UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1999
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-18684
Command Security Corporation
(Exact name of registrant as specified in its charter)
New York 14-1626307
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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 February 11, 2000).
<PAGE>
COMMAND SECURITY CORPORATION
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Statements of Operations -
three months and nine months ended
December 31, 1999 and 1998 (unaudited) 2
Condensed Balance Sheets -
December 31, 1999 and March 31, 1999
(unaudited) 3
Condensed Statements of Changes in Stockholders' Equity
nine months ended December 31, 1999 and 1998
(unaudited) 4
Condensed Statements of Cash Flows nine months
ended December 31, 1999 and 1998
(unaudited) 5-7
Notes to Condensed Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 11-15
PART II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
1
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenue $15,322,437 $14,537,004 $43,942,966 $44,467,583
Cost of revenue 12,818,623 12,143,633 36,110,487 37,037,633
Gross profit 2,503,814 2,393,371 7,832,479 7,429,950
Service contract revenue (note 1) 107,395 187,042 455,230 728,131
2,611,209 2,580,413 8,287,709 8,158,081
Operating expenses
General and administrative expenses 2,064,989 2,188,502 5,998,429 6,314,841
Amortization of intangibles 302,099 319,194 904,297 973,190
Provision for doubtful accounts 61,507 181,969 199,242 353,262
Bad debt recoveries (36,216) (254,940) (36,416) (302,937)
2,392,379 2,434,725 7,065,552 7,338,356
Operating profit 218,830 145,688 1,222,157 819,725
Interest income 40,787 45,382 137,029 106,683
Service company termination fee -0- -0- 35,000 -0-
Interest expense (205,067) (243,873) (616,047) (763,670)
Equipment dispositions (4,704) (11,511) 12,110 (13,444)
Income/(loss) before income taxes 49,846 (64,314) 790,249 149,294
Provision for income taxes -0- -0- -0- -0-
Net income/(loss) 49,846 (64,314) 790,249 149,294
Preferred stock dividends (40,675) (37,661) (137,179) (112,983)
Net income/(loss) applicable to
common stockholders $ 9,171 $ (101,975) $ 653,070 $ 36,311
Net income/(loss) per common share $ .001 $ (.02) $ .10 $ .01
Weighted average number of
common shares outstanding 6,574,800 6,658,143 6,630,261 6,658,143
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
Dec. 31, March 31,
1999 1999
<S> <C> <C>
ASSETS
Current assets:
Cash $ -0- $ 122,470
Accounts receivable - net 12,390,120 11,460,880
Prepaid expenses 589,348 396,227
Other receivables - net 69,126 53,381
Total current assets 13,048,594 12,032,958
Property and equipment - net 1,005,087 1,031,042
Other assets:
Intangible assets - net 732,213 1,606,511
Restricted cash 789,684 1,091,527
Other assets 498,809 425,942
Total other assets 2,020,706 3,123,980
Total assets $16,074,387 $16,187,980
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 992,031 $ -0-
Current maturities of long-term debt 436,422 492,677
Current maturities of obligations under capital leases 35,579 69,428
Short-term borrowings 6,524,744 6,995,852
Accounts payable 636,076 701,296
Due to service companies 280,169 567,603
Preferred dividends payable 40,674 -0-
Accrued payroll and other expenses 2,570,151 3,005,866
Total current liabilities 11,515,846 11,832,722
Self-insurance reserves 802,302 764,482
Long-term debt due after one year 328,544 425,149
Obligations under capital leases due after one year 19,862 46,552
12,666,554 13,068,905
Stockholders' equity:
Preferred stock, convertible Series A 2,033,682 2,033,682
Common stock, $.0001 par value 651 666
Additional paid-in capital 8,926,812 9,277,997
Retained earnings/(deficit) (7,403,021) (8,193,270)
Treasury stock at cost (150,291) -0-
Total stockholders' equity 3,407,833 3,119,075
Total liabilities and stockholders' equity $16,074,387 $16,187,980
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Retained
Preferred Common Paid-In Earnings Treasury
Stock Stock Capital (Deficit) Stock
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1998 1,883,039 801 9,431,505 (8,177,871) (3,000)
Preferred stock dividends 112,983 (112,983)
Retirement of treasury stock (135) (2,865) 3,000
Net income - nine months ended
December 31, 1998 149,294
Balance at December 31, 1998 1,996,022 666 9,315,657 (8,028,577) -0-
Preferred stock dividends 37,660 (37,660)
Net loss - three months ended
March 31, 1999 (164,693)
Balance at March 31, 1999 2,033,682 666 9,277,997 (8,193,270) -0-
Return of escrowed
common stock (15) (214,006)
Preferred stock dividends (137,179)
Purchase of treasury stock (150,291)
Net income - nine months ended
December 31, 1999 790,249
Balance at December 31, 1999 $2,033,682 $ 651 $8,926,812 $(7,403,021) $(150,291)
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Dec. 31, Dec. 31,
1999 1998
<S> <C> <C>
Cash flow from operating activities:
Net income $ 790,249 $ 149,294
Adjustments to reconcile net income to net
cash provided by/(used in) operating activities:
Depreciation and amortization 1,274,219 1,304,512
Provision for doubtful accounts, net of recoveries 162,826 50,325
(Gain)/loss on equipment dispositions (12,110) 13,444
Self-insurance reserves 274,900 496,760
Stock compensation settlement (154,021) -0-
Increase in receivables,
prepaid expenses and deposits (949,512) (2,209,064)
Decrease in accounts payable
and other current liabilities (1,085,449) (1,821,493)
Net cash provided by/(used in) operating activities 301,102 (2,016,222)
Cash flows from investing activities:
Purchases of equipment (97,865) (83,801)
Proceeds from sale of equipment 17,964 2,255
Purchase of intangible assets (12,000) (45,738)
Notes issued -0- (5,000)
Principal collections on notes receivable 200 47,376
Net cash used in investing activities (91,701) (84,908)
Cash flows from financing activities:
Net borrowings/(repayments) on line-of-credit (495,773) 1,639,429
Increase in cash overdrafts 992,031 1,470,909
Principal payments on other borrowings (529,196) (956,385)
Principal payments on capital lease obligations (52,137) (52,823)
Purchase of treasury stock (150,291) -0-
Payments of preferred stock dividends (96,505) -0-
Net cash provided by/(used in) financing activities (331,871) 2,101,130
Net change in cash
and cash equivalents (122,470) -0-
Cash and cash equivalents
at beginning of period 122,470 -0-
Cash and cash equivalents
at end of period $ -0- $ -0-
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental Disclosures of Cash Flow Information
Cash paid during the nine months ended December 31 for:
1999 1998
Interest $ 616,047 $ 767,855
Income taxes -0- -0-
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the nine months ended December 31, 1999 and 1998, the Company purchased
transportation and office equipment with direct installment and lease
financing of $260,357 and $184,287, respectively.
The Company generally obtains short-term financing to meet its insurance
needs. For the nine months ended December 31, 1999 and 1998, $122,644 and
$107,099, respectively, have been borrowed for this purpose. These borrowings
have been excluded from the condensed statement of cash flows.
For the nine months ended December 31, 1998, the Company accrued dividends of
$112,983 on its Series A convertible preferred stock. These charges to
paid-in capital and credits to preferred stock have been excluded in the
condensed statement of cash flows.
In December, 1999, the Company entered into an agreement modifying a stock
compensation arrangement entered into in November, 1993, and canceling
150,000 shares of the Company's common stock held in escrow. The resultant
charges to common stock and additional paid-in capital and credits to accrued
expenses 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
condensed statement of cash flows.
In June, 1998, the Company purchased certain guard service accounts and
related equipment and supplies for a total consideration of $222,098. The
Company paid $55,525 and issued two notes for $55,525 and $111,049,
respectively. The non-cash portions have been excluded from the purchase of
accounts and issuance of notes in the condensed statement of cash flows.
6
<PAGE>
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's financial statements
for the year ended March 31, 1999.
The financial statements for the interim periods shown in this report are not
necessarily indicative of results to be expected for the fiscal year. In the
opinion of management, the information contained herein reflects all
adjustments necessary to summarize fairly the results of operations,
financial position, stockholders' equity and cash flows at December 31, 1999,
and for the period then ended. All such adjustments are of a normal recurring
nature, except for a decrease in compensation expense of $154,021 recognized
in connection with the settlement of a stock compensation arrangement entered
into in November, 1993.
1.) Service Companies
The following is a summary of the service companies' activities for the nine
months ended December 31, 1999 and 1998, respectively, the components of
which have been excluded from the Company's financial statements:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Service companies' guard
service revenue $ -0- $742,767 $566,190 $6,750,765
Cost of revenue -0- 594,478 444,664 5,032,264
Gross profit -0- 148,289 121,526 1,718,501
Service companies' share
of gross profit -0- 104,832 87,634 1,320,921
Total employer of record
service fees -0- 43,457 33,892 397,580
Other service revenue 107,395 143,585 421,338 330,551
Total service contract revenue $107,395 $187,042 $455,320 $ 728,131
</TABLE>
7
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2.) Short-Term Notes Payable
In February, 1995, the Company entered into an agreement with The CIT
Group/Finance, Inc. ("CIT") under a revolving loan and security agreement
(the "agreement"). The agreement, as amended on January 30, 1997, provides
for a discretionary line of credit of up to 85% of eligible accounts
receivable, as defined in the agreement, but in no event in excess of $10
million. At December 31, 1999, the Company had used $6,448,110 of this line,
representing 84% of its maximum borrowing capacity. Interest is payable
monthly, at 1.5% above prime (10% at December 31, 1999). The line is
collateralized by customer accounts receivable and substantially all other
assets of the Company. The agreement will currently expire in February, 2001,
and provides for automatic two year renewal terms.
3.) Income/(Loss) per Share:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128), "Earnings Per Share," which is required to be
adopted for periods ending after December 15, 1997. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
common stock equivalents, if any, is excluded. The implementation of SFAS 128
had no impact on the calculation of the Company's earnings or loss per share.
Warrants and stock options outstanding and preferred stock conversions were
excluded from the computation for each period presented because their effect
was antidilutive.
4.) Self-Insurance
The Company adopted a partially self-insured health insurance program
that covers all eligible administrative personnel, effective as of March 1,
1997. There is a maximum of $30,000 per year per employee and an aggregate
amount per year, based on the number of participants (currently 60 employees,
or $256,600), that the Company can be responsible for. A stop-loss insurance
policy covers all claims in excess of the above amounts.
The Company has an insurance policy to cover workers compensation claims
in most states that the Company performs services. Annual premiums are based
on incurred losses as determined at the end of the coverage period, subject
to a minimum and maximum premium. Insurance providers assist the Company in
determining its estimated liability for these claims.
The nature of the Company's business also subjects it to claims or
litigation alleging that it is liable for damages as a result of the conduct
of its employees or others. The Company insures against such claims and suits
through policies with third-party insurance companies. Such policies have
limits of $1,000,000 per occurrence and $10,000,000 in the aggregate. In
addition, the Company has obtained an excess liability policy that covers
claims for an additional $50,000,000 in the aggregate. The Company retains
the risk for the first $50,000 per occurrence.
Cumulative amounts estimated to be payable by the Company with respect
to pending and potential claims for all years in which the Company is liable
under its self-insurance retention and retro workers compensation policies
have been accrued as liabilities. Such accrued liabilities are necessarily
based on estimates; thus, the Company's ultimate liability may exceed or be
less than the amounts accrued. The methods of making such estimates and
establishing the resultant accrued liability are reviewed continually and any
adjustments resulting therefrom are reflected in current earnings.
8
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Contingent Liabilities
The Company has guaranteed certain installment loans extended to various
service companies and customer account purchasers by Capital Resources
Company. The total outstanding balance on such loans as of December 31, 1999,
was approximately $317,100.
In May, 1996, a complaint was filed in Queens County Civil Court by
three former employees alleging emotional distress, anguish, mental distress
and injury to their professional reputation due to retaliatory discharge and
related matters. Plaintiffs each seek $2 million for compensatory damages and
$2 million in punitive damages in addition to payment of overtime wages of
$25,000. The Company's customer, also a defendant and a former employer, has
engaged counsel representing all defendants. On November 27, 1998, the Kings
County Supreme Court ruled on a motion dismissing three counts concerning
contractual allegations but allowed the remaining nine counts to proceed to
findings. At this time the Company is unable to estimate the possible loss,
if any, that may be incurred as a result of this action. The ultimate outcome
may or may not have a material impact on the Company's financial position or
results of operations.
In August, 1997, a complaint was filed in Los Angeles County Superior
Court by six former employees alleging discrimination, wrongful termination,
breach of employment contract and intentional infliction of emotional
distress. The complaint alleges that plaintiffs have suffered damages in
excess of $1 million. After filing the complaint, the plaintiffs, through
counsel, agreed to submit the dispute to binding arbitration and a request
for dismissal, without prejudice, was filed with the Court. At this time the
Company is unable to estimate the possible loss, if any, that may be incurred
as a result of such arbitration. The ultimate outcome of such arbitration may
or may not have a material impact on the Company's financial position or
results of operations.
The Company has been named as a defendant in several other employment
related claims, including claims of sexual harassment by current and former
employees, which are currently under investigation by the New York State
Division of Human Rights. At this time the Company is unable to determine the
impact on the financial position and results of operations that these claims
may have should the investigation conclude that they are valid.
The Private Placement Memorandum issued in connection with the Company's
1993 Private Placement and the interim financial reports for the first three
quarters in the fiscal years ended March 31, 1994 and 1995, filed by the
Company contained financial information which has since been restated. A
legal action has been filed against the Company and is described in greater
detail below. It includes claims based on the restatements. It is possible
that other purchasers of Units pursuant to the 1993 offering and the
purchasers of shares in connection with the offerings that were consummated
in February, 1995, may make further claims against the Company, alleging, as
the basis, among other possible claims the above-mentioned restatements.
The Company is in negotiation with a client concerning disputed Company
charges. The Company is unable to determine the maximum amount of potential
loss that could arise as a result of the negotiations. Management believes
that a prompt resolution will be in the best interests of the Company in
terms of client relations and the avoidance of litigation costs and has
accrued $220,000 in connection with this matter.
9
<PAGE>
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Contingent Liabilities: (Continued)
On or about December 4, 1997, an outside shareholder and four of the
Company's directors (Sands, P. Kikis, Saunders and T. Kikis) commenced an
action in the Supreme Court of the State of New York, County of New York
(Index No. 606166/97) against the other four directors (Vassell, Robinett,
Nekos and Miller), the Company's outside corporate and securities counsel and
the Company itself in a lawsuit characterized as a derivative action. The
complaint alleges that one or more of the defendant-directors engaged in
improper activities, including ultra-vires acts, breach of fiduciary duty,
fraud against the Company, constructive fraud, waste of corporate assets and
concealment of information from the plaintiff-directors regarding the
Company's earnings, lacked power to enter into an employment agreement on
behalf of the Company with Mr. Robinett, and entered into service contracts
with financially unstable companies without performing due diligence. The
complaint further alleges that the Company has failed to appoint a
replacement to the office of president and that the directors have entered
into a shareholder agreement which is violative of public policy. Plaintiffs
seek the award of money damages in an amount which is "not less than" $11
million from the individual defendants, a declaratory judgment that the
shareholder agreement is void, an order for an accounting, certain other
injunctive relief and attorneys' fees and disbursements.
The Company has interposed an answer denying the allegations contained
in the complaint. The individual defendants have stated that they believe the
allegations are completely without merit and intend to vigorously defend
against each and every claim. The Company's Certificate of Incorporation and
the Business Corporation Law of New York provide for indemnification of
officers and directors with respect to damages and legal fees incurred in
connection with lawsuits against them arising by reason of serving the
Company. Due to the fact that certain members of the board have chosen to
participate as plaintiffs in this lawsuit, the Company may not have coverage
under its officers and directors liability insurance policy. The defendant-
directors intend to seek indemnification, and have received advancements of
legal fees incurred in connection with their defense, from the Company.
Through December 31, 1999, the Company has expended approximately $204,000 in
legal fees in defense of this matter on its own behalf as well as on behalf
of the defendant officers and directors. In addition, the Company has
expended $100,000 for legal fees on behalf of the plaintiff directors in
December, 1998, and in March, 1999, accrued $92,000 for contingent legal fees
incurred by one of the defendants, where management has determined that
indemnification by the Company is probable . On or about March 25, 1998, the
plaintiffs filed a motion for the appointment of a temporary receiver. On
June 5, 1998, the Court ordered the appointment of a temporary receiver, but
prior to the order taking effect, the parties agreed to a stipulation
pursuant to which Franklyn H. Snitow, Esq., was appointed acting President
and Chief Executive Officer and acting ninth Board member during the pendency
of the defendants' appeal to the Appellate Division of the decision to
appoint a receiver. Based on the stipulation, the defendants' request to the
Appellate Division for a stay pending the appeal of the order appointing the
receiver was granted. On January 12, 1999, the Appellate Division dismissed
the appeal and modified the lower court's order to continue Mr. Snitow's
authority to discharge his responsibilities as Acting President, Chief
Executive Officer and Director pending the underlying litigation. The Company
is unable to reasonably estimate the potential impact on the Company's
financial condition and results of operations from this lawsuit.
In August of 1998, the Company was informed that the United States
Attorneys' Office for the Southern District of Florida was conducting a
criminal investigation of certain activities at the Miami office of its
Aviation Safeguards Division. The investigation concerned the accuracy and
completeness of forms submitted in connection with Miami airport employee
background verifications. The Company is taking steps to ensure future
compliance in all areas covered by the investigation. Local counsel
representing the Company has completed negotiations with the United States
Attorney's office whereby the proposed pleas and settlement were accepted by
the United States Attorney's office and presented to the Court for its
approval. The amount of $110,000 reserved by the Company for this matter
covers restitution and fines.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following sections contain forward-looking statements. Please refer to
the "Forward-Looking Statements" and "Cautionary Statement" sections at page
15 below.
Results of Operations
The following should be read in conjunction with the Company's financial
statements and the related notes thereto.
Revenue increased by $785,433 or 5.4% for the quarter ended December 31,
1999, to $15,322,437 from $14,537,004 for the quarter ended December 31,
1998. The major components of this increase are approximately $520,000 due to
the cumulative effect of new contract starts net of contract cancellations
and terminations and approximately $265,000 for services to a long haul
trucking concern that is in the process of liquidation. 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.
For the nine months ended December 31, 1999, revenue decreased by $524,617 or
1.2% to $43,942,966 from $44,467,583 for the nine months ended December 31,
1998. The decrease is composed of approximately $4,248,000 cumulative effect
of contract cancellations and terminations net of new contract starts from
general commercial accounts offset by approximately $2,933,000 revenue
increase from accounts within the commercial airline industry and
approximately $790,000 of non-recurring revenue due to the liquidation of a
long haul trucking concern.
Gross profit increased by $110,443 to $2,503,814 or 16.3% of revenue for the
quarter ended December 31, 1999, compared to $2,393,371 or 16.5% of revenue
for the quarter ended December 31, 1998. Gross profit increased by $130,000
as a result of revenue growth mentioned above. However, cost of sales
increased by $19,500, the major components of which are: an accrual increase
of $120,000 regarding disputed Company charges with a client (see Note 5 to
the condensed financial statements), increases in insurance costs ($48,000),
various losses incurred at client premises ($32,000), an increase in uniform
expense due to new start-ups ($33,000) and car depreciation and expenses
($19,000), offset by $183,000 decrease in labor and subcontract costs due to
the termination of some lower margin contracts and new and temporary business
at improved margins and a $31,000 reduction in payroll taxes due to more
favorable unemployment insurance rates and increase in usage of
subcontractors and $13,500 decrease in union benefit costs due to recognition
withdrawal by a key service employee union.
For the nine months ended December 31, 1999, gross profit increased by
$402,529 to $7,832,479, or 17.8% of revenue compared to $7,429,950 or 16.7%
of revenue for the nine months ended December 31, 1998. This results from
cost reductions of approximately $490,000, the major components consist of:
$627,000 decrease in labor costs due to termination of lower margin
contracts, $155,800 decrease in payroll related tax expenses, $216,000
reduction in general liability self-insurance reserves provisions and $51,900
decrease in union benefits, offset by increases due to accruals regarding
disputed Company charges with a client of $220,000 (see Note 5 to the
condensed financial statements), uniform expenses ($136,700), auto
depreciation and expenses ($98,600), insurance costs ($60,500) and losses at
client premises ($57,000). These net cost reductions are partially offset by
the above noted decline in revenue which caused gross profit to decrease by
$87,500.
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 unemployment costs.
The Company provides payroll and billing services and accounts receivable
financing through contracts with service company clients for a percentage of
the revenue or gross profit generated from their business. The Company owns
the accounts receivable and, depending on the individual contract, may be the
employer of record. The caption "Service Contract Revenue" represents the
income earned on the Service Agreements.
11
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations (continued)
Service contract revenue decreased by $79,647 to $107,395 in the quarter
ended December 31, 1999, from $187,042 in the quarter ended December 31,
1998. For the nine months ended December 31, 1999, service contract revenue
decreased by $272,901 to $455,230 from $728,131 for the nine months ended
December 31, 1998. This decrease is primarily due to the termination of two
service agreements during the quarter ended June 30, 1999, and the
renegotiation of one contract in August, 1998, from an employer of record to
a non-employer of record type at a lower rate. At December 31, 1999, there
are only two active service contracts where in either case the Company is not
the employer of record. Although there are prospective clients, the Company
did not sign new service agreements in the current quarter. If no new
contracts are signed, service contract revenue will decrease as current
contracts expire.
General and administrative expenses decreased by $123,513 to $2,064,989 for
the quarter ended December 31, 1999, from $2,188,502 for the quarter ended
December 31, 1998. The major area of reduction is professional fees
($230,000) primarily due charges during the period ended December 31, 1998,
in connection with the Florida Aviation Safeguard matter and the stockholder
derivative action, both described in Note 5 to the condensed financial
statements. The reduction was offset by increases in office and
administrative salaries of $175,000 due to expansion in Florida and New York
branches, reduced by a stock compensation settlement related credit of
$154,000, payroll taxes ($17,000), recruitment advertising ($28,000) and an
additional contingency reserve for a labor union case ($20,000).
For the nine months ended December 31, 1999, general and administrative
expenses decreased by $316,412 to $5,998,429 compared to $6,314,841 for the
nine months ended December 31, 1998. The major areas of reduction are
professional fees ($510,000), telephone expense recovery ($37,000) and a
penalty charge in September, 1998, of $58,000. These reductions were
primarily offset by increases in office and administrative salaries of
approximately $243,000 (net of the above mentioned $154,000 stock
compensation related credit) and recruitment advertising of $51,000.
Amortization of intangibles decreased by $17,095 to $302,099 for the quarter
ended December 31, 1999, compared to $319,194 for the quarter ended December
31, 1998. For the nine months ended December 31, 1999, amortization of
intangibles decreased by $68,893 to $904,297 compared to $973,190 for the
nine months ended December 31, 1998. This is primarily due to some intangible
assets being fully amortized as of March 31, 1999. Amortization charges are
expected to continue at current levels through March, 2000, with significant
reductions thereafter as purchased customer lists become fully amortized.
The provisions for bad debts, net of recoveries, increased by $98,262 to
$25,291 for the quarter ended December 31, 1999, from ($72,971) for the
quarter ended December 31, 1998. For the nine months ended December 31, 1999,
the net provision for bad debts increased by $112,501 to $162,826 compared to
$50,325 for the period December 31, 1998. These increases are primarily due
to the net effect of bad debt recoveries in the amount of $230,000 recovered
from a former service agreement client in the quarter ending December 31,
1998. Excluding these recoveries, current bad debt expense has decreased from
prior year periods. This decrease is primarily due to improved collection
procedures thereby reducing the occurrence of additional past due
receivables. The provision for bad debts is management's estimate of accounts
that may be uncollectible based on the results of its continuous monitoring
of accounts outstanding in excess of 60 days. It is not known if bad debts
excluding recoveries will decrease in future periods nor are these decreases
necessarily indicative of a trend.
Interest income decreased by $4,595 to $40,787 for the quarter ended December
31, 1999, from $45,382 for the quarter ended December 31, 1998. This decrease
is primarily due to the termination of one key service agreement customer
contract in September 30, 1999, reducing the amount of outstanding
receivables that are being financed by the Company. For the nine months ended
December 31, 1999, interest income increased by $30,346 to $137,029 compared
to $106,683 for the nine months ended December 31, 1998. This increase
resulted from the collection of interest from a non-employer of record
service agreement that prior to August 1998 was contracted by the Company as
an employer of record service agreement where interest fee structure was not
part of the contract.
12
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations (continued)
Interest expense decreased by $38,806 to $205,067 for the quarter ended
December 31, 1999, from $243,873 for the quarter ended December 31, 1998. For
the nine months ended December 31, 1999, interest expense decreased by
$147,623 to $616,047 compared to $763,670 for the nine months ended December
31, 1998. The decrease is due primarily to reductions in current maturities
of long term debt with final payment of the Deltec loan arrangement in the
quarter ended March 31, 1999, and reduced usage of the revolving loan
arrangement with CIT Group/Credit Finance while the prime rate averaging
7.84% in the quarter ended December 31, 1998 increased to 8.38% averaging in
the quarter ended December 31, 1999.
For the nine months ending December 31, 1999, a service company termination
fee of $35,000 was recognized for terminating an Employer of Record service
agreement prior to it's October 2000 expiration. Such termination fees are
not expected to recur in future periods.
For the nine months ending December 31, 1999, net gain on equipment
dispositions represents proceeds of two vehicles sold in excess of book
value.
Liquidity and Capital Resources
The Company pays its guard employees and those of its service agreement
clients on a weekly basis, while its customers and the customers of service
company clients pay for the services of such employees generally within 65
days after billing by the Company. In order to provide funds for payment to
its guard employees, the Company uses a commercial revolving loan arrangement
with CIT Group/Credit Finance (CIT). Under this agreement, borrowings may be
made in an amount up to 85% of eligible accounts receivable, but in no event
more than $10,000,000. The Company also has a term loan in the amount of
$500,000 to be repaid in equal monthly installments over five years. The term
loan matures in February, 2002. Outstanding balances under the revolving loan
and the term loan bear interest at a per annum rate of 1 1/2% in excess of
the "prime rate" and are collateralized by a pledge of the Company's accounts
receivable and other assets.
As of December 31, 1999, the Company had borrowed $6,448,110 representing 84%
of its maximum borrowing capacity based on the definition of "eligible
accounts receivable" under the terms of the revolving loan agreement.
Generally, the Company borrows a high percentage of its available borrowing,
which can fluctuate materially from day to day due to changes in the status
of the factors used to determine availability (such as billing, payments and
aging of accounts receivable).
The Company's operations for the nine months ended December 31, 1999,
resulted in an operating profit of $1,222,157, an increase of $402,432
compared to $819,725 from the nine months ended December 31, 1998. On
December 31, 1999, the Company experienced a book cash overdraft of $992,031
for one business day which may have been covered with the excess availability
of the Company's borrowing capacity as noted above. The Company, as of
December 31, 1999, had positive working capital of $1,532,748, an increase of
$1,332,512 from the working capital as of March 31, 1999, of $200,236. The
Company anticipates continued improvements in working capital with improved
operating results and reductions in long term debt service requirements.
In August, 1998, the Company was informed that the United States Attorney's
office for the Southern District of Florida was conducting a criminal
investigation of certain activities at the Miami office of its Aviation
Safeguard Division. The investigation concerned the accuracy and completeness
of forms submitted in connection with Miami airport employee background
verifications. The Company continues to take steps to ensure future
compliance in all areas covered by the investigation. Local counsel
representing the Company has completed the negotiations with the United
States Attorney's office whereby the proposed pleas and settlement were
accepted and presented to the Court for its approval. The amount of $110,000
reserved by the Company covers restitution and fines that are detailed in the
settlement.
13
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Liquidity and Capital Resources (continued)
The Company is in negotiation with a client concerning disputed Company
charges. Management believes that a prompt resolution will be in the best
interest of the Company in terms of client relations and the avoidance of
litigation costs. Management has estimated that the financial impact of the
ultimate resolution of this dispute will be approximately $220,000. The basis
of the dispute does not lead management to believe that this type of claim is
indicative of a trend or that other similar disputes are likely to arise in
the future.
In October, 1999, and November, 1999, the Company's Board of Directors
authorized the purchase of up to 200,000 shares of its common stock through
December 31, 1999. As of December 31, 1999, the Company purchased 145,800
shares for $150,291. Subsequently, in January, 2000, the Board authorized the
purchase of 75,000 additional shares on the open market. Through February 10,
2000, the Company purchased the total currently authorized amount of 220,800
shares for $226,202. The Company may repurchase additional shares in the open
market from time to time depending on market conditions.
The Company finances vehicle purchases typically over three years and
insurance through short-term borrowings. The Company has committed
approximately $300,000 to upgrade its computer system in order to enhance
communications, data utilization and to maintain leadership role in security
guard software. Management expects to have the new system operational in
June, 2000, and has secured lease financing for the improvements providing
for repayment terms over a three to five year period. The Company has no
additional lines of credit other than discussed herein and has no other
present material commitments for capital expenditures.
The Company has expended $30,540 through December 31, 1999, in connection
with outside consultants for services related to Year 2000 issues. All such
expenditures have been charged in the Company's financial statements as an
expense. The Company was not required to purchase computer equipment to
replace non-compliant systems. The Company has not tracked internal labor
costs because the Company believes these costs to be immaterial and there are
no further anticipated costs to be incurred. The only Year 2000 problem
encountered was in a financial program which resides only on the Company's
headquarters mainframe system and was insignificant. Subsequently, no other
problems were encountered with regard to Year 2000 issues. The Company does
not anticipate any major problems in the future in connection with the Year
2000 issue and will continue to monitor for potential glitches through March,
2000.
On August 6, 1999, the Company received notice from the NASDAQ Stock Market
stating that the Company was not in compliance with NASDAQ listing
requirements because its stock had not complied with the minimum bid price of
$1.00. On November 30, 1999, the Company received notification that it was
again in compliance with the bid price requirement for continued listing on
the NASDAQ Small Cap Market.
Forward-Looking Statements
The forgoing "Management's Discussion and Analysis of Results of Operations
and Financial Condition" includes "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves as long as they
identify these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact we make in this Form 10-Q are forward-looking.
In particular, the statements herein regarding our future results of
operations or financial position are forward-looking statements.
Forward-looking statements reflect our current expectations and are
inherently uncertain. Our actual results may differ significantly from our
expectations. The section entitled "Cautionary Statement" below describes
some, but not all of the factors that could cause these differences.
14
<PAGE>
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Cautionary Statement
As provided for under the Private Securities Litigation Reform Act of 1995,
the Company wishes to caution shareholders and investors that the following
important factors, among others, could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements in this
report.
1. The Company's assumptions regarding projected results depend largely
upon the Company's ability to retain substantially all of the Company's
current clients. Retention is affected by several factors including but
not limited to the quality of the services provided by the Company, the
quality and pricing of comparable services offered by competitors,
continuity of management and continuity of non-management personnel.
There are several major national competitors with resources far greater
than those of the Company which therefore have the ability to provide
service, cost and compensation incentives to clients and employees which
could result in the loss of such clients and/or employees.
2. The Company's ability to realize its projections will be largely
dependent upon its ability to maintain margins, which in turn will be
determined in large part by management's control over costs. To a
significant extent, certain costs are not within the control of
management and margins may be adversely affected by such items as
significant inflation, labor unrest and increased payroll and related
costs.
3. Although management currently has no reasonable basis of information
upon which to conclude that any significant service company client or
security guard customers will default, a default by a significant client
or customer would have a material adverse impact on the Company's
liquidity, results of operations and financial condition.
Additional detailed information concerning a number of factors that could
cause actual results 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).
15
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
(1) Reference is made to footnote 5 to the condensed financial
statements presented herein.
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits
None
(2) Reports on Form 8-K
During the quarter the Company filed two forms 8-K, dated October
6, 1999, and November 1, 1999, both reporting certain press
releases.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMAND SECURITY CORPORATION
Date: 2/14/00 By: /s/ William C. Vassell
William C. Vassell,
Chairman of the Board
By: /s/ Nathan Nelson
Nathan Nelson,
Principal Financial Officer
17
<PAGE>
COMMAND SECURITY CORPORATION
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.00
<CASH> (992)
<SECURITIES> 0
<RECEIVABLES> 12,937
<ALLOWANCES> 547
<INVENTORY> 0
<CURRENT-ASSETS> 13,049
<PP&E> 3,521
<DEPRECIATION> 2,516
<TOTAL-ASSETS> 16,074
<CURRENT-LIABILITIES> 11,516
<BONDS> 7,345
0
2,034
<COMMON> 1
<OTHER-SE> 1,524
<TOTAL-LIABILITY-AND-EQUITY> 16,074
<SALES> 0
<TOTAL-REVENUES> 44,398
<CGS> 0
<TOTAL-COSTS> 36,110
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 163
<INTEREST-EXPENSE> 616
<INCOME-PRETAX> 790
<INCOME-TAX> 0
<INCOME-CONTINUING> 790
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 790
<EPS-BASIC> .10
<EPS-DILUTED> .10
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