suite 500
Rockville, Maryland 20852
Common Stock Harry Kaneshiro 3,150,000 15.36%
2600 Tower Oaks Blvd.
Suite 500
Rockville, Maryland 20852
Common Stock Frank Jakovac 0 0%
2600 Tower Oaks Blvd.
Suite 500
Rockville, Maryland 20852
Common Stock Francis Ryan 0 0%
2600 Tower Oaks Blvd.
Suite 500
Rockville, Maryland 20852
Common Stock John Moore 0 0%
2600 Tower Oaks Blvd.
Suite 500
Rockville, Maryland 20852
Common Stock Edwin MacAvery 0 0%
2600 Tower Oaks Blvd.
Suite 500
Rockville, Maryland 20852
Common Stock All Directors and Executive
Officers as a Group (Five Persons) 17,500,000 77.67%
Common Stock Samar Ghadry 1,575,000 7.68%
2600 Tower Oaks Blvd.
Suite 500
Rockville, Maryland 20852
Common Stock Shortline Equity Partners, Inc. 500,000 2.44%
8400 East Prentice Avenue
Penthouse, Suite 1500
Greenwood Village, CO 80111
Common Stock J.P. Consulting 1,054,411 5.14%
6590 East Lake Place
Centennial, CO 80111
Common Stock Ultimate Investments Corp. 607,939 2.97%
8400 East Prentice Avenue
Penthouse, Suite 1500
Greenwood Village, CO 80111
Ultimate Investments Corp. and
Shortline Equity Partners, Inc.
together own 5.41%
65
(1) Applicable percentage of ownership is based on 20,503,368 shares of common
stock outstanding as of January 12, 2006 together with securities exercisable or
convertible into shares of common stock within 60 days of January 12, 2006 for
each stockholder. Beneficial ownership is determined in accordance with the
rules of the SEC and generally includes voting or investment power with respect
to securities. Shares of common stock subject to securities exercisable or
convertible into shares of common stock that are currently exercisable or
exercisable within 60 days of January 12, 2006 are deemed to be beneficially
owned by the person holding such options for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person.
J. Paul Consulting, Shortline Equity Partners, Inc and Ultimate Investments
Corp. are considered to be statutory underwriters within the meaning of the
Securities Act of 1933 in connection with the sale of their shares.
66
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
67
MARKET PRICE OF AND DIVIDENDS
ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
Our common stock has been listed on the Over-the-Counter Bulletin Board
sponsored by the National Association of Securities Dealers, Inc., maintained by
NASDAQ, under the symbol "PDHO" since September 14, 2004, following our name
change and a 1 for 85 reverse stock split. The shares of Cheyenne Resources
traded on the OTC BB under the symbol "CHYN" from January 2002 to July 2004. The
following table contains the reported high and low bid prices for the common
stock as reported on the OTC BB for the periods indicated.
The following table sets forth the high and low bid prices for the common stock
as reported on the Over-the-Counter Bulletin Board, maintained by NASDAQ, for
each quarter since January 2002 for the periods indicated. Such information
reflects inter dealer prices without retail mark-up, mark down or commissions
and may not represent actual transactions.
The following table sets forth, for the period indicated, the bid price range of
our common stock.
YEAR 2002 High Bid Low Bid
- ----------------------------------------------- -------- -------
Quarter Ended March 31, 2002 $ 0.015 $0.0100
Quarter Ended June 30, 2002 $ 0.016 $0.0071
Quarter Ended September 30, 2002 $ 0.025 $0.0070
Quarter Ended December 31, 2002 $ 0.007 $0.0005
YEAR 2003 High Bid Low Bid
- ----------------------------------------------- -------- -------
Quarter Ended March 31, 2003 $ 0.005 $0.0010
Quarter Ended June 30, 2003 $ 0.010 $0.0050
Quarter Ended September 30, 2003 $ 0.010 $0.0020
Quarter Ended December 31, 2003 $ 0.005 $0.0020
YEAR 2004 High Bid Low Bid
- ----------------------------------------------- -------- -------
Quarter Ended March 31, 2004 $ 0.021 $0.0050
Quarter Ended June 30, 2004 $ 0.012 $0.0070
Quarter Ended September 30, 2004 $ 0.035 $0.0060
Quarter Ended December 31, 2004 $ 05.00 $0.3500
On January 12, 2006, the closing price of our common stock as reported on the
Over-the-Counter Bulletin Board, maintained by NASDAQ, was $1.90 per share. As
of January 12, 2006, we had approximately 2,800 holders of common stock and
20,503,368 shares of our common stock were issued and outstanding. Many of our
shares are held in brokers' accounts, so we are unable to give an accurate
statement of the number of shareholders.
Dividends
We have not paid any dividends on our common stock and do not anticipate paying
any cash dividends in the foreseeable future. We intend to retain any earnings
to finance the growth of the business. We cannot assure you that we will ever
pay cash dividends. Whether we pay any cash dividends in the future will depend
on the financial condition, results of operations and other factors that the
Board of Directors will consider.
68
Recent Sales Of Unregistered Securities
J. Paul Consulting Corporation, Shortline Equity Partners Inc. and Ultimate
Investments Corporation subscribed for 10,000,000 shares of Common Stock (post
reverse split of one for eighty-five) for $200,000 cash on August 27, 2004. The
transaction was exempt from registration pursuant to section 4(6) of the
Securities Act of 1933.
Effective as of December 15, 2005, the Board of Directors of Paradigm Holdings,
Inc., a Wyoming corporation (the "Company") granted options (the "Options") to
acquire shares of the Company's common stock, par value $0.01 per share to the
below listed individuals. The options were vested as of December 15, 2005, have
an exercise price equal to $1.70 per share, and expire on December 14, 2015. The
Options shall not be exercisable unless a registration statement with respect to
the Options is effective or Paradigm Holdings has determined that such
registration is unnecessary. The Options are not intended to be incentive stock
Options under Section 422 of the Internal Revenue Code of 1986, as amended and
will be interpreted accordingly.
NAME TITLE OPTIONS
--------------------- ----------------------------------------------- ----------
Francis Ryan Director 40,000
John Moore Director 40,000
Edwin Avery Director 40,000
Frank Jakovac President, Chief Operating Officer and Director 800,000
Richard Sawchak Chief Financial Officer 200,000
Harry Kaneshiro Executive Vice-President 100,000
Stephen Murray Senior Vice-President 100,000
Robert Valli Vice-President, Business Development 75,000
Russell Blackwell Vice-President, Product and Professional Services 75,000
Lori Ermi Vice-President 75,000
In addition, the Company granted an aggregate of 577,000 Options to 34 other
employees of the Company.
Corporate Organization
On November 3, 2004, Paradigm Holdings, Inc., entered into an Agreement and Plan
of Reorganization with Paradigm Solutions Merger Corp., a Delaware corporation
and wholly-owned subsidiary of Paradigm Holdings (the "Merger Sub"), Paradigm
Solutions Corporation, a Maryland corporation and the shareholders of Paradigm
Solutions Corporation. Pursuant to the Agreement and Plan of Reorganization, the
Merger Sub was merged with and into Paradigm Solutions Corporation, the
surviving corporation and continues its existence under the laws of the State of
Maryland and is a wholly-owned subsidiary of Paradigm Holdings, Inc. In
consideration of the Merger, the Paradigm Solutions Corporation shareholders
exchanged 13,699 shares of common stock of Paradigm Solutions Corporation, which
was 100% of the issued and outstanding capital stock of Paradigm Solutions
Corporation, for 17,500,000 shares of common stock of Paradigm Holdings Inc.
Cheyenne Resources, Inc. was incorporated under the laws of the State of Wyoming
on November 17, 1970. Cheyenne Resources, prior to the reverse merger with
Paradigm Solutions Merger Sub, operated principally in one industry segment, the
exploration for and sale of oil and gas.
Cheyenne Resources held oil and gas interests and was involved with producing
and selling oil, gas and other mineral substances. Cheyenne Resources did not
engage in refining or retail marketing operations; rather its activities had
been restricted to acquiring and disposing of mineral properties, and to
producing and selling oil and gas from its wells.
Prior Principal activities of Cheyenne Resources involved buying leases, filing
on federal and state open land leases as well as acquiring and trading of oil,
gas, and other mineral properties, primarily in the Rocky mountain area and
Oklahoma.
Cheyenne Resources' oil and gas activities included the acquisition of whole or
partial interests in oil and gas leases and the farming out or resale of all or
part of its interests in these leases. In connection with farmouts and resales,
Cheyenne Resources attempted to retain an overriding royalty or a working or
carried interest.
In 1999, Cheyenne Resources entered into a memorandum of understanding to obtain
a 25% interest in Cayenne Records, Inc., which has a 75% interest in NL Records
of Nashville, Tennessee. This transaction was rescinded in 2000 due to the
inability of the seller to produce records and data. No value was recorded in
the financial statements. Cheyenne Resources issued 11,473,711 shares of common
stock for this interest.
69
In 1999, Cheyenne Resources entered into an Agreement with Tiger Exploration to
acquire the Dixie Gas Field and interests in the Stephens and Lick Creeds Fields
for 12,000,000 shares of common stock. Title and production data could not be
verified or produced, consequently, no value of assets could be carried.
In June 2000, Cheyenne Resources rescinded its memorandum of understanding with
Cayenne Records, Inc. In June 2000, Cheyenne Resources also rescinded its
memorandums of understanding to acquire Dixie Gas Field and interests in
Stephens and Lick Creek Fields. No value was recorded in this financial
statement for these acquisitions. Of the 23,473,711 shares issued for the above
referenced transactions, all but 2,623,838 shares were returned.
In January 2004, Skye Blue Ventures, an entity beneficially owned by Mr. Dennis
Iler, purchased a controlling interest in Paradigm Holdings, formerly Cheyenne
Resources, Inc. Skye Blue Ventures purchased 2,350,000 shares of common stock of
Cheyenne Resources, Inc. from the former directors of Cheyenne Resources, Inc.
for $75,000 and purchased 23,000,000 shares of common stock directly from
Cheyenne Resources, Inc. for $50,000. Cheyenne Resources issued 21,300,000
shares out of the 23,000,000 as it only had 21,300,000 available under its
then-current authorized common stock. Mr. Iler, former President and a Director
of Cheyenne Resources, Inc. and the then-beneficial owner of Skye Blue Ventures,
brought Cheyenne Resources current in its securities filings, settled its
outstanding debt, and assisted in having the company listed on the
Over-the-Counter Bulletin Board. In August 2004, J. Paul Consulting, Shortline
Equity Investments and Ultimate Investments purchased Skye Blue Ventures'
ownership interest in Cheyenne Resources, Inc. and subscribed for an aggregate
of 10,000,000 shares of common stock of Cheyenne Resources, Inc. for $200,000.
With respect to the sale of unregistered securities referenced above, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 Act"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding Paradigm Holdings so as to make an informed investment decision. More
specifically, Paradigm Holdings had a reasonable basis to believe that each
purchaser was an "accredited investor" as defined in Regulation D of the 1933
Act and otherwise had the requisite sophistication to make an investment in
Paradigm Holdings' common stock.
On October 14, 2005, Paradigm Holdings, Inc., a Wyoming corporation ("Paradigm
Holdings"), Paradigm Solutions International, Inc., a Maryland corporation and
wholly-owned subsidiary of Paradigm Holdings ("PSI"), Blair Management Services,
Inc. t/d/b/a Blair Technology Group, a Pennsylvania corporation ("Blair") and
the shareholders of Blair (collectively, the "Shareholders") consummated a
merger transaction pursuant to the terms of that certain Merger Agreement (the
"Merger Agreement"), whereby Blair was merged with and into PSI. PSI is the
surviving corporation and will continue its corporate existence under the laws
of the State of Maryland as a wholly-owned subsidiary of Paradigm Holdings.
Pursuant to the Merger Agreement, the Shareholders exchanged all of the issued
and outstanding capital stock of Blair in exchange for (i) One Million Dollars
(US $1,000,000) and (ii) five hundred thousand shares of common stock, par value
$0.001 per share, of Paradigm Holdings (the "Shares"). Pursuant to the Merger
Agreement and an Escrow Agreement entered into by the parties, sixty thousand
(60,000) of the Shares will be held in escrow for a period of one (1) year from
the date of closing subject to the terms and conditions of the Merger Agreement.
In addition, under the terms of the Merger Agreement, Paradigm Holdings will
issue to the Shareholders up to an additional 350,000 shares of common stock of
Paradigm Holdings pursuant to an earn-out provision.
At the October 14, 2005 share price of $3.00, the transaction has a total
purchase price of $3,550,000 assuming all earn-out provisions are achieved.
Blair Technology Group was founded in 1992. The Company has provided business
continuity and information technology security solutions to over 300 commercial
customers in a variety of industries including finance, healthcare and energy.
The acquisition of Blair Technology Group allows Paradigm Holdings to combine
the OpsPlanner software suite with Blair's extensive credentials in the business
continuity arena. Paradigm Holdings can now offer our customers a comprehensive
business continuity solution. The acquisition also allows Paradigm Holdings to
expand its presence in the commercial marketplace. For the year ended December
31, 2004, Blair generated $4.6 million in revenue and $0.4 million in net
income.
At the closing of the merger, PSI entered into employment agreements with
Messrs. Kristofco, Duffy and Fochler.
70
DESCRIPTION OF SECURITIES
Common Stock
Our Articles of Incorporation authorize the issuance of 50,000,000 shares of
common stock, $0.01 par value per share. As of January 12, 2006, 20,503,368
Paradigm Holdings' shares of common stock were issued and outstanding. The
following description is a summary of the capital stock of Paradigm Holdings and
contains the material terms of the capital stock. Additional information can be
found in our Articles of Incorporation and Bylaws.
Each holder of our common stock is entitled to one vote per share of common
stock standing in such holder's name on our records on each matter submitted to
a vote of our stockholders, except as otherwise required by law. Holders of our
common stock do not have cumulative voting rights so that the holders of more
than 50% of the combined shares of our common stock voting for the election of
directors may elect all of the directors if they choose to do so and, in that
event, the holders of the remaining shares of our common stock will not be able
to elect any members to our board of directors. Holders of our common stock are
entitled to equal dividends and distributions, per share, when, as and if
declared by our board of directors from funds legally available. Holders of our
common stock do not have preemptive rights to subscribe for any of our
securities nor are any shares of our common stock redeemable or convertible into
any of our other securities. If we liquidate, dissolve or wind up our business
or affairs, our assets will be divided up pro-rata on a share-for-share basis
among the holders of our common stock after creditors and preferred
shareholders, if any, are paid.
As of January 12, 2006, the Company had 2.1 million options outstanding. The
options were vested as of December 15, 2005, have an exercise price equal to
$1.70 per share, and expire on December 14, 2015. The options shall not be
exercisable unless a registration statement with respect to the options is
effective or Paradigm Holdings has determined that such registration is
unnecessary.
Transfer Agent
The transfer agent for our common stock is Corporate Stock Transfer, Inc. in
Denver, Colorado and its telephone number is (303) 282-4800.
Disclosure of SEC Position on Indemnification for Securities Act Liabilities
Our Articles of Incorporation, as well as our By-Laws provide for the
indemnification of directors, officers, employees and agents of the corporation
to the fullest extent provided by the corporate laws of the State of Wyoming, as
well as are described in the Articles of Incorporation and the By-Laws. These
sections generally provide that the Company may indemnify any person who was or
is a party to any threatened, pending or completed action, suit or proceeding
whether civil, criminal, administrative or investigative except for an action by
or in right of the corporation by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation. Generally, no
indemnification may be made where the person has been determined to be negligent
or guilty of misconduct in the performance of his or her duties to the Company.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or controlling persons of Paradigm Holdings,
pursuant to the foregoing provisions, or otherwise, we have been advised that,
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Securities Act of 1933, and is,
therefore, unenforceable.
Anti-Takeover Effects Of Provisions of The Articles Of Incorporation Authorized
And Un-issued Stock
The authorized but un-issued shares of our common and preferred stock are
available for future issuance without our shareholders' approval. These
additional shares may be utilized for a variety of corporate purposes including
but not limited to future public or direct offerings to raise additional
capital, corporate acquisitions and employee incentive plans.
71
EXPERTS
The financial statements of Paradigm Holdings incorporated herein have been so
incorporated in reliance upon the report of independent registered public
accountants, Aronson & Company, given upon their authority as experts in
auditing and accounting.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for us by Rogers and Rogers, PC, Wyoming.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the securities
offered by this prospectus. This prospectus, which forms a part of the
registration statement, does not contain all the information set forth in the
registration statement, as permitted by the rules and regulations of the
Commission. For further information with respect to us and the securities
offered by this prospectus, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document that we have filed as an exhibit to the registration statement
are qualified in their entirety by reference to the to the exhibits for a
complete statement of their terms and conditions. The registration statement and
other information may be read and copied at the Commission's Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the
Commission.
72
FINANCIAL STATEMENTS
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
TABLE OF CONTENTS
Page
----
PARADIGM HOLDINGS FINANCIAL STATEMENTS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005
Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004 F-1 - F-2
Consolidated Statements of Operations For The Three Months and Nine Months Ended September 30, 2005 and 2004 F-3
Consolidated Statements of Cash Flows For The Nine Months Ended September 30, 2005 and 2004 F-5
Notes to Consolidated Financial Statements F-6 - F-12
PARADIGM HOLDINGS FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
Report of Independent Registered Public Accounting Firm F-13
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-14 - F-15
Consolidated Statements of Operations For The Fiscal Years Ended December 31, 2004, 2003 and 2002 F-16
Consolidated Statements of Stockholders' Equity For The Fiscal Years Ended December 31, 2004, 2003 and F-17
2002
Consolidated Statements of Cash Flows For The Fiscal Years Ended December 31, 2004, 2003 and 2002 F-18
Notes to Consolidated Financial Statements F-19 - F-30
BLAIR MANAGEMENT SERVICES FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
Condensed Balance Sheets as of September 30, 2005 and December 31, 2004 F-31
Condensed Statements of Operations For The Nine Months Ended September 30, 2005 and 2004 F-32
Condensed Statements of Cash Flows For The Nine Months Ended September 30, 2005 and 2004 F-33
Notes to Financial Statements F-34 - F-36
BLAIR MANAGEMENT SERVICES FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 and 2003
Independent Auditor's Report F-37
Balance Sheets as of December 31, 2004 and 2003 F-38 - F-39
Statements of Income For The Fiscal Years Ended December 31, 2004 and 2003 F-40
Statements of Changes in Stockholders' Equity For The Fiscal Years Ended December 31, 2004 and 2003 F-41
Statements of Cash Flows For The Fiscal Years Ended December 31, 2004 and 2003 F-42
Notes to Financial Statements F-43 - F-46
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Basis of Presentation F-47
Unaudited Pro Forma Condensed Combined Statements of Income for the Fiscal Year Ended December 31, 2004 F-48
Unaudited Pro Forma Condensed Combined Statements of Income for the Nine Months Ended September 30, 2005 F-49
Unaudited Pro Forma Condensed Combined Balance Sheets as of September 30, 2005 F-50
Notes to Pro Forma Condensed Combined Financial Statements F-51 - F-52
F-i
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
9/30/05 12/31/04
(Unaudited)
- -------------------------------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,131,176 $ 179,389
Accounts receivable - contracts 13,318,851 11,478,901
Inventory, net -- 616,020
Prepaid expenses 153,251 4,239,770
Other current assets 529,287 89,890
------------ ------------
TOTAL CURRENT ASSETS 15,132,565 16,603,970
------------ ------------
PROPERTY AND EQUIPMENT, AT COST
Furniture and fixtures 153,546 124,845
Equipment 844,841 1,043,725
Software 542,932 221,965
Leasehold improvements 121,000 121,000
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 1,662,319 1,511,535
Less: Accumulated depreciation (693,339) (504,348)
------------ ------------
NET PROPERTY AND EQUIPMENT 968,980 1,007,187
------------ ------------
OTHER ASSETS
Deposits 83,382 77,182
------------ ------------
TOTAL ASSETS $ 16,184,927 $ 17,688,339
============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-1
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
9/30/05 12/31/04
(Unaudited)
- -------------------------------------------------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 1,477,238 $ 1,046,160
Note payable - line of credit 3,182,712 3,220,072
Capital lease payable 11,476 --
Accounts payable and accrued expenses 4,432,705 5,476,967
Accrued salaries and related liabilities 2,022,913 1,812,545
Deferred income taxes 515,167 527,000
Deferred revenue 466,318 1,749,410
----------- -----------
TOTAL CURRENT LIABILITIES 12,108,529 13,832,154
----------- -----------
LONG-TERM LIABILITIES
Deferred rent 149,871 144,435
Capital lease payable, net of current portion 24,293 --
Deferred income taxes, net of current portion 842,979 1,356,000
----------- -----------
TOTAL LIABILITIES 13,125,672 15,332,589
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.01 par value, 50,000,000
shares authorized, 20,003,368 shares
issued and outstanding 200,034 200,034
Retained earnings 2,859,221 2,155,716
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,059,255 2,355,750
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,184,927 $17,688,339
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-2
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
------------------------- -------------------------
Three Months Ended Nine Months Ended
RESTATED RESTATED
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004
- ------------------------------------------------- ----------- ----------- ----------- -----------
Contract Revenue
Service contracts $10,524,664 $10,149,144 $31,691,621 $29,741,366
Repair and maintenance contracts 5,018,669 6,443,460 14,527,534 16,233,988
----------- ----------- ----------- -----------
Total contract revenue 15,543,333 16,592,604 46,219,155 45,975,354
----------- ----------- ----------- -----------
Cost of revenue
Service contracts 8,417,929 8,396,336 25,603,568 25,475,741
Repair and maintenance contracts 4,699,727 6,200,501 13,528,080 14,880,293
----------- ----------- ----------- -----------
Total cost of revenue 13,117,656 14,596,837 39,131,648 40,356,034
----------- ----------- ----------- -----------
Gross margin 2,425,677 1,995,767 7,087,507 5,619,320
Selling, general and administrative 1,996,307 2,216,522 5,876,367 6,106,561
----------- ----------- ----------- -----------
Income (loss) from operations 429,370 (220,755) 1,211,140 (487,241)
----------- ----------- ----------- -----------
Other (expense) income
Interest income 2,703 4,670 9,015 10,642
Other income 162 185 501 529
Interest expense (53,396) (13,969) (154,961) (46,052)
----------- ----------- ----------- -----------
Total other (expense) income (50,531) ( 9,114) (145,445) (34,881)
----------- ----------- ----------- -----------
Net income (loss) before income taxes $ 378,839 $ (229,869) $ 1,065,695 $ (522,123)
----------- ----------- ----------- -----------
Provision for income taxes 131,452 25,368 362,190 29,850
----------- ----------- ----------- -----------
Net income (loss) $ 247,387 $ (255,237) $ 703,505 $ (551,973)
----------- ----------- ----------- -----------
Basic and diluted net income (loss) per
common share $ 0.01 $ (0.01) $ 0.04 $ (0.03)
----------- ----------- ----------- -----------
Basic and diluted weighted average common shares
used to compute net income (loss) per share 20,003,368 17,500,000 20,003,368 17,500,000
----------- ----------- ----------- -----------
F-3
------------------------- -------------------------
Three Months Ended Nine Months Ended
RESTATED RESTATED
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004
- ------------------------------------------------- ----------- ----------- ----------- -----------
Pro-forma income tax provision (benefit) 131,452 (73,000) 362,190 (183,110)
----------- ----------- ----------- -----------
Pro-forma net income (loss) $ 247,387 $ (156,869) $ 703,505 $ (339,013)
----------- ----------- ----------- -----------
Pro-forma basic and diluted net income (loss) per
common share $ 0.01 $ (0.01) $ 0.04 $ (0.02)
----------- ----------- ----------- -----------
Pro-forma basic and diluted weighted average common
shares used to compute net income (loss) per share 20,003,368 17,500,000 20,003,368 17,500,000
----------- ----------- ----------- -----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-4
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
RESTATED
Nine Months Ended September 30, 2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 703,505 $ (551,973)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 275,053 219,158
Loss on sale and disposal of assets 40,722 --
Deferred income taxes (524,854) --
(INCREASE) DECREASE IN
Accounts receivable - contracts (1,839,949) 4,284,897
Inventory, net (32,914) (42,617)
Prepaid expenses 4,086,518 1,576,900
Other current assets 10,603 (7,736)
Deposits (6,200) --
(DECREASE) INCREASE IN
Accounts payable and accrued expenses (1,044,262) (2,189,221)
Accrued salaries and related liabilities 210,367 1,090,521
Deferred revenue (1,283,092) 215,559
Deferred rent 5,436 14,711
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 600,933 4,610,199
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (337,808) (276,369)
Proceeds from sale of assets 300,000 --
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (37,808) (276,369)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 431,078 (695,980)
Payments on capital lease (5,056)
Proceeds from line of credit 32,289,074
Payments on line of credit (32,326,434) (3,000,000)
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 388,662 (3,695,980)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 951,787 637,850
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 179,389 17,891
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,131,176 $ 655,741
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Assets sold in exchange for a note receivable $ 750,000
============ ============
Cash paid for income taxes $ 212,205 $ 29,850
============ ============
Cash paid for interest $ 154,961 $ 46,053
============ ============
Equipment purchased under capital lease $ 40,825 $
============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-5
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION
Paradigm Holdings, Inc. ("PDHO"), formerly Cheyenne Resources, Inc., was
incorporated in the state of Wyoming on November 17, 1970. On November 3, 2004,
Paradigm Holdings, Inc. entered into an Agreement and Plan of Reorganization
with Paradigm Solutions Merger Corp. ("Merger Sub"), Paradigm Solutions
Corporation ("PSC"), and the shareholders of PSC. Pursuant to the Agreement and
Plan of Reorganization, the Merger Sub was merged with and into PSC, which was
the surviving corporation, and became a wholly owned subsidiary of PDHO. In
consideration of the merger, the PSC shareholders exchanged 13,699, or 100%, of
their common stock for 17,500,000 shares of common stock of PDHO.
Although PDHO is the legal acquirer in the acquisition, and remains the
registrant with the SEC, under generally accepted accounting principles, the
acquisition was accounted for as a reverse acquisition, whereby PSC is
considered the "acquirer" of PDHO for financial reporting purposes. The
following factors were considered: 1) PSC's shareholders controlled more than
50% of the post acquisition combined entity, 2) management, after the
acquisition, is that of PSC, 3) PDHO had no assets and an immaterial amount of
liabilities as of the acquisition date, and 4) continuing operations of the
business are that of PSC.
Effective November 3, 2004, PDHO conducts business through its wholly owned
subsidiary Paradigm Solutions Corporation. On December 17, 2004, PSC formed a
wholly owned subsidiary, Paradigm Solutions International, Inc. ("PSI"). The
accompanying consolidated financial statements include the accounts of PDHO, PSC
and PSI (collectively, the "Company"). All significant inter-company balances
and transactions have been eliminated in consolidation.
The Company is a full-service information technology (IT) and business solutions
provider offering a wide range of technical support and management services to
improve the operational efficiency of government and industry. The Company
graduated from the Small Business Administration's 8(a) Business Development
program on October 13, 2004. Today, the Company possesses a portfolio of
flexible contract vehicle arrangements to expedite delivery of information
technology services and solutions to clients across the federal government.
The consolidated condensed financial statements included herein have been
prepared by Paradigm Holdings, Inc. (the Company) without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations; however, the Company believes that the disclosures are adequate to
make the information presented not misleading. The condensed financial
statements included herein should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2004 Form 10-K.
In the opinion of the registrant, the accompanying financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position of the Company at September 30, 2005 and
December 31, 2004, its results of operations for the quarter and nine months
ended September 30, 2005 and September 30, 2004, and its cash flows for the nine
months ended September 30, 2005 and September 30, 2004.
SUBSEQUENT EVENTS
On October 14, 2005, Paradigm Holdings, Inc., a Wyoming corporation ("Paradigm
Holdings"), Paradigm Solutions International, Inc., a Maryland corporation and
wholly-owned subsidiary of Paradigm Holdings ("PSI"), Blair Management Services,
Inc. t/d/b/a Blair Technology Group, a Pennsylvania corporation ("Blair") and
the shareholders of Blair (collectively, the "Shareholders") consummated a
merger transaction pursuant to the terms of that certain Merger Agreement (the
"Merger Agreement"), whereby Blair was merged with and into PSI. PSI is the
surviving corporation and will continue its corporate existence under the laws
of the State of Maryland as a wholly-owned subsidiary of Paradigm Holdings.
Pursuant to the Merger Agreement, the Shareholders exchanged all of the issued
and outstanding capital stock of Blair in exchange for (i) One Million Dollars
(US $1,000,000) and (ii) five hundred thousand shares of common stock, par value
$0.001 per share, of Paradigm Holdings (the "Shares"). Pursuant to the Merger
Agreement and an Escrow Agreement entered into by the parties, sixty thousand
(60,000) of the Shares will be held in escrow for a period of one (1) year from
the date of closing subject to the terms and conditions of the Merger Agreement.
In addition, under the terms of the Merger Agreement, Paradigm Holdings will
issue to the Shareholders up to an additional 350,000 shares of common stock of
Paradigm Holdings pursuant to an earn-out provision.
F-6
At the October 14, 2005 share price of $3.00, the transaction has a total
purchase price of $3,550,000 assuming all earn-out provisions are achieved.
Blair Technology Group was founded in 1992. The Company has provided business
continuity and information technology security solutions to over 300 commercial
customers in a variety of industries including finance, healthcare and energy.
The acquisition of Blair Technology Group allows Paradigm Holdings to combine
the OpsPlanner software suite with Blair's extensive credentials in the business
continuity arena. Paradigm Holdings can now offer our customers a comprehensive
business continuity solution. The acquisition also allows Paradigm Holdings to
expand its presence in the commercial marketplace. For the year ended December
31, 2004, Blair generated $4.6 million in revenue and $0.4 million in net
income.
At the closing of the merger, PSI entered into employment agreements with
Messrs. Kristofco, Duffy and Fochler.
On October 12, 2005, Thomas J. Kristofco and Paradigm Solutions International, a
wholly owned subsidiary of Paradigm Holdings, entered into an Employment
Agreement with an effective date of October 16, 2005. The agreement has a term
of three years and is renewable for additional terms of one (1) year unless
either party provides the other with notice at least ninety (90) days prior to
the date the employment term would otherwise renew. Paradigm Solutions
International can terminate the agreement by providing at least thirty (30)
days' advance written notice to Mr. Kristofco. In the event that Paradigm
Solutions International terminates the agreement, other than in connection with
a change of control of Paradigm Solutions International and other than for
cause, Paradigm Solutions International is obligated to continue to pay Mr.
Kristofco's base salary and benefits for a period that is the greater of: (i)
the remainder of the initial employment term or (ii) twelve (12) months from the
date of termination. In addition, in the event Paradigm Solutions International
terminates the agreement, other than in connection with a change of control or
for cause, any and all options granted to Mr. Kristofco will become
automatically and immediately vested and exercisable. Under the agreement, Mr.
Kristofco shall receive an annual salary of $200,000 for the period of October
16, 2005 through October 15, 2006, $220,000 for the period of October 16, 2006
through October 15, 2007, and $242,000 for the period of October 16, 2007
through October 15, 2008. Mr. Kristofco is entitled to participate in any health
insurance, accident insurance, hospitalization insurance, life insurance,
pension, or any other similar plan or benefit provided by Paradigm Solutions
International to its executives or employees generally, including any stock
option plan. Mr. Kristofco is eligible for bonus compensation as a result of the
business unit's operations. Mr. Kristofco shall receive a pool of money equal to
one fourth of the amount, if any, by which the business unit's EBITDA exceed the
budgeted amounts of EBITDA for each of the three, 12 month periods ended on
October 31, 2008. The three measurement periods and their respective EBITDA
budgeted amounts are $600,000 for the period November 1, 2005 through October
31, 2006, $750,000 for the period November 1, 2006 through October 31, 2007 and
$900,000 for the period November 1, 2007 through October 31, 2008. Such bonus
compensation pool will be divided among those of the three former principals of
Blair Technology Group then employed by the Company in proportion to their
respective individual base salary in relation to total combined base salary of
all such principals who are then still employed by the Company at the end of the
respective measurement period; provided, however, that if Mr. Kristofco is not
employed by the Company at the end of the applicable measurement period, he
shall share in the bonus pool, on a pro rata basis based on the portion of the
measurement period that he was so employed, unless he was terminated for cause
or voluntarily resigned without good reason, in either of which events he shall
not share in the bonus pool.
On October 12, 2005, Robert J. Duffy and Paradigm Solutions International, a
wholly owned subsidiary of Paradigm Holdings, entered into an Employment
Agreement with an effective date of October 16, 2005. The agreement has a term
of three years and is renewable for additional terms of one (1) year unless
either party provides the other with notice at least ninety (90) days prior to
the date the employment term would otherwise renew. Paradigm Solutions
International can terminate the agreement by providing at least thirty (30)
days' advance written notice to Mr. Duffy. In the event that Paradigm Solutions
International terminates the agreement, other than in connection with a change
of control of Paradigm Solutions International and other than for cause,
Paradigm Solutions International is obligated to continue to pay Mr. Duffy's
base salary and benefits for a period that is the greater of: (i) the remainder
of the initial employment term or (ii) twelve (12) months from the date of
termination. In addition, in the event Paradigm Solutions International
terminates the agreement, other than in connection with a change of control or
for cause, any and all options granted to Mr. Duffy will become automatically
and immediately vested and exercisable. Under the agreement, Mr. Duffy shall
receive an annual salary of $180,000 for the period of October 16, 2005 through
October 15, 2006, $198,000 for the period of October 16, 2006 through October
15, 2007, and $218,000 for the period of October 16, 2007 through October 15,
2008. Mr. Duffy is entitled to participate in any health insurance, accident
insurance, hospitalization insurance, life insurance, pension, or any other
similar plan or benefit provided by Paradigm Solutions International to its
executives or employees generally, including any stock option plan. Mr. Duffy is
eligible for bonus compensation as a result of the business unit's operations.
Mr. Duffy shall receive a pool of money equal to one fourth of the amount, if
any, by which the business unit's EBITDA exceed the budgeted amounts of EBITDA
for each of the three, 12 month periods ended on October 31, 2008. The three
measurement periods and their respective EBITDA budgeted amounts are $600,000
for the period November 1, 2005 through October 31, 2006, $750,000 for the
period November 1, 2006 through October 31, 2007 and $900,000 for the period
November 1, 2007 through October 31, 2008. Such bonus compensation pool will be
divided among those of the three former principals of Blair Technology Group
then employed by the Company in proportion to their respective individual base
salary in relation to total combined base salary of all such principals who are
then still employed by the Company at the end of the respective measurement
period; provided, however, that if Mr. Duffy is not employed by the Company at
the end of the applicable measurement period, he shall share in the bonus pool,
on a pro rata basis based on the portion of the measurement period that he was
so employed, unless he was terminated for cause or voluntarily resigned without
good reason, in either of which events he shall not share in the bonus pool.
F-7
On October 12, 2005, Stephen M. Fochler and Paradigm Solutions International, a
wholly owned subsidiary of Paradigm Holdings, entered into an Employment
Agreement with an effective date of October 16, 2005. The agreement has a term
of three years and is renewable for additional terms of one (1) year unless
either party provides the other with notice at least ninety (90) days prior to
the date the employment term would otherwise renew. Paradigm Solutions
International can terminate the agreement by providing at least thirty (30)
days' advance written notice to Mr. Fochler. In the event that Paradigm
Solutions International terminates the agreement, other than in connection with
a change of control of Paradigm Solutions International and other than for
cause, Paradigm Solutions International is obligated to continue to pay Mr.
Fochler's base salary and benefits for a period that is the greater of: (i) the
remainder of the initial employment term or (ii) twelve (12) months from the
date of termination. In addition, in the event Paradigm Solutions International
terminates the agreement, other than in connection with a change of control or
for cause, any and all options granted to Mr. Fochler will become automatically
and immediately vested and exercisable. Under the agreement, Mr. Fochler shall
receive an annual salary of $120,000 for the period of October 16, 2005 through
October 15, 2006, $132,000 for the period of October 16, 2006 through October
15, 2007, and $145,000 for the period of October 16, 2007 through October 15,
2008. Mr. Fochler is entitled to participate in any health insurance, accident
insurance, hospitalization insurance, life insurance, pension, or any other
similar plan or benefit provided by Paradigm Solutions International to its
executives or employees generally, including any stock option plan. Mr. Fochler
is eligible for bonus compensation as a result of the business unit's
operations. Mr. Fochler shall receive a pool of money equal to one fourth of the
amount, if any, by which the business unit's EBITDA exceed the budgeted amounts
of EBITDA for each of the three, 12 month periods ended on October 31, 2008. The
three measurement periods and their respective EBITDA budgeted amounts are
$600,000 for the period November 1, 2005 through October 31, 2006, $750,000 for
the period November 1, 2006 through October 31, 2007 and $900,000 for the period
November 1, 2007 through October 31, 2008. Such bonus compensation pool will be
divided among those of the three former principals of Blair Technology Group
then employed by the Company in proportion to their respective individual base
salary in relation to total combined base salary of all such principals who are
then still employed by the Company at the end of the respective measurement
period; provided, however, that if Mr. Fochler is not employed by the Company at
the end of the applicable measurement period, he shall share in the bonus pool,
on a pro rata basis based on the portion of the measurement period that he was
so employed, unless he was terminated for cause or voluntarily resigned without
good reason, in either of which events he shall not share in the bonus pool.
DESCRIPTION OF CRITICAL ACCOUNTING POLICIES
The preparation of these consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States,
which require our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. On an ongoing basis,
management evaluates its estimates including those related to contingent
liabilities, revenue recognition, and other intangible assets. Management bases
its estimates on historical experience and on various other factors that are
believed to be reasonable at the time the estimates are made. Actual results may
differ from these estimates under different assumptions or conditions.
Our management routinely makes judgments and estimates about the effects of
matters that are inherently uncertain. As the number of variables and
assumptions affecting the probable future resolution of the uncertainties
increase, these judgments become even more subjective and complex. We have
identified certain accounting policies, described below, that are the most
important to the portrayal of our current financial condition and results of
operations.
F-8
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from time and materials contracts is recognized as costs are incurred at
amounts represented by the agreed-upon billing amounts.
Fixed price labor hour and level of effort contracts involve defined numbers of
hours or categories of personnel. Revenue on fixed unit price contracts, where
specific units of output under service agreements are delivered, is recognized
as units are delivered based on the specific price per unit. Fixed price
maintenance contracts are recognized as revenue on a pro-rata basis over the
life of the contract.
In certain arrangements, the Corporation enters into contracts that include the
delivery of a combination of two or more of its service offerings. Such
contracts are divided into separate units of accounting and revenue is
recognized separately, and in accordance with, the Corporation's revenue
recognition policy for each element.
Software revenue recognition is in accordance with AICPA Statement of Position
97-2. Since the Company has not established VSOE, recognition of revenue from
the sale of licenses is over the term of the contract.
Revenue from cost-type contracts is recognized as costs are incurred on the
basis of direct costs plus allowable operating costs and expenses and an
allocable portion of the fixed fee.
The Company is subject to audits from federal government agencies. The Company
has reviewed its contracts and determined there is no material risk of financial
adjustments due to government audit. To date, we have not had any adjustments as
a result of a government audit of our contracts.
Revenue recognized on contracts for which billings have not yet been presented
to customers is included in the Accounts Receivable - contracts classification
on the accompanying Balance Sheets.
Deferred revenue relates to contracts for which customers pay in advance for
services to be performed at a future date. The Corporation recognizes deferred
revenue attributable to our maintenance contracts over the related service
periods, which run through 2005. Revenue related to our OpsPlanner offering,
including consulting, software subscriptions and technical support, is deferred
and recognized over the appropriate contract service period. These payments are
nonrefundable.
COST OF REVENUE
Cost of revenue for service contracts consist primarily of labor, consultant,
subcontract, materials, travel expenses and an allocation of indirect costs
attributable to the performance of the contract.
Cost of revenue for repair and maintenance contracts consist primarily of labor,
consultant, subcontract, materials, travel expenses and an allocation of
indirect costs attributable to the performance of the contract.
MAJOR CUSTOMERS
During the nine months ended September 30, 2005 and 2004, the Company's revenues
generated from five major customers, totaled 98% and 99% of total revenue,
respectively. The Company's accounts receivable related to these five major
customers were 98% and 99% of total accounts receivable at the end of the
respective periods. The Company defines major customer as a government agency or
individual commercial customer.
F-9
INVENTORY
Inventory consists of replacement printer parts and is stated at the lower of
cost or market using the FIFO method. As of September 30, 2005, the Company had
no inventory remaining.
INCOME TAXES
Prior to November 5, 2004, Paradigm Solutions Corporation was treated as an S
Corporation, and therefore, did not pay Federal and state corporate income taxes
since the tax attributes of the entity were reported on the stockholders' tax
returns. Paradigm Solutions Corporation filed its income tax returns on the cash
basis of accounting, whereby revenue was recognized when received and expenses
were recognized when paid. Effective November 5, 2004, Paradigm Solutions
Corporation revoked its S-Corporation status and therefore is subject to income
taxes at the corporate level.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized.
PRO FORMA FINANCIAL DATA:
The unaudited pro forma information for the periods set forth below is based on
the operations of Paradigm Solutions Corporation and is prepared as if the
Corporation had been a C Corporation at the beginning of each period assuming a
tax provision of 38.6%.
Three Months Ended Nine Months Ended
STATEMENT OF OPERATION DATA: Restated Restated
(in thousands, except per share data) Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Net income (loss) before income taxes 379 (230) 1,066 (522)
Income tax provision 132 (73) 362 (183)
(benefit)
Net income 247 (157) 704 (339)
(loss)
Basic and diluted net income (loss) per common share $ 0.01 $ (0.01) $ 0.04 $ (0.02)
Weighted average common shares outstanding 20,003 17,500 20,003 17,500
2. COMPENSATION AND EMPLOYMENT AGREEMENTS
On September 28, 2005, Mr. Sawchak and Paradigm Holdings entered into an
Employment Agreement with an effective date of September 19, 2005. The agreement
has a term of two years and is renewable for additional terms of one (1) year
unless either party provides the other with notice at least ninety (90) days
prior to the date the employment term would otherwise renew. Paradigm Holdings
can terminate the agreement by providing at least thirty (30) days' advance
written notice to Mr. Sawchak. In the event that Paradigm Holdings terminates
the agreement, other than in connection with a change of control of Paradigm
Holdings and other than for cause, Paradigm Holdings is obligated to continue to
pay Mr. Sawchak's base salary and benefits for a period that is the greater of:
(i) the remainder of the initial employment term or (ii) twelve (12) months from
the date of termination. In addition, in the event Paradigm Holdings terminates
the agreement, other than in connection with a change of control or for cause,
any and all options granted to Mr. Sawchak will become automatically and
immediately vested and exercisable. Under the agreement, Mr. Sawchak receives
$200,000 in annual salary and is entitled to participate in any health
insurance, accident insurance, hospitalization insurance, life insurance,
pension, or any other similar plan or benefit provided by Paradigm Holdings to
its executives or employees generally, including any stock option plan.
F-10
Effective April 1, 2005, Samar Ghadry and Paradigm Solutions Corporation, a
wholly-owned subsidiary of Paradigm Holdings, entered into a Letter Agreement
pursuant to which Ms. Ghadry and Paradigm Solutions Corporation agreed and
acknowledged that Ms. Ghadry's employment with Paradigm Solutions Corporation
ended effective April 1, 2005. Pursuant to the terms of the Letter Agreement,
Paradigm Solutions Corporation agreed to pay Ms. Ghadry severance pay in an
amount equal to Ms. Ghadry's base pay for nine months in accordance with
Paradigm Solutions Corporation's normal payroll practices. Paradigm Solutions
Corporation agreed to pay Ms. Ghadry a bonus for the first quarter of 2005 equal
to $20,250. In addition, Paradigm Holdings agreed to register 1,575,000 shares
of common stock owned by Ms. Ghadry. Further, Ms. Ghadry agreed that she will
not, except with the prior written approval of Paradigm Holdings, engage in a
disposition with respect to 100% of these shares until the earlier to occur of:
(i) the date of the closing of a financing through the sale of debt or equity
securities in which Paradigm Holdings receives in one or a series of
transactions gross proceeds in an amount equal to at least $3 million or (ii)
September 30, 2005. Ms. Ghadry also agreed that, when she is able to sell her
shares of common stock, that she will not sell more than 2,000 shares in any
single business day; however, in the event the average daily volume of the
shares of Paradigm Holdings' common stock exceeds 10,000 shares for a period of
5 consecutive business days, Ms. Ghadry may sell up to an aggregate of 4,000
shares per day, commencing on the first business day thereafter and continuing
so long as the average 5-day daily volume continues to exceed 10,000 shares. Ms.
Ghadry and Paradigm Holdings agreed that, to the extent allowed by law and with
the express written approval of the President and Chief Operating Officer of
Paradigm Holdings, Ms. Ghadry may sell her shares to a bona fide purchaser in a
private placement provided such purchaser agrees to be subject to the terms of
the Letter Agreement.
3. CONTRACT STATUS
The Company has authorized but uncompleted contracts on which work is in
progress at September 30, 2005 approximately, as follows:
Total contract prices of initial contract awards, including
exercised options and approved change orders (modifications) $ 184,193,000
Completed to date (157,814,000)
-----------------------------------------------------------------------------
AUTHORIZED BACKLOG $ 26,379,000
The foregoing contracts contain unfunded and unexercised options not reflected
in the above amounts of approximately $75,409,000.
4. NOTE PAYABLE - LINE OF CREDIT
On July 28, 2005, the Company entered into a two year Loan and Security
Agreement with Chevy Chase Bank that provides for a revolving line of credit
facility of up to $9 million. The agreement became effective August 4, 2005. The
revolving line of credit will be used to borrow revolving loans for working
capital and general corporate purposes.
The revolving loans under the Chevy Chase Bank Loan and Security Agreement are
secured by a first priority lien on substantially all of the assets of the
Company, excluding intellectual property and real estate. Under the agreement,
the line is due on demand and interest is payable monthly depending on the
Corporation's leverage ratio at the LIBOR rate plus the applicable spread which
ranges from 2.25% to 3.00%. Under the terms of the agreement, the Corporation
may borrow up to the lesser of $9,000,000 or 90% of eligible U.S. Government
receivables plus 80% of eligible commercial receivables plus 75% of the
aggregate amount of billable but unbilled accounts to a maximum of $3,000,000.
The Loan and Security Agreement requires that the Company maintain the following
covenants and ratios: (1) minimum tangible net worth of $2,000,000 plus 50% of
Company's net income for each fiscal year beginning with fiscal year ending
December 31, 2005; (2) debt coverage ratio of not less than 1.500 to 1.000; (3)
maximum leverage ratio of 5.50 to 1.00, which will be decreased to 5.25 to 1.00
by December 31, 2005 and 4.00 to 1.00 by December 31, 2006. All working capital,
as it relates to these covenants and ratio requirements will be evaluated as of
quarter-end. The Company was in compliance with all covenant requirements as of
September 30, 2005.
The Loan and Security Agreement contains events of default that include among
other things, non-payment of principal, interest or fees, violation of
covenants, inaccuracy of representations and warranties, cross default to
certain other indebtedness, bankruptcy and insolvency events, change of control
and material judgments. Upon occurrence of an event of default, Chevy Chase Bank
is entitled to, among other things, accelerate all obligations of the Company
and sell the Company's assets to satisfy the Company's obligations under the
Loan and Security Agreement.
The Company terminated its line of credit agreement with SunTrust Bank effective
September 1, 2005.
F-11
5. RESTATEMENT
The Company has restated certain financial statements to resolve the following
items:
o Break-out expenses previously reported as "Other Operating Costs and
Expenses" into Cost of Revenue and Selling, General and
Administrative expenses. Although there is no impact on total
revenue, net income or earnings-per-share, the gross margin for each
year reported has changed.
o For the nine months ended September 30, 2004, the Company restated
Revenue and Cost of Revenue balances for our federal maintenance
contracts and federal service contracts. The adjustment had no
impact on total revenue, net income or earnings-per-share.
o The Company restated the results of the first, second and third
quarters of 2004, as reported in the Company's SB-2 filing on
February 11, 2005, to recognize revenue in the proper periods on the
Department of Treasury LTMCC contract.
F-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
Rockville, Maryland
We have audited the accompanying Consolidated Balance Sheets of PARADIGM
HOLDINGS, INC. (FORMERLY PARADIGM SOLUTIONS CORPORATION) AND SUBSIDIARIES as of
December 31, 2004 and 2003, and the related Consolidated Statements of
Operations, Stockholders' Equity and Cash Flows for each of the three years in
the period ended December 31, 2004. 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 in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PARADIGM HOLDINGS,
INC. (FORMERLY PARADIGM SOLUTIONS CORPORATION) AND SUBSIDIARIES as of December
31, 2004 and 2003, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedules for each of the three
years in the period ended December 31, 2004, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in Note 16, the financial statements referred to above have been
restated to break-out certain expenses previously reported as "indirect costs"
into cost of revenue and selling, general and administrative expenses and to
restate revenue and cost of revenue balances related to the federal maintenance
contracts and federal service contracts.
/s/ Aronson & Company
Rockville, Maryland
February 11, 2005, except for Notes 5 and 16, as to
which the dates are July 25, 2005 and September 28,
2005, respectively
F-13
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
December 31, 2004 2003
- ------------------------------------------ ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 179,389 $ 17,890
Accounts receivable - contracts 11,478,901 14,494,968
Inventory, net 616,020 540,005
Prepaid expenses 4,239,770 2,220,991
Other current assets 89,890 17,414
------------ ------------
TOTAL CURRENT ASSETS 16,603,970 17,291,268
------------ ------------
PROPERTY AND EQUIPMENT, AT COST
Furniture and fixtures 124,845 117,920
Software 221,965 82,051
Leasehold improvements 121,000 102,531
Equipment 1,043,725 916,922
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 1,511,535 1,219,424
------------ ------------
Less: Accumulated depreciation (504,348) (204,690)
------------ ------------
NET PROPERTY AND EQUIPMENT 1,007,187 1,014,734
------------ ------------
OTHER ASSETS
Deposits 77,182 76,207
------------ ------------
TOTAL ASSETS $ 17,688,339 $ 18,382,209
============ ============
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-14
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
December 31, 2004 2003
- -------------------------------------------------------------------------------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 1,046,160 $ 695,980
Note payable - line of credit 3,220,072 3,000,000
Accounts payable and accrued expenses 5,476,967 4,514,721
Accrued salaries and related liabilities 1,812,545 1,601,297
Deferred income taxes 527,000
Deferred revenue 1,749,410 2,328,690
----------- -----------
TOTAL CURRENT LIABILITIES 13,832,154 12,140,688
----------- -----------
LONG-TERM LIABILITIES
Deferred rent 144,435 115,012
Deferred income taxes, net of current portion 1,356,000
----------- -----------
TOTAL LIABILITIES 15,332,589 12,255,700
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (AS RESTATED, NOTE 11)
Common stock - $.01 par value, 50,000,000 shares authorized, 20,003,368 and
17,500,000 shares issued and outstanding as of 2004 and 2003, respectively 200,034 175,000
Retained earnings 2,155,716 5,951,509
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,355,750 6,126,509
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,688,339 $18,382,209
=========== ===========
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-15
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
RESTATED RESTATED RESTATED
Years Ended December 31, 2004 2003 2002
- ---------------------------------------------------------------- ------------ ------------ ------------
CONTRACT REVENUE
Service contracts $ 39,487,603 $ 36,091,375 $ 26,656,972
Repair and maintenance contracts 22,268,698 15,114,617 11,016,120
------------ ------------ ------------
TOTAL CONTRACT REVENUE 61,756,301 51,205,992 37,673,092
------------ ------------ ------------
Cost of revenue
Service contracts 33,950,665 32,675,562 23,023,558
Repair and maintenance contracts 20,594,289 13,134,103 9,396,121
------------ ------------ ------------
Total cost of revenue 54,544,954 45,809,665 32,419,679
------------ ------------ ------------
Gross margin 7,211,347 5,396,327 5,253,413
Selling, general and administrative 8,994,477 4,950,853 2,889,944
------------ ------------ ------------
Income (loss) from operations (1,783,130) 445,474 2,363,469
------------ ------------ ------------
Other (expense) income
Interest income - stockholder 1,607 4,039
Interest income - other 12,529 20,085 30,665
Interest expense (61,920) (290) (2,741)
------------ ------------ ------------
Total other (expense) income (49,391) 21,402 31,963
------------ ------------ ------------
Net income (loss) before income taxes (1,832,521) $ 466,876 $ 2,395,432
------------ ------------ ------------
Provision for income taxes 1,934,380 35,125 7,529
------------ ------------ ------------
Net income (loss) $ (3,766,901) $ 431,751 $ 2,387,903
------------ ------------ ------------
Basic and diluted net income (loss) per common share $ (0.21) $ 0.03 $ 0.14
------------ ------------ ------------
Basic and diluted weighted average common share used to
compute net income per share 17,896,709 17,500,000 17,500,000
------------ ------------ ------------
Pro-forma provision (benefit) for income taxes (Note 12) (707,353) 180,214 924,636
------------ ------------ ------------
Pro-forma net income (loss) (1,125,168) 286,662 1,470,796
------------ ------------ ------------
Pro-forma basic and diluted net income (loss) per common share ($ 0.06) $ 0.02 $ 0.08
------------ ------------ ------------
Pro-forma weighted average common shares outstanding 17,896,709 17,500,000 17,500,000
------------ ------------ ------------
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-16
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
------------------------------
Years Ended December 31, 2004, 2003 and Retained
2002 Share Amount Earnings Total
- --------------------------------------------------- ----------- ----------- ----------- -----------
Balance, January 1, 2002
(as Restated, Note 11) 17,500,000 $ 175,000 $ 3,313,855 $ 3,306,855
Net Income 2,387,903 2,387,903
---------- ----------- ----------- -----------
Balance, December 31, 2002 17,500,000 175,000 5,519,758 5,694,758
Net Income 431,751 431,751
---------- ----------- ----------- -----------
Balance, December 31, 2003 17,500,000 175,000 5,951,509 6,126,509
Recapitalization and Net Liabilities Assumed as
a Result of Reverse Merger 2,503,368 25,034 (28,892) (3,858)
Net Loss (3,766,901) (3,766,901)
----------- ----------- ----------- -----------
Balance, December 31, 2004 20,003,368 $ 200,034 $ 2,155,716 $ 2,355,750
----------- ----------- ----------- -----------
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-17
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004 2003 2002
- --------------------------------------------------------------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,766,901) $ 431,751 $ 2,387,903
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH USED BY
OPERATING ACTIVITIES:
Depreciation 299,658 159,292 48,001
Loss on disposal -- 24,315 --
(INCREASE) DECREASE IN
Accounts receivable - contracts 3,016,067 (5,983,859) (2,167,584)
Inventory, net (76,015) (540,005)
Prepaid expenses (2,018,779) (839,719) (640,356)
Other current assets (72,476) (14,724) (6,453)
Deposits (975) (57,139) (4,473)
(DECREASE) INCREASE IN
Accounts payable and accrued expenses 958,387 1,964,129 32,437
Accrued salaries and related liabilities 211,248 788,853 276,182
Deferred income taxes 1,883,000 -- --
Deferred revenue (579,280) 2,328,690 --
Deferred rent 29,423 115,012 --
------------ ------------ ------------
NET CASH USED BY OPERATING ACTIVITIES (116,643) (1,623,404) (74,343)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (292,110) (1,042,859) (108,559)
Repayment of notes receivable - stockholder 0 47,510 19,453
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (292,110) (995,349) (89,106)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 350,180 (635,385) 913,142
Proceeds from line of credit 37,673,041 7,214,629 1,757,040
Payments on line of credit (37,452,969) (4,573,448) (1,928,186)
------------ ------------ ------------
NET CASH PROVED BY FINANCING ACTIVITIES 570,252 2,005,796 741,996
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH 161,499 (612,957) 578,547
CASH, BEGINNING OF YEAR 17,890 630,847 52,300
------------ ------------ ------------
CASH, END OF YEAR $ 179,389 $ 17,890 $ 630,847
============ ============ ============
SUPPLEMENT DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 747,486 $ 35,125 $ 7,529
============ ============ ============
Cash paid for interest $ 61,920 $ 290 $ 2,741
============ ============ ============
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-18
PARADIGM HOLDINGS, INC.
(FORMERLY PARADIGM SOLUTIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION
Paradigm Holdings, Inc. (PDHO), formerly Cheyenne Resources, Inc., was
incorporated in the state of Wyoming on November 17, 1970. On November 3, 2004,
Paradigm Holdings, Inc. entered into an Agreement and Plan of Reorganization
with Paradigm Solutions Merger Corp. (Merger Sub), Paradigm Solutions
Corporation (PSC), and the shareholders of PSC. Pursuant to the Agreement and
Plan of Reorganization, the Merger Sub was merged with and into PSC, which was
the surviving corporation, and became a wholly owned subsidiary of PDHO. In
consideration of the merger, the PSC shareholders exchanged 13,699, or 100%, of
their common stock for 17,500,000 shares of common stock of PDHO.
Although PDHO is the legal acquirer in the acquisition, and remains the
registrant with the SEC, under generally accepted accounting principles, the
acquisition was accounted for as a reverse acquisition, whereby PSC is
considered the "acquirer" of PDHO for financial reporting purposes. The
following factors were considered: 1) PSC's shareholders controlled more than
50% of the post acquisition combined entity, 2) management, after the
acquisition, is that of PSC, 3) PDHO had no assets and an immaterial amount of
liabilities as of the acquisition date, and 4) continuing operations of the
business are that of PSC.
Effective November 3, 2004, PDHO conducts business through its wholly owned
subsidiary Paradigm Solutions Corporation. On December 17, 2004, PDHO formed a
wholly owned subsidiary, Paradigm Solutions International, Inc. (PSI). The
accompanying consolidated financial statements include the accounts of PDHO, PSC
and PSI (collectively, the Corporation). All significant inter-company balances
and transactions have been eliminated in consolidation.
The Corporation is a full-service information technology (IT) and business
solutions provider offering a wide range of technical support and management
services to improve the operational efficiency of government and industry. The
Corporation graduated from the Small Business Administration's 8(a) Business
Development program on October 13, 2004. Today, the Corporation possesses a
portfolio of flexible contract vehicles arrangements to expedite delivery of
information technology services and solutions to clients across the federal
government.
Use Of Accounting Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash And Cash Equivalents
For purposes of financial statement presentation, the Corporation considers all
highly liquid debt instruments with initial maturities of ninety days or less to
be cash equivalents. The Corporation maintains cash balances which may exceed
federally insured limits. Management does not believe that this results in any
significant credit risk.
Fair Value Of Financial Instruments
At December 31, 2004 and 2003, the carrying value of current financial
instruments such as cash, accounts receivable, accounts payable, and accrued
liabilities approximated their market values, based on the short-term maturities
of these instruments. Fair value is determined based on expected cash flows,
discounted at market rates, and other appropriate valuation methodologies.
Revenue Recognition
Revenue from time and materials contracts is recognized as costs are incurred at
amounts represented by the agreed-upon billing amounts.
F-19
Fixed price labor hour and level of effort contracts involve defined numbers of
hours or categories of personnel. Revenue on fixed unit price contracts, where
specific units of output under service agreements are delivered, is recognized
as units are delivered based on the specific price per unit. Fixed price
maintenance contracts are recognized as revenue on a pro-rata basis over the
life of the contract.
In certain arrangements, the Corporation enters into contracts that include the
delivery of a combination of two or more of its service offerings. Such
contracts are divided into separate units of accounting and revenue is
recognized separately, and in accordance with, the Corporation's revenue
recognition policy for each element.
Software revenue recognition is in accordance with AICPA Statement of Position
97-2. Since the Company has not established VSOE, recognition of revenue from
the sale of licenses is over the term of the contract.
Revenue from cost-type contracts is recognized as costs are incurred on the
basis of direct costs plus allowable operating costs and expenses and an
allocable portion of the fixed fee.
The Company is subject to audits from federal government agencies. The Company
has reviewed its contracts and determined there is no material risk of financial
adjustments due to government audit. To date, we have not had any adjustments as
a result of a government audit of our contracts.
Revenue recognized on contracts for which billings have not yet been presented
to customers is included in the Accounts Receivable - contracts classification
on the accompanying Balance Sheets.
Deferred revenue relates to contracts for which customers pay in advance for
services to be performed at a future date. The Corporation recognizes deferred
revenue attributable to our maintenance contracts over the related service
periods, which run through 2005. Revenue related to our OpsPlanner offering,
including consulting, software subscriptions and technical support, is deferred
and recognized over the appropriate contract service period. These payments are
nonrefundable.
Cost Of Revenue
Cost of revenue for service contracts consist primarily of labor, consultant,
subcontract, materials, travel expenses and an allocation of indirect costs
attributable to the performance of the contract.
Cost of revenue for repair and maintenance contracts consist primarily of labor,
consultant, subcontract, materials, travel expenses and an allocation of
indirect costs attributable to the performance of the contract.
Major Customers
During the years ended December 31, 2004, 2003 and 2002, the Corporation's
revenues generated from three major customers, totaled 84%, 92% and 76% of total
revenue, respectively. The Corporation's accounts receivable related to these
three major customers were 78%, 90 % and 80% of total accounts receivable at the
end of the respective years. The Company defines major customers by government
agency.
Accounts Receivable
Accounts receivable are attributable to trade receivables in the ordinary course
of business. Estimates relating to allowance for doubtful accounts are based on
historical experience, troubled account information and other available
information.
Inventory
Inventory consists of replacement printer parts and is stated at the lower of
cost or market using the FIFO method.
Property And Equipment
Property and equipment are recorded at the original cost to the Corporation and
are depreciated using straight-line methods over established useful lives of
three to seven years. Software is recorded at original cost and depreciated on
the straight-line basis over three years. Leasehold improvements are recorded at
original cost and are depreciated on the straight-line basis over the life of
the lease.
F-20
Advertising Costs
Advertising costs are expensed as incurred. Expenses for fiscal years ending
December 31, 2004, 2003 and 2002 were immaterial.
Software Development Costs
Software development costs are included in selling, general and administrative
expenses and are expensed as incurred. Statement of Financial Accounting
Standards No. 86, "Accounting for the Cost of Computer Software to be Sold,
Leased or Otherwise Marketed" requires the capitalization of certain software
development costs once technological feasibility is established, which the
Corporation generally defines as completion of a working model. Capitalization
ceases when the products are available for general release to customers, at
which time amortization of the capitalized costs begins on a straight-line basis
over the estimated product life, or on the ratio of current revenues to total
projected product revenues, whichever is greater. As of December 31, 2004, the
Corporation had not established technological feasibility for its software
product, and therefore, no costs have been capitalized.
All other research and development costs are expensed as incurred. For the years
ended December 31, 2004 and 2003 the Corporation's R&D expenses totaled
$1,078,058 and $559,073, respectively. The Corporation did not incur any R&D
expenses during the year ended December 31, 2002.
Income Taxes
Prior to November 5, 2004 the Paradigm Solutions Corporation was treated as an S
Corporation, and therefore, did not pay Federal and state corporate income taxes
since the tax attributes of the entity were reported on the stockholders' tax
returns. Paradigm Solutions Corporation filed its income tax returns on the cash
basis of accounting, whereby revenue was recognized when received and expenses
were recognized when paid.
Effective November 5, 2004, Paradigm Solutions Corporation revoked its
S-Corporation status and therefore is subject to income taxes at the corporate
level. At of the date of revocation, Paradigm Solutions Corporation recorded a
deferred income tax liability of approximately $2,576,000 which relates to the
timing differences between book basis and income tax basis at the date of the
revocation.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized.
Net Income Per Share
Basic net income per common share is calculated by dividing the net income by
the weighted average number of common shares outstanding during the period. A
diluted earnings per share is calculated using the weighted average number of
common shares plus dilutive common stock equivalents outstanding during the
period. Anti-dilutive common stock equivalents are excluded. There were no
dilutive common stock equivalents outstanding during the years ended December
31, 2004, 2003 and 2002.
Reclassification
Certain 2003 and 2002 balances have been reclassified to conform to the 2004
presentation.
F-21
2. ACCOUNTS RECEIVABLE
The accounts receivable consist of billed and unbilled amounts under contracts
in progress with governmental units, principally the Bureau of Alcohol, Tobacco,
and Firearms, the Office of the Comptroller of the Currency, the U.S. Secret
Service, and the Internal Revenue Service. The components of accounts receivable
at December 31, 2004 and 2003 are:
2004 2003
----------- -----------
Billed receivables $ 6,821,859 $12,727,297
Unbilled receivables 4,657,042 1,767,671
----------- -----------
TOTALS $11,478,901 $14,494,968
=========== ===========
All receivables are expected to be collected during the next fiscal year and are
pledged to the bank as collateral for the line of credit. The Corporation's
unbilled receivables are comprised of contract costs that cover the current
service period and are normally billed in the following month. The Corporation's
unbilled at December 31, 2004 does not contain retainage.
3. NOTES RECEIVABLE - STOCKHOLDER
Prior to 2003, the Corporation made advances to its majority stockholder under
two loan agreements. The stockholder loans were paid in full during the year
ended December 31, 2003. Interest income earned and received during 2003 and
2002 for the stockholder loans was $1,607 and $4,039, respectively.
4. INVENTORY
Inventory consists of the following at December 31:
2004 2003
--------- ---------
Inventory of replacement printer parts $ 683,026 $ 607,011
Inventory valuation allowance (67,006) (67,006)
--------- ---------
TOTALS $ 616,020 $ 540,005
========= =========
5. NOTE PAYABLE - LINE OF CREDIT
The Company has a line of credit arrangement with SunTrust Bank which expired on
June 30, 2005. Subsequently, on June 22, 2005 the company received an extension
of the line of credit arrangement through September 30, 2005. Under the terms of
the latest agreement, the Corporation had to maintain: (1) minimum tangible net
worth of $2,650,000 beginning on and as of June 30, 2005; (2) debt coverage
ratio of not more then 5.0 to 1.0 beginning on and as of June 30, 2005; (3)
minimum quarterly net income of $1.00 for the quarters ending June 30 and
September 30, 2005. The Corporation was in compliance with the line of credit
agreement covenants as of June 30, 2005.
The Company terminated its line of credit agreement with SunTrust Bank effective
September 1, 2005.
F-22
On July 28, 2005, the Company entered into a two year Loan and Security
Agreement with Chevy Chase Bank that provides for a revolving line of credit
facility of up to $9 million. The agreement became effective August 4, 2005. The
revolving line of credit will be used to borrow revolving loans for working
capital and general corporate purposes. The Company will terminate its existing
revolving line of credit facility with SunTrust once this agreement is
activated.
The revolving loans under the Chevy Chase Bank Loan and Security Agreement are
secured by a first priority lien on substantially all of the assets of the
Company, excluding intellectual property and real estate. Under the agreement,
the line is due on demand and interest is payable monthly depending on the
Corporation's leverage ratio at the LIBOR rate plus the applicable spread which
ranges from 2.25% to 3.00%. Under the terms of the agreement, the Corporation
may borrow up to the lesser of $9,000,000 or 90% of eligible U.S. Government
receivables plus 80% of eligible commercial receivables plus 75% of the
aggregate amount of billable but unbilled accounts to a maximum of $3,000,000.
The Loan and Security Agreement requires that the Company maintain the following
covenants and ratios: (1) minimum tangible net worth of $2,000,000 plus 50% of
Company's net income for each fiscal year beginning with fiscal year ending
December 31, 2005; (2) debt coverage ratio of not less than 1.500 to 1.000; (3)
maximum leverage ratio of 5.50 to 1.00, which will be decreased to 5.25 to 1.00
by December 31, 2005 and 4.00 to 1.00 by December 31, 2006. All working capital,
as it relates to these covenants and ratios requirements will evaluated as of
quarter-end.
The Loan and Security Agreement contains events of default that include among
other things, non-payment of principal, interest or fees, violation of
covenants, inaccuracy of representations and warranties, cross default to
certain other indebtedness, bankruptcy and insolvency events, change of control
and material judgments. Upon occurrence of an event of default, Chevy Chase Bank
is entitled to, among other things, accelerate all obligations of the Company
and sell the Company's assets to satisfy the Company's obligations under the
Loan and Security Agreement.
6. INCOME TAXES
For the years ended December 31, 2004, 2003 and 2002, the components of the
provision for income taxes consisted of:
2004 2003 2002
---------- ---------- ----------
Current:
State $ 51,380 $ 35,125 $ 7,529
Deferred:
Federal 1,542,000
State 341,000
---------- ---------- ----------
Totals $1,934,380 $ 35,125 $ 7,529
========== ========== ==========
The provision for income taxes for the years ended December 31, 2004, 2003 and
2002 reflected in the accompanying financial statements varies from the amount
which would have been computed using statutory rates as follows:
2004 2003 2002
----------- ----------- -----------
Tax computed at the maximum Federal statutory rate $ (623,057) $ 158,738 $ 814,447
State income tax, net of Federal benefit (84,662) 21,570 110,669
Merger related expenses 62,441
Other permanent differences 3,400 17,111 10,725
Reduction in income taxes due to S-Corporation status (162,294) (928,312)
Income tax expense attributable to revocation of
S-Corporation election 2,576,258
----------- ----------- -----------
PROVISION FOR INCOME TAXES $ 1,934,380 $ 35,125 $ 7,529
=========== =========== ===========
F-23
A net deferred income tax liability of $1,883,000 at December 31, 2004 results
from financial statement income and expenses that are recognized in different
periods for income tax purposes. The components of such temporary differences
are as follows:
2004
-----------
Section 481 adjustment due to conversion from cash basis to accrual
basis for income tax reporting $(2,122,000)
Inventory valuation allowance 26,000
Accrued vacation and officers' compensation deducted for financial
statement reporting purposes but not income tax reporting purposes 173,000
Depreciation and amortization expense reported for income tax
purposes different from financial statement amounts (73,000)
Deferred rent 56,000
Net operating loss carryforward 57,000
Net operating loss carryforward - PDHO 1,502,000
-----------
NET (381,000)
LESS: VALUATION ALLOWANCE (1,502,000)
-----------
NET DEFERRED TAX LIABILITY $(1,883,000)
===========
For income tax purposes, the Paradigm Solutions Corporation has a net operating
loss carryforward of approximately $148,000 at December 31, 2004 that, subject
to applicable limitation, may be applied against future taxable income. If not
utilized, the net operating loss carryforward will expire in the year 2024.
In addition, Paradigm Holdings, Inc. has operating loss carryforwards of
approximately $3,891,000 related to pre-merger activities. The Internal Revenue
Code places certain limitations on the annual amount of net operating loss
carryforward which can be utilized when certain changes in the Corporation's
ownership occur. Changes in the Corporation's ownership may limit the use of
such carryforward benefits. If not utilized, these operating loss carryforwards,
as limited, will expire in various years beginning in 2020 and through the year
2024.
Prior to November 5, 2004, Paradigm Solution Corporation was taxed as an
S-Corporation. The timing differences between book basis and income tax basis
and the related deferred income tax liability that existed as of the date of the
revocation of the S election was as follows:
Accounts receivable $ 11,147,000
Prepaid expenses 4,374,000
Depreciation 191,000
Accounts payable and account expenses (6,923,000)
Accrued salaries and related liabilities (1,980,000)
Deferred rent (135,000)
------------
Total timing differences $ 6,674,000
============
Deferred income tax liability $ 2,576,258
============
F-24
7. LEASES
The Corporation is obligated under an operating lease, as lessee, for its office
space which expires in 2011. The lease contains escalation clauses for 2.5%-3%
annual increases in the base monthly rent. In addition, the Corporation leases
equipment, as lessee, under noncancelable operating leases that expire at
various times through March 2006.
The following is a schedule, by year, of future minimum rental payments required
under the operating leases:
Year Ending December 31, Office Space Equipment Total
- -------------------------- ------------ ---------- ----------
2005 $ 887,232 $ 40,572 $ 927,804
2006 884,520 34,794 919,314
2007 543,515 11,535 555,050
2008 447,132 -- 447,132
2009 458,313 -- 458,313
Thereafter 668,328 -- 668,328
---------- ---------- ----------
Total $3,889,040 $ 86,901 $3,975,941
========== ========== ==========
Total rent expense for the years ended December 31, 2004, 2003 and 2002 was
$945,878, $613,202 and $204,126, respectively.
8. RETIREMENT PLAN
The Corporation maintains a 401(k) profit sharing retirement plan for all
eligible employees. Under the plan, employees become eligible to participate
after three months of employment. The annual contribution under this plan is
based on employee participation. The participants may elect to contribute up to
100% of their gross annual earnings limited to amounts specified in Internal
Revenue Service Regulations as indexed for inflation. The Corporation's matching
contribution to the Plan is determined annually by the Board of Directors. For
the years ended December 31, 2004, 2003 and 2002, the Corporation contributed an
amount equal to 100% of the first 3% of the employees' contributions as a match.
Employees vest 100% in all salary reduction contributions. Rights to benefits
provided by the Corporation's matching contributions vest over a five year
period. The Corporation's contributions were $289,681, $224,684 and $148,041 for
the years ended December 31, 2004, 2003 and 2002, respectively.
9. COMPENSATION AND EMPLOYMENT AGREEMENTS
During 1999, the Corporation entered into a Section 162 Bonus Plan for the
benefit of its executives. This plan is a nonqualified employee benefit
arrangement. The Corporation pays a bonus to its executives who use the bonus to
pay the premiums on life insurance policies insuring his/her life. The policies
are owned personally by the executives. The bonus payments are treated as
additional compensation to the executives. The Corporation's bonus payments
under this plan were $88,747, $86,628 and $42,623 for the years ended December
31, 2004, 2003 and 2002 respectively.
Effective November 4, 2004, Raymond Huger, Frank Jakovac and Mark Serway and
Paradigm Holdings entered into an Employment Agreement. Pursuant to the
agreement, Mr. Huger serves as Chief Executive Officer and Mr. Jakovac serves as
Chief Operating Officer. The agreement has a term of three years and is
renewable for additional terms of one (1) year unless either party provides the
other with notice at least ninety (90) days prior to the date the employment
term would otherwise renew. Paradigm Holdings can terminate the agreement by
providing at least thirty (30) days' advance written notice to any of the three
executives. In the event that Paradigm Holdings terminates the agreement, other
than in connection with a change of control of Paradigm Holdings and other than
for cause, Paradigm Holdings is obligated to continue to pay their base salary
and benefits for a period that is the greater of: (i) the remainder of the
initial employment term or (ii) twelve (12) months from the date of termination.
Under the agreement, Mr. Huger receives $395,200, Mr. Jakovac receives $365,250
in annual salary in annual salary, Mr. Serway receives $315,175 in annual salary
and all are entitled to participate in any benefit plans provided by Paradigm
Holdings to its executives or employees generally.
F-25
On September 28, 2005, Mr. Sawchak and Paradigm Holdings entered into an
Employment Agreement with an effective date of September 19, 2005. The agreement
has a term of two years and is renewable for additional terms of one (1) year
unless either party provides the other with notice at least ninety (90) days
prior to the date the employment term would otherwise renew. Paradigm Holdings
can terminate the agreement by providing at least thirty (30) days' advance
written notice to Mr. Sawchak. In the event that Paradigm Holdings terminates
the agreement, other than in connection with a change of control of Paradigm
Holdings and other than for cause, Paradigm Holdings is obligated to continue to
pay Mr. Sawchak's base salary and benefits for a period that is the greater of:
(i) the remainder of the initial employment term or (ii) twelve (12) months from
the date of termination. In addition, in the event Paradigm Holdings terminates
the agreement, other than in connection with a change of control or for cause,
any and all options granted to Mr. Sawchak will become automatically and
immediately vested and exercisable. Under the agreement, Mr. Sawchak receives
$200,000 in annual salary and is entitled to participate in any health
insurance, accident insurance, hospitalization insurance, life insurance,
pension, or any other similar plan or benefit provided by Paradigm Holdings to
its executives or employees generally, including any stock option plan.
Mark Serway resigned from the company effective August 15, 2005. Mr. Serway
received three months of severance as part of his resignation agreement.
10. CONTRACT STATUS
Provisional Indirect Cost Rates
Billings under cost-based government contracts are calculated using provisional
rates which permit recovery of indirect costs and expenses. These rates are
subject to audit on an annual basis by the government agencies' cognizant audit
agency. The cost audits will result in the negotiation and determination of the
final indirect cost rates which the Corporation may use for the period(s)
audited. The final rates, if different from the provisionals, may create an
additional receivable or liability.
As of December 31, 2004, the Corporation has had no final settlements on
indirect rates. The Corporation periodically reviews its cost estimates and
experience rates and adjustments, if needed, are made and reflected in the
period in which the estimates are revised. In the opinion of management,
re-determination of any cost-based contracts for the open years will not have
any material effect on the Corporation's financial position or results of
operations.
Contract Status
The Corporation has authorized but uncompleted contracts on which work is in
progress at December 31, 2004 approximately, as follows:
Total contract prices of initial contract awards, including
Exercise options and approved change orders (modifications) $ 179,025,000
Completed to date (144,150,000)
-------------
AUTHORIZED BACKLOG $ 34,875,000
=============
The foregoing contracts contain unfunded and unexercised options not reflected
in the above amounts of approximately $91,340,000.
11. STOCKHOLDERS EQUITY
Stockholders' equity of the Corporation has been restated retroactively to
reflect the equivalent number of shares of common stock received in the reverse
acquisition with Paradigm Holdings, Inc. which occurred on November 3, 2004.
F-26
12. PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma information for the periods set forth below gives effect
to the above noted reverse merger as if it had occurred at the beginning of the
period. The pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisitions been consummated as of that time
(unaudited):
2004 2003
------------ ------------
Revenue $ 61,756,301 $ 51,216,189
Net income (loss) (1,116,476) 292,969
Net income (loss) per share, basic and diluted $ (.06) $ .02
The unaudited pro forma information for the periods set forth below is based on
the operations of Paradigm Solutions Corporation and is prepared as if the
Corporation had been a C Corporation at the beginning of each period. The
effective tax rate of 38.6% reflects Federal taxes at 34% and state taxes, net
of the Federal benefit. There are no significant permanent differences in any of
the periods presented.
2004 2003 2002
(Pro Forma) (Pro Forma) (Pro Forma)
------------ ------------ ------------
Contract revenue $ 61,756,301 $ 51,205,992 $ 37,673,092
Net income (loss) before income taxes (1,832,521) 466,876 2,395,432
Income tax provision (benefit) (707,353) 180,214 924,636
------------ ------------ ------------
Net income (loss) $ (1,125,168) $ 286,662 $ 1,470,796
============ ============ ============
Basic and diluted net income (loss) per
common share $ (0.06) $ 0.02 $ 0.08
Weighted average common shares outstanding 17,896,709 17,500,000 17,000,000
13. SELECTED QUARTERLY FINANCIAL DATA-UNAUDITED
The following table presents the quarterly results for the Corporation for the
years ended December 31, 2004 and 2003:
RESTATED RESTATED RESTATED RESTATED
1st 2nd 3rd 4th
2004 QUARTER QUARTER QUARTER QUARTER
---- ------------ ------------ ------------ ------------
Revenue $ 14,111,171 $ 15,271,579 $ 16,592,604 $ 15,780,947
Gross margin 1,584,143 2,039,410 1,995,767 1,592,027
Net income (loss) $ (153,321) $ (143,415) $ (255,237) $ (3,214,928)
Net income (loss) per $ (0.01) $ (0.01) $ (0.01) $ (0.18)
share, basic
diluted
RESTATED RESTATED RESTATED RESTATED
1st 2nd 3rd 4th
2003 QUARTER QUARTER QUARTER QUARTER
---- ------------ ------------ ------------ ------------
Revenue $ 10,599,899 $ 14,287,100 $ 12,281,706 $ 14,037,287
Gross margin 1,014,526 1,656,497 1,404,101 1,321,203
Net income (loss) $ (62,029) $ 752,044 $ (172,830) $ (85,434)
Net income (loss) per
share, basic and
diluted $ -- $ 0.04 $ (0.01) $ --
F-27
RESTATED RESTATED RESTATED RESTATED
1st 2nd 3rd 4th
2004 QUARTER QUARTER QUARTER QUARTER
---- ------------ ------------ ------------ ------------
Contract Revenue, as previously reported $ 14,328,008 $ 15,483,752 $ 16,900,323 $ 15,780,947
Adjustment to Revenue due to
LTMCC Revenue recognition (2) (216,837) (212,173) (307,719) --
------------ ------------ ------------ ------------
Contract Revenue, as restated $ 14,111,171 $ 15,271,579 $ 16,592,604 $ 15,780,947
Gross Margin, as previously reported $ 3,653,422 $ 4,197,729 $ 4,202,027 $ 3,644,963
Adjustment to Gross Margin due to
LTMCC Cost of Revenue recognition (2) (196,752) (169,758) (248,243) --
Adjustment to Gross Margin due to
Break-out of Indirect Expense ((1)) (1,872,527) (1,988,561) (1,958,017) (2,052,936)
------------ ------------ ------------ ------------
Gross Margin, as restated $ 1,584,143 $ 2,039,410 $ 1,995,767 $ 1,592,027
Net income (loss) as previously reported $ 41,765 $ 47,474 $ 21,614 $ (3,214,928)
Adjustments to net income (loss) due
to LTMCC Revenue recognition (2) (195,086) (190,889) (276,851) --
------------ ------------ ------------ ------------
Net income (loss), as restated $ (153,321) $ (143,415) $ (255,237) $ (3,214,928)
Net income (loss) per $ (0.01) $ (0.01) $ (0.01) $ (0.18)
share, basic Diluted
RESTATED RESTATED RESTATED RESTATED
1st 2nd 3rd 4th
2003 QUARTER QUARTER QUARTER QUARTER
---- ------------ ------------ ------------ ------------
Contract Revenue, as previously reported $ 10,599,899 $ 14,287,100 $ 12,281,706 $ 14,037,287
Adjustment to revenue -- -- -- --
------------ ------------ ------------ ------------
Contract Revenue, as restated $ 10,599,899 $ 14,287,100 $ 12,281,706 $ 14,037,287
Gross Margin, as previously reported $ 2,529,140 $ 3,483,192 $ 2,785,975 $ 3,657,271
Adjustments to Gross Margin due to
break-out of Indirect Expense ((1)) (1,514,614) (1,826,695) (1,318,874) (2,336,068)
------------ ------------ ------------ ------------
Gross Margin, as restated $ 1,014,526 $ 1,656,497 $ 1,404,101 $ 1,321,203
Net income (loss), as previously reported $ (62,029) $ 752,044 $ (172,830) $ (85,434)
Adjustments to net income (loss) -- -- -- --
------------ ------------ ------------ ------------
Net income (loss), as restated $ (62,029) $ 752,044 $ (172,830) $ (85,434)
Net income (loss) per
share, basic and diluted $ -- $ 0.04 $ (0.01) $ --
The company has restated certain financial statements to resolve the following
items:
1. Break-out expenses previously reported as "Other Operating Costs and
Expenses" into Cost of Revenue and Selling, General and Administrative expenses.
Although there is no impact on total revenue, net income or earnings-per-share,
the gross margin for each quarter reported has changed.
2. The Company restated the results of the first, second and third quarters of
2004, as reported in the Company's SB-2 filing on February 11, 2005, to
recognize revenue in the proper periods on the Department of Treasury LTMCC
contract.
F-28
14. REGULATIONS
PDHO owned producing oil and gas properties. The development and operation of
oil, gas and other mineral properties are subject to numerous and extensive
regulations by federal and state agencies dealing with, among other subjects,
protection of the environment. Management is not aware of any potential
environmental liabilities.
15. LITIGATION
The Company is involved in legal actions arising in the normal course of
business. The Company believes the claims are without merit and intends to
vigorously defend its position. In the opinion of management, the outcome of
these matters will not have a material adverse effect on these financial
statements.
16. RESTATEMENT
The Company has restated its previously issued financial statements to break-out
certain expenses previously reported as Indirect Costs into Cost of Revenue and
Selling, General and Administrative expenses for the years ended December 31,
2004, 2003, and 2002 and to restate revenue and cost of revenue balances for our
federal maintenance contracts and federal service contracts for the year ended
December 31, 2004. The effects of the restatement were as follows:
2004 2003 2002
------------ ------------ ------------
Total contract revenue, as previously reported $ 61,756,301 $ 51,205,992 $ 37,673,092
Adjustment to Total Contract Revenue -- -- --
------------ ------------ ------------
Total contract revenue, as restated $ 61,756,301 $ 51,205,992 $ 37,673,092
Cost of revenue, as previously reported $ 46,673,183 $ 38,750,414 $ 28,241,358
Adjustment to Cost of Revenue 7,871,771 7,059,251 4,178,321
------------ ------------ ------------
Cost of revenue, as restated $ 54,544,954 $ 45,809,665 $ 32,419,679
Gross margin, as previously reported $ 15,083,118 $ 12,455,578 $ 9,431,734
Adjustment to Gross Margin (7,871,771) (7,059,251) (4,178,321)
------------ ------------ ------------
Gross margin, as restated $ 7,211,347 $ 5,396,327 $ 5,253,413
Other operating expense,
as previously reported $ 16,866,248 $ 12,010,104 $ 7,068,265
Adjustment to Other Operating Expense (7,871,771) (7,059,251) (4,178,321)
------------ ------------ ------------
Selling, General & Admin, as restated $ 8,994,477 $ 4,950,853 $ 2,889,944
Income from operations, as previously reported $ (1,783,130) $ 445,474 $ 2,363,469
Adjustment to Income from Operations -- -- --
------------ ------------ ------------
Income from operations, as restated $ (1,783,130) $ 445,474 $ 2,363,469
The restatements had no effects on total assets, total liabilities & stock
holders' equity, total revenue, net income or earnings-per-share as previously
reported.
F-29
PARADIGM HOLDINGS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2004, 2003 and 2002:
Balance at Additional
Beginning of Charged to Costs Balance at End
Description Period and Expenses Deductions of Period
- -------------------------------------- ------------ ---------------- ---------- --------------
Deferred tax asset valuation allowance
December 31, 2002 $ -- $ -- $ -- $ --
December 31, 2003 -- -- -- --
December 31, 2004(1) -- 1,502,00 -- 1,502,000
Allowance for non-salable inventory
December 31, 2002 $ -- $ -- $ -- $ --
December 31, 2003 -- 67,006 -- 67,006
December 31, 2004 67,006 -- -- 67,006
(1) as a result of merger with Paradigm Holdings, Inc.
F-30
BLAIR MANAGEMENT SERVICES, INC
d/b/a BLAIR TECHNOLOGY GROUP
CONDENSED BALANCE SHEETS
(Unaudited)
9/30/05 12/31/04
- ---------------------------------------------- ----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 415,828 $ 528,647
Accounts receivable 471,899 612,610
Prepaid expenses 58,348 115,640
----------- -----------
TOTAL CURRENT ASSETS 946,075 1,256,897
----------- -----------
PROPERTY AND EQUIPMENT, NET 102,091 115,330
OTHER ASSETS
Commissions and royalties receivable 6,052 32,329
Research and development costs, net 3,084 6,684
Deposits 6,340 6,340
----------- -----------
TOTAL OTHER ASSETS 15,476 45,353
----------- -----------
TOTAL ASSETS $ 1,063,642 $ 1,417,580
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 116,084 $ 39,470
Accrued salaries and related liabilities 73,285 61,585
Deferred revenue 57,329 136,977
Income taxes payable 18,970 23,866
----------- -----------
TOTAL CURRENT LIABILITIES 265,668 261,898
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, no par value, 1,000 shares
authorized, 300 shares issued and
Outstanding 65 65
Additional paid-in-capital 128,756 128,756
Retained earnings 672,809 1,030,517
Treasury stock, 150 shares at cost (3,656) (3,656)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 797,974 1,155,682
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,063,642 $ 1,417,580
The accompanying Notes to Condensed Financial Statements are an integral part of
these financial statements.
F-31
BLAIR MANAGEMENT SERVICES, INC
d/b/a BLAIR TECHNOLOGY GROUP
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended September 30, 2005 2004
- ----------------------------------------- ------------ ------------
Contract revenues $ 2,477,250 $ 3,515,493
Cost of revenues 1,707,205 2,354,859
------------ ------------
Gross Margin 770,045 1,160,634
Selling, general and administrative 853,288 799,101
------------ ------------
Income (loss) from operations (83,243) 361,533
Interest income 7,141 6,278
Other income (expense) (4,092) --
------------ ------------
Net income (loss) before income taxes (80,194) 367,811
Provision for income taxes 12,515 23,422
------------ ------------
Net income (loss) (92,709) 344,389
The accompanying Notes to Condensed Financial Statements are an integral part of
these financial statements.
F-32
BLAIR MANAGEMENT SERVICES, INC
d/b/a BLAIR TECHNOLOGY GROUP
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30, 2005 2004
- ----------------------------------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (92,709) $ 344,389
ADJUSTMENT TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 33,476 33,750
(INCREASE) DECREASE IN
Accounts receivable 140,711 (108,837)
Prepaid expenses 57,292 56,708
Other assets 26,277 7,283
(DECREASE) INCREASE IN
Accounts payable and accrued expenses 76,614 71,719
Accrued salaries and related liabilities 11,700 29,626
Deferred revenue (79,648) 41,482
Income tax payable (4,896) (7,436)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 168,817 468,684
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (16,637) (3,208)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (16,637) (3,208)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to stockholders (264,999) (315,000)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (264,999) (315,000)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (112,819) 150,476
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 528,647 420,108
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD 415,828 570,584
The accompanying Notes to Condensed Financial Statements are an integral part of
these financial statements.
F-33
BLAIR MANAGEMENT SERVICES, INC
d/b/a BLAIR TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Blair Technology Group ("Blair") was incorporated in the Commonwealth of
Pennsylvania on January 6, 1992. Blair's principal business is the provision of
information technology consulting and staffing services. The information
technology group of Blair specializes in web enabled business continuity
planning, technology utilization reviews, strategic technology planning, network
design, network installation, network security and objective third-party system
selection and implementation. The staffing services group specializes in
information technology staffing for its client's permanent and contract needs.
Blair operates primarily in the mid-Atlantic region of the United States.
The consolidated condensed financial statements included herein have been
prepared without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations; however, the
registrant believes that the disclosures are adequate to make the information
presented not misleading. The registrant recommends that you read the condensed
consolidated financial statements in conjunction with Blair's financial
statements and related notes included in Exhibit 99.2 for the fiscal year ended
December 31, 2004 and 2003.
In the opinion of the registrant, the accompanying financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position of Blair at September 30, 2005 and
December 31, 2004, its results of operations for the nine months ended September
30, 2005 and September 30, 2004, and its cash flows for the nine months ended
September 30, 2005 and September 30, 2004.
Description of Critical Accounting Policies
The preparation of these consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America.
Management routinely makes judgments and estimates about the effects of matters
that are inherently uncertain. As the number of variables and assumptions
affecting the probable future resolution of the uncertainties increase, these
judgments become even more subjective and complex. We have identified certain
accounting policies, described below, that are the most important to the
portrayal of Blair's current financial condition and results of operations.
Use of Accounting Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
On an ongoing basis, management evaluates its estimates including those related
to contingent liabilities, revenue recognition, and other intangible assets.
Management bases its estimates on historical experience and on various other
factors that are believed to be reasonable at the time the estimates are made.
Revenue Recognition
Revenues from time and materials contracts are recognized as costs are incurred
at amounts represented by the agreed-upon billing amounts.
Fixed price contracts involve specific service performance throughout a period.
Revenues on fixed price contracts that provide for Blair to render services
throughout a period are recognized as earned according to contract terms as
service is provided. In certain arrangements, Blair enters into contracts that
include the delivery of a combination of two or more of its service offerings.
Such contracts are divided into separate units of accounting and revenue is
recognized separately, and in accordance with, Blair's revenue recognition
policy for each element.
F-34
Revenues recognized on contracts for which billings have not yet been presented
to customers are included in accounts receivable in the accompanying balance
sheets.
Deferred revenue relates to contracts for which customers pay in advance for
services. Blair recognizes deferred revenue attributable to its service
contracts as the service is delivered.
Cost of Revenue
Cost of revenue consists primarily of labor, consultant, subcontract, materials,
travel expenses and an allocation of indirect costs attributable to the
performance of the contract.
Accounts Receivable
An allowance for doubtful accounts is estimated and recorded based on Blair's
historical bad debt experience and based on management's judgment. There were no
receivables that management judged to be uncollectible at September 30, 2005 or
December 31, 2004.
Property and Equipment
For financial statement purposes, property, equipment and leasehold improvements
are recorded at cost and are depreciated using the straight-line method over a
period of 3-7 years. When property or equipment is sold or otherwise disposed
of, the related cost and accumulated depreciation are removed from the accounts
and any gain or loss is included in other income (expense). Repairs and
maintenance are charged to expense in the period incurred.
Major Customers
Blair derives substantial revenue from businesses in need of information
technology consulting and staffing services and grants credit to these customers
in the normal course of business. Sales to its two largest customers represented
27% and 12% of total sales for the nine months ended September 30, 2005, and 34%
and 17% for the nine months ended September 30, 2004, respectively.
Income Taxes
Blair is taxed as an S-Corporation under the Internal Revenue Code and
applicable state statues. Under an S-Corporation election, the income of the
corporation flows through to the stockholders to be taxed at the individual
level rather than the corporate level. Accordingly, Blair will have no federal
tax liability as long as the S-Corporation election is in effect.
2. Line of Credit
Blair has an available line of credit with First National Bank of PA for
$250,000. The line of credit bears interest at prime plus 0.25% and is secured
by all assets of Blair. The line of credit has a maturity date of June 11, 2010.
No amount was outstanding at September 30, 2005.
3. Research and Development Costs
The costs of materials and labor related to research and development activities
that have alternative future uses were capitalized and are being amortized over
their useful life of 60 months. Management periodically reviews and revises,
when necessary, its estimate of the future benefit of these costs and expenses
them if it deems there is no longer future benefit. As of September 30, 2005,
these capitalized costs were $44,559. Amortization of theses costs, which began
in October 2000, totaled $41,475 at September 30, 2005.
4. Related Party Transactions
Blair leases its administrative facility from KF Properties, a partnership,
owned 100% by two of the stockholders of Blair. The terms of this lease, which
expires on July 1, 2012 but which has four renewal periods of five years each,
requires rent of $4,500 per month at the commencement of the lease (July 1,
1997) and automatically increases on an annual basis by 4%. This lease also
contains a provision that the rent could be adjusted upward in August 1999 and
again in August 2004 to insure that the rent, at a minimum, equals the amount of
debt service. The lessor has the right to adjust this lease at any time. As of
July 2002, the 4% increase was waived and a decrease of $1,000 per month was
authorized by the lessor. Lease payments under this lease amount to $51,172 for
the twelve months ended December 31, 2004 and 2003. Lease payments for the nine
months ended September 30, 2005 amounted to $38,379.
F-35
The following reflects the minimum lease payments required under the above
operating lease for future periods.
2005 $12,793
2006 51,172
2007 51,172
2008 51,172
2009 51,172
2010 and Thereafter $127,930
5. Subsequent Events
On October 14, 2005, Paradigm Holdings, Inc., a Wyoming corporation ("Paradigm
Holdings"), Paradigm Solutions International, Inc., a Maryland corporation and
wholly-owned subsidiary of Paradigm Holdings ("PSI"), Blair Management Services,
Inc. t/d/b/a Blair Technology Group, a Pennsylvania corporation ("Blair") and
the shareholders of Blair (collectively, the "Shareholders") consummated a
merger transaction pursuant to the terms of that certain Merger Agreement (the
"Merger Agreement"), whereby Blair was merged with and into PSI. PSI is the
surviving corporation and will continue its corporate existence under the laws
of the State of Maryland as a wholly-owned subsidiary of Paradigm Holdings.
Pursuant to the Merger Agreement, the Shareholders exchanged all of the issued
and outstanding capital stock of Blair in exchange for (i) One Million Dollars
(US $1,000,000) and (ii) five hundred thousand shares of common stock, par value
$0.001 per share, of Paradigm Holdings (the "Shares"). Pursuant to the Merger
Agreement and an Escrow Agreement entered into by the parties, sixty thousand
(60,000) of the Shares will be held in escrow for a period of one (1) year from
the date of closing subject to the terms and conditions of the Merger Agreement.
In addition, under the terms of the Merger Agreement, Paradigm Holdings will
issue to the Shareholders up to an additional 350,000 shares of common stock of
Paradigm Holdings pursuant to an earn-out provision.
At the closing of the merger, PSI entered into employment agreements with
Messrs. Kristofco, Duffy and Fochler, the three shareholders of Blair.
F-36
INDEPENDENT AUDITOR'S REPORT
Mr. Thomas Kristofco, President
Blair Management Services, Inc.
d/b/a Blair Technology Group
3375 Lynnwood Drive
Altoona, PA 16602
We have audited the accompanying balance sheets of Blair Management Services,
Inc. (a Subchapter-S Corporation) as of December 31, 2004 and 2003, and the
related statements of income, changes in stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Blair Management Services, Inc.
at December 31, 2004 and 2003, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Young, Oakes, Brown & company, P.C
December 16, 2005
F-37
BLAIR MANAGEMENT SERVICES, INC.
d/b/a BLAIR TECHNOLOGY GROUP
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
ASSETS
Current Assets
Cash $ 528,647 $ 420,108
Accounts Receivable 609,022 750,341
Commissions and Royalties Receivable,
net of abatement of $18,523 and $12,179 3,588 11,413
Prepaid Expenses 115,640 124,071
----------- -----------
Total Current Assets $ 1,256,897 $ 1,305,933
----------- -----------
Property and Equipment
Leasehold Improvements $ 11,881 $ 11,881
Office Equipment 297,272 296,416
Automobiles 104,604 102,027
----------- -----------
$ 413,757 $ 410,324
Less: Accumulated Depreciation (298,427) (252,571)
----------- -----------
Net Property and Equipment $ 115,330 $ 157,753
----------- -----------
Other Assets
Commissions and Royalties Receivable $ 32,329 $ 46,723
Research and Development Costs, Net of
Accumulated Amortization of $37,875 and $28,963 6,684 15,596
Security Deposit 6,340 6,845
----------- -----------
Total Other Assets $ 45,353 $ 69,164
----------- -----------
TOTAL ASSETS $ 1,417,580 $ 1,532,850
See Accompanying Notes and Independent Auditor's Report
F-38
2004 2003
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 39,126 $ 86,645
Payroll Taxes Payable 10,197 0
Sales Tax Payable 344 1,243
Compensated Absences Payable 51,388 47,252
Unearned Revenue 136,977 182,704
Accrued Taxes and Expenses 23,866 20,466
----------- -----------
Total Current Liabilities $ 261,898 $ 338,310
----------- -----------
Stockholders' Equity
Common Stock, No Par Value, 1,000 Shares Authorized,
300 Shares Issued and Outstanding $ 65 $ 65
Additional Paid-In Capital 128,756 128,756
Retained Earnings 1,030,517 1,069,375
Treasury Stock, 150 Shares at Cost (3,656) (3,656)
----------- -----------
Total Stockholders' Equity $ 1,155,682 $ 1,194,540
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,417,580 $ 1,532,850
=========== ===========
See Accompanying Notes and Independent Auditor's Report
F-39
BLAIR MANAGEMENT SERVICES, INC.
d/b/a BLAIR TECHNOLOGY GROUP
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
---- ----
Revenues
Project Management Service Income $4,489,316 $5,408,717
Conference Revenues 62,469 0
---------- ----------
Total Revenues $4,551,785 $5,408,717
---------- ----------
Operating Expenses
Salaries $1,722,546 $1,570,408
Subcontractor Fees 1,617,332 2,780,495
Payroll Taxes 136,741 124,588
Employee Benefits 91,194 89,976
Profit-Sharing Plan 13,162 15,301
Rent 74,565 74,565
Travel 101,568 33,181
Corporate and Other Taxes 32,194 32,472
Internet Recruiting Site Fees 24,863 26,430
Amortization 8,912 8,912
Advertising 31,131 23,142
Depreciation 45,856 39,296
Insurance 67,153 40,394
Legal, Accounting, and Consulting 17,865 15,055
Office Expenses 14,969 18,863
Bad Debts 2,914 5,098
Continuing Education and Training 1,965 2,141
Auto Expense 3,471 9,254
Repairs and Maintenance 9,404 15,709
Professional Dues 5,668 7,295
Professional Literature 174 328
Telephone 24,018 23,137
Utilities 8,513 7,815
Miscellaneous 0 169
Meals and Entertainment 4,467 4,029
Postage 3,594 6,929
Royalty Abatement 18,523 12,179
Conference 55,365 0
---------- ----------
Total Operating Expenses $4,138,127 $4,987,161
---------- ----------
Net Income from Operations $ 413,658 $ 421,556
---------- ----------
Other Income $ 9,935 $ 4,742
---------- ----------
Net Income $ 423,593 $ 426,298
========== ==========
See Accompanying Notes and Independent Auditor's Report
F-40
BLAIR MANAGEMENT SERVICES, INC.
d/b/a BLAIR TECHNOLOGY GROUP
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004 AND 2003
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock Total
----------- ----------- ----------- ----------- -----------
Balance - December 31, 2002 $ 65 $ 128,756 $ 914,824 $ (3,656) $ 1,039,989
Net Income 0 0 426,298 0 426,298
Dividends 0 0 (271,747) 0 (271,747)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 2003 $ 65 $ 128,756 $ 1,069,375 $ (3,656) $ 1,194,540
Net Income 0 0 423,593 0 423,593
Dividends 0 0 (462,451) 0 (462,451)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 2004 $ 65 $ 128,756 $ 1,030,517 $ (3,656) $ 1,155,682
=========== =========== =========== =========== ===========
See Accompanying Notes and Independent Auditor's Report
F-41
BLAIR MANAGEMENT SERVICES, INC.
d/b/a BLAIR TECHNOLOGY GROUP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
--------- ---------
Cash Flows from Operating Activities
Net Income $ 423,593 $ 426,298
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 45,856 39,296
Amortization 8,912 8,912
(Increase) Decrease in:
Accounts Receivable 163,538 387,564
Prepaid Expenses 8,431 (66,072)
Other Assets 505 0
Increase (Decrease) in:
Accounts Payable (47,519) (189,619)
Accrued Expenses 3,400 (9,729)
Payroll and Other Taxes 9,298 (3,534)
Unearned Revenue (45,727) 31,550
Compensated Absences 4,136 (16,918)
--------- ---------
Net Cash Provided by Operating Activities $ 574,423 $ 607,748
--------- ---------
Cash Flows from Investing Activities
Purchases of Property and Equipment ($ 3,433) $(100,280)
--------- ---------
Cash Flows from Financing Activities
Dividends to Stockholders $(462,451) $(271,747)
--------- ---------
Net Increase (Decrease) in Cash $(108,539) $ 235,721
Cash Balance - Beginning of Year 420,108 184,387
--------- ---------
Cash Balance - End of Year $ 528,647 $ 420,108
========= =========
See Accompanying Notes and Independent Auditor's Report
F-42
BLAIR MANAGEMENT SERVICES, INC.
d/b/a BLAIR TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note A: Summary of Significant Accounting Policies
Business Activity
The acquisition of the Company as of October 14, 2005 is discussed in Note J.
Blair Technology Group was incorporated in the Commonwealth of Pennsylvania on
January 6, 1992. The Corporation's principal business is the provision of
information technology consulting and staffing services. The Information
Technology segment of the Corporation specializes in web enabled business
continuity planning, technology utilization reviews, strategic technology
planning, network design, network installation, network security, and objective
third-party system selection and implementation. The staffing services segment
specializes in information technology staffing for its client's permanent and
contract needs. The Company operates primarily in the mid-Atlantic region of the
United States.
Financial Statement Presentation The accompanying financial statements have been
prepared in accordance with generally accepted accounting principles and on a
continuing operations basis. The presentation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
of assets and liabilities at the date of the financial statements and the
reported amounts and disclosures of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Concentrations
Financial instruments that potentially subject the Corporation to credit risk
include cash balances at banks that exceeded the related federal deposit
insurance coverage by $385,724.
The Corporation derives substantial revenue from businesses in need of
information technology consulting and staffing services and grants credit to
these customers in the normal course of business. Sales to two customers
represented 52% and 59% of total sales for the years ended December 31, 2004 and
2003.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Corporation considers all
instruments with an original maturity of three months or less to be cash
equivalents.
Accounts Receivable
Management closely monitors outstanding accounts receivable and charges off to
expense any balances that are determined to be uncollectible. At December 31,
2004, the Company considered all remaining accounts receivable to be fully
collectible. Accordingly, there was no allowance for doubtful accounts. Bad debt
expense was $2,914 for 2004.
Property and Equipment
For financial statement purposes, property, equipment, and leasehold
improvements are recorded at cost and are depreciated using the straight-line
method over a period of 3 - 7 years. When property or equipment is sold or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the accounts and any gain or loss is included in income. Maintenance and
repairs are charged to expense in the period incurred.
F-43
BLAIR MANAGEMENT SERVICES, INC.
d/b/a BLAIR TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(CONTINUED)
Note A: Summary of Significant Accounting Policies (Continued)
Unearned Revenue
Unearned revenue represents retainers received for services not yet rendered.
Income is recognized when services are performed.
Advertising
Nondirect-response advertising costs, amounting to $31,131 and $23,142 in 2004
and 2003 were expensed as incurred.
Note B: Income Taxes
The Corporation is taxed as an S Corporation under the Internal Revenue Code and
applicable state statues. Under an S Corporation election, the income of the
Corporation flows through to the stockholders to be taxed at the individual
level rather than the corporate level. Accordingly, the Corporation will have no
federal tax liability as long as the S Corporation election is in effect.
The Corporation in addition to being a Subchapter S Corporation has elected to
report its taxable income on the cash basis of accounting. The cumulative cash
to accrual adjustment would produce additional taxable income of $563,000 and
$661,000 for 2004 and 2003.
Note C: Line of Credit
The Corporation has an available line of credit with First National Bank of PA
for $250,000. The line of credit bears interest at prime plus .25% and is
secured by all assets of the Corporation. No amounts were outstanding at
December 31, 2004 or 2003.
Note D: Defined Contribution Retirement Plan
The Corporation sponsors a profit-sharing 401(k) retirement plan covering
substantially all employees. The Corporation's expense related to this plan
totaled $13,162 and $15,301 for 2004 and 2003. Under the plan, the Corporation
contributed 25% up to 5% of employees' gross pay at the end of the year.
Note E: Operating Leases
In addition to the related party lease described in Note G, the Corporation also
leases office space under an operating lease. The lease had a term from December
2001 to November 2003, and it has been renewed each year since then. Annual rent
expense under this operating lease amounted to $23,392 for 2004 and 2003. At
December 31, 2004, the future minimum lease payments under this operating lease
follows:
December 31, 2005 $21,443
F-44
BLAIR MANAGEMENT SERVICES, INC.
d/b/a BLAIR TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(CONTINUED)
Note F: Research and Development Costs
The costs of materials and labor related to research and development activities
that have alternative future uses were capitalized and are being amortized over
their useful life of 60 months. Management periodically reviews and revises,
when necessary, its estimate of useful lives.
Note G: Related Party Transactions
Blair Management Services, Inc. leases their building from KF Properties, which
is 100% owned by two of the stockholders. The lease began in July 1997 and has
four renewal periods in five year increments. The original terms of the lease
were monthly payments of $4,500 with automatic annual increases of 4% unless
waived by the lessor. The lease contains provisions that rent can be adjusted
upward in certain years to ensure that the rent, at a minimum, equals the amount
of debt service. The lessor has the right to adjust the lease at any time, and
as of July 2002, the 4% increase was waived and a decrease of $1,000 per month
was authorized. Lease payments under this lease amounted to $51,172 in 2004 and
2003, and are expected to increase to $54,000 for 2005.
The following reflects the minimum lease payments required under the above
operating lease for future periods.
2005 $ 54,000
2006 54,000
2007 54,000
2008 54,000
2009 54,000
2010 and Thereafter 135,000
Note H: Commissions and Royalties Receivable
The Corporation has an agreement with Strohl Systems Group, Inc. to receive
commissions and royalties in exchange for consulting and intellectual property
ownership. The schedule of payments for the long-term portion follows:
2006 $23,167
2007 5,530
2008 1,330
2009 719
2010 719
Thereafter 864
-------
$32,329
=======
F-45
BLAIR MANAGEMENT SERVICES, INC.
d/b/a BLAIR TECHNOLOGY GROUP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
(CONTINUED)
Note I: Variable Interest Entities
In December 2003, the FASB issued revised Interpretation No. 46, Consolidation
of Variable Interest Entities. Interpretation No. 46 requires nonpublic
companies with a variable interest in a variable interest entity to apply this
guidance as of the beginning of the period beginning after December 15, 2004 for
existing interests and immediately for new interests. The application of the
guidance could result in the consolidation of a variable interest entity. The
only potential variable interest entity with which the Company is associated is
the lessor of a building as discussed in the following paragraph.
The lessors' assets consist primarily of the building, land, and improvements
with a net book value of $340,000, and its liabilities consist primarily of the
mortgage in the amount of $159,000. Estimated fair value of the property is
assumed to equal or exceed book value, therefore, consolidation would have a
positive effect to equity. The lease, which expires in 2012 and has four
subsequent five-year renewal options, is treated as an operating lease.
Note J: Subsequent Event
The Company entered into an acquisition agreement effective October 14, 2005,
whereby the shareholders sold their stock for cash and common stock of the
acquiring company. Additional consideration will be paid in the form of common
stock if certain future operating performance targets are met. The transaction
will be reported as a purchase, with contingent consideration (if paid) being
added to the cost of the acquisition. The additional consideration would
increase the amount of goodwill arising from the acquisition. Final
determination of the purchase price allocation amounts had not been determined
as of December 16, 2005.
F-46
PARADIGM HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On October 14, 2005, Paradigm Holdings, Inc. ("Paradigm") acquired Blair
Management Services, Inc. ("Blair") t/d/b/a Blair Technology Group for $1.0
million in cash and 500,000 shares of common stock. At the October 14, 2005
share price of $3.00, the transaction has a total purchase price $2.5 million
excluding contingent consideration based on achieving future financial targets.
The acquisition has been accounted for using purchase accounting.
Blair has provided business continuity and information technology security
solutions to over 300 commercial customers in a variety of industries including
finance, healthcare and energy. The acquisition of Blair allows Paradigm to
combine the OpsPlanner software suite with Blair's extensive credentials in the
business continuity arena. Paradigm Holdings can now offer our customers a
comprehensive business continuity solution. The acquisition also allows Paradigm
Holdings to expand its presence in the commercial marketplace.
Contingent Consideration
The preliminary purchase price excludes the effect of the additional purchase
price of up to 350,000 shares of common stock whose issuance is contingent on
Blair achieving certain earnings levels for the period from November 1, 2005
through October 31, 2006. The earnings levels are based on net income which
result in contingent shares being issued as follows: if Blair net income is less
than $275,000, there shall be no contingent common shares issued. If Blair net
income is at least $275,000 but less than $300,000, there shall be 125,000
contingent common shares issues. If Blair net income is at least $300,000 but
less than $325,000, there shall be 250,000 contingent common shares issued. If
Blair net income is $325,000 or greater, there shall be 350,000 contingent
common shares issued. If all 350,000 contingent shares are issued, approximately
$1,050,000 of additional purchase price will result of which all would be
attributable to goodwill.
Basis of Presentation
The unaudited pro forma condensed combined statements of operations for the
twelve months ended December 31, 2004 and the nine months ended September 30,
2005 included in this report have been prepared as if the acquisition occurred
on January 1, 2004. The unaudited pro forma condensed combined consolidated
balance sheet as of September 30, 2005 included in this report has been prepared
as if the acquisition occurred on September 30, 2005.
The unaudited pro forma condensed combined financial statements, which have been
prepared in accordance with rules prescribed by Article 11 of Regulation S-X,
are provided for informational purposes only and are not necessarily indicative
of the past or future results of operations. No effect has been given for
operational efficiencies that may have been achieved if the acquisition had
occurred on January 1, 2004.
This information should be read in conjunction with our Current Report of Form
8-K, filed with the SEC on October 20, 2005, Paradigm's historical financial
statements and the accompanying notes in both our Annual Report on Form 10-K/A
for the fiscal year ended December 31, 2004 and our Quarterly Report on Form
10-Q for the nine months ended September 30, 2005 and Blair's historical
financial statements and the accompanying notes that are included in this
Current Report on Form 8-K/A.
F-47
PARADIGM HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS ENDING DECEMBER 31, 2004
Paradigm Pro Forma Pro Forma
Holdings Blair Adjustments Note Combined
------------ ------------ ------------ ---- ------------
Contract Revenue
Service contracts $ 39,487,603 $ 4,551,785 (80,791) (1) $ 43,958,597
Repair and maintenance contracts 22,268,698 -- -- 22,268,698
------------ ------------ ------------ ------------
Total contract revenue 61,756,301 4,551,785 (80,791) 66,227,295
------------ ------------ ------------ ------------
Cost of revenue
Service contracts 33,950,665 3,004,557 (80,791) (2) 36,874,431
Repair and maintenance contracts 20,594,289 -- -- 20,594,289
------------ ------------ ------------ ------------
Total cost of revenue 54,544,954 3,004,557 (80,791) 57,468,720
------------ ------------ ------------ ------------
Gross margin 7,211,347 1,547,228 -- 8,758,575
Selling, General & Administrative 8,994,477 1,101,376 51,600 (10) 10,147,453
------------ ------------ ------------ ------------
Income (loss) from operations (1,783,130) 445,852 (51,600) (1,388,878)
Total other (expense) income (49,391) 9,935 (70,000) (6) (109,456)
------------ ------------ ------------ ------------
Net income (loss) before income taxes $ (1,832,521) $ 455,787 $ (121,600) $ (1,498,334)
Provision (benefit) for income taxes 1,934,380 32,194 (2,544,931) (8) (578,357)
------------ ------------ ------------ ------------
Net income (loss) $ (3,766,901) $ 423,593 $ 2,423,331 $ (919,977)
------------ ------------ ------------ ------------
Basic and diluted net income (loss)
per common share $ (0.21) $ (0.05)
------------ ------------ ------------ ------------
Basic and diluted weighted average common shares
used to compute net income (loss) per share 17,896,709 500,000 18,396,709
------------ ------------ ------------ ------------
F-48
PARADIGM HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDING SEPTEMBER 30, 2005
Paradigm Pro Forma Pro Forma
Holdings Blair Adjustments Note Combined
------------ ------------ ------------ ---- ------------
Contract Revenue
Service contracts $ 31,691,621 $ 2,477,250 (218,751) (1) $ 33,950,120
Repair and maintenance contracts 14,527,534 -- -- 14,527,534
------------ ------------ ------------ ------------
Total contract revenue 46,219,155 2,477,250 (218,751) 48,477,654
------------ ------------ ------------ ------------
Cost of revenue
Service contracts 25,603,568 1,707,205 (218,751) (2) 27,092,022
Repair and maintenance contracts 13,528,080 -- -- 13,528,080
------------ ------------ ------------ ------------
Total cost of revenue 39,131,648 1,707,205 (218,751) 40,620,102
------------ ------------ ------------ ------------
Gross margin 7,087,507 770,045 -- 7,857,552
Selling, General & Administrative 5,876,367 853,288 97,030 (10) 6,826,685
------------ ------------ ------------ ------------
Income (loss) from operations 1,211,140 (83,243) (97,030) 1,030,867
Total other (expense) income (145,445) 3,049 (52,500) (6) (194,896)
------------ ------------ ------------ ------------
Net income (loss) before income taxes $ 1,065,695 $ (80,194) $ (149,530) $ 835,971
Provision (benefit) for income taxes 362,190 12,515 (101,189) (8) $ 273,516
------------ ------------ ------------ ------------
Net income (loss) $ 703,505 $ (92,709) $ (48,341) $ 562,455
------------ ------------ ------------ ------------
Basic and diluted net income (loss)
per common share $ 0.04 $ 0.03
------------ ------------ ------------ ------------
Basic and diluted weighted average common shares
used to compute net income (loss) per share 20,003,368 500,000 20,503,368
------------ ------------ ------------ ------------
F-49
PARADIGM HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2005
Paradigm Pro Forma Pro Forma
Holdings Blair Adjustments Note Combined
----------- ----------- ----------- ---- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,131,176 $ 415,828 -- $ 1,547,004
Accounts receivable - net 13,318,851 471,899 -- 13,790,750
Inventory, net -- -- -- --
Prepaid expenses 153,251 58,348 -- 211,599
Other current assets 529,287 -- -- 529,287
----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 15,132,565 946,075 -- 16,078,640
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET 968,980 102,091 -- 1,071,071
----------- ----------- ----------- -----------
OTHER ASSETS
Goodwill -- -- 1,987,788 (3) 1,987,788
Other assets -- 9,136 -- 9,136
Deposits 83,382 6,340 -- 89,722
----------- ----------- ----------- -----------
TOTAL OTHER ASSETS 83,382 15,476 1,987,788 2,086,646
----------- ----------- ----------- -----------
TOTAL ASSETS $16,184,927 $ 1,063,642 $ 1,987,788 $19,236,357
----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft 1,477,238 -- -- 1,477,238
Note payable - line of credit 3,182,711 -- 1,000,000 (4) 4,182,711
Capital lease payable 11,476 -- -- 11,476
Accounts payable and accrued expenses 4,432,705 116,084 -- 4,548,789
Accrued salaries and related payables 2,022,913 73,285 -- 2,096,198
Income taxes payable -- 18,970 -- 18,970
Deferred income taxes 515,167 -- 75,000 (7) 590,167
Deferred revenue 466,319 57,329 -- 523,648
----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES 12,108,529 265,668 1,075,000 13,449,197
LONG TERM LIABILITIES
Deferred rent 149,871 -- -- 149,871
Capital lease payable, net of current portion 24,293 -- -- 24,293
Deferred income taxes, net of current portion 842,979 -- -- 842,979
----------- ----------- ----------- -----------
TOTAL LONG TERM LIABILITIES 1,017,143 -- -- 1,017,143
TOTAL LIABILITIES 13,125,672 265,668 1,075,000 14,466,340
----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY
Common stock - $.01 par value, 50,000,000
Shares authorized, 20,003,368 shares
Issued and outstanding 200,034 65 4,935 (5,9) 205,034
Additional paid in capital -- 128,756 1,577,006 (9) 1,705,762
Retained earnings 2,859,221 672,809 (672,809) (9) 2,859,221
Treasury stock -- (3,656) 3,656 (9) --
----------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,059,255 797,974 912,788 4,770,017
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 16,184,927 1,063,642 1,987,788 19,236,357
F-50
PARADIGM HOLDINGS, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Basis of Presentation
The unaudited pro forma condensed combined statements of operations for the
twelve months ended December 31, 2004 and the nine months ended September 30,
2005 included in this report have been prepared as if the acquisition occurred
on January 1, 2004. The unaudited pro forma condensed combined consolidated
balance sheet as of September 30, 2005 included in this report has been prepared
as if the acquisition occurred on September 30, 2005.
The acquisition has been accounted for using purchase accounting.
A reclassification has been made between Blair's selling, general and
administrative expenses and cost of revenues to conform to Paradigm's historical
statement of operations.
Financial Notes
(1) Adjustments made to revenues to eliminate inter-company transactions
between Paradigm Holdings and Blair as if the acquisition occurred at the
beginning of the reported period.
(2) Adjustments made to cost of revenues to eliminate inter-company
transactions between Paradigm Holdings and Blair as if the acquisition
occurred at the beginning of the reported period.
(3) Goodwill represents the excess purchase price of $2.5 million over the
historical basis of the assets and liabilities of Blair. The excess of the
purchase price was recorded as goodwill as none was attributable to
identifiable intangible assets. The purchase price, purchase price
allocation, and financing of the transaction are summarized as follows:
Purchase price paid as:
Proceeds from borrowings on line of credit $1,000,000
Common stock 1,500,000
----------
Total purchase consideration 2,500,000
Allocated to:
Historical book value of Blair's assets and liabilities 437,212
Deferred tax impact of purchase price accounting
adjustments 75,000
-----------
Excess purchase price over allocation to identifiable
assets and liabilities (goodwill) $1,987,788
The purchase price allocation is preliminary based on whether any
contingent consideration will be paid and whether intangible assets may be
associated with the one-year non-compete agreements provided to the three
Blair shareholders included in the Merger Agreement. Management expects
that any reclassification of goodwill to intangible assets will be
completed in the next thirty days. The potential magnitude of such a
reclassification would be a maximum of $480,000 of intangible assets that
would result in annual amortization of $160,000 over the three-year
employment agreements signed by the Blair shareholders.
(4) Assumes $1.0 million of borrowings on Paradigm's line of credit for the
acquisition of Blair.
(5) Represents the value of $1.5 million in Paradigm Holding's stock issued as
part of the $2.5 million purchase price of Blair. Paradigm Holdings issued
500,000 shares of common stock on October 14, 2005. The price per share of
Paradigm Holding's common stock on October 14, 2005 was $3.00. If all
these contingent shares, but not the greater level of net income necessary
to require issuance of any of the contingent shares, were included in the
EPS calculation for the period ended September 30, 2005, the EPS would
have been $0.03.
F-51
(6) Adjustments made to reflect additional interest expense assuming the
acquisition occurred at the beginning of the period presented. Interest
expense was calculated using an annual interest rate of LIBOR plus 3.00
points (or a total of 7.00%) for each period presented. If interest
expense were to increase 1/8%, then interest expense would have been
$1,250 and $938 greater for the year ended December 31, 2004 and the nine
months ended September 30, 2005, respectively.
(7) Provision for income taxes represents cash to accrual adjustments for
Blair from S-Corporation to C-Corporation tax status upon acquisition.
(8) Effective November 5, 2004, Paradigm revoked its S-Corporation status and
became a C-Corporation. After the revocation of the S election, Paradigm
will be responsible for income taxes generated as a result of reporting
taxable income. The financial statements as of and for the year ended
December 31, 2004 and at and for the nine months ended September 30, 2005,
include both audited financial statements and unaudited financial
statements, respectively, and pro-forma adjustments to provide for an
income tax provision (benefit) and a deferred income tax liability for
each year presented as if Paradigm had been a C-Corporation during these
periods of operation. Paradigm and Blair assumed an effective tax rate of
38.6% which reflects Federal taxes at 34% and state taxes, net of the
federal benefit.
The following table breaks out the calculation of provision (benefit) for
income taxes:
Adjustment Dec 31, 2004 Sep 30, 2005
- --------------------------------------------- ------------ -------------
Paradigm S-Corp to C-Corp conversion $ (2,641,733) $ --
Blair S-Corp to C-Corp conversion 143,740 (43,470)
Tax effect of pro forma adjustments at 38.6% (46,938) (57,719)
------------ ------------
Total provision (benefit) for income taxes $ (2,544,931) $ (101,189)
(9) Stockholder's equity adjustment reflects the payout of $1.0 million to
eliminate the Blair retained earnings, common stock, additional paid-in
capital and treasury stock upon acquisition.
(10) Adjustment to reflect the difference between actual salaries paid to the
principals of Blair and the salaries contained in the employment
agreements for Messrs. Kristofco, Duffy and Fochler.
F-52