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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
---------------
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
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(Exact name of registrant as specified in its charter)
New York 14-1626307
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Lexington Park, LaGrangeville, New York 12540
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (845) 454-3703
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date: 6,287,343 (as of August 12, 2003).
---------
COMMAND SECURITY CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Statements of Operations -
three months ended June 30, 2003
and 2002 (unaudited) 3
Condensed Balance Sheets -
June 30, 2003 and March 31, 2003
(unaudited) 4
Condensed Statements of Stockholders' Equity -
three months ended June 30, 2003
and 2002 (unaudited) 5
Condensed Statements of Cash Flows -
three months ended June 30, 2003 and 2002
(unaudited) 6 - 7
Notes to Condensed Financial Statements 8 - 10
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 11 - 15
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit 31.1 Certification of William C. Vassell 18
Exhibit 31.2 Certification of Graeme R. Halder 19
Exhibit 32.1 ss.1350 Certification of William C. Vassell 20
Exhibit 32.2 ss.1350 Certification of Graeme R. Halder 21
Exhibit 99.1 Press Release 22 - 23
2
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
---------------------------
June, 30 June, 30
2003 2002
----------- -----------
Revenue $16,573,825 $28,271,152
Cost of revenue 13,829,347 21,914,412
----------- -----------
Gross profit 2,744,478 6,356,740
----------- -----------
Operating expenses
General and administrative expenses 2,722,866 3,287,593
Provision for doubtful accounts 72,012 293,043
----------- -----------
2,794,878 3,580,636
----------- -----------
Operating (loss)/profit (50,400) 2,776,104
Interest income 22,624 24,121
Interest expense (116,767) (198,220)
Equipment dispositions 9,566 4,055
----------- -----------
(Loss)/Income before income taxes (134,977) 2,606,060
Provision for income taxes -0- (456,339)
----------- -----------
Net (loss)/income (134,977) 2,149,721
Preferred stock dividends (40,674) (325,394)
----------- -----------
Net (loss)/income applicable to
common stockholders $ (175,651) $ 1,824,327
=========== ===========
Net (loss)/income per common share
Basic $ (0.03) $ 0.29
=========== ===========
Diluted n/a $ 0.28
=========== ===========
Weighted average number
of common shares outstanding
Basic 6,287,343 6,287,343
=========== ===========
Diluted n/a 7,646,101
=========== ===========
See accompanying notes to condensed financial statements.
3
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
June 30, March 31,
2003 2003
----------- -----------
ASSETS
Current assets:
Accounts receivable, net $14,705,364 $17,527,395
Prepaid expenses 476,238 821,300
Other receivables, net 361,981 330,930
----------- -----------
Total current assets 15,543,583 18,679,625
Property and equipment, net 723,789 837,814
Other assets:
Intangible assets, net 53,586 75,322
Restricted cash 256,754 256,308
Other receivables, net 791,353 505,769
Other assets 330,002 352,467
----------- -----------
Total other assets 1,431,695 1,189,866
----------- -----------
Total assets $17,699,067 $20,707,305
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 1,057,500 $ 1,081,068
Current maturities of long-term debt 103,476 133,983
Current maturities of obligations
under capital leases 67,209 67,819
Short-term borrowings 7,058,692 9,046,106
Accounts payable 657,828 602,096
Due to service companies 100,848 188,095
Preferred dividends payable 81,349 81,349
Accrued payroll and other expenses 3,225,700 3,888,284
----------- -----------
Total current liabilities 12,352,602 15,088,800
Self-insurance reserves 502,995 563,815
Long-term debt due after one year 24,699 44,596
Obligations under capital leases due
after one year 27,611 43,283
----------- -----------
12,907,907 15,740,494
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 8,131,196 8,171,870
Retained earnings/(deficit) (5,374,347) (5,239,370)
----------- -----------
Total stockholders' equity 4,791,160 4,966,811
----------- -----------
Total liabilities and stockholders' equity $17,699,067 $20,707,305
=========== ===========
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, 2002 $2,033,682 $ 629 $8,619,286 $(6,566,108)
Preferred stock dividends (325,394)
Net income - three months ended
June 30, 2002 2,149,721
---------- ------ ---------- -----------
Balance at June 30, 2002 2,033,682 629 8,293,892 (4,416,387)
Preferred stock dividends (122,022)
Net loss - nine months ended
March 31, 2003 (822,983)
---------- ------ ---------- -----------
Balance at March 31, 2003 2,033,682 629 8,171,870 (5,239,370)
Preferred stock dividends (40,674)
Net loss - three months ended
June 30, 2003 (134,977)
---------- ------ ---------- -----------
Balance at June 30, 2003 $2,033,682 $ 629 $8,131,196 $(5,374,347)
========== ====== ========== ===========
See accompanying notes to condensed financial statements.
5
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
June 30, June 30,
2003 2002
------------ ------------
Cash flow from operating activities:
Net (loss)/income $ (134,977) $ 2,149,721
Adjustments to reconcile net (loss)/income to
net cash provided by operating activities:
Depreciation and amortization 137,416 172,357
Provision for doubtful accounts 72,012 293,043
Gain on equipment dispositions (9,566) (4,055)
Deferred income taxes -0- 456,339
Self-insurance reserves (21,659) 827,816
(Increase)/decrease in receivables,
prepaid expenses and other current assets 2,787,982 (262,924)
Increase/(decrease) in accounts payable
and other current liabilities (733,260) (701,841)
------------ ------------
Net cash provided by operating activities 2,097,948 2,930,456
------------ ------------
Cash flows from investing activities:
Purchases of equipment (6,428) (63,248)
Proceeds from sale of equipment 12,364 5,183
Decrease in intangible assets 1,975 -0-
Principal collections on notes receivable 12,483 20,000
------------ ------------
Net cash provided by/(used in)
investing activities 20,394 (38,065)
------------ ------------
Cash flows from financing activities:
Net repayments on line-of-credit (1,747,146) (2,084,564)
(Decrease)/increase in cash overdrafts (23,568) 181,751
Principal payments on other borrowings (290,672) (664,112)
Principal payments on capital
lease obligations (16,282) (40,746)
Payment of preferred stock dividends (40,674) (284,720)
------------ ------------
Net cash used in financing activities (2,118,342) (2,892,391)
------------ ------------
Net change in cash and cash equivalents -0- -0-
Cash and cash equivalents, at beginning
of period -0- -0-
------------ ------------
Cash and cash equivalents, at end of period $ -0- $ -0-
============ ============
See accompanying notes to condensed financial statements.
(Continued)
6
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental Disclosures of Cash Flow Information
Cash paid during the three months ended June 30 for:
2003 2002
--------- ---------
Interest $ 122,504 $ 225,786
Income taxes 159,154 -0-
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the three months ended June 30, 2002, the Company purchased
transportation equipment with direct installment and lease financing of
$16,170, respectively.
For the three months ended June 30, 2003 and 2002, the Company accrued
dividends of $40,674 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.
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, 2003.
The financial statements for the interim periods shown in this
report are not necessarily indicative of results to be expected for the
fiscal year. In the opinion of management, the information contained herein
reflects all adjustments necessary to summarize fairly the results of
operations, financial position, stockholders' equity and cash flows at June
30, 2003, and for the period then ended. All such adjustments are of a normal
recurring nature.
1.) Short-Term Notes Payable:
In November, 2000, the Company entered into a three year agreement with
LaSalle Business Credit, Inc. ("LaSalle") under a loan and security
agreement (the "agreement"), providing for a line of credit of up to
85% of eligible accounts receivable, as defined in the agreement, but
in no event in excess of $15 million. The agreement was modified in
January, 2002 and again in March, 2002 to provide for a $250,000
over-advance and to expand the definition of eligible accounts
receivable. At June 30, 2003, the Company had used $7,058,692 of this
line, representing approximately 89% of its maximum borrowing capacity.
Interest is payable at Prime plus 0.5% (4.5% at June 30, 2003). The
line is collateralized by customer accounts receivable and substantially
all other assets of the Company.
2.) Net Income/(Loss) per Common Share:
Under the requirements of Financial Accounting Standards Board
Statement No. 128 (SFAS 128), "Earnings Per Share," the dilutive
effect of potential common shares, if any, is excluded from the
calculation for basic earnings per share. No diluted earnings per
share are presented for the three months ended June 30, 2003, because
the effect of assumed issuance of common shares in connection with
warrants and stock options outstanding and preferred stock conversions
was antidilutive.
3.) Preferred Stock
The Company has issued and outstanding 12,325 shares of Series A
Preferred Stock. The Series A shareholders are entitled to receive
annual dividends equal to 8% of the liquidation value of their
shares, payable quarterly. Upon liquidation or redemption the Series
A shareholders are entitled to $165 per share, or $2,033,682. The
Company had suspended payment of preferred dividends as of July 1,
2000, until it could re-establish sufficient surplus in accordance
with applicable regulations. This was achieved and total arrears of
$284,720 were paid during the June 2002 quarter end. As of June 30,
2003, the Company owed its preferred stockholders $81,349,
representing dividends accrued for the March 2003 and June 2003
quarters.
(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 $586,682 and $1,119,971
for the three months ended June 30, 2003 and 2002, respectively.
The nature of the Company's business also subjects it to claims or
litigation alleging that it is liable for damages as a result of the
conduct of its employees or others. The Company insures against such
claims and suits through general liability policies with third-party
insurance companies. Such policies have 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 related
business, as of October 1, 2002 the Company acquired a policy with a
$25 million limit per occurrence. Prior to December 1, 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 coverage
under 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 coverage 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 ($50,000 for claims based on
losses incurred prior to October 1, 2000). Estimated accrued
liabilities are based on specific reserves in connection with existing
claims as determined by third party risk management consultants and
actuarial factors and the timing of reported claims. These are all
factored into estimating 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.
(Continued)
9
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Contingent Liabilities (continued):
In addition to such cases, the Company has been named as a defendant
in several uninsured employment related claims which are currently
before various courts, the EEOC or various state and local agencies.
The Company has instituted policies to minimize these occurrences and
monitor those that do occur. At this time the Company is unable to
determine the impact on the financial position and results of
operation that these claims may have, should the investigations
conclude that they are valid.
The Company was subject to an audit 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. Verbal
agreement has been reached with the Attorney General's Office over
issues raised during their audit of our services to New York State
under the OGS contract. The agreement calls for a settlement of
$600,000 to be paid to New York State over a period of 2 years at
approximately $25,000 per month plus interest at 9%, commencing August
2003. This amount has been recorded in the current liabilities.
An audit of the Company's FAA contract for pre-board screening
services was completed during December 2002. Based on initial audit
findings of the Defense Contract Audit Agency (DCAA), the FAA had
indicated that approximately $5.2 million of billing was not supported
by the Company's accounting records and consequently the FAA held back
$2.9 million of payment on final invoices until the audit is resolved.
The Company is continuing negotiations with the Defense Contract
Management Agency (DCMA) over the disputed billings on the FAA
contract for pre-board screening services. Steps have been taken to
ensure we achieve a fair and equitable solution to our claim for costs
incurred. This includes retaining a firm of Lawyers based in
Washington to consider our options. They have themselves retained a
firm of accountants who have experience in dealing with the DCMA to
settle a dispute over the same issue with another security company.
During our discussions, we received written correspondence from the
DCMA indicating revised rates and a total contract price of $30.3
million compared to original billings of $33.8 million, a difference
of $3.5 million. Cash withheld by the FAA totals $2.9 million. We
continue to negotiate with the DCMA to prove additional costs we
believe are not adequately reflected in their latest contract price.
Our reserves remain unchanged on this issue at $1.0 million with an
upper range of $2.2 million.
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 "intends", "plans", "efforts", "anticipates", "believes", "expects", or
words of similar import typically identify such statements. Various important
factors that could cause actual results to differ materially from those
expressed in the forward-looking statements are identified at the end of this
Item 2. The actual results may vary significantly based on a number of
factors including, but not limited to, availability of labor, marketing
success, competitive conditions and the change in economic conditions of the
various markets the Company serves. Actual future results may differ
materially from any suggested in the following statements.
Critical Accounting Policies and Estimates
The preparation of 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
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. 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.
Results of Operations
Revenue
Revenue decreased by $11,697,328 from $28,271,152 for the quarter
ended June 30, 2002 to $16,573,824 for the quarter ended June 30, 2003. The
reduction was primarily due to the federalization of pre-board screening
services in November 2002 by the US government. These services accounted for
$13,551,181 in the June 2002 quarter. Underlying revenues excluding these
services therefore rose by $1,853,853 or 12.6%. This increase was due to
additional revenues from other services provided by our Aviation division to
the airline industry, including baggage handling, wheelchair services and
document verification (up $2,473,000). This increase was offset by reduced
revenues in the Guard division ($511,000) reflecting the cancellation of
lower margin accounts to improve overall returns (see Gross Profit below).
Gross Profit
It is not possible to ascertain the Gross Profit performance
excluding the FAA revenues for pre-board screening services as several direct
costs were shared between FAA and non-FAA continuing services in the Aviation
division. The published Gross Profit decreased by $3,612,263 to $2,744,477
(16.56% of revenue) for the quarter ended June 30, 2003, from $6,356,740
(22.48% of revenue) for the quarter ended June 30, 2002. The Guard division
did improve by approximately 1% in the first quarter of the fiscal year
2003/04 compared to the same quarter the previous year. Overall the Gross
profit of 16.56% was in line with earlier expectations of between 16 and 17%.
(Continued)
11
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
General and Administrative Expenses
General and administrative expenses decreased by $564,727 to
$2,722,866 (16.43% of revenue) for the quarter ended June 30, 2003, from
$3,287,593 (11.63% of revenue) for the quarter ended June 30, 2002. The main
reason for the decrease was due to the reduced revenues following the loss of
pre-board screening services at US airports. The main area of reduction was
in administrative salaries and bonuses ($545,000 lower) due to reduced
headcount and a lower bonus accrual reflecting the reduced levels of
profitability. A cost reduction program was initiated in June 2003 to
compensate for reduced revenues as the negative effect of the Iraq war and
the SARS epidemic adversely impacted demand for our services in the aviation
division (see Outlook below).
Provision for Doubtful Accounts (Net)
The provision for doubtful accounts decreased by $221,031 to $72,012
for the quarter ended June 30, 2003, compared to $293,043 for the same
quarter in 2002. The main reason for the larger provision in 2002 was due to
a more conservative stance being taken at that time on the recoverability of
some older debt.
The Company periodically evaluates the requirement for providing for
credit losses on its accounts receivables. Criteria used by management to
evaluate the adequacy of the allowance for doubtful accounts include, among
others, the creditworthiness of the customer, prior payment performance, the
age of the receivables and the Company's overall historical loss experience.
It is not known if bad debts will increase in future periods nor is it
believed by management that the current decrease is necessarily indicative of
a trend.
Interest Income
Interest income decreased by $1,497 to $22,624 for the quarter
ended June 30, 2003, from $24,121 in the quarter ended June 30, 2002.
Interest Expense
Interest expense decreased to $116,767 for the quarter ended June 30,
2003, from $198,220 for the quarter ended June 30, 2002, a reduction of
$81,453. The decreased charge primarily arose from lower average borrowing on
the revolver loan and a decrease in average interest rates. The rates
averaged approximately 4.7% for the quarter ended June 30, 2003 compared to
around 5.8% for the quarter ended June 30, 2002.
Equipment Dispositions
The gain on equipment dispositions of $9,566 in the quarter ended
June 30, 2003, related to the disposal of three vehicles and office equipment
sold at above book value and compares with a gain of $4,055 for the quarter
ended June 30, 2002.
Liquidity and Capital Resources
The Company pays its guard employees and those of its administrative
service clients on a weekly basis, while its customers and the customers of
administrative service clients pay for the services of such employees
generally within 65 days after billing by the Company. In order to fund the
Company's payroll and operations, the Company maintains a commercial
revolving loan arrangement with LaSalle Business Credit, Inc. (LaSalle).
The LaSalle loan agreement provides for borrowings in an amount up to
85% of the Company's eligible accounts receivable, but in no event more than
$15,000,000. LaSalle also provided a term loan in the amount of $3,000,000.
This was repaid during the 2002/03 fiscal year. The revolving loan bears
interest at prime plus 0.50%. All loans are collateralized by a pledge of the
Company's accounts receivable and other assets.
(Continued)
12
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
At June 30, 2003, the Company had borrowed $7,058,692 representing
approximately 89% of its maximum borrowing capacity based on the definition
of "eligible accounts receivable" under the terms of the loan and security
agreement.
Long-term debt (including current maturities) decreased by $50,404 to
$128,175 at June 30, 2003, from $178,579 at March 31, 2003. Capital lease
obligations were $94,820 at the quarter ended June 30, 2003 compared to
$111,102 as at March 31, 2003. The Company did not enter into any new capital
lease obligations during the quarter ended June 30, 2003.
The Company finances vehicle purchases typically over three years and
insurance through short-term borrowings. The Company has no additional lines
of credit other than discussed herein and has no present material commitments
for capital expenditures.
The Company's operations for the quarter ended June 30, 2003,
resulted in an operating loss of $50,400, a decrease of $2,826,504 compared
to the profit of $2,776,104 for the quarter ended June 30, 2002. The decrease
was due to the reduced revenues following the federalization of pre-board
screening services by the US government in November 2002. The Company saw a
decrease of $399,844 in its working capital from $3,590,825 as at March 31,
2003 to $3,190,981 as at June 30, 2003. The Company experienced a cash
overdraft (defined as checks drawn in advance of future deposits) of
$1,057,500 as of June 30, 2003, compared to $1,081,068 at March 31, 2003.
Cash balances and overdrafts can fluctuate materially from day to day
depending on such factors as collections, timing of billing and payroll
dates, and are covered via advances from the revolving loan as checks are
presented for payment.
The loan agreement with LaSalle expires on November 1, 2003 and we
will be working with various banks over the coming months to secure a new
deal to replace LaSalle. At this time it is not known what impact this may
have on on-going rates of interest although the banking environment would
appear to have deteriorated since we negotiated the LaSalle agreement.
The non-payment by the FAA of $2.9 million in billing caused this
receivable to become ineligible for borrowing purposes under the LaSalle
revolver agreement. Therefore any settlement below this amount should have a
favorable impact on future liquidity.
We are actively considering potential areas of additional finance to
ensure we have the capacity to develop our business, have the necessary
funding to meet any increased payroll obligations and to strengthen our
balance sheet.
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 at acceptable margins
while minimizing further contract terminations. The revenues of the Guard
division decreased over the past year as we eliminated contracts with
unacceptable margins and worked to increase both margin and net
profitability. The focus now is to increase revenue as branch managers work
to sell new business while retaining good contracts. The airline industry
continues to suffer in general although demand for our services has increased
over recent months. As a result, the Company has been awarded new contracts
and annualized revenues are now running at around $80 million.
(Continued)
13
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
We are investing approximately $200,000 per annum in cost to support
our attempts to secure contracts from the Department of Homeland Security and
other government departments. We have started the process of submitting bids
and although we do not expect to win any such contracts in the short term, we
are developing our contacts and experience, having previously provided such
services in earlier years. We believe this to be an area of tremendous
opportunity over the next few years given the heightened focus on security in
the US.
We expected margins post the federalization of pre-board screening
services to stabilize at between 16 and 17%, which proved to be the case in
the first quarter of the 2003/04 fiscal year. We expect some reduction over
the coming months as recently won contracts in the Aviation division are at a
lower margin than the average for the division. The pressure on the airline
industry to reduce their cost base remains high and this might have an
adverse impact over the remainder of 2003/04. Overall, however, we expect
margins for 2003/04 of approximately 16%.
Although we had completed a cost reduction program in our aviation
division following the loss of pre-board screening services in November 2002,
the adverse impact on demand for our services from the Iraq war and the SARS
epidemic meant we had to further reduce our cost base within the aviation
division. This was completed in June 2003 along with a reduction in costs at
the corporate level. We therefore expect a reduction in our general and
administrative expenses from the second quarter of 2003/04 forward. Some of
this cost reduction will be offset by the recent increases in revenues which
will require additional costs to service although we do expect an improvement
from the 16.43% achieved in the first quarter of 2003/04.
Overall, we expect to become profitable from the second quarter of
2003/04 as the benefit of increased revenues and reduced costs combine to
deliver a positive level of net income for the remainder of 2003/04. This
assumes that there is no material change in the current level of revenues nor
any exceptional charges. We are currently looking at additional sources of
finance to strengthen our balance sheet and to ensure we have the capacity to
fund further contract wins in the Guard or Aviation divisions as well as in
the new area of government contracts.
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
The Company's management assumes that the current regulation and
federalization of pre-board screening services provided by the Company will
not be expanded into other areas such as general security and baggage
handling at aviation facilities. Such increased regulation or federalization
would have a material adverse impact on the Company's results of operations
and financial condition.
(Continued)
14
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Airline Industry
Several of the Company's aviation clients filed for bankruptcy
protection during fiscal year 2003. The aviation industry continues to
struggle with various challenges including the cost of security and decreased
volumes due the threat of terrorism. Additional bankruptcy filings by
aviation and non-aviation clients would have a material adverse impact on the
Company's liquidity, results of operations and financial condition.
Potential Regulatory Litigation
Please refer to "Note to Condensed Financial statements Item 5
Contingent Liabilities" where there is description of the Company's separate
negotiations with the DCMA and the New York State Office of General Services
(OGS). Management believes it has adequately addressed these matters with
appropriate adjustments and/or reserves as reflected in the financial
statements filed with the form 10-K as at March 2003. However, there can be
no assurance that the revenue adjustment of $1.0 million made in connection
with the FAA dispute will be adequate. To the extent an FAA settlement and
related legal costs exceeded this reserve, projected earnings would be reduced
by the excess amount.
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, continuity of Management and continuity of non-management
personnel. There are several major national competitors with resources far
greater than those of the Company which, therefore, have the ability to
provide service, cost and compensation incentives to clients and employees
which could result in 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 and increased
pressure on its customers to cut their costs. To a significant extent,
certain costs are not within the control of management and margins may be
adversely affected by such items as litigation expenses, fees incurred in
connection with extraordinary business transactions, inflation, labor unrest,
increased payroll and related costs.
Collection of Accounts Receivable
Management has no reasonable basis to believe that default in
payment of accounts receivable by the Company's security guard customers or
administrative service clients will occur. However, any such default by a
significant client due to bankruptcy or otherwise, would have a material
adverse impact on the Company's liquidity, results of operations, and
financial condition.
Catastrophic Events
The Company is exposed to potential claims for catastrophic events,
such as a hijacked airplane or other terrorist acts, 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 for guard services and $25 million in
the aviation division. The former umbrella coverage of $50 million is no
longer available to the Company at commercially reasonable rates following
the September 11 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 and 10-Q (all as filed with the Securities and Exchange Commission
from time to time).
15
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk in connection with changes in
interest rates, primarily in connection with outstanding balances under its
revolving line of credit and term loan with LaSalle. Based on the Company's
interest rate at June 30, 2003 and average outstanding balances during the
three months then ended, a 1% change in the prime lending rate would impact
the Company's financial position and results of operations by approximately
$19,000 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.
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 31.1 Certification of William C. Vassell, filed herewith.
Exhibit 31.2 Certification of Graeme R. Halder, filed herewith.
Exhibit 32.1 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 32.2 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 99.1 Press Release dated August 14, 2003, filed herewith
(2) Reports on form 8-K
During the quarter the Company did not file any form 8-K's.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMAND SECURITY CORPORATION
Date: August 12, 2003 By: /s/ William C. Vassell
William C. Vassell, President, CEO and
Chairman of the Board
By: /s/ Graeme Halder
Graeme Halder, Chief Financial Officer
17
Exhibit 31.1
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: August 12, 2003
/s/ William C. Vassell
- ----------------------------
William C. Vassell
Principal Executive Officer
18
Exhibit 31.2
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: August 12, 2003
/s/ Graeme R. Halder
- ----------------------------
Graeme R. Halder
Principal Financial Officer
19
Exhibit 32.1
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 June 30, 2003
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: August 12, 2003 By: /s/ William C. Vassell
William C. Vassell, President, CEO and
Chairman of the Board
20
Exhibit 32.2
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 June 30, 2003
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: August 12, 2003 By: /s/ Graeme Halder
Graeme Halder, Chief Financial Officer
21
Exhibit 99.1
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
FIRST FISCAL QUARTER RESULTS
Lagrangeville, New York *** August 14, 2003 *** Command Security Corporation
(OTCBB: CMMD) announced today its results for the first fiscal quarter ended
June 30, 2003. Due to the federalization of the company's pre-board screening
business, revenues for the quarter decreased to $16.6 million from the $28.3
million recorded in the same period of the prior fiscal year. During this
same period in the prior fiscal year, pre-board screening revenues were $13.6
million. Excluding the pre-board screening business lost to federalization,
therefore, revenues for the quarter would have increased by 12.6% due to
growth in other sectors of the Aviation division.
Gross profit for the quarter decreased to $2.7 million (16.6% of revenue)
compared to $6.4 million (22.5% of revenue) in the same period of the prior
fiscal year. Net loss applicable to common stockholder was $(175,651) or
$(0.03) per basic share compared to net income of $1,824,327 or $0.29 per
basic share in the same period of the prior fiscal year.
Commenting on the results, Chairman and President William C. Vassell said,
"During the quarter we began rebuilding revenues in our Aviation business by
concentrating our efforts on other service sectors such as baggage handling
and document verification. We also initiated a program to secure government
related Homeland Security contracts which we see as a major opportunity for
the company. At the same time, we implemented further cost reduction measures
in other areas of our company that will have effect as of July. We were
encouraged by the result for the first quarter which was in line with our
earlier expectations and, with recent contract wins that have seen our
revenues increase to an annualized run rate of around $80 million (up from
$65 million previously), we look forward to the rest of the year with growing
confidence."
(TABLE FOLLOWS)
22
COMMAND SECURITY CORPORATION
Three Months Ended June 30,
2003 2002
----------- -----------
Revenue $16,573,825 $28,271,152
Operating (Loss)/Profit (50,400) 2,776,104
Net (Loss)/Income (134,977) 2,149,721
Preferred stock dividends (40,674) (325,394)
----------- -----------
Net (Loss)/Income applicable
to common stockholders $ (175,651) $ 1,824,327
=========== ===========
Net (Loss)/Income per common share
Basic $ (0.03) $ 0.29
=========== ===========
Diluted N/A $ 0.28
=========== ===========
Weighted average number of common
shares outstanding
Basic 6,287,343 6,287,343
=========== ===========
Diluted N/A 7,646,101
=========== ===========
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.
23