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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, 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
(Exact name of registrant as specified in its charter)
New York 14-1626307
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Lexington Park, Lagrangeville, New York 12540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (845) 454-3703
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act)
Yes ___ No _X_
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date: 6,287,343 (as of February 13, 2004).
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, 2003 and 2002 (unaudited) 2
Condensed Balance Sheets -
December 31, 2003 and March 31, 2003
(unaudited) 3
Condensed Statements of Changes in
Stockholders' Equity - nine months ended
December 31, 2003 and 2002 (unaudited) 4
Condensed Statements of Cash Flows -
nine months ended December 31, 2003 and 2002
(unaudited) 5 - 6
Notes to Condensed Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10 - 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 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
Exhibit 31.1 Certification of William C. Vassell 18
Exhibit 31.2 Certification of Graeme R. Halder 19
Exhibit 99.1 ss.1350 Certification of William C. Vassell 20
Exhibit 99.2 ss.1350 Certification of Graeme R. Halder 21
1
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
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue $20,609,953 $20,969,586 $56,167,214 $76,710,839
Cost of revenue 17,808,982 17,353,968 47,617,779 60,034,711
----------- ----------- ----------- -----------
Gross profit 2,800,971 3,615,618 8,549,435 16,676,128
----------- ----------- ----------- -----------
Operating expenses
General and administrative expenses 2,739,382 3,135,968 8,066,970 10,095,238
Provision for doubtful accounts, net (87,621) 162,803 (25,557) 1,344,519
----------- ----------- ----------- -----------
2,651,761 3,298,771 8,041,413 11,439,757
----------- ----------- ----------- -----------
Operating profit 149,210 316,847 508,022 5,236,371
Interest income 27,721 20,023 69,053 68,185
Interest expense (141,175) (103,000) (361,201) (443,675)
Equipment dispositions 150 522 9,716 10,927
----------- ----------- ----------- -----------
Income before income taxes 35,906 234,392 225,590 4,871,808
Provision for income taxes (10,772) (2,216) (88,226) (1,333,288)
----------- ----------- ----------- -----------
Net income 25,134 232,176 137,364 3,538,520
Preferred stock dividends (40,673) (40,674) (122,021) (406,742)
----------- ----------- ----------- -----------
Net income/(loss) applicable to
common stockholders $ (15,539) $ 191,502 $ 15,343 $ 3,131,778
=========== =========== =========== ===========
Net income/(loss) per common share
Basic $ 0.00 $ 0.03 $ 0.00 $ 0.50
=========== =========== =========== ===========
Diluted $ N/A $ 0.03 $ 0.00 $ 0.46
=========== =========== =========== ===========
Weighted average number
of common shares outstanding
Basic 6,287,343 6,287,343 6,287,343 6,287,343
=========== =========== =========== ===========
Diluted N/A 7,601,970 6,333,565 7,749,783
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
2
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
December 31, March 31,
2003 2003
----------- -----------
ASSETS
Current assets:
Accounts receivable, net of allowance for doubtful accounts
of $356,264 and $2,432,337 respectively $16,765,754 $17,527,395
Prepaid expenses 1,164,096 821,300
Other receivables 394,172 330,930
----------- -----------
Total current assets 18,324,022 18,679,625
----------- -----------
Property and equipment, net 555,476 837,814
----------- -----------
Other assets:
Intangible assets, net 332,547 75,322
Restricted cash 107,464 256,308
Accounts receivable disputed, net of allowance for billing
adjustments of $1,000,000 1,930,379 -0-
Other receivables, net 348,941 505,769
Other assets 441,365 352,467
----------- -----------
Total other assets 3,160,696 1,189,866
----------- -----------
Total assets $22,040,194 $20,707,305
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 801,855 $ 1,081,068
Current maturities of long-term debt 330,191 133,983
Current maturities of obligations under capital leases 59,871 67,819
Short-term borrowings 10,438,764 9,046,106
Accounts payable 763,505 602,096
Due to service companies 98,719 188,095
Preferred dividends payable 81,348 81,349
Accrued payroll and other expenses 3,880,481 3,888,284
----------- -----------
Total current liabilities 16,454,734 15,088,800
Self-insurance reserves 385,123 563,815
Long-term debt due after one year 213,752 44,596
Obligations under capital leases due after one year 4,431 43,283
----------- -----------
17,058,040 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 8,049,849 8,171,870
Retained earnings/(deficit) (5,102,006) (5,239,370)
----------- -----------
Total stockholders' equity 4,982,154 4,966,811
----------- -----------
Total liabilities and stockholders' equity $22,040,194 $20,707,305
=========== ===========
See accompanying notes to condensed financial statements.
3
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Retained
Preferred Common Paid-In Earnings
Stock Stock Capital (Deficit)
---------- -------- ---------- -----------
Balance at March 31, 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)
Preferred stock dividends (40,674)
Net loss - three months ended
March 31, 2003 (2,211,784)
---------- -------- ---------- -----------
Balance at March 31, 2003 2,033,682 629 8,171,870 (5,239,370)
Preferred stock dividends (122,021)
Net income - nine months ended
December 31, 2003 137,364
---------- -------- ---------- -----------
Balance at December 31, 2003 $2,033,682 $ 629 $8,049,849 $(5,102,006)
========== ======== ========== ===========
See accompanying notes to condensed financial statements.
4
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
----------------------------------
December 31, December 31,
2003 2002
----------- -----------
Cash flows from operating activities:
Net income $ 137,364 $ 3,538,520
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 367,209 483,436
Provision for doubtful accounts (25,557) 1,344,519
Provision for audit contingencies -0- 700,000
Gain on equipment dispositions (9,716) (10,927)
Deferred income taxes -0- 983,067
Self-insurance reserves (34,415) 33,516
(Increase)/Decrease in receivables, prepaid
expenses and deposits (460,166) 3,968,963
Increase/(Decrease) in accounts payable and
other current liabilities 446,953 (1,681,557)
----------- -----------
Net cash provided by operating activities 421,672 9,359,537
----------- -----------
Cash flows from investing activities:
Purchases of equipment (29,406) (126,293)
Proceeds from sale of equipment 12,514 20,066
Principal collections on notes receivable 37,825 45,000
----------- -----------
Net cash provided by/(used in) investing activities 20,933 (61,227)
----------- -----------
Cash flows from financing activities:
Net advances/(repayments) on line-of-credit 1,035,954 (5,678,787)
Decrease in cash overdraft (279,213) (1,066,591)
Debt issuance costs (315,488) (95,000)
Principal payments on other borrowings (715,036) (1,982,115)
Principal payments on capital lease obligations (46,800) (109,749)
Payment of preferred stock dividends (122,022) (366,068)
----------- -----------
Net cash used in financing activities (442,605) (9,298,310)
----------- -----------
Net change in cash
and cash equivalent -0- -0-
Cash and cash equivalents
at beginning of period -0- -0-
Cash and cash equivalents
at end of period $ -0- $ -0-
=========== ===========
See accompanying notes to condensed financial statements.
5
(Continued)
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental Disclosures of Cash Flow Information
Cash paid during the nine months ended December 31 for:
2003 2002
----------- -----------
Interest $ 361,201 $ 483,415
Income taxes 203,063 75,000
Supplemental Schedule of Non-Cash Investing and Financing Activities
During the nine months ended December 31, 2003, the Company refinanced its
line of credit agreement from LaSalle to CIT, the proceeds in the amount of
$8,723,102 have been excluded from net advances/(repayments) on line of
credit, on the condensed statement of cash flows presented.
During the nine months ended December 31, 2003, the Company reclassified
$1,930,379 of accounts receivable from current assets to other assets in
connection with the FAA disputed billings. This amount has been excluded from
the condensed statements of cash flows presented.
During the nine months ended December 31, 2003, the Company agreed to a
settlement with the OGS in the amount of $600,000. This amount had been
accrued for during the year ended March 31, 2003 and included in other
payables. A portion of the agreement calls for 21 monthly payments totaling
$527,000, commencing December 1, 2003. This amount has been excluded from the
change in other payables and proceeds from long-term debt financing on the
condensed statements of cash flows presented.
For the nine months ended December 31 2002, the Company purchased
transportation and office equipment with direct installment and lease
financing of $29,355.
The Company may obtain short-term financing to meet its insurance needs. For
the nine months ended December 31, 2003 and 2002, $910,104 and $744,217,
respectively, were borrowed for this purpose. These borrowings have been
excluded from the condensed statements of cash flows.
For the nine months ended December 31, 2003 and 2002, the Company accrued
dividends of $122,021 and $40,674 respectively on its Series A convertible
preferred stock. These charges to paid-in capital and credits to dividends
payable have been excluded in the condensed statements of cash flows.
See accompanying notes to condensed financial statements.
6
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The unaudited financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q and do not include
all of the information and note disclosures required by generally accepted
accounting principles. These statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
financial statements for the year ended March 31, 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 December 31, 2003,
and for the period then ended. All such adjustments are of a normal recurring
nature.
1.) Short Term Notes Payable:
On December 12 2003, the Company entered into a three year agreement
with CIT Group/Business Credit, Inc. ("CIT") 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, 2003, the Company had
used $9,841,792 of this line, representing approximately 81% of its
maximum borrowing capacity. Interest is payable at Prime plus 1.25%
(5.25% at December 31, 2003). The line is collateralized by customer
accounts receivable and substantially all other assets of the Company.
The previous agreement with LaSalle Business Credit, Inc ("LaSalle") was
terminated, which provided for financing of eligible accounts
receivable, as defined, but in no event in excess of $15 million.
Interest was payable at prime plus 0.5%. The line was collateralized by
customer accounts receivable and substantially all other assets of the
company. This agreement was scheduled to expire on November 1, 2003 but
was extended to December 12, 2003 to enable the company to complete the
closing with CIT.
2.) Net Income 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 of
basic earnings per share. Diluted earnings per share are presented for
the three months and nine months ended December 31, 2003 because of the
effect the issuance of common shares would have if the outstanding stock
options and warrants were exercised. The preferred stock conversions
were not included in the diluted earnings per share as they were
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 Preferred
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, 2003, the Company owed
its preferred stockholder $81,347, representing the dividend accrued for
the quarters ended September 30 and December 31, 2003. The September 30,
2003 accrued dividend was subsequently paid in January 2004.
7
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4.) Self-Insurance
The Company has an insurance policy to cover workers' compensation
claims in most states 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 $2,713,862 and $1,939,811 for the nine
months ended December 31, 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 aviation-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). This coverage has become more affordable and the Company has an
excess general liability insurance policy that covers aviation claims
for an additional $25 million in the aggregate as of October 1, 2003.
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 do not 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 per
occurrence on the non-aviation-related claims and $10,000 on the
aviation-related claims for cases after that date. Any punitive damage
award would not be covered by the general liability insurance policy.
The only other potential impact would be on future premiums, which may
be adversely effected by a poor claims history.
8
(Continued)
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5.) Contingent Liabilities (continued):
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. A settlement
was reached with the Attorney General's Office calling for a penalty
provision in the amount of $73,000 to be paid over a three month period
and a note provision in the amount of $527,000 to be paid with
twenty-one monthly payments of approximately $27,000 including interest
at 9%, commencing December 1, 2003.
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. We continue to negotiate with the
DCMA to prove additional costs we believe are not adequately reflected
in their latest offer. A formal submission was made on November 4, 2003,
outlining our claims for additional costs over and above those reflected
in the total contract price of $30.3 million. The total of the
additional costs claimed are over $3.1 million and will be the subject
of further negotiation. Our reserves remain unchanged on this issue at
$1.0 million and the upper range also remains unchanged at $2.4 million.
A further submission was provided to the DCMA in response to their
initial queries to our first submission and we continue to try to
negotiate a fair and equitable solution.
6.) Accounts receivable disputed
Accounts receivable disputed in the amount of $1,930,379 represents the
balance reported by the Company, net of a $1,000,000 billing adjustment,
as due from the FAA in connection with pre-board screening services
rendered under a contract completed during November 2002. The final
contract amount is currently the subject of negotiation with the Defense
Contract Management Agency (DCMA). Refer to note 5, Contingent
Liabilities for details regarding the status of the dispute.
9
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. 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.
Prepaid Expenses
A significant new contract commenced in August 2003. Due to the size of
the costs relating to this contract (uniforms, radios, etc), $264,781 was
capitalized and is being charged to earnings over its estimated useful life
of 12 months. The expense reported amounted to $66,195 for the quarter ended
December 31, 2003 and $110,325 for the nine months ended December 2003.
Results of Operations
Revenue
Revenue decreased by $359,633 or 1.7% for the quarter ended December 31,
2003, to $20,609,953 from $20,969,586 in 2002. The major component of the
decrease in the current quarter was the federalization of pre-board screening
at US airports in November 2002. These services accounted for approximately
$2,933,000 of the December 2002 quarter end revenue. Underlying revenues
excluding these services therefore rose by $2,573,367 or 14.3%. The reason
for the increase was additional revenue from the Aviation division due to
additional non-screening services at the airports and an increase of $788,596
in the Guard division reflecting additional short term revenue from
strike-related work in California.
10
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
For the nine months ended December 31, 2003, revenue decreased by
$20,543,625 or 26.8% to $56,167,214 from $76,710,839 for the nine months
ended December 31, 2002. The reasons for the change were the same as those
that impacted the third quarter revenues. Pre-board screening revenues in the
nine months ended 2002 were approximately $27,322,000. Underlying revenues
excluding these services increased by $6,778,000 or 13.7%. 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. Underlying Aviation revenues rose by
$7,146,000 offset by reductions in the Guard division ($248,000) and the
closure of the National Accounts division ($129,000).
Gross Profit
It is not practical 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. Gross Profit decreased by $814,647 to $2,800,971 (13.59% of
revenue) for the quarter ended December 31, 2003, from $3,615,618 (17.24% of
revenue) for the quarter ended December 31, 2002. Overall the Gross Profit of
13.59% was below expectations expressed in the June 2003 10Q of around 16%
due primarily to the adverse impact of workers compensation claims in the
quarter. This was due to a serious accident suffered by one of our employees
in Miami.
For the nine months ended December 31, 2003, Gross Profit decreased by
$8,126,693 to $8,549,435 (15.22% of revenue) compared to $16,676,128 or
21.74% of revenue for the nine months ended December 31, 2002. The reduction
in the margin for the nine month period was due to the loss of the pre-board
screening services in 2002, the new contract wins in the Aviation division
which were at lower than previous margin levels and the adverse impact during
the quarter of the workers compensation costs, referenced above.
General and Administrative Expenses
General and administrative expenses were $2,739,382 (13.29% of revenue)
compared to $3,135,968 (14.95% of revenue) for the quarter ended December 31,
2002, a decrease of $396,586. The reduction primarily resulted from the
removal of costs associated with the increase in revenue in 2002. The cost in
the quarter ended December 2003 of 13.29% of revenue compares to 16.43% and
13.72% of revenue for the previous two quarters ended June 30 and September
30, 2003 respectively. The margin improvement in general and administrative
expenses reflects cost reductions implemented in June 2003 in the light of
the losses incurred in the first quarter of 2003/04. These losses were the
result of the negative impact of the Iraq war and the SARS epidemic as well
as a weak economy and a troubled airline industry. The cost reductions
coincided with an improvement in these factors and combined with improved
revenues.
For the nine months ended December 31, 2003, general and administrative
expenses decreased by $2,028,268 to $8,066,970, compared to $10,095,238 for
the nine months ended December 31, 2002. The major reasons for the reduction
were the reduced revenues following federalization and the impact of the cost
reductions implemented in June 2003.
Provision for Doubtful Accounts (Net)
The provisions for doubtful accounts decreased by $250,424 to a credit
of $87,621 for the quarter ended December 31, 2003, compared to a charge of
$162,803 in 2002. For the nine months ended December 31, 2003, the provision
for doubtful accounts fell by $1,370,076 to a credit of $25,557 compared to a
charge of $1,344,519 for the nine months ended December 31, 2002. The credit
of $87,621 reflects a current provision for bad debt of $10,305 offset by an
estimated recovery of $97,926 from accounts in bankruptcy for which an active
market is developing at 10% to 20% of face value. The cost for 2002 was
unusually high due mainly to aviation bankruptcies (including US Airways) and
write-offs in balances on the closed National Accounts division and closed
guard branches, which were not considered recoverable.
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 increase in future periods nor do we believe that the
current period decrease is indicative of a trend.
11
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Interest Income
Interest income in the quarter ended December 31, 2003 of $27,721 was
$7,698 more than the previous year of $20,023. For the nine months ended
December 31, 2003, interest income rose by $668 to $69,053 compared to
$68,185 the previous year.
Interest Expense
Interest expense increased to $141,175 for the 2003 quarter from
$103,000 the previous year, a rise of $38,175. For the nine months ended
December 31, 2003, interest expense fell by $82,474 to $361,201 from $443,675
for the nine months ended December 31, 2002. The decrease in the nine months
primarily arose from lower average borrowing on the line of credit and from a
lowering of the base rate of interest.
Equipment Dispositions
There were disposals in the quarter resulting in a gain of $150 for the
quarter ended December 31, 2003 compared to a gain on equipment dispositions
of $522 in the quarter ended December 31, 2002. Cumulatively, the gain of
$9,716 in 2003 was $1,211 less than the gain of $10,927 in 2002.
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 65 days after billing by the Company. In order to fund our
payroll and operations, we maintain a commercial revolving loan arrangement,
currently with CIT Group/Business Credit, Inc. ("CIT").
The CIT loan agreement is for 3 years ending December 12, 2006 and
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. The loan also
provides for advances against unbilled revenue (primarily monthly invoiced
accounts) although the benefit of this to availability is offset by a reserve
against all outstanding payroll checks. The revolving loan bears interest at
prime plus 1.25%. Costs to close the loan agreement totaled $317,463 and are
to be amortized over the life of the loan.
At December 31, 2003, we had borrowed $9,841,792 representing
approximately 81% of our maximum borrowing capacity based on the definition
of "eligible accounts receivable" under the terms of the loan and security
agreement. However, as the business grows and produces new receivables, an
additional amount of up to $5,158,208 would be available to borrow under the
current line.
The Company signed a note in connection with the OGS settlement in the
amount of $527,000. The note calls for twenty-one monthly payments in the
amount of $27,217 including interest at 9% per annum. The payments commenced
December 1, 2003 and are expected to be financed with cash flows from
continuing operations.
We finance vehicle purchases typically over three years and insurance
through short-term borrowings. The Company has no additional lines of credit
other than discussed herein and has no present material commitments for
capital expenditures.
Our operations for the nine months ended December 31, 2003, resulted in
an operating profit of $508,022, a decrease of $4,728,349 compared to a
profit of $5,236,371 for the nine months ended December 31, 2002. The
decrease is primarily due to the loss of pre-board screening business
following completion of federalization by the US government in November 2002,
partly offset by additional other aviation revenues and better cost control.
Working capital decreased by $1,721,537 to $1,869,288 as of December 31,
2003, from $3,590,825 as of March 31, 2003 primarily due to the disputed debt
from the FAA being reclassified as a long term asset. We experienced a cash
overdraft (defined as checks drawn in advance of future deposits) of $801,855
as of December 31, 2003, compared to $1,081,068 at March 31, 2003. 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.
12
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
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".
Overall, we are currently projecting a small pre-tax loss in the final
quarter of 2003/04 due to the adverse impact of higher SUI rates as well as a
large proportion of payroll being subject to SUI charges in the first
calendar quarter. We expect that there will be no material change in the
current level of revenue. As our employees start to hit the State ceilings
for SUI combined with cost reductions, we expect to achieve at least
breakeven in the first quarter of 2004/05. We are currently evaluating
potential additional sources of capital to strengthen our balance sheet and
to increase our capacity to fund further contract wins in the Guard and
Aviation divisions as well as in the new area of government contracts.
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 have stabilized over recent months after reductions over the past
few years as we cancelled contracts with unacceptable margins. The focus now
is to increase revenue as branch manager's work to sell new business while
retaining good contracts. The airline industry continues to improve and
demand for our services remains steady. Our previous estimate of annualized
revenues remains unchanged at just over $77 million.
We continue to invest approximately $200,000 per annum to support our
attempts to secure contracts from the Department of Homeland Security and
other government departments. We started the process of submitting bids in
the first quarter of 2003/04 and although we do not expect to win any
contracts in the short term, we continue to develop our contacts and
experience. We believe this to be an area of tremendous opportunity over the
next few years given the heightened focus on security in the US and the
creation of the Department for Homeland Security.
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 expected some reduction over
the second quarter as recently won contracts in the Aviation division were 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. Unfortunately the adverse
impact on State Unemployment Insurance (SUI) rates of the federalization of
pre-board screening has led to a significant increase in our rates in
California, Florida, Pennsylvania and, we expect, in New York State. We
expect this to reduce gross profit margins for the calendar year 2004 by
around 1%. We therefore expect gross profit margins to average around 15%
until we receive revised SUI rates from January 2005.
A cost reduction program was completed in June 2003 in the light of
reduced revenues and the loss in the first quarter. We saw the benefit of
these reductions in our general and administrative expenses for the second
and third quarters of 2003/04. Due to the adverse impact of the higher SUI
rates, we intend to reduce our cost base to maintain profitability and
further cost reductions have been identified and will be implemented in the
final quarter of 2003/04.
In November 2001, following the September 11 tragedy, the US government
enacted legislation to federalize pre-board screening services at US
airports. As part of the legislation, there was a restriction on companies
with a significant foreign ownership (defined as greater than 25%) from
providing services on many security contracts in the US. This would include
those issued by the Department of Homeland Security, as well as the US
airports when they have the right to opt out from federalization from
November 2004. For this reason, the Board of Reliance Security Group plc
("Reliance"), a UK based security company announced that it was in the best
interests of both Command and Reliance to sell its interest in Command.
13
(Continued)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Reliance has therefore instructed advisors in the US to assist with the
sale in a private transaction. The Company is assisting with this process, as
well as investigating alternative sources of finance to allow it to complete
the disposal and fund future growth.
Reliance's interests consist of 1,632,339 shares of common stock, 12,325
shares of preferred stock convertible into shares of common stock and
warrants covering 2,448,092 shares exercisable at $1.25 per share. The
Company and William C. Vassell, its President, CEO and Chairman, entered into
a Shareholder's Agreement dated September 12, 2000 with Reliance. This
agreement makes provision for a seven person board and grants Mr. Vassell and
Reliance the ability to each designate three nominees to the board plus one
independent nominee to be jointly selected. The Shareholder's Agreement also
addresses the rights of Mr. Vassell and Reliance in the event of his
termination and contains a right of first refusal in the event of a sale of
the securities covered by the agreement. The full text of the Shareholder's
Agreement is available as Exhibit 99.19 on the Company's Form 8K filed
September 27, 2000. A copy of this agreement will be provided upon request
directed to Graeme Halder, Chief Financial Officer at the Company's
headquarters, 845-454-3703. It may also be obtained on line at
www.sec.gov/edgar.shtml.
It is expected, but there is no assurance at this time, that any
purchaser of Reliance's interests in the Company will do so subject to the
terms of the Shareholder's Agreement. If Reliance is successful in selling
its interests in Command, management expects such sale will constitute a
change in control of the Company for Securities and Exchange Commission
reporting purposes and the Company would file a Form 8K which will contain
the details of any such transaction. The Company's Board of Directors,
subject to the advice and direction of the Board's Independent Committee of
Directors, will evaluate any sale of Reliance's interests. At this time,
management does not expect that any such transaction will require shareholder
approval
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 those under the heading "Outlook," contain
forward-looking statements. These are based on current expectations,
estimates, forecasts and projections about the industry in which the Company
operates, management's beliefs, and assumptions made by management. In
addition, other written or oral statements that constitute forward-looking
statements may be made by or on behalf of the Company. While we believe these
statements are accurate, our business is dependent upon general economic
conditions and various conditions specific to our industry. Future trends and
these factors could cause actual results to differ materially from the
forward-looking statements that have been made. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, the actual outcomes and
results may differ materially from what is expressed or forecast in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
As provided for under the Private Securities Litigation Reform Act of
1995, the Company wishes to caution shareholders and investors that the
following important factors, among others, could cause the Company's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements in
this report.
Regulation
Management's evaluation of the Company's present status and future
prospects is dependent upon the assumption that the current regulation and
federalization of pre-board screening services previously provided by the
Company will not be expanded into other areas such as general security and
baggage handling at aviation facilities. Such increased regulation or
federalization would have a material adverse impact on the Company's
liquidity, results of operations and financial condition.
14
(Continued)
Item 2. Management's Discussion and Analysis of 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
significantly 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 is 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 outcome
of the billing dispute with the FAA (discussed above in Note 5 to the
Condensed Financial Statements). A failure in negotiations between the
Company and the FAA would have an 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 (now back to $50 million as of
October 1, 2003).
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).
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 with CIT Group/Business Credit, Inc. Based on the
Company's interest rate at December 31, 2003 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 $21,250 over the next three months.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act and as of the fiscal
quarter ended December 31, 2003, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures. 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.
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. The
evaluation concluded further that during the quarter ended December 31, 2003,
there were no changes in the Company's internal control over financial
reporting or in other factors that have, or are reasonably likely to,
materially affect said control.
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.
(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 13, 2004 By: /s/ William C. Vassell
----------------- ---------------------------------------------
William C. Vassell, Chairman, President & CEO
By: /s/ Graeme R. Halder
---------------------------------------------
Graeme R. 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 officers and I am 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 officer and I have disclosed, based
on our most recent evaluation of the internal control over financial
reporting, 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 and material weaknesses in the design or
operation of internal controls over financial reporting which could adversely
affect the registrant's ability to record, process, summarize and report
financial data; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the internal control over financial
reporting; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were material changes in internal
control over financial reporting or in other factors that could materially
affect said control subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 13, 2004
/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 officers and I am 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 officer and I have disclosed, based
on our most recent evaluation of the internal control over financial
reporting, 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 and material weaknesses in the design or
operation of internal controls over financial reporting which could adversely
affect the registrant's ability to record, process, summarize and report
financial data; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the internal control over financial
reporting; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were material changes in internal
control over financial reporting or in other factors that could materially
affect said control subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 13, 2004
/s/ Graeme R. 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,
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: February 13, 2004 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,
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: February 13, 2004 By: /s/ Graeme R. Halder
----------------- ---------------------------------------------
Graeme R. Halder, Chief Financial Officer
21