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 ended September 30, 1997
------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number 0-18684
-------
Command Security Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1626307
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Lexington Park, LaGrangeville, New York 12540
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 454-3703
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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date: 6,658,143 (as of November 8, 1997).
<PAGE>
COMMAND SECURITY CORPORATION
INDEX
PART I. Financial Information Page No.
--------------------- --------
Item 1. Financial Statements
Condensed Statements of Operations -
three months and six months ended
September 30, 1997 and 1996 (unaudited) 2
Condensed Balance Sheets -
September 30, 1997 and March 31, 1997
(unaudited) 3
Condensed Statements of Changes in Stockholders' Equity -
six months ended September 30, 1997 and 1996
(unaudited) 4
Condensed Statements of Cash Flows -
six months ended September 30, 1997 and 1996
(unaudited) 5 - 6
Notes to Condensed Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10 - 14
PART II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
1
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $ 12,980,183 $ 12,721,075 $ 24,768,661 $ 24,721,864
Cost of revenue 10,988,008 10,364,688 21,146,250 20,404,845
------------ ------------ ------------ ------------
Gross profit 1,992,175 2,356,387 3,622,411 4,317,019
Service contract revenue (note 1) 382,447 361,580 810,240 689,352
------------ ------------ ------------ ------------
2,374,622 2,717,967 4,432,651 5,006,371
------------ ------------ ------------ ------------
Operating expenses
General and administrative expenses 1,904,913 1,879,846 3,722,078 3,515,169
Labor claim settlement 180,000 -0- 180,000 -0-
Amortization of intangibles 417,834 437,493 830,843 883,284
Provision for doubtful accounts 994,288 161,950 1,153,407 225,036
------------ ------------ ------------ ------------
3,497,035 2,479,289 5,886,328 4,623,489
------------ ------------ ------------ ------------
Operating profit/(loss) (1,122,413) 238,678 (1,453,677) 382,882
Interest income 67,192 69,071 172,012 128,872
Management fees -0- -0- 35,000 -0-
Interest expense (266,691) (223,592) (540,111) (505,512)
Equipment dispositions 1,601 (13,770) (9,771) (25,738)
------------ ------------ ------------ ------------
Income/(loss) before income taxes (1,320,311) 70,387 (1,796,547) (19,496)
Provision for income taxes -0- -0- -0- -0-
----------- ------------ ------------ ------------
Net income/(loss) (1,320,311) 70,387 (1,796,547) (19,496)
Preferred stock dividends (34,871) (32,291) (69,742) (64,582)
------------ ------------ ------------ ------------
Net income/(loss) applicable to
common stockholders $ (1,355,182) $ 38,096 $ (1,866,289) $ (84,078)
============ ============ ============ ============
Net income/(loss) per common share $ (.20) $ .01 $ (.28) $ (.01)
============ ============ ============ ============
Weighted average number
of common and common
equivalent shares outstanding 6,649,618 6,814,749 6,730,203 6,789,897
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
Sept. 30, March 31,
Current assets: 1 9 9 7 1 9 9 7
------- -------
Accounts receivable - net $ 12,324,189 $ 12,771,692
Notes receivable, current maturities - net 30,040 218,267
Prepaid expenses 684,802 1,322,918
Other receivables - net 43,605 699,248
------------ ------------
Total current assets 13,082,636 15,012,125
Property and equipment - net 1,203,810 1,105,473
Other assets:
Notes and accounts receivable
due after one year - net 484 387,327
Intangible assets - net 4,386,806 5,033,566
Deferred income taxes 259,835 259,835
Other assets 1,732,388 1,390,250
------------ ------------
Total other assets 6,379,513 7,070,978
------------ ------------
Total assets $ 20,665,959 $ 23,188,576
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 1,163,115 $ 753,644
Current maturities of long-term debt 911,531 977,372
Current maturities of obligations under
capital leases 77,884 77,047
Short-term borrowings 7,119,160 7,763,578
Accounts payable 890,119 654,339
Due to service companies 645,541 685,150
Accrued payroll and other expenses 2,687,807 2,687,783
------------ ------------
Total current liabilities 13,495,157 13,598,913
Deferred revenue 10,830 391,685
Self-insurance reserves 593,029 438,820
Long-term debt due after one year 1,083,801 1,195,234
Obligations under capital leases due after one year 99,359 89,189
------------ ------------
15,282,176 15,713,841
------------ ------------
Redeemable, convertible Series A preferred stock 1,813,297 1,743,555
------------ ------------
Stockholders' equity:
Common stock, $.0001 par value 796 842
Additional paid-in capital 9,533,218 9,897,319
Retained earnings/(deficit) (5,960,528) (4,163,981)
Treasury stock at cost (3,000) (3,000)
------------ ------------
Total stockholders' equity 3,570,486 5,731,180
------------ ------------
Total liabilities and stockholders' equity $ 20,665,959 $ 23,188,576
============ ============
See accompanying notes to condensed financial statements.
3
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Retained
Common Paid-In Earnings Treasury
Stock Capital (Deficit) Stock
-------- ----------- ----------- --------
Balance at March 31, 1996 $ 812 $ 9,805,425 $(4,614,011) $(3,000)
Exercise of common stock put (218,765)
Common stock issued 15 299,985
Preferred stock dividends (64,582)
Net loss - six months ended
September 30, 1996 (19,496)
----- ----------- ----------- -------
Balance at September 30, 1996 827 9,822,063 (4,633,507) (3,000)
Common stock issued 6 139,213
Issuance/(return) of
escrowed common stock
Note collateral 24 (24)
Accrued fees (15) 15
Common stock warrants subscribed 500
Preferred stock dividends (64,448)
Net income - six months ended
March 31, 1997 469,526
----- ----------- ----------- -------
Balance at March 31, 1997 842 9,897,319 (4,163,981) (3,000)
Return of escrowed
common stock
Note collateral (35) 35
Retention adjustments (11) (294,394)
Preferred stock dividends (69,742)
Net loss - six months ended
September 30, 1997 (1,796,547)
----- ----------- ----------- -------
Balance at September 30, 1997 $ 796 $ 9,533,218 $(5,960,528) $(3,000)
===== =========== =========== =======
See accompanying notes to condensed financial statements.
4
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
Sept. 30, Sept. 30,
1 9 9 7 1 9 9 6
------- -------
Cash flow from operating activities:
Net loss $(1,796,547) $ (19,496)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 1,017,777 1,060,716
Provision for doubtful accounts 1,153,407 225,036
Loss on equipment dispositions 9,771 25,736
Self-insurance reserves 362,906 74,395
Decrease/(increase) in receivables,
prepaid expenses and deposits 563,279 (206,638)
Decrease in accounts payable
and other current liabilities (50,600) (815,186)
----------- -----------
Net cash provided by operating activities 1,259,993 344,563
----------- -----------
Cash flows from investing activities:
Purchases of equipment (104,987) (38,017)
Proceeds from sale of equipment 14,830 27,569
Purchase of intangible assets (105,850) (123,365)
Notes issued -0- (161,206)
Principal collections on notes receivable 67,570 132,081
----------- -----------
Net cash used in investing activities (128,437) (162,938)
----------- -----------
Cash flows from financing activities:
Net borrowings/(repayments) on line-of-credit (364,320) 579,889
Increase in cash overdrafts 409,471 293,203
Principal payments on other borrowings (1,141,473) (990,731)
Principal payments on capital lease obligations (35,234) (63,986)
----------- -----------
Net cash used in financing activities (1,131,556) (181,625)
----------- -----------
Net decrease in cash
and cash equivalents -0- -0-
Cash and cash equivalents
at beginning of period -0- -0-
Cash and cash equivalents ----------- -----------
at end of period $-0- $-0-
=========== ===========
See accompanying notes to condensed financial statements.
5
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental Disclosures of Cash Flow Information
Cash paid during the six months ended September 30 for:
1 9 9 7 1 9 9 6
------------- ------------
Interest $ 562,148 $ 514,539
Income taxes -0- -0-
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the six months ended September 30, 1997 and 1996, the Company purchased
transportation and office equipment with direct installment and lease financing
of $204,885 and $327,157, respectively.
For the six months ended September 30, 1997 and 1996, the Company accrued
dividends of $69,742 and $64,582, respectively, on its Series A convertible
preferred stock. These charges to paid-in capital and credits to preferred stock
have been excluded in the condensed statement of cash flows.
In July, 1997, the Company acquired certain guard service accounts from a former
service agreement client in settlement of outstanding advances and the
assumption of certain loan guarantees. Debt assumed of $130,114 and net advances
of $30,098 have been excluded from the purchase of intangible assets in the
condensed statement of cash flows.
In June, 1997, the Company purchased certain guard service accounts for a total
consideration of $144,684. The Company paid $56,717, issued a note for $56,717
and entered into an agreement for consulting services for $31,250 to effect the
transition of the accounts. The non-cash portions have been excluded from the
purchase of accounts and issuance of notes in the condensed statement of cash
flows.
In August, 1996, the Company purchased certain guard service accounts for a
total consideration of $606,164. The Company paid $115,000, issued two
short-term notes for $191,164 and issued 150,000 shares of its common stock at a
capitalized value of $300,000. The issuance of the notes and the common stock
have been excluded from the purchase of intangible assets in the condensed
statement of cash flows.
In July, 1996, the Company entered into a non-compete agreement with its former
Treasurer for $180,000. This charge to intangible assets and credit to notes
payable has been excluded in the condensed statement of cash flows.
In June, 1996, the Company negotiated a settlement with NSC Shareholder Trust in
connection with a put offer given for common stock issued in consideration for
the purchase of customer accounts. The resultant charge to paid-in capital and
intangibles of $218,765 and $3,512, respectively, and credit to notes payable of
$222,277 have been excluded in the statement of cash flows.
See accompanying notes to condensed financial statements.
6
<PAGE>
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's financial statements for
the year ended March 31, 1997.
The financial statements for the interim periods shown in this report are not
necessarily indicative of results to be expected for the fiscal year. In the
opinion of management, the information contained herein reflects all adjustments
necessary to summarize fairly the results of operations, financial position,
stockholders' equity and cash flows at September 30, 1997, and for the period
then ended. All such adjustments are of a normal recurring nature, except for an
increase in reserves for uncollectible accounts and notes receivable of $764,000
in connection with amounts due from a former service agreement client as a
result of the client's Chapter 7 bankruptcy filing.
1.) Service Companies
The following is a summary of the service companies' activities for the six
months ended September 30, 1997 and 1996, respectively, the components of which
have been excluded from the Company's financial statements:
Three Months Ended Six Months Ended
------------------ ----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
Service companies' guard
service revenue $4,672,209 $4,201,413 $9,541,428 $7,955,446
Cost of revenue 3,393,514 3,476,589 7,130,464 6,600,564
---------- ---------- ---------- ----------
Gross profit 1,278,695 724,824 2,411,064 1,354,882
Service companies' share
of gross profit 998,026 472,579 1,839,044 878,641
---------- ---------- ---------- ----------
280,669 252,245 572,020 476,241
Other service revenue 101,778 109,335 238,220 213,111
---------- ---------- ---------- ----------
Total service contract revenue $ 382,447 $ 361,580 $ 810,240 $ 689,352
========== ========== ========== ==========
7
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2.) Short-Term Notes Payable
In February, 1995, the Company entered into an agreement with The CIT
Group/Finance, Inc. ("CIT") under a revolving loan and security agreement
(the "agreement"). The agreement, as amended on January 30, 1997, provides
for a discretionary line of credit of up to 85% of eligible accounts
receivable, as defined in the agreement, but in no event in excess of $10
million. At September 30, 1997, the Company had used $6,786,516 of this
line, representing virtually 100% of its maximum borrowing capacity.
Interest is payable monthly, at 1.5% above prime (10% at September 30,
1997). The line is collateralized by customer accounts receivable and
substantially all other assets of the Company. The term of the agreement
is initially until February, 1999, with automatic two year renewal terms
thereafter.
3.) Loss per Share
Loss per common share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the period,
including the dilutive effect, if any, of warrants and stock options
outstanding. Warrants and stock options outstanding and preferred stock
conversions were excluded from the computation for each period presented
because their effect was antidilutive.
4.) Self-Insurance
The Company adopted a partially self-insured health insurance program that
covers all eligible administrative personnel, effective as of March 1,
1997. There is a maximum of $30,000 per year per employee and an aggregate
amount per year, based on the number of participants (currently 103
employees, or $348,200), that the Company can be responsible for. A
stop-loss insurance policy covers all claims in excess of the above
amounts.
The Company has an insurance policy to cover workers compensation claims
in most states that the Company performs services. Annual premiums are
based on incurred losses as determined at the end of the coverage period,
subject to a minimum and maximum premium. Insurance providers assist the
Company in determining its estimated liability for these claims.
The nature of the Company's business also subjects it to claims or
litigation alleging that it is liable for damages as a result of the
conduct of its employees or others. The Company insures against such
claims and suits through policies with third-party insurance companies.
Such policies have limits of $1,000,000 per occurrence and $2,000,000 in
the aggregate. In addition, the Company has obtained an excess liability
policy that covers claims for an additional $25,000,000 in the aggregate.
The Company retains the risk for the first $50,000 per occurrence.
Cumulative amounts estimated to be payable by the Company with respect to
pending and potential claims for all years in which the company is liable
under its self-insurance retention and retro workers compensation policies
have been accrued as liabilities. Such accrued liabilities are necessarily
based on estimates; thus, the company's ultimate liability may exceed or
be less than the amounts accrued. The methods of making such estimates and
establishing the resultant accrued liability are reviewed continually and
any adjustments resulting therefrom are reflected in current earnings.
8
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Contingent Liabilities
The Company has guaranteed certain installment loans extended to various
service companies by Capital Resources Company. The total outstanding
balance on such loans as of September 30, 1997, was approximately
$732,000.
The Private Placement Memorandum issued in connection with the Company's
1993 Private Placement and the interim financial reports for the first
three quarters in the fiscal years ended March 31, 1994 and 1995, filed by
the Company contained financial information which has since been restated.
It is possible that the purchasers of Units pursuant to the 1993 offering
and the purchasers of shares in connection with the offerings that were
consummated in February, 1995, may make a claim for, among other things,
rescission of their investment, which totaled $4,000,000 in the 1993
offering and approximately $4,160,000 in the 1995 offerings, plus
interest, alleging, in each case, as the basis, the above-mentioned
restatements. No such claims have been received by the Company to date.
Other causes of action against the Company based on federal and/or state
securities laws are also possible. On November 11, 1997, the Company
received a letter from a shareholder demanding that the Company
investigate certain management actions and threatening a lawsuit for
damages against the Chairman of the Board, individually. The Chairman
believes these claims to be unfounded. Although the letter does not
indicate a claim against the Company, the Company could be obligated to
the Chairman under the Company's officer indemnification provisions and it
could be obligated to incur expenses in the event the Company is required
to appear on its own behalf in the potential litigation. Expenditures in
the form of damages, indemnification and fees may be incurred and the
amounts thereof are not quantifiable at this time. If the Company were to
incur indemnification expenses or become involved in litigation arising
from these circumstances, the Company's results of operations and
financial condition may be materially adversely affected due to the drain
on cash and management resources. Management is of the opinion that the
probability of claims for rescission and the resultant negative impact on
the Company's operations and financial condition is diminishing with time.
Management can express no opinion at this time as to the probability of
incurring indemnification or litigation expenses as the result of the
above referenced letter.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
The following should be read in conjunction with the Company's financial
statements and the related notes thereto.
Revenue increased by approximately $259,000 for the quarter ended September 30,
1997, to $12,980,183 from $12,721,075 for the quarter ended September 30, 1996.
The major components of this increase are as follows: approximately $649,000
increase due to acquisitions, approximately $366,000 decrease due to the sale of
the Miami business in December, 1996, and approximately $24,000 decrease due to
contract cancellations net of new contract starts.
For the six months ended September 30, 1997, revenue increased by approximately
$47,000 to $24,768,661 from $24,721,864 for the six months ended September 30,
1996. The major components of this increase are as follows: approximately
$1,103,000 increase due to acquisitions; approximately $875,000 decrease due to
the sale of Miami business in December, 1996, and approximately $181,000
decrease due to contract cancellations net of new contract starts.
Gross profit decreased by approximately $364,000 to $1,992,175 or 15.3% of
revenue for the quarter ended September 30, 1997 compared to $2,356,387 or 18.5%
of revenue for the quarter ended September 30, 1996. This decrease results from
higher payroll costs (including payroll taxes and insurance) of approximately
$232,000 due to new contracts replacing old contracts at lower prices and
margins. Also the increased use of independent contractors of approximately
$103,000 to staff contract sites contributed to the decrease. Uniform costs
increased by approximately $30,000 due to increased sales.
Gross profit decreased by approximately $695,000 to $3,622,411 or 14.6% of
revenue for the six months ended September 30, 1997 compared to $4,317,019 or
17.5% of revenue for the six months ended September 30, 1996. This decrease
results from higher payroll costs of approximately $205,000 due to new contracts
replacing old contracts at lower prices and margins. Payroll taxes increased by
approximately $20,000 and insurance costs increased by approximately $336,000
primarily due to higher general liability self-insured reserves. The use of
independent contractors to staff contract sites increased cost by approximately
$108,000 and uniform costs increased by approximately $41,000.
Management expects the trend of increasing pressures on margins to continue due
to primarily the intense competition which is characteristic of the industry.
Management carefully analyses each of its bids for security guard services in
order to assure reasonably adequate profit margins. Management has determined
that jobs with inadequate margins will not be accepted. Management is also
pursing related types of business which provide higher margins. At this time,
such businesses are not material and management believes that disclosure of same
would not be beneficial in light of the potential competitive advantage that it
may retain by pursuing these alternatives without putting competitors on notice
by way of disclosure.
The Company provides payroll and billing services and accounts receivable
financing through contracts with service company clients for a percentage of the
revenue or gross profit generated from their business. The Company owns the
accounts receivable and, depending on the individual contract, may be the
employer of record. The caption "Service Contract Revenue" represents the income
earned on the service agreements.
Service contract revenue increased by $20,867 to $382,447 in the quarter ended
September 30, 1997 from $361,580 in the quarter ended September 30, 19956 and
increased by $120,888 to $810,240 in the six months ended September 30, 1997
from $689,352 in the six months ended September 30, 1996. These increases are
due to higher volume of sales generated by service agreement clients under both
the employer of record and non-employer of record programs, however, the amount
of growth in the second quarter has slowed compared to the amount of growth in
the first six months due to the termination of one service agreement as a result
of the client who filed Chapter 7 bankruptcy on August 28, 1997 (please refer to
item 1 of Part II of this quarterly report on Form 10-Q for a description of the
circumstances surrounding this service company's bankruptcy filing).
10
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations (continued)
Service contract revenue in the future is expected to decrease due to fewer
service contract customers. Three of them have deficit balances, which have been
fully reserved for. The Company also has potential exposure of approximately
$324,000 for loan guarantees extended on behalf of these companies and
approximately $720,000 of accounts receivable (all of which are the property of
the Company and are considered collectible by the Company in the normal course
of business, subject to customary reserves). Management is closely monitoring
the status of the financial condition of these service company clients and is
working to reduce the deficits as quickly as possible. Management has no reason
to believe at this time that the remaining service company clients are likely to
file for bankruptcy protection.
General and administrative expenses increased by $25,067 to $1,904,913 for the
quarter ended September 30, 1997, from $1,879,846 for the quarter ended
September 30, 1996. The major areas of increase are salaries ($37,000), rent &
utilities ($31,000), telephone ($38,000), stationery & supplies ($21,000) and
travel & entertainment ($28,000) due to increased internal marketing efforts.
These increases were largely offset by a reduction in professional fees of
approximately $135,000.
For the six months ended September 30, 1997, general and administrative expenses
increased by $207,000 to $3,722,078 compared to $3,515,169 for the six months
ended September 30, 1996. The major areas of increase are rent and utilities
($44,000), telephone ($69,000), insurance ($57,000), stationary and supplies
($44,000) and travel and entertainment ($81,000). These increases were offset by
a reduction in professional fees of $90,000.
The labor claim settlement resulted from a default judgment in the amount of
$314,376.58 by the Eastern District Court of New York in favor of a guard who
alleged unjust termination. The claim was settled for $180,000.
Amortization of intangibles decrease by $19,659 to $417,834 for the quarter
ended September 30, 1997 compared to $437,493 for the quarter ended September
30, 1996. Amortization decreased by $52,441 to $830,843 for the six months ended
September 30, 1997 compared to $883,284 for the six months ended September 30,
1996. These decreases are primarily due to the full amortization of capitalized
borrowing costs incurred in 1995.
The provision for doubtful accounts increased by $832,338 to $994,288 for the
quarter ended September 30, 1997 compared to $161,950 for the quarter ended
September 30, 1996. This increase was primarily caused by the Chapter 7
bankruptcy filing of a service agreement client in August, 1997.
For the six months ended September 30, 1997, the provision for doubtful accounts
increased by $928,371 to $1,153,407 compared to $225,036 for the six months
ended September 30, 1996. This increase was primarily caused by the
aforementioned bankruptcy.
Net interest expense increased by $44,978 to $199,499 for the quarter ended
September 30, 1997 compared to $154,521 for the quarter ended September 30,
1996. This increase is primarily a result of the reversal in September, 1996, of
previously accrued interest expense of $64,000 in connection with the Company's
settlement agreement with ISS International Service Systems, Inc. in October,
1996, offset by decreased debt levels and reductions in the Company's effective
rate of borrowing.
For the six months ended September 30, 1997, net interest expense decreased by
$8,541 to $368,099 compared to $376,640 for the six months ended September 30,
1996. This decrease resulted primarily from the collection of certain advances
from one of the Company's employer of record service agreement clients in the
prior quarter, decreased debt levels and effective rate of borrowing, offset by
the reversal of the previously accrued interest expense mentioned above.
11
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations (continued)
Management fee income is income recognized for financial consulting services
provided to a service agreement client. Such service are not expected to recur
in future periods.
Loss on equipment dispositions primarily represents older vehicles sold or
retired.
Management expects the Company's losses to increase modestly through the fiscal
year ending March 31, 1998. The Company's performance thereafter will be
dependent on its ability to reduce corporate overhead costs, develop new higher
margin product lines and to obtain profitability for underperforming branches
through acquisitions and/or interal sales. The Company's Board of Directors has
not agreed on a strategy for financing acquisitions, primarily due to differing
views expressed by members of the Board with respect to costs of such financing,
the availability of well-priced targets and the Company's capacity for
integrating new acquisitions on a profitable basis. Management regularly
evalutes the feasibility of selling existing branch offices, particularly those
four out of the Company's eighteen offices which are generating losses prior to
the allocation of corporate overhead.
Liquidity and Capital Resources
The Company pays its guard employees and those of its service agreement clients
on a weekly basis, while its customers and the customers of service company
clients pay for the services of such employees generally between 50 to 60 days
after billing by the Company. In order to provide funds for payment to its guard
employees, on February 24, 1995, the Company entered into a commercial revolving
loan arrangement with CIT Group/Credit Finance (CIT).
This agreement was amended as of January 30, 1997, to provide for a two year
renewal to February 23, 1999, as well as other changes in terms and conditions.
Under this agreement, borrowings may be made in an amount up to 85% (previously
82.5%) of eligible accounts receivable, but in no event more than $10,000,000.
The amendment also provided for a term loan in the amount of $500,000 to be
repaid in equal monthly installments over five years. The Company used those
funds for working capital purposes. Outstanding balances under the revolving
loan and the term loan bear interest at a per annum rate of 1 and 1/2%
(previously 2% on the revolving loan) in excess of the "prime rate" and are
collateralized by a pledge of the Company's accounts receivable and other
assets.
At September 30, 1997, the Company had borrowed $6,786,516 or approximately
65.6% of its net accounts receivable (after allowance for bad debts, but before
accrued and unbilled receivables) and virtually 100% of its maximum borrowing
capacity based on the definition of "eligible accounts receivable" under the
terms of the revolving loan agreement.
Generally, the Company borrows a high percentage of its available borrowing,
which can fluctuate materially from day to day due to changes in the status of
the factors used to determine availability (such as billing, payments and aging
of accounts receivable).
12
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Liquidity and Capital Resources (continued)
Due primarily to the service company client bankruptcy referred to above in
Results of Operations, the Company has experienced larger cash overdrafts and a
working capital deficit. This has impacted accounts payable and management is
carefully monitoring its relationships with vendors. Management believes that
the Company's cash flow situation is manageable based on current cash flows as
well as a significant cash receipt expected in May, 1998. The adverse impact of
the service company client bankruptcy, as well as the previously existing cash
overdraft situation, is expected to take approximately one year to cure based
on current projections. In addition to managements efforts to decrease
expenditures in connection with the operation of the ongoing business,
management has heightened its focus on the collection of accounts receivable.
During the period from March 31, 1997 to September 30, 1997, accounts receivable
outstanding over 90 days decreased by approximately $360,000 primarily due to
these increased efforts.
The Company entered into a subordinated loan arrangement on February 24, 1995,
with Deltec Development Corporation pursuant to which the Company borrowed
$1,500,000, the proceeds of which were used primarily to acquire the assets of
United Security Group, Inc. The subordinated loan has a term of four years,
calls for quarterly principal and interest payments and bears interest at
fourteen percent (14%) per annum. It is collateralized, on a subordinated basis,
by all the Company's assets, properties and other revenue. The balance due
Deltec at September 30, 1997 was $562,500.
The Company finances vehicle purchases typically over three years and insurance
through short-term borrowings. The Company has no additional lines of credit
other than discussed herein.
The Company has no present material commitments for capital expenditures.
Cautionary Statement
As provided for under the Private Securities Litigation Reform Act of 1995, the
Company wishes to caution shareholders and investors that the following
important factors, among others, could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements in this
report.
1. The Company's assumptions regarding projected results depend largely upon
the Company's ability to retain substantially all of the Company's current
clients. Retention is affected by serveral factors including but not limited
to the quality of the services provided by the Company, the quality and
pricing of comparable services offered by competitors, continunity of
management and continuity of non-management personnel. There are several
major national competitors with resources far greater than those of the
Company which therefore have the ability to provide service, cost and
compensation incentives to clients and employees which could result in the
loss of such clients and/or employees.
2. The Company's ability to realize its projections will be largely dependent
upon its ability to maintain margins, which in turn will be determined in
large part by management's control over costs. To a significant extent,
certain costs are not within the control of management and margins may be
adversely affected by such items as significant inflation, labor unrest and
increased payroll and related costs.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Cautionary Statement (continued)
3. Although management currently has no reasonable basis of information upon
which to conclude that any significant service company client or security
guard client will default in payment for the services rendered by the
Company, any such default by a significant client would have a material
adverse impact on the Company's liquidity, results of operations and
financial condition.
4. There are no material non-recurring charges contemplated by management in
the forward-looking statements included in this report.
Additional detailed information concerning a number of factors that could cause
actual results to differ materially from the information contained herein is
readily available in the Company's most recent reports on Form 10-K, 10Q and 8-K
and its current registration statement on Form S-3 and any amendments thereto
(all as filed with the Securities and Exchange Commission from time to time).
14
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
(1) Reference is made to footnote 5 to the condensed financial
statements presented herein.
(2) On August 28, 1997, GFM Bayview, Inc. (GFM), a service agreement
client, filed a petition under Chapter 7 of the United States
Bankruptcy Code. At the time of the filing, GFM was indebted to the
Company in the approximate amount of $1,700,000. Following the
bankruptcy filing, the Company received relief from the automatic
stay to collect the Company's accounts receivable. As of October 31,
1997, the Company had collected approximately $372,000 of GFM
related receivables. On or about October 24, 1997, the Company filed
suit in the Bankruptcy Court against Aetna Total Security, Inc.
(Aetna), James Basler and several other former GFM managers alleging
that they had conspired to cause GFM's goodwill to be moved to Aetna
for no consideration. The Company intends to evalute its options
with respect to persuing claims against other protential defendants
in this matter.
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits - None
(2) Reports on Form 8-K
During the quarter the Company filed two forms 8-K, dated August 11,
1997 and September 10, 1997, respectively, both reporting certain
press releases.
15
<PAGE>
SIGNATURE
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 SECURITY CORPORATION
Date:________________ By:
-----------------------------------------
William C. Vassell, Chairman of the Board
By:
-----------------------------------------
William C. Vassell, Chairman of the Board
Acting Principal Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> (1,163)
<SECURITIES> 0
<RECEIVABLES> 14,802
<ALLOWANCES> 2,404
<INVENTORY> 0
<CURRENT-ASSETS> 13,083
<PP&E> 3,085
<DEPRECIATION> 1,881
<TOTAL-ASSETS> 20,666
<CURRENT-LIABILITIES> 13,495
<BONDS> 9,292
1,813
0
<COMMON> 1
<OTHER-SE> 3,570
<TOTAL-LIABILITY-AND-EQUITY> 20,666
<SALES> 0
<TOTAL-REVENUES> 25,579
<CGS> 0
<TOTAL-COSTS> 21,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,153
<INTEREST-EXPENSE> 540
<INCOME-PRETAX> (1,797)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,797)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,797)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.23)
</TABLE>
