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 Third Quarter Ended September 30, 1999
Commission file number: 0-23797
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COMMAND SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 06-1527672
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
POND VIEW CORPORATE CENTER
76 BATTERSON PARK RD.
FARMINGTON, CT 06032
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(Address of principal executive officers) (Zip Code)
(860) 409-2000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Common Stock. $.01 Par Value 7,656,750 shares as of November 12, 1999.
COMMAND SYSTEMS, INC.
INDEX
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Part I Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998........................................... 1
Condensed Consolidated Statements of Operations Three-months
ended September 30, 1999 and 1998............................... 2
Condensed Consolidated Statements of Operations Nine-months
ended September 30, 1999 and 1998............................... 3
Condensed Consolidated Statements of Cash Flows Nine-months
ended September 30, 1999 and 1998............................... 4
Condensed Consolidated Statements of Stockholders' Equity as of
September 30, 1999 and December 31, 1998........................ 5
Notes to Unaudited Condensed Consolidated Financial Statements
as of September 30, 1999........................................ 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 11-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 15
Part II Other Information
Item 1. Legal Proceedings............................................... 16-17
Item 2. Changes in Securities and Use of Proceeds....................... 17
Item 3. Defaults Upon Senior Securities................................. 17
Item 4. Submission of Matters to a Vote of Security Holders............. 17
Item 5. Other Information............................................... 17
Item 6. Exhibits and Reports on Form 8-K................................ 17
Signatures...................................................... 18
Command Systems, Inc.
Condensed Consolidated Balance Sheets
September 30, December 31,
1999 1998
------------ ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,689,247 $ 16,169,749
Marketable securities 14,758,773 2,824,417
Accounts receivable, net of allowance for doubtful accounts
of $531,805 and $341,942 in 1999 and 1998 4,985,913 6,433,864
Prepaid expenses and other assets 305,112 571,285
Income taxes recoverable 402,545 364,892
------------ ------------
Total current assets 22,141,590 26,364,207
Furniture and improvements
Furniture and equipment 2,894,923 2,857,215
Leasehold improvements 1,003,052 995,030
------------ ------------
3,897,975 3,852,245
Less accumulated depreciation and amortization (2,131,686) (1,569,489)
------------ ------------
Net furniture and improvements 1,766,289 2,282,756
Other assets:
Goodwill, net of accumulated amortization
of $805,986 and $456,356 in 1999 and 1998 6,171,882 6,388,982
Deposits 461,539 459,705
Other non-current assets 85,003 152,041
------------ ------------
Total assets $ 30,626,303 $ 35,647,691
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,773,759 $ 2,505,343
Accrued stockholder litigation and related expenses 150,000 1,800,000
Accrued payroll and related costs 954,832 754,292
Deferred revenue 47,446 132,710
------------ ------------
Total current liabilities 2,926,037 5,192,345
Stockholders' equity:
Common stock, $.01 par value, 25,000,000 shares authorized,
7,656,750 issued and outstanding in 1999 and 1998 34,818 34,818
Additional paid-in-capital 33,400,480 33,400,480
Accumulated deficit (5,349,406) (2,664,069)
Accumulated other comprehensive loss (385,626) (315,883)
------------ ------------
Total stockholders' equity 27,700,266 30,455,346
------------ ------------
Total liabilities and stockholders' equity $ 30,626,303 $ 35,647,691
============ ============
See notes to unaudited condensed consolidated financial statements.
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Command Systems, Inc.
Condensed Consolidated Statements of Operations
Three Months Ended September 30,
1999 1998
----------- -----------
(unaudited)
Revenue $ 6,622,547 $ 8,921,237
Cost of revenue 4,628,904 6,330,612
----------- -----------
Gross profit 1,993,643 2,590,625
Selling, general and administrative expense 2,907,034 3,163,276
----------- -----------
Loss income (913,391) (572,651)
Other income (expense):
Interest income 230,738 319,078
Interest expense (14,192) --
Other income 84,427 --
Translation gain (loss) 5,938 (663)
Loss on disposal of equipment (21,298) --
----------- -----------
285,613 318,415
----------- -----------
(Loss) before income taxes (627,778) (254,236)
Income tax benefit -- 66,088
----------- -----------
Net loss (627,778) (188,148)
Preferred stock dividends and accretion -- --
----------- -----------
(Loss) applicable to common stockholders $ (627,778) $ (188,148)
=========== ===========
Basic and diluted loss per share $ (0.08) $ (0.02)
=========== ===========
See notes to unaudited condensed consolidated financial statements.
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Command Systems, Inc.
Condensed Consolidated Statements of Operations
Nine Months Ended September 30,
1999 1998
------------ ------------
(unaudited)
Revenue $ 20,553,176 $ 25,552,056
Cost of revenue 15,151,776 17,389,784
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Gross profit 5,401,400 8,162,272
Selling, general and administrative expense 8,871,157 8,685,822
------------ ------------
Loss income (3,469,757) (523,550)
Other income (expense):
Interest income 714,418 650,296
Interest expense (24,919) (40,421)
Other income 90,161 --
Translation gain 26,058 89,955
Loss on disposal of equipment (21,928) --
------------ ------------
783,790 740,251
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(Loss) income before income taxes (2,685,967) 216,701
Income tax benefit -- (114,695)
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Net (loss) income (2,685,967) 331,396
Preferred stock dividends and accretion -- 260,303
------------ ------------
(Loss) income applicable to common stockholders $ (2,685,967) $ 71,093
============ ============
Basic and diluted (loss) earnings per share $ (0.35) $ --
============ ============
See notes to unaudited condensed consolidated financial statements.
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Command Systems, Inc.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30,
1999 1998
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(unaudited)
Cash flows from operating activities:
Net (loss) income $ (2,685,337) $ 290,975
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization 959,672 863,484
Bad debt expense 288,200 (181,502)
Loss on disposal of equipment 21,928 --
Deferred taxes (37,653) (545,870)
Changes in operating assets and liabilities:
Accounts receivable 1,159,751 (2,024,764)
Prepaid expenses and other assets 76,886 4,430
Deposits and other non-current assets (78,679) (124,659)
Accounts payable and accrued expenses (2,203,455) (214,972)
Accrued payroll and related costs 200,541 405,797
Deferred revenue (85,264) (82,659)
Income taxes payable -- (70,453)
------------ ------------
Net cash used in operating activities (2,383,410) (1,680,193)
Cash flows from investing activities:
Purchases of equipment and improvements (134,013) (1,018,325)
Sales of available for sale securities 7,307,923 --
Purchases of available for sale securities (19,242,279) --
------------ ------------
Net cash used in investing activities (12,068,369) (1,018,325)
Cash flows from financing activities:
Issuance of common stock -- 23,210,818
Payments under revolving line of credit agreement -- (857,535)
Payments of bank loan -- (533,191)
Payment of preferred stock dividend -- (297,641)
------------ ------------
Net cash provided by financing activities -- 21,522,451
Effect of exchange rate changes on cash (28,723) (104,636)
(Decrease) increase in cash (14,480,502) 18,719,297
Cash, beginning of period 16,169,749 391,687
------------ ------------
Cash, end of period $ 1,689,247 $ 19,110,984
============ ============
Cash paid for:
Interest expense $ 24,919 $ 40,421
Income taxes $ 51,500 $ 460,017
See notes to unaudited condensed consolidated financial statements.
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COMMAND SYSTEMS, INC.
Condensed Consolidated Statements of Stockholders' Equity
Accumulated
Common Stock Additional Other
--------------------- Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Loss Total
--------- ------- ----------- ----------- --------- ------------
Balance at December 31, 1998 7,656,750 $34,818 $33,400,480 $(2,664,069) $(315,883) $ 30,455,346
--------- ------- ----------- ----------- --------- ------------
Net loss -- -- -- (2,685,337) -- (2,685,337)
Translation adjustment -- -- -- -- (69,743) (69,743)
--------- ------- ----------- ----------- --------- ------------
Balance at September 30, 1999 (unaudited) 7,656,750 $34,818 $33,400,480 $(5,349,406) $(385,626) $ 27,700,266
========= ======= =========== =========== ========= ============
See notes to unaudited condensed consolidated financial statements.
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Command Systems, Inc.
Notes To Unaudited Condensed Consolidated Financial Statements
September 30,1999
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine-month period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year-
ending December 31, 1999.
The Company computes its income tax provision on a quarterly basis. The
Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recorded to reflect
the tax consequences of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each period based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. A valuation
allowance is provided against the future benefit of deferred tax assets if
it is determined that it is more likely than not that the future tax
benefits associated with the deferred tax asset will not be realized.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report for the year
ended December 31, 1998 on Form 10-K.
Note 2 Stockholders' Equity
The Company made its initial public offering on March 12, 1998, pursuant to
an effective registration statement covering 2,400,000 shares of $.01 par
value common stock plus an additional 360,000 shares for an over-allotment
option granted to the underwriters.
Of the 3,105,000 shares sold in the initial public offering, 2,760,000
shares were properly registered, but the remaining 345,000 shares were not
registered. Persons who purchased unregistered shares in the initial
public offering had rescission rights under the Securities Act of 1933.
However, the Company has been released from any liability for rescission by
terms of the judgment entered by the court on August 11, 1999, in the
purported consolidated class action discussed in Note 3 below.
The Company sold 2,200,000 of the aforementioned shares, and received net
proceeds of $24,552,000 after underwriters' discounts and before other
offering expenses in the amount of $1,314,000.
Simultaneously with the initial offering, all the holders of Series A and B
redeemable convertible preferred stock exchanged their 200 shares for
1,181,750 shares of common stock. Dividends accrued during the period and
previously unamortized offering expenses have been recognized as a
reduction to net income. The Company has paid dividends of $298,000 from
the initial public offering proceeds in 1998.
On February 5, 1998 the Company effected a 1-for-2 reverse stock split.
All shares and per share data have been retroactively restated.
Note 3 Legal Proceedings
On or about May 6, 1998, plaintiffs Don M. Doney, Jr. and Madelyn J. McCabe
filed a lawsuit in the United States District Court for the Southern
District of New York. The lawsuit was filed against the Company, certain of
its officers and directors (Edward G. Caputo, Stephen L. Willcox, Robert B.
Dixon, John J.C. Herndon, James M.
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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 also, may be responsible for certain legal fees
and related expenses incurred in connection with the litigation. The
Company recognized a charge to operations of $1.8 million in the fourth
quarter of 1998 for costs of the settlement and related expenses.
Of the $5.75 million 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.
Note 4 Earnings Per Share
In 1997, the Company adopted FASB No. 128, "Earnings Per Share." All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement.
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The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Numerator for basic and diluted:
Net (loss) income $ (627,778) $ (188,148) $(2,685,337) $ 290,975
Preferred stock dividends and accretion -- -- -- (260,303)
----------- ----------- ----------- -----------
Numerator for basic and diluted earnings
per share--net (loss) income applicable
to common stockholders $ (627,778) $ (188,148) $(2,685,337) $ 30,672
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per
share--weighted average shares 7,656,750 7,656,750 7,656,750 6,730,151
Effect of dilutive securities:
Employee stock options -- 1,130 -- 27,537
----------- ----------- ----------- -----------
Denominator for diluted earnings per
share--weighted average shares 7,656,750 7,657,880 7,656,750 6,757,688
=========== =========== =========== ===========
Basic and diluted (loss)
earnings per share applicable
to common stockholders $ (0.08) $ (0.02) $ (0.35) $ 0.00
=========== =========== =========== ===========
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Note 5 Comprehensive Income
During 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income". Statement No. 130 requires the reporting of
comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology
that requires disclosure of certain financial information that historically
has not been recognized in the calculation of net income.
The following table presents the components of comprehensive income for the
three-months and nine-month periods ended September 30:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------------------------
1999 1998 1999 1998
--------- --------- ----------- ---------
Net (loss) income $(627,778) $(188,148) $(2,685,337) $ 290,975
Other comprehensive (loss) income:
Foreign currency translation adjustments (14,000) (1,000) (70,000) (228,000)
--------- --------- ----------- ---------
Other comprehensive (loss) income $(641,778) $(189,148) $(2,755,337) $ 62,975
========= ========= =========== =========
Accumulated other comprehensive income equals the amount included in
stockholders' equity for cumulative translation adjustments which is the
only component of other comprehensive income included in the Company's
condensed consolidated financial statements.
Note 6 Segment Reporting
The Company operates in one industry segment providing a wide range of
computer consulting services to large financial services organizations
primarily in North America. The Company operates in two geographic areas:
the United States and India. Prior to 1996, the Company only operated in
the United States.
UNITED STATES INDIA ELIMINATION CONSOLIDATED
------------- ----- ----------- ------------
THREE-MONTHS ENDED
SEPTEMBER 30, 1999
Revenue $ 6,571,846 $ 229,882 $ (179,181) $ 6,622,547
Operating loss (633,196) (280,195) -- (913,391)
Identifiable assets 26,629,052 3,997,251 -- 30,626,303
THREE-MONTHS ENDED
SEPTEMBER 30, 1998
Revenue $ 8,921,237 $ 946,564 $ (946,564) $ 8,921,237
Operating (loss) income (284,003) (288,648) -- (572,651)
Identifiable assets 30,738,501 4,583,344 -- 35,321,845
NINE-MONTHS ENDED
SEPTEMBER 30, 1999
Revenue $ 20,445,181 $ 899,670 $ (791,675) $ 20,553,176
Operating (loss) income (2,655,695) (814,062) -- (3,469,757)
Identifiable assets 26,629,052 3,997,251 -- 30,626,303
NINE-MONTHS ENDED
SEPTEMBER 30, 1998
Revenue $ 25,552,056 $ 3,177,717 $(3,177,717) $ 25,552,056
Operating (loss) income (998,641) 475,091 -- (523,550)
Identifiable assets 30,738,501 4,583,344 -- 35,321,845
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Note 7 Nova Acquisition
On August 1, 1999, the Company purchased 100% of the outstanding stock of
Nova Technology, Inc. ("Nova") for $200,000. The acquisition was accounted
for as a purchase. As such, the excess of the purchase price over the fair
value of the assets acquired and the liabilities assumed was recorded as
goodwill. The goodwill recorded is a preliminary calculation based upon the
August 1, 1999 financial information. The Company will be responsible for
additional payments to Nova based upon the working capital provided by Nova
and sales targets achieved over the next twelve months. Nova provides:
Oracle IT consulting, systems integration and custom software application
development.
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COMMAND SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. Statements contained in this document which are not historical fact
are forward-looking statements based upon management's current expectations that
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements.
Forward-looking statements include statements regarding the Company's expected
goals and strategies and the demand for IT services. Such statements are
subject to a number of risks including the risks associated with the failure to
obtain contracts to perform higher margin services, variability of quarterly
operations and financial results, the ability of the Company to manage growth,
the competitive market for technical personnel, reliance on significant
customers, the year 2000 solutions services offering and the finite nature of
demand for Year 2000 solutions services, competition, rapid technological
change, dependence on the Company's Offshore Technology Resource Center and a
variety of risks described under "Risk Factors" in the Company's Annual Report
on Form 10-K. The Company undertakes no obligation to publicly release results
of any of these forward-looking statements, which may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unexpected results.
OVERVIEW
Command Systems, Inc. (the "Company") provides a wide range of information
technology ("IT") solutions and services to financial services organizations to
support their evolving business processes. The Company utilizes leading
technologies to offer its customers a comprehensive range of IT services. In
1996, the Company established a software development facility in Bangalore,
India (the "Offshore Technology Resource Center") which today provides customers
with increased access to skilled IT professionals on a cost-effective basis.
Management is aware that as a result of the detonation of nuclear devices
in India in May 1998, there may be some adverse economic repercussions caused by
the institution of sanctions or other similar actions, the effects of which are
unknown to management at this time. Although the U.S. Government waived some
sanctions in November 1998, others remain. No assurance can be given that any of
these sanctions will continue to be waived , that additional economic sanctions
of this nature will not be imposed or that these actions would not have a
material adverse effect on the Company's business, financial condition or
results of operations.
RESULTS OF OPERATIONS
Three-Months Ended September 30, 1999 Compared With Three-Months Ended
September 30, 1998
Revenue during the three-month period ended September 30, 1999 decreased by
25.8% to $6,623,000 from $8,921,000 for the third quarter ended September 30,
1998. This decrease resulted primarily from a decrease in revenue generated from
Year 2000 solutions services performed at the Offshore Technology Resource
Center and from the Company's decision to de-emphasize hardware solutions
services. Revenue may continue to decline as the demand for Year 2000 solution
services continues to diminish as the Year 2000 approaches.
Gross profit for the three-month period ended September 30, 1999 decreased
by 23.0% to $1,994,000 from $2,591,000 for the three-month period ended
September 30, 1998, as a result of a reduction in revenue. Gross profit as a
percentage of revenue increased to 30.1% for the three-month period ended
September 30, 1999 from 29.0% for the three-month period ended September 30,
1998. This margin increase resulted primarily from permanent placements and
Oracle sales which were offset by a smaller amount of the Company's revenue
being derived from Year 2000 solutions services which typically carry higher
margins than the Company's traditional IT services. Future gross profit as a
percentage of revenue may decline as the demand for Year 2000 solution services
continues to diminish as the Year 2000 approaches.
Selling, general and administrative expense consists primarily of salaries
and employee benefits for selling and administrative personnel as well as
travel, telecommunications and occupancy costs for the Company's U.S. and India
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operations. Selling, general and administrative expense for the three-month
period ended September 30, 1999 decreased by 8.1% to $2,907,000 from $3,163,000
for the three-month period ended September 30, 1998. The decrease is primarily
attributable to a reduction in support staff.
The operating loss for the three-month period ended September 30, 1999 was
$913,000 compared to a loss of $573,000 for the three-month period ended
September 30, 1998. The operating loss as a percentage of revenue was 13.8%
during the three-month period ended September 30, 1999 as compared to a loss of
6.4% for the three-month period ended September 30, 1998.
Other income was $286,000 for the three-month period ended September 30,
1999 compared to $318,000 for the three-month period ended September 30, 1998.
Other income included $231,000 of interest income for the three-months ended
September 30, 1999 and $319,000 of interest income for the three-month period
ended September 30, 1998. The interest income was attributable to interest
earned from investment of the net proceeds of the Company's initial public
offering. In addition, the Company recorded rental income of $67,000 in
connection with subleasing space at its Bangalore facility during the three-
months ended September 30, 1999.
No income tax provision or benefit was recorded for the three-month period
ended September 30, 1999 as compared to a $66,000 tax benefit for the
three-month period ended September 30, 1998.
As a result of the foregoing, the net loss was $628,000 for the three-
month period ended September 30, 1999 as compared to a net loss of $188,000 for
the three-month period ended September 30, 1998. Basic and diluted loss per
share was $0.08 for the three-month period ended September 30, 1999 as compared
to basic and diluted loss per share of $0.02 for the three-month period ended
September 30, 1998.
Nine-Months Ended September 30, 1999 Compared With Nine-Months Ended
September 30, 1998
Revenue during the nine-month period ended September 30, 1999 decreased by
19.6% to $20,553,000 from $25,552,000 for the nine-month period ended September
30, 1998. This decrease resulted primarily from a decrease in revenue generated
from Year 2000 solutions services performed at the Offshore Technology Resource
Center and from the Company's decision to de-emphasize hardware solutions
services. Revenue may continue to decline as the demand for Year 2000 solution
services continues to diminish as the Year 2000 approaches.
Gross profit for the nine-month period ended September 30, 1999 decreased
by 33.8% to $5,401,000 from $8,162,000 for the nine-month period ended September
30, 1998 as a result of the reduction in revenue and a 5.6 point reduction in
gross profit margin. Gross profit as a percentage of revenue decreased to 26.3%
for the nine-month period ended September 30, 1999 from 31.9% for the nine-month
period ended September 30, 1998. This decrease resulted primarily from a smaller
percentage of the Company's revenue being derived from Year 2000 solutions
services which typically carry higher margins than the Company's traditional IT
services.
Selling, general and administrative expense for the nine-month period ended
September 30, 1999 increased by 2.1% to $8,871,000 from $8,686,000 for the
nine-month period ended September 30, 1998. The increase is primarily
attributable to additional support staff to support planned sales growth and
costs associated with being a public company.
The operating loss for the nine-month period ended September 30, 1999 was
$3,470,000 compared to an operating loss of $524,000 for the nine-month period
ended September 30, 1998. The operating loss as a percentage of revenue was
16.9% for the nine-month period ended September 30, 1999 as compared to a loss
of 2.0% for the nine-month period ended September 30, 1998.
Other income was $784,000 for the nine-month period ended September 30,
1999 compared to other income of $700,000 for the nine-month period ended
September 30, 1998. Other income included $714,000 of interest income for the
nine-month period ended September 30,1999 and $650,000 of interest income for
the nine-month period ended September 30, 1998. The interest income was
attributable to interest earned from investment of the net proceeds of the
Company's initial public offering. In addition, the Company recorded a foreign
currency exchange gain of $26,000 for the nine-month period ended September 30,
1999 compared to a foreign currency exchange gain of $90,000 for the nine-month
period ended September 30, 1998. The gain was in connection with the U.S. dollar
denominated cash and receivable balances of its Indian operations.
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No income tax benefit or provision was recorded for the nine-month period
ended September 30, 1999 compared to a $115,000 tax benefit for the nine-month
period ended September 30, 1998.
As a result of the foregoing, the net loss was $2,685,000 for the
nine-month period ended September 30, 1999 as compared to net income of $291,000
for the nine-month period ended September 30, 1998. Basic and diluted loss per
share was $0.35 for the nine-month period ended September 30, 1999 as compared
to breakeven earnings per share for the nine-month period ended September 30,
1998. Preferred stock dividends and accretion in 1998 of $260,000 affected basic
and diluted earnings per share.
LIQUIDITY AND SOURCES OF CAPITAL
The Company has financed its operations and capital expenditures primarily
with internally generated cash flows, borrowings under its credit line
facilities and proceeds from the issuance of preferred and common stock.
The Company's operating activities used $2,383,000 for the nine-month
period ended September 30, 1999 compared to $1,680,000 for the nine-month period
ended September 30, 1998. Cash was used primarily to fund the operating loss and
pay the shareholder litigation settlement.
The Company used cash of $12,068,000 for investing activities during the
nine-month period ended September 30, 1999 as compared to $1,018,000 during the
nine-month period ended September 30, 1998. The Company acquired $11,934,000 of
marketable securities during the nine-month period ended September 30, 1999. The
Company spent $134,000 for capital expenditures during the nine-month period
ended September 30, 1999 as compared to $1,018,000 during the nine-month period
ended September 30, 1998 to support planned sales growth.
The Company did not have any financing activities for the nine-month period
ended September 30, 1999; $21,522,000 was provided by financing activities for
the same period in 1998. In March 1998, the Company issued and sold 2,200,000
shares of $.01 par value common stock for $12.00 per share in its initial public
offering.
From the sale of 2,200,000 shares in the initial public offering, the
Company received net proceeds of $24,552,000 after underwriters' discounts and
before other offering expenses in the amount of $1,314,000. Simultaneously, with
the initial public offering, the holders of 100 shares of Series A redeemable
convertible preferred stock and the holders of 100 shares of Series B redeemable
convertible preferred stock exchanged their shares for 1,181,750 shares of
common stock. Dividends accrued during the period and previously unamortized
offering expenses have been recognized as a reduction to net income. The Company
has paid dividends of $298,000 from the proceeds of the initial public offering
in 1998.
As of September 30, 1999, the Company had $1,689,000 in cash and cash
equivalents and had working capital of $19,216,000. During the period, the
Company invested its excess cash balances primarily in U.S. Treasury Notes with
maturity dates up to two years.
In October 1999, the Company renewed its revolving line of credit, which
limits borrowings to $4.0 million, for its U.S. operations. As of September 30,
1999, no amounts were outstanding under the credit facility. Borrowings under
this bank line of credit are secured by substantially all of the Company's
tangible and intangible personal property and are utilized primarily to fund the
Company's working capital requirements. The Company is required to maintain a
minimum of the following: total net worth of five times credit facility; debt
service coverage ratio of 3:1; interest coverage of 3:1; and a current ratio of
2:1. In June 1998, Command International Software Pvt., the Company's wholly-
owned Indian subsidiary, entered into a funded and non-funded credit facility.
The funded facility provides for borrowing up to 90% of the Company's export
receivables subject to a maximum of Rs 7.5 MM (approximately $175,000), based
upon monthly export billing, and an overdraft facility of Rs .5 MM
(approximately $12,000). The export billing facility is at a base FEDAI rate of
9%; the overdraft facility is at an interest rate of 17.85%. The non-funded
facility provides for a letter of credit line in the amount of Rs .3MM
(approximately $7,000). Corresponding deposits of 15% to 25% are required for
utilized facilities. The letter of credit facility charge is 1.8% per annum; the
guarantee letter of credit facility is at a commission rate of 1%. Primarily
accounts receivable and a lien on the fixed assets of the Indian subsidiary
secure these credit facilities. As of September 30, 1999, there were no
outstanding amounts under these facilities.
The Company believes that its cash balances and funds available from the
sale of its marketable securities, together with other available funds, will be
adequate to satisfy its current and planned operations over the next 12 months.
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IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue refers to potential problems with computer systems or
any equipment with computer chips or software that use dates where the date has
been stored as just two digits (e.g.,"97" for 1997). On January 1, 2000, any
clock or date recording mechanism incorporating date sensitive software which
uses only two digits to represent the year may recognize a date using "00" as
the Year 1900 rather than the Year 2000. This could result in a system failure
or miscalculations causing disruption of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar business activities.
The Company has completed an assessment of its information systems to
determine the extent to which existing systems correctly define the Year 2000.
Those systems found not to be compliant have been upgraded by the vendors of
those systems except for certain purchased software packages which are expected
to be upgraded and brought into compliance by their vendors before the Year
2000. The majority of the upgrades were implemented via standard maintenance
contracts, without costs. As of this date, a nominal amount has been expended.
The remaining upgrades are expected to be implemented for minimal cost. Based on
such review we do not currently believe that we have material exposure to the
Year 2000 problem with respect to our own information systems. With respect to
the information systems of third parties that are our major vendors, we will be
seeking to obtain Year 2000 compliance certifications for those systems that
relate to our business. These third parties may include major hardware and
software vendors, as well as financial services providers. Most of our major
vendors have made public statements indicating that they intend to cause their
products and services to be Year 2000 compliant on a timely basis. Based on the
foregoing, we have not to date developed contingency plans for the failure by
our major vendors to provide Year 2000 compliant products and services. The Year
2000 problem could affect the information systems of our major vendors as they
relate to our business. Although we believe that the information systems of our
major vendors as they relate to our business are Year 2000 compliant, we cannot
be sure that the advent of the Year 2000 will not affect our major vendors'
information systems. If a major vendor's information system fails or
malfunctions significantly due to the Year 2000 problem it could materially and
adversely affect us.
- 14 -
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Risk
Approximately 5% of the Company's sales consist of work performed by
employees of the Company's Bangalore, India facility. As a result, the Company's
financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets where the Company employs its workforce. The Company's currency exposure
is concentrated in the Indian Rupee.
The Company does not hedge overseas sales denominated in foreign currencies
or translation exposures. The Company does not enter into financial instruments
for speculation or trading purposes.
The Company utilizes bank loans and other debt instruments throughout its
operation. To mitigate foreign currency risk, such debt is usually denominated
in the underlying local currency.
Interest Rate Risk
The Company's interest income and expense are most sensitive to changes in
the general level of U.S. interest rates. In this regard, changes in these
interest rates primarily affect the interest earned on cash and cash equivalents
and marketable securities.
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COMMAND SYSTEMS, INC.
Part II Other Information
Item 1. Legal Proceedings.
The discussion below references certain legal proceedings previously
reported in and as of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
On or about May 6, 1998, plaintiffs Don M. Doney, Jr. and Madelyn J. McCabe
filed a lawsuit in the United States District Court for the Southern District of
New York. The lawsuit was filed against Command, certain of the Company's
officers and directors (Edward G. Caputo, Stephen L. Willcox, Robert B. Dixon,
John J.C. Herndon, James M. Oates and Joseph D. Sargent) and the managing
underwriters of the initial public offering (Cowen & Company and Volpe Brown
Whelan & Company LLC). On or about June 22, 1998, the same plaintiffs amended
their complaint in the lawsuit they had filed with the United States District
Court for the Southern District of New York. On or about May 8, 1998, another
plaintiff, Chaile B. Steinberg, filed a new lawsuit against the same defendants
in the same court. On or about June 26, 1998, a plaintiff named Michael
Makinen, filed a lawsuit in the same court against the same defendants. Each of
the plaintiffs 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
into 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 also may be responsible
for certain legal fees and related expenses incurred in connection with the
litigation. The Company recognized a charge to operations of $1.8 million in
the fourth quarter of 1998 for costs of the settlement and related expenses.
Of the $5.75 million deposited in the settlement fund 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.
The settlement provided for a pro rata distribution of the cash settlement
fund, plus interest, minus approved attorneys' fees and related expenses, to
purchasers of the Company's common stock in the period from March 12 through
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April 29, 1998, inclusive. Without knowing the number of claimants, the Company
cannot estimate the net amount actually payable on a per share basis.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
No. Title
------- -----
27 Financial Data Schedule.
The Company did not file any reports on Form 8-K during the three-months ended
September 30, 1999.
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COMMAND SYSTEMS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
Command Systems, Inc.
November 15, 1999 /s/ Edward G. Caputo
- ---------------------- --------------------------------------------
(Date) President and Chief Executive Officer
(principal executive officer)
November 15, 1999 /s/ Stephen L. Willcox
- ---------------------- --------------------------------------------
(Date) Chief Financial Officer
(principal financial and accounting officer)
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