UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-18684
Command Security Corporation
(Exact name of registrant as specified in its charter)
New York 14-1626307
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Lexington Park, LaGrangeville, New York 12540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 454-3703
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date: 6,287,343 (as of August 11, 2000).
<PAGE>
COMMAND SECURITY CORPORATION
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Statements of Operations -
three months ended June 30, 2000
and 1999 (unaudited) 2
Condensed Balance Sheets -
June 30, 2000 and March 31, 2000
(unaudited) 3
Condensed Statements of Stockholders' Equity -
three months ended June 30, 2000 and 1999
(unaudited) 4
Condensed Statements of Cash Flows -
three months ended June 30, 2000 and 1999
(unaudited) 5 - 6
Notes to Condensed Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10 - 14
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 15
PART II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
1
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended
----------------------------
June 30, June 30,
2 0 0 0 1 9 9 9
------------ ------------
<S> <C> <C>
Revenue $ 16,117,665 $ 13,402,632
Cost of revenue 13,436,112 10,934,195
------------ ------------
Gross profit 2,681,553 2,468,437
Administrative service revenue 88,302 187,331
------------ ------------
2,769,855 2,655,768
------------ ------------
Operating expenses
General and administrative expenses 2,342,919 1,973,991
Amortization of intangibles 96,560 300,599
Provision for doubtful accounts 126,989 71,937
------------ ------------
2,566,468 2,346,527
------------ ------------
Operating profit 203,387 309,241
Interest income 32,063 43,527
Interest expense (213,137) (195,673)
Insurance rebate 50,000 15,689
Equipment dispositions (2,206) 16,650
------------ ------------
Income before income taxes 70,107 189,434
Provision for income taxes -0- -0-
------------ ------------
Net income 70,107 189,434
Preferred stock dividends (40,674) (40,674)
------------ ------------
Net income applicable to
common stockholders $ 29,433 $ 148,760
============ ============
Net income per common share $ .005 $ .02
============ ============
Weighted average number
of common shares outstanding 6,287,343 6,658,143
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, March 31,
2 0 0 0 2 0 0 0
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable - net 11,573,890 $ 11,911,484
Prepaid expenses 392,162 491,969
Other receivables - net 188,035 94,607
------------ ------------
Total current assets 12,154,087 12,498,060
Property and equipment - net 1,309,461 1,340,331
Other assets:
Intangible assets - net 363,503 460,063
Restricted cash 680,916 799,993
Other assets 419,284 249,524
------------ ------------
Total other assets 1,463,703 1,509,580
------------ ------------
Total assets $ 14,927,251 $ 15,347,971
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 257,281 $ 184,772
Current maturities of long-term debt 375,530 410,603
Current maturities of obligations under capital leases 114,436 113,752
Short-term borrowings 6,927,159 7,192,515
Accounts payable 713,124 669,552
Due to service companies 171,048 478,006
Preferred dividends payable 81,348 40,674
Accrued payroll and other expenses 2,721,172 2,658,476
------------ ------------
Total current liabilities 11,361,098 11,748,350
Self-insurance reserves 810,687 820,693
Long-term debt due after one year 286,696 309,676
Obligations under capital leases due after one year 248,046 277,961
------------ ------------
12,706,527 13,156,680
Stockholders' equity:
Preferred stock, Series A, $.0001 par value 2,033,682 2,033,682
Common stock, $.0001 par value 629 651
Additional paid-in capital 8,619,286 8,886,140
Retained earnings/(deficit) (8,432,873) (8,502,980)
Treasury stock at cost -0- (226,202)
------------ ------------
Total stockholders' equity 2,220,724 2,191,291
------------ ------------
Total liabilities and stockholders' equity $ 14,927,251 $ 15,347,971
============ ============
</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, 1999 $2,033,682 $ 666 $9,277,997 $(8,193,270) $ -0-
Preferred stock dividends (40,674)
Net income - three months ended
June 30, 1999 189,434
---------- --------- ---------- ----------- ------------
Balance at June 30, 1999 2,033,682 666 9,237,323 (8,003,836) -0-
Return of escrowed stock (15) (214,006)
Purchase of treasury stock (226,202)
Preferred stock dividends (137,177)
Net loss - nine months ended
March 31, 2000 (499,144)
---------- --------- ---------- ----------- ------------
Balance at March 31, 2000 2,033,682 651 8,886,140 (8,502,980) (226,202)
Retirement of treasury stock (22) (226,180) 226,202
Preferred stock dividends (40,674)
Net income - three months ended
June 30, 2000 70,107
---------- --------- ---------- ----------- ------------
Balance at June 30, 2000 $2,033,682 $ 629 $8,619,286 $(8,432,873) $ -0-
========== ========= ========== =========== ============
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
---------------------------------
June 30, June 30,
2 0 0 0 1 9 9 9
---------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 70,107 $ 189,434
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 262,799 416,757
Provision for doubtful accounts 126,989 71,937
(Gain)/loss on equipment dispositions 2,206 (16,650)
Self-insurance reserves 131,848 140,487
(Increase)/decrease in receivables,
prepaid expenses and deposits 166,301 (382,769)
Decrease in accounts payable
and other current liabilities (316,033) (285,933)
---------- -----------
Net cash provided by operating activities 444,217 133,263
---------- -----------
Cash flows from investing activities:
Purchases of equipment (55,883) (33,000)
Proceeds from sale of equipment 1,300 16,650
Principal collections on notes receivable -0- 200
---------- -----------
Net cash used in investing activities (54,583) (16,150)
---------- -----------
Cash flows from financing activities:
Net repayments on line-of-credit (252,932) (692,108)
Increase in cash overdrafts 72,509 676,710
Principal payments on other borrowings (179,980) (204,116)
Principal payments on capital lease obligations (29,231) (20,069)
---------- -----------
Net cash used in financing activities (389,634) (239,583)
---------- -----------
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 three months
ended June 30 for:
2 0 0 0 1 9 9 9
--------- ---------
Interest $ 213,137 $ 195,673
Income taxes -0- -0-
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the three months ended June 30, 2000 and 1999, the Company purchased
transportation and office equipment with direct installment and lease
financing of $82,992 and $105,265, respectively.
For the three months ended June 30, 2000 and 1999, the Company accrued
dividends of $40,674 for each period, respectively, on its Series A
convertible preferred stock. These charges to paid-in capital and credits to
dividends payable have been excluded 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, 2000.
The financial statements for the interim periods shown in this report are not
necessarily indicative of results to be expected for the fiscal year. In the
opinion of management, the information contained herein reflects all
adjustments necessary to summarize fairly the results of operations,
financial position, stockholders' equity and cash flows at June 30, 2000, and
for the period then ended. All such adjustments are of a normal recurring
nature.
1.) Short-Term Notes Payable:
In February, 1995, the Company entered into an agreement with The CIT
Group/Business Credit, Inc. ("CIT") under a revolving loan and security
agreement (the "agreement"). The agreement, as amended on January 30,
1997, provides for a discretionary line of credit of up to 85% of
eligible accounts receivable, as defined in the agreement, but in no
event in excess of $10 million. At June 30, 2000, the Company had used
$6,927,159 of this line, representing virtually 100% of its maximum
borrowing capacity. Interest is payable monthly, at 1.5% above prime
(11% at June 30, 2000). 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.
2.) Income per Share:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128), "Earnings Per Share," which is required to
be adopted for periods ending after December 15, 1997. Under the new
requirements for calculating basic earnings per share, the dilutive
effect of common stock equivalents, if any, is excluded. No diluted
earnings per share are presented because the effect of assumed issuance
of common shares in connection with warrants and stock options
outstanding and preferred stock conversions was antidilutive. The
implementation of SFAS 128 had no effect on the calculation of the
Company's earnings per share for the periods ended June 30, 2000 and
1999.
3.) Self-Insurance
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. Estimated accrued
liabilities are based on the Company's historical loss experience and
the ratio of claims paid to industry standard payout profiles. Charges
for estimated workers compensation related losses incurred included in
cost of sales were $407,391 and $386,374 for the three months ended June
30, 2000 and 1999, respectively.
7
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3.) Self-Insurance: (continued)
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 general liability insurance 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 general liability insurance policy that
covers claims for an additional $50,000,000 in the aggregate
($30,000,000 prior to October 1, 1999). The Company retains the risk for
the first $50,000 per occurrence. Charges for general liability
self-insurance expense of $131,848 and $140,487, are included in cost of
sales for the three months ended June 30, 2000 and 1999, respectively.
Estimated accrued liabilities are based on specific reserves in
connection with existing claims as determined by third party risk
management consultants and actuarial factors to provide for estimated
losses incurred but not yet reported.
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 health, general liability risk retention and 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.
4.) Contingent Liabilities:
The Company has guaranteed certain installment loans extended to various
service companies by Capital Resources Company. The total outstanding
balance on such loans as of June 30, 2000, was approximately $211,700.
In May, 1996, a complaint was filed in Queens County Civil Court by three
former employees alleging emotional distress, anguish, mental distress
and injury to their professional reputation due to retaliatory discharge
and related matters. Plaintiffs each seek $2 million for compensatory
damages and $2 million in punitive damages in addition to payment of
overtime wages of $25,000. The Company's customer, also a defendant and
a former employer, has engaged counsel representing all defendants. On
November 27, 1998, the Kings County Supreme Court ruled on a motion
dismissing three counts concerning contractual allegations but allowed
the remaining nine counts to proceed to findings. At this time the
Company is unable to estimate the possible loss, if any, that may be
incurred as a result of this action. The ultimate outcome may or may not
have a material impact on the Company's financial position or results of
operations.
In August, 1997, a complaint was filed in Los Angeles County Superior
Court by six former employees alleging discrimination, wrongful
termination, breach of employment contract and intentional infliction of
emotional distress. The complaint alleges that plaintiffs have suffered
damages in excess of $1 million. After filing the complaint, the
plaintiffs, through counsel, agreed to submit the dispute to binding
arbitration and a request for dismissal, without prejudice, was filed
with the Court. At this time the Company is unable to estimate the
possible loss, if any, that may be incurred as a result of such
arbitration. The ultimate outcome of such arbitration may or may not
have a material impact on the Company's financial position or results of
operations.
The Company has been named as a defendant in several other employment
related claims, including claims of sexual harassment by current and
former employees, which are currently under investigation by the New
York State Division of Human Rights. At this time the Company is unable
to determine the impact on the financial position and results of
operations that these claims may have should the investigation conclude
that they are valid.
8
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4.) Contingent Liabilities: (continued)
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.
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 claims against the Company's outside corporate
and securities counsel have since been dismissed. 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 and waste of corporate assets.
These charges are based upon claims that the defendant-directors
concealed 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
administrative service agreements with financially unstable companies
without performing due diligence. The plaintiffs further allege 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's carrier has reserved its rights with respect to the defense
and indemnity of the Company based on a claimed exclusion from coverage.
To date, the Company has not been notified of declination of coverage.
The Company may have a claim against its carrier based on the carrier's
failure to timely disclaim coverage. The defendant-directors intend to
seek indemnification, and have received advancements of legal fees
incurred in connection with their defense, from the Company. Through
June 30, 2000, the Company has expended and charged earnings with
approximately $204,000 in legal fees (none since April 1, 1999) 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 accrued a $92,000 contingency for 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'
9
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4.) Contingent Liabilities: (Continued)
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. The parties are currently in agreement
that proceedings will be held in abeyance until September 7, 2000 while
management is exploring alternate ways to settle the litigation.
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Management's Discussion and Analysis should be read in conjunction with the
Company's financial statements and the related notes thereto.
The following can be interpreted as including forward looking statements
under the Private Securities Litigation Reform Act of 1995. Such statements
are typically identified by the words "intends", "plans", "efforts",
"anticipates", "believes", "expects", or words of similar import. Various
important factors that could cause actual results to differ materially from
those expressed in the forward looking statements are identified below and
may vary significantly based on a number of factors including, but not
limited to, availability of labor, marketing success, competitive conditions
and the change in economic conditions of the various markets the Company
serves. Actual future results may differ materially from those suggested in
the following statements.
Revenue increased by $2,715,033 or 20.3 percent for the quarter ended June
30, 2000 to $16,117,665 from $13,402,632 for the quarter ended June 30, 1999.
The major components of this increase are: approximately $1,478,000 from
additional accounts (net of terminated accounts from Tower Air's Chapter 11
Bankruptcy in February, 2000) within the commercial airline industry;
approximately $336,000 increase in revenue from the servicing of new ATM
sites through the network of independent security guard companies;
approximately $663,000 new contract starts from general commercial accounts
in New York City as well as $481,000 in hospital guard services in
Westchester; and approximately $117,000 increase due to rate increase. The
above increases were partially offset by approximately $360,000 of contract
cancellations and terminations net of new contract starts from general
commercial accounts. Management believes that the net increase is not
necessarily indicative of a trend and, due to the competitive nature of the
business, there can be no assurance that future net increases can be obtained
at acceptable margins to offset lost accounts.
Gross profit increased by $213,116 to $2,681,553 or 16.6% of revenue for the
quarter ended June 30, 2000 compared to $2,468,437 or 18.4% of revenue for
the quarter ended June 30, 1999. Gross profit increased by approximately
$500,000 as a result of revenue growth mentioned above. However, this
increase is offset by an increase in cost of sales of approximately $287,000
of which the major components consist of $264,000 increase in labor costs due
in part to the tightened labor market causing higher levels of overtime
expense and increased usage of subcontractors, and miscellaneous items of
$23,000.
10
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Management expects margins to stabilize at between 16.5% and 18% 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 employment costs.
The Company provides payroll and billing services and accounts receivable
financing through contracts with administrative service 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 of the guards who provide the
services to the customers of the administrative service client. Whenever
contracted as the employer of record, the legal liability for tax
withholdings including FICA and unemployment insurance taxes is borne by the
Company. Additionally, the Company is responsible for worker's compensation
and general liability claims for damages which result from the employees'
conduct and/or negligence. The administrative service client manages its
internal operations including sales and marketing of its guard contracts. The
caption "Administrative Service Revenue" represents the income earned on the
Administrative Agreements as well as income earned on back-office support to
police departments for off-duty police services.
Administrative service contract revenue decreased by $99,029 to $88,302 in
the quarter ended June 30, 2000 from $187,331 in the quarter ended June 30,
1999. The decrease is primarily due to the termination of three
administrative service agreements: two contracted as employer of record
during the quarter ended June 30, 1999 and one contracted as non-employer of
record terminated in May, 2000 which had represented approximately 56% of the
fee revenue in fiscal year 2000. Costs associated with the administrative
service revenue are primarily clerical and administrative in nature and are
not readily segregated from the Company's total general and administrative
costs. Although there are potential new administrative service clients, the
Company did not sign any new administrative service agreements in this
quarter. The Company, at period ending June 30, 2000 supports one
administrative service client. Additionally, the Company signed a new police
department during the quarter and now services two police departments in
connection with off-duty police support which represents approximately 53% of
the fee revenue earned in the quarter ended June 30, 2000.
General and administrative expenses increased by $368,948 to $2,342,939 for
the quarter ended June 30, 2000 from $1,973,991 for the quarter ended June
30, 1999. The major areas of increase are office and administrative salaries
and payroll taxes ($162,714) due to business expansion effecting ATM and
corporate administrations; conferences including MIS classes ($31,909)
required in order to implement Comguard 2000 system; professional fees
($34,012); travel and entertainment ($16,850) and for a non-recurring
reversal of reserve accrual in period ending June 30,1999 ($50,000) for a
labor case dismissed on July 8, 1999 by the National Labor Relations Board;
and office, utilities and other costs ($73,463) due to increase in new
business.
Amortization of intangibles decreased by $204,039 to $96,560 for the quarter
ended June 30, 2000 compared to $300,599 for the quarter ended June 30, 1999.
This decrease is primarily due to intangible assets from the ISS
International Service System, Inc. ($105,000), United Securities Group Inc.
($94,000) and McVey Security Inc. ($5,000) acquisitions being fully
amortized. Amortization charges are expected to be continued significantly
lower in the remainder of fiscal 2001 and thereafter as additional purchased
customer lists become fully amortized.
The provision for bad debts increased by $55,032 to $126,969 for the quarter
ended June 30, 2000 from $71,937 for the quarter ended June 30, 1999. This
increase is primarily due to the non-performance of various smaller accounts
in the Company's New York City and New Jersey branches. 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 increase in future periods nor is
this increase necessarily indicative of a trend.
11
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Interest income decreased by $11,464 to $32,063 for the quarter ended June
30, 2000 from $43,527 for the quarter ended June 30, 1999. This decrease of
collection of interest resulted from the termination of the key non-employer
of record administrative service client in early May, 2000. Interest income
in fiscal 2001 is expected to decrease by approximately $78,000 as a result
of the account termination.
Interest expense increased by $17,464 to $213,137 for the quarter ended June
30, 2000 from $195,673 for the quarter ended June 30, 1999. The increase is
due to prime rate increases totaling 175 basis points from 7.75% during the
quarter ending June 30, 1999 to 9.50% during and ending the quarter ending
June 30, 2000, ($33,400), offset by lower average borrowing on the revolving
loan agreement and reductions in the term loan with CIT Group/Business
Credit, Inc (16,000). Interest expense is expected to continue to increase in
future periods in light of recent business growth and continued upward
pressure by the Federal Reserve Board on interest rates.
Insurance Rebate increased by $34,311 to $50,000 for the quarter ended June
30, 2000 from $15,689 for the quarter ended June 30, 1999. The $50,000 rebate
received in quarter ended June 30, 2000 represents a multi-year commitment
longevity discount from a third-party insurance carrier covering workers'
compensation, general liability and automobile insurance for policy years
covering 10-1-97 through 10-1-00. The $16,794 rebate in quarter ended June
30, 1999 represents a dividend distribution against workers' compensation
policy written for the Company's Florida operations for policy year covering
12-1-94 through 12-1-95. The Company does not expect any future insurance
rebates for the balance of Fiscal 2001.
Loss on equipment dispositions in fiscal 2000 represents the loss of two
vehicles sold below book value, whereas in fiscal 1999 a fully depreciated
vehicle was sold for $16,650.
Liquidity and Capital Resources
The Company pays its guard employees and those of its administrative service
clients on a weekly basis, while its customers and the customers of
administrative service clients pay for the services of such employees
generally within 60 days after billing by the Company. In order to fund the
Company's payroll and operations, the Company maintains a commercial
revolving loan arrangement with CIT Group/Business Credit, Inc. (CIT).
The CIT loan agreement provides for borrowings in an amount up to 85% of the
Company's eligible accounts receivable, but in no event more than
$10,000,000. CIT has also provided a term loan in the amount of $500,000 to
be repaid in equal monthly installments of $8,333 through February, 2002.
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.
At June 30, 2000, the Company had borrowed $6,927,159 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).
Long term debt (including current maturities) was reduced by $58,053 to
$662,226 at June 30, 2000 from $720,279 at March 31, 2000. The Company did
not take on any additional capital lease obligations during the quarter ended
June 30, 2000.
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
claims against the Company's outside corporate and securities counsel have
since been dismissed. The complaint alleges that one or more of the
defendant-directors engaged in improper activities, including ultra-vires
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(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
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 alleged that the Company
failed to appoint a replacement to the office of president and that the
directors entered into a shareholder agreement which was 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's carrier has reserved
its right with respect to the defense and indemnity of the Company based on a
claimed exclusion from coverage. To date, the Company has not been notified
of declination of coverage. The Company may have a claim against its carrier
based on the carrier's failure to timely disclaim coverage. The
defendant-directors intend to seek indemnification, and have received
advancements of legal fees incurred in connection with their defense, from
the Company. Through June 30, 2000, the Company has expended approximately
$204,000 in legal fees (none since April 1, 1999) 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 accrued a $92,000
contingency for 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. At a duly convened meeting
of the board of directors on June 22, 1998, the board voted unanimously to
elect Mr. Snitow as an acting director and to appoint him acting president
and chief executive officer pending the outcome of the appeal. 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 continued impact on the Company's financial condition
and results of operations from this lawsuit.
Management is not currently in discussion with third parties concerning the
outright sale of the Company or its assets. However, private discussions are
in progress between certain shareholders, the Company and a third party
which, if successful, will result in settlement of the litigation and a
change in control with William C. Vassell as President, Chief Executive
Officer and Chairman of the Board. If an agreement is reached, management
plans to issue a press release and proxy statement providing the details of
the transaction.
The Company's operations for the quarter ended June 30, 2000 resulted in an
operating profit of $203,387, a decrease of $105,854 compared to $309,241
from the quarter ended June 30, 1999 primarily due reduced gross profit
margin, reduced administrative service revenue and increases in general and
administrative expenses. The Company has been able to increase its working
capital by $43,279 to $792,989 as of June 30, 2000 compared to positive
working capital of $749,710 as of March 31, 2000. The Company experienced a
book overdraft (defined as checks drawn in advance of future deposits) of
$257,281 at June 30, 2000, compared to a book overdraft of $184,722 at March
31, 2000. Cash balances can fluctuate materially from day to day depending on
such factors as collections, timing of billing and payroll dates. The Company
anticipates continued improvements in working capital with better operating
results and reductions in long-term debt service requirements.
13
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Through March 31, 2000, the Company purchased 220,800 shares of treasury
stock which were retired during the three months ended June 30, 2000. The
Company has not purchased any additional shares during the three months ended
June 30, 2000, and has currently no plans to purchase additional shares of
the Company's stock.
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 other present material
commitments for capital expenditures.
On May 31, 2000, 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. If at anytime before August 29, 2000, the bid price of the
Company's Common Stock is at least $1.00 for a minimum of 10 consecutive
trading days, Nasdaq Staff will then determine whether the Company is in
compliance with the Nasdaq's minimum listing requirements. If the Company is
unable to demonstrate compliance, management believes that the Company would
then be listed on the OTC-Bulletin Board.
Cautionary Statement
As provided for under the Private Securities Litigation Reform Act of 1995,
the Company wishes to caution shareholders and investors that the following
important factors, among others, could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements in this
report.
1. The Company's assumptions regarding projected results depend largely
upon the Company's ability to retain substantially all of the
Company's current clients. Retention is affected by several factors
including but not limited to the quality of the services provided by
the Company, the quality and pricing of comparable services offered
by competitors, continuity of management and continuity of
non-management personnel. There are several major national
competitors with resources far greater than those of the Company
which therefore have the ability to provide service, cost and
compensation incentives to clients and employees which could result
in the loss of such clients and/or employees.
2. The Company's ability to realize its projections will be largely
dependent upon its ability to maintain margins, which in turn will be
determined in large part by management's control over costs. To a
significant extent, certain costs are not within the control of
management and margins may be adversely affected by such items as
litigation expense, fees incurred in connection with extraordinary
business transactions, inflation, labor unrest, increased payroll and
related costs.
3. Although management currently has no reasonable basis of information
upon which to conclude that any significant administrative service
client or security guard customers will default in payment for the
services rendered by the Company, any such default by a significant
client due to bankruptcy or otherwise, 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 8K 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).
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk in connection with changes in interest
rates, primarily in connection with outstanding balances under its revolving
line of credit and term loan with CIT Group/Business Credit, Inc. Based on
the Company's interest rate at June 30, 2000, and average outstanding
balances during the three months then ended, a 1% change in the prime lending
rate would impact the Company's financial position and results of operations
by approximately $16,800 over the next three months.
PART II. Other Information
Item 1. Legal Proceedings
Reference is made to footnote 4 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 one form 8-K, dated June 30,
2000, reporting a press release.
15
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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
William C. Vassell, Chairman of the Board
By: /s/ Nathan Nelson
Nathan Nelson, Principal Financial Officer
16
