<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, 1999
Commission file number: 0-23797
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COMMAND SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1527672
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(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
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(Address of principal executive officers) (Zip Code)
(860) 409-2000
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(Registrant's telephone number, including area code)
Not Applicable
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(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 August 5, 1999.
<PAGE>
COMMAND SYSTEMS, INC.
INDEX
-----
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998............................................... 1
Condensed Consolidated Statements of Operations Three-months
ended June 30, 1999 and 1998.................................... 2
Condensed Consolidated Statements of Operations Six-months
ended June 30, 1999 and 1998.................................... 3
Condensed Consolidated Statements of Cash Flows Six-months
ended June 30, 1999 and 1998.................................... 4
Condensed Consolidated Statements of Stockholders' Equity as
of June 30, 1999 and December 31, 1998.......................... 5
Notes to Unaudited Condensed Consolidated Financial Statements
as of June 30, 1999............................................. 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................11-14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk .............................................. 15
Part II Other Information
Item 1. Legal Proceedings...............................................16-17
Item 2. Changes in Securities and Use of Proceeds...................... 17
Item 3. Defaults Upon Senior Securities................................. 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information............................................... 17
Item 6. Exhibits and Reports on Form 8-K................................ 17
Signatures...................................................... 18
<PAGE>
Command Systems, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,747,074 $ 16,169,749
Marketable securities 15,709,803 2,824,417
Accounts receivable, net of allowance for doubtful accounts
of $579,085 and $341,942 in 1999 and 1998 5,857,578 6,433,864
Prepaid expenses and other assets 446,410 571,285
Income taxes recoverable 386,271 364,892
------------ ------------
Total current assets 24,147,136 26,364,207
Furniture and improvements:
Furniture and equipment 2,980,242 2,857,215
Leasehold improvements 1,007,190 995,030
------------ ------------
3,987,432 3,852,245
Less accumulated depreciation and amortization (1,983,395) (1,569,489)
------------ ------------
Net furniture and improvements 2,004,037 2,282,756
Other assets:
Goodwill, net of accumulated amortization
of $684,534 and $456,356 in 1999 and 1998 6,160,804 6,388,982
Deposits 471,275 459,705
Other noncurrent assets 105,719 152,041
------------ ------------
Total assets $ 32,888,971 $ 35,647,691
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,728,795 $ 2,505,343
Accrued stockholder litigation and related expenses 1,762,842 1,800,000
Accrued payroll and related costs 1,008,385 754,292
Deferred revenue 47,446 132,710
------------ ------------
Total current liabilities 4,547,468 5,192,345
Stockholders' equity:
Common stock, $.01 par value, 25,000,000 shares authorized,
7,656,750 issued and outstanding in 1999 and 1998 34,818 34,818
Additional paid-in-capital 33,400,480 33,400,480
Accumulated deficit (4,721,628) (2,664,069)
Accumulated other comprehensive loss (372,167) (315,883)
------------ ------------
Total stockholders' equity 28,341,503 30,455,346
------------ ------------
Total liabilities and stockholders' equity $ 32,888,971 $ 35,647,691
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
Command Systems, Inc.
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
Revenue $ 6,998,218 $ 8,697,074
Cost of revenue 5,156,147 5,949,041
----------- -----------
Gross profit 1,842,071 2,748,033
Selling, general and administrative expense 2,915,268 3,251,174
----------- -----------
Operating loss (1,073,197) (503,141)
Other income (expense):
Interest income 226,917 284,373
Interest expense (9,800) --
Translation gain 23,449 90,618
Other expense (10,383) --
----------- -----------
230,183 374,991
----------- -----------
Loss before income taxes (843,014) (128,150)
Income tax benefit -- 152,888
----------- -----------
Net (loss) income applicable to common stockholders $ (843,014) $ 24,738
=========== ===========
Basic and diluted (loss) earnings per share $ (0.11) $ 0.00
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
Command Systems, Inc.
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Revenue $ 13,930,629 $ 16,630,819
Cost of revenue 10,522,872 11,059,173
------------ ------------
Gross profit 3,407,757 5,571,646
Selling, general and administrative expense 5,964,123 5,522,546
------------ ------------
Operating (loss) income (2,556,366) 49,100
Other income (expense):
Interest income 483,680 331,218
Interest expense (10,727) (40,366)
Translation gain 20,120 90,618
Other income 5,734 --
------------ ------------
498,807 381,470
------------ ------------
(Loss) income before income taxes (2,057,559) 430,570
Income tax benefit -- 48,607
------------ ------------
Net (loss) income (2,057,559) 479,177
Preferred stock dividends and accretion -- 260,303
------------ ------------
Net (loss) income applicable to common stockholders $ (2,057,559) $ 218,874
============ ============
Basic and diluted (loss) earnings per share $ (0.27) $ 0.03
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
Command Systems, Inc.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (2,057,559) $ 479,177
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization 661,172 548,005
Bad debt expense 88,200 (181,502)
Gain on disposal of equipment 10,559 --
Changes in operating assets and liabilities:
Accounts receivable 488,086 (867,283)
Prepaid expenses and other assets 23,449 (247,062)
Deposits and other noncurrent assets 23,757 58,958
Accounts payable and accrued expenses (724,844) 590,983
Accrued payroll and related costs 254,093 5,411
Deferred revenue (85,264) (130,194)
Deferred income taxes (21,379) (414,701)
Income taxes payable -- (78,535)
------------ ------------
Net cash used in operating activities (1,339,730) (236,743)
Cash flows from investing activities:
Purchases of furniture and improvements (176,639) (734,810)
Sales of available for sale securities 4,198,000 --
Purchases of available for sale securities (17,083,387) --
------------ ------------
Net cash used in investing activities (13,062,026) (734,810)
Cash flows from financing activities:
Issuance of common stock -- 23,235,483
Payments under revolving line of credit agreement -- (857,535)
Payments of bank loan -- (556,952)
Payment of preferred stock dividend -- (297,641)
------------ ------------
Net cash provided by financing activities -- 21,523,355
Effect of exchange rate changes on cash (20,919) (226,835)
(Decrease) increase in cash (14,422,675) 20,324,967
Cash, beginning of period 16,169,749 391,687
------------ ------------
Cash, end of period $ 1,747,074 $ 20,716,654
============ ============
Cash paid for:
Interest expense $ 10,727 $ 42,740
Income taxes $ 51,500 $ 409,831
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
COMMAND SYSTEMS, INC.
Condensed Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
----------------------- Paid in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Loss Equity
---------- -------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 7,656,750 $ 34,818 $33,400,480 $(2,664,069) $(315,883) $ 30,455,346
---------- -------- ----------- ----------- --------- ------------
Net loss -- -- -- (2,057,559) -- (2,057,559)
Translation adjustment -- -- -- -- (56,284) (56,284)
---------- -------- ----------- ----------- --------- ------------
Balance at June 30, 1999 (unaudited) 7,656,750 $ 34,818 $33,400,480 $(4,721,628) $(372,167) $ 28,341,503
========== ======== =========== =========== ========= ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
Command Systems, Inc.
Notes To Unaudited Condensed Consolidated Financial Statements
June 30, 1999
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, 1999 are not necessarily
indicative of the results that may be expected for the year-ending December
31, 1999.
The Company computes its income tax provision on a quarterly basis. The
Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recorded to reflect
the tax consequences of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each period based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. A valuation
allowance is provided against the future benefit of deferred tax assets if
it is determined that it is more likely than not that the future tax
benefits associated with the deferred tax asset will not be realized.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report for the year
ended December 31, 1998 on Form 10-K.
Note 2 Stockholders' Equity
The Company made its initial public offering on March 12, 1998, pursuant to
an effective registration statement covering 2,400,000 shares of $.01 par
value common stock plus an additional 360,000 shares for an over-allotment
option granted to the underwriters. Shortly before the effective date, the
size of the offering was increased by 300,000 shares plus an additional
45,000 shares to increase the over-allotment option. The additional 345,000
shares were sold by the Company (100,000 shares) and selling stockholders
(245,000 shares) at the public offering price of $12.00 per share. While
the increase in size of the offering was reflected in the final prospectus,
a registration statement pursuant to Rule 462(b) of the Securities Act of
1933 covering the additional 345,000 shares was not filed with the
Commission. The Company has filed a registration statement covering these
shares which was declared effective February 5, 1999.
Of the 3,105,000 shares sold in the initial public offering, 2,760,000
shares were properly registered, but the remaining 345,000 shares were not
registered. Persons who purchased unregistered shares in the initial
public offering had rescission rights under the Securities Act of 1933.
However, the Company has been released from any liability for rescission by
terms of the judgment entered by the court on August 11, 1999, in the
purported consolidated class action discussed in Note 3 below. The Company
and the selling stockholders in the initial public offering entered into an
agreement with the Company's former securities counsel which served as the
Company's counsel in the initial public offering holding 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 plaintiffs in the purported consolidated class action discussed in Note
3 below sought rescission of the sales of the shares in the initial public
offering and unspecified damages, including rescissionary damages,
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<PAGE>
interest, costs and fees. On May 20, 1999, a definitive settlement
agreement was executed by the parties via their counsel. The federal
district court entered a judgment approving this settlement on August 11,
1999. See Note 3 below.
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
$1,314,000.
Simultaneously with the initial offering, all the holders of Series A and B
redeemable 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 initial public offering proceeds in 1998.
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, plaintiffs Don M. Doney, Jr. and Madelyn J. McCabe
filed a lawsuit in the United States District Court for the Southern
District of New York. The lawsuit was filed against the Company, certain
of its officers and directors (Edward G. Caputo, Stephen L. Willcox, Robert
B. Dixon, John J.C. Herndon, James M. Oates and Joseph D. Sargent) and the
managing underwriters of the initial public offering (Cowen & Company and
Volpe Brown Whelan & Company LLC). On or about June 22, 1998, the same
plaintiffs amended their complaint in the lawsuit they had filed with the
United States District Court for the Southern District of New York. On or
about May 8, 1998, another plaintiff, Chaile B. Steinberg, filed a new
lawsuit against the same defendants in the same court. On or about June
26, 1998, named plaintiff Michael Makinen, filed a lawsuit in the same
court against the same defendants. Each of the plaintiffs purports to
represent a class consisting of purchasers of common stock pursuant to the
initial public offering. These lawsuits were consolidated into one lawsuit
by order of the United States District Court for the Southern District of
New York. Consequently, the plaintiffs filed a consolidated complaint
named In Re Command Systems, Inc. Securities Litigation on September 30,
1998, seeking to represent a class of purchasers of common stock from March
12, 1998, the date of the initial public offering, through April 29, 1998.
The consolidated complaint alleges that the defendants violated the
Securities Act of 1933 in that the Company failed to properly register
345,000 shares of common stock that were sold in the initial public
offering, and consequently the defendants sold unregistered securities to
the public, and the prospectus for the initial public offering contained
untrue statements of material fact and omitted to state other facts
necessary to make the statements made in the prospectus not misleading with
respect to the unregistered shares, the Company's business strategy and
other matters.
The plaintiffs sought rescission of the sales of the shares in the initial
public offering and unspecified damages, including rescissionary damages,
interest, costs and fees. On May 20, 1999, a definitive settlement
agreement (the "Stipulation of Settlement" or "Stipulation") was executed
by the parties via their counsel. The court entered a judgment approving
this settlement on August 11, 1999. Pursuant to the terms of the
Stipulation, the parties agreed to a total payment from the Company to the
plaintiffs of $5.75 million in cash plus accrued interest, minus approved
attorneys' fees and related expenses. The $5.75 million accumulated
interest as of June 11, 1999, the date of the preliminary court approval of
the Stipulation of Settlement, but will not be payable until the court's
judgment of August 11, 1999 is no longer subject to appeal. Such judgment
is not appealable after 30 days from the date the judgment was entered. In
addition, the Company may be responsible for certain legal fees and related
expenses incurred in connection with the litigation. The Company
recognized a charge to operations of $1.8 million in the fourth quarter of
1998 for costs of the settlement and related expenses.
Of the $5.75 million to be deposited in a settlement fund by the Company,
the Company will be reimbursed for all but $1.65 million. This
reimbursement will come in part from the Company's insurance carrier and
the rest pursuant to the indemnification agreement with the Company's
former counsel in the initial public offering. In addition, the Company
may be responsible for certain legal fees and related expenses incurred in
connection with the litigation.
- 7 -
<PAGE>
In the settlement, the members of the class represented by plaintiffs gave
up their right to assert individual claims against the Company or its
underwriters, based on their purchase of the Company's common stock in the
initial public offering and in the open market during the period from March
12, 1998 through April 29, 1998. In return for this concession, class
members became entitled to share pro rata in the $5.75 million cash
settlement fund, plus interest, minus approved attorneys' fees and related
expenses. No class member chose not to participate in, or to "opt-out" of,
the settlement.
The settlement provided for a pro rata distribution of the cash settlement
fund, plus interest, minus approved attorneys' fees and related expenses,
to purchasers of the Company's common stock in the period from March 12
through April 29, 1998, inclusive. Without knowing the number of
claimants, the Company cannot estimate the net amount actually payable on a
per share basis.
Note 4 Earnings Per Share
In 1997, the Company adopted FASB No. 128, "Earnings Per Share." All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement.
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,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator for basic and diluted:
Net (loss) income $ (843,014) $ 24,738 $(2,057,559) $ 479,177
Preferred stock dividends and accretion -- -- -- (260,303)
----------- ----------- ----------- -----------
Numerator for basic and diluted earnings
per share--net (loss) income applicable to
common stockholders $ (843,014) $ 24,738 $(2,057,559) $ 218,874
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share--
weighted average shares 7,656,750 7,656,750 7,656,750 6,266,851
Effect of dilutive securities:
Employee stock options -- 20,539 -- 40,741
----------- ----------- ----------- -----------
Denominator for diluted earnings per
share--weighted average shares 7,656,750 7,677,289 7,656,750 6,307,592
=========== =========== =========== ===========
Basic and diluted (loss)
earnings per share applicable
to common stockholders $ (0.11) $ 0.00 $ (0.27) $ 0.03
=========== =========== =========== ===========
</TABLE>
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<PAGE>
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-month periods ended June 30:
<TABLE>
<CAPTION>
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30 JUNE 30
------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net (loss) income $(843,014) $ 24,738 $(2,057,559) $ 479,177
Other comprehensive (loss) income:
Foreign currency translation adjustments (52,000) (211,000) (56,000) (227,000)
--------- --------- ----------- ---------
Other comprehensive (loss) income $(895,014) $(186,262) $(2,113,559) $ 252,177
========= ========= =========== =========
</TABLE>
Accumulated other comprehensive income equals the amount included in
stockholders' equity for cumulative translation adjustments which is the
only component of other comprehensive income included in the Company's
condensed consolidated financial statements.
Note 6 Segment Reporting
The Company operates in one industry segment: providing a wide range of
computer consulting services to large financial services organizations
primarily in North America. The Company operates in two geographic areas;
the United States and India. Prior to 1996, the Company only operated in
the United States.
<TABLE>
<CAPTION>
UNITED STATES INDIA ELIMINATION CONSOLIDATED
<S> <C> <C> <C> <C>
THREE-MONTHS ENDED JUNE 30, 1999
Revenue $ 6,972,559 $ 382,158 $ (356,499) $ 6,998,218
Operating loss (900,287) (172,910) -- (1,073,197)
Identifiable assets 28,712,017 4,176,954 -- 32,888,971
THREE-MONTHS ENDED JUNE 30, 1998
Revenue $ 8,697,074 $ 1,126,349 $(1,126,349) $ 8,697,074
Operating (loss) income (849,115) 345,974 -- (503,141)
Identifiable assets 31,603,857 4,602,606 -- 36,206,463
SIX-MONTHS ENDED JUNE 30, 1999
Revenue $ 13,873,335 $ 669,788 $ (612,494) $ 13,930,629
Operating (loss) income (2,022,499) (533,867) -- (2,556,366)
Identifiable assets 28,712,017 4,176,954 -- 32,888,971
SIX-MONTHS ENDED JUNE 30, 1998
Revenue $ 16,630,819 $ 2,230,613 $(2,230,613) $ 16,630,819
Operating (loss) income (714,638) 763,738 -- 49,100
Identifiable assets 31,603,857 4,602,606 -- 36,206,463
</TABLE>
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<PAGE>
Note 7 Subsequent Events
On August 1, 1999, the Company purchased 100% of the outstanding stock of
Nova Technology, Inc. ("Nova") for $200,000. The acquisition will be
accounted for as a purchase. As such, the excess of the purchase price
over the fair value of the assets acquired and the liabilities assumed will
be recorded as goodwill. Nova provides: Oracle IT consulting, systems
integration and custom software application development.
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<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 Company's expected
goals and strategies and the demand for IT services. 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,
the year 2000 solutions services offering and the finite nature of demand for
Year 2000 solutions services, competition, rapid technological change,
dependence on the Company's Offshore Technology Resource Center and a variety of
risks described under "Risk Factors" in the Company's Annual Report on Form
10-K. The Company undertakes no obligation to publicly release results of any of
these forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of unexpected
results.
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. In 1996, the Company established a software development facility in
Bangalore, India (the "Offshore Technology Resource Center") which today
provides 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 in May 1998, there may be some adverse economic repercussions caused by
the institution of sanctions or other similar actions, the effects of which are
unknown to management at this time. Although the U.S. Government has lifted some
sanctions in November 1998, others remain. No assurance can be given that such
actions would not have a material adverse effect on the Company's business,
financial condition or results of operations.
RESULTS OF OPERATIONS
Three-months Ended June 30, 1999 Compared With Three-months Ended June
30, 1998
Revenue during the three-month period ended June 30, 1999 decreased by
19.5% to $6,998,000 from $8,697,000 for the second quarter ended June 30, 1998.
This decrease resulted primarily from a decrease in revenue generated from Year
2000 solutions services performed at the Offshore Technology Resource Center and
from the Company's decision to de-emphasize hardware solutions services. Revenue
may continue to decline as the demand for Year 2000 solution services continues
to diminish as the Year 2000 approaches.
Gross profit for the three-month period ended June 30, 1999 decreased by
33.0% to $1,842,000 from $2,748,000 for the three-month period ended June 30,
1998. Gross profit as a percentage of revenue decreased to 26.3% for the three-
month period ended June 30, 1999 from 31.6% for the three-month period ended
June 30, 1998. This decrease resulted primarily from a smaller 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.
Future gross profit as a percentage of revenue may continue to decline as the
demand for Year 2000 solution services continues to diminish as the Year 2000
approaches.
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
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<PAGE>
India operations. Selling, general and administrative expense for the three-
month period ended June 30, 1999 decreased by 10.3% to $2,915,000 from
$3,251,000 for the three-month period ended June 30, 1998. The decrease is
primarily attributed to a reduction in support staff and a one-time credit for
communication charges at the Bangalore facility.
The operating loss for the three-month period ended June 30, 1999 was
$1,073,000 compared to a loss of $503,000 for the three-month period ended June
30, 1998. The operating loss as a percentage of revenue was 15.3% during the
three-month period ended June 30, 1999 as compared to a loss of 5.8% for the
three-month period ended June 30, 1998.
Other income was $230,000 for the three-month period ended June 30, 1999
compared to other income of $375,000 for the three-month period ended June 30,
1998. Other income included $227,000 of interest income for the three- months
ended June 30, 1999 and $284,000 of interest income for the three-month period
ended June 30, 1998. The interest income was attributable to interest earned
from investment of the net proceeds of the Company's initial public offering. In
addition, the Company recorded a foreign currency exchange gain of $23,000 for
the three-month period ended June 30, 1999 compared to a foreign currency
exchange gain of $91,000 for the three-month period ended June 30, 1998. The
gain was in connection with the U.S. dollar denominated cash and receivable
balances of its Indian operations.
No income tax provision or benefit was recorded for the three-month
period ended June 30, 1999 as compared to a $153,000 tax benefit for the three-
month period ended June 30, 1998.
As a result of the foregoing, the net loss was $843,000 for the three-
month period ended June 30, 1999 as compared to net income of $25,000 for the
three-month period ended June 30, 1998. Basic and diluted loss per share was
$0.11 for the three-month period ended June 30, 1999 as compared to basic and
diluted earnings per share of $0.00 for the three-month period ended June 30,
1998.
Six-months Ended June 30, 1999 Compared With Six-months Ended June 30,
1998
Revenue during the six-month period ended June 30, 1999 decreased by
16.2% to $13,931,000 from $16,631,000 for the six-month period ended June 30,
1998. This decrease resulted primarily from a decrease in revenue generated from
Year 2000 solutions services performed at the Offshore Technology Resource
Center and from the Company's decision to de-emphasize hardware solutions
services. Revenue may continue to decline as the demand for Year 2000 solution
services continues to diminish as the Year 2000 approaches.
Gross profit for the six-month period ended June 30, 1999 decreased by
38.8% to $3,408,000 from $5,572,000 for the six-month period ended June 30,
1998. Gross profit as a percentage of revenue decreased to 24.5% for the six-
month period ended June 30, 1999 from 33.5% for the six-month period ended June
30, 1998. This decrease resulted primarily from a smaller 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 for the six-month period
ended June 30, 1999 increased by 8.0% to $5,964,000 from $5,523,000 for the six-
month period ended June 30, 1998. The increase is primarily attributable to
additional support staff to support planned sales growth and costs associated
with being a public company.
The operating loss for the six-month period ended June 30, 1999 was
$2,556,000 compared to operating income of $49,000 for the six-month period
ended June 30, 1998. The operating loss as a percentage of revenue was 18.3% for
the six-month period ended June 30, 1999 as compared to income of 0.3% for the
six-month period ended June 30, 1998.
Other income was $499,000 for the six-month period ended June 30, 1999
compared to other income of $381,000 for the six-month period ended June 30,
1998. Other income included $484,000 of interest income for the six-month period
ended June 30,1999 and $331,000 of interest income for the six-month period
ended June 30, 1998. The interest income was attributable to interest earned
from investment of the net proceeds of the Company's initial public offering. In
addition, the Company recorded a foreign currency exchange gain of $20,000 for
the six-month period ended June 30,
- 12 -
<PAGE>
1999 compared to foreign currency exchange gain of $91,000 for the six-month
period ended June 30, 1998. The gain was in connection with the U.S. dollar
denominated cash and receivable balances of its Indian operations.
No income tax benefit or provision was recorded for the six-month period
ended June 30, 1999 as compared to a $49,000 tax benefit for the six- month
period ended June 30, 1998.
As a result of the foregoing, the net loss was $2,058,000 for the six-
month period ended June 30, 1999 as compared to net income of $219,000 for the
six-month period ended June 30, 1998. Basic and diluted loss per share was $0.27
for the six-month period ended June 30, 1999 as compared to earnings per share
of $0.03 for the six-month period ended June 30, 1998. Preferred stock dividends
and accretion in 1998 of $260,000 affected basic and diluted earnings per share.
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 and proceeds from the issuance of common stock.
The Company's operating activities used $1,340,000 for the six-month
period ended June 30, 1999 compared to $237,000 for the six-month period ended
June 30, 1998. Cash was used primarily to fund the operating loss.
The Company used cash of $13,062,000 during the six-month period ended
June 30, 1999 as compared to $735,000 during the six-month period ended June 30,
1998. The Company acquired $12,885,000 of marketable securities during the six-
month period ended June 30, 1999. The Company spent $177,000 for capital
expenditures during the six-month period ended June 30, 1999 as compared to
$735,000 during the six-month period ended June 30, 1998 to support planned
sales growth.
The Company did not have any financing activities for the six-month
period ended June 30, 1999; $21,561,000 was provided by financing activities for
the same period in 1998. 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, a registration statement did not cover 245,000 shares
sold by selling stockholders in the public offering. The Company has filed a
registration statement covering the 345,000 unregistered shares which was
declared effective February 5, 1999. Persons who purchased unregistered shares
in the initial public offering had rescission rights under the Securities Act of
1933. However, the Company has been released from any liability for rescission
by terms of the judgment entered by the court on August 11, 1999, in the
purported consolidated class action discussed in Note 3 above.
The Company and certain stockholders who sold shares in the initial
public offering entered into an indemnification agreement with the Company's
former counsel in the initial public offering, which held Command and those
stockholders harmless for damages which might result from any claims as a
consequence of the aforementioned circumstances. In view of the indemnification
agreement, and in light of assurances 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."
Stockholders in connection with the initial public offering are also suing the
Company. The stockholders suing the Company in their consolidated lawsuit sought
rescission of the sales of all the shares in the initial public offering and
unspecified damages, including rescissionary damages, interest, costs and fees.
On May 20, 1999, a definitive settlement agreement was executed by the parties
via their counsel. The federal district court entered a judgment approving this
settlement on August 11, 1999. See " Part II Item 1. Legal Proceedings."
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 $1,314,000. Simultaneously, with
the initial public offering, the holders of 100 shares of Series A redeemable
convertible preferred stock and the holders of 100 shares of Series B redeemable
convertible preferred stock exchanged their shares for 1,181,750 shares of
common stock. Dividends accrued during the period and previously unamortized
offering expenses have been recognized as a reduction to net income. The Company
has paid dividends of $298,000 from the proceeds of the initial public offering
in 1998.
- 13 -
<PAGE>
As of June 30, 1999, the Company had $1,747,000 in cash and cash
equivalents and had working capital of $19,600,000. During the period the
Company invested its excess cash balances primarily in U.S. Treasury Notes with
maturity dates up to two years.
In October 1998, the Company entered into a revolving line of credit,
which limits borrowings to $4.0 million, for its U.S. operations. As of June 30,
1999, no amounts were outstanding under the credit facility. Borrowings under
this bank line of credit are secured by substantially all of the Company's
tangible and intangible personal property and are utilized primarily to fund the
Company's working capital requirements. The Company is required to maintain a
minimum of the following: total net worth of five times credit facility; debt
service coverage ratio of 3:1; interest coverage of 3:1; and a current ratio of
2:1. In June 1998, Command International Software Pvt., the Company's wholly-
owned Indian subsidiary, entered into a funded and non-funded credit facility.
The funded facility provides for borrowing up to 90% of the Company's export
receivables subject to a maximum of Rs 7.5 MM (approximately $175,000), based
upon monthly export billing, and an overdraft facility of Rs .5 MM
(approximately $12,000). The export billing facility is at a base FEDAI rate of
9%; the overdraft facility is at an interest rate of 17.85%. The non-funded
facility provides for a letter of credit line in the amount of Rs .3MM
(approximately $7,000). Corresponding deposits of 15% to 25% are required for
utilized facilities. The letter of credit facility charge is 1.8% per annum; the
guarantee letter of credit facility is at a commission rate of 1%. Primarily
accounts receivable and a lien on the fixed assets of the Indian subsidiary
secure these credit facilities. As of June 30, 1999, there were no outstanding
amounts under these facilities.
The Company believes that its cash balances and funds available from the
sale of its marketable securities, together with other available funds, will be
adequate to satisfy its current and planned operations over the next 12 months.
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 completed an assessment of our information systems to
determine the extent to which our existing systems correctly define the Year
2000. Those systems found not to be compliant have been upgraded by the vendors
of those systems except for certain purchased software packages which are
expected to be upgraded and brought into compliance by their vendors before the
Year 2000. The majority of the upgrades were implemented via standard
maintenance contracts, without costs. As of this date, a nominal amount has been
expended. The remaining upgrades are expected to be implemented for minimal
cost. Based on such review we do not currently believe that we have material
exposure to the Year 2000 problem with respect to our own information systems.
With respect to the information systems of third parties that are our major
vendors, we will be seeking to obtain Year 2000 compliance certifications for
those systems that relate to our business. These third parties may include major
hardware and software vendors, as well as financial services providers. Most of
our major vendors have made public statements indicating that they intend to
cause their products and services to be Year 2000 compliant on a timely basis.
Based on the foregoing, we have not to date developed contingency plans for the
failure by our major vendors to provide Year 2000 compliant products and
services. The Year 2000 problem could affect the information systems of our
major vendors as they relate to our business. Although we believe that the
information systems of our major vendors as they relate to our business are Year
2000 compliant, we cannot be sure that the advent of the Year 2000 will not
affect our major vendors' information systems. If a major vendor's information
system fails or malfunctions significantly due to the Year 2000 problem it could
materially and adversely affect us.
- 14 -
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Risk
Approximately 5% of the Company's sales consist of work performed by
employees of the Company's Bangalore, India facility. As a result, the Company's
financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets where the Company employs its workforce. The Company's currency exposure
is concentrated in the Indian Rupee.
The Company does not hedge overseas sales denominated in foreign
currencies or translation exposures. The Company does not enter into financial
instruments for speculation or trading purposes.
The Company utilizes bank loans and other debt instruments throughout its
operation. To mitigate foreign currency risk, such debt is usually denominated
in the underlying local currency.
Interest Rate Risk
The Company's interest income and expense are most sensitive to changes
in the general level of U.S. interest rates. In this regard, changes in these
interest rates primarily affect the interest earned on cash and cash equivalents
and short-term investments.
- 15 -
<PAGE>
COMMAND SYSTEMS, INC.
Part II Other Information
Item 1. Legal Proceedings.
The discussion below references certain legal proceedings previously
reported in and as of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
On or about May 6, 1998, plaintiffs Don M. Doney, Jr. and Madelyn J.
McCabe filed a lawsuit in the United States District Court for the Southern
District of New York. The lawsuit was filed against Command, 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 initial public offering (Cowen & Company and Volpe
Brown Whelan & Company LLC). On or about June 22, 1998, the same plaintiffs
amended their complaint in the lawsuit they had filed with the United States
District Court for the Southern District of New York. On or about May 8, 1998,
another plaintiff, Chaile B. Steinberg, filed a new lawsuit against the same
defendants in the same court. On or about June 26, 1998, a plaintiff named
Michael Makinen, filed a lawsuit in the same court against the same defendants.
Each of the plaintiffs purports to represent a class consisting of purchasers of
common stock pursuant to the initial public offering. These lawsuits were
consolidated into one lawsuit by order of the United States District Court for
the Southern District of New York. Consequently, the plaintiffs filed a
consolidated complaint named In Re Command Systems, Inc. Securities Litigation
on September 30, 1998, seeking to represent a class of purchasers of common
stock from March 12, 1998 the date of Command's initial public offering through
April 29, 1998. The consolidated complaint alleges that the defendants violated
the Securities Act of 1933 in that the Company failed to properly register
345,000 shares of common stock that were sold in the initial public offering,
and consequently the defendants sold unregistered securities to the public, and
the prospectus for the initial public offering contained untrue statements of
material fact and omitted to state other facts necessary to make the statements
made in the prospectus not misleading with respect to the unregistered shares,
the Company's business strategy and other matters.
The plaintiffs sought rescission of the sales of the shares in the
initial public offering and unspecified damages, including rescissionary
damages, interest, costs and fees. On May 20, 1999, a definitive settlement
agreement (the "Stipulation of Settlement" or "Stipulation") was executed by the
parties via their counsel. The court entered a judgment approving this
settlement on August 11, 1999. Pursuant to the terms of the Stipulation, the
parties agreed to a total payment from the Company to the plaintiffs of $5.75
million in cash plus accrued interest, minus approved attorneys' fees and
related expenses. The $5.75 million accumulated interest as of June 11, 1999,
the date of the preliminary court approval of the Stipulation of Settlement, but
will not be payable until the court's judgment of August 11, 1999 is no longer
subject to appeal. Such judgment is not appealable after 30 days from the date
the judgment was entered. In addition, the Company may be responsible for
certain legal fees and related expenses incurred in connection with the
litigation. The Company recognized a charge to operations of $1.8 million in the
fourth quarter of 1998 for costs of the settlement and related expenses.
Of the $5.75 million to be deposited in a settlement fund by the Company,
the Company will be reimbursed for all but $1.65 million. This reimbursement
will come in part from the Company's insurance carrier and the rest pursuant to
the indemnification agreement with the Company's former counsel in the initial
public offering. In addition, the Company may be responsible for certain legal
fees and related expenses incurred in connection with the litigation.
In the settlement, the members of the class represented by plaintiffs
gave up their right to assert individual claims against the Company or its
underwriters, based on their purchase of the Company's common stock in the
initial public offering and in the open market during the period from March 12,
1998 through April 29, 1998. In return for this concession, class members became
entitled to share pro rata in the $5.75 million cash settlement fund, plus
interest, minus approved attorneys' fees and related expenses. No class member
chose not to participate in, or to "opt-out" of, the settlement.
- 16 -
<PAGE>
The settlement provided for a pro rata distribution of the cash
settlement fund, plus interest, minus approved attorneys' fees and related
expenses, to purchasers of the Company's common stock in the period from March
12 through April 29, 1998, inclusive. Without knowing the number of claimants,
the Company cannot estimate the net amount actually payable on a per share
basis.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
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, 1999.
- 17 -
<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.
8/16/99 /s/ Edward G. Caputo
- ----------------------- ----------------------------------------------
(Date) President and Chief Executive Officer
(principal executive officer)
8/16/99 /s/ Stephen L. Willcox
- ----------------------- ----------------------------------------------
(Date) Chief Financial Officer
(principal financial and accounting officer)
- 18 -
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SIX MONTHS
ENDED JUNE 30, 1999 IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
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<SECURITIES> 15,709,803 2,824,417
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