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 June 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 (I.R.S. Employer Identification No.)
of 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 August 12, 1998).
<PAGE>
COMMAND SECURITY CORPORATION
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Statements of Operations -
three months ended June 30, 1998
and 1997 (unaudited) 2
Condensed Balance Sheets -
June 30, 1998 and March 31, 1998
(unaudited) 3
Condensed Statements of Stockholders' Equity -
three months ended June 30, 1998 and 1997
(unaudited) 4
Condensed Statements of Cash Flows -
three months ended June 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 - 13
PART II. Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
1
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended
------------------------------
June 30, June 30,
1 9 9 8 1 9 9 7
----------- -----------
<S> <C> <C>
Revenue $14,351,339 $11,788,480
Cost of revenue 11,962,653 10,158,242
----------- -----------
Gross profit 2,388,686 1,630,238
Service contract revenue (note 1) 295,743 427,793
----------- -----------
2,684,429 2,058,031
----------- -----------
Operating expenses
General and administrative expenses 1,954,714 1,817,165
Amortization of intangibles 323,456 413,009
Provision for doubtful accounts 95,105 159,119
----------- -----------
2,373,275 2,389,293
----------- -----------
Operating profit/(loss) 311,154 (331,262)
Interest income 27,051 104,820
Management fees -0- 35,000
Interest expense (251,800) (273,420)
Equipment dispositions (1,200) (11,372)
----------- -----------
Income/(loss) before income taxes 85,205 (476,234)
Provision for income taxes -0- -0-
Net income/(loss) 85,205 (476,234)
Preferred stock dividends (37,661) (34,871)
----------- -----------
Net income/(loss) applicable to
common stockholders $ 47,544 $ (511,105)
=========== ===========
Net income/(loss) per common share $ .01 $ (.07)
=========== ===========
Weighted average number
of common and common
equivalent shares outstanding 6,658,143 6,859,578
=========== ===========
See accompanying notes to condensed financial statements.
</TABLE>
2
<PAGE>
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, March 31,
1 9 9 8 1 9 9 8
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable - net $13,129,913 $11,506,266
Notes receivable, current maturities - net 12,631 12,272
Prepaid expenses 455,097 493,870
Other receivables - net 37,233 92,376
----------- -----------
Total current assets 13,634,874 12,104,784
Property and equipment - net 1,138,716 1,176,246
Other assets:
Intangible assets - net 2,603,402 2,714,550
Other assets 1,688,939 1,701,679
----------- -----------
Total other assets 4,292,341 4,416,229
----------- -----------
Total assets $19,065,931 $17,697,259
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 814,528 $ 449,895
Current maturities of long-term debt 1,105,964 1,224,423
Current maturities of obligations under capital leases 68,319 71,115
Short-term borrowings 8,067,856 6,698,907
Accounts payable 793,598 817,126
Due to service companies 610,556 732,555
Accrued payroll and other expenses 3,224,053 3,233,632
----------- -----------
Total current liabilities 14,684,874 13,227,653
Self-insurance reserves 738,050 803,809
Long-term debt due after one year 367,546 458,995
Obligations under capital leases due after one year 55,782 72,328
----------- -----------
15,846,252 14,562,785
Stockholders' equity:
Preferred stock, Series A, $.0001 par value 1,920,700 1,883,039
Common stock, $.0001 par value 666 801
Additional paid-in capital 9,390,979 9,431,505
Retained earnings/(deficit) (8,092,666) (8,177,871)
Treasury stock at cost 0 (3,000)
----------- -----------
Total stockholders' equity 3,219,679 3,134,474
----------- -----------
Total liabilities and stockholders' equity $19,065,931 $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 (35) 35
Preferred stock dividends (34,871)
Net loss - three months ended
June 30, 1997 (476,234)
---------- ------ ---------- ----------- --------
Balance at June 30, 1997 -0- 807 9,862,483 (4,640,215) (3,000)
Common stock issued 5 54,008
Return of escrowed
common stock (11) (294,394)
Cash paid in lieu of
compensatory stock warrants (85,979)
Transfer of
Preferred stock 1,813,297
Preferred stock dividends 69,742 (104,613)
Net loss - nine months ended
March 31, 1998 (3,537,656)
---------- ------ ---------- ----------- --------
Balance at March 31, 1998 1,883,039 801 9,431,505 (8,177,871) (3,000)
Preferred stock dividends 37,661 (37,661)
Retirement of treasury stock (135) (2,865) 3,000
Net income - three months ended
June 30, 1998 85,205
---------- ------ ---------- ----------- --------
Balance at June 30, 1998 $1,920,700 $ 666 $9,390,979 $(8,092,666) $ -0-
========== ====== ========== =========== ========
See accompanying notes to condensed financial statements.
</TABLE>
4
<PAGE>
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
----------------------------------
June 30, June 30,
1 9 9 8 1 9 9 7
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income/(loss) $ 85,205 $ (476,234)
Adjustments to reconcile net income/(loss) to
net cash provided by/(used in) operating activities:
Depreciation and amortization 432,637 503,366
Provision for doubtful accounts 95,105 159,119
Loss on equipment dispositions 1,200 11,372
Self-insurance reserves 147,792 313,737
Decrease/(increase) in receivables,
prepaid expenses and deposits (1,628,743) 1,451,647
Decrease in accounts payable
and other current liabilities (363,060) (679,746)
----------- -----------
Net cash provided by/(used in) operating activities (1,229,864) 1,283,261
----------- -----------
Cash flows from investing activities:
Purchases of equipment (36,143) (47,120)
Proceeds from sale of equipment -0- 1,330
Purchase of intangible assets (45,734) (76,717)
Note issued (5,000) -0-
Principal collections on notes receivable 15,691 80,275
----------- -----------
Net cash used in investing activities (71,186) (42,232)
----------- -----------
Cash flows from financing activities:
Net borrowings/(repayments) on line-of-credit 1,273,542 (286,608)
Increase/(decrease) in cash overdrafts 364,633 (356,457)
Principal payments on other borrowings (317,783) (583,000)
Principal payments on capital lease obligations (19,342) (14,964)
----------- -----------
Net cash provided by/(used in) financing activities 1,301,050 (1,241,029)
----------- -----------
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.
</TABLE>
5
<PAGE>
<TABLE>
(Continued)
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Supplemental Disclosures of Cash Flow Information
Cash paid during the three months ended June 30 for:
1 9 9 8 1 9 9 7
--------- ---------
<S> <C> <C>
Interest $ 249,453 $ 288,823
Income taxes -0- -0-
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the three months ended June 30, 1998 and 1997, the Company purchased
transportation and office equipment with direct installment and lease
financing of $36,708 and $106,063, respectively.
For the three months ended June 30, 1998 and 1997, the Company accrued
dividends of $37,661 and $34,871, respectively, on its Series A convertible
preferred stock. These charges to paid-in capital and credits to preferred
stock have been excluded in the 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 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, 1999.
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 June 30, 1998, and
for the period then ended. All such adjustments are of a normal recurring
nature.
1.) Service Companies:
The following is a summary of the service companies' activities for the
three months ended June 30, 1998 and 1997, respectively, the components
of which have been excluded from the Company's financial statements:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
June 30, June 30,
1 9 9 8 1 9 9 7
---------- ----------
<S> <C> <C>
Service companies' guard
service revenue $3,901,296 $4,869,219
Cost of revenue 2,933,610 3,736,950
---------- ----------
Gross profit 967,686 1,132,269
Service companies' share
of gross profit 738,353 841,018
---------- ----------
229,333 291,251
Other service revenue 66,410 136,542
---------- ----------
Total service contract revenue $ 295,743 $ 427,793
========== ==========
</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 June 30, 1998, the Company had used $7,892,470 of this line,
representing virtually 100% of its maximum borrowing capacity. Interest is
payable monthly, at 1.5% above prime (10% at June 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 June 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 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 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 by Capital Resources Company. The total outstanding
balance on such loans as of June 30, 1998, was approximately $591,000.
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 June 30, 1998, the Company has expended
approximately $193,000 in legal fees ($73,000 during the quarter ended
June 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.
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 $2,562,859 or 21.7 percent for the quarter ended June
30, 1998 to $14,351,339 from $11,788,480 for the quarter ended June 30, 1997.
The major components of this increase are approximately $820,000 due to
acquisitions and approximately $1,740,000 due to new contract starts net of
contract cancellations.
Gross profit increased by $758,448 to $2,388,686 or 16.6% of revenue for the
quarter ended June 30, 1998 compared to $1,630,238 or 13.8% of revenue for
the quarter ended June 30, 1997. This results from cost reductions of
approximately $400,000, the major components of which are: $157,000 reduction
in unemployment taxes; $78,000 in auto expenses; and $166,000 in self
insurance reserves for general liability claims. The remaining increase of
approximately $360,000 is attributable to the 21.7 percent increase in sales
for the quarter ended June 30, 1998 over the quarter ended June 30, 1997. 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.
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 $132,050 to $295,743 in the quarter
ended June 30, 1998 from $427,793 in the quarter ended June 30, 1997. This
decrease is 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
terminations of three other service contracts. Currently 63% of service fee
revenue is generated from one contract which is currently being renegotiated
and is expected to result in less revenue as the result thereof. 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 $137,549 to $1,954,714 for
the quarter ended June 30, 1998 from $1,817,165 for the quarter ended June
30, 1997. The major areas of increase are professional fees ($123,000),
office and administrative salaries ($90,000) and sales commissions ($39,000).
These increases were offset by reductions in several general office expenses
(including telephone, Express Mail, bank costs and travel and entertainment)
of approximately $114,000.
Amortization of intangibles decreased by $89,553 to $323,456 for the quarter
ended June 30, 1998 compared to $413,009 for the quarter ended June 30, 1997.
This is 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 $64,014 to $95,105 for the quarter
ended June 30, 1998 from $159,119 for the quarter ended June 30, 1997. This
decrease is primarily due to higher reserve requirements in the quarter ended
June 30, 1997 for receivables from certain service agreement clients that is
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.
11
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Interest income decreased by $77,769 to $27,051 for the quarter ended June
30, 1998 from $104,820 for the quarter ended June 30, 1997. This decrease
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 decreased by $21,620 to $251,800 for the quarter ended June
30, 1998 from $273,420 for the quarter ended June 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.
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 June 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 described in 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
June 30, 1998. The Company has been unable to obtain waivers from CIT.
At June 30, 1998, the Company had borrowed $7,892,470 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 of GFM Bayview, a former service
agreement client, and increased expenditures due to the start-up of a large
contract, 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. The cash overdraft has
increased by $365,000 since March 31, 1998 primarily as a result of settling
several general liability and labor claims, however, management expects to
decrease the overdraft with a significant cash receipt expected in August,
1998 in connection with its workers compensation insurance policy. This
receipt, however, will not have any impact on the Company's profit or loss.
12
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
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 quarter ended June 30, 1998
resulted in an operating profit and the working capital deficit has improved
by $72,869 to ($1,050,000) as of June 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 to CIT, by all the Company's assets, properties and
other revenue. The balance due Deltec at June 30, 1998 was $281,250. The
Company was not in compliance with several loan covenants at June 30, 1998
(see above disclosure regarding CIT).
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 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, and the actual and perceived continuity and stability of
management and non-management personnel as well as the Company itself.
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, 10-Q 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).
13
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
Reference is made to footnote 5 to the condensed financial
statements presented herein.
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits - None
(2) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1998.
14
<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
15
<PAGE>
COMMAND SECURITY CORPORATION
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.00
<CASH> (815)
<SECURITIES> 0
<RECEIVABLES> 14,202
<ALLOWANCES> 1,059
<INVENTORY> 0
<CURRENT-ASSETS> 13,635
<PP&E> 3,125
<DEPRECIATION> 1,986
<TOTAL-ASSETS> 19,066
<CURRENT-LIABILITIES> 14,685
<BONDS> 9,665
0
1,921
<COMMON> 1
<OTHER-SE> 1,298
<TOTAL-LIABILITY-AND-EQUITY> 19,066
<SALES> 0
<TOTAL-REVENUES> 14,647
<CGS> 0
<TOTAL-COSTS> 11,963
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 95
<INTEREST-EXPENSE> 252
<INCOME-PRETAX> 85
<INCOME-TAX> 0
<INCOME-CONTINUING> 85
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
