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, 1998
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 incorporation (I.R.S. Employer
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: 6,658,143 (as of November 10, 1998).
<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, 1998 and 1997 (unaudited) 2
Condensed Balance Sheets -
September 30, 1998 and March 31, 1998
(unaudited) 3
Condensed Statements of Changes in Stockholders' Equity -
six months ended September 30, 1998 and 1997
(unaudited) 4
Condensed Statements of Cash Flows -
six months ended September 30, 1998 and 1997
(unaudited) 5 - 6
Notes to Condensed Financial Statements 7 - 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
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $15,579,240 $12,980,183 $29,930,579 $24,768,661
Cost of revenue 12,931,347 10,988,008 24,894,000 21,146,250
----------- ----------- ----------- -----------
Gross profit 2,647,893 1,992,175 5,036,579 3,622,411
Service contract revenue (note 1) 245,346 382,447 541,089 810,240
----------- ----------- ----------- -----------
2,893,239 2,374,622 5,577,668 4,432,651
----------- ----------- ----------- -----------
Operating expenses
General and administrative expenses 2,188,025 1,904,913 4,142,739 3,722,078
Labor claim settlements, net (16,400) 180,000 (16,400) 180,000
Amortization of intangibles 330,540 417,834 653,996 830,843
Provision for doubtful accounts, net 28,191 994,288 123,296 1,153,407
----------- ----------- ----------- -----------
2,530,356 3,497,035 4,903,631 5,886,328
----------- ----------- ----------- -----------
Operating profit/(loss) 362,883 (1,122,413) 674,037 (1,453,677)
Interest income 34,250 67,192 61,301 172,012
Management fees -0- -0- -0- 35,000
Interest expense (267,997) (266,691) (519,797) (540,111)
Equipment dispositions (733) 1,601 (1,933) (9,771)
----------- ----------- ----------- -----------
Income/(loss) before income taxes 128,403 (1,320,311) 213,608 (1,796,547)
Provision for income taxes -0- -0- -0- -0-
----------- ----------- ----------- -----------
Net income/(loss) 128,403 (1,320,311) 213,608 (1,796,547)
Preferred stock dividends (37,661) (34,871) (75,322) (69,742)
----------- ----------- ----------- -----------
Net income/(loss) applicable to
common stockholders $ 90,742 $(1,355,182) $ 138,286 $(1,866,289)
=========== =========== =========== ===========
Net income/(loss) per common share $ .01 $ (.20) $ .02 $ (.28)
=========== =========== =========== ===========
Weighted average number
of common and common
equivalent shares outstanding 6,658,143 6,649,618 6,658,143 6,730,203
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
</TABLE>
2
<PAGE>
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
<CAPTION>
Sept. 30, March 31,
1 9 9 8 1 9 9 8
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net $13,215,393 $11,506,266
Notes receivable, net 7,991 12,272
Prepaid expenses 668,921 493,870
Other receivables, net 47,236 92,376
----------- -----------
Total current assets 13,939,541 12,104,784
Property and equipment, net 1,147,055 1,176,246
Other assets:
Intangible assets, net 2,272,866 2,714,550
Restricted cash 1,053,839 848,965
Other assets 212,419 852,714
----------- -----------
Total other assets 3,539,124 4,416,229
----------- -----------
Total assets $18,625,720 $17,697,259
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 469,639 $ 449,895
Current maturities of long-term debt 973,243 1,224,423
Current maturities of obligations under capital leases 82,304 71,115
Short-term borrowings 7,766,283 6,698,907
Accounts payable 729,667 817,126
Due to service companies 895,285 732,555
Accrued payroll and other expenses 3,129,532 3,233,632
----------- -----------
Total current liabilities 14,045,953 13,227,653
Self-insurance reserves 855,891 803,809
Long-term debt due after one year 302,668 458,995
Obligations under capital leases due after one year 73,126 72,328
----------- -----------
15,277,638 14,562,785
----------- -----------
Stockholders' equity:
Preferred stock, Series A, $.0001 par value 1,958,361 1,883,039
Common stock, $.0001 par value 666 801
Additional paid-in capital 9,353,318 9,431,505
Retained earnings/(deficit) (7,964,263) (8,177,871)
Treasury stock at cost -0- (3,000)
----------- -----------
Total stockholders' equity 3,348,082 3,134,474
----------- -----------
Total liabilities and stockholders' equity $18,625,720 $17,697,259
=========== ===========
See accompanying notes to condensed financial statements.
</TABLE>
3
<PAGE>
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<CAPTION>
Retained
Preferred Common Paid-In Earnings Treasury
Stock Stock Capital (Deficit) Stock
---------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997 $ -0- $ 842 $9,897,319 $(4,163,981) $ (3,000)
Return of escrowed
common stock
Note collateral (35) 35
Retention adjustment (11) (294,394)
Preferred stock dividends (69,742)
Net loss - six months ended
September 30, 1997 (1,796,547)
---------- -------- ---------- ----------- ---------
Balance at September 30, 1997 -0- 796 9,533,218 (5,960,528) (3,000)
Common stock issued 5 54,008
Cash paid in lieu of
compensatory stock warrants (85,979)
Transfer of
Preferred stock 1,813,297
Preferred stock dividends 69,742 (69,742)
Net loss - six months ended
March 31, 1998 (2,217,343)
---------- -------- ---------- ----------- ---------
Balance at March 31, 1998 1,883,039 801 9,431,505 (8,177,871) (3,000)
Preferred stock dividends 75,322 (75,322)
Retirement of treasury stock (135) (2,865) 3,000
Net income - six months ended
September 30, 1998 213,608
---------- -------- ---------- ----------- ---------
Balance at September 30, 1998 $1,958,361 $ 666 $9,353,318 $(7,964,263) $ -0-
========== ======== ========== =========== =========
See accompanying notes to condensed financial statements.
</TABLE>
4
<PAGE>
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
----------------------------------
Sept. 30, Sept. 30,
1 9 9 8 1 9 9 7
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income/(loss) $ 213,608 $(1,796,547)
Adjustments to reconcile net income/(loss) to
net cash provided by/(used in) operating activities:
Depreciation and amortization 876,611 1,017,777
Provision for doubtful accounts 123,296 1,153,407
Loss on equipment dispositions 1,933 9,771
Self-insurance reserves 350,610 362,906
Decrease/(increase) in receivables,
prepaid expenses and deposits (1,530,811) 563,279
Decrease in accounts payable
and other current liabilities (301,760) (50,600)
----------- -----------
Net cash provided by/(used in) operating activities (266,513) 1,259,993
----------- -----------
Cash flows from investing activities:
Purchases of equipment (59,645) (104,987)
Proceeds from sale of equipment 1,507 14,830
Purchases of intangible assets (45,738) (105,850)
Note issued (5,000) -0-
Principal collections on notes receivable 31,681 67,570
----------- -----------
Net cash used in investing activities (77,195) (128,437)
----------- -----------
Cash flows from financing activities:
Net borrowings/(repayments) on line-of-credit 1,034,333 (364,320)
Increase in cash overdrafts 19,744 409,471
Principal payments on other borrowings (674,422) (1,141,473)
Principal payments on capital lease obligations (35,947) (35,234)
----------- -----------
Net cash provided by/(used in) financing activities 343,708 (1,131,556)
----------- -----------
Net decrease in cash
and cash equivalent -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.
</TABLE>
5
<PAGE>
<TABLE>
(Continued)
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
1 9 9 8 1 9 9 7
----------- -----------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash paid during the six months ended September 30 for:
Interest $ 522,559 $ 562,148
Income taxes -0- -0-
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the six months ended September 30, 1998 and 1997, the Company purchased
transportation and office equipment with direct installment and lease
financing of $133,384 and $204,885, respectively.
The Company may obtain short-term financing to meet its insurance needs. For
the six months ended September 30, 1998 and 1997, $44,100 and $41,930,
respectively, was borrowed for this purpose. These borrowings have been
excluded from the condensed statement of cash flows.
For the six months ended September 30, 1998 and 1997, the Company
accrued dividends of $75,322 and $69,742, 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 June, 1998, the Company purchased certain guard service accounts and
related equipment and supplies for a total consideration of $222,098. The
Company paid $55,525 and issued two notes for $55,525 and $111,049,
respectively. The non-cash portions have been excluded from the purchase of
accounts and issuance of notes in the 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 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,
1998, 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 during the quarter ended September
30, 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 six
months ended September 30, 1998 and 1997, respectively, the components of
which have been excluded from the Company's financial statements:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ---------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Service companies' guard
service revenue $2,106,702 $4,672,209 $6,007,998 $9,541,428
Cost of revenue 1,504,176 3,393,514 4,437,786 7,130,364
---------- ---------- ---------- ----------
Gross profit 602,526 1,278,695 1,570,212 2,411,064
Service companies' share
of gross profit 477,736 998,026 1,216,089 1,839,044
---------- ---------- ---------- ----------
124,790 280,669 354,123 572,020
Other service revenue 120,556 101,778 186,966 238,220
---------- ---------- ---------- ----------
Total service contract revenue $ 245,346 $ 382,447 $ 541,089 $ 810,240
========== ========== ========== ==========
</TABLE>
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, 1998, the Company had used $7,651,261 of this line,
representing virtually 100% of its maximum borrowing capacity. Interest is
payable monthly, at 1.5% above prime (9.5% at September 30, 1998). 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. The Company relies
heavily on its revolving loan from CIT which contains numerous non-financial
covenants. At September 30, 1998, the Company was not in compliance with
several of the non-financial covenants.
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 or loss per share.
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 91 employees,
or $360,800), 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 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. 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 and customer account purchasers by Capital Resources
Company. The total outstanding balance on such loans as of September 30,
1998, was approximately $552,300.
In May, 1996, a complaint was filed in Queens County Civil Court by
three former employees alleging emotional distress, anguish, mental distress
and injury to their professional reputation due to retaliatory discharge and
related matters. Plaintiffs each seek $2 million for compensatory damages and
$2 million in punitive damages in addition to payment of overtime wages of
$25,000. The Company's customer, also a defendant and a former employer, has
engaged counsel representing all defendants. At this time the Company is
unable to estimate the possible loss, if any, that may be incurred as a
result of this action. The ultimate outcome may or may not have a material
impact on the Company's financial position or results of operations.
In August, 1997, a complaint was filed in Los Angeles County Superior
Court by six former employees alleging discrimination, wrongful termination,
breach of employment contract and intentional infliction of emotional
distress. The complaint alleges that plaintiffs have suffered damages in
excess of $1 million. After filing the complaint, the plaintiffs, through
counsel, agreed to submit the dispute to binding arbitration and a request
for dismissal, without prejudice, was filed with the Court. At this time the
Company is unable to estimate the possible loss, if any, that may be incurred
as a result of such arbitration. The ultimate outcome of such arbitration may
or may not have a material impact on the Company's financial position or
results of operations.
The Company has been named as a defendant in several other employment
related claims, including claims of sexual harassment by current and former
employees, which are currently under investigation by the New York State
Division of Human Rights. At this time the Company is unable to determine the
impact on the financial position and results of operations that these claims
may have should the investigation conclude that they are valid.
The Company has been charged with unfair labor practices by the Service
Employees International Union 32B-J, claiming the Company refused to bargain
with the Union and that the Company unilaterally changed terms and conditions
of employment without bargaining. The charge seeks back dues, wages and
health and welfare contributions for all employees covered by the collective
bargaining agreement between 32B-J and the Company. The matter is being held
in suspension pending a decision on a similar case before the National Labor
Relations Board. At this time the Company is unable to estimate the impact on
the financial position and results of operations as a result of a decision on
such case. The ultimate outcome may or may not have a material impact on the
Company's financial position or results of operations.
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.
9
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Contingent Liabilities: (Continued)
On or about December 4, 1997, an outside shareholder and four of the
Company's directors (Sands, P. Kikis, Saunders and T. Kikis) commenced an
action in the Supreme Court of the State of New York, County of New York
(Index No. 606166/97) against the other four directors (Vassell, Robinett,
Nekos and Miller), the Company's outside corporate and securities counsel and
the Company itself in a lawsuit characterized as a derivative action. The
complaint alleges that one or more of the defendant-directors engaged in
improper activities, including ultra-vires acts, breach of fiduciary duty,
fraud against the Company, constructive fraud, waste of corporate assets and
concealment of information from the plaintiff-directors regarding the
Company's earnings, lacked power to enter into an employment agreement on
behalf of the Company with Mr. Robinett, 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 has interposed an answer denying the allegations contained
in the complaint. The individual defendants have stated that they believe the
allegations are completely without merit and intend to vigorously defend
against each and every claim. 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 certain members of the board have chosen to
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, and have received
advancements of legal fees incurred in connection with their defense, from
the Company. Through September 30, 1998, the Company has expended
approximately $193,000 in legal fees ($73,000 during the six months ended
September 30, 1998) in defense of this matter on its own behalf as well as on
behalf of the defendant officers and directors. On or about March 25, 1998,
the plaintiffs filed a motion for the appointment of a temporary receiver. On
June 5, 1998, the Court ordered the appointment of a temporary receiver, but
prior to the order taking effect, the parties agreed to a stipulation
pursuant to which Franklyn H. Snitow, Esq., was appointed acting President
and Chief Executive Officer and acting ninth Board member during the pendency
of the defendants' appeal to the Appellate Division of the decision to
appoint a receiver. Based on the stipulation, the defendants' request to the
Appellate Division for a stay pending the appeal of the order appointing the
receiver was granted. The Company is unable to reasonably estimate the
potential impact on the Company's financial condition and results of
operations from this lawsuit.
In August of 1998, the Company was informed that the United States
Attorneys' Office for the Southern District of Florida was conducting a
criminal investigation of certain activities at the Miami office of its
Aviation Safeguards Division. The investigation concerns the accuracy and
completeness of forms submitted in connection with Miami airport employee
background verifications. The United States Code provides for fines of up to
$500,000 for violations of this nature. The Company is cooperating with the
investigation and is taking steps to ensure future compliance in all areas
covered by the investigation. The Company has also instructed its local
counsel to represent the Company in negotiations with the United States
Attorneys' Office and is exploring various options regarding a resolution to
this matter. Management is unable to reasonably estimate the Company's
exposure to penalties, if any, and has made no provision in the Company's
financial statements.
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 $2,599,057 or 20.0% for the quarter ended September 30,
1998 to $15,579,240 from $12,980,183 for the quarter ended September 30,
1997. The major components of this increase are approximately $925,000 due to
acquisitions, approximately $1,465,000 due to new contract starts net of
contract cancellations and approximately $210,000 of non- recurring revenue
due to servicing the Goodwill Games.
For the six months ended September 30, 1998, revenue increased by $5,161,918
or 20.8% to $29,930,579 from $24,768,661 for the six months ended September
30, 1997. The major components of this increase are approximately $1,745,000
increase due to acquisitions, approximately $3,207,000 due to new contract
starts net of cancellations and approximately $210,000 of non-recurring
revenue due to the Goodwill Games.
Gross profit increased by $655,718 to $2,647,893 or 17.0% of revenue for the
quarter ended September 30, 1998 compared to $1,992,175 or 15.3% of revenue
for the quarter ended September 30, 1997. The gross profit increase results
from lower unemployment costs, lower self-insurance reserves for general
liability claims and the increase in sales. The self insurance reserve is
based on actuarial computations and the timing of reported claims and,
therefore, at this time, it is not known if the decrease will continue in
future periods.
For the six months ended September 30, 1998, gross profit increased by
$1,414,168 to $5,036,579, or 16.8% of revenue compared to $3,622,411 or 14.6%
of revenue for the six months ended September 30, 1997. This increase results
from lower unemployment costs, lower self insurance reserves for general
liability claims and the increase in sales.
Management expects margins to stabilize at approximately 17% of revenue as
long as the economy remains strong. Should a recession develop, margins will
trend lower due to, among other things, increased competition for accounts
and potentially higher unemployment costs.
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 $137,101 to $245,346 in the quarter
ended September 30, 1998 from $382,447 in the quarter ended September 30,
1997. For the six months ended September 30, 1998, service contract revenue
decreased by $269,151 to $541,089 from $810,240 for the six months ended
September 30, 1997. These decreases are primarily due to the termination of
one service agreement with a client who filed Chapter 7 bankruptcy on August
28, 1997 as well as the termination of three other service contracts and the
contract for a large service agreement client which was renegotiated
effective August, 1998 to a lower service charge. Although there are
prospective clients, the Company did not sign new service agreements in the
current quarter. If no new contracts are signed, service contract revenue
will decrease as current contracts expire.
General and administrative expenses increased by $283,112 to $2,188,025
for the quarter ended September 30, 1998 from $1,904,913 for the quarter
ended September 30, 1997. The major areas of increase are professional fees
($142,000) and office and administrative salaries ($126,000).
For the six months ended September 30, 1998, general and administrative
expenses increased by $420,661 to $4,142,739 compared to $3,722,078 for the
six months ended September 30, 1997. The major areas of increase are
professional fees ($265,000) and administrative salaries ($216,000). These
increases were offset by reductions in several general office expenses of
approximately $60,000.
11
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations (continued)
Management expects continued high levels of professional fees as a result of
the Company's indemnification obligation to the defendant directors involved
in the derivative action referred to in footnote 5 as well as legal fees to
be incurred in connection with the investigation by the United States
Attorney in Miami referred to in footnote 5 to the condensed financial
statements.
The reduction in labor claim settlements for both the quarter and six months
ended September 30, 1998 compared to the same periods ended September 30,
1997 resulted from a default judgment in the amount of $314,376 by the
Eastern District Court of New York in favor of a guard who alleged unjust
termination. The claim was settled for $180,000 in September, 1997.
Amortization of intangibles decreased by $87,294 to $330,540 for the quarter
ended September 30, 1998 compared to $417,834 for the quarter ended September
30, 1997. For the six months ended September 30, 1998, amortization of
intangibles decreased by $176,847 to $653,996 compared to $830,843 for the
six months ended September 30, 1997. These reductions are primarily due to
the write-down in the fiscal year ended March 31, 1998 of intangible assets
which was the result of management's re-evaluation of the business retained
from certain prior acquisitions.
The provision for bad debts decreased by $966,097 to $28,191 for the quarter
ended September 30, 1998 from $994,288 for the quarter ended September 30,
1997. For the six months ended September 30, 1998, the provision for bad
debts decreased by $1,030,111 to $123,296 compared to $1,153,407 for the
period ended September 30, 1997. These decreases are primarily due to the
Chapter 7 bankruptcy filing of a service agreement client in August, 1997 and
partially due to higher reserve requirements in the quarter ended June 30,
1997 for receivables from certain service agreement clients that are no longer
necessary. The provision for bad debts is management's estimate of accounts
that may be uncollectible based on the results of its continuous monitoring
of accounts outstanding in excess of 60 days. It is not known if bad
debts will decrease in future periods nor is this decrease necessarily
indicative of a trend.
Interest income decreased by $32,942 to $34,250 for the quarter ended
September 30, 1998 from $67,192 for the quarter ended September 30, 1997. For
the six months ended September 30, 1998, interest income decreased by
$110,711 to $61,301 compared to $172,012 for the six months ended September
30, 1997. These decreases partially resulted from the collection of certain
advances with accumulated interest from one of the Company's employer of
record service agreement clients in the quarter ended June 30, 1997 and the
remainder of the decrease results from the Chapter 7 bankruptcy of a former
service agreement client.
Interest expense increased by $1,306 to $267,997 for the quarter ended
September 30, 1998 from $266,691 for the quarter ended September 30, 1997.
This is due to increased borrowing to finance accounts receivable because of
the sales increase offset by reductions in long-term debt.
For the six months ended September 30, 1998, interest expense decreased by
$20,314 to $519,797 compared to $540,111 for the six months ended September
30, 1997 due primarily to reductions in long-term debt.
Management fee income was recognized during the quarter ended June 30,
1997 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.
12
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
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 an initial
two year renewal to February 23, 1999 and automatic two year renewal terms
thereafter 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. 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 September 30, 1998, the Company was not in compliance
with several of the non-financial covenants contained in the loan agreement
as a result of the shareholder derivative action (see Note 5 to the condensed
financial statements). Accordingly, all amounts due under the term loan have
been classified as short-term on the Company's balance sheet as of September
30, 1998.
At September 30, 1998, the Company had borrowed $7,651,261 representing
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).
Due primarily to the bankruptcy filing in August, 1997, by GFM Bayview, a
former service agreement client, the Company has experienced continued cash
overdrafts and a working capital deficit. This had impacted accounts payable
and management is carefully monitoring its relationships with vendors.
Management anticipates continued improvements in cash overdrafts and working
capital provided operating results continue at improved levels. In addition,
the Company expects to recover approximately $184,000, net of associated
fees, from its settlement with Allstate Security Industries, Inc. in
connection with amounts owed by a former service agreement client. The
Company will recognize this recovery when and if the cash is received.
Working capital and cash overdrafts may be negatively impacted by any
penalties that may be imposed as a result of negotiations with the United
States Attorneys' Office referred to below.
In August of 1998, the Company was informed that the United States Attorneys'
Office for the Southern District of Florida was conducting a criminal
investigation of certain activities at the Miami office of its Aviation
Safeguards Division. The investigation concerns the accuracy and completeness
of forms submitted in connection with Miami airport employee background
verifications. The United States Code provides for fines of up to $500,000
for violations of this nature. The Company is cooperating with the
investigation and is taking steps to ensure future compliance in all areas
covered by the investigation. The Company has also instructed its local
counsel to represent the Company in negotiations with the United States
Attorneys' Office and is exploring various options regarding a resolution of
this matter. Management is unable to reasonably estimate the Company's
exposure to penalties, if any, and has made no provision in the Company's
financial statements.
13
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Liquidity and Capital Resources (continued)
The independent accountant's report on the Company's financial statements for
the year ended March 31, 1998 was modified, indicating that there was
substantial doubt about the Company's ability to continue as a going concern
due to operating losses for the year ended March 31, 1998, working capital
deficits and litigation and a contingency for which the outcomes were
uncertain. The Company's operations for the six months ended September 30,
1998 resulted in an operating profit and the working capital deficit has
improved by $1,016,457 to ($106,412) as of September 30, 1998 from
($1,122,869) as of March 31, 1998. Management is continuing its efforts to
improve profit margins and to reduce cash and working capital deficits with
improved earnings and reductions in long-term debt service requirements.
In February, 1995 the Company entered into a subordinated loan arrangement
with Deltec Development Corporation (Deltec) pursuant to which the Company
borrowed $1.5 million, 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 of the Company's assets, properties and other
revenue. The balance due Deltec at September 30, 1998 was $187,500. The
Company was not in compliance with several loan covenants at September 30,
1998.
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 and 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 forward-looking statements 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 achieve results contemplated in forward-looking
statements 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 litigation costs, attorney fees, 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 5 to the condensed financial
statements presented herein.
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits
99.1 Press release dated November 19, 1998
(2) Reports on Form 8-K
During the quarter the Company filed two forms 8-K, dated July 17,
1998 and August 17, 1998, 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
<PAGE>
COMMAND SECURITY CORPORATION
(LOGO)
CORPORATE OFFICE
LEXINGTON PARK
PO BOX 340
LAGRANGEVILLE, NY 12540
TEL 914 454-3703
FAX 914 454-0075
FOR IMMEDIATE RELEASE
CONTACT: William C. Vassell Donald Radcliffe
Chairman Radcliffe & Associates, Inc.
Tel: (914) 454-3703 Tel: (212) 605-0174
COMMAND SECURITY CORPORATION
REPORTS RESULTS FOR SECOND FISCAL QUARTER
- -- Revenues up 20% for quarter, 20.8% year-to-date
- -- EPS $.01 for quarter versus $(.20) loss in prior quarter
$.02 year-to-date versus loss of $(.28) in prior year-to-date period
- -- EBITDA $.12 per share for quarter, $.23 per share year-to-date
Lagrangeville, New York *** November 19, 1998 *** Command Security
Corporation (NASDAQ:CMMD) today reported results for its second fiscal
quarter ended September 30, 1998. For the quarter ended September 30, 1998
net income applicable to common stockholders was $90,742 or $.01 per share,
an increase over the $47,544 or $.01 per share recorded in the first fiscal
quarter. These results are contained in the Company's form 10-Q filed with
the Securities and Exchange Commission.
Revenues for the quarter ending September 30, 1998 increased by 20% to
$15,579,240 from the $12,980,183 reported in the same quarter in the last
fiscal year. For the six months ended September 30, 1998 revenues increased
by 20.8% to $29,930,579 from the $24,768,661 reported in the same period in
the last fiscal year.
Gross profit as a percentage of revenues increased to 17% for the quarter
ended September 30, 1998 compared to 15.3% reported for the quarter ended
September 30, 1997. For the six months ended September 30, 1998 gross profit
as a percentage of revenues increased to 16.8% from the 14.6% reported for
the same period in the last fiscal year.
Mr. William C. Vassell, Chairman of the Board commenting on the results said,
"We are very pleased that the positive results which began in the first
quarter have continued. In the second fiscal quarter we achieved strong
revenue growth and improved operating margins as is evidenced by our gross
profit percentage increasing by more than 2 points over the prior year.
EBITDA (Earnings before interest, taxes, depreciation, and amortization),
which I believe is a key indicator in valuing our performance, was $.12 per
share for the current fiscal quarter and $.23 for the first six months.
<PAGE>
Statements in this press release other than statements of historical fact are
"forward-looking statements." Such statements are subject to certain risks
and uncertainties including the demand for the Company's services,
litigation, labor market, and other risk factors identified from time to time
in the Company's filings with the Securities and Exchange Commission that
could cause actual results to differ materially from any forward looking
statements. These forward-looking statements represent the Company's judgment
as of the date of this release. The Company disclaims, however, any intent or
obligation to update these forward-looking statements.
Command Security Corporation provides security services to company-owned
offices in New York, New Jersey, California, Illinois, Connecticut, Florida,
Georgia and Pennsylvania and provides services to independent security
companies nationwide.
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $15,579,240 $12,980,183 $29,930,579 $24,768,661
Operating Profit/(loss) $ 362,883 $(1,122,413) $ 674,037 $(1,453,677)
Net income/(loss) $ 128,403 $(1,320,311) $ 213,608 $(1,796,547)
Preferred stock dividends (37,661) (34,871) (75,322) (69,742)
----------- ----------- ----------- -----------
Net income/(loss) applicable to
common stockholders $ 90,742 $(1,355,182) $ 138,286 $(1,866,289)
=========== =========== =========== ===========
Net income/(loss) per
common share $ .01 $ (.20) $ .02 $ (.28)
Weighted average number
of common and common
equivalent shares
outstanding 6,658,143 6,649,618 6,658,143 6,730,203
=========== =========== =========== ===========
</TABLE>
0053november
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
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0
1,958
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