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 SEPTEMBER 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
incorporation or organization) Identification No.)
Pond View Corporate Center
76 Batterson Park Rd.
Farmington, CT 06032
(Address of principal executive officers) (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 November 10, 2000.
COMMAND SYSTEMS, INC.
INDEX
-----
PART I Financial Information
Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999....................... 1
Consolidated Statements of Operations
Three months ended September 30, 2000 and 1999................. 2
Consolidated Statements of Operations
Nine months ended September 30, 2000 and 1999.................. 3
Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999.................. 4
Consolidated Statements of
Stockholder's 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................................ 12
Item 4. Submissions of Matters to a Vote of Security Holders........... 12
Item 5. Other Information.............................................. 12
Item 6. Exhibits and Reports on Form 8-K............................... 12
Signatures..................................................... 12
COMMAND SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,364,635 $ 3,900,751
Marketable securities 6,960,808 14,347,828
Accounts receivable, net of allowance for
doubtful accounts of $334,802 in 2000 and
$500,000 in 1999 3,866,052 3,490,764
Prepaid expenses and other current assets 311,703 197,112
Income taxes recoverable - 402,528
----------- -----------
Total current assets 20,503,198 22,338,983
Equipment and improvements:
Furniture and equipment 2,625,284 2,906,685
Leasehold improvements 959,584 1,005,486
----------- -----------
3,584,868 3,912,171
Less accumulated depreciation and amortization (2,390,909) (2,342,874)
----------- -----------
Net equipment and improvements 1,193,959 1,569,297
Other assets:
Goodwill, net of accumulated amortization
of $1,309,874 and $931,427 in 2000 and 1999 5,678,795 6,057,241
Security deposits 432,164 454,712
Other non-current assets 106,678 48,310
----------- -----------
Total assets $27,914,794 $30,468,543
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 582,879 $ 608,125
Accrued payroll and related costs 1,151,262 843,188
Accrued warranty 270,603 270,603
Deferred revenue - 209,815
Accrued other expenses 704,938 1,181,252
----------- -----------
Total current liabilities 2,709,682 3,112,983
Stockholders' Equity:
Common stock, $.01 par value, 25,000,000
authorized, 7,656,750 issued and outstanding
in 2000 and 1999 34,818 34,818
Additional paid-in-capital 33,400,480 33,400,480
Accumulated deficit (7,699,292) (5,600,105)
Accumulated other comprehensive loss (530,894) (479,633)
----------- -----------
Total stockholders' equity 25,205,112 27,355,560
----------- -----------
Total liabilities and stockholders' equity $27,914,794 $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 SEPTEMBER 30,
2000 1999
----------- -----------
(unaudited)
Revenue $6,341,556 $6,622,547
Cost of revenue 4,354,883 4,628,904
----------- -----------
Gross profit 1,986,673 1,993,643
Selling, general and administrative expense 2,684,251 2,928,332
----------- -----------
Operating loss (697,578) (934,689)
Other income (expense):
Other income - 84,427
Interest income 264,278 230,738
Interest expense (893) (14,192)
Foreign exchange gain 41,097 5,938
----------- -----------
304,482 306,911
Loss before income taxes (393,096) (627,778)
Income taxes (35,917) -
----------- -----------
Net loss $ (429,013) $ (627,778)
=========== ===========
Basic and diluted loss per share $ (0.06) $ (0.08)
=========== ===========
See notes to unaudited consolidated financial statements.
2
COMMAND SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
----------- -----------
(unaudited)
Revenue $ 17,467,051 $ 20,553,176
Cost of revenue 12,459,553 15,151,776
------------- ------------
Gross profit 5,007,498 5,401,400
Selling, general and administrative expense 7,856,750 8,893,085
------------- ------------
Operating loss (2,849,252) (3,491,685)
Other income (expense):
Other income - 90,161
Interest income 745,037 714,418
Interest expense (2,204) (24,919)
Foreign exchange gain 63,499 26,058
------------- ------------
806,332 805,718
------------- ------------
Loss before income taxes (2,042,920) (2,685,967)
Income taxes (56,267) -
------------- ------------
Net loss $ (2,099,187) $ (2,685,967)
============= ============
Basic and diluted loss per share $ (0.27) $ (0.35)
============= ============
See notes to unaudited consolidated financial statements.
3
COMMAND SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
----------- -----------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,099,187) $ (2,685,337)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 935,967 959,672
Allowance for doubtful accounts (31,269) 288,200
Loss on disposal of equipment 92,090 21,928
Changes in operating assets and liabilities:
Accounts receivable (347,039) 1,159,751
Income taxes recoverable 402,528 (37,653)
Prepaid expenses and other current assets (118,573) 76,886
Security deposits and other non-current assets (65,495) (78,679)
Accounts payable and accrued other expenses (476,249) (2,203,455)
Accrued payroll and related costs 308,074 200,541
Deferred revenue (209,815) (85,264)
----------- ------------
Net cash used in operating activities (1,608,968) (2,383,410)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (305,553) (134,013)
Sales of available-for-sale securities 7,450,393 7,307,923
Purchases of available-for-sale securities - (19,242,279)
----------- ------------
Net cash provided by (used in) investing activities 7,144,840 (12,068,369)
Effect of exchange rate changes on cash and cash
equivalents (71,988) (28,723)
Increase (decrease) in cash and cash equivalents 5,463,884 (14,480,502)
Cash and cash equivalents, beginning of period 3,900,751 16,169,749
----------- ------------
Cash and cash equivalents, end of period $ 9,364,635 $ 1,689,247
=========== ============
CASH PAID FOR:
Interest expense $ - $ 24,919
Income taxes $ 56,267 $ 51,500
See notes to unaudited consolidated financial statements.
4
COMMAND SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------------- 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 - - (2,099,187) - (2,099,187)
Other comprehensive (loss) income:
Foreign currency translation
adjustment - - - - (114,702) (114,702)
Unrealized gain on marketable
securities - - - - 63,441 63,441
--------- -------- ------------ ----------- ---------- -----------
Comprehensive loss (2,099,187) (51,261) (2,150,448)
--------- -------- ------------ ----------- ---------- -----------
BALANCE AT SEPTEMBER 30, 2000 7,656,750 $ 34,818 $ 33,400,480 $(7,699,292) $ (530,894) $25,205,112
========= ======== ============ =========== ========== ===========
See notes to unaudited consolidated financial statements.
5
COMMAND SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine-month period ended September 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. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
THREE MONTHS ENDED
----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
----------------------------------
Numerator:
Net loss $ (429,013) $ (627,778)
Denominator:
Weighted-average shares outstanding
for basic and diluted loss per share 7,656,750 7,656,750
----------------------------------
Basic and diluted loss per share $ (0.06) $ (0.08)
=================================
6
The following table sets forth the computation of basic and diluted loss per
share:
NINE MONTHS ENDED
----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
----------------------------------
Numerator:
Net loss $(2,099,187) $(2,685,967)
Denominator:
Weighted-average shares outstanding
for basic and diluted loss per share 7,656,750 7,656,750
Basic and diluted loss per share $ (0.27) $ (0.35)
=================================
Options to purchase approximately 756,000 and 411,000 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 LOSS
The following table sets forth comprehensive loss:
THREE MONTHS ENDED
----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
----------------------------------
Net loss $ (429,013) $ (627,778)
Other comprehensive (loss) income:
Foreign currency translation (40,684) (14,000)
adjustment
Unrealized gain on marketable securities 30,206 -
Total comprehensive loss $ (439,491) $ (641,778)
=================================
The following table sets forth comprehensive loss:
NINE MONTHS ENDED
----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
----------------------------------
Net loss $(2,099,187) $(2,685,967)
Other comprehensive (loss) income:
Foreign currency translation (114,702) (70,000)
adjustment
Unrealized gain on marketable securities 63,441 -
Total comprehensive loss $(2,150,448) $(2,755,337)
=================================
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 September 30,
2000:
Revenue $ 6,307,900 $ 225,866 $(192,210) $ 6,341,556
Operating loss (448,142) (249,436) - (697,578)
Identifiable assets 25,689,142 2,225,652 - 27,914,794
Three months ended September 30,
1999:
Revenue $ 6,571,846 229,882 $(179,181) $ 6,622,547
Operating loss (654,494) (280,195) - (934,689)
Identifiable assets 26,629,052 3,997,251 - 30,626,303
UNITED STATES INDIA ELIMINATION CONSOLIDATED
------------------------------------------------------------------
Nine months ended September 30,
2000:
Revenue $17,371,670 $ 555,132 $(459,751) $17,467,051
Operating loss (2,293,341) (555,911) - (2,849,252)
Identifiable assets 25,689,142 2,225,652 - 27,914,794
Nine months ended September 30,
1999:
Revenue $20,445,181 $ 899,670 $(791,675) $20,553,176
Operating loss (2,677,623) (814,062) - (3,491,685)
Identifiable assets 26,629,052 3,997,251 - 30,626,303
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 SEPTEMBER 30, 2000 COMPARED TO THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 1999
Revenue. Revenue for the three-month period ended September 30, 2000 decreased
by 4.2% to $6,341,556 from $6,622,547 for the three-month period ended September
30, 1999. The decrease in revenue was attributable to the completion of Year
2000 projects during 1999 and a general slowdown in the overall demand for
traditional IT services.
Gross Profit. Gross profit for the three-month period ended September 30, 2000
was $1,986,673 compared to $1,993,643 for the three-month period ended September
30, 1999. Gross profit as a percentage of revenue increased to 31.3% for the
three-month period ended September 30, 2000 from 30.1% for the three-month
period ended September 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 three-month period ended September 30, 2000
decreased 8.3% to $2,684,251 from $2,928,332 for the three-month period ended
September 30, 1999. The decrease was primarily attributable to a reduction in
support staff.
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 $304,482 for the three-month period
ended September 30, 2000 compared to $306,911 for the three-month period ended
September 30, 1999.
9
Income Taxes. Income taxes for the three-month period ended September 30, 2000
were $35,917, which represents estimated state tax payments on our capital
structure and foreign tax on income from sources other than the export of
services of Command International Software Pvt., our wholly owned Indian
subsidiary. No income taxes were recorded in the corresponding period of the
prior year.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 1999
Revenue. Revenue for the nine-month period ended September 30, 2000 decreased
by 15.0% to $17,467,051 from $20,553,176 for the nine-month period ended
September 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 nine-month period ended September 30, 2000
decreased by 7.3% to $5,007,498 from $5,401,400 for the nine-month period ended
September 30, 1999. Gross profit as a percentage of revenue increased to 28.7%
for the nine-month period ended September 30, 2000 from 26.3% for the nine-month
period ended September 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 nine-month period ended September 30, 2000
decreased 11.6% to $7,856,750 from $8,893,085 for the nine-month period ended
September 30, 1999. The decrease was primarily attributable to a reduction in
support staff.
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 $806,332 for the nine-month period
ended September 30, 2000 compared to $805,718 for the nine-month period ended
September 30, 1999.
Income Taxes. Income taxes for the nine-month period ended September 30, 2000
were $56,267, which represents estimated state tax payments on our capital
structure and foreign tax on income from sources other than the export of
services of Command International Software Pvt., our wholly owned Indian
subsidiary. 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
10
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 20, 2000, limits borrowings to a maximum of $4,000,000. The agreement
expires on October 15, 2001 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 September 30, 2000, there
were no outstanding amounts under these credit facilities.
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 September 30, 2000 we had cash and cash equivalents and marketable securities
of $16,325,443. Cash used in operating activities for the nine-month period
ended September 30, 2000 was $1,608,968, primarily due to a net loss of
$2,099,187, decreases in accounts payable and accrued other expenses, increases
in accounts receivable, prepaid expenses and other current assets, offset in
part by non-cash charges of depreciation and amortization and a decrease in
income taxes recoverable.
Cash provided by investing activities for the nine-month period ended September
30, 2000 was $7,144,840, 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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
During the fourth quarter of 1999, the SEC released Staff Accounting Bulletin
No. 101, "Revenue Recognition" ("SAB No. 101"), to provide guidance on the
recognition, presentation and disclosure of revenue in financial statements.
SAB No. 101 explains the SEC's general framework for revenue recognition. SAB
101 does not change existing literature on revenue, but rather clarifies the
SEC's position on preexisting literature. We must adopt SAB No. 101 by December
31, 2000. We do not believe that its adoption will have a significant impact on
our financial position and results of operations.
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 AND USE OF PROCEEDS.
None
11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(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.
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: NOVEMBER 10, 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 Operating
Officer, Secretary and Director (Principal
Financial and Accounting Officer)
12