<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 First Quarter Ended March 31, 1999
Commission file number: 0-23797
-------
Command Systems, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1527672
- ------------------------------- ------------------------------------
(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 (Zip Code)
executive officers)
(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 May 12, 1999.
<PAGE>
Command Systems, Inc.
INDEX
-----
Part I Financial Information
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998..................... 1
Condensed Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998............... 2
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998............... 3
Condensed Consolidated Statements of
Stockholders' Equity (Deficit)......................... 4
Notes to Unaudited Condensed Consolidated
Financial Statements as of March 31, 1999.............. 5-9
Item 2 Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................................... 10-13
Item 3 Quantitative and Qualitative Disclosures
About Market Risk........................................ 14
Part II Other Information
Item 1. Legal Proceedings........................................ 15
Item 2. Changes in Securities.................................... 16
Item 3. Defaults Upon Senior Securities.......................... 16
Item 4. Submission of Matters to a Vote of Security Holders...... 16
Item 5. Other Information........................................ 16
Item 6. Exhibits and Reports on Form 8-K......................... 17
Signatures............................................... 18
<PAGE>
Command Systems, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 12,862,603 $ 16,169,749
Marketable securities 4,584,333 2,824,417
Accounts receivable, net of allowance for doubtful accounts
of $427,714 and $341,942 in 1999 and 1998 6,749,059 6,433,864
Prepaid expenses and other assets 609,399 571,285
Income taxes recoverable 386,883 364,892
------------ ------------
Total current assets 25,192,277 26,364,207
Furniture and improvements
Furniture and equipment 2,942,923 2,857,215
Leaseholds improvements 998,774 995,030
------------ ------------
3,941,697 3,852,245
Less accumulated depreciation and amortization (1,777,521) (1,569,489)
------------ ------------
Net equipment and improvements 2,164,176 2,282,756
Other assets:
Goodwill, net of accumulated amortization
of $570,445 and $456,356 in 1999 and 1998 6,274,893 6,388,982
Deposits 471,043 459,705
Other non-current assets 103,995 152,041
------------ ------------
Total assets $ 34,206,384 $ 35,647,691
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses $ 2,222,210 $ 2,505,343
Accrued stockholder litigation and related expenses 1,800,000 1,800,000
Deferred revenue 89,350 132,710
Accrued payroll and related costs 850,453 754,292
------------ ------------
Total current liabilities 4,962,013 5,192,345
Stockholders' Equity:
Common stock, $.01 par value, 25,000,000 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 (3,878,614) (2,664,069)
Accumulated other comprehensive loss (312,313) (315,883)
------------ ------------
Total stockholders' equity 29,244,371 30,455,346
------------ ------------
Total liabilities and stockholders' equity $ 34,206,384 $ 35,647,691
============ ============
</TABLE>
* See notes to unaudited condensed consolidated financial statements.
Note: The balance sheet at December 31, 1998 has been derived from the audited
consolidated 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 March 31,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
Revenue $ 6,932,411 $ 7,933,745
Cost of revenue 5,366,725 5,110,131
----------- -----------
Gross profit 1,565,686 2,823,614
Selling, general and administrative expense 3,048,855 2,271,372
----------- -----------
Operating (Loss) income (1,483,169) 552,242
Other income (expense):
Other income 16,117 -
Interest income 256,763 49,219
Interest expense (4,256) (42,740)
----------- -----------
268,624 6,479
----------- -----------
(Loss) income before income taxes (1,214,545) 558,721
Income tax provision - 104,281
----------- -----------
Net (loss) income (1,214,545) 454,440
Preferred stock dividends and accretion - 260,303
----------- -----------
(Loss) income applicable to common stockholders $(1,214,545) $ 194,137
=========== ===========
Basic and diluted (loss) earnings per share* $ (0.16) $ 0.04
=========== ===========
</TABLE>
* See notes to unaudited condensed consolidated financial statements.
2
<PAGE>
Command Systems, Inc.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,214,545) $ 454,440
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization 320,683 288,050
Bad debt expense 88,200 (60,000)
Gain on disposal of equipment 9,816 -
Other - 1,585
Changes in operating assets and liabilities:
Accounts receivable (403,395) (672,969)
Prepaid expenses and other assets (124,484) 102,611
Deposits and other noncurrent assets 41,424 (850)
Accounts payable and accrued expenses (223,710) (95,883)
Accrued payroll and related costs 96,161 (69,890)
Deferred revenue (43,360) (153,969)
Income taxes payable - (40,452)
------------ ------------
Net cash used in operating activities (1,453,210) (247,327)
Cash flows from investing activities:
Purchases of equipment and improvements (96,097) (272,253)
Sales of available for sale securities 1,747,455 -
Purchases of available for sale securities (3,507,371) -
------------ ------------
Net cash used in investing activities (1,856,013) (272,253)
Cash flows from financing activities:
Payments under revolving line of credit agreement - (857,535)
Payments of bank loan - (556,952)
Issuance of common stock - 23,256,786
Payment of preferred stock dividend - (297,641)
------------ ------------
Net cash provided by financing activities - 21,544,658
Effect of exchange rate changes on cash 2,077 (15,368)
(Decrease) increase in cash (3,307,146) 21,025,078
Cash, beginning of period 16,169,749 391,687
------------ ------------
Cash, end of period $ 12,862,603 $ 21,401,397
============ ============
Cash paid for:
Interest expense $ - $ 42,740
Income taxes $ - $ 99,831
</TABLE>
* See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
COMMAND SYSTEMS, INC.
Condensed Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Retained Other
---------------------- Paid in Earnings Comprehensive
Shares Amount Capital (Deficit) Income/(loss) Total
--------- ------- ----------- ----------- ------------- -----------
<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 - - (1,214,545) - (1,214,545)
Translation adjustment - - - - 3,570 3,570
--------- ------- ----------- ----------- --------- -----------
Balance at March 31, 1999 (unaudited) 7,656,750 $34,818 $33,400,480 $(3,878,614) $(312,313) $29,244,371
========= ======= =========== =========== ========= ===========
</TABLE>
* See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
Command Systems, Inc.
Notes To Unaudited Condensed Consolidated Financial Statements
March 31,1999
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 three-month period ended
March 31, 1999 are not necessarily indicative of the results that may
be expected for the year-ended 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 have rescission rights under the Securities
Act of 1933. If the purchaser has not sold the shares, the right to
rescind means he or she can sue to exchange the unregistered shares
for an amount equal to what he or she paid for the shares, plus
interest. If the purchaser no longer owns the unregistered shares,
and sold them at a loss, he or she may sue for damages. The maximum
rescission liability for the 100,000 unregistered shares which the
Company sold would be $1,200,000 (100,000 shares at $12 per share)
plus interest. The Company
5
<PAGE>
has not recognized a liability based on the rescission of the 100,000
unregistered shares since, as noted above, only someone who is still
holding the same shares he or she bought in the initial public
offering has a right of rescission. The large trading volume
subsequent to the initial public offering suggests a substantial
turnover in share ownership and for each individual purchaser, the
Company is unable to identify which shares were registered and which
were not; the Company believes it is not probable that it will be
required to effect an actual rescission instead of paying
rescissionary damages.
As indicated previously, stockholders who purchased unregistered
shares in the offering may recover damages if they sold such
securities at a loss. The Company and the selling stockholders in the
initial public offering have entered into an agreement with the
Company's former securities counsel which served as the Company's
counsel in the initial public offering which would hold the Company
and the selling stockholders harmless for damages which might result
from any claims as a consequence of the aforementioned circumstances.
In view of such hold harmless agreement, and in light of assurances
the Company has received concerning the professional indemnity
insurance maintained by such counsel, the Company does not believe
that any claims relating to the foregoing will have a material adverse
effect on its financial condition.
In addition, the plaintiffs in the purported consolidated class action
discussed in Note 3 below seek rescission of the sales of the shares
in the initial public offering and unspecified damages, including
rescissionary damages, interest, costs and fees. Such stockholder
litigation, if concluded in favor of the plaintiffs, could have a
material adverse effect on the Company's business, financial condition
and results of operations. However, the Company and the individual
defendants have entered into a memorandum of understanding to settle
the dispute with the plaintiffs in the purported consolidated class
action. Any definitive agreement resulting from such memorandum will
require court approval. No assurance can be given that a definitive
settlement agreement will be reached, or that , if reached, it will be
approved.
The Company 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
6
<PAGE>
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 dates of the initial public offering, through
April 29, 1999. 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 seek rescission of the sales of the shares in the
initial public offering and unspecified damages, including
rescissionary damages, interest, costs and fees. Such shareholder
litigation, if concluded in favor of the plaintiffs, could have a
material adverse effect on the Company's business, financial condition
and results of operations. On December 7, 1998, the Company and the
other defendants entered into a memorandum of understanding to settle
the dispute, but a memorandum of understanding is not a definitive
settlement agreement. A definitive settlement agreement resulting
from the memorandum will also require court approval. By the terms of
the memorandum, the parties have agreed in principle to a total
payment from the Company to the plaintiffs of $5.75 million in cash
plus accrued interest, minus approved attorney's fees and related
expenses. The $5.75 million will accumulate interest as of the date
of the preliminary court approval of a definitive settlement agreement
entered into among the parties based on the memorandum, but will not
be payable until the court approves the settlement and such approval
is final. 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. There can be no assurance, however, that a
definitive settlement agreement will be reached, or that, if reached,
it will be approved by the court.
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. The
Company cannot be certain, however, that a definitive settlement
agreement will be reached, or that if it is reached, that the court
will approve it.
In the definitive settlement agreement, the members of the class
represented by plaintiffs will give up their right to assert
individual claims against the Company
7
<PAGE>
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 will be entitled to share pro rata in the
$5.75 million cash settlement fund, plus interest, minus approved
attorneys' fees and related expenses, upon the court's final approval
of the settlement. Any class member can decide not to participate in
the settlement, and choose to pursue his or her individual claim
against the Company or the other defendants, by filling out and
returning an "opt-out" form which will be mailed to all class members
following the court's preliminary approval of the settlement.
The memorandum of understanding provides 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 and the amount of attorneys'
fees and expenses to be approved by the court, the Company cannot
estimate the net amount actually payable on a per share basis.
If the court decides not to approve the settlement, the stockholder
litigation will continue. If concluded in favor of the plaintiffs,
such litigation could have a material adverse effect on the Company's
business, financial condition and results of operations.
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 (loss)
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Numerator:
Net (loss) income $(1,214,545) $ 454,440
Preferred stock dividends and accretion - 260,303
----------------- -----------------
Numerator for basic and diluted (loss) earnings per share $(1,214,545)
applicable to common stockholders $ 194,137
================= ==================
Denominator:
Weighted-average shares outstanding for basic (loss) earnings
per share 7,656,750 4,876,952
Effect of Dilutive Securities:
Employee Stock Options - 60,943
----------------- -----------------
================= ==================
Weighted-average shares outstanding for diluted loss earnings
per share 7,656,750 4,937,895
================= ==================
Basic and diluted (loss) earnings per share applicable to common
stockholders $ (.16) $.04
================= ==================
</TABLE>
8
<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 months ended March 31:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
--------------------------------------------
<S> <C> <C>
Net (loss) income $(1,215,000) $454,000
Other comprehensive (loss) income:
Foreign currency translation adjustments (4,000) -
-------------------- ------------------
Other comprehensive (loss) income
$(1,219,000) $454,000
==================== ==================
</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
Three months ended March 31, 1999
<S> <C> <C> <C> <C>
Revenue $ 6,900,776 $ 287,630 $(255,995) $ 6,932,411
Operating loss (1,122,212) (360,957) - (1,483,169)
Identifiable assets 29,876,598 4,329,786 - 34,206,384
Three months ended March 31, 1998
<S> <C> <C> <C> <C>
Revenue $ 7,933,745 $1,104,264 $(1,104,264) $ 7,933,745
Operating income 134,478 417,764 - 552,242
Identifiable assets 31,776,765 4,278,952 - 36,055,717
</TABLE>
9
<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 Company's
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,
risks associated with the year 2000 solutions services offering and the finite
nature of demand for Year 2000 solutions services offering, 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 our customers with increased access to skilled IT
professionals on a cost-effective basis.
Management is aware that as a result of the detonation of nuclear devices
in India, there may be some adverse economic repercussions caused by the
institution of sanctions or other similar actions, the effects of which are
unknown to management at this time. No assurance can be given that such
actions would not have a material adverse effect on the Company's business,
financial condition or results of operations.
Impact of the Year 2000 Issue
The Year 2000 Issue refers to potential problems with computer systems or any
equipment with computer chips or software that use dates where the date has been
stored as just two digits (e.g., 97 for 1997). On January 1, 2000, any clock or
date recording mechanism incorporating date sensitive software which uses only
two digits to represent the year may recognize a date using 00 as the Year 1900
rather than the Year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar business activities.
We have 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
10
<PAGE>
problem with respect to our own information systems. With respect to
the information systems of third parties who 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.
Results of Operations
Three Months Ended March 31, 1999 Compared With Three Months Ended March
31, 1998
Revenue during the three-month period ended March 31, 1999 decreased by
12.6 % to $6,932,000 from $7,934,000 for the first quarter ended March 31,
1998. This decrease resulted primarily from an 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. Future revenue growth may be affected as the
demand for Year 2000 solution services diminishes as Year 2000 approaches.
Gross profit for the three-month period ended March 31, 1999 decreased by
44.6% to $1,566,000 from $2,824,000 for the three-month period ended March
31, 1998. Gross profit as a percentage of revenue decreased to 22.6% for
the period ended March 31, 1999 from 35.6% for the period ended March 31,
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.
The decrease also resulted from the Company's decision to de-emphasize
hardware solutions services. Future gross profit as a percentage of revenue
may be affected as the demand for Year 2000 solution services continues to
diminish as the Year 2000 approaches.
Selling, general and administrative expenses consist primarily of salaries
and employee benefits for selling and administrative personnel as well as
travel, telecommunications and occupancy costs for the Company's U.S. and
India operations. Selling, general and administrative expenses, net of
amortization for goodwill, for the three-month period ended March 31, 1999
increased by 36.1% to $2,935,000 from $2,157,000 for the three-month period
ended March 31, 1998. The increase is primarily attributed to the increase
in support staff necessary to support anticipated increased revenues in the
project business and the costs associated with operating as a public
company.
Amortization of goodwill for each of the three-month period ended March 31,
1999 and 1998 amounted to $114,000. On December 31, 1997, the Company
purchased the 49% minority interest of its Offshore Technology Resource
Center from Phoenix Home Life Mutual Insurance ("PHL"). The Company
accounted for this as a purchase and recognized the $6,845,000 excess of
the purchase price over the fair value of the assets acquired and
liabilities assumed as goodwill.
Loss from operations for the three month period ended March 31, 1999 was
$(1,483,000) compared to income of $552,000 for the three month period
ended March 31, 1998. Loss from operations as a percentage of revenue was
(21.4)% during the three-month period ended March 31, 1999 as compared to
income of 7.0% for the three-month period ended March 31, 1998.
Other income was $269,000 for the three-month period ended March 31, 1998
compared to net interest income of $6,000 for the three-month period ended
March 31, 1998. Other income included
11
<PAGE>
$257,000 of interest income that was attributable to interest earned from
investment of the net proceeds of the initial public offering during the three-
month period ended March 31, 1999.
No income tax benefit was recorded for the three-month period ended
March 31, 1999, due to an increase in the valuatoin allowance; the Company
recorded a $104,000 tax provision for the three-month period ended March 31,
1998.
As a result of the foregoing, the net loss was $(1,215,000) for the
three month period ended March 31, 1999 as compared to net income of $454,000
for the three month period ended March 31, 1998. Basic and diluted loss per
share was $(0.16) for the three month period ended March 31, 1999 as compared to
basic and diluted earnings per share of $0.04 for the three month period ended
March 31, 1998. Basic and diluted earnings per share are effected by preferred
stock dividends and accretion for the three-month period ended March 31, 1998.
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 $1,453,000 for the three month
period ended March 31, 1999 compared to $247,000 for the three months ended
March 31, 1998. The use of cash was primarily used to fund the loss from
operations.
The Company used cash of $1,856,000 during the three months ended March 31,
1999 for marketable securities and capital expenditures for infrastructure
support items. The Company spent $272,000 for capital expenditures to support
planned sales growth during the three months ended March 31,1998.
No funds were provided by the Company's financing activities for the three
months ended March 31, 1999 and $21,545,000 was provided 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, 245,000 shares sold by selling stockholders in the public offering in
March 1998 were not covered by a registration statement. The Company has filed a
registration statement covering the 345,000 unregistered shares which declared
effective February 5, 1999. Persons who purchased unregistered shares in our
initial public offering have rescission rights under the Securities Act of
1933. If the purchaser has not sold the shares, the right to rescind means he
or she can sue to exchange the unregistered shares for an amount equal to what
he or she paid for the shares, plus interest. If the purchaser no longer owns
the unregistered shares, and sold them at a loss, he or she may sue for damages.
The maximum rescission liability for the 100,000 unregistered shares which the
Company sold would be $1,200,000 (100,000 shares at $12 per share) plus
interest. The Company has not recognized a liability based on the rescission of
the 100,000 unregistered shares since, as noted above, only someone who is still
holding the same share he or she bought in the initial public offering has a
right of rescission. Since the large trading volume subsequent to the Company's
initial public offering suggests a substantial turnover in share ownership and
for each individual purchaser, the Company is unable to identify which shares
were registered and which were not. The Company believes it is not probable that
we will be required to effect an actual rescission, instead of paying
rescissionary damages
The Company and certain stockholders who sold shares in the initial public
offering have entered into an indemnification agreement with the Company's
former counsel in the initial public offering, which would hold 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
12
<PAGE>
adverse effect on its financial condition. . See "Part I Item 1 Financial
Statements Note 2 to the Unaudited Condensed Consolidated Financial Statements".
The Company is also being sued by stockholders in connection with the initial
public offering. The stockholders suing the Company in their consolidated
lawsuit seek rescission of the sales of all the shares in the initial public
offering and unspecified damages, including rescissionary damages, interest,
costs and fees. If the lawsuit is concluded in favor of the stockholders suing
the Company, business, financial condition and results of operations may be
materially and adversely affected. The Company and the other defendants have
entered into a memorandum of understanding to settle the dispute with the
stockholders suing the Company, but a memorandum of understanding is not a
definitive settlement agreement. A definitive settlement agreement resulting
from the memorandum will also require court approval. The Company cannot be
certain that a definitive settlement agreement will be reached, or that, if it
is reached, that the court will approve it. 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.
As of March 31, 1999, the Company had $12,863,000 in cash and cash
equivalents and had working capital of $20,230,000. In October 1998, the
Company entered into a new revolving line of credit which limits borrowings to
$4.0 million, for our U.S. operation. As of March 31, 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%. Then 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%. These credit facilities are
secured primarily by accounts receivable and a lien on the fixed assets of the
Indian subsidary. As of March 31, 1999 there was no outstanding amounts under
these facilities.
In the past, the Company has been in default of certain similar covenants
under a previous line of credit facilities and has had to obtain waivers. While
we do not anticipate utilizing this credit facility in the near future, if we do
borrow under the line, we may be required to seek additional amendments or
waivers. Although we anticipate that we would be able to obtain such amendments
or waivers, there can be no assurance that we 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 our current and planned operations
over the next 12 months.
13
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Risk
Approximately, 10% of the Company's sales consist of work performed by
employees 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, charges in these
interest rates primarily affect the interest earned on cash and cash equivalents
and short term investments.
14
<PAGE>
Command Systems, Inc.
Part II Other Information
Item 1. 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 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 purport
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
stocks from March 12, 1998 the date of Command's initial public offering
through April 29, 1999. 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 seek rescission of all the sales of the shares in the
initial public offering and unspecified damages, including rescissionary
damages, interest, costs and fees. Such shareholder litigation, if
concluded in favor of the plaintiffs, could have a material adverse effect
on the Company's business, financial condition and results of operations.
On December 7, 1998, the Company and the other defendants entered into a
memorandum of understanding to settle the dispute with the plaintiffs, but
a memorandum of understanding is not a definitive settlement agreement. A
definitive settlement agreement resulting from the memorandum will also
require court approval. By the terms of the memorandum, the parties have
agreed in principle to a total payment from Command to the plaintiffs of
$5.75 million in cash plus accrued interest, minus approved attorney's fees
and related expenses. The $5.75 million will accumulate interest as of the
date of the preliminary court approval of a definitive settlement agreement
entered into among the parties based on the memorandum, but will not be
payable until the court approves the settlement and such approval is final.
In addition, the Company may be responsible for certain legal fees and
related expenses incurred in connection with the litigation. The Company
recognized a one-time charge to operations
15
<PAGE>
in the fourth quarter of 1998 in the amount of $1,800,000 for the cost of
the settlement and related expenses. There can be no assurance, however,
that a definitive settlement agreement will be reached, or that it will be
approved by the court.
Of the $5.75 million to be deposited in a settlement fund by Command,
the Company will be reimbursed for all but $1.65 million. This
reimbursement will come in part from Command'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. The Company cannot be certain, however,
that a definitive agreement will be reached, or that if it is reached, that
the court will approve it.
In the definitive settlement agreement, the members of the class
represented by plaintiffs will give up their right to individually assert
claims against Command or its underwriters, based on their purchase of the
Company' 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 will be entitled to share pro rata in
the $5.75 million cash settlement fund, plus interest, minus approved
attorneys' fees and related expenses, upon the court's final approval of
the settlement. Any class member can decide not to participate in the
settlement, and choose to pursue his or her individual claim against
Command or the other defendants, by filling out and returning an "opt-out"
form which will be mailed to all class members following the court's
preliminary approval of the settlement.
The memorandum of understanding provides for a pro rata distribution
of the cash settlement fund, plus interest, minus approved attorneys' fees
and related expenses, to purchasers of Command common stock in the period
from March 12 through April 29, 1998, inclusive. Without knowing the
number of claimants and the amount of attorneys' fees and expenses to be
approved by the court, the Company cannot estimate the net amount actually
payable on a per share basis.
If the court decides not to approve the settlement, the stockholder
litigation will continue. If concluded in favor of the plaintiffs, such
litigation could have a material adverse effect on the Company's business,
financial condition and results of operation.
Item 2. Changes in Securities
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
March 31, 1999.
16
<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.
5/17/99 /s/ Edward G. Caputo
- ------------------------------ --------------------------------------
(Date) President and Chief Executive Officer
(principal executive officer)
5/17/99 /s/ Stephen L. Willcox
- ------------------------------ --------------------------------------------
(Date) Chief Financial Officer
(principal financial and accounting officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1999 10Q 1ST QTR. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 DEC-31-1998
<CASH> 12,862,603 16,169,749
<SECURITIES> 4,584,333 2,824,417
<RECEIVABLES> 7,176,773 6,775,806
<ALLOWANCES> 427,714 341,942
<INVENTORY> 0 0
<CURRENT-ASSETS> 25,192,277 26,364,207
<PP&E> 3,941,697 3,852,245
<DEPRECIATION> 1,777,521 1,569,489
<TOTAL-ASSETS> 34,206,384 35,647,691
<CURRENT-LIABILITIES> 4,962,013 5,192,345
<BONDS> 0 0
0 0
0 0
<COMMON> 34,818 34,818
<OTHER-SE> 312,313 315,883
<TOTAL-LIABILITY-AND-EQUITY> 34,206,384 35,647,691
<SALES> 6,932,411 35,214,586
<TOTAL-REVENUES> 6,932,411 35,214,586
<CGS> 5,366,725 24,527,627
<TOTAL-COSTS> 5,366,725 24,527,627
<OTHER-EXPENSES> 3,048,855 13,725,527
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (4,256) (40,536)
<INCOME-PRETAX> (1,214,545) (2,084,846)
<INCOME-TAX> 0 317,589
<INCOME-CONTINUING> (1,214,545) (1,767,257)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,214,545) (1,767,257)
<EPS-PRIMARY> (.16) (.29)
<EPS-DILUTED> (.16) (.29)
</TABLE>
