Unassociated Document
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, 2007
or
o
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)
|
(845) 454-3703
(Registrant's
telephone number, including area code)
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨
|
Accelerated
Filer ¨
|
Non-Accelerated
Filer x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨
No x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 10,752,216 (as of February 7,
2008).
COMMAND SECURITY CORPORATION
INDEX
PART
I.
|
FINANCIAL
INFORMATION
|
Page
No.
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
Condensed
Consolidated Statements of Income -
|
|
|
three
and nine months ended December 31, 2007
|
|
|
and
2006 (unaudited)
|
3
|
|
|
|
|
Condensed
Consolidated Balance Sheets -
|
|
|
December
31, 2007 (unaudited) and March 31, 2007
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Stockholders' Equity -
|
|
|
nine
months ended December 31, 2007 and 2006
|
|
|
(unaudited)
|
5
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows -
|
|
|
nine
months ended December 31, 2007 and 2006
|
|
|
(unaudited)
|
6-7
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
8-12
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of
|
|
|
Financial
Condition and Results of Operations
|
13-20
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
21
|
|
|
|
Item
4.
|
Controls
and Procedures
|
21
|
|
|
|
PART
II.
|
OTHER INFORMATION
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
22
|
|
|
|
Item
6.
|
Exhibits
|
22
|
|
|
|
SIGNATURES
|
|
23
|
|
|
|
Exhibit
31.1
|
Certification
of Barry I. Regenstein
|
24
|
Exhibit
32.1
|
§1350
Certification of Barry I. Regenstein
|
25
|
PART
I. FINANCIAL INFORMATION
Item
1
|
Financial
Statements
|
COMMAND
SECURITY CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Three
months ended
|
Nine
months ended
|
|
|
December
31,
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
$
|
30,225,328
|
|
$
|
24,092,767
|
|
$
|
88,922,998
|
|
$
|
70,309,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
26,073,598
|
|
|
20,283,575
|
|
|
76,804,358
|
|
|
59,850,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,151,730
|
|
|
3,809,192
|
|
|
12,118,640
|
|
|
10,459,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
3,362,716
|
|
|
3,416,974
|
|
|
9,927,373
|
|
|
9,524,059
|
|
Provision
(recoveries) for doubtful accounts, net
|
|
|
66,005
|
|
|
53,170
|
|
|
(152,755
|
)
|
|
139,086
|
|
|
|
|
3,428,721
|
|
|
3,470,144
|
|
|
9,774,618
|
|
|
9,663,145
|
|
Operating
income
|
|
|
723,009
|
|
|
339,048
|
|
|
2,344,022
|
|
|
796,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
13,401
|
|
|
61,704
|
|
|
61,243
|
|
|
188,636
|
|
Interest
expense
|
|
|
(196,239
|
)
|
|
(171,160
|
)
|
|
(626,306
|
)
|
|
(377,525
|
)
|
Gain
on sale of available for-sale securities
|
|
|
-
|
|
|
-
|
|
|
50,007
|
|
|
-
|
|
Equipment
dispositions
|
|
|
300
|
|
|
(4,251
|
)
|
|
1,188
|
|
|
(2,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
540,471
|
|
|
225,341
|
|
|
1,830,154
|
|
|
604,454
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
275,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
540,471
|
|
$
|
225,341
|
|
$
|
1,555,154
|
|
$
|
604,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.05
|
|
$
|
.02
|
|
$
|
.15
|
|
$
|
.06
|
|
Diluted
|
|
$
|
.05
|
|
$
|
.02
|
|
$
|
.14
|
|
$
|
.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,727,191
|
|
|
10,137,970
|
|
|
10,727,191
|
|
|
10,137,970
|
|
Diluted
|
|
|
11,379,450
|
|
|
10,636,968
|
|
|
11,326,613
|
|
|
10,590,394
|
|
See
accompanying notes to condensed consolidated financial
statements.
COMMAND SECURITY CORPORATION
CONDENSED CONSOLIDATED
BALANCE SHEETS
|
|
|
December
31,
|
|
|
March
31,
|
|
|
|
|
2007
|
|
|
2007
|
|
ASSETS
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
180,991
|
|
$
|
220,040
|
|
Accounts
receivable, net of allowance for
|
|
|
|
|
|
|
|
doubtful
accounts of $959,357 and $831,397, respectively
|
|
|
21,480,216
|
|
|
17,978,737
|
|
Prepaid
expenses
|
|
|
2,134,769
|
|
|
556,953
|
|
Other
assets
|
|
|
1,898,343
|
|
|
3,428,626
|
|
Total
current assets
|
|
|
25,694,319
|
|
|
22,184,356
|
|
|
|
|
|
|
|
|
|
Furniture
and equipment at cost, net
|
|
|
592,807
|
|
|
529,042
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
3,636,208
|
|
|
782,621
|
|
Restricted
cash
|
|
|
302,272
|
|
|
78,126
|
|
Other
assets
|
|
|
1,878,900
|
|
|
1,755,432
|
|
Total
other assets
|
|
|
5,817,380
|
|
|
2,616,179
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
32,104,506
|
|
$
|
25,329,577
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Checks
issued in advance of deposits
|
|
$
|
1,714,215
|
|
$
|
1,760,155
|
|
Current
maturities of long-term debt
|
|
|
125,740
|
|
|
247,054
|
|
Current
maturities of obligations under capital leases
|
|
|
20,922
|
|
|
16,774
|
|
Short-term
borrowings
|
|
|
10,635,325
|
|
|
8,487,065
|
|
Accounts
payable
|
|
|
770,029
|
|
|
639,783
|
|
Accrued
expenses and other liabilities
|
|
|
5,468,768
|
|
|
4,519,862
|
|
Total
current liabilities
|
|
|
18,734,999
|
|
|
15,670,693
|
|
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
|
828,855
|
|
|
539,503
|
|
Long-term
debt, due after one year
|
|
|
-
|
|
|
5,902
|
|
Obligations
under capital leases, due after one year
|
|
|
18,261
|
|
|
9,643
|
|
Total
liabilities
|
|
|
19,582,115
|
|
|
16,225,741
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, Series A, $.0001 par value
|
|
|
-
|
|
|
-
|
|
Common
stock, $.0001 par value
|
|
|
1,075
|
|
|
1,014
|
|
Accumulated
other comprehensive income
|
|
|
(127,099
|
)
|
|
12,550
|
|
Additional
paid-in capital
|
|
|
15,892,850
|
|
|
13,889,861
|
|
Accumulated
deficit
|
|
|
(3,244,435
|
)
|
|
(4,799,589
|
)
|
Total
stockholders’ equity
|
|
|
12,522,391
|
|
|
9,103,836
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
32,104,506
|
|
$
|
25,329,577
|
|
See
accompanying notes to condensed consolidated financial statements.
COMMAND SECURITY CORPORATION
CONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
on
Available For-
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Sale
Securities
|
|
|
Capital
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2006
|
|
$
|
--
|
|
$
|
1,014
|
|
$
|
--
|
|
$
|
13,663,311
|
|
$
|
(6,039,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
175,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on available-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for-sale
securities
|
|
|
|
|
|
|
|
|
29,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income - nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
604,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
--
|
|
|
1,014
|
|
|
29,590
|
|
|
|
|
|
(5,435,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
51,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on available-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for-sale
securities
|
|
|
|
|
|
|
|
|
(17,040
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income - three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
635,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2007
|
|
|
--
|
|
|
1,014
|
|
|
12,550
|
|
|
13,889,861
|
|
|
(4,799,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 614,246 shares for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
|
|
|
|
|
|
61
|
|
|
|
|
|
1,784,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
218,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on available-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for-sale
securities
|
|
|
|
|
|
|
|
|
(139,649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income - nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,555,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$
|
--
|
|
$
|
1,075
|
|
$
|
(127,099
|
)
|
$
|
15,892,850
|
|
$
|
(3,244,435
|
)
|
See
accompanying notes to condensed consolidated financial
statements.
COMMAND SECURITY CORPORATION
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Nine
Months Ended
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,555,154
|
|
$
|
604,454
|
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
514,977
|
|
|
233,823
|
|
Provision
(recoveries) for doubtful accounts, net
|
|
|
(152,755
|
)
|
|
139,086
|
|
Gain
on equipment dispositions
|
|
|
(1,188
|
)
|
|
2,851
|
|
Gain
on sale of available-for-sale securities
|
|
|
(50,007
|
)
|
|
-
|
|
Stock
compensation
|
|
|
218,050
|
|
|
175,350
|
|
Insurance
reserves
|
|
|
289,352
|
|
|
106,642
|
|
Deferred
income taxes
|
|
|
(37,000
|
)
|
|
-
|
|
Restricted
cash
|
|
|
(221,330
|
)
|
|
-
|
|
Increase
in receivables, prepaid expenses and other current assets
|
|
|
(3,296,278
|
)
|
|
(4,075,824
|
)
|
Increase
(decrease) in accounts payable and other current liabilities
|
|
|
1,051,152
|
|
|
(1,066,728
|
)
|
Net
used in operating activities
|
|
|
(129,873
|
)
|
|
(3,880,346
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of equipment
|
|
|
(132,096
|
)
|
|
(269,282
|
)
|
Proceeds
from equipment dispositions
|
|
|
1,188
|
|
|
2,050
|
|
Acquisition
of business
|
|
|
(1,775,596
|
)
|
|
(412,500
|
)
|
Proceeds
from sale of available for-sale securities
|
|
|
149,096
|
|
|
-
|
|
Principal
collections on notes receivable
|
|
|
- |
|
|
115,803
|
|
Net
cash used in investing activities
|
|
|
(1,757,408
|
)
|
|
(563,929
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
advances on line-of-credit
|
|
|
2,148,260
|
|
|
4,463,356
|
|
Increase
(decrease) in checks issued in advance of deposits
|
|
|
(45,940
|
)
|
|
291,041
|
|
Debt
issuance costs
|
|
|
(113,472
|
)
|
|
-
|
|
Principal
payments on other borrowings
|
|
|
(127,216
|
)
|
|
(159,177
|
)
|
Principal
payments on capital lease obligations
|
|
|
(13,400
|
)
|
|
(27,717
|
)
|
Net
cash provided by financing activities
|
|
|
1,848,232
|
|
|
4,567,503
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(39,049
|
)
|
|
123,228
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, at beginning of period
|
|
|
220,040
|
|
|
32,243
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, at end of period
|
|
$
|
180,991
|
|
$
|
155,471
|
|
See
accompanying notes to condensed consolidated financial statements.
COMMAND SECURITY CORPORATION
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental
Disclosures of Cash Flow Information
Cash
paid during the nine months ended December 31 for:
|
|
|
2
0 0 7
|
|
|
2
0 0 6
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
625,108
|
|
$
|
290,401
|
|
Income
taxes
|
|
|
919,723
|
|
|
17,070
|
|
Supplemental Schedule of Non-Cash Investing and Financing Activities
During
the nine month period ended December 31, 2007, we acquired a security services
business for a purchase price of $3,400,000. At the closing, we paid $1,615,000
of the purchase price in cash and issued 614,246 shares of our common stock,
valued at an aggregate amount of $1,785,000 for the remaining balance of the
purchase price. The issuance of these shares of our common stock has been
excluded from investing and financing activities on the condensed consolidated
statements of cash flows.
During
the nine month period ended December 31, 2007, we received available-for-sale
securities in connection with our claim related to the bankruptcy filing of
Northwest Airlines in the amount of $366,988 which is included as a bad debt
recovery in the accompanying condensed statements of income. This amount has
been excluded from investing activities on the condensed consolidated statements
of cash flows.
During
the nine month period ended December 31, 2006, we acquired a security services
business for a purchase price of $750,000. At the closing, we paid $412,500
of
the purchase price in cash and issued a note payable in the amount of $337,500
for the remaining balance of the purchase price. This note payable amount has
been excluded from investing activities on the condensed consolidated statements
of cash flows.
See
accompanying notes to condensed consolidated financial
statements.
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
The
unaudited consolidated 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 in the United States. These statements should be read in conjunction
with the financial statements and notes thereto included in our financial
statements for the fiscal year ended March 31, 2007.
The
consolidated financial statements for the interim period shown in this report
are not necessarily indicative of results to be expected for the fiscal year
ending March 31, 2008. 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 as of,
and
for the periods, indicated therein. All such adjustments are of a normal
recurring nature.
1.
|
Recent
Accounting Pronouncements
|
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business
Combinations” (“SFAS No. 141R"). SFAS 141R
requires all business combinations completed after the effective date to be
accounted for by applying the acquisition method (previously referred to as
the
purchase method). Companies applying this method will have to identify the
acquirer, determine the acquisition date and purchase price and recognize at
their acquisition-date fair values of the identifiable assets acquired,
liabilities assumed, and any non-controlling interests in the acquiree. In
the
case of a bargain purchase the acquirer is required to reevaluate the
measurements of the recognized assets and liabilities at the acquisition date
and recognize a gain on that date if an excess remains. SFAS 141R becomes
effective for fiscal periods beginning after December 15, 2008. The Company
is currently evaluating the impact, if any, that SFAS 141R will have on its
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 amends ARB 51
to establish accounting and reporting standards for the non-controlling
(minority) interest in a subsidiary and for the deconsolidation of a subsidiary.
It clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements and establishes a single method of accounting
for changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation. SFAS No. 160 is effective for fiscal years beginning on
or
after December 15, 2008. The Company is currently evaluating the impact, if
any,
that SFAS No. 160 will have on its consolidated financial statements.
2. |
Short-Term Borrowings:
|
Until
March 21, 2006, we were parties to a financing agreement (the “Agreement”) with
CIT that had a term of three years ending December 12, 2006 and provided for
borrowings in an amount up to 85% of our eligible accounts receivable, but
in no
event more than $15,000,000. The Agreement also provided for advances against
unbilled revenue (primarily monthly invoiced accounts) although this benefit
was
offset by a reserve against all outstanding payroll checks. Borrowings under
the
Agreement bore interest at the prime rate, (as defined in the Agreement), plus
1.25% per annum on the greater of: (i) $5,000,000 or (ii) the average of the
net
balances we owe to CIT in the loan account at the close of each day during
such
month. Closing costs totaled $279,963 and are being amortized over the three
year life of the Agreement, as extended (see below).
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
March
22, 2006, we entered into an Amended and Restated Financing Agreement with
CIT
(the “Amended and Restated Agreement”), which provided for borrowings as noted
above, but in no event more than $12,000,000. The Amended and Restated Agreement
provided for a letter of credit sub-line in an aggregate amount of up to
$1,500,000. Letters of credit are subject to a two percent (2%) per annum fee
on
the face amount of each letter of credit. The Amended and Restated Agreement
provided that interest will be calculated on the outstanding principal balance
of the revolving loans at the prime rate, (as defined in the Amended and
Restated Agreement), plus .25% if our EBITDA, (as defined in the Amended and
Restated Agreement), is equal to or less than $500,000 for the most recently
completed fiscal quarter; otherwise, at the prime rate. For LIBOR loans,
interest will be calculated on the outstanding principal balance of the LIBOR
loans at the LIBOR rate, (as defined in the Amended and Restated Agreement),
plus 2.75% if our EBITDA is equal to or less than $500,000 for the most recently
completed fiscal quarter; otherwise, at the LIBOR rate plus 2.50%.
On
April
12, 2007, we entered into an amendment to the Amended and Restated Agreement
(“the Amended Agreement”). Pursuant to the Amended Agreement, the aggregate line
of credit was increased from $12,000,000 to $16,000,000, and we were provided
with a $2,400,000 acquisition advance to fund the cash requirements associated
with the acquisition of a security services business (see Note 4). The Amended
Agreement also provides for an extension of the maturity date to December 12,
2008, and for reductions in fees and availability reserves and an increase
in
the letter of credit sub-line to an aggregate amount of up to $3,000,000. The
Amended Agreement provides that interest will be calculated on the outstanding
principal balance of the revolving loans at the prime rate (as defined in the
Amended Agreement), less .25% and for LIBOR loans, interest will be calculated
on the outstanding principal balance of the LIBOR loans at the LIBOR rate (as
defined in the Amended Agreement), plus 2.0%.
As
of
December 31, 2007, the interest rates were 7.00% and 6.87% for revolving and
LIBOR loans, respectively. Closing costs for the Amended Agreement totaled
$158,472, including $125,000 payable to the lender, with $45,000 due at closing,
$40,000 due six months after closing and $40,000 due twelve months after
closing, and $33,472 in legal costs incurred in connection with the transaction.
Such costs are being amortized over the remaining life of the Amended Agreement.
At
December 31, 2007, we had borrowed $4,635,325 in revolving loans, $6,000,000
in
LIBOR loans and had a $70,000 letter of credit outstanding representing
approximately 73% of the maximum borrowing capacity under the Amended Agreement
based on our “eligible accounts receivable” (as defined under the Amended
Agreement) as of such date. However, as our business grows and produces new
receivables (as to which no assurance can be given), up to an additional
$5,294,675 could be available to borrow under the Amended
Agreement.
We
rely
on our revolving loan from CIT which contains a fixed charge covenant and
various other financial and non-financial covenants. If we breach a covenant,
CIT has the right to immediately request the repayment in full of all borrowings
under the Amended Agreement, unless CIT waives the breach. We were in compliance
with all covenants under the Amended Agreement during the nine months ended
December 31, 2007.
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
Other
assets consist of the following:
|
|
|
December
31
|
|
|
March
31,
|
|
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Workers’
compensation insurance
|
|
$
|
1,470,814
|
|
$
|
3,249,549
|
|
Other
receivables
|
|
|
170,524
|
|
|
138,187
|
|
Security
deposits
|
|
|
267,263
|
|
|
210,184
|
|
Deferred
tax asset
|
|
|
1,423,845
|
|
|
1,358,845
|
|
Available-for-sale
securities
|
|
|
240,152
|
|
|
111,903
|
|
Other
|
|
|
204,645
|
|
|
115,390
|
|
|
|
|
3,777,243
|
|
|
5,184,058
|
|
Current
portion
|
|
|
(1,898,343
|
)
|
|
(3,428,626
|
)
|
|
|
|
|
|
|
|
|
Total
non-current portion
|
|
$
|
1,878,900
|
|
$
|
1,755,432
|
|
On
April
12, 2007, we completed the acquisition of 100% of the security services business
of California-based Brown Security Industries, Inc., including its wholly-owned
operating subsidiaries, Strategic Security Services, Inc. and Rodgers Police
Patrol, Inc. (“Brown”). The purchase price for these companies was $3,000,000,
plus an amount equal to their estimated consolidated tangible net worth (as
defined in the purchase agreement) on the closing date of $400,000, subject
to
adjustment. The purchase price was comprised of $1,615,000 in cash and 614,246
shares of the our common stock, valued at an aggregate amount of $1,785,000,
based on the average closing price of our common stock on the OTC Bulletin
Board
for the five consecutive trading days immediately prior to the date that the
parties first entered into the definitive transaction documents. The residual
amount of the purchase price, of approximately $875,000, in excess of certain
operating assets and intangible assets was allocated to goodwill.
The
acquisition of Brown is expected to continue to broaden our national network
of
office locations and expand our geographical reach as part of the Company’s
ongoing efforts to accelerate growth and profitability. This transaction further
enhances our position as a nationally recognized provider of security services
in this growing market within the United States.
Activity
related to the acquisition of Brown and its related subsidiaries included in
the
condensed consolidated statements of income consisted of the
following:
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
December
31
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,732,004
|
|
$
|
8,215,113
|
|
Net
income
|
|
|
121,323
|
|
|
424,358
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.01
|
|
$
|
.04
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
.01
|
|
$
|
.04
|
|
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
5. |
Accrued
Expenses and Other Liabilities:
|
Accrued
expenses and other liabilities consist of the following:
|
|
|
December
31,
|
|
|
March
31,
|
|
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Payroll
and related expenses
|
|
$
|
3,319,149
|
|
$
|
3,367,775
|
|
Taxes
and fees payable
|
|
|
1,311,646
|
|
|
800,687
|
|
Accrued
interest payable
|
|
|
79,936
|
|
|
71,143
|
|
Other
|
|
|
758,037
|
|
|
280,257
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,468,768
|
|
$
|
4,519,862
|
|
We
have
an insurance policy covering workers’ compensation claims in states that we
perform services. Estimated accrued liabilities are based on our historical
loss
experience and the ratio of claims paid to our historical payout profiles.
Charges for estimated workers’ compensation related losses incurred and included
in cost of sales were $385,927 and $547,644, and $1,296,602 and $2,037,759
for
the three and nine months ended December 31, 2007 and 2006, respectively.
The
nature of our business also subjects us to claims or litigation alleging that
we
are liable for damages as a result of the conduct of our employees or others.
We
insure against such claims and suits through general liability policies with
third-party insurance companies. Such policies have limits of $5,000,000 per
occurrence. Effective October 1, 2006, the policy limit was increased to
$7,000,000 per occurrence with an additional excess umbrella policy of
$5,000,000. On the aviation related business, as of October 1, 2004, we acquired
a policy with a $30,000,000 limit per occurrence. Effective as of October 1,
2006, we retain the risk for the first $25,000 per occurrence on the
non-aviation related policy, which includes airport wheelchair and electric
cart
operations, and $5,000 on the aviation related policy except for $25,000 for
damage to aircraft and $100,000 for skycap 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 us.
Cumulative
amounts estimated to be payable by us with respect to pending and potential
claims for all years in which we are liable under our general liability
retention and workers’ compensation policies have been accrued as liabilities.
Such accrued liabilities are necessarily based on estimates; thus, our 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.
7.
|
Net
Income 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 and nine months ended December 31, 2007 and 2006
because of the effect of the assumed issuance of common shares would have if
outstanding stock
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
options
and warrants were exercised.
The
nature of our 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. We maintain general liability and
workers’ compensation insurance coverage that we believe is appropriate to the
relevant level of risk and potential liability. Some of the claims brought
against us could result in significant payments; however, the exposure to us
under general liability is limited to the first $25,000 per occurrence on the
non-aviation, airport wheelchair and electric cart operations related claims
and
$5,000 per occurrence on the aviation related claims except for $25,000 for
damage to aircraft and $100,000 for skycap 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, we have been named as a defendant in several uninsured
employment related claims which are currently before various courts, the Equal
Employment Opportunities Commission or various state and local agencies. We
have
instituted policies to minimize these occurrences and monitor those that do
occur. At this time the, we are 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.
Certain
amounts have been reclassified to conform to our fiscal 2008 presentation.
These
reclassifications had no impact on our consolidated financial position or
results of operations.
On
January 7, 2008 we completed the acquisition of substantially all of the assets
of Expert Security Services, Inc., a Maryland-based provider of guard and
related security services (“ESS”). The purchase price for these assets was
$437,000, subject to adjustment based on the achievement or failure to achieve
certain revenue targets, as specified in accordance with the terms, and subject
to the conditions, of that certain Asset Purchase Agreement dated as of January
1, 2008, among the Company, ESS and the shareholders of ESS. We paid --the
entire purchase price in cash at the closing of the transaction.
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following discussion should be read in conjunction with our condensed
consolidated financial statements and the related notes thereto contained in
this quarterly report.
Forward
Looking Statements
Certain
of the statements contained in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations section of this quarterly report
on Form 10-Q and, in particular, those under the heading “Outlook,” contain
forward-looking statements. The words “outlook”, “intend”, “plans”, “efforts”,
“anticipates”, “believes”, “expects” or words of similar import typically
identify such statements. These are based on current expectations, estimates,
forecasts and projections about the industry in which we operate, management’s
beliefs, and assumptions made by our management. In addition, other written
or
oral statements that constitute forward-looking statements may be made by us
or
on our behalf. While our management believes these statements are accurate,
our
business is dependent upon general economic conditions and various conditions
specific to the industries in which we operate. Future trends and these factors
could cause our actual results to differ materially from the forward-looking
statements that we have made based on a number of factors including, but not
limited to, availability of labor, marketing success, competitive conditions,
changes in the financial condition of certain of our customers, including
bankruptcies, and changes in economic conditions of the various markets in
which
we operate. These forward-looking statements are not guarantees of future
performance, and involve certain risks, uncertainties and assumptions that
are
difficult for us to predict. We undertake no obligation to update publicly
any
of these 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, we
wish
to caution shareholders and investors that the important factors under the
heading “Risk Factors” in our Annual Report on Form 10-K filed with respect to
our fiscal year ended March 31, 2007 could cause our actual results and
experience to differ materially from our anticipated results or other
expectations expressed in our forward-looking statements in this
report.
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. Our actual
results may differ from these estimates under different assumptions and
conditions.
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts
of
the Company and our wholly-owned domestic subsidiaries. All significant
intercompany accounts and transactions have been eliminated in our condensed
consolidated financial statements.
Revenue
Recognition
We
record
revenue as services are provided to our customers. Revenue consists primarily
of
aviation and security services, which are typically billed at hourly rates.
These rates may vary depending on base, overtime and holiday time worked.
Revenue for administrative services provided to other security services
companies are calculated as a percentage of the administrative service client’s
revenue and are recognized when billings for the related security services
are
generated.
Trade
Receivables
We
periodically evaluate the requirement for providing for billing adjustments
and/or credit losses on our accounts receivable. We provide for billing
adjustments where management determines that there is a likelihood of a
significant adjustment for disputed billings. Criteria used by management to
evaluate the adequacy of the allowance for doubtful accounts include, among
others, the creditworthiness of the customer, current trends, prior payment
performance, the age of the receivables and our overall historical loss
experience. Individual accounts are charged off against the allowance as
management deems them as uncollectible.
Intangible
Assets
Intangible
assets are stated at cost and consist primarily of customer lists and borrowing
costs that are being amortized on a straight-line basis over three to ten years
and goodwill which is reviewed annually for impairment. The life assigned to
customer lists acquired is based on management’s estimate of the attrition rate.
The attrition rate is estimated based on historical contract longevity and
management’s operating experience. We test for impairment annually or when
events and circumstances warrant such a review, if sooner. Any potential
impairment is evaluated based on anticipated undiscounted future cash flows
and
actual customer attrition in accordance with Statement of Financial Accounting
Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.”
Insurance
Reserves
General
liability estimated accrued liabilities are calculated on an undiscounted basis
based on actual claim data and estimates of incurred but not reported claims
developed utilizing historical claim trends. Projected settlements and incurred
but not reported claims are estimated based on pending claims, historical trends
and data.
Workers’
compensation annual premiums are based on the incurred losses as determined
at
the end of the coverage period, subject to minimum and maximum premium.
Estimated accrued liabilities are based on our historical loss experience and
the ratio of claims paid to our historical payout profiles.
Income
Taxes
Income
taxes are based on income (loss) for financial reporting purposes and reflect
a
current tax liability (asset) for the estimated taxes payable (recoverable)
in
the current year tax return and changes in deferred taxes. Deferred tax assets
or liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using enacted tax
laws
and rates. A valuation allowance is provided on deferred tax assets if it is
determined that it is more likely than not that the asset will not be
realized.
Accounting
for stock options
In
December 2002 the Financial Accounting Standards Board (“FASB”) issued SFAS No.
148, (“SFAS 148”), “Accounting for Stock-Based Compensation-Transition and
Disclosure”, an amendment of SFAS No. 123, (“SFAS 123”), “Accounting for
Stock-Based Compensation” to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
compensation. Since SFAS 148 was adopted during fiscal year ended March 31,
2003, we could elect to adopt any of the three transitional recognition
provisions. We adopted the prospective method of accounting for stock-based
compensation.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123R”), which replaces SFAS 123. SFAS 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values at
grant
date and the recognition of the related expense over the period in which the
share-based compensation vests. We were required to adopt the provisions of
SFAS
123R effective July 1, 2005 and use the modified-prospective transition method.
Under the modified-prospective method, we recognize compensation expense in
our
financial statements issued subsequent to the date of adoption for all
share-based payments granted, modified or settled after July 1, 2005. The
adoption of SFAS 123R resulted in non-cash charges of $15,600 and $63,450 and
$218,050 and $175,350 for stock compensation cost for the three and nine months
ended December 31, 2007 and 2006, respectively. Such non-cash charge would
have
been the same under the provisions of SFAS 148.
Results
of Operations
Revenues
Revenues
increased $6,132,561, or 25.5%, for the three months ended December 31, 2007
and
increased $18,613,649, or 26.5%, for the nine months ended December 31, 2007
compared with the same periods of the prior year. The increases for the three
and nine month periods resulted primarily from: (i) incremental revenues of
approximately $2,732,004 and $8,215,113, respectively, associated with the
acquisition of a security services business in California in April 2007; (ii)
approximately $2,335,000 and $6,955,000 respectively, from new and existing
airline customers at our terminal operations at Los Angeles and John F. Kennedy
International Airports; (iii) approximately $801,000 and $1,591,000,
respectively, in New York City due mainly to a new contract to provide security
services to a major medical center and the expansion of services with a major
commercial bank with branch offices throughout the New York metropolitan area;
and (iv) approximately $230,000 for both the three and nine month periods due
to
the opening of a new branch office in the Buffalo, New York area in conjunction
with the expansion of services with a major commercial bank noted above. Also
contributing to the increase in revenues for the nine month period were: (i)
approximately $911,000 from expanded services at San Jose International Airport
in California and LaGuardia Airport in New York and (ii) approximately
$1,216,000 due to new contracts that commenced in May and September 2006 with
groups of airlines at new airport locations in Oakland, California and Seattle,
Washington. The increase in revenues for the three and nine month periods were
partially offset by the loss of revenues at Miami and Baltimore/Washington
International airports of approximately $266,000 and $340,000, respectively,
due
mainly to a change in government regulations that require the Transportation
Security Administration (“TSA”) to provide certain document verification
services that were formerly provided by us at these airports. The increase
in
revenues for the nine month period were also partially offset by the termination
in September 2006 of a short-term contract to provide security services to
a
national insurance company at multiple domestic locations, which generated
revenues of approximately $843,000 during the nine months ended December 31,
2006.
Gross
Profit
Our
gross
profit increased by $342,538, or 9.0%, for the three months ended December
31,
2007 and increased $1,659,301, or 15.9% for the nine months ended December
31,
2007 compared with the same periods of the prior year. The increases for the
three and nine month periods resulted primarily from: (i) our acquisition of
a
security services businesses in California; (ii) expanded aviation services
at
the airports described above, with the exception of John F. Kennedy
International Airport (“JFK”) (see below); and (iii) lower workers’ compensation
insurance costs. The increases in our gross profit were partially offset by:
(i)
higher labor ratio margins for both our aviation and security services divisions
due mainly to increases in wages, salaries and related tax and benefits of
our
employees at rates in excess of the amount that we are willing to pass on to
our
clients through increased billing rates charged under our service contracts;
(ii) the loss to the TSA of document verification services, as described above;
(iii) higher overhead costs at JFK resulting from a shortage of manpower needed
to meet increased demand for services; (iv) the absence of a short-term contract
to provide security services to a national insurance company at multiple
domestic locations and (v) the loss of service fees under our service agreement
contracts that were discontinued during our fiscal year ended March 31, 2007.
General
and Administrative Expenses
Our
general and administrative expenses decreased by $54,258, or 1.6%, for the
three
months ended December 31, 2007 and increased by $403,314, or 4.2%, for the
nine
months ended December 31, 2007 compared with the same periods of the prior
year.
The decrease for the three month period resulted primarily from lower
professional fees (see below), partially offset by higher administrative payroll
costs associated mainly with expanded operations, including the acquisitions
noted above and additional investment in our sales and marketing group. The
increase for the nine month period resulted primarily from (i) higher
administrative payroll costs associated mainly with expanded operations,
including the acquisitions noted above, and additional investment in our sales
and marketing group; (ii) professional and related fees principally associated
with settlement of employment related claims; (iii) facility costs; (iv)
amortization costs associated with the acquisitions noted above; (v) stock
compensation costs and (vi) expenses associated with our (A) reporting,
compliance and other obligations under applicable securities laws, (B)
advertising and promotion including our participation in an annual security
industry conference program and (C) the initial listing of our common shares
on
the American Stock Exchange. The increases in our general and administrative
expenses were partially offset by lower professional fees of approximately
$530,000 and $1,646,000 respectively, related primarily to the expiration in
December 2006 of our consulting agreement with Giuliani Security & Safety
LLC.
Provision
for Doubtful Accounts
The
provision for doubtful accounts increased by $12,835 for the three months ended
December 31, 2007 and decreased $291,841 for the nine months ended December
31,
2007 compared with the same periods of the prior year. The increase in our
provision for doubtful accounts during the three month period reflects the
excess of bad debt provision expense accruals over recoveries. The decrease
in
our provision for doubtful accounts during the nine month period reflects our
recovery of approximately $378,000 related primarily to the stock that we
received under our claim related to the bankruptcy filing of Northwest Airlines.
We
periodically evaluate the requirement for providing for billing adjustments
and/or credit losses on our accounts receivable. We provide for billing
adjustments where our management determines that there is a likelihood of a
significant adjustment for disputed billings. Criteria used by management to
evaluate the adequacy of the allowance for doubtful accounts include, among
others, the creditworthiness of the customer, current trends, prior payment
performance, the age of the receivables and our overall historical loss
experience. Individual accounts are charged off against the allowance as
management deems them as uncollectible. We do not know if bad debts will
increase in future periods nor does our management believe that the decrease
during the nine months ended December 31, 2007 compared with the same period
of
the prior year is necessarily indicative of a trend.
Interest
Income
Interest
income which principally represents interest earned on: (i) cash balances and
(ii) trust funds for potential future workers’ compensation claims, decreased
for the three and nine months ended December 31, 2007 compared with the same
periods of the prior year primarily as a result of the loss of financing income
from our service agreement contracts which were discontinued during the fiscal
year ended March 31, 2007.
Interest
Expense
Interest
expense increased for the three and nine months ended December 31, 2007 by
$25,079 and $248,781, respectively, compared with the same periods of the prior
year. The increases for the three and nine month periods ended December 31,
2007
were due mainly to higher average outstanding borrowings under our commercial
revolving loan agreement, partially offset by lower weighted average interest
rates, during such periods.
Equipment
Dispositions
Equipment
dispositions are a result of the sale of vehicles, office equipment and security
equipment at prices above or below book value.
Gains
on
equipment dispositions are comparable between the three and nine months ended
December 31, 2007 and the same periods of the prior year.
Income
Taxes
Provision
for income taxes was $275,000 for the nine months ended December 31, 2007.
The
effective tax rate for the nine months ended December 31, 2007 was 15.0%. For
the three months ended December 31, 2007, there was no provision for income
taxes due mainly to the Company’s recognition of a portion of its deferred tax
assets. The difference between the United States statutory rate and the
effective tax rate is primarily due to the realization of deferred tax assets.
For the three and nine months ended December 31, 2006, there was no provision
for income taxes as taxable income was offset by the availability of net
operating loss carryforwards.
Liquidity
and Capital Resources
We
pay
employees and administrative service clients on a weekly basis, while customers
pay for services generally within 60 days after billing by us. In order to
fund
payroll and operations, we maintain a commercial revolving loan arrangement,
currently with CIT Group/Business Credit, Inc. (“CIT”).
Our
principal use of short-term borrowings is for carrying accounts
receivable. Our short-term borrowings have supported the increase in
accounts receivable associated with: (i) our ongoing expansion and organic
growth; (ii) the October 1, 2006 change in a majority of Delta Airline’s billing
and payment terms from monthly invoices prepaid in advance to weekly invoices
due in thirty (30) days; and (iii) our acquisition of Brown Security Industries,
Inc. on April 12, 2007 (see Note 4 of the Notes to the Condensed Consolidated
Financial Statements). We will continue to use our short-term borrowings
to support our working capital requirements.
We
believe that existing funds, cash generated from operations, and existing
sources of and access to financing are adequate to satisfy our working capital,
capital expenditure and debt service requirements for the foreseeable future.
However, we cannot assure you that this will be the case, and we may be required
to obtain additional financing to maintain and expand our existing operations
through the sale of our securities, an increase in our credit facilities or
otherwise. The failure by us to obtain such financing, if needed, would have
a
material adverse effect upon our business, financial condition and results
of
operations.
CIT
Revolving Loan
Until
March 21, 2006, we were parties to a financing agreement (the “Agreement”) with
CIT that had a term of three years ending December 12, 2006 and provided for
borrowings in an amount up to 85% of our eligible accounts receivable, but
in no
event more than $15,000,000. The Agreement also provided for advances against
unbilled revenue (primarily monthly invoiced accounts) although this benefit
was
offset by a reserve against all outstanding payroll checks. Borrowings under
the
Agreement bore interest at the prime rate, (as defined in the Agreement), plus
1.25% per annum on the greater of: (i) $5,000,000 or (ii) the average of the
net
balances owed by us to CIT in the loan account at the close of each day during
such month. Closing costs totaled $279,963 and are being amortized over the
three year life of the Agreement, as extended (see below).
On
March
22, 2006, we entered into an Amended and Restated Financing Agreement with
CIT
(the “Amended and Restated Agreement”), which provided for borrowings as noted
above, but in no event more than $12,000,000. The Amended and Restated Agreement
provided for a letter of credit sub-line in an aggregate amount of up to
$1,500,000. Letters of credit are subject to a two percent (2%) per annum fee
on
the face amount of each letter of credit. The Amended and Restated Agreement
provided that interest will be calculated on the outstanding principal balance
of the revolving loans at the prime rate, (as defined in the Amended and
Restated Agreement), plus .25% if our EBITDA, (as defined in the Amended and
Restated Agreement), is equal to or less than $500,000 for the most recently
completed fiscal quarter; otherwise, at the prime rate. For LIBOR loans,
interest will be calculated on the outstanding principal balance of the LIBOR
loans at the LIBOR rate, (as defined in the Amended and Restated Agreement),
plus 2.75% if our EBITDA is equal to or less than $500,000 for the most recently
completed fiscal quarter; otherwise, at the LIBOR rate plus 2.50%.
On
April
12, 2007, we entered into an amendment to the Amended and Restated Agreement
(“the Amended Agreement”). Pursuant to the Amended Agreement, the aggregate line
of credit was increased from $12,000,000 to $16,000,000, and we were provided
with a $2,400,000 acquisition advance to fund the cash requirements associated
with the acquisition of a security services business (see Note 4) The Amended
Agreement also provides for an extension of the maturity date of the Amended
Agreement to December 12, 2008, and for reductions in fees and availability
reserves and an increase in the letter of credit sub-line to an aggregate amount
of up to $3,000,000. The Amended Agreement provides that interest will be
calculated on the outstanding principal balance of the revolving loans at the
prime rate, (as defined in the Amended Agreement), less .25% and for LIBOR
loans, interest will be calculated on the outstanding principal balance of
the
LIBOR loans at the LIBOR rate, (as defined in the Amended Agreement), plus
2.0%.
As
of
December 31, 2007, the interest rates were 7.00% and 6.87% for revolving and
LIBOR loans, respectively. Closing costs for the Amended Agreement totaled
$158,472, including $125,000 payable to the lender, with $45,000 due at closing,
$40,000 due six months after closing and $40,000 due twelve months after
closing, and $33,472 in legal costs incurred in connection with the transaction.
Such costs are being amortized over the remaining life of the Amended Agreement.
At
December 31, 2007, we had borrowed $4,635,325 in revolving loans, $6,000,000
in
LIBOR loans and had a $70,000 letter of credit outstanding representing
approximately 73% of the maximum borrowing capacity under the Amended Agreement
based on our “eligible accounts receivable” (as defined under the Amended
Agreement) as of such date. However, as our business grows and produces new
receivables (as to which no assurance can be given), up to an additional
$5,294,675 could be available to borrow under the Amended
Agreement.
We
rely
on our revolving loan from CIT which contains a fixed charge covenant and
various other financial and non-financial covenants. If we breach a covenant,
CIT has the right to immediately request the repayment in full of all borrowings
under the Amended Agreement, unless CIT waives the breach. We were in compliance
with all covenants under the Amended Agreement during the nine months ended
December 31, 2007.
Other
Borrowings
During
the nine months ended December 31, 2007, we increased our short-term borrowings
principally to support the acquisition of a security services business in
California (see Note 4 of Notes to Condensed Consolidated Financial Statements).
These borrowings were partially offset by a cash refund associated with workers’
compensation loss fund payments for two prior policy year periods.
We
have
no additional lines of credit other than described above.
Investing
We
have
no present material commitments for capital expenditures.
Working
Capital
Working
capital increased by $445,657 to $6,959,320 as of December 31, 2007.
We
experienced checks issued in advance of deposits (defined as checks drawn in
advance of future deposits) of $1,714,215 at December 31, 2007, compared with
$1,760,155 at March 31, 2007. Cash balances and book overdrafts can fluctuate
materially from day to day depending on such factors as collections, timing
of
billing and payroll dates, and are covered via advances from the revolving
loan
as checks are presented for payment.
Outlook
Financial
Results
Our
future revenues will be largely dependent upon our ability to gain additional
revenue in the security and aviation services divisions at acceptable margins
while minimizing terminations of contracts with existing clients. The revenues
of our security services division has stabilized and has started to experience
both organic and transactional growth 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 our marketing and sales team and
branch managers work to sell new business and retain profitable contracts.
The
airline industry continues to increase its demand for services provided by
us.
However, our aviation services division is continually subject to government
regulation, which has adversely affected us in the past with the federalization
of the pre-board screening services and most recently with the ongoing
federalization of the document verification process at several of our domestic
airport locations.
Our
gross
profit margin was 13.6% of revenues for the nine months ended December 31,
2007
compared with 14.9% for the corresponding period last year. The decrease
resulted primarily from: (i) higher labor ratio margins for both our aviation
and security services divisions due mainly to increases in wages, salaries
and
related tax and benefits of our employees at rates in excess of the amount
that
we are willing to pass on to our clients through increased billing rates charged
under our service contracts; (ii) the loss of document verification services
to
the TSA, as previously discussed; (iii) increased overhead costs at JFK
resulting from a shortage of manpower needed to meet increased demand for
services; (iv) the absence of a short-term contract to provide security services
to a national insurance company at multiple domestic locations in the current
year period; and (v) the loss of service fees associated with our service
agreement contracts that were discontinued during the fiscal year ended March
31, 2007. Partially offsetting these decreases were savings achieved through
lower workers’ compensation expenses reflecting our on-going commitment to
implement loss prevention practices in the workplace, provide safety training
to
our employees and reduce the frequency and severity of job-related claims
incurred. We are actively pursuing recouping the aforementioned higher labor
and
related costs; however, competitive pressures in the security and aviation
services industries may prevent us from increasing our hourly billing rates
on
contract anniversary or renewal dates. We expect our gross profit margins to
average between 14.0% and 15.0% of revenue for fiscal year 2008 based on current
business conditions. 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 our cost structures, improved workers’ compensation
experience ratings, workflow process efficiencies associated with our newly
integrated financial software system and higher contributions from our
continuing new business development.
Our
cost
reduction program is expected to reduce certain of our operating and general
and
administrative expenses for both the remainder of fiscal 2008 and future
periods. Additional cost reduction opportunities are being pursued as they
are
determined.
Our
aviation services division represents approximately 62% of our total revenue,
and Delta, at annual billings of approximately $17,500,000, is the largest
customer of our aviation division representing, on an annual basis,
approximately 25% of the revenues from our aviation services division and 16%
of
our total revenues. Due to the existing limitations under the Amended Agreement
with CIT, we are limited to borrowing against Delta’s accounts receivable of up
to (but not exceeding) approximately $2,060,000, so long as such accounts do
not
remain unpaid for more than 60 days from the invoice date. In the event of
a
bankruptcy by another airline customer(s), our earnings and liquidity could
be
adversely affected to the extent of the accounts receivable with such
airline(s), as well as from lost future revenues if such airline(s) cease
operations or reduce their requirements from us.
As
of the
close of business on February 7, 2008, our cash availability was approximately
$5,635,000. We believe that existing funds, cash generated from operations,
and
existing sources of and access to financing are adequate to satisfy our working
capital, capital expenditure and debt service requirements for the foreseeable
future, barring any increase in reserves imposed by CIT. However, we cannot
assure you that this will be the case, and we may be required to obtain
additional financing to maintain and expand our existing operations through
the
sale of our securities, an increase in available borrowings under our existing
or new credit facilities or otherwise. We believe that existing funds, cash
generated from operations, and existing sources of and access to financing
are
adequate to satisfy our working capital, capital expenditure and debt service
requirements for the foreseeable future. As of the date of this quarterly report
and for the past several months, the financial markets generally, and the credit
markets in particular, are and have been experiencing substantial turbulence
and
turmoil, and extreme volatility, both in the United States and, increasingly,
in
other markets worldwide. The current market situation has resulted generally
in
substantial reductions in available loans to a broad spectrum of businesses,
increased scrutiny by lenders of the credit-worthiness of borrowers, more
restrictive covenants imposed by lenders upon borrowers under credit and similar
agreements and, in some cases, increased interest rates under commercial and
other loans. If we require additional financing at this or any other time,
we
cannot assure you that such financing will be available upon commercially
acceptable terms or at all. If we fail to obtain additional financing when
and
if required by us, our business, financial condition and results of operations
would be materially adversely affected.
Item
3.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
During
the nine months ended December 31, 2007, we did not hold a portfolio of
securities instruments for trading or speculative purposes. Periodically, we
hold securities instruments for other than trading purposes. Due to the
short-term nature of our investments, we believe that we have no material
exposure to changes in the fair value as a result of market
fluctuations.
We
are
exposed to market risk in connection with changes in interest rates, primarily
in connection with outstanding balances under our revolving line of credit
with
CIT, which was entered into for purposes other than trading purposes. Based
on
our average outstanding balances during the nine months ended December 31,
2007,
a 1% change in the prime and/or LIBOR lending rates could impact our financial
position and results of operations by approximately $25,000 over the remainder
of fiscal 2008. For additional information on the revolving line of credit
with
CIT, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity and Capital Resources.”
Reference
is made to Item 2 of Part I of this quarterly report, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Forward Looking
Statements.”
Item
4.
|
Controls
and Procedures
|
We
maintain “disclosure controls and procedures,” as such term is defined under
Exchange Act Rule 13a-15(e), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the Securities
and
Exchange Commission’s rules and forms, and that such information is accumulated
and communicated to our management, including our President and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures.
We
believe that a control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control system are met,
and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.
Our
disclosure controls and procedures are designed to provide reasonable assurance
of achieving their objectives and our President and Chief Financial Officer
has
concluded that such controls and procedures are effective at the reasonable
assurance level.
An
evaluation was performed under the supervision and with the participation of
management, including our President and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation and subject to the foregoing, the President
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2007. There have been no changes
in
our internal control over financial reporting that occurred during the third
quarter of fiscal 2008 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
There
have been no changes to our risk factors from those disclosed in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2007.
Exhibit
31.1 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
99.1 Press
Release dated February 12, 2008 announcing December 31, 2007 financial
results.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
COMMAND
SECURITY CORPORATION |
|
|
|
Date:
February 13, 2008 |
By: |
/s/
Barry I. Regenstein |
|
Barry
I. Regenstein
|
|
President
and
Chief Financial Officer |
|
(Principal Executive Officer and Principal Financial
Officer) |