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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 December 31, 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
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 February 14, 2003).
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, 2002 and 2001 (unaudited) 3
Condensed Balance Sheets -
December 31, 2002 and March 31, 2002
(unaudited) 4
Condensed Statements of Changes in Stockholders' Equity-
Nine months ended December 31, 2002 and 2001
(unaudited) 5
Condensed Statements of Cash Flows-
Nine months ended December 31, 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 - 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 17
Certifications 18 - 19
Exhibit 99.1 20
Exhibit 99.2 21
Exhibit 99.3 22
2
PART I. Financial Information
Item 1. Financial Statements
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
December 31 December 31 December 31 December 31
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenue $20,969,586 $21,890,743 $76,710,839 $59,289,308
Cost of revenue 17,353,968 18,428,369 60,034,711 50,050,209
----------- ----------- ----------- -----------
Gross profit 3,615,618 3,462,374 16,676,128 9,239,099
Operating expenses
General and administrative expenses 3,135,968 2,643,669 10,095,238 8,354,313
Provision for doubtful accounts 162,803 213,958 1,344,519 361,890
----------- ----------- ----------- -----------
3,298,771 2,857,627 11,439,757 8,716,203
----------- ----------- ----------- -----------
Operating profit 316,847 604,747 5,236,371 522,896
Interest income 20,023 23,013 68,185 70,194
Interest expense (103,000) (176,080) (443,675) (570,973)
Equipment dispositions 522 6,314 10,927 7,246
----------- ----------- ----------- -----------
Income before income taxes 234,392 457,994 4,871,808 29,363
Provision for income taxes (2,216) -0- (1,333,288) -0-
----------- ----------- ----------- -----------
Net income 232,176 457,994 3,538,520 29,363
Preferred stock dividends (40,674) -0- (406,742) -0-
----------- ----------- ----------- -----------
Net income applicable to
common stockholders $ 191,502 $ 457,994 $ 3,131,778 $ 29,363
=========== =========== =========== ===========
Net income per common share
Basic $ .03 $ .07 $ .50 $ -0-
=========== =========== =========== ===========
Diluted $ .03 $ .06 $ .46 $ -0-
=========== =========== =========== ===========
Weighted average number
of common shares outstanding
Basic 6,287,343 6,287,343 6,287,343 6,287,343
=========== =========== =========== ===========
Diluted 7,601,970 7,519,878 7,749,783 7,519,878
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
3
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
December 31, March 31,
2002 2002
----------- -----------
ASSETS
Current assets:
Accounts receivable, net $16,698,001 $21,929,464
Prepaid expenses 828,348 498,203
Other receivables, net 203,713 388,066
Deferred tax asset 301,000 -0-
----------- -----------
Total current assets 18,031,062 22,815,733
Property and equipment, net 954,444 1,195,422
Other assets:
Intangible assets, net 194,961 195,910
Restricted cash 255,852 253,548
Deferred tax asset 15,933 1,300,000
Other receivables, net 138,086 304,733
Other assets 887,126 251,377
----------- -----------
Total other assets 1,491,958 2,305,568
----------- -----------
Total assets $20,477,464 $26,316,723
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 996,770 $ 2,063,361
Current maturities of long-term debt 160,047 1,626,065
Current maturities of obligations under capital leases 70,924 120,532
Short-term borrowings 6,482,022 11,823,022
Income tax payable 275,221 -0-
Accounts payable 556,607 1,178,712
Due to administrative service clients 161,249 164,794
Self-insurance reserves -0- 373,102
Preferred dividends payable 40,674 -0-
Accrued payroll and other expenses 3,500,045 3,941,041
----------- -----------
Total current liabilities 12,243,559 21,290,629
Self-insurance reserves 864,421 647,935
Long-term debt due after one year 77,321 186,988
Obligations under capital leases due after one year 72,894 103,680
----------- -----------
13,258,195 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 8,212,544 8,619,286
Retained earnings/(deficit) (3,027,586) (6,566,106)
----------- -----------
Total stockholders' equity 7,219,269 4,087,491
----------- -----------
Total liabilities and stockholders' equity $20,477,464 $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 $ 651 $ 8,619,286 $(8,941,866)
Net income - nine months ended
December 31, 2001 29,363
----------- ----------- ----------- -----------
Balance at December 31, 2001 2,033,682 629 8,619,286 (8,912,503)
Net income - three months ended
March 31, 2002 2,346,397
----------- ----------- ----------- -----------
Balance at March 31, 2002 2,033,682 629 8,619,286 (6,566,106)
Preferred stock dividends (406,742)
Net income - nine months ended
December 31, 2002 3,538,520
----------- ----------- ----------- -----------
Balance at December 31, 2002 $ 2,033,682 $ 629 $ 8,212,544 $(3,027,586)
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
5
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-------------------------------
December 31, December 31,
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 3,538,520 $ 29,363
Adjustments to reconcile net income to net
cash provided by/(used in) operating activities:
Depreciation and amortization 483,436 542,023
Provision for doubtful accounts 1,344,519 361,890
Provision for audit contingencies 700,000 -0-
Gain on equipment dispositions (10,927) (7,246)
Deferred income taxes 983,067 -0-
Self-insurance reserves 33,516 191,376
Decrease/(increase) in receivables,
prepaid expenses and deposits 3,968,963 (4,133,377)
Increase/(decrease) in accounts payable
and other current liabilities (1,681,557) 899,424
----------- -----------
Net cash provided by/(used in) operating activities 9,359,537 (2,116,547)
----------- -----------
Cash flows from investing activities:
Purchases of equipment (126,293) (143,532)
Proceeds from sale of equipment 20,066 42,338
Note issued to service company -0- (35,000)
Purchases of intangible assets (95,000) -0-
Principal collections on notes receivable 45,000 119,459
----------- -----------
Net cash used in investing activities (156,227) (16,735)
----------- -----------
Cash flows from financing activities:
Net borrowings/(repayments) on line-of-credit (5,678,787) 3,008,438
Increase/(decrease) in cash overdraft (1,066,591) 564,787
Principal payments on other borrowings (1,982,115) (1,334,248)
Principal payments on capital lease obligations (109,749) (105,695)
Payment of preferred stock dividends (366,068) -0-
----------- -----------
Net cash provided by/(used in) financing activities (9,203,310) 2,133,282
----------- -----------
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.
(Continued)
6
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
2002 2001
----------- -----------
Supplemental Disclosures of Cash Flow Information
Cash paid during the nine months ended December 31 for:
Interest $ 483,415 $ 570,973
Income taxes 75,000 -0-
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the nine months ended December 31, 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 nine months ended December 31, 2002 and 2001, $744,217 and $516,228,
respectively, were borrowed for this purpose. These borrowings have been
excluded from the condensed statements of cash flows.
As of December 31, 2002, the Company accrued dividends of $40,674 on its
Series A convertible preferred stock. This charge to paid-in capital and
credit to dividends payable has 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 December 31, 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 December 31, 2002, the Company had
used $5,993,132 of this line, representing approximately 53% 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 per Common Share:
Under the requirements of Financial Accounting Standards Board
Statement No. 128 (SFAS 128), "Earnings Per Share," basic earnings per
share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common shares and dilutive
potential common shares outstanding during the period. Dilutive common
shares consist of warrants and employee stock options using the
treasury method and common shares issued assuming conversion of the
convertible preferred stock outstanding, if dilutive.
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 December 31,
2002, the Company owed its preferred stockholder $40,674,
representing dividends accrued for December, 2002 quarter.
(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 $1,939,811 and
$1,626,723 for the nine months ended December 31, 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 an
acceptable premium 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 there from 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.
(Continued)
9
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Contingent Liabilities (continued):
An audit of the Company's FAA contract for pre-board screening services
was completed during December 2002. Although no formal audit report has
been received by the Company, we have had informal discussions with the
FAA and they have indicated a lack of understanding over the base wage
rate charged to them as part of the rate per hour charge. We are
currently putting together a detailed explanation of the basis for our
rates charged and will be discussing this with them shortly. Our best
estimate in light of these discussions to date, along with other
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, remains in the range of $700,000 to $2,000,000. The FAA
is currently holding back payment of our final invoices totaling just
under $3million until the audit issue is resolved.
6.) Reclassifications
Certain 2001 income and expense items have been reclassified to conform
to the 2002 presentation. Administrative service revenue of $82,547 and
$74,862 for the three months and $247,564 and $198,888 for the nine
months ended December 31, 2002 and 2001, respectively, have been
included with total revenue. Amortization of intangibles of $29,137 and
$36,293 for the three months and $95,949 and $120,454 for the nine
months ended December 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.
10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
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 in the subsection entitled "Forward Looking Statements". The
actual results may vary significantly based on a number of factors including,
but not limited to, the outcome of the various audits, the financial
stability of the airline industry, 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.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosure of contingent
assets and liabilities. We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation
of our consolidated financial statements. Actual results may differ from
these estimates under different assumptions and conditions.
Revenue Recognition
The Company records revenue as services are provided to its customers
and to its administrative service clients. Revenue consists primarily of
security guard services which are typically billed at hourly rates. These
rates may vary depending on base, overtime and holiday time worked. Costs
associated with the Company's guard service revenue consist of direct and
indirect payroll and related expenses, subcontractor costs, vehicle and other
costs directly related to the guard service revenue generated.
Reserve for Doubtful Accounts
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.
Individual accounts are charged off as management deems them as
uncollectible.
The results of operations reflected in this report are not necessarily
indicative of future results because part of the period (to November 19,
2002) included pre-board screening services to the FAA prior to completion of
federalization on November 19, 2002. We continue to provide many other
aviation-related services to the airline industry including baggage handling,
wheelchair assistance and general security. The completion of the
federalization process did not have any adverse impact on any other parts of
our business. We are now clear of all pre-board screening work and our
December 2002 revenues indicate an annualized revenue run rate of
approximately $76 million.
(Continued)
11
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Revenue
Revenue decreased by $921,157 or 4.2% for the quarter ended December 31,
2002, to $20,969,586 from $21,890,743 in 2001. The major components of the
decrease in the current quarter were from reductions in the Guard division
($870,000) and the closure of the National Accounts division ($1,007,000).
These reductions were partly offset by increase in our Aviation division
($947,000). 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 and has led to a significant margin improvement.
The decision to close the National Accounts division was made in August
2001 due to an inadequate margins and high costs. This process was completed
in March 2002. The increase in the Aviation division revenues reflects in
part a rise in non pre-board screening services. FAA revenue in the quarter
ended December 31, 2002, was approximately $2,933,000 or 14.0% of total
revenue. However, the December 2001 quarter included a full period of
pre-board screening compared to only a partial period in the current year's
quarter.
For the nine months ended December 31, 2002, revenue increased by
$17,421,531 or 29.4% to $76,710,839 from $59,289,308 for the nine months
ended December 31, 2001. The reasons for the change were largely the same as
those that impacted the third quarter revenues, with an increase in Aviation
revenues ($23,318,000) being offset by reductions in the Guard division
($2,188,000) and the closure of the National Accounts division ($3,682,000).
Gross Profit
Gross profit increased to $3,615,618 (17.24% of sales) for the quarter
ended December 31, 2002, from $3,462,374 (15.82% of sales) for the quarter
ended December 31, 2001, a rise of $153,244. The improvement in the gross
profit margin was 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 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 nine months ended December 31, 2002, gross profit increased by
$7,437,029 to $16,676,128 or 21.74% of revenue compared to $9,239,099 or
15.58% of revenue for the nine months ended December 31, 2001. The increase
in revenue of $17,421,531 had an impact of $3,787,441 on gross profits based
on the achieved margin of 21.74%. As noted above, the impact of the increased
focus on airport security was the primary factor in the improvement of gross
margins. In addition, the gross margin in the Guard division has improved by
just under 4 percentage points over this period while a relatively low gross
margin of 6.4% in the National Accounts division in the nine months to
December 31, 2001 was removed with the closure of that division.
General and Administrative Expenses
General and administrative expenses were $3,135,968 (14.95% of revenue)
compared to $2,643,669 (12.08% of revenue) for the quarter ended December 31,
2001, an increase of $492,299. The increase was primarily the result of costs
associated with the FAA contract that continued post completion of the FAA
work. We reduced these in December 2002 in the light of the revised revenue
levels. Aviation division general and administrative expenses were $197,000
higher than the quarter the previous year.
For the nine months ended December 31, 2002, general and
administrative expenses increased by $1,740,925 to $10,095,238 (13.16% of
revenue), compared to $8,354,313 (14.09% of revenue) for the nine months
ended December 31, 2001. The major areas of increase were primarily related
to supporting the increased revenue levels of 29.4%. General and
administrative expenses in the Aviation division rose by $1,230,000 for the
nine months ended December 31, 2002 when compared to the previous period last
year. Bonus expense also increased over this period by $438,000 while these
increases were partly offset by reduced costs following the closure of the
National Accounts division ($539,000).
Provision for Doubtful Accounts (Net)
The provisions for doubtful accounts decreased by $51,155 to $162,803
for the quarter ended December 31, 2002, compared to $213,958 in 2001. For
the nine months ended December 31, 2002, the provision for doubtful accounts
rose by $982,629 to $1,344,519 compared to $361,890 for the nine months ended
December 31, 2001. The increase was due mainly to aviation bankruptcies
(including United and US Airways) and write-offs in balances on the closed
National Accounts division and closed branches, which were not considered
recoverable. As of December 31, 2002, approximately 56% of our accounts
receivable were due from aviation related customers (excluding the FAA).
(Continued)
12
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
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 although we
have some concern over the general situation in the airline industry which
accounts for approximately 56% of total accounts receivable.
Interest Income
Interest income was slightly down from the previous year at $20,023
compared to $23,013 for the quarter ended December 31, 2001. For the nine
months ended December 31, 2002, interest income remained at a similar level
to the prior period at $68,185 compared to $70,194 the previous year.
Interest Expense
Interest expense decreased to $103,000 for the 2002 quarter from
$176,080 the previous year, a reduction of $73,080. For the nine months ended
December 31, 2002, interest expense fell by $127,298 to $443,675 from
$570,973 for the nine months ended December 31, 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 4.25% compared to an average of approximately
6.5% in the same period last year.
Equipment Dispositions
The gain on equipment dispositions of $522 in the quarter ended December
31, 2002, related to the disposal of a vehicle sold at above book value and
compares with a gain of $6,314 for the quarter ended December 31, 2001.
Cumulatively, the gain of $10,927 in 2002 was $3,681 better than the gain of
$7,246 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 this was fully repaid during the quarter ended December 31, 2002. The
revolving loan bears interest at prime plus 0.5% while the term loan bore
interest at prime plus 0.75%. All loans are collateralized by a pledge of the
Company's accounts receivable and other assets.
At December 31, 2002, we had borrowed $5,993,132 representing
approximately 53% of our maximum borrowing capacity based on the definition
of "eligible accounts receivable" under the terms of the loan and security
agreement.
We are currently exploring alternate financing arrangements in order
to better position the Company for future expansion via acquisitions and to
provide for the redemption of our preferred stock and/or repurchase of
certain common stock and warrants previously issued. Through December 31,
2002, $95,000 of financing related expenditures are included with intangible
assets. These will be amortized over the life of the future financing
arrangement or alternately written off should the efforts prove unproductive.
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.
(Continued)
13
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Our operations for the nine months ended December 31, 2002, resulted in
an operating profit of $5,236,371, an increase of $4,713,475 compared to a
profit of $522,896 for the nine months ended December 31, 2001. The increase
is primarily due to additional volumes, improved margin and better cost
control. Working capital increased by $4,262,399 to $5,787,503 as of December
31, 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 completing the repayment of the LaSalle
term loan as at December 31, 2002. We experienced a cash overdraft (defined
as checks drawn in advance of future deposits) of $996,770 as of December 31,
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 our ability to win
additional revenue in the guard and aviation divisions while minimizing any
terminations. The aviation division continues to see significant turmoil due
to general uncertainty within the aviation industry. We continue to pick up
additional work in all areas of our aviation division, however, and have now
replaced the pre-September 11 screening revenues with non-screening
aviation-related work. Revenues for the Company are currently at around $76
million on an annualized basis and consist of approximately 60% aviation
related work.
We expect margins to drop back down, post completion of the
federalization process, to around the 17% mark. 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 we are fully clear of the federalization process and we have a
requirement to service around $76 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 60% 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.
(Continued)
14
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
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. 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 and 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.
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.
(Continued)
15
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
FAA and Other Audits
An audit of the Company's FAA contract for pre-board screening services
was completed during December 2002. Although the Company has received no
formal audit report, we have had informal discussions with the FAA and they
have indicated a lack of understanding over the base wage rate charged to
them as part of the rate per hour charge. We are currently putting together a
detailed explanation of the basis for our rates charged and will be
discussing this with them shortly. Our best estimate in light of these
discussions to date, along with other 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, remains in the range of
$700,000 to $2,000,000. The FAA is currently holding back our final invoices
totaling just under $3 million for the pre-board screening services pending
resolution of the audit issues.
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).
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 December 31, 2002 and average
outstanding balances during the nine 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.
16
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 February 14, 2003.
(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: February 14, 2003 By: /s/ William C. Vassell
---------------------------------------------
William C. Vassell, Chairman, President & CEO
By: /s/ Graeme R. Halder
---------------------------------------------
Graeme R. Halder, Chief Financial Officer
17
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 officer 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 officer 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: February 14, 2003
/s/ William C. Vassell
- ----------------------------
William C. Vassell
Principal Executive Officer
18
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 officer 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 officer 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: February 14, 2003
/s/ Graeme P. Halder
- ----------------------------
Graeme R. Halder
Principal Financial Officer
19
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 December 31,
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: February 14, 2003 By: /s/ William C. Vassell
--------------------------------------
William C. Vassell, President, CEO and
Chairman of the Board
20
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 December 31,
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: February 14, 2003 By: /s/ Graeme Halder
--------------------------------------
Graeme Halder, Chief Financial Officer
21
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
THIRD QUARTER RESULTS
o Revenue decreases 4.2% for quarter, up 29.4% year to date
o Gross Profit
17.24% versus 15.82% for quarter
21.74% versus 15.58% year to date
o Basic EPS
$0.03 versus $0.07 for quarter
$0.50 versus $0.00 year-to-date
Lagrangeville, New York *** February 14, 2003 *** Command Security
Corporation (OTCBB: CMMD) today reported results for its third fiscal quarter
ending December 31, 2002. Revenue for the quarter decreased by 4.2% to
$20,969,586 from the $21,890,743 reported in the same period of the prior
fiscal year. Gross profit for the three months ended December 31, 2002
increased to $3,615,618 (17.24% of revenue) from $3,462,374 (15.82% of
revenue) for the quarter ended December 31, 2001.
Commenting on the revenue and gross profit for the quarter, William C.
Vassell, Command's Chairman and President said, "I am pleased with the
results of the quarter which we achieved despite the completion of our
pre-board screening contract with the FAA in November 2002. During the
quarter we continued to see growth in non pre-board screening services in our
Aviation division. I believe that we are now positioned post federalization
of pre-board screening services to generate further revenue increases above
our current run rate of around $75-80 million in annual revenue, with
stronger margins than we achieved pre September 11."
Net income applicable to common stockholders for the three months ended
December 31, 2002 was $191,502 or $0.03 per basic common share compared to
$457,994 or $0.07 per basic common share for the same period in the prior
fiscal year. Stockholders' equity increased to $7,219,269 or $1.15 per basic
common share as of December 31, 2002 and has a 1.47 current ratio.
Mr. Vassell added, "During this quarter general and administrative expenses
increased to 14.95% of revenue compared to 12.08% recorded in the same period
last year primarily as a result of costs associated with the FAA contract
that continued post completion of the FAA work. These expenses were reduced
in December. We believe that we are now well positioned both financially and
operationally to take advantage of the increased interest in security."
For the nine months ended December 31, 2002 revenue increased by 29.4% to
$76,710,839 from the $59,289,308 recorded for the same period of the prior
fiscal year. Gross profit increased to $16,676,128 (21.74% of revenue) for
the nine months ending December 31, 2002 from the $9,239,099 (15.58% of
revenue) for the same period in the prior fiscal year. Net income applicable
to common shares was $3,131,778 or $0.50 per basic common share for the nine
months ended December 31,2002 compared to $29,363 or $0.00 per basic share
for the nine months ended December 31, 2001.
Three Months Ended Nine Months Ended
December 31, December 31,
2002 2001 2002 2001
Revenue $20,969,586 $21,890,743 $76,710,839 $59,289,308
Operating profit 316,847 604,747 5,236,371 522,896
Income before income taxes 234,392 457,994 4,871,808 29,363
Provision for income taxes (2,216) 0 (1,333,288) 0
----------- ----------- ----------- -----------
Net income 232,176 457,994 3,538,520 29,363
Preferred stock dividends (40,674) 0 (406,742) 0
Net income applicable
to common stockholders $ 191,502 $ 457,994 $ 3,131,778 $ 29,363
=========== =========== =========== ===========
Net income
per common share
Basic $ 0.03 $ 0.07 $ 0.50 $ 0.00
=========== =========== =========== ===========
Diluted $ 0.03 $ 0.06 $ 0.46 $ 0.00
=========== =========== =========== ===========
Weighted average number
of common shares outstanding
Basic 6,287,343 6,287,343 6,287,343 6,287,343
=========== =========== =========== ===========
Diluted 7,601,970 7,519,878 7,749,783 7,519,878
=========== =========== =========== ===========
About Command
Command Security Corporation provides security services through company-owned
offices in New York, New Jersey, California, Illinois, Connecticut, Florida,
Massachusetts, Pennsylvania, Maryland and Oregon.
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