UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 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: 6,287,343 (as of November 9, 2000).
<PAGE>
COMMAND SECURITY CORPORATION
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Statements of Operations -
three months and six months ended
September 30, 2000 and 1999 (unaudited) 2
Condensed Balance Sheets -
September 30, 2000 and March 31, 2000
(unaudited) 3
Condensed Statements of Changes in
Stockholders' Equity - six months ended
September 30, 2000 and 1999
(unaudited) 4
Condensed Statements of Cash Flows -
six months ended September 30, 2000 and 1999
(unaudited) 5 - 6
Notes to Condensed Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10 - 16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 16
PART II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
1
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $18,322,148 $15,217,897 $34,439,813 $28,620,529
Cost of revenue 15,390,001 12,357,669 28,826,113 23,291,864
----------- ----------- ----------- -----------
Gross profit 2,932,147 2,860,228 5,613,700 5,328,665
Administrative service revenue 64,294 160,504 152,596 347,835
----------- ----------- ----------- -----------
2,996,441 3,020,732 5,766,296 5,676,500
----------- ----------- ----------- -----------
Operating expenses
General and administrative expenses 2,666,789 1,975,138 5,009,708 3,949,129
Amortization of intangibles 78,922 301,599 175,482 602,198
Provision for doubtful accounts, net 100,860 65,598 227,849 137,535
----------- ----------- ----------- -----------
2,846,571 2,342,335 5,413,039 4,688,862
----------- ----------- ----------- -----------
Operating profit 149,870 678,397 353,257 987,638
Interest income 22,295 52,715 54,358 96,242
Interest expense (223,939) (215,307) (437,076) (410,980)
Insurance rebates 10,799 -0- 60,799 15,689
Administrative service client termination fee -0- 35,000 -0- 35,000
Stockholder derivative suit related expenses (373,746) -0- (373,746) -0-
Equipment dispositions (7,191) 164 (9,397) 16,814
----------- ----------- ----------- -----------
Income/(loss) before income taxes (421,912) 550,969 (351,805) 740,403
Provision for income taxes -0- -0- -0- -0-
----------- ----------- ----------- -----------
Net income/(loss) (421,912) 550,969 (351,805) 740,403
Preferred stock dividends (40,673) (55,830) (81,347) (96,504)
----------- ----------- ----------- -----------
Net income/(loss) applicable to
common stockholders $ (462,585) $ 495,139 $ (433,152) $ 643,899
=========== =========== =========== ===========
Net income/(loss) per common share $ (.07) $ .07 $ (.07) $ .10
=========== =========== =========== ===========
Weighted average number
of common shares outstanding 6,287,343 6,658,143 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>
Sept. 30, March 31,
2000 2000
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net $13,450,201 $11,911,484
Prepaid expenses 267,079 491,969
Other receivables, net 100,575 94,607
----------- -----------
Total current assets 13,817,855 12,498,060
Property and equipment, net 1,247,093 1,340,331
Other assets:
Intangible assets, net 334,580 460,063
Restricted cash 691,346 799,993
Other assets 432,842 249,524
----------- -----------
Total other assets 1,458,768 1,509,580
----------- -----------
Total assets $16,523,716 $15,347,971
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 640,315 $ 184,772
Current maturities of long-term debt 352,331 410,603
Current maturities of obligations under capital leases 114,974 113,752
Short-term borrowings 7,890,994 7,192,515
Accounts payable 991,126 669,552
Due to administrative service clients 83,898 478,006
Preferred dividends payable 40,674 40,674
Accrued payroll and other expenses 3,400,605 2,658,476
----------- -----------
Total current liabilities 13,514,917 11,748,350
Self-insurance reserves 780,998 820,693
Long-term debt due after one year 250,562 309,676
Obligations under capital leases due after one year 219,100 277,961
----------- -----------
14,765,577 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 8,578,613 8,886,140
Retained earnings/(deficit) (8,854,785) (8,502,980)
Treasury stock at cost -0- (226,202)
----------- -----------
Total stockholders' equity 1,758,139 2,191,291
----------- -----------
Total liabilities and stockholders' equity $16,523,716 $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 (96,504)
Net income - six months ended
September 30, 1999 740,403
---------- -------- ---------- ----------- ------------
Balance at September 30, 1999 2,033,682 666 9,181,493 (7,452,867) -0-
Return of escrowed stock (15) (214,006)
Purchase of treasury stock (226,202)
Preferred stock dividends (81,347)
Net loss - six months ended
March 31, 2000 (1,050,113)
---------- -------- ---------- ----------- ------------
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 (81,347)
Net loss - six months ended
September 30, 2000 (351,805)
---------- -------- ---------- ----------- ------------
Balance at September 30, 2000 $2,033,682 $ 629 $8,578,613 $(8,854,785) $ -0-
========== ======== ========== =========== ============
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
<TABLE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
----------------------------------
Sept. 30, Sept. 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ (351,805) $ 740,403
Adjustments to reconcile net income/(loss)
to net cash used in operating activities:
Depreciation and amortization 502,978 841,630
Provision for doubtful accounts 227,849 137,535
(Gain)/loss on equipment dispositions 9,397 (16,814)
Self-insurance reserves 239,272 127,169
Increase in receivables,
prepaid expenses and deposits (1,575,456) (1,730,902)
Increase/(decrease) in accounts payable
and other current liabilities 417,139 (164,660)
----------- -----------
Net cash used in operating activities (530,626) (65,639)
----------- -----------
Cash flows from investing activities:
Purchases of equipment (119,297) (49,650)
Proceeds from sale of equipment 2,950 16,650
Purchases of intangible assets (50,000) (12,000)
Principal collections on notes receivable 4,412 200
----------- -----------
Net cash used in investing activities (161,935) (44,800)
----------- -----------
Cash flows from financing activities:
Net borrowings on line-of-credit 679,653 814,783
Increase in cash overdraft 455,543 -0-
Principal payments on other borrowings (303,649) (365,544)
Principal payments on capital lease obligations (57,639) (34,254)
Payments of preferred stock dividends (81,347) (55,830)
----------- -----------
Net cash provided by financing activities 692,561 359,155
----------- -----------
Net increase in cash
and cash equivalent -0- 248,716
Cash and cash equivalents
at beginning of period -0- 122,470
Cash and cash equivalents
at end of period $ -0- $ 371,186
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
<TABLE>
(Continued)
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental Disclosures of Cash Flow Information
Cash paid during the six months ended September 30 for:
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Interest $ 437,076 $ 410,980
Income taxes -0- -0-
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the six months ended September 30, 2000 and 1999, the Company purchased
transportation and office equipment with direct installment and lease
financing of $127,307 and $130,765, respectively.
The Company may obtain short-term financing to meet its insurance needs. For
the six months ended September 30, 2000 and 1999, $51,271 and $122,644,
respectively, was borrowed for this purpose. These borrowings have been
excluded from the condensed statement of cash flows.
In August, 1999, the Company purchased certain guard service accounts and
related equipment and supplies for a total consideration of $30,000. The
Company paid $12,000 and issued a note for $18,000. The non-cash portion has
been excluded from the purchase of accounts and issuance of notes in the
statement of cash flows.
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 September 30,
2000, and for the period then ended. All such adjustments are of a normal
recurring nature, except for accruals relating to the tentative settlement of
the stockholder derivative suit of $250,000 and related professional fees
incurred of $123,746 (see Note 4).
1.) Short-Term Notes Payable
In February, 1995, the Company entered into an agreement with The CIT
Group/Finance, Inc. ("CIT") under a revolving loan and security
agreement (the "agreement"). The agreement, as amended on January 30,
1997, provides for a discretionary line of credit of up to 85% of
eligible accounts receivable, as defined in the agreement, but in no
event in excess of $10 million. At September 30, 2000, the Company had
used $7,836,414 of this line, representing virtually 100% of its
maximum borrowing capacity. Interest is payable monthly, at 1.5% above
prime (11% at September 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.
On September 19, 2000, the Company received a commitment letter from
LaSalle Business Credit, Inc. for an $18 million credit facility,
consisting of a $15 million revolving credit line, limited by 85% of
eligible accounts receivable, and a $3 million term loan, payable over
30 months. Interest would fluctuate based on a combination of prime
and libor. The commitment is valid through November 30, 2000, and the
initial contract term, should the loan close, is for three years.
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
September 30, 2000 and 1999.
7
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 $870,080 and $751,680 for the
six months ended September 30, 2000 and 1999, respectively.
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 $239,272 and $127,169,
are included in cost of sales for the six months ended September 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 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 and customer account purchasers by Capital
Resources Company. The total outstanding balance on such loans as of
September 30, 2000, was approximately $178,300.
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. The complainants have failed to proceed
with this arbitration. Management believes that the continuation of
this case is remote and that the court would bar the reinstatement of
any action in connection with this complaint.
8
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4.) Contingent Liabilities, continued
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 before the EEOC or various
state and local agencies. The Company has instituted policies to
minimize these occurrences and monitors those that do occur. 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 investigations conclude that they are valid.
The Private Placement Memorandum issued in connection with the
Company's 1993 Private Placement and the interim financial reports
for the first three quarters in the fiscal years ended March 31, 1994
and 1995, filed by the Company contained financial information which
has since been restated. A legal action has been filed against the
Company and is described in greater detail below. It includes claims
based on the restatements. It is possible that other purchasers of
Units pursuant to the 1993 offering and the purchasers of shares in
connection with the offerings that were consummated in February,
1995, may make further claims against the Company, alleging, as the
basis, among other possible claims the above-mentioned restatements.
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
March 31, 1999, the Company had expended and charged earnings with
approximately $204,000 in legal fees in defense of this matter on its
own behalf as well as on behalf of the defendant officers and
directors. In addition, the Company has expended $100,000 for legal
fees on behalf of the plaintiff directors in December, 1998, and
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.
9
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4.) Contingent Liabilities: (Continued)
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.
On September 12, 2000, the Company entered into an agreement in
connection with the purchase by Reliance Security Group plc
("Reliance") , whereby Reliance agreed to the purchase of all the
common shares owned by the plaintiff outside stockholder and all
common shares, preferred shares and options owned by the plaintiff
directors which represent approximately 38% of the outstanding common
stock of the Company on a fully diluted basis. As a result the
plaintiffs agreed to terminate their lawsuit, relinquish their seats
on the Board and terminate a shareholder agreement to which they are
a party. As an inducement to Reliance to complete the transaction,
the Company has agreed to the issuance of a five year warrant to
purchase up to 20% of the Company's then outstanding stock on a fully
diluted basis (approximately 2.3 million shares) at $1.25 per share.
The Company also agreed to pay certain transaction related expenses
of $200,000 and expects to reimburse approximately $50,000 for
certain directors' related legal costs and, accordingly, has accrued
these costs in the accompanying financial statements as of September
30, 2000. In addition, the Company incurred $123,746 in professional
fees through September 30, 2000, in connection with the Reliance
transaction and tentative settlement of the derivative action. The
Reliance transaction constitutes a change in control and, as such,
requires shareholder approval. Management believes that it is
probable that the shareholders will vote for such approval at a
special meeting scheduled on November 13, 2000.
10
<PAGE>
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 $3,104,251 or 20.4% for the quarter ended September 30,
2000, to $18,322,148 from $15,217,897 for the quarter ended September 30,
1999, and has increased by $5,819,284 or 20.3% to $34,439,813 from
$28,620,529 for the six months ended September 30, 2000. The major components
of the increase in the second quarter were: approximately $1,989,000 from
additional aviation accounts with the loss of the Tower air contract
(following the Chapter 11 Bankruptcy in February 2000) being more than offset
by a new contract with Northwest Air and other organic growth; around
$245,000 from an increase in the number of ATM sites serviced through a
network of independent security guard companies, and about $1,243,000 from
additional hours worked by the security guard branch network net of accounts
terminated as well as rate increases on existing business. For the six months
revenue from the aviation accounts increased by $3,539,000, the ATM accounts
increased by $521,000 and other security guard revenue increased by
$1,759,000, net of terminations. Management expects that revenue will
continue at increased levels and that it will exceed prior year's revenue
by 20% in the next fiscal period. This would exceed the current industry
growth rate of approximately 7%.
Gross profits increased to $2,932,147 (16.0% of sales) for the quarter ended
September 30, 2000, from $2,860,228 (18.8% of sales) for the quarter ended
September 30, 1999, a rise of $71,919. The main reason for the reduction in
the margin was an increase in the cost of payroll and taxes. While the impact
of the increased revenue on gross profits was approximately $466,000, a large
part of the margin reduction came from increased overtime due in part to the
tight labor market as well as additional costs of start up on some of the
larger new contracts. The margin for the quarter ended September 30, 1999,
also benefitted from guard service to a regional long haul trucking concern
that was in the process of liquidation. Focus on rates and overtime levels
has increased to try and improve gross profit from all divisions. The gross
profit from the aviation division has also decreased due to new contracts
generally coming in at lower margins than terminated business. Management
expects margins to remain at about this level for the remainder of this
fiscal year despite low levels of unemployment and the competitive nature
of the industry.
For the six months ended September 30, 2000, gross profit increased by
$285,035 to $5,613,700 or 16.3% of revenue compared to $5,328,665 or 18.6% of
revenue for the six months ended September 30, 1999. The increase in revenue
of $5,819,284 had an impact of $948,543 on gross profits based on the
achieved margin of 16.3%. This increase was offset by increased payroll and
subcontract costs due to the tight labor market and resultant increase in
overtime ($703,000) as well as increased vehicle operating costs ($78,900).
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 while 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.
11
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Administrative service revenue decreased by $96,210 to $64,294 in the
quarter ended September 30, 2000, from $160,504 in the quarter ended
September 30, 1999. For the six months administrative service revenue
decreased by $195,239 to $152,596 for the period ended September 30, 2000
from $347,835 for the period ended September, 1999. The decrease is primarily
due to a contract as non-employer of record which terminated in May 2000.
This had accounted for approximately 56% of the fee revenue in fiscal year
2000. Management is actively pursuing potential new administrative service
clients and has signed a new contract starting in November, 2000. The Company
currently supports one administrative service client and services two police
departments in connection with off-duty police support which now represents
around 59% of the fee revenue earned in the quarter ended September 30, 2000.
A third police department is expected to start in November, 2000.
General and administrative expenses increased by $691,651 to $2,666,789 for
the quarter ended September 30, 2000, from $1,975,138 for the quarter ended
September 30, 1999. The main areas of increase were office and administrative
salaries and payroll taxes which rose by around $285,000 due primarily to
additional sales people to drive an internal growth program and additional
staff to manage the increased level of sales, most notably in the guard and
ATM divisions. Other areas of material increase were: telephone charges
($68,000), ongoing legal and professional fees ($74,000), conference costs
($103,000) reflecting the sales drive and the increased costs of travel,
advertising and recruitment ($23,000) due to the tightened labor market, and
rent and utilities ($31,000).
For the six months ended September 30, 2000, general and administrative
expenses increased by $1,060,579 to $5,009,708, compared to $3,949,129 for
the six months ended September 30, 1999. The major areas of increase are:
administrative salaries and payroll taxes from investment in personnel to
deliver and support the sales growth ($447,700), telephone charges ($93,400),
ongoing professional fees ($105,000) and increased spending on travel and
conferences to improve internal sales growth ($150,900). Management expects
these costs to decrease as focus is shifted from sales conferences to direct
sales calls and more professional services are brought in house.
Amortization of intangibles decreased by $222,677 to $78,922 for the quarter
ended September 30, 2000, compared to $301,599 for the quarter ended
September 30, 1999. For the six months ended September 30, 2000, amortization
of intangibles decreased by $426,716 to $175,482 compared with $602,198 for
the six months ended September 30, 1999. The reduction is primarily due to
intangible assets from the ISS International Service System, Inc. ($232,500),
United Securities Group Inc. ($188,900) and McVey Security Inc. ($9,500)
acquisitions being fully amortized. These charges are expected to remain at
current levels for the rest of this fiscal year.
The provisions for doubtful accounts increased by $35,262 to $100,860 for the
quarter ended September 30, 2000, compared to $65,598 for the quarter ended
September 30, 1999. For the six months ended September 30, 2000, the
provision for doubtful accounts increased by $90,314 to $227,849, compared to
$137,535 for the six months ended September 30, 1999. The provision for
doubtful accounts increased by $35,000 for the three months and $65,000 for
the six months due to reserves provided in connection with other than guard
service related receivables and is management's best estimate of amounts that
may not be collectible. The Company periodically evaluates the requirement
for providing for credit losses on its accounts receivables. Criteria used by
management to evaluate the adequacy of the allowance for doubtful accounts
include, among others, the creditworthiness of the customer, prior payment
performance, the age of the receivables and the Company's overall historical
loss experience. It is not known if bad debts will increase in future periods
nor is this increase necessarily indicative of a trend.
Interest income decreased by $30,420 to $22,295 for the quarter ended
September 30, 2000, from $52,715 in the quarter ended September 30, 1999. For
the six months ended September 30, 2000, interest income decreased by $41,884
to $54,358 compared to $96,242 for the six months ended September 30, 1999.
The decrease in interest income was primarily due to the termination of a
non-employer of record administrative service client in May 2000 and interest
income for the remainder of the fiscal year is not expected to change
significantly from current levels.
12
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Interest expense rose to $223,939 for the quarter ended September 30, 2000,
from $215,307 for the quarter ended September 30, 1999, an increase of
$8,632. For the six months ended September 30, 2000, interest expense rose by
$26,096 to $437,076 from $410,980 for the quarter ended September 30, 1999.
The prime base rate remained at 9.50% since May, 2000, with the increased
charge primarily arising from slightly higher average borrowing on the
revolving loan agreement. The new LaSalle financing arrangement described
in more detail below is expected to result in annualized interest savings
of approximately $150,000 based on current borrowing levels. These savings,
however, will be offset by a one time termination charge in November, 2000,
of $125,000 payable to CIT.
The insurance rebate of $10,799 for the quarter ended September 30, 2000,
relates to the reimbursement of a maintenance tax surcharge for tax years
1991 through 1996 paid to the Texas Workers' Compensation insurance fund. The
Company does not expect any further material insurance rebates of this kind
for the balance of fiscal 2001.
In connection with the tentative settlement of the stockholder derivative
action disclosed in Note 4 to the condensed financial statements the Company
recorded at September 30, 2000, an accrual of $250,000 for agreed upon
transaction related expenses as well as related professional fees incurred of
$123,700.
Loss on equipment dispositions of $7,191 in the quarter ended September 30,
2000, related to the disposal of three vehicles sold at below book value.
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 which is currently 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 September 30, 2000, the Company had borrowed $7,836,414 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
status of the factors used to determine availability (such as billing,
payments and aging of accounts receivable).
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
13
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
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 March 31, 1999, the Company had expended and charged
earnings with approximately $204,000 in legal fees in defense of this matter
on its own behalf as well as on behalf of the defendant officers and
directors. In addition, the Company has expended $100,000 for legal fees on
behalf of the plaintiff directors in December, 1998, and 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. 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.
On September 12, 2000, the Company entered into an agreement in connection
with the purchase by Reliance Security Group plc ("Reliance") , whereby
Reliance agreed to the purchase of all the common shares owned by the
plaintiff outside stockholder and all common shares, preferred shares and
options owned by the plaintiff directors which represent approximately 38% of
the outstanding common stock of the Company on a fully diluted basis. As a
result the plaintiffs agreed to terminate their lawsuit, relinquish their
seats on the Board and terminate a shareholder agreement to which they are a
party. As an inducement to Reliance to complete the transaction, the Company
has agreed to the issuance of a five year warrant to purchase up to 20% of
the Company's then outstanding stock on a fully diluted basis (approximately
2.3 million shares) at $1.25 per share. The Company also agreed to pay
certain transaction related expenses of $200,000 and expects to reimburse
approximately $50,000 for certain directors' related legal costs and,
accordingly, has accrued these costs in the accompanying financial statements
as of September 30, 2000. In addition, the Company incurred $123,700 in
professional fees through September 30, 2000, in connection with this
tentative settlement. The Reliance transaction constitutes a change in
control and, as such, requires shareholder approval. Management believes that
it is probable that the shareholders will vote for such approval at a special
meeting scheduled on November 13, 2000.
The Company has a commitment letter for a new loan and security
agreement with LaSalle Business Credit Inc. which is expected to close on or
about November 10, 2000. The maximum overall credit facility will be
$18,000,000 with $3,000,000 being a term loan repayable in equal monthly
installments of $100,000 through June, 2003. The loans can be either at LIBOR
or prime (although there can only be three LIBOR loans outstanding at any one
point in time) with interest rates of LIBOR plus 2% and prime on the
revolving loan and LIBOR plus 2.5% and prime on the term loan. Management
believes that the new borrowing facility will provide the Company with excess
cash availability of approximately $2.5 million with which to finance its
growth objectives.
14
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Long term debt (including current maturities) was reduced by $117,386, net of
additions of $127,307, to $602,893 at September 30, 2000, from $720,279 at
March 31, 2000. The Company did not take on any additional capital lease
obligations during the quarter ended September 30, 2000.
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.
The Company's operations for the six months ended September 30, 2000,
resulted in an operating loss of $20,489, a decrease of $1,008,127 compared
to a profit of $987,638 for the six months ended September 30, 1999. The
reduction is primarily due to the one-off costs of the Reliance transaction
reserved in the second quarter of the current fiscal year and additional
costs of investment in people and infrastructure to maintain and manage the
volume growth achieved over the first six months of fiscal year 2001. As a
result, working capital decreased by $446,772 to $302,938 as of September 30,
2000, from $749,710 as of March 31, 2000. The Company experienced a cash
overdraft (defined as checks drawn in advance of future deposits) of $640,315
as of September 30, 2000, compared to $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.
Due to the fact that the Company's stock had been trading below $1.00 since
approximately May of this year, the Company received notification from NASDAQ
that it was not in compliance with the minimum closing bid requirement. The
Company was advised that unless the stock price came into compliance, the
Company's stock would be delisted from the NASDAQ Small Cap Market. The
Company attended a hearing before a NASDAQ panel on October 6, 2000, and
presented a plan to the hearing panel which the Company's management believed
would lead to compliance within a reasonable period of time. The Company
received notice from NASDAQ at the close of business on October 24th that its
plan for compliance would not be accepted and that the Company's stock would
be delisted effective October 25, 2000. The Company's stock is now quoted in
the OTC Bulletin Board Service. The Company intends to continue to comply
with all applicable reporting requirements of the Securities and Exchange
Commission.
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.
15
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
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, 10-Q and 8-K and its current registration statement on Form S-3 and any
amendments thereto (all as filed with the Securities and Exchange Commission
from time to time).
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 September 30, 2000, and average outstanding
balances during the six months then ended, a 1% change in the prime lending
rate would impact the Company's financial position and results of operations
by approximately $35,400 over the next six months.
PART II. Other Information
Item 1. Legal Proceedings
(1) 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 three forms 8-K, two are
dated August 12, 2000, and September 12, 2000, respectively,
reporting certain press releases and one is dated September 12,
2000, reporting a change in control.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMAND SECURITY CORPORATION
Date: November 13, 2000 By: /s/ William C. Vassell
-----------------------------------------
William C. Vassell, Chairman of the Board
By: /s/ Peter Nekos
-----------------------------------------
Peter Nekos, Principal Financial Officer
17
