UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
_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).
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Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Explanatory Note
The purpose of this amendment is to amend the Company's 10-Q for the period
ending September 30, 1998 in order to augment the Company's disclosure with
respect to its year 2000 readiness. The additional disclosure is contained in
the five paragraphs preceding the Cautionary Statement found at the end of
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
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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.
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
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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.
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.
<PAGE>
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.
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.
<PAGE>
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.
In the past, many computer software programs were written using two digits
rather than four digits to define the applicable year. As a result,
date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This situation is generally referred to as the
"Year 2000 Issue". If such a situation occurs, computer-based information
systems will be faced with problems potentially affecting hardware, software,
networks and customer and vendor inter-dependencies. The effects of Year 2000
Issue may be experienced before, on or after January 1, 2000 and if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failures which could effect a Company's
ability to conduct normal business operations. Command has an ongoing program
of evaluating the effect of the Year 2000 Issue on its information processing
systems and business operations.
In early 1998, the Company implemented a review program to address Year 2000
Issues. The program addresses internal systems as well as key third party
systems. Key third parties have been identified as lenders, banks, key
customers and vendors. Under the program, the Company has reviewed its
internal systems and has requested representations from key third parties as
to year 2000 compliance.
Internally, there are two primary systems being reviewed by the Company. The
first is the main frame system located at the Company's headquarters. The
initial assessment by the Company's outside consultants is that this system
will have minimal year 2000 compliance issues due to the fact that the
software recognizes dates based on a four digit entry system. The Company is
also in the process of compiling information on its desk-top PC's which are
primarily used for financial analysis and word processing. The Company's
initial assessment of its desk-top PC's is that most are less than three
years old and therefore the cost associated with year 2000 compliance should
be minimal.
The Company is in the process of determining its contingency plans which will
include identification of its most reasonably likely worst-case scenarios.
Once the Company receives replies to its third party inquiries, it will be in
a better position to evaluate the impact of reasonably likely worst-case
scenarios. The Company's Year 2000 Issues and any potential interruptions,
costs, damages or losses related thereto, are not, based on currently
available information, expected to be material. The Company believes that its
compliance efforts have and will reduce the impact of such issues on the
Company.
The Company has expended $21,900 through September 30, 1998, in connection
with outside consultants for services related to Year 2000 Issues. The
Company expects to spend an additional $20,000 on Year 2000 Issues in the
future. All such expenditures are being charged to expense except with
respect to the replacement of non-compliant systems which will be
capitalized. The costs associated with replacement equipment are not expected
to be material. The Company has not tracked internal labor costs because the
Company believes these costs to be immaterial. The balance of internal labor
costs associated with Year 2000 compliance is also expected to be immaterial
but there can be no assurance that unanticipated costs will not be incurred.
<PAGE>
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's 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).
<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: 3/30/99 By:/S/ Willam C. Vassell
Willam C. Vassell,
Chairman of the Board
