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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 September 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 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 (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
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act)
Yes No [X]
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 13, 2002).
COMMAND SECURITY CORPORATION
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Statements of Operations -
three months and nine months ended
September 30, 2002 and 2001 (unaudited) 2
Condensed Balance Sheets -
September 30, 2002 and March 31, 2002
(unaudited) 3
Condensed Statements of Changes in Stockholders' Equity Six
months ended September 30, 2002 and 2001
(unaudited) 4
Condensed Statements of Cash Flows Six months ended September
30, 2002 and 2001
(unaudited) 5-6
Notes to Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
PART II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 16
Certification 17-18
Exhibits 19-22
1
PART I. Financial Information
Item 1. Financial Statements
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
September 30 September 30 September 30 September 30
2002 2001 2002 2001
Revenue $27,470,101 $18,840,467 $55,741,253 $37,398,565
Cost of revenue 20,766,331 15,685,991 42,680,743 31,621,840
----------- ----------- ----------- -----------
Gross profit 6,703,770 3,154,476 13,060,510 5,776,725
Operating expenses
General and administrative expenses 3,671,677 2,944,681 6,959,270 5,710,644
Provision for doubtful accounts, net 888,673 84,983 1,181,716 147,932
----------- ----------- ----------- -----------
4,560,350 3,029,664 8,140,986 5,858,576
----------- ----------- ----------- -----------
Operating profit 2,143,420 124,812 4,919,524 (81,851)
Interest income 24,041 22,420 48,162 47,181
Interest expense (142,455) (180,883) (340,675) (394,893)
Equipment dispositions 6,350 (760) 10,405 932
----------- ----------- ----------- -----------
Income/(loss) before income taxes 2,031,356 (34,411) 4,637,416 (428,631)
Provision for income taxes (874,733) -0- (1,331,072) -0-
----------- ----------- ----------- -----------
Net income/(loss) 1,156,623 (34,411) 3,306,344 (428,631)
Preferred stock dividends (40,674) -0- (366,068) -0-
----------- ----------- ----------- -----------
Net income/(loss) applicable to
common stockholders $ 1,115,949 $ (34,411) $ 2,940,276 $ (428,631)
=========== =========== =========== ===========
Net income/(loss) per common share
Basic $ 0.18 $ (0.01) $ 0.47 $ (0.07)
=========== =========== =========== ===========
Diluted $ 0.14 $ N/A $ 0.37 $ N/A
=========== =========== =========== ===========
Weighted average number
of common shares outstanding
Basic 6,287,343 6,287,343 6,287,343 6,287,343
=========== =========== =========== ===========
Diluted 7,753,029 N/A 7,844,369 N/A
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
2
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
September 30, March 31,
2002 2002
Current assets:
Accounts receivable, net 21,061,687 21,929,464
Prepaid expenses 224,976 498,203
Other receivables, net 172,379 388,066
Deferred tax asset 301,000 -0-
----------- -----------
Total current assets 21,760,042 22,815,733
Property and equipment, net 1,061,622 1,195,422
Other assets:
Intangible assets, net 164,098 195,910
Restricted cash 255,208 253,548
Deferred tax asset 95,101 1,300,000
Other receivables, net 90,090 304,733
Other assets 323,343 251,377
----------- -----------
Total other assets 927,840 2,305,568
----------- -----------
Total assets $23,749,504 $26,316,723
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 1,493,806 $ 2,063,361
Current maturities of long-term debt 678,171 1,626,065
Current maturities of obligations
under capital leases 86,604 120,532
Short-term borrowings 7,248,347 11,823,022
Income tax payable 377,172 -0-
Accounts payable 821,206 1,178,712
Due to administrative service clients 211,843 164,794
Self-insurance reserves 98,780 373,102
Preferred dividends payable 81,348 -0-
Accrued payroll and other expenses 4,497,473 3,941,041
----------- -----------
Total current liabilities 15,594,750 21,290,629
Self-insurance reserves 928,996 647,935
Long-term debt due after one year 107,884 186,988
Obligations under capital leases
due after one year 90,107 103,680
----------- -----------
16,721,737 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 8,253,218 8,619,286
Retained earnings/(deficit) (3,259,762) (6,566,106)
----------- -----------
Total stockholders' equity 7,027,767 4,087,491
----------- -----------
Total liabilities and stockholders' equity $23,749,504 $26,316,723
=========== ===========
See accompanying notes to condensed financial statements.
3
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 $ 651 $ 8,619,286 $(8,941,866)
Net loss - six months ended
September 30, 2001 (428,631)
----------- --------- ----------- -----------
Balance at September 30, 2001 2,033,682 629 8,619,286 (9,370,497)
Net income - six months ended
March 31, 2002 2,804,391
----------- --------- ----------- -----------
Balance at March 31, 2002 2,033,682 629 8,619,286 (6,566,106)
Preferred stock dividends (366,068)
Net income - six months ended
September 30, 2002 3,306,344
----------- --------- ----------- -----------
Balance at September 30, 2002 $ 2,033,682 $ 629 $ 8,253,218 $(3,259,762)
=========== ========= =========== ===========
See accompanying notes to condensed financial statements.
4
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30, September 30,
2002 2001
Cash flows from operating activities:
Net income/(loss) $ 3,306,344 $ (428,631)
Adjustments to reconcile net income/(loss) to net
cash provided by/(used in) operating activities:
Depreciation and amortization 333,724 378,850
Provision for doubtful accounts 1,181,716 147,932
Provision for audit contingencies 700,000 -0-
Gain on equipment dispositions (10,405) (932)
Deferred income taxes 903,899 -0-
Self-insurance reserves 141,757 145,136
Decrease/(increase) in receivables,
prepaid expenses and deposits 357,040 (1,018,821)
Decrease in accounts payable
and other current liabilities (211,871) (160,071)
----------- ----------
Net cash provided by/(used in) operating activities 6,702,204 (936,537)
----------- ----------
Cash flows from investing activities:
Purchases of equipment (112,896) (102,248)
Proceeds from sale of equipment 19,544 13,351
Note issued to service company -0- (35,000)
Purchases of intangible assets (35,000) -0-
Principal collections on notes receivable 32,500 76,349
----------- ----------
Net cash used in investing activities (95,852) (47,548)
----------- ----------
Cash flows from financing activities:
Net borrowings/(repayments) on line-of-credit (4,490,415) 1,196,229
Increase/(decrease) in cash overdraft (569,555) 721,645
Principal payments on other borrowings (1,184,806) (861,444)
Principal payments on capital lease obligations (76,856) (72,345)
Payment of preferred stock dividends (284,720) -0-
----------- ----------
Net cash provided by/(used in) financing activities (6,606,352) 984,085
----------- ----------
Net change in cash
and cash equivalent -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.
5
(Continued)
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental Disclosures of Cash Flow Information
Cash paid during the nine months ended September 30 for:
2002 2001
-------- --------
Interest $372,322 $394,893
Income taxes 50,000 -0-
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the six months ended September 30, 2002 and 2001, the Company purchased
transportation and office equipment with direct installment and lease
financing of $29,355 and $216,078, respectively.
The Company may obtain short-term financing to meet its insurance needs. For
the six months ended September 30, 2002 and 2001, $73,548 and $50,686,
respectively, were borrowed for this purpose. These borrowings have been
excluded from the condensed statements of cash flows.
For the six months ended September 30, 2002, the Company accrued dividends of
$81,348 on its Series A convertible preferred stock. These charges to paid-in
capital and credits to dividends payable have been excluded in the statement
of cash flows.
See accompanying notes to condensed Financial statements.
6
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 September 30,
2002, and for the period then ended. All such adjustments are of a normal
recurring nature except for a provision for potential revenue adjustments
related to certain government contracts for security services.
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 September 30, 2002, the Company had
used $7,181,504 of this line, representing approximately 54% 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 and six months ended September 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. As of September 30, 2002, the Company owed
its preferred stockholder $81,348, representing dividends accrued for
June and September, 2002.
7
(Continued)
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 $1,509,787 and $970,536
for the six months ended September 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 general liability insurance
policies with a third-party insurance carrier. The policy for
non-airport business has limits of $5 million per occurrence and $10
million in the aggregate (reduced to $5 million as of October 1, 2002)
on a per project basis. On the airport side of our business, as of
October1, 2002 the Company acquired a policy with a $25 million limit
per occurrence. Prior 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 on the non-aviation related policy and
$10,000 on the aviation related policy. 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.
8
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Contingent Liabilities (continued):
An audit has recently been completed of the Company's FAA contract to
provide pre-board screening services at US airports in the transition
period to full federalization. Although no report has yet been received
by the Company, there is a potential for the FAA to claim a rebate based
upon the rate per hour charged to them. Management intends to vigorously
defend any such claim, and has undertaken an analysis of the areas that
the FAA auditors have indicated might be in dispute. Management's
estimate of this potential claim, along with any potential amounts due
on other outstanding audits such as that by the New York State Attorney
General's Office relative to the provision of services to New York State
under the Office of General Services (OGS) requirements, is in the range
of $700,000 to $2,000,000.
6.) Reclassifications
Certain 2001 income and expense items have been reclassified to conform
to the 2002 presentation. Administrative service revenue of $84,463 and
$64,669 for the three months and $165,016 and $124,026 for the six
months ended September 30, 2002 and 2001, respectively, have been
included with total revenue. Amortization of intangibles of $30,519 and
$37,944 for the three months and $66,812 and $84,161 for the six months
ended June 30, 2002 and 2001, respectively, have been included within
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).
9
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
"outlook", "intend", "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 a result of federalization of pre-board screening
services 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 and the future impact on
results post federalization are outlined in the "Outlook" section below.
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 currently do
not anticipate taking part in an FAA pilot program for independent companies
to provide pre-board screening services at certain designated airports.
Revenue
Revenue increased by $8,629,634 or 45.8% for the quarter ended September
30, 2002, to $27,470,101 from $18,840,467 in 2001. The major component of the
increase in the current quarter was $10,502,000 from additional revenue
within the Aviation division, including pre-board screening services
performed for the FAA. Revenue charged to the FAA in the quarter was
approximately $11,373,000 or 40% of total revenue. These services will be
terminated once the FAA has completed their process of federalization. All
airports we serviced have largely been completed with LAX in the process of
being federalized. The increase in revenue from these services was offset by
a $700,000 contingency provision to reflect potential revenue adjustments due
to certain government contract audits (see Note 5 to Condensed Financial
Statements), reductions in the Guard division ($684,000) and the closure of
the National Accounts division ($1,177,000). The reduction in the Guard
division was primarily the result of the cancellation of certain contracts at
lower margins than we required to make an adequate return.
For the six months ended September 30, 2002, revenue increased by
$18,342,688 or 49.0% to $55,741,253 from $37,398,565 for the six months ended
September 30, 2001. The reasons for the change were the same as those that
impacted the second quarter revenues, with an increase in Aviation revenues
($22,371,000) being offset by reductions in the Guard division ($1,318,000)
and the closure of the National Accounts division ($2,676,000).
Gross Profit
Gross profit increased to $6,703,770 (24.40% of sales) for the quarter
ended September 30, 2002, from $3,154,476 (16.74% of sales) for the quarter
ended September 30, 2001, a rise of $3,549,294. The improvement in the gross
profit margin was mostly due to three primary factors. Firstly, increased
focus on airport security in light of the September 11 tragedy resulted in
higher volumes, wage rates and margins to provide a better-qualified security
officer. The management infrastructure to support the additional volumes was
largely in place, thus improving margins. Secondly, although Guard division
revenues have dropped, this reflects low margin business
10
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
being terminated and replaced by higher margin work. Finally, management's
efforts to improve safety procedures have resulted in an improved workers
compensation claims experience. The amount and number of reported claims is
expected to level off going forward.
For the six months ended September 30, 2002, gross profit increased by
$7,283,785 to $13,060,510 or 23.43% of revenue compared to $5,776,725 or
15.45% of revenue for the six months ended September 30, 2001. The increase
in revenue of $18,342,688 had an impact of $4,297,692 on gross profits based
on the achieved margin of 23.43%. In addition, the gross margin in the Guard
division has improved by over 3 percentage points over this period while a
negative gross margin of 2% in the six months to September 30, 2001 was
removed with the closure of the National Accounts division.
General and Administrative Expenses
General and administrative expenses were $3,671,677 compared to
$2,944,681 for the quarter ended September 30, 2001, an increase of $726,996.
The increase was primarily the result of costs associated with supporting the
46% rise in revenue, especially in the Aviation division where general and
administrative costs increased by $434,000. Another significant cost increase
was in bonus expense, which rose by $245,000 reflecting the higher level of
profitability forecast for the current fiscal year.
For the six months ended September 30, 2002, general and administrative
expenses increased by $1,248,626 to $6,959,270, compared to $5,710,644 for
the six months ended September 30, 2001. The major areas of increase were
also related to supporting the increased revenue levels. General and
administrative expenses in the Aviation division rose by $995,000 for the six
months ended September 30, 2002 when compared to the previous period last
year. Bonus expense also increased over this period by $533,000 while these
increases were partly offset by reduced costs following the closure of the
National Accounts division ($430,000).
Provision for Doubtful Accounts (Net)
The provisions for doubtful accounts increased by $803,690 to $888,673
for the quarter ended September 30, 2002, compared to $84,983 in 2001. For
the six months ended September 30, 2002, the provision for doubtful accounts
rose by $1,033,784 to $1,181,716 compared to $147,932 for the six months
ended September 30, 2001. The increase was due mainly to aviation
bankruptcies (including US Airways) and write-offs in balances on the closed
National Accounts division and closed branches, which were not considered
recoverable. As of September 30, 2002, approximately 32% of our accounts
receivable were due from aviation related customers.
We periodically evaluate the requirement for providing for credit losses
on our 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 continue to increase in future periods nor do we
believe that the current period increase is indicative of a trend.
Interest Income
Interest income remained largely unchanged from the previous year at
$24,041 compared to $22,420 for the quarter ended September 30, 2001. For the
six months ended September 30, 2002, interest income also remained at a
similar level to the prior period at $48,162 compared to $47,181 the previous
year.
Interest Expense
Interest expense decreased to $142,455 for the 2002 quarter from
$180,883 the previous year, a reduction of $38,428. For the six months ended
September 30, 2002, interest expense fell by $54,218 to $340,675 from
$394,893 for the six months ended September 30, 2001. The decrease primarily
arose from lower average borrowing, both on the line of credit and the term
loan with LaSalle and from a lowering of the base rate of interest. The prime
base rate currently stands at 4.75% compared to an average of approximately
6.5% in the same period last year.
11
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Equipment Dispositions
The gain on equipment dispositions of $6,350 in the quarter ended
September 30, 2002, related to the disposal of vehicles sold at above book
value and compares with a loss of $760 for the quarter ended September 30,
2001. Cumulatively, the gain of $10,405 in 2002 was $9,473 better than the
small gain of $932 in 2001.
Liquidity and Capital Resources
We pay our guard employees and those of our administrative service
clients on a weekly basis, while our customers and the customers of
administrative service clients pay for the services of such employees
generally within 60 to 90 days after billing by the Company. In order to fund
our payroll and operations, we maintain 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
and the balance outstanding as at September 30, 2002 was $500,000. This is
being paid off at the rate of $150,000 per month and will be repaid in full
by the end of the 2002 calendar year. The revolving loan bears interest at
prime plus 0.5% while the term loan bears interest at prime plus 0.75%. All
loans are collateralized by a pledge of the Company's accounts receivable and
other assets.
At September 30, 2002, we had borrowed $7,181,504 representing
approximately 54% of our maximum borrowing capacity based on the definition
of "eligible accounts receivable" under the terms of the loan and security
agreement.
We finance 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.
Our operations for the six months ended September 30, 2002, resulted in
an operating profit of $4,919,524, an increase of $5,001,375 compared to a
loss of $81,851 for the six months ended September 30, 2001. The increase is
primarily due to additional volumes, improved margin and better cost control.
Working capital increased by $4,640,188 to $6,165,292 as of September 30,
2002, from $1,525,104 as of March 31, 2002 primarily due to the improved
profit performance. As a result, we were able to significantly reduce
borrowing on our line of credit while reducing the balance on our term loan
with LaSalle by $900,000 since March 31, 2002. We experienced a cash
overdraft (defined as checks drawn in advance of future deposits) of
$1,493,806 as of September 30, 2002, compared to $2,063,361 at March 31,
2002. Cash balances and book 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 largely dependent upon the success of our
sales team's business development efforts in the guard division and our
ability to win additional revenue in the aviation division. This division
continues to see significant turmoil due to general uncertainty within the
aviation industry including the federalization of pre-board screening. We
continue to pick up additional work in all areas of our aviation division,
however, and have now largely replaced the pre-September 11 screening
revenues with non-screening aviation-related work. Revenues for the Company,
excluding the FAA contract, are currently at around $70 million on an
annualized basis and consist of approximately 50% aviation related work.
12
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
We expect margins to drop back down, post completion of the
federalization process, to the 17% to 18% range. This would be an improvement
over the levels achieved prior to September 11 due in part to cost controls
implemented since August 2001.
Our expectations are that general and administrative costs will reduce
once federalization has been completed and we have a requirement to service
around $70 million of revenue rather than recent levels well in excess of
$100 million on an annualized basis. Overall, we expect to be profitable post
completion of the federalization timetable and to have adequate funding
resources to develop and grow our overall business.
The primary uncertainties that could negatively affect the Company's
results of operations and liquidity and capital resources are the financial
condition of certain of our aviation industry customers representing
approximately 50% of our post-federalization revenue and the potential of an
adverse outcome on the outstanding audits outlined in the contingent
liabilities section of the Notes to the Financial Statements above.
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 current regulation and
federalization of pre-board screening services previously 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.
13
(Continued)
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 profits
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. The primary uncertainty that could
result in a default in payment of accounts receivable relates to the
financial condition of certain of our aviation industry customers (discussed
above in the paragraph titled "Provision for Doubtful Accounts" and Note 5 to
the Condensed Financial Statements). 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 (reduced to $5 million effective
October 1, 2002 for non-aviation and increased to $25 million for aviation
related services) on a per project basis. The former umbrella coverage of $50
million is no longer available to the Company at commercially reasonable
rates following the September 11, 2001, tragedy.
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 (all as filed with the Securities and Exchange
Commission from time to time).
14
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 Business Credit, Inc.
Based on the Company's interest rate at September 30, 2002 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 $21,000 over the next three months.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90-day
period prior to the filing date of this report, the Company carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. This evaluation was carried out under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer. Based upon
that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these internal
controls subsequent to the date of their evaluation.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by
the Company in the reports it files or submits under the Exchange Act is
accumulated and communicated to the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
15
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
Exhibit 99.1 Certification of William C. Vassell pursuant to 18
U.S.C Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 99.2 Certification of Graeme R. Halder pursuant to 18 U.S.C
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 99.3 Press Release dated November 19, 2002.
(2) Reports on Form 8-K None
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: 11/19/02 By: /s/ William C. Vassell
---------------------------------------------
William C. Vassell, Chairman, President & CEO
By: /s/ Graeme R. Halder
---------------------------------------------
Graeme R. Halder, Chief Financial Officer
16
Certification (pursuant to Rule 13a-14 of the Securities Exchange Act of
1934, as amended)
I, William C. Vassell certifying individual, certify that:
1. I have reviewed the quarterly report on Form 10-Q of Command
Security Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's' auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying offices and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ William C. Vassell
- ---------------------------
William C. Vassell
Principal Executive Officer
17
Certification (pursuant to Rule 13a-14 of the Securities Exchange Act of
1934, as amended)
I, Graeme Halder certifying individual, certify that:
1. I have reviewed the quarterly report on Form 10-Q of Command
Security Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's' auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying offices and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Graeme R. Halder
- ---------------------------
Graeme R. Halder
Principal Financial Officer
18
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report on Command Security
Corporation (the "Company") on Form 10-Q for the period ended September 30,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, William C. Vassell, Chairman of the Board of Directors,
President and Chief Executive Officer of the Company, certify, pursuant to 18
U. S. C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Date: 11/19/02 By: /s/ William C. Vassell
--------------------------------------
William C. Vassell, President, CEO and
Chairman of the Board
19
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report on Command Security
Corporation (the "Company") on Form 10-Q for the period ended September 30,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Graeme Halder, Chief Financial Officer of the Company,
certify, pursuant to 18 U. S. C. section 1350, as adopted pursuant to section
906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Date: 11/19/02 By: /s/ Graeme Halder
--------------------------------------
Graeme Halder, Chief Financial Officer
20
Exhibit 99.3
FOR IMMEDIATE RELEASE
CONTACT: William C. Vassell Donald Radcliffe
Chairman & President Radcliffe & Associates, Inc.
Tel: (845) 454-3703 Tel: (212) 605-0201
COMMAND SECURITY REPORTS
SECOND QUARTER RESULTS
o Revenue up 45.8% for quarter, 49.0% year-to-date
o Operating Profit
$2.1 million versus $0.1 million for quarter
$4.9 million versus ($0.1) million loss year to date
o Basic EPS
$0.18 versus $(0.01) for quarter
$0.47 versus $(0.07) year-to-date
Lagrangeville, New York *** November 19, 2002 *** Command Security
Corporation (OTCBB: CMMD) today reported results for its second fiscal
quarter ending September 30, 2002. Revenue for the quarter increased by 45.8%
to $27,470,101 from the $18,840,467 reported in the same period of the prior
fiscal year. For the six months ended September 30, 2002 revenue increased by
49.0% to $55,741,253 from the $37,398,565 reported in the same period last
year. The major component of the increase is from aviation, including
pre-board screening services for the FAA. Although the pre-board screening
services performed for the FAA will be ending, revenues for other aviation
services have increased to compensate for this lost revenue and the company
believes that post-federalization annualized revenues will be at around the
$70 million mark.
Gross profit for the three months ended September 30, 2002 increased to
$6,703,770 (24.40% of revenue) from $3,154,476 (16.74% of revenues) for the
three months ended September 30, 2001. For the six months ended September 30,
2002, gross profit increased to $13,060,510 (23.43% of revenue) from
$5,776,725 (15.45% of revenue). The improvement in profits has come from the
increased focus on airport and general security resulting in the higher
volumes, wage rates and margins necessary to provide better qualified
security officers. The guard division has also benefited from the gradual
elimination of unacceptably low margin contracts and the improvement of
safety procedures reducing workers compensation claims.
Net income applicable to common stockholders increased to $1,115,949 or $0.18
per basic common share for the quarter ended September 30, 2002 compared to a
loss of ($34,411) or $(0.01) per share reported in the same period of the
prior fiscal year. For the six months ended, September 30, 2002, net income
applicable to common stockholders increased to $2,940,276 or $0.47 per basic
share compared to a loss of $(428,631) or $(0.07) per basic share reported
for the six months ended September 30, 2001.
William C. Vassell, commenting on the results of the quarter said, "We are
extremely proud of the progress the Company has made. During the second
fiscal quarter we generated significant income and cash flow and we've
clearly benefited from significant growth in non-FAA related revenues which
will remain post-federalization and the improvement in the margins of the
guard business. These results were achieved despite a $888,673 provision for
bad debts established due primarily to concerns over the recoverability of
some airline debt as well as certain airline bankruptcies (including US
Airways). Our results are also now fully taxed resulting in an expense of
$874,733 in the quarter."
Mr. Vassell added, "Even more importantly during the quarter we continued
progress preparing for post-federalization. Our financial resources are
strong utilizing only slightly more than half of the availability of our bank
line as at the end of the period. We have continued to improve our margins in
all areas of our business and are optimistic that we are positioned to
increase our business from the newly formed Homeland Security Department as
well as non-screening airport security services and from the new focus we
feel will be placed on our nations ports and surface transportation
infrastructure."
21
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
Revenue $27,470,101 $18,840,467 $55,741,255 $37,398,565
Operating profit/(loss) 2,143,420 124,812 4,919,524 (81,851)
Net income/(loss)
before income taxes 2,031,356 (34,411) 4,637,416 (428,631)
Provision for income taxes (874,733) 0 (1,331,072) 0
----------- ----------- ----------- -----------
Net income/(loss) 1,156,623 (34,411) 3,306,344 (428,631)
Preferred stock dividends (40,674) 0 (366,068) 0
Net income/(loss) applicable
to common stockholders $ 1,115,949 $ (34,411) $ 2,940,276 $ (428,631)
=========== =========== =========== ===========
Net income/(loss)
per common share
Basic $ 0.18 $ (0.01) $ 0.47 $ (0.07)
=========== =========== =========== ===========
Diluted $ 0.14 N/A $ 0.37 N/A
=========== =========== =========== ===========
Weighted average number
of common shares outstanding
Basic 6,287,343 6,287,343 6,287,343 6,287,343
=========== =========== =========== ===========
Diluted 7,753,029 N/A 7,844,369 N/A
=========== =========== =========== ===========
About Command
Command Security Corporation provides security services through company-owned
offices in New York, New Jersey, California, Illinois, Connecticut, Florida,
Massachusetts and Pennsylvania.
Statements in this press release other than statements of historical fact are
"forward-looking statements." Such statements are subject to certain risks
and uncertainties including the demand for the Company's services,
litigation, labor market, and other risk factors identified from time to time
in the Company's filings with the Securities and Exchange Commission that
could cause actual results to differ materially from any forward looking
statements. These forward-looking statements represent the Company's judgment
as of the date of this release. The Company disclaims, however, any intent or
obligation to update these forward-looking statements.
22