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, 1999
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 August 12, 1999).
<PAGE>
COMMAND SECURITY CORPORATION
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Statements of Operations -
three months ended June 30, 1999
and 1998 (unaudited) 2
Condensed Balance Sheets -
June 30, 1999 and March 31, 1999
(unaudited) 3
Condensed Statements of Stockholders' Equity
three months ended June 30, 1999 and 1998
(unaudited) 4
Condensed Statements of Cash Flows
three months ended June 30, 1999 and 1998
(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
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30, June 30,
1999 1998
Revenue $13,402,632 $14,351,339
Cost of revenue 10,934,195 11,962,653
Gross profit 2,468,437 2,388,686
Service contract revenue (note 1) 187,331 295,743
2,655,768 2,684,429
Operating expenses
General and administrative expenses 1,958,302 1,954,714
Amortization of intangibles 300,599 323,456
Provision for doubtful accounts 71,937 95,105
2,330,838 2,373,275
Operating profit 324,930 311,154
Interest income 43,527 27,051
Interest expense (195,673) (251,800)
Equipment dispositions 16,650 (1,200)
Income before income taxes 189,434 85,205
Provision for income taxes -0- -0-
Net income 189,434 85,205
Preferred stock dividends (40,674) (37,661)
Net income applicable to
common stockholders $ 148,760 $ 47,544
Net income per common share $ .02 $ .01
Weighted average number
of common and common
equivalent shares outstanding 6,658,143 6,658,143
See accompanying notes to condensed financial statements.
2
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, March 31,
Current assets: 1999 1999
Cash $ -0- $ 122,470
Accounts receivable - net 11,811,689 11,460,880
Prepaid expenses 366,069 396,227
Other receivables - net 35,082 53,381
Total current assets 12,212,840 12,032,958
Property and equipment - net 1,053,149 1,031,042
Other assets:
Intangible assets - net 1,305,912 1,606,511
Other assets 1,525,749 1,517,469
Total other assets 2,831,661 3,123,980
Total assets $16,097,650 $16,187,980
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 676,710 $ -0-
Current maturities of long-term debt 466,331 492,677
Current maturities of obligations
under capital leases 58,737 69,428
Short-term borrowings 6,262,160 6,995,852
Accounts payable 591,248 701,296
Due to service companies 629,911 567,603
Preferred dividends payable 40,674 -0-
Accrued payroll and other expenses 2,836,953 3,005,866
Total current liabilities 11,562,724 11,832,722
Self-insurance reserves 835,689 764,482
Long-term debt due after one year 394,228 425,149
Obligations under capital leases due
after one year 37,174 46,552
12,829,815 13,068,905
Stockholders' equity:
Preferred stock, Series A,
$.0001 par value 2,033,682 2,033,682
Common stock, $.0001 par value 666 666
Additional paid-in capital 9,237,323 9,277,997
Retained earnings/(deficit) (8,003,836) (8,193,270)
Total stockholders' equity 3,267,835 3,119,075
Total liabilities and
stockholders' equity $16,097,650 $16,187,980
See accompanying notes to condensed financial statements.
3
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COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Retained
Preferred Common Paid-In Earnings Treasury
Stock Stock Capital (Deficit) Stock
<S> <C> <C> <C> <C> <C>
Balance at March 31, 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-
Preferred stock dividends 112,982 (112,982)
Net loss - nine months ended
March 31, 1999 (100,604)
Balance at March 31, 1999 2,033,682 666 9,277,997 (8,193,270) -0-
Preferred stock dividends (40,674)
Net income - three months ended
June 30, 1999 189,434
Balance at June 30, 1999 $2,033,682 $ 666 $9,237,323 $(8,003,836) $ -0-
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
1999 1998
<S> <C> <C>
Cash flow from operating activities:
Net income $ 189,434 $ 85,205
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation and amortization 416,757 432,637
Provision for doubtful accounts 71,937 95,105
(Gain)/loss on equipment dispositions (16,650) 1,200
Self-insurance reserves 140,487 147,792
Increase in receivables,
prepaid expenses and deposits (382,769) (1,628,743)
Decrease in accounts payable
and other current liabilities (285,933) (363,060)
Net cash provided by/(used in)
operating activities 133,263 (1,229,864)
Cash flows from investing activities:
Purchases of equipment (33,000) (36,143)
Proceeds from sale of equipment 16,650 -0-
Purchase of intangible assets -0- (45,734)
Note issued -0- (5,000)
Principal collections on notes receivable 200 15,691
Net cash used in investing activities (16,150) (71,186)
Cash flows from financing activities:
Net borrowings/(repayments) on line-of-credit (692,108) 1,273,542
Increase in cash overdrafts 676,710 364,633
Principal payments on other borrowings (204,116) (317,783)
Principal payments on capital lease obligations (20,069) (19,342)
Net cash provided by/(used in)
financing activities (239,583) 1,301,050
Net decrease in cash and cash equivalents (122,470) -0-
Cash and cash equivalents at beginning of period 122,470 -0-
Cash and cash equivalents at end of period $ -0- $ -0-
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental Disclosures of Cash Flow Information
Cash paid during the three months ended June 30 for:
1999 1998
Interest $195,673 $249,453
Income taxes -0- -0-
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the three months ended June 30, 1999 and 1998, the Company purchased
transportation and office equipment with direct installment and lease
financing of $105,265 and $36,708, respectively.
For the three months ended June 30, 1999 and 1998, the Company accrued
dividends of $40,674 and $37,661, respectively, on its Series A convertible
preferred stock. These charges to paid-in capital and credits to dividends
payable in 1999 and preferred stock in 1998 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.
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, 1999, 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, 1999 and 1998, respectively, the components of which
have been excluded from the Company's financial statements:
Three Months Ended
June 30, June 30,
1999 1998
Service companies' guard
service revenue $566,190 $3,901,296
Cost of revenue 444,664 2,933,610
Gross profit 121,526 967,686
Service companies' share
of gross profit 87,634 738,353
33,892 229,333
Other service revenue 153,439 66,410
Total service contract revenue $187,331 $ 295,743
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, 1999, the Company had used $6,251,775 of this line,
representing virtually 100% of its maximum borrowing capacity. Interest is
payable monthly, at 1.5% above prime (9.25% at June 30, 1999). The line is
collateralized by customer accounts receivable and substantially all other
assets of the Company. The agreement will currently expire in February, 2001,
and provides for automatic two year renewal terms.
3.) Income 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. No diluted earnings per share are presented
because the effect of assumed issuance of common shares in connection with
warrants and stock options outstanding and preferred stock conversions was
antidilutive. The implementation of SFAS 128 had no effect on the calculation
of the Company's earnings per share for the periods ended June 30, 1999 and
1998.
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 71 employees, or
$291,700), 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, 1999, was approximately $393,700.
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. On November 27, 1998, the Kings
County Supreme Court ruled on a motion dismissing three counts concerning
contractual allegations but allowed the remaining nine counts to proceed to
findings. 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 a labor
union representing some of its employees claiming the Company refused to
bargain with the union and that the Company unilaterally changed terms and
conditions of employment without bargaining. The charge has been arbitrated
and it was determined that the Company has responsibility for some back
payments to union funds. However, on July 9, 1999, the charge was withdrawn
and the complaint dismissed. A previous accrual for this contingency has been
reversed during the period ended June 30, 1999.
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, 1999, the Company has expended approximately $204,000 in
legal fees in defense of this matter on its own behalf as well as on behalf
of the defendant officers and directors. In addition, the Company has
expended $100,000 for legal fees on behalf of the plaintiff directors in
December, 1998, and in March, 1999, accrued $92,000 for contingent legal fees
incurred by one of the defendants, where management has determined that
indemnification by the Company is probable . 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. On January 12, 1999, the Appellate Division dismissed
the appeal and modified the lower court's order to continue Mr. Snitow's
authority to discharge his responsibilities as Acting President, Chief
Executive Officer and Director pending the underlying litigation. 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 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. As of June
30, 1999, the Company has accrued $110,000 for loss contingencies in
connection with this matter.
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 decreased by $948,707 or 6.6 percent for the quarter ended June 30,
1999, to $13,402,632 from $14,351,339 for the quarter ended June 30, 1998.
The decrease is primarily composed of the cumulative effect of contract
cancellations and terminations net of new contract starts. Management does
not believe that the net decrease is indicative of a trend although, due to
the competitive nature of the business, there can be no assurance that future
net increases can be obtained at acceptable margins to offset lost accounts.
Gross profit increased by $79,751 to $2,468,437 or 18.4% of revenue for the
quarter ended June 30, 1999, compared to $2,388,686 or 16.6% of revenue for
the quarter ended June 30, 1998. This results from cost reductions of
approximately $237,600, the major components of which are: $214,000 decrease
in labor and subcontract costs due to the termination of some lower margin
contracts and new contract starts at improved margins, $67,500 reduction in
payroll taxes due to more favorable unemployment rates and $27,700 decrease
in union benefit costs due to recognition withdrawal by a key service
employee union, offset by increases in auto expense ($40,200) and uniform
expenses ($27,800) as part of new contracts signed. These cost reductions are
partially offset by the decrease in revenue mentioned above which caused
gross profit to decrease by $157,900
The Company provides payroll and billing services and accounts receivable
financing through contracts with service company clients for a percentage of
the revenue or gross profit generated from their business. The Company owns
the accounts receivable that are financed 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 $108,412 to $187,331 in the quarter
ended June 30, 1999, from $295,743 in the quarter ended June 30, 1998. This
decrease is primarily due to the termination of two service agreements during
the quarter ended June 30, 1999, and the renegotiation of one contract in
August, 1998, from an employer of record to a non-employer of record type at
a lower rate. At June 30, 1999, there are only two active service contracts
where in either case the Company is not the employer of record. Currently,
78% of service fee revenue is generated from one key contract. 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 $3,588 to $1,958,302 for the
quarter ended June 30, 1999, from $1,954,714 for the quarter ended June 30,
1998. The major areas of increase are office and administrative salaries
($166,860) primarily due to expansion in the Company's aviation division and
advertising - recruiting ($26,624). These increases were offset by reductions
in professional fees ($118,540) primarily in connection with the derivative
action described in Note 5 to the condensed financial statements and the
reversal of a contingency accrual ($50,000) for a labor case dismissed on
July 8, 1999 by the National Labor Relations Board (see description in Note 5
to the condensed financial statements) and several general office expenses
(including commissions, bank costs, computer expense and travel and
entertainment) of approximately $21,000.
Amortization of intangibles decreased by $22,857 to $300,599 for the quarter
ended June 30, 1999, compared to $323,456 for the quarter ended June 30,
1998. This is primarily due to some intangible assets being fully amortized
as of March 31, 1999. Amortization charges are expected to continue at
current levels through March, 2000, with significant reductions thereafter as
purchased customer lists become fully amortized.
11
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
The provision for bad debts decreased by $23,168 to $71,937 for the quarter
ended June 30, 1999, from $95,105 for the quarter ended June 30, 1998. This
decrease is primarily due to a combination of lower billing as well as
improved collection procedures thereby reducing the occurrence of additional
past due open receivables. 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 increased by $16,476 to $43,527 for the quarter ended June
30, 1999, from $27,051 for the quarter ended June 30, 1998. This increase
resulted from the collection of interest from a key non-employer of record
service agreement client whom prior to August, 1998 was contracted by the
Company as an employer of record client where interest fee structure was not
part of the contractual agreement.
Interest expense decreased by $56,127 to $195,673 for the quarter ended June
30, 1999, from $251,800 for the quarter ended June 30, 1998. The decrease is
due primarily to reductions in current maturities of long term debt with
final payment of the Deltec loan arrangement in the quarter ended March 31,
1999, and reduced usage of the revolving loan arrangement with CIT
Group/Credit Finance in conjunction with a reduced prime rate from 8 1/2% in
the quarter ended June 30, 1998, to 7 3/4% in the quarter ended June 30,
1999.
Gain on equipment dispositions represents proceeds of a vehicle sold that had
been fully depreciated.
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, the Company entered into a commercial revolving loan
arrangement with CIT Group/Credit Finance (CIT). Under this agreement,
borrowings may be made in an amount up to 85% of eligible accounts
receivable, but in no event more than $10,000,000. The Company has also
obtained 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% 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, 1999, the Company had borrowed $6,251,775 representing 95% 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).
The Company's operations for the quarter ended June 30, 1999, resulted in an
operating profit of $324,930, an increase of $13,776 compared to $311,154
from the quarter ended June 30, 1998. On June 30, 1999, the Company
experienced a cash overdraft of $676,710 for one business day. The Company,
as of June 30, 1999, had positive working capital of $650,116, an increase of
$449,880 from the working capital as of March 31, 1999, of $200,236. The cash
overdraft was due to the timing of billings, collections and payroll dates.
The Company anticipates continued improvements in working capital with
improved operating results and reductions in long term debt service
requirements.
12
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
In August, 1998, the Company was informed that the United States Attorney's
office for the Southern District of Florida was conducting a criminal
investigation of certain activities at the Miami office of its Aviation
Safeguard Division. The investigation concerns the accuracy and completeness
of forms submitted in connection with Miami airport employee background
verifications. 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 Attorney's office and is
exploring various options regarding a resolution to this matter. As of June
30, 1999, the Company reserved $110,000 for loss contingencies in connection
with this matter.
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.
As of April 15, 1999, the Company has completed the Year 2000 system
evaluation, testing and implementation and management believes that the
Company is now fully Year 2000 compliant. The only Y2K problems encountered
were in the General Ledger programs, which reside only on the Company's
headquarters mainframe system. This problem was corrected and tested prior to
April 15, 1999. No other problems were encountered with regard to Year 2000
issues since the fixes were implemented.
Most of the Company's desktop PC's are less than three years old and will not
have a Y2K compatibility issue at all. There are minimal desktop PC's that
are older than three years, which may have a problem with sorting or
searching for documents that are stored on the hard drive. This potential
problem will not warrant purchasing replacement PC's.
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. Based on current available information, given reasonably likely
worse-case scenarios, the Company's Year 2000 Issues and any potential
interruptions, costs, damages or losses related thereto, are not 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 $28,400 through June 30, 1999, in connection with
outside consultants for services related to Year 2000 Issues. All such
expenditures have been charged in the Company's financial statements as an
expense. In the event the Company has any unanticipated equipment purchases
to replace non-compliant systems, those expenditures will be capitalized. Any
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 the 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.
13
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
On August 6, 1999, the Company received notice from The NASDAQ Stock Market
stating that the Company was not in compliance with NASDAQ listing
requirements because its stock had not maintained a minimum bid price of
$1.00 for the last thirty days. If the Company fails to regain compliance or
request a hearing, the Company's stock will no longer be listed on the NASDAQ
Small Cap Market as of November 10, 1999. A hearing would allow the Company
additional time within which to regain compliance. The Company intends to
request a hearing, if necessary, and to actively pursue the retention of its
listing on the NASDAQ Small Cap Market. If efforts to regain compliance are
unsuccessful, management believes that the Company would then be listed on
the OTC-Bulletin Board.
Cautionary Statement
As provided for under the Private Securities Litigation Reform Act of 1995,
the Company wishes to caution shareholders and investors that the following
important factors, among others, could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements in this
report.
1. The Company's assumptions regarding projected results depend largely
upon the Company's ability to retain substantially all of the Company's
current clients. Retention is affected by several factors including but
not limited to the quality of the services provided by the Company, the
quality and pricing of comparable services offered by competitors,
continuity of management and continuity of non-management personnel.
There are several major national competitors with resources far greater
than those of the Company which therefore have the ability to provide
service, cost and compensation incentives to clients and employees which
could result in the loss of such clients and/or employees.
2. The Company's ability to realize its projections will be largely
dependent upon its ability to maintain margins, which in turn will be
determined in large part by management's control over costs. To a
significant extent, certain costs are not within the control of
management and margins may be adversely affected by such items as
significant inflation, labor unrest and increased payroll and related
costs.
3. Although management currently has no reasonable basis of
information upon which to conclude that any significant service
company client or security guard customers 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
Reference is made to footnote 5 to the condensed financial statements
presented herein.
Item 4. Submission of Matters to a Vote of Security Holders
The Company conducted its 1998 annual meeting of shareholders on June
21, 1999.
The following four directors were re-elected to hold office until the
annual meeting of shareholders in 2000: Peter T. Kikis, Thomas P. Kikis,
Steven B. Sands, and Lloyd H. Saunders, III.
A motion to ratify the selection of D'Arcangelo & Co., LLP, to serve as
auditors for the fiscal year ending March 31, 1999 was passed. The number
of affirmative votes and the number of negative votes cast with respect
to this matter is 4,109,601 and 59,010, respectively.
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits
99.1 Press release dated August 16, 1999.
(2) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1999.
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: August 16, 1999 By:/s/ William C. Vassell
-----------------------------------------
William C. Vassell, Chairman of the Board
By:/s/ Nathan Nelson
------------------------------------------
Nathan Nelson, Principal Financial Officer
16
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DRAFT #2 - 8/10/99 3:00 PM
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 FIRST FISCAL QUARTER
* Net income to common shareholder up 212%
* EPS $.02 versus $.01 in prior year
* EBITDA $.11 per share
Lagrangeville, New York *** August 16, 1999 *** Command Security Corporation
(NASDAQ:CMMD) today reported results for its first fiscal quarter ended June
30, 1999.
Revenues for the quarter ended June 30, 1999 decreased by 6.6% to $13,402,632
from the $14,351,339 reported for the same period in the prior fiscal year.
However, gross profit as a percentage of revenue increased to 18.4% for the
quarter ended June 30, 1999, compared to the 16.6% reported in the quarter
ended June 30, 1998. Net income applicable to common stock shareholders
increased by 212% to $148,760 or $.02 per share from the $47,544 or $.01 per
share recorded in the same period in the prior fiscal period.
EBITDA (Earnings before interest, taxes, depreciation, and amortization) was
$758,337 or $.11 per share in the quarter ended June 30, 1999, compared to
$742,591 or $.11 per share in the same period in the prior fiscal year. As of
June 30, 1999, working capital was $650,116, an increase of approximately
$450,000 from the working capital balance as of March 31, 1999.
Mr. William C. Vassell, Chairman of the Board, commenting on the results
said, "The Company has achieved profitability despite what we believe
to be a temporary decrease in revenue compared to the same quarter in the
previous year. Senior management continues to execute greater selectivity
with respect to improved margin contracts as well as cost control plans.
These efforts have resulted in improved income and increased working capital
as we focus on enhancing profitability."
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.
<PAGE>
Command Security Corporation provides security services through company-owned
offices in New York, New Jersey, California, Illinois, Connecticut, Florida,
Georgia, Massachusetts and Pennsylvania and provides services to independent
security companies nationwide.
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATION
(UNAUDITED)
Three Months Ended
June 30
1999 1998
Revenues $13,402,632 $14,351,339
Operating income $ 324.930 $ 311,154
Net income $ 189,434 $ 85,205
Preferred
stock dividends $ (40,674) $ (37,661)
Net income applicable
to common stockholders $ 148,760 $ 47,544
Income per share $ .02 $ .01
Weighted average number
of common and common
equivalent shares
outstanding 6,658,143 6,658,143
