UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDING JUNE 30, 2000
Commission file number 0-23797
COMMAND SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1527672
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Pond View Corporate Center
76 Batterson Park Rd.
Farmington, CT 06032
(Address of principal executive officer (Zip Code)
(860) 409-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No
APPLICABLE ONLY CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value -- 7,656,750 shares as of August 11, 2000
COMMAND SYSTEMS, INC.
INDEX
-----
PART I Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999..................... 1
Consolidated Statements of Operations
Three months ended June 30, 2000 and 1999............... 2
Consolidated Statements of Operations
Six months ended June 30, 2000 and 1999................. 3
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999................. 4
Consolidated Statements of
Stockholders' Equity.................................... 5
Notes to Unaudited Consolidated
Financial Statements.................................... 6-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................................... 9-11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk....................................... 11
PART II Other Information
Item 1. Legal Proceedings....................................... 11
Item 2. Changes in Securities................................... 11
Item 3. Defaults Upon Senior Securities......................... 11
Item 4. Submissions of Matters to a Vote of Security Holders.... 11-12
Item 5. Other Information....................................... 12
Item 6. Exhibits and Reports on Form 8-K........................ 12
Signatures.............................................. 13
COMMAND SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
------------- -------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 7,170,494 $ 3,900,751
Marketable securities 10,473,425 14,347,828
Accounts receivable, net of allowance for doubtful accounts
of $423,000 in 2000 and $500,000 in 1999 2,791,117 3,490,764
Prepaid expenses and other current assets 479,633 197,112
Income taxes recoverable - 402,528
------------- -------------
Total current assets 20,914,669 22,338,983
Equipment and improvements:
Furniture and equipment 2,543,486 2,906,685
Leasehold improvements 983,765 1,005,486
------------- -------------
3,527,251 3,912,171
Less accumulated depreciation and amortization (2,259,031) (2,342,874)
------------- -------------
Net equipment and improvements 1,268,220 1,569,297
Other assets:
Goodwill, net of accumulated amortization
of $1,183,724 and $931,427 in 2000 and 1999 5,804,943 6,057,241
Security deposits 444,184 454,712
Other non-current assets 45,232 48,310
------------- -------------
Total assets $ 28,477,248 $ 30,468,543
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 579,461 $ 608,125
Accrued payroll and related costs 923,496 843,188
Accrued warranty 270,603 270,603
Deferred revenue 201,134 209,815
Accrued other expenses 857,951 1,181,252
------------- -------------
Total current liabilities 2,832,645 3,112,983
Stockholders' Equity:
Common stock, $.01 par value, 25,000,000 authorized,
7,656,750 issued and outstanding in 2000 and 1999
Additional paid-in-capital 34,818 34,818
Accumulated deficit 33,400,480 33,400,480
Accumulated other comprehensive loss (7,270,279) (5,600,105)
Total stockholders' equity (520,416) (479,633)
------------- -------------
Total liabilities and stockholders' equity 25,644,603 27,355,560
------------- -------------
$ 28,477,248 $ 30,468,543
============= =============
See notes to unaudited consolidated financial statements.
Note: The balance sheet at December 31, 1999 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
1
COMMAND SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
2000 1999
------------ ------------
(unaudited)
Revenue $ 5,622,709 $ 6,998,218
Cost of revenue 4,058,060 5,156,147
------------ ------------
Gross profit 1,564,649 1,842,071
Selling, general and administrative expense 2,666,824 2,915,268
------------ ------------
Operating loss (1,102,175) (1,073,197)
Other income (expense):
Other expense - (10,383)
Interest income 237,808 226,917
Interest expense - (9,800)
Foreign exchange gains 27,092 23,449
------------ ------------
264,900 230,183
------------ ------------
Loss before income taxes (837,275) (843,014)
State income taxes (2,100) -
------------ ------------
Net loss $ (839,375) $ (843,014)
============ ============
Basic and diluted loss per share $ (0.11) $ (0.11)
============ ============
See notes to unaudited consolidated financial statements.
2
COMMAND SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30,
2000 1999
------------ -------------
(unaudited)
Revenue $ 11,125,495 $ 13,930,629
Cost of revenue 8,104,670 10,522,872
------------ ------------
Gross profit 3,020,825 3,407,757
Selling, general and administrative expense 5,172,499 5,964,123
------------ ------------
Operating loss (2,151,674) (2,556,366)
Other income (expense):
Other income - 5,734
Interest income 480,759 483,680
Interest expense (1,311) (10,727)
Foreign exchange gains 22,402 20,120
------------ ------------
501,850 498,807
------------ ------------
Loss before income taxes (1,649,824) (2,057,559)
State income taxes (20,350) -
------------ ------------
Net loss $ (1,670,174) $ (2,057,559)
============ ============
Basic and diluted loss per share $ (0.22) $ (0.27)
============ ============
See notes to unaudited consolidated financial statements.
3
COMMAND SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
2000 1999
------------- -------------
(unaudited)
Cash flows from operating activities:
Net loss $ (1,670,174) $ (2,057,559)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 637,189 661,172
Bad debt expense - 88,200
Loss on disposal of equipment 92,090 10,559
Changes in operating assets and liabilities:
Accounts receivable 698,492 488,086
Income taxes recoverable 402,528 (21,379)
Prepaid expenses and other current assets (283,805) 23,449
Security deposits and other non-current assets 717 23,757
Accounts payable and accrued other expenses (340,199) (724,844)
Accrued payroll and related costs 80,308 254,093
Deferred revenue (8,681) (85,264)
------------ ------------
Net cash used in operating activities (391,535) (1,339,730)
Cash flows from investing activities:
Purchases of equipment and improvements (191,452) (176,639)
Sales of available-for-sale securities 3,907,570 4,198,000
Purchases of available-for-sale securities - (17,083,387)
------------ ------------
Net cash provided by (used in) investing activities 3,716,118 (13,062,026)
Effect of exchange rate changes on cash and cash equivalents (54,840) (20,919)
Increase (decrease) in cash and cash equivalents 3,269,743 (14,422,675)
Cash and cash equivalents, beginning of period 3,900,751 16,169,749
------------ ------------
Cash and cash equivalents, end of period $ 7,170,494 $ 1,747,074
============ ============
Cash paid for:
Interest expense $ - $ 10,727
Income taxes $ 20,350 $ 51,500
See notes to unaudited consolidated financial statements.
4
COMMAND SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other
Common Stock Paid in Accumulated Comprehensive
-------------------
Shares Amount Capital Deficit Income/(Loss) Total
--------- -------- ------------ ----------- ------------- -----------
Balance at December 31, 1999 7,656,750 $ 34,818 $ 33,400,480 $(5,600,105) $ (479,633) $27,355,560
Net loss - - (830,799) - (830,799)
Other comprehensive (loss) income:
Foreign currency translation adjustment - - - - (6,245) (6,245)
Unrealized gain on marketable securities - - - - 5,926 5,926
--------- -------- ------------ ----------- ------------- -----------
Comprensive loss (830,799) (319) (831,118)
--------- -------- ------------ ----------- ------------- -----------
Balance at March 31, 2000 7,656,750 34,818 33,400,480 (6,430,904) (479,952) 26,524,442
Net loss - - (839,375) - (839,375)
Other comprehensive (loss) income:
Foreign currency translation adjustment - - - (67,773) (67,773)
Unrealized gain on marketable securities - - - 27,309 27,309
--------- -------- ------------ ----------- ------------- -----------
Comprehensive loss (839,375) (40,464) (879,839)
--------- -------- ------------ ----------- ------------- -----------
Balance at June 30, 2000 7,656,750 $ 34,818 $ 33,400,480 $(7,270,279) $ (520,416) $25,644,603
========= ======== ============ =========== ============= ===========
See notes to unaudited consolidated financial statements.
5
COMMAND SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
1. Business and Basis of Presentation
Command Systems, Inc. (the Company) is an information technology company which
provides a wide range of computer consulting services to large financial
services and insurance organizations, middle market companies and public sector
organizations to support their evolving business needs.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 2000
are not necessarily indicative of the results that may be expected for the year-
ended December 31, 2000.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three months ended
------------------------------
June 30, June 30,
2000 1999
------------------------------
Numerator:
Net loss $ (839,375) $ (843,014)
Denominator:
Weighted-average shares outstanding
for basic and diluted loss per share 7,656,750 7,656,750
--------------------------------
Basic and diluted loss per share $ (0.11) $ (0.11)
================================
6
The following table sets forth the computation of basic and diluted earnings per
share:
Six months ended
------------------------------------
June 30, June 30,
2000 1999
------------------------------------
Numerator:
Net loss $ (1,670,174) $ (2,057,559)
Denominator:
Weighted-average shares outstanding
for basic and diluted loss per share 7,656,750 7,656,750
------------------------------------
Basic and diluted loss per share $ (0.22) $ (0.27)
====================================
Options to purchase approximately 740,000 and 169,000 shares of the Company's
common stock in 2000 and 1999, respectively, were not included in the
computation of diluted earnings per share because the effect of their inclusion
would be antidilutive.
3. Comprehensive Income
The following table sets forth comprehensive income:
Three months ended
--------------------------------
June 30, June 30,
2000 1999
--------------------------------
Net loss $ (839,375) $ (843,014)
Other comprehensive (loss) income:
Foreign currency translation
adjustment (67,773) (52,000)
Unrealized gain on marketable securities 27,309 -
--------------------------------
Total comprehensive loss $ (879,839) $ (895,014)
================================
The following table sets forth comprehensive income:
Six months ended
--------------------------------
June 30, June 30,
2000 1999
--------------------------------
Net loss $ (1,670,174) $ (2,057,559)
Other comprehensive (loss) income:
Foreign currency translation
adjustment (74,018) (56,000)
Unrealized gain on marketable securities 33,235 -
--------------------------------
Total comprehensive loss $ (1,710,957) $ (2,113,559)
================================
7
4. Segment Reporting
The Company operates in one industry segment providing a wide range of computer
consulting services to large financial services and insurance organizations,
middle market companies and public sector organizations primarily in North
America. The Company operates in two geographic areas: the United States and
India.
United
States India Elimination Consolidated
---------------------------------------------------------------------
Three months ended June 30, 2000:
Revenue $ 5,587,876 $ 201,443 $ (166,610) $ 5,622,709
Operating loss (947,805) (154,370) - (1,102,175)
Identifiable assets 26,083,588 2,393,660 - 28,477,248
Three months ended June 30, 1999:
Revenue $ 6,972,559 382,158 $ (356,499) $ 6,998,218
Operating loss (900,287) (172,910) - (1,073,197)
Identifiable assets 28,712,017 4,176,954 - 32,888,971
United
States India Elimination Consolidated
---------------------------------------------------------------------
Six months ended June 30, 2000:
Revenue $ 11,063,769 $ 329,267 $ (267,541) $ 11,125,495
Operating loss (1,768,199) (383,475) - (2,151,674)
Identifiable assets 26,083,588 2,393,660 - 28,477,248
Six months ended June 30, 1999:
Revenue $ 13,873,335 $ 669,788 $ (612,494) $ 13,930,629
Operating loss (2,022,499) (533,867) - (2,556,366)
Identifiable assets 28,712,017 4,176,954 - 32,888,971
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995. Statements contained in this document which are not historical fact are
forward-looking statements based upon management's current expectations that are
subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements.
Forward-looking statements include statements regarding the Company's expected
goals and strategies and the demand for IT services. Such statements are
subject to a number of risks including the risks associated with the failure to
obtain contracts to perform higher margin services, variability of quarterly
operations and financial results, the ability of the Company to manage growth,
the competitive market for technical personnel, reliance on significant
customers, rapid technological change, dependence on the Company's Offshore
Technology Resource Center and a variety of risks described under "Risk Factors"
in the Company's Annual Report Form on 10-K. The Company undertakes no
obligation to publicly release results of any of these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unexpected results.
Three Month Period Ended June 30, 2000 Compared to Three Month Period Ended June
30, 1999
Revenue. Revenue for the three-month period ended June 30, 2000 decreased by
19.7 % to $5,622,709 from $6,998,218 for the three month period ended June 30,
1999. The decrease in revenue was attributable to the completion of Year 2000
projects and a general slowdown in the overall demand for traditional IT
services.
Gross Profit. Gross profit for the three-month period ended June 30, 2000
decreased by 15.1% to $1,564,649 from $1,842,071 for the three-month period
ended June 30, 1999. Gross profit as a percentage of revenue increased to 27.8%
for the three-month period ended June 30, 2000 from 26.3% for the three-month
period ended June 30, 1999. The increase resulted primarily from an increase in
our higher margin service offerings offset by the completion of Year 2000
projects.
Selling, General and Administrative Expense. Selling, general and
administrative expense consists primarily of salaries and employee benefits for
selling, marketing, professional services, recruiting, human resources, finance
and administrative personnel, as well as travel, telecommunications and
occupancy costs for the Company's U.S. and India operations. These expenses are
relatively fixed in advance of any particular quarter. To the extent revenue
does not increase at a rate commensurate with these expenses, our results of
operations could be materially and adversely affected. Selling, general and
administrative expense for the quarter ended June 30, 2000 decreased 8.5% to
$2,666,824 from $2,915,268 for the quarter ended June 30, 1999. The decrease
was primarily attributable to a reduction in support staff, offset in part by a
$92,000 charge relating to the disposal of equipment.
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. Other income, net, was $264,900 for the three-month period
ended June 30, 2000 compared to $230,183 for the three-month period ended June
30, 1999.
Six Month Period Ended June 30, 2000 Compared to Six Month Period Ended June 30,
1999
Revenue. Revenue for the six-month period ended June 30, 2000 decreased by 20.1
% to $11,125,495 from $13,930,629 for the six-month period ended June 30, 1999.
The decrease in revenue was attributable to the completion of Year 2000 projects
and a general slowdown in the overall demand for traditional IT services.
9
Gross Profit. Gross profit for the six-month period ended June 30, 2000
decreased by 11.4% to $3,020,825 from $3,407,757 for the six-month period ended
June 30, 1999. Gross profit as a percentage of revenue increased to 27.1% for
the six-month period ended June 30, 2000 from 24.5% for the six-month period
ended June 30, 1999. The increase resulted primarily from an increase in our
higher margin service offerings offset by the completion of Year 2000 projects.
Selling, General and Administrative Expense. Selling, general and
administrative expense consists primarily of salaries and employee benefits for
selling, marketing, professional services, recruiting, human resources, finance
and administrative personnel, as well as travel, telecommunications and
occupancy costs for the Company's U.S. and India operations. These expenses are
relatively fixed in advance of any particular quarter. To the extent revenue
does not increase at a rate commensurate with these expenses, our results of
operations could be materially and adversely affected. Selling, general and
administrative expense for the six-month period ended June 30, 2000 decreased
13.3% to $5,172,499 from $5,964,123 for the six-month period ended June 30,
1999. The decrease was primarily attributable to a reduction in support staff,
offset in part by a $92,000 charge relating to the disposal of equipment.
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. Other income, net, was $501,850 for the six-month period ended
June 30, 2000 compared to $498,807 for the six-month period ended June 30, 1999.
State Income Taxes. Income taxes for the six-month period ended June 30, 2000
were $20,350, which represents estimated tax payments on our capital structure.
No income taxes were recorded in the corresponding period of the prior year.
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 is 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.
Liquidity and Sources of Capital
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 June 30, 2000, there were
no outstanding amounts under these credit facilities.
10
Historically, we have financed our working capital requirements through
internally generated funds, borrowings under our credit facilities and with the
proceeds from the issuance of our common stock.
At June 30, 2000 we had cash and cash equivalents and marketable securities of
$17,643,919 compared to $17,456,877 at June 30, 1999. Cash used in operating
activities for the six-month period ended June 30, 2000 was $391,535, primarily
due to a net loss of $1,670,174, decreases in accounts payable and accrued other
expenses, increases in prepaid expenses and other current assets, offset in part
by non-cash charges of depreciation and amortization and decreases in accounts
receivable and income taxes recoverable.
Cash provided by investing activities for the six-month period ended June 30,
2000 was $3,716,118, primarily due to the maturity of available-for-sale
securities.
We believe we have adequate funds to satisfy our current and planned operations
over the next 12 months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the information reported in our Form 10-K
for the year ended December 31, 1999 under the "Quantitative and Qualitative
Disclosures About Market Risk" section of Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submissions of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on May 26, 2000.
(b) The following individuals were nominated and elected to serve a term of
three years as Class I directors:
Mr. Stephen L. Willcox
Mr. John T. Crawford
(c) The following individuals continued to serve a term of three years to
expire in 2001 as Class II directors:
John J.C. Herndon
Joseph D. Sargent
(d) The following individuals continued to serve a term of three years to
expire in 2002 as Class III directors:
Edward G. Caputo
Theodore Ketterer
James M. Oates
(e) The stockholders voted on the following matters:
1. Election of Directors - the voting results for each nominee, both of
whom were reelected, are as follows:
11
Name Votes For Votes Withheld
Mr. Stephen L. Willcox 6,970,435 394,435
Mr. John T. Crawford 6,968,825 396,045
2. A proposal to approve an amendment of the Company's 1997 Employee,
Director and Consultant Stock Plan increasing the number of shares
that may be issued thereunder was approved by a vote of 5,046,372
for, 440,499 against, 15,650 abstaining, and 1,862,349 shares not
voted.
3. A proposal to approve the adoption of the Company's 2000 Non-Employee
Director Stock Purchase Plan was approved by a vote of 5,222,487 for,
264,384 against, 15,650 abstaining, and 1,862,349 shares not voted.
4. A proposal for the appointment of Ernst & Young LLP as the Company's
independent auditors was approved by a vote of 7,248,765 for, 3,220
against, and 1,885 abstaining.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as part of this report
Exhibit 27. Financial Data Schedule (submitted electronically herewith)
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter for which this Form 10-Q
is filed.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMAND SYSTEMS, INC.
Date: August 11, 2000
By:
/s/ Edward G. Caputo
President, Chief Executive Officer and
Chairman of the Board (Principal Executive
Officer)
/s/ Stephen L. Willcox
Executive Vice President, Chief Financial
Officer, Secretary and Director (Principal
Financial and Accounting Officer)
13