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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, 2004
------------------
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 incorporation (I.R.S. Employer Identification No.)
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: 7,669,878 (as of February 4, 2005).
COMMAND SECURITY CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------------------- --------
Item 1. Financial Statements
Condensed Statements of Operations -
three and nine months ended December 31, 2004
and 2003 (unaudited) 3
Condensed Balance Sheets -
December 31, 2004 and March 31, 2004
(unaudited) 4
Condensed Statements of Stockholders' Equity - nine
months ended December 31, 2004 and 2003
(unaudited) 5
Condensed Statements of Cash Flows - nine months ended
December 31, 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 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
- ----------
Exhibit 31.1 Certification of Barry I. Regenstein 22
Exhibit 31.2 Certification of Barry I. Regenstein 23
Exhibit 32.1 ss.1350 Certification of Barry I. Regenstein 24
Exhibit 32.2 ss.1350 Certification of Barry I. Regenstein 25
2
Part I. Financial Information
Item 1. Financial Statements
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
December 31 December 31 December 31 December 31
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues $ 20,257,624 $ 20,609,953 $ 59,881,542 $ 56,167,214
Cost of revenues 17,436,499 17,808,982 51,747,577 47,617,779
------------ ------------ ------------ ------------
Gross profit 2,821,125 2,800,971 8,133,965 8,549,435
------------ ------------ ------------ ------------
Operating expenses
General and administrative 2,354,772 2,739,382 8,049,246 8,066,970
Provision for doubtful accounts, net 172,494 (87,621) 146,231 (25,557)
------------ ------------ ------------ ------------
2,527,266 2,651,761 8,195,477 8,041,413
------------ ------------ ------------ ------------
Operating income (loss) 293,859 149,210 (61,512) 508,022
Interest income 23,542 27,721 61,924 69,053
Interest expense (136,972) (141,175) (356,014) (361,201)
Equipment dispositions 3,568 150 (13,311) 9,716
------------ ------------ ------------ ------------
Income (loss) before income taxes 183,997 35,906 (368,913) 225,590
Provision for income taxes -- (10,772) -- (88,226)
Net income (loss) 183,997 25,134 (368,913) 137,364
Preferred stock dividends -- (40,673) (38,413) (122,021)
------------ ------------ ------------ ------------
Net income (loss) applicable to
common stockholders $ 183,997 $ (15,539) $ (407,326) $ 15,343
============ ============ ============ ============
Net income (loss) per common share
Basic $ .02 $ 0.00 $ (.06) $ 0.00
============ ============ ============ ============
Diluted $ .02 $ n/a $ n/a $ 0.00
============ ============ ============ ============
Weighted average number of common shares outstanding
Basic 7,603,211 6,287,343 7,164,200 6,287,343
============ ============ ============ ============
Diluted 7,723,409 n/a n/a 6,333,565
============ ============ ============ ============
See accompanying notes to condensed financial statements.
3
COMMAND SECURITY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
- ------
December 31, March 31,
2004 2004
------------ ------------
Current assets:
Cash and cash equivalents $ 163,709 $ 10,301
Accounts receivable, net of allowance for
doubtful accounts of $190,845 and $361,865, respectively 12,322,087 16,078,250
Accounts receivable, net of allowance for
billing adjustments of $965,374 -- 1,965,006
Prepaid expenses 977,297 936,454
Other receivables 1,934,834 369,058
------------ ------------
Total current assets 15,397,927 19,359,069
------------ ------------
Furniture and equipment at cost, net 475,615 645,592
------------ ------------
Other assets:
Intangible assets, net 198,226 270,217
Restricted cash 71,640 107,676
Other receivables 39,348 1,252,993
Other assets 309,284 291,862
------------ ------------
Total other assets 618,498 1,922,748
------------ ------------
Total assets $ 16,492,040 $ 21,927,409
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Checks issued in advance of deposits $ 1,784,901 $ 566,611
Current maturities of long-term debt 29,356 361,540
Current maturities of obligations under capital leases 26,474 66,270
Short-term borrowings 2,837,633 9,091,628
Accounts payable 481,560 771,042
Due to service companies 87,887 248,205
Preferred dividends payable -- 40,674
Accrued expenses and other liabilities 6,510,622 5,664,021
------------ ------------
Total current liabilities 11,758,433 16,809,991
Insurance reserves 397,881 402,290
Long-term debt, due after one year 47,932 153,882
Obligations under capital leases, due after one year 46,725 67,538
------------ ------------
Total liabilities 12,250,971 17,433,701
------------ ------------
Stockholders' equity:
Preferred stock, Series A, $.0001 par value -- 2,033,682
Common stock, $.0001 par value 767 629
Additional paid-in capital 10,158,993 8,009,175
Accumulated deficit (5,918,691) (5,549,778)
------------ ------------
Total stockholders' equity 4,241,069 4,493,708
------------ ------------
Total liabilities and stockholders' equity $ 16,492,040 $ 21,927,409
============ ============
See accompanying notes to condensed financial statements.
4
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Additional
Preferred Common Paid-In Accumulated
Stock Stock Capital Deficit
----------- ----------- ----------- -----------
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)
Preferred stock dividends (40,674)
Net loss - three months ended
March 31, 2004 (447,772)
----------- ----------- ----------- -----------
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
Warrants exercised 15 154,672
Net loss - nine months ended
December 31, 2004 (368,913)
----------- ----------- ----------- -----------
Balance at December 31, 2004 $ -- $ 767 $10,158,993 $(5,918,691)
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
5
COMMAND SECURITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
------------------------------
December 31, December 31,
2004 2003
------------- -------------
Cash flow from operating activities:
Net income (loss) $ (368,913) $ 137,364
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 307,693 367,209
Provision for doubtful accounts, net 146,231 (25,557)
Loss (gain) on equipment dispositions 13,311 (9,716)
Insurance reserves (1,880) (34,415)
Decrease (increase) in receivables, prepaid expenses
and other current assets 6,054,411 (460,166)
Increase in accounts payable and other current liabilities 394,272 446,953
------------- -------------
Net cash provided by operating activities 6,545,125 421,672
------------- -------------
Cash flows from investing activities:
Purchases of equipment (35,570) (29,406)
Proceeds from sale of equipment 10,350 12,514
Principal collections on notes receivable 70,900 37,825
------------- -------------
Net cash provided by investing activities 45,680 20,933
------------- -------------
Cash flows from financing activities:
Net (repayments) advances on line-of-credit (6,561,820) 1,035,954
Increase (decrease) in checks issued in advance of deposits 1,218,290 (279,213)
Debt issuance costs -- (315,488)
Proceeds from warrant exercises 154,687 --
Principal payments on other borrowings (1,108,858) (715,036)
Principal payments on capital lease obligations (60,609) (46,800)
Payment of preferred stock dividends (79,087) (122,022)
------------- -------------
Net cash used in financing activities (6,437,397) (442,605)
------------- -------------
Net change in cash and cash equivalents 153,408 --
Cash and cash equivalents, at beginning of period 10,301 --
------------- -------------
Cash and cash equivalents, at end of period $ 163,709 $ --
============= =============
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 nine months ended December 31 for: 2 0 0 4 2 0 0 3
------- --------
Interest $356,901 $361,201
Income taxes 43,328 203,063
Supplemental Schedule of Non-Cash Investing and Financing Activities
For the nine months ended December 31, 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
nine months ended December 31, 2004 and 2003, $924,733 and $910,104,
respectively, were borrowed for this purpose. These borrowings have been
excluded from the condensed statements of cash flows.
During the nine months ended December 31, 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 nine months ended December 31, 2004 and 2003, the Company accrued
dividends of $38,413 and $122,021, 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 fiscal 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 December 31, 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 Borrowings:
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 December 31, 2004, the
Company had used $2,236,204 of this line, representing approximately 35%
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. In September 2004,
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 (8.50% at December 31, 2004). The
line is collateralized by customer accounts receivable and substantially
all other assets of the Company (see Note 8).
2.) Accrued Expenses and Other Liabilities:
Accrued expenses and other liabilities consist of the following:
March 31,
December 31,
2004 2004
---------- ----------
Payroll and related expenses $1,853,387 $3,327,520
Insurance 1,719,091 1,495,987
Customer prepayments, net 2,449,318 --
Other 488,826 840,514
---------- ----------
Total $6,510,622 $5,664,021
========== ==========
8
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3.) Insurance Reserves:
The Company has an insurance policy covering workers' compensation claims
in states that the Company performs services. 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 $2,540,366 and $2,713,862, for the nine months
ended December 31, 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. On the aviation related business, as of October 1, 2002, the
Company acquired a policy with a $25,000,000 limit per occurrence. From
October 17, 2003 to October 17, 2004, the Company had an excess general
liability insurance policy covering aviation claims for an additional
$25,000,000 in the aggregate. As of October 1, 2004, the Company acquired
a policy with a $30,000,000 limit per occurrence. The Company retains the
risk for the first $25,000 per occurrence on the non-aviation related
policy which includes airport wheelchair operations and $5,000 on the
aviation related policy except $25,000 for damage to aircraft and
$100,000 for skycap and electric cart operations. 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.
4.) 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.
5.) Common Stock:
During the current quarter, the Company issued 150,000 shares of common
stock upon the exercise of warrants to purchase common stock at an
exercise price of $1.03125 per share. The proceeds from such exercise of
$154,687 were included in common stock and additional paid-in capital at
December 31, 2004.
6.) Net Income/(Loss) per Common Share:
Under the requirements of Statement of Financial Accounting Standards No.
128, "Earnings Per Share," the dilutive effect of potential common
shares, if any, is excluded from the calculation for basic earnings per
share. Diluted earnings per share are presented for the three months
ended December 31, 2004 and the nine months ended December 31, 2003,
because of the effect of the assumed issuance of common shares would have
if the outstanding stock options and warrants were executed. No diluted
earnings (loss) per share are presented for the nine months ended
December 31, 2004 and three months ended December 31, 2003, because the
effect of assumed issuance of common shares in connection with warrants
and stock options outstanding was antidilutive.
9
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended December 31, 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,
7,519,878 shares of common stock outstanding as of June 25, 2004 through
November 10, 2004 and 7,669,878 shares of common stock outstanding as of
November 11, 2004 through December 31, 2004. An 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 and an additional
150,000 shares of common stock were issued by the Company upon the
exercise of warrants to purchase common stock as of November 11, 2004.
7.) 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 and airport wheelchair operations related
claims and $5,000 per occurrence on the aviation related claims except
$25,000 for damage to aircraft and $100,000 for skycap and electric cart
operations. 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.
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.
The Company has an employment agreement with its Executive Vice
President/Chief Operating Officer. The agreement is for a three year
period expiring September 2007. The terms of the agreement call for
severance payments and specified benefits in the approximate range of
$135,000 to $270,000 depending upon the date of and reason for
termination.
8.) Subsequent Events:
On February 2, 2005, the Company received a Waiver and Amendment letter
(the "Waiver") from its lender CIT. The Waiver confirms that (i) the
Company's previously reported failure to comply with a fixed charge
coverage ratio and a non-financial covenant related to the change in the
management and stock ownership of the Company shall not constitute
defaults and/or events of default under the Agreement, and (ii) CIT
waives any and all rights they may have to accelerate any of the
obligations and exercise any other remedies against the Company or the
collateral as a result thereof.
In addition, CIT (i) rescinds and revokes its Notice of
Default/Reservation of Rights letter dated September 2, 2004 effective as
of February 1, 2005, and (ii) confirms that they will cease charging the
default rate of interest effective as of January 1, 2005.
9.) 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.
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
Revenues
Revenues decreased $352,329, or 1.7%, for the three months ended December 31,
2004 and increased $3,714,328, or 6.6%, for the nine months ended December 31,
2004, compared with the same periods of the prior year. The increase is
primarily due to higher revenues of approximately $7,300,000 during the nine
months ended December 31, 2004 in the Aviation division from: (i) a contract
with Delta Airlines ("Delta") which commenced in August 2003 and (ii) new
airline customers at the Company's existing terminal operations at John F.
Kennedy International Airport in New York and Los Angeles International Airport
in California. The increase was partially offset by lower revenues of
approximately $3,700,000 due to the losses in the prior year of: (i) a
wheelchair contract at Los Angeles International Airport; (ii) temporary
security guard strike work associated with a California based grocery market
chain and (iii) an escort program transporting international passengers without
United States visas within terminals at certain of the Company's airport
locations. The decrease in revenues for the three months ended December 31, 2004
results from lower revenues of approximately $1,200,000 associated with the loss
of temporary security guard strike work as described above. The decrease was
partially offset by increased revenues of approximately $700,000 associated with
the Delta contract noted above.
Gross Profit
Gross profit increased by $20,154, or .7%, for the three months ended December
31, 2004 and decreased $415,470, or 4.9%, for the nine months ended December 31,
2004, compared with the same periods of the prior year. The increase for the
three months ended December 31, 2004 is due mainly to the absence of additional
workers' compensation costs incurred in the prior year period associated with a
serious accident suffered by an employee. The increase was partially offset by
the loss in the prior year of temporary security guard strike work with a
California based grocery market chain. The decrease for the nine months ended
December 31, 2004 was primarily due to: (i) the loss of temporary security guard
strike work as described above, (ii) higher state unemployment insurance rates
as a result of layoffs of personnel in 2003 due to the federalization of
aviation pre-board screening services, (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 decreased by $384,610, or 14.0%, for the
three months ended December 31, 2004 and were comparable for the nine months
ended December 31, 2004 compared with the same periods of the prior year. The
decrease was primarily due to lower (i) payroll and related costs and (ii)
professional fees.
Provision for Doubtful Accounts
The provision for doubtful accounts increased by $260,115 and $171,788 for the
three and nine months ended December 31, 2004, respectively, compared with the
same periods of the prior year. The increases were primarily due to a $150,000
charge in October 2004 associated with ATA Airlines filing for protection under
Chapter 11 of the U.S. Bankruptcy Code and the effect of benefits recorded in
the prior year periods associated with estimated recoveries on bankrupt
customers' receivables.
12
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 increase during the nine months ended December 31, 2004
compared with the same period of the prior year is necessarily indicative of a
trend.
Interest Income
Interest income which principally represents financing income from the Company's
service agreement customers for the three and nine months ended December 31,
2004 was comparable with the same periods of the prior year.
Interest Expense
Interest expense for the three and nine months ended December 31, 2004 was
comparable with the same periods of the prior year as higher interest rates were
offset by lower weighted average outstanding borrowings.
Equipment Dispositions
The loss on equipment dispositions of $13,311 for the nine months ended December
31, 2004, 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 51 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 December 31, 2004, the Company had borrowed $2,236,204 representing
approximately 35% of its 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 $12,763,796 could
additionally be available to borrow under the Agreement.
13
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.
In September 2004, 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
did 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.
On February 2, 2005, the Company received a Waiver and Amendment letter (the
"Waiver") from CIT. The Waiver confirms that (i) the Company's previously
reported failure to comply with a fixed charge coverage ratio and a non-financed
covenant related to the change in management and stock ownership of the Company
shall not constitute defaults and/or events of default under the Agreement, and
(ii) CIT waives any and all rights they may have to accelerate any of the
obligations and exercise any other remedies against the Company or the
collateral as a result thereof.
In addition, CIT (i) rescinded and revoked the Letter effective as of February
1, 2005 and (ii) confirmed that they will cease charging the default rate of
interest effective as of January 1, 2005.
Other Credit
During September 2003, 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. On December 29, 2004, the Company paid the remaining outstanding
balance of $210,568 on such note.
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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.
During the current quarter, the Company issued 150,000 shares of common stock
upon the exercise of warrants to purchase common stock at an exercise price of
$1.03125 per share. The proceeds from such exercise of $154,687 were included in
common stock and additional paid-in capital at December 31, 2004.
Working Capital
Working capital increased by $1,090,416 to $3,639,494 as of December 31, 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.
The Company experienced checks issued in advance of deposits (defined as checks
drawn in advance of future deposits) of $1,784,901 as of December 31, 2004,
compared with $566,611 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.
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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. Recently, the Company's Aviation
division has been successful in obtaining two new service contracts, one of
which represents a new airport location for such division, commencing in the
first quarter of calendar 2005.
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 during the nine months ended December 31, 2004 to
13.6% of revenue compared with an average gross profit margin of 14.4% for the
fiscal year ended March 31, 2004 primarily due to: (i) the loss of temporary
security guard strike work with a California based grocery market chain, (ii)
higher state unemployment insurance rates as a result of layoffs due to the
federalization of pre-board screening, (iii) term discounts with airline
customers for prompt payment of accounts receivable and (iv) 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 increased to 13.9% of revenue for the quarter ended December 31,
2004 compared with 13.6% of revenue for the same period of the previous year.
The Company expects gross profit margins 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 workers'
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 nine months ended December 31, 2004.
The Aviation division represents approximately 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. 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 Delta or 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.
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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 October 2004 an amendment to their contract whereby Delta shall
pay the Company by electronic funds transfer in advance without invoice on the
last day of the month preceding the month in which services will be performed at
applicable airport locations, as defined. Such services with Delta are subject
to a 3% term discount. 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 $1,300,000. As of the
close of business, February 4, 2005, the Company's cash availability was
approximately $2,700,000 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. Certain
consequences of such a filing are discussed above in the "Outlook" section.
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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.
Catastrophic Events
The Company is exposed to potential claims for catastrophic events, such as acts
of terrorism, or 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 $30,000,000 per
occurrence for guard and aviation services, respectively. The Company retains
the risk for the first $25,000 per occurrence on the non-aviation related policy
which includes airport wheelchair operations and $5,000 on the aviation related
policy (except $25,000 for damage to aircraft and $100,000 for skycap and
electric cart operations). The Terrorism Risk Insurance Act of 2002 established
a program within the United States Department of the Treasury, under which the
federal government shares, with the insurance industry, the risk of loss from
future "acts of terrorism," as defined in the Act. The Company does not
currently maintain additional insurance coverage for losses arising from "acts
of terrorism".
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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 average outstanding
balances during the three months ended December 31, 2004, 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 December 31, 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 Chief
Operating and Chief Financial Officer. Based upon that evaluation, the Company's
Chief Operating 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, 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.
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PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 Certification of Barry I. Regenstein 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 Barry I. Regenstein 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 December 31, 2004
A Form 8-K was furnished on October 8, 2004, under Items 5.02 and
9.01, relating to the resignation of the Chief Executive and Chief
Financial Officers of the registrant, appointment of a new Chief
Financial Officer, appointment of a member to the registrant's board
of directors and press release setting forth such changes.
A Form 8-K was furnished on December 15, 2004, under Items 5.02 and
9.01, relating to the registrant's finalization of an employment
agreement with its Executive Vice President and Chief Operating
Officer.
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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 10, 2005 By: /s/ Barry I. Regenstein
----------------- --------------------------------------------
Barry I. Regenstein
Principal Executive and Principal Financial
Officer
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