<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Second Quarter Ended June 30, 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 Identification No.)
incorporation or organization)
POND VIEW CORPORATE CENTER
76 BATTERSON PARK RD.
FARMINGTON, CT 06032
- ---------------------------------------- ------------------
(Address of principal executive offices) (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 x No
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 July 23, 1998.
<PAGE>
COMMAND SYSTEMS, INC.
INDEX
-----
Part I Financial Information
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997...................... 1
Condensed Consolidated Statements of Operations
Three months ended June 30, 1998 and 1997................ 2
Condensed Consolidated Statements of Operations
Six months ended June 30, 1998 and 1997.................. 3
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997.................. 4
Condensed Consolidated Statements of
Stockholders' Equity (Deficit) as of June 30, 1998 and
December 31, 1997........................................ 5
Notes to Unaudited Condensed Consolidated
Financial Statements as of June 30, 1998................. 6 - 8
Item 2 Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................ 9 - 15
II Other Information............................................ 16
Signatures................................................... 17
<PAGE>
COMMAND SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 20,716,654 $ 391,687
Accounts receivable, net of allowance
for doubtful accounts of $78,391 and
$259,893 in 1998 and 1997 5,252,026 4,203,241
Prepaid expenses and other current assets 602,012 354,950
Deferred income taxes 84,738 52,024
------------ -----------
Total current assets 26,655,430 5,001,902
Furniture & equipment 2,624,721 2,007,254
Leasehold & improvements 969,820 852,476
------------ -----------
Total fixed assets 3,594,541 2,859,730
Less accumulated depreciation (1,138,514) (825,562)
------------ -----------
Net equipment and improvements 2,456,027 2,034,168
Other assets:
Goodwill, net of accumulated amortization
expense of $228,178 and $0 in 1998 and 1997 6,617,160 6,845,338
Security deposits 378,629 428,005
Other noncurrent assets 99,217 115,674
------------ -----------
Total assets $ 36,206,463 $14,425,087
============ ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Line of credit $ -- $ 857,535
Bank loan -- 556,952
Accounts payable and accrued expenses 2,772,180 2,218,540
Deferred revenue 89,350 219,544
Accrued payroll and related costs 616,344 610,933
Income taxes payable -- 78,535
Deferred income taxes -- 381,987
------------ -----------
Total liabilities 3,477,874 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, 25,000,000
authorized, 7,656,750 and 4,275,000
issued and outstanding 34,818 1,000
Additional paid-in-capital 33,425,140 --
Retained earnings (deficit) (417,629) (636,509)
Cumulative translation adjustment (313,740) (86,905)
------------ -----------
Total stockholders' equity (deficit) 32,728,589 (722,414)
------------ -----------
Total liabilities and stockholders'
equity (deficit) $ 36,206,463 $14,425,087
============ ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
1
<PAGE>
COMMAND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
------ ------
(unaudited)
<S> <C> <C>
Revenue $ 8,697,074 $ 5,736,133
Cost of revenue 5,949,041 3,986,812
----------- -----------
Gross profit 2,748,033 1,749,321
Selling, general and administrative expense 3,251,174 1,730,964
----------- -----------
Income (loss) from operations (503,141) 18,357
Other income (expense)
Foreign exchange gain 90,618 --
Interest income 284,373 9,367
Interest expense -- (139,082)
----------- -----------
374,991 (129,715)
----------- -----------
Loss before income taxes and minority interest (128,150) (111,358)
Provision (benefit) for income taxes (152,888) 830
Minority interest -- 33,040
----------- -----------
Net income (loss) $ 24,738 $ (79,148)
=========== ===========
Preferred stock dividends and accretion $ -- $ --
=========== ===========
Income (loss) applicable to common stockholders $ 24,738 $ (79,148)
=========== ===========
Basic earnings (loss) per share $ 0.00 $ (0.02)
=========== ===========
Diluted earnings (loss) per share $ 0.00 $ (0.02)
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
<PAGE>
COMMAND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
------ ------
(unaudited)
<S> <C> <C>
Revenue $ 16,630,819 $ 10,880,168
Cost of revenue 11,059,173 7,832,623
------------ ------------
Gross profit 5,571,646 3,047,545
Selling, general and administrative expense 5,522,546 3,205,438
------------ ------------
Income (loss) from operations 49,100 (157,893)
Other income (expense)
Foreign exchange gain 90,618 --
Interest income 331,218 15,506
Interest expense (40,366) (183,023)
------------ ------------
381,470 (167,517)
Income (loss) before income taxes and minority interest 430,570 (325,410)
Provision (benefit) for income taxes (48,607) 830
Minority interest -- (23,834)
------------ ------------
Net income (loss) $ 479,177 $ (350,074)
============ ============
Preferred stock dividends and accretion $ (260,303) $ --
============ ============
Income (loss) applicable to common stockholders $ 218,874 $ (350,074)
============ ============
Basic earnings (loss) per share $ 0.03 $ (0.08)
============ ============
Diluted earnings (loss) per share $ 0.03 $ (0.08)
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
COMMAND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 479,177 $ (350,074)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 548,005 146,259
Bad debt expense (181,502) 130,000
Minority interest -- 23,834
Accrued interest capitalized -- 39,710
Deferred income taxes (414,701) --
Other -- 7,794
Changes in operating assets and liabilities:
Accounts receivable (867,283) (1,436,517)
Prepaid expenses and other current assets (247,062) 205,759
Security deposits and other noncurrent assets 58,958 (69,704)
Accounts payable and accrued expenses 590,983 283,152
Accrued payroll and related costs 5,411 102,071
Deferred revenue (130,194) (80,976)
Income taxes payable (78,535) 2,506
------------ -----------
Net cash used in operating activities (236,743) (996,186)
Cash flows from investing activities:
Purchases of equipment and improvements (734,810) (869,040)
------------ -----------
Net cash used in investing activities (734,810) (869,040)
Cash flows from financing activities:
(Payments) borrowings under revolving line of credit agreement (857,535) 298,645
(Payment of) proceeds from bank loan (556,952) 250,000
Minority investment in affiliate -- 400,135
Proceeds from notes payable -- 975,794
Issuance of common stock, net 23,235,483
Payment of preferred stock dividend (297,641)
------------ -----------
Net cash provided by financing activities 21,523,355 1,924,574
Effect of exchange rate changes on cash (226,835) 9,332
Increase in cash 20,324,967 68,680
Cash, beginning of period 391,687 443,505
------------ -----------
Cash, end of period $ 20,716,654 $ 512,185
============ ===========
Cash paid for:
Interest expense $ 42,740 $ 183,023
Income taxes $ 409,831 $ 830
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
COMMAND SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional
Common Stock Pd in Capt'l
Shares Amount Amount
-------- -------- --------
<S> <C> <C> <C>
Balance at December 31, 1997 4,275,000 $ 1,000 $ --
Net income
Issuance of common stock 2,200,000 22,000 24,530,000
Conversion of preferred stock 1,181,750 11,818 10,211,658
Cost of issuance of common stock -- -- (1,316,518)
Preferred stock dividends and accretion -- -- --
Translation adjustment -- -- --
--------- ------- -----------
Balance at June 30, 1998 (unaudited) 7,656,750 $34,818 $33,425,140
========= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
Retained Cumulative
Earnings Translation
(Deficit) Adjustment Total
--------- ---------- -------
<S> <C> <C> <C>
Balance at December 31, 1997 $ (636,509) $ (86,905) $ (722,414)
Net income 479,177 -- 479,177
Issuance of common stock -- -- 24,552,000
Conversion of preferred stock -- -- 10,223,476
Cost of issuance of common stock -- -- (1,316,518)
Preferred stock dividends and accretion (260,297) -- (260,297)
Translation adjustment -- (226,835) (226,835)
---------- ---------- -----------
Balance at June 30, 1998 (unaudited) $ (417,629) $ (313,740) $32,728,589
========== ========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
Command Systems, Inc.
Notes To Unaudited Condensed Consolidated Financial Statements
June 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 six month period ended June 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 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 assets to the amount expected
to be realized.
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, 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 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.
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 $1,317,000.
6
<PAGE>
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 (the "Makinen
Litigation"). Each of the plaintiffs purports to represent a class consisting
of purchasers of common stock pursuant to the initial public offering. The
complaints allege that defendants violated the Act. The amended complaint
relating to the Doney Litigation and the complaint relating to the Makinen
Litigation also claim that the sale of unregistered shares breached the
disclosure and filing requirements of the Act. The plaintiffs seek 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. Based upon the status of such complaints, the Company cannot
currently estimate a range of loss.
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.
7
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
----------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted:
Net income (loss) $ 24,738 $ (79,148) $ 479,177 $ (350,074)
---------- ---------- ---------- ----------
Preferred stock dividends and accretion - - (260,303) -
Numerator for basic and diluted earnings
per share income (loss) applicable to
common stockholders $ 24,738 $ (79,148) $ 218,874 $ (350,074)
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share
weighted average shares 7,656,750 4,275,000 6,266,851 4,275,000
Effect of dilutive securities:
Employee stock options 20,539 - 40,741 -
---------- ---------- ---------- ----------
Denominator for diluted earnings per
share weighted average shares 7,677,289 4,275,000 6,307,592 4,275,000
========== ========== ========== ==========
</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
three and six months ended June 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(in thousands) 1998 1997 1998 1997
------------------------------ --------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 25 $ (79) $ 479 $(350)
Other comprehensive income:
Foreign currency translation adjustments (211) (13) (227) 9
----- ----- ----- -----
Other comprehensive income $(186) $ (92) $ 252 $(341)
===== ===== ===== =====
</TABLE>
Accumulated other comprehensive income equals the amount included in retained
earnings for cumulative translation adjustments which is the only component of
other comprehensive income included in the Company's financial statements.
8
<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.
Forward looking statements include statements regarding the expected growth of
Year 2000 solutions services, the Company's goals and strategies, the demand for
IT services and the ability of the Company to capitalize on offshore investments
and infrastructure. Such statements are subject to a number of risks including
the risks associated with the failure to obtain contracts to perform higher
margin services, variability of quarterly operations and financial results, the
ability of the Company to manage growth, the competitive market for technical
personnel, reliance on significant customers, risks associated with the Year
2000 solutions services offering and the finite nature of demand for Year 2000
solutions services, competition, rapid technological change and dependence on
the Company's Offshore Technology Resource Center.
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 growing percentage of the Company's revenue during the year ended
December 31, 1997 and the six months ended June 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. For
the year ended December 31, 1997, IT staff augmentation, Year 2000 solutions
services, software and hardware solutions (together with education and training,
and management consulting services) and other application development,
maintenance and networking services accounted for 59%, 21%, 12% and 8%,
respectively, of the Company's total revenue. For the three months ended March
31, 1998, IT staff augmentation, Year 2000 solutions services, software and
hardware solutions (together with education and training, and management
consulting services) and other application development, maintenance and
networking services accounted for 51%, 31%, 12% and 6%, respectively, of the
Company's total revenue. For the three months ended June 30, 1998, IT staff
augmentation, Year 2000 solutions services, software and hardware solutions
(together with education and training, and management consulting services) and
other application development, maintenance and networking services accounted for
52%, 28%, 14% and 6%, respectively, of the Company's total revenue. For the six
months ended June 30, 1998, IT staff augmentation, Year 2000 solutions services,
software and hardware solutions (together with education and training, and
management consulting services) and other application development, maintenance
and networking services accounted for 51%, 30%, 13% and 6%, respectively, 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 total revenue for future periods.
The Company believes 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 and results of operations.
9
<PAGE>
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
---------------------------------------------------------------------
Year Ended Three Months Six Months
DECEMBER 31, ENDED JUNE 30 ENDED JUNE 30,
---------------------------------------------------------------------
1995 1996 1997 1997 1998 1997 1998
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue 73.2 73.2 67.7 69.5 68.4 72.0 66.5
---------------------------------------------------------------------
Gross profit 26.8 26.8 32.3 30.5 31.6 28.0 33.5
Selling, general and
administrative expense 24.2 30.3 29.0 30.2 37.4 29.5 33.2
---------------------------------------------------------------------
Income (loss) from operations 2.6 (3.5) 3.3 0.3 (5.8) (1.5) 0.3
Other income (expense), net (0.4) (0.5) (1.1) (2.3) 4.3 (1.5) 2.3
---------------------------------------------------------------------
Income (loss) before income taxes
and minority interest 2.2 (4.0) 2.2 (2.0) (1.5) (3.0) 2.6
Income tax (provision) benefit (0.4) - 0.4 - 1.8 - 0.3
Income tax (provision) for change
in corporate status - - (2.8) - - - -
---------------------------------------------------------------------
Income (loss) before minority
interest 1.8 (4.0) (0.2) (2.0) 0.3 (3.2) 2.9
Minority interest in net (income)
loss - 1.4 (1.8) 0.6 - (0.2) -
---------------------------------------------------------------------
Net income (loss) 1.8 (2.6) (2.0) (1.4) 0.3 (3.2) 2.9
Preferred stock dividends and
accretion - - (0.3) - - - (1.6)
Income (loss) applicable to common
stockholders 1.8% (2.6)% (2.3)% (1.4)% 0.3% (3.2)% 1.3%
=====================================================================
</TABLE>
Three Months Ended June 30, 1998 Compared With Three Months Ended June 30, 1997
Revenue for the three month period ended June 30, 1998 increased by 51.6%
to $8,697,000 from $5,736,000 for the same period ended June 30, 1997. This
resulted primarily from an increase in revenue generated from Year 2000
solutions services. As compared to the three months ended March 31, 1998,
however, revenue from Year 2000 projects and other higher margin services for
the three months ended June 30, 1998 decreased as a percentage of the Company's
total revenue. 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 total revenue for future periods.
Gross profit for the three month period ended June 30, 1998 increased by
57.1% to $2,748,000 from $1,749,000 for the three month period ended June 30,
1997. Gross profit as a percentage of revenue increased to 31.6% for the three
month period ended June 30, 1998 from 30.5% for the three month period ended
June 30, 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, 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.
Specifically, the Company experienced low rates of employee utilization in its
Offshore Technology Resource Center in Bangalore, India during the three months
ended June 30, 1998 as a result of investments which were not accompanied by the
expected increase in complete projects and solutions business. 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. The Company's gross
margin for the three months ended June 30, 1998 decreased as compared to the
three months ended March 31, 1998 and the year ended December 31, 1997,
reflecting the foregoing and a less profitable mix of business and reduced
margins from Year 2000 and other project business.
10
<PAGE>
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 three month period ended June 30, 1998
increased by 81.2% to $3,137,000 from $1,731,000 for the three month period
ended June 30, 1997. The increase is primarily attributable to additional sales
and project management personnel, which were added in anticipation of growth in
complete projects and solutions business. Also, a non-recurring charge of
approximately $100,000 was recorded to recognize certain use taxes and the
Company accrued costs of approximately $90,000 as a result of certain
shareholder litigation.
Amortization of goodwill for the three month period ended June 30,
1998 was $114,000. On December 31, 1997, the Company purchased the 49% minority
interest in its Offshore Technology Resource Center from Phoenix Home Life
Mutual Insurance ("PHL"). 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.
The loss from operations for the three month period ended June 30,
1998 was $(503,000) compared to income of $18,000 for the three month period
ended June 30, 1997. The loss from operations as a percentage of revenue was
(5.8)% for the three month period ended June 30, 1998 as compared to income of
0.3% for the three month period ended June 30, 1997. The loss from operations
for the three months ended June 30, 1998 was primarily due to increased selling,
general and administrative costs associated primarily with the Company's
increase in sales and project management personnel which were not accompanied by
expected growth in complete projects and solutions business, as well as reduced
gross margins 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.
Net interest income was $284,000 for the three month period ended June
30, 1998 compared to net interest expense of $130,000 for the three month period
ended June 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 three month
period ended June 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 the note purchase agreement (the "Agreement")
with PHL. In addition, the Company recorded a $91,000 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.
The income tax benefit for the three month period ended June 30, 1998 was
$153,000 as a result of reversing the first quarter's income tax provision and
the utilization of deferred tax credits. The Company computes its income tax
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 assets to the amount expected to be realized.
As a result of the foregoing, net income was $25,000 for the three
month period ended June 30, 1998 as compared to a net loss of $(79,000) for the
three month period ended June 30, 1997. Basic and diluted earnings per share
were $0.00 for the three month period ended June 30, 1998 as compared to a loss
per share of $(0.02) for the three month period ended June 30, 1997. The
weighted average number of shares outstanding used in the calculation of basic
and fully 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.
11
<PAGE>
Six Months Ended June 30, 1998 Compared With Six Months Ended June 30, 1997
Revenue for the six month period ended June 30, 1998 increased by
52.9% to $16,631,000 from $10,880,000 for the six months ended June 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 six months
ended June 30, 1998 increased as a percentage of the Company's total revenue. As
discussed above, revenue from Year 2000 projects and other higher margin
services for the three months ended June 30, 1998, decreased as a percentage of
the Company's total revenue as compared to the three months ended March 31,
1998. 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
total revenue for future periods.
Gross profit for the six month period ended June 30, 1998 increased by
82.8% to $5,572,000 from $3,048,000 for the six month period ended June 30,
1997. Gross profit as a percentage of revenue increased to 33.5% for the six
month period ended June 30, 1998 from 28.0% for the six month period ended June
30, 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.
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 six month period ended June 30, 1998
increased by 65.2% to $5,295,000 from $3,205,000 for the six month period ended
June 30, 1997. The increase is primarily attributable to additional sales and
project management personnel, which were added in anticipation of growth in
complete projects and solutions business. Also, a non-recurring charge of
approximately $100,000 was recorded to recognize certain use taxes and the
Company accrued costs of approximately $90,000 as a result of certain
shareholder litigation.
Amortization of goodwill for the six month period ended June 30, 1998
was $228,000, relating to the Company's purchase of the 49% minority interest
in its Offshore Technology Resource Center from PHL. 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 from operations for the six month period ended June 30, 1998
was $49,000 compared to a loss of $(158,000) for the six month period ended June
30, 1997. Income from operations as a percentage of revenue was 0.3% for the six
month period ended June 30, 1998 as compared to a loss of (1.5)% for the six
month period ended June 30, 1997.
Net interest income was $291,000 for the six month period ended June
30, 1998 compared to net interest expense of $168,000 for the six month period
ended June 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 six month
period ended June 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 the Agreement with PHL. In addition, the
Company recorded a $91,000 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.
The income tax benefit for the six month period ended June 30, 1998
was $49,000, as a result of reversing the first quarter's income tax provision
and the utilization of deferred tax credits. The Company computes its income tax
provision on a quarterly basis and provides for deferred income taxes based upon
12
<PAGE>
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 assets to the amount expected to be realized.
As a result of the foregoing, net income was $479,000 for the six month
period ended June 30, 1998 as compared to a net loss of $(350,000) for the six
month period ended June 30, 1997. Basic and diluted earnings per share were
$0.03 for the six month period ended June 30, 1998 as compared to a loss per
share of $(0.08) for the six month period ended June 30, 1997. Basic and
diluted earnings per share were effected by preferred stock dividends and
accretion in 1998 of $260,000. In addition, the weighted average number of
shares outstanding used in the calculation of basic and fully 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.
LIQUIDITY AND SOURCES OF CAPITAL
Since inception, the Company has financed its operations and capital
expenditures primarily with internally generated cash flows, borrowings under
its credit line facilities, proceeds from the Agreement with PHL and proceeds
from the issuance of common stock.
The Company's operating activities used $237,000 for the six month period
ended June 30, 1998 compared to $996,000 for the six months ended June 30, 1997.
The use of cash was primarily due to an increase in accounts receivable.
The Company used cash of $237,000 for capital expenditures during the six
months ended June 30, 1998 to support planned sales growth. The Company spent
$869,000 during the six months ended June 30, 1997 which was primarily related
to the Offshore Technology Resource Center.
The Company's financing activities provided $ 21,523,000 for the six
months ended June 30, 1998 and $1,925,000 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 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 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. See "Part I-Item 1-
Financial Statements-Note 2 to the Unaudited Condensed Consolidated Financial
Statements".
From the sale of the 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 $1,317,000. 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.
For the six month period ended June 30, 1997, cash was generated under
the Company's bank credit facilities, and from proceeds from the Agreement with
PHL.
13
<PAGE>
As of June 30, 1998, the Company had $20,717,000 in cash and $23,178,000
of working capital. The Company also has an available line of credit, which as
of June 30, 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
accounts receivable and are utilized primarily to fund the Company's working
capital requirements. The line of credit, which expires August 15, 1998,
contains certain financial covenants, which require the Company to maintain a
minimum total net worth of $1,750,000, debt service coverage ratio of 1.25:1 and
a current ratio of not less than 1:1. Such borrowings are also guaranteed by
Edward G. Caputo, the Company's President and Chief Executive Officer. 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 believes that the net proceeds from the initial public
offering, together with other available funds, and the cash flow expected to be
generated from operations, will be adequate to satisfy its current and planned
operations over the next 12 months.
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 (the "Makinen
Litigation"). Each of the plaintiffs purports to represent a class consisting
of purchasers of common stock pursuant to the initial public offering. The
complaints allege that defendants violated the Act. The amended complaint
relating to the Doney Litigation and the complaint relating to the Makinen
Litigation also claim that the sale of unregistered shares breached the
disclosure and filing requirements of the Act. The plaintiffs seek 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. Based upon the status of such complaints, the Company cannot
currently estimate a range of loss.
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 or will correctly define Year 2000 by
December 31, 1999. Although the Company believes that the information systems
of its major vendors (insofar as they relate to the Company's business) comply
with Year 2000 requirements, there can be no assurance that the Year 2000
requirements 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.
14
<PAGE>
COMMAND SYSTEMS, INC.
Part II Other Information
Item 1 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 (the "Makinen
Litigation"). Each of the plaintiffs purports to represent a class consisting
of purchasers of common stock pursuant to the initial public offering. The
complaints allege that defendants violated the Act. The amended complaint
relating to the Doney Litigation and the complaint relating to the Makinen
Litigation also claim that the sale of unregistered shares breached the
disclosure and filing requirements of the Act. The plaintiffs seek 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. Based upon the status of such complaints, the Company cannot
currently estimate a range of loss.
Item 6. Exhibits and Reports on Form 8-K
Exhibit
No. Title
- ------ -----
27 Financial Data Schedule
The Company did not file any reports on Form 8-K during the three months ended
June 30, 1998.
15
<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.
8/14/98 /s/ Edward G. Caputo
- --------------------- ---------------------------------
President and Chief Executive Officer
(Date) (principal executive officer)
8/14/98 /s/ Stephen L. Willcox
- --------------------- ---------------------------------
Executive Vice President and Chief
(Date) Operating Officer (principal financial
and accounting officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SECOND
QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 20,716,654 391,687
<SECURITIES> 0 0
<RECEIVABLES> 5,330,417 4,462,134
<ALLOWANCES> (78,391) (259,893)
<INVENTORY> 0 0
<CURRENT-ASSETS> 686,750 406,974
<PP&E> 3,594,541 2,859,730
<DEPRECIATION> (1,138,514) (825,562)
<TOTAL-ASSETS> 36,206,463 14,425,087
<CURRENT-LIABILITIES> 3,477,874 4,924,026
<BONDS> 0 0
0 0
0 10,223,475
<COMMON> 34,818 1,000
<OTHER-SE> 32,728,589 (722,414)
<TOTAL-LIABILITY-AND-EQUITY> 36,206,463 14,425,087
<SALES> 16,630,819 10,880,168
<TOTAL-REVENUES> 16,630,819 10,880,168
<CGS> 11,059,173 7,832,623
<TOTAL-COSTS> 11,059,173 7,832,623
<OTHER-EXPENSES> 5,522,546 3,205,438
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (40,336) (183,023)
<INCOME-PRETAX> 430,570 (325,410)
<INCOME-TAX> (48,607) 830
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 479,177 (350,074)
<EPS-PRIMARY> .03 (.08)
<EPS-DILUTED> .03 (.08)
</TABLE>
