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 December 31, 1996
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
incorporation or organization) Identification No.)
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: 7,046,432 (as of February 12, 1997).
<PAGE>
COMMAND SECURITY CORPORATION
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Statements of Operations -
three months and nine months ended
December 31, 1996 and 1995 (unaudited) 2
Condensed Balance Sheets -
December 31,1996 and March 31, 1996
(unaudited) 3
Condensed Statements of Stockholders' Equity -
nine months ended December 31, 1996 and 1995
(unaudited) 4
Condensed Statements of Cash Flows -
nine months ended December 31, 1996 and 1995
(unaudited) 5 - 7
Notes to Condensed Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 12 - 15
PART II. Other Information
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Exhibit 27 - Financial Data Schedule
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 12,904,267 $ 12,857,564 $ 37,626,131 $ 41,988,658
Cost of revenue 10,649,888 10,906,246 31,054,733 35,953,685
------------ ------------ ------------ ------------
Gross profit 2,254,379 1,951,318 6,571,398 6,034,973
Service contract revenue (note 1) 359,742 444,171 1,049,094 1,126,443
------------ ------------ ------------ ------------
2,614,121 2,395,489 7,620,492 7,161,416
------------ ------------ ------------ ------------
Operating expenses
General and administrative expenses (1,767,046) (1,903,393) (5,282,215) (6,103,366)
Amortization of intangibles (450,146) (291,376) (1,333,430) (897,436)
Provision for doubtful accounts (176,309) (59,547) (401,345) (218,852)
Bad debt recoveries 90,011 200,000 90,011 200,000
Insurance rebates 598,139 603,033 598,139 603,033
------------ ------------ ------------ ------------
(1,705,351) (1,451,283) (6,328,840) (6,416,621)
------------ ------------ ------------ ------------
Operating profit 908,770 944,206 1,291,652 744,795
Interest income 68,055 45,798 196,927 113,623
Interest expense (284,373) (309,806) (789,885) (873,546)
Equipment dispositions (22,761) (17,786) (48,499) (31,789)
------------ ------------ ------------ ------------
Income/(loss) before income taxes 669,691 662,412 650,195 (46,917)
Provision for income taxes -0- -0- -0- -0-
------------ ------------ ------------ ------------
Net income/(loss) 669,691 662,412 650,195 (46,917)
Preferred stock dividends (32,291) (29,901) (96,873) (101,172)
------------ ------------ ------------ ------------
Net income/(loss) applicable to
common shareholders $ 637,400 $ 632,511 $ 553,322 $ (148,089)
============ ============ ============ ============
Net income/(loss) per common share
Primary $ .09 $ .10 $ .08 $ (.02)
============ ============ ============ ============
Fully diluted $ .08 $ .09 $ .08 n/a
============ ============ ============ ============
Weighted average number
of common and common
equivalent shares outstanding
Primary 7,152,739 6,633,932 6,911,097 6,633,932
============ ============ ============ ============
Fully diluted 8,131,239 7,589,335 7,889,597 n/a
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS Dec. 31, March 31,
1 9 9 6 1 9 9 6
Current assets: ------------ ------------
Accounts receivable - net $ 12,386,645 $ 12,320,412
Notes receivable, current maturities - net 198,283 260,547
Prepaid expenses 1,599,399 1,176,972
Other receivables - net 993,147 285,469
------------ ------------
Total current assets 15,177,474 14,043,400
------------ ------------
Property and equipment - net 1,099,918 975,832
------------ ------------
Other assets:
Notes and accounts receivable
due after one year - net 331,326 210,659
Intangible assets - net 5,423,732 6,270,440
Deferred income taxes 300,541 300,541
Other assets 916,701 583,542
------------ ------------
Total other assets 6,972,300 7,365,182
------------ ------------
Total assets $ 23,249,692 $ 22,384,414
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 1,257,238 $ 913,944
Current maturities of long-term debt 1,469,063 1,938,273
Current maturities of obligations under
capital leases 55,822 102,811
Short-term borrowings 7,287,240 6,465,827
Accounts payable 772,236 629,710
Due to service companies 306,551 641,944
Accrued payroll and other expenses 2,764,190 3,131,923
------------ ------------
Total current liabilities 13,912,340 13,824,432
Deferred gain 194,856 133,303
Self-insurance reserves 478,771 428,423
Long-term debt due after one year 958,270 1,178,962
Obligations under capital leases due after one year 75,774 15,543
------------ ------------
15,620,011 15,580,663
------------ ------------
Redeemable, convertible Series A preferred stock 1,711,398 1,614,525
------------ ------------
Stockholders' equity:
Common stock, $.0001 par value 855 812
Additional paid-in capital 9,884,244 9,805,425
Retained earnings/(deficit) (3,963,816) (4,614,011)
Treasury stock at cost (3,000) (3,000)
------------ ------------
Total stockholders' equity 5,918,283 5,189,226
------------ ------------
Total liabilities and stockholders' equity $ 23,249,692 $ 22,384,414
------------ ------------
See accompanying notes to condensed financial statements.
3
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Retained
Preferred Common Paid-In Earnings Treasury
Stock Stock Capital (Deficit) Stock
---------- ------ ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1995 $1,495,065 $799 $10,121,721 $(5,125,661) $(3,000)
Deferred stock compensation 4,300
Stock registration costs (148,436)
Preferred stock dividends 101,172 (101,172)
Net loss - nine months ended
December 31, 1995 (46,917)
---------- ---- ----------- ----------- -------
Balance at December 31, 1995 1,596,237 799 9,876,413 (5,172,578) (3,000)
Stock registration costs 12,000
Common stock issued/(returned)
- Accrued fees 15 (15)
- Retention settlement (2) (64,685)
Preferred stock dividends 18,288 (18,288)
Net income - three months ended
March 31,1996 558,567
---------- ---- ----------- ----------- -------
Balance at March 31, 1996 1,614,525 812 9,805,425 (4,614,011) (3,000)
Exercise of common stock put (218,765)
Common stock issued 43 393,957
Common stock warrants issued 500
Preferred stock dividends 96,873 (96,873)
Net income - nine months ended
December 31, 1996 650,195
---------- ---- ----------- ----------- -------
Balance at December 31, 1996 $1,711,398 $855 $9,884,244 $(3,963,816) $(3,000)
========== ==== =========== =========== =======
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
Dec. 31, Dec. 31,
1 9 9 6 1 9 9 5
----------- -----------
Cash flow from operating activities:
Net income/(loss) $ 650,195 $ (46,917)
Adjustments to reconcile net income/(loss) to
net cash provided by/(used in)
operating activities:
Depreciation and amortization 1,596,677 1,182,008
Provision for doubtful accounts 401,345 218,852
Loss on equipment dispositions 48,499 31,789
Deferred gain -0- 15,734
Self-insurance reserves 128,154 114,048
Increase in receivables,
prepaid expenses and deposits (1,175,104) (3,924,941)
Increase/(decrease) in accounts payable
and other current liabilities (896,271) 215,969
----------- -----------
Net cash provided by/(used in)
operating activities 753,495 (2,193,458)
----------- -----------
Cash flows from investing activities:
Purchases of equipment (52,200) (97,178)
Proceeds from sale of equipment 70,320 9,997
Purchase of intangible assets (231,243) (225,567)
Proceeds from sale of intangible assets 210,000 69,825
Notes issued (221,499) (49,500)
Principal collections on notes receivable 189,299 148,380
----------- -----------
Net cash used in investing activities (35,323) (144,043)
----------- -----------
Cash flows from financing activities:
Net borrowings on line-of-credit 552,415 2,940,278
Increase in cash overdrafts 343,294 547,111
Principal payments on other borrowings (1,537,811) (940,952)
Principal payments on capital lease
obligations (76,570) (60,500)
Common stock warrants issued 500 -0-
Stock registration costs -0- (148,436)
----------- -----------
Net cash provided by/(used in)
financing activities (718,172) 2,337,501
----------- -----------
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 nine months ended December 31 for: 1 9 9 6 1 9 9 5
--------- ---------
Interest $ 798,104 $ 871,289
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the nine months ended December 30, 1996 and 1995, the Company purchased
transportation and office equipment with direct installment and lease financing
of $481,880 and $166,403, respectively.
The Company generally obtains short-term financing to meet its insurance needs.
For the nine months ended December 31, 1996 and 1995, $576,991 and $200,855,
respectively, have been borrowed for this purpose. These borrowings have been
excluded from the condensed statement of cash flows.
For the nine months ended December 31, 1996 and 1995, the Company accrued
dividends of $96,873 and $101,172, respectively, on its Series A convertible
preferred stock. These charges to paid-in capital and credits to preferred stock
have been excluded from 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 from 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 from 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 October, 1996, the Company purchased certain guard service accounts for a
total consideration of $169,590. The Company paid $75,590 and issued 47,000
shares of its common stock at a capitalized value of $94,000. The issuance of
common stock has been excluded from the purchase of intangible assets in the
condensed statement of cash flows.
In November, 1996, the Company purchased certain guard service accounts for a
total consideration of $144,966. The Company paid $36,241 and issued two
short-term notes for $108,725. The cost of the guard service accounts and one of
the related notes were subsequently reduced by $26,390 due to a retention
adjustment. The issuance of the notes and subsequent retention adjustment have
been excluded from the purchase of intangible assets in the condensed statement
of cash flows.
6
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental Schedule of Non-Cash Investing and Financing Activities (continued)
In November, 1996, the Company finalized an agreement reached with ISS
International Service System, Inc. ("ISS"), whereby it has adjusted the notes
payable to ISS from $1,000,000 to $500,000 in consideration for lost accounts
and settlement of certain other claims. The resultant decreases in intangibles
of $410,000 and notes payable of $500,000, offset by a net increase in accrued
expenses of $90,000, have been excluded from the condensed statement of cash
flows.
On December 30, 1996, the Company entered into an agreement for the sale of its
Miami operations for a total consideration of $318,878, including $40,000 for
related transportation and other equipment. The Company received $250,000 in
cash and a note for $68,878. The resultant gain of $76, 866 has been deferred
pending collection of the note and the reduction of a guarantee provided by the
Company in connection with this transaction. The deferred gain and the receipt
of the note have been excluded from the condensed statement of cash flows.
See accompanying notes to condensed financial statements.
7
<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, 1996.
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 December 31, 1996, and for the period
then ended. All such adjustments are of a normal recurring nature.
1.) Service Companies:
The following is a summary of the service companies' activities for the
three months and nine months ended December 31, 1996 and 1995,
respectively, the components of which have been excluded from the Company's
financial statements:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Service companies' guard
service revenue $4,287,746 $5,638,390 $12,243,192 $15,853,692
Cost of revenue 3,508,928 4,483,113 10,109,492 12,713,506
---------- ---------- ----------- -----------
Gross profit 778,818 1,155,277 2,133,700 2,756,252
Service companies' share
of gross profit 521,839 808,124 1,400,480 1,801,603
---------- ---------- ----------- -----------
256,979 347,153 733,220 954,649
---------- ---------- ----------- -----------
Other service revenue 102,763 97,018 315,874 171,794
---------- ---------- ----------- -----------
Total service contract revenue $ 359,742 $ 444,171 $ 1,049,094 $ 1,126,443
========== ========== =========== ===========
</TABLE>
8
<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 December 1, 1995, provides
for a discretionary line of credit of up to 82.5% of eligible accounts
receivable, as defined in the Agreement, but in no event in excess of $10
million. At December 31, 1996, the Company had used $6,516,619 of this
line, representing virtually 100% of its maximum borrowing capacity.
Interest is payable monthly, at 2% above prime (10.25% at December 31,
1996). The line is collateralized by customer accounts receivable and
substantially all other assets of the Company. The term of the Agreement is
two years, expiring in February, 1997.
On January 30, 1997, the Company entered into an agreement with CIT to
extend the financing arrangement to February, 1999, thereafter with
automatically renewable two year extensions until terminated by either
party. The agreement provides for borrowings of up to 85% of eligible
accounts receivable and monthly interest charges at 1.5% above prime. The
expiration date for the exercise of common stock options issued in
connection with the original agreement is extended to February 24, 2001.
All other terms remain generally unchanged.
3.) Income/(loss) per Share:
Income/(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 were excluded
from the computation for each period presented because their effect was
antidilutive. The computation for fully diluted income per share includes
assumed conversions of the Company's preferred stock.
4.) Self-Insurance:
The Company has an insurance policy to cover workers' compensation claims
in most states in which 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 policy
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.
9
<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 December 31, 1996, was approximately
$1,210,000.
An action was commenced against the Company and the City of New York on or
about August 20, 1992. The action originally sought $3 million in damages
together with $9 million in punitive damages arising from injuries
allegedly sustained by the plaintiff as a result of an assault by one of
the Company's guards, while said guard was on duty. This suit has been
turned over to the insurance carrier for defense. Insurance coverage is
limited to $6 million covering this claim. Punitive damages, if any, may
not be covered under the Company's insurance policy. On February 7, 1997,
the Company was informed that the suit was settled by the insurance carrier
for $175,000. The remaining liability of the Company under its risk
retention in connection with this claim of $7,588 has been accrued in the
condensed financial statements.
In August, 1992, the Company commenced action against a former service
company client for non-payment of obligations owed by the service company
to the Company. At approximately the same time, the service company
initiated suit for non-performance of the Company in connection with the
terms of the service agreement seeking compensatory damages. Management has
reviewed both suits with legal counsel and is of the opinion that the
likelihood of loss on the suit against the Company is remote. Accordingly,
no adjustment has been made to the accompanying financial statements. In
addition, management is of the opinion that all amounts due to the Company
from the former service company are for bona fide claims for services
provided by the Company and are collectable, subject to the financial
viability of the service company and the value of the related collateral.
Amounts due from this service company, which approximate $495,000 plus
interest and legal fees, have been fully reserved.
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.
Other causes of action against the Company based on federal and/or state
securities laws are also possible. Additional expenditures in the form of
damages and fees, if any, are not quantifiable. No such claims have been
received by the Company to date. If the Company were to 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 and a resultant negative impact on the
Company's operations and financial condition is diminishing with time.
10
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Contingent Liabilities: (continued)
In October, 1996, the Company reached an agreement with ISS to settle all
pending issues in connection with its October, 1993, acquisition of certain
security guard assets. Under the terms of the agreement, the purchase price
of the assets has been adjusted and the amount owed by the Company to ISS
has been reduced from $1,000,000 to $500, 000, $100,000 of which was paid
at the time of the agreement. The remaining $400,000 is due on or before
January 31, 1997. ISS has agreed to release the stock of William C.
Vassell, the Company's Chairman of the Board, which it held as collateral
in exchange for 238,000 newly issued shares of the Company's common stock.
The stock will be held in escrow and is subject to adjustment based on
market value until the remaining balance is paid in full. The balance was
paid in full on February 3, 1997, and management expects to retire the
escrowed shares upon their return to the Company.
11
<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 $46,703 for the quarter ended December 31, 1996 to
$12,904,267 from $12,857,564 for the quarter ended December 31, 1995. Of this
increase, approximately $865,000 represents revenue generated by acquisitions
closed in August, October and November, 1996. This is offset by $655,284
resulting from contracts that were not renewed during the year due to low
margins, $112,000 due to other contract cancellations net of new contracts
starts and $51,678 from revenue generated by the Company's Boston operation
during the quarter ended December 31, 1995 that was sold in October, 1995.
For the nine months ended December 31, 1996 revenue decreased by $4,362,527 to
$37,626,131 from $41,988,658 for the nine months ended December 31, 1995. Of
this decrease, $504,200 represents revenue generated by the Company's Boston
operation during the nine months ended December 31, 1995, approximately
$2,457,000 resulted from contracts that were not renewed during the year due to
low margins, approximately $1,200,000 is due to the loss of an aviation client
on October 1, 1995 and $1,280,000 is due to other contract cancellations net of
new contracts starts. This is offset by approximately $1,070,000 of revenue
generated by acquisitions closed in August, October and November, 1996.
Gross profit increased by $303,061 to $2,254,379 or 17.5% of revenue for the
quarter ended December 31, 1996, compared to $1,951,318 or 15.2% of revenue for
the quarter ended December 31, 1995. Gross profit increased as a result of lower
insurance costs of $430,000 and lower net costs in other expense categories of
$24,000, offset by higher union benefits of $150,900 due to a settlement with
the union during the quarter ended December 31, 1995, which reduced expense for
that quarter by $197,000.
Gross profit increased by $536,425 to $6,571,398 or 17.5% of revenue for the
nine months ended December 31, 1996, compared to $6,034,973 or 14.4% of revenue
for the nine months ended December 31, 1995. Gross profit decreased by $627,000
as a result of lower revenue, offset by $1,163,445 resulting from lower direct
costs. This decrease in direct costs is primarily the result of lower payroll
taxes and insurance expense ($1,143,800) and lower union benefit costs
($193,500), offset by higher uniform expense ($90,800) and subcontract costs
($73,900).
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 decreased by $84,429 to $359,742 in the quarter ended
December 31, 1996 from $444,171 in the quarter ended December 31, 1995. $90,174
of this decrease is attributable to lower fees earned from existing contracts
due to contract terminations offset by higher fees earned from the Company's
non-employer of record program of $5,745.
Service contract revenue decreased by $77,349 to $1,049,094 for the nine months
ended December 31, 1996 from $1,126,443 for the same period last year. $221,429
of this decrease is attributable to lower fees earned from existing contracts
due to contract terminations offset by higher fees earned from the Company's
non-employer of record program of $144,080.
General and administrative expenses decreased by $136,347 to $1,767,046 for the
quarter ended December 31, 1996 from $1,903,393 for the quarter ended December
31, 1995. The major areas of decrease are salaries and related payroll taxes
($73,700), insurance expense ($40,900) and professional fees ($51,100) offset by
higher bank fees ($7,800), travel and entertainment ($13,900) and other
categories ($7,700).
12
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
General and administrative expenses decreased by $821,151 to $5,282,215 for the
nine months ended December 31, 1996 from $6,103,366 for the nine months ended
December 31, 1995. The major areas of decrease are salaries and related payroll
taxes ($524,300), rent and utilities ($91,300), insurance expense ($110,400),
professional fees ($84,000) and bank fees ($29,800), offset by increases in
other categories ($18,600).
Amortization of intangibles increased by $158,770 to $450,146 for the quarter
ended December 31, 1996 compared to $291,376 for the prior year's quarter.
Amortization expense increased by $435,994 to $1,333,430 for the nine months
ended December 31, 1996 compared to $897,436 for the same period in the last
fiscal year. Of the total increases for the quarter and the nine months,
$131,200 and $393,600, respectively, are the result of management's
re-evaluation, during the quarter ended June 30, 1996, of the useful lives of
the customer lists acquired from ISS in October, 1993. Based on the contract
retention since the acquisition, the Company has reduced the useful life from 15
years to 5 years.
The provision for bad debts increased by $116,762 to $176,309 for the quarter
ended December 31, 1996 from $59,547 for the quarter ended December 31, 1995.
This increase results primarily from additional reserves provided in connection
with loans and advances to two of the Company's service agreement clients.
The provision for bad debts increased by $182,493 to $401,345 for the nine
months ended December 31, 1996 from $218,852 for the nine months ended December
31, 1995. In addition to additional reserves provided in connection with loans
and advances to two of the Company's service agreement clients, these increases
are the result of write-offs in connection the settlement of a long-outstanding
accounts receivable from a major client ($55,000), as well as the establishment
of a reserve for disputed amounts due from a governmental agency with which the
Company has a substantial contract ($34,000).
Bad debt recoveries decreased by $109,989 to $90,011 for both the quarter and
nine months ended December 31, 1996 from $200,000 for the same periods in the
prior year. This caption represents the amounts collected on accounts receivable
in excess of the value carried, net of established provisions for doubtful
accounts. The amount reported for the quarter and nine months ended December 31,
1995 represents the amount collected in excess of book value of the WOODSTOCK
'94 receivable. The amount reported for the period just ended represents
collection of an older receivable that had been previously reserved 100%.
Insurance rebates received by the Company for the periods ended December 31,
1996 and 1995 of $598,139 and $603,033 represent dividends received from the
Company's former worker's compensation insurance carrier for a multi-state
program that was in effect for the three years ended September 30, 1995. The net
premium was based on ultimate losses pursuant to a predetermined calculation
with rebates of excess premiums refundable to the Company in the form of
dividends at the discretion of the insurance carrier. The policies in effect for
periods after September 30, 1995 are also loss sensitive but provide for a
contractual obligation on the part of the insurance carrier to refund premiums
paid, in excess of actually determined premiums. As such, the Company has
calculated its insurance expense since that time on the basis of estimated
losses plus certain minimum premium amounts. Therefore, no dividends will be
forthcoming in the future with respect to those policy periods.
Interest expense decreased by $25,433 to $284,373 for the quarter ended December
31, 1996 from $309,806 for the comparable quarter of the prior year. This
decrease is the result of lower debt levels. Interest expense decreased by
$83,661 to $789,885 for the nine months ended December 31, 1996 from $873,546
for the nine months ended December 31, 1996. This decrease is also due to lower
debt levels, as well as the reversal of previously accrued interest expense of
$64,000 in connection with the Company's settlement agreement with ISS in
October, 1996, under which all pending issues between the two companies,
including interest on the note payable to ISS, were settled (See Note 5 to
"Notes to Condensed Financial Statements").
13
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Interest income increased by $22,257 to $68,055 for the quarter ended December
31, 1996 and by $83,304 to $196,927 for the nine months ended December 31, 1996
resulting from increased finance charges earned as part of the Company's
non-employer of record service agreement program.
Loss on equipment dispositions primarily represents older vehicles sold or
retired, as well as vehicles sold in connection with the disposition of the
Company's Miami operations.
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 provides for a term loan in the amount of $500,000 to be
repaid in equal monthly installments over five years. The Company will use 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.
As of December 31, 1996, the Company had borrowed $6,516,619 or approximately
55.4% of its billed 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 arrangement. 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).
The Company entered into a subordinated loan arrangement on February 24, 1995,
with Deltec Development Corporation (Deltec) 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. (United). 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 December 31, 1996 was $843,750.
In October, 1996, the Company reached an agreement with ISS to settle all
pending issues in connection with its October, 1993 acquisition of certain
security guard assets. Under the terms of the agreement, the purchase price of
the assets has been adjusted and the amount owed by the Company to ISS has been
reduced from $1,000,000 to $500,000, $100,000 of which was paid at the time of
the agreement. The remaining $400,000 was due on or before January 31, 1997. ISS
has agreed to release the stock of William C. Vassell, the Company's Chairman of
the Board, which it held as collateral in exchange for 238,000 newly issued
shares of the Company's stock. The stock will be held in escrow and is subject
to adjustment based on market value until the remaining balance is paid in full.
The balance was paid in full on February 3, 1997 at a meeting of the parties
which was delayed from January 31, 1997 at the request of ISS.
14
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Working capital at December 31, 1996 increased by $1,046,166 to $1,265,134 from
$218,968 at March 31, 1996. The major factors contributing to this increase were
the settlement with ISS ($500,000) and the workers' compensation insurance
rebate ($598,139). Working capital should further improve in the fourth quarter
due to the $500,000 term loan provided for by the amended loan agreement with
CIT which will decrease current liabilities $400,000.
As of December 31, 1996 the Company had a book overdraft of $1,257,238. The
term loan of $500,000 and other increases in borrowing availability provided for
under the amended agreement with CIT, receipt of the insurance rebate of
$598,139, collection of older accounts receivable and cash generated from
operations for the last fiscal quarter are expected to exceed cash requirements
for regularly scheduled debt service and allow for significant reductions in the
cash overdraft.
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.
In addition to the retirement of 238,000 shares of its common stock in
connection with the settlement with ISS, another 152,774 shares are also to be
retired by the end of the fourth quarter as a result of the satisfaction by the
Company of a contract claim by a former employee. The cumulative effect of the
retirement of these shares will be to reduce the number of outstanding shares by
approximately 5%.
15
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
Reference is made to footnote 5 to the condensed financial statements
presented herein.
Item 4. Submission of Matters to a Vote of Security Holders
The Company conducted its annual meeting of shareholders on November 18,
1996.
The following four directors were re-elected to hold office until the
annual meeting of shareholders in 1998: H. Richard Dickinson, Peter T.
Kikis, Steven B. Sands, and Lloyd H. Saunders.
A motion to ratify the selection of D'Arcangelo & Co., LLP, to serve as
auditors for the fiscal year ending March 31, 1997 was passed. The number
of affirmative votes and the number of negative votes cast with respect to
this matter is 3,894,440 and 16,614, respectively. 13,573 votes abstained.
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits
(a) Press release dated February 13, 1997.
(2) Reports on Form 8-K
During the quarter, the Company filed two forms 8-K, dated November 10, 1996,
and November 18, 1996, respectively, both reporting certain press releases.
16
<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: /s/ William C. Vassell
--------------------------------------------
William C. Vassell, Chairman of the Board
By: /s/ H. Richard Dickinson
--------------------------------------------
H. Richard Dickinson
(Principal Financial Officer)
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<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
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<CASH> (1,257)
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<RECEIVABLES> 13,729
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<PP&E> 2,869
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1,711
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FOR IMMEDIATE RELEASE
COMMAND SECURITY CORPORATION ANNOUNCES
* FAVORABLE RESOLUTION OF CONTINGENT LIABILITIES
CONTRIBUTES TO STABILITY
Lagrangeville, New York *** February 13, 1997 *** Command Security Corporation
(NASDAQ:CMMD) today filed results for the third quarter ended December 31, 1996
on Form 1OQ with the Securities and Exchange Commission. The Company reports
that a claim arising from injuries allegedly sustained as the result of an
assault by one of the Company's guards which created a $12 million contingent
liability has been favorably resolved by its insurance carrier for $175,000 with
no further liability. The remaining unaccrued portion of its risk retention,
$7,500, has been accrued in the financial statements for the quarter.
The Company also reports that, in addition to the retirement of 238,000 shares
of its common stock in connection with the recently announced settlement of a
claim by ISS International Service System, Inc. ("ISS"), another 152,774 shares
are to be retired by the end of the fourth quarter as the result of satisfaction
by the Company of a breach of contract claim by a former employee. The
cumulative effect of the retirement of these shares will be to reduce the number
of outstanding shares by 5%.
William C. Vassell, Chairman of the Board of Command, said, "The resolution of
these issues is important to the Company because it creates a more stable base
for the development for the Company's future operations. Coupling the resolution
of these matters with earnings per share for the three months ended December
31, 1996 of $.09 per share is great news for the Company."
As reported in the Company's 1OQ for the quarter ended December 31, 1996,
revenues for the quarter increased to $12,904,267 while gross profit increased
by approximately $303,000 to $2,254,370. Net income for the three months ended
December 31, 1996 increased to $637,400 from the $632,511 reported for the same
period last year. Both quarters results include insurance rebates of
approximately $600,000 representing dividends received from the Company's former
workers' compensation insurance carrier. Future insurance rebates are not
anticipated to have as material an impact.
Command Security Corporation provides security services through Company-owned
offices in New York, New Jersey, California, Illinois and Connecticut and
provides back-office service agreements to independent security companies
nationwide.
Contact:
William C. Vassell, Chairman of the Board 914-454-3703
H. Richard Dickinson, Chief Financial Officer 212-689-6565
Donald Radcliffe, Radcliffe & Associates, Inc. 212-605-0174
