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, 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
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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 February 8, 1998).
<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, 1997 and 1996 (unaudited) 2
Condensed Balance Sheets -
December 31, 1997 and March 31, 1997
(unaudited) 3
Condensed Statements of Changes in
Stockholders' Equity nine months
ended December 31, 1997 and 1996 (unaudited) 4
Condensed Statements of Cash Flows -
six months ended December 31, 1997 and 1996
(unaudited) 5 - 7
Notes to Condensed Financial Statements 8 - 10
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 11 - 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 Nine Months Ended
------------------------- -------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $13,557,619 $12,904,267 $38,326,280 $37,626,131
Cost of revenue 11,735,475 10,649,888 32,881,725 31,054,733
----------- ----------- ----------- -----------
Gross profit 1,822,144 2,254,379 5,444,555 6,571,398
Service contract revenue (note 1) 331,364 359,742 1,141,604 1,049,094
----------- ----------- ----------- -----------
2,153,508 2,614,121 6,586,159 7,620,492
----------- ----------- ----------- -----------
Operating expenses
General and administrative expenses (1,998,403) (1,767,046) (5,720,481) (5,282,215)
Labor claim settlement -0- -0- (180,000) -0-
Amortization of intangibles (410,304) (450,146) (1,241,147) (1,333,430)
Provision for doubtful accounts (94,652) (176,309) (1,248,059) (401,345)
Bad debt recoveries 64,775 90,011 64,775 90,011
Insurance rebates -0- 598,139 -0- 598,139
----------- ----------- ----------- -----------
(2,438,584) (1,705,351) (8,324,912) (6,328,840)
----------- ----------- ----------- -----------
Operating profit/(loss) (285,076) 908,770 (1,738,753) 1,291,652
Interest income 32,127 68,055 204,139 196,927
Management fees -0- -0- 35,000 -0-
Interest expense (268,176) (284,373) (808,287) (789,885)
Equipment dispositions (11,320) (22,761) (21,091) (48,499)
----------- ----------- ----------- -----------
Income/(loss) before income taxes (532,445) 669,691 (2,328,992) 650,195
Provision for income taxes -0- -0- -0- -0-
----------- ----------- ----------- -----------
Net income/(loss) (532,445) 669,691 (2,328,992) 650,195
Preferred stock dividends (34,871) (32,291) (104,613) (96,873)
----------- ----------- ----------- -----------
Net income/(loss) applicable to
common stockholders $ (567,316) $ 637,400 $(2,433,605) $ 553,322
=========== =========== =========== ===========
Net income/(loss) per common share $ (.09) $ .09 $ (.36) $ .08
=========== =========== =========== ===========
Net income per common share
assuming dilution n/a $ .08 n/a $ .08
=========== ===========
Weighted average number of
common shares outstanding 6,639,410 7,152,739 6,699,718 6,911,097
=========== =========== =========== ===========
common shares and dilutive
potential common shares n/a 8,131,239 n/a 7,889,597
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
Dec. 31, March 31,
Current assets: 1 9 9 7 1 9 9 7
------------ ------------
Accounts receivable - net $ 12,033,964 $ 12,771,692
Notes receivable, current maturities - net 23,674 218,267
Prepaid expenses 697,576 1,322,918
Other receivables - net 47,507 699,248
------------ ------------
Total current assets 12,802,721 15,012,125
Property and equipment - net 1,263,877 1,105,473
Other assets:
Notes and accounts receivable
due after one year - net -0- 387,327
Intangible assets - net 3,943,291 5,033,566
Deferred income taxes 259,835 259,835
Other assets 1,757,890 1,390,250
------------ ------------
Total other assets 5,961,016 7,070,978
------------ ------------
Total assets $ 20,027,614 $ 23,188,576
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 748,294 $ 753,644
Current maturities of long-term debt 960,219 977,372
Current maturities of obligations under
capital leases 75,377 77,047
Short-term borrowings 7,288,168 7,763,578
Accounts payable 837,361 654,339
Due to service companies 363,179 685,150
Accrued payroll and other expenses 3,014,672 2,687,783
------------ ------------
Total current liabilities 13,287,270 13,598,913
Deferred revenue 10,830 391,685
Self-insurance reserves 767,377 438,820
Long-term debt due after one year 971,832 1,195,234
Obligations under capital leases due after
one year 84,954 89,189
------------ ------------
15,122,263 15,713,841
------------ ------------
Redeemable, convertible Series A preferred stock -0- 1,743,555
------------ ------------
Stockholders' equity:
Preferred stock, convertible Series A 1,848,168 -0-
Common stock, $.0001 par value 801 842
Additional paid-in capital 9,552,355 9,897,319
Retained earnings/(deficit) (6,492,973) (4,163,981)
Treasury stock at cost (3,000) (3,000)
------------ ------------
Total stockholders' equity 4,905,351 5,731,180
------------ ------------
Total liabilities and stockholders' equity $ 20,027,614 $ 23,188,576
============ ============
See accompanying notes to condensed financial statements.
3
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CHANGES IN 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, 1996 $ -0- $ 812 $ 9,805,425 $(4,614,011) $(3,000)
Exercise of common stock put (218,765)
Issuance of escrowed common stock
for note collateral 43 393,957
Common stock warrants issued 500
Preferred stock dividends (96,873)
Net income - nine months ended
December 31, 1996 650,195
--------- ----- ----------- ----------- -------
Balance at December 31, 1996 855 9,884,244 (3,963,816) (3,000)
Issuance of common stock 2 45,217
Return of escrowed common stock
for accrued fees (15) 15
Preferred stock dividends (32,157)
Net loss - three months ended
March 31, 1997 (200,165)
--------- ----- ----------- ----------- -------
Balance at March 31, 1997 842 9,897,319 (4,163,981) (3,000)
Issuance of common stock 5 54,008
Return of escrowed
common stock
Note collateral (35) 35
Retention adjustments (11) (294,394)
Transfer of preferred stock 1,813,297
Preferred stock dividends 34,871 (104,613)
Net loss - nine months ended
December 31, 1997 (2,328,992)
---------- ----- ----------- ----------- -------
Balance at December 31, 1997 $1,848,168 $ 801 $ 9,552,355 $(6,492,973) $(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 7 1 9 9 6
----------- -----------
Cash flow from operating activities:
Net income/(loss) $(2,328,992) $ 650,195
Adjustments to reconcile net income/(loss)
to net cash provided by operating activities:
Depreciation and amortization 1,535,712 1,596,677
Provision for doubtful accounts 1,183,284 401,345
Loss on equipment dispositions 21,091 48,499
Self-insurance reserves 717,906 128,154
Decrease/(increase) in receivables,
prepaid expenses and deposits 872,574 (1,175,104)
Decrease in accounts payable
and other current liabilities (228,320) (896,271)
----------- -----------
Net cash provided by operating activities 1,773,255 753,495
----------- -----------
Cash flows from investing activities:
Purchases of equipment (143,379) (52,200)
Proceeds from sale of equipment 25,421 70,320
Purchase of intangible assets (116,521) (231,243)
Proceeds from sale of intangible assets -0- 210,000
Notes issued -0- (221,499)
Principal collections on notes receivable 83,420 189,299
----------- -----------
Net cash used in investing activities (151,059) (35,323)
----------- -----------
Cash flows from financing activities:
Net borrowings/(repayments) on line-of-credit (149,202) 552,415
Increase/(decrease) in cash overdrafts (5,350) 343,294
Principal payments on other borrowings (1,412,800) (1,537,811)
Principal payments on capital lease obligations (54,844) (76,570)
Common stock warrants issued -0- 500
----------- -----------
Net cash used in financing activities (1,622,196) (718,172)
----------- -----------
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 7 1 9 9 6
-------- ---------
Interest $834,598 $ 798,104
Income taxes -0- -0-
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the nine months ended December 31, 1997 and 1996, the Company purchased
transportation and office equipment with direct installment and lease financing
of $356,102 and $481,880, respectively.
The Company generally obtains short-term financing to meet its insurance needs.
For the nine months ended December 31, 1997 and 1996, $133,055 and $576,991,
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, 1997 and 1996, the Company accrued
dividends of $104,613 and $96,873, 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.
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.
In November, 1996, the Company finalized an agreement reached with ISS
International Service System, Inc., 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.
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 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.
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 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 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, 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 December 31, 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 September, 1997, 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
nine months ended December 31, 1997 and 1996, respectively, the components
of which have been excluded from the Company's financial statements:
Three Months Ended Nine Months Ended
---------------------- ------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
---------- ---------- ----------- -----------
Service companies' guard
service revenue $4,322,202 $4,287,746 $13,863,630 $12,243,192
Cost of revenue 3,326,172 3,508,928 10,456,536 10,109,492
---------- ---------- ----------- -----------
Gross profit 996,030 778,818 3,407,094 2,133,700
Service companies' share
of gross profit 738,051 521,839 2,577,095 1,400,480
---------- ---------- ----------- -----------
257,979 256,979 829,999 733,220
Other service revenue 73,385 102,763 311,605 315,874
---------- ---------- ----------- -----------
Total service contract revenue $ 331,364 $ 359,742 $ 1,141,604 $ 1,049,094
========== ========== =========== ===========
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 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 December 31, 1997, the Company had used $7,001,634 of this
line, representing virtually 100% of its maximum borrowing capacity.
Interest is payable monthly, at 1.5% above prime (10% at December 31,
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.) Income/(loss) per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128), "Earnings Per Share," which is required to
be adopted for periods ending after December 15, 1997. Under the new
requirements for calculating basic earnings per share, the dilutive effect
of common stock equivalents, if any, is excluded. The implementation of
SFAS 128 had no impact on the calculation of the Company's earnings per
share. Dilutive potential common shares in the periods ended December 31,
1996, assume conversion of preferred stock for 978,500 shares of common
stock. For the periods ended December 31, 1997, such assumed conversions
are anti-dilutive.
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 $10,000,000
($2,000,000 for products) in the aggregate. In addition, the Company has
obtained an excess liability policy that covers claims for an additional
$30,000,000 in the aggregate ($25,000,000 prior to October 1, 1997). 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.
9
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Preferred Stock
The Board of Directors has been authorized to issue preferred stock in
series and to fix the number, designation, relative rights, preferences
and limitations of each series of such preferred stock. Of the 1,000,000
shares authorized for issuance, 10,567 have been designated as Series A
Convertible Preferred Stock ("Series A"). Any holder of Series A shares
may at any time convert their shares into common stock of the Company at a
conversion ratio of 100 shares of common stock for each share of Series A
stock. The Company was obligated to redeem any unconverted Series A shares
at such time as the Deltec debt is paid in full. However, no redemption
was required until all outstanding warrants issued in the Company's
October 1993 private placement were exercised. All such warrants expired
in October, 1997, and the preferred stock has been transferred and
included with stockholders' equity on the condensed balance sheet as of
December 31, 1997.
6.) Contingent Liabilities
The Company has guaranteed certain installment loans extended to various
service companies and customer account purchasers by Capital Resources
Company. The total outstanding balance on such loans as of December 31,
1997, was approximately $664,000.
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.
A legal action has been filed against the Company and is described in
greater detail below. It includes claims based on the restatements. It is
possible that other 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 further claims against the
Company, alleging, as the basis, among other possible claims the
above-mentioned restatements.
On or about December 4, 1997, the Company was served with a complaint
naming the Company, several Board of Director members and the Company's
outside corporate and securities counsel, as a defendant in a lawsuit
characterized as a derivative action. The Company and the individual
defendants believe the complaint is entirely without merit. They intend to
vigorously defend against each and every claim and are giving
consideration to counterclaims. The plaintiffs allege that Mr. Vassell,
Chairman of the Board, engaged in a scheme to keep the Company within his
control culminating in an alleged breach of fiduciary duty, concealed
information from the plaintiff-directors regarding the Company's earnings,
lacked power to enter into an employment agreement on behalf of the
Company, and entered into service contracts with financially unstable
companies without performing due diligence. The complaint further alleges
that the Company has failed to appoint a replacement to the office of
president and that the directors have entered into a shareholder agreement
which is violative of public policy. Plaintiffs seek the award of money
damages in an amount which is "not less than" $11 million from the
individual defendants, a declaratory judgment that the shareholder
agreement is void, an order for an accounting, certain other injunctive
relief and attorneys' fees and disbursements. The Company's Certificate of
Incorporation and the Business Corporation Law of New York provide for
indemnification of officers and directors with respect to damages and
legal fees incurred in connection with lawsuits against them arising by
reason of serving the Company. Due to the fact that part of the board has
chosen to cooperate with and participate as plaintiffs in this lawsuit,
the Company may not have coverage under its officers and directors
liability insurance policy. The defendant-directors intend to seek
indemnification, as well as the advancement of legal fees incurred in
connection with their defense, from the Company. It is too early in the
litigation to reasonably estimate the potential impact on the Company's
results of operations and financial condition from this lawsuit. The
Company does not anticipate any change in the day-to-day operation of the
Company or in the operation of its Board of Directors.
10
<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 $653,000 for the quarter ended December 31,
1997, to $13,557,619 from $12,904,267 for the quarter ended December 31, 1996.
The major components of this increase are as follows: approximately $825,000
increase due to acquisitions, approximately $256,000 decrease due to the sale of
Miami business in December, 1996, and approximately $84,000 increase due to
new contract starts net of contract cancellations.
For the nine months ended December 31, 1997, revenue increased by approximately
$700,000 to $38,326,280 from $37,626,131 for the nine months ended December 31,
1996. The major components of this increase are as follows: approximately
$1,928,000 increase due to acquisitions; approximately $1,131,000 decrease due
to the sale of Miami business in December, 1996, and approximately $97,000
decrease due to contract cancellations net of new contract starts.
Gross profit decreased by approximately $432,000 to $1,822,144 or 13.4% of
revenue for the quarter ended December 31, 1997 compared to $2,254,379 or 17.5%
of revenue for the quarter ended December 31, 1996. This decrease is a result of
higher self insurance reserves for general liability insurance ($310,000) and
from higher payroll and subcontract costs of approximately $126,000 due to new
contracts replacing old contracts at lower prices and margins as well as labor
cost increases due to the current shortage of qualified labor and increases in
overtime.
Gross profit decreased by approximately $1,127,000 to $5,444,555 or 14.2% of
revenue for the nine months ended December 31, 1997 compared to $6,571,398 or
17.5% of revenue for the nine months ended December 31, 1996. This decrease
results from higher payroll and subcontract costs of approximately $461,000 due
to new contracts replacing old contracts at lower prices and margins and the
current shortage of qualified labor and increases in overtime. Insurance costs
increased by approximately $645,000 primarily due to higher general liability
self-insured reserves. These charges for self insurance reserves are based on
actuarial computations and the timing of reported claims and it is, therefore,
not known at this time if these increases will continue in future periods.
Management expects the trend of increasing pressures on margins to continue
primarily due to the intense competition which is characteristic of the
industry. Management carefully analyzes 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 pursuing related types of businesses 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 decreased by $28,378 to $331,364 in the quarter ended
December 31, 1997 from $359,742 in the quarter ended December 31, 1996 and
increased by $92,510 to $1,141,604 in the nine months ended December 31, 1997
from $1,049,094 in the nine months ended December 31, 1996. The decrease in the
quarter is primarily 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). The
increase for the nine months comparison is due to higher volume of sales
generated in prior quarters by remaining service agreement clients.
11
<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. The Company currently has five service contract
customers. Two of them have deficit balances, which have been fully reserved
for. The Company also has potential exposure of approximately $277,000 for loan
guarantees extended on behalf of these companies and approximately $480,000 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 $231,357 to $1,998,403 for the
quarter ended December 31, 1997, from $1,767,046 for the quarter ended December
31, 1996. The major areas of increase are legal fees ($112,000), health
insurance ($68,000) and recruitment advertising ($33,000). The increase in
health insurance is not likely to recur; recruitment advertising costs, however,
will probably continue at increased levels due to the increasing shortage of
qualified labor. During the quarter ended December 31, 1997, the Company
incurred $85,000 of legal fees in connection with the ongoing GFM Bayview
litigation. Legal fees will likely continue at increased levels due to this
ongoing litigation as well as the derivative action lawsuit filed against the
Company and some of its directors (please refer to note 6 to these condensed
financial statements and item 1 of Part II of this quarterly report on Form 10-Q
for a description of the circumstances surrounding these legal proceedings).
For the nine months ended December 31, 1997, general and administrative expenses
increased by $438,266 to $5,720,481 compared to $5,282,245 for the nine months
ended December 31, 1996. The major areas of increase are telephone ($127,000),
health insurance ($68,000), legal fees ($78,000) and travel and entertainment
costs ($93,000). Increases in telephone and travel costs are primarily
associated with the start-up of a large contract.
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 decreased by $39,842 to $410,304 for the quarter
ended December 31, 1997 compared to $450,146 for the quarter ended December 31,
1996. Amortization decreased by $92,283 to $1,241,147 for the nine months ended
December 31, 1997 compared to $1,333,430 for the nine months ended December 31,
1996. These decreases are primarily due to the full amortization of capitalized
borrowing costs incurred in 1995.
The provision for doubtful accounts decreased by $81,657 to $94,652 for the
quarter ended December 31, 1997 from $176,309 for the quarter ended December 31,
1996. This decrease was primarily due to increased collection efforts.
For the nine months ended December 31, 1997, the provision for doubtful accounts
increased by $846,714 to $1,248,059 compared to $401,345 for the nine months
ended December 31, 1996. This increase was primarily caused by the Chapter 7
bankruptcy filing of GFM Bayview, a service agreement client, in August, 1997.
Net interest expense increased by $19,731 to $236,049 for the quarter ended
December 31, 1997 compared to $216,318 for the quarter ended December 31, 1996.
For the nine months ended September 31, 1997, net interest expense increased by
$10,915 to $604,148 compared to $593,233 for the nine months ended December 31,
1996. These increases resulted primarily from the reduction in interest income
due to the collection of certain advances from one of the Company's employer of
record service agreement clients in a prior quarter.
12
<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 services 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 internal sales. The Company's Board of Directors has
not agreed on a policy with respect to acquisitions, primarily due to differing
views expressed by members of the Board with respect to costs of financing, the
availability of well- priced targets and the Company's capacity for integrating
new acquisitions on a profitable basis. Management regularly evaluates the
feasibility of selling existing branch offices, with emphasis on those five 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 within 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 December 31, 1997, the Company had borrowed $7,001,634 or approximately 64.8%
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).
13
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Liquidity and Capital Resources (continued)
Due primarily to the bankruptcy filing by GFM Bayview referred to above and
increased expenditures due to the start-up of a large contract, the Company has
experienced increased cash overdrafts and a working capital deficit. This has
impacted accounts payable and management is carefully monitoring its
relationships with vendors. The Company has been able to reduce its cash
overdraft by $415,000 since September 30, 1997, and management expects to
further decrease the overdraft with future cash flows from operations as well as
a significant cash receipt expected in May, 1998, in connection with its workers
compensation insurance policy. This receipt, however, will not have any impact
on the Company's profit or loss.
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 December 31, 1997 was $468,750.
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 several 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,
continuity 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.
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.
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 Forms 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 6 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 and the Company
increased reserves for uncollectible accounts and notes receivable
by $764,000, accordingly. Following the bankruptcy filing, the
Company received relief from the automatic stay to collect the
Company's accounts receivable and as of January 31, 1998, had
collected approximately $721,000 of GFM related receivables. On or
about October 24, 1997, the Company filed suit 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
evaluate its options with respect to pursuing claims in this matter.
Item 4. Submission of Matters to a Vote of Security Holders
The Company conducted its annual meeting of shareholders on November 17,
1997.
The following four directors were re-elected to hold office until the
annual meeting of shareholders in 1999: William C. Vassell, Gordon
Robinett, Peter J. Nekos, and Gregory J. Miller.
A motion to ratify the selection of D'Arcangelo & Co., LLP, to serve as
auditors for the fiscal year ending March 31, 1998 was passed. The number
of affirmative votes and the number of negative votes cast with respect to
this matter is 4,304,486 and 147,645, respectively.
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, one dated
November 19, 1997, reporting a press release and one dated December
18, 1997, reporting on the serving of a complaint by a shareholder
and certain directors (see footnote 6 to the condensed financial
statements presented herein).
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: February 13, 1998 By: /s/ William C. Vassell
----------------------------------------------
William C. Vassell, Chairman of the Board
By: /s/ William C. Vassell
----------------------------------------------
William C. Vassell, Chairman of the Board
Acting Principal Financial Officer
16
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