UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 (I.R.S. Employer Identification No.)
incorporationor 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: 6,576,343 (as of November 9, 1999).
<PAGE>
COMMAND SECURITY CORPORATION
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Statements of Operations -
three months and six months ended
September 30, 1999 and 1998 (unaudited) 2
Condensed Balance Sheets -
September 30, 1999 and March 31, 1999
(unaudited) 3
Condensed Statements of Changes in Stockholders'
Equity six months ended September 30, 1999 and
1998 (unaudited) 4
Condensed Statements of Cash Flows -
six months ended September 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 - 15
PART II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
1
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenue $15,217,897 $15,579,240 $28,620,529 $29,930,579
Cost of revenue 12,357,669 12,931,347 23,291,864 24,894,000
Gross profit 2,860,228 2,647,893 5,328,665 5,036,579
Service contract revenue (note 1) 160,504 245,346 347,835 541,089
3,020,732 2,893,239 5,676,500 5,577,668
Operating expenses
General and administrative expenses 1,975,138 2,188,025 3,933,440 4,142,739
Amortization of intangibles 301,599 330,540 602,198 653,996
Provision for doubtful accounts, net 65,598 28,191 137,535 123,296
2,342,335 2,530,356 4,673,173 4,903,631
Operating profit 678,397 362,883 1,003,327 674,037
Interest income 52,715 34,250 96,242 61,301
Interest expense (215,307) (267,997) (410,980) (519,797)
Service company termination fee 35,000 -0- 35,000 -0-
Equipment dispositions 164 (733) 16,814 (1,933)
Income before income taxes 550,969 128,403 740,403 213,608
Provision for income taxes -0- -0- -0- -0-
Net income 550,969 128,403 740,403 213,608
Preferred stock dividends (55,830) (37,661) (96,504) (75,322)
Net income applicable to
common stockholders $ 495,139 $ 90,742 $ 643,899 $ 138,286
Net income per common share $ .07 $ .01 $ .10 $ .02
Weighted average number
of common and common
equivalent shares outstanding 6,658,143 6,658,143 6,658,143 6,658,143
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, March 31,
1999 1999
<S> <C> <C>
ASSETS
Current assets:
Cash $ 371,186 $ 122,470
Accounts receivable, net 13,140,767 11,460,880
Prepaid expenses 419,856 396,277
Other receivables, net 34,330 53,381
Total current assets 13,966,139 12,032,958
Property and equipment, net 969,341 1,031,042
Other assets:
Intangible assets, net 1,034,313 1,606,511
Restricted cash 1,116,068 1,091,527
Other assets 432,747 425,942
Total other assets 2,583,128 3,123,980
Total assets $17,518,608 $16,187,980
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 430,402 $ 492,677
Current maturities of obligations under capital leases 50,105 69,428
Short-term borrowings 7,876,183 6,995,852
Accounts payable 754,724 701,296
Due to service companies 474,845 567,603
Preferred dividends payable 40,674 -0-
Accrued payroll and other expenses 3,001,051 3,005,866
Total current liabilities 12,627,984 11,832,722
Self-insurance reserves 771,136 764,482
Long-term debt due after one year 327,741 425,149
Obligations under capital leases due after one year 28,773 46,552
13,755,634 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 9,181,493 9,277,997
Retained earnings/(deficit) (7,452,867) (8,193,270)
Total stockholders' equity 3,762,974 3,119,270
Total liabilities and stockholders' equity $17,518,608 $16,187,980
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Retained
Preferred Common Paid-In Earnings Treasury
Stock Stock Capital (Deficit) Stock
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1998 $1,883,039 $ 801 $9,431,505 $(8,177,871) $(3,000)
Retirement of treasury stock (135) (2,865) 3,000
Preferred stock dividends 75,322 (75,322)
Net income - six months ended
September 30, 1998 213,608
Balance at September 30, 1998 1,958,361 666 9,353,318 (7,964,263) -0-
Preferred stock dividends 75,321 (75,321)
Net loss - six months ended
March 31, 1999 (229,007)
Balance at March 31, 1999 2,033,682 666 9,277,997 (8,193,270) -0-
Preferred stock dividends (96,504)
Net income - six months ended
September 30, 1999 740,403
Balance at September 30, 1999 $2,033,682 $ 666 $9,181,493 $(7,452,867) $ -0-
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Sept. 30, Sept. 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 740,403 $ 213,608
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 841,630 876,611
Provision for doubtful accounts 137,535 123,296
(Gain)/loss on equipment dispositions (16,814) 1,933
Self-insurance reserves 127,169 350,610
Increase in receivables,
prepaid expenses and deposits (1,730,902) (1,530,811)
Decrease in accounts payable
and other current liabilities (164,660) (301,760)
Net cash used in operating activities (65,639) (266,513)
Cash flows from investing activities:
Purchases of equipment (49,650) (59,645)
Proceeds from sale of equipment 16,650 1,507
Purchases of intangible assets (12,000) (45,738)
Note issued -0- (5,000)
Principal collections on notes receivable 200 31,681
Net cash used in investing activities (44,800) (77,195)
Cash flows from financing activities:
Net borrowings on line-of-credit 814,783 1,034,333
Increase in cash overdrafts -0- 19,744
Principal payments on other borrowings (365,544) (674,422)
Principal payments on capital lease obligations (34,254) (35,947)
Payments of preferred stock dividends (55,830) -0-
Net cash provided by financing activities 359,155 343,708
Net increase in cash and cash equivalent 248,716 -0-
Cash and cash equivalents at beginning of period 122,470 -0-
Cash and cash equivalents at end of period $ 371,186 $ -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 six months ended September 30 for:
1999 1998
Interest $410,980 $522,559
Income taxes -0- -0-
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the six months ended September 30, 1999 and 1998, the Company purchased
transportation and office equipment with direct installment and lease
financing of $130,765 and $133,384, respectively.
The Company may obtain short-term financing to meet its insurance needs. For
the six months ended September 30, 1999 and 1998, $122,644 and $44,100,
respectively, was borrowed for this purpose. These borrowings have been
excluded from the condensed statement of cash flows.
In August, 1999, the Company purchased certain guard service accounts and
related equipment and supplies for a total consideration of $30,000. The
Company paid $12,000 and issued a note for $18,000. The non-cash portion has
been excluded from the purchase of accounts and issuance of notes in the
statement of cash flows.
For the six months ended September 30, 1998, the Company accrued dividends of
$75,322 payable in stock on its Series A convertible preferred stock. These
charges to paid-in capital and credits to preferred stock have been excluded
in the condensed statement of cash flows.
In June, 1998, the Company purchased certain guard service accounts and
related equipment and supplies for a total consideration of $222,098. The
Company paid $55,525 and issued two notes for $55,525 and $111,049,
respectively. The non-cash portions have been excluded from the purchase of
accounts and issuance of notes in the statement of cash flows.
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 September 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 six
months ended September 30, 1999 and 1998, respectively, the components of
which have been excluded from the Company's financial statements:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Employer of record service contract revenue
Service companies' guard service revenue $ -0- $2,106,702 $566,190 $6,007,998
Cost of revenue -0- 1,504,176 444,664 4,437,786
Gross profit -0- 602,526 121,526 1,570,212
Service companies' share of gross profit -0- 477,736 87,634 1,216,089
-0- 124,790 33,892 354,123
Non employer of record service contract revenue 160,504 120,556 313,943 186,966
Total service contract revenue $ 160,504 $ 245,346 $347,835 $ 541,089
</TABLE>
7
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2.) Short-Term Notes Payable
In February, 1995, the Company entered into an agreement with The CIT
Group/Finance, Inc. ("CIT") under a revolving loan and security agreement
(the "agreement"). The agreement, as amended on January 30, 1997, provides
for a discretionary line of credit of up to 85% of eligible accounts
receivable, as defined in the agreement, but in no event in excess of $10
million. At September 30, 1999, the Company had used $7,758,666 of this line,
representing 95% of its maximum borrowing capacity. Interest is payable
monthly, at 1.5% above prime (9.75% at September 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/(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 60 employees, or
$256,600), 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 million per occurrence and $10 million in the aggregate. In
addition, the Company has obtained an excess liability policy that covers
claims for an additional $30 million in the aggregate ($50 million as of
October 1, 1999). The Company retains the risk for the first $50,000 per
occurrence.
Cumulative amounts estimated to be payable by the Company with respect to
pending and potential claims for all years in which the company is liable
under its self-insurance retention and retro workers compensation policies
have been accrued as liabilities. Such accrued liabilities are necessarily
based on estimates; thus, the Company's ultimate liability may exceed or be
less than the amounts accrued. The methods of making such estimates and
establishing the resultant accrued liability are reviewed continually and any
adjustments resulting therefrom are reflected in current earnings.
8
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Contingent Liabilities
The Company has guaranteed certain installment loans extended to various
service companies and customer account purchasers by Capital Resources
Company. The total outstanding balance on such loans as of September 30,
1999, was approximately $356,100.
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 Private Placement Memorandum issued in connection with the Company's 1993
Private Placement and the interim financial reports for the first three
quarters in the fiscal years ended March 31, 1994 and 1995, filed by the
Company contained financial information which has since been restated. A
legal action has been filed against the Company and is described in greater
detail below. It includes claims based on the restatements. It is possible
that other purchasers of Units pursuant to the 1993 offering and the
purchasers of shares in connection with the offerings that were consummated
in February, 1995, may make further claims against the Company, alleging, as
the basis, among other possible claims the above-mentioned restatements.
9
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Contingent Liabilities: (Continued)
On or about December 4, 1997, an outside shareholder and four of the
Company's directors (Sands, P. Kikis, Saunders and T. Kikis) commenced an
action in the Supreme Court of the State of New York, County of New York
(Index No. 606166/97) against the other four directors (Vassell, Robinett,
Nekos and Miller), the Company's outside corporate and securities counsel and
the Company itself in a lawsuit characterized as a derivative action. The
complaint alleges that one or more of the defendant-directors engaged in
improper activities, including ultra-vires acts, breach of fiduciary duty,
fraud against the Company, constructive fraud, waste of corporate assets and
concealment of information from the plaintiff-directors regarding the
Company's earnings, lacked power to enter into an employment agreement on
behalf of the Company with Mr. Robinett, and entered into service contracts
with financially unstable companies without performing due diligence. The
complaint further alleges that the Company has failed to appoint a
replacement to the office of president and that the directors have entered
into a shareholder agreement which is violative of public policy. Plaintiffs
seek the award of money damages in an amount which is "not less than" $11
million from the individual defendants, a declaratory judgment that the
shareholder agreement is void, an order for an accounting, certain other
injunctive relief and attorneys' fees and disbursements.
The Company has interposed an answer denying the allegations contained in the
complaint. The individual defendants have stated that they believe the
allegations are completely without merit and intend to vigorously defend
against each and every claim. The Company's Certificate of Incorporation and
the Business Corporation Law of New York provide for indemnification of
officers and directors with respect to damages and legal fees incurred in
connection with lawsuits against them arising by reason of serving the
Company. Due to the fact that certain members of the board have chosen to
participate as plaintiffs in this lawsuit, the Company may not have coverage
under its officers and directors liability insurance policy. The defendant-
directors intend to seek indemnification, and have received advancements of
legal fees incurred in connection with their defense, from the Company.
Through September 30, 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
September 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
The following sections contain forward-looking statements. Please refer to
the "Forward-Looking Statements" and "Cautionary Statement" sections at page
15 below.
Results of Operations
The following should be read in conjunction with the Company's financial
statements and the related notes thereto.
Revenue decreased by $361,343 or 2.3% for the quarter ended September 30,
1999, to $15,217,897 from $15,579,240 for the quarter ended September 30,
1998. The decrease is primarily composed of the cumulative effect of
temporary services and contract cancellations and terminations net of new
contract starts. Within revenue for the quarter ended September 30, 1999, was
approximately $527,000 for services to a regional long haul trucking concern
that is in the process of liquidation while the quarter ended September 30,
1998, included approximately $210,000 of revenue from servicing the Goodwill
Games. Management does not believe that the net decrease is indicative of a
trend although, due to competitive nature of the business, there can be no
assurance that future net increases can be obtained at acceptable margins to
offset lost accounts.
For the six months ended September 30, 1999, revenue decreased by $1,310,050
or 4.4% to $28,620,529 from $29,930,579 for the six months ended September
30, 1998. The decrease is composed of approximately $2,800,000 cumulative
effect of contract cancellations and terminations net of new contract starts
from general commercial accounts offset by approximately $1,507,000 revenue
increase from accounts within the commercial airline industry.
Gross profit increased by $212,335 to $2,860,228 or 18.8% of revenue for the
quarter ended September 30, 1999, compared to $2,647,893 or 17% of revenue
for the quarter ended September 30, 1998. This results from cost reductions
of approximately $274,000, the major components of which are: $205,000
decrease in labor and subcontract costs due to the termination of some lower
margin contracts and new and temporary business at improved margins, $130,000
reduction in self-insurance reserves for general liability claims, $57,000
reduction in payroll taxes due to more favorable unemployment insurance rates
and increased usage of subcontractors and $10,700 decrease in union benefits
costs due to recognition withdrawal by a key service employee union offset by
increases in uniform expenses ($75,900), auto depreciation and expenses
($35,900) and new miscellaneous reserve ($25,000) for losses at client
premises. These cost reductions are partially offset by the decrease in
revenue mentioned above which caused gross profit to decrease by $62,100.
For the six months ended September 30, 1999, gross profit increased by
$292,086 to $5,328,665, or 18.6% of revenue compared to $5,036,579 or 16.8%
of revenue for the six months ended September 30, 1998. This results from
cost reductions of approximately $511,400, the major components consist of:
$419,000 decrease in labor costs due to termination of lower margin
contracts, $130,000 reduction in general liability self-insurance reserves,
$124,800 decrease in payroll related tax expenses and $38,400 decrease in
union benefits, offset by increases in uniform expenses ($103,700), auto
depreciation and expenses ($76,100) and a client premises loss reserve
($25,000). These net cost reductions are partially offset by the above noted
decline in revenue which caused gross profit to decrease by $219,300.
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.
11
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Service contract revenue decreased by $84,842 to $160,504 in the quarter
ended September 30, 1999, from $245,346 in the quarter ended September 30,
1998. For the six months ended September 30, 1999, service contract revenue
decreased by $193,254 to $347,835 from $541,089 for the six months ended
September 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 September 30, 1999, there
are only two active service contracts where in either case the Company is not
the employer of record. For the three months ended September 30, 1999, 38% of
service fee revenue was generated from one key service client customer
contract which terminated September 30, 1999. 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 decreased by $212,887 to $1,975,138 for
the quarter ended September 30, 1999, from $2,188,025 for the quarter ended
September 30, 1998. The major areas of reduction are professional fees
($155,800) primarily due charges during the period ended September 30, 1998,
in connection with the Florida Aviation Safeguard matter and the stockholder
derivative action, both described in Note 5 to the condensed financial
statements, resolution of disputed telephone expenditures ($37,000), improved
management control over travel, entertainment and conference expenses
($35,900) and a penalty charge in September, 1998, of $58,000. These
reductions were offset by increases in office and administrative salaries
($55,200) due to expansion in Florida and New York branches and a new
contingency reserve for a labor union case ($25,000).
For the six months ended September 30, 1999, general and administrative
expenses decreased by $209,299 to $3,933,440 compared to $4,142,739 for the
six months ended September 30, 1998. The major areas of reduction are
professional fees ($280,800), telephone expense recovery ($37,000), improved
management controls over travel, entertainment and conference expenses
($45,200) and a penalty charge in September, 1998, of $58,000. These
reductions were primarily offset by office and administrative salaries of
approximately $222,000.
Amortization of intangibles decreased by $28,941 to $301,599 for the quarter
ended September 30, 1999, compared to $330,540 for the quarter ended
September 30, 1998. For the six months ended September 30, 1999, amortization
of intangibles decreased by $51,798 to $602,198 compared to $635,996 for the
six months ended September 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.
The provisions for bad debts increased by $37,407 to $65,598 for the quarter
ended September 30, 1999, from $28,191 for the quarter ended September 30,
1998. For the six months ended September 30, 1999, the provision for bad
debts increased by $14,239 to $137,535 compared to $123,296 for the period
September 30, 1998. These increases are primarily due to the net effect of
bad debt recoveries in the amount of $42,000 realized in the quarter ending
September 30, 1998. Excluding these recoveries, current bad debt expense has
decreased from prior year periods. This decrease is primarily due to 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 excluding recoveries will decrease in future periods nor are these
decreases necessarily indicative of a trend.
Interest income increased by $18,465 to $52,715 for the quarter ended
September 30, 1999, from $34,250 for the quarter ended September 30, 1998.
For the six months ended September 30, 1999, interest income increased by
$34,941 to $96,242 compared to $61,301 for the six months ended September 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.
12
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Conditions
Interest expense decreased by $52,690 to $215,307 for the quarter ended
September 30, 1999, from $267,997 for the quarter ended September 30, 1998.
For the six months ended September 30, 1999, interest expense decreased by
$108,817 to $410,980 compared to $519,797 for the six months ended September
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 averaging 8 1/2 % in the quarter ended September 30, 1998, to 8 1/4% in
the quarter ended September 30, 1999.
Service company termination fee of $35,000 was recognized during the quarter
ended September 30, 1999, for terminating an Employer of Record service
agreement prior to it's October 2000 expiration. Such termination fees are
not expected to recur in future periods.
For the six months ending September 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 September 30, 1999, the Company had borrowed $7,758,666 representing
95% of its maximum borrowing capacity based on 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 six months ended September 30, 1999,
resulted in an opening profit of $1,003,327, an increase of $329,290 compared
to $674,037 from the six months ended September 30, 1998. On September 30,
1999, the Company had improved its cash position to a positive balance of
$371,186. The Company, as of September 30, 1999, had positive working capital
of $1,338,155, an increase of $1,137,919 from the working capital as of March
31, 1999, of $200,236. The Company anticipates continued improvements in
working capital with improved operating results and reduced long term debt
service requirements.
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 instructed its local counsel to represent the
Company in negotiations with the United States Attorney's office and to
accept the proposed pleas and waiver of indictment. The amount reserved by
the Company as of September 30, 1999, of $110,000 covers fines and
restitution that are detailed in the proposed plea.
13
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
In October, 1999, the Company's Board of Directors authorized the purchase of
up to 100,000 shares of its common stock. On November 11, the Board
authorized the purchase of up to an additional 100,000 shares through
December 1, 1999. Through November 9, 1999, the Company purchased 81,800
shares for $82,204.
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 then 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.
The Company received responses from 64% of its inquiries to third parties,
none of which indicated potential unresolved issues. Based on these responses
and other currently available information, given reasonably likely worst-case
scenarios, the Company's Year 2000 Issues and any potential interruptions,
costs, damages or losses related thereto, may include delayed collections
from certain guard service customers and thereby impact the Company's
availability under its revolving loan agreement (see note 2 to the condensed
financial statements). Other potential issues are not expected to be
material. The Company believes that its accounts receivable collection and
other compliance efforts have and will reduce the impact of such issues on
the Company.
The Company has expended $29,100 through September 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.
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 complied with the minimum bid price
required of $1.00. The Company has obtained a stay of the delisting of its
stock by submitting, on November 5, 1999, a request for hearing before
Nasdaq. If efforts to regain compliance are not successful, management
believes that the Company would then be listed on the OTC-Bulletin Board.
14
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Forward-Looking Statements
The forgoing "Management's Discussion and Analysis of Results of Operations
and Financial Condition" includes "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves as long as they
identify these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact we make in this Form 10-Q are forward-looking.
In particular, the statements herein regarding our future results of
operations or financial position are forward-looking statements.
Forward-looking statements reflect our current expectations and are
inherently uncertain. Our actual results may differ significantly from our
expectations. The section entitled "Cautionary Statement" below describes
some, but not all of the factors that could cause these differences.
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, a default by a significant client
or customer 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 of 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).
15
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
(1) Reference is made to footnote 5 to the condensed financial statements
presented herein.
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits
None
(2) Reports on Form 8-K
During the quarter the Company filed two Forms 8-K, dated July 1, 1999,
and August 24, 1999, both reporting certain press releases.
16
<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: November 11, 1999 By:/s/ William C. Vassell
William C. Vassell, Chairman of the Board
By:/s/ Nathan Nelson
Nathan Nelson, Principal Financial Officer
17
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COMMAND SECURITY CORPORATION
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
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<S> <C>
<PERIOD-TYPE> 6-MOS
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<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
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<CASH> 371
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<RECEIVABLES> 13,659
<ALLOWANCES> 519
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<CURRENT-ASSETS> 13,966
<PP&E> 3,371
<DEPRECIATION> 2,402
<TOTAL-ASSETS> 17,519
<CURRENT-LIABILITIES> 12,628
<BONDS> 8,713
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