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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File No. 0-23797
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COMMAND SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1527672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Pondview Corporate Center, 76 Batterson Park Road, Farmington, CT 06032
(Address of principal executive offices, including zip code)
(860) 409-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $0.01 Par Value
(Title of Class)
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
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shorter period 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 [ ]
Indicate by check mark if disclosure or delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock (Common Stock, $.01 par value)
held by non-affiliates of the registrant on March 15, 2000 was $14,737,000 based
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on the closing sales price of the Common Stock on such date.
The aggregate number of Registrant's shares outstanding on March 15, 2000 was
7,656,750 of Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed for the
registrant's 1999 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Form 10-K.
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COMMAND SYSTEMS, INC.
1999 Form 10-K
Table of Contents
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PART I Page No.
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Item 1. Business
Item 2. Properties................................................................ 4
Item 3. Legal Proceedings......................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders....................... 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 17
Item 6. Selected Consolidated Financial Data...................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................. 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................ 25
Item 8. Financial Statements and Supplementary Data............................... 25
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure....... 25
PART III
Item 10. Directors and Executive Officers of Registrant............................ 26
Item 11. Executive Compensation.................................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 26
Item 13. Certain Relationships and Related Transactions............................ 26
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PART IV
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Item 14. Exhibits, Consolidated Financial Statement Schedule and Reports on
Form 8-K.............................................................. 26
Item 15. Signature Page........................................................ 29
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PART I
Item 1. BUSINESS
Introduction
We provide a wide range of information technology (IT) services and solutions to
large financial services and insurance organizations, middle market companies
and public sector organizations to support their evolving business needs. Our
services are delivered through the use of seamless on-site and offshore
consulting project teams. We strive to establish long-term client relationships
and to secure additional engagements with existing clients by providing quality
services and by being responsive to client needs. We are headquartered in
Farmington, Connecticut and maintain offices in Hartford, New York, Boston and
Stamford supported by an offshore technology resource center in Bangalore,
India.
In 1996, through a joint venture with Phoenix Home Life Mutual Insurance
Company, we created our offshore technology resource center in Bangalore, India.
The facility, which we now wholly own, is ISO 9001 certified and is connected
via a securepoint-to-point link to our headquarters, branch offices and customer
sites. It offers our clients certain advantages as compared to domestic
maintenance and/or development, including (1) cost savings; (2) faster response
time and delivery, as larger teams can be deployed; (3) virtual 24-hour
schedules, due to the time difference between North America and India; and (4)
access to a larger pool of skilled, English-speaking IT professionals.
On February 3, 2000, we announced the formation of Command e-Solutions. The
entire focus of Command e-Solutions is devoted to assisting clients who are
creating e-businesses or are rethinking or expanding their existing businesses
to integrate e-business capabilities. Command e-Solutions combines the
e-business development talents of our United States and India based project
teams and provides clients with high quality Internet technology capabilities.
We service a broad range of industries including consumer products, financial
services, insurance, manufacturing, pharmaceuticals, professional services,
retail and technology. In 1999, we provided services to over 100 customers.
Market Opportunity
Many businesses today are facing intense competition, accelerating technological
change, personnel downsizing and widespread business process reengineering.
Increasingly, these companies are turning to IT solutions to address these
issues and to compete more effectively. As a result, the ability of an
organization to integrate and deploy new information technologies has become
critical. Although many companies have recognized the importance of IT systems
and products to compete in this business climate, the process of designing,
developing and implementing IT solutions has become increasingly complex.
Companies are continuing to migrate away from centralized mainframes running
proprietary software toward decentralized, scalable architectures based on
personal computers, client/server architectures, local and wide area networks,
the Internet, shared databases and packaged application software. These advances
have greatly enhanced the ability of companies to benefit from the application
of IT.
During this time of increasing reliance on IT, rapid technological change and
other challenges have strained the capabilities of the internal departments
within these organizations. At the same time, external economic factors have
forced organizations to focus on core competencies and trim workforces in the IT
management area. Accordingly, these organizations often lack the quantity or
variety of IT skills necessary to design and develop emerging IT solutions.
Consequently, businesses are increasingly
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looking to outsource IT services. By outsourcing IT services, companies are able
to focus on their core business, access specialized technical skills, implement
IT solutions more rapidly, benefit from flexible staffing and reduce the cost of
recruiting, training and retaining IT professionals.
The Internet has created numerous revenue growth and operating efficiency
opportunities. As a result, a growing number of companies are turning to
Internet professional services firms to design and implement their Internet and
e-commerce solutions. According to Forrester Research, the market for such
Internet and e-commerce services in the United States is projected to grow from
$10.6 billion as of November 1999 to $64.8 billion in 2003, representing a
compound growth rate of 59%.
The Command Systems Solution
Our solution is designed to enable large financial services and insurance
organizations, middle market companies, and public sector organizations to use
IT as a more effective business tool to support their evolving business needs.
We deliver high-quality, cost-effective, full life-cycle solutions for complex
IT problems, including e-business development, through the use of a seamless on-
site and offshore project team. Our solutions give companies the insight and
technology they need to evolve in increasingly competitive markets. The
following are key attributes of our solution:
Broad Range of IT Services. We provide our customers with a single source for a
broad range of IT services required to successfully design, develop and
implement integrated solutions in the client/server, Internet and midrange
computing environments including:
. e-business development,
. Internet/intranet applications,
. network design and deployment,
. outsourcing solutions,
. application and systems development,
. database design and development, and
. staff augmentation services.
In addition, we utilize leading technologies such as object-oriented
development, database management systems and various Internet/intranet
networking technologies.
Continually Expand Our Solution Offerings. We continually leverage our core
competencies to develop new solution capabilities that we then market to
existing and potential clients. For example, advances in technology and
functionality have led to the widespread acceptance of the Internet as a new
global medium that allows people to share information and conduct commerce. Much
of the growth of the Internet has been driven by corporate recognition that the
Internet can be used to achieve competitive advantage. To meet this demand, on
February 3, 2000 we announced the formation of Command e-Solutions to expand our
Internet/e-commerce service offerings. The focus of Command e-Solutions is to
help companies gain competitive advantage through the use of the Internet and
e-business solutions.
A Strategic Focus on the Financial Services Industry. By focusing on the
financial services industry since 1985, and particularly on the needs of large
insurance companies, we have developed expertise in a large vertical market
dominated by large organizations with extensive IT needs. We seek to leverage
our expertise in the financial services industry to increase our customer base
and to increase our business from existing customers. By hiring personnel with
experience in the financial services industry, we have been able to establish
new relationships with customers in this industry as well as maintain or
strengthen existing relationships.
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Offshore Technology Resource Center. In 1996 we established the offshore
technology resource center in Bangalore, India. It offers our clients certain
advantages as compared to domestic maintenance and/or development, including (1)
cost savings; (2) faster response time and delivery, as larger teams can be
deployed; (3) virtual 24-hour schedules, due to the time difference between
North America and India; and (4) access to a larger pool of skilled,
English-speaking IT professionals.
Expertise in Key and Emerging Technologies. We hire highly skilled personnel who
are experienced with key technologies, such as client/server development and
design and network integration, and emerging technologies, such as data
warehousing and object-oriented analysis and design. Additionally, our IT
professionals receive training in a variety of technology platforms. We assist
customers in understanding the latest IT developments and guide them through the
implementation of the IT solutions best suited to their needs.
Business Strategy
Our objective is to become the preferred single-source provider of IT services
to an expanding base of customers by establishing teams that quickly and cost
effectively provide industry-based IT solutions. Our strategies to achieve this
objective include the following:
Cross-Sell Services to Existing Customers. Our relationships with our customers
provide us with an opportunity to market additional services and solutions to
such customers. We seek to maximize our customer retention rate and secure
additional engagements by providing high-quality responsive services.
Leverage Expertise in Insurance Market. We seek to leverage our expertise within
the insurance industry into a larger, more diverse customer base within the
broader financial services market, especially as deregulation encourages the
creation of full-service financial services organizations. Large companies
dominate the insurance, banking and other financial service industries, with
extensive IT needs. We seek to leverage our industry-specific expertise and our
existing accounts into a larger number of customers in these IT intensive
markets. As we expand our customer base, we intend to open additional regional
sales offices in the U.S. to enable us to sell to and support existing and new
customers in expanded geographic areas and industries. To achieve these goals,
we may seek strategic acquisitions of organizations that complement or enhance
our core skills.
Migration to Higher Margin Services. We seek to derive a greater percentage of
our revenue from higher margin services. A core element of our growth strategy
is to derive an increasing percentage of our revenue from higher margin
Command-managed projects as opposed to lower margin client-managed staff
augmentation projects.
Utilize Offshore Technology Resource Center. We believe that our offshore
infrastructure improves our access to IT professionals, reduces our clients'
costs associated with IT services and enables us to provide better support to
our customers. This facility utilizes state-of-the-art technology and is
connected via a secure point to point link to our headquarters, branch offices
and customer sites.
Continued Development of Long-Term Relationships with Customers. We seek to
develop long-term strategic relationships with our customers and leverage these
relationships into additional project opportunities. For example, the knowledge
of customers' systems gained during the performance of Year 2000 solutions has
provided us with a competitive advantage in securing additional projects from
these customers. We continue to develop preferred provider relationships with
our customers. Our on-site personnel are integrated into the operations of our
customers' IT departments. In addition, we make significant investments in
technology enhancements to support the strategic technical direction of our
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customers. We also use several methods to obtain continuous customer feedback,
including consultant performance surveys and regularly scheduled meetings with
senior management of each customer. A significant portion of the compensation of
our senior executives, sales executives, recruiters and senior solution and
project managers is directly linked to customer satisfaction and the delivery of
high quality, timely IT services at or below budget. We believe that these
initiatives foster long-term customer satisfaction as evidenced by the fact that
for each of the fiscal years ended December 31, 1999, 1998 and 1997 existing
customers from the previous fiscal year generated over 60% of our revenue.
Attract, Train and Retain Highly Skilled IT Professionals. Our future success
depends to a significant extent on our ability to attract, train, motivate and
retain highly skilled IT professionals, particularly solution and project
managers, software engineers and other technology leaders. To achieve this
objective, we maintain programs and personnel to identify and hire the best
available IT professionals. We conduct training of our IT professionals in both
legacy systems and emerging technologies to enhance our methodologies. In order
to attract , maintain and retain our employees, we focus on our corporate
culture, incentive programs, compensation and benefits and provide a career and
education management program to create an individualized structured career
growth plan for our employees. We also have access to a large pool of IT
professionals through our state-of-the-art Bangalore facility.
Services
We offer our clients a single source for a comprehensive range of IT services
required to successfully design, develop and implement integrated IT solutions
in diverse computing environments including: (1) e-business development; (2)
Internet/intranet applications; (3) network design and deployment; (4)
outsourcing solutions; (5) applications and systems development; (6) database
design and development; and (7) staff augmentation. These services may be
provided individually or as a combination of service offerings to provide
complete solutions. We believe the successful implementation of major projects
requires a wide range of skills and a comprehensive methodology for delivering
these services. Accordingly, we employ senior consultants who possess
industry-specific knowledge and a broad range of technical expertise. We have
adopted an integrated approach to providing solutions to our customers. Each of
our service offerings is led by a technology leader, supported by a team of
dedicated IT consultants with focused expertise in the technologies specific to
the service offering. Our dedicated teams of service providers work closely with
each other, with our customers and with a wide variety of technology vendors. In
this manner, we aim to ensure the availability of leading-edge technologies and
capabilities, cost-efficient and timely delivery of services and the development
of solutions for specific business needs and objectives. We believe that our
integrated approach to designing, developing and implementing our service
offerings promotes long-term customer satisfaction and a more complete
understanding of customer requirements.
Our solutions are focused on providing integrated services in specific areas of
expertise - Command e-Solutions, CommandWEB, CommandNET, CommandSOURCE,
CommandAPPS, CommandDATA and CommandSTAFF. These groups also work together to
provide cross-functional solutions. For example, solutions for the Internet may
incorporate disciplines from the full spectrum of our services.
Following is a more detailed description of these services.
Command e-Solutions provides integrated e-business capabilities to clients who
are creating e-businesses or expanding their existing businesses. These
solutions give companies the insight and technology they need to evolve in
increasingly competitive markets.
CommandWEB provides development of integrated Web-based applications that can
increase market share and improve internal/external communications and services.
Examples of CommandWEB
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applications include Web-enabling legacy application development, Web page
design, security protection and Internet application development.
CommandNET is a comprehensive, project-based consulting service that uses
network computing strategies and technologies to develop business connectivity
solutions that allow people, technology and organizations to work
collaboratively, regardless of geographic location. The technical expertise of
our architects and engineers is backed by reliable project planning, integrated
design experience and the market knowledge to assure that the best solutions are
implemented on time and within budget. As an independent integrator, we have the
capability to implement the best of breed in each component category and
integrate them seamlessly into the best solution. Examples of CommandNET include
workstation migration, the design and deployment of LAN/WAN software and
hardware and software management solutions.
CommandSOURCE provides and manages the long-term maintenance of application
systems by utilizing a range of technology toolsets. CommandSOURCE takes
responsibility for project management, systems analysis, programming and ongoing
maintenance. An important component of CommandSOURCE is our offshore technology
resource center in Bangalore, India.
CommandAPPS provides advanced technology application development and support and
employs traditional approaches and software frameworks to develop applications
that meet clients' needs rapidly and efficiently with high quality results.
CommandDATA provides advanced administration and support for application and
database servers. Featured in this service are middleware and database products
from Microsoft, Oracle and IBM.
CommandSTAFF contracts to provide both temporary and permanent personnel with
highly specialized technical skills. In order to obtain the necessary technical
personnel for our contract staffing business, we conduct extensive recruiting
operations. We also use these recruiting services to fulfill our internal
personnel requirements.
Customers
Our customers consist primarily of large financial services and insurance
organizations, middle-market companies and public sector organizations. We have
maintained ongoing relationships with many of our customers over several years,
spanning multiple projects and services. Our strategy is to maximize our
customer retention rate and secure follow-on engagements by providing
high-quality services and client responsiveness. For the year ended December 31,
1999, two customers accounted for approximately 16% and 12% of revenue. For the
year ended December 31, 1998, two customers accounted for approximately 15% and
10% of revenue. For the year ended December 31, 1997, three customers accounted
for approximately 13%, 13% and 10% of revenue.
Business Development
We market and sell our services to large financial service and insurance
organizations, middle market companies and the public sector through a direct
sales force located throughout our offices in Farmington and Stamford,
Connecticut, Needham, Massachusetts and New York, New York, our technical
delivery team and senior management. A significant amount of our business comes
from additional projects from existing customers, referrals from existing
customers, and from relationships within our target industries. We identify
sales prospects through a variety of marketing activities, including attendance
at targeted conferences and trade shows, mailings to senior business and IT
executives, advertising, private briefings with individual companies, and
seminars that demonstrate our unique capabilities. The sales executives work
with our technical delivery team to:
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. define the scope, deliverables, assumptions and execution of strategies
for the proposed project;
. develop project estimates;
. prepare pricing and margin analyses; and
. finalize sales proposals.
Management reviews and approves all proposals, which are then presented to the
prospective customer. The sales executive remains actively involved in the
project through the execution phase.
In order to develop an in-depth understanding of each customer's individual
needs and to form strong customer relationships, sales executives are assigned
to a limited number of customers that generally does not exceed twelve. These
executives are responsible for providing highly responsive service and ensuring
that our applications solutions achieve customer objectives. Commissions based
upon the gross profit generated from each business transaction constitute a
substantial portion of the total compensation for each sales executive.
Our maintenance and application services require a substantial financial
commitment by customers and, therefore, typically involve a long sales cycle.
Once a lead is generated, we endeavor to understand quickly the potential
customer's business needs and objectives in order to develop the appropriate
solution and bid, accordingly. Our technology leaders are involved throughout
the sales cycle to ensure mutual understanding of customer goals, including time
to completion, and technological requirements. The sales cycle for complex
solutions projects typically range from one to six months from the time we
initially meet with a prospective customer until the customer decides whether to
authorize commencement of an engagement.
As of December 31, 1999, we had 15 persons engaged in sales and marketing
full-time.
Human Resources
Our future success depends to a significant extent on our ability to attract,
train, motivate and retain highly skilled IT professionals. Qualified technical
employees are in great demand and are likely to remain a limited resource for
the foreseeable future. We dedicate significant resources to recruiting
consultants in the United States and India. Recruiting methods include
advertisement on television, on the radio, in leading newspapers, in trade
magazines and on our web site and through participation in career fairs. Each
candidate is screened through a rigorous process comprising detailed interviews
by our recruiting and technical personnel and technical testing. We also utilize
stock options as part of our recruitment and retention strategy.
Our strategy for employee retention includes:
. career planning,
. thorough initial and ongoing training,
. allocation of assignments in accordance with employee skills and career
objectives and
. a comprehensive benefits package, including incentive-based compensation
and tuition reimbursement.
As part of our retention efforts, we seek to minimize turnover by emphasizing:
. competitive salaries,
. employee stock options and
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. contractual limitations effective upon termination of employment.
Our IT professionals receive on-going training on a variety of technology
platforms and in new technologies. In addition to comprehensive technical
training, we provide extensive training in software quality implementation
processes.
As of December 31, 1999, we had 259 employees comprised of 204 salaried IT
professionals, 15 sales and marketing personnel, 14 recruiting and human
resources personnel and 26 general and administrative personnel. As of December
31, 1999, we also utilized 50 independent contractors to supplement our
workforce.
Our employees are not represented by any labor unions. We consider our relations
with our employees to be good.
Our Competition
The market for IT services includes a large number of competitors, is subject to
rapid change and is highly competitive. Primary competitors include participants
from a variety of market segments, including publicly and privately held firms,
"Big Five" accounting firms, systems consulting and implementation firms,
application software firms, general management consulting firms and programming
companies. In addition, we compete with our clients' internal resources,
particularly where these resources represent a fixed cost to the client. Such
competition may impose additional pricing pressures. Many of our competitors
have significantly greater financial, technical and marketing resources and
generate greater revenue.
We believe that the principal competitive factors in the IT services industry
include quality of service, availability of qualified technical personnel,
responsiveness to client requirements and needs, price, ability to deliver large
multi-year contracts, breadth of product and service offering, timely completion
of projects, capital resources and perceived value.
Intellectual Property Rights
In order to protect our ownership rights in our various intellectual properties,
we rely upon a combination of:
. copyright and trade secret laws and
. non-disclosure and other contractual arrangements.
We presently hold no patents or registered copyrights. Although we believe that
our intellectual property rights do not infringe on the intellectual property
rights of others, we cannot be sure of this and we may be sued in the future. If
this situation arises, we may lose and may have to attempt to settle with third
parties by trying to obtain a license for an infringed intellectual property,
which might not be available at commercially reasonable terms.
Our ability to enforce our intellectual property rights in India may depend on
India law. India is a member of the Berne Convention, an international treaty.
As a member of the Berne Convention, the Government of India has agreed to
extend copyright protection under its domestic laws to foreign works, including
works created or produced in the United States. We believe that laws, rules,
regulations and treaties in effect in the United States and India are adequate
to protect us from unauthorized use of our intellectual property.
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We cannot assure you, however, that:
. the steps taken by us to protect our rights will be adequate to deter
theft of our intellectual property,
. we will be able to detect unauthorized use and take appropriate steps to
enforce our rights or
. the laws of India or the United States will remain the same and , in
particular, that the laws of India will not change in ways that affect us
negatively.
Additionally, we may in the future license certain technologies to our
customers. We cannot be certain that we will be able to:
. successfully license these technologies,
. protect them from infringement and
. prevent lawsuits against us relating to our licensing efforts.
We expect that the risk of such lawsuits will increase if more of our
competitors are able to successfully obtain patents for software products and
processes. See "Risk Factors -- We Have Limited Protection for and May Be Sued
Over Our Use of Intellectual Property."
More About Command
We incorporated in Delaware on July, 1, 1997. Prior to that time, we conducted
our business as Command Systems Incorporated, a corporation organized under the
laws of the State of Connecticut on April 2, 1985 which was merged into Command
Systems, Inc. in December 1997. In 1996, we established two subsidiaries:
. Command International Holdings, LLC, a corporation organized under the
laws of Mauritius, and
. Command International Software Pvt., an India unlimited liability company.
We wholly own Command International Holdings, LLC, which in turn wholly owns our
India subsidiary. Our Bangalore facility and its employees are operated through
our India subsidiary. Our executive offices are located at 76 Batterson Park
Road, Farmington, Connecticut, 06032 and our telephone number is (860) 409-2000.
RISK FACTORS
Please remember to be cautious in reading forward-looking statements.
Important Factors Regarding Forward-Looking Statements
In addition to other information in this Annual Report on Form 10-K and in the
documents we are incorporating by reference, the following risk factors should
be carefully considered in evaluating Command and our business because such
factors currently have a significant impact or may have a significant impact on
our business, operating results or financial condition. This Form 10-K contains
forward-looking statements that have been made pursuant to the provisions of the
Private Securities Litigation Reform Act of 1995. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth below and elsewhere in this form.
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We May Fail to Obtain More Profitable Service Contracts
During 1999, 1998 and 1997, Year 2000 projects constituted most of our higher
margin services. For the years ended December 31, 1999, 1998 and 1997 we
realized 14%, 27% and 21%, respectively, of revenue related to Year 2000
solutions. There is no longer a demand for our Year 2000 solutions, and as a
result, our financial performance has been adversely affected.
A core element of our growth strategy is to derive an increasing percentage of
our revenue from higher margin Command-managed projects as opposed to lower
margin client-managed staff augmentation projects. The sales and marketing
methods for obtaining projects that we manage are different than those for our
historical businesses and involve a longer sales process. In addition, we assume
greater responsibility in coordinating and completing these larger, more complex
projects that we manage. Consequently, we may not be successful in obtaining
Command-managed projects.
We May Fail To Recruit and Retain IT Professionals
Our business involves the delivery of professional services and is
labor-intensive. Our future success depends to a significant extent on our
ability to attract, train, motivate and retain highly skilled IT professionals
and project managers who possess the technical skills and experience necessary
to deliver our services. Qualified technical employees are in great demand and
are likely to remain a limited resource for the foreseeable future. There can be
no assurance that qualified IT professionals will continue to be available to us
in sufficient numbers, or that we will be successful in retaining current or
future employees. Failure to attract or retain qualified IT professionals in
sufficient numbers could have a material adverse effect on our business,
operating results and financial condition.
Our Quarterly Financial Results May Vary Significantly
Our revenue and operating results are subject to significant variation from
quarter to quarter depending on a number of factors, including the timing and
number of client projects commenced and completed during the quarter; the number
of working days in a quarter; employee hiring, attrition and utilization rates
and the mix of time-and-materials projects versus fixed-price projects during
the quarter. We recognize revenue on time-and-materials projects as the services
are performed, while revenue on fixed-price projects are recognized using the
percentage of completion method. Although fixed-price projects have not
contributed significantly to revenue to date, operating results may be adversely
affected in the future by cost overruns on fixed-price projects. Because a high
percentage of our expenses are relatively fixed, variations in revenue may cause
significant variations in operating results. Hiring and employment practices and
applicable law in India make it difficult for us to effect reductions in
staffing at our Bangalore, India facility. As a result, we are unable to quickly
adjust these costs in the event that our revenue is unexpectedly lower in any
quarter. Additionally, we periodically incur cost increases due to both the
hiring of new employees and strategic investments in our infrastructure in
anticipation of future opportunities for revenue growth. No assurances can be
given that our quarterly results will not fluctuate, causing a material adverse
effect on our business and financial condition.
The Internet Economy and the Market for E-Commerce Solutions is Still Developing
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and volume of traffic. The Internet
infrastructure may not continue to be able to support the demands placed on it
by this continued growth. In addition, critical issues concerning the use of
Internet and e-commerce solutions, including security, reliability, cost, ease
of deployment and administration and quality of service, remain unresolved and
may affect the acceptance of these technologies to operate a business, expand
product marketing, improve corporate communications and increase business
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efficiencies. The adoption of Internet solutions for these purposes can be
capital intensive and generally requires the acceptance of a new way of
conducting business and exchanging information. If critical issues concerning
the ability of Internet solutions to improve business positioning and processes
are not resolved or if the necessary infrastructure is not developed, our
business could be adversely affected.
Even if these issues are resolved, businesses may not elect to outsource the
design, development and maintenance of their Web sites to Internet professional
services firms. If independent providers of Internet professional services prove
to be unreliable, ineffective or too expensive, or if software companies develop
tools that are sufficiently user-friendly and cost-effective, enterprises may
choose to design, develop or maintain all or part of their intranets, extranets
or web sites themselves. If the market for such services does not continue to
develop or develops more slowly than expected, our business could be adversely
affected.
We Depend on Our Bangalore, India Facility and Doing Business in India May be
Risky
A significant element of our business strategy is to increase the utilization of
our Bangalore, India facility. The Indian government exerts significant
influence over its economy. In the recent past, the Indian government has
provided significant tax incentives and relaxed certain regulatory restrictions
in order to encourage foreign investment in certain sectors of the economy,
including the technology industry. Certain of these benefits include, among
others, tax holidays (temporary exemptions from taxation on operating income),
liberalized import and export duties and preferential rules on foreign
investment and repatriation. If any of these benefits are eliminated or
diminished, it could have a material adverse effect on our business, financial
condition and results of operations.
In the past, India has been subject to civil unrest and acts of terrorism.
Changes in inflation, interest rates, taxation or other social, political,
economic or diplomatic developments affecting India in the near future could
have a material adverse effect on our business, financial condition and results
of operations.
We May Lose Business to Many Competitors
The IT services industry is highly competitive and served by numerous national,
regional and local firms, all of which are either existing or potential
competitors. Primary competitors include participants from a variety of market
segments, including publicly and privately held firms, "Big Five" accounting
firms, systems consulting and implementation firms, application software firms,
general management consulting firms and programming companies. Many of our
competitors have significantly greater financial, technical and marketing
resources and greater name recognition than Command. There are relatively few
barriers to entry into our markets and we may face competition from new
entrants. In addition, there is a risk that clients may elect to increase their
internal IT resources to satisfy their applications solutions needs.
Furthermore, the IT services industry is undergoing consolidation that may
result in increasing pressure on margins. These factors may limit our ability to
increase prices commensurate with increases in compensation. There can be no
assurance that we will compete successfully with existing or new competitors.
We Rely On Significant Customers Without Long-Term Contracts
We have derived a significant portion of our revenue from a limited number of
large corporate customers. Moreover, our industry has shifted away from the use
of long-term contracts, which might otherwise provide steady work at a time of
decreasing demand for our services. If a significant customer decides to
terminate or reduce the use of our services, our business, financial condition
and results of operations could be materially and adversely affected. See
"---Customers".
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<PAGE>
We are Potentially Liable to Customers for Project Work
We perform many projects that are critical to the operations of our customers'
businesses and provide benefits that may be difficult to quantify. If a
customer's system fails, it could result in a claim for substantial damages
against us, regardless of our responsibility for such failure. In addition, if
we fail to complete projects on time, customers may sue us for substantial
damages.
We generally attempt to limit our liability for damages arising from errors,
mistakes or omissions in rendering our IT services in our contracts. These
contract provisions may not effectively shield us from liability for damages. We
maintain general liability insurance coverage, including coverage for errors or
omissions in the amount of $5.0 million. However, we cannot be certain that:
. insurance coverage will continue to be available on reasonable terms,
. such coverage will be available in sufficient amounts to cover one or more
large lawsuits or
. the insurer will not disclaim coverage as to any future lawsuit.
Our business, financial condition and results of operations could be adversely
affected if any of the following occurred:
. one or more successful large lawsuits against us exceeds our insurance
coverage or
. changes are made in our insurance policies, including premium increases,
larger deductibles or coinsurance requirements.
Our Strategy of Expansion Could Adversely Affect Our Business
As an integral part of our business strategy, we intend to continue to expand by
acquiring IT businesses. We continuously evaluate potential business
combinations and aggressively pursue attractive transactions. During 1999, we
completed one relatively small business combination. The success of this
strategy depends not only upon our ability to identify and acquire businesses on
a cost-effective basis, but also upon our ability to integrate acquired
operations into our organization effectively, to retain and motivate key
personnel and to retain clients of acquired businesses. There can be no
assurance that we will be able to identify, acquire or profitably manage
additional businesses or successfully integrate any acquired businesses without
substantial expense, delays or other operational or financial problems.
We Depend on Key Executives
Our success will largely depend upon the continued availability and services of
key executive officers, particularly Edward G. Caputo, our President and Chief
Executive Officer. In addition, Mr. Caputo is instrumental to most of our
customer relationships relating to the delivery of more profitable, complete
project and solution services. If we lose Mr. Caputo or other key executives, it
could have an adverse effect on our customer relationships in this area.
Accordingly, losing Mr. Caputo or other key executives could have a material
adverse effect on our business, financial condition and results of operations.
We maintain key person life insurance on Mr. Caputo in the amount of $10.0
million. This amount of insurance, however, may not be sufficient to offset our
loss of Mr. Caputo's services.
Our Principal Stockholder Controls Us and Can Influence Many Key Decisions
Mr. Caputo beneficially owns approximately 51.9% of the outstanding shares of
our common stock. Accordingly, Mr. Caputo can control the election of members of
the board of directors. Mr. Caputo can also control any decision whether:
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<PAGE>
. to merge or sell our assets,
. to change our charter and by-laws and
. to take other actions requiring the vote or consent of our stockholders.
In addition, Mr. Caputo's voting power may delay or prevent a future merger or
change in control. He may also impede or prevent transactions in which
stockholders might otherwise receive a premium for their shares over current
market prices.
We Have Limited Protection for and May be Sued Over Our Use of Intellectual
Property
As an IT service provider, we are dependent on using our own intellectual
property and the intellectual property of others to provide our services. In
doing so, we run the risk that our intellectual property may be inadequately
protected from infringement. We also may be sued with claims of unauthorized use
of our own intellectual property and/or third party intellectual property.
Moreover, since we do business in India, we are also subject to a change to the
status of our rights under India's law and may be subject to India's
jurisdiction on some matters. Any lawsuits, regardless of outcome, could greatly
divert our focus on our business and would be costly. Thus, any intellectual
property lawsuits would have a material adverse effect on our business,
financial condition and results of operations. For a more detailed discussion,
please see "---Intellectual Property Rights."
Our Common Stock Price is Subject to Significant Market Volatility
We cannot assure you that an active trading market for our stock will be
sustained. Market prices for securities of IT service companies similar to
Command are highly volatile. The market price of our common stock has been
adversely affected in response to:
. variations in quarterly operating results and
. our failure to achieve earnings estimates of securities analysts.
The market price of the common stock may experience further volatility in the
future.
Difficulties in Acquiring Control of Our Company Under Our Charter and Delaware
Law May Discourage Future Transactions Generating Significant Shareholder Value
Anyone seeking to acquire control of Command may encounter difficulties because
of anti-takeover provisions in our charter and under Delaware law. These
provisions are intended to encourage any person interested in acquiring us to
negotiate with and obtain the approval of our board of directors in connection
with the transaction. These provisions could have the effect of delaying,
deterring or preventing a merger or change in control. Some of these provisions
may also discourage a future acquisition of Command even if stockholders would
receive an attractive value for their shares and even if a substantial number,
or even if a majority, of our stockholders might believe the transaction to be
in their best interest. As a result, stockholders who desire to participate in
such a transaction may not have the opportunity to do so.
Item 2. PROPERTIES
Command Systems, Inc. leases approximately 12,922 square feet of office space in
Farmington, Connecticut which is used by our senior management, administrative
personnel, human resources and sales and marketing functions. This lease expires
on March 31, 2003. We also lease facilities in Stamford, Connecticut, Needham,
Massachusetts, and New York, New York.
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<PAGE>
In addition, we lease approximately 23,450 square feet of office space in
downtown Bangalore, India for our offshore technology resource center; we have
sublet approximately 12,600 square feet related thereto for a period of one
year. This lease expires on September 15, 2000 and is renewable at our option
for a two-year period.
We believe that these facilities will be adequate for our presently anticipated
future needs.
Item 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
purported 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 alleged 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. 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. The court entered a
judgment approving this settlement on August 11, 1999, which became final and no
longer subject to appeal on September 10, 1999. On September 10, 1999 the
settlement fund was also established. The Company may also 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 deposited in the settlement fund established September 10,
1999 by the Company, the Company has been reimbursed for all but $1.65 million.
This reimbursement came 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.
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<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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock has been trading on the Nasdaq National Market under the symbol
CMND since our initial public offering on March 12, 1998. The following tables
set forth the closing high and low sales price for our common stock during 1998
and 1999:
High Low
---- ---
1998
- ----
First Quarter from
(March 12, 1998).. $14 3/4 $13
Second Quarter........................... 18 3/4 4
Third Quarter............................ 5 11/16 2 7/8
Fourth Quarter........................... 3 11/16 2 7/8
1999
- ----
First Quarter............................ $3 27/32 $1 7/8
Second Quarter........................... 2 1/8 1 1/2
Third Quarter............................ 2 7/16 1 1/2
Fourth Quarter........................... 2 23/32 1 1/4
As of March 27, 2000, there were approximately 24 holders of record of our
common stock.
We have never declared or paid any dividends on our common stock. We were,
however, obligated to pay a 10% dividend on our Series A and Series B redeemable
convertible preferred stock. Accrued and unpaid dividends were paid with a
portion of the net proceeds of the initial public offering upon the conversion
of the preferred stock. We do not anticipate paying any other cash dividends in
the foreseeable future and intend to retain any earnings to fund future growth
and the operation of our business. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1999,
1998, 1997, 1996, and 1995 and for the years then ended are derived from and are
qualified by reference to our audited consolidated financial statements and the
notes thereto. The audited consolidated financial statements include all
adjustments, consisting only of normal recurring accruals, which we consider
necessary for a fair presentation of financial position and results of
operations. Historical results are not necessarily
17
<PAGE>
indicative of results to be expected in the future. The data should be read in
conjunction with our consolidated financial statements, including the notes
thereto, appearing elsewhere in this report, "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and other
financial information included herein.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenue ............................... $ 27,192 $ 35,215 $ 25,057 $ 17,069 $ 12,436
Cost of revenue ....................... 19,820 24,528 16,973 12,494 9,108
-------- -------- -------- -------- --------
Gross profit .......................... 7,372 10,687 8,084 4,575 3,328
Selling, general and administrative
expense ............................ 11,346 11,926 7,255 5,172 3,013
Litigation expense .................... -- 1,800 -- -- --
-------- -------- -------- -------- --------
(Loss) income from operations ......... (3,974) (3,039) 829 (597) 315
Other income (expense), net ........... 1,104 954 (277) (75) (50)
-------- -------- -------- -------- --------
(Loss) income before income taxes and
minority interest .................. (2,870) (2,085) 552 (672) 265
Income tax (provision) benefit ........ (66) 318 (598) 8 (44)
-------- -------- -------- -------- --------
(Loss) income before minority
interest ........................... (2,936) (1,767) (46) (664) 221
Minority interest ..................... -- -- (451) 241 --
-------- -------- -------- -------- --------
Net (loss) income ..................... (2,936) (1,767) (497) (423) 221
Preferred stock dividends and
accretion .......................... -- (260) (80) -- --
-------- -------- -------- -------- --------
(Loss) income applicable to common
stockholders ....................... $ (2,936) $ (2,027) $ (577) $ (423) $ 221
======== ======== ======== ======== ========
Basic and diluted loss per common share $ (0.38) $ (0.29)
Pro forma results of operations:
Adjustments to U.S. federal income tax
provision assuming C Corporation
status.............................. $ 633
Net income, as adjusted................ 136
Preferred stock dividends and
accretion........................... (80)
--------
Income applicable to common
stockholders........................ $ 56
========
Pro forma basic earnings per common
share............................... $ 0.01
========
Shares used in per share calculation...
Basic.................................. 7,657 7,018 4,275
Diluted................................ 7,657 7,018 4,275
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ............. $ 3,901 $ 16,170 $ 392 $ 444 $ 223
Working capital (deficit) ............. 19,226 21,172 460 (99) 85
Total Assets .......................... 30,468 35,648 14,425 4,816 2,294
Short-term debt ....................... -- -- 1,414 1,452 949
Long-term debt ........................ -- -- -- 1,145 --
Series A redeemable convertible
preferred stock .................... -- -- 2,223 -- --
Series B redeemable convertible
preferred stock .................... -- -- 8,000 -- --
Stockholders' equity (deficit) ........ 27,355 30,455 (722) (58) 365
</TABLE>
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<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with "Item
6--Selected Consolidated Financial Data" and our consolidated financial
statements, including the notes thereto, appearing elsewhere in this report.
Overview
We provide a wide range of IT services and solutions to large financial service
and insurance organizations, middle market companies, and public sector
organizations. We strive to establish long-term client relationships and to
secure additional engagements with existing clients by providing quality
services and by being responsive to client needs. We offer our clients with a
single source for a comprehensive range of IT services including (1) e-business
development; (2) Internet/intranet applications; (3) network design and
deployment; (4) outsourcing solutions; (5) applications and systems development;
(6) database design and development; and (7) staff augmentation. Our revenue is
derived from fees paid by clients for our professional services. Historically,
we have derived the majority of our revenue from traditional client-managed
staff augmentation projects. On client-managed projects, we provide professional
services as a member of the project team on a time-and-materials basis. We
recognize revenue on time-and-material projects as the services are performed.
On Command-managed projects, we assume responsibility for project management and
bill our clients on a time-and-materials or fixed-price basis. Revenue on fixed-
price contracts is recognized by the percentage of completion method.
Our most significant cost is our personnel expense, which consists primarily of
salaries and benefits of our billable personnel. The number of IT professionals
assigned to projects may vary depending on the size and duration of each
engagement. Project terminations, completions and scheduling delays may result
in periods when personnel are not assigned to projects. Additionally, hiring and
employment practices and applicable law in India make it difficult to affect
staff reductions at our Bangalore, India facility. We manage our personnel costs
by closely monitoring our clients' needs. While the number of IT professionals
may be adjusted to reflect active projects, we must maintain a sufficient number
of professionals to respond to demand for our services on both existing and new
engagements.
The results of operations for 1999 were adversely affected primarily due to
diminished demand for Year 2000 services, a general slowdown in the overall
demand for traditional IT services, a reduction in hardware and software sales,
low rates of employee utilization at our Bangalore, India facility, and a less
profitable mix of business.
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<PAGE>
Results of Operations
The following table sets forth certain operating data as a percentage of revenue
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Revenue ............................................... 100.0% 100.0% 100.0%
Cost of revenue ....................................... 72.9 69.7 67.7
----- ----- -----
Gross profit .......................................... 27.1 30.3 32.3
Selling, general and administrative expense ........... 41.7 33.8 29.0
Litigation expense .................................... -- 5.1 --
----- ----- -----
(Loss) income from operations ......................... (14.6) (8.6) 3.3
Other income (expense), net ........................... 4.0 2.7 (1.1)
----- ----- -----
(Loss) income before income taxes and minority interest (10.6) (5.9) 2.2
Income tax (provision) benefit ........................ (0.2) 0.9 (2.4)
----- ----- -----
Loss before minority interest ......................... (10.8) (5.0) (0.2)
Minority interest ..................................... -- -- (1.8)
----- ----- -----
Net loss .............................................. (10.8) (5.0) (2.0)
Preferred stock dividends and accretion ............... -- (0.7) (0.3)
----- ----- -----
Loss applicable to common stockholders ................ (10.8)% (5.7)% (2.3)%
===== ===== =====
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. Revenue for the year ended December 31, 1999 decreased 22.8% to
$27,192,000 from $35,215,000 for the year ended December 31, 1998. The decrease
in revenue is attributed to diminished demand for Year 2000 services, a general
slowdown in the overall demand for traditional IT services due to the reluctance
of customers to implement new projects as they focused on their internal Year
2000 compliance efforts and a reduction in hardware and software sales.
Gross Profit. Gross profit of $7,372,000 for the year ended December 31, 1999
represented a decrease of $3,315,000 or 31.0% over gross profit of $10,687,000
for the year ended December 31, 1998. Gross margin decreased to 27.1% for the
year ended December 31, 1999 from 30.3% for the year ended December 31, 1998.
The decrease in gross margin is attributed to diminished demand for our higher
margin Year 2000 services, low rates of employee utilization at our Bangalore,
India facility and a less profitable mix of business.
Selling, General and Administrative Expense. Selling, general and administrative
expense consists primarily of salaries and employee benefits for our sales,
marketing, recruiting, human resource, finance and administrative personnel, as
well as travel, telecommunications and occupancy costs for our U.S. and India
operations. These expenses are relatively fixed in advance of any particular
quarter. To the extent revenue does not increase at a rate commensurate with
these expenses, our results of operations could be materially and adversely
affected. Selling, general and administrative expense decreased 4.9% to
20
<PAGE>
$11,346,000 from $11,926,000 for the year ended December 31, 1998. The decrease
was attributed to a reduction in support staff.
Shareholder litigation and related expenses. During 1998 we recognized a
one-time charge to operations of $1,800,000 relating to the proposed settlement
of stockholder litigation and related costs. This matter was settled during
1999.
Other Income (Expense), Net. Other income (expense), net consists primarily of
interest earned on our marketable securities from the proceeds of our initial
public offering and foreign exchange activity. Other income, net, was $1,104,000
for the year ended December 31, 1999 compared to $954,000 for the year ended
December 31, 1998.
Income Tax (Provision) Benefit. The income tax provision for the year ended
December 31, 1999 was $66,000 compared to an income tax benefit of $318,000 for
the year ended December 31, 1998. The current year provision represents a tax
computed based on our capital structure. The prior year benefit resulted from
the utilization of deferred tax credits.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Revenue for the year ended December 31, 1998 increased by 41.0% to
$35,215,000 from $25,057,000 for the year ended December 31, 1997. This resulted
primarily from an increase in revenue generated from Year 2000 compliance
services. As compared to the year ended December 31, 1997, revenue from Year
2000 projects and other higher margin services for the year ended December 31,
1998 increased as a percentage of our revenue. We have decided to de-emphasize
our hardware solutions services and, therefore, hardware solutions may
constitute a decreasing percentage of our revenue.
Gross Profit. Gross profit for the year ended December 31, 1998 increased by
32.2% to $10,687,000 from $8,084,000 for the year ended December 31, 1997. Gross
profit as a percentage of revenue decreased to 30.3% for the year ended December
31, 1998 from 32.3% for the year ended December 31, 1997. This decrease resulted
primarily from a smaller amount of our revenue being derived from Year 2000
compliance services, which typically carry higher margins than our traditional
staff augmentation services. It was also impacted by low rates of employee
utilization in India, a less profitable mix of business and reduced margins in
our traditional staff augmentation business
Selling, General and Administrative Expense. Selling, general and administrative
expense consists primarily of salaries and employee benefits for selling,
marketing, recruiting, human resources, finance and administrative personnel, as
well as travel, telecommunications and occupancy costs for our U.S. and India
operations. These expenses are relatively fixed in advance of any particular
quarter. To the extent revenue does not increase at a rate commensurate with
these expenses, our results of operations could be materially and adversely
affected. Selling, general and administrative expense, net of amortization for
goodwill, for the year ended December 31, 1998 increased by 64.4% to $11,926,000
from $7,255,000 for the year ended December 31, 1997. The increase was
attributable to additional sales and project management personnel, which were
added in anticipation of growth in complete projects and solutions business
which, did not materialize to the extent expected.
Amortization of goodwill for the year ended December 31, 1998 was $456,000,
relating to our purchase of the 49% minority interest in our Bangalore facility
from PHL Global Holding Co. on December 31, 1997. We accounted for this
transaction as a purchase and recognized the $6,845,000 excess of the purchase
price over the fair value of the assets acquired and liabilities assumed as
goodwill.
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<PAGE>
Stockholder litigation and related expenses. During the fourth quarter of 1998,
we recognized a one-time charge to operations for costs and expenses of
$1,800,000 relating to the proposed settlement of shareholder litigation.
(Loss) Income From Operations. Operations for the year ended December 31, 1998
lost $3,039,000 compared to income of $829,000 for the year ended December 31,
1997. Loss from operations as a percentage of revenue was (8.6)% for the year
ended December 31, 1998 as compared to income of 3.3% for the year ended
December 31, 1997. Absent the recognition of the one-time settlement and
litigation expenses, the Company would have reported at $1,227,000 loss from
operations for the year ended December 31, 1998.
Other Income (Expense), Net. Net other income was $954,000 for the year ended
December 31, 1998 compared to net other expense of $277,000 for the year ended
December 31, 1997. Net other income was comprised of interest income and a
foreign currency exchange gain. The interest income was attributable to interest
earned from investment in commercial paper of the net proceeds of our initial
public offering and other cash equivalent instruments during the year ended
December 31, 1998. Interest expense in 1997 was a result of bank borrowings
required to provide us with working capital and accrued interest expense
associated with subordinated notes issued to Phoenix Home Life Mutual Insurance
Company. In addition, during the nine months ended December 31, 1998, we
recognized an $87,000 foreign currency exchange gain in connection with our U.S.
Dollar-denominated cash and receivable balances of the offshore technology
resource center in Bangalore, India.
Income Tax (Provision) Benefit. The income tax benefit for the year ended
December 31, 1998 was $318,000, as a result of the utilization of deferred tax
credits. We compute our income tax provision on a quarterly basis and provide
for deferred income taxes based upon the difference between the financial
statement and tax basis of assets and liabilities. A valuation allowance is
provided when necessary to reduce the deferred tax asset to the amount expected
to be realized.
From our inception through August 23, 1997, we had elected to be taxed under the
S Corporation provisions of the Internal Revenue Code of 1986, as amended. An S
Corporation generally is not subject to income tax at the corporate level with
certain exceptions under state income tax laws. This election was terminated in
conjunction with our formation as a Delaware holding corporation and the
issuance of our Series A redeemable convertible preferred stock.
In connection with the termination of our S Corporation status, we were required
by the Internal Revenue Code to change our method of accounting for tax
reporting purposes from the cash method to the accrual method. This change
resulted in a one-time charge to earnings in the year ended December 31, 1997 of
$693,000 resulting from differences of approximately $2.0 million in the tax
treatment of certain of our assets and liabilities under the cash and accrual
methods of accounting and is reflected through an increase in current and
deferred income tax liabilities. Under current statutes, this liability will be
payable over a period of four years.
The offshore technology resource center in Bangalore, India is eligible for
certain favorable tax treatment provided under India law including (a) an
exemption from payment of corporate income taxes for a period of five
consecutive years in the first eight years of operation or (b) an exemption from
income taxes on the profits derived from sources outside India, know as an
export exemption.
The export exemption remains available after expiration of the tax holiday. As a
result of the availability of these exemptions, we have not recorded deferred
income taxes applicable to the undistributed earnings of the offshore technology
resource center. We consider these earnings to be permanently invested in India
and do not anticipate repatriating any of these earnings to the U.S. If any
earnings of our subsidiary,
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<PAGE>
Command International Software Pvt., are repatriated to the U.S. in the future,
we will be required to record a provision for income taxes on such amounts and,
upon repatriation of the funds, pay U.S. taxes thereon. See Note 9 to our
consolidated financial statements.
Preferred Stock Dividends and Accretion. Preferred stock dividends and accretion
was $260,000 in 1998 and $80,000 in 1997.
(Loss) Income Applicable to Common Stockholders. As a result of the foregoing,
loss applicable to common stockholders was $2,027,000 for the year ended
December 31, 1998 as compared to a net income of $56,000 on a pro-forma basis
for the year ended December 31, 1997. Therefore, basic and diluted loss per
share were $0.29 for the year ended December 31, 1998 as compared to pro-forma
earnings of $0.01 for the year ended December 31, 1997. Pro-forma earnings give
rise to the effect of the change in corporate tax status. Absent the recognition
of the one-time settlement and litigation expense, the net loss for the year
ended December 31, 1998 would have been $91,000 or $0.01 per share. The weighted
average number of shares outstanding used in the calculation of basic and
diluted earnings per share increased over the comparable period as a result of
shares issued in conjunction with our March 12, 1998 initial public offering.
Quarterly Results of Operations
Our revenue and operating results are subject to significant variation from
quarter to quarter depending on a number of factors, including the timing and
number of client projects commenced and completed during the quarter; the number
of working days in a quarter; employee hiring, attrition and utilization rates
and the mix of time-and-materials projects versus fixed-price projects during
the quarter. We recognize revenue on time-and-materials projects as the services
are performed, while revenue on fixed-price projects are recognized using the
percentage of completion method. Although fixed-price projects have not
contributed significantly to revenues to date, operating results may be
adversely affected in the future by cost overruns on fixed-price projects.
Because a high percentage of our expenses are relatively fixed, variations in
revenue may cause significant variations in operating results. Hiring and
employment practices and applicable law in India make it difficult for us to
effect reductions in staffing at our Bangalore, India facility. As a result, we
are unable to quickly adjust these costs in the event that our revenue is
unexpectedly lower in any quarter. Additionally, we periodically incur cost
increases due to both the hiring of new employees and strategic investments in
our infrastructure in anticipation of future opportunities for revenue growth.
No assurances can be given that our quarterly results will not fluctuate,
causing a material adverse effect on our business and financial condition.
Liquidity and Capital Resources
Our revolving line of credit agreement for our U.S. operations, as amended
October 13, 1999, limits borrowings to a maximum of $4,000,000. The agreement
expires on October 15, 2000 and bears interest at the Bank Rate, as defined, or
the London Interbank Offered Rate plus 1.75 points. Under the terms of the
agreement, we are required, among other things, to maintain certain financial
ratios and minimum levels of net worth. In addition, Command International
Software Pvt., our wholly owned Indian subsidiary, has available borrowings
under a credit facility of approximately $176,500. At December 31, 1999, there
were no outstanding amounts under these credit facilities.
In March 1998, we issued and sold 2,200,000 shares of common stock in our
initial public offering. We received net proceeds of $24,552,000 after
underwriters' discounts and before other offering expenses of $1,341,000.
Simultaneously with the initial public offering, the holders of the Series A and
B redeemable convertible preferred stock exchanged their 200 shares for
1,181,750 shares of our common stock.
23
<PAGE>
Proceeds were used to pay preferred stock dividends of $298,000 related thereto
and to repay a bank loan of $528,000 and borrowings of $858,000 under a
revolving line of credit.
Historically, we have financed our working capital requirements through
internally generated funds, borrowings under our credit facilities, the issuance
of subordinated notes to the Phoenix Home Life Mutual Insurance Company and with
the proceeds from the issuance of our common stock.
At December 31, 1999 we had cash and cash equivalents and marketable securities
of $18,248,000 compared to $18,994,000 at December 31, 1998. For the year ended
December 31, 1999 we met our liquidity needs primarily through cash generated
from a reduction of our accounts receivable balances. Cash provided by operating
activities was $103,000 for the year ended December 31, 1999 compared to cash
used in operating activities of $1,635,000 for the year ended December 31, 1998.
The primary uses of cash during the year ended December 31, 1999 were to fund a
net loss of $2,936,000 and pay the shareholder litigation settlement, offset by
decreases in accounts receivable and prepaid expenses and other assets.
Cash used in investing activities of $12,349,000 for the year ended December 31,
1999 included $250,000 for the purchase of equipment and improvements and
$11,645,000 of net purchases of available-for-sale securities.
In addition, on August 1, 1999, we acquired 100% of the outstanding stock of
Nova Technology, Inc. (Nova), a privately owned Oracle IT consulting, systems
integration and custom software application developer for approximately
$454,000. The acquisition has been accounted for as a purchase; accordingly, the
excess of the purchase price over the fair value of the net assets acquired has
been recorded as goodwill and is being amortized on a straight line basis over
three years. The results of operations of Nova are included in our financial
statements from the date of acquisition. This acquisition did not materially
affect our financial statements in 1999 nor would it have materially effected
our financial statements of prior periods had the results of its operations been
included in them.
Concurrent with the acquisition, we entered into employment agreements with the
former shareholders of Nova. The agreements, which are for a period of four
years, provide for specific salary levels and additional incentive bonuses that
are contingent upon the Nova business achieving certain performance criteria;
performance based payments are not expected to exceed $250,000 annually.
We believe that the net proceeds from the initial public offering, together with
other available funds, will be adequate to satisfy our current and planned
operations over the next 12 months.
Legal Proceedings
See "Item 3. Legal Proceedings"
Inflation
Our most significant costs are the salaries and related benefits for our
consultants and other professionals. Competition in India and the U.S. for IT
professionals with the advanced technological skills necessary to perform our
service offerings have caused wages to increase at a rate greater than the
general rate of inflation. As with other IT service providers, we must
adequately anticipate wage increases. Further, India has in the past experienced
significant inflation. Historically, our wage costs in India have been
significantly lower than our wage costs in the U.S. for comparably skilled
employees, although wage costs in India are presently increasing at a faster
rate than in the U.S. We may not be able to recover cost increases through
increases in the prices that we charge for our services in the U.S.
24
<PAGE>
Impact of the Year 2000 Issue
Previously, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed our remediation and testing of our
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical IT and non-IT systems
and believe these systems successfully responded to the Year 2000 date change.
The costs incurred in connection with remediating our systems were not material.
We are not aware of any material problems resulting from Year 2000 issues,
either with our internal systems, or with products and services provided to us
by third parties. We will continue to monitor our mission critical computer
applications and those of our suppliers and vendors throughout the year 2000 to
ensure that any latent Year 2000 matters that may arise are addressed promptly.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
Included in our sales are services performed by our Bangalore, India facility.
As a result, our financial results could be affected by factors such as a change
in the foreign exchange rate between the U.S. dollar and the Indian Rupee, or by
weak economic conditions in India. When the U.S. dollar strengthens against the
Indian Rupee, the value of revenues in India decreases. When the U.S. dollar
weakens against the Indian Rupee, the value of revenues in India increases. The
monetary assets and liabilities in our foreign subsidiary which are impacted by
foreign currency fluctuations are principally cash, accounts receivable, fixed
assets, accounts payable and certain accrued liabilities. A hypothetical 2%
increase or decrease in the exchange rate between the U.S. dollar and the Indian
Rupee from the December 31, 1999 rate would cause the fair value of such
monetary assets and liabilities in India to change by an insignificant amount.
We are not currently engaged in any foreign currency hedging activities.
Interest Rate Risk
Our marketable securities are invested in United States Treasury Notes. These
investments are subject to interest rate risk and will decrease in value if
market interest rates increase. A hypothetical increase or decrease in market
interest rates by 2% from the December 31, 1999 rates would cause the fair value
of these investments to change by an insignificant amount. Risk is mitigated
through limits regarding investment concentration in particular securities and
investments in varying maturities. We do not invest in any financial derivatives
or any other complex financial instrument. We do not own any equity investments.
Therefore, we do not currently have any direct equity price risk.
Our revolving line of credit facility for our U.S. operations is based upon the
London Interbank Offered Rate and, as such, is sensitive to changes in interest
rates.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required by this item are filed
as part of this Form 10-K. See List of Financial Statements and Financial
Statement Schedule on page F-1 of this Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
25
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors" and "Executive Officers"
in our proxy statement to be filed in connection with our annual meeting of
stockholders.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Compensation of Executive Officers and Directors"
contained in our proxy statement to be filed in connection with our annual
meeting of stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Beneficial Ownership of Common Stock" contained
in our proxy statement to be filed in connection with our annual meeting of
stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "Certain Transactions" contained in our proxy
statement to be filed in connection with our annual meeting of stockholders.
PART IV
Item 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND
REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements.
Reference is made to the List of Consolidated Financial
Statements on Page F-1.
(a)(2) Consolidated Financial Statement Schedule.
Reference is made to the List of Consolidated Financial
Statements on Page F-1.
(b) Reports on Form 8-K:
None
(c) Exhibits
*1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Certificate of Incorporation of the
Registrant
*3.2 Certificate of Amendment to Registrant's Amended and Restated
Certificate of Incorporation filed on February 5, 1998.
*3.3 By-Laws of the Registrant.
*4.1 Specimen Certificate for shares of the Company's Common Stock.
*10.1 1997 Employee, Director and Consultant Stock Plan.
*10.2 Registration Rights Agreement dated August 26, 1997 between
Registrant and Phoenix Home Life Mutual Insurance Company.
*10.3 Registration Rights Agreement dated December 31, 1997 between
Registrant and PHL Global Holding Co.
26
<PAGE>
*10.4 Co-Sale Agreement dated August 26, 1997 between Registrant,
Edward G. Caputo and Phoenix Home Life Mutual Insurance Company.
*10.5 Amendment No. 1, dated December 31, 1997 to Co-Sale Agreement
between Registrant, Edward G. Caputo and Phoenix Home Life Mutual
Insurance Co.
*10.6 Co-Sale Agreement dated December 31, 1997 between Registrant,
Edward G. Caputo and PHL Global Holding Co.
*10.7 Employment Contract dated January 1, 1998 between Registrant and
Edward G. Caputo.
*10.8 Assumption Agreement dated December 1997 by and between
Registrant and People's Bank.
*10.9 Loan Agreement by and between Command International Software Pvt.
and Deutsche Bank.
*10.10 Employment Agreement dated January 1, 1998 between Registrant and
Stephen L. Willcox.
**10.11 Indemnification Agreement, by and among Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, P.C. and Registrant, Phoenix Home Life
Mutual Insurance Company, PHL Global Holding Co. and Edward G.
Caputo.
*10.12 Employment Agreement, dated as of December 1, 1997 by and between
Registrant and Glenn M. King.
*10.13 Loan/and Security Agreement dated October 29, 1998 by and between
Registrant and People's Bank.
10.14 First Amendment to Loan and Security Agreement dated October 29,
1998 by and between Registrant and People's Bank.
10.15 First Amendment to 1997 Employee, Director and Consultant Stock
Plan dated January 5, 2000.
---------------
*21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young, LLP
27.1 Financial Data Schedule.
- --------------------------------------------------------------------------------
* Incorporated by reference from registration statement on Form S-1,
Registration No. 33-53877.
** Incorporated by reference from the Registrant's Quarterly Report on Form
10Q/A for the three months ended March 31, 1998.
(d) Financial Statement Schedule-- The response to this portion of Item 14. is
submitted as a separate section of this report.
27
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
*1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Certificate of Incorporation of the Registrant
*3.2 Certificate of Amendment to Registrant's Amended and Restated
Certificate of Incorporation filed on February 5, 1998.
*3.3 By-Laws of the Registrant.
*4.1 Specimen Certificate for shares of the Company's Common Stock.
*10.1 1997 Employee, Director and Consultant Stock Plan.
*10.2 Registration Rights Agreement dated August 26, 1997 between Registrant
and Phoenix Home Life Mutual Insurance Company.
*10.3 Registration Rights Agreement dated December 31, 1997 between Registrant
and PHL Global Holding Co.
*10.4 Co-Sale Agreement dated August 26, 1997 between Registrant, Edward G.
Caputo and Phoenix Home Life Mutual Insurance Company.
*10.5 Amendment No. 1, dated December 31, 1997 to Co-Sale Agreement between
Registrant, Edward G. Caputo and Phoenix Home Life Mutual Insurance Co.
*10.6 Co-Sale Agreement dated December 31, 1997 between Registrant, Edward G.
Caputo and PHL Global Holding Co.
*10.7 Employment Contract dated January 1, 1998 between Registrant and Edward
G. Caputo.
*10.8 Assumption Agreement dated December 1997 by and between Registrant and
People's Bank.
*10.9 Loan Agreement by and between Command International Software Pvt. and
Deutsche Bank.
*10.10 Employment Agreement dated January 1, 1998 between Registrant and
Stephen L. Willcox.
**10.11 Indemnification Agreement, by and among Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C. and Registrant, Phoenix Home Life Mutual
Insurance Company, PHL Global Holding Co. and Edward G. Caputo.
*10.12 Employment Agreement, dated as of December 1, 1997 by and between
Registrant and Glenn M. King.
*10.13 Loan/and Security Agreement dated October 29, 1998 by and between
Registrant and People's Bank.
10.14 First Amendment to Loan and Security Agreement dated October 29, 1998 by
and between Registrant and People's Bank.
10.15 First Amendment to 1997 Employee, Director and Consultant Stock Plan
dated January 5, 2000.
---------------
*21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young, LLP
27.1 Financial Data Schedule.
- -------------
* Incorporated by reference from Registration Statement on Form S-1,
Registration No. 333- 53877.
** Incorporated by reference from the Registrant's Form 10-Q/A for the
three months ended March 31, 1998.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 29, 2000.
---
COMMAND SYSTEMS, INC.
By: /s/ Edward G. Caputo
------------------------------------
Edward G. Caputo
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Edward G. Caputo
- ----------------------------
Edward G. Caputo President, Chief Executive Officer and
Chairman of the Board (Principal
Executive Officer)
/s/ Stephen L. Willcox
- ----------------------------
Stephen L. Willcox Executive Vice President, Chief
Financial Officer, Secretary and
Director (Principal Financial and
Accounting Officer)
/s/ John J.C. Herndon
- ----------------------------
John J.C. Herndon Director
/s/ James M. Oates
- ----------------------------
James M. Oates Director
/s/ Joseph D. Sargent
- ---------------------------- Director
Joseph D. Sargent
/s/ Jack Crawford
- ----------------------------
Jack Crawford Director
29
<PAGE>
Command Systems, Inc.
List of Financial Statements and Financial Statement Schedule
The report of Ernst & Young LLP, independent auditors, dated February 15, 2000,
and the following consolidated financial statements of Command Systems, Inc. are
included in Item 8:
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Operations - Years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Stockholders' Equity (Deficit) - Years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements - December 31, 1999
The following consolidated financial statement schedule of Command Systems, Inc.
is included in Item 14(a):
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Command Systems, Inc.
We have audited the accompanying consolidated balance sheets of Command Systems,
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Command
Systems, Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Hartford, Connecticut
February 15, 2000
F-2
<PAGE>
Command Systems, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1999 1998
----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,900,751 $ 16,169,749
Marketable securities 14,347,828 2,824,417
Accounts receivable, net of allowance for
doubtful accounts of $500,000 and $341,942 in
1999 and 1998 3,490,764 6,433,864
Prepaid expenses and other assets 197,112 571,285
Income taxes recoverable 402,528 364,892
----------------------------
Total current assets 22,338,983 26,364,207
Equipment and improvements:
Furniture and equipment 2,906,685 2,857,215
Leasehold improvements 1,005,486 995,030
----------------------------
3,912,171 3,852,245
Less accumulated depreciation and amortization (2,342,874) (1,569,489)
----------------------------
Net equipment and improvements 1,569,297 2,282,756
Other assets:
Goodwill, net of accumulated amortization of
$931,427 and $456,356 in 1999 and 1998 6,057,241 6,388,982
Deposits 454,712 459,705
Other non-current assets 48,310 152,041
----------------------------
$ 30,468,543 $ 35,647,691
============================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
December 31
1999 1998
----------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 608,125 $ 1,188,607
Accrued shareholder litigation and related
expenses 1,800,000
Accrued payroll and related costs 843,188 754,292
Accrued warranty 270,603 248,638
Deferred revenue 209,815 132,710
Accrued other expenses 1,181,252 1,068,098
----------------------------
Total liabilities 3,112,983 5,192,345
Stockholders' equity:
Common stock, 25,000,000 shares authorized,
$0.01 par value; 7,656,750 shares issued and
outstanding in 1999 and 1998 34,818 34,818
Additional paid in capital 33,400,480 33,400,480
Accumulated deficit (5,600,105) (2,664,069)
Accumulated other comprehensive loss:
Foreign currency translation adjustments (380,838) (315,883)
Unrealized loss on marketable securities (98,795)
----------------------------
Total stockholders' equity 27,355,560 30,455,346
----------------------------
Total liabilities and stockholders' equity $ 30,468,543 $ 35,647,691
============================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Command Systems, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Revenue $ 27,192,278 $ 35,214,586 $ 25,057,039
Cost of revenue 19,820,066 24,527,627 16,972,812
-----------------------------------------
Gross profit 7,372,212 10,686,959 8,084,227
Selling, general and administrative expense 11,346,573 11,925,572 7,254,992
Shareholder litigation and related expenses 1,800,000
-----------------------------------------
Operating (loss) income (3,974,361) (3,038,613) 829,235
Other income (expense):
Other income 222,171 86,975
Interest income 934,280 907,328 32,911
Interest expense (24,398) (40,536) (309,657)
Loss on disposal of furniture and equipment (27,975)
-----------------------------------------
1,104,078 953,767 (276,746)
-----------------------------------------
(Loss) income before income taxes and
minority interest (2,870,283) (2,084,846) 552,489
Income tax (provision) benefit (65,753) 317,589 (597,751)
-----------------------------------------
(2,936,036) (1,767,257) (45,262)
Minority interest (451,431)
Net loss (2,936,036) (1,767,257) (496,693)
Preferred stock dividends and accretion (260,303) (80,351)
-----------------------------------------
Loss applicable to common stockholders $ (2,936,036) $ (2,027,560) (577,044)
===========================
Basic and diluted loss per share
applicable to common stockholders $ (0.38) $ (0.29)
===========================
Pro forma results of operations:
Adjustments to U.S. federal income tax
provision assuming C corporation status 633,000
--------------
Net income, as adjusted 136,307
Preferred stock dividends and accretion (80,351)
--------------
Income applicable to common stockholders $ 55,956
==============
Pro forma earnings per common share:
Basic and diluted earnings per share
applicable to common stockholders $ 0.01
==============
</TABLE>
See accompanying notes.
F-5
<PAGE>
Command Systems, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Retained Other
-------------------- Paid in Earnings Comprehensive
Shares Amount Capital (Deficit) Loss Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 4,275,000 $1,000 $ (59,465) $ (58,465)
Net loss (496,693) (496,693)
Other comprehensive loss:
Foreign currency translation
adjustment $(86,905) (86,905)
------------
Comprehensive loss (583,598)
Preferred stock dividends and
accretion (80,351) (80,351)
-------------------------------------------------------------------------
Balance at December 31, 1997 4,275,000 1,000 (636,509) (86,905) (722,414)
Net loss (1,767,257) (1,767,257)
Other comprehensive loss:
Foreign currency translation
adjustment (228,978) (228,978)
------------
Comprehensive loss (1,996,235)
Issuance of common stock, net 2,200,000 22,000 $23,188,822 23,210,822
Conversion of
preferred stock 1,181,750 11,818 10,211,658 10,223,476
Preferred stock dividends
and accretion (260,303) (260,303)
-------------------------------------------------------------------------
Balance at December 31, 1998 7,656,750 34,818 33,400,480 (2,664,069) (315,883) 30,455,346
Net loss (2,936,036) (2,936,036)
Other comprehensive loss:
Foreign currency translation
adjustment (64,955) (64,955)
Unrealized losses on
marketable securities (98,795) (98,795)
------------
Comprehensive loss (3,099,786)
-------------------------------------------------------------------------
Balance at December 31, 1999 7,656,750 $34,818 $33,400,480 $(5,600,105) $(479,633) $27,355,560
=========================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Command Systems, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(2,936,036) $(1,767,257) $ (496,693)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,393,133 1,277,727 428,777
Bad debt expense 158,058 82,049 235,395
Realized loss on investments 22,797
Deferred income taxes (329,946) 257,868
Minority interest 451,431
Accrued interest capitalized 132,674
Loss on disposal of equipment 27,975
Changes in operating assets and liabilities:
Accounts receivable 3,270,334 (2,312,672) (2,063,572)
Prepaid expenses and other assets 375,077 (158,312) 61,166
Income taxes recoverable (37,636) (364,892)
Deposits and other noncurrent assets 82,705 (131,163) (34,639)
Accounts payable and accrued expenses (2,383,215) 2,090,583 937,482
Accrued payroll and related costs 52,876 143,359 234,628
Deferred revenue 77,105 (86,834) 69,110
Income taxes payable (78,137) 76,835
---------------------------------------
Net cash provided by (used in) operating activities 103,173 (1,635,495) 290,462
Cash flows from investing activities
Acquisition of business, net of cash acquired (454,227)
Purchases of equipment and improvements (249,814) (1,174,339) (1,497,783)
Sales of available-for-sale securities 7,867,352 10,950,000
Purchases of available-for-sale securities (19,512,355) (13,774,417)
---------------------------------------
Net cash used in investing activities (12,349,044) (3,998,755) (1,497,783)
</TABLE>
F-7
<PAGE>
Command Systems, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities
Payments under revolving line of credit $ (857,535) $ (521,355)
Proceeds from bank loan 806,952
Principal payments of bank loan (528,425) (250,000)
Minority investment in affiliate 391,098
Proceeds from notes payable 869,630
Payment of loan payable to officer (73,224)
Preferred stock issuance costs (43,013)
Payment of preferred stock dividend (297,641)
Issuance of common stock 24,552,000
Cost of issuance of common stock (1,341,178)
---------------------------------------
Net cash provided by financing activities 21,527,221 1,180,088
Effect of exchange rate changes on cash and cash equivalents (23,127) (114,909) (24,585)
---------------------------------------
(Decrease) increase in cash and cash equivalents (12,268,998) 15,778,062 (51,818)
Cash and cash equivalents, beginning of year 16,169,749 391,687 443,505
---------------------------------------
Cash and cash equivalents, end of year $ 3,900,751 $16,169,749 $ 391,687
=======================================
Cash paid for
Interest $ 40,421 $ 193,202
Income taxes $ 91,000 460,017 271,130
Non-cash financing activities
Preferred stock exchanged for notes payable $ 2,186,137
Preferred stock issued for purchase of minority interest 8,000,000
</TABLE>
See accompanying notes.
F-8
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
1. Organization
Command Systems, Inc. (the "Company") is an information technology company which
provides a wide range of computer consulting services primarily to large
financial services organizations.
Through December 31, 1997, the Company held a 51% interest in Command
International Software Pvt. ("CIS"), an India unlimited liability company, with
the remaining 49% interest held by Phoenix Home Life Mutual Insurance Co.
("Phoenix"). On December 31, 1997, the Company purchased Phoenix's holdings (see
Note 10).
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition and Warranty Costs
Revenue on time-and-materials contracts is recognized as the services are
performed. Revenue on fixed-price contracts is recognized using the percentage
of completion method based on the labor costs incurred to total estimated labor
costs for the contract. Under this method revenue on such contracts is
recognized concurrently with cost incurred thereon. The Company bears the risk
of cost overruns and inflation with respect to its fixed-price projects. If
estimates indicate a probable ultimate loss on a fixed price contract, provision
is made at that date for the entire estimated loss. The Company provides for
estimated future warranty costs for its year 2000 solutions as services are
performed.
Revenues from product sales are recognized upon shipment.
Billings in excess of revenue earned are classified as deferred revenue.
F-9
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Advertising Costs
Advertising costs are expensed as incurred and are included in selling, general
and administrative expense. Advertising costs were $195,000, $300,000 and
$141,000 in 1999, 1998 and 1997, respectively.
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recorded to reflect the tax
consequences of future years differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is
provided against the future benefit of deferred tax assets if it is determined
that it is more likely than not that the future tax benefits associated with the
deferred tax asset will not be realized (see Note 9). Prior to August 1997, the
Company had elected to be taxed as an S Corporation in accordance with the
provisions of the Internal Revenue Code. As an S Corporation, the taxable income
of the Company is reportable on the individual stockholder's federal tax return.
In conjunction with the formation of the Company as a Delaware holding
corporation (see Note 6) and the issuance of its Series A convertible preferred
stock, the S Corporation election was terminated and the Company became subject
to U.S. federal income taxes in 1997.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries which have a
functional currency other than the U.S. dollar reflect the translation of assets
and liabilities into U.S. dollars at current exchange rates with income and
expense accounts being translated at average rates of exchange prevailing during
the period. The resulting adjustments are recorded as a separate component of
accumulated other comprehensive loss. Foreign currency transaction gains and
losses are not material and are included in the determination of net loss when
incurred.
Earnings Per Share
In 1997, the Company adopted Financial Accounting Statement (FAS) No. 128,
"Earnings Per Share." All per share amounts for all periods have been presented
to conform with this Statement.
F-10
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Pro forma earnings per common share reflect adjustments in the U.S. federal
income tax provision assuming the Company had always had C corporation status
and the realization of pre-existing net operating losses.
Cash Equivalents
Highly liquid investments purchased with a maturity of three months or less are
considered cash equivalents.
Concentration of Credit Risk
The Company markets its services primarily to the financial services industry.
The Company performs periodic credit evaluations of a customer's financial
condition and generally does not require collateral. Credit losses have been
within management's expectations.
Marketable Securities
Marketable securities are classified as available-for-sale and are available to
support current operations or to take advantage of other investment
opportunities. Unrealized gains and losses, net of tax, are recorded as a
separate component of accumulated other comprehensive loss. Realized gains and
losses are included in interest expense. The cost of securities sold is
based on the specific identification method.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable, and other accrued
liabilities approximate fair value due to the short maturity of these items. The
fair value of marketable securities is based on quoted market prices for those
or similar investments.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation on equipment is
calculated on a straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are amortized on a straight-line basis over the
shorter of the lease term or estimated useful life of the assets.
F-11
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Goodwill
Goodwill is being amortized using the straight-line method over periods ranging
from three to fifteen years.
Impairment of Long-Lived Assets
Long-lived assets, including goodwill, are reviewed for impairment and written
down to fair value whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. At December 31, 1999, no
such impairment existed. The Company measures the potential impairment of
long-lived assets, including goodwill, by the undiscounted value of expected
operating cash flow in relation to the assets to which it applies.
Stock-Based Compensation
During 1997, the Company adopted FAS No. 123, "Accounting for Stock-Based
Compensation." This statement defines a fair value based method of accounting
for employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans in accordance with
Accounting Principles Board ( "APB ") Opinion No. 25, "Accounting for Stock
Issued to Employees." Under APB No. 25, compensation cost is the excess, if any,
of the market price of the stock at the grant date over the amount the employee
must pay to acquire the stock. The Company has elected to continue to account
for awards granted under the Command Systems, Inc. 1997 Employee, Directors and
Consultant Stock Option Plan under APB No. 25.
Reclassifications
Certain reclassifications, including those relating to the adoption of FAS No.
130, "Reporting Comprehensive Income," have been made to the prior year to
conform to the current year presentation.
F-12
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
3. Acquisition
On August 1, 1999, the Company acquired 100% of the outstanding stock of Nova
Technology, Inc. (Nova), a privately owned Oracle IT consulting, systems
integration and custom software application developer for approximately
$454,000. The acquisition has been accounted for as a purchase; accordingly, the
excess of the purchase price over the fair value of the net assets acquired has
been recorded as goodwill and is being amortized on a straight line basis over
three years. The results of operations of Nova are included in the accompanying
financial statements from the date of acquisition. This acquisition did not
materially affect the financial statements of the Company in 1999 nor would it
have materially effected the financial statements of prior periods had the
results of its operations been included in them.
Concurrent with the acquisition, the Company entered into employment agreements
with the former shareholders of Nova. The agreements, which are for a period of
four years, provide for specific salary levels and additional incentive bonuses
that are contingent upon the Nova business achieving certain performance
criteria; performance based payments are not expected to exceed $250,000
annually.
4. Marketable Securities
The Company invests in only high quality, short-term investments. The Company
views its available-for-sale portfolio as available for use in its current
operations; therefore, all marketable securities have been classified as current
assets. Marketable securities consist of:
<TABLE>
<CAPTION>
1999
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
United States Treasury
Notes $14,446,623 $ 31,773 $(130,568) $14,347,828
1998
U.S. Corporate debt securities, due within one year $ 1,003,289
Mortgage-backed securities, due after one year through three years 1,821,128
------------
$ 2,824,417
============
</TABLE>
F-13
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
4. Marketable Securities (continued)
There were no significant differences between cost and fair value at December
31, 1998. Gross realized losses in 1999 were $22,797; there were no gross
realized gains or losses in 1998.
The following is a summary of contractual maturities:
Amortized Estimated
Cost Fair Value
-------------------------
Amounts maturing within one year $ 7,479,634 $ 7,449,224
Amounts maturing after one year, within three years 6,966,989 6,898,604
-------------------------
$14,446,623 $14,347,828
=========================
5. Debt
The Company's revolving line of credit agreement, as amended October 13, 1999,
limits borrowings to a maximum of $4,000,000; no amount related thereto is
outstanding at December 31, 1999. The agreement expires October 15, 2000 and
bears interest at the Bank Rate, as defined, or the London Interbank Offered
Rate ("LIBOR") plus 1.75 basis points. Under the terms of the revolving line of
credit agreement, the Company is required, among other things, to maintain
certain financial ratios and minimum levels of net worth. Borrowings under the
line of credit agreement are secured by all the Company's business assets,
except for the assets of CIS.
On July 1, 1996, the Company and its wholly-owned subsidiary Command
International Holdings ("CIH") entered into a note purchase agreement (the
"Agreement") with Phoenix under which the Company could issue up to $3 million
aggregate principal amount of its 15% Subordinated Secured Series Notes (the "C
Notes"), accrued and capitalized interest on such notes and its Zero Coupon
Receivables-Based Subordinated Secured Series Notes (the "Z Notes"). Also, under
this Agreement, CIH was authorized to issue up to $3 million aggregate principal
amount of its 15% Guaranteed Senior Secured Series Notes (the "M Notes") and
accrued capitalized interest on such notes. The payment obligations of the
Company in respect to the C Notes and the Z Notes ranked junior and subordinate
in right of payment to the senior indebtedness of the Company under the M Notes.
On August 26, 1997, the Company entered into an agreement with Phoenix whereby
the Company issued to Phoenix 100 shares of its Series A convertible preferred
stock in exchange for the aggregate outstanding indebtedness of $2,186,137 of
the C, Z, and M Notes, including accrued capitalized interest of $171,044.
F-14
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
In June 1998, CIS entered into a Funded and Non Funded Credit facility. The
Funded Facility provides for a maximum of Rs. 7.5 MM ($176,500) based upon
monthly export billing and an overdraft facility of Rs. .5MM. The export
billing facility is at a base FEDAI rate plus 10% interest; 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 and a guarantee letter of
credit line in the amount of Rs. 3MM. The letter of credit facility is at a base
FEDAI rate plus 15% interest; the guarantee letter of credit facility charge is
at the Central Bank of India's internal rate plus 25%. These credit facilities
are secured primarily by accounts receivable and a lien on the fixed assets of
CIS; no amounts related thereto were outstanding at December 31, 1999.
6. Stockholders' Equity
On July 1, 1997 Command Systems, Inc., a Delaware corporation, was established
and exchanged 4,275,000 shares of its common stock for the 100 shares of issued
and outstanding common stock of the Company held by its sole stockholder and
became the ultimate holding company for the Command group of companies. The
Company was authorized to issue 10,650,000 shares of $0.01 par value common
stock and 1,000 shares of $0.01 par value preferred stock. This transaction was
accounted for at historical cost in a manner similar to a pooling of interests.
The number of common shares authorized, issued and outstanding have been
restated for all periods to reflect this capitalization. Effective December 31,
1997 the Company was authorized to issue up to 25,000,000 shares of its common
stock and 5,000,000 shares of preferred stock. The consolidated financial
statements have been adjusted to reflect this change.
The Company made its initial public offering on March 12, 1998, pursuant to an
effective registration statement covering 2,400,000 shares of $0.01 par value
common stock (of which 300,000 shares were sold by certain shareholders) 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). All of these shares
were sold at the public offering price of $12.00 per share.
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 had 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 judgement
entered by the court on August 11, 1999, in the purported consolidated class
action discussed in Note 13.
F-15
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
6. Stockholders' Equity (continued)
On August 26, 1997, the Company issued 100 shares of its Series A redeemable
convertible preferred stock to Phoenix. The Series A redeemable convertible
preferred stock had a liquidation preference of $2,186,137 and had a dividend
requirement of 10% per annum which accrued on a cumulative basis. Accrued and
unpaid dividends amounted to $75,474 at December 31, 1997. These shares were
convertible at any time into 522,500 shares of the Company's common stock and
were redeemable by Phoenix after July 31, 1999.
On December 31, 1997, the Company issued 100 shares of Series B redeemable
convertible preferred stock to Phoenix. The Series B redeemable convertible
preferred stock had a liquidation preference of $8,000,000 and had a dividend
requirement of 10% per annum which accrued on a cumulative basis. These shares
were convertible at any time into 659,250 shares of the Company's common stock.
Simultaneously with the initial public offering, Phoenix exchanged its 200
shares of Series A and B redeemable convertible preferred stock 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
for 1998. The Company paid preferred stock dividends in 1998 of $298,000 from
the initial public offering proceeds.
The Company has 4,999,800 shares of $.01 par value undesignated preferred stock.
The Board of Directors of the Company is authorized to establish, among other
things, the rate of dividends payable, redemption rights and voting rights prior
to issuance.
7. Stock Options
In March 1997 the Company issued options to purchase 61,500 shares of its common
stock, the number of units previously outstanding under the Shadow Stock
Incentive Plan (the Shadow Plan), exercisable at a price of $4.00 per share (the
fair market value as determined by the Board of Directors of such stock at the
date of grant) to certain persons who, upon such issuance, relinquished their
rights under the Company's Shadow Plan.
In August 1997, the Company created the Command Systems, Inc. 1997 Employee,
Director and Consultant Stock Option Plan (the "Plan"). The Company reserved
427,500 shares of its common stock for issuance under the Plan. Options granted
under the Plan generally have a five year term and generally vest in increments
of 20% on the anniversary of the date of grant.
F-16
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stock Options (continued)
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year 214,400 $ 7.32 150,550 $ 6.96
Granted 255,000 1.75 94,175 7.80 150,550 $ 6.96
Exercised
Forfeited (45,775) 7.41 (30,325) 7.03
-----------------------------------------------------------
Outstanding, end of year 423,625 $ 3.96 214,400 $ 7.32 150,550 $ 6.96
============================================================
Exercisable, end of year 104,380 $ 6.55 76,465 $ 5.89 45,550 $ 4.27
============================================================
</TABLE>
Options outstanding at December 31, 1999 had exercise prices as follows: 255,000
options at $1.75, 9,350 options at $2.81, 56,500 options at $4.00, 85,275
options at $9.00, and 17,500 options at $12.00. The weighted average remaining
contractual life of these options is 4 years.
If compensation costs for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates for 1999, 1998 and 1997
consistent with the method prescribed by FAS No. 123, the Company's net loss
applicable to common stockholders and loss per share would have been adjusted to
the pro forma amounts indicated below:
1999 1998 1997
---------------------------------------
Net loss applicable to
common stockholders As reported $(2,936,036) $(2,027,560) $(577,044)
Pro forma (3,048,954) (2,185,807) (605,444)
Basic and diluted loss
per share As reported $(0.38) $(0.29) $(0.13)
Pro forma $(0.40) $(0.31) $(0.13)
F-17
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stock Options (continued)
The fair value of each stock option grant was estimated using a Black-Scholes
option valuation model with the following weighted-average assumptions:
1999 1998 1997
------------------------
Risk free interest rate 6% 6% 6%
Expected volatility 81.5% 68.5% 40.4%
Expected option life 5 5 5
Dividend yield 0% 0% 0%
The risk-free interest rate is based on short-term treasury bill rates. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
8. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
1999 1998 1997
---------------------------------------
Numerator:
Net loss $(2,936,036) $(1,767,257) $ (496,693)
Preferred stock dividends and
accretion (260,303) (80,351)
---------------------------------------
Numerator for basic and diluted loss
per share-loss applicable to
common stockholders (2,936,036) (2,027,560) (577,044)
F-18
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
8. Earnings Per Share (continued)
1999 1998 1997
-----------------------------------------
Denominator:
Weighted-average shares
outstanding for basic and
diluted loss per share 7,656,750 7,017,937 4,275,000
-----------------------------------------
Basic and diluted loss per share
applicable to common stockholders $ (0.38) $ (0.29) $ (0.13)
=========================================
Options to purchase 423,625, 214,400 and 150,550 shares of the Company's common
stock in 1999, 1998 and 1997, respectively, and 223,233 and 1,181,750 shares of
the Company's common stock issuable upon the conversion of the Series A and B
redeemable convertible preferred stock in 1998 and 1997, respectively, were not
included in the computation of diluted earnings per share because the effect of
their inclusion would be antidilutive.
9. Income Taxes
Components of the income tax (provision) benefit for income taxes follow:
Year ended December 31
1999 1998 1997
-----------------------------------
Current:
Federal $ 66,440 $(334,871)
State $ (51,500) (78,814) (5,012)
Foreign (14,253)
-----------------------------------
Total current (65,753) (12,374) (339,883)
Deferred:
Federal 305,991 (293,078)
State 23,972 35,210
Foreign
-----------------------------------
Total deferred 329,963 (257,868)
-----------------------------------
Total (provision) benefit $ (65,753) $ 317,589 $(597,751)
===================================
With the issuance of the Series A redeemable convertible preferred stock in
1997, the Company's ability to be taxed as an S Corporation automatically
terminated and the ability to report on the cash basis of accounting ceased. The
Company recognized additional taxable income in 1997 as a result and incurred a
liability of approximately $693,000 in 1997.
F-19
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
The effective income tax rate differed from the federal statutory rate for the
following reasons:
Year ended December 31
1999 1998 1997
-----------------------------
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 2.2 3.6 (5.5)
No federal income tax benefit (provision)
for S Corporation period income (loss) 15.9
Tax effect of conversion from S Corporation
to C Corporation, related primarily to
accounting method change 125.5
Foreign profits and (losses) not subject to tax (8.2) 15.4 (56.7)
Goodwill (5.3) (7.4)
Other (1.7) (2.2)
Valuation allowance (23.2) (28.2) (5.0)
-----------------------------
Effective income tax rate (2.2)% 15.2% 108.2%
=============================
Significant components of the Company's deferred income tax assets and
(liabilities) are as follows:
December 31
1999 1998
---------------------------
Deferred tax assets:
Federal and state net operating loss
carryforwards $1,095,952 $ 42,510
Allowance for doubtful accounts 199,073 41,231
Shareholder litigation accrual 680,701
Accrued warranty, legal and other 271,297 276,847
Accrued wages 33,881
Unrealized gains 34,806
---------------------------
1,635,009 1,041,289
F-20
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
December 31
1999 1998
---------------------------
Deferred tax liabilities:
Tax effect of conversion from S Corporation
to C Corporation, related primarily to
accounting method change $ (212,552) $ (444,745)
Equipment and improvements (19,274) (9,365)
Cash to accrual conversions (134,174)
---------------------------
(366,000) (454,110)
---------------------------
Net deferred income tax asset 1,269,009 587,179
Less valuation allowance 1,269,009 587,179
===========================
Net deferred income tax asset (liability) $ -- $ --
===========================
The Company has net operating loss ("NOL") carryforwards for federal and state
tax purposes of approximately $2,700,000 and $2,800,000 respectively at December
31, 1999 and $618,000 for state tax purposes at December 31, 1998 which expire
through 2019. The valuation allowance increased by $681,830 during 1999.
Under Indian tax laws CIS's export income is fully exempt from income tax. The
exemption is available for a period of 10 years from the year in which it
commenced business (exemption period March 31, 1997 through March 31, 2006). The
foreign income tax provision in 1999 relates to income from sources other than
export of software (e.g. interest income, rental income). CIH is also eligible
for certain tax exemptions under the laws of Mauritius. As a result of such
exemptions, no deferred tax asset or liability is recognized. During 1999, 1998
and 1997, (loss) income of the Company's foreign subsidiaries before minority
interest which is exempt from income taxes was $(708,930), $943,104 and
$921,287, respectively.
Undistributed foreign earnings of approximately $704,000 at December 31, 1999
are considered to be indefinitely reinvested. Accordingly, no provision for U.S.
federal and state income taxes has been provided thereon, nor is it practicable
to determine the amount. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes.
F-21
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
10. Related Party Transactions
During 1996, the Company entered into an agreement with Phoenix to establish a
joint venture in India which would provide software services on a subcontracting
basis to the Company. Under the terms of the agreement, the Company owned a 51
percent interest. Phoenix invested $391,098 in this venture during 1997.
On December 31, 1997, Phoenix exchanged its 49% interest for 100 shares of the
Company's Series B redeemable convertible preferred stock valued at $8,000,000.
The Company recorded this as a purchase and recognized the excess of the
purchase price over the fair value of the assets acquired and
liabilities assumed of $6,845,338 as goodwill.
The Company provides various information technology services to Phoenix;
revenues related thereto were $1,690,000, $2,165,000 and $2,600,000 for 1999,
1998 and 1997, respectively. At December 31, 1999 and 1998, receivables from
Phoenix approximated $199,000 and $263,000, respectively.
11. Leases
The Company has non-cancelable long-term operating leases for various office
facilities and equipment.
Rent expense under operating leases was $795,887, $618,425 and $543,700 in
1999, 1998 and 1997, respectively.
Future minimum lease payments at December 31, 1999 for these non-cancelable
operating leases, net of minimum rentals to be received under noncancelable
subleases of $233,072, $240,060 and $189,298 in 2000, 2001 and 2002,
respectively, follow:
2000 $ 577,800
2001 544,900
2002 445,000
2003 83,000
2004
-----------
$1,650,700
===========
The Company is required to maintain security deposits for office space rented in
Bangalore, India; amounts related thereto were $403,402 and $408,235 at December
31, 1999 and 1998, respectively.
F-22
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
12. Reportable Segments
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. The accounting policies of each geographic area are
substantially the same as those described in Note 2.
United States India Elimination Consolidated
-----------------------------------------------------
1999
Revenue $27,049,120 $1,064,274 $ (921,116) $27,192,278
Operating (loss) (3,025,487) (948,874) (3,974,361)
Identifiable assets 27,698,022 2,770,521 30,468,543
1998
Revenue $35,214,586 $3,942,217 $(3,942,217) $35,214,586
Operating (loss)
income (3,863,899) 825,286 (3,038,613)
Identifiable assets 31,004,269 4,643,422 35,647,691
1997
Revenue $25,057,039 $2,870,150 $(2,870,150) $25,057,039
Operating (loss)
income (99,974) 929,209 829,235
Identifiable assets 12,173,801 2,251,286 14,425,087
For the year ended December 31, 1999, two customers accounted for approximately
16% and 12% of revenue. For the year ended December 31, 1998, two customers
accounted for approximately 15% and 10% of revenue. For the year ended December
31, 1997, three customers accounted for approximately 13%, 13% and 10% of
revenue.
The following table sets forth the revenue percentages by line of business:
Year ended December 31
1999 1998 1997
---------------------------------
Staff augmentation 68% 57% 59%
Year 2000 14% 27% 21%
Software and hardware 2% 10% 12%
Projects 15%
Other 1% 6% 8%
---------------------------------
Total 100% 100% 100%
=================================
F-23
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
13. 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
purported 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 alleged 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. 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. The court entered a
judgment approving this settlement on August 11, 1999, which became final and no
longer subject to appeal on September 10, 1999. On September 10, 1999 the
settlement fund was also established. The Company may also 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.
F-24
<PAGE>
Command Systems, Inc.
Notes to Consolidated Financial Statements (continued)
13. Legal Proceedings (continued)
Of the $5.75 million deposited in the settlement fund established September 10,
1999 by the Company, the Company has been reimbursed for all but $1.65 million.
This reimbursement came 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 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.
14. Risks and Uncertainties of Doing Business
Many of the Company's engagements involve projects that are critical to the
operations of its customers' businesses and provide benefits that may be
difficult to quantify. Any failure in a customer's system could result in a
claim for substantial damages against the Company, regardless of the Company's
responsibility for such failure. Although the Company attempts to limit
contractually its liability for damages arising from errors, mistakes or
omissions in rendering its information technology services, there can be no
assurance that the limitations of liability set forth in its services contracts
will be enforceable in all instances or would otherwise protect the Company from
liability for damages. Although the Company maintains general liability
insurance coverage, including coverage for errors or omissions in the amount of
$5.0 million, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Company that exceed available insurance coverage, or changes in the
Company's insurance policies, including premium increases or the imposition of
large deductible or co-insurance requirements, could adversely affect the
Company's business, financial condition and results of operations.
F-25
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COMMAND SYSTEMS, INC.
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Charged Charged
Balance at to Costs to Other Balance at
Beginning and Accounts End of
Description of Period Expenses Describe Deductions Period
- ------------------------------- ------------ ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts receivable... $341,942 $158,058 $ -- $ -- $500,000
Year ended December 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts receivable... $259,893 $82,049 $ -- $ -- $341,942
Year ended December 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts receivable... $24,500 $357,582 $ -- $(122,189) $259,893
</TABLE>
<PAGE>
EXHIBIT 10.14
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT made this 13th day of
October, 1999, by and between COMMAND SYSTEMS, INC., a corporation having its
chief executive office at 76 Batterson Park Road, Farmington, Connecticut 06032
("Debtor") and PEOPLE'S BANK, a Connecticut savings bank, having its chief
executive office at 855 Main Street, Bridgeport, Connecticut 06604 ("Secured
Party").
WITNESSETH:
WHEREAS, on October 29, 1998, Debtor and Secured Party entered into a Loan
and Security Agreement (the "Agreement") pursuant to which Debtor requested
Secured Party to make available to it a certain line of credit loan (the "Loan")
pursuant to the provisions of Paragraph 4 of the Agreement; and
WHEREAS, Debtor has requested an extension of the maturity date of the
Loan made pursuant to Paragraph 4 of the Agreement, and Secured Party is willing
to make such Loans to Debtor on the terms and conditions and in reliance upon
the representations and warranties of Debtor hereinafter set forth:
NOW, THEREFORE, in consideration of the foregoing and in further
consideration of the mutual covenants herein contained, the parties hereto agree
as follows:
1. The Loan Agreement is hereby amended as follows:
(a) Paragraph 4(b) is hereby deleted and the following inserted in lieu
thereof:
"(b) In the event Debtor desires an advance on the Loan, it may
request the same by delivering to Secured Party a written request for
advance, or by telephonic or facsimile notice to Secured Party, upon which
telephonic or facsimile notice Secured Party shall be entitled to rely,
Debtor agreeing to indemnify Secured Party, if it shall have so relied in
good faith to its detriment, for its losses and expenses, if any, arising
from such reliance. Each such request for an advance on the Loan made by
telephonic notice shall be evidenced by Debtor delivering to Secured
Party, a written confirmation of the request for advance, with such
written confirmation accompanied by a borrowing certificate attesting to
Debtor's compliance with the provisions of the Loan Agreement. The Loans
shall be made by Secured Party depositing the proceeds thereof in Debtor's
operating account maintained with Secured Party;".
(b) Paragraph 4(d) is hereby deleted and the following inserted in
lieu thereof:
<PAGE>
"(d) At Debtor's option, which Debtor shall exercise by notifying Secured
Party in writing at least two days prior to any requested advance pursuant to
the notice requirements outlined in Subparagraph (b) above, Debtor may elect
that any advance on the Loan in excess of Five Hundred Thousand and 00/100
Dollars ($500,000.00) bear interest at a rate per annum equal to LIBOR plus 175
basis points ("LIBOR Rate") for Interest Periods of either thirty, sixty or
ninety days as selected by Debtor from the date hereof to October 15, 2000. Any
Loan advance that Debtor elects to bear interest at the LIBOR Rate must be in an
amount of at least Five Hundred Thousand and 00/100 Dollars ($500,000.00), and
Debtor's option to borrow at the LIBOR Rate shall terminate at any time that
there are outstanding seven LIBOR maturities. No LIBOR maturity shall have an
expiration date after October 15, 2000. Each Interest Period for a LIBOR Rate
Loan advance shall commence on the date a Loan advance is made, and shall end on
the thirty, sixty or ninety day Interest Period date that Debtor has elected
provided that: (i) any Interest Period which would otherwise end on a day which
is not a Business Day shall end on the next preceding or succeeding Business Day
as is Secured Party's custom in the market to which such LIBOR Rate relates;
(ii) all Interest Periods which commence on the same date shall end on the same
date; (iii) each Interest Period which commences before, and would otherwise end
after October 15, 2000, shall end on October 15, 2000; and (iv) any Interest
Period which begins on a day for which there is no numerically corresponding day
in the calendar month during which such Interest Period is to end, shall
(subject to clause (a) above) end on the last day of such calendar month.
In the event that Secured Party shall have determined that (i) by reason
of circumstances affecting the London Interbank Eurodollar market, adequate and
reasonable means do not exist for determining the LIBOR Rate, or (ii) dollar
deposits in the relevant amount of the relevant maturity are not available to
the Secured Party in the London Interbank Eurodollar market with respect to a
proposed Loan advance, Secured Party shall give Debtor prompt notice of such
determination. If such notice is given, then a requested Loan advance shall bear
interest at the Prime Rate. Until such notice has been withdrawn, Secured Party
shall have no obligation to make Loan advances at the LIBOR Rate or to maintain
outstanding Loan advances at the LIBOR Rate.
Debtor agrees to indemnify Secured Party and hold Secured Party harmless
from any loss or expense (including, without limitation, any lost profit) that
it may sustain or incur as a consequence of any prepayment or any default by
Debtor in the payment of the principal of or interest on a Loan advance bearing
interest at the LIBOR Rate including, but not limited to, any loss of profit
-2-
<PAGE>
or any interest payable by Secured Party to lenders of funds obtained by it in
order to make or maintain its Loan advances at the LIBOR Rate."
(c) Paragraph 4(f) of the Agreement is hereby deleted and the following
inserted in lieu thereof:
"(f) Debtor shall pay to Secured Party on October 15, 2000 the
outstanding principal balance and all accrued interest and any outstanding
charges in connection with the Loan as shown on Debtor's Account; and".
(d) Paragraph 4(g) of the Agreement is hereby deleted and the following
inserted in lieu thereof:
"(g) The provisions of this Paragraph 4 shall continue in effect
until October 15, 2000, provided, however, that Secured Party may
terminate the provisions of this Paragraph 4 at any time upon the
happening of an Event of Default hereunder. No such termination shall (i)
in any way affect or impair the security interest granted to Secured Party
hereunder or any other rights of Secured Party hereunder or under any
other agreements, instruments or documents required to be executed and
delivered to Secured Party pursuant to the terms of this Agreement,
arising prior to any such termination or by reason thereof, (ii) relieve
Debtor of any obligation to Secured Party under this Agreement, any such
other agreement, instrument or document, or otherwise, until all the
Obligations are fully paid and performed, or (iii) affect any right or
remedy of Secured Party, hereunder or under any, such other agreement,
instrument or document."
(e) Paragraph 5(a)(v) of the Agreement is hereby amended to read as
follows:
"(v) maintain at all times cash and/or cash equivalents of at least
Ten Million and 00/100 Dollars ($10,000,000.00) which covenant shall be
tested quarterly commencing December 31, 1999."
(f) Paragraph 5(e)(i) of the Agreement is hereby deleted and the following
inserted in lieu thereof:
"(i) Within one hundred (100) days after the end of each of Debtor's
fiscal years following the date hereof, its Form 10K filed with the
Securities and Exchange Commission and audited financial statement
including Debtor's
-3-
<PAGE>
balance sheet, statement of income, and statement of cash flows. Each
such audited financial statement shall set forth in each case in
comparative form the corresponding figures for the preceding fiscal year,
all in reasonable detail, including all supporting schedules, comments
and notes, and shall be prepared in accordance with generally accepted
accounting principles consistently applied from year to year, including
the fiscal year preceding that for which such statement is being
furnished;".
(g) Paragraph 5(e)(iii) of the Agreement is hereby deleted and the
following inserted in lieu thereof:
(iii) Within sixty-five (65) days after the end of each fiscal
quarter following the date hereof, its Form 10Q filed with the
Securities and Exchange Commission and unaudited management prepared
balance sheet as at the end of such fiscal quarter and the end of the
corresponding fiscal quarter of the preceding fiscal year, and a
statement of income of Debtor for the period between the end of the last
fiscal year and the end of such fiscal quarter and for the corresponding
period of the preceding fiscal year, certified by the President or
Treasurer of Debtor as presenting fairly the financial position of
Debtor, the results of its operations and the changes in its financial
position as at the end of each such fiscal quarter, subject only to
normal recurring year-end adjustments which will not, either singly or in
the aggregate, have a material adverse effect on Debtor's financial
condition;".
2. All sums at any time outstanding to Debtor's credit on Secured Party's
books and all of Debtor's property at any time in Secured Party's possession, or
in transit to Secured Party, or upon or in which Secured Party has a lien or
security interest shall be security for all Liabilities, In addition to and not
in limitation of the above, with respect to any deposits or property of Debtor
in Secured Party's bank, or in Secured Party's possession or control, or in
transit to Secured Party, now or in the future, Secured Party shall have the
right to setoff all or any portion thereof, at any time against any Liabilities
hereunder, even though unmatured, without prior notice or demand to Debtor.
3. The Loan Documents are hereby ratified and confirmed by Debtor and
Secured Party and every provision, covenant, warranty, representation,
condition, obligation, right and power contained in and under the Loan Documents
as amended and modified, shall continue in full force and effect, affected by
this Modification only to the extent of the amendments and modifications set
forth above. Without limiting the generality of the foregoing, Debtor and
Secured Party hereby ratify and confirm that as of the date hereof, there exists
no Event of Default (as defined in the Loan Documents)
-4-
<PAGE>
and no circumstances exist which could constitute an Event of Default after the
giving of notice or the passage of time, or both.
4. Debtor represents and warrants to Secured Party that all of the
representations and warranties Debtor has set forth in the Loan Agreement, as
amended hereby, are true and correct and are hereby remade and restated.
5. The covenants and agreements herein set forth shall bind and inure to
the benefit of the parties hereto and their respective heirs, successors and
assigns.
6. The consummation of the transactions hereby contemplated and the
performance of the obligations of Debtor under and by virtue of the Loan
Documents will not result in any breach of, or constitute a default under, any
mortgage, security deed, deed of trust, lease, bank loan or credit agreement,
trust agreement or other instrument to which Debtor is a party or by which it
may be bound or affected.
7. There are no actions, suits or proceedings pending, or to the knowledge
of Debtor threatened, against or affecting Debtor, or involving the validity or
enforceability of any of the Loan Documents or the priority of the lien thereof.
8. There has been no material adverse change in the financial condition of
Debtor since the date of the last financial statements delivered to Secured
Party. No bankruptcy or insolvency case or proceedings of any kind have been
filed, threatened or are outstanding by or against Debtor, and Debtor is current
with regard to payment and performance of all loans, contracts and other
agreements or obligations affecting Debtor.
9. Debtor agrees to execute and deliver to Secured Party any and all
additional documentation as Secured Party may reasonably require to effectuate
the terms and conditions of this Amendment.
10. Debtor shall pay to Secured Party the reasonable fees, expenses and
disbursements of any attorney, other than a regular employee of the Secured
Party, whom the Secured Party may engage: (i) with respect to preparing or
reviewing this Amendment or otherwise representing the Secured Party in
connection with any matters relating to the Agreement or this Amendment; and
(ii) rendering opinions with respect to any of the transactions contemplated by
this Amendment.
11. Except as herein expressly amended, the Agreement is hereby ratified
and affirmed in all respects.
-5-
<PAGE>
12. DEBTOR ACKNOWLEDGES THAT THE TRANSACTIONS DESCRIBED HEREIN ARE
COMMERCIAL TRANSACTIONS AND WAIVES ITS RIGHTS TO NOTICE AND HEARING UNDER
CHAPTER 903a OF THE CONNECTICUT GENERAL STATUTES, OR AS OTHERWISE ALLOWED BY ANY
STATE OR FEDERAL LAW WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH SECURED PARTY
MAY DESIRE TO USE, AND FURTHER WAIVES DILIGENCE, DEMAND, PRESENTMENT FOR
PAYMENT, NOTICE OF NONPAYMENT, PROTEST, AND NOTICE OF PROTEST, AND NOTICE OF ANY
RENEWALS OR EXTENSIONS OF THE NOTE, AND ALL RIGHTS UNDER ANY STATUTE OF
LIMITATIONS.
13. DEBTOR HEREBY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY SUIT,
ACTION OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY
RELATED TO THE FINANCING TRANSACTIONS OF WHICH THIS AGREEMENT IS A PART AND/OR
THE ENFORCEMENT OF ANY OF SECURED PARTY'S RIGHTS AND REMEDIES. DEBTOR
ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY, AND ONLY AFTER
EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEYS.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals, and to a duplicate instrument of the same tenor at Hartford, Connecticut,
the day and year first above written.
Signed, Sealed, and Delivered
in the Presence of:
COMMAND SYSTEMS, INC.
/s/ [Illegible] By: /s/ [Illegible]
- -------------------- -----------------------
Its [Illegible]
/s/ [Illegible] As to both
- --------------------
PEOPLE'S BANK
By: /s/ Domenic A. Cessario
- -------------------- -----------------------
Domenic A. Cessario
Its Assistant Vice President
- --------------------
-6-
<PAGE>
EXHIBIT 10.15
COMMAND SYSTEMS, INC.
1997 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK PLAN
(As Amended and Restated Effective as of January 5, 2000)
--
1. DEFINITIONS.
Unless otherwise specified or unless the context otherwise requires, the
following terms, as used in this COMMAND SYSTEMS, INC. 1997 Employee, Director
and Consultant Stock Plan, have the following meanings:
Administrator means the Board of Directors, unless it has delegated power
to act on its behalf to the Committee, in which case the Administrator
means the Committee.
Affiliate means a corporation which, for purposes of Section 424 of the
Code, is a parent or subsidiary of the Company, direct or indirect.
Board of Directors means the Board of Directors of the Company.
Code means the United States Internal Revenue Code of 1986, as amended.
Committee means the committee of the Board of Directors to which the Board
of Directors has delegated power to act under or pursuant to the provisions
of the Plan.
Common Stock means shares of the Company's common stock, $.01 par value per
share.
Company means COMMAND SYSTEMS, INC., a Delaware corporation.
Disability or Disabled means permanent and total disability as defined in
Section 22(e)(3) of the Code.
Fair Market Value of a Share of Common Stock means:
(1) If the Common Stock is listed on a national securities exchange or
traded in the over-the-counter market and sales prices are regularly
reported for the Common Stock, the closing or last price of the Common
Stock on the Composite Tape or other comparable reporting system for the
trading day immediately preceding the applicable date;
(2) If the Common Stock is not traded on a national securities exchange but
is traded on the over-the-counter market, if sales prices are not regularly
reported for the Common Stock for the trading day referred to in clause
(1), and if bid and asked prices for the Common Stock are regularly
reported, the mean between the bid and the asked price for the Common Stock
at the close of trading in the over-the-counter market for the trading day
on which Common Stock was traded immediately preceding the applicable date;
and
<PAGE>
(3) If the Common Stock is neither listed on a national securities exchange
nor traded in the over-the-counter market, such value as the Administrator,
in good faith, shall determine.
ISO means an option intended to qualify as an incentive stock option under
Section 422 of the Code.
Key Employee means an employee of the Company or of an Affiliate
(including, without limitation, an employee who is also serving as an
officer or director of the Company or of an Affiliate), designated by the
Administrator to be eligible to be granted one or more Stock Rights under
the Plan.
Non-Qualified Option means an option which does not qualify as an ISO.
Option means an ISO or Non-Qualified Option granted under the Plan.
Option Agreement means an agreement between the Company and a Participant
delivered pursuant to the Plan, in such form as the Administrator shall
approve.
Participant means a Key Employee, director or consultant to whom one or
more Stock Rights are granted under the Plan. As used herein, "Participant"
shall include "Participant's Survivors" where the context requires.
Plan means this Command Systems, Inc. 1997 Employee, Director and
Consultant Stock Plan, as amended.
Shares means shares of the Common Stock as to which Stock Rights have been
or may be granted under the Plan or any shares of capital stock into which
the Shares are changed or for which they are exchanged within the
provisions of Paragraph 3 of the Plan. The Shares issued under the Plan may
be authorized and unissued shares or shares held by the Company in its
treasury, or both.
Stock Grant means a grant by the Company of Shares under the Plan.
Stock Grant Agreement means an agreement between the Company and a
Participant delivered pursuant to the Plan, in such form as the
Administrator shall approve.
Stock Right means a right to Shares of the Company granted pursuant to the
Plan -- an ISO, a Non-Qualified Option or a Stock Grant.
Survivors means a deceased Participant's legal representatives and/or any
person or
2
<PAGE>
persons who acquired the Participant's rights to a Stock Right by will or
by the laws of descent and distribution.
2. PURPOSES OF THE PLAN.
The Plan is intended to encourage ownership of Shares by Key Employees and
directors of and consultants to the Company or its Affiliates in order to
attract such people, to induce them to work for the benefit of the Company or of
an Affiliate and to provide additional incentive for them to promote the success
of the Company or of an Affiliate. The Plan provides for the granting of ISOs,
Non-Qualified Options and Stock Grants. Stock Rights granted under the Plan
prior to January 5, 2000, will be governed by the terms of the Plan as in
effect on the date on which such Stock Rights were granted.
3. SHARES SUBJECT TO THE PLAN.
The number of Shares which may be issued from time to time pursuant to this
Plan shall be 1,355,000, or the equivalent of such number of Shares after the
Administrator, in its sole discretion, has interpreted the effect of any stock
split, stock dividend, combination, recapitalization or similar transaction in
accordance with Paragraph 23 of the Plan.
If an Option ceases to be "outstanding," in whole or in part, due to its
termination or expiration or if the Company shall reacquire any Shares issued
pursuant to a Stock Grant, the Shares which were subject to such Option and any
Shares so reacquired by the Company shall be available for the granting of other
Stock Rights under the Plan. Any Option shall be treated as "outstanding" until
such Option is exercised in full, or terminates or expires under the provisions
of the Plan, or by agreement of the parties to the pertinent Option Agreement.
4. ADMINISTRATION OF THE PLAN.
The Administrator of the Plan will be the Board of Directors, except to the
extent the Board of Directors delegates its authority to the Committee, in which
case the Committee shall be the Administrator. Subject to the provisions of the
Plan, the Administrator is authorized to:
a. Interpret the provisions of the Plan or of any Option or Stock
Grant and to make all rules and determinations which it deems
necessary or advisable for the administration of the Plan;
b. Determine which employees of the Company or of an Affiliate shall
be designated as Key Employees and which of the Key Employees,
directors and consultants shall be granted Stock Rights;
3
<PAGE>
c. Determine the number of Shares for which a Stock Right or Stock
Rights shall be granted, provided, however, that in no event shall
Stock Rights with an aggregate Fair Market Value of more than $250,000
or covering more than 100,000 shares be granted to any Participant in
any fiscal year; and
d. Specify the terms and conditions upon which a Stock Right or Stock
Rights may be granted;
provided, however, that all such interpretations, rules, determinations, terms
and conditions shall be made and prescribed in the context of preserving the tax
status under Section 422 of the Code of those Options which are designated as
ISOs. Subject to the foregoing, the interpretation and construction by the
Administrator of any provisions of the Plan or of any Stock Right granted under
it shall be final, binding and conclusive unless otherwise determined by the
Board of Directors, if the Administrator is the Committee.
5. ELIGIBILITY FOR PARTICIPATION.
The Administrator will, in its sole discretion, name the Participants in
the Plan, provided, however, that each Participant must be a Key Employee,
director or consultant of the Company or of an Affiliate at the time a Stock
Right is granted. Notwithstanding any of the foregoing provisions, the
Administrator may authorize the grant of a Stock Right to a person not then an
employee, director or consultant of the Company or of an Affiliate; provided,
however, that the actual grant of such Stock Right shall be conditioned upon
such person becoming eligible to become a Participant at or prior to the time of
the delivery of the Agreement evidencing such Stock Right. ISOs may be granted
only to Key Employees. Non-Qualified Options and Stock Grants may be granted to
any Key Employee, director or consultant of the Company or an Affiliate. The
granting of any Stock Right to any individual shall neither entitle that
individual to, nor disqualify him or her from, participation in any other grant
of Stock Rights.
6. TERMS AND CONDITIONS OF OPTIONS.
Each Option shall be set forth in writing in an Option Agreement, duly
executed by the Company and, to the extent required by law or requested by the
Company, by the Participant. The Administrator may provide that Options be
granted subject to such conditions as the Administrator may deem appropriate
including, without limitation, subsequent approval by the stockholders of the
Company of this Plan or any amendments thereto. The Option Agreements shall be
subject to at least the following terms and conditions:
A. Non-Qualified Options: Each Option intended to be a
Non-Qualified Option shall be subject to the terms and conditions
which the Administrator determines to be appropriate and in the best
interest of the Company, subject to
4
<PAGE>
the following minimum standards for any such Non-Qualified Option:
a. Option Price: Each Option Agreement shall state the
option price (per share) of the Shares covered by each Option,
which option price shall be determined by the Administrator but
shall not be less than the par value per share of Common Stock.
b. Each Option Agreement shall state the number of Shares to
which it pertains;
c. Each Option Agreement shall state the date or dates on
which it first is exercisable and the date after which it may no
longer be exercised, and may provide that the Option rights
accrue or become exercisable in installments over a period of
months or years, or upon the occurrence of certain conditions or
the attainment of stated goals or events; and
d. Exercise of any Option may be conditioned upon the
Participant's execution of a Share purchase agreement in form
satisfactory to the Administrator providing for certain
protections for the Company and its other stockholders, including
requirements that:
i. The Participant's or the Participant's Survivors'
right to sell or transfer the Shares may be restricted; and
ii. The Participant or the Participant's Survivors may
be required to execute letters of investment intent and must
also acknowledge that the Shares will bear legends noting
any applicable restrictions.
B. ISOs: Each Option intended to be an ISO shall be issued only
to a Key Employee and be subject to at least the following terms and
conditions, with such additional restrictions or changes as the
Administrator determines are appropriate but not in conflict with
Section 422 of the Code and relevant regulations and rulings of the
Internal Revenue Service:
a. Minimum standards: The ISO shall meet the minimum
standards required of Non-Qualified Options, as described in
Paragraph 6(A) above, except clause (a) thereunder.
b. Option Price: Immediately before the Option is granted,
if the Participant owns, directly or by reason of the applicable
attribution rules in Section 424(d) of the Code:
5
<PAGE>
i. Ten percent (10%) or less of the total combined
voting power of all classes of stock of the Company or an
Affiliate, the Option price per share of the Shares covered
by each Option shall not be less than one hundred percent
(100%) of the Fair Market Value per share of the Shares on
the date of the grant of the Option.
ii. More than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or an
Affiliate, the Option price per share of the Shares covered
by each Option shall not be less than one hundred ten
percent (110%) of the said Fair Market Value on the date of
grant.
c. Term of Option: For Participants who own
i. Ten percent (10%) or less of the total combined
voting power of all classes of stock of the Company or an
Affiliate, each Option shall terminate not more than ten
(10) years from the date of the grant or at such earlier
time as the Option Agreement may provide.
ii. More than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or an
Affiliate, each Option shall terminate not more than five
(5) years from the date of the grant or at such earlier time
as the Option Agreement may provide.
7. TERMS AND CONDITIONS OF STOCK GRANTS.
Each offer of a Stock Grant to a Participant shall state the date prior to
which the Stock Grant must be accepted by the Participant, and the principal
terms of each Stock Grant shall be set forth in a Stock Grant Agreement, duly
executed by the Company and, to the extent required by law or requested by the
Company, by the Participant. The Stock Grant Agreement shall be in a form
approved by the Administrator and shall contain terms and conditions which the
Administrator determines to be appropriate and in the best interest of the
Company, subject to the following minimum standards:
(a) Each Stock Grant Agreement shall state the purchase price (per
share), if any, of the Shares covered by each Stock Grant, which
purchase price shall be determined by the Administrator but shall not
be less than the minimum
6
<PAGE>
consideration required by the Delaware General Corporation Law on the
date of the grant of the Stock Grant;
(b) Each Stock Grant Agreement shall state the number of Shares to
which the Stock Grant pertains; and
7
<PAGE>
(c) Each Stock Grant Agreement shall include the terms of any right of
the Company to reacquire the Shares subject to the Stock Grant,
including the time and events upon which such rights shall accrue and
the purchase price therefor, if any.
8. EXERCISE OF OPTIONS AND ISSUE OF SHARES.
An Option (or any part or installment thereof) shall be exercised by giving
written notice to the Company at its principal executive office, together with
provision for payment of the full purchase price in accordance with this
Paragraph for the Shares as to which the Option is being exercised, and upon
compliance with any other condition(s) set forth in the Option Agreement. Such
written notice shall be signed by the person exercising the Option, shall state
the number of Shares with respect to which the Option is being exercised and
shall contain any representation required by the Plan or the Option Agreement.
Payment for the Shares as to which such Option is being exercised shall be made
(a) in United States dollars in cash or by check, or (b) at the discretion of
the Administrator, through delivery of shares of Common Stock having a Fair
Market Value equal as of the date of the exercise to the cash exercise price of
the Option, or (c) at the discretion of the Administrator, having the Company
retain from the shares otherwise issuable upon exercise of the Option, a number
of shares having a Fair Market Value equal as of the date of exercise to the
exercise price of the Option, or (d) at the discretion of the Administrator, by
delivery of the grantee's personal recourse note bearing interest payable not
less than annually at no less than 100% of the applicable Federal rate, as
defined in Section 1274(d) of the Code, or (e) at the discretion of the
Administrator, in accordance with a cashless exercise program established with a
securities brokerage firm, and approved by the Administrator, or (f) at the
discretion of the Administrator, by any combination of (a), (b), (c), (d) and
(e) above. Notwithstanding the foregoing, the Administrator shall accept only
such payment on exercise of an ISO as is permitted by Section 422 of the Code.
The Company shall then reasonably promptly deliver the Shares as to which
such Option was exercised to the Participant (or to the Participant's Survivors,
as the case may be). In determining what constitutes "reasonably promptly," it
is expressly understood that the issuance and delivery of the Shares may be
delayed by the Company in order to comply with any law or regulation (including,
without limitation, state securities or "blue sky" laws) which requires the
Company to take any action with respect to the Shares prior to their issuance.
The Shares shall, upon delivery, be evidenced by an appropriate certificate or
certificates for fully paid, non-assessable Shares.
The Administrator may, in its discretion, amend any term or condition of an
outstanding Option or Option Agreement provided (i) such term or condition as
amended is permitted by the Plan, (ii) any such amendment shall be made only
with the consent of the Participant to whom the Option was granted, or in the
event of the death of the Participant, the Participant's
8
<PAGE>
Survivors, if the amendment is adverse to the Participant, and (iii) any such
amendment of any ISO shall be made only after the Administrator, after
consulting the counsel for the Company, determines whether such amendment would
constitute a "modification" of any Option which is an ISO (as that term is
defined in Section 424(h) of the Code) or would cause any adverse tax
consequences for the holder of such ISO.
9. ACCEPTANCE OF STOCK GRANT AND ISSUE OF SHARES.
A Stock Grant (or any part or installment thereof) shall be accepted by
executing the Stock Grant Agreement and delivering it to the Company at its
principal office, together with provision for payment of the full purchase
price, if any, in accordance with this Paragraph for the Shares as to which such
Stock Grant is being accepted, and upon compliance with any other conditions set
forth in the Stock Grant Agreement. Payment for the Shares as to which such
Stock Grant is being accepted shall be made (a) in United States dollars in cash
or by check, or (b) at the discretion of the Administrator, through delivery of
shares of Common Stock having a fair market value equal as of the date of
acceptance of the Stock Grant to the purchase price of the Stock Grant
determined in good faith by the Administrator, or (c) at the discretion of the
Administrator, by delivery of the grantee's personal recourse note bearing
interest payable not less than annually at no less than 100% of the applicable
Federal rate, as defined in Section 1274(d) of the Code, or (d) at the
discretion of the Administrator, by any combination of (a), (b) and (c) above.
The Company shall then reasonably promptly deliver the Shares as to which
such Stock Grant was accepted to the Participant (or to the Participant's
Survivors, as the case may be), subject to any escrow provision set forth in the
Stock Grant Agreement. In determining what constitutes "reasonably promptly," it
is expressly understood that the issuance and delivery of the Shares may be
delayed by the Company in order to comply with any law or regulation (including,
without limitation, state securities or "blue sky" laws) which requires the
Company to take any action with respect to the Shares prior to their issuance.
The Administrator may, in its discretion, amend any term or condition of an
outstanding Stock Grant or Stock Grant Agreement provided (i) such term or
condition as amended is permitted by the Plan, and (ii) any such amendment shall
be made only with the consent of the Participant to whom the Stock Grant was
made, if the amendment is adverse to the Participant.
10. RIGHTS AS A STOCKHOLDER.
No Participant to whom a Stock Right has been granted shall have rights as
a stockholder with respect to any Shares covered by such Stock Right, except
after due exercise of the Option or acceptance of the Stock Grant and tender of
the full purchase price, if any, for the Shares being purchased pursuant to such
exercise or acceptance and registration of the Shares in the
9
<PAGE>
Company's share register in the name of the Participant.
11. ASSIGNABILITY AND TRANSFERABILITY OF STOCK RIGHTS.
By its terms, a Stock Right granted to a Participant shall not be
transferable by the Participant other than (i) by will or by the laws of descent
and distribution, or (ii) except in the case of an ISO, as otherwise determined
by the Administrator and set forth in the applicable Option Agreement or Stock
Grant Agreement. The designation of a beneficiary of a Stock Right by a
Participant shall not be deemed a transfer prohibited by this Paragraph. Except
as provided above, a Stock Right shall only be exercisable or may only be
accepted, during the Participant's lifetime, by such Participant (or by his or
her legal representative) and shall not be assigned, pledged or hypothecated in
any way (whether by operation of law or otherwise) and shall not be subject to
execution, attachment or similar process. Any attempted transfer, assignment,
pledge, hypothecation or other disposition of any Stock Right or of any rights
granted thereunder contrary to the provisions of this Plan, or the levy of any
attachment or similar process upon a Stock Right, shall be null and void.
12. EFFECT ON OPTIONS OF TERMINATION OF SERVICE OTHER THAN "FOR CAUSE" OR DEATH
OR DISABILITY.
Except as otherwise provided in the pertinent Option Agreement in the event
of a termination of service (whether as an employee, director or consultant)
with the Company or an Affiliate before the Participant has exercised an Option,
the following rules apply:
a. A Participant who ceases to be an employee, director or consultant
of the Company or of an Affiliate (for any reason other than
termination "for cause", Disability, or death for which events there
are special rules in Paragraphs 13, 14, and 15, respectively), may
exercise any Option granted to him or her to the extent that the
Option is exercisable on the date of such termination of service, but
only within such term as the Administrator has designated in the
pertinent Option Agreement.
b. Notwithstanding anything herein to the contrary, if subsequent to a
Participant's termination of employment, termination of director
status or termination of consultancy, but prior to the exercise of an
Option, the Board of Directors determines that, either prior or
subsequent to the Participant's termination, the Participant engaged
in conduct which would constitute "cause", then such Participant shall
forthwith cease to have any right to exercise any Option.
10
<PAGE>
c. A Participant to whom an Option has been granted under the
Plan who is absent from work with the Company or with an Affiliate
because of temporary disability (any disability other than a permanent
and total Disability as defined in Paragraph 1 hereof), or who is on
leave of absence for any purpose, shall not, during the period of any
such absence, be deemed, by virtue of such absence alone, to have
terminated such Participant's employment, director status or
consultancy with the Company or with an Affiliate, except as the
Administrator may otherwise expressly provide.
d. Except as required by law or as set forth in the pertinent Option
Agreement, Options granted under the Plan shall not be affected by any
change of a Participant's status within or among the Company and any
Affiliates, so long as the Participant continues to be an employee,
director or consultant of the Company or any Affiliate.
13. EFFECT ON OPTIONS OF TERMINATION OF SERVICE "FOR CAUSE".
Except as otherwise provided in the pertinent Option Agreement, the
following rules apply if the Participant's service (whether as an employee,
director or consultant) with the Company or an Affiliate is terminated "for
cause" prior to the time that all his or her outstanding Options have been
exercised:
a. All outstanding and unexercised Options as of the time the
Participant is notified his or her service is terminated "for
cause" will immediately be forfeited.
b. For purposes of this Plan, "cause" shall include (and is not
limited to) dishonesty with respect to the Company or any
Affiliate, insubordination, substantial malfeasance or
non-feasance of duty, unauthorized disclosure of confidential
information, and conduct substantially prejudicial to the
business of the Company or any Affiliate. The determination of
the Administrator as to the existence of "cause" will be
conclusive on the Participant and the Company.
c. "Cause" is not limited to events which have occurred prior to
a Participant's termination of service, nor is it necessary that
the Administrator's finding of "cause" occur prior to
termination. If the Administrator determines, subsequent to a
Participant's termination of service but prior to the exercise of
an Option, that either prior or subsequent to the Participant's
termination the Participant engaged in conduct which would
constitute "cause", then the right to exercise any outstanding
and unexercised Option is forfeited.
d. Any definition in an agreement between the Participant and the
Company
11
<PAGE>
or an Affiliate, which contains a conflicting definition of
"cause" for termination and which is in effect at the time of
such termination, shall supersede the definition in this Plan
with respect to such Participant.
12
<PAGE>
14. EFFECT ON OPTIONS OF TERMINATION OF SERVICE FOR DISABILITY.
Except as otherwise provided in the pertinent Option Agreement, a
Participant who ceases to be an employee, director or consultant of the Company
or of an Affiliate by reason of Disability may exercise any Option granted to
such Participant:
a. To the extent exercisable but not exercised on the date of
Disability; and
b. In the event rights to exercise the Option accrue
periodically, to the extent of a pro rata portion of any
additional rights as would have accrued had the Participant not
become Disabled prior to the end of the accrual period which next
ends following the date of Disability. The proration shall be
based upon the number of days of such accrual period prior to the
date of Disability.
A Disabled Participant may exercise such rights only within a period of not
more than one (1) year after the date of the Participant's termination of
employment, directorship or consultancy, as the case may be, notwithstanding
that the Participant might have been able to exercise the Option as to some or
all of the Shares on a later date if the Participant had not become Disabled and
had continued to be an employee, director or consultant or, if earlier, within
the originally prescribed term of the Option.
The Administrator shall make the determination both of whether Disability
has occurred and the date of its occurrence (unless a procedure for such
determination is set forth in another agreement between the Company and such
Participant, in which case such procedure shall be used for such determination).
If requested, the Participant shall be examined by a physician selected or
approved by the Administrator, the cost of which examination shall be paid for
by the Company.
15. EFFECT ON OPTIONS OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT.
Except as otherwise provided in the pertinent Option Agreement, in the
event of the death of a Participant while the Participant is an employee,
director or consultant of the Company or of an Affiliate, such Option may be
exercised by the Participant's Survivors:
a. To the extent exercisable but not exercised on the date of
death; and
b. In the event rights to exercise the Option accrue
periodically, to the extent of a pro rata portion of any
additional rights which would have accrued had the Participant
not died prior to the end of the accrual period which next ends
following the date of death. The proration shall be based upon
the number of
13
<PAGE>
days of such accrual period prior to the Participant's death.
If the Participant's Survivors wish to exercise the Option, they must take
all necessary steps to exercise the Option within one (1) year after the date of
death of such Participant, notwithstanding that the decedent might have been
able to exercise the Option as to some or all of the Shares on a later date if
he or she had not died and had continued to be an employee, director or
consultant or, if earlier, within the originally prescribed term of the Option.
16. EFFECT OF TERMINATION OF SERVICE ON STOCK GRANTS.
In the event of a termination of service (whether as an employee, director
or consultant) with the Company or an Affiliate for any reason before the
Participant has accepted a Stock Grant, such offer shall terminate.
For purposes of this Paragraph 16 and Paragraph 17 below, a Participant to
whom a Stock Grant has been offered under the Plan who is absent from work with
the Company or with an Affiliate because of temporary disability (any disability
other than a permanent and total Disability as defined in Paragraph 1 hereof),
or who is on leave of absence for any purpose, shall not, during the period of
any such absence, be deemed, by virtue of such absence alone, to have terminated
such Participant's employment, director status or consultancy with the Company
or with an Affiliate, except as the Administrator may otherwise expressly
provide.
In addition, for purposes of this Paragraph 16 and Paragraph 17 below, any
change of employment or other service within or among the Company and any
Affiliates shall not be treated as a termination of employment, director status
or consultancy so long as the Participant continues to be an employee, director
or consultant of the Company or any Affiliate.
17. EFFECT ON STOCK GRANTS OF TERMINATION OF SERVICE OTHER THAN "FOR CAUSE" OR
DEATH OR DISABILITY.
Except as otherwise provided in the pertinent Stock Grant Agreement, in the
event of a termination of service (whether as an employee, director or
consultant), other than termination "for cause," Disability, or death for which
events there are special rules in Paragraphs 18, 19, and 20, respectively,
before all Company rights of repurchase shall have lapsed, then the Company
shall have the right to repurchase that number of Shares subject to a Stock
Grant as to which the Company's repurchase rights have not lapsed.
18. EFFECT ON STOCK GRANTS OF TERMINATION OF SERVICE "FOR CAUSE".
Except as otherwise provided in the pertinent Stock Grant Agreement, the
following rules apply if the Participant's service (whether as an employee,
director or consultant) with the Company or an Affiliate is terminated "for
cause" (as defined in Paragraph 13), all Shares
14
<PAGE>
subject to any Stock Grant shall be immediately subject to repurchase by the
Company at the purchase price, if any, thereof.
19. EFFECT ON STOCK GRANTS OF TERMINATION OF SERVICE FOR DISABILITY.
Except as otherwise provided in the pertinent Stock Grant Agreement, the
following rules apply if a Participant ceases to be an employee, director or
consultant of the Company or of an Affiliate by reason of Disability: to the
extent the Company's rights of repurchase have not lapsed on the date of
Disability, they shall be exercisable; provided, however, that in the event such
rights of repurchase lapse periodically, such rights shall lapse to the extent
of a pro rata portion of the Shares subject to such Stock Grant as would have
lapsed had the Participant not become Disabled prior to the end of the vesting
period which next ends following the date of Disability. The proration shall be
based upon the number of days of such vesting period prior to the date of
Disability.
The Administrator shall make the determination both of whether Disability
has occurred and the date of its occurrence (unless a procedure for such
determination is set forth in another agreement between the Company and such
Participant, in which case such procedure shall be used for such determination).
If requested, the Participant shall be examined by a physician selected or
approved by the Administrator, the cost of which examination shall be paid for
by the Company.
20. EFFECT ON STOCK GRANTS OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT.
Except as otherwise provided in the pertinent Stock Grant Agreement, the
following rules apply in the event of the death of a Participant while the
Participant is an employee, director or consultant of the Company or of an
Affiliate: to the extent the Company's rights of repurchase have not lapsed on
the date of death, they shall be exercisable; provided, however, that in the
event such rights of repurchase lapse periodically, such rights shall lapse to
the extent of a pro rata portion of the Shares subject to such Stock Grant as
would have lapsed had the Participant not died prior to the end of the vesting
period which next ends following the date of death. The proration shall be based
upon the number of days of such vesting period prior to the Participant's death.
21. PURCHASE FOR INVESTMENT.
Unless the offering and sale of the Shares to be issued upon the particular
exercise or acceptance of a Stock Right shall have been effectively registered
under the Securities Act of 1933, as now in force or hereafter amended (the
"1933 Act"), the Company shall be under no obligation to issue the Shares
covered by such exercise unless and until the following conditions
15
<PAGE>
have been fulfilled:
a. The person(s) who exercise(s) or accept(s) such Stock Right shall
warrant to the Company, prior to the receipt of such Shares, that such
person(s) are acquiring such Shares for their own respective accounts,
for investment, and not with a view to, or for sale in connection
with, the distribution of any such Shares, in which event the
person(s) acquiring such Shares shall be bound by the provisions of
the following legend which shall be endorsed upon the certificate(s)
evidencing their Shares issued pursuant to such exercise or such
grant:
"The shares represented by this certificate have been taken
for investment and they may not be sold or otherwise transferred
by any person, including a pledgee, unless (1) either (a) a
Registration Statement with respect to such shares shall be
effective under the Securities Act of 1933, as amended, or (b)
the Company shall have received an opinion of counsel
satisfactory to it that an exemption from registration under such
Act is then available, and (2) there shall have been compliance
with all applicable state securities laws."
b. At the discretion of the Administrator, the Company shall have
received an opinion of its counsel that the Shares may be issued upon
such particular exercise or acceptance in compliance with the 1933 Act
without registration thereunder.
22. DISSOLUTION OR LIQUIDATION OF THE COMPANY.
Upon the dissolution or liquidation of the Company, all Options granted
under this Plan which as of such date shall not have been exercised and all
Stock Grants which have not been accepted will terminate and become null and
void; provided, however, that if the rights of a Participant or a Participant's
Survivors have not otherwise terminated and expired, the Participant or the
Participant's Survivors will have the right immediately prior to such
dissolution or liquidation to exercise or accept any Stock Right to the extent
that the Stock Right is exercisable or subject to acceptance as of the date
immediately prior to such dissolution or liquidation.
23. ADJUSTMENTS.
Upon the occurrence of any of the following events, a Participant's rights
with respect to any Stock Right granted to him or her hereunder shall be
adjusted as hereinafter provided, unless otherwise specifically provided in the
pertinent Option Agreement or Stock Grant Agreement:
16
<PAGE>
A. Stock Dividends and Stock Splits. If the shares of Common Stock shall be
subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise or acceptance of such Stock Right shall be appropriately increased
or decreased proportionately, and appropriate adjustments shall be made in the
purchase price per share to reflect such subdivision, combination or stock
dividend.
B. Consolidations or Mergers. If the Company is to be consolidated with or
acquired by another entity in a merger, sale of all or substantially all of the
Company's assets or otherwise (an "Acquisition"), the Administrator or the board
of directors of any entity assuming the obligations of the Company hereunder
(the "Successor Board"), shall, as to outstanding Options, either (i) make
appropriate provision for the continuation of such Options by substituting on an
equitable basis for the Shares then subject to such Options either the
consideration payable with respect to the outstanding shares of Common Stock in
connection with the Acquisition or securities of any successor or acquiring
entity; or (ii) upon written notice to the Participants, provide that all
Options must be exercised at the end of which period the Options shall
terminate; or (iii) terminate all Options in exchange for a cash payment equal
to the excess of the Fair Market Value of the Shares subject to such Options
over the exercise price thereof. For purposes of this Subparagraph, in the event
of an Acquisition, all Options shall be made fully exercisable.
With respect to outstanding Stock Grants, the Administrator or the
Successor Board, shall either (i) make appropriate provisions for the
continuation of such Stock Grants by substituting on an equitable basis for the
Shares then subject to such Stock Grants either the consideration payable with
respect to the outstanding Shares of Common Stock in connection with the
Acquisition or securities of any successor or acquiring entity; or (ii) upon
written notice to the Participants, provide that all Stock Grants must be
accepted (to the extent then subject to acceptance) within a specified number of
days of the date of such notice, at the end of which period the offer of the
Stock Grants shall terminate; or (iii) terminate all Stock Grants in exchange
for a cash payment equal to the excess of the Fair Market Value of the Shares
subject to such Stock Grants over the purchase price thereof, if any. In
addition, in the event of an Acquisition, the Administrator may waive any or all
Company repurchase rights with respect to outstanding Stock Grants.
C. Recapitalization or Reorganization. In the event of a recapitalization
or reorganization of the Company (other than a transaction described in
Subparagraph B above) pursuant to which securities of the Company or of another
corporation are issued with respect to the outstanding shares of Common Stock, a
Participant upon exercising or accepting a Stock Right shall be entitled to
receive for the purchase price, if any, paid upon such exercise or acceptance
the securities which would have been received if such Stock Right had been
exercised or accepted prior to such recapitalization or reorganization.
17
<PAGE>
D. Modification of ISOs. Notwithstanding the foregoing, any adjustments
made pursuant to Subparagraph A, B or C with respect to ISOs shall be made only
after the Administrator, after consulting with counsel for the Company,
determines whether such adjustments would constitute a "modification" of such
ISOs (as that term is defined in Section 424(h) of the Code) or would cause any
adverse tax consequences for the holders of such ISOs. If the Administrator
determines that such adjustments made with respect to ISOs would constitute a
modification of such ISOs, it may refrain from making such adjustments, unless
the holder of an ISO specifically requests in writing that such adjustment be
made and such writing indicates that the holder has full knowledge of the
consequences of such "modification" on his or her income tax treatment with
respect to the ISO.
24. ISSUANCES OF SECURITIES.
Except as expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares subject to Stock Rights. Except as
expressly provided herein, no adjustments shall be made for dividends paid in
cash or in property (including without limitation, securities) of the Company
prior to any issuance of Shares pursuant to a Stock Right.
25. FRACTIONAL SHARES.
No fractional shares shall be issued under the Plan and the person
exercising a Stock Right shall receive from the Company cash in lieu of such
fractional shares equal to the Fair Market Value thereof.
26. CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOs.
The Administrator, at the written request of any Participant, may in its
discretion take such actions as may be necessary to convert such Participant's
ISOs (or any portions thereof) that have not been exercised on the date of
conversion into Non-Qualified Options at any time prior to the expiration of
such ISOs, regardless of whether the Participant is an employee of the Company
or an Affiliate at the time of such conversion. Such actions may include, but
not be limited to, extending the exercise period or reducing the exercise price
of the appropriate installments of such Options. At the time of such conversion,
the Administrator (with the consent of the Participant) may impose such
conditions on the exercise of the resulting Non-Qualified Options as the
Administrator in its discretion may determine, provided that such conditions
shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to
give any Participant the right to have such Participant's ISOs converted into
Non-Qualified Options,
18
<PAGE>
and no such conversion shall occur until and unless the Administrator takes
appropriate action. The Administrator, with the consent of the Participant, may
also terminate any portion of any ISO that has not been exercised at the time of
such conversion.
27. WITHHOLDING.
In the event that any federal, state, or local income taxes, employment
taxes, Federal Insurance Contributions Act ("F.I.C.A.") withholdings or other
amounts are required by applicable law or governmental regulation to be withheld
from the Participant's salary, wages or other remuneration in connection with
the exercise or acceptance of a Stock Right or in connection with a
Disqualifying Disposition (as defined in Paragraph 28) or upon the lapsing of
any right of repurchase, the Company may withhold from the Participant's
compensation, if any, or may require that the Participant advance in cash to the
Company, or to any Affiliate of the Company which employs or employed the
Participant, the amount of such withholdings unless a different withholding
arrangement, including the use of shares of the Company's Common Stock (in an
amount necessary to satisfy not more than the minimum withholding obligation) or
a promissory note, is authorized by the Administrator (and permitted by law).
For purposes hereof, the Fair Market Value of the shares withheld for purposes
of payroll withholding shall be determined in the manner provided in Paragraph 1
above, as of the most recent practicable date prior to the date of exercise. If
the Fair Market Value of the shares withheld is less than the amount of payroll
withholdings required, the Participant may be required to advance the difference
in cash to the Company or the Affiliate employer. The Administrator in its
discretion may condition the exercise of an Option for less than the then Fair
Market Value on the Participant's payment of such additional withholding.
28. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION.
Each Key Employee who receives an ISO must agree to notify the Company in
writing immediately after the Key Employee makes a Disqualifying Disposition of
any shares acquired pursuant to the exercise of an ISO. A Disqualifying
Disposition is any disposition (including any sale) of such shares before the
later of (a) two years after the date the Key Employee was granted the ISO, or
(b) one year after the date the Key Employee acquired Shares by exercising the
ISO. If the Key Employee has died before such stock is sold, these holding
period requirements do not apply and no Disqualifying Disposition can occur
thereafter.
29. TERMINATION OF THE PLAN.
The Plan will terminate on the date which is ten (10) years from the
earlier of the date of its adoption and the date of its approval by the
stockholders of the Company. The Plan may be terminated at an earlier date by
the Board of Directors; provided, however, that any such earlier termination
shall not affect any Option Agreements or Stock Grant Agreements executed prior
to
19
<PAGE>
the effective date of such termination.
30. AMENDMENT OF THE PLAN AND AGREEMENTS.
The Plan may be amended by the stockholders of the Company. The Plan may
also be amended by the Board of Directors, including, without limitation, to the
extent necessary to qualify any or all outstanding Stock Rights granted under
the Plan or Stock Rights to be granted under the Plan for favorable federal
income tax treatment (including deferral of taxation upon exercise) as may be
afforded incentive stock options under Section 422 of the Code, and to the
extent necessary to qualify the shares issuable upon exercise or acceptance of
any outstanding Stock Rights granted, or Stock Rights to be granted, under the
Plan for listing on any national securities exchange or quotation in any
national automated quotation system of securities dealers. Any amendment
approved by the Board of Directors which the Board of Directors determines is of
a scope that requires stockholder approval shall be subject to obtaining such
stockholder approval. Any modification or amendment of the Plan shall not,
without the consent of a Participant, adversely affect his or her rights under a
Stock Right previously granted to him or her. With the consent of the
Participant affected, the Administrator may amend outstanding Option Agreements
and Stock Grant Agreements in a manner which may be adverse to the Participant
but which is not inconsistent with the Plan. In the discretion of the
Administrator, outstanding Option Agreements and Stock Grant Agreements may be
amended by the Administrator in a manner which is not adverse to the
Participant.
31. EMPLOYMENT OR OTHER RELATIONSHIP.
Nothing in this Plan or any Option Agreement or Stock Grant Agreement shall
be deemed to prevent the Company or an Affiliate from terminating the
employment, consultancy or director status of a Participant, nor to prevent a
Participant from terminating his or her own employment, consultancy or director
status or to give any Participant a right to be retained in employment or other
service by the Company or any Affiliate for any period of time.
32. GOVERNING LAW.
This Plan shall be construed and enforced in accordance with the law of the
State of Delaware, without regard to its principles of conflicts of law.
20
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-82719) pertaining to the Command Systems, Inc. 1997 Employee,
Director and Consultant Stock Plan, the Stock Option Agreement with Russell
Adams, the Stock Option Agreement with Pamela A. Broderick, the Stock Option
Agreement with Stephen C. Chasse, the Stock Option Agreement with Robert B.
Dixon, the Stock Option Agreement with Glenn M. King, the Stock Option Agreement
with Holly R. Neumann, the Stock Option Agreement with William L. Tamburro and
the Stock Option Agreement with David R. Wheeland of our report dated February
15, 2000, with respect to the consolidated financial statements and schedule of
Command Systems, Inc. included in its annual report (Form 10-K) for the year
ended December 31, 1999, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Hartford, Connecticut
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,900,751
<SECURITIES> 14,347,828
<RECEIVABLES> 3,990,764
<ALLOWANCES> 500,000
<INVENTORY> 0
<CURRENT-ASSETS> 22,338,983
<PP&E> 3,912,171
<DEPRECIATION> 2,342,874
<TOTAL-ASSETS> 30,468,543
<CURRENT-LIABILITIES> 3,112,983
<BONDS> 0
0
0
<COMMON> 34,818
<OTHER-SE> 27,320,742
<TOTAL-LIABILITY-AND-EQUITY> 30,468,543
<SALES> 0
<TOTAL-REVENUES> 27,192,278
<CGS> 0
<TOTAL-COSTS> 19,820,066
<OTHER-EXPENSES> 11,346,573
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,398
<INCOME-PRETAX> (2,870,283)
<INCOME-TAX> 65,753
<INCOME-CONTINUING> (2,936,036)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,936,036)
<EPS-BASIC> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
