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 December 31, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
Lexington Park, LaGrangeville, New York 12540
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 454-3703
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date: 6,658,143 (as of February 10, 1999).
<PAGE>
COMMAND SECURITY CORPORATION
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Statements of Operations -
three months and nine months ended
December 31, 1998 and 1997 (unaudited) 2
Condensed Balance Sheets -
December 31, 1998 and March 31, 1998
(unaudited) 3
Condensed Statements of Changes in Stockholders'
Equity - nine months ended December 31, 1998 and 1997
(unaudited) 4
Condensed Statements of Cash Flows -
nine months ended December 31, 1998 and 1997
(unaudited) 5 - 7
Notes to Condensed Financial Statements 8 - 10
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 11 - 16
PART II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
1
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $14,537,004 $13,557,619 $44,467,583 $38,326,280
Cost of revenue 12,143,633 11,735,475 37,037,633 32,881,725
----------- ----------- ----------- -----------
Gross profit 2,393,371 1,822,144 7,429,950 5,444,555
Service contract revenue (note 1) 187,042 331,364 728,131 1,141,604
----------- ----------- ----------- -----------
2,580,413 2,153,508 8,158,081 6,586,159
----------- ----------- ----------- -----------
Operating expenses
General and administrative expenses 2,188,502 1,998,403 6,331,241 5,720,481
Labor claim settlement -0- -0- (16,400) 180,000
Amortization of intangibles 319,194 410,304 973,190 1,241,147
Provision for doubtful accounts 181,969 94,652 353,262 1,248,059
Bad debt recoveries (254,940) (64,775) (302,937) (64,775)
----------- ----------- ----------- -----------
2,434,725 2,438,584 7,338,356 8,324,912
----------- ----------- ----------- -----------
Operating profit/(loss) 145,688 (285,076) 819,725 (1,738,753)
Interest income 45,382 32,127 106,683 204,139
Management fees -0- -0- -0- 35,000
Interest expense (243,873) (268,176) (763,670) (808,287)
Equipment dispositions (11,511) (11,320) (13,444) (21,091)
----------- ----------- ----------- -----------
Income/(loss) before income taxes (64,314) (532,445) 149,294 (2,328,992)
Provision for income taxes -0- -0- -0- -0-
Net income/(loss) (64,314) (532,445) 149,294 (2,328,992)
Preferred stock dividends (37,661) (34,871) (112,983) (104,613)
----------- ----------- ----------- -----------
Net income/(loss) applicable to
common stockholders $ (101,975) $ (567,316) $ 36,311 $(2,433,605)
=========== =========== =========== ===========
Net income/(loss) per common share $ (.02) $ (.09) $ .01 $ (.36)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 6,658,143 6,639,410 6,658,143 6,699,718
=========== =========== ============ ===========
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
<CAPTION>
Dec. 31, March 31,
1 9 9 8 1 9 9 8
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable - net $13,804,872 $11,506,266
Notes receivable, current maturities - net 3,750 12,272
Prepaid expenses 612,684 493,870
Other receivables - net 63,873 92,376
----------- -----------
Total current assets 14,485,179 12,104,784
Property and equipment - net 1,097,313 1,176,246
Other assets:
Intangible assets - net 1,953,668 2,714,550
Restricted cash 1,079,840 848,965
Other assets 195,823 852,714
----------- -----------
Total other assets 3,229,331 4,416,229
----------- -----------
Total assets $18,811,823 $17,697,259
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 1,920,804 $ 449,895
Current maturities of long-term debt 833,588 1,224,423
Current maturities of obligations under capital leases 76,478 71,115
Short-term borrowings 8,382,541 6,698,907
Accounts payable 719,018 817,126
Due to service companies 171,802 732,555
Accrued payroll and other expenses 2,257,102 3,233,632
----------- -----------
Total current liabilities 14,361,333 13,227,653
Self-insurance reserves 845,380 803,809
Long-term debt due after one year 259,266 458,995
Obligations under capital leases due after one year 62,076 72,328
----------- -----------
15,528,055 14,562,785
Stockholders' equity:
Preferred stock, convertible Series A 1,996,022 1,883,039
Common stock, $.0001 par value 666 801
Additional paid-in capital 9,315,657 9,431,505
Retained earnings/(deficit) (8,028,577) (8,177,871)
Treasury stock at cost -0- (3,000)
----------- -----------
Total stockholders' equity 3,283,768 3,134,474
----------- -----------
Total liabilities and stockholders' equity $18,811,823 $17,697,259
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<CAPTION>
Retained
Preferred Common Paid-In Earnings Treasury
Stock Stock Capital (Deficit) Stock
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997 $ -0- $ 842 $ 9,897,319 $(4,163,981) $ (3,000)
Issuance of common stock 5 54,008
Return of escrowed
common stock
Note collateral (35) 35
Retention adjustment (11) (294,394)
Transfer of preferred stock 1,813,297
Preferred stock dividends 34,871 (104,613)
Net loss - nine months ended
December 31, 1997 (2,328,992)
------------ --------- ----------- ----------- ---------
Balance at December 31, 1997 1,848,168 801 9,552,355 (6,492,973) (3,000)
Cash paid in lieu of
compensatory stock warrants (85,979)
Preferred stock dividends 34,871 (34,871)
Net loss - three months ended
March 31, 1998 (1,684,898)
------------ --------- ----------- ----------- ---------
Balance at March 31, 1998 1,883,039 801 9,431,505 (8,177,871) (3,000)
Preferred stock dividends 112,983 (112,983)
Retirement of treasury stock (135) (2,865) 3,000
Net income - nine months ended
December 31, 1998 149,294
------------ --------- ----------- ----------- ---------
Balance at December 31, 1998 $ 1,996,022 $ 666 $ 9,315,657 $(8,028,577) $ -0-
============ ========= =========== =========== =========
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
-----------------------------------
Dec. 31, Dec. 31,
1998 1997
------------ -----------
<S> <C> <C>
Cash flow from operating activities:
Net income/(loss) $ 149,294 $(2,328,992)
Adjustments to reconcile net income/(loss) to net
cash provided by/(used in) operating activities:
Depreciation and amortization 1,304,512 1,535,712
Provision for doubtful accounts, net of recoveries 50,325 1,183,284
Loss on equipment dispositions 13,444 21,091
Self-insurance reserves 496,760 717,906
Decrease/(increase) in receivables,
prepaid expenses and deposits (2,209,064) 872,574
Decrease in accounts payable
and other current liabilities (1,821,493) (228,320)
------------ -----------
Net cash provided by/(used in) operating activities (2,016,222) 1,773,255
------------ -----------
Cash flows from investing activities:
Purchases of equipment (83,801) (143,379)
Proceeds from sale of equipment 2,255 25,421
Purchase of intangible assets (45,738) (116,521)
Notes issued (5,000) -0-
Principal collections on notes receivable 47,376 83,420
------------ -----------
Net cash used in investing activities (84,908) (151,059)
------------ -----------
Cash flows from financing activities:
Net borrowings/(repayments) on line-of-credit 1,639,429 (149,202)
Increase/(decrease) in cash overdrafts 1,470,909 (5,350)
Principal payments on other borrowings (956,385) (1,412,800)
Principal payments on capital lease obligations (52,823) (54,844)
------------ -----------
Net cash provided by/(used in) financing activities 2,101,130 (1,622,196)
------------ -----------
Net change in cash
and cash equivalents -0- -0-
Cash and cash equivalents
at beginning of period -0- -0-
Cash and cash equivalents
at end of period $ -0- $ -0-
============ ===========
</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 nine months ended December 31 for:
1998 1997
--------- ---------
Interest $ 767,855 $ 834,598
Income taxes -0- -0-
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the nine months ended December 31, 1998 and 1997, the Company purchased
transportation and office equipment with direct installment and lease
financing of $184,287 and $356,102, respectively.
The Company generally obtains short-term financing to meet its insurance
needs. For the nine months ended December 31, 1998 and 1997, $107,099 and
$133,055, respectively, have been borrowed for this purpose. These borrowings
have been excluded from the condensed statement of cash flows.
For the nine months ended December 31, 1998 and 1997, the Company accrued
dividends of $112,983 and $104,613, respectively, on its Series A convertible
preferred stock. These charges to paid-in capital and credits to preferred
stock have been excluded in the condensed statement of cash flows.
In June, 1998, the Company purchased certain guard service accounts and
related equipment and supplies for a total consideration of $222,098. The
Company paid $55,525 and issued two notes for $55,525 and $111,049,
respectively. The non-cash portions have been excluded from the purchase of
accounts and issuance of notes in the statement of cash flows.
In July, 1997, the Company acquired certain guard service accounts from a
former service agreement client in settlement of outstanding advances and the
assumption of certain loan guarantees. Debt assumed of $130,114 and net
advances of $30,098 have been excluded from the purchase of intangible assets
in the condensed statement of cash flows.
In June, 1997, the Company purchased certain guard service accounts for a
total consideration of $144,684. The Company paid $56,717, issued a note for
$56,717 and entered into an agreement for consulting services for $31,250 to
effect the transition of the accounts. The non-cash portions have been
excluded from the purchase of accounts and issuance of notes in the condensed
statement of cash flows.
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, 1998.
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 December 31, 1998,
and for the period then ended. All such adjustments are of a normal recurring
nature, except for an increase in reserves for uncollectible accounts and
notes receivable of $764,000 in September, 1997, in connection with amounts
due from a former service agreement client as a result of the client's
Chapter 7 bankruptcy filing.
1.) Service Companies
The following is a summary of the service companies' activities for the
nine months ended December 31, 1998 and 1997, respectively, the
components of which have been excluded from the Company's financial
statements:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Service companies' guard
service revenue $ 742,767 $4,322,202 $6,750,765 $13,863,630
Cost of revenue 594,478 3,326,172 5,032,264 10,456,536
---------- ---------- ---------- -----------
Gross profit 148,289 996,030 1,718,501 3,407,094
Service companies' share
of gross profit 104,832 738,051 1,320,921 2,577,095
---------- ---------- ---------- -----------
Total employer of record
service fees 43,457 257,979 397,580 829,999
Other service revenue 143,585 73,385 330,551 311,605
---------- ---------- ---------- -----------
Total service contract revenue $ 187,042 $ 331,364 $ 728,131 $ 1,141,604
========== ========== ========== ===========
</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 December 31, 1998, the Company had
used $8,256,357 of this line, representing virtually 100% of its
maximum borrowing capacity. Interest is payable monthly, at 1.5% above
prime (9.25% at December 31, 1998). The line is collateralized by
customer accounts receivable and substantially all other assets of the
Company. The term of the agreement is initially until February, 1999,
with automatic two year renewal terms thereafter. The Company relies
heavily on its revolving loan from CIT which contains numerous
non-financial covenants. At December 31, 1998, the Company was not in
compliance with several of the non-financial covenants.
3.) Income/(Loss) per Share:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128), "Earnings Per Share," which is required
to be adopted for periods ending after December 15, 1997. Under the
new requirements for calculating basic earnings per share, the
dilutive effect of common stock equivalents, if any, is excluded. The
implementation of SFAS 128 had no impact on the calculation of the
Company's earnings or loss per share. Warrants and stock options
outstanding and preferred stock conversions were excluded from the
computation for each period presented because their effect was
antidilutive.
4.) Self-Insurance
The Company adopted a partially self-insured health insurance program
that covers all eligible administrative personnel, effective as of
March 1, 1997. There is a maximum of $30,000 per year per employee
and an aggregate amount per year, based on the number of participants
(currently 94 employees, or $360,800), that the Company can be
responsible for. A stop-loss insurance policy covers all claims in
excess of the above amounts.
The Company has an insurance policy to cover workers compensation
claims in most states that the Company performs services. Annual
premiums are based on incurred losses as determined at the end of the
coverage period, subject to a minimum and maximum premium. Insurance
providers assist the Company in determining its estimated liability
for these claims.
The nature of the Company's business also subjects it to claims or
litigation alleging that it is liable for damages as a result of the
conduct of its employees or others. The Company insures against such
claims and suits through policies with third-party insurance
companies. Such policies have limits of $1,000,000 per occurrence and
$10,000,000 in the aggregate. In addition, the Company has obtained
an excess liability policy that covers claims for an additional
$30,000,000 in the aggregate. The Company retains the risk for the
first $50,000 per occurrence.
Cumulative amounts estimated to be payable by the Company with
respect to pending and potential claims for all years in which the
company is liable under its self-insurance retention and retro
workers compensation policies have been accrued as liabilities. Such
accrued liabilities are necessarily based on estimates; thus, the
company's ultimate liability may exceed or be less than the amounts
accrued. The methods of making such estimates and establishing the
resultant accrued liability are reviewed continually and any
adjustments resulting therefrom are reflected in current earnings.
8
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Contingent Liabilities
The Company has guaranteed certain installment loans extended to
various service companies and customer account purchasers by Capital
Resources Company. The total outstanding balance on such loans as of
December 31, 1998, was approximately $512,500.
In May, 1996, a complaint was filed in Queens County Civil Court by
three former employees alleging emotional distress, anguish, mental
distress and injury to their professional reputation due to
retaliatory discharge and related matters. Plaintiffs each seek $2
million for compensatory damages and $2 million in punitive damages
in addition to payment of overtime wages of $25,000. The Company's
customer, also a defendant and a former employer, has engaged counsel
representing all defendants. At this time the Company is unable to
estimate the possible loss, if any, that may be incurred as a result
of this action. 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. 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. The plaintiffs have not responded to
Company requests to pick an arbitrator and proceed with the hearing.
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 has been determined that the Company has
responsibility for some back payments to union funds. The final
amount has not yet been assessed. As of December 31, 1998, the
Company has accrued $60,000 for loss contingencies in connection with
this matter.
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 December 31, 1998, the Company has
expended approximately $193,000 in legal fees ($73,000 during the
nine months ended December 31, 1998) 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. 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 United States Code
provides for fines of up to $500,000 for violations of this nature.
The Company is cooperating with the investigation and is taking steps
to ensure future compliance in all areas covered by the
investigation. The Company has also instructed its local counsel to
represent the Company in negotiations with the United States
Attorneys' Office and is exploring various options regarding a
resolution to this matter. Management is unable to reasonably
estimate the Company's exposure to penalties, if any, and has made no
provision in the Company's financial statements.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
The following should be read in conjunction with the Company's financial
statements and the related notes thereto.
Revenue increased by $979,385 or 7.2% for the quarter ended December 31, 1998
to $14,537,004 from $13,557,619 for the quarter ended December 31, 1997. The
major components of this increase are approximately $420,000 due to
acquisitions and approximately $559,000 due to new contract starts net of
contract cancellations.
For the nine months ended December 31, 1998, revenue increased by $6,141,303
or 16.0% to $44,467,583 from $38,326,280 for the nine months ended December
31, 1997. The major components of this increase are approximately $2,165,000
increase due to acquisitions, approximately $3,766,000 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 $571,227 to $2,393,371 or 16.5% of revenue for the
quarter ended December 31, 1998 compared to $1,822,144 or 13.4% of revenue
for the quarter ended December 31, 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 nine months ended December 31, 1998, gross profit increased by
$1,985,395 to $7,429,950, or 16.7% of revenue compared to $5,444,555 or 14.2%
of revenue for the nine months ended December 31, 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 between 16% and 17% of revenue as
long as the economy remains strong. Should a recession develop, margins will
trend lower due to, among other things, increased competition for accounts
and potentially higher unemployment costs.
The Company provides payroll and billing services and accounts receivable
financing through contracts with service company clients for a percentage of
the revenue or gross profit generated from their business. The Company owns
the accounts receivable and, depending on the individual contract, may be the
employer of record. The caption "Service Contract Revenue" represents the
income earned on the Service Agreements.
Service contract revenue decreased by $144,322 to $187,042 in the quarter
ended December 31, 1998 from $331,364 in the quarter ended December 31, 1997.
This decrease is primarily due a contract for a large "employer of record"
service agreement client which was renegotiated effective August, 1998 as a
"non employer of record" contract as well as the termination of one service
contract in December, 1997.
For the nine months ended December 31, 1998, service contract revenue
decreased by $413,473 to $728,131 from $1,141,604 for the nine months ended
December 31, 1997. This decrease is primarily due to the termination of one
service agreement with a client who filed Chapter 7 bankruptcy on August 28,
1997 as well as the 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.
11
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations (continued)
General and administrative expenses increased by $190,099 to $2,188,502 for
the quarter ended December 31, 1998 from $1,998,403 for the quarter ended
December 31, 1997. The increase is primarily due to $100,000 in legal fees
expended on behalf of the plaintiff directors in the derivative action
disclosed in footnote 5 to the condensed financial statements as well as
$40,000 for the services of Mr. Snitow. During the quarter ended December 31,
1997, the Company incurred $85,000 in legal fees in connection with the GFM
litigation. Office and administrative salaries increased by $135,000 due to
additional staffing in the Company's corporate and branch offices as a result
of adding branches in Georgia, Florida and Pennsylvania.
For the nine months ended December 31, 1998, general and administrative
expenses increased by $610,760 to $6,331,241 compared to $5,720,481 for the
nine months ended December 31, 1997. The major areas of increase are
professional fees ($337,000) and administrative salaries ($352,000). These
increases were offset by reductions in several general office expenses of
approximately $78,000.
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 as well as possible payments for legal fees on
behalf of the plaintiff directors (see footnote 5). Furthermore, additional
legal fees are expected 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 the nine months ended December
31, 1998 compared to the period ended December 31, 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 $91,110 to $319,194 for the quarter
ended December 31, 1998 compared to $410,304 for the quarter ended December
31, 1997. For the nine months ended December 31, 1998, amortization of
intangibles decreased by $267,957 to $973,190 compared to $1,241,147 for the
nine months ended December 31, 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 increased by $87,317 to $181,969 for the quarter
ended December 31, 1998 from $94,652 for the quarter ended December 31, 1997.
This increase is primarily due to higher accounts receivable balances because
of increased sales and slower collections due to the December holiday period.
Bad debt recoveries for the quarter ended December 31, 1998, includes
$230,000 recovered from a former service agreement client.
For the nine months ended December 31, 1998, the provision for bad debts
decreased by $894,797 to $353,262 compared to $1,248,059 for the period ended
December 31, 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 is no longer
necessary. The provision for bad debts is management's estimate of accounts
that may be uncollectible based on the results of its continuous monitoring
of accounts outstanding in excess of 60 days. It is not known if bad debts
will decrease in future periods nor is this decrease necessarily indicative
of a trend.
Interest income increased by $13,255 to $45,382 for the quarter ended
December 31, 1998 from $32,127 for the quarter ended December 31, 1997. This
increase is primarily due to the conversion of an employer of record service
agreement into a non-employer of record service agreement resulting in
interest income on certain outstanding accounts receivable.
12
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations (continued)
For the nine months ended December 31, 1998, interest income decreased by
$97,456 to $106,683 compared to $204,139 for the nine months ended December
31, 1997. This decrease partially resulted from the collection of certain
advances with accumulated interest from one of the Company's employer of
record service agreement clients in the quarter ended June 30, 1997 and the
remainder of the decrease results from the Chapter 7 bankruptcy of a former
service agreement client.
Interest expense decreased by $24,303 to $243,873 for the quarter ended
December 31, 1998 from $268,176 for the quarter ended December 31, 1997. For
the nine months ended December 31, 1998, interest expense decreased by
$44,617 to $763,670 compared to $808,287 for the nine months ended December
31, 1997. This decrease is 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 December 31, 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 December 31, 1998, balance
sheet.
At December 31, 1998, the Company had borrowed $8,256,357 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).
13
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Liquidity and Capital Resources (continued)
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 improvements in cash overdrafts and working capital
provided operating results continue at improved levels. 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 nine months ended December 31,
1998 resulted in an operating profit and the Company has positive working
capital of $123,846 as of December 31, 1998 compared to a working capital
deficit of $(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 operating results 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 December 31, 1998 was $93,750. The Company
was not in compliance with several loan covenants at December 31, 1998. The
Company anticipates paying the balance of this loan in full by February 25,
1999.
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.
14
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Liquidity and Capital Resources (continued)
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 December 31, 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.
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.
15
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Cautionary Statement (continued)
2. The Company's ability to achieve results contemplated in forward-looking
statements will be largely dependent upon its ability to maintain
margins, which in turn will be determined in large part by management's
control over costs. To a significant extent, certain costs are not
within the control of management and margins may be adversely affected
by such items as litigation costs, attorney fees, significant inflation,
labor unrest and increased payroll and related costs.
3. Although management currently has no reasonable basis of information
upon which to conclude that any significant service company client or
security guard client will default in payment for the services rendered
by the Company, any such default by a significant client would have a
material adverse impact on the Company's liquidity, results of
operations and financial condition.
Additional detailed information concerning a number of factors that could
cause actual results to differ materially from the information contained
herein is readily available in the Company's most recent reports on Forms
10-K, 10Q and 8-K and its current registration statement on Form S-3 and any
amendments thereto (all as filed with the Securities and Exchange Commission
from time to time).
16
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
(1) Reference is made to footnote 5 to the condensed financial
statements presented herein.
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits
99.1 Press release dated February 16, 1999.
(2) Reports on Form 8-K
During the quarter the Company filed one form 8-K, dated November
30, 1998, reporting certain press releases.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMAND SECURITY CORPORATION
Date: ______________ By: /S/ _________________________________
William C. Vassell, Chairman of the Board
By: /S/ _________________________________
William C. Vassell, Chairman of the Board
Acting Principal Financial Officer
18
<PAGE>
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 THIRD FISCAL QUARTER
- Revenues up 7.2% for quarter, 16% year-to-date
- EPS $(.02) loss for quarter versus $(.09) loss in prior year quarter
$.01 year-to-date versus loss of $(.36) in prior year-to-date period
- EBITDA per share for quarter $.09 per share, year-to-date $.33 per share
Lagrangeville, New York *** February , 1999 *** Command Security Corporation
(NASDAQ:CMMD) today reported results for its third fiscal quarter ended
December 31, 1998. For the quarter ended December 31, 1998, revenues
increased by 7.2% to $14,537,004 compared to the $13,557,619 reported for the
same period in the prior fiscal year. For the nine months, revenues increased
by 16% to $44,467,583 from the $38,326,280 recorded in the same period in the
prior fiscal year.
Gross profit as a percentage of revenues increased to 16.5% for the quarter
ended December 31, 1998 compared to the 13.4% recorded in the same period of
the prior fiscal year. Year-to-date gross profit as a percentage of revenues
increased to 16.7% compared to the 14.2% recorded in the prior nine month
period.
Net loss applicable to common stockholders for the three months ended
December 31, 1998 was $(101,975) or $(.02) per share compared to the
$(567,316) or $(.09) per share loss reported in the same period of the last
fiscal year. For the nine months ended December 31, 1998 net income
applicable to common stockholders was $36,311 or $.01 per share compared to a
net loss applicable to common stockholders of $(2,433,605) or $(.36) per
share reported in the same period of the prior fiscal year.
Mr. William C. Vassell, Chairman of the Board said, "Although we reported a
small loss during our third fiscal quarter we are pleased that we have
continued the revenue growth and improved operating margins which we
experienced during our first two fiscal quarters. EBITDA (Earnings before
interest taxes and depreciation, and amortization), which I continue to
believe is a key indicator in valuing company's performance, was $.09 per
share for the current fiscal quarter and $.33 per share for the first nine
months of our fiscal year."
<PAGE>
On November 30, 1998, the Company announced that it was engaging in
discussions concerning the possible sale of the Company. Senior management
representatives have met with several interested parties who have expressed
various degrees of interest. None of these discussions have thus far lead to
an offer which, in the opinion of the management representatives, would result
in the maximization of shareholder value. Nonetheless, discussions with new
parties and with parties who have previously met with management are expected
to continue in the near term.
The Company's press release of November 30, 1998 also referenced open market
purchases of the Company's stock to be made by two members of the Company's
Board of Directors. To date, a total of 32,000 shares have been purchased.
Statements in this press release other than statements of historical fact are
"forward-looking statements." Such statements are subject to certain risks
and uncertainties including the demand for the Company's services,
litigation, labor market, and other risk factors identified from time to time
in the Company's filings with the Securities and Exchange Commission that
could cause actual results to differ materially from any forward looking
statements. These forward-looking statements represent the Company's judgment
as of the date of this release. The Company disclaims, however, any intent or
obligation to update these forward-looking statements.
Command Security Corporation provides security services through company-owned
offices in New York, New Jersey, California, Illinois, Connecticut, Florida,
Georgia and Pennsylvania and provides services to independent security
companies nationwide.
0060february
<PAGE>
<TABLE>
COMMAND SECURITY CORPORATION
Condensed Statements of Operation
<CAPTION>
Three Months Ended Nine Month Ended
December 31, December 31,
1998 1997 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $14,537,004 $13,557,619 $44,467,583 $ 38,326,280
Operating Profit/Loss 145,688 (285,076) 819,725 (1,738,753)
Net Income/Loss $ (64,314) $ (532,445) $ 149,294 $ (2,328,992)
Preferred
Stock dividends (37,661) (34,871) (112,983) (104,613)
----------- ----------- ----------- ------------
Net income/loss
Applicable to
Common stockholders $ (101,975) $ (567,316) $ 36,311 $ (2,433,605)
=========== =========== =========== ============
Net income/loss per
Common share $ (.02) $ (.09) $ .01 $ (.36)
=========== =========== =========== ============
Weighted average number of
common and common equivalent
shares outstanding 6,658,143 6,639,410 6,658,143 6,699,718
=========== =========== =========== ============
</TABLE>
0060february/3
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.00
<CASH> (1,921)
<SECURITIES> 0
<RECEIVABLES> 14,917
<ALLOWANCES> 1,109
<INVENTORY> 0
<CURRENT-ASSETS> 14,485
<PP&E> 3,217
<DEPRECIATION> 2,120
<TOTAL-ASSETS> 18,812
<CURRENT-LIABILITIES> 14,361
<BONDS> 9,614
0
1,996
<COMMON> 1
<OTHER-SE> 1,287
<TOTAL-LIABILITY-AND-EQUITY> 18,812
<SALES> 0
<TOTAL-REVENUES> 45,196
<CGS> 0
<TOTAL-COSTS> 37,038
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 764
<INCOME-PRETAX> 149
<INCOME-TAX> 0
<INCOME-CONTINUING> 149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
