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 September 30, 2008
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 or
organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
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 o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
number of outstanding shares of the registrant’s common stock as of November 6,
2008 was 10,757,216.
Table
of Contents
PART
I.
|
FINANCIAL INFORMATION
|
Page
|
|
|
|
Item
1.
|
Financial
Statements
Condensed
Consolidated Statements of Income -
three
and six months ended September 30, 2008
and
2007 (unaudited)
|
3
|
|
|
|
|
Condensed
Consolidated Balance Sheets -
September
30, 2008 (unaudited) and March 31, 2008
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Changes in Stockholders' Equity -
six
months ended September 30, 2008 and 2007
(unaudited)
|
5
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows -
six
months ended September 30, 2008 and 2007
(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
4.
|
Submission
of Matters to a Vote of Security Holders
|
22
|
|
|
|
Item
6.
|
Exhibits
|
23
|
|
|
|
SIGNATURES
|
24
|
|
|
|
Exhibit
31.1
|
Certification
of Edward S. Fleury
|
25
|
Exhibit
31.2
|
Certification
of Barry I. Regenstein
|
26
|
Exhibit
32.1
|
§1350
Certification of Edward S. Fleury
|
27
|
Exhibit
32.2
|
§1350
Certification of Barry I. Regenstein
|
28
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements
COMMAND
SECURITY CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
September
30
|
|
September
30
|
|
September
30
|
|
September
30
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
33,706,141
|
|
$
|
30,613,782
|
|
$
|
65,655,097
|
|
$
|
58,697,670
|
|
Cost
of revenues
|
|
|
28,649,796
|
|
|
26,224,509
|
|
|
55,993,753
|
|
|
50,730,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
5,056,345
|
|
|
4,389,273
|
|
|
9,661,344
|
|
|
7,966,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
3,784,266
|
|
|
3,474,701
|
|
|
7,265,004
|
|
|
6,564,657
|
|
Provision
(recoveries) for doubtful accounts, net
|
|
|
71,131
|
|
|
75,000
|
|
|
152,665
|
|
|
(218,760
|
)
|
|
|
|
3,855,397
|
|
|
3,549,701
|
|
|
7,417,669
|
|
|
6,345,897
|
|
Operating
income
|
|
|
1,200,948
|
|
|
839,572
|
|
|
2,243,675
|
|
|
1,621,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
8,146
|
|
|
17,564
|
|
|
15,793
|
|
|
47,842
|
|
Interest
expense
|
|
|
(129,830
|
)
|
|
(201,806
|
)
|
|
(256,881
|
)
|
|
(430,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of available for-sale securities
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
50,007
|
|
Equipment
dispositions
|
|
|
2,200
|
|
|
488
|
|
|
8,812
|
|
|
888
|
|
Income
before income taxes
|
|
|
1,081,464
|
|
|
655,818
|
|
|
2,011,399
|
|
|
1,289,683
|
|
Provision
for income taxes
|
|
|
475,000
|
|
|
100,000
|
|
|
855,000
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
606,464
|
|
$
|
555,818
|
|
$
|
1,156,399
|
|
$
|
1,014,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.06
|
|
$
|
.05
|
|
$
|
.11
|
|
$
|
.09
|
|
Diluted
|
|
$
|
.05
|
|
$
|
.05
|
|
$
|
.10
|
|
$
|
.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,757,216
|
|
|
10,714,679
|
|
|
10,757,216
|
|
|
10,714,679
|
|
Diluted
|
|
|
11,401,752
|
|
|
11,273,788
|
|
|
11,410,941
|
|
|
11,287,682
|
|
See
accompanying notes to condensed consolidated financial
statements
COMMAND SECURITY CORPORATION
CONDENSED CONSOLIDATED
BALANCE SHEETS
(Unaudited)
ASSETS
|
|
September
30,
|
|
March
31,
|
|
|
|
2008
|
|
2008
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
234,179
|
|
$
|
146,782
|
|
Accounts
receivable, net of allowance for
|
|
|
|
|
|
|
|
doubtful
accounts of $1,062,668 and $1,020,442, respectively
|
|
|
22,378,144
|
|
|
20,097,835
|
|
Prepaid
expenses
|
|
|
2,352,425
|
|
|
2,680,751
|
|
Other
assets
|
|
|
976,726
|
|
|
1,910,163
|
|
Total
current assets
|
|
|
25,941,474
|
|
|
24,835,531
|
|
|
|
|
|
|
|
|
|
Furniture
and equipment at cost, net
|
|
|
696,873
|
|
|
559,665
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
5,011,650
|
|
|
4,049,273
|
|
Restricted
cash
|
|
|
129,310
|
|
|
302,736
|
|
Other
assets
|
|
|
3,194,028
|
|
|
3,039,244
|
|
Total
other assets
|
|
|
8,334,988
|
|
|
7,391,253
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
34,973,335
|
|
$
|
32,786,449
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Checks
issued in advance of deposits
|
|
$
|
1,197,364
|
|
$
|
1,962,314
|
|
Current
maturities of long-term debt
|
|
|
703
|
|
|
5,901
|
|
Current
maturities of obligations under capital leases
|
|
|
67,159
|
|
|
17,100
|
|
Short-term
borrowings
|
|
|
9,601,657
|
|
|
8,752,433
|
|
Accounts
payable
|
|
|
1,180,913
|
|
|
1,025,963
|
|
Accrued
expenses and other liabilities
|
|
|
7,471,344
|
|
|
6,974,784
|
|
Total
current liabilities
|
|
|
19,519,140
|
|
|
18,738,495
|
|
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
|
741,131
|
|
|
670,617
|
|
Obligations
under capital leases, due after one year
|
|
|
132,560
|
|
|
17,588
|
|
Total
liabilities
|
|
|
20,392,831
|
|
|
19,426,700
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, Series A, $.0001 par value
|
|
|
--
|
|
|
--
|
|
Common
stock, $.0001 par value
|
|
|
1,076
|
|
|
1,076
|
|
Accumulated
other comprehensive loss
|
|
|
(239,144
|
)
|
|
(240,270
|
)
|
Additional
paid-in capital
|
|
|
15,988,177
|
|
|
15,924,947
|
|
Accumulated
deficit
|
|
|
(1,169,605
|
)
|
|
(2,326,004
|
)
|
Total
stockholders’ equity
|
|
|
14,580,504
|
|
|
13,359,749
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
34,973,335
|
|
$
|
32,786,449
|
|
See
accompanying notes to condensed consolidated financial
statements
COMMAND SECURITY CORPORATION
CONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
202,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss) (a)
|
|
|
|
|
|
|
|
|
(85,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income - six months ended September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,014,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2007
|
|
|
--
|
|
|
1,075
|
|
|
(72,701
|
)
|
|
15,877,250
|
|
|
(3,784,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
|
|
|
1
|
|
|
|
|
|
10,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
37,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss) (a)
|
|
|
|
|
|
|
|
|
(167,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income - six months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,458,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2008
|
|
|
--
|
|
|
1,076
|
|
|
(240,270
|
)
|
|
15,924,947
|
|
|
(2,326,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
63,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss) (a)
|
|
|
|
|
|
|
|
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income - six months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,156,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2008
|
|
$
|
--
|
|
|
1,076
|
|
$
|
(239,144
|
)
|
$
|
15,988,177
|
|
$
|
(1,169,605
|
)
|
(a) |
-
Represents unrealized gain (loss) on marketable
securities.
|
See
accompanying notes to condensed consolidated financial
statements
COMMAND SECURITY CORPORATION
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six
months ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,156,399
|
|
$
|
1,014,683
|
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
cash
provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
367,253
|
|
|
337,227
|
|
Provision
(recoveries) for doubtful accounts, net
|
|
|
42,446
|
|
|
(218,760
|
)
|
Gain
on equipment dispositions
|
|
|
(8,812
|
)
|
|
(888
|
)
|
Gain
on sale of investments
|
|
|
--
|
|
|
(50,007
|
)
|
Stock
based compensation costs
|
|
|
63,230
|
|
|
202,450
|
|
Insurance
reserves
|
|
|
70,514
|
|
|
328,626
|
|
Deferred
income taxes
|
|
|
(130,000
|
)
|
|
(37,000
|
)
|
Increase
in receivables, prepaid expenses
|
|
|
|
|
|
|
|
and
other current assets
|
|
|
(911,225
|
)
|
|
(1,096,217
|
)
|
Increase
in accounts payable and other current liabilities
|
|
|
651,511
|
|
|
1,090,057
|
|
Net
cash provided by operating activities
|
|
|
1,301,316
|
|
|
1,570,171
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of equipment
|
|
|
(76,227
|
)
|
|
(97,118
|
)
|
Proceeds
from equipment dispositions
|
|
|
8,812
|
|
|
888
|
|
Acquisition
of businesses
|
|
|
(1,212,875
|
)
|
|
(1,768,096
|
)
|
Proceeds
from sale of investments
|
|
|
--
|
|
|
149,096
|
|
Net
cash used in investing activities
|
|
|
(1,280,290
|
)
|
|
(1,715,230
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
advances on line-of-credit
|
|
|
849,224
|
|
|
206,923
|
|
(Decrease)
increase in checks issued in advance of deposits
|
|
|
(764,950
|
)
|
|
508,112
|
|
Debt
issuance costs
|
|
|
--
|
|
|
(73,472
|
)
|
Principal
payments on other borrowings
|
|
|
(5,198
|
)
|
|
(122,780
|
)
|
Principal
payments on capital lease obligations
|
|
|
(12,705
|
)
|
|
(8,486
|
)
|
Net
cash provided by financing activities
|
|
|
66,371
|
|
|
510,297
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
87,397
|
|
|
365,238
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
146,782
|
|
|
220,040
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
234,179
|
|
$
|
585,278
|
|
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 six months ended September 30 for:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
254,402
|
|
$
|
430,218
|
|
Income
taxes
|
|
|
305,630
|
|
|
453,923
|
|
Supplemental Schedule of Non-Cash Investing and Financing Activities
During
the six months ended September 30, 2008, we purchased security equipment
with
lease financing of $177,736. This amount has been excluded from the purchases
of
equipment on the condensed consolidated statements of cash flows
presented.
During
the six months ended September 30, 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 presented.
During
the six months ended September 30, 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 consolidated statements of income.
This
amount has been excluded from investing activities on the condensed consolidated
statements of cash flows presented.
See
accompanying notes to condensed consolidated financial
statements
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
The
accompanying condensed consolidated financial statements presented herein
have
not been audited, and have been prepared in accordance with the instructions
to
Form 10-Q which do not include all of the information and note disclosures
required by generally accepted accounting principles in the United States.
These
financial statements should be read in conjunction with our consolidated
financial statements and notes thereto as of and for the fiscal year ended
March
31, 2008. In this discussion, the words “Company,” “we,” “our,” “us” and terms
of similar import should be deemed to refer to Command Security
Corporation.
The
condensed consolidated financial statements for the interim period shown
in this
report are not necessarily indicative of our results to be expected for the
fiscal year ending March 31, 2009 or for any subsequent period. In the opinion
of our management, the accompanying condensed consolidated financial statements
reflect all adjustments, consisting of only normal recurring adjustments,
considered necessary for a fair presentation of the financial statements
included in this quarterly report. All such adjustments are of a normal
recurring nature.
1. |
Recent
Accounting Pronouncements
|
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157 "Fair Value Measurements"
("SFAS No. 157"), which defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS No.
157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In February
2008, the FASB issued Staff Position (“FSP”) 157-2, Effective Date of FASB
Statement No. 157. This FSP delays the effective date of FAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The adoption of SFAS No.157 did not have a material impact
on our consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159 "The Fair Value Option for Financial Assets and Financial Liabilities"
("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure certain
financial assets and financial liabilities at fair value. The stated objective
of SFAS No. 159 is to improve financial reporting by providing entities with
the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge
accounting provisions. SFAS No. 159 is effective for financial statements
issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The adoption of SFAS No.159 did not have a material impact
on our consolidated financial statements.
In
December 2007, the FASB issued SFAS 141 (Revised 2007), "Business
Combinations." SFAS 141(R) will significantly change the accounting for business
combinations. Under SFAS 141(R), an acquiring entity will be required to
recognize, with limited exceptions, all the assets acquired and liabilities
assumed in a transaction at the acquisition-date fair value. SFAS 141(R)
will
change the accounting treatment for certain specific acquisition-related
items
including, among other items: (1) expensing acquisition-related costs as
incurred, (2) valuing noncontrolling interests at fair value at the
acquisition date, and (3) expensing restructuring costs associated with an
acquired business. SFAS 141(R) also includes a substantial number of new
disclosure requirements. SFAS 141(R) is to be applied prospectively to business
combinations for which the acquisition date is on or after the beginning
of the
first annual reporting period beginning on or
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
after
December 15, 2008. The Company will adopt the provisions of SFAS 141(R) as
of April 1, 2009.
2. |
Short-Term Borrowings:
|
Until
March 21, 2006, we were parties to a financing agreement (the “Agreement”) with
CIT Group/Business Credit, Inc. (“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, as defined in the Agreement, but in no event
more
than $15,000,000. The Agreement also provided for advances against unbilled
revenues (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 the applicable month for which interest was calculated. Costs to close
the loan 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. Under the Amended and Restated Agreement, letters of credit were
subject to a two percent (2%) per annum fee on the face amount of each letter
of
credit. The Amended and Restated Agreement provided for interest to 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) was equal to or
less
than $500,000 for the most recently completed fiscal quarter; otherwise,
the
outstanding principal balance bore interest at the prime rate. For LIBOR
loans,
interest was 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 was equal to or less than $500,000 for the most recently completed
fiscal quarter; otherwise, the outstanding principal balance bore interest
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”). Under the Amended Agreement, the aggregate amount
that we could borrow from CIT under the credit facility was increased from
$12,000,000 to $16,000,000, and CIT also provided us with a $2,400,000
acquisition advance to fund the cash requirements associated with the
acquisition of a security services business. Further, the Amended Agreement
extended the maturity date of this credit facility to December 12, 2008,
reduced
certain fees and availability reserves and increased the letter of credit
sub-line to an aggregate amount of up to $3,000,000. Under the Amended
Agreement, letters of credit are subject to a one and three-quarters percent
(1.75%) per annum fee on the face amount of each letter of credit. The Amended
Agreement provides that interest is calculated on the outstanding principal
balance of the revolving loans at the prime rate (as defined in the Amended
Agreement) less .25%. 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%.
On
October 10, 2008, we amended the Amended Agreement to extend the maturity
date
of the CIT credit facility to December 31, 2008 and to reduce the written
notice
period required to terminate the Amended Agreement from 60 days to 30
days.
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
As
of
September 30, 2008, the interest rate for revolving loans was 4.75%. 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. Legal costs incurred in connection
with the transaction were $33,472. All of these costs are being amortized
over
the remaining life of the Amended Agreement.
At
September 30, 2008, we had borrowed $9,601,657 in revolving loans and had
$115,000 of letters of credit outstanding representing approximately 68%
of our
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 the amount of eligible accounts receivable
increases (as to which no assurance can be given), up to an additional
$6,283,343 could be available to borrow under the Amended
Agreement.
We
rely
on our borrowings from CIT under our credit facility. The agreements that
relate
to this facility contain various other financial and non-financial covenants,
including a fixed charge covenant. If we breach a covenant, CIT has the right
to
immediately request the repayment in full of all borrowings under the Amended
Agreement. For the six months ended September 30, 2008, we were in compliance
with all covenants under the Amended Agreement.
Other
assets consist of the following:
|
|
September
30,
|
|
March
31,
|
|
|
|
2008
|
|
2008
|
|
|
|
|
|
|
|
|
|
Workers’
compensation insurance
|
|
$
|
824,252
|
|
$
|
1,622,489
|
|
Other
receivables
|
|
|
--
|
|
|
138,413
|
|
Security
deposits
|
|
|
236,953
|
|
|
247,122
|
|
Deferred
tax asset
|
|
|
2,735,253
|
|
|
2,605,253
|
|
Other
|
|
|
374,296
|
|
|
336,130
|
|
|
|
|
4,170,754
|
|
|
4,949,407
|
|
Current
portion
|
|
|
(976,726
|
)
|
|
(1,910,163
|
)
|
|
|
|
|
|
|
|
|
Total
non-current portion
|
|
$
|
3,194,028
|
|
$
|
3,039,244
|
|
4. |
Accrued
Expenses and Other Liabilities:
|
Accrued
expenses and other liabilities consist of the following:
|
|
September
30,
|
|
March
31,
|
|
|
|
2008
|
|
2008
|
|
|
|
|
|
|
|
|
|
Payroll
and related expenses
|
|
$
|
3,810,715
|
|
$
|
4,048,102
|
|
Taxes
and fees payable
|
|
|
3,261,619
|
|
|
2,139,846
|
|
Accrued
interest payable
|
|
|
43,127
|
|
|
46,659
|
|
Other
|
|
|
355,883
|
|
|
740,177
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,471,344
|
|
$
|
6,974,784
|
|
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In
September 2008, we completed the acquisition of substantially all of the
assets
of Eagle International Group, LLC (“EIG”) and International Security &
Safety Group, LLC (“ISSG”), providers of security services primarily in Broward
and Palm Beach counties in Florida. EIG and ISSG have an aggregate of
approximately 200 employees and estimated annual sales of approximately
$5,000,000 in 2008. The combined cash purchase price for these businesses
was
approximately $1,200,000, subject to reduction in the event that certain
revenue
targets are not met.
We
have
an insurance policy covering workers’ compensation claims in states where 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 $375,106 and $333,967, and $911,938 and $910,675, for
the
three and six months ended September 30, 2008 and 2007, 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 $7,000,000
per
occurrence for claims related to our non-aviation business with an additional
excess umbrella policy of $5,000,000. On the aviation related business, we
have
a policy with a $30,000,000 limit per occurrence. 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 accrued amounts. 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 our common shares that have not been issued,
but that may be issued upon the exercise or conversion, as the case may be,
of
rights or options to acquire such common shares, is excluded from the
calculation for basic earnings per share. Diluted earnings per share reflects
the additional dilution that would result from the issuance of our common
shares
if such rights or options were exercised or converted, as the case may be,
and
is presented for the three and six months ended September 30, 2008 and
2007.
COMMAND SECURITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The
nature of our business is such that there is a significant volume of routine
claims and lawsuits that are issued against us, 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 that are pending 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, 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.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our condensed
consolidated financial statements and the related notes contained in this
quarterly report.
Forward
Looking Statements
Certain
of our statements contained in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations section of this quarterly report
and, in particular, those under the heading “Outlook,” contain forward-looking
statements. The words “may,” “will,” “should,” “expect,” “anticipate,”
“believe,” “plans,” “intend” and “continue,” or the negative of these words or
other variations on these words or comparable terminology typically identify
such statements. These statements are based on our management’s current
expectations, estimates, forecasts and projections about the industry in
which
we operate generally, and other beliefs of and assumptions made by our
management, some or many of which may be incorrect. In addition, other written
or verbal 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. Moreover, we believe
that the current business environment is more challenging and difficult than
it
has been in the past several years, if not longer. Many of our customers,
particularly those that are primarily involved in the aviation industry,
are
currently experiencing substantial financial and business difficulties as
a
result of a generally poor economic environment, and the relatively high
price
of oil and the corresponding substantial increase in their operating costs
in
particular. If the business of any substantial customer or group of customers
fails or is materially and adversely affected by these factors, they may
seek to
substantially reduce their expenditures for our services. These factors could
cause our actual results to differ materially from the forward-looking
statements that we have made in this quarterly report. Further, other factors,
including, but not limited to, those relating to the shortage of qualified
labor, competitive conditions, and adverse changes in economic conditions
of the
various markets in which we operate, could adversely impact our business,
operations and financial condition and cause our actual results to fail to
meet
our expectations, as expressed in the forward-looking statements that we
have
made in this quarterly report. 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 the
Securities and Exchange Commission with respect to our fiscal year ended
March
31, 2008 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 quarterly 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 the significant estimates
and
judgments used in the preparation of our financial statements. 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 its wholly-owned domestic subsidiaries. All significant
intercompany accounts and transactions have been eliminated in the condensed
consolidated financial statements.
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenue and expenses during the periods reported. Estimates
are
used when accounting for certain items such as allowances for doubtful accounts,
depreciation and amortization, income tax assets and insurance reserves.
Estimates are based on historical experience, where applicable or other
assumptions that management believes are reasonable under the circumstances.
Due
to the inherent uncertainty involved in making estimates, actual results
may
differ from those estimates under different assumptions or
conditions.
Revenue
Recognition
We
record
revenues as services are provided to our customers. Revenues are generated
primarily from our aviation and security services, which we typically bill
at
hourly rates. These rates may vary depending on base, overtime and holiday
time
worked.
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
of our customers. 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 our 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 replaced 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 a non-cash charge of $63,230 and $202,450
for
stock compensation cost for the six months ended September 30, 2008 and 2007,
respectively. Such non-cash charge would have been the same under the provisions
of SFAS 148.
Results
of Operations
Revenues
Our
revenues increased $3,092,359 and $6,957,427, or 10.1% and 11.9%, for the
three
and six months ended September 30, 2008, respectively, compared with the
corresponding periods of the prior year. The increases in revenues for the
three
and six month periods ended September 30, 2008 were due mainly to: (i) expanded
security services provided to new and existing customers, including a major
medical center, a New York based hospital center, a major international
commercial bank, a large grocery market distribution center in California
and a
company that provides merchandising and distribution services to a major
grocery
retailer in New Jersey, resulting in additional aggregate revenues of
approximately $2,800,000 and $5,600,000, respectively; (ii) the acquisitions
of
security services businesses in Florida (September 2008) and Maryland (January
2008) that generated aggregate revenues of approximately $720,000 and
$1,200,000, respectively; and (iii) expanded aviation services to new and
existing customers at our terminal operations at Los Angeles International
Airport in California and John F. Kennedy International Airport and LaGuardia
Airport in New York, that generated additional aggregate revenues of
approximately $1,100,000 and $2,800,000, respectively. The increases in revenues
were partially offset by: (i) the loss of revenues at seven domestic airport
locations resulting from a change in government regulations that requires
the
Transportation Security Administration (“TSA”) to provide certain document
verification services that we formerly provided at these airports of
approximately $970,000 and $1,900,000, respectively; and (ii) several of
our
airline customers beginning to reduce capacity within their systems which
resulted in reductions of service hours that we provided to such carriers.
Gross
Profit
Our
gross
profit increased by $667,072 and $1,694,434, or 15.2% and 21.3%, for the
three
and six months ended September 30, 2008, respectively, compared with the
corresponding periods of the prior year. The increases in gross profit for
the
three and six month periods resulted primarily from: (i) our acquisition
of a
Maryland-based security services businesses in January 2008; (ii) expanded
security and aviation services provided to new and existing customers as
described above; and (iii) lower labor ratio margins primarily for our security
services division. The increases in our gross profit were partially offset
by
the loss to the TSA of certain document verification services and airline
capacity reductions, described above.
General
and Administrative Expenses
Our
general and administrative expenses increased by $309,565 and $700,347, or
8.9%
and 10.7%, for the three and six months ended September 30, 2008, respectively,
compared with the corresponding periods of the prior year. The increases
in
general and administrative expenses resulted primarily from higher: (i)
administrative payroll and related costs of approximately $335,000 and $685,000,
respectively, associated primarily with expanded operations, including the
acquisitions in Florida and Maryland noted above, and additional investment
in
our sales and marketing group; and (ii) professional and related fees. The
increase in our general and administrative expenses for the three and six
months
ended September 30, 2008 was partially offset by reductions of approximately
$68,000 and $200,000, respectively, resulting mainly from: (i) lower stock
compensation costs; and (ii) the absence in the current year period of public
company expenses associated with our initial listing of our common shares
on the
American Stock Exchange in the prior year.
Provision
for Doubtful Accounts
The
provision for doubtful accounts decreased by $3,869 for the three months
ended
September 30, 2008 and increased $371,425 for the six months ended September
30,
2008 compared with the corresponding periods of the prior year. The increase
in
our provision for doubtful accounts for the six months ended September 30,
2008
reflects the recovery of approximately $369,000 attributable to the value
of the
stock that we received under our claim related to the bankruptcy filing of
Northwest Airlines in the corresponding period of the prior year.
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 increase
during the six months ended September 30, 2008 compared with the corresponding
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 six months ended September 30, 2008 compared with the same
periods of the prior year as a result of lower trust fund balances due to
favorable trending for potential future workers’ compensation claims, as well as
a reduction in the rate at which interest accrues on such balances.
Interest
Expense
Interest
expense decreased by $71,976 and $173,186 for the three and six months ended
September 30, 2008, respectively, compared with the corresponding periods
of the
prior year. The decreases for the three and six month periods ended September
30, 2008 were due mainly to lower weighted average interest rates under our
commercial revolving loan agreement.
Equipment
Dispositions
Equipment
dispositions are a result of the sale of vehicles, office equipment and security
equipment at prices above or below book value.
The
gains
on equipment dispositions for the three and six months ended September 30,
2008
were primarily due to the disposition of Company vehicles at amounts in excess
of their respective book values.
Provision
for income taxes
Provision
for income taxes increased by $375,000 and $580,000 for the three and six
months
ended September 30, 2008, respectively, compared with the corresponding periods
of the prior year due mainly to increases in our pre-tax earnings and the
recognition of deferred tax assets in the prior year periods.
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 we bill them. We maintain
a
commercial revolving loan arrangement, currently with CIT Group/Business
Credit,
Inc. (“CIT”), to fund our payroll and operations.
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 acquisitions of Eagle International
Group,
LLC and International Security & Safety Group, LLC, Expert Security
Services, Inc. and Brown Security Industries, Inc. on September 12, 2008,
January 1, 2008 and April 12, 2007, respectively. We intend to continue to
use our short-term borrowings to support our working capital
requirements.
We
believe that our 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,
except as described below under the heading “CIT Revolving Loan.” However, we
cannot assure you that this will be the case, and we may be required to obtain
alternative or 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, as
defined in the Agreement, but in no event more than $15,000,000. The Agreement
also provided for advances against unbilled revenues (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 the applicable month for which interest
was calculated. Costs to close the loan 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. Under the Amended and Restated Agreement, letters of credit were
subject to a two percent (2%) per annum fee on the face amount of each letter
of
credit. The Amended and Restated Agreement provided for interest to 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) was equal to or
less
than $500,000 for the most recently completed fiscal quarter; otherwise,
the
outstanding principal balance bore interest at the prime rate. For LIBOR
loans,
interest was 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 was equal to or less than $500,000 for the most recently completed
fiscal quarter; otherwise, the outstanding principal balance bore interest
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”). Under the Amended Agreement, the aggregate amount
that we could borrow from CIT under the credit facility was increased from
$12,000,000 to $16,000,000, and CIT also provided us with a $2,400,000
acquisition advance to fund the cash requirements associated with the
acquisition of a security services business. Further, the Amended Agreement
extended the maturity date of this credit facility to December 12, 2008,
reduced
certain fees and availability reserves and increased the letter of credit
sub-line to an aggregate amount of up to $3,000,000. Under the Amended
Agreement, letters of credit are subject to a one and three-quarters percent
(1.75%) per annum fee on the face amount of each letter of credit. The Amended
Agreement provides that interest is calculated on the outstanding principal
balance of the revolving loans at the prime rate (as defined in the Amended
Agreement) less .25%. For LIBOR loans, interest is calculated on the outstanding
principal balance of the LIBOR loans at the LIBOR rate (as defined in the
Amended Agreement) plus 2.0%.
On
October 10, 2008, we amended the Amended Agreement to extend the maturity
date
of the CIT credit facility to December 31, 2008 and to reduce the written
notice
period required to terminate the Amended Agreement from 60 days to 30
days.
As
of
September 30, 2008, the interest rate for revolving loans was 4.75%. Closing
costs for the Amended Agreement totaled $158,472, including $125,000 payable
to
CIT, with $45,000 due at closing, $40,000 due six months after closing and
$40,000 due twelve months after closing. Legal costs incurred in connection
with
the transaction were $33,472. All of these costs are being amortized over
the
remaining life of the Amended Agreement.
At
September 30, 2008, we had borrowed $9,601,657 in revolving loans and had
$115,000 of letters of credit outstanding representing approximately 68%
of our
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 the amount of eligible accounts receivable
increases (as to which no assurance can be given), up to an additional
$6,283,343 could be available to borrow under the Amended
Agreement.
We
rely
on our borrowings from CIT under our credit facility. The agreements that
relate
to this facility contain various other financial and non-financial covenants,
including a fixed charge covenant. If we breach a covenant, CIT has the right
to
immediately request the repayment in full of all borrowings under the Amended
Agreement. For the six months ended September 30, 2008, we were in compliance
with all covenants under the Amended Agreement.
As
described above, the CIT credit facility is currently scheduled to mature
on
December 31, 2008. However, CIT has provided us with a written offer to extend
the maturity date of our existing credit facility with CIT from December
31,
2008 to March 31, 2009 (subject to the payment by us of certain fees to CIT
and
an increase in the applicable interest rates). We are currently evaluating
preliminary terms and conditions that several financial institutions have
proposed to us for a replacement credit facility, each of which provides
for
borrowings by us of up to $20,000,000 in the aggregate. We expect to make
a
determination over the next several weeks of whether to accept CIT’s offer to
extend the maturity date of the existing credit facility as we approach the
current maturity date of December 31, 2008, based on the status of our
discussions with one or more of these financial institutions and our view
at the
time as to whether a replacement credit facility can be finalized prior to
the
current maturity date of the existing credit facility with CIT. Although
we
believe that we have made substantial progress to date in our discussions
and
negotiations with several financial institutions regarding a replacement
credit
facility, we cannot assure you that we will be able to successfully negotiate
and complete a replacement credit facility with another financial institution
prior to the expiration of the existing CIT credit facility on favorable
terms,
or at all. If we do not obtain a replacement credit facility that provides
us
with sufficient available financing prior to the expiration of our existing
credit facility with CIT, our business, financial condition and results of
operations would be materially and adversely affected.
Other
Borrowings
During
the six months ended September 30, 2008, we increased our short-term borrowings
principally to support higher accounts receivable associated with our ongoing
expansion and organic growth.
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 $325,298 to $6,422,334 as of September 30, 2008, from
$6,097,036 as of March 31, 2008. We experienced checks issued in advance
of
deposits (defined as checks drawn in advance of future deposits) of $1,197,364
at September 30, 2008, compared with $1,962,314 at March 31, 2008. 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
Future
revenues will be largely dependent upon our ability to gain additional business
from new and existing customers in our security and aviation services divisions
at acceptable margins while minimizing terminations of contracts with existing
customers. The revenues of our security services division has started to
experience both organic and transactional growth over recent quarters 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 third party services
provided by us;
however, several of our airline customers have begun to reduce capacity within
their system which results in reductions of service hours provided by us
to such
carriers. Additionally, 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 increased during the six months ended September 30, 2008 to
14.7%
of revenues compared with 13.6% for the corresponding period last year. The
increase resulted primarily from: (i) our acquisition of a Maryland-based
security services business in January 2008; (ii) expanded security and aviation
services provided to new and existing customers as described above; and (iii)
lower labor ratio margins primarily for our security services division. We
expect our gross profit margins to average between 14.0% and 15.0% of revenue
for fiscal year 2009 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 2009 and future
periods. Additional cost reduction opportunities are being pursued as they
are
determined.
The
aviation services division represents approximately 59% of our total revenue,
and Delta, at annual billings of approximately $18,000,000, is the largest
customer of our aviation division representing, on an annual basis,
approximately 25% of the revenues from our aviation services division and
15% 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 November 6, 2008, our cash availability was approximately
$6,200,000, which is believed to be sufficient to meet our needs for the
foreseeable future barring any increase in reserves imposed by CIT. We believe
that our 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, except
as
described above under the heading “Liquidity and Capital Resources - CIT
Revolving Loan.” However, we cannot assure you that this will be the case, and
we may be required to obtain alternative or additional financing to maintain
and
expand our existing operations through the sale of our securities, an increase
in our credit facilities or otherwise. 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 alternative or 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 six months ended September 30, 2008, we did not hold a portfolio of
securities instruments for either 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 six months ended September 30,
2008,
a 1% change in the prime and/or LIBOR lending rates could impact our financial
position and results of operations by approximately $50,000 over the remainder
of our fiscal year ending March 31, 2009. 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
Rule 13a-15(e) of the Securities Exchange Act of 1934, 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
Chief Executive Officer 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 Chief Executive Officer and Chief
Financial Officer have 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 Chief Executive Officer 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 Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of September 30, 2008. There have
been
no changes in our internal control over financial reporting that occurred
during
the second quarter of fiscal 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item 1A.
Risk
Factors
Except
as
described below, there have been no changes to our risk factors from those
disclosed in our Annual Report on Form 10-K for our fiscal year ended March
31,
2008.
Expiration
of Existing Credit Facility; Failure to Obtain Replacement Credit Facility
Our
payroll and operations are being financed in part by a commercial revolving
loan
arrangement and letter of credit sub-line with CIT Group/Business Credit,
Inc.
(“CIT”). As described above, the CIT credit facility is currently scheduled to
mature on December 31, 2008. However, CIT has provided us with a written
offer
to extend the maturity date of our existing credit facility with CIT from
December 31, 2008 to March 31, 2009 (subject to the payment by us of certain
fees to CIT and an increase in the applicable interest rates). We are currently
evaluating preliminary terms and conditions that several financial institutions
have proposed to us for a replacement credit facility, each of which provides
for borrowings by us of up to $20,000,000 in the aggregate. We expect to
make a
determination over the next several weeks of whether to accept CIT’s offer to
extend the maturity date of the existing credit facility as we approach the
current maturity date of December 31, 2008, based on the status of our
discussions with one or more of these financial institutions and our view
at
that time as to whether a replacement credit facility can be finalized prior
to
the current maturity date of the existing credit facility with CIT. We cannot
assure you that we will be able to successfully negotiate and complete a
replacement credit facility with another financial institution prior to the
expiration of the existing CIT credit facility on favorable terms, or at
all. If
we do not obtain a replacement credit facility that provides us with sufficient
available financing prior to the expiration of our existing credit facility
with
CIT, our business, financial condition and results of operations would be
materially and adversely affected.
Item
4.
Submission
of Matters to a Vote of Security Holders
On
September 18, 2008, an annual meeting of our shareholders was held to: (i)
elect
three 3 directors to serve on Class II of our Board of Directors; (ii) ratify
the selection of D’Arcangelo & Co., LLP as our independent accountants for
the fiscal year ending March 31, 2009 and (iii) approve an amendment to our
Certificate of Incorporation to increase the number of authorized shares
of
common stock from 20,000,000 shares to 50,000,000 shares. At this meeting,
Thomas P. Kikis, Robert S. Ellin and Barry I. Regenstein were elected as
members
of Class II of our Board of Directors to hold office until the second succeeding
annual meeting of our shareholders and until their successors have been elected
and qualified, the selection of D’Arcangelo & Co., LLP as our independent
public accountants for the fiscal year ending March 31, 2009 was ratified
and
the amendment to our Certificate of Incorporation to increase the number
of
authorized shares of our common stock to 50,000,000 shares was approved.
Martin
C. Blake, Jr., Peter T. Kikis and Laurence A. Levy continued to hold office
as
members of Class I of our Board of Directors until our next annual meeting
of
shareholders and until their successors have been elected and qualified.
The
votes
were cast by our shareholders as follows:
|
|
For
|
|
Against
|
|
Abstain
|
|
Broker Non-Votes
|
|
|
|
|
|
|
|
|
|
|
|
Election
of
Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
P. Kikis
|
|
|
9,942,691
|
|
|
|
|
|
14,251
|
|
|
|
|
Robert
S. Ellin
|
|
|
9,871,619
|
|
|
|
|
|
85,251
|
|
|
|
|
Barry
I. Regenstein
|
|
|
9,872,619
|
|
|
|
|
|
84,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratification
of Selection of Auditors
|
|
|
9,762,862
|
|
|
182,635
|
|
|
11,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amendment
to Certificate of Incorporation
|
|
|
9,400,466
|
|
|
543,890
|
|
|
12,514
|
|
|
|
|
Item 6.
Exhibits
Exhibit
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit
32.1 Certification of Chief Executive Officer 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 Chief Financial Officer 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 November 14, 2008 announcing September 30, 2008 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: November
14, 2008 |
By: |
/s/ Edward
S.
Fleury |
|
Edward
S. Fleury
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
By: |
/s/ Barry
I.
Regenstein |
|
Barry
I. Regenstein
President
and Chief Financial Officer
(Principal
Financial and Accounting
Officer)
|