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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission file number 0-18684
Command Security Corporation
(Exact name of registrant as specified in its charter)
New York 14-1626307
(State or other jurisdiction I.R.S. Employer Identification No.)
of incorporation or organization)
Lexington Park, LaGrangeville, New York 12540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (845) 454-3703
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date: 6,287,343 (as of August 14, 2002).
COMMAND SECURITY CORPORATION
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Statements of Operations -
three months ended June 30, 2002
and 2001 (unaudited) 3
Condensed Balance Sheets -
June 30, 2002 and March 31, 2002
(unaudited) 4
Condensed Statements of Stockholders' Equity -
three months ended June 30, 2002 and 2001
(unaudited) 5
Condensed Statements of Cash Flows -
three months ended June 30, 2002 and 2001
(unaudited) 6 - 7
Notes to Condensed Financial Statements 8 - 10
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 11 - 15
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 16
2
PART I. Financial Information
Item 1. Financial Statements
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June, 30 June, 30
2002 2001
----------- -----------
Revenue $28,271,152 $18,558,098
Cost of revenue 21,914,412 15,935,849
----------- -----------
Gross profit 6,356,740 2,622,249
----------- -----------
Operating expenses
General and administrative expenses 3,287,593 2,765,963
Provision for doubtful accounts 293,043 62,949
----------- -----------
3,580,636 2,828,912
----------- -----------
Operating profit/(loss) 2,776,104 (206,663)
Interest income 24,121 24,761
Interest expense (198,220) (214,010)
Equipment dispositions 4,055 1,692
----------- -----------
Income/(loss) before income taxes 2,606,060 (394,220)
Provision for income taxes (456,339) -0-
----------- -----------
Net income/(loss) 2,149,721 (394,220)
Preferred stock dividends (325,394) -0-
----------- -----------
Net income/(loss) applicable to
common stockholders $ 1,824,327 $ (394,220)
=========== ===========
Net income/(loss) per common share
Basic $ 0.29 $ (.06)
=========== ===========
Diluted $ 0.28 n/a
=========== ===========
Weighted average number
of common shares outstanding
Basic 6,287,343 6,287,343
=========== ===========
Diluted 7,646,101 n/a
=========== ===========
See accompanying notes to condensed financial statements.
3
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
June 30, March 31,
2002 2002
----------- -----------
ASSETS
Current assets:
Accounts receivable, net $22,446,433 $21,929,464
Prepaid expenses 212,334 498,203
Deferred tax asset 386,081 -0-
Other receivables, net 153,661 388,066
----------- -----------
Total current assets 23,198,509 22,815,733
Property and equipment, net 1,137,648 1,195,422
Other assets:
Intangible assets, net 159,617 195,910
Restricted cash 254,406 253,548
Other receivables, net 195,021 304,733
Deferred tax asset 457,580 1,300,000
Other assets 313,417 251,377
----------- -----------
Total other assets 1,380,041 2,305,568
----------- -----------
Total assets $25,716,198 $26,316,723
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 2,245,112 $ 2,063,361
Current maturities of long-term debt 1,157,189 1,626,065
Current maturities of obligations under capital leases 101,076 120,532
Short-term borrowings 9,587,355 11,823,022
Accounts payable 833,762 1,178,712
Due to service companies 246,857 164,794
Self-insurance reserves 980,313 373,102
Preferred dividends payable 40,674 -0-
Accrued payroll and other expenses 3,595,095 3,941,041
----------- -----------
Total current liabilities 18,787,433 21,290,629
Self-insurance reserves 775,532 647,935
Long-term debt due after one year 142,855 186,988
Obligations under capital leases due after one year 98,560 103,680
----------- -----------
19,804,380 22,229,232
Stockholders' equity:
Preferred stock, Series A, $.0001 par value 2,033,682 2,033,682
Common stock, $.0001 par value 629 629
Additional paid-in capital 8,293,892 8,619,286
Retained earnings/(deficit) (4,416,385) (6,566,106)
----------- -----------
Total stockholders' equity 5,911,818 4,087,491
----------- -----------
Total liabilities and stockholders' equity $25,716,198 $26,316,723
=========== ===========
See accompanying notes to condensed financial statements.
4
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Retained
Preferred Common Paid-In Earnings
Stock Stock Capital (Deficit)
---------- --------- ---------- -----------
Balance at March 31, 2001 $2,033,682 $ 629 $8,619,286 $(8,941,866)
Net loss - three months ended
June 30, 2001 (394,220)
---------- --------- ---------- -----------
Balance at June 30, 2002 2,033,682 629 8,619,286 (9,336,086)
Net income - nine months ended
March 31, 2002 2,769,980
---------- --------- ---------- -----------
Balance at March 31, 2002 2,033,682 629 8,619,286 (6,566,106)
Preferred stock dividends (325,394)
Net income - three months ended
June 30, 2002 2,149,721
---------- --------- ---------- -----------
Balance at June 30, 2002 $2,033,682 $ 629 $8,293,892 $(4,416,385)
========== ========= ========== ===========
See accompanying notes to condensed financial statements.
5
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
----------------------------------
June 30, June 30,
2002 2001
----------- ----------
Cash flow from operating activities:
Net income/(loss) $ 2,149,721 $ (394,220)
Adjustments to reconcile net income/(loss) to
net cash provided/(used in) by operating activities:
Depreciation and amortization 172,357 194,156
Provision for doubtful accounts 293,043 62,948
Gain on equipment dispositions (4,055) (1,692)
Deferred income taxes 456,339 -0-
Self-insurance reserves 827,816 124,427
Increase in receivables,
prepaid expenses and deposits (262,924) (711,694)
Increase/(decrease) in accounts payable
and other current liabilities (701,841) 212,168
----------- ----------
Net cash provided/(used in) by operating activities 2,930,456 (513,907)
----------- ----------
Cash flows from investing activities:
Purchases of equipment (63,248) (59,811)
Proceeds from sale of equipment 5,183 1,692
Note issued to service company -0- (35,000)
Principal collections on notes receivable 20,000 28,534
----------- ----------
Net cash used in investing activities (38,065) (64,585)
----------- ----------
Cash flows from financing activities:
Net advances/(repayments) on line-of-credit (2,084,564) 539,115
Increase in cash overdrafts 181,751 532,399
Principal payments on other borrowings (664,112) (464,135)
Principal payments on capital lease obligations (40,746) (28,887)
Payment of preferred stock dividends (284,720) -0-
----------- ----------
Net cash provided by/(used in) financing activities (2,892,391) 578,492
----------- ----------
Net change in cash
and cash equivalents -0- -0-
Cash and cash equivalents
at beginning of period -0- -0-
Cash and cash equivalents
at end of period $ -0- $ -0-
=========== ==========
See accompanying notes to condensed financial statements.
(Continued)
6
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental Disclosures of Cash Flow Information
Cash paid during the three months ended June 30 for:
2002 2001
-------- --------
Interest $225,786 $214,010
Income taxes -0- -0-
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the three months ended June 30, 2002 and 2001, the Company purchased
transportation equipment with direct installment and lease financing of
$16,170 and $76,265, respectively.
For the three months ended June 30, 2002, the Company accrued dividends of
$40,674 on its Series A convertible preferred stock. This charge to paid-in
capital and credits to dividends payable have been excluded in the statement
of cash flows.
See accompanying notes to condensed financial statements.
7
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, 2002.
The financial statements for the interim periods shown in this
report are not necessarily indicative of results to be expected for the
fiscal year. In the opinion of management, the information contained herein
reflects all adjustments necessary to summarize fairly the results of
operations, financial position, stockholders' equity and cash flows at June
30, 2002, and for the period then ended. All such adjustments are of a normal
recurring nature.
1.) Short-Term Notes Payable:
In November, 2000, the Company entered into a three year agreement with
LaSalle Business Credit, Inc. ("LaSalle") under a loan and security
agreement (the "agreement"), providing for a line of credit of up to 85%
of eligible accounts receivable, as defined in the agreement, but in no
event in excess of $15 million. At June 30, 2002, the Company had used
$9,587,355 of this line, representing approximately 74% of its maximum
borrowing capacity. Interest is payable at Prime plus 0.5%. The line is
collateralized by customer accounts receivable and substantially all
other assets of the Company.
2.) Net Income/(Loss) per Common Share:
Under the requirements of Financial Accounting Standards Board Statement
No. 128 (SFAS 128), "Earnings Per Share," the dilutive effect of
potential common shares, if any, is excluded from the calculation for
basic earnings per share. No diluted earnings per share are presented
for the three months ended June 30, 2001, because the effect of assumed
issuance of common shares in connection with warrants and stock options
outstanding and preferred stock conversions was antidilutive.
3.) Preferred Stock
The Company has issued and outstanding 12,325 shares of Series A
Preferred Stock. The Series A shareholders are entitled to receive
annual dividends equal to 8% of the liquidation value of their shares,
payable quarterly. Upon liquidation or redemption the Series A
shareholders are entitled to $165 per share, or $2,033,682. The Company
had suspended payment of preferred dividends as of July 1, 2000, until
it could re-establish sufficient surplus in accordance with applicable
regulations. This was achieved and total arrears of $284,720 were paid
during the June 2002 quarter end.
(Continued)
8
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4.) 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 the Company's historical
payout profiles. Charges for estimated workers compensation related
losses incurred included in cost of sales were $1,119,971 and $538,190
for the three months ended June 30, 2002 and 2001, 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 general
liability claims and lawsuits through a general liability insurance
policy with a third-party insurance carrier. Such policies have limits
of $5 million per occurrence and $10 million in the aggregate on a per
project basis. Previous to December 2001, the Company had limits of $1
million per occurrence and $10 million in the aggregate. Prior to
October 1, 2001, the Company also had an excess general liability
insurance policy that covered claims for an additional $50 million in
the aggregate. The impact of the September 11 tragedy meant that this
umbrella cover was no longer available to the company at the time of
policy renewal (October 1, 2001). The Company retains the risk for the
first $25,000 per occurrence ($50,000 prior to October 1, 2000). The
general liability insurance reserve is based upon existing claims,
actuarial computations and the timing of reported claims. These are all
factored in to estimate losses incurred but not yet reported to the
Company
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.
5.) Contingent Liabilities:
The nature of the Company's business is such that there is a significant
volume of routine claims and lawsuits that are issued against it, the
vast majority of which never lead to substantial damages being awarded.
The Company maintains general liability, casualty and worker's
compensation insurance coverage that it believes is appropriate to the
relevant level of risk and potential liability. Some of the claims
brought against the Company could result in significant payments,
however, the exposure to the Company under general liability is limited
to the first $50,000 for cases before October 1, 2000, and $25,000 for
cases after that date. Any punitive damage award would not be covered by
the general liability insurance policy. The only other potential impact
would be on future premiums, which may be adversely effected by a poor
claims history.
In addition to such cases, the Company has been named as a defendant in
several uninsured employment related claims which are currently before
various courts, 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 operation
that these claims may have should the investigations conclude that they
are valid.
(Continued)
9
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Contingent Liabilities (continued):
The New York State Attorney General's Office has subpoenaed records of
the Company for 2001 relative to the provision of services to New York
State under the Office of General Services (OGS) requirements contract.
The total revenue generated on this contract in this year was
approximately $800,000. It is the understanding of the Company that the
Attorney General's Office has subpoenaed the records of several other
security companies that also provide services under this contract. The
investigation revolves around certain contract provisions and the
Company may be subject to partial return of billings if found to be in
non-compliance with the contract. It is not known at this time what the
likelihood or extent of any such amounts may be.
6.) Reclassifications
Certain 2001 income and expense items have been reclassified to conform
with the 2002 presentation. Administrative service revenue of $80,553
and $59,357 for the three months ended June 30, 2002 and 2001,
respectively, have been included with total revenue. Amortization of
intangibles of $36,293 and 46,217 for the three months ended June 30,
2002 and 2001, respectively, have been included with general and
administrative expenses. These items are no longer considered
significant enough to warrant separate presentation. These
reclassifications had no impact on reported earnings/(loss).
10
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. The
words "intends", "plans", "efforts", "anticipates", "believes", "expects", or
words of similar import typically identify such statements. Various important
factors that could cause actual results to differ materially from those
expressed in the forward-looking statements are identified at the end of this
Item 2. The actual results 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 any suggested in the following statements.
The results of operations reflected in this report are not indicative
of results expected in the medium term. They are for the most part reflective
of the increased volumes and higher rates negotiated with the Federal
Aviation Administration ("FAA") as the result of federalization of pre-board
screening at US airports. This resulted in higher wage rates and margins to
ensure retention of adequate employees to provide continuing services. The
benefits of these volumes and higher rates and margins are expected to
continue until federalization by the FAA is completed. The deadline set for
completion of this process is November 19, 2002.
Following the federalization of pre-board screening services, we will
continue to provide certain other aviation-related services such as baggage
handling, wheelchair assistance and general security. The federalization
process is not expected to have an impact on any other parts of the Company's
business. We expect that the Company will remain profitable
post-federalization and we are currently considering various means by which
to replace the revenue lost as a result of federalization. We are preparing
an application to the FAA to be a participant in a pilot program where we
would provide pre-board screening services at certain airports designated by
the FAA.
Revenue
Revenue increased by $9,713,054 or 52.3% for the quarter ended June
30, 2002, to $28,271,152 from $18,558,098 for the quarter ended June 30,
2001. The major component of the increase in the first quarter was
$11,869,000 from additional revenue within the aviation division, including
pre-board screening services performed for the Federal Aviation
Administration (FAA). Revenue charged to the FAA in the quarter was
$13,551,181 or 48% of total revenue. These services will be terminated once
the FAA has completed their process of federalization. Although no formal
timetable has yet been issued, they did take over pre-board screening
services at JFK airport early in July 2002 and at La Guardia in early August
2002. The proposed deadline for completing this process is November 19, 2002.
This increase in revenue was offset by the closure of certain divisions in
existence last year, most notably the National Accounts division that
provided nationwide security services to ATM and retail customers. The
revenue for this division in the quarter to June 2001 was $1,498,000.
Finally, revenues in the Guard division fell by $635,000 due primarily to the
cancellation of certain contracts that were at lower margins than we required
to make an adequate return offset by new contract starts which were at a
higher charge rate per hour than existing business.
Gross Profit
Gross profits increased by $3,734,491 to $6,356,740 (22.5% of sales)
for the quarter ended June 30, 2002, from $2,622,249 (14.1% of sales) for the
quarter ended June 30, 2001. The improvement in the gross profit was due to 3
key factors. Firstly, the additional revenue in the aviation division was
reflective of the greater focus on the quality of security at US airports
generally. This resulted in higher wage rates and margins to provide a
better-qualified security officer. The infrastructure was largely in place to
support the additional volumes, thus improving margins. The second area of
improvement in margins was in the Guard division, due primarily to the
cancellation of relatively low margin contracts outlined above. Finally, the
problems in our National Accounts division, which had resulted in its
closure, were largely in the first quarter of 2001 and these had been
eliminated by the June 2002 quarter. These benefits were partly offset by
increased reserves for workers compensation claims. Management is working
proactively with its insurance carrier to improve safety procedures and
anticipates an improvement in its claims experience going forward.
(Continued)
11
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
General and Administrative Expenses
General and administrative expenses increased by $521,630 to
$3,287,593 for the quarter ended June 30, 2002, from $2,765,963 for the
quarter ended June 30, 2001. The main reason for the increase was the
additional costs of supporting the 52% rise in revenues, including
administrative and support staff to handle the processing of data on the FAA
contract for pre-board screening. The main areas of increase were
administrative salaries and bonuses ($821,000) and stationery and supplies
($53,000). These increases were offset by reduced costs following the closure
of certain divisions in August 2001 and a reduced number of business
development managers compared to the same period last year.
Provision for Doubtful Accounts (Net)
The provisions for doubtful accounts increased by $230,094 to $293,043
for the quarter ended June 30, 2002, compared to $62,949 for the same quarter
in 2001. The main reason for the increase in the provision was due to a more
conservative stance being taken on the recoverability of some of the older
debt that has not been recovered to date, despite greater management focus
and the use of an external collections agency. 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 it believed by management that
this increase is necessarily indicative of a trend.
Interest Income
Interest income decreased by $640 to $24,121 for the quarter ended
June 30, 2002, from $24,761 in the quarter ended June 30, 2001. The decrease
in interest income was primarily due to the repayment of part of the
Restricted Cash balance in June 2001 and lower rates offset by increases in
interest charged to administrative service clients.
Interest Expense
Interest expense decreased to $198,220 for the quarter ended June 30,
2002, from $214,010 for the quarter ended June 30, 2001, a reduction of
$15,790. The decreased charge primarily arose from lower average borrowing on
the term loan and a decrease in average interest rates offset by higher
average borrowings on the revolver loan. The rates averaged approximately
5.8% for the quarter ended June 30, 2002 compared to around 8.5% for the
quarter ended June 30, 2001.
Equipment Dispositions
The gain on equipment dispositions of $4,055 in the quarter ended
June 30, 2002, related to the disposal of two vehicles and office equipment
sold at above book value and compares with a gain of $1,692 for the quarter
ended June 30, 2001.
(Continued)
12
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
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 65 days after billing by the Company. In order to fund the
Company's payroll and operations, the Company maintains a commercial
revolving loan arrangement with LaSalle Business Credit, Inc. (LaSalle).
The LaSalle loan agreement provides for borrowings in an amount up to
85% of the Company's eligible accounts receivable, but in no event more than
$15,000,000. LaSalle also provided a term loan in the amount of $3,000,000.
This was originally being repaid at $100,000 per month but from April 2002 is
to be repaid at $150,000 per month. The outstanding balance as at June 30,
2002 is $950,000. The revolving loan bears interest at prime plus 0.50%
whilst the term loan rate is prime plus 0.75%. All loans are collateralized
by a pledge of the Company's accounts receivable and other assets.
At June 30, 2002, the Company had borrowed $9,587,355 representing
approximately 74% of its maximum borrowing capacity based on the definition
of "eligible accounts receivable" under the terms of the loan and security
agreement.
Long-term debt (including current maturities) decreased by $513,009 to
$1,300,044 at June 30, 2002, from $1,813,053 at March 31, 2002 primarily due
to repayments on the LaSalle term loan of $450,000. Capital lease obligations
were $199,636 at the quarter ended June 30, 2002 compared to $224,212 as at
March 31, 2002. The Company took on additional capital lease obligations
during the quarter ended June 30, 2002 of $16,170.
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.
Effective July 2000, we had suspended payment of preferred stock
dividends until we could re-establish sufficient reserves through future
earnings. With the profit achieved in 2002 and the first quarter of 2003, we
were able to repay all dividends in arrears on our preferred stock.
The Company's operations for the quarter ended June 30, 2002,
resulted in an operating profit of $2,776,104, an increase of $2,982,767
compared to the loss of $206,663 for the quarter ended June 30, 2001. The
increase is due to the increased revenues and the closure of certain
divisions that were not providing an adequate return. The Company saw an
increase of $2,885,972 in its working capital from $1,525,104 as at March 31,
2002 to $4,411,076 as at June 30, 2002. The Company experienced a cash
overdraft (defined as checks drawn in advance of future deposits) of
$2,245,612 as of June 30, 2002, compared to $2,063,361 at March 31, 2002.
Cash balances and overdrafts can fluctuate materially from day to day
depending on such factors as collections, timing of billing and payroll
dates, and are covered via advances from the revolving loan as checks are
presented for payment.
Outlook
This Section, Management's Discussion and Analysis of Results of
Operations and Financial Condition, contains a number of forward-looking
statements, all of which are based upon current expectations. Actual results
may differ materially and are qualified by the section below entitled
"Forward Looking Statements".
Our outlook on revenues is dependent upon the success of our sales
team's business development efforts in both the guard and aviation divisions
and on the timing of federalization at the airports where we continue to
provide pre-board screening services for the FAA. We continue to grow both
guard division and non pre-board screening aviation revenues from our
internal sales force and we expect this to continue. Current revenues on an
annualized basis are in excess of $65 million due to this growth.
(Continued)
13
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
We expect margins to drop back down from the level achieved in the
June 2002 quarter post federalization due to reduced economies of scale from
direct management and other costs. We have seen an improvement in gross
margins generally, however, and we therefore expect them to settle post
federalization at between 17 and 18%.
Finally, we expect to be able to adjust our cost base to support our
remaining revenue post-federalization to ensure that we continue to be
profitable. We incurred additional general and administrative expenses in the
quarter ended June 30, 2002, which will not be required post-federalization.
We expect net income immediately post-federalization to be in excess of $1
million on an annualized basis. This does not assume any significant wins
that are currently unknown, such as award of one or more of the pilot
airports.
Forward Looking Statements
Certain of the statements contained in this Management's Discussion
and Analysis of Financial Condition and Results of Operations section of the
Form 10Q and in particular this report including those under the heading
"Outlook," contain forward-looking statements. These are based on current
expectations, estimates, forecasts and projections about the industry in
which the Company operates, management's beliefs, and assumptions made by
management. In addition, other written or oral statements that constitute
forward-looking statements may be made by or on behalf of the Company. While
we believe these statements are accurate, our business is dependent upon
general economic conditions and various conditions specific to our industry.
Future trends and these factors could cause actual results to differ
materially from the forward-looking statements that have been made. These
statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that are difficult to predict.
Therefore, the actual outcomes and results may differ materially from what is
expressed or forecast in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
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.
Regulation
Management's evaluation of the Company's present status and future
prospects is dependent upon the assumption that the Company's contracts with
the FAA will be terminated sometime before November 2002. Since the FAA
contracts are terminable by the FAA prior to November 2002, such early
termination would have an adverse impact on the Company's results of
operations and financial condition. An extension of these contracts beyond
November 2002 would have a beneficial effect.
The Company's management further assumes that the current regulation
and federalization of pre-board screening services provided by the Company
will not be expanded into other areas such as general security and baggage
handling at aviation facilities. Such increased regulation or federalization
would have a material adverse impact on the Company's results of operations
and financial condition.
Competition
The Company's assumptions regarding projected results depend largely
upon the Company's ability to retain substantially all of the Company's
current clients (with the exception of the FAA as of November 2002).
Retention is affected by several factors including but not limited to,
regulatory limitations, the quality of the services provided by the Company,
the quality and pricing of comparable services offered by competitors,
continuity of Management. 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 a loss of such clients and/or employees.
(Continued)
14
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Cost Management
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 expenses, fees incurred
in connection with extraordinary business transactions, inflation, labor
unrest, increased payroll and related costs.
Collection of Accounts Receivable
Management has no reasonable basis to believe that default in
payment of accounts receivable by the Company's security guard customers or
administrative service clients will occur. However, 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.
Catastrophic Events
The Company is exposed to potential claims for catastrophic events,
such as a hijacked airplane, based upon allegations that the Company failed
to perform its services in accordance with contractual or industry standards.
The Company's insurance coverage limits are currently $5 million per
occurrence and $10 million in the aggregate on a per project basis. The
former umbrella coverage of $50 million is no longer available to the Company
at commercially reasonable rates following September 11.
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 and 10-Q (all as filed with the Securities and Exchange Commission
from time to time).
15
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 LaSalle. Based on the Company's
interest rate at June 30, 2002 and average outstanding balances during the
three months then ended, a 1% change in the prime lending rate would impact
the Company's financial position and results of operations by approximately
$34,000 over the next three months.
PART II. Other Information
Item 1. Legal Proceedings
Reference is made to footnote 5 to the condensed financial statements
presented herein.
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits
Press Release
(2) Reports on form 8-K
During the quarter the Company filed three form 8-K's,
dated April 9, June 13 and June 19, 2002.
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: August 14, 2002
By: /s/ William C. Vassell
William C. Vassell, President, CEO and
Chairman of the Board
By: /s/ Graeme Halder
Graeme Halder, Chief Financial Officer