<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q/A
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the First Quarter
Ended March 31, 1998
Commission file number:0-23797
-------
COMMAND SYSTEMS, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1135009
- - ------------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
POND VIEW CORPORATE CENTER
76 BATTERSON PARK RD.
FARMINGTON, CT 06032
- - ------------------------------------------- ---------------------------
(Address of principal executive officers) (Zip Code)
(860) 409-2000
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [_] No [X]
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock. $.01 Par Value 7,656,750 shares as of April 23, 1998.
<PAGE>
INTRODUCTORY NOTE: THE COMPANY IS FILING THIS FORM 10-Q/A TO AMEND
ITEMS REPORTED IN ITS QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 1998, FILED ON MAY 15, 1998, BY REVISING AND
CORRECTING CERTAIN STATEMENTS IN VIEW OF THE FACT THAT 345,000 SHARES
SOLD BY THE COMPANY AND SELLING STOCKHOLDERS IN THE PUBLIC OFFERING IN
MARCH 1998 WERE NOT COVERED BY A REGISTRATION STATEMENT. THE ITEMS
AMENDED ARE SET FORTH IN "PART I--ITEM 1--FINANCIAL STATEMENTS--NOTE 2
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS";
"PART I--ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS"; "PART II--ITEM 2--CHANGES IN
SECURITIES AND USE OF PROCEEDS"; "PART II--ITEM 5--OTHER INFORMATION"
AND "PART II--ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K."
<PAGE>
COMMAND SYSTEMS, INC.
INDEX
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<TABLE>
<S> <C> <C>
Part I Financial Information
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997..................................... 1
Condensed Consolidated Statements of Operations
Three months ended March 31, 1998 and 1997............................... 2
Condensed Consolidated Statement of Cash Flows
Three months ended March 31, 1998 and 1997............................... 3
Condensed Consolidated Statement of
Stockholders' Equity (Deficit)........................................... 4
Notes to Condensed Consolidated
Financial Statements as of March 31, 1998................................ 5-6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 7-9
Part II Other Information........................................................ 10
Signatures............................................................... 11
</TABLE>
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COMMAND SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 21,401,397 $ 391,687
Accounts receivable, net of allowance for doubtful accounts
of $74,995 and $259,893 in 1998 and 1997 4,936,210 4,203,241
Prepaid expenses 300,662 354,950
Deferred income taxes - 52,024
Total current assets 26,638,269 5,001,902
------------ ------------
Furniture & equipment 2,254,783 2,007,254
Leasehold & improvements 877,200 852,476
------------ ------------
Total fixed assets 3,131,983 2,859,730
Less accumulated depreciation (995,822) (825,562)
------------ ------------
Net equipment and improvements 2,136,161 2,034,168
Other assets:
Goodwill, net of accumulated amortization expense
of $114,089 and $0 in 1998 and 1997 6,731,249 6,845,338
Security deposits 447,579 428,005
Other non-current assets 96,950 115,674
------------ ------------
Total assets $ 36,050,208 $ 14,425,087
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ============ ============
Current liabilities:
Line of credit $ - $ 857,535
Bank loan - 556,952
Accounts payable and accrued expenses 2,086,899 2,218,540
Deferred revenue 65,575 219,544
Accrued payroll and related costs 541,043 610,933
Taxes payable 258,434 78,535
Deferred income taxes 161,636 381,987
------------ ------------
Total current liabilities 3,113,587 4,924,026
Preferred stock - series A - 2,223,475
Preferred stock - series B - 8,000,000
Stockholders' Equity (Deficit):
Common stock, $.01 par value, 25,000,0000 authorized,
7,656,750 and 4,275,000 issued and outstanding, respectively 34,818 1,000
Additional paid-in-capital 33,446,443 -
Retained earnings (deficit) (442,367) (636,509)
Cumulative translation adjustment (102,273) (86,905)
------------ ------------
Total stockholders' equity (deficit) 32,936,621 (722,414)
------------ ------------
Total liabilities and stockholders' equity $ 36,050,208 $ 14,425,087
============ ============
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
1
<PAGE>
COMMAND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Revenue $ 7,933,745 $ 5,144,033
Cost of revenue 5,110,131 3,845,811
------------ ------------
Gross profit 2,823,614 1,298,222
Selling, general and administrative 2,271,372 1,474,474
------------ ------------
Income(loss) from operations 552,242 (176,252)
Other income(expense)
Interest income 49,219 6,139
Interest expense (42,740) (43,941)
------------ ------------
6,479 (37,802)
------------ ------------
Income (loss) before income taxes & minority interest 558,721 (214,054)
Income taxes 104,281 -
------------ ------------
Minority interest - (56,874)
Net income (loss) $ 454,440 $ (270,928)
============ ============
Preferred dividends and accretion $ 260,298 $ -
------------ ------------
Income applicable to common shareholders $ 194,142 $ (270,928)
============ ============
Basic earnings per share* $ 0.04 $ (0.06)
============ ============
Diluted earnings per share* $ 0.04 $ (0.06)
============ ============
</TABLE>
* See notes to condensed consolidated financial statements.
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COMMAND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ 454,440 $ (270,928)
Adjustments to reconcile net income (loss) to net cash used in
provided by operating activities:
Depreciation and amortization 288,050 20,923
Bad debt expense (60,000) -
Minority interest - 367,621
Accrued interest capitalized - 39,710
Other 1,585 6,639
Changes in operating assets and liabilities:
Accounts receivable (672,969) (1,197,709)
Prepaid expenses and other assets 102,611 148,739
Deposits and other noncurrent assets (850) (51,950)
Accounts payable and accrued expenses (95,883) (1,019,884)
Accrued payroll and related costs (69,890) 102,870
Deferred taxes - -
Deferred revenue (153,969) (54,241)
Income taxes payable (40,452) 11,258
------------ ------------
Net used in operating activities (247,327) (1,896,952)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (272,253) (892,061)
------------ ------------
Net cash used in investing activities (272,253) (892,061)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings under revolving line of credit agreement (857,535) 425,800
(Payment)/proceeds from bank loan (556,952) 1,443,335
Minority investment in affiliate - 424,495
Proceeds from notes payable - 574,969
Issuance of common stock 23,256,786 -
Payment of preferred stock dividend (297,641) -
------------ ------------
Net cash provided by financing activities 21,544,658 2,868,599
Effect of exchange rate changes on cash (15,368) 22,380
Increase in cash 21,025,078 79,586
Cash, beginning of year 391,687 443,505
------------ ------------
Cash, end of year $ 21,401,397 $ 545,471
============ ============
CASH PAID FOR:
Interest expense $ 42,740 $ 43,941
Income taxes $ 99,831 $ 830
</TABLE>
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COMMAND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PD IN CAPT'L RETAINED CUMULATIVE
------------------- ------------ EARNINGS TRANSLATION
SHARES AMOUNT AMOUNT (DEFICIT) ADJUSTMENT TOTAL
--------- ------- ------------ ----------- ----------- -----------
<S> <C> <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)
--------- ------- ------------ ----------- ----------- -----------
Net Income - - - 454,440 - 454,440
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 - - (1,295,215) - - (1,295,215)
Preferred stock dividends and accretion - - - (260,298) - (260,298)
Translation adjustment - - - - (15,368) (15,368)
--------- ------- ------------ ----------- ----------- -----------
Balance at March 31, 1998 (unaudited) 7,656,750 $34,818 $33,446,443 $ (442,367) $ (102,273) $32,936,621
========= ======= =========== =========== =========== ============
</TABLE>
<PAGE>
Command Systems, Inc.
Notes To Unaudited Condensed Consolidated Financial Statements
March 31,1998
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 three-month period ended
March 31, 1998 are not necessarily indicative of the results that may
be expected for the year-ended December 31, 1998.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's
registration statement on Form S-1.
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 overallotment 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 overallotment 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. The Company intends to file a registration
statement covering these shares.
As provided in the Securities Act of 1933, 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 Company
and the selling stockholders in the initial public offering have
entered into an agreement with the Company's counsel in the 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. A copy of this agreement is being filed
herewith. (See Exhibit 10.) 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.
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
underwriters' discounts and before other offering expenses in the
amount of $1,295,000.
Simultaneously with the initial 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
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 Oates and Joseph D. Sargent) and the managing
underwriters of the Company's initial public offering (Cowen & Company
and Volpe Brown Whelan & Company, LLC) . 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. Each of the plaintiffs purports to
represent a class consisting of purchasers of common stock pursuant to
the initial public offering. The complaint alleges that defendants
violated the Securities Act of 1933, as amended. The plaintiffs seek
unspecified damages, including rescissionary damages, interest, costs
and fees.
Note 4 Earnings Per Share
In February 1997, the FASB issued Statement No. 128, "Earning Per
Share." This statement replaced the calculation of primary and fully
diluted earnings per share with
<PAGE>
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. Diluted earnings per share for the
three months ended March 31, 1998 exclude the assumed conversion of
the Companies convertible preferred stock as such inclusion would be
antidilutive.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
<S> <C> <C>
Numerator for Basic and Diluted:
Net Income $ 454,440 $ (270,928)
Preferred Stock Dividends and Accretion 260,298 -
---------- ----------
Numerator for basic earnings per share Income available to
common stockholders $ 194,142 $ (270,928)
---------- ----------
Denominator:
Denominator for basic earnings per share weighted average
shares 4,876,952 4,275,000
Effect of Dilutive Securities:
Employee Stock Options 60,943 -
Convertible Preferred Stock - -
Dilutive Potential Commonshares 4,937,895 4,275,000
---------- ----------
</TABLE>
<PAGE>
COMMAND SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. Statements contained in this document which are not historical fact
are forward-looking statements based upon management's current expectations that
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements.
OVERVIEW
Command Systems, Inc. (the "Company) provides a wide range of
information technology ("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 services, management consulting, and product
procurement and education services. In 1996 the Company established a software
development facility in Bangalore, India (the "Offshore Technology Resource
Center") which today provides its customers with increased access to skilled IT
professionals on a cost-effective basis.
Management is aware that as a result of the detonation of nuclear
devices in India, 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. 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.
Impact of the Year 2000 Issue.
The Year 2000 Issue refers to potential problems with computer systems
or any equipment with computer chips or software that use dates where the date
has been stored as just two digits (e.g., 97 for 1997). On January 1, 2000, any
clock or date recording mechanism incorporating date sensitive software which
uses only two digits to represent the year may recognize a date using 00 as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar business activities.
The Company has conducted a review of its internal information systems
to determine the extent of any Year 2000 problem. Based on such review, the
Company does not currently believe that it has material exposure to the Year
2000 Issue with respect to its own information systems, since its existing
systems correctly define the year 2000.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared With Three Months Ended
March 31, 1997
Revenue during the three-month period ended March 31, 1998 increased
by 54.2% to $7,934,000 from $5,144,000 for the first quarter ended March 31,
1997. This increase resulted primarily from an increase in revenue generated
from Year 2000 solutions services performed at the Offshore Technology Resource
Center. As the Company previously announced, future revenue growth 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.
Gross profit for the three-month period ended March 31, 1998 increased
by 117.5% to $2,824,000 from $1,298,000 for the three-month period ended March
31, 1997. Gross profit as a
<PAGE>
percentage of revenue increased to 35.6% for the period ended March 31, 1998
from 25.2% for the period ended March 31, 1997. This 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 services. As the Company previously announced, future 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, primarily due to the timing of necessary
additional infrastructure investments relative to the commencement of new
projects.
Selling, general and administrative expenses consist 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. Selling, general and administrative expenses net of
amortization of goodwill for the three-month period ended March 31, 1998
increased by 46.3% to $2,157,000 from $1,474,000 for the three-month period
ended March 31, 1997. The increase is primarily attributed to the increase in
support staff necessary to support increased revenues.
Amortization of goodwill for the three-month period ended March 31,
1998 amounted to $114,000. On December 31, 1997, the Company purchased the 49%
minority interest of its Offshore Technology Resource Center from Phoenix Home
Life Mutual Insurance ("PHL"). The Company accounted for this as a purchase and
recognized $6,845,000 the excess of the purchase price over the fair value of
the assets acquired and liabilities assumed as goodwill.
Income from operations for the three month period ended March 31, 1998
was $552,000 compared to a loss of $(176,000) for the three month period ended
March 31, 1997. Income from operations as a percentage of revenue was 7.0%
during the three-month period ended March 31, 1998 as compared to a loss of
(3.4)% for the three-month period ended March 31, 1997.
Net interest income was $6,000 for the three-month period ended March
31, 1998 compared to net interest expense of $38,000 for the three-month period
ended March 31, 1997. The interest income was attributable to interest earned
from investment of the net proceeds of the initial public offering during the
three-month period ended March 31, 1998.
The income tax provision for the three-month period ended March 31,
1998 was $104,000. The provision is lower than the U.S. statutory tax rate, as
a result of earnings from its India subsidiary enjoying a tax holiday.
Therefore, the effective tax rate was 18%.
As a result of the foregoing, net income was $454,000 for the three
month period ended March 31, 1998 as compared to a net loss of $(271,000) for
the three month period ended March 31, 1997. Basic earnings per share, were
$0.04 for the three month period ended March 31, 1998 as compared to loss per
share of $(0.06) for the three month period ended March 31, 1997. On a diluted
basis earnings per share were $0.04 versus $(0.06) for the respective periods.
Basic and diluted earnings per share are effected by preferred stock dividends
and accretion.
LIQUIDITY AND SOURCES OF CAPITAL
This section has been amended to add disclosure with respect to the sale
of certain shares in the initial public offering which were not covered by a
registration statement.
Since inception, the Company has financed its operations and capital
expenditures primarily with internally generated cash flows, borrowings under
its credit line facilities and proceeds from the issuance of common stock.
The Company's operating activities used $244,000 for the three month period
ended March 31,1998 compared to $1,897,000 for the three months ended March 31,
1997. The use of cash was primarily due to an increase in accounts receivable.
The Company used cash of $276,000 for capital expenditures during the three
months ended March 31,1998 to support the planned sales growth. The Company
spent $892,000 during
<PAGE>
the three months ended March 31,1997 which was primarily related to the Offshore
Technology Resource Center.
The Company's financing activities provided $21,545,000 for the three
months ended March 31, 1998 and $2,869,000 for the same period in 1997. In March
1998, the Company issued and sold 2,200,000 shares of $.01 par value 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 public offering in March 1998
were not covered by a registration statement. The Company intends to file a
registration statement covering the 345,000 unregistered shares. As provided in
the Securities Act of 1933, 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 Company and the selling stockholders in the initial public
offering have entered into an agreement with the Company's counsel in the
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. A copy of this agreement is filed herewith. (See
Exhibit 10.) 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. See "Part I -- Item 1 -- Financial Statements -- Note 2 to
the Unaudited Condensed Consolidated Financial Statements"; "Part II -- Item 2
- - -- Changes in Securities and Use of Proceeds"; "Part II -- Item 5 -- Other
Information" and "Part II -- Item 6 -- Exhibits and Reports on Form 8-K."
From the sale of 2,200,000 shares in the initial public offering, the
Company received net proceeds of $24,552,000 after underwriters' discounts and
before other offering expenses in the amount of $1,295,000. 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 $297,641 from the proceeds. For the three month
period ended March 31, 1997 the cash was generated under the Company's bank
credit facilities.
As of March 31, 1998, the Company had $21,400,000 in cash and had working
capital of $23,500,000. The Company also has an available line of credit, which
as of March 31, 1998 was unused, for its U.S. facilities of $ 2.5 million.
Borrowings under this bank line of credit are secured by the Company's eligible
account receivable and are utilized primarily to fund the Company's working
capital requirements. The line of credit contains certain financial covenants
which require the Company to maintain minimum total net worth ratio, debt
service ratio and current ratio of 1.25:1. In the past the Company has been
in default of these covenants and has had to obtain waivers. While the Company
does not anticipate utilizing this credit facility in the near future, if it
does borrow under the line it may be required to seek additional amendments or
waivers. Although the Company anticipates that it would be able to obtain such
amendments or waivers there can be no assurance that it would be able to do so.
The Company's Offshore Technology Resource Center maintains a credit
facility for approximately $800,000 with Duetsche Bank, which at March 31, 1998
had no outstanding balance under this credit facility.
The Company believes that the net proceeds from the initial public
offering, together with available funds, existing credit facilities 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.
<PAGE>
COMMAND SYSTEMS, INC.
Part II - Other Information
Item 1 - Legal Proceedings
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 Oates and Joseph D. Sargent) and the
managing underwriters of the Company's initial public offering (Cowen & Company
and Volpe Brown Whelan & Company, LLC. 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. Each of the plaintiffs purports to represent a class consisting of
purchasers of common stock pursuant to the initial public offering. The
complaint alleges that defendants violated the Securities Act of
1933, as amended. The plaintiffs seek unspecified damages, including
rescissionary damages, interest, costs and fees.
Item 2. Changes in Securities and Use of Proceeds
The Company's responses to Items 2(c) and 2(d)(4)(iv) to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, filed on May 15, 1998,
are amended by deleting them in their entirety and replacing them as corrected
and revised below. See "Part I - Item 1 - Financial Statements - Note 2 to the
Unaudited Condensed Consolidated Financial Statements", "Part I - Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Part II - Item 5 - Other Information" and "Part II - Item 6 -
Exhibits and Reports on Form 8-K."
(a) Not applicable.
(b) Not applicable.
(c) Recent sale of unregistered securities:
(a) Securities sold - 100,000 shares of Common Stock were sold by the
Company on or about March 12, 1998.
(b) The principal underwriters were Cowen & Company and Volpe Brown
Whelan & Company. The Securities were sold as part of the public
offering made pursuant to the Prospectus included in Registration
Statement on Form S-1 (File No. 333-43877) but were not registered
in such Registration Statement.
(c) The Aggregate Offering Price was $1,200,000 and the aggregate
underwriting discounts and commissions was $84,000 with respect to
the shares identified in Item 2(c)(a).
(d) The 100,000 shares were part of the 345,000 unregistered shares
sold by the Company and selling stockholders as described in
Item 5 below.
(e) Not applicable.
(f) See Item 2(d) of this report.
(d) Use of Proceeds.
(1) On March 12, 1998 the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form S-1 (File No. 333-43877).
(2) The offering date was March 12, 1998.
(3) Not applicable.
(4) (i) Status: The offering has terminated and all of the securities
------
registered have been sold.
(ii) Managing Underwriters: Cowen & Company and Volpe, Brown,
---------------------
Whelan & Company, LLC.
(iii) Title of Class of Securities Registered: Common Stock, par
---------------------------------------
value $.01 per share.
(iv) Amount Registered: Issuer - 2,100,000 shares; Selling
-----------------
Stockholders - 660,000 shares.
Aggregate Price of the Offering Amount Registered: Issuer -
-------------------------------------------------
$25,200,000; Selling Stockholders - $7,920,000.
Amount Sold: Issuer - 2,200,000 shares; Selling
-----------
Stockholders - 905,000 shares.
Aggregate Offering Price of the Amount Sold to Date:
---------------------------------------------------
Issuer - $26,400,000; Selling Stockholders - $10,860,000.
(v) Estimate of Expenses: $3,145,000 all of which was comprised of
--------------------
direct or indirect payments to others.
(vi) Net Offering Proceeds: $23,255,000.
---------------------
(vii) Use of Net Offering Proceeds (Estimated): Repayment of
----------------------------------------
outstanding credit facility $2,427,000 and preferred
dividends $298,000, both of which were comprised of direct
or indirect payments to others. The balance not utilized has
been invested in short-term money market accounts.
(viii) Material Change in the Use of Proceeds: Not applicable.
--------------------------------------
10
<PAGE>
Item 5. Other Information
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 overallotment 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 overallotment 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. The Company intends to file a
registration statement covering these shares. In view of the foregoing, several
items in the Company's Quarterly Report on Form 10-Q for the period ending March
31, 1998, including Part II - Items 2(c) and 2(d) (4)(iv), are being amended as
reflected herein.
As provided in the Securities Act of 1933, 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 Company and the selling stockholders in the
initial public offering have entered into an agreement with the Company's
counsel in the 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. A copy of the agreement is
being filed herewith. (See Exhibit 10.) 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. See "Part I - Item 1 - Financial
Statements - Note 2 to the Unaudited Condensed Consolidated Financial
Statements"; "Part I - Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations"; "Part II - Item 2 - Changes in
Securities and Use of Proceeds"; and "Part II - Item 6 - Exhibits and Reports on
Form 8-K."
Item 6. Exhibits and Reports on Form 8-K
This item has been amended to include Exhibit 10. See "Part II - Item 5 - Other
Information" and items cross-referenced therein.
<TABLE>
<CAPTION>
Exhibit
No. Title
- - ------- -----
<C> <S>
10 Indemnification Agreement
27 Financial Data Schedule
</TABLE>
The Company did not file any reports on Form 8-K during the three months ended
March 31, 1998.
11
<PAGE>
COMMAND SYSTEMS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
Command Systems, Inc.
6/17/98 /s/ Edward G. Caputo
- - ----------------- --------------------------------------------------
(Date) Edward G. Caputo
President and Chief Executive Officer
(principal executive officer)
6/17/98 /s/ Stephen L. Willcox
- - ----------------- --------------------------------------------------
(Date) Stephen L. Willcox
Executive Vice President and Chief Operating Officer
(principal financial and accounting officer)
12
<PAGE>
EXHIBIT 10
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement ("Agreement") is entered into between
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. ("Mintz Levin") and Command
Systems, Inc. ("Command"), Phoenix Home Life Mutual Insurance Company, a New
York mutual life insurance company, and PHL Global Holding Co., a Mauritius
Company (collectively, "Phoenix"), and Edward G. Caputo ("Caputo")
(collectively, the "Parties").
WHEREAS, Mintz Levin, a professional corporation duly organized under
the laws of the State of Massachusetts, provided certain professional legal
services to Command; and
WHEREAS, Command, a Delaware corporation, may be liable to certain
third parties as a result of the provision of those legal services rendered by
Mintz Levin; and
WHEREAS, Phoenix may be liable to certain third parties as a result of
the provision of those legal services rendered by Mintz Levin to Command; and
WHEREAS, Caputo may be liable to certain third parties as a result of
the provision of those legal services rendered by Mintz Levin to Command;
NOW, THEREFORE, and intending to be legally bound, the Parties agree as
follows;
1. Indemnification. Mintz Levin agrees to indemnify and hold harmless
---------------
Command, and its officers, directors, and employees as of the date hereof,
Phoenix and its officers, directors, and employees as of the date hereof, and
Caputo for (i) all reasonable costs and expenses (including, but not limited to,
reasonable attorney's fees, reasonable accountant's fees, and reasonable fees or
costs incurred as a result of any additional Registration Statement or post-
effective amendment to a Registration Statement filed with the Securities and
Exchange Commission) relating to, and (ii) any amounts paid to settle any claims
or to satisfy any judgment or judicial or administrative order arising from,
any liability caused by reason of:
a. The failure to file a Registration Statement with the
Securities and Exchange Commission pursuant to Rule 462(b) under the
Securities Act of 1933 covering 345,000 shares of Command common stock
sold in March 1998, which shares were not covered by a registration
statement ordered effective by the Commission or its staff; and
b. The statements made in response to Item 2(c) and (d)(4)(iv)
of Part II of the Form 10-Q filed by Command with the Securities and
Exchange Commission on May 15, 1998, and other deficiency in the Form
10-Q caused by the failure to file the Rule 462(b) Registration
Statement, as described in subparagraph a. above; and
c. The failure before June 17, 1998, to disclose any contingent
liabilities arising from the matters identified in subparagraphs
a. and b. above.
<PAGE>
This indemnity is limited to liabilities caused by the acts and omissions
identified in subparagraphs a. through c. above.
2. Required Notices to Mintz Levin. Command, Phoenix, and
--------------------------------
Caputo will promptly notify Mintz Levin in writing of any allegation, claim,
suit, proceeding, or investigation relating to the matters identified in
paragraph 1. Command, Phoenix, and Caputo shall not retain counsel or
accountants in connection with any such allegation, claim, suit, proceeding, or
investigation without the approval of Mintz Levin, which approval shall not be
unreasonably withheld. Command, Phoenix, and Caputo will fully and promptly
advise Mintz Levin of the progress and developments in any such allegation,
claim, suit, proceeding, or investigation. Command, Phoenix, and Caputo will
fully and promptly comply with any reasonable request of Mintz Levin for
information about the status of any such allegations, claim, suit, proceeding,
or investigation. Command, Phoenix, and Caputo shall not enter into any
settlement without written approval of Mintz Levin, which approval shall not be
unreasonably withheld.
3. Payment and Repayment. Mintz Levin will pay all amounts
----------------------
indemnifiable under this Agreement promptly on receipt of satisfactory
documentation from Command, Phoenix, or Caputo.
4. Representations and Warranties of Mintz Levin. Mintz
----------------------------------------------
Levin represents and warrants to Command, Phoenix, and Caputo that it is duly
organized, validly existing, and in good standing as a professional corporation
under the laws of the State of Massachusetts; that it has the full power and
authority to execute, deliver, and perform its obligations under this
Agreement; and that this Agreement is the legal, valid and binding obligation of
Mintz Levin and is enforceable against it in accordance with its terms.
5. Representations and Warranties of Command. Command
------------------------------------------
represents and warrants to Mintz Levin that it is duly organized, validly
existing, and in good standing as a corporation in the State of Delaware; that
it has the full power and authority to execute, deliver, and perform its
obligations under this Agreement; and that this Agreement is the legal, valid
and binding obligation of Command and is enforceable against it in accordance
with its terms.
6. Representations and Warranties of Phoenix. Phoenix
------------------------------------------
represents and warrants to Mintz Levin that it is duly organized, validly
existing, and in good standing as a New York mutual life insurance company; that
it has the full power and authority to execute, deliver, and perform its
obligations under this Agreement; and that this Agreement is the legal, valid
and binding obligation of Phoenix and is enforceable against it in accordance
with its terms.
-2-
<PAGE>
7. Dispute Resolution. The Parties will seek to resolve any dispute
-------------------
arising under this Agreement by good faith negotiation. In the event negotiation
fails, the dispute shall be resolved by arbitration before a panel of three
arbitrators under the Commercial Arbitration Rules of the American Arbitration
Association, by which the Parties agree to be bound, or by such other
alternative dispute mechanism to which the Parties otherwise agree in writing.
8. Binding Effect: Successors. This Agreement shall be binding on
---------------------------
and inure to the benefit of the Parties and their respective successors and
assigns.
9. Authority to Execute. Each person executing this Agreement on
---------------------
behalf of the Parties represents that he or she is authorized to agree to its
terms by the Party on whose behalf he or she is acting.
10. No Third Party Rights. This Agreement does not create rights
----------------------
in third parties, including, without limitation, third party beneficiary rights.
11. Counterpart Originals. This Agreement may be executed in its
----------------------
original version or in copies, counterparts, or other such duplicate versions.
All signatures to this Agreement need not appear on the same version, and the
signatories may execute different versions, so long as they contain identical
provisions, and all such executed versions shall together constitute the
complete Agreement. The Agreement is complete and binding upon its execution
by all signatories.
12. Entire Agreement. This Agreement is the complete understanding
-----------------
and agreement of the Parties with respect to the subject matter of this
Agreement.
IN WITNESS WHEREOF, the Parties have executed this Indemnification
Agreement by their duly authorized representatives.
Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
By: /s/ R. Robert Popeo
---------------------
Name: R. Robert Popeo
Title: Chairman
-3-
<PAGE>
Command Systems, Inc.
By: /s/ Edward G. Caputo
------------------------------------
Name:
Title:
Phoenix Home Life Mutual Insurance Company
By: /s/ John J. C. Herndon
------------------------------------
Name:
Title: Vice President
PHL Global Holding Co.
By: /s/ John J. C. Herndon
------------------------------------
Name:
Title: Director
/s/ Edward G. Caputo
------------------------------------
Name: Edward G. Caputo
Title: President and Chief Executive Officer
-4-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Command
Systems Inc., and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 21,401,397 391,687
<SECURITIES> 0 0
<RECEIVABLES> 5,017,205 4,462,134
<ALLOWANCES> (74,995) (259,893)
<INVENTORY> 0 0
<CURRENT-ASSETS> 300,662 406,974
<PP&E> 3,131,983 2,859,730
<DEPRECIATION> (995,822) (825,562)
<TOTAL-ASSETS> 36,050,208 14,425,087
<CURRENT-LIABILITIES> 3,113,587 4,924,026
<BONDS> 0 0
0 0
0 10,223,475
<COMMON> 34,818 1,000
<OTHER-SE> 22,901,803 (723,414)
<TOTAL-LIABILITY-AND-EQUITY> 36,050,208 14,425,087
<SALES> 7,933,745 5,144,033
<TOTAL-REVENUES> 7,933,745 5,144,033
<CGS> 5,110,131 3,845,811
<TOTAL-COSTS> 5,110,131 3,845,811
<OTHER-EXPENSES> 2,271,372 1,474,474
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 42,740 43,941
<INCOME-PRETAX> 558,721 (214,054)
<INCOME-TAX> 104,281 0
<INCOME-CONTINUING> 454,440 (214,054)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 454,440 (270,928)
<EPS-PRIMARY> .04 (.06)
<EPS-DILUTED> .04 (.06)
</TABLE>
