UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
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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 (I.R.S. Employer Identification No.)
of incorporation or organization)
Lexington Park, LaGrangeville, New York 12540
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (845) 454-3703
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date: 7,519,878 (as of November 5, 2004).
COMMAND SECURITY CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Condensed Statements of Operations
three and six months ended
September 30, 2004
and 2003 (unaudited) 3
Condensed Balance Sheets -
September 30, 2004 and
March 31, 2004 (unaudited) 4
Condensed Statements of Stockholders' Equity -
six months ended September 30, 2004 and 2003
(unaudited) 5
Condensed Statements of Cash Flows -
six months ended September 30, 2004 and 2003
(unaudited) 6-7
Notes to Condensed Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
11-18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders
19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20-21
Signatures 22
Exhibit 10.42 Employment Agreement 23-24
Exhibit 10.43 Employment Agreement, Amendment One 25
Exhibit 31.1 Certification of Barry I. Regenstein 26
Exhibit 31.2 Certification of Barry I. Regenstein 27
Exhibit 32.1 ss.1350 Certification of Barry I. Regenstein 28
Exhibit 32.2 ss.1350 Certification of Barry I. Regenstein 29
2
Part I. Financial Information
Item 1. Financial Statements
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
September 30 September 30 September 30 September 30
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue $ 20,455,171 $ 18,983,436 $ 39,623,918 $ 35,557,261
Cost of revenue 17,522,298 15,979,450 34,311,078 29,808,797
------------ ------------ ------------ ------------
Gross profit 2,932,873 3,003,986 5,312,840 5,748,464
------------ ------------ ------------ ------------
Operating expenses
General and administrative expenses 2,922,039 2,604,722 5,694,474 5,327,588
Provision for doubtful accounts, net 21,888 (9,948) (26,263) 62,064
------------ ------------ ------------ ------------
2,943,927 2,594,774 5,668,211 5,389,652
------------ ------------ ------------ ------------
Operating profit (loss) (11,054) 409,212 (355,371) 358,812
Interest income 19,696 18,708 38,382 41,332
Interest expense (102,225) (103,259) (219,042) (220,026)
Equipment dispositions (19,279) -- (16,879) 9,566
------------ ------------ ------------ ------------
Income (loss) before income taxes (112,862) 324,661 (552,910) 189,684
Provision for income taxes -- (77,454) -- (77,454)
------------ ------------ ------------ ------------
Net income (loss) (112,862) 247,207 (552,910) 112,230
Preferred stock dividends -- (40,674) (38,413) (81,348)
------------ ------------ ------------ ------------
Net income (loss) applicable to
common stockholders $ (112,862) $ 206,533 $ (591,323) $ 30,882
============ ============ ============ ============
Net income (loss) per common share
Basic $ (.02) $ 0.03 $ (.09) $ 0.005
============ ============ ============ ============
Diluted $ n/a $ 0.03 $ n/a $ 0.005
============ ============ ============ ============
Weighted average number of common shares outstanding
Basic 7,519,878 6,287,343 6,944,695 6,287,343
============ ============ ============ ============
Diluted n/a 6,336,400 n/a 6,339,376
============ ============ ============ ============
See accompanying notes to condensed financial statements.
3
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
- ------
September 30, March 31,
2004 2004
------------ ------------
Current assets:
Accounts receivable, net of allowance for
doubtful accounts of $214,300 and $361,865, respectively $ 13,210,468 $ 16,078,250
Accounts receivable, net of allowance for
billing adjustments of $965,374 -- 1,965,006
Prepaid expenses 237,891 936,454
Other receivables 602,161 369,058
------------ ------------
Total current assets 14,050,520 19,348,768
------------ ------------
Furniture and equipment at cost, net 527,596 645,592
------------ ------------
Other assets:
Intangible assets, net 221,557 270,217
Restricted cash 71,353 107,676
Other receivables 44,673 1,252,993
Other assets 274,254 291,862
------------ ------------
Total other assets 611,837 1,922,748
------------ ------------
Total assets $ 15,189,953 $ 21,917,108
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Cash overdraft $ 878,829 $ 556,310
Current maturities of long-term debt 297,619 361,540
Current maturities of obligations under capital leases 39,399 66,270
Short-term borrowings 4,172,475 9,091,628
Accounts payable 603,079 771,042
Due to service companies 206,466 248,205
Preferred dividends payable -- 40,674
Accrued payroll and other expenses 4,633,576 5,664,021
------------ ------------
Total current liabilities 10,831,443 16,799,690
Self-insurance reserves 346,995 402,290
Long-term debt, due after one year 54,718 153,882
Obligations under capital leases, due after one year 54,412 67,538
------------ ------------
Total liabilities 11,287,568 17,423,400
------------ ------------
Stockholders' equity:
Preferred stock, Series A, $.0001 par value -- 2,033,682
Common stock, $.0001 par value 752 629
Additional paid-in capital 10,004,321 8,009,175
Accumulated deficit (6,102,688) (5,549,778)
------------ ------------
Total stockholders' equity 3,902,385 4,493,708
------------ ------------
Total liabilities and stockholders' equity $ 15,189,953 $ 21,917,108
============ ============
See accompanying notes to condensed financial statements.
4
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Deficit
----------- ----------- ----------- -----------
Balance at March 31, 2003 $ 2,033,682 $ 629 $ 8,171,870 $(5,239,370)
Preferred stock dividends (81,348)
Net income - six months ended
September 30, 2003 112,230
----------- ----------- ----------- -----------
Balance at September 30, 2003 2,033,682 629 8,090,522 (5,127,140)
Preferred stock dividends (81,347)
Net loss - six months ended
March 31, 2004 (422,638)
----------- ----------- ----------- -----------
Balance at March 31, 2004 2,033,682 629 8,009,175 (5,549,778)
Preferred stock dividends (38,413)
Preferred stock conversion (2,033,682) 123 2,033,559
Net loss - six months ended
September 30, 2004 (552,910)
----------- ----------- ----------- -----------
Balance at September 30, 2004 $ 0 $ 752 $10,004,321 $(6,102,688)
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
5
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
----------------------------
September 30, September 30,
2004 2003
----------- -----------
Cash flow from operating activities:
Net income (loss) $ (552,910) $ 112,230
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 214,276 262,611
Provision for doubtful accounts, net (26,263) 62,064
Loss (gain) on equipment dispositions 16,879 (9,566)
Self-insurance reserves (28,764) (80,147)
Decrease in receivables, prepaid expenses
and other current assets 6,619,716 1,482,139
Decrease in accounts payable and other current liabilities (1,266,679) (461,071)
----------- -----------
Net cash provided by operating activities 4,976,255 1,368,260
----------- -----------
Cash flows from investing activities:
Purchases of equipment (15,933) (19,544)
Proceeds from sale of equipment 5,250 12,364
Purchases of intangible assets -- (58,025)
Principal collections on notes receivable 57,407 25,090
Net cash provided by (used in) investing activities 46,724 (40,115)
----------- -----------
Cash flows from financing activities:
Net repayments on line-of-credit (4,704,614) (689,964)
Increase (decrease) in cash overdrafts 322,519 (150,245)
Principal payments on other borrowings (521,800) (333,132)
Principal payments on capital lease obligations (39,997) (32,782)
Payment of preferred stock dividends (79,087) (122,022)
----------- -----------
Net cash used in financing activities (5,022,979) (1,328,145)
----------- -----------
Net change in cash and cash equivalents -- --
Cash and cash equivalents, at beginning of period -- --
----------- -----------
Cash and cash equivalents, at end of period $ -- $ --
=========== ===========
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 six months ended September 30 for: 2 0 0 4 2 0 0 3
-------- --------
Interest $226,806 $225,763
Income taxes 41,264 171,754
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the six months ended September 30, 2004, the Company purchased
transportation equipment with direct installment financing of $53,816. This
amount has been excluded from the purchases of equipment and proceeds from
long-term debt on the condensed statements of cash flows.
The Company may obtain short-term financing to meet its insurance needs. For the
six months ended September 30, 2004 and 2003, $90,360 and $87,875, respectively,
were borrowed for this purpose. These borrowings have been excluded from the
condensed statements of cash flows.
During the six months ended September 30, 2004, the holder of 12,325.35 shares
of the Company's Series A convertible preferred stock converted such shares into
1,232,535 shares of common stock. The debit to preferred stock of $2,033,682 and
credits to common stock of $123 and additional paid-in capital of $2,033,559
have been excluded in the condensed statements of cash flows.
For the six months ended September 30, 2004 and 2003, the Company accrued
dividends of $38,413 and $81,348, respectively, on its Series A convertible
preferred stock. These charges to additional 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.
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, 2004.
The financial statements for the interim periods shown in this report
are not necessarily indicative of results to be expected for the fiscal year. In
the opinion of management, the information contained herein reflects all
adjustments necessary to summarize fairly the results of operations, financial
position, stockholders' equity and cash flows at September 30, 2004, and for the
period then ended. Except for provisions in connection with the change in the
Company's management and Board of Directors in August 2004, including the
resignation of the Company's former Chief Executive Officer, and related legal
expenses, all such adjustments are of a normal recurring nature.
1.) Short-Term Notes Payable:
In December 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 $15,000,000.
The Company relies on its revolving loan from CIT for its operating and
working capital. The loan contains a fixed charge covenant and various
other financial and non-financial covenants. At September 30, 2004, the
Company had used $4,093,410 of this line, representing approximately 51%
of its maximum borrowing capacity. Interest is payable at the prime rate,
as defined, plus 1.25% per annum on the greater of : (i) $5,000,000 or
(ii) the average of the net balances owed by the Company to CIT in the
loan account at the close of each day during a month. During the current
quarter, the Company received a Notice of Default/Reservation of Rights
letter from its lender CIT. This letter notified management that effective
September 1, 2004 a default rate of interest of an additional 2% over the
bank rate of interest, as defined, would be charged on any obligations
under the financing agreement with CIT (8.00% at September 30, 2004). 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 Statement of Financial Accounting Standards
("SFAS") No. 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 (loss) per share are presented
for the three and six months ended September 30, 2004, because the effect
of assumed issuance of common shares in connection with warrants and
stock options outstanding was antidilutive. Diluted earnings per share
are presented for the three and six months ended September 30, 2003
because of the effect of the assumed issuance of common shares would have
if the outstanding stock options and warrants were executed.
For the six months ended September 30, 2004, the basic weighted average
number of common shares outstanding includes the weighted average of
6,287,343 shares of common stock outstanding through June 24, 2004 and
7,519,878 shares of common stock outstanding as of June 25, 2004 through
September 30, 2004. The additional 1,232,535 shares of common stock were
issued by the Company upon the conversion of preferred stock into common
stock as of June 25, 2004.
8
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3.) Preferred Stock
The Company had issued and outstanding 12,325 shares of Series A
preferred stock. The holders of Series A preferred stock were entitled
to receive annual dividends equal to 8% of the liquidation value of
their shares, payable quarterly. As of June 25, 2004, the preferred
stock was converted into 1,232,535 shares of common stock.
4.) Self-Insurance
The Company has an insurance policy covering workers' compensation
claims in 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 and
included in cost of sales were $1,875,157 and $1,530,370, for the six
months ended September 30, 2004 and 2003, 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 $5,000,000 per
occurrence and $10,000,000 in the aggregate. (Reduced to $5,000,000 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
$25,000,000 limit per occurrence. As of October 17, 2003, the Company
has an excess general liability insurance policy that covers aviation
claims for an additional $25,000,000 in the aggregate. The Company
retains the risk for the first $25,000 per occurrence on the
non-aviation related policy and $5,000 on the aviation related policy
except $25,000 for damaged aircraft. 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
estimated 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 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 results of operations.
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 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 $25,000 per occurrence on the non-aviation
related claims and $5,000 per occurrence on the aviation related claims
except $25,000 for damaged aircraft. 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 affected by an unfavorable claims history.
9
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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
operations that these claims may have, should the investigations
conclude that they are valid.
6.) Subsequent Events:
a.) On October 7, 2004, the Company entered into a Settlement Agreement
and Mutual Release with William C. Vassell, formerly the Chairman of
the Board, President and Chief Executive Officer of the Company.
Pursuant to this agreement, Mr. Vassell resigned from all positions
that he held with the Company, the employment agreement between the
Company with Mr. Vassell was terminated and the Company agreed on or
before November 8, 2004 to (i) pay Mr. Vassell $250,000 and (ii)
purchase or cause to be purchased from Mr. Vassell an aggregate of
400,000 shares of the Company's common stock owned by him for a
purchase price of $1.00 per share. Except as described above, the
Company has no continuing obligations to Mr. Vassell under his
former employment agreement or otherwise. As part of the settlement,
Mr. Vassell, the Company, GCM Security Partners LLC and Reliance
Security Group plc agreed to dismiss all pending litigation between
them.
In September 2004, the Company provided for the $250,000 obligation
to Mr. Vassell in general and administrative expenses in the
accompanying condensed statements of operations. There has been no
provision made in the Company's financial statements related to the
purchase of the 400,000 shares of the Company's common stock owned
by Mr. Vassell since purchases of the Company's stock are prohibited
under the financing agreement with CIT, without their prior written
consent, and the intent is for such shares to be purchased by a
third party, and not by the Company.
b.) On October 26, 2004, ATA Holding Corp. ("ATA") one of the Company's
aviation services customers, filed for protection under Chapter 11
of the U.S. Bankruptcy Code. The Company expects to record a
provision for bad debts of approximately $160,000 related to
outstanding accounts receivable from ATA in October 2004 which is
principally comprised of billings for services provided during such
month.
7.) Reclassifications:
Certain amounts have been reclassified to conform with the fiscal 2005
presentation. These reclassifications had no impact on the Company's
consolidated financial position or results of operations.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Company's condensed
financial statements and the related notes thereto contained in this report.
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 aviation and 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 aviation
and guard service revenues consist of direct and indirect payroll and related
expenses, subcontractor costs, vehicle and other costs directly related to the
aviation and guard service revenues 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 uncollectible.
Prepaid Expenses
A significant new contract with Delta Airlines ("Delta") commenced in
August 2003. Due to the size of the costs relating to this contract (uniforms,
radios, etc), $264,781 was capitalized and was being charged to earnings over
its estimated useful life of 12 months. The capitalized expenses were fully
amortized during the current quarter and expenses reported amounted to $88,260
for the six months ended September 30, 2004.
Income Taxes
The Company follows SFAS No. 109 "Accounting for Income Taxes" which
requires the use of the asset and liability method of accounting for deferred
income taxes.
11
Results of Operations
Revenue
Revenues increased $1,471,735, or 7.8%, and $4,066,657, or 11.4%, for the three
and six months ended September 30, 2004, respectively, compared with the same
periods of the prior year. The increases were primarily due to increases of
approximately $1,893,000 and $4,909,000 during the three and six months ended
September 30, 2004, respectively, in the Aviation division from a contract with
Delta which commenced in August 2003. The increases were partially offset by the
losses of a wheelchair contract at Los Angeles International Airport and an
escort program transporting international passengers without United States visas
within terminals at certain of the Company's airport locations.
Gross Profit
Gross profit decreased by $71,113, or 2.4%, and $435,624, or 7.6%, for the three
and six months ended September 30, 2004, respectively, compared with the same
periods of the prior year. The decreases were primarily due to increased direct
payroll reflecting the higher cost of providing qualified and experienced
personnel. Other factors contributing to the decrease in gross profit include:
(i) higher state unemployment insurance rates as a result of layoffs of
personnel in 2003 due to the federalization of aviation pre-board screening
services, (ii) increased workers' compensation insurance costs due mainly to a
serious injury to an employee in the Company's Miami guard operation and current
conditions in the marketplace for such insurance, (iii) term discounts with
airline customers for prompt payment of accounts receivable and (iv) loss of the
wheelchair and escort program contracts noted above.
General and Administrative Expenses
General and administrative expenses increased by $317,317, or 12.2%, and
$366,886, or 6.9%, for the three and six months ended September 30, 2004,
respectively, compared with the same periods of the prior year. The increase was
primarily due to increased professional fees related to a resolved dispute
between GCM Security Partners, LLC and the Company.
The increase in general and administrative expenses primarily reflects
approximately $380,000 and $470,000 of costs incurred by the Company during the
three and six months ended September 30, 2004, respectively, in connection with
the change in the Company's management and Board of Directors in August 2004,
including the resignation of the Company's former Chief Executive Officer (as
discussed in Note 6 to the condensed financial statements), and related legal
expenses.
Provision for Doubtful Accounts
The provision for doubtful accounts increased by $31,836 for the three months
ended September 30, 2004 compared with the same period of the prior year. The
provision for doubtful accounts decreased by $88,327 for the six months ended
September 30, 2004 compared with the same period of the prior year. This
reduction was primarily due to the accelerated collection of accounts receivable
that were outstanding more than 90 days.
Management periodically evaluates the requirement for providing for credit
losses on its accounts receivable. Criteria used by management to evaluate the
adequacy of the allowance for doubtful accounts include, among others,
creditworthiness of the customer, prior payment performance, 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 decrease during the six months ended September 30, 2004
compared with the same period of the prior year is necessarily indicative of a
trend.
12
Interest Income
Interest income which principally represents financing income from the Company's
service agreement customers for the three and six months ended September 30,
2004 was comparable with the same periods of the prior year.
Interest Expense
Interest expense for the three and six months ended September 30, 2004 was
comparable with the same periods of the prior year. During the current quarter,
the Company received a Notice of Default/Reservation of Rights letter from its
lender, CIT Group Business Credit, Inc. ("CIT"). This letter notified management
that effective September 1, 2004 a default rate of interest of an additional 2%
over the borrowing rate, as defined, would be charged on all obligations under
the financing agreement with CIT.
Equipment Dispositions
The loss on equipment dispositions of $19,279 and $16,879 for the three and six
months ended September 30, 2004, respectively, was due mainly to the sale of a
Company vehicle to its former Chief Financial Officer as provided for in his
Employment Agreement with the Company. Equipment dispositions are a result of
vehicles, office equipment and security equipment sold at prices above or below
book value.
Liquidity and Capital Resources
The Company pays employees and administrative service clients on a weekly basis,
while customers pay for services generally within 61 days after billing by the
Company. In order to fund payroll and operations, the Company maintains a
commercial revolving loan arrangement, currently with CIT.
CIT Revolving Loan
The CIT financing agreement (the "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
Agreement also provides for advances against unbilled revenue (primarily monthly
invoiced accounts) although this benefit is offset by a reserve against all
outstanding payroll checks. The revolving loan bears interest at the prime rate,
as defined, plus 1.25% per annum on the greater of: (i) $5,000,000 or (ii) the
average of the net balances owed by the Company to CIT in the loan account at
the close of each day during such month (see below). Costs to close the loan
totaled $279,963 and are being amortized over its 3 year life.
At September 30, 2004, the Company had borrowed $4,093,000 representing
approximately 51% of our maximum borrowing capacity based on the definition of
"eligible accounts receivable" under the terms of the Agreement. However, as the
business grows and produces new receivables, up to $10,907,000 could be
available to borrow under the Agreement.
The Company relies on its revolving loan from CIT which contains a fixed charge
covenant and various other financial and non-financial covenants. If the Company
breaches a covenant, CIT has the right to call the line unless CIT waives the
breach. GCM Security Partners LLC's ("GCM") acquisition of the Company's
securities owned by Reliance Security Group plc ("Reliance") resulted in a
violation of a covenant restricting Reliance from selling such securities absent
CIT's consent, and may be deemed a "change in control" of the Company requiring
CIT's consent, the absence of which may also be deemed to violate a covenant
under the Agreement. Further, the Agreement includes covenants requiring William
C. Vassell, formerly the Chairman, President and Chief Executive Officer of the
Company, to maintain ownership of at least 500,000 shares of voting common stock
of the Company and to remain as Chairman of the Board of Directors and Chief
Executive Officer of the Company or actively engaged in the management of the
Company. The resignation by Mr. Vassell from all positions he held with the
Company on October 7, 2004 and his agreement to sell 400,000 shares of the
Company's common stock may also be deemed to violate the foregoing covenant.
13
During the current quarter, the Company received a Notice of Default/Reservation
of Rights letter from its lender CIT (the "Letter"). The Letter notified
management that the Company was not in compliance with the fixed charge covenant
for the month of July 2004 and was also in violation of a non-financial covenant
since Mr. Vassell was no longer Chairman of the Board of Directors and Chief
Executive Officer of the Company. Further, the Letter advised that CIT was not
at this time terminating the Agreement but was notifying management that: (i)
such defaults and/or events of defaults (the "Defaults") exist, (ii) CIT at this
time does not intend to waive the Defaults, (iii) the Company inform CIT of
actions taken or to be taken to remedy the Defaults, (iv) effective September 1,
2004 a default rate of interest of 2% over the bank rate of interest, as
defined, would be charged on all obligations under the Agreement and (v) all
future loans, advances and other extensions of credit under the Agreement will
be at CIT's sole discretion in accordance with the provisions thereof.
Management of the Company has met with CIT to discuss these issues, and is
working closely with CIT in an effort to obtain a waiver of the violations from
CIT at the earliest possible time.
Other Credit
The Company signed a note related to a settlement with the Office of General
Services 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.
On March 31, 2004, the Company settled a dispute with a uniform cleaning service
which calls for the Company to pay $1,756.20 per week for 344 weeks or a total
amount of $604,133 ending in 2011.
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.
Working Capital
Working capital increased by $669,999 to $3,219,077 as of September 30, 2004,
from $2,549,078 as of March 31, 2004 primarily due to end of quarter timing
factors for accrued payroll and decreased accruals for unemployment taxes and
worker's compensation claims.
The Company experienced a cash overdraft (defined as checks drawn in advance of
future deposits) of $878,829 as of September 30, 2004, compared with $556,310 at
March 31, 2004. 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.
14
Outlook
This section, Management's Discussion and Analysis of Financial Condition and
Results of Operations, 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".
Financial Results
Future revenue will be largely dependent upon the Company's ability to gain
additional revenue in the Guard and Aviation divisions at acceptable margins
while minimizing terminations of existing clients. The revenue of the Guard
division has stabilized over recent months after a reduction over the past few
years as contracts with unacceptable margins were cancelled. Our current focus
is on increasing revenue while branch manager's work to sell new business and
retain profitable contracts. The airline industry continues to increase its
demand for services provided by the Company.
The Company is continuing its attempts to secure contracts from the Department
of Homeland Security and other government departments. The Company believes this
to be an area of opportunity over the next few years, given the heightened focus
on security in the United States.
Gross profit margins decreased due to increased direct payroll reflecting: (i)
the higher cost of providing qualified and experienced personnel, (ii) higher
state unemployment insurance ("SUI") rates as a result of layoffs due to the
federalization of pre-board screening, (iii) increased worker's compensation
insurance costs as a result of a serious injury to an employee in the Company's
Miami guard operation and current conditions in the marketplace for such
insurance, (iv) term discounts to airline customers for prompt payment of
accounts receivable and (v) lost contracts for a wheelchair operation at Los
Angeles International Airport and an escort program transporting international
passengers without United States visas within terminals at certain of the
Company's airport locations. The Company's gross profit margin decreased to
14.3% of revenue for the quarter ended September 30, 2004 compared with an
average gross profit margin of 14.5% for fiscal year ended March 31, 2004 and
gross profit margins are expected to average approximately 13.5% of revenue for
fiscal year 2005. Management expects gross profit to remain under pressure due
primarily to continued price competition. However, management expects these
effects to be moderated by continued operational efficiencies resulting from
better management of the Company's cost structures and from lower SUI rates and
worker's compensation experience ratings.
A cost reduction program was instituted in October 2004 which is expected to
reduce the Company's general and administrative expenses for both the remainder
of fiscal 2005 and future periods. Additional cost reduction opportunities are
being pursued as they are determined. However, costs associated with the change
in the Company's management and Board of Directors in August 2004, including the
resignation of the Company's former Chief Executive Officer, and related legal
expenses had an unfavorable impact on the Company's results of operations for
the three and six months ended September 30, 2004.
The Aviation division represents 62% of the Company's total revenue and Delta,
at annual billings of approximately $13,000,000, is the largest customer of the
Aviation division at approximately 26% of the Aviation division's and 16% of the
Company's total revenue. In recent months, Delta has threatened filing for
bankruptcy. In the event of a bankruptcy filing by Delta, management would
expect an adverse impact on earnings of between $.4 and $1.6 million. However,
due to the existing limitations under the CIT credit line, discussed below, the
Company is restricted from borrowing against Delta's accounts receivable. In the
event of a bankruptcy by another airline customer earnings would be adversely
affected to the extent of the accounts receivable with such airline. Liquidity
would also be affected, but to a limited extent due to existing limitations
under the CIT credit line.
15
The Company is concerned about the possibility of Delta filing for bankruptcy,
and to reduce exposure to such bankruptcy filing, management proposed and Delta
accepted during the first quarter of fiscal 2005 a 3% term discount on invoices
paid by Delta within 10 days. The 3% term discount has negatively impacted the
Company's results of operations. In the event of a Delta bankruptcy, payments
received in the 90 days prior to Delta's filing for bankruptcy may be alleged
preferential payments under the federal bankruptcy rules and a demand could be
made on the Company to return some or all of the payments made by Delta within
such 90-day period. CIT has established specific reserves for all Delta, US Air
and ATA Airlines accounts receivable; United Airline accounts receivable in
excess of $350,000; Northwest Airlines accounts receivable in excess of
$550,000; and an additional general airline reserve of $1,000,000 thereby
reducing the Company's current cash availability for borrowing by approximately
$2,400,000. As of the close of business, November 5, 2004, the Company's cash
availability was approximately $1,800,000 which is believed to be sufficient to
meet its needs for the foreseeable future barring increased reserves imposed by
CIT.
Management is currently evaluating potential additional sources of capital to
strengthen the Company's balance sheet and improve cash availability.
Reliance's sale of its securities in the Company makes the Company eligible to
bid on certain federal privatization contracts for the provision of security
services in the airline industry. No such contracts have, to management's
knowledge, been bid to date. However, the Company is positioned to actively
pursue such opportunities.
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 10-Q 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 management believes these statements are accurate,
the Company's business is dependent upon general economic conditions and various
conditions specific to the industries in which the Company operates. 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.
CIT Default/Airline Industry Concerns/Potential for Insolvency
In the event CIT terminates the Company's revolving loan (see, Liquidity and
Capital Resources - CIT Revolving Loan, above) the Company's access to working
capital would be eliminated and would likely result in the Company's insolvency.
Several of the Company's aviation clients filed for bankruptcy protection during
fiscal 2003 and 2005. The aviation industry continues to struggle with various
challenges including the cost of security and higher fuel prices. Additional
bankruptcy filings by aviation and non-aviation clients could have a material
adverse impact on the Company's liquidity, results of operations and financial
condition. The possibility of a bankruptcy filing by Delta remains high. Certain
consequences of such a filing are discussed above in the "Outlook" section.
16
Increased Legal Expense
Due to the legal proceedings between Mr. Vassell, Reliance, GCM and the Company
(as referenced in Part II, Item 1 below), the Company incurred higher than usual
costs for the three and six months ended September 30, 2004, including, but not
limited to those associated with the defense of legal actions against it by Mr.
Vassell and GCM.
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.
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 non-management personnel. There are several major national
competitors with resources 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 expectations will be largely dependent upon
management and 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
vendors 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 definite basis to believe that default in payment of accounts
receivable by the Company's aviation and security guard customers or
administrative service clients will occur. However, the aviation industry in
general and Delta, in particular, pose a high degree of risk. Any such default
by one or more significant clients due to bankruptcy or otherwise, would have a
material adverse impact on the Company's liquidity, results of operations and
financial condition.
17
Catastrophic Events
The Company is exposed to potential claims for catastrophic events, such as acts
of terrorism, 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 $5,000,000 and $50,000,000 per
occurrence for guard and aviation services, respectively. The Company retains
the risk for the first $25,000 per claim on the non-aviation related policy and
$5,000 on the aviation related policy (except $25,000 for damaged aircraft).
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. Based on the Company's interest rate at
September 30, 2004 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 $25,000 over the
next six months.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act and as of the fiscal
quarter ended September 30, 2004, 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 Chairman of the Board 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 Chairman of
the Board and Chief Financial Officer. Based upon that evaluation, the Company's
Chairman of the Board and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. The evaluation concluded
further that during the quarter ended September 30, 2004, 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.
18
PART II. Other Information
Item 1. Legal Proceedings
On May 21, 2004, GCM Securities Partners, LLC ("GCM") purchased from Reliance
Security Group, plc ("Reliance") the following securities: (i) 1,617,339 shares
of the Company's common stock, (ii) 12,325,.35 shares of the Company's Series A
preferred stock (which were converted into 1,232,535 shares of the Company's
common stock), (iii) a warrant to acquire 150,000 shares of the Company's common
stock at an exercise price of $1.03125 per share and (iv) a warrant to acquire
2,298,092 shares of the Company's common stock at an exercise price of $1.25 per
share. At the time of the purchase by GCM, Command's former Chairman, President
and CEO, William C. Vassell, had already initiated legal action in the United
States District Court, Southern District of New York (Case No. 04 CIV. 2657 (CM)
ECF CASE) seeking a determination that Mr. Vassell's right of first refusal
under a Shareholders' Agreement between Reliance, Mr. Vassell and Command was
violated by Reliance in its offering (and subsequent sale) of the securities to
GCM. On June 18, 2004, the United States District Court Judge rejected all of
Mr. Vassell's claims, awarded summary judgment declaring GCM the lawful owner of
the Command securities purchased from Reliance and ordered that Mr. Vassell and
Command be preliminarily and permanently restrained from interfering with the
registration of the securities in GCM's name or the exercise by GCM of any
rights as the new owner of the securities. Mr. Vassell subsequently filed an
appeal of such decision with the United States Court of Appeals for the Second
Circuit.
On June 25, 2004, GCM submitted the preferred stock it acquired from Reliance
for conversion into 1,232,535 shares of the Company's common stock. The former
Board did not permit such conversion, based on its view that the conversion of
the preferred stock into common should be construed as a violation of Section
912 of the New York Business Corporation Law ("NY BCL 912"). Shortly thereafter,
GCM brought a motion before the same United States District Court asking the
court to clarify, enforce or supplement the Court's prior order and direct the
Company to issue the common stock upon conversion of the preferred. On July 29,
2004, the court issued an opinion finding that Command's own anti-takeover
language contained in Article Ninth of its Certificate of Incorporation
constituted an express election by Command not to be governed by NY BCL 912.
This decision enjoined Command from preventing the issuance of the 1,232,535
common stock to GCM in conversion of the Series A Preferred Stock. As a result
of such decision, the Company directed its transfer agent to issue the 1,232,535
additional common shares to GCM effective as of June 25, 2004.
On October 7, 2004, the Company entered into a Settlement Agreement and Mutual
Release with Mr. Vassell. As part of the settlement, all of the foregoing legal
proceedings, as well as counterclaims asserted by GCM and Reliance against
certain of the Company's former directors, have been dismissed and may not be
brought again.
Item 4. Submission of Matters to a Vote of Security Holders
On August 27, 2004, an annual meeting of the Company's shareholders was held to
elect four directors from eight nominees to hold office until the second
succeeding annual meeting of the shareholders and until their successors have
been elected and qualified. At this meeting, Bruce R. Galloway, Robert S. Ellin,
Thomas P. Kikis and Martin R. Wade III were elected as directors.
The votes were cast by the Company's shareholders as follows:
Name For Against Abstain Broker Non-Votes
- ------------------ ---------- -------- ------- -----------------
Bruce R. Galloway 3,777,824 400
Robert S. Ellin 3,777,424
Thomas P. Kikis 3,776,774
Martin R. Wade III 3,754,789 4,400
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Item 5. Other Information
On September 10, 2004, Peter Kikis was elected to the board of directors of the
Company. Mr. Kikis is the father of Thomas Kikis who is a member of the
Company's board of directors. Peter Kikis served as a member of the Company's
board of directors from February 1995 to November 2000. Mr. Kikis, age 82, has
served as President of Spencer Management Corporation, a real estate investment
company, since 1950 and was a former Principal and Chairman of the Board of
McRoberts Protective Agency from 1974 to 1992.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.42 Employment Agreement dated March 1, 2003, between the
Registrant and Martin C. Blake, Jr.
Exhibit 10.43 Employment Agreement, Amendment One dated March 31,
2004, between the Registrant and Martin C. Blake, Jr.
Exhibit 31.1 Certification of Bruce Galloway pursuant to Rule 13(a)
- 14(a) of the Securities Exchange Act of 1934.
Exhibit 31.2 Certification of Barry I. Regenstein pursuant to Rule
13(a) - 14(a) of the Securities Exchange Act of 1934.
Exhibit 32.1 Certification of Bruce Galloway pursuant to 18 U.S.C
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Barry I. Regenstein pursuant to 18
U.S.C Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K during the quarter ended September 30, 2004
A Form 8-K was furnished on April 9, 2004 which reported events
under Item 5.
A Form 8-K was furnished on April 16, 2004 which reported events
under Item 7.
A Form 8-K was furnished on April 19, 2004 which reported events
under Item 7.
A Form 8-K was furnished on June 2, 2004 which reported events under
Item 7.
A Form 8-K was furnished on June 10, 2004 which reported events
under Item 7.
A Form 8-K was furnished on June 14, 2004 which reported events
under Item 5.
A Form 8-K was furnished on July 2, 2004, under Item 1, relating to
the request for the conversion of preferred stock owned by GCM
Securities Partners, LLC ("GCM") into shares of the registrant's
common stock.
A Form 8-K was furnished on August 4, 2004, under Item 5, relating
to the conversion of preferred stock owned by GCM into shares of the
registrant's common stock.
A Form 8-K was furnished on August 31, 2004, under Items 5.02, 8.01
and 9.01, relating to the resignation and election of members from
the registrant's board of directors, hiring of a Chief Operating
Officer and press release setting forth such changes.
A Form 8-K was furnished on September 2, 2004, under Item 8.01,
relating to the registrant's receiving notice of a lawsuit filed
against it by the registrant's Chief Executive Officer.
20
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: November 10, 2004 By: /s/ Barry I.Regenstein
----------------- ---------------------------------------------
Barry I. Regenstein
Principal Executive and Principal
Financial Officer
21