<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1998
REGISTRATION NO. 333-66809
REGISTRATION NO. 333-43877
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
POST-EFFECTIVE
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
COMMAND SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 7371 06-1135009
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
76 BATTERSON PARK ROAD
FARMINGTON, CT 06032
(860) 409-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
EDWARD G. CAPUTO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COMMAND SYSTEMS, INC.
76 BATTERSON PARK ROAD
FARMINGTON, CT 06032
(860) 409-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
PAUL JACOBS, ESQ.
WARREN J. NIMETZ, ESQ.
FULBRIGHT & JAWORSKI L.L.P.
666 FIFTH AVENUE
NEW YORK, NY 10103
(212) 318-3000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: MARCH 12,
1998
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT OFFERING PRICE REGISTRATION FEE(2)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock par value
$.01 per share........ 345,000 Shares $12.00 $4,140,000 $1,221.30
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 45,000 Shares sold pursuant to the Underwriters' over-allotment
options. Excludes 2,760,000 shares of Common Stock registered for sale
under the Registration Statement on Form S-1, Registration No. 333-43877.
(2) A registration fee of $9,770.40 was previously paid with respect to
2,760,000 shares of Common Stock sold under the Registration Statement on
Form S-1, Registration No. 333-43877. The $1,221.30 was previously paid.
---------------
THIS REGISTRATION STATEMENT INCLUDES A COMBINED PROSPECTUS PURSUANT TO RULE
429, WHICH ALSO RELATES TO REGISTRATION STATEMENT ON FORM S-1, REGISTRATION
NO. 333-43877.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT SPECIFICALLY STATING THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY +
+NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN +
+OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE +
+SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
DECEMBER , 1998
3,105,000 SHARES OF COMMON STOCK
COMMAND SYSTEMS, INC.
This Prospectus relates to 3,105,000 shares of our Common Stock which were
sold as part of our initial public offering on March 12, 1998 at the price of
$12 per share. Of such amount, (i) we sold 2,200,000 shares; and (ii) certain
shareholders sold 905,000 shares. Shortly before the offering, we increased the
offering by 345,000 shares, including 45,000 shares which were part of an over-
allotment option granted to the underwriters of the offering. 3,105,000 shares
were sold in the initial public offering, of which 2,760,000 shares (which
included 360,000 shares subject to the underwriters' over-allotment option)
were properly registered, but the remaining 345,000 shares were not registered.
We described this increase in the size of the offering in a final prospectus.
However, we did not file a registration statement covering the additional
345,000 shares with the Securities and Exchange Commission under Rule 462(b) of
the Securities Act of 1933. This Prospectus forms a part of a registration
statement filed with the Commission to register the 345,000 shares. This
Prospectus also forms a part of a post-effective amendment to the registration
statement relating to the 2,760,000 shares. As provided in the Securities Act,
certain persons purchasing shares in violation of the registration provisions
of the Securities Act may recover what he or she paid for the shares with
interest upon the return of the shares, less the amount of any income received,
or damages if he or she no longer owns the shares. See "Risk Factors--Sale of
Unregistered Shares; Violation of the Act."
NASDAQ NATIONAL MARKET TRADING SYMBOL--CMND
Closing Price (December 10, 1998): $3 1/4
The sale of the shares in the initial public offering was underwritten by the
underwriters named under the caption "Plan of Distribution." We and certain
shareholders who sold shares in the initial public offering agreed to indemnify
the underwriters against certain liabilities relating to the offering,
including liabilities under the Act. See "Plan of Distribution."
Neither the underwriters nor their
representatives have participated in the
preparation, review or dissemination of this
Prospectus or the Registration Statement which
contains this Prospectus. Neither the underwriters
nor their representatives have passed upon, or
performed any investigation regarding, any of the
factual or legal matters set forth in this
Prospectus or the Registration Statement which
contains this Prospectus, except to the extent
such investigation was performed in connection
with the initial public offering and the initial
Registration Statement (and the prospectus dated
March 12, 1998 that formed a part of the initial
Registration Statement) relating thereto.
-----------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES
ONLY IF YOU CAN AFFORD A COMPLETE LOSS. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
-----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION....................................... iii
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................. iii
PROSPECTUS SUMMARY........................................................ 1
The Company............................................................. 1
Services as Percentage of Total Revenue................................. 2
Our Mission............................................................. 2
Our Strategy............................................................ 2
Recent Developments..................................................... 3
More About Us........................................................... 3
The Offering............................................................ 3
Summary Consolidated Financial Data..................................... 4
RISK FACTORS.............................................................. 5
Risks Associated with Failure to Obtain Contracts to Perform More
Profitable Services.................................................... 5
Variability of Quarterly Operations and Financial Results............... 5
Management of Growth.................................................... 6
Sale of Unregistered Shares; Violation of the Securities Act............ 7
Shareholder Litigation.................................................. 7
Competitive Market for Technical Personnel.............................. 8
Reliance on Significant Customers; Absence of Long-Term Contracts....... 8
Risks Associated with Year 2000 Service Offering; Limited Nature of
Demand for Year 2000 Solutions Services................................ 9
Competition............................................................. 10
Rapid Technological Change; Dependence on New Solutions................. 10
Dependence on Bangalore Facility........................................ 10
Dependence on Continued Authorization to Resell......................... 11
Immigration Issues...................................................... 11
Internal Controls....................................................... 11
Risks of Doing Business in International Markets........................ 11
Potential Liability to Customers........................................ 12
Risks Related to Possible Acquisitions and Internal Expansion........... 12
Dependence on Key Executives............................................ 13
Control By Principal Stockholder........................................ 13
Broad Discretion of Management as to Use of Proceeds.................... 13
Intellectual Property Rights............................................ 13
Benefits of the Initial Public Offering to Then Existing Stockholders... 14
Public Market for the Common Stock; Price and Market Volatility......... 14
Immediate and Substantial Dilution...................................... 14
Certain Anti-Takeover Provisions........................................ 14
Shares Eligible for Future Sale; Registration Rights.................... 15
USE OF PROCEEDS........................................................... 16
DIVIDEND POLICY........................................................... 17
PRICE RANGE OF COMMON STOCK............................................... 17
CAPITALIZATION............................................................ 18
DILUTION.................................................................. 19
SELECTED CONSOLIDATED FINANCIAL DATA...................................... 20
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 22
Overview................................................................ 22
Income Tax Matters...................................................... 23
Results of Operations................................................... 24
Quarterly Results of Operations......................................... 28
Liquidity and Capital Resources......................................... 29
Shareholder Litigation.................................................. 31
Inflation............................................................... 32
The Year 2000 Issue..................................................... 32
BUSINESS.................................................................. 32
Summary................................................................. 32
Industry Overview....................................................... 33
Recent Developments; Third Quarter Results.............................. 34
The Command Systems Solution............................................ 35
Business Strategy....................................................... 36
Services................................................................ 37
Customers............................................................... 40
Representative Engagements.............................................. 41
Sales and Marketing..................................................... 41
Human Resources......................................................... 42
Competition............................................................. 43
Intellectual Property Rights............................................ 43
Facilities.............................................................. 43
Legal Proceedings....................................................... 44
MANAGEMENT................................................................ 45
Directors and Executive Officers........................................ 45
Committees of the Board of Directors.................................... 47
Compensation of Directors............................................... 48
Key Person Life Insurance............................................... 48
Executive Compensation.................................................. 48
Employee Benefit Plans.................................................. 50
Compensation Committee Interlocks and Insider Participation............. 52
CERTAIN TRANSACTIONS...................................................... 52
Transactions with Phoenix............................................... 52
Transactions with Officers.............................................. 53
PRINCIPAL AND SELLING STOCKHOLDERS........................................ 54
DESCRIPTION OF CAPITAL STOCK.............................................. 55
Common Stock............................................................ 55
Preferred Stock......................................................... 55
Delaware Law and Certain Charter and By-Law Provisions.................. 55
Transfer Agent and Registrar............................................ 56
SHARES ELIGIBLE FOR FUTURE SALE........................................... 57
Registration Rights..................................................... 57
Lock-Up Agreements...................................................... 57
PLAN OF DISTRIBUTION...................................................... 59
LEGAL MATTERS............................................................. 60
EXPERTS................................................................... 60
</TABLE>
ii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information filed by us at the Commission's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and 500 West
Madison Street, Chicago, Illinois 60661. You can obtain copies of this
material from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference rooms in New
York, New York and Chicago, Illinois, at prescribed rates. Please call the
Commission at 1-800-SEC-0330 for further information on the public reference
rooms. You may also inspect copies of such information at the reading room of
the library of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006. Our filings with the Commission are also
available to the public from commercial document retrieval services and at the
Commission's web site at "http://www.sec.gov." More information can also be
obtained from our website at "http:// www.commandsys.com". Our website is not
part of this Prospectus.
----------------
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus (including the documents incorporated by reference in this
Prospectus) contains certain "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995 and information relating to
us that are based on the beliefs of our management, as well as assumptions
made by and information currently available to our management. When used in
this Prospectus, the words "estimate," "project," "believe," "anticipate,"
"intend," "expect" and similar expressions are intended to identify forward-
looking statements. Such statements reflect our current views with respect to
future events. These statements are subject to risks and uncertainties that
could cause actual results to differ materially from those contemplated in the
forward-looking statements. Many of these risks are discussed under "Risk
Factors." You are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date of this Prospectus. We do
not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after such date
or to reflect the occurrence of unanticipated events.
----------------
iii
<PAGE>
PROSPECTUS SUMMARY
This Prospectus forms a part of the Registration Statement covering the
345,000 shares, which sale in the initial public offering was not the subject
of an effective registration statement. This Prospectus also forms a part of
the Registration Statement covering 2,760,000 shares sold in the initial public
offering. See "Risk Factors--Sale of Unregistered Shares; Violation of the
Securities Act."
The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere in this Prospectus.
Except as otherwise described, all information in this Prospectus (i)
reflects the conversion of all shares of our Series A and Series B Convertible
Preferred Stock into 1,181,750 shares of our Common Stock at the time of the
initial public offering and (ii) reflects a 1-for-2 reverse stock split of our
Common Stock which occurred in February 1998. See "Capitalization,"
"Description of Capital Stock," "Principal and Selling Stockholders" and "Plan
of Distribution."
THE COMPANY
Command Systems, Inc. ("Command" or the "Company") provides a wide range of
information technology ("IT") solutions and services to financial services
organizations to support their evolving business processes. We utilize leading
technologies to offer our customers a comprehensive range of IT services,
including:
.technology
.education services
In 1996 we established a software development facility in Bangalore, India
which now provides our customers with increased access to skilled IT
professionals on a cost-effective basis. As of September 30, 1998, we employed
305 IT professionals in our four U.S. offices and the Bangalore facility. We
develop and maintain long-term relationships with our customers. In 1997, we
provided services to over 100 customers and for each of 1996 and 1997 over 60%
of our revenue was derived from existing customers from the previous year. Our
customers are typically large financial services organizations, especially
leading insurance companies, such as Mutual Life Insurance Company of New York,
The Hartford Financial Services Group, Inc., MassMutual, Phoenix Home Life
Mutual Insurance Company and Aetna, and G.E. Capital.
According to industry sources, the U.S. market for outsourced IT services is
expected to grow from over $13 billion in 1996 to approximately $24 billion in
2001, representing an average annual growth rate of 12.8%. We believe that a
number of factors will cause the demand for IT services to continue to grow,
particularly for organizations in such data and technology intensive industries
as the insurance, banking, brokerage and other financial services industries.
These factors include:
.intense competition .rapid technological innovation and
change
.globalization
.deregulation
.strategic shift of many financial services organizations to focus on core
competencies
Businesses are finding it increasingly difficult and expensive to maintain
in-house the management capabilities and technical expertise necessary to
successfully integrate and deploy advanced IT systems and applications in a
timely and cost-effective manner. As a result, financial services organizations
are increasingly turning to third-party IT service providers to help them (i)
evaluate, develop, implement and support new IT systems and applications, and
(ii) maintain existing legacy systems and applications.
1
<PAGE>
We offer the following technology services:
.IT staff augmentation
.Year 2000 solutions services
.Project-based applications development and implementation
.Network design and deployment
.Internet/intranet development and systems maintenance
We also offer other services, including:
.education and training services to our customers' IT staffs
These services may be provided individually or as a combination of offerings
to provide comprehensive IT solutions. We believe that the key attributes of
our IT solutions are (i) the provision of a broad range of IT services, (ii)
our strategic focus on the financial services industry, (iii) our Bangalore,
India facility, (iv) our complete range of Year 2000 solutions services and (v)
our expertise in key and emerging technologies.
SERVICES AS PERCENTAGE OF TOTAL REVENUE
<TABLE>
<CAPTION>
THREE MONTHS
THREE MONTHS ENDED
YEAR ENDED ENDED JUNE 30, THREE MONTHS ENDED NINE MONTHS ENDED
SERVICE TYPE DECEMBER 31, 1997 MARCH 31, 1998 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
IT Staff Augmentation... 59% 51% 52% 62% 55%
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Year 2000 Solutions
Services............... 21% 31% 28% 25% 28%
- --------------------------------------------------------------------------------------------------------------
Software and hardware
solutions (including
education and training
and management
consulting services)... 12% 12% 14% 9% 12%
- --------------------------------------------------------------------------------------------------------------
Other application
development,
maintenance and
networking services.... 8% 6% 6% 4% 5%
</TABLE>
As illustrated above, Year 2000 projects and other higher margin services
decreased as a percentage of the Company's revenue in the three months ended
June 30, 1998, compared to the three months ended March 31, 1998. Those
services continued to decrease as a percentage of the Company's sales in the
three months ended September 30, 1998. Year 2000 projects and other higher
margin services may continue to decrease as a percentage of the Company's
revenue for future periods. The Company has decided to de-emphasize its
hardware solutions services and, therefore, hardware solutions may constitute a
decreasing percentage of its revenue.
OUR MISSION
Our objective is to become the preferred provider of IT services to an
expanding base of customers.
OUR STRATEGY
.Cross-sell our services to existing customers.
. Leverage our expertise within the insurance industry into a larger, more
diverse, customer base within the broader financial services market.
2
<PAGE>
.Derive a greater percentage of our revenue from more profitable services.
.Use effectively our Bangalore facility.
.Strengthen our preferred provider relationships with existing customers.
.Attract, train and retain highly skilled IT professionals.
RECENT DEVELOPMENTS
We lost $573,000 from operations in the three months ended September 30, 1998
compared with earnings from operations of $402,000 in the third quarter of
1997. Our gross margin was lower than expected for the three months ended
September 30, 1998, reflecting a less profitable mix of business and reduced
margins from Year 2000 and other project business. Operating results were also
less than we expected, primarily because of costs expended in increasing our
sales and project management personnel in anticipation of an increase in our
project business, which did not grow as expected. We reported a net loss of
$188,000 for the three months ended September 30, 1998, compared to a net loss
of $503,000 for the comparable 1997 period. Our results for the three months
ended September 30, 1998 benefited from interest income of $319,000. Our net
loss for the three months ended September 30, 1997 was affected by a non-
recurring charge of about $693,000 resulting from a change in our tax status.
MORE ABOUT US
We incorporated in Delaware on July 1, 1997. Prior to that time, we conducted
our business as Command Systems Incorporated, a corporation organized under the
laws of the State of Connecticut on April 2, 1985, which was merged into the
Company in December 1997. Our executive offices are located at 76 Batterson
Park Road, Farmington, Connecticut, 06032 and our telephone number is (860)
409-2000.
We own the following trademarks: Command Systems(TM), CommandMCS(TM),
CommandNET(TM), CommandOO(TM), CommandPRO(TM), CommandSOURCE(TM),
CommandSTAFF(TM), CommandU(TM), CommandWARE(TM), CommandWEB(TM),
Command2000(TM), C-BOLT(TM), Command International Software(TM) and our logo.
All other trade names, trademarks or service marks appearing in this Prospectus
are the property of their respective owners and are not our property.
THE OFFERING
<TABLE>
<S> <C>
Common Stock sold by the
Company................ 2,200,000 shares
Common Stock sold by the
Selling Stockholders... 905,000 shares
Common Stock outstanding
after the Initial
Public Offering........ 7,656,750 shares (1)
Use of proceeds......... For the repayment of debt, the payment of accumulated
and unpaid preferred stock dividends, the expansion
of sales and marketing capabilities and other general
corporate purposes, including working capital.
Nasdaq National Market
Symbol................. CMND
</TABLE>
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(1) Excludes 219,950 shares of Common Stock issuable upon the exercise of stock
options outstanding as of December 10, 1998 at a weighted average exercise
price of $7.15 per share. Of this amount, 56,500 were issued on March 5,
1997 in exchange for units of shadow stock issued under our Shadow Stock
Incentive Plan, 48,350 of which are currently exercisable, and 163,450 of
which were issued under our 1997 Employee, Director and Consultant Stock
Plan, 23,750 of which are currently exercisable. See "Management--Employee
Benefit Plans."
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue............... $6,127 $9,272 $12,436 $17,069 $25,057 $17,742 $25,552
Gross profit.......... 406 2,382 3,328 4,575 8,084 5,529 8,162
Income (loss) from
operations........... (202) 280 315 (597) 829 245 (524)
Net income (loss)(1).. (256) 193 221 (423) (497) (853) 291
Preferred stock
dividends and
accretion(2)......... -- -- -- -- (80) (23) (260)
Income (loss)
applicable to common
stockholders......... (256) 193 221 (423) (577) (876) 31
Pro forma earnings
(loss) per common
share-diluted(3)..... $ 0.01 $ (0.05)
======= =======
Basic and diluted
earnings per share... $ 0.00
=======
Shares used in per
share calculation:
Basic............... 4,275 4,275 6,730
Diluted............. 4,275 4,275 6,758
<CAPTION>
DEC.
31, SEPTEMBER 30,
1997 1998(4)
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<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.......... $ 392 $19,111
Working capital....... 460 23,208
Total assets.......... 14,425 35,699
Short-term debt....... 1,414 --
Series A Convertible
Preferred Stock...... 2,223 --
Series B Convertible
Preferred Stock...... 8,000 --
Stockholders' equity
(deficit)............ (722) 32,514
</TABLE>
- --------
(1) Net loss for the year ended December 31, 1997 includes a one-time charge to
earnings of $693,000 as a provision for current and deferred income taxes
resulting from the termination of the Company's S corporation status. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Income Tax Matters."
(2) Reflects accrued dividends at a rate of 10% per annum on the Company's
Series A and Series B Convertible Preferred Stock and accretion relating to
unamortized expenses of the preferred stock offerings. Such dividends were
paid out of the proceeds of the initial public offering and were
approximately $298,000 in the aggregate.
(3) Adjusted to reflect on a pro forma basis a federal income tax provision as
if the Company had historically been taxed as a C corporation.
(4) Reflects (i) the receipt by the Company of net proceeds of $23.2 million
from the sale of 2,200,000 shares of Common Stock in the initial public
offering after deducting the underwriting discounts and commissions and
offering expenses paid by the Company; (ii) the conversion of Series A and
B Convertible Preferred Stock into 1,181,750 shares of Common Stock; (iii)
the payment of $298,000 of preferred stock dividends; and (iv) the
repayment of the Company's then outstanding line of credit in the amount of
$2.4 million.
4
<PAGE>
RISK FACTORS
Please remember to be cautious in reading forward-looking statements.
RISKS ASSOCIATED WITH FAILURE TO OBTAIN CONTRACTS TO PERFORM MORE PROFITABLE
SERVICES
A core element of our growth strategy is to derive an increasing percentage
of our revenue from more profitable or higher margin services. These services
include the delivery of complete projects and solutions, as opposed to less
profitable or lower margin IT staff augmentation projects. The sales and
marketing methods for obtaining complete projects and solutions contracts is
different than those for our historical businesses and involves longer bidding
processes. In addition, in performing complete projects and solutions, we
assume greater responsibility in coordinating and completing larger, more
complex projects. We may not be successful in obtaining contracts for the
delivery of complete projects and solutions or complete any projects and
solutions obtained.
For the year ended December 31, 1997 and the nine months ended September 30,
1998, complete projects and solutions accounted for 29% and 33%, respectively,
of our total revenue. After expressing certain concerns relating to our
performance under a Year 2000 solutions contract, one of our largest customers
ended the contract in early 1998. In addition, in 1998 we performed an
assessment phase of a Year 2000 conversion project for one of our other large
customers. Following completion of the assessment, we failed to obtain a
contract for the complete Year 2000 conversion project. In the three month
periods ended June 30, 1998 and September 30, 1998, complete projects and
solutions accounted for a decreasing percentage of our total revenue. Revenue
from higher margin services may continue to decrease as a percentage of our
revenue for future periods.
During 1998 we built up our infrastructure of personnel, facilities and
equipment and other resources to meet anticipated growth in the demand for
Year 2000 conversions and other IT services. Many of these personnel were
added to our Bangalore, India facility, where it is difficult to effect
reductions in staffing to adjust to shortfalls in revenue. As a result, we
experienced low rates of employee utilization at our Bangalore facility during
the three month periods ended June 30, 1998 and September 30, 1998. If we fail
to increase revenue from higher margin services, it would have a material
adverse effect on our business, financial condition and results of operations.
See "--Variability of Quarterly Operations and Financial Results" and "--Risks
Associated with Year 2000 Service Offering; Limited Nature of Demand for Year
2000 Solutions Services."
VARIABILITY OF QUARTERLY OPERATIONS AND FINANCIAL RESULTS
Our operations and related revenue and operating results historically have
varied substantially from quarter to quarter, and we expect these variations
to continue. Factors causing these variations include:
.number, timing and scope of our IT projects
.contractual terms of our IT projects
.delays incurred in performing our IT projects
.difficulty in accurately estimating resources and time frames for
completing our IT projects
.patterns of capital spending by customers
.IT outsourcing trends
.pricing changes in response to various competitive factors
.new service introductions by us or our competitors
.level of market acceptance of our service and product offerings
.our ability to staff our assignments with qualified personnel
.general economic conditions
5
<PAGE>
A high percentage of our selling, general and administrative expense,
particularly salaries, is relatively fixed in advance of any particular
quarter. As a result, unanticipated variations in the number and timing of our
projects during a particular quarter may cause significant variations in
operating results in that quarter.
Examples of what could happen:
.A major project may be terminated unexpectedly.
.A customer may decide not to pursue a new project or proceed to succeeding
stages of a current project.
.We may complete several major customer projects during a quarter.
If any of these events occurred, we would be required to continue to pay for
underutilized personnel. As a result, our business, financial condition and
results of operations would be materially and adversely affected. Any
unexpected shortfall in revenue without a corresponding and timely reduction
in staffing and other expenses, or a staffing increase that is unaccompanied
by a corresponding increase in revenue, could also have a material adverse
effect on our business, financial condition and results of operations.
Specifically, hiring and employment practices and applicable law in India make
it difficult for us to effect reductions in staffing at our Bangalore, India
facility.
The results of operations for the second and third quarter were adversely
affected primarily due to costs associated with our increase in sales and
project management personnel which were not accompanied by expected growth in
complete projects and solutions business. In addition, we experienced a lower
than expected gross margin reflecting a less profitable mix of business and
reduced margins from Year 2000 and other project business.
As a result of the factors described above, our operating results for a
future quarter may differ from the expectations of public market analysts and
investors. In such event, the price of our Common Stock could be adversely
affected. We believe, therefore, you should not rely on past operating results
and period-to-period comparisons as an indication of our future operating
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Recent Developments; Third Quarter
Results."
MANAGEMENT OF GROWTH
Our business has grown significantly in size and complexity over the past
several years. Revenue increased by approximately 311% to $25.1 million in
1997 from $6.1 million in 1993, and increased by approximately 47% from 1996
to 1997. In addition, revenue for the nine months ended September 30, 1998
increased 44.0% to $25.6 million compared to $17.7 million for the nine months
ended September 30, 1997. In December 1996, we began operations in Bangalore.
This growth has placed and will continue to place significant demands on our
management and administrative, technical and other operational resources. In
addition, we have substantially increased the number of our skilled technical
and management personnel at our Bangalore facility and will be required to
increase the number of our skilled technical, marketing and management
personnel in the United States. We will also need to continue to develop and
improve our operational, financial, communications and other internal systems,
in both the United States and our Bangalore facility.
During the three month periods ended June 30, 1998 and September 30, 1998,
we experienced low rates of employee utilization at our Bangalore facility.
Our future success will depend on our ability to manage our projects and
personnel in a manner that allocates our human resources at profitable billing
rates and assumes our employees are performing quality work. Certain members
of our senior management team have been with us for less than a year and our
senior management has little experience in managing publicly traded companies.
If we do not manage our growth effectively, it could have a material adverse
effect on the quality of our services and projects, our ability to attract and
retain key personnel, our business, financial condition and results of
operations. See "--Variability of Quarterly Operations and Financial Results"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
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SALE OF UNREGISTERED SHARES; VIOLATION OF THE SECURITIES ACT
In the initial public offering, we sold 3,105,000 shares under a
registration statement which registered the sale of only 2,760,000 shares. We
did not register the remaining 345,000 shares. As provided in the Securities
Act, certain persons purchasing shares sold in violation of the registration
provisions of the Securities Act may recover what he or she paid for the
shares with interest upon the return of the shares, less the amount of any
income received, or damages if he or she no longer owns the shares. The
maximum rescission liability for the 100,000 unregistered shares which we sold
would be $1,200,000 (100,000 shares at $12 per share) plus interest. We have
not recognized a liability based on the rescission of the 100,000 unregistered
shares since, as noted above, only someone who is still holding the same
shares he or she bought in the initial public offering has a right of
rescission. Since (i) the large trading volume subsequent to the offering
suggests a substantial turnover in share ownership and (ii) for each
individual purchaser, we are unable to identify which shares were registered
and which were not, we believe it is not probable that we will be required to
effect an actual rescission, instead of paying rescissionary damages.
We and certain stockholders who sold shares in the initial public offering
have entered into an indemnification agreement with our former counsel in the
initial public offering, which would hold the Company and those stockholders
harmless for damages which might result from any claims as a consequence of
the aforementioned circumstances. In view of the indemnification agreement,
and in light of assurances we have received concerning the professional
indemnity insurance maintained by such counsel, we do not believe that any
claims relating to the foregoing will have a material adverse effect on our
financial condition. We are also being sued by shareholders in connection with
the initial public offering. The shareholders suing us in their joint lawsuit
seek rescission of the sales of all the shares in the initial public offering
and unspecified damages, including rescissionary damages, interest, costs and
fees. If the lawsuit is concluded in favor of the shareholders suing us, our
business, financial condition and results of operations may be materially and
adversely affected. However, we and the other defendants have entered into a
memorandum of understanding to settle the dispute with the shareholders suing
us, but a memorandum of understanding is not a definitive settlement
agreement. A definitive settlement agreement resulting from the memorandum
will also require court approval. We cannot be certain that a definitive
settlement agreement will be reached, or that, if it is reached, that the
court will approve it. See "--Shareholder Litigation."
SHAREHOLDER LITIGATION
On or about May 6, 1998, plaintiffs Don M. Doney, Jr. and Madelyn J. McCabe
filed a lawsuit in the United States District Court for the Southern District
of New York against the Company, certain of our officers and directors (Edward
G. Caputo, Stephen L. Willcox, Robert B. Dixon, John J.C. Herndon, James M.
Oates and Joseph D. Sargent) and the managing underwriters of the initial
public offering (Cowen & Company and Volpe Brown Whelan & Company, LLC). On or
about June 22, 1998, the same plaintiffs amended their complaint in the
lawsuit they had filed with the United States District Court for the Southern
District of New York. On or about May 8, 1998, another plaintiff, Chaile B.
Steinberg, filed a new lawsuit against the same defendants in the same court.
On or about June 26, 1998, named plaintiff Michael Makinen, filed a lawsuit in
the same court against the same defendants. Each of the plaintiffs purports to
represent a class consisting of purchasers of Common Stock pursuant to the
initial public offering. These lawsuits were consolidated into one lawsuit by
order of the United States District Court for the Southern District of New
York. Consequently, the plaintiffs filed a consolidated complaint named In Re
Command Systems, Inc. Securities Litigation on September 30, 1998. The
consolidated complaint alleges that the defendants violated the Securities
Act. The plaintiffs seek rescission of the sales of the shares in the initial
public offering and unspecified damages, including rescissionary damages,
interest, costs and fees. Such shareholder litigation, if concluded in favor
of the plaintiffs, could have a material adverse effect on our business,
financial condition and results of operations. On December 7, 1998, we and the
other defendants entered into a memorandum of understanding to settle the
dispute with the plaintiffs, but a memorandum of understanding is not a
definitive settlement agreement. A definitive settlement agreement resulting
from the memorandum will also require court approval. By the terms of the
memorandum, the parties
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have agreed in principle to a total payment to the plaintiffs of $5.75 million
in cash plus accrued interest, minus approved attorneys' fees and related
expenses, from us. The $5.75 million will receive interest as of the date of
the preliminary court approval of a definitive settlement agreement entered
into among the parties based on the memorandum, but will not be payable until
the court approves the settlement and such approval is final. Of the final
settlement amount, we will be reimbursed for all but $1.65 million, and
interest upon that portion. In addition, we may be responsible for certain
legal fees and related expenses incurred in connection with the litigation. We
cannot be certain, however, that a definitive settlement agreement will be
reached, or that if it is reached, that the court will approve it.
COMPETITIVE MARKET FOR TECHNICAL PERSONNEL
To be successful, we need to attract, train, motivate and retain highly
skilled IT professionals, particularly project managers, software engineers
and other senior technical personnel. There is currently a shortage of
software development professionals with the skills we need. Competition to
hire these professionals has caused their wages to rise, which increases our
costs and costs in the industry. In the past, we have had a turnover rate of
IT professionals that is higher than the industry average. This can occur
again in the future. In addition, many of our IT consulting contracts allow a
customer to hire away our IT professionals who are providing consulting
services to the customer, for a fee payable to us. Our ability to maintain
existing contracts and obtain new business depends, in large part, on our
ability to hire and retain qualified personnel. If we cannot hire enough
qualified personnel, it will be difficult (i) to manage and complete existing
projects and (ii) to bid for new projects. Such a problem can materially and
adversely affect our business, financial condition and results of operations.
We may not succeed in attracting and retaining qualified employees. See
"Business--Human Resources."
RELIANCE ON SIGNIFICANT CUSTOMERS; ABSENCE OF LONG-TERM CONTRACTS
We have derived a significant portion of our revenue from a limited number
of large corporate customers. We believe this trend will continue.
Largest Customers By Revenue
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 PERCENT OF TOTAL REVENUE
- -------------------------------------------- ------------------------
<S> <C>
Mutual Life Insurance Company of New York............. 15.3%
New York Life Insurance Company....................... 10.8%
The Hartford Financial Services Group, Inc............ 10.2%
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
- ------------------------------------
<S> <C>
The Hartford Financial Services Group, Inc............ 13.1%
New York Life Insurance Company....................... 13.0%
Phoenix Home Life Mutual Insurance Company............ 10.3%
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
- ------------------------------------
<S> <C>
The Hartford Financial Services Group, Inc............ 13.6%
New York Life Insurance Company....................... 12.6%
</TABLE>
The volume of work performed for specific customers is likely to vary each
year. A major customer in one year may not provide the same level of revenue
in any subsequent year. In addition, our contracts generally may be canceled
by our customers at any time and customers may decide to reduce their use of
our services without penalty. If a significant customer decides to terminate
or reduce use of our services, our business, financial condition and results
of operations would be materially and adversely affected.
Moreover, in addition to being one of our largest customers, Phoenix Home
Life Mutual Insurance Company owns 7.6% of our Common Stock. In addition, one
of Phoenix's officers, John J.C. Herndon, is a director of the Company. Loss
of this strategic relationship could adversely affect our reputation and
client relationships in the financial services industry. This could, in turn,
have a material adverse effect on our business, financial condition and
results of operations.
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<PAGE>
Many of our projects are critical to the operations of our customers'
businesses. If we do not meet a customer's expectations, the customer could
cancel or decide not to renew its contract with us. This could damage our
reputation and adversely affect our ability to attract new business.
Furthermore, since we are not generally the exclusive source for IT services
to our customers and other competitors exist, if a customer is dissatisfied
with our performance, the customer may opt to use a competitor. A significant
aspect of our growth strategy is to leverage our expertise within the
insurance industry into a larger, more diverse customer base within the
broader financial services market. However, we cannot assure you that we will
be successful in expanding our customer base or that our management skills and
infrastructure will be adequate to service such additional customers. See "--
Risks Associated with Year 2000 Service Offering; Limited Nature of Demand for
Year 2000 Solutions Services," "Business--Business Strategy," "--Customers,"
and "--Representative Engagements."
RISKS ASSOCIATED WITH YEAR 2000 SERVICE OFFERING; LIMITED NATURE OF DEMAND FOR
YEAR 2000 SOLUTIONS SERVICES
During 1996, in response to customer demand, we began to offer Year 2000
solutions services. We realized no revenue from Year 2000 services in 1996,
and 21% and 28% of our revenue from Year 2000 services during the year ended
December 31, 1997 and the nine months ended September 30, 1998, respectively.
As of September 30, 1998, we have generated new contracts for and have
commenced work on a number of Year 2000 conversion projects. However, we have
completed only six Year 2000 projects and such services remain in an early
stage of marketing and customer acceptance. After expressing certain concerns
relating to our performance under a Year 2000 solutions contract, one of our
largest customers ended the contract in early 1998. In addition, in 1998 we
performed an assessment phase of a Year 2000 conversion project for one of our
other large customers. Following completion of the assessment, we failed to
obtain a contract for the complete Year 2000 conversion project. In the three
month periods ended June 30, 1998 and September 30, 1998, complete projects
and solutions accounted for a decreasing percentage of our total revenue.
Year 2000 projects currently constitute most of our higher margin services.
A core element of our growth strategy is to use the business relationships and
the knowledge of our customers' computer systems obtained in providing its
Year 2000 services to generate additional IT projects for these customers. We
expect that Year 2000 services will diminish rapidly after the Year 2000 as
companies complete projects that address their needs. If we are unable to
effectively market and deliver Year 2000 conversion services in the near
future, our ability to obtain other contracts to deliver higher margin
services would be adversely impacted and our business, financial condition and
results of operations would be materially and adversely affected. Moreover, as
a result of recently introduced automated software tools, Year 2000
conversions require fewer man-hours to complete. This introduction, together
with increased competition among IT service providers for Year 2000 conversion
projects, has reduced the amount of revenue which can be earned from each Year
2000 conversion project. As a result, we would need to obtain a greater number
of contracts for Year 2000 conversion services in order to increase the share
of our revenue obtained from Year 2000 conversion contracts. If we failed to
obtain such greater number of Year 2000 conversion contracts, it would
adversely affect our employee utilization.
When the demand for Year 2000 services decreases, our revenues are likely to
decrease. The extent of this decrease will depend on (i) how much of our
revenue is attributable to Year 2000 solutions services at the time of such
decreased demand and (ii) our ability to offset this decrease by increasing
revenue from other services. This decrease in revenue could materially and
adversely impact our business, financial condition and results of operations.
In addition to the risks described above, we face additional risks that may
cause the demand for our Year 2000 services to decline. These additional risks
include the possibility that a competitor may introduce automated software
processes or tools that would enable companies to perform their own Year 2000
services more effectively. Moreover, because we are allocating significant
resources during the next several years to solve our customers' Year 2000
problems, our ability to continue to deliver other IT services could be
adversely affected. See "--Risks Associated with Failure to Obtain Contracts
to Perform More Profitable Services," "--Variability of Quarterly Operations
and Financial Results," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "Business--Services."
9
<PAGE>
COMPETITION
The IT services market is highly competitive and fragmented, and numerous
international, national, regional and local firms serve the market. Our
primary competitors include other IT service providers, along with
participants from a variety of market segments, including "Big Five"
accounting firms, implementation firms, applications software firms, service
groups of computer equipment companies, general management consulting firms,
programming companies and temporary staffing firms, as well as in-house IT
departments. In addition, a significant and increasing number of companies
have recently announced that they offer Year 2000 services or automated Year
2000 software products. Many of our competitors have significantly greater
financial, technical and marketing resources and generate greater revenue. We
may lose existing customers to such competitors. We believe that our ability
to compete also depends in part on a number of factors outside our control,
including:
.our competitors' ability to hire and retain technical employees
.the price at which others offer comparable services
.the extent of our competitors' responsiveness to customer needs
See "Business--Competition."
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SOLUTIONS
We operate in a market that is rapidly changing due to technology, frequent
new services and product introductions. New technology, services and products
can render existing technology, services and products obsolete. Our continued
success will depend on our ability to:
.attract and retain highly capable technical personnel
.enhance existing service and product offerings
.develop new service and product offerings timely and cost-effectively
.keep pace with technological developments and changing customer
requirements
We may not succeed in the foregoing.
DEPENDENCE ON BANGALORE FACILITY
In 1996 through a joint venture with Phoenix Home Life Mutual Insurance
Company, we created an offshore technology resource center in Bangalore,
India. The facility, which we now wholly-own, is intended to provide us with:
(i) improved access to IT professionals, (ii) cost advantages and (iii) the
ability to provide flexible coverage for our outsourcing services customers.
To make it work, we must maintain communications between our domestic offices,
the offices of our United States customers and the Bangalore facility. A loss
in our ability to transmit voice and data through satellite communications to
India could materially and adversely affect our business, financial condition
and results of operations.
In the past, India has experienced significant inflation, low growth in
gross domestic product and shortages of foreign exchange. India also has
experienced civil unrest and terrorism. In the past, the country has been
involved in conflict with neighboring countries. We may be adversely affected
by changes in inflation, interest rates, taxation, social stability or other
political, economic or diplomatic developments in or affecting India in the
future. We believe that as a result of the detonation of nuclear devices in
India in May 1998, there may be some adverse economic repercussions caused by
the institution of sanctions or other similar actions. Although the U.S.
government has decided to lift some sanctions, other sanctions remain. We are
not certain if such actions would not have a material adverse effect on our
business, financial condition or results of operations.
The Government of India has exercised and continues to exercise significant
influence over many aspects of the Indian economy. The Government of India's
actions concerning the economy could have a material adverse effect on private
sector entities, including our business. To encourage foreign investment in
specified sectors of its economy, including the software development industry,
India's government has provided significant tax
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<PAGE>
incentives and relaxed certain regulatory restrictions in recent years. Some
of these factors which affect the Company include, among others:
.tax holidays
.liberalized import and export duties
.preferential rules on foreign investment and repatriation
India's central and state governments still remain significantly involved in
the Indian economy. If any of these benefits are eliminated or diminished, it
could have a material adverse effect on our business, financial condition and
results of operations.
DEPENDENCE ON CONTINUED AUTHORIZATION TO RESELL
Our future success in both product sales and service and support offerings
depends largely on our continued status as an approved reseller of products
and our continued authorization as a service provider. Without these sales and
service authorizations, we would be unable to provide the range of products
and services we currently offer, including warranty services. Consequently,
our future success depends in part on our continued status as an authorized
remarketer of computer products. We cannot be sure that we will maintain our
status as an approved reseller and service provider. If we lose one or more of
such authorizations, the loss could have a material adverse effect on our
business, financial condition and results of operations.
IMMIGRATION ISSUES
As of September 30, 1998 we employed a number of employees of foreign
nationalities in the United States, each of whom obtained the required visas.
During the remainder of 1998, we intend to employ more qualified foreign
nationals in the United States. There is a limit on the number of new
petitions for certain visas that the Immigration and Naturalization Service
may approve in any year. In years in which this limit is reached, we may be
unable to obtain certain visas necessary to bring critical foreign employees
to the United States. We may incur additional unexpected labor costs in
complying with existing United States immigration laws, or changes in such
laws. Any restrictions or limitations on our hiring practices might have a
material adverse effect on our business, financial condition and results of
operations. We believe that our success, in part, may result from our ability
to attract and retain persons with technical and project management skills
from other countries due to the shortage of similarly qualified people in the
United States.
INTERNAL CONTROLS
We only recently implemented an accounting system capable of generating
information and reports necessary to appropriately manage a public company. We
are developing and implementing a system of internal controls and are
developing an appropriate administrative infrastructure. If we fail to develop
and maintain an effective internal control structure, it could have a material
adverse effect on our business, financial condition and results of operations.
RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS
For the year ended December 31, 1997 and the nine months ended September 30,
1998 revenue derived from operations in India accounted for approximately 10%
and 15% respectively, of our revenue, all of which related to services we
performed for our customers located in the United States. An increasing
percentage of our revenue in the future may be from operations in India or
from providing services outside the United States. As a result, we are subject
to a number of risks, including, among other things:
.difficulties relating to administering our global business and managing
foreign operations
.currency fluctuations
.restrictions against the repatriation of earnings
.export requirements and restrictions
.multiple and possibly overlapping tax structures
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<PAGE>
Any of these factors could have a material adverse effect on our business,
financial condition and results of operations. Any earnings that we generate
in countries other than the United States may be permanently invested in those
countries or may be subject to considerable taxation if we repatriate those
earnings to the United States.
We presently incur a significant amount of our costs in local currency in
India. In contrast, we presently generate most of our revenue in U.S. Dollars.
Accordingly, currency fluctuations--the translation of foreign currencies into
U.S. Dollars--could adversely affect our business, financial condition and
results of operations. Historically, we have not hedged any meaningful portion
of our foreign exchange exposures.
POTENTIAL LIABILITY TO CUSTOMERS
We perform many projects that are critical to the operations of our
customers' businesses and provide benefits that may be difficult to quantify.
If a customer's system fails, it could result in a claim for substantial
damages against us, regardless of our responsibility for such failure. In
addition, if we fail to complete a project on time, particularly a Year 2000
solutions contract, a customer may sue us for substantial damages. We
generally attempt to limit our liability for damages arising from errors,
mistakes or omissions in rendering our IT services in our contracts. These
contract provisions may not effectively shield us from liability for damages.
We maintain general liability insurance coverage, including coverage for
errors or omissions in the amount of $5.0 million. However, we cannot be
certain that: (i) insurance coverage will continue to be available on
reasonable terms, (ii) such coverage will be available in sufficient amounts
to cover one or more large lawsuits, or (iii) the insurer will not disclaim
coverage as to any future lawsuit. Our business, financial condition and
results of operations could be adversely affected if any of the following
occurred:
.one or more successful large lawsuits against us exceeds our insurance
coverage
. changes are made in our insurance policies, including premium increases,
larger deductibles or co-insurance requirements
RISKS RELATED TO POSSIBLE ACQUISITIONS AND INTERNAL EXPANSION
We may expand our operations through the acquisition of additional
businesses. To date, we have made no material acquisition of an unaffiliated
company. We may not be able to identify, acquire or profitably manage
additional businesses. In addition, if we acquire an additional business, we
may not succeed in integrating the acquired business without substantial
expenses, delays or other operational or financial problems. Further,
acquisitions may involve a number of special risks, including:
.diversion of management's attention
.failure to retain key acquired personnel
.unanticipated events or circumstances
.legal liabilities
.amortization of acquired intangible assets
Some or all of these factors could materially and adversely affect our
business, financial condition and results of operations. If acquired customers
are dissatisfied or the acquired business underperforms, either instance could
materially and adversely impact our reputation. Moreover, any acquired
business may not achieve anticipated revenue and earnings. If we fail to
manage our acquisition strategy successfully, it could materially and
adversely affect our business, financial condition and results of operations.
In addition, we may issue additional shares of our Common Stock to acquire
such additional businesses, which may reduce the percentage ownership of
existing stockholders. See "Business--Business Strategy."
We may open new offices in attractive markets with a local pool of available
personnel. All of our branch offices were originally start-up operations. Not
all branch offices have been successful. For example, our branch office in
Minneapolis, Minnesota closed primarily as a result of a shortage of qualified
local IT professionals. We may not be able to establish what will ultimately
be successful branch operations. See "Business--Business Strategy."
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DEPENDENCE ON KEY EXECUTIVES
Our success will largely depend upon the continued availability of key
executive officers. In particular, we depend upon the continued services of
Edward G. Caputo, President and Chief Executive Officer. In addition, Mr.
Caputo is instrumental to most of our customer relationships relating to the
delivery of more profitable, complete project and solution services. If we
lose Mr. Caputo, it could have an adverse effect on our customer relationships
in this area. Accordingly, losing Mr. Caputo or other key executives would
have a material adverse effect on our business, financial condition and
results of operations. We maintain key person life insurance on Mr. Caputo in
the amount of $5.0 million. This amount of insurance, however, may not be
sufficient to offset our loss of Mr. Caputo's services. See "Management--Key
Person Life Insurance."
CONTROL BY PRINCIPAL STOCKHOLDER
Mr. Caputo beneficially owns approximately 51.9% of the outstanding shares
of Common Stock. Accordingly, Mr. Caputo can control the election of members
of the Board of Directors. Mr. Caputo can also control any decision whether:
(i) to merge or sell our assets, (ii) to change our charter and By-Laws, or
(iii) to take other actions requiring the vote or consent of our stockholders.
In addition, Mr. Caputo's voting power may delay or prevent a future merger or
change in control. It may also impede or prevent transactions in which
stockholders might otherwise receive a premium for their shares over current
market prices. See "Management--Directors and Executive Officers" and
"Principal and Selling Stockholders."
BROAD DISCRETION OF MANAGEMENT AS TO USE OF PROCEEDS
We did not allocate for a specific purpose a substantial portion of the net
proceeds which we received from the initial public offering. Instead, the
proceeds will be allocated to working capital and general corporate purposes.
We may use a portion or all of the remaining net proceeds for strategic
acquisitions of businesses, products or technologies, which are complementary
to our products or technologies. We are not currently a party to any
commitments and are not currently involved in any negotiations with respect to
any material acquisitions. Accordingly, our management has broad discretion
with respect to the expenditure of the proceeds from the initial public
offering. You must rely on our management, with limited information concerning
the specific working capital requirements and general corporate purposes to
which the funds will ultimately be applied. See "Use of Proceeds."
INTELLECTUAL PROPERTY RIGHTS
In order to protect our ownership rights in our various intellectual
properties, we rely upon a combination of: (i) copyright and trade secret
laws, (ii) nondisclosure and (iii) other contractual arrangements. India is a
member of the Berne Convention, an international treaty. As a member of the
Berne Convention, the Government of India has agreed to extend copyright
protection under its domestic laws to foreign works, including works created
or produced in the United States. We believe that laws, rules, regulations and
treaties in effect in the United States and India are adequate to protect us
from unauthorized use of our intellectual property. However, we cannot be
certain that such laws will remain the same and, in particular, that the laws
of India will not change in ways that affect us negatively.
We enter into confidentiality agreements with our employees and limit
distribution of proprietary information. We cannot assure you, however, that:
(i) the steps taken by us to protect our rights will be adequate to deter
theft of our intellectual property, or that (ii) we will be able to detect
unauthorized use and take appropriate steps to enforce our rights.
We presently hold no patents or registered copyrights. Although we believe
that our intellectual property rights do not infringe on the intellectual
property rights of others, we cannot be sure of this and we may be sued in the
future, in which case, we may not win and may have to attempt to settle with
third parties by attempting to obtain a license for an infringed intellectual
property, which might not be available at commercially reasonable terms.
Additionally, we may in the future license certain technologies to our
customers. There can be no
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assurance that we will be able to successfully license these technologies,
protect them from infringement, or prevent lawsuits against us relating to our
licensing efforts. We expect that the risk of such lawsuits will increase if
more of our competitors are able to successfully obtain patents for software
products and processes. Any lawsuits, regardless of their outcome, could be
substantially costly and divert management's attention from our operations.
Thus, intellectual property lawsuits could have a material adverse effect on
our business, financial condition and results of operations. See "Business--
Intellectual Property Rights."
BENEFITS OF THE INITIAL PUBLIC OFFERING TO THEN EXISTING STOCKHOLDERS
The initial public offering provided significant benefits to our
stockholders at the time, including certain of our directors and officers. We
did not receive any of the net proceeds from the sale of shares by the
stockholders who sold shares in the offering, which totaled approximately
$10.1 million. We used $298,000 of our net proceeds to pay accumulated and
unpaid dividends on our Series A and Series B Convertible Preferred Stock. The
dividends were paid at the time of the offering upon the conversion of those
shares into Common Stock by Phoenix Home Life Mutual Insurance Company and its
wholly-owned subsidiary, PHL Global Holding Co. In addition, we used $2.4
million of the net proceeds for completely repaying a loan from People's Bank.
This credit facility, which expired on August 15, 1998, was guaranteed by
Edward G. Caputo, a current stockholder, director and the President and Chief
Executive Officer. Mr. Caputo thus benefitted personally from the repayment of
this guaranteed debt. See "Use of Proceeds," "Dilution," "Management" and
"Principal and Selling Stockholders."
PUBLIC MARKET FOR THE COMMON STOCK; PRICE AND MARKET VOLATILITY
Prior to the initial public offering there was no public market for the
Common Stock. We cannot assure you that an active trading market will be
sustained. Market prices for securities of IT services companies similar to us
are highly volatile. The market price of our Common Stock has been adversely
affected in response to: (i) variations in quarterly operating results and
(ii) our failure to achieve earnings estimates of securities analysts. The
market price of the Common Stock may experience further volatility in the
future.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock in the initial public offering suffered
an immediate and substantial dilution in the net tangible book value of the
Common Stock from the initial public offering price. See "Dilution."
CERTAIN ANTI-TAKEOVER PROVISIONS
Our Certificate of Incorporation authorizes the Board of Directors to issue,
without stockholder approval, 4,999,800 shares of undesignated preferred
stock. The preferred stock may have voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of
stockholders who own Common Stock. We could issue preferred stock or rights to
purchase preferred stock to discourage an unsolicited acquisition proposal. In
addition, by issuing preferred stock, we could: (i) discourage a proxy
contest, (ii) make more difficult the acquisition of a substantial block of
our Common Stock or (iii) limit the price that investors might be willing to
pay in the future for shares of our Common Stock. The Certificate of
Incorporation also has a number of other anti-takeover provisions including
these:
. The favorable vote of the holders of at least 70% of the voting power of
outstanding shares of our capital stock is required to adopt, amend or
repeal any provision of the By-Laws.
. Our stockholders may not take any action by written consent.
. On or before the date on which we first provide notice of an annual
stockholders' meeting (or a special meeting of stockholders instead)
following the initial public offering, the Board of Directors will be
classified into three classes with staggered terms of three years each.
. Members of the Board of Directors may be removed only for cause, after
reasonable notice and an opportunity to be heard before the body
proposing to remove the director.
14
<PAGE>
These provisions could have the effect of delaying, deterring or preventing
a merger or a change in control. Delaware law also contains provisions that
may have the effect of delaying, deferring or preventing a non-negotiated
merger or other business combination involving us. These provisions are
intended to encourage any person interested in acquiring us to negotiate with
and obtain the approval of our Board of Directors in connection with the
transaction. Certain of these provisions may, however, discourage a future
acquisition of us even if stockholders would receive an attractive value for
their shares and even if a substantial number, or even if a majority of our
stockholders, might believe the transaction to be in their best interest. As a
result, stockholders who desire to participate in such a transaction may not
have the opportunity to do so. See "Description of Capital Stock--Delaware Law
and Certain Charter and By-Law Provisions."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
If substantial amounts of Common Stock are in the public market, it could
adversely affect the market price of the Common Stock. The 3,105,000 shares
registered in this Registration Statement will be freely tradable without
restriction by persons other than people who qualify as our "affiliates." The
remaining 4,551,750 shares held by current stockholders were subject to lock-
up agreements. Under these agreements, the holders of these shares agreed not
to sell their shares without the consent of Cowen & Company, one of the
underwriters.
Upon expiration of these lock-up agreements on September 9, 1998 (and
assuming no exercise of outstanding options), approximately 3,972,500
additional shares of Common Stock became available for sale in the public
market, subject to the provisions of Rule 144 or Rule 701 under the Securities
Act. The remaining 579,250 shares of Common Stock will become eligible for
sale in the public market, subject to the provisions of Rule 144, over a
period of less than one year and could be sold earlier if the holders thereof
exercise their registration rights described in the next paragraph. We intend
to register 427,500 shares of Common Stock underlying the 1997 Employee,
Director and Consultant Stock Plan and 56,500 shares underlying our Shadow
Stock Plan.
The holder of 579,250 shares of Common Stock is entitled to certain
piggyback and Form S-3 registration rights with respect to its shares. By
exercising its registration rights, the holder could cause a large number of
shares to be registered and sold in the public market. Any sales of the shares
made under Rule 144, by other exemptions from registration, or by exercising
the registration rights, may have an adverse effect on the market price for
the Common Stock and could impair our ability to raise capital through an
offering of our equity securities. See "Description of Capital Stock," "Shares
Eligible for Future Sale" and "Plan of Distribution."
15
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the 2,200,000 shares of Common Stock
offered in the initial public offering was $23,211,000 after deducting
underwriting discounts and commissions of $1,848,000 and other offering
expenses of $1,341,000. The stockholders who sold 905,000 shares in the
initial public offering received net proceeds of $10,099,800, after deducting
underwriting discounts and commissions of $760,200. We did not receive any
proceeds from these stockholders' sales. See "Principal and Selling
Stockholders" and "Certain Transactions--Transactions with Phoenix."
THE PRINCIPAL PURPOSES OF THE INITIAL PUBLIC OFFERING WERE TO:
. increase our equity capital
. create a public market for the Common Stock
. facilitate our access to public equity markets in the future
. provide liquidity for our existing stockholders
We used $2.4 million of the net proceeds for the repayment of the
outstanding balance under our secured credit facility with People's Bank. The
facility, which expired August 15, 1998, bore interest at the bank's prime
rate plus 0.5% per annum. We used funds obtained from the credit facility for
working capital purposes. We also used $298,000 of the net proceeds to pay
accumulated and unpaid dividends on our Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock upon the conversion of those shares
into Common Stock by Phoenix Home Life Mutual Insurance Company and its
wholly-owned subsidiary, PHL Global Holding Co.
We began to use, and intend to continue to use, the balance of the net
proceeds from the initial public offering:
. to expand our sales and marketing capabilities by
--increasing the size of our sales force
--recruiting staff
--expanding our marketing and promotional programs
. for general corporate purposes, including working capital
We may also use a portion of such net proceeds for acquisitions of
businesses that are complementary to our businesses. While we from time to
time evaluate such potential acquisitions, we currently have no
understandings, commitments or agreements with respect to making any
acquisitions. We have not determined the amounts we plan to expend with
respect to each of the expected uses or the timing of such expenditures. As a
consequence, we will have the discretion to allocate the remaining net
proceeds from the initial public offering. The amounts actually expended for
each use may vary significantly depending on a number of factors, including:
. the amount of future revenue
. the amount of cash provided by or used in our operations
. the progress of our sales and marketing efforts
. the success of our recruiting efforts
. the status of competitive services
. acquisition opportunities presented to us
Pending such uses, our net proceeds from the initial public offering have been
invested in short-term, investment-grade, interest-bearing instruments.
16
<PAGE>
DIVIDEND POLICY
We have never declared or paid any dividends on our Common Stock. We were,
however, obligated to pay a 10% dividend on our Series A and Series B
Convertible Preferred Stock, and paid these accrued and unpaid dividends with
a portion of the net proceeds of the initial public offering upon the
conversion of the preferred stock. We do not anticipate paying any other cash
dividends in the foreseeable future and intend to retain any earnings to fund
future growth and the operation of our business. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK
The Common Stock has been traded on the Nasdaq National Market under the
symbol CMND since the initial public offering on March 12, 1998.
The following table sets forth the intra-day high and low sale prices for
the Common Stock as reported on the Nasdaq National Market since March 12,
1998.
<TABLE>
<CAPTION>
HIGH LOW
--------- --------
<S> <C> <C>
First quarter ended March 31, 1998 (from March 12, 1998).... $14 3/4 $13
Second quarter.............................................. $18 3/4 $ 4
Third quarter............................................... $ 5 11/16 $ 2 5/8
Fourth quarter (through December 9, 1998)................... $ 3 7/16 $ 2 7/16
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on December 10, 1998 was $3.25 per share. As of December 10, 1998,
there were 14 record holders of Common Stock.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998, reflecting the issuance and sale by the Company of
2,200,000 shares of Common Stock sold in the initial public offering at the
initial public offering price of $12.00 per share, after giving effect to the
deduction of the underwriting discounts and commissions and offering expenses
paid by the Company, the application of the net proceeds thereof and the
Preferred Stock Conversion. The 3,105,000 shares being registered hereby were
sold pursuant to a registration statement which properly registered the sale
of the 2,760,000 shares but not the sale of an additional 345,000 shares which
were not properly registered. As provided in the Securities Act of 1933,
certain persons purchasing securities sold in violation of the registration
provisions of the Securities Act may recover the consideration paid for such
securities with interest upon the tender of such securities, less the amount
of any income received, or damages if such person no longer owns the
securities. See "Risk Factors--Sale of Unregistered Shares; Violation of the
Securities Act." The following table should be read in conjunction with the
Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
<S> <C>
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares
authorized; 7,656,750 issued and outstanding(1).......... $ 34,818
Additional paid-in capital................................ 33,400,480
Accumulated deficit....................................... (605,837)
Cumulative translation adjustment......................... (315,082)
-----------
Total stockholders' equity.............................. $32,514,379
===========
</TABLE>
- --------
(1) Excludes 219,950 shares of Common Stock issuable upon exercise of stock
options outstanding as of December 10, 1998, consisting of 56,500 options
issued on March 5, 1997 in exchange for units of shadow stock issued under
the Company's Shadow Stock Incentive Plan, 48,350 of which are currently
exercisable, and 163,450 stock options granted under the Company's 1997
Employee, Director and Consultant Stock Plan, 23,750 of which are
currently exercisable, at a weighted average exercise price of $7.15 per
share.
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of December 31,
1997, assuming the conversion of all the preferred stock, was approximately
$2.6 million or $0.47 per share of Common Stock. Pro forma net tangible book
value per share is determined by dividing the net tangible book value of the
Company (pro forma tangible assets less total liabilities) by the number of
shares of Common Stock outstanding. Dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the Initial Public Offering and the pro forma net tangible book value
per share of Common Stock immediately after completion of the Initial Public
Offering. Without taking into account any changes in such pro forma net
tangible book value after December 31, 1997, other than to give effect to (i)
the sale of 2,200,000 shares of Common Stock by the Company in the initial
public offering at the initial public offering price of $12.00 per share and
after deducting the underwriting discounts and commissions and offering
expenses and (ii) the application of the estimated net proceeds therefrom, the
pro forma net tangible book value of the Company as of December 31, 1997 would
have been approximately $25.8 million or $3.37 per share. This represents an
immediate increase in pro forma net tangible book value of $2.90 per share to
the then existing stockholders and an immediate dilution in pro forma net
tangible book value of $8.63 per share to new investors. The following table
illustrates this dilution on a per share basis.
<TABLE>
<S> <C> <C>
Initial public offering price per share(1)........................ $12.00
Net tangible book value per share before the initial public
offering....................................................... $0.47
Increase per share attributable to new investors................ 2.90
-----
Pro forma net tangible book value per share after the initial
public offering.................................................. 3.37
------
Dilution per share to new investors............................... $ 8.63
======
</TABLE>
- --------
(1) Before deducting underwriting discounts and commissions and estimated
offering expenses.
The following table summarizes on a pro forma basis, as of December 31,
1997, the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share of
Common Stock paid by the then existing stockholders and new investors in the
initial public offering at $12.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER(1) PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Then existing
stockholders(2).......... 5,456,750 71.3% $10,187,000 27.8% $1.87
New investors............. 2,200,000 28.7 26,400,000 72.2 12.00
--------- ----- ----------- -----
Total................... 7,656,750 100.0% $36,587,000 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Sales by the stockholders who sold shares in the initial public offering
reduced the number of shares held by then existing stockholders to
4,551,750 shares or approximately 59.4% and increased the number of shares
held by new investors to 3,105,000 shares or approximately 40.6% of the
total number of shares of Common Stock outstanding after the initial
public offering. See "Principal and Selling Stockholders."
(2) Number of shares held by then existing stockholders consisted of 4,275,000
shares of Common Stock issued and outstanding, 522,500 shares of Common
Stock as of December 31, 1997 which was then issuable upon conversion of
the Series A Convertible Preferred Stock and 659,250 shares of Common
Stock which was then issuable upon conversion of the Series B Convertible
Preferred Stock. See "Principal and Selling Stockholders."
The foregoing table excludes 219,950 shares of Common Stock issuable upon
exercise of stock options outstanding as of December 10, 1998, consisting of
56,500 options issued on March 5, 1997 in exchange for units of shadow stock
issued under the Company's Shadow Stock Incentive Plan, 48,350 of which are
currently exercisable, and 163,450 stock options granted under the Company's
1997 Employee, Director and Consultant Stock Plan, 23,750 of which are
currently exercisable, at a weighted average exercise price of $7.15 per
share. To the extent that such options are exercised in the future, there will
be further dilution to new investors. See "Capitalization," "Management--
Employee Benefit Plans" and "Description of Capital Stock."
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1995,
1996 and 1997 and for the years then ended are derived from and are qualified
by reference to the audited Consolidated Financial Statements of the Company
and the Notes thereto. The selected consolidated financial data as of December
31, 1994 is derived from audited consolidated financial statements not
included in this Prospectus. The selected consolidated financial data as of
December 31, 1993 and for the nine months ended September 30, 1997 and 1998
are derived from unaudited consolidated financial statements. The unaudited
consolidated financial statements include all adjustments, consisting only of
normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations.
Historical results are not necessarily indicative of results to be expected in
the future. The operating results for the nine months ended September 30, 1998
are not indicative of the operating results for the full year. The data should
be read in conjunction with the Consolidated Financial Statements, including
the Notes thereto, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information included
herein.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------- ------- ------- ------- -------
(IN THOUSAND, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $6,127 $9,272 $12,436 $17,069 $25,057 $17,742 $25,552
Cost of revenue......... 5,721 6,890 9,108 12,494 16,973 12,213 17,390
------ ------ ------- ------- ------- ------- -------
Gross profit........... 406 2,382 3,328 4,575 8,084 5,529 8,162
Selling, general and
administrative
expense................ 608 2,102 3,013 5,172 7,255 5,284 8,686
------ ------ ------- ------- ------- ------- -------
Income (loss) from
operations............ (202) 280 315 (597) 829 245 (524)
Other income (expense),
net.................... (38) (55) (50) (75) (277) (241) 700
------ ------ ------- ------- ------- ------- -------
Income (loss) before
income taxes and
minority interest...... (240) 225 265 (672) 552 4 176
Income tax (provision)
benefit................ (16) (32) (44) 8 95 21 115
Income tax (provision)
for change in corporate
status................. -- -- -- -- (693) (693) --
------ ------ ------- ------- ------- ------- -------
Income (loss) before
minority interest...... (256) 193 221 (664) (46) (668) 291
Minority interest....... -- -- -- 241 (451) (185) --
------ ------ ------- ------- ------- ------- -------
Net income (loss)....... (256) 193 221 (423) (497) (853) 291
Preferred stock
dividends and
accretion.............. -- -- -- -- (80) (23) (260)
------ ------ ------- ------- ------- ------- -------
Income (loss) applicable
to common
stockholders........... $ (256) $ 193 $ 221 $ (423) $ (577) $ (876) $ 31
====== ====== ======= ======= ======= ======= =======
Basic and diluted
earnings (loss) per
common share........... $ 0.00
=======
Pro forma results of
operations:
Adjustments to U.S.
federal income tax
provision assuming C
corporation status ... $ 633 $ 673
------- -------
Net income (loss), as
adjusted.............. 136 (180)
Preferred stock
dividends and
accretion............. (80) (23)
------- -------
Income applicable to
common stockholders... $ 56 $ (203)
======= =======
Pro forma basic
earnings (loss) per
common share.......... $ 0.01 $ (0.05)
======= =======
Shares used in per share
calculation:
Basic.................. 4,275 4,275 6,730
Diluted................ 4,275 4,275 6,758
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............. $ 43 $ 83 $ 223 $ 444 $ 392 $19,111
Working capital
(deficit)............... 265 86 85 (99) 460 23,208
Total assets............. 1,112 1,188 2,294 4,816 14,425 35,699
Short-term debt.......... 187 436 949 1,452 1,414 --
Long-term debt........... 418 -- -- 1,145 -- --
Series A Convertible
Preferred Stock......... -- -- -- -- 2,223 --
Series B Convertible
Preferred Stock......... -- -- -- -- 8,000 --
Stockholders' equity
(deficit)............... (50) 142 365 (58) (722) 32,514
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Consolidated Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus.
OVERVIEW
The Company is a solutions provider offering IT services based on leading
technologies, including a wide variety of technology, software and hardware
solutions (including procurement), education and management consulting
services. Historically, the Company has derived the majority of its revenue
from the Company's traditional IT staff augmentation services and software and
hardware solutions. However, as a result of the introduction of Year 2000
solutions services in December 1996 and the significant demand for such
services, a significant percentage of the Company's revenue during the year
ended December 31, 1997 and the nine months ended September 30, 1998 was
derived from Year 2000 solutions services. Year 2000 solutions services, as
well as other complete project and solution services, typically provide higher
margins than the Company's IT staff augmentation and software and hardware
solutions. Moreover, as indicated below, the Company has decided to de-
emphasis its hardware solutions services.
The following table sets forth the revenue percentages by line of business:
PERCENTAGE OF TOTAL REVENUE
<TABLE>
<CAPTION>
YEAR THREE MONTHS THREE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
DEC. 31, MAR. 31, JUN. 30, SEPT. 30, SEPT. 30,
1997 1998 1998 1998 1998
-------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
IT Staff Augmentation... 59% 51% 52% 62% 55%
Year 2000............... 21% 31% 28% 25% 28%
Software and Hardware... 12% 12% 14% 9% 12%
Other................... 8% 6% 6% 4% 5%
---- ---- ---- ---- ----
Total Revenue......... 100% 100% 100% 100% 100%
</TABLE>
As indicated above, revenue from Year 2000 projects and other higher margin
services decreased as a percentage of the Company's revenue in the three
months ended June 30, 1998 compared to the three months ended March 31, 1998.
For the three months ended September 30, 1998, revenue from Year 2000
engagements and other application development services continued to decrease
as a percentage of the Company's total revenue. There can be no assurance that
revenue from Year 2000 projects and other higher margin services will not
continue to decrease as a percentage of the Company's revenue for future
periods. The Company has decided to de-emphasize its hardware solutions
services and, therefore, hardware solutions may constitute a decreasing
percentage of its revenue.
The results of operations in the second and third quarter were adversely
affected primarily due to costs associated with the Company's increase in
sales and project management personnel which were not accompanied by expected
growth in complete projects and solutions business. In addition, the Company
experienced a lower than expected gross margin reflecting low rates of
employee utilization in the offshore technology resource center, a less
profitable mix of business and reduced margins from Year 2000 and other
project business. As the Company previously announced, gross profit as a
percentage of revenue may be affected as the Company continues to strive to
shift an increasing percentage of its business from IT staff augmentation to a
project orientation. Following certain concerns expressed relating to the
Company's performance under a Year 2000 solutions services contract for one of
the Company's largest customers in early 1998, the customer terminated the
contract. The loss of revenue from the customer contract termination will not
have a material adverse effect on the Company's results of operations and
financial condition.
22
<PAGE>
Over 90% of the Company's service revenue is billed on a time and materials
basis. Revenue from services provided on a time and materials basis is
recognized in the period that services are provided. The balance of the
Company's service revenue is derived from services provided on a fixed-price
basis. Such revenue is recognized using the percentage-of-completion method.
The Company bears the risk of cost overruns and inflation with respect to its
fixed-price projects. When entering into such contracts, the Company strives
to mitigate the attendant risks by subdividing such projects into smaller,
more manageable phases with fixed price and time frames. See "Risk Factors--
Variability of Quarterly Operations and Financial Results."
In the mid-1990s, several conferences and market pronouncements increased
worldwide awareness of the Year 2000 problem (which prevents existing
applications from properly interpreting dates after 1999). The Company began
providing Year 2000 solutions services in December 1996 through its workforce
both in the U.S. and at the software development facility in Bangalore, India
in response to the needs and demands of its customers. As of September 30,
1997, the Company expended approximately $1,453,000 for the lease of
additional office space in its existing facility in downtown Bangalore, and
the purchase of equipment and leasehold improvements. See "Risk Factors--Risks
Associated with Year 2000 Service Offering; Limited Nature of Demand for Year
2000 Solutions Services," "--Dependence on Bangalore Facility" and "Business--
Industry Overview."
Personnel and rent expenses represent a significant percentage of the
Company's operating expenses and are relatively fixed in advance of any
particular quarter. In particular, due to hiring and employment practices and
applicable law in India, the Company is unable to effect appropriate
reductions of staff at its Bangalore, India facility in response to revenue
shortfalls. Senior management seeks to manage the Company's personnel
utilization rates by carefully monitoring its needs and basing most personnel
increases on specific project requirements. To the extent revenue does not
increase at a rate commensurate with these additional expenses, the Company's
results of operations could be materially and adversely affected.
During 1996, the Company entered into an agreement with Phoenix Home Life
Mutual Insurance Company to organize Command International Software Pvt. in
Bangalore, India, to establish the offshore technology resource center.
Initially, the Company and Phoenix maintained a 51% and 49% interest,
respectively, in Command International Software Pvt. On December 31, 1997,
Phoenix, acting through a wholly-owned subsidiary, exchanged its 49% interest
for shares of the Company's Series B Convertible Preferred Stock which was
converted into 659,250 shares of Common Stock upon consummation of the initial
public offering. Accordingly, the Company currently owns 100% of the Bangalore
facility. See "Certain Transactions."
As a result of the acquisition of the minority interest in the Bangalore
facility, the Company recorded goodwill of approximately $6.8 million which
will be amortized over a period of 15 years commencing January 1, 1998.
The Company believes that as a result of the detonation of nuclear devices
in India in May 1998, there may be some adverse economic repercussions caused
by the institution of sanctions or other similar actions, the effects of which
are unknown to management at this time. Although the U. S. government has
decided to lift some sanctions, other sanctions remain. No assurance can be
given that such actions would not have a material adverse effect on the
Company's business, financial condition or results of operations.
INCOME TAX MATTERS
From its inception through August 23, 1997, the Company elected to be taxed
under the S corporation provisions of the Internal Revenue Code of 1986, as
amended. An S corporation generally is not subject to income tax at the
corporate level (with certain exceptions under state income tax laws). This
election was terminated in conjunction with the formation of the Company as a
Delaware holding corporation and the issuance of its Series A Convertible
Preferred Stock.
In connection with the termination of its S corporation status, the Company
was required by the Internal Revenue Code to change its method of accounting
for tax reporting purposes from the cash method to the accrual
23
<PAGE>
method. This change resulted in a one-time charge to earnings in the three
months ended September 30, 1997 of $693,000 resulting from differences (of
approximately $2.0 million) in the tax treatment of certain of the Company's
assets and liabilities under the cash and accrual methods of accounting and is
reflected through an increase in current and deferred income tax liabilities.
Under current statutes, this liability will be payable over a period of four
years.
The offshore technology resource center in Bangalore, India is eligible for
certain favorable tax treatment provided under India law including: (i) an
exemption from payment of corporate income taxes for a period of five
consecutive years in the first eight years of operation (the "Tax Holiday") or
(ii) an exemption from income taxes on the profits derived from outside India
(the "Export Exemption"). The Export Exemption remains available after
expiration of the Tax Holiday. As a result of the availability of these
exemptions, the Company has not recorded deferred income taxes applicable to
the undistributed earnings of the offshore technology resource center, which
aggregated approximately $429,000 and $1,425,000, respectively, as of December
31, 1997 and September 30, 1998. The Company considers these earnings to be
permanently invested in India and does not anticipate repatriating any of
these earnings to the U.S. If any earnings of Command International Software
Pvt. are repatriated to the U.S. in the future, the Company will be required
to record a provision for income taxes on such amounts and, upon repatriation
of the funds, pay U.S. taxes thereon. See Note 4 of the Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-------------------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ---------------
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue........................ 73.2 73.2 67.7 68.8 68.1
----- ----- ----- ------ ------
Gross profit........................... 26.8 26.8 32.3 31.2 31.9
Selling, general and administrative
expense............................... 24.2 30.3 29.0 29.8 34.0
----- ----- ----- ------ ------
Income (loss) from operations.......... 2.6 (3.5) 3.3 1.4 (2.1)
Other income (expense), net............ (0.4) (0.5) (1.1) (1.4) 2.7
----- ----- ----- ------ ------
Income (loss) before income taxes and
minority interest..................... 2.2 (4.0) 2.2 0.0 0.6
Income tax (provision) benefit......... (0.4) -- 0.4 (3.8) 0.5
Income tax (provision) for change in
corporate status...................... -- -- (2.8) -- --
----- ----- ----- ------ ------
Income (loss) before minority
interest.............................. 1.8 (4.0) (0.2) (3.8) 1.1
Minority interest...................... -- 1.4 (1.8) (1.0) --
----- ----- ----- ------ ------
Net income (loss)...................... 1.8 (2.6) (2.0) (4.8) 1.1
Preferred stock dividends and
accretion............................. -- -- (0.3) (0.1) (1.0)
----- ----- ----- ------ ------
Income (loss) applicable to common
stockholders.......................... 1.8% (2.6)% (2.3)% (4.9)% 0.1%
===== ===== ===== ====== ======
</TABLE>
Nine Months Ended September 30, 1998 Compared With Nine Months Ended
September 30, 1997
Revenue. Revenue for the nine month period ended September 30, 1998
increased by 44.0% to $25,552,000 from $17,742,000 for the nine months ended
September 30, 1997. This resulted primarily from an increase in revenue
generated from Year 2000 solutions services. As compared to the year ended
December 31, 1997, revenue from Year 2000 projects and other higher margin
services for the nine months ended September 30, 1998 increased as a
percentage of the Company's revenue. However, revenue from Year 2000 projects
and other higher margin services for the three months ended September 30,
1998, decreased as a percentage of the
24
<PAGE>
Company's revenue as compared to the three month periods ended March 31 and
June 30, 1998 and were the same as the year ended December 31, 1997. There can
be no assurance that revenue from Year 2000 and other higher margin services
will not continue to decrease as a percentage of the Company's revenue for
future periods. The Company has decided to de-emphasize its hardware solutions
services and, therefore, hardware solution may constitute a decreasing
percentage of its revenue.
Gross Profit. Cost of revenue consists primarily of salaries and employee
benefits for personnel as well as the cost of hardware and software purchased
for resale to customers. Gross profit for the nine month period ended
September 30, 1998 increased by 47.6% to $8,162,000 from $5,529,000 for the
nine month period ended September 30, 1997. Gross profit as a percentage of
revenue increased to 31.9% for the nine month period ended September 30, 1998
from 31.2% for the nine month period ended September 30, 1997. This slight
increase resulted primarily from a larger amount of the Company's revenue
being derived from Year 2000 solutions services which typically carry higher
margins than the Company's traditional IT staff augmentation services. This
was offset by a decrease in the margin for traditional IT staff augmentation
services in the second and third quarters of 1998 and as a result of low rates
of employee utilization in India, a less profitable mix of business and
reduced margins for Year 2000 and other projects business. However, the
Company's gross margin for the three month periods ended September 30, 1998
and June 30, 1998 decreased as compared to the three months ended March 31,
1998 reflecting low rates of employee utilization in the offshore technology
resource center, a less profitable mix of business and reduced margins from
year 2000 and other project business.
Selling, General and Administrative Expense. Selling, general and
administrative expense consists primarily of salaries and employee benefits
for selling and administrative personnel as well as travel, telecommunications
and occupancy costs for the Company's U.S. and India operations. These
expenses are relatively fixed in advance of any particular quarter. To the
extent revenue does not increase at a rate commensurate with these expenses,
the Company's results of operations could be materially and adversely
affected. Selling, general and administrative expense, net of amortization for
goodwill, for the nine month period ended September 30, 1998 increased by
57.9% to $8,344,000 from $5,284,000 for the nine month period ended September
30, 1997. The increase was primarily attributable to additional sales and
project management personnel, which were added in anticipation of growth in
complete projects and solutions business.
Amortization of goodwill for the nine month period ended September 30, 1998
was $342,000, relating to the Company's purchase of the 49% minority interest
in its Bangalore facility from PHL Global Holding Co. in December 31, 1997.
The Company accounted for this transaction as a purchase and recognized the
$6,845,000 excess of the purchase price over the fair value of the assets
acquired and liabilities assumed as goodwill.
Income (Loss) From Operations. Operations for the nine month period ended
September 30, 1998 lost $524,000 compared to income of $245,000 for the nine
month period ended September 30, 1997. Loss from operations as a percentage of
revenue was (2.1)% for the nine month period ended September 30, 1998 as
compared to income of 1.4% for the nine month period ended September 30, 1997.
Other Income (Expense), Net. Net interest income was $610,000 for the nine
month period ended September 30, 1998 compared to net interest expense of
$241,000 for the nine month period ended September 30, 1997. The interest
income was attributable to interest earned from investment of the net proceeds
of the Company's initial public offering in commercial paper and other cash
equivalent instruments during the nine month period ended September 30, 1998.
Interest expense in 1997 was a result of bank borrowings required to provide
working capital to the Company and accrued interest expense associated with
subordinated notes issued to Phoenix Home Life Mutual Insurance Company. In
addition, during the nine months ended September 30, 1998, the Company
recognized a $90,000 foreign currency exchange gain in connection with its
U.S. Dollar-denominated cash and receivable balances of the offshore
technology resource center in Bangalore, India.
Income Tax (Provision) Benefit. The income tax benefit for the nine month
period ended September 30, 1998 was $115,000, as a result of the utilization
of deferred tax credits. The Company computes its income tax
25
<PAGE>
provision on a quarterly basis and provides for deferred income taxes based
upon the difference between the financial statement and tax basis of assets
and liabilities. A valuation allowance is provided when necessary to reduce
the deferred tax asset to the amount expected to be realized.
From its inception through August 23, 1997, the Company elected to be taxed
under the S corporation provisions of the Internal Revenue Code of 1986, as
amended. An S corporation generally is not subject to income tax at the
corporate level (with certain exceptions under state income tax laws). This
election was terminated in conjunction with the formation of the Company as a
Delaware holding corporation and the issuance of its Series A Convertible
Preferred Stock.
In connection with the termination of its S corporation status, the Company
was required by the Internal Revenue Code to change its method of accounting
for tax reporting purposes from the cash method to the accrual method. This
change resulted in a one-time charge to earnings in the nine months ended
September 30, 1997 of $693,000 resulting from differences (of approximately
$2.0 million) in the tax treatment of certain of the Company's assets and
liabilities under the cash and accrual methods of accounting and is reflected
through an increase in current and deferred income tax liabilities. Under
current statutes, this liability will be payable over a period of four years.
Net Income (Loss). As a result of the foregoing, net income was $291,000 for
the nine month period ended September 30, 1998 as compared to a net loss of
$853,000 for the nine month period ended September 30, 1997. Income for the
nine month period ended September 30, 1998 has been reduced by the preferred
stock dividends and accretion, and the loss for the nine month period ended
September 30, 1997 has been increased, to arrive at income (loss) attributable
to common stockholders. Therefore, basic and diluted earnings per share were
$0.00 for the nine month period ended September 30, 1998 as compared to a
basic and diluted loss per share of $0.20 for the nine month period ended
September 30, 1997. The weighted average number of shares outstanding used in
the calculation of basic and diluted earnings per share increased over the
comparable period as a result of shares issued in conjunction with the
Company's March 12, 1998 initial public offering.
Preferred Stock Dividends and Accretions. Preferred stock dividends and
accretion was $260,000 in 1998 and $23,000 in 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue. Revenue during the year ended December 31, 1997 increased by 46.8%
to $25.1 million from $17.1 million during the year ended December 31, 1996.
This increase resulted primarily from an increase in demand for the Company's
traditional IT consulting services and the introduction of Year 2000 solutions
services in December 1996.
Gross Profit. Gross profit during the year ended December 31, 1997 increased
by 76.1% to $8.1 million from $4.6 million during the year ended December 31,
1996. Gross profit as a percentage of revenue increased to 32.3% during the
year ended December 31, 1997 from 26.8% during the year ended December 31,
1996. This increase resulted primarily from the introduction of the Company's
Year 2000 solutions services which were performed primarily from the Company's
offshore technology resource center and which carried higher margins than the
Company's IT services performed in the United States.
Selling, General and Administrative Expense. Selling, general and
administrative expense during the year ended December 31, 1997 increased by
40.4% to $7.3 million from $5.2 million during the year ended December 31,
1996. Selling, general and administrative expense as a percentage of revenue
decreased to 29.0% during the year ended December 31, 1997 from 30.3% during
the year ended December 31, 1996. The decrease resulted primarily from
increased revenue from the Company's offshore facilities.
Income (Loss) from Operations. Income from operations during the year ended
December 31, 1997 was $829,000 compared to a loss of $(597,000) during the
year ended December 31, 1996. Income from operations as a percentage of
revenue was 3.3% during the year ended December 31, 1997 as compared to a loss
of (3.5)% during the year ended December 31, 1996.
26
<PAGE>
Other Income (Expense), net. Other expense during the year ended December
31, 1997 increased to $277,000 from $75,000 during the year ended December 31,
1996. The increase resulted primarily from an increase in borrowing by the
Company to support the expansion of its offshore technology resource center.
Income Tax (Provision) Benefit. Income tax provision during the year ended
December 31, 1997 increased to $(598,000) from a benefit of $8,000 during the
year ended December 31, 1996. This increase was a result of the Company's
change from S corporation status to a C corporation, pursuant to which the
Company incurred a one-time charge in the amount of $693,000 because of the
related requirement to change from the cash method of accounting to the
accrual method of accounting.
Minority Interest in Net (Income) Loss. Minority interest in net (income)
loss was ($451,000) during the year ended December 31, 1997.
Preferred stock dividends and accretion. Preferred stock dividends and
accretion for the year ended December 31, 1997 was $80,000.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue during the year ended December 31, 1996 increased by 37.9%
to $17.1 million from $12.4 million during the year ended December 31, 1995.
The increase resulted primarily from an increase in demand for the Company's
traditional IT consulting services.
Gross Profit. Gross profit during the year ended December 31, 1996 increased
by 39.4% to $4.6 million from $3.3 million during the year ended December 31,
1995. Gross profit as a percentage of revenue remained constant at 26.8%.
Selling, General and Administrative Expense. Selling, general and
administrative expense during the year ended December 31, 1996 increased by
73.3% to $5.2 million from $3.0 million during the year ended December 31,
1995. Selling, general and administrative expense as a percentage of revenue
increased to 30.3% during the year ended December 31, 1996 from 24.2% during
the year ended December 31, 1995. The increase resulted primarily from
expansion of the Company's sales, marketing and recruiting capabilities to
support a higher level of revenue.
Income (Loss) from Operations. Loss from operations during the year ended
December 31, 1996 was $(597,000) compared to income of $315,000 during the
year ended December 31, 1995.
Other Income (Expense), net. Other expense during the year ended December
31, 1996 increased to $75,000 from $50,000 during the year ended December 31,
1995. The increase resulted primarily from an increase in borrowing by the
Company to support the creation of the offshore technology resource center.
Minority Interest in Net (Income) Loss. Minority interest in net (income)
loss was $241,000 during the year ended December 31, 1996.
27
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain quarterly operating information for
each of the eight quarters ending September 30, 1998, both in dollars and as a
percentage of revenue. This information was derived from the unaudited
consolidated financial statements of the Company, which, in the opinion of
management, were prepared on the same basis as the Consolidated Financial
Statements, including the Notes thereto, appearing elsewhere in this
Prospectus and include all adjustments, consisting of normal recurring
accruals, which management considers necessary for the fair presentation of
the information for the periods presented. The financial data given below
should be read in conjunction with the Consolidated Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Results
for any previous fiscal quarter are not necessarily indicative of results for
the full year or for any future quarter.
<TABLE>
<CAPTION>
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT.30,
1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Revenue................. $4,507 $5,144 $5,736 $6,861 $7,316 $7,934 $8,697 $8,921
Cost of revenue......... 3,653 3,846 3,987 4,380 4,760 5,110 5,949 6,331
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 854 1,298 1,749 2,481 2,556 2,824 2,748 2,590
Selling, general and
administrative
expense................ 1,711 1,474 1,731 2,079 1,971 2,272 3,251 3,163
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (857) (176) 18 402 585 552 (503) (573)
Other income (expense),
net.................... (48) (38) (130) (73) (36) 6 375 318
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes and
minority interest...... (905) (214) (112) 329 549 558 (128) (255)
Income tax (provision)
benefit................ 15 -- -- 21 74 104 (153) 66
Income tax (provision)
for change in corporate
status................. -- -- -- (693) -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
minority interest...... (890) (214) (112) (343) 623 454 25 (188)
Minority interest....... 241 (57) 33 (160) (267) -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... (649) (271) (79) (503) 356 454 25 (188)
Preferred stock
dividends and
accretion.............. -- -- -- (23) (57) (260) -- --
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) applicable
to common
stockholders........... $ (649) $ (271) $ (79) $ (526) $ 299 $ 194 $ 25 $ (188)
====== ====== ====== ====== ====== ====== ====== ======
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......... 81.1 74.8 69.5 63.8 65.1 64.4 68.4 71.0
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 18.9 25.2 30.5 36.2 34.9 35.6 31.6 29.0
Selling, general and
administrative
expense................ 38.0 28.6 30.2 30.3 26.9 28.6 37.4 35.4
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (19.1) (3.4) 0.3 5.9 8.0 7.0 (5.8) (6.4)
Other income (expense),
net.................... (1.1) (0.7) (2.3) (1.1) (0.5) 0.1 4.3 3.6
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes and
minority interest...... (20.2) (4.1) (2.0) 4.8 7.5 7.1 (1.5) (2.8)
Income tax (provision)
benefit................ 0.4 -- -- 0.3 1.0 (1.3) 1.8 0.7
Income tax (provision)
for change in corporate
status................. -- -- -- (10.1) -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
minority interest...... (19.8) (4.1) (2.0) (5.0) 8.5 5.8 0.3 (2.1)
Minority interest....... 5.4 (1.1) 0.6 (2.3) (3.6) -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... (14.4) (5.2) (1.4) (7.3) 4.9 5.8 0.3 (2.1)
Preferred stock
dividends and
accretion.............. -- -- -- (0.3) (0.8) (3.3) -- --
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) applicable
to common
stockholders........... (14.4)% (5.2)% (1.4)% (7.6)% 4.1% 2.5% 0.3% (2.1)%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
28
<PAGE>
The Company's operations and related revenue and operating results
historically have varied substantially from quarter to quarter and the Company
expects these variations to continue. Among the factors causing these
variations have been the number, timing and scope of IT projects in which the
Company is engaged, the accuracy of estimates of resources and time frames
required to complete ongoing projects, and general economic conditions. A high
percentage of the Company's selling, general and administrative expenses,
particularly salary, are relatively fixed in advance of any particular
quarter. As a result, unanticipated variations in the number and timing of the
Company's projects during a particular quarter may cause significant
variations in operating results in that quarter. An unanticipated termination
of a major project, a customer's decision not to pursue a new project or
proceed to succeeding stages of a current project, or the completion during a
quarter of several major customer projects could require the Company to
continue to pay for underutilized personnel and, therefore, have a material
adverse effect on the Company's business, financial condition and results of
operations. Specifically, hiring and employment practices and applicable law
in India make it difficult for the Company to effect reductions in staffing at
the Company's Bangalore, India facility. The results of operations in the
second and third quarter were adversely affected primarily due to costs
associated with the Company's increase in sales and project management
personnel which were not accompanied by expected growth in complete projects
and solutions business. In addition, the Company experienced a lower than
expected gross margin reflecting low rates of employee utilization in the
Bangalore facility, a less profitable mix of business and reduced margins from
Year 2000 and other project business. Demand for the Company's services
generally is lower in the fourth quarter due to reduced activity during the
holiday season and fewer working days for those customers which curtail
operations during such period. The Company anticipates that its business will
continue to be subject to such seasonal variations. See "Risk Factors--
Variability of Quarterly Operations and Financial Results."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and capital
expenditures primarily with internally generated cash flows, borrowings under
its line of credit facilities, proceeds from the issuance of subordinated
notes to Phoenix Home Life Mutual Insurance Company and proceeds from the
issuance of Common Stock in the initial public offering.
The Company's operating activities used $1,680,000 for the nine month period
ended September 30, 1998 compared to $850,000 for the nine months ended
September 30, 1997. The use of cash was primarily due to an increase in
accounts receivable.
The Company's operating activities generated cash of $290,000 during the
year ended December 31, 1997 and used cash of $1,072,000 for the year ended
1996 and $108,000 in 1995. In 1996 and 1995 the use of cash was due primarily
to increases in accounts receivable. In addition, in 1996 the Company incurred
an operating loss associated with start up expenses for its Bangalore
facility.
The Company used cash of $1,018,000 for capital expenditures during the nine
months ended September 30, 1998 to support planned sales growth. The Company
spent $1,453,000 during the nine months ended September 30, 1997 which was
primarily related to the Bangalore facility.
The Company's capital expenditures used cash of $1,498,000 during the year
ended December 31, 1997 and $955,000 for the year ended 1996, which were
primarily related to the operations of the Company's Bangalore facility. The
Company's investing activities used cash of $264,000 in 1995 to finance
additions to equipment and improvements.
The Company's financing activities provided $21.5 million for the nine
months ended September 30, 1998 and $2.5 million for the same period in 1997.
In March 1998, the Company issued and sold 2,200,000 shares of Common stock
for $12.00 per share in its initial public offering. Of the 2,200,000 shares
sold by the Company, 100,000 shares were not registered. In addition, 245,000
shares sold by selling stockholders in the initial public offering in March
1998 were not covered by a registration statement. As provided in the
Securities Act, certain persons purchasing securities sold in violation of the
registration provisions of the Securities Act may recover
29
<PAGE>
the consideration paid for such securities with interest upon the tender of
such securities, less the amount of any income received, or damages if such
person no longer owns the securities. The maximum rescission liability with
respect to the 100,000 unregistered shares sold by the Company would be
$1,200,000 (100,000 shares at $12 per share) plus interest. The Company has
not recognized a liability based on the rescission of the 100,000 unregistered
shares it sold because, as noted above, the right to rescind rests only with a
purchaser in the initial public offering who still holds such shares. Given
the large trading volume in the Company's common stock subsequent to the
offering (indicating substantial turnover in share ownership) and the
inability to identify which securities were unregistered, the Company is of
the belief that it is not probable that it will be required to effect an
actual rescission, as opposed to paying rescissionary damages. As indicated
previously, shareholders who purchased unregistered shares in the offering may
recover damages if they sold such securities at a loss.
The Company and the stockholders who sold shares in the initial public
offering have entered into an agreement with the Company's former securities
counsel which served as the Company's counsel in the initial public offering,
which would hold the Company and those stockholders harmless for damages which
might result from any claims as a consequence of the aforementioned
circumstances. In view of this indemnification agreement, and in light of
assurances the Company has received concerning the professional indemnity
insurance maintained by such counsel, the Company does not believe that any
claims relating to the foregoing will have a material adverse effect on its
financial condition. The Company is also the subject of shareholder litigation
relating to the initial public offering. The plaintiffs in the purported
consolidated class action seek rescission of the sales of the shares in the
initial public offering and unspecified damages, including rescissionary
damages, interest, costs and fees. Such shareholder litigation, if concluded
in favor of the plaintiffs, could have a material adverse effect on the
Company's business, financial condition and results of operations. However,
the Company and the individual defendants have entered into a memorandum of
understanding to settle the dispute with the plaintiffs in the purported
consolidated class action. Any definitive agreement resulting from such
memorandum will require court approval. No assurance can be given that a
definitive settlement agreement will be reached, or that, if reached, it will
be approved.
The Company received net proceeds of $23.2 million after deducting
underwriting discounts and commissions and other offering expenses from the
sale of 2,200,000 shares in the initial public offering. Simultaneously, with
the initial public offering, the holders of 100 shares of Series A Convertible
Preferred Stock and the holders of 100 shares of Series B Convertible
Preferred Stock exchanged their shares for 1,181,750 shares of Common Stock.
Dividends accrued during the period and previously unamortized offering
expenses have been recognized as a reduction to net income. The Company has
paid dividends of $298,000 from the proceeds. For the nine month period ended
September 30, 1997 cash was generated by exchanging subordinated notes issued
to Phoenix Home Life Mutual Insurance Company for 100 shares of Series A
Convertible Preferred Stock.
The Company's financing activities provided cash of $1.2 million for the
year ended December 31, 1997, $2.2 million in 1996 and $512,000 in 1995.
During the year ended December 31, 1997, cash was generated primarily through
the Company's issuance of subordinated notes to Phoenix, investments by
Phoenix in the offshore technology resource center and bank borrowings. The
Company generated cash in 1996 primarily through the issuance of subordinated
notes to Phoenix in order to finance the establishment of its offshore
technology resource center. In 1995 financing activities generated cash
primarily as a result of borrowings under the Company's bank credit
facilities.
As of September 30, 1998, the Company had $19.1 million in cash and cash
equivalents and had working capital of $23.2 million.
Effective October 29, 1998, the Company entered into a Loan and Security
Agreement with People's Bank (the "Credit Facility"), which provides for a
revolving line of credit of up to $4.0 million for its U.S. operations.
Borrowings under the line of credit are secured by a valid first priority
perfected security interest in all business
30
<PAGE>
assets of Command Systems, Inc. Such security interest excludes the assets of
Command International Software Pvt. The Credit Facility will be primarily used
to fund the Company's working capital requirements. The Credit Facility will
bear interest at a floating rate based upon prime plus 0% or at the Company's
option LIBOR plus 175 basis points for 30, 60 or 90 day periods. LIBOR
borrowings will be limited to a maximum of seven LIBOR maturities at one time,
with LIBOR borrowings in increments of $500,000. The Company was required to
pay a commitment fee of $22,000 at the time of closing. The Company is
required to maintain a minimum of the following: total net worth of five times
the Credit Facility, debt service coverage ratio of 3:1, interest coverage of
3:1 and a current ratio of 2:1.
The Company believes that the net proceeds from the initial public offering,
together with other available funds, including the Credit Facility, and the
cash flow expected to be generated from operations, will be adequate to at
least satisfy its current and planned operations over the next 12 months.
The Company's offshore technology resource center invoices its U.S.
customers in U.S. dollars to mitigate exchange risk; however, local expenses
are denominated in local currency. The Company presently incurs a significant
amount of its costs in local currency in India. In contrast, the Company
presently generates most of its revenue in U.S. dollars. Accordingly, the
Company is subject to risks that, as a result of currency fluctuations, the
translation of foreign currencies into U.S. dollars could adversely affect its
business, financial condition and results of operations. Historically, the
Company has not hedged any meaningful portion of its foreign exchange
transactions. See "Risk Factors--Risks of Doing Business in International
Markets."
SHAREHOLDER LITIGATION
On or about May 6, 1998, a complaint was filed in the United States District
Court for the Southern District of New York by named plaintiffs Don M. Doney,
Jr. and Madelyn J. McCabe against the Company, certain of the Company's
officers and directors (Edward G. Caputo, Stephen L. Willcox, Robert B. Dixon,
John J.C. Herndon, James M. Oates and Joseph D. Sargent) and the managing
underwriters of the Company's initial public offering (Cowen & Company and
Volpe Brown Whelan & Company, LLC) (the "Doney Litigation"). On or about June
22, 1998, an amended complaint relating to the Doney Litigation was filed in
the United States District Court for the Southern District of New York. On or
about May 8, 1998, a second complaint was filed in the United States District
Court for the Southern District of New York by named plaintiff Chaile B.
Steinberg against the same defendants. On or about June 26, 1998, a third
complaint was filed in the United States District Court for the Southern
District of New York by named plaintiff Michael Makinen against the same
defendants. Each of the plaintiffs purports to represent a class consisting of
purchasers of common stock pursuant to the initial public offering. These
actions were consolidated by order of the United States District Court for the
Southern District of New York, and a consolidated complaint styled In Re
Command Systems, Inc. Securities Litigation was filed on September 30, 1998.
The consolidated complaint alleges that defendants violated the Act and claims
the sale of unregistered shares breached the disclosure and filing
requirements of the Act. The plaintiffs seek rescission of the sales of the
shares in the initial public offering and unspecified damages, including
rescissionary damages, interest, costs and fees. Such litigation, if concluded
in favor of the plaintiffs, could have a material adverse effect on the
Company's business, financial condition and results of operations. On December
7, 1998, the Company and the individual defendants entered into a memorandum
of understanding to settle the dispute with the plaintiffs in the purported
consolidated class action. Any definitive settlement agreement resulting from
such memorandum will require court approval. Pursuant to the terms of the
memorandum, the parties have agreed in principle to an aggregate payment to
the plaintiffs of $5.75 million in cash plus accrued interest, minus approved
attorneys' fees and related expenses, from the Company. The $5.75 million will
accrue interest as of the date of preliminary court approval of a definitive
settlement agreement entered into among the parties based upon the memorandum,
but will not be payable until the District Court for the Southern District of
New York approves the settlement and such approval becomes final. Of the final
settlement amount, the Company will be reimbursed for all but $1.65 million,
and the interest thereon. In addition, the Company may be responsible for
certain legal fees and related expenses incurred in connection with the
litigation. The Company will recognize a charge to operations in the fourth
quarter of 1998 for its costs of the settlement and related expenses. There
can be no assurance, however, that a definitive settlement agreement will be
reached, or that, if reached, it will be approved by the court.
31
<PAGE>
INFLATION
The Company's most significant costs are the salaries and related benefits
for its consultants and other professionals. Competition in India and the U.S.
for IT professionals with the advanced technological skills necessary to
perform the services offered by the Company have caused wages to increase at a
rate greater than the general rate of inflation. As with other IT service
providers, the Company must adequately anticipate wage increases. Further,
India has in the past experienced significant inflation. Historically, the
Company's wage costs in India have been significantly lower than its wage
costs in the U.S. for comparably skilled employees, although wage costs in
India are presently increasing at a faster rate than in the U.S. There can be
no assurance that the Company will be able to recover cost increases through
increases in the prices that it charges for its services in the U.S. See "Risk
Factors--Competitive Market for Technical Personnel."
THE YEAR 2000 ISSUE
The Company has completed an assessment of its information systems to
determine the extent to which its existing systems correctly define the Year
2000. Those systems found not to be compliant have been upgraded by the
vendors of those systems except for certain purchased software packages which
are expected to be upgraded and brought into compliance by their vendors
before the year 2000. The majority of the upgrades were implemented via
standard maintenance contracts, without costs. Only a nominal amount has been
expended, to date, and the remaining upgrades are expected to be implemented
for minimal cost. With respect to the information systems of third parties who
are major vendors of the Company, the Company will be seeking to obtain Year
2000 compliance certifications for those systems that relate to the Company's
business. These third parties may include major hardware and software vendors,
as well as financial services providers. Most of the Company's major vendors
have made public statements indicating that they intend to cause their
products and services to be Year 2000 compliant on a timely basis. Based on
the foregoing, the Company has not to date developed contingency plans for the
failure by its major vendors to provide Year 2000 compliant products and
services. There can be no assurance, however, that the Year 2000 issue will
not affect the information systems of the Company's major vendors as they
relate to the Company's business, or that any such impact of a major vendor's
information system would not have a material adverse effect on the Company.
BUSINESS
SUMMARY
The Company provides a wide range of IT solutions and services to financial
services organizations to support their evolving business processes. The
Company utilizes leading technologies to offer its customers a comprehensive
range of IT services, including technology and education services. In 1996 the
Company established its offshore technology resource center in Bangalore,
India, which today provides its customers with increased access to skilled IT
professionals. As of September 30, 1998, the Company employed 305 full-time IT
professionals in its four U.S. offices and the offshore technology resource
center. The Company develops and maintains long-term relationships with its
customers. In 1997, the Company provided services to over 100 customers and
for each of 1996 and 1997 over 60% of the Company's revenue was derived from
existing customers from the previous year. The Company's customers are
typically large financial services organizations, especially leading insurance
companies, such as Mutual Life Insurance Company of New York, The Hartford
Financial Services Group, Inc., MassMutual, Phoenix HomeLife Mutual Insurance
Company and Aetna, and G.E. Capital.
32
<PAGE>
The following table sets forth the revenue percentages by line of business:
PERCENTAGE OF TOTAL REVENUE
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1998 1998
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
IT Staff Augmentation... 59% 51% 52% 62% 55%
Year 2000............... 21% 31% 28% 25% 28%
Software and Hardware... 12% 12% 14% 9% 12%
Other................... 8% 6% 6% 4% 5%
---- ---- ---- ---- ----
Total Revenue......... 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
</TABLE>
INDUSTRY OVERVIEW
Intense competition, globalization, rapid technological innovation and
deregulation are accelerating the rate of change in business today,
particularly for organizations in such data and technology intensive
industries as the insurance, banking, brokerage and other financial services
industries. Financial services organizations face increasing pressures to
improve product and service quality, reduce costs, improve operating
efficiencies and strengthen customer relationships. These organizations are
changing and adapting their business processes in order to achieve these
objectives and therefore require systems and personnel that are flexible and
capable of rapid change. Accordingly, a financial services organization's
ability to successfully integrate and deploy advanced IT systems and
applications in a timely and cost-effective manner has become critical to its
success in today's rapidly changing business environment. In addition, many
financial services organizations have begun to view IT solutions as strategic
tools that can be used to gain competitive advantages such as reducing the
time to market of products, providing an expanded mix of value-added client
services, reducing the cost of development and maintenance of systems and
providing timely access to information.
At the same time, rapid technological advances have accelerated the pace of
transition from mainframe to client/server architectures and from the
utilization of many interdepartmental systems to enterprise-wide integrated
systems. These technological advances have also increased the use of network
and Internet/intranet communications systems. In addition, such technological
advances have accelerated the convergence of the foregoing technologies.
Although these rapid technological advances and other emerging and converging
technologies offer the promise of faster, more functional and more flexible IT
systems and applications, the implementation of business solutions utilizing
these new technologies presents organizations and IT departments present major
challenges. Evaluating, developing and integrating these solutions requires a
large number of highly skilled individuals trained in many diverse
technologies and architectures. However, there is a shortage of these
individuals, and consequently many organizations either will not have
sufficient staffing to satisfy their needs or will not have personnel with
adequate expertise. Moreover, many companies have made a strategic decision to
focus on their core competencies, minimize their fixed costs and reduce their
work forces, thereby preventing them from investing in large IT staffs.
As a result, many organizations are increasingly turning to third-party IT
service providers to help them evaluate, develop, implement and support new IT
systems and applications, and to help them maintain existing legacy systems
and applications. Consequently, demand for IT services has grown
significantly. According to industry sources, the U.S. market for outsourced
IT services is expected to grow from over $13 billion in 1996 to approximately
$24 billion in the year 2001. IT services are particularly essential to the
financial services industry, whose business is highly dependent on effective
data processing management and analysis. Third-party implementation of such
services in a timely and cost-effective manner requires not only technical
expertise, but also highly developed project management skills and prior
experience with the customers' systems. Also, because of needs specific to
their industry, financial services organizations frequently seek IT service
providers with financial industry experience.
33
<PAGE>
Financial services organizations are particularly sensitive to, and need to
address, the Year 2000 problem (which prevents existing applications from
properly interpreting dates after 1999), because it would prevent or inhibit
the proper calculation of critical data and ultimately, if not corrected, may
lead to an interruption or discontinuation of service. Solving a Year 2000
problem is a highly time-intensive and labor-intensive project, typically
requiring:
. identification and analysis of programs that are or may be affected,
. analysis of up to millions of lines of code and millions of items of
data,
. renovation of affected code,
. testing.
Although the cost to remedy the Year 2000 problem is difficult to estimate,
a recognized industry source has estimated that the worldwide costs (including
in-house costs) to resolve the Year 2000 problem could range from $300 billion
to $600 billion. Many providers of IT services expect to have an opportunity
to leverage services rendered in connection with solving Year 2000 problems
into other projects that require experience with these same customer systems,
including:
. maintaining and re-engineering legacy systems, which many financial
services organizations choose to maintain in order to maximize their
investments in these systems and because of the high degree of customized
functionality they provide; and
. addressing the growing backlog of applications development projects that
are accumulating while customers' internal IT departments devote greater
portions of their limited budgets and deploy more of their personnel to
the Year 2000 problem
As organizations continue to maintain legacy systems, migrate from mainframe
to client/server architectures, implement other emerging IT technologies and
address the Year 2000 problem, the demand for IT professionals will continue
to rise and the shortage of IT professionals is expected to become more
severe. Meanwhile, financial services organizations continue to be challenged
by the rising costs of applications development and maintenance and the large
and growing backlog of applications development projects. For these reasons,
financial services organizations are increasingly turning to outside IT
service providers.
By outsourcing IT services, companies are able to:
. focus on their core business
. access specialized technical skills
. implement IT solutions more rapidly
. benefit from flexible staffing
. reduce the cost of recruiting and training
RECENT DEVELOPMENTS; THIRD QUARTER RESULTS
Following certain concerns expressed relating to the Company's performance
under a Year 2000 solutions services contract for one of the Company's largest
customers in early 1998, the customer terminated the contract. In addition, in
1998 the Company performed an assessment phase of a Year 2000 conversion
project for one of the Company's other large customers and, following
completion of such assessment, failed to obtain a contract for the complete
Year 2000 conversion project. In the three month periods ended June 30, 1998
and September 30, 1998, complete projects and solutions accounted for a
decreasing percentage of the Company's total revenue compared to the three
months ended March 31, 1998. The Company intends to continue to pursue the
strategies described below under the caption "--Business Strategy." There can
be no assurance, however, that revenues obtained from higher margin services
will not continue to decrease as a percentage of the Company's total revenue,
or that the Company will otherwise succeed in pursuing its strategies.
34
<PAGE>
The Company lost $573,000 from operations in the three months ended
September 30, 1998 compared with earnings from operations of $402,000 in the
third quarter of 1997. The Company's gross margin was lower than expected for
the three months ended September 30, 1998, reflecting a less profitable mix of
business and reduced margins from Year 2000 and other project business.
Operating results were also lower than anticipated, primarily due to costs
associated with the Company's increase in sales and project management
personnel which were not accompanied by expected growth in project business.
The Company reported a net loss of $188,000 for the three months ended
September 30, 1998, compared to a net loss of $503,000 for the comparable 1997
period. The Company's results for the three months ended September 30, 1998
benefited from interest income of $319,000. The net loss for the three months
ended September 30, 1997 was affected by a non-recurring charge of
approximately $693,000 resulting from a change in the tax status of the
Company.
THE COMMAND SYSTEMS SOLUTION
Command Systems provides IT services and solutions to financial services
organizations by integrating and deploying new IT technologies to support
evolving business processes in an efficient and cost-effective manner. The
following are key attributes of the Command Systems solution:
Broad Range of IT Services. The Company provides its customers with a single
source for a broad range of IT services including (i) IT staff augmentation,
(ii) Year 2000 solutions services, (iii) project-based applications
development and implementation, (iv) network design and deployment, (v)
Internet/intranet application development and (vi) systems maintenance. The
Company provides its services in a wide variety of computing environments
(including client/server and legacy-based platforms) and utilizes leading
technologies such as object-oriented development, database management systems
and various Internet/intranet networking technologies. In addition, the
Company provides education and training services to its IT customers' staffs.
Strategic Focus on Financial Services Industry. By focusing on the financial
services industry since 1985, and particularly on the needs of large insurance
companies, the Company has developed expertise in a large vertical market
dominated by large organizations with extensive IT needs. The Company seeks to
leverage its expertise in the financial services industry to increase its
customer base and to increase its business from existing customers. By hiring
personnel with experience in the financial services industry, the Company has
been able to establish new relationships with customers in this industry as
well as maintain or strengthen existing relationships.
Offshore Technology Resource Center. In anticipation of the growing demand
for IT services and the shortage of skilled IT professionals in the United
States, the Company in 1996 established the offshore technology resource
center in Bangalore, India. The Company believes that its offshore technology
resource center offers customers certain advantages, including access to a
large pool of IT professionals and lower development costs.
Complete Range of Year 2000 Solutions Services. The Company's services
include a comprehensive approach to the Year 2000 problem that (i) identifies
and analyzes programs that are or may be affected, (ii) analyzes up to
millions of lines of code and millions of items of data, (iii) renovates
affected code to make it Year 2000 compliant and (iv) conducts multi-level
testing. The Company believes that its Command2000 conversion methodology
results in cost-effective and timely conversion solutions for its customers.
Expertise in Key and Emerging Technologies. The Company hires highly skilled
personnel who are experienced with key technologies (such as client/server
development and design and network integration) and emerging technologies
(such as data warehousing and object-oriented analysis and design).
Additionally, the Company's IT professionals receive initial and ongoing
training in a variety of technology platforms. The Company assists customers
in understanding the latest IT developments and guides them through the
implementation of the IT solutions best suited to their needs.
35
<PAGE>
BUSINESS STRATEGY
The Company's objective is to become the preferred provider of IT services
to an expanding base of customers. The Company's strategies to achieve this
objective include the following:
Cross-Sell Services to Existing Customers. The Company's relationships with
its customers provide it with an opportunity to market additional services and
solutions to such customers. The Company seeks to maximize its customer
retention rate and secure additional engagements by providing high-quality,
responsive services. In addition, the Company believes that the detailed
knowledge of customers' organizations, systems and needs that it gains, as
well as the customer relationships that are created during the performance of
its Year 2000 conversion projects and other projects, will serve as a
competitive advantage in securing additional projects from these customers.
Leverage Expertise in Insurance Market. The Company will seek to leverage
its expertise within the insurance industry into a larger, more diverse
customer base within the broader financial services market, especially as
deregulation encourages the creation of full service financial services
organizations. The insurance, banking and other financial services industries
are generally dominated by large companies with extensive IT needs. The
Company will seek to leverage its industry-specific expertise and its existing
accounts into a larger number of customers in these IT intensive markets. As
the Company expands its customer base, it intends to open additional regional
sales offices in the U.S. to enable the Company to sell to and support
existing and new customers in expanded geographic areas and industries. To
achieve these goals, the Company may seek strategic acquisitions of
organizations that complement or enhance the Company's core skills.
Migration to Higher Margin Services. The Company seeks to derive a greater
percentage of its revenue from higher margin services. To support this goal,
in December 1996 the Company introduced Year 2000 solutions services for its
customers. The Company has also reorganized and increased its sales force to
focus on the delivery of complete projects and solutions to its clients. The
Company believes that projects managed by the Company, if obtained, will carry
higher margins and will better enable it to become a full service technology
solutions provider to its customers.
Utilize Offshore Technology Resource Center. The Company believes that its
offshore infrastructure improves the Company's access to IT professionals,
reduces the costs to the Company's clients associated with IT services and
enables it to provide better support to its customers. This facility, which
has been operational since December 1996, utilizes state-of-the-art technology
and is connected via secure, high-speed satellite links to the Company's
headquarters, branch offices and customer sites. The staff at the offshore
technology resource center had grown to 151 employees as of September 30,
1998.
Continued Development of Long-Term Relationships with Customers. The Company
continues to develop preferred provider relationships with its customers. The
Company's on-site personnel are integrated into the operations of its
customers' IT departments. In addition, the Company makes significant
investments in technology enhancements to support the strategic technical
direction of its customers. The Company also uses several methods to obtain
continuous customer feedback, including customer satisfaction surveys,
consultant performance surveys and regularly scheduled meetings with senior
management of each customer. A significant portion of the compensation of the
Company's senior executives, sales executives and senior project managers is
directly linked to customer satisfaction and the delivery of high quality,
timely IT services at or below budget. The Company believes that these
initiatives foster long-term customer satisfaction as evidenced by the fact
that for each of the fiscal years ended December 31, 1996 and 1997 existing
customers from the previous fiscal year generated over 60% of the Company's
revenue.
Attract, Train and Retain Highly Skilled IT Professionals. The Company's
future success depends to a significant extent on its ability to attract,
train, motivate and retain highly skilled IT professionals, particularly
project managers, software engineers and other technology leaders. To achieve
this objective, the Company
36
<PAGE>
maintains programs and personnel to identify and hire the best available IT
professionals. The Company conducts training of its IT professionals in both
legacy systems and emerging technologies to maintain its position as a
technological leader and to enhance its methodologies. In addition, the
Company utilizes its IT educational courses as an additional method of
recruiting IT professionals. In order to attract, motivate and retain its
employees in the face of existing shortages of IT professionals, the Company
focuses on its corporate culture, incentive programs, compensation and
benefits and provides a career and education management program to create an
individualized structured career growth plan for its employees. The Company
also has access to a large pool of IT professionals through its state-of-the-
art Bangalore facility.
SERVICES
The Company is a solutions provider, using leading technologies to offer its
customers a comprehensive range of IT services, including technology, and
education services. These services may be provided individually or as a
combination of services offerings to provide complete solutions. The Company
has adopted an integrated approach to providing solutions to its customers.
Each of the Company's service offerings is led by a technology leader,
supported by a team of dedicated IT consultants with focused expertise in the
technologies specific to such service offering. The Company's dedicated teams
of service providers work closely with each other, with the Company's
customers and with a wide variety of technology vendors to ensure the
availability of leading-edge technologies and capabilities, cost efficient and
timely delivery of services and the development of solutions for specific
business needs and objectives. The Company believes that its integrated
approach to designing, developing and implementing its services offerings
promotes long-term customer satisfaction, active customer involvement and a
more complete understanding of customer requirements. The Company offers IT
services primarily in the following areas:
.IT staff augmentation
.Year 2000 solutions services
.application development, maintenance and networking services
Following is a more detailed description of these and other services provided
by the Company.
37
<PAGE>
TECHNOLOGY SERVICES
The Company solves business problems by building technical solutions for
customers utilizing the Company's business and technology expertise. The
Company's organization enables focused attention to customer requirements and
is based on the following services:
COMMAND SYSTEMS SOLUTIONS
DESCRIPTION
COMMANDSTAFF--IT staff augmentation .Design
services to provide customers with .Data modeling
highly skilled IT professionals, .Analysis
over a wide range of technologies .Programming
from client server and/or .Development
traditional technology developers to .Testing
help desk support to supplement IT .Networking
requirements on demand and as .Implementation
needed. IT professionals are .Help Desk
carefully selected and technically .Maintenance
qualified to match areas of
expertise with specific customer
requirements.
COMMAND2000--Year 2000 solutions The Company provides the following
services. Provides expertise to six step methodology to analyze,
cost-effectively assess business renovate and test millions of lines
requirements and develop quality of code and millions of items of
solutions utilizing a combination of data:
on-site project management staff and
programming support from the
Company's offshore technology
resource center in Bangalore, India.
. Management Awareness--Advise
corporate executives of the nature
and scope of the Year 2000
problem.
. Inventory Analysis--Provide a
comprehensive survey, data
collection and analysis of the
scope of the Year 2000 problem by
application, line of business or
enterprise.
. Portfolio Assessment--Perform an
in-depth assessment of all of the
date fields and date processing
routines. Source code is analyzed
and computer program interaction
is documented.
. Change Strategy--Determine the
conversion schedule and logistics
by focusing on the relationships
of computer system components.
. Application Renovation--Deliver
on-site project management and
analysis at the customer facility,
combined with the renovation of
affected code.
. Testing--Provide unit testing and
parallel testing comparisons back
to the predetermined baseline of
each application system.
38
<PAGE>
ADDITIONAL TECHNOLOGY SERVICES
COMMAND SYSTEMS SOLUTIONS
DESCRIPTION
COMMANDPRO--Project-based .Requirements definition and vision
application development and .General analysis
implementation services, including .Prototype sizing and functionality
turnkey application systems assessment
development, migration and/or .Detail analysis
integration of client/server systems .Platform and tool selection
through all phases of the .Data modeling and interface
development life cycle from design development
through production implementation. .Development and implementation
scheduling
The Company develops application .Prototype development
systems utilizing leading technology .Prototype deployment to selected
tools provided by vendors such as: users
.Full architectural and platform
.Microsoft development
.Powersoft .Total application system
.Oracle development
.Rational .Enterprise testing
.Implementation
.Lotus/IBM
.Cognos
COMMANDNET--Integrated network . Workstation Migration--Deploys
services to design and deploy consistent enterprise user
networks, including related hardware workstations.
and software systems to: . Messaging--Provides better
communications and reduced cost of
management.
.Reduce network complexity
.Improve deployment speed . Network Systems Engineering--
.Standardize platforms Designs and deploys LAN/WAN
.Integrate messaging software and hardware.
.Manage software assets . Enterprise Software Management--
.Reduce help desk support Designs and deploys software
.Improve enterprise network management solutions.
efficiency
.Reduce cost of ownership
COMMANDWEB--Internet/intranet .Web-enabling legacy application
application development services. development
Provides web-based application and .Web page design
communication solutions to improve .Graphics and multimedia
internal and external communications .Security protection
and services. .Internet application development
CommandWEB incorporates the use of
leading technologies such as: Java,
HTML, PERL, and leading web servers
from Microsoft, Oracle and Sun
Microsystems.
COMMANDOO--Object-oriented . Incorporate the use of business
development services to improve new objects within the application
application development time to design.
market and reduce ongoing . Establish a repeatable process for
application maintenance expense by the project life cycle.
providing and utilizing leading
object-oriented tools, methodologies
and expertise.
. Develop and utilize enterprise-
wide object repository.
39
<PAGE>
COMMAND SYSTEMS SOLUTIONS DESCRIPTION
COMMANDSOURCE--Provides and manages Outsource and/or insource ongoing
long-term maintenance of application customer application maintenance and
systems by utilizing a range of enhancement needs across
technology toolsets. The Company client/server and mainframe computer
provides carefully selected and environments, onsite at customer
qualified resources that are fully locations, offsite at the Company's
integrated into the customer's IT domestic offices and/or at the
environment. Offshore Technology Resource Center.
In addition to the foregoing services, the Company, to a limited extent,
provides educational services to its customers' IT staff as required for
application systems' development.
CUSTOMERS
The Company focuses its sales efforts on Fortune 500 companies in the
financial services industries and middle market companies in the insurance,
banking and brokerage industries with significant IT budgets and recurring
software development needs. During 1997 and as of September 30, 1998, the
Company provided services to over 100 customers. The Company seeks to maximize
its customer retention rate and secure additional engagements by (i) providing
quality services and customer responsiveness, (ii) leveraging its expertise
within the insurance industry into a larger, more diverse customer base within
the broader financial services market and (iii) cross-selling additional
services to existing customers.
Typical development projects for insurance companies include applications
systems such as claims processing; agency management; coordination of benefits
and subrogation, pension, premium and loss reporting; accounting;
compensation; annual statement; actuarial; underwriting and benefits. Typical
development projects for other financial services organizations include
applications for mutual fund analysis, fund tracking, stock transfer, customer
information, cash distribution, accounting, annual statement, portfolio
accounting and human resource systems. Organizations in these industries are
highly information dependent and use IT systems to gain a competitive
advantage.
The following table sets forth our largest customers by revenue:
Largest Customers By Revenue
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 PERCENT OF TOTAL REVENUE
- -------------------------------------------- ------------------------
<S> <C>
Mutual Life Insurance Company of New York............. 15.3%
New York Life Insurance Company....................... 10.8%
The Hartford Financial Services Group, Inc............ 10.2%
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
- ------------------------------------
<S> <C>
The Hartford Financial Services Group, Inc............ 13.1%
New York Life Insurance Company....................... 13.0%
Phoenix Home Life Mutual Insurance Company............ 10.3%
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
- ------------------------------------
<S> <C>
The Hartford Financial Services Group, Inc............ 13.6%
New York Life Insurance Company....................... 12.6%
</TABLE>
No other single customer accounted for more than 10% of the Company's total
revenue during these periods. For each of the fiscal years ended December 31,
1996 and 1997 existing customers from the previous fiscal year generated at
least 60% of the Company's revenue.
Organizations to which the Company provided services during the year ended
December 31, 1997 include among others: Aetna, Boston Mutual, Fleet Services,
G.E. Capital, General Reinsurance, J.P. Morgan, Liberty Mutual Group,
MassMutual, New York Life Insurance Company, Otis Eastern Service, Phoenix
Home Life Mutual Insurance Company, QualMed, The Hartford Financial Services
Group, Inc., Mutual Life Insurance Company of New York, TransAmerica Leasing
and United Parcel Service.
40
<PAGE>
REPRESENTATIVE ENGAGEMENTS
Examples of the Company's engagements, which are representative of the
nature of the Company's services and customer relationships, are set forth
below:
COMMAND2000--An ongoing Year 2000 solutions services project for a large New
York-based insurance company. Command was awarded a multi-million dollar
contract to assess and renovate over eight million lines of code for century
change compliance. Due to the speed, efficiency and effectiveness of the
Command2000 process, the Company has been engaged to renovate another two
million lines of code for this customer.
COMMANDPRO--Project management and application development for a major New
England-based, Fortune 500 insurance company. The Company was awarded a
contract to manage a turnkey project to develop an insurance underwriting
application system, designed to fully automate the underwriting process. The
Company developed a system with built-in sophisticated algorithms and
underwriting business logic to automatically calculate business ratings and
various premiums. The Company's expertise in the insurance industry also
enabled it to develop the underwriting system so that it was fully integrated
with the customer's accounting system in order to streamline and automate the
customer's billing process. The Company utilized a team of 12 CommandPRO
consultants with insurance industry expertise in order to reengineer this
component of the customer's business process. Command has successfully
delivered many other services to this insurance company.
COMMANDNET--The Company provided project management and implementation for a
network and workstation migration and infrastructure upgrade of more than
3,000 desktops for another Fortune 500 insurance company at the customer's
corporate headquarters. The Company is also in the process of providing such
services at over 75 field offices for this customer. The Company was awarded
this multi-million dollar contract to develop a turnkey process to provide a
standardized single workstation environment to support over 200 applications
on desktop workstations. The Company is also training all of the customer's
affected employees in order to minimize productivity interruptions. The
Company planned and implemented the deployment, managed the rollout and
successfully migrated these desktops at the customer's headquarters ahead of
schedule. The solution provides central desktop and application
administration, automated update and version control. Command has successfully
delivered many other services to this insurance company.
COMMANDWEB--The Company web-enabled an enrollment application for a large
Midwest-based, managed health care company. The Company was awarded a contract
to develop a three-tier, interactive online health benefits enrollment program
utilizing Internet technology and subsequently designed and coded an online
extranet application for this customer. This enrollment application
(consisting of fractional and architectural components such as Javascript
code, NetDynamics Application Server, Netscape Fasttrack Web Server and Oracle
Database Server) allows users to execute certain transactions via the
Internet, such as opening a new enrollment, adding additional dependents to
the existing plan, deleting dependents and terminating coverage. Once entered,
data is processed by a legacy application using a customized feed from an
Oracle database.
SALES AND MARKETING
The Company markets its services through a direct sales force located
throughout the Company's offices in Farmington and Stamford, Connecticut,
Natick, Massachusetts and New York, New York, as well as senior executives
from corporate headquarters. The Company sells to customers utilizing a sales
team approach in which each team is led by a senior sales executive and
supported by one or more junior sales executives, recruiters and technology
leaders. The members of the team combine their efforts to present a
comprehensive solution proposal to each customer.
In order to develop an in-depth understanding of each customer's individual
needs and to form strong customer relationships, sales executives are assigned
to a limited number of customers that generally does not exceed twelve. These
executives are responsible for providing highly responsive service and
ensuring that the Company's applications solutions achieve customer
objectives. Commissions based upon the gross profit generated from each
business transaction constitute a substantial portion of the total
compensation for each sales executive.
41
<PAGE>
The Company focuses its marketing efforts on financial services
organizations with substantial IT budgets and recurring IT staffing and
services needs. Marketing programs include direct mail campaigns, seminars,
conferences, trade shows and other activities intended to generate and
maintain an interest in the Company's services. In addition, the Company has
organized its staff into areas of technology expertise and has branded such
areas to promote market awareness and differentiation.
The Company's services require a substantial financial commitment by
customers and, therefore, typically involve a long sales cycle. Once a lead is
generated, the Company endeavors to understand quickly the potential
customer's business needs and objectives in order to develop the appropriate
solution and bid accordingly. The Company's technology leaders are involved
throughout the sales cycle to ensure mutual understanding of customer goals,
including time to completion, and technological requirements. Sales cycles for
complex business solutions projects typically range from one to six months
from the time the Company initially meets with a prospective customer until
the customer decides whether to authorize commencement of an engagement.
As of September 30, 1998, the Company had 24 persons engaged in sales and
marketing full-time. In addition to its sales and marketing force, the Company
also uses an outside public relations firm that coordinates all corporate
communications, including the scheduling of press conferences to promote the
Company's services and delivery methodologies.
HUMAN RESOURCES
As of September 30, 1998, the Company employed 21 full-time personnel
dedicated to recruiting IT professionals and managing its human resources. The
Company actively recruits in the United States and India. Recruiting methods
include advertisement on television, in leading newspapers, in trade magazines
and on the Company's web site and through participation in career fairs. The
Company also participates in on-campus recruiting for recent college graduates
and has hired employees from various schools with degrees in computer science
and management information systems. In addition, the Company has established
an employee referral plan, which actively involves employees in referring
individuals and screening candidates for new positions. The Company also
utilizes stock options as part of its recruitment and retention strategy.
The Company's strategy for employee retention includes career planning,
thorough initial and ongoing training, allocation of assignments in accordance
with employee skills and career objectives and a comprehensive benefits
package, including incentive-based compensation and tuition reimbursement. As
part of its retention efforts, the Company seeks to minimize turnover by
emphasizing:
. competitive salaries
. employee stock options
. deferred compensation
. contractual limitations effective upon termination of employment
All IT professionals receive ongoing training on a variety of technology
platforms. The Company's education and training department helps employees
make the transition from legacy to client/server skills by providing cross-
platform training in new technologies. In addition to comprehensive technical
training, the Company provides extensive training in software quality
implementation processes. The Technology Education Centers provide ancillary
benefits to the Company by reducing the cost to train its own software
developers and provide the Company with highly trained individuals. The
training services provided by the Company also provide it with a pool of new
talent for development projects.
The Company's IT professionals typically have Bachelor's or Master's degrees
in Computer Science or another technical discipline, and, as of September 30,
1998, the average U.S.-based professional, including newly hired personnel,
had over 10 years of relevant industry work experience. As of September 30,
1998, the Company had 464 employees comprised of 305 salaried IT
professionals, 26 sales and marketing personnel, 17 recruiting and human
resource personnel and 44 general and administrative personnel. As of
September 30, 1998, the Company also utilized 72 independent contractors to
supplement its IT workforce.
42
<PAGE>
The Company believes that there is a shortage of, and significant
competition for, IT professionals and that its future success is highly
dependent upon its ability to attract, train, motivate and retain skilled IT
consultants with the advanced technical skills necessary to perform the
services offered by the Company.
The Company's employees are not represented by any labor unions. The Company
considers its relations with its employees to be good.
COMPETITION
The IT services industry is highly competitive and fragmented and served by
numerous international, national, regional and local firms, all of which are
either existing or potential competitors of the Company. Primary competitors
include other IT service providers, along with participants from a variety of
market segments, including "Big Five" accounting firms, implementation firms,
applications software firms, service groups of computer equipment companies,
general management consulting firms, programming companies and temporary
staffing firms, as well as in-house IT departments. In addition, a significant
and increasing number of companies have recently announced that they offer
Year 2000 solutions services or automated Year 2000 solutions services
software products. Many of the Company's competitors have significantly
greater financial, technical and marketing resources and generate greater
revenue than the Company, and there can be no assurance that the Company will
not lose existing customers to such competitors. The Company believes that the
principal competitive factors in the IT services industry include the range of
services offered, industry expertise, technical expertise, responsiveness to
customer needs, speed in delivering IT solutions, quality of service and
perceived value. See "Risk Factors--Competition."
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of copyright and trade secret laws,
nondisclosure and other contractual arrangements in order to protect its
proprietary rights in its various intellectual properties. India is a member
of the Berne Convention, an international treaty. As a member of the Berne
Convention, the government of India has agreed to extend copyright protection
under its domestic laws to foreign works, including works created or produced
in the United States. The Company believes that laws, rules, regulations and
treaties in effect in the United States and India are adequate to protect it
from misappropriation or unauthorized use of its intellectual property.
However, there can be no assurance that such laws will not change and, in
particular, that the laws of India will not change in ways that may prevent or
restrict the transfer of software components, libraries and toolsets from
India to the United States. The Company enters into confidentiality agreements
with its employees and limits distribution of proprietary information. There
can be no assurance, however, that the steps taken by the Company to protect
its proprietary rights will be adequate to deter misappropriation of its
intellectual property, or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its rights. The Company presently
holds no patents or registered copyrights. Although the Company believes that
its intellectual property rights do not infringe on the intellectual property
rights of others, there can be no assurance that such a claim will not be
asserted against the Company in the future, that assertion of such claims will
not result in litigation or that the Company would prevail in such litigation
or be able to obtain a license for the use of any infringed intellectual
property from a third party on commercially reasonable terms. Additionally,
the Company may in the future license certain technologies to its customers.
There can be no assurance that the Company will be able to successfully
license these technologies, protect them from infringement or misuse, or
prevent infringement claims against the Company in connection with its
licensing efforts. The Company expects that the risk of infringement claims
against the Company will increase if more of the Company's competitors are
able to successfully obtain patents for software products and processes. Any
such claims, regardless of their outcome, could result in substantial cost to
the Company and divert management's attention from the Company's operations.
Any infringement claim or litigation against the Company could, therefore,
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors--Intellectual Property Rights."
FACILITIES
The Company leases approximately 15,065 square feet of office space in
Farmington, Connecticut which is used by the Company's senior management,
administrative personnel, human resources and sales and marketing
43
<PAGE>
functions. This lease expires on March 31, 2003. The Company also leases
facilities in Stamford, Connecticut, Natick, Massachusetts, and New York, New
York.
In addition, the Company leases approximately 23,450 square feet of office
space in downtown Bangalore, India for its offshore technology resource
center. This lease expires on September 15, 2000 and is renewable at the
option of the Company for a two-year period.
The Company believes that these facilities, together with additional space
to be obtained at the Company's headquarters in Farmington, Connecticut and,
if necessary, in Bangalore, India will be adequate for its presently
anticipated future needs.
LEGAL PROCEEDINGS
On or about May 6, 1998, a complaint was filed in the United States District
Court for the Southern District of New York by named plaintiffs Don M. Doney,
Jr. and Madelyn J. McCabe against the Company, certain of the Company's
officers and directors (Edward G. Caputo, Stephen L. Willcox, Robert B. Dixon,
John J.C. Herndon, James M. Oates and Joseph D. Sargent) and the managing
underwriters of the Company's initial public offering (Cowen & Company and
Volpe Brown Whelan & Company, LLC) (the "Doney Litigation"). On or about June
22, 1998, an amended complaint relating to the Doney Litigation was filed in
the United States District Court for the Southern District of New York. On or
about May 8, 1998, a second complaint was filed in the same court by named
plaintiff Chaile B. Steinberg against the same defendants. On or about June
26, 1998, a third complaint was filed in the same court by named plaintiff
Michael Makinen against the same defendants. Each of the plaintiffs purports
to represent a class consisting of purchasers of common stock pursuant to the
initial public offering. These actions were consolidated by order of the
United States District Court for the Southern District of New York, and a
consolidated complaint styled In Re Command Systems, Inc. Securities
Litigation was filed on September 30, 1998. The consolidated complaint alleges
that defendants violated the Securities Act and claims the sale of
unregistered shares breached the disclosure and filing requirements of the
Securities Act. The plaintiffs seek rescission of the sales of the shares in
the initial public offering and unspecified damages, including rescissionary
damages, interest, costs and fees. Such litigation, if concluded in favor of
the plaintiffs, could have a material adverse effect on the Company's
business, financial condition and results of operations. On December 7, 1998,
the Company and the individual defendants entered into a memorandum of
understanding to settle the dispute with the plaintiffs in the purported
consolidated class action. Any definitive settlement agreement resulting from
such memorandum will require court approval. Pursuant to the terms of the
memorandum, the parties have agreed in principle to an aggregate payment to
the plaintiffs of $5.75 million in cash plus accrued interest, minus approved
attorney's fees and related expenses, from the Company. The $5.75 million will
accrue interest as of the date of preliminary court approval of a definitive
settlement agreement entered into among the parties based upon the memorandum,
but will not be payable until the District Court for the Southern District of
New York approves the settlement and such approval becomes final. Of the final
settlement amount, the Company will be reimbursed for all but $1.65 million,
and the interest thereon. In addition, the Company may be responsible for
certain legal fees and related expenses incurred in connection with the
litigation. There can be no assurance, however, that a definitive settlement
agreement will be reached, or that, if reached, it will be approved by the
court.
44
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------- --- -----------------------------------------------
<C> <C> <S>
President, Chief Executive Officer and Chairman
Edward G. Caputo.......... 48 of the Board
Executive Vice President, Chief Operating
Stephen L. Willcox........ 47 Officer, Secretary and Director
Robert B. Dixon........... 61 Vice President of Finance and Treasurer
Glenn M. King............. 46 Vice President of Marketing and Assistant
Secretary
Lee Lapioli............... 57 Vice President of Education and Training
Mary Lou Welch............ 50 Vice President of Sales
William P. Scharfenstein.. 51 Vice President of Professional Services
William Tamburro.......... 43 Vice President of Recruiting
John J.C. Herndon(1)(2)... 67 Director
James M. Oates(1)(2)...... 52 Director
Joseph D. Sargent(1)(2)... 69 Director
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Edward G. Caputo founded the Company in April 1985 and has served as its
President, Chief Executive Officer and Chairman of the Board of Directors
since inception. Prior to founding the Company, for eight years Mr. Caputo
served as President of Computech, Inc. ("Computech"), a privately held
consulting services company which he founded in 1977 and sold to Price
Waterhouse in 1985. From 1972 until he founded Computech, Mr. Caputo was a
programmer for Electronic Data Systems, a systems integration company.
Stephen L. Willcox has served as Executive Vice President, Chief Operating
Officer and Secretary since December 1997 and as a Director of the Company
since October 1997. From July 1997 until December 1997, Mr. Willcox served as
a strategic and financial consultant for the Company. From January 1995 to
December 1996, Mr. Willcox served in various executive capacities, including
President and Chief Operating Officer, of United HealthCare Administrators,
Inc. (including its predecessor), a subsidiary of United HealthCare, a
publicly held managed care company. From January 1993 to December 1994, Mr.
Willcox served as the Vice President of Employee Benefits for The Travelers
Corporation. From January 1982 to December 1993, Mr. Willcox held various
positions in The Travelers Insurance Companies, where he most recently served
as its Vice President of Corporate Finance. From 1973 to 1981, Mr. Willcox was
employed by Coopers & Lybrand, including as General Practice Manager. Mr.
Willcox is also a Certified Public Accountant and a Certified Management
Accountant.
Robert B. Dixon has served as Vice President of Finance for the Company
since March 1997 and as Treasurer for the Company since December 1997. From
October 1996 to March 1997, Mr. Dixon served as a financial consultant to the
Company. From July 1993 to October 1996, Mr. Dixon served as the Deputy
Director and Executive Vice President of the Connecticut Development
Authority, a quasi-public merchant bank that was responsible for the economic
development of the State of Connecticut. In 1986 Mr. Dixon founded Dixon &
Associates, a financial consulting services firm, and from inception until
July 1993, Mr. Dixon served as its principal. Previously, Mr. Dixon has held
senior financial positions with Citibank, The Hertz Corporation, The Gillette
Company and The Ford Motor Company.
Glenn M. King has been employed by the Company in various capacities since
September 1986, most recently Vice President of Marketing and Assistant
Secretary since October 1998, as Vice President of Recruiting from June 1998
to October 1998 and as Vice President of Marketing from November 1997 through
June 1998. From May 1983 to September 1986, Mr. King served as a Systems
Analyst for the Travelers Insurance Company, the Hartford Insurance Group and
Vantage Computer Systems. From May 1979 to May 1983, Mr. King served as a
Licensed Insurance Adjuster for Metropolitan Property and Casualty Insurance
Co.
45
<PAGE>
Lee Lapioli has served as Vice President of Education and Training since
October 1998 and previously as Vice President of Management Consulting
Services for the Company from June 1997 to October 1998. From December 1994 to
May 1997, Mr. Lapioli served as Senior Vice President and Chief Information
Officer of New York Life, a multi-line mutual insurance company. From February
1982 to November 1994, Mr. Lapioli served as Senior Vice President for Phoenix
Home Life, a mutual insurance company. From February 1973 to January 1982, Mr.
Lapioli served as Vice President and Chief Operating Officer of Penn Mutual
Life, a mutual insurance company. From February 1964 to January 1973, Mr.
Lapioli served as Manager of Actuarial Services for Provident Mutual Life, a
mutual insurance company.
Mary Lou Welch has served as Vice President of Sales since June 1998, and
also served as Vice President of Recruiting for the Company from November 1997
through June 1998. From July 1995 to July 1997, Ms. Welch served as Vice
President of Sales and Marketing for Portable Data Collection for WPI
Oyster/Termiflex. From November 1994 to July 1995, Ms. Welch served as
Director of Marketing for Worldwide Services for Data General Corporation.
From June 1984 to November 1994, Ms. Welch held various positions from Sales
Executive to Director of Marketing to the banking industry for Digital
Equipment Corporation. From June 1977 to June 1984, Ms. Welch served as a
Sales Representative for Control Data Corporation.
William P. Scharfenstein has served as Vice President of Professional
Services since October 1998 and Vice President of Operations from February
1998 to October 1998. From 1973 to February 1998, Mr. Scharfenstein served in
various capacities for Pratt & Whitney including Senior System Programmer,
Business Support from 1973 to 1982, Senior Systems Analyst, Operations
Research from 1982 to 1986, Superior Systems Programming & Operations from
1986 to 1992, MIS Manager, Powerplant Production from 1992 to June 1997, and
MIS Manager, Eagle Service from July 1997 to February 1998. Previously, Mr.
Scharfenstein served as Systems Analyst for Dunham-Bush, Beneficial Computing
Services and Travelers Insurance Company.
William Tamburro has served as Vice President of Recruiting since October
1998. From June 1990 until October 1998 Mr. Tamburro served as Vice President
of Information Systems recruiting for J. Morrissey & Co. From May 1985 until
June 1990 Mr. Tamburro was employed in the recruiting and sales area of
Command Systems. Previously, Mr. Tamburro performed programming functions with
Computech, Inc., a privately-held consulting services Company.
John J.C. Herndon has served as a Director of the Company since December
1997. Mr. Herndon has served as the Vice President of Strategic Development
for Phoenix since April 1996. In 1995, Mr. Herndon was a consultant to the
Advest Group and successfully raised a venture capital fund for investment in
companies based in Connecticut. From 1993 to 1994, he was President of the
Connecticut Development Authority, a quasi-public merchant bank for economic
development, and he served as Deputy Chief of Staff under Governor Lowell
Weicker. From 1977 to 1985, Mr. Herndon was Senior Vice President of City
Investing Company in New York, a diversified international corporation engaged
in insurance, manufacturing, construction and consumer services.
James M. Oates has served as a Director of the Company since December 1997.
In addition, since November 1996 to the present he has been the Chairman of
IBEX Capital Markets, LLC. Mr. Oates currently is, and since 1994 has been,
Managing Director of the Wydown Group, a consulting firm specializing in
start-ups and growth strategies. From 1984 to 1994, Mr. Oates served as
President and Chief Executive Officer of Neworld Bancorp. From 1983 to 1984,
Mr. Oates served as President and Chief Operating Officer of Burgess and
Leith, a full service brokerage firm. From 1977 to 1983, Mr. Oates served as
President and Chief Operating Officer to Metro Bancholding Corporation. From
1973 to 1977, Mr. Oates served as Vice President of Centerre Bank, N.A. Mr.
Oates serves on the Board of Directors of Investors Financial Services, Inc.,
Stifel Financial, Phoenix Investment Partners, Plymouth Rubber Company and
Connecticut River Bancorp, all of which are publicly traded companies, and
Phoenix Funds, Investors Bank & Trust, The Govett Funds and Emerson
Investment, all of which are registered investment companies under the
Investment Company Act of 1940.
Joseph D. Sargent has served as a Director of the Company since January
1998. Mr. Sargent has served as Chairman and Principal of Bradley, Foster &
Sargent since 1993. Mr. Sargent also currently serves as Vice Chairman and
Director of Connecticut Surety Corporation and its several affiliates. From
1995 to 1996, Mr. Sargent served as Chairman and Director of S-K-I Ltd. Mr.
Sargent served as Chairman, and later as Vice
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<PAGE>
Chairman, of Conning & Company, an investment banking firm, from 1991 to 1995
and as its Chairman and Chief Executive Officer from 1988 to 1991. Mr. Sargent
is a Director of Trenwick Group Inc., E.W. Blanch Holdings, Policy Management
Systems Corporation, Mutual Risk Management Ltd., MMI Companies, Inc. and
Executive Risk, Inc., all of which are publicly held companies.
During the period of Mr. Willcox's service as Vice President of Corporate
Finance for The Travelers Corporation, the Commission commenced an
investigation into the manner in which Travelers and its wholly-owned
subsidiary The Travelers Insurance Company ("TIC") implemented an accounting
rule known as FAS 97. FAS 97, which was promulgated by the Financial
Accounting Standards Board in 1988, required the elimination in 1989 of
certain types of reserves for real estate investments. The Commission
contended that Travelers had omitted to state material facts in its 1988
annual report and in the 1989 annual and quarterly reports of Travelers and
TIC by failing to eliminate a $231 million risk reserve and taking a $231
million charge against its 1989 earnings, which would have reduced Travelers'
1989 earnings to $277 million from the reported $508 million.
In early 1989, Travelers' Chief Financial Officer assigned Mr. Willcox to
assemble and lead a task force to recommend the proper implementation of FAS
97 with respect to certain reserves maintained by TIC's Asset Management and
Pension Services Department ("AMPS"). The task force consisted of several of
Travelers' employees, representing a cross section of Travelers' employees
with information relevant to the implementation of FAS 97, and included
representatives from AMPS' and Travelers' financial standards, corporate tax,
and financial reporting units. While the task force reviewed information
provided by AMPS' personnel regarding how the reserve was developed and
funded, representatives from Travelers and its independent accountants, a
nationally recognized accounting firm, also worked on TIC's implementation of
FAS 97.
Following investigative proceedings pursuant to Section 21C of the Exchange
Act, the Commission in May 1994 entered into an order (the "Travelers' Order")
(i) requiring Travelers and TIC to restate their consolidated financial
statements as of and for the year ended December 31, 1989 in order to
implement FAS 97 properly and (ii) directing TIC, Travelers' Chief Financial
Officer and Mr. Willcox to cease and desist from violating or causing
violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and
13a-13. As part of the settlement with the Commission, Travelers, its Chief
Financial Officer, TIC and Mr. Willcox agreed to the Travelers' Order without
admitting or denying the charges. Following the release of the Travelers'
Order, the AICPA closed an investigation as to whether Mr. Willcox violated
the Codes of Professional Conduct of the AICPA or the Connecticut Society of
CPAs and took no action.
Pursuant to the Company's Amended and Restated Certificate of Incorporation
and By-Laws, on or prior to the date on which the Company first provides
notice of an annual meeting of the stockholders (or a special meeting in lieu
thereof) following the initial public offering (the "Initial Public Meeting"),
the Board of Directors of the Company shall divide the directors nominated for
election at such meeting into three classes, as nearly equal in number as
reasonably possible, with the term of office of the first class to expire at
the first annual meeting of stockholders or any special meeting in lieu
thereof following the Initial Public Meeting, the term of office of the second
class to expire at the second annual meeting of stockholders or any special
meeting in lieu thereof following the Initial Public Meeting, and the term of
office of the third class to expire at the third annual meeting of
stockholders or any special meeting in lieu thereof following the Initial
Public Meeting. At each annual meeting of stockholders or special meeting in
lieu thereof following such initial classification, directors elected to
succeed those directors whose terms expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders or
special meeting in lieu thereof after their election and until their
successors are duly elected and qualified.
There are no family relationships among any of the executive officers and
directors of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees
of and consultants to the Company, establishes and approves salaries and
incentive compensation for executive officers and administers the Company's
1997 Employee, Director and Consultant Stock Plan, and an Audit Committee,
which reviews the results and scope of audits and other services provided by
the Company's independent public accountants.
47
<PAGE>
COMPENSATION OF DIRECTORS
Non-employee directors each receive a monthly fee of $1,000 and are
reimbursed for reasonable out-of-pocket expenses incurred in attending
meetings. Non-employee directors are also eligible for participation in the
Company's 1997 Employee, Director and Consultant Stock Plan and the Company
has, and may in the future, grant non-qualified stock options to non-employee
directors as an incentive to join or remain on the Board of Directors. Upon
joining the Board of Directors, each of Messrs. Herndon and Oates were granted
an option to purchase 5,000 shares of Common Stock at an exercise price of
$9.00 per share, 25% of which vested immediately and the remainder of which
will vest ratably on each of the first, second and third anniversary of the
date of the initial grant. Mr. Sargent has been granted an option, effective
as of March 12, 1998, to purchase 5,000 shares of Common Stock at an exercise
price of $12.00 per share, 25% of which will vest immediately and the
remainder of which will vest ratably on each of the first, second and third
anniversary of March 12, 1998.
KEY PERSON LIFE INSURANCE
The Company presently maintains key person life insurance in the amount of
$5.0 million on Edward G. Caputo, the Company's President and Chief Executive
Officer.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and its four
other most highly compensated executive officers (the "Named Executive
Officers") whose total salary and bonus for fiscal 1997 exceeded $100,000, for
services rendered to the Company and its subsidiaries in all capacities during
that fiscal year. No executive who would otherwise have been includable in
such table on the basis of salary and bonus earned for fiscal 1997 has
resigned or otherwise terminated employment during fiscal 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION(2) AWARDS
---------------- ------------
SECURITIES
UNDERLYING
SALARY BONUS OPTIONS
NAME AND PRINCIPAL POSITION(1) YEAR ($) ($) (#)
- -------------------------------------------- ---- -------- ------- ------------
<S> <C> <C> <C> <C>
Edward G. Caputo............................ 1997 151,198 -- --
President and Chief Executive Officer
Robert B. Dixon(3).......................... 1997 107,333 10,000 12,500
Vice President of Finance
Glenn M. King............................... 1997 100,833 10,000 14,250
Vice President of Recruiting and Assistant
Secretary
Lee Lapioli................................. 1997 116,574 -- --
Vice President of Education and Training
David R. Wheeland........................... 1997 110,000 10,000 12,500
Former Vice President of Operations
</TABLE>
- --------
(1) Mr. Willcox, Ms. Welch and Mr. Scharfenstein, who commenced employment
with the Company in January 1998, November 1997 and February 1998,
respectively, would be among the five most highly compensated individuals
had they been with the Company during all of fiscal 1997. Mr. Willcox's
base salary is $175,000, Ms. Welch's base salary is $120,000 and Mr.
Scharfenstein's base salary is $120,000.
(2) The costs of certain benefits are not included because they did not
exceed, in the case of each Named Executive Officer, the lesser of $50,000
or 10% of the total annual salary and bonus for such Named Executive
Officer.
(3) Mr. Dixon's salary includes $24,000 received as compensation for
consulting services rendered to the Company for the first two months of
1997.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of
stock options made pursuant to the Company's 1997 Plan during 1997 to each of
the Named Executive Officers.(1)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES STOCK PRICE
UNDERLYING PERCENT OF TOTAL EXERCISE APPRECIATION FOR
OPTIONS OPTIONS GRANTED OR BASE OPTION TERM(3)
GRANTED TO EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME (#)(2) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ------------------------ ---------- ---------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Edward G. Caputo........ -- -- -- -- -- --
Robert B. Dixon......... 12,500 5.9% 4.00 3/5/07 31,445 79,687
Glenn M. King........... 12,500 5.9% 4.00 3/5/07 31,445 79,687
1,750 * 9.00 12/31/07 9,905 25,101
Lee Lapioli............. -- -- -- -- -- --
David R. Wheeland....... 12,500 5.9% 4.00 3/5/07 31,445 79,687
</TABLE>
- --------
* Less than one percent.
(1) Mr. Willcox was granted an option to purchase 50,000 shares of Common
Stock on January 1, 1998 at an exercise price of $9.00 per share. Ms.
Welch was granted an option to purchase 12,500 shares of Common Stock on
December 31, 1997 at an exercise price of $9.00 per share. Mr.
Scharfenstein was granted an option, effective as of March 12, 1998, to
purchase 12,500 shares of Common Stock at an exercise price of $12.00 per
share.
(2) Options which expire on March 5, 2007 were granted on March 5, 1997 in
exchange for units of shadow stock previously granted under the Company's
Shadow Stock Incentive Plan. All other options are granted pursuant to and
in accordance with the Company's 1997 Plan. See "--Employee Benefit
Plans."
(3) Potential realizable value is based on the assumption that the price per
share of Common Stock appreciates at the assumed annual rate of stock
appreciation for the option term. The assumed 5% and 10% annual rates of
appreciation (compounded annually) over the term of the option are set
forth in accordance with the rules and regulations adopted by the
Commission and do not represent the Company's estimate of stock price
appreciation.
49
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning each exercise of
options during 1997 by each of the Named Executive Officers and the fiscal
year-end value of unexercised in-the-money options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT FISCAL VALUE OF UNEXERCISED
YEAR-END IN-THE-MONEY
(#) OPTIONS AT FISCAL YEAR-END ($)
------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(1)(2)
---- ----------- ------------- ----------- -------------------
<S> <C> <C> <C> <C>
Edward G. Caputo........ -- -- -- --
Robert B. Dixon......... -- 12,500 -- 62,500
Glenn M. King........... 12,500 1,750 62,500 --
Lee Lapioli............. -- -- -- --
David R. Wheeland....... 7,500 5,000 37,500 25,000
</TABLE>
- --------
(1) Based on the fair market value of the Common Stock at December 31, 1997 of
$9.00 per share as determined by the Board of Directors, less the exercise
price payable for such shares.
(2) Mr. Willcox was granted an option to purchase 50,000 shares of Common
Stock on January 1, 1998 at an exercise price of $9.00 per share. Ms.
Welch was granted an option to purchase 12,500 shares of Common Stock on
December 31, 1997 at an exercise price of $9.00 per share. Mr.
Scharfenstein was granted an option, effective as of March 12, 1998, to
purchase 12,500 shares of Common Stock at an exercise price of $12.00 per
share.
Employment Agreements
The Company and Mr. Caputo have entered into an employment agreement (the
"Employment Agreement") with an initial term expiring January 1, 2001, and
which will be automatically extended annually for an additional period of one
year unless either Mr. Caputo or the Company gives 60 days' prior written
notice to the other that such automatic extension will not occur. The
Employment Agreement sets forth (i) the terms of Mr. Caputo's employment as
President and Chief Executive Officer of the Company, (ii) Mr. Caputo's
agreement not to compete with the Company by rendering IT consulting or
staffing services to customers in the insurance, banking, brokerage or other
financial services industries during the term of his employment and for a
period of two (2) years following the expiration or termination of such
employment and (iii) Mr. Caputo's agreement to protect and preserve
information and property which is confidential and proprietary to the Company.
The Employment Agreement does not provide for any specified compensation to
Mr. Caputo and contains no provisions regarding compensation in the event of
his severance or upon a change of control of the Company.
The Company and Mr. Willcox have entered into an employment agreement
pursuant to which, among other things, in the event that Mr. Willcox's
employment is terminated voluntarily or by the Company for any reason other
than for "cause" (as defined in the agreement), Mr. Willcox will be entitled
to a severance payment equal to one-half of his annual base salary in effect
on the date of termination, but in no event less than $87,500. The Company may
pay this severance either as a lump sum or over a six-month period following
termination.
The Company and Mr. King have entered into an employment agreement pursuant
to which, among other things, in the event that Mr. King's employment is
terminated without "cause" (as defined in the agreement), Mr. King will be
entitled to a severance payment equal to one-half of his annual base salary.
Mr. King's current annual base salary is $120,000.
EMPLOYEE BENEFIT PLANS
1997 Employee, Director and Consultant Stock Plan
The Company's 1997 Employee, Director and Consultant Stock Plan (the "1997
Plan"), was approved by the Company's Board of Directors and stockholders in
August 1997. The 1997 Plan provides for the grant of stock options and shares
of Common Stock ("Stock Grants") to employees, directors and consultants of
the
50
<PAGE>
Company or its affiliates. Under the 1997 Plan, the Company may grant
incentive stock options and non-qualified stock options. Incentive stock
options may only be granted to employees of the Company. Effective upon the
closing of the initial public offering, a total of 427,500 shares of Common
Stock were reserved for issuance under the 1997 Plan. As of December 10, 1998,
options to purchase a total of 163,450 shares of Common Stock were outstanding
under the 1997 Plan, and no options to purchase Common Stock had been
exercised. As of December 10, 1998, no grants of Common Stock had been made
under the 1997 Plan.
The 1997 Plan is administered by the Compensation Committee of the Board of
Directors, except to the extent such authority is retained by the Board of
Directors. Subject to the provisions of the 1997 Plan, the committee has the
authority to administer the provisions of the 1997 Plan and to select the
participants to whom options or Stock Grants are to be granted and to
determine the terms of each option or Stock Grant, including:
.the number of shares of Common Stock subject to such option or Stock Grant
.when an option becomes exercisable
. the option exercise price or Stock Grant purchase price, which, in the
case of incentive stock options, must be at least 100% (110% in the case
of incentive stock options granted to a stockholder owning in excess of
10% of the Company's voting stock) of the fair market value of the
Common Stock as of the date of grant
. the duration of the option (which, in the case of incentive stock
options, generally may not exceed ten years)
. in the case of Stock Grants, the terms of any right of the Company to
reacquire the shares of Common Stock subject to the Stock Grant,
including the time and events upon which such rights shall accrue and
the purchase price therefor, if any
An incentive stock option granted under the 1997 Plan may be exercised after
the termination of the optionholder's employment with the Company (other than
by reason of death, disability or termination for "cause" as defined in the
1997 Plan), to the extent exercisable on the date of termination, at any time
prior to the earlier of the option's specified expiration date or three months
after such termination. The committee may specify the termination or
cancellation provisions applicable to a non-qualified stock option. In the
event of the optionholder's death or disability, both incentive stock options
and non-qualified stock options generally may be exercised, to the extent
exercisable on the date of death or disability, by the optionholder or the
optionholder's survivors at any time prior to the earlier of the option's
specified expiration date or one year from the date of death or disability.
Generally, in the event of the optionholder's termination for cause, all
outstanding and unexercised options are forfeited.
If the Company is to be consolidated with or acquired by another entity in a
merger, sale of all or substantially all of the Company's assets or otherwise,
all outstanding options shall become fully exercisable. In addition, the
committee or the board of directors of any entity assuming the obligations of
the Company under the 1997 Plan shall as to outstanding options under the
plan, either:
. make appropriate provision for the continuation of such options by
substituting, on any equitable basis, for the shares then subject to
such options, the amount payable with respect to the outstanding shares
of Common Stock, in connection with the merger or sale of substantially
all of the Company's assets, or securities of the successor or acquiring
entity,
. upon written notice to the optionholders, provide that all options must
be exercised within a specified number of days of the date of such
notice, at the end of which period the options shall terminate or
. terminate all options in exchange for a cash payment equal to the excess
of the fair market value of the shares subject to each such option over
the exercise price thereof.
Shadow Stock Incentive Plan
In March 1997, an aggregate of 61,500 options were issued to eight employees
in exchange for an aggregate of 61,500 outstanding shadow purchase units that
had previously been granted to such employees under the
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Shadow Stock Incentive Plan. These options have an exercise price of $4.00 per
share and expire on March 5, 2007. The Shadow Stock Incentive Plan has been
terminated and no shadow purchase units are outstanding.
401(k) Retirement Savings Plan
The Company's 401(k) Retirement Savings Plan is a defined contribution plan
covering all full-time employees of the Company who have six months of service
and are age twenty and one-half or older. Each year, participants may
contribute up to 15% of pretax annual compensation, subject to the statutory
limit (a maximum of $10,000 in 1998). Participants may also contribute amounts
representing distributions from other qualified defined benefit or
contribution plans. Additional amounts may be contributed at the option of the
Company's Board of Directors. Participants are immediately vested in their
contributions plus actual earnings thereon. Vesting in the Company's
discretionary contribution portion of their accounts plus actual earnings
thereon is based on years of continuous services. A participant is 100% vested
after six years of credited service.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors did not have a Compensation Committee
during 1997. Consequently, all Directors participated in deliberations
concerning executive compensation, including decisions relative to their own
compensation. In January 1998 following the addition of Messrs. Herndon and
Oates, the Board of Directors created a Compensation Committee. The Company's
Compensation Committee makes recommendations concerning salaries and incentive
compensation for employees of and consultants to the Company, establishes and
approves salaries and incentive compensation for executive officers and
administers the 1997 Plan. No executive officer of the Company serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of the Company's Board
of Directors or Compensation Committee. Mr. Herndon is the Vice President of
Strategic Development for Phoenix Home Life Mutual Insurance Company. Mr.
Oates is a director of Phoenix Duff & Phelps and Phoenix Funds which are
affiliates of Phoenix. See "Certain Transactions."
CERTAIN TRANSACTIONS
TRANSACTIONS WITH PHOENIX
In June 1996, the Company entered into an agreement with Phoenix to
establish the Offshore Technology Resource Center. In connection therewith,
the Company formed Command International Holdings, LLC, a corporation
organized under the laws of Mauritius ("Command Holdings"), and Command
International Software Pvt., an Indian unlimited liability company ("Command
Software"). Pursuant to the terms of the agreement the Company owned 100% of
the outstanding equity of Command Holdings which in turn owned 51% of the
outstanding equity of Command Software. The remaining 49% ownership in Command
Software was owned by PHL Global Holding Co., a wholly-owned subsidiary of PM
Holdings, Inc., which in turn is wholly-owned by Phoenix. During 1996 and
1997, Phoenix invested an aggregate of approximately $1.0 million to the
offshore technology resource center. In addition, during the period from July
11, 1996 to April 3, 1997, Phoenix made advances pursuant to a subordinated
debt agreement to the Company and Command Holdings totaling approximately $2.0
million in the aggregate. Approximately $1.4 million of this was used by the
Company to directly fund the offshore technology resource center and
approximately $600,000 was used by the Company itself to develop the
infrastructure needed in the United States to support the Bangalore facility.
Notes evidencing these advances (the "Notes") bore interest at 15% per annum
and were due and payable in full five years from the date of each such Note.
At the time the offshore technology resource center was established, the only
relationship between the Company and Phoenix was that the Company provided IT
services to Phoenix.
On August 26, 1997, the Company and Phoenix effected a transaction pursuant
to which the Notes, including the right to receive prior interest accrued
thereon, evidencing indebtedness to Phoenix of approximately $2.2 million,
were exchanged for an aggregate of 100 shares of Series A Convertible
Preferred Stock. These shares of Series A Convertible Preferred Stock were
convertible on a 5,225 for one basis into 522,500 shares of
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<PAGE>
the Company's Common Stock. In addition, the Series A Convertible Preferred
Stock was entitled to a mandatory 10% cash dividend. Phoenix was granted
certain registration rights in connection with this transaction. See "Shares
Eligible for Future Sale--Registration Rights." In August 1997, at the
Company's request, Phoenix exchanged the Notes for equity securities in the
Company. Following the Company's request, representatives of Phoenix and the
Company negotiated the terms of the exchange, pursuant to which shares of
Series A Convertible Preferred Stock were issued to Phoenix in exchange for
approximately $2.2 million of indebtedness represented by the Notes. In
determining the fairness of the transaction to the Company, the Company's
Board of Directors considered, among other things, (i) the advantage of the
debt-for-equity exchange, including the impact on the Company's balance sheet
and the added flexibility under the Company's line of credit facility with
People's Bank, (ii) the reduction of the 15% rate of interest to a 10%
dividend rate, (iii) the fairness of the terms of the Series A Convertible
Preferred Stock, (iv) the advantages of having Phoenix as a long-term
stockholder, including increasing the incentives of Phoenix to remain as a
customer as a result of its equity position in the Company and (v) the absence
of reasonable alternative means to raise additional equity in the near term.
The Company pledged all of its shares held in Command Holdings (the "CH
Shares"), its wholly-owned subsidiary, to Phoenix to secure the Company's
dividend and redemption obligations arising under the Series A Convertible
Preferred Stock. In connection with the foregoing transactions, Edward G.
Caputo transferred all the shares owned by him in Command Holdings to the
Company, which shares constituted a portion of the CH Shares. In addition, Mr.
Caputo guaranteed the Company's dividend and redemption obligations arising
under the Series A Convertible Preferred Stock.
As of December 31, 1997, the Company and Phoenix completed a transaction
whereby the 49% interest in Command Software owned by PHL Global Holding Co.
("PHL"), an indirect wholly-owned subsidiary of Phoenix, was exchanged for 100
shares of Series B Convertible Preferred Stock. These shares of Series B
Convertible Preferred Stock were convertible on a 6,592.5-for-1 basis into
659,250 shares of Common Stock and were entitled to a mandatory 10% cash
dividend. Phoenix was granted certain registration rights in connection with
this transaction. See "Shares Eligible for Future Sale--Registration Rights."
All shares of Series A and Series B Convertible Preferred Stock outstanding
as of the consummation of the Initial Public Offering were converted into an
aggregate of 1,181,750 shares of Common Stock.
In connection with the issuance of the Series A and Series B Convertible
Preferred Stock, the Company entered into a Co-Sale Agreement with Mr. Caputo
and each of Phoenix and PHL (collectively, the "Co-Sale Agreements"). Pursuant
to the Co-Sale Agreements, Mr. Caputo granted to Phoenix and PHL the right to
participate in any sale of Common Stock or preferred stock, if any, of the
Company (collectively, "Co-Sale Stock") by Mr. Caputo, upon the same terms and
conditions as the proposed sale, with the exception of certain specified
transfers. The Co-Sale Agreements will terminate upon the earliest to occur of
(i) ten years after the date of such agreement, (ii) the date that Mr. Caputo
ceases to own shares of Co-Sale Stock constituting at least 25% of the
Company's issued and outstanding Common Stock on a fully-diluted basis and
(iii) the date that Phoenix and PHL, together with their respective
affiliates, cease to own shares of Common Stock constituting at least 5% of
the Company's issued and outstanding Common Stock on a fully-diluted basis.
During the years ended December 31, 1994, 1995 and 1996, the Company
provided IT services to Phoenix that generated revenue to the Company of
approximately $3.3 million, $2.8 million and $1.3 million, respectively. For
the year ended December 31, 1997 and for the nine months ended September 30,
1998, the Company provided IT services to Phoenix, which generated revenue of
approximately $2.6 million and $1.7 million, respectively. These services were
provided on terms no less favorable to the Company than were obtained during
these same periods from unaffiliated third parties. Mr. Herndon, a director of
the Company, is the Vice President of Strategic Development for Phoenix. There
can be no assurance that the Company will continue to provide this level of
services to Phoenix, if at all.
TRANSACTIONS WITH OFFICERS
All transactions, including any loan from the Company to its officers,
directors, principal stockholders or affiliates, will be approved by a
majority of the Board of Directors, including a majority of the independent
and disinterested members of the Board of Directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock prior to, and as of
December 10, 1998, as adjusted to reflect, the sale of the shares offered by
the Company and the stockholders who sold shares in the initial public
offering, by (i) each person (or group of affiliated persons) known by the
Company to beneficially own more than five percent of the outstanding shares
of Common Stock, (ii) each stockholder who sold shares in the initial public
offering, (iii) each of the Company's directors, (iv) each of the named
executive officers and (v) all directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
SHARES OF COMMON STOCK BENEFICIALLY OWNED AFTER
BENEFICIALLY OWNED PRIOR TO THE
THE INITIAL PUBLIC OFFERING(1) INITIAL PUBLIC OFFERING(1)
------------------------------- -------------------------------
SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(2) OFFERED NUMBER PERCENT
- ------------------------------------ ----------- ---------- ------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Edward G. Caputo........ 4,275,000 78.3% 302,500 3,972,500 51.9%
c/o Command Systems,
Inc.
76 Batterson Park Road,
Farmington, Connecticut
06032
Phoenix Home Life Mutual 1,181,750(3) 21.7 602,500 579,250 7.6
Insurance Company......
One American Row
P.O. Box 5956
Hartford, CT 06102
Stephen L. Willcox...... 10,000(4) -- -- 10,000(4) --
Robert B. Dixon......... 2,500(4) * -- 2,500(4) *
Glenn M. King........... 12,500(4) * -- 12,500(4) *
Lee Lapioli............. -- -- -- -- --
David R. Wheeland....... 7,500(4) * -- 7,500(4) *
John J.C. Herndon....... 1,183,000(5) 21.7 602,500 580,500(5) 7.6
James M. Oates.......... 1,250(6) * -- 1,250(6) *
Joseph D. Sargent....... 1,250(4) * -- 1,250(4) *
All current directors
and executive officers
as
group (10 persons)...... 5,485,500(7) 100.0% 905,000 4,580,500(7) 59.7%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the Common Stock.
(1) Except as indicated in footnotes to this table, the Company believes that
the stockholders named in this table have sole voting and investment power
with respect to all shares of Common Stock shown to be beneficially owned
by them based on information provided to the Company by such stockholders.
(2) Applicable percentage of ownership is based on 5,456,750 shares of Common
Stock outstanding prior to the consummation of the initial public offering
and 7,656,750 Shares of Common Stock outstanding as of the date of this
Prospectus.
(3) Consists of 1,181,750 shares of Common Stock issued upon the conversion of
the preferred stock, 522,500 of which are beneficially owned by Phoenix
and 659,250 of which are beneficially owned by PHL Global Holding Co., an
indirectly wholly-owned subsidiary of Phoenix. The 579,250 shares owned
following the Initial Public Offering are beneficially owned by PHL.
(4) Consists solely of shares of Common Stock underlying options which are
exercisable as of the date of this Prospectus or within 60 days of such
date.
(5) Includes 1,181,750 shares of Common Stock owned by Phoenix and PHL. Mr.
Herndon is the Vice President of Strategic Development for Phoenix, a New
York domiciled mutual life insurance company. Mr. Herndon expressly
disclaims beneficial ownership of such shares. Also includes 1,250 shares
of Common Stock underlying options which are exercisable as of the date of
this Prospectus or within 60 days of such date.
(6) Consists solely of shares of Common Stock underlying options which are
exercisable as of the date of this Prospectus or within 60 days of such
date. Mr. Oates is a director of each of Phoenix Duff & Phelps and Phoenix
Funds, both of which are affiliates of Phoenix.
(7) See Notes 4, 5 and 6. Excludes shares beneficially owned by David R.
Wheeland, a former officer who is a named executive officer.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares of
Common Stock, par value $.01 per share, and 4,999,800 shares of undesignated
preferred stock, par value $.01 per share.
COMMON STOCK
The Company has 7,656,750 shares of Common Stock outstanding. Holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of stockholders and are not entitled to cumulative
voting rights. Holders of Common Stock are entitled to receive dividends
ratably, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In
the event of a dissolution, liquidation or winding-up of the Company, holders
of Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and any payment required to be made to holders of
preferred stock. Holders of Common Stock have no preemptive or other
subscription rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
The Company's Certificate of Incorporation permits the Company's Board of
Directors, without further vote or action by the stockholders, to issue shares
of the preferred stock in one or more series and to determine the
designations, preferences, voting powers, qualifications and special or
relative rights and privileges of the shares of each such series, including
the dividend rights, dividend rate, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences, the number of shares constituting any series and the
designation of such series. These rights and privileges could limit the voting
power of holders of Common Stock and restrict their rights to receive
dividends or liquidation proceeds in an adverse manner.
The Company has granted the Board of Directors authority to issue preferred
stock and to determine its rights and preferences to eliminate delays
associated with a stockholder vote on specific issuances. The Company believes
that this authority will provide flexibility in connection with possible
corporate transactions. However, it could also have the effect of making it
more difficult for a third-party to acquire, or of discouraging a third-party
from attempting to acquire, control of the Company. Further, the issuance of
preferred stock could adversely affect the voting power of holders of Common
Stock and restrict their rights to receive payments upon liquidation of the
Company. The Board of Directors could also utilize shares of preferred stock
in order to adopt a stockholders' rights plan (a so-called "poison pill"),
which could also have the effect of discouraging or delaying a takeover of the
Company. The Company has no present plans to issue any shares of preferred
stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a company's outstanding voting stock), from engaging in a "business
combination" (as defined in Section 203), with such company for three years
following the date that person becomes an interested stockholder unless (a)
before that person became an interested stockholder, such company's Board of
Directors approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination; (b) upon
completion of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owns at least
85% of the voting stock outstanding at the time the transaction commenced
(excluding stock held by directors who are also officers of such company and
by employee stock plans that do not provide employees with the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer); or (c) following the transaction in
which that person became an interested stockholder, the business combination
is approved by such company's Board of
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<PAGE>
Directors and authorized at a meeting of stockholders by the affirmative vote
of the holders of at least 66 2/3% of the outstanding voting stock not owned
by the interested stockholder.
The Company's Certificate of Incorporation authorizes the Board of Directors
to issue, without stockholder approval, 4,999,800 shares of preferred stock
with voting, conversion and other rights and preferences that could adversely
affect the voting power or other rights of the holders of Common Stock. The
issuance of preferred stock or of rights to purchase preferred stock could be
used to discourage an unsolicited acquisition proposal. In addition, the
possible issuance of preferred stock could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Company's Common
Stock or limit the price that investors might be willing to pay in the future
for shares of the Company's Common Stock. The Certificate of Incorporation
also provides that: (i) the affirmative vote of the holders of at least 70% of
the voting power of all of the then outstanding shares of the capital stock of
the Company shall be required to adopt, amend or repeal any provision of the
By-Laws of the Company; (ii) stockholders of the Company may not take any
action by written consent and a meeting of the stockholders may only be called
by the Board of Directors; (iii) on or prior to the date on which the Company
first provides notice of an annual meeting of the stockholders (or a special
meeting in lieu thereof) following the initial public offering, the Board of
Directors will be classified into three classes with staggered terms of three
years each; (iv) advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Company shall be given in a timely manner as provided
in the By-Laws of the Company and (v) members of the Board of Directors may be
removed only for cause and after reasonable notice and an opportunity to be
heard before the body proposing to remove such director. The Certificate of
Incorporation also provides that the affirmative vote of the holders of shares
of voting stock of the Company representing at least seventy percent (70%) of
the voting power of all of the then outstanding shares of the capital stock of
the Company entitled to vote generally in the election of directors, voting
together as a single class, shall be required to (i) reduce or eliminate the
number of authorized shares of Common Stock or the number of authorized shares
of preferred stock or (ii) amend or repeal, or adopt certain provisions of the
Certificate of Incorporation regarding the management of the Company, the
indemnification of officers and directors, the election and classification of
the Board of Directors, the ability of the Board of Directors or the
stockholders to amend or repeal the Certificate of Incorporation or the By-
Laws and the super majority voting requirements. The foregoing provisions of
the Certificate of Incorporation could have the effect of delaying, deterring
or preventing a change in control of the Company. See "Risk Factors--Certain
Anti-Takeover Provisions."
The Company's Certificate of Incorporation contains provisions eliminating
or limiting the personal financial liability of the Company's directors to the
fullest extent permitted by the DGCL. Delaware law provides that directors
will not be personally liable to a corporation or its stockholders for
monetary damages for breach of their fiduciary duties as directors, except for
liability where there has been a breach of the duty of loyalty, a failure to
act in good faith, an act of intentional misconduct, a knowing violation of
law, certain unlawful payments of dividends, stock repurchases or redemptions,
or any transaction from which the director derives an improper personal
benefit. In addition, the Company's Certificate of Incorporation and By-Laws
include provisions to indemnify its officers and directors and persons serving
in various other capacities at the request of the Company to the fullest
extent permitted by the DGCL against expenses, judgments, fines and amounts
paid in connection with threatened, pending or completed suits and proceedings
against such persons by reason of having served as officers or directors or in
other capacities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Boston Equiserve,
Inc.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company has outstanding 7,656,750 shares of Common Stock. Of such
shares, the 3,105,000 shares registered pursuant to the post-effective
amendment to the registration statement relating to the 2,760,000 shares
properly registered and the registration statement filed with the Commission
to register the additional 345,000 shares which have already been sold but
were not registered in the initial public offering, will be freely tradable by
persons other than "affiliates" of the Company without restriction. The
remaining 4,551,750 shares held by current stockholders of the Company were
subject to Lock-Up Agreements under which the holders of such shares agreed
not to sell or otherwise dispose of such shares without the prior written
consent of Cowen & Company, one of the representatives of the underwriters,
until September 9, 1998. Upon expiration of the Lock-Up Agreements (and
assuming no exercise of outstanding options), approximately 3,972,500
additional shares of Common Stock became available for sale in the public
market, subject to the provisions of Rule 144 under the Securities Act. The
remaining 579,250 shares of Common Stock will become eligible for sale in the
public market, subject to the provisions of Rule 144, over a period of less
than one year and could be sold earlier if the holders thereof exercise their
registration rights. The Company intends to register an aggregate of 427,500
shares of Common Stock issuable under the 1997 Employee, Director and
Consultant Stock Plan.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated with those of others), including any affiliate of
the Company, is entitled to sell in brokers' transactions or directly to
market makers within any three-month period a number of restricted shares that
does not exceed the greater of (i) 1% of the class of such shares then
outstanding (76,567 shares of Common Stock based on the number of shares
currently outstanding after consummation of this offering) or (ii) the average
weekly trading volume of the class of such shares in the over-the-counter
market during the four calendar weeks preceding the date on which notice of
such sale is filed with the Commission, provided that certain current public
information concerning the Company is then available, that the seller complies
with certain manner of sale provisions and notice requirements, and that at
least one year has elapsed since the Restricted Shares were fully paid for and
acquired from the Company or an affiliate of the Company. A person (or persons
whose shares are aggregated with those of others), who is not an affiliate of
the Company at any time during the three months preceding any sale by such
person, is entitled to sell such shares, under Rule 144(k), without regard to
the limitations described above, provided that at least two years have lapsed
since the Restricted Shares were fully paid for and acquired from the Company
or an affiliate of the Company. The above is a summary of Rule 144 and is not
intended to be a complete description thereof or of the rights of the parties
to sell shares of Common Stock thereunder.
As of December 10, 1998, options to purchase 219,950 shares of Common Stock
are outstanding, 72,100 of which options are currently vested. Upon exercise
of these options, the underlying shares of Common Stock will be eligible for
sale to the public in the open market under Rule 701.
In general, under Rule 701 as currently in effect, absent contractual
restrictions on transfer, any employee, officer or director of or consultant
or advisor to, the Company who purchases shares from the Company pursuant to a
written compensatory stock option or other benefit plan or written contract
relating to compensation is eligible to resell such shares, in each case
commencing 90 days after March 12, 1998, in reliance on Rule 144, but without
compliance with certain restrictions contained in Rule 144. Shares acquired
pursuant to Rule 701 may be sold by nonaffiliates without regard to the
holding period, volume limitations, information or notice requirements of Rule
144, and by affiliates without regard to the holding period requirement.
The Company has reserved an aggregate of 427,500 shares of Common Stock for
issuance pursuant to the 1997 Plan. The Company may elect to register such
shares under the Act. Shares so registered will be eligible for sale in the
public market after the effective date of such registration, subject to Rule
144 limitations applicable to affiliates and subject to the lock-up agreements
described below.
Except as indicated above, the Company is unable to estimate the amount,
timing or nature of future sales of outstanding Common Stock. There was no
market for the Common Stock prior to this offering, and no predictions can be
made as to the effect, if any, that market sales of shares or the availability
of shares for sale
57
<PAGE>
will have on the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of the Common Stock in the public market may have
an adverse effect on the market price thereof, and could impair the Company's
ability to raise capital through the future sale of its equity securities.
REGISTRATION RIGHTS
PHL holds in the aggregate 579,250 shares of the Company's Common Stock (the
"Registrable Securities"). Each of PHL or its transferees are entitled to
certain rights with respect to the registration of such securities under the
Act. These rights are provided under the terms of an agreement between the
Company and the holders of the Registrable Securities. If the Company
registers any of its securities either for its own account or for the account
of other security holders, the holders of Registrable Securities are entitled
to include their securities in the registration, subject to the ability of the
underwriters to limit the number of shares included in an underwritten
offering. When use of such form becomes available to the Company, any holder
of the Registrable Securities may request that the Company register all or any
portion of their Registrable Securities on Form S-3 provided that the
reasonably anticipated aggregate price to the public is at least $500,000 and
that no more than one such registration may be requested and obtained during
any nine month period. All registration expenses must be borne by the Company
and all selling expenses relating to the Registrable Securities must be borne
by the holders of the securities being registered. Except to the extent
included herein, the holders of the Registrable Securities have waived their
right to have such securities registered under the Act as part of the Initial
Public Offering and until September 9, 1998.
LOCK-UP AGREEMENTS
Pursuant to the underwriting agreement dated March 12, 1998, all of the
Company's directors, executive officers and stockholders, owning as of the
date all of the outstanding Common Stock prior to the Initial Public Offering
(representing an aggregate of 4,611,350 shares of Common Stock, including
59,600 shares of Common Stock that may be acquired pursuant to the exercise of
options which were then exercisable), agreed that they will not, without the
prior written consent of Cowen & Company, offer, sell or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common
Stock owned by them, until September 9, 1998. See "Plan of Distribution."
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PLAN OF DISTRIBUTION
Subject to the terms and conditions of the underwriting agreement dated
March 12, 1998, the Company and certain stockholders who sold shares in the
initial public offering sold to each of the underwriters named below, and each
of the underwriters, for whom Cowen & Company and Volpe Brown Whelan &
Company, LLC acted as representatives (the "Representatives"), purchased from
the Company and the Selling Stockholders the respective number of shares of
Common Stock set forth opposite the name of each underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NAME COMMON STOCK
---- ------------
<S> <C>
Cowen & Company................................................. 1,212,184
Volpe Brown Whelan & Company, LLC............................... 808,126
BT Alex. Brown Incorporated..................................... 77,941
CIBC Oppenheimer Corp........................................... 77,941
Furman Selz LLC................................................. 77,941
J.P. Morgan Securities Inc...................................... 77,941
NationsBanc Montgomery Securities LLC........................... 77,941
UBS Securities LLC.............................................. 77,941
Adams, Harkness & Hill, Inc..................................... 32,476
Advest, Inc..................................................... 32,476
Robert W. Baird & Co. Incorporated.............................. 32,476
George K. Baum & Company........................................ 32,476
Chatsworth Securities, LLC...................................... 32,476
Crowell, Weedon & Co............................................ 32,476
Gaines, Berland Inc............................................. 32,476
Gerard Klauer Mattison & Co., LLC............................... 32,476
Janney Montgomery Scott Inc..................................... 32,476
Legg Mason Wood Walker, Incorporated............................ 32,476
Neuberger & Berman.............................................. 32,476
Parker/Hunter Incorporated...................................... 32,476
Pennsylvania Merchant Group..................................... 32,476
Ragen Mackenzie Incorporated.................................... 32,476
Raymond James & Associates, Inc................................. 32,476
The Seidler Companies Incorporated.............................. 32,476
Soundview Financial Group....................................... 32,476
Tucker Anthony Incorporated..................................... 32,476
H.C. Wainwright & Co., Inc...................................... 32,476
---------
Total......................................................... 3,105,000
=========
</TABLE>
The underwriters offered the shares of Common Stock, in part, directly to
the public at the initial public offering price of $12.00 and, in part, to
certain dealers at such price less a concession not in excess of $0.47 per
share. The underwriters may have allowed, and such dealers may have reallowed,
a concession not in excess of $0.10 per share to certain brokers and dealers.
The stockholders who sold shares in the initial public offering granted the
underwriters an option, exercisable for up to 30 days after the date of this
Prospectus, to purchase up to an aggregate of 405,000 additional shares of
Common Stock to cover over-allotments, if any. The underwriters purchased such
shares pursuant to an exercise of the over-allotment option on March 25, 1998
and the foregoing table gives effect to such exercise.
The Company and these stockholders agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the Act,
and to contribute to payments that the underwriters may be required to make in
respect thereof.
59
<PAGE>
The Company, the Company's officers and directors, and all of the
stockholders who sold shares in the initial public offering agreed not to
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or any right to acquire Common Stock until September 9, 1998
without the prior written consent (which consent may be given without notice
to the Company's stockholders or other public announcement) of Cowen &
Company. Cowen & Company has advised the Company that it has no present
intention of releasing any of the Company's stockholders from such lock-up
agreements. See "Shares Eligible for Future Sale."
The representatives of the underwriters have been making a market in the
Company's Common Stock following the Initial Public Offering although they
have no obligation to do so and may cease such market making at any time.
There can be no assurance that a market in the Common Stock will continue.
Prior to the consummation of the initial public offering, the underwriters'
representatives advised the Company and the stockholders who sold shares in
the offering that the underwriters did not intend to confirm sales in excess
of 5% of the shares offered hereby to any accounts over which they exercise
discretionary authority.
Prior to the initial public offering, there was no public market for the
Common Stock. Consequently, the initial public offering price was determined
by negotiation among the Company, the stockholders who sold shares in the
offering and the underwriters' representatives. Among the factors considered
in such negotiations were the prevailing market conditions, the results of
operations of the Company in periods prior to the initial public offering, the
market capitalization and stage of development of other companies that the
Company, these stockholders and the underwriters' representatives believed to
be comparable to the Company, estimates of the business potential of the
Company, the then current state of the Company's development and other factors
deemed relevant.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"CMND."
Neither the underwriters nor their representatives have participated in the
preparation, review or dissemination of the registration statement filed with
the Commission to register the additional 345,000 shares which have already
been sold (the "Additional Shares Registration Statement") or the Prospectus
forming a part of the Additional Shares Registration Statement; and neither
the underwriters nor their representatives have passed upon, or performed any
investigation regarding any of the factual or legal matters set forth in the
Additional Shares Registration Statement or the Prospectus forming a part of
the Additional Shares Registration Statement, except to the extent such
investigation was performed in connection with the initial public offering and
the initial registration statement (and the prospectus dated March 12, 1998
that formed a part of the initial registration statement) relating thereto.
LEGAL MATTERS
The validity of issuance of the 2,760,000 shares which were properly
registered was passed upon for the Company by Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C., Boston, Massachusetts, the Company's former
securities counsel which served as the Company's counsel in the initial public
offering. The validity of the issuance of the additional 345,000 shares was
passed upon for the Company by Fulbright & Jaworski L.L.P., New York, New
York. Certain legal matters were passed upon for the underwriters by Buchanan
Ingersoll, Princeton, New Jersey.
EXPERTS
The Consolidated Financial Statements and schedule of the Company at
December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, appearing in this Prospectus and the Additional
Shares Registration Statement and the initial registration statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting
and auditing.
60
<PAGE>
COMMAND SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................... F-2
AUDITED FINANCIAL STATEMENTS:
Consolidated Balance Sheet at December 31, 1996 and 1997................. F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997..................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997 ................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheet at September 30, 1998............... F-16
Condensed Consolidated Statements of Operations for the nine months ended
September 30, 1997 and 1998............................................. F-17
Condensed Consolidated Statement of Stockholders' Equity (Deficit) for
the nine months ended September 30, 1998................................ F-18
Condensed Consolidated Statement of Cash Flows for the nine months ended
September 30, 1997 and 1998............................................. F-19
Notes to Unaudited Condensed Consolidated Financial Statements........... F-20
PRO FORMA FINANCIAL DATA:
Headnote to Pro Forma Financial Data..................................... P-1
Pro Forma Statement of Operations for the year ended December 31, 1997... P-2
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Command Systems, Inc.
We have audited the accompanying consolidated balance sheets of Command
Systems, Inc. as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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 Command
Systems, Inc. at December 31, 1996 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Hartford, Connecticut
February 9, 1998
F-2
<PAGE>
COMMAND SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 443,505 $ 391,687
Accounts receivable, net of allowance for doubtful
accounts of $24,500 and $259,893 in 1996 and 1997.. 2,375,064 4,203,241
Prepaid expenses and other current assets........... 416,116 354,950
Deferred income taxes .............................. -- 52,024
---------- -----------
Total current assets............................... 3,234,685 5,001,902
Equipment and improvements:
Furniture and equipment............................. 914,452 2,007,254
Leasehold improvements.............................. 554,873 852,476
---------- -----------
1,469,325 2,859,730
Less accumulated depreciation....................... (396,785) (825,562)
---------- -----------
Net equipment and improvements........................ 1,072,540 2,034,168
Other assets:
Goodwill............................................ -- 6,845,338
Security deposits................................... 441,644 428,005
Other non-current assets............................ 67,396 115,674
---------- -----------
Total assets....................................... $4,816,265 $14,425,087
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit...................................... $1,378,890 $ 857,535
Bank loan........................................... -- 556,952
Accounts payable and accrued expenses............... 1,281,058 2,218,540
Accrued payroll and related costs................... 376,305 610,933
Loan payable to officer............................. 73,224 --
Deferred revenue.................................... 150,434 219,544
Income taxes payable................................ 1,700 78,535
Deferred income taxes............................... 72,095 --
---------- -----------
Total current liabilities.......................... 3,333,706 4,542,039
Notes payable......................................... 1,145,463 --
Deferred income taxes payable......................... -- 381,987
---------- -----------
Total liabilities.................................. 4,479,169 4,924,026
Minority interest..................................... 395,561 --
Preferred stock, $.01 par value, 5,000,000 shares
authorized...........................................
Series A convertible preferred stock, 100 shares
authorized, issued and outstanding................. -- 2,223,475
Series B convertible preferred stock, 100 shares
authorized, issued and outstanding................. -- 8,000,000
Stockholders' equity (deficit):
Common stock, $.01 par value, 25,000,000 shares
authorized; 4,275,000 shares issued and
outstanding........................................ 1,000 1,000
Retained earnings (deficit)......................... (59,465) (636,509)
Cumulative translation adjustment................... -- (86,905)
---------- -----------
Total stockholders' equity (deficit)............. (58,465) (722,414)
---------- -----------
Total liabilities and stockholders' equity
(deficit)....................................... $4,816,265 $14,425,087
========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
COMMAND SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue................................. $12,436,529 $17,069,417 $25,057,039
Cost of revenue......................... 9,108,436 12,494,448 16,972,812
----------- ----------- -----------
Gross profit.......................... 3,328,093 4,574,969 8,084,227
Selling, general and administrative
expense................................ 3,012,869 5,171,912 7,254,992
----------- ----------- -----------
Income (loss) from operations......... 315,224 (596,943) 829,235
Other income (expense):
Other income.......................... -- 42,786 --
Interest income....................... 2,195 14,138 32,911
Interest expense...................... (52,405) (132,482) (309,657)
----------- ----------- -----------
(50,210) (75,558) (276,746)
----------- ----------- -----------
Income (loss) before income taxes and
minority interest...................... 265,014 (672,501) 552,489
Income tax (provision) benefit.......... (43,577) 8,056 (597,751)
----------- ----------- -----------
221,437 (664,445) (45,262)
----------- ----------- -----------
Minority interest....................... -- 241,439 (451,431)
----------- ----------- -----------
Net income (loss)....................... 221,437 (423,006) (496,693)
----------- ----------- -----------
Preferred stock dividends and
accretion.............................. -- -- (80,351)
----------- ----------- -----------
Income (loss) applicable to common
stockholders........................... $ 221,437 $ (423,006) $ (577,044)
=========== =========== ===========
Pro forma results of operations:
Adjustments to U.S. federal income tax
provision assuming
C corporation status ................ $ (53,720) $ -- $ 633,000
----------- ----------- -----------
Net income (loss), as adjusted........ 167,717 (423,006) 136,307
Preferred stock dividends and
accretion............................ -- -- (80,351)
----------- ----------- -----------
Income (loss) applicable to common
stockholders......................... $ 167,717 $ (423,006) $ 55,956
=========== =========== ===========
Pro forma earnings per common share:
Basic earnings (loss) per common
share.............................. $ 0.04 $ (0.10) $ 0.01
=========== =========== ===========
Diluted earnings (loss) per common
share.............................. $ 0.04 $ (0.10) $ 0.01
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
COMMAND SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED CUMULATIVE
---------------- EARNINGS TRANSLATION
SHARES AMOUNT (DEFICIT) ADJUSTMENT TOTAL
--------- ------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995.. 4,275,000 $1,000 $ 142,104 $ -- $143,104
Net income................. -- -- 221,437 -- 221,437
--------- ------ --------- -------- ---------
Balance at December 31,
1995....................... 4,275,000 1,000 363,541 -- 364,541
Net loss................... -- -- (423,006) -- (423,006)
--------- ------ --------- -------- ---------
Balance at December 31,
1996....................... 4,275,000 1,000 (59,465) -- (58,465)
Net loss................... -- -- (496,693) -- (496,693)
Preferred stock dividends
and accretion............. -- -- (80,351) -- (80,351)
Translation adjustment..... -- -- -- (86,905) (86,905)
--------- ------ --------- -------- ---------
Balance at December 31,
1997....................... 4,275,000 $1,000 $(636,509) $(86,905) $(722,414)
========= ====== ========= ======== =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
COMMAND SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
--------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $ 221,437 $ (423,006) $ (496,693)
Adjustments to reconcile net income
(loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization.......... 58,963 136,796 428,777
Bad debt expense....................... -- 24,500 235,395
Deferred income taxes.................. 42,079 (15,948) 257,868
Minority interest...................... -- (241,439) 451,431
Accrued interest capitalized........... -- 38,370 132,674
Other.................................. -- 4,773 --
Changes in operating assets and
liabilities:
Accounts receivable.................. (718,936) (637,497) (2,063,572)
Prepaid expenses and other assets.... (23,566) (386,286) 61,166
Security deposits and other non-
current assets...................... (17,410) (489,258) (34,639)
Accounts payable and accrued
expenses............................ 268,475 691,485 937,482
Accrued payroll and related costs.... 60,716 74,760 234,628
Deferred revenue..................... -- 150,434 69,110
Income taxes payable................. -- -- 76,835
--------- ----------- ----------
Net cash (used in) provided by
operating activities.............. (108,242) (1,072,316) 290,462
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements.. (263,884) (954,602) (1,497,783)
--------- ----------- ----------
Net cash used in investing
activities........................ (263,884) (954,602) (1,497,783)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under revolving
line of credit agreement................ 512,400 503,390 (521,355)
Proceeds from bank loan.................. -- -- 806,952
Principal payments of bank loan.......... -- -- (250,000)
Minority investment in affiliate......... -- 637,000 391,098
Proceeds from notes payable.............. -- 1,107,093 869,630
Payment of loan payable to officer....... -- -- (73,224)
Preferred stock issuance costs........... -- -- (43,013)
--------- ----------- ----------
Net cash provided by financing
activities........................ 512,400 2,247,483 1,180,088
--------- ----------- ----------
Effect of exchange rate changes on cash... -- -- (24,585)
Increase (decrease) in cash............... 140,274 220,565 (51,818)
Cash, beginning of year................... 82,666 222,940 443,505
--------- ----------- ----------
Cash, end of year......................... $ 222,940 $ 443,505 $ 391,687
========= =========== ==========
CASH PAID FOR:
Interest expense......................... $ 52,405 $ 104,482 $ 193,202
Income taxes............................. 1,498 3,581 271,130
NON-CASH FINANCING ACTIVITIES:
Preferred stock exchanged for notes
payable................................. $2,186,137
Preferred stock issued for purchase of
minority interest....................... 8,000,000
</TABLE>
See accompanying notes.
F-6
<PAGE>
COMMAND SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
Command Systems, Inc. (the "Company") provides information technology
solutions and services to financial services organizations.
Through December 31, 1997, the Company held a 51% interest in Command
International Software Pvt. ("CIS"), an Indian unlimited liability company,
with the remaining 49% interest held by Phoenix Home Life Mutual Insurance Co.
("PHL"). On December 31, 1997, the Company purchased PHL's holdings (see Note
5).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Concentration of Credit Risk
The Company markets its services primarily to the financial services
industry. The Company performs periodic credit evaluations of a customer's
financial condition and generally does not require collateral. Credit losses
have been within management's expectations.
Revenue Recognition
The Company recognizes revenue on time-and-materials contracts as the
services are performed. Revenue on fixed-price contracts are recognized using
the percentage of completion method. Under this method, applicable fees and
profits on such contracts are recorded concurrently with costs incurred
thereon. The Company bears the risk of cost overruns and inflation with
respect to its fixed-price projects. If estimates indicate a probable ultimate
loss on a fixed-price contract, provision is made at that date for the entire
estimated loss.
Revenue from product sales, primarily equipment and commercially available
software, are recognized upon shipment.
Billings in excess of revenue earned are classified as deferred revenue.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation on equipment is
calculated on a straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are being amortized on a straight-line basis
over the shorter of the lease term or estimated useful life of the assets.
Income Taxes
The Company had previously elected to be taxed as an S Corporation in
accordance with the provisions of the Internal Revenue Code. As an S
Corporation, the taxable income of the Company is reportable on the individual
stockholder's federal tax return. In conjunction with the formation of the
Company as a Delaware holding corporation (see Note 6) and the issuance of its
Series A convertible preferred stock, the S Corporation election was
terminated and the Company became subject to U.S. federal income taxes. The
Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recorded to reflect the
tax consequences of future years differences between the tax basis 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 income. A valuation allowance
is provided against the future benefit of deferred tax assets if it is
determined that it is more likely than not that the future tax benefits
associated with the deferred tax asset will not be realized (see Note 4).
F-7
<PAGE>
COMMAND SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Impairment of Long-Lived Assets
Long-lived assets, including goodwill, are reviewed for impairment and
written down to fair value whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. At
December 31, 1997, no such impairment existed. The Company measures the
potential impairment of long-lived assets, including goodwill, by the
undiscounted value of expected operating cash flow in relation to the assets
to which it applies.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable, and other accrued liabilities approximate fair
value due to the short maturity of these items. The carrying value of the
notes payable approximate fair value based on the Company's borrowing rate for
similar financing arrangements. Amounts due under the line of credit
approximate fair value because the interest rates vary with market interest
rates.
Stock-Based Compensation
Effective in fiscal 1996, the Company adopted Financial Accounting Statement
No. 123, "Accounting for Stock-Based Compensation." This statement defines a
fair value based method of accounting for employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans in accordance with Accounting Principle Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." Under APB No. 25, compensation
cost is the excess, if any, of the market price of the stock at the grant date
over the amount the employee must pay to acquire the stock. The Company has
elected to continue to account for awards granted under its Shadow Stock
Incentive Plan and the Command Systems, Inc. 1997 Employee, Director and
Consultant Stock Plan under APB No. 25.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries which have a
functional currency other than the U.S. dollar reflect the translation of
assets and liabilities into United States dollars at current exchange rates
with income and expense accounts being translated at average rates of exchange
prevailing during the period. The related adjustments are recognized as a
separate component of the stockholder's equity. Foreign currency transaction
gains and losses, which are not material, are recognized in net income (loss)
when incurred.
Earnings Per Share
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share."
This statement replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement No. 128 requirements.
Pro forma earnings per common share reflect adjustments in the U.S. federal
income tax provision assuming C corporation status and the realization of net
operating losses for all periods presented.
3. DEBT
The Company maintains a line of credit with a current availability of
$2,500,000 or 75% ($1,000,000 prior to May 26, 1997) of the Company's accounts
receivable less than 90 days past due. Interest is charged at the bank's prime
rate of interest plus 0.5% (10%, 8.75% and 9% in 1995, 1996 and 1997,
respectively).
F-8
<PAGE>
COMMAND SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The line of credit is guaranteed by the Company's President, and is
collateralized by all personal property of the Company. The agreement also
contains several restrictive covenants which require, among other things, the
Company to maintain defined financial ratios and prohibits the declaration and
payment of dividends, other than payment of dividends to the holder of its
Series A and Series B convertible preferred stock, provided that no event of
default exists. The agreement expires August 15, 1998.
On July 1, 1996, the Company and its wholly-owned subsidiary Command
International Holdings ("CIH") entered into a note purchase agreement (the
"Agreement") with Phoenix Home Life Mutual Insurance ("PHL") under which the
Company could issue up to $3 million (U.S. dollars) aggregate principal amount
of its 15% Subordinated Secured Series Notes (the "C Notes"), accrued and
capitalized interest on such notes and its Zero Coupon Receivables-Based
Subordinated Secured Series Notes (the "Z Notes"). Also, under this Agreement,
CIH was authorized to issue up to $3 million (U.S. dollars) aggregate
principal amount of its 15% Guaranteed Senior Secured Series Notes (the "M
Notes") and accrued capitalized interest on such notes. The payment
obligations of the Company in respect to the C Notes and the Z Notes rank
junior and subordinate in right of payment to the senior indebtedness of the
Company under the M Notes.
At December 31, 1996, outstanding debt (including accrued interest of
$38,370) on the C, Z and M Notes amounted to $214,370, $196,000 and $735,093,
respectively. Repayment of the debt is due in 2001. The payment obligations of
the Company in respect of the C, Z and M Notes are subordinate to the senior
indebtedness of the Company under the line of credit.
On August 26, 1997, the Company entered into an agreement with PHL whereby
the Company issued to PHL 100 shares of its Series A convertible preferred
stock in exchange for the aggregate outstanding indebtedness of $2,186,137 of
the C, Z, and M Notes, including accrued capitalized interest of $171,044.
CIS entered into a RS. 20,000,000 ($560,000) letter of credit facility on
December 31, 1996; no amounts related thereto were outstanding at December 31,
1996 and 1997.
CIS has a short term credit facility whereby each borrowing under the
facility has a term of six months from the date of disbursement and bears
interest at varying rates based upon the prime lending rate and the currency
borrowed; borrowing may be denominated in Indian rupees or U.S. dollars. At
December 31, 1997, rates of interest ranged from 10.65% to 16.00%. There were
no outstanding balances under this credit facility at December 31, 1996;
$556,952 was outstanding at December 31, 1997.
4. INCOME TAXES
Comparisons of the provision for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- ---------
<S> <C> <C> <C>
Federal
Current........................................ $ -- $ -- $ 334,871
Deferred....................................... -- -- 293,078
------- ------- ---------
Total federal................................ -- -- 627,949
------- ------- ---------
State
Current........................................ 1,498 5,270 5,012
Deferred....................................... 42,079 (13,326) (35,210)
------- ------- ---------
Total state.................................. 43,577 (8,056) (30,198)
------- ------- ---------
Total provision.............................. $43,577 $(8,056) $ 597,751
======= ======= =========
</TABLE>
F-9
<PAGE>
COMMAND SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
With the issuance of the Series A convertible preferred stock, the Company's
ability to be taxed as an S Corporation automatically terminated and the
ability to report on the cash basis of accounting ceased. The Company
recognized additional taxable income as a result and incurred a liability of
approximately $693,000. Under current statutes this liability will be payable
over a period of four years.
The effective tax rate from operations differed from the federal statutory
rate for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
--------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate................................ 34.0% 34.0% 34.0%
State income taxes, net of federal benefit............ 16.4 (1.2) (5.5)
No federal income tax benefit (provision) for S
corporation period income (loss)..................... (34.0) (9.6) 15.9
Tax effect of conversion from S corporation to C
corporation, related primarily to accounting method
change............................................... -- -- 125.5
Foreign profits and losses not subject to tax......... -- (24.4) (56.7)
Other................................................. -- -- (5.0)
----- ----- -----
Effective income tax rate............................. 16.4% (1.2)% 108.2%
===== ===== =====
</TABLE>
The significant components of the Company's deferred tax assets and
liabilities are:
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1996 1997
------- --------
<S> <C> <C> <C>
Deferred tax assets
State net operating loss carryforwards............... $11,000 $ 36,639
Bad debt reserve..................................... -- 125,272
Reserves and accruals................................ -- 136,714
Accrued payroll and related costs.................... -- 84,341
------- --------
11,000 382,966
------- --------
Deferred tax liabilities
Cash basis of accounting............................. 78,700 --
Tax effect of change from S corporation to C
corporation, primarily related to accounting method
change.............................................. -- 693,031
Tax over book depreciation........................... 4,300 19,898
------- --------
83,000 712,929
------- --------
Net deferred federal and state liabilities......... $72,000 $329,963
======= ========
</TABLE>
The Company has net operating loss ("NOL") carryforwards for state tax
purposes of approximately $118,000 and $450,000 as of December 31, 1996 and
1997, respectively. The NOL expires through 2010.
The financial statements reflect no foreign income tax provision. Under
Indian tax laws, CIS is not currently subject to a corporate tax since it
earns all of its income from export activities. This exemption is for a period
of five consecutive years during an eight year period which began in 1996. CIH
is also eligible for certain tax exemptions under the laws of Mauritius. As a
result of such exemptions, no deferred tax asset or liability is recognized.
During 1996 and 1997 income (loss) of the Company's foreign subsidiaries
before minority interest was $(492,732) and $921,287, respectively.
F-10
<PAGE>
COMMAND SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. MINORITY INTEREST
During 1996, the Company entered into an agreement with PHL to establish a
joint venture in India which would provide software services on a
subcontracting basis to the Company. Under the terms of the agreement, the
Company owned a 51% interest. PHL invested $637,000 and $391,098 in this
venture during 1996 and 1997, respectively.
On December 31, 1997, PHL exchanged its 49% interest for 100 shares of the
Company's Series B convertible preferred stock valued at $8,000,000. The
Company recorded this as a purchase and recognized the excess of the purchase
price $6,845,338 over the fair value of the assets acquired and liabilities
assumed as goodwill. The Company will amortize this goodwill over a 15 year
period.
The pro forma results of operations for the years ended December 31, 1996
and 1997 which reflect the elimination of interest expense, minority interest
in earnings of this subsidiary and the amortization of goodwill are as
follows, and assume the transaction had occurred at the beginning of the
periods presented:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Revenue............................................ $17,069,417 $25,057,039
Net (loss)......................................... (740,164) (449,295)
Income (loss) per share applicable to common
stockholders--diluted............................. (0.14) (0.08)
</TABLE>
At December 31, 1996 and 1997, included in prepaid expenses and other assets
are receivables from PHL approximating $365,000 and $4,000, respectively;
included in accounts payable and accrued expenses are payables to PHL
approximating $481,000 and $248,000, respectively.
6. STOCKHOLDERS' EQUITY
On July 1, 1997 Command Systems, Inc., a Delaware corporation ("CSI"), was
established and exchanged 4,275,000 shares of its common stock for the 100
shares of issued and outstanding common stock of the Company held by its sole
stockholder and became the ultimate holding company for the Command group of
companies. CSI was authorized to issue 10,650,000 shares of $.01 par value
common stock and 1,000 shares of $.01 par value preferred stock. This
contribution was accounted for at historical cost in a manner similar to a
pooling of interests. The number of common shares authorized, issued and
outstanding have been restated for all periods to reflect this
recapitalization. Effective December 31, 1997 the Company was authorized to
issue up to 25,000,000 shares of its common stock and 5,000,000 shares of
preferred stock. The consolidated financial statements have been adjusted to
reflect this change. On February 5, 1998, the Company effectuated a 1-for-2
reverse stock split. All share and per share data have been restated
retroactively.
On August 26, 1997, CSI issued 100 shares of its Series A convertible
preferred stock. The Series A convertible preferred stock has a liquidation
preference of $2,186,137 plus accrued and unpaid dividends. Such dividends
amounted to $75,474 at December 31, 1997. The Series A convertible preferred
stock entitles the holder to one vote per convertible common share, including
the right to elect one director as a class, and has a dividend requirement of
10% per annum which shall accrue on a cumulative basis (which rate will
increase to 15% if certain thresholds are not met). These shares are
convertible at any time into 522,500 shares of CSI common stock and are
redeemable by PHL after July 31, 1999. These shares automatically convert
following a qualified public offering.
On December 31, 1997, the Company issued 100 shares of Series B convertible
preferred stock. The Series B convertible preferred stock has a liquidation
preference of $8,000,000 and has a dividend requirement of 10% per annum which
shall accrue on a cumulative basis. The holders are also entitled to one vote
per convertible common share and the right to elect one director as a class.
These shares are redeemable after July 31, 1999 and
F-11
<PAGE>
COMMAND SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
are convertible at any time into 659,250 shares of the Company's common stock.
The Series B convertible preferred stock automatically converts following a
qualified public offering.
The Company has filed a registration statement for the initial public
offering of 2,200,000 shares of its common stock. Assuming the successful
completion of the offering and the conversion of the Series A and B
convertible preferred stock, the Company would have stockholders' equity at
December 31, 1997 as follows:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
--------- -----------
<S> <C> <C>
Common stock......................................... $ 1,000 $ 34,817
Additional paid-in capital........................... -- 33,711,319
Accumulated deficit.................................. (636,509) (680,042)
Cumulative translation adjustment.................... (86,905) (86,905)
--------- -----------
$(722,414) $32,979,189
========= ===========
</TABLE>
The Company had maintained a Shadow Stock Incentive Plan (the "Shadow Plan")
for certain key employees, whereby awards, expressed in units, were earned
only upon the occurrence of certain events including continued employment for
five years after the grant date. The Shadow Plan provided for any earned
benefits to be paid either in cash or in the form of common stock of the
Company. At December 31, 1995 and 1996 there were 53,750 and 61,500 units
outstanding, respectively. The Company accounted for this Shadow Plan as a
stock appreciation right and, therefore, accrued amounts based on a formula
value defined in the Shadow Plan which reflected the benefits to be earned.
There was no compensation expense recognized under the Shadow Plan for the
years ended December 31, 1995, 1996 and 1997, respectively. In March 1997 the
Company issued options to purchase 61,500 shares of its common stock
exercisable at a price of $4.00 per share (the fair market value as determined
by the Board of Directors of such stock at the date of grant) to certain
persons who, upon such issuance, relinquished their rights under the Company's
Shadow Plan.
In August 1997, the Company created the Command Systems, Inc. 1997 Employee,
Director and Consultant Stock Plan (the "Option Plan"). The Company reserved
427,500 shares of its common stock for issuance under the Option Plan. In
December 1997, the Company granted options to purchase 89,050 shares of its
common stock at a price of $9.00 per share to certain employees and directors.
Options granted under the plan generally have a five year term. Options
generally vest in increments of 20% on the anniversary of the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
granted subsequent to December 31, 1995 under the fair value method of that
Statement. The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997: risk-free interest rate of 6%, volatility factor of the
expected market price of the Company's common stock of 40.4% and a weighted-
average expected life for the options of 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
F-12
<PAGE>
COMMAND SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma net loss would have been approximately $660,000 and pro
forma loss per common share basic and diluted would have been $0.15 for 1997.
In accordance with the provisions of SFAS No. 123, the pro forma disclosures
include only the effect of stock options granted in 1997. These pro forma
effects may not be representative of the effects of SFAS No. 123 on future
years because of the fact that options vest over several years and new grants
generally are made each year.
Changes in outstanding options were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding December 31, 1996....................... -- --
Options granted:
March 1997....................................... 61,500 $4.00
December 1997.................................... 89,050 $9.00
Options exercised................................. -- --
Options cancelled................................. -- --
------- -----
Outstanding December 31, 1997....................... 150,550 $6.96
======= =====
</TABLE>
As of December 31, 1997, there were options exercisable for 45,550 shares.
Outstanding options at December 31, 1997 had exercise prices ranging from
$4.00 to $9.00.
A former employee has pledged 7,500 common stock purchase options as
collateral for a bank loan. The Company has granted the bank a put option
whereby upon default of the loan, the bank could require the Company to
repurchase the options for the outstanding balance of the loan.
7. LEASES
The Company leases office space from unrelated third parties. Total rent
expense for the years ended December 31, 1995, 1996 and 1997 was $132,839,
$251,597 and $543,700, respectively.
The Company is required to maintain security deposits for office space
rented in Bangalore, India. Such deposits amounted to $421,862 and $413,807 at
December 31, 1996 and 1997, respectively.
Future minimum lease payments under non-cancelable operating leases at
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.................... $ 515,216
1999.................... 529,395
2000.................... 557,315
2001.................... 324,998
2002.................... 349,373
----------
$2,276,297
==========
</TABLE>
8. BENEFIT PLANS
The Company has established a 401(k) Retirement Savings Plan (the "401(k)
Plan"). All employees of the Company's domestic operations are eligible to
participate in the 401(k) Plan after completing six months of service and
attaining age twenty and one-half. Employees are allowed to contribute between
1% and 15% of their annual compensation up to the maximum contribution
allowable each year under IRS regulations. The Company contributed $27,000 to
the 401(k) Plan during 1997. No such contributions were made in 1995 or 1996.
F-13
<PAGE>
COMMAND SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS
The Company had a noninterest bearing loan payable to its President. The
outstanding balance at December 31, 1996 was $73,224. The loan was payable on
demand and was subordinated to the debt described in Note 3. The loan was
repaid in October 1997.
The Company provided IT services to PHL representing revenues of
approximately $2,800,000, $1,300,000 and $2,600,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Net income (loss).................... $ 221,437 $ (423,006) $ (496,693)
Preferred stock dividends............ -- -- (80,351)
---------- ---------- ----------
Numerator for basic and diluted earn-
ings per share-income/(loss) avail-
able to common stockholders......... $ 221,437 $ (423,006) $ (577,044)
========== ========== ==========
Denominator:
Weighted-average shares outstanding
for basic and diluted earnings per
share............................... 4,275,000 4,275,000 4,275,000
========== ========== ==========
Basic and diluted earnings (loss) per
share................................ $ 0.05 $ (0.10) $ (0.13)
========== ========== ==========
</TABLE>
Options to purchase 150,550 shares of the Company's common stock and
1,181,750 shares of the Company's common stock issuable upon the conversion of
the Series A and B convertible preferred stock were not included in the
computation of diluted earnings per share because the effect of their
inclusion would be antidilutive. For additional disclosures regarding the
outstanding Series A and B convertible preferred stock and the employee stock
options see Note 6.
For purposes of computing pro forma basic and diluted earnings, the Company
has assumed that it was taxed as a C corporation for U.S. federal income tax
purposes at statutory tax rates.
11. GEOGRAPHIC DATA AND MAJOR CUSTOMERS
The Company is engaged in one segment of business, providing information
technology services to large organizations. The Company operates in two
geographic areas. Prior to 1996, the Company only operated in the United
States.
<TABLE>
<CAPTION>
1996 United States India Elimination Consolidated
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $17,069,417 $ -- -- $17,069,417
Income (loss) from operations (82,194) (514,749) -- (596,943)
Identifiable assets 3,434,094 1,382,171 -- 4,816,265
<CAPTION>
1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $25,057,039 $2,870,150 $(2,870,150) $25,057,039
Income (loss) from operations (99,974) 929,209 -- 829,235
Identifiable assets 12,173,801 2,251,286 -- 14,425,087
</TABLE>
F-14
<PAGE>
COMMAND SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996, two customers accounted for
approximately 12% and 23%, and 14% and 13%, respectively, of revenue. For the
year ended December 31, 1997, three customers accounted for approximately 13%,
13% and 10%, respectively, of revenue.
12. RISKS AND UNCERTAINTIES OF DOING BUSINESS
Many of the Company's engagements involve projects that are critical to the
operations of its customers' businesses and provide benefits that may be
difficult to quantify. Any failure in a customer's system could result in a
claim for substantial damages against the Company, regardless of the Company's
responsibility for such failure. In addition, the Company's failure to
complete a project in the contractually prescribed time period, particularly a
Year 2000 solutions services contract, may result in a claim for substantial
damages against the Company. Although the Company attempts to limit
contractually its liability for damages arising from errors, mistakes or
omissions in rendering its IT services, there can be no assurance that the
limitations of liability set forth in its services contracts will be
enforceable in all instances or would otherwise protect the Company from
liability for damages. Although the Company maintains general liability
insurance coverage, including coverage for errors or omissions in the amount
of $5.0 million, there can be no assurance that such coverage will continue to
be available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Company that exceed available insurance coverage, or changes in
the Company's insurance policies, including premium increases or the
imposition of large deductible or co-insurance requirements, could adversely
affect the Company's business, financial condition and results of operations.
F-15
<PAGE>
COMMAND SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER
30,
1998
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $19,110,984
Accounts receivable, net of allowance for doubtful accounts of
$71,891........................................................ 6,409,507
Prepaid expenses and other current assets....................... 282,196
Income taxes recoverable........................................ 376,660
-----------
Total current assets.......................................... 26,179,347
Equipment and Improvements:
Furniture and equipment......................................... 2,778,801
Leasehold and improvements...................................... 979,846
-----------
3,758,647
Less accumulated depreciation................................... (1,335,018)
-----------
Net equipment and improvements.................................. 2,423,629
Other assets:
Goodwill, net of accumulated amortization of $342,267........... 6,503,071
Security deposits............................................... 455,795
Other non-current assets........................................ 136,663
-----------
Total assets.................................................. $36,698,505
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................... $ 1,817,751
Deferred revenue................................................ 136,885
Accrued payroll and related costs............................... 1,016,730
-----------
Total current liabilities..................................... 2,971,366
Deferred income taxes............................................. 212,760
Stockholders' Equity:
Common stock, $.01 par value, 25,000,000 authorized, 7,656,750
issued and outstanding......................................... 34,818
Additional paid-in-capital...................................... 33,400,480
Retained earnings (deficit)..................................... (605,837)
Cumulative translation adjustment............................... (315,082)
-----------
Total stockholders' equity.................................... 32,514,379
-----------
Total liabilities and stockholders' equity.................... $35,698,505
===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-16
<PAGE>
COMMAND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenue.............................................. $17,741,755 $25,552,056
Cost of revenue...................................... 12,212,686 17,389,784
----------- -----------
Gross profit........................................ 5,529,069 8,162,272
Selling, general and administrative expense.......... 5,283,863 8,685,822
----------- -----------
Income (loss) from operations....................... 245,206 (523,550)
Other income (expense):
Foreign exchange gain.............................. -- 89,955
Interest income.................................... 21,242 650,296
Interest expense................................... (262,287) (40,421)
----------- -----------
(241,045) 699,830
----------- -----------
Income before income taxes and minority interest..... 4,161 176,280
Income tax (provision) benefit....................... (672,330) 114,695
Minority interest.................................... (184,454) --
----------- -----------
Net income (loss).................................... (852,623) 290,975
Preferred stock dividends and accretion.............. (23,000) (260,303)
----------- -----------
Income (loss) applicable to common stockholders...... $ (875,623) $ 30,672
=========== ===========
Basic earnings (loss) per share...................... $ (0.20) $ 0.00
=========== ===========
Diluted earnings (loss) per share.................... $ (0.20) $ 0.00
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-17
<PAGE>
COMMAND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID IN CAPITAL RETAINED CUMULATIVE
----------------- --------------- EARNINGS TRANSLATION
SHARES AMOUNT AMOUNT (DEFICIT) ADJUSTMENT TOTAL
--------- ------- --------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... 4,275,000 $ 1,000 $ -- $(636,509) $(86,905) $ (722,414)
--------- ------- ----------- --------- --------- -----------
Net Income............ -- -- -- 290,975 -- 290,975
Issuance of common
stock................ 2,200,000 22,000 24,530,000 -- -- 24,552,000
Conversion of
preferred stock...... 1,181,750 11,818 10,211,658 -- -- 10,223,476
Cost of issuance of
common stock......... -- -- (1,341,178) -- -- (1,341,178)
Preferred stock
dividends and
accretion............ -- -- -- (260,303) -- (260,303)
Translation
adjustment........... -- -- -- -- (228,177) (228,177)
--------- ------- ----------- --------- --------- -----------
Balance at September 30,
1998 (unaudited)....... 7,656,750 $34,818 $33,400,480 $(605,837) $(315,082) $32,514,379
========= ======= =========== ========= ========= ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-18
<PAGE>
COMMAND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ (852,623) $ 290,975
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization.................... 290,520 863,484
Bad debt expense................................. 288,090 (181,502)
Minority interest................................ (184,454) --
Deferred income taxes............................ -- (545,870)
Other............................................ 15,198 --
Changes in operating assets and liabilities:
Accounts receivable............................ (2,307,749) (2,024,764)
Prepaid expenses and other assets.............. 181,506 4,430
Security deposits and other non-current
assets........................................ (116,368) (124,659)
Accounts payable and accrued expenses.......... 838,604 (214,972)
Accrued payroll and related costs.............. 424,363 405,797
Deferred revenue............................... (100,836) (82,659)
Income taxes payable........................... 674,142 (70,453)
----------- -----------
Net cash used in operating activities........ (849,607) (1,680,193)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements............ (1,453,079) (1,018,325)
----------- -----------
Net cash used in investing activities........ (1,453,079) (1,018,325)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock........................ 2,186,137 --
Payments under revolving line of credit agreement.. (101,355) (857,535)
(Payment) of proceeds from bank loan............... 817,614 (533,191)
Minority investment in affiliate................... 775,510 --
Payment of notes payable........................... (1,145,463) --
Issuance of common stock, net...................... -- 23,210,818
Payment of preferred stock dividend................ -- (297,641)
----------- -----------
Net cash provided by financing activities.... 2,532,443 21,522,451
Effect of exchange rate changes on cash............ -- (104,636)
Increase in cash................................... 229,757 18,719,297
Cash, beginning of period.......................... 443,505 391,687
----------- -----------
Cash, end of period................................ $ 673,262 $19,110,984
=========== ===========
CASH PAID FOR:
Interest expense................................... $ 262,287 $ 40,421
Income taxes....................................... $ 830 $ 460,017
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-19
<PAGE>
COMMAND SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the nine month
period ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998.
The Company computes its income tax provision on a quarterly basis. The
Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recorded to reflect the
tax consequences of future years differences between the tax basis of assets
and liabilities and their financial reporting amounts at each period based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. A valuation allowance
is provided against the future benefit of deferred tax assets if it is
determined that it is more likely than not that the future tax benefits
associated with the deferred tax asset will not be realized.
NOTE 2 STOCKHOLDERS' EQUITY
The Company made its initial public offering on March 12, 1998, pursuant to
an effective registration statement covering 2,400,000 shares of $.01 par
value common stock plus an additional 360,000 shares for an over-allotment
option granted to the underwriters. Shortly before the effective date, the
size of the offering was increased by 300,000 shares plus an additional 45,000
shares to increase the over-allotment option. The additional 345,000 shares
were sold by the Company (100,000 shares) and selling stockholders (245,000
shares) at the public offering price of $12.00 per share. While the increase
in size of the offering was reflected in the final prospectus, a registration
statement pursuant to Rule 462(b) of the Securities Act of 1933 covering the
additional 345,000 shares was not filed with the Commission.
As provided in the Securities Act of 1933, as amended (the "Act"), certain
persons purchasing securities sold in violation of its registration provisions
may recover the consideration paid for such securities with interest upon the
tender of such securities, less the amount of any income received, or damages
if such person no longer owns the securities. The maximum rescission liability
with respect to the 100,000 unregistered shares sold by the Company would be
$1,200,000 (100,000 shares at $12 per share) plus interest. The Company has
not recognized a liability based on the rescission of the 100,000 unregistered
shares it sold because, as noted above, the right to rescind rests only with a
purchaser in the initial public offering who still holds such shares. Given
the large trading volume in the Company's common stock subsequent to the
offering (indicating substantial turnover in share ownership) and the
inability to identify which securities were unregistered, the Company is of
the belief that it is not probable that it will be required to effect an
actual rescission, as opposed to paying rescissionary damages. As indicated
previously, shareholders who purchased unregistered shares in the offering may
recover damages if they sold such securities at a loss. The Company and the
selling stockholders in the initial public offering have entered into an
agreement with the Company's former securities counsel which served as the
Company's counsel in the initial public offering which would hold the Company
and the selling stockholders harmless for damages which might result from any
claims as a consequence of the aforementioned circumstances. In view of such
hold harmless agreement, and in light of assurances the Company has received
concerning the professional indemnity insurance maintained by such counsel,
the Company does not believe that any claims relating to the foregoing will
have a material adverse effect on its financial condition. In addition, the
plaintiffs in the purported consolidated class action seek rescission of the
sales of the shares in the initial public offering and unspecified damages,
including rescissionary damages, interest, costs and fees. Such shareholder
F-20
<PAGE>
COMMAND SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
litigation, if concluded in favor the plaintiffs, could have a material
adverse effect on the Company's business, financial condition and results of
operations. However, the Company and the individual defendants have entered
into a memorandum of understanding to settle the dispute with the plaintiffs
in the purported consolidated class action. Any definitive agreement resulting
from such memorandum will require court approval. No assurance can be given
that a definitive settlement agreement will be reached, or that, if reached,
it will be approved. See Note 3--Legal Proceedings.
The Company sold 2,200,000 of the aforementioned shares, 2,100,000 of which
were registered, and received net proceeds of $24,552,000 after reduction for
underwriting discounts and commissions and before other offering expenses in
the amount of $1,341,000.
Simultaneously with the initial public offering, all the holders of Series A
and B convertible preferred stock exchanged their 200 shares for 1,181,750
shares of common stock. Dividends accrued during the period and previously
unamortized offering expenses have been recognized as a reduction to net
income. The Company has paid dividends of $298,000 from the proceeds.
On February 5, 1998 the Company effected a 1-for-2 reverse stock split. All
shares and per share data have been retroactively restated.
NOTE 3 LEGAL PROCEEDINGS
On or about May 6, 1998, a complaint was filed in the United States District
Court for the Southern District of New York by named plaintiffs Don M. Doney,
Jr. and Madelyn J. McCabe against the Company, certain of the Company's
officers and directors (Edward G. Caputo, Stephen L. Willcox, Robert B. Dixon,
John J.C. Herndon, James M. Oates and Joseph D. Sargent) and the managing
underwriters of the Company's initial public offering (Cowen & Company and
Volpe Brown Whelan & Company, LLC) (the "Doney Litigation"). On or about June
22, 1998, an amended complaint relating to the Doney Litigation was filed in
the United States District Court for the Southern District of New York. On or
about May 8, 1998, a second complaint was filed in the United States District
Court for the Southern District of New York by named plaintiff Chaile B.
Steinberg against the same defendants. On or about June 26, 1998, a third
complaint was filed in the United States District Court for the Southern
District of New York by named plaintiff Michael Makinen against the same
defendants. Each of the plaintiffs purported to represent a class consisting
of purchasers of common stock pursuant to the initial public offering. These
actions were consolidated by order of the United States District Court for the
Southern District of New York, and a consolidated complaint styled In Re
Command Systems, Inc. Securities Litigation was filed on September 30, 1998.
The consolidated complaint alleges that defendants violated the Act and claims
the sale of unregistered shares breached the disclosure and filing
requirements of the Act. The plaintiffs seek rescission of the sales of the
shares in the initial public offering and unspecified damages, including
rescissionary damages, interest, costs and fees. Such litigation, if concluded
in favor of the plaintiffs, could have a material adverse effect on the
Company's business, financial condition and results of operations. On December
7, 1998, the Company and the individual defendants entered into a memorandum
of understanding to settle the dispute with the plaintiffs in the purported
consolidated class action. Any definitive settlement agreement resulting from
such memorandum will require court approval. Pursuant to the terms of the
memorandum, the parties have agreed in principle to an aggregate payment to
the plaintiffs of $5.75 million in cash plus accrued interest, minus approved
attorney's fees and related expenses, from the Company. The $5.75 million will
accrue interest as of the date of preliminary court approval of a definitive
settlement agreement entered into among the parties based upon the memorandum,
but will not be payable until the District Court for the Southern District of
New York approves the settlement and such approval becomes final. Of the final
settlement amount, the Company will be reimbursed for all but $1.65 million,
and the interest thereon. In addition, the Company may be responsible for
certain legal fees and related expenses incurred in connection with the
litigation. The Company will recognize a charge to operations in the fourth
quarter of 1998 for its costs of the settlement and related expenses. There
can be no assurance, however, that a definitive settlement agreement will be
reached, or that, if reached, it will be approved by the court.
F-21
<PAGE>
COMMAND SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
NOTE 4 EARNINGS PER SHARE
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share."
This statement replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share are very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement No. 128 requirements.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Net income (loss).................................... $ (852,623) $ 290,975
Preferred stock dividends and accretion.............. (23,000) (260,303)
---------- ----------
Numerator for basic and diluted earnings per share--
income (loss) applicable to common stockholders..... $ (875,623) $ 30,672
========== ==========
Denominator:
Denominator for basic earnings per share--weighted
average shares...................................... 4,275,000 6,730,151
Effect of dilutive securities:
Employee stock options............................... -- 27,537
---------- ----------
Denominator for diluted earnings per share--weighted
average shares...................................... 4,275,000 6,757,688
========== ==========
</TABLE>
NOTE 5 COMPREHENSIVE INCOME
During 1998, the Company adopted FASB Statement No. 130, Reporting
Comprehensive Income. Statement No. 130 requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that indicates
disclosure of certain financial information that historically has not been
recognized in the calculation of net income.
The following table represents the components of comprehensive income for
the nine months ended September 30:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Net income (loss)......................................... $(852,623) $ 290,975
Other comprehensive income:
Foreign currency translation adjustments.................. 15,105 (228,177)
--------- ---------
Other comprehensive income (loss)......................... $(837,518) $ 62,798
========= =========
</TABLE>
Accumulated other comprehensive income equals the amount included in
stockholders' equity for cumulative translation adjustments which is the only
component of other comprehensive income included in the Company's condensed
consolidated financial statements.
F-22
<PAGE>
PRO FORMA FINANCIAL DATA
(UNAUDITED)
On December 31, 1997 the Company issued 100 shares of its Series B
Convertible Preferred Stock valued at $8,000,000 to PHL in exchange for PHL's
49% interest in the Offshore Technology Resource Center. This transaction has
been treated as a purchase and the excess of cost over the fair value of the
assets acquired and liabilities assumed has been recognized as goodwill.
The pro forma statement of operations for the year ended December 31, 1997
reflects the effects of this transaction as if it had occurred at the
beginning of the year. In addition, this statement reflects adjustments to the
Company's U.S. federal income tax provision to recognize what the Company's
earnings would have been had the Company historically been taxed as a C
corporation.
The pro forma statement of operations also takes into effect the use of net
proceeds of the Company's initial public offering and the conversion of the
Series A and B Convertible Preferred Stock.
The pro forma results of operations are not necessarily indicative of
results to be expected in the future.
P-1
<PAGE>
COMMAND SYSTEMS, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL ADJUSTMENT PRO FORMA
----------- ---------- -----------
<S> <C> <C> <C>
Revenue............................. $25,057,039 $25,057,039
Cost of revenue..................... 16,972,812 16,972,812
----------- -----------
Gross profit...................... 8,084,227 8,084,227
Selling, general and administrative
expenses........................... 7,254,992 $456,356(a) 7,711,348
----------- -----------
Income from operations............ 829,235 372,879
Other income (expense).............. (276,746) 132,674(b) (43,432)
100,640(d)
----------- -----------
Income before income taxes and
minority interest.................. 552,489 329,447
Income tax (provision) benefit...... (597,751) 693,000(g) 95,249
----------- -----------
(45,262) 424,696
Minority interest................... (451,431) 451,431(c) --
----------- -----------
Net income (loss)................... (496,693) 424,696
Preferred stock dividends and
accretion.......................... (80,351) 80,351(f) --
----------- -----------
Income (loss) applicable to common
stockholders....................... $ (577,044) $ 424,696
=========== ===========
Earnings per common share:
Basic earnings (loss) per share... $ (0.13) $ 0.06 (e)
=========== ===========
Diluted earnings (loss) per
share............................ $ (0.13) $ 0.06 (e)
=========== ===========
</TABLE>
Notes to Statement:
(a) To reflect the amortization of goodwill over an estimated useful life of
15 years.
(b) To reflect the elimination of interest expense related to the C, Z, and M
notes used to finance the operations of the Offshore Technology Resource
Center.
(c) To eliminate the 49% minority interest previously held by PHL.
(d) To eliminate interest on the Company's domestic line of credit assumed to
be refinanced by the proceeds of the Company's public offering of
2,200,000 shares of common stock.
(e) Earnings per share is computed using weighted average shares outstanding
of 7,656,750, which assumes the conversion of the Series A and B
Convertible Preferred Stock and the issuance of 2,200,000 shares of common
stock in connection with the assumed initial public offering.
(f) To eliminate the preferred stock dividends and accretion.
(g) To eliminate the U.S. Federal income tax provision associated with the
Company's conversion from S corporation to C corporation status to assume
that the Company had historically been treated as a C corporation for tax
purposes.
P-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY US, CERTAIN OF OUR STOCKHOLDERS OR ANY OF THE UNDER-
WRITERS OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HERE-
BY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UN-
DER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-----------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,105,000 SHARES
LOGO
COMMON STOCK
-----------------
PROSPECTUS
-----------------
DECEMBER , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the Registrant's expenses in connection with
the issuance and distribution of the securities being registered.
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 10,991.70
NASD Filing Fee............................................... 3,812.00
Nasdaq Listing Fees........................................... 69,375.00
Legal Fees and Expenses....................................... 596,122.00
Blue Sky Fees and Expenses.................................... 5,000.00
Accounting Fees and Expenses.................................. 310,175.00
Printing and Engraving........................................ 135,599.00
Transfer Agent and Registrar Fees and Expenses................ 30,813.00
Miscellaneous................................................. 179,112.30
-------------
Total....................................................... $1,341,000.00
=============
</TABLE>
All of the above expenses will be paid by the Registrant.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article NINTH of the Registrant's Amended and Restated Certificate of
Incorporation provides as follows:
NINTH: 1. To the fullest extent permitted by the Delaware General
Corporation Law as the same now exists or may hereafter be amended, the
Corporation shall indemnify, and advance expenses to, its directors, officers
and any person who is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, or of a
partnership, joint venture, trust or other enterprise, if such person was or
is made a party to or is threatened to be made a party to or is otherwise
involved (including, without limitation, as a witness) in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director or officer of the Corporation
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, or of a partnership, joint venture,
trust or other enterprise, including service with respect to an employee
benefit plan; provided, however, that except with respect to proceedings to
enforce rights to indemnification or as is otherwise required by law, the By-
Laws of the Corporation may provide that the Corporation shall not be required
to indemnify, and advance expenses to, any director, officer or other person
in connection with a proceeding (or part thereof) initiated by such director,
officer or other person, unless such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. The Corporation, by
action of its Board of Directors, may provide indemnification or advance
expenses to employees and other agents of the Corporation or other persons
only on such terms and conditions and to the extent determined by the Board of
Directors in its sole and absolute discretion.
2. The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article NINTH shall not be deemed exclusive of any other
rights to which a person seeking indemnification or advancement of expenses
may be entitled under any By-Law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
3. The Corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the
II-1
<PAGE>
Corporation as a director, officer, employee or agent of another corporation,
or of a partnership, joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have
the power to indemnify him against such liability under this Article NINTH.
4. The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article NINTH shall, unless otherwise specified when
authorized or ratified, continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs, executors and
administrators of such director or officer. The indemnification and rights to
advancement of expenses that may have been provided to an employee or agent of
the Corporation by action of the Board of Directors, pursuant to the last
sentence of Paragraph 1 of this Article NINTH, shall, unless otherwise
specified when authorized or ratified, continue as to a person who has ceased
to be an employee or agent of the Corporation and shall inure to the benefit
of the heirs, executors and administrators of such person, after the time such
person has ceased to be an employee or agent of the Corporation, only on such
terms and conditions and to the extent determined by the Board of Directors in
its sole discretion. No repeal or amendment of this Article NINTH shall
adversely affect any rights of any person pursuant to this Article NINTH which
existed at the time of such repeal or amendment with respect to acts or
omissions occurring prior to such repeal or amendment.
Article TENTH of the Registrant's Amended and Restated Certificate of
Incorporation provides as follows:
TENTH: No director shall be personally liable to the Corporation or its
stockholders for any monetary damages for breaches of fiduciary duty as a
director, notwithstanding any provision of law imposing such liability;
provided that this provision shall not eliminate or limit the liability of a
director, to the extent that such liability is imposed by applicable law, (i)
for any breach of the director's duty of loyalty to the Corporation or its
Stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) under Section 174
or successor provisions of the General Corporation Law of the State of
Delaware; or (iv) for any transaction from which the director derived an
improper personal benefit. This provision shall not eliminate or limit the
liability of a director for any act or omission if such elimination or
limitation is prohibited by the General Corporation Law of the State of
Delaware. No amendment to or repeal of this provision shall apply to or have
any effect on the liability or alleged liability of any director for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Article VIII of the Registrant's By-Laws provides as follows:
Section 1. Right to Indemnification. Each person who was or is made a party
or is threatened to be made a party to or is otherwise involved (including,
without limitation, as a witness) in any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
he is or was a director or an officer of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "Indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee or agent,
shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists
or may hereafter be amended (but, in the case of any such amendment, only to
the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide
prior to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement), reasonably incurred or suffered by such Indemnitee in
connection therewith; provided, however, that, except as provided in Section 3
of this Article with respect to proceedings to enforce rights to
indemnification or as otherwise required by law, the Corporation shall not be
II-2
<PAGE>
required to indemnify or advance expenses to any such Indemnitee in connection
with a proceeding (or part thereof) initiated by such Indemnitee unless such
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation.
Section 2. Right to Advancement of Expenses. The right to indemnification
conferred in Section 1 of this Article shall include the right to be paid by
the Corporation the expenses (including attorney's fees) incurred in defending
any such proceeding in advance of its final disposition; provided, however,
that, if the Delaware General Corporation Law requires, an advancement of
expenses incurred by an Indemnitee in his capacity as a director or officer
(and not in any other capacity in which service was or is rendered by such
Indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking,
by or on behalf of such Indemnitee, to repay all amounts so advanced if it
shall ultimately be determined by final judicial decision from which there is
no further right to appeal that such Indemnitee is not entitled to be
indemnified for such expenses under this Section 2 or otherwise. The rights to
indemnification and to the advancement of expenses conferred in Sections 1 and
2 of this Article shall be contract rights and such rights shall continue as
to an Indemnitee who has ceased to be a director, officer, employee or agent
and shall inure to the benefit of the Indemnitee's heirs, executors and
administrators. Any repeal or modification of any of the provisions of this
Article shall not adversely affect any right or protection of an Indemnitee
existing at the time of such repeal or modification.
Section 3. Right of Indemnitees to Bring Suit. If a claim under Section 1 or
2 of this Article is not paid in full by the Corporation within sixty (60)
days after a written claim has been received by the Corporation, except in the
case of a claim for an advancement of expenses, in which case the applicable
period shall be twenty (20) days, the Indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the claim.
If successful in whole or in part in any such suit, or in a suit brought by
the Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking, the Indemnitee shall also be entitled to be paid the expenses
of prosecuting or defending such suit. In (i) any suit brought by the
Indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the Indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) any suit brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking,
the Corporation shall be entitled to recover such expenses upon a final
adjudication that, the Indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent
legal counsel, or its Stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the Indemnitee is proper in
the circumstances because the Indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors,
independent legal counsel, or its Stockholders) that the Indemnitee has not
met such applicable standard of conduct, shall create a presumption that the
Indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the Indemnitee, be a defense to such suit. In any suit
brought by the Indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the Indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article or otherwise shall be on the
Corporation.
Section 4. Non-Exclusivity of Rights. The rights to indemnification and to
the advancement of expenses conferred in this Article shall not be exclusive
of any other right which any person may have or hereafter acquire under any
statute, the Corporation's Certificate of Incorporation as amended from time
to time, these by-laws, any agreement, any vote of stockholders or
disinterested directors or otherwise.
Section 5. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
II-3
<PAGE>
Section 6. Indemnification of Employees and Agents of the Corporation. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article with respect to the indemnification and advancement
of expenses of directors and officers of the Corporation.
OTHER INDEMNIFICATION PROVISIONS
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation has the power to indemnify a director, officer, employee or
agent of the corporation and certain other persons serving at the request of
the corporation in related capacities against amounts paid and expenses
incurred in connection with an action or proceeding to which he is or is
threatened to be made a party by reason of such position, if such person shall
have acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, and, in any criminal
proceeding, if such person had no reasonably cause to believe his conduct was
unlawful; provided that, in the case of actions brought by or in the right of
the corporation, no indemnification shall be made with respect to any matter
as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the adjudicating court
determines that such indemnification is proper under the circumstances.
Under Section 6 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed
as Exhibit 1.1 hereto.
The Registrant has obtained insurance which insures the officers and
directors of the Registrant against certain losses and which insures the
Registrant against certain of its obligations to indemnify such officers and
directors.
The Company and the selling stockholders in the Company's Initial Public
Offering (as defined in Item 15 below) have entered into an agreement (the
"Indemnification Agreement") with the Company's former securities counsel
which served as the Company's counsel in the Initial Public Offering, which
would hold the Company (including its officers, directors and employees)
harmless for damages which might result from any claims as a consequence of
the circumstances described under the caption "Risk Factors--Sale of
Unregistered Shares; Violation of the Act." The Indemnification Agreement is
filed as Exhibit 10.16.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of the Registration Statements, the
Corporation has sold the following securities that were not registered under
the Securities Act:
In August 1997, the Company issued 100 shares of Series A Convertible
Preferred Stock (522,500 shares of Common Stock on an as-converted to Common
Stock basis) to Phoenix in exchange for notes, including the right to receive
prior interest accrued thereon, evidencing indebtedness of approximately $2.2
million.
In December 1997, the Company issued 100 shares of Series B Convertible
Preferred Stock (659,250 shares of Common Stock on an as-converted to Common
Stock basis) to PHL Global Holding Co., a wholly-owned subsidiary of Phoenix
in exchange for the 49% minority interest in Command International Software
Pvt., an Indian unlimited liability company of which the Company owned 51% of
the outstanding equity.
Since the Company's inception through December 31, 1997, the Company has
issued options for an aggregate of 218,050 shares of Common Stock to employees
and consultants of the Company in exchange for services. No shares of Common
Stock have been issued upon exercise of such options.
The sale and issuance of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701
promulgated under Section 3(b) of the Securities Act, as transactions by an
issuer not involving a public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as
II-4
<PAGE>
provided under such Rule 701. The recipients of securities in each such
transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.
The Company conducted its underwritten initial public offering pursuant to
an effective registration statement covering 2,400,000 shares of Common Stock
plus an additional 360,000 shares of Common Stock subject to the underwriters'
over-allotment option (collectively, the "Registered Shares"). Shortly before
the effective date, the size of the offering was increased by 300,000 shares,
plus an additional 45,000 shares to increase the over-allotment option
(collectively, the "Additional Shares," and together with the Registered
Shares, the "Shares"). The increase in size of the offering was reflected in a
final prospectus. However, a registration statement pursuant to Rule 462(b) of
the Securities Act covering the Additional Shares was not filed with the
Securities and Exchange Commission. As a result, the Shares were sold pursuant
to a registration statement which registered the sale of the Registered Shares
but not the sale of the Additional Shares. As provided in the Securities Act,
certain persons purchasing securities sold in violation of the registration
provisions of the Securities Act may recover the consideration paid for such
securities with interest upon the tender of such securities, less the amount
of any income received, or damages if such person no longer owns the
securities.
The Company received net proceeds of $23,211,000 from the sale of an
aggregate of 2,200,000 Shares in the initial public offering, after deducting
underwriting discounts and commissions of $1,848,000 and other offering
expenses of $1,341,000. The Selling Stockholders received net proceeds of
$10,099,800 from the sale of an aggregate of 905,000 Shares in the initial
public offering, after deducting underwriting discounts and commissions of
$760,200. The Company did not receive any proceeds from the sale of Shares by
the Selling Stockholders.
The initial public offering was co-managed by Cowen & Company and Volpe
Brown Whelan & Company, LLC.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Certificate of Incorporation of the Registrant.
*3.2 Certificate of Amendment to Registrant's Amended and Restated
Certificate of Incorporation filed on February 5, 1998.
*3.3 By-Laws of the Registrant.
*4.1 Specimen Certificate for shares of the Company's Common Stock.
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. with
respect to the legality of certain securities being registered.
***5.2 Opinion of Fulbright & Jaworski L.L.P. with respect to the legality
of certain securities being registered.
*10.1 1997 Employee, Director and Consultant Stock Plan.
*10.2 Registration Rights Agreement dated August 26, 1997 between
Registrant and Phoenix Home Life Mutual Insurance Company.
*10.3 Registration Rights Agreement dated December 31, 1997 between
Registrant and PHL Global Holding Co.
*10.4 Co-Sale Agreement dated August 26, 1997 between Registrant, Edward
G. Caputo and Phoenix Home Life Mutual Insurance Company.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*10.5 Amendment No. 1, dated December 31, 1997 to Co-Sale Agreement
between Registrant, Edward G. Caputo and Phoenix Home Life Mutual
Insurance Co.
*10.6 Co-Sale Agreement dated December 31, 1997 between Registrant,
Edward G. Caputo and PHL Global Holding Co.
*10.7 Employment Contract dated January 1, 1998 between Registrant and
Edward G. Caputo.
*10.8 Loan and Security Agreement dated November 30, 1993 between
Registrant and People's Bank.
*10.9 Amendment dated December 21, 1994 to Loan and Security Agreement
between Registrant and People's Bank.
*10.10 Second Amendment dated May 28, 1996 to Loan and Security Agreement
between Registrant and People's Bank.
*10.11 Third Amendment dated June 30, 1997 to Loan and Security Agreement
between Registrant and People's Bank.
*10.12 Assumption Agreement dated December 1997 by and between Registrant
and People's Bank.
*10.13 Loan Agreement by and between Command International Software Pvt.
and Deutsche Bank.
*10.14 Employment Agreement dated January 1, 1998 between Registrant and
Stephen L. Willcox.
*10.15 Form of Lock-Up Letter.
**10.16 Indemnification Agreement, by and among Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C. and Registrant, Phoenix Home Life Mutual
Insurance Company, PHL Global Holding Co. and Edward G. Caputo.
***10.17 Employment Agreement dated as of December 1, 1997 by and between
Registrant and Glenn M. King.
***10.18 Loan and Security Agreement dated October 29, 1998 by and between
Registrant and People's Bank.
10.19 Memorandum of Understanding dated December 7, 1998, by and among
Registrant, Edward G. Caputo, Robert B. Dixon, John J.C. Herndon,
James M. Oates, Joseph D. Sargent, Stephen L. Willcox and a certain
class of plaintiffs.
*21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, independent auditors.
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (see
Exhibit 5.1).
23.3 Consent of Fulbright & Jaworski L.L.P. (see Exhibit 5.2)
***24.1 Power of Attorney (see page II-10).
*27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference from Registration Statement on Form S-1,
Registration No. 333-43877.
** Incorporated by reference from the Registrant's Form 10-Q/A for the three
months ended March 31, 1998.
*** Previously filed.
(b) Financial Statement Schedules
Report of Independent Auditors.
Schedule II--Valuation and Qualifying Accounts.
All financial statement schedules other than as provided are omitted because
the information is not required, or is otherwise included in the Consolidated
Financial Statements or the Notes thereto.
II-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Command Systems, Inc.
We have audited the consolidated financial statements of Command Systems,
Inc. as of December 31, 1996 and 1997, and for each of the three years in the
period ended December 31, 1997, and have issued our report thereon dated
February 9, 1998 (included elsewhere in this Registration Statement). Our
audit also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Hartford, Connecticut
February 9, 1998
II-7
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
COMMAND SYSTEMS, INC.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- -------------------- ---------- ----------
ADDITIONS
--------------------
CHARGED
BALANCE AT CHARGED TO TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DEDUCTIONS PERIOD
----------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997....................
Deducted from asset ac-
counts:
Allowance for doubtful
accounts receivable... $24,500 $357,582 $-- $(122,189) $259,893
Year ended December 31,
1996....................
Deducted from asset ac-
counts:
Allowance for doubtful
accounts receivable... $ -- $ 24,500 $-- $ -- $ 24,500
Year ended December 31,
1995....................
Deducted from asset ac-
counts:
Allowance of doubtful
accounts receivable... $ -- $ -- $-- $ -- $ --
</TABLE>
II-8
<PAGE>
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under "Item 14--
Indemnification of Directors and Officers" above, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT AND POST-EFFECTIVE AMENDMENT TO
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF HARTFORD, STATE OF CONNECTICUT, ON
DECEMBER 10, 1998.
Command Systems, Inc.
/s/ Edward G. Caputo
By: _________________________________
EDWARD G. CAPUTO
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POST-EFFECTIVE AMENDMENT TO REGISTRATION STATEMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
SIGNATURE TITLE DATE
* President, Chief
- ------------------------------------- Executive Officer and December 10,
EDWARD G. CAPUTO Chairman of the Board 1998
(Principal executive
officer)
/s/ Stephen L. Willcox Executive Vice
*By: ________________________________ President, Chief December 10,
STEPHEN L. WILLCOX AS ATTORNEY-IN- Operating Officer, 1998
FACT Secretary and
Director (Principal
financial officer)
* Vice President of
- ------------------------------------- Finance and Treasurer December 10,
ROBERT B. DIXON (Principal accounting 1998
officer)
* Director
- ------------------------------------- December 10,
JOHN J.C. HERNDON 1998
* Director
- ------------------------------------- December 10,
JAMES M. OATES 1998
* Director
- ------------------------------------- December 10,
JOSEPH D. SARGENT 1998
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Certificate of Incorporation of the Registrant.
*3.2 Certificate of Amendment to Registrant's Amended and Restated
Certificate of Incorporation filed on February 5, 1998.
*3.3 By-Laws of the Registrant.
*4.1 Specimen Certificate for shares of the Company's Common Stock.
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. with
respect to the legality of certain securities being registered.
***5.2 Opinion of Fulbright & Jaworski L.L.P. with respect to the legality
of certain securities being registered.
*10.1 1997 Employee, Director and Consultant Stock Plan.
*10.2 Registration Rights Agreement dated August 26, 1997 between
Registrant and Phoenix Home Life Mutual Insurance Company.
*10.3 Registration Rights Agreement dated December 31, 1997 between
Registrant and PHL Global Holding Co.
*10.4 Co-Sale Agreement dated August 26, 1997 between Registrant, Edward G.
Caputo and Phoenix Home Life Mutual Insurance Company.
*10.5 Amendment No. 1, dated December 31, 1997 to Co-Sale Agreement between
Registrant, Edward G. Caputo and Phoenix Home Life Mutual Insurance
Co.
*10.6 Co-Sale Agreement dated December 31, 1997 between Registrant, Edward
G. Caputo and PHL Global Holding Co.
*10.7 Employment Contract dated January 1, 1998 between Registrant and
Edward G. Caputo.
*10.8 Loan and Security Agreement dated November 30, 1993 between
Registrant and People's Bank.
*10.9 Amendment dated December 21, 1994 to Loan and Security Agreement
between Registrant and People's Bank.
*10.10 Second Amendment dated May 28, 1996 to Loan and Security Agreement
between Registrant and People's Bank.
*10.11 Third Amendment dated June 30, 1997 to Loan and Security Agreement
between Registrant and People's Bank.
*10.12 Assumption Agreement dated December 1997 by and between Registrant
and People's Bank.
*10.13 Loan Agreement by and between Command International Software Pvt. and
Deutsche Bank.
*10.14 Employment Agreement dated January 1, 1998 between Registrant and
Stephen L. Willcox.
*10.15 Form of Lock-Up Letter.
**10.16 Indemnification Agreement, by and among Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C. and Registrant, Phoenix Home Life Mutual
Insurance Company, PHL Global Holding Co. and Edward F. Caputo.
***10.17 Employment Agreement, dated as of December 1, 1997 by and between
Registrant and Glenn M. King.
***10.18 Loan/and Security Agreement dated October 29, 1998 by and between
Registrant and People's Bank.
10.19 Memorandum of Understanding dated December 7, 1998, by and among
Registrant, Edward G. Caputo, Robert B. Dixon, John J.C. Herndon,
James M. Oates, Joseph D. Sargent, Stephen L. Willcox and a certain
class of plaintiffs.
*21.1 Subsidiaries of the Company.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1 Consent of Ernst & Young LLP, independent auditors.
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (see
Exhibit 5.1).
23.3 Consent of Fulbright & Jaworski, L.L.P. (see Exhibit 5.2).
***24.1 Power of Attorney (see page II-10).
*27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference from Registration Statement on Form S-1,
Registration No. 333-43877.
** Incorporated by reference from the Registrant's Form 10-Q/A for the three
months ended March 31, 1998.
*** Previously filed.
<PAGE>
EXHIBIT 10.19
MEMORANDUM OF UNDERSTANDING
This will confirm the essential terms of our agreement in principle,
reached on December 7, 1998, to effectuate settlement of In Re Command Systems
Inc. Securities Litigation, File No. 98-CIV-3279(AGS) in the United States
District Court for the Southern District of New York (the "Litigation"). This
agreement is subject to the execution of a Definitive Settlement Agreement and
final judicial approval pursuant to the Federal Rules of Civil Procedure. It is
our mutual intention to work expeditiously and in good faith toward consummation
of settlement on the terms set forth below.
The undersigned Defendants will cause a cash payment of $5,750,000 to be
paid into a fund (the "Settlement Fund"), in full settlement of all class and
individual claims which are or could be asserted in the Litigation against any
Defendant. The payments into the Settlement Fund shall be made in the following
manner: (1) within five days after the Court signs an order preliminarily
approving the Definitive Settlement Agreement and scheduling a final approval
hearing, the sum of $50,000 shall be deposited into an interest-bearing escrow
account, to be used to the extent necessary to pay reasonable expenses incurred
in the preparation, mailing and publication of such notice of settlement as the
Court may direct; (2) within five days after judicial approval of the Definitive
Settlement Agreement has become final, either through appeal or the expiration
of the time therefor, the sum of $5,700,000 shall be placed in escrow, together
with interest thereon at the 30-day Treasury Bill rate from the date the
District Court enters a order preliminarily approving the Definitive Settlement
Agreement. No monies shall be disbursed from the Settlement Fund without Court
approval, or, with respect to the initial deposit
<PAGE>
of $50,000 only, the consent of the defendants. All interest earned on the
Settlement Fund shall become a part thereof.
Upon execution of the Definitive Settlement Agreement, this Memorandum
will be superseded thereby and have no further force or effect.
Defendants' counsel shall cooperate in such discovery, to be mutually
agreed-upon, as may be reasonably sought by Plaintiffs' counsel in connection
with the settlement. Plaintiffs' counsel and Defendants' counsel will cooperate
in the approval process so as to effectuate settlement on the terms stated in
this Memorandum.
In entering into this settlement, all Defendants vigorously deny any
wrongdoing or liability to any person or entity whatsoever, and maintain their
conduct at all times has been legal and proper. Execution of this Memorandum
does not imply that there has been any finding of any violation of law by any
person or entity, or that recovery could be had in any amount should the
Litigation not be settled.
If the Definitive Settlement Agreement is not executed, or if final
judicial approval thereof is not obtained, all parties shall be returned to
their status quo prior to the execution of this Memorandum, except that any sums
reasonably expended from the Settlement Fund to pay for notice of the settlement
need not be returned. The Definitive Settlement Agreement shall also contain a
provision giving Defendants the option of withdrawing from the settlement if
members of the class owning more than a specified percentage of Command Systems
securities (to be
2
<PAGE>
mutually agreed-upon as part of the Definitive Settlement Agreement) exercise
their right to opt out of the settlement.
Among other things, the settlement shall be presented to the Court on
behalf of a class (the "Class") defined as all persons who purchased the common
stock of Command Systems during the period March 12, 1998 through April 29,
1998, inclusive (the "Class Period"). Excluded from the Class are: the named
Defendants; the heirs and the members of the immediate family of any individual
Defendant; the subsidiaries, affiliates, officers and directors of Command
Systems, Cowen & Company and Volpe Brown Whelan & Company, LLC; and the
successors or assigns of any Defendant.
The Settlement Fund, less deductions approved by the Court for
Plaintiffs' counsel's fees and litigation expenses, and settlement
administration expenses, shall be distributed pro rata to those members of the
Class filing approved claims.
At the final approval hearing in the District Court, Plaintiffs' counsel
will petition the Court for reasonable fees and litigation expenses to be
awarded by the Court, all of which shall be paid out of the Settlement Fund.
All settlement administration expenses also shall be paid out of the Settlement
Fund, in an amount approved by the Court.
The final judgment and order shall contain full and complete releases as
to all Defendants named in the Litigation, and to all selling shareholders in
the Company's March 1998 initial public offering (collectively the "Releasees"),
and as to all current and former officers, directors,
3
<PAGE>
employees, agents, accountants, underwriters, auditors, investment bankers,
attorneys, parents, subsidiaries, affiliates, representatives, heirs, executors,
successors and assigns of any Defendant or Releasee, with respect to each and
every class and individual claim, known and unknown, which was or could have
been asserted against any Defendant in the Litigation or in any other court or
forum in connection with, arising out of or in any way related to the acts,
facts, transactions, occurrences, representations, omissions or the subject
matters alleged or referred to in the Litigation.
Nothing in this Memorandum is or shall be construed to be an admission
by any Defendant or other person of any wrongdoing or liability whatsoever.
Neither this Memorandum, nor any term thereof, may be offered or received in
evidence in any proceeding or utilized in any manner as an admission or
implication of liability or fault on the part of any Defendant or other person.
Dated: 12/7/98 /s/ Richard L. Jacobson
------- --------------------------
Richard L. Jacobson, Esq.
For Defendant Command Systems Inc. and Individual
Defendants Edward G. Caputo, Robert B. Dixon, John J.C.
Herndon, James M. Oates, Joseph D. Sargent and
Stephen L. Willcox
Dated: 12/7/98 /s/ Stuart D. Wechsler
------- ---------------------------
Stuart D. Wechsler, Esq.
Lead Counsel for Plaintiffs and the Class
Dated: 12/7/98 /s/ Lester Levy
------- ---------------------------
Lester Levy, Esq.
On Behalf of Plaintiffs
4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 9, 1998, in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-66809) for the registration of
345,000 shares of its common stock and the Post-Effective Amendment No. 3 to
the Registration Statement (Form S-1 No. 333-43877) and related Prospectus of
Command Systems, Inc. for the sale of 3,105,000 shares of its common stock.
/s/ Ernst & Young LLP
Hartford, Connecticut
December 9, 1998
