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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ______
Commission File Number 0-18684
COMMAND SECURITY CORPORATION
(Exact name of registrant as specified in its charter)
New York 14-1626307
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Lexington Park, Lagrangeville, New York 12540
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 454-3703
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definite proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K
As of June 24, 2004, the aggregate market value of the voting stock held by
non-affiliates of the registrant (3,257,204 shares), based on the last sales
price of $1.67 on that date, was approximately $ 5,439,530.
As of June 24, 2004, the registrant had issued and outstanding 6,287,343
shares of common stock.
Command Security Corporation
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended March 31, 2004
TABLE OF CONTENTS
PART I
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for the Registrant's Common Stock and Related Stockholder Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
7A. Quantitative and Qualitative Disclosures about Market Risk
8. Financial Statements and Supplementary Data
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures.
9a. Controls and Procedures
PART III
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
14. Principal Accountant Fees and Services
PART IV
15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
PART I
ITEM 1. BUSINESS
Command Security Corporation ("Company") is a corporation formed under the
laws of the State of New York on May 9, 1980. It principally provides
uniformed security services from its twenty one operating offices in New
York, Massachusetts, New Jersey, Illinois, California, Pennsylvania,
Connecticut, Maryland, Oregon and Florida to commercial, financial,
industrial, aviation and governmental clients in the United States.
The Company files registration statements, periodic and current reports,
proxy statements and other materials with the Securities and Exchange
Commission (SEC). Any materials the Company files with the SEC may be read or
copied at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. Information on operation of the Public Reference Room
may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a
website at www.sec.gov that contains reports, proxy and information
statements and other information regarding issuers that file electronically
with the SEC, including the Company's filings.
The Company's internet address is www.commandsecurity.com. The Company's
annual report on Form 10-K, its quarterly reports on Form 10-Q as well as
Command press releases are made available on the website as soon as
reasonably practicable after they are electronically filed with or furnished
to the SEC. All such filings on the website are available free of charge.
The Company provides its security services to a wide range of industries
which the Company has categorized into three groups - guard services,
aviation services and support services. The latter includes any revenue from
administrative service agreements and back office support to police
departments.
The guard service division includes governmental and quasi-governmental
clients such as cities and statewide institutions and industrial and
commercial clients such as retail chains and health care institutions. Guard
services represented approximately 39.6% (or $30.0 million) of the Company's
revenue for the fiscal year ended March 2004. Security services include
providing uniformed guards for access control, theft prevention,
surveillance, vehicular and foot patrol and crowd control.
Approximately 60.0% (or $45.5 million of the Company's revenue for the fiscal
year ended March 2004) was generated from the aviation services division.
This division provides uniformed guard services to airport and airport
related clients including general security and baggage handling services.
The support services division accounted for less than 1% (or $0.3 million) of
the 2004 revenues and encompasses back office support to 3 police departments
and an administrative service client. The latter are where the Company
provides a computerized scheduling and information system and programs, as
well as accounts receivable financing. Accounts receivable financing is
secured by the administrative service company's client's accounts receivable,
customer lists, contracts, all other assets and the personal guarantee of the
owner(s) of the administrative service company. Neither the sales revenue
generated by the administrative service client nor the associated expenses
are accounted for within the Company's operations. Financed receivables are
included in the Company's accounts receivable figures.
The Company employs 50 employees indirectly attributable to guard and
aviation services including supervisors and dispatchers, another 110
administrative employees, including the executive staff, and 3,100 hourly
guards.
Management believes there is continued heightened attention to security
matters due to the events of September 11 and the ongoing threat of criminal
and terrorist activities. As a result of such attention, management further
believes that the urban commercial centers served by the Company, including
New York, Los Angeles, Miami and Chicago, continue to provide an opportunity
for increased market participation and growth. In addition, the creation of
the Homeland Security department opens up the potential of significant
additional contracts for the private security sector.
Operations
As a licensed watchguard and patrol agency, the Company's guard services
division furnishes guards to its security service customers to protect people
or property and to prevent the theft of property. In this regard, the Company
principally conducts business by providing guards and other personnel who
are, depending on the particular requirements of the customer, uniformed or
plain-clothed, armed or unarmed, and who patrol in marked radio cars or stand
duty on the premises at stationary posts such as fire stations, reception
areas or video monitors. The Company's guards maintain contact with
headquarters or supervisors via car radio or hand-held radios. In addition to
the more traditional tasks associated with access control and theft
prevention, guards respond to emergency situations and report to appropriate
authorities for fires, natural disasters, work accidents and medical crises.
The Company provides guard services to many of its industrial and commercial
customers on a 24-hour basis, 365 days per year. For these customers, guards
are on hand to provide plant security, access control, personnel security
checks and traffic and parking control and to protect against fire, theft,
sabotage and safety hazards. The remaining customers include retail
establishments, hospitals and governmental units. The services provided to
these customers may require armed as well as unarmed guards. The Company also
provides specialized vehicle patrol and inspection services and personal
protection services to key executives and high profile personalities from
time to time.
The Company's aviation services division provides a variety of uniformed
services for domestic and international air carriers including aircraft
security, access control, wheelchair escorts, skycaps, baggage handlers and
uniformed guards for cargo security areas. In November 2001, the US
Government made the decision to federalize the pre-board screening process at
US airports and in February 2002, the Federal Aviation Administration (FAA)
took over responsibility for managing the contracts with private security
companies. Completion of the federalization process was achieved by the US
Government set deadline of November 2002. The termination of this contract
has had a significant adverse impact on the Company's revenues and earnings.
The Company has replaced a portion of the lost revenue with alternative
services to the airline industry, such as document verification and screened
baggage services and has secured new work at three further airports - San
Jose (California), Baltimore-Washington (Maryland) and Portland (Oregon).
Under the law of negligence, the Company can be liable for acts or omissions
of its agents or employees performed or occurring in the course of their
employment. The nature of some of the services provided by the Company (e.g.
crowd control and armed guard services) exposes it to risks of liability for
employee conduct. The Company currently maintains general liability insurance
for its security guard division in the amount of $5 million per occurrence
with $25,000 retained risk per occurrence. For its aviation division it
maintains a $25 million per occurrence general liability policy with $5,000
retained risk per occurrence except for $25,000 for damaged aircrafts. The
Company has an excess general liability insurance policy that covers aviation
claims for an additional $25 million in the aggregate.
To ensure that adequate protection requirements have been established prior
to commencing service to a customer, the Company evaluates the customer's
site and prepares a recommendation for any required changes to existing
security programs or services. Surveys typically include an examination and
evaluation of perimeter controls, lighting, personnel and vehicle
identification and control, visitor controls, electronic alarm reporting
systems, safety and emergency procedures, key controls and security force
manning levels. While surveys and recommendations are prepared by the
Company, the security plan and coverage requirements are determined by the
customer. Operational procedures and individual post orders are reviewed
and/or rewritten by the Company to meet the requirements of the security plan
and coverage determined by the customer.
In order to provide a high level of service without incurring large overhead
expenses, the Company establishes offices close to its customers and
delegates responsibility and decision making to its local managers. The
Company emphasizes the role of its managers by assigning to each one
responsibility for service and sales. The Company believes that in most
situations the combination of responsibility for both service and sales in a
single individual, results in better supervision and quality control and
greater responsiveness to customer needs.
The Company generally renders its security guard services pursuant to a
standard form security services agreement which specifies the personnel
and/or equipment to be provided by the Company at designated locations and
the rates therefore, which typically are hourly rates per person. Rates vary
depending on base, overtime and holiday time worked, and the term of
engagement. The Company assumes responsibility for a variety of functions
including scheduling each customer site, paying all guards and providing
uniforms, training, equipment, supervision, fringe benefits and workers'
compensation insurance. These security services agreements also provide
customers with flexibility by permitting reduction or expansion of the guard
force on relatively short notice. The Company is responsible for preventing
the interruption of security services as a consequence of illness, vacations
or resignations. In most cases the customer also agrees not to hire any
security personnel used by the Company for at least one year after the
termination of the engagement. Each security services agreement may be
terminated by the customer, typically with no prior notice or short notice
(usually 30 days). In addition, the Company may terminate an agreement
immediately upon default by the customer in payment of monies due thereunder
or if there is filed by or against the customer a bankruptcy petition or if
any other act of bankruptcy occurs.
The Company has its own proprietary computerized scheduling and information
system. The scheduling of guards, while time-consuming, is a most important
function of any guard company. Management believes the system substantially
reduces the time a manager must spend on scheduling daily guard hours and
allows the Company to fulfill customer needs by automatically selecting those
guards that fit the customer's requirements.
Employee Recruitment and Training
The Company believes that the quality of its guards is essential to its
ability to offer effective and reliable service, and it believes diligence in
their selection and training produces the level of performance required to
maintain customer satisfaction and internal growth.
The Company's policy requires that all selected applicants for Company guard
positions undergo a detailed pre-employment interview and a background
investigation covering such areas as employment, education, military service,
medical history and, subject to applicable state laws, criminal record. In
certain cases the Company employs psychological testing and, where permitted,
uses pre-employment polygraph examinations. Personnel are selected based upon
physical fitness, maturity, experience, personality, stability and
reliability. Medical examinations and substance abuse testing may also be
performed. Prerequisites for all Company guards include a good command of the
English language and the ability to communicate well and write a
comprehensive and complete report. Preference is given to applicants with
previous experience, either as a military or a civilian security-police
officer.
The Company trains accepted applicants in three phases:
Pre-assignment; On-the-job; and Refresher. The Company's training programs
can utilize current curricula and audio-visual materials. Pre-assignment
training explains the duties and powers of a security guard, report
preparation, emergency procedures, general orders, regulations, grounds for
discharge, uniforms, personal appearance and basic post responsibilities.
On-the-job assignment training covers specific duties as required by the post
and job orders. Ongoing refresher training is given on a periodic basis as
determined by the local area supervisor and manager.
Command treats all employees and applicants for employment without unlawful
discrimination as to race, creed, color, national origin, sex, age,
disability, marital status or sexual orientation in all employment-related
decisions.
Significant Customers
For the years ended March 31, 2004 and 2003, two and one customers,
respectively, accounted for approximately 19% and 30% of total revenue. For
the year ended March 31, 2004, the two customers were in the airline industry
and for the year ended March 31, 2003 the one customer was the FAA which
consisted primarily of airport pre-board screening services. The FAA contract
terminated in November 2002. For the year ended March 31, 2002 no customer
accounted for more than 10% of revenue.
Competition
Competition in the security service business is intense. It is based
primarily on price and the quality of service provided, the scope of services
performed, name recognition and the extent and quality of security guard
supervision, recruiting and training. As the Company has expanded its
operations it has had to compete more frequently against larger national
companies, such as Securitas and The Wackenhut Corporation, which generally
have substantially greater financial resources, personnel and facilities than
the Company. These competitors also offer a range of security and
investigative services which are at least as extensive as and directly
competitive with, those offered by the Company. In addition, the Company
competes with numerous regional and local organizations which offer
substantially all of the services provided by the Company. Although
management believes that, especially with respect to certain of its markets,
the Company enjoys a favorable competitive position because of its emphasis
on customer service, supervision and training and is able to compete on the
basis of the quality of its service, personal relationships with customers
and reputation, there can be no assurance that it will be able to maintain
its competitive position in the industry.
Government Regulation
The Company is subject to city, county and state firearm and occupational
licensing laws that apply to security guards and private investigators. In
addition, many states have laws requiring training and registration of
security guards, regulating the use of badges and uniforms, prescribing the
use of identification cards or badges, and imposing minimum bond, surety or
insurance standards. The Company may be subjected to penalties or fines as
the result of licensing irregularities or the misconduct of one of its guards
from time to time in the ordinary course of its business. Management believes
the Company is in material compliance with all applicable laws and
regulations.
In the light of the September 11 tragedy, the US Government passed a
bill in November 2001, outlining their proposal to federalize the pre-board
screening process at all US airports. The process of federalization has been
completed, the impact of which is discussed above in "Item 1. Business" and
"Operations". Also see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations"
Employees
The Company employs 50 employees indirectly attributable to guard services
including supervisors and dispatchers, another 110 administrative employees
including the executive staff, and 3,100 hourly guards.
The Company's business is labor intensive and, as a result, is affected by
the availability of qualified personnel and the cost of labor. Although the
security guard industry is characterized by high turnover, the Company
believes its experience compares favorably with that of the industry. The
Company has not experienced any material difficulty in employing suitable
numbers of qualified security guards, although, when labor has been in short
supply, it has been required to pay higher wages and incur overtime charges.
Approximately 59% of the Company's employees do not belong to a labor union.
Some of the Company's employees in the following locations are members of
unions: the New York City branch, the Philadelphia Airport office, the
Chicago Illinois branch, the JFK and La Guardia airport branches and the Los
Angeles International Airport office. Together, the unionized employees
account for 41% of the Company's employees and work under collective
bargaining agreements with the following unions: Allied International Union,
Allied Services Division of the Transportation Communications International
Union and Special & Superior Officers Benevolent Association. Many of the
Company's New York City, Los Angeles and Chicago competitors are also
unionized. Presently the Company is negotiating with a Union that wishes to
represent the Company's employees at Baltimore-Washington International
Airport. The Company has experienced no work stoppages attributable to labor
disputes. The Company believes that its relations with its employees are
satisfactory. Guards and other personnel supplied by the Company to its
customers are employees of the Company, even though they may be stationed
regularly at the customer's premises.
Service Marks
The Company believes itself to be the owner of the service marks "Command
Security Corporation", "CSC" and "CSC Plus" design for security guard,
detective, private investigation services and security consulting services.
On February 22, 1994, the service mark assignment was recorded with the U.S.
Patent and Trademark Office, Registration No. 1,823,346. The prior
registration number was No. 1,662,089.
The Company also believes itself to be the owner of the trademark
"Smartwheel" for the computer program for use in dispatching and tracking
small vehicles such as carts and wheelchairs at transportation terminals. The
trademark was acquired as part of United Security Group, Inc. acquisition. On
May 23, 1995 the trademark was registered with the U.S. Patent and Trademark
Office, Registration No. 1894956. In addition, the Company believes itself to
be the owner of the service marks "STAIRS" and "Smart Guard." The respective
registration dates and numbers are September 15, 1992; No. 1,715,363 and
December 19, 1992; No. 1,742,892.
ITEM 2. PROPERTIES
As of March 31, 2004, the Company owned and used in connection with its
business approximately 62 vehicles.
As of March 31, 2004, the Company did not own any real property. It occupies
executive offices at Route 55, Lexington Park, Lagrangeville, New York, of
approximately 6,600 square feet with a base annual rental of $112,200 under a
one-year lease expiring September 30, 2004. The Company also occupies the
following offices:
- ------------------------------------------------------------------------------
When Square Base Annual
Location Opened Footage Rent
- ------------------------------------------------------------------------------
Los Angeles Int'l Airport
380 World Way Box N-28,
Los Angeles, CA 8/15/96 647 $27,648
5759 Rickenbacker Road
Commerce, CA 11/1/01 2,650 $31,560
7841 Balboa Ave.
Suite 208
San Diego, CA 2/8/00 395 $7,030
8939 S Sepulveda Blvd., Suite 201
Los Angeles, CA 3/1/00 1,422 $24,480
8939 S. Sepulveda Blvd., Suite 422
Los Angeles, CA 11/1/01 575 $12,804
1400 Colman Ave
Ste D-24
Santa Clara, CA 12/1/03 520 $9,540
1450, Barnum Avenue, Suite 105
Bridgeport, CT 11/1/00 1,500 $18,732
100 Wells Street #2E
Hartford, CT 7/1/03 970 $15,520
2777 Summer Street, Suite 302
Stamford, CT 3/13/95 1,850 $44,400
8181 North West 36th St., Unit 21A
Miami, FL 6/1/98 300 $13,161
800 Virginia Avenue, Suite 53
Ft. Pierce, FL 8/1/97 400 $9,315
4901 NW 17th Way Suite 504
Ft. Lauderdale, FL 7/1/00 1,642 $28,945
Miami Int'l. Airport, Concourse A, 2nd Level
Miami, FL 7/1/99 262 $14,407
8452 S. Stony Island
2nd Floor
Chicago, IL 10/1/03 998 $12,000
21 Cummings Park, Suite 224
Woburn, MA 3/15/99 198 $4,235
780 Elkridge Landing Road, Suite 220
Linthicum Heights, MD 9/20/02 635 $9,048
2222 Morris Avenue
Union, NJ 2/1/98 2,250 $27,600
22 IBM Road
Suite 105
Poughkeepsie, NY 9/1/03 815 $12,600
17 Battery Place, Suite 223
New York, NY 4/8/02 6,080 $139,354
300 Hamilton Avenue, Suite 300
White Plains, NY 8/15/96 1,538 $38,593
505 Main Street, Suite 2
Williamsville, NY 5/1/93 680 $5,700
JFK International Airport
175-01 Rockaway Boulevard, Jamaica, NY 4/1/97 1,700 $80,184
186 Stafford Street
Springfield, MA 11/15/03 200 $1,200
2144 Doubleday Avenue
Ballston Spa, NY 4/1/93 800 $13,488
52 Oswego Road
Baldwinsville, NY 6/1/98 120 $1,500
La Guardia Int'l Airport United Hanger #2,
Room 328, Flushing, NY 11/1/02 225 $3,912
575 Madison Avenue, #188
New York, NY 7/1/02 167 $42,000
700 NE Airport Way, Suite B2420
Portland, OR 12/1/02 817 $29,469
29 Bala Avenue, Suite 103
Bala Cynwyd, PA 3/1/02 575 $13,420
2 International Plaza, Suite 242
Philadelphia, PA 9/1/01 1,277 $30,648
The Company believes its properties are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The nature of the Company's business subjects it to claims or litigation
alleging that it is liable for damages as a result of the conduct of its
employees or others. Except for such litigation incidental to its business,
other claims or actions that are not material and the lawsuits described
below, there are no pending legal proceedings to which the Company is a party
or to which any of its property is subject.
The nature of the Company's business as a supplier of personnel services
lends itself to employment-related claims on a regular basis. The Company has
been named in several employment-related claims, including claims of sexual
harassment by current and former employees, some of which are in various
courts at various stages of adjudication and some of which are currently
under investigation by Federal and State agencies, including the New York
State Division of Human Rights. At this time the Company is unable to
determine the impact on the financial position and results of operations that
these claims may have, should the investigation conclude that they are valid.
On April 9, 2004, Command President and CEO William C. Vassell filed a
complaint in the United States District Court Southern District of New York
(Case No. 04 Civ. 2657 (CM) ECF CASE) seeking a determination that Mr.
Vassell's right of first refusal under the Shareholder Agreement between
Reliance Security Group, plc ("Reliance"), Mr. Vassell and Command (filed as
Exhibit 99.19 of the Form 8-K filed September 27, 2000) was violated by
Reliance in its sale of securities to GCM Security Partners, LLC ("GCM"). On
June 1, 2004, Mr. Vassell filed an Amended Complaint adding GCM as a
defendant and requesting that the court preliminarily and permanently enjoin
Command from registering the transfer of Reliance Shares to GCM. GCM filed an
answer to the Amended Complaint on June 8, 2004, asserting affirmative
defenses and counterclaiming against Mr. Vassell and Command board members
Gregory J. Miller and Peter J. Nekos.
On June 18, 2004 District Court Judge Colleen McMahon awarded partial summary
judgment to Reliance and GCM, dismissed Mr. Vassell's claims, denied
Command's motion and declared that GCM was the lawful owner of the Command
securities purchased from Reliance. The court further directed that Command
and Mr. Vassell not interfere with GCM's registration of the Command
securities or with GCM's exercise of its rights as a shareholder of Command.
Mr. Vassell has advised the Company that he has filed a notice of appeal with
respect to this decision. Mr. Vassell's counsel has indicated that he expects
the appeal decision in August, 2004. The securities which are the primary
subject of the litigation between Mr. Vassell and GCM constitute
approximately 26% of the voting stock of Command. Additional nonvoting
warrants and nonvoting convertible preferred stock represent, in the
aggregate, approximately another 27% of the voting stock upon exercise and
conversion respectively.
The warrants are exercisable at $1.25 per share and cover 2,298,092
shares of Command's common stock. The Series A convertible preferred stock is
convertible (without additional cash consideration) into 1,232,535 shares of
common stock.
The ownership of these securities represents a substantial degree of control
over the outcome of votes taken by Command's shareholders. Most votes by the
shareholders require the affirmative vote by the holders of a majority of the
shares attending a duly-called meeting at which a quorum (a majority of the
shares) is present.
On or about June 30, 2004, GCM tendered its Series A convertible preferred
stock to the Company and demanded its conversion into 1,232,535 shares of
common stock. According to the second amendment to Schedule 13D filed by GCM
Managing Member Bruce Galloway on May 26, 2004, GCM beneficially owns more
than twenty percent of the outstanding voting stock of the Company. Based on
this amount of ownership and the provisions of Section 912, GCM is an
"interested shareholder" and the Company is prohibited from engaging in a
"business combination" with GCM at any time within the 5 years following
GCM's acquisition of Command stock from Reliance. The Company's board of
directors sought the advice of an independent outside law firm to determine
whether the issuance of common stock under these circumstances would
constitute a "business combination" and violate Section 912(b) of the New
York Business Corporation Law. This outside law firm prepared a memorandum of
law which determined that it would be the better view that any such issuance
is a prohibited business combination under NYBCL Section 912(b).
Section 912 defines the term "business combination" to include, in relevant
part, i) the issuance or transfer by the Company of any stock with an
aggregate market value equal to 5% or more of the aggregate market value of
all outstanding stock (unless pursuant to a pro rata distribution to all
shareholders) (see, NYBCL ss. 912(a)(4)(C)) or ii) any reclassification of
securities (including any stock split, stock dividend or other distribution
of stock in respect of stock) or recapitalization or merger with any
subsidiary, or any other transaction proposed by, or pursuant to any
agreement, arrangement or understanding with such interested shareholder,
which has the effect, directly or indirectly of increasing the proportionate
share of the outstanding shares of any class which is directly or indirectly
owned by the interested shareholder. (See, NYBCL Section 912(a)(4)(E)).
Based on the advice in the memorandum that the issuance of the common stock
pursuant to the proposed preferred stock conversion should be considered as a
violation of NYBCL Section 912(b), Command's board of directors decided not to
allow conversion of the preferred stock. Consequently, it is expected that
CGM will pursue an adjudication of its rights to convert its preferred stock.
In the event the board's conclusion with respect to the applicability of
NYBCL ss. 912(b) were upheld by a court, GCM would be further limited in its
exercise of its warrants covering 2,298,092 shares of common stock, future
investments in the Company as well as any other "business combinations" with
the Company.
An audit of the Company's FAA contract for pre-board screening services was
completed during December 2002. Based on initial audit findings of the
Defense Contract Audit Agency (DCAA), the FAA held back $2.9 million of
payment on final invoices until the audit was resolved. The Company was
subject to an audit by the New York State Attorney General's Office related
to the Company's provision of services to New York State under the Office of
General Services' ("OGS") requirements. Allowances in connection with the FAA
audit were recorded as a reduction of revenue whereas the loss provision in
connection with the OGS audit was included in general and administrative
expenses. Both matters were resolved within the established allowances and
reserves.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holder's during
the fourth quarter of the fiscal year covered by this Report. The Company has
not yet conducted its Annual Meeting of Shareholders for the years ended
March 31, 2003 or March 31, 2004. This is due in substantial part to the
issues surrounding the potential change of control as a result of the sale of
the Reliance securities (see Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview).
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's stock is quoted on the OTC Bulletin Board Service, under the
symbol "CMMD.OB" The Company intends to continue to comply with all capital
reporting requirements of the Securities and Exchange Commission.
The following table sets forth, for the calendar periods indicated, the high
and low sales price for the Common Stock as reported by the OTC Bulletin
Board Service, for each full quarterly period within the two most recent
fiscal years.
Last Sales Price
Period (1)
High Low
2003
First Quarter 1.890 0.850
Second Quarter 1.740 1.250
Third Quarter 1.470 1.050
Fourth Quarter 1.250 0.720
2004
First Quarter 1.200 0.930
Second Quarter 1.200 0.900
Third Quarter 1.100 0.910
Fourth Quarter 1.700 1.020
(1) Reflects fiscal years ended March 31 of the year indicated.
The above quotations do not include retail mark-ups, markdowns or commissions
and represent prices between dealers and not necessarily actual transactions.
The past performance of the Company's securities is not necessarily
indicative of future performance.
As of June 24, 2004 there were approximately 200 holders of record of the
Company's common stock. Management believes there are approximately 1,000
beneficial holders of the Company's common stock.
The last sales price of the Company's common stock on June 24, 2004, was
$1.67.
The Company has never paid cash dividends on its common stock. Payment of
dividends on common stock, if any, will be within the discretion of the
Company's Board of Directors and will depend, among other factors, on
approval of its principle lender, earnings, capital requirements and the
operating and financial condition of the Company. At present, the Company's
anticipated capital requirements are such that it intends to follow a policy
of retaining earnings, if any, in order to finance, in part, the development
of its business.
Equity Compensation Plan Information
See Item 12 "Security Ownership of Certain Beneficial Owners and Management".
COMMAND SECURITY CORPORATION
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in this table have been derived from the
financial statements as of and for the years ended March 31, 2004, 2003,
2002, 2001, and 2000, which have been audited by independent certified public
accountants. The information should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
with the financial statements and related notes included in the Report.
Statement of Operations
Years ended March 31
- ------------------------------------------- ---------------- -------------- --------------- ------------- ---------------
In $ Thousands 2004 2003 2002 2001 2000
- ------------------------------------------- ---------------- -------------- --------------- ------------- ---------------
Revenue 75,905 94,315 84,162 71,595 59,800
Gross Profit 10,960 19,558 13,805 11,805 10,557
Operating Income 195 3,266 1,752 328 315
Net Income / (Loss) (310) 1,327 2,376 (439) (310)
Income /(Loss) per common share (.08) 0.14 0.38 (0.08) (0.07)
Weighted average number
of common shares 6,287,343 6,287,343 6,287,343 6,287,343 6,635,581
- ------------------------------------------- ---------------- -------------- --------------- ------------- ---------------
All of the above statistics are in $ thousand except for Income / (Loss) per
common share and weighted average number of common shares outstanding which
are expressed in $ and number respectively.
Balance Sheet Data as of March 31
- ------------------------------------------- ---------------- -------------- --------------- ------------- ---------------
In $ Thousands 2004 2003 2002 2001 2000
- ------------------------------------------- ---------------- -------------- --------------- ------------- ---------------
Working Capital 2,549 3,591 1,525 1,874 750
Total Assets 21,917 20,707 26,317 17,991 15,348
Short-term debt 9,520 9,248 13,570 8,489 7,717
Long-term debt 222 88 291 1,801 588
Stockholders' equity 4,494 4,967 4,087 1,712 2,191
- ------------------------------------------- ---------------- -------------- --------------- ------------- ---------------
The Company's short-term debt includes the current maturities of
long-term debt, obligations under capital leases and short term
borrowings. See Notes 8, 9 and 17 of "Notes to the Financial
Statements".
The Company's long-term debt includes the long-term portion of
obligations under capital leases.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three years ended March 31, 2004.
Management's discussion and Analysis should be read in conjunction with the
Financial Statements and related notes. In this discussion, the words
"Company", "we", "our" and "us" refer to Command Security Corporation.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated 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
consolidated financial statements. Actual results may differ from these
estimates under different assumptions and conditions.
Revenue Recognition
The Company records revenue as services are provided to its customers and to
its administrative service clients. Revenue consists primarily of security
guard services which are typically billed at hourly rates. These rates may
vary depending on base, overtime and holiday time worked. Costs associated
with the Company's guard service revenue consist of direct and indirect
payroll and related expenses, subcontractor costs, vehicle and other costs
directly related to the guard service revenue generated.
Reserve for Doubtful Accounts
The Company periodically evaluates the requirement for providing for credit
losses on its accounts receivables. Criteria used by management to evaluate
the adequacy of the allowance for doubtful accounts include, among others,
the creditworthiness of the customer, prior payment performance, the age of
the receivables and the Company's overall historical loss experience.
Individual accounts are charged off as management deems them as
uncollectible.
OVERVIEW
Command Security Corporation is a provider of uniformed security services
from our 21 operating offices in 10 states throughout the United States. The
biggest change to our business occurred in the 2003 fiscal year, with the
federalization of pre-board screening services by the US Government at all US
airports. This process was completed in November 2002 and resulted in the
loss of significant revenues for the Company. Although we replaced part of
this lost revenue during fiscal year 2003, the war in Iraq and the SARS
epidemic has adversely affected the airline industry and hence demand for our
services, which currently accounts for approximately 60% of total revenues.
In reaction to the many challenges facing the airline industry currently, we
have had to cut back our cost base to attempt to remain profitable, including
the reduction in our sales force in the Guard Division. We have switched the
focus of our sales effort to our local branch managers who have been
incentivized to secure new business at strong margins. We have invested some
of the money saved from these cost cuts in developing potential opportunities
provided by the creation of the Department of Homeland Security. Security
should remain a key area of focus for the US Government and this should
provide opportunities for private security companies such as Command to win
profitable Government contracts over the medium term.
As discussed in detail above in Item 3 - Legal Proceedings, the Company is
currently a defendant in a lawsuit involving Command president William
Vassell, Reliance Security Group, plc ("Reliance"), GCM Security Partners,
LLC ("GCM") and Command board members Gregory J. Miller and Peter J. Nekos.
The district court ruled on June 18, 2004 and awarded partial summary
judgment to Reliance and GCM, dismissed Mr. Vassell's claims, denied
Command's motion and declared that GCM was the lawful owner of the Command
securities purchased from Reliance. The court further directed that Command
and Mr. Vassell not interfere with GCM's registration of the Command
securities or with GCM's exercise of its rights as a shareholder of Command.
Mr. Vassell has advised the Company that he has filed a notice of appeal with
respect to this decision. Mr. Vassell's counsel has indicated that he expects
the appeal decision in August, 2004.
The securities which are the primary subject of the litigation between Mr.
Vassell and GCM constitute approximately 26% of the voting stock of Command.
Additional nonvoting warrants and nonvoting convertible preferred stock
represent, in the aggregate, approximately another 27% of the voting stock
upon exercise and conversion respectively.
The warrants are exercisable at $1.25 per share and cover 2,298,092
shares of Command's common stock. The Series A convertible preferred stock is
convertible (without additional cash consideration) into 1,232,535 shares of
common stock.
The ownership of these securities represents a substantial degree of control
over the outcome of votes taken by Command's shareholders. Most votes by the
shareholders require the affirmative vote by the holders of a majority of the
shares attending a duly-called meeting at which a quorum (a majority of the
shares) is present.
As also discussed in greater detail above in Item 3 - Legal Proceedings, on
or about June 30, 2004, GCM tendered its Series A convertible preferred stock
to the Company and demanded its conversion into 1,232,535 shares of common
stock. The Company's board of directors has been advised by independent
outside counsel that such counsel believes it to be the better view that any
such conversion would be a violation of Section 912(b) of the New York
Business Corporation Law. Based on this advice, Command's board of directors
has decided not to allow conversion of the preferred stock. Consequently, it
is expected that GCM will pursue an adjudication of its rights to convert its
preferred stock. In the event the board's conclusion with respect to the
applicability of NYBCL ss. 912(b) were upheld by a court, GCM would be
further limited in its exercise of its warrants covering 2,298,092 shares of
common stock, future investments in the Company as well as any other
"business combinations" with the Company.
An audit of the Company's FAA contract for pre-board screening services was
completed during December 2002. Based on initial audit findings of the
Defense Contract Audit Agency (DCAA), the FAA had held back $2.9 million of
payment on final invoices until the audit was resolved. Additionally, the
Company was subject to an audit by the New York State Attorney General's
Office related to the Company's provision of services to New York State under
the Office of General Services' ("OGS") requirements. Allowances in
connection with the FAA audit were recorded as a reduction of revenue whereas
the loss provision in connection with the OGS audit was included in general
and administrative expenses. Both matters were resolved after fiscal year
end, March 31, 2004, within the established allowances and reserves.
RESULTS OF OPERATIONS
Earnings
In fiscal year 2004 the Company suffered a small net loss of $310,408. The
major factors contributing to this loss were higher worker's compensation
insurance costs and higher State and Federal unemployment taxes. The worker's
compensation costs increased primarily due to a large claim for a guard who
suffered serious injuries working for a client in our Miami office. The
higher unemployment taxes are caused by the numerous layoffs and terminations
due to the federalization of the pre-board screening at all U. S. airports
during the fiscal year 2003. Both of these costs should be reduced going
forward as these areas return to normalcy.
The major change in the 2003 fiscal year was the federalization of pre-board
screening services by the US Government. This process started in November
2001 with the announcement of the plan to federalize pre-board screening at
all US airports by November 2002. Our contracts with the commercial airlines
to provide such services were taken over by the FAA (and subsequently, by the
then newly formed TSA) in February 2002. Volumes and rates remained very
strong throughout this period of change, helping us to produce net income in
2003 of $1,326,736 (net of the $1.6 million allowance in connection with the
FAA and OGS audits). Our results post completion of federalization were
adversely effected by the many challenges facing the Aviation industry which
affected their revenues and hence demand for our services. In addition to
weak revenues, we suffered from the filing for bankruptcy protection by US
Airways and United Airlines during the 2003 fiscal year and Air Canada and
Hawaiian Airlines in April 2003. Full provision for the balances due from the
latter two airlines was charged in the fiscal year 2003 (see "Provision for
Doubtful Accounts" below).
2002 was also a difficult year following resolution of the stockholder
derivative suit that had distracted management throughout most of the 2001
fiscal year. The closure of our National Accounts Division and the turmoil in
the airline security industry following the September 11 tragedy created many
challenges. Ultimately, however, the heightened focus on aviation security in
the US had a positive impact on our results in the second half of fiscal year
2002. Overall, we produced a strong result for 2002 achieving net income of
$2,375,760 (inclusive of a $1.3 million reduction in valuation reserves for
deferred tax assets).
Revenue
Revenue for fiscal year ended March 31, 2004 decreased by $18,409,733 to
$75,904,782 from $94,314,515 for fiscal year 2003. The major component of
this decrease was the federalization of pre-board screening at U.S. airports
in November, 2002. These services accounted for approximately $27,322,000 of
the fiscal year 2003 revenue. Underlying revenue excluding these services
increased by approximately $8,912,000 (or 13.3%)mostly due to additional
revenue from other services provided to the airline industry and an increase
of approximately $2 million in the Guard Division reflecting short term
revenue from strike-related work in California. Total Guard Division revenue
at $30,216,000 decreased by $4,000 from $30,220,000 in fiscal year 2003,
which reflects lower margin business, being terminated offset by the
temporary higher margin strike business. The strike ended in March 2004.
Revenue for 2003 grew by $10,152,660 to $94,324,515 net of an allowance of $1
million for an adjustment from the result of the FAA audit. The major
components of this increase were $17,333,000 from additional accounts within
the commercial airline industry reflecting increased volumes and rates
following the September 11 tragedy. This increase was offset by a reduction
in revenues in both our Guard Division ($2,549,000) and our National Accounts
Division ($4,350,000) following its closure in March 2002. The fall in Guard
Division revenues was a combination of terminated accounts (some of which
were due to an aggressive policy of improving margins on under Performing
contracts) offset by new business and rate reviews from current customers.
The benefit of this was reflected in a significant improvement in gross
margins.
Gross Profit
Gross profit for fiscal year ended, March 31, 2004 decreased by $8,597,987 to
$10,959,669 (14.4% of Revenue) from $19,557,656 (20.7% of Revenue) for fiscal
year 2003. It is not practical to ascertain the Gross Profit performance
excluding the FAA revenues for pre-board screening as several direct costs
were shared between FAA and non-FAA continuing services in the Aviation
Division. The overall reduction in the margin was due to the loss of the
pre-board screening services in 2002, the new contract wins in the Aviation
Division (which were at lower than previous margin levels) and the adverse
impact of workers compensation costs due to a serious accident in our guard
division caused by a third party. Sadly, this resulted in a tragic and
substantial injury being suffered by one of our employees in Miami.
The gross profit for fiscal year 2003 increased by $5,752,201 from
$13,805,455 (16.4% of Revenue) to $19,557,656 (20.7% of revenue). The
improvement in the gross profit margin was due to three primary factors.
Firstly, increased focus on airport security in light of the September
tragedy resulted in higher volumes, wage rates and margins to provide a
better qualified security officer. The management infrastructure to support
the additional volumes was largely in place, thus improving margins.
Secondly, although Guard Division revenues have dropped, this largely
reflects lower margin business being terminated and replaced by higher margin
contracts. Finally, management's efforts to improve safety procedures and
awareness generally have resulted in improved workers compensation claims
experience. The amount and number of claims is expected to level off going
forward.
One area of relative uncertainty within the gross profit calculation is
insurance, which is largely dependent upon the result of past actions. We
insure against general liability claims and lawsuits through a general
liability insurance policy with a third-party insurance carrier. Such
policies have limits of $5 million per claim in the guard division and $25
million in the aviation division. Prior to October 1, 2002, we also had an
excess general liability insurance policy that covered claims for an
additional $50 million in the aggregate. The impact of September 11 tragedy
meant that this umbrella coverage was no longer available to the Company at
the time of policy renewal. As of October 1, 2003, we have an excess general
liability insurance policy that covers aviation claims for an additional $25
million in the aggregate. We retain the risk for the first $25,000 per claim
on the non-aviation related policy and $5,000 on the aviation related policy
(except $25,000 for damaged aircraft). The general liability insurance
reserve is based upon existing claims, actuarial computations and the timing
of reported claims. These are all factored in to estimate losses incurred but
not yet reported to the Company.
We also have a worker's compensation insurance policy where the premium is
based on incurred losses as determined at the end of coverage plus the basic
insurance amounts. The worker's compensation basic premium is determined by
the insurance carrier and includes its overhead costs and insurance premium.
We estimate accrued losses based on historical loss experience and the ratio
of claims paid to our historical payout profiles.
General and Administrative Expenses
General and Administrative expenses decreased by $2,824,996 to $10,808,384
(14.2% of revenue) in fiscal year 2004, from $13,633,380 (14.5% of revenue)
in fiscal year 2003. The reduction primarily resulted from the removal of
costs associated with the increase in revenue in 2002 and from a cost
reduction program implemented in June 2003.
General and Administrative expenses had increased by $2,161,974 to
$13,633,380 (14.5% of revenue) in fiscal year 2003, primarily as a result of
the increased revenues from $11,471,406 (13.6% of revenue) in fiscal year
2002. The most significant cost movement was administrative salaries, largely
reflecting the opening of new Aviation branches at San Jose (California),
Baltimore-Washington (Maryland) and Portland (Oregon) airports. In addition,
there was an increase in infrastructure required to manage the administration
on the FAA contract and to generally support the pre-board screening services
provided. The provision for the settlement with the New York Attorney General
regarding an audit by the Office of General Services in the amount of
$600,000 was charged to general and administrative expenses.
Provision for Doubtful Accounts
The provision for doubtful accounts decreased by $2,505,429 to $154,401 in
fiscal year 2004 compared to a charge of $2,659,830 in fiscal year 2003. The
cost for fiscal year 2003 was unusually high due mainly to aviation
bankruptcies and write-offs in balances on the closed National Accounts
division and closed guard branches which were not considered recoverable.
The provision for doubtful accounts in fiscal year 2003 increased by
$2,078,151 to $2,659,830 due to chapter 11 bankruptcies in the aviation
industry. The charges for these bankruptcies include amounts that were owed
from US Airways, United Airlines, Air Canada, National Airlines and Hawaiian
Airlines, all of which filed for bankruptcy during the 2003 fiscal year.
We periodically evaluate the requirement for providing for credit losses on
our accounts receivables. Criteria used by management to evaluate the
adequacy of the allowance for doubtful accounts include, among others, the
creditworthiness of the customer, prior payment performance, the age of the
receivables and the Company's overall historical loss experience. It is not
known if bad debts will increase in future periods nor do we believe that the
current period decrease is indicative of a trend.
Bad Debt Recoveries
Bad debt recoveries increased by $196,601 from $1,946 in fiscal year ended,
March 31, 2003 to $198,547 in fiscal year ended March 31, 2004. The bad debt
recoveries include $74,144 from the Air Canada bankruptcy and $59,529 from
the Hawaiian Airlines bankruptcy. Bad debt recoveries for fiscal year ended
March 31, 2002 were insignificant.
Interest Income
The majority of interest income arises from charges to our administrative
service client. Interest income remained fairly static at $89,800 for fiscal
year 2004 compared to $89,499 for fiscal year 2003, an increase of $301.
Interest income in fiscal year 2003 decreased slightly to $89,499 from
$93,201 the year before, a reduction of $3,702.
Interest Expense
Interest expense of $516,763 in fiscal year 2004 was $44,272 less than the
fiscal year 2003 charge of $561,035. This decrease was due primarily to lower
average borrowing on the line of credit and from a lowering of the base rate
of interest. Interest expense of $561,035 in fiscal year 2003 was $219,120
less than the fiscal year 2002 charge of $780,155. The reduction was due to
lower interest rates and a reduced average revolver balance, as well as the
repayment of the term loan by December 2002. The reduced revolver balance
reflected the benefit of the operating profit earned in the year.
Equipment Dispositions
The $12,667 gain on equipment dispositions represents proceeds from the sale
in fiscal year 2004 of older equipment and vehicles in excess of book value.
This compared with gains in fiscal years 2003 and 2002 of $17,203 and 10,344
respectively.
Income Tax Benefit
It was thought that in fiscal year 2003 we would be able to use 100% of our
net operating loss carryover for the calculation of the 2003 alternative
minimum tax, however, only 90% of the net operating loss carryover could be
used for this calculation. This, along with various state taxes resulted in a
tax expense for fiscal year 2004 of $91,543.
In March 2002, due to increased revenue and earnings as a result of
additional accounts and changes in the airport security industry (following
the September 11 tragedy) along with the contract with the FAA to continue to
provide pre-board screening, we determined that it was more likely than not
that we would be able to utilize a substantial part of our net operating loss
carryovers for Federal and State income tax purposes. We therefore reduced
our deferred tax asset valuation allowance in fiscal year 2002 by $1.3
million. This tax benefit was utilized in fiscal year 2003. Federal net
operating loss carryovers were $1,384,197 at fiscal year ended March 31, 2004
and we will not recognize further tax benefits until we achieve sustained
profitability. The net operating loss carryovers begin to expire in 2010.
LIQUIDITY AND CAPITAL RESOURCES
CIT Revolving Loan
We pay our guard employees and those of our administrative service clients on
a weekly basis, while our customers and the customers of administrative
service clients pay for the services of such employees generally within 65
days after billing by the Company. In order to fund our payroll and
operations, we maintain a commercial revolving loan arrangement with CIT
Group/Business Credit, Inc. ("CIT").
The CIT loan agreement is for three years ending December 12, 2006 and
provides for borrowings in an amount up to 85% of the Company's eligible
accounts receivable, but in no event more than $15,000,000. The loan also
provides for advances against unbilled revenue (primarily monthly invoiced
accounts) although the benefit of this to availability is reduced by a
reserve against all outstanding payroll checks. The revolving loan bears
interest at prime plus 1.25%. Costs to close the loan agreement totaled
$317,463 and are to be amortized over the life of the agreement.
At March 31, 2004, we had borrowed $8,798,024 representing approximately 83%
of our maximum borrowing capacity based on the definition of "eligible
accounts receivable" under the terms of the loan and security agreement.
However, as the business grows and produces new receivables, an additional
amount of up to $6,201,976 would be available to borrow under the current
line.
The Company relies heavily on its revolving loan from CIT which contains a
fixed charge covenant and various other financial and non-financial
covenants. If the Company beaches a covenant, CIT has the right to call the
line unless CIT waives the breach. For the fiscal year ended March 31, 2004,
the Company was not in compliance with the fixed charge covenant. Subsequent
to the year-end however, the Company obtained a waiver from CIT for this
violation. Additionally, the Company is in breach of certain non-financial
covenants including, an unapproved change in control of the company and the
sale by Reliance Security Group, plc of its shares without prior written
consent from CIT. Non-financial covenants also include the termination of
William Vassell as Chairman of the Board and Chief Executive Officer or his
no longer remaining actively engaged in the management of the Company. GCM's
purchase of the Reliance shares (see Item 3 - Legal Proceedings) placed the
Company in violation of the first two CIT covenants referenced above and to
date the Company has not obtained a waiver from CIT for these violations. If
the Company terminates Mr. Vassell, as has been requested by GCM (see
"Outlook" below,) or removes him as Chairman of the Board or Chief Executive
Officer, CIT will be permitted to call the line. The Company has agreed to
give GCM limited access to CIT for purposes of discussing GCM's proposals for
managing Command. The CIT financing agreement containing these covenants is
attached hereto as Exhibit 10.41.
Other Credit
The Company signed a note in connection with the OGS settlement in the amount
of $527,000. The note calls for twenty-one monthly payments in the amount of
$27,217 including interest at 9% per annum. The payments commenced December
1, 2003 and are expected to be financed with cash flows from continuing
operations.
On March 31, 2004, the Company settled a dispute with a uniform cleaning
service which calls for the Company to pay $1,756.20 per week for 344 weeks
or a total amount of $604,133 ending in
2011.
We finance vehicle purchases typically over three years and insurance through
short-term borrowings. The Company has no additional lines of credit other
than discussed herein and has no present material commitments for capital
expenditures.
Working capital decreased by $1,041,747 to $2,549,078 as of March 31, 2004,
from $3,590,825 as of March 31, 2003 primarily due to end of year timing
factors for accrued payroll, increased accruals for unemployment taxes due to
the federalization of pre-board screening at the airlines and increased
insurance accruals for worker's compensation due to a serious accident
suffered by a guard employee.
We experienced a cash overdraft (defined as checks drawn in advance of future
deposits) of $556,310 as of March 31, 2004, compared to $1,081,068 at March
31, 2003. Cash balances and book overdrafts can fluctuate materially from day
to day depending on such factors as collections, timing of billing and
payroll dates, and are covered via advances from the revolving loan as checks
are presented for payment.
OUTLOOK
This section, Management's Discussion and Analysis of Results of Operations
and Financial Condition, contains a number of forward-looking statements, all
of which are based upon current expectations. Actual results may differ
materially and are qualified by the section below entitled "Forward Looking
Statements".
Overall, we are currently projecting a small pre-tax loss in the first
quarter of 2004/05 due to the adverse impact of higher State Unemployment
Insurance (SUI) rates arising from a significant proportion of payroll being
subject to the higher rates in this quarter. Along with cost reduction
efforts, we expect to achieve at least breakeven in the second quarter of
2004/05, as our employees begin to exceed the State ceilings for SUI. We
continue to seek new private and government contract wins in the Guard and
Aviation divisions.
Our outlook on revenue is largely dependent upon our ability to gain
additional revenue in the Guard and Aviation divisions at acceptable margins
while minimizing further contract terminations. The revenue of the Guard
division has stabilized over recent months after a reduction over the past
few years as we cancelled contracts with unacceptable margins. Our current
focus is on increasing revenue while branch manager's work to sell new
business and retain good contracts. The airline industry continues to improve
and demand for our services remains steady. Our estimate for annualized
revenue for fiscal year 2004/05 calls for a modest increase of $2 to $5
million, totaling $77 to $80 million.
We are continuing our attempts to secure contracts from the Department of
Homeland Security and other government departments. We started submitting
bids in 2003/04 and, although we have not yet received any contracts, we
continue to develop our contacts. We believe this to be an area of tremendous
opportunity over the next few years, given the heightened focus on security
in the US.
Unfortunately our margins continue to suffer from the adverse impact of state
unemployment insurance ("SUI") rates as a result of the federalization of
pre-board screening and our increased worker's compensation insurance
experience rating as a result of a serious injury to an employee in Miami.
Our gross profit margin averaged 14.5% of revenue for fiscal year 2004 and
gross profit margins are expected to average between 13.4% and 13.9% of
revenue for fiscal year 2005. We expect an improvement in margins after the
quarter ended March 31, 2005 when we should receive more favorable SUI and
worker's compensation experience ratings.
A cost reduction program was begun in June 2003 which reduced our general and
administrative expenses for the remainder of the 2003/04 fiscal year. Due to
the adverse impact of the higher SUI and worker's compensation rates, we
intend to further reduce our cost base to return to profitability. Cost
reductions are being implemented as we find them.
The aviation division represents 60% of the Company's total revenue and Delta
airlines, at annual billing of approximately $12 million is the largest
customer of the aviation division at 26.4% of the Aviation division and 15.8%
of our total revenue. In recent months, most of the airlines have enjoyed a
resurgence of business with passenger carry miles during the high travel
months of July, August and September expected to equal or exceed
pre-September 11, 2001 levels. Delta airlines, however, has threatened filing
for bankruptcy if their pilot's union does not accept a 30% wage cut.
Our accounts receivable lender, CIT, is very concerned about a Delta
bankruptcy, so to reduce their exposure to a possible bankruptcy, we proposed
an accelerated payment plan and Delta accepted a 3% cash discount on invoices
paid by them within 30 days of billing receipt. The 3% discount has
negatively impacted our gross profit and earnings. In the event of a Delta
bankruptcy, payments received in the 90 days prior to Delta's filing for
bankruptcy may be considered preferential payments under the federal
bankruptcy rules and a demand could be made on the Company to return some or
all of the payments mde by Delta within such 90-day payments.
As of June 24, 2004, CIT has established a Delta specific reserve of all
Delta accounts receivable in excess of $500,000 and an additional general
airline reserve of $1 million thereby reducing our cash availability for
borrowing by approximately $1,500,000. As of the close of business, June 26,
2004, after the application of these reserves, our cash availability was
$1,406,467 which is adequate to meet our needs for the next several months
barring unforeseen occurrences. Should a Delta bankruptcy occur, it would
significantly impact our liquidity. The losses that could be incurred in the
event of a Delta bankruptcy are estimated to be between $1million and $3
million. The current Delta receivable is approximately $1,135,000.
We are currently evaluating potential additional sources of capital to
strengthen our balance sheet and improve our cash availability.
Management believes that the Company is faced with a substantial degree of
uncertainty and allocation of human and financial resources away from normal
operations as long as the legal proceeding between Mr. Vassell and GCM
continues (see Item 3 - Legal Proceedings). The Company is a defendant in
these proceedings and is incurring additional legal costs as a result. At the
next shareholders meeting (to occur August 27, 2004) the current terms of
office of Messrs. Vassell, Miller, Nekos and Painter as directors expire. If
Mr. Vassell is not successful on appeal prior to this meeting, it is expected
that they will all be replaced by the individuals who GCM have nominated to
stand for election. The proxy for the annual meeting on August 27, 2004 will
identify seven or eight candidates, including Messrs. Vassell, Nekos, and
Miller, running for the four open directorships. Management has decided to
refrain from making any recommendation to the shareholders as to any of the
candidates.
GCM has asked the current Board to terminate Mr. Vassell and he has been
notified by the Board that his Employment contract will not be extended on
the anniversary of the effective date in November 2006. Based on the advice
of Company Counsel, Mr. Vassell's Employment Period, as defined in his
Employment Agreement dated September 12, 2000, shall continue until November
2006. If he is terminated by the Company's Board prior to November 2006 his
Employment Agreement provides for the payment of severance pay in a lump sum
equal to his base salary (currently at $250,000) multiplied by a fraction,
the denominator of which is 365 and the numerator of which is the number of
days between the date of such termination and November 2006. In addition, Mr.
Vassell would be entitled to participate in certain incentive compensation
for the year of termination and health benefits. For one year following his
termination, Mr. Vassell would not be permitted (except under limited
circumstances) to solicit for employment certain employees of the Company, to
solicit any customer to purchase services offered by the Company, to solicit
any customer to purchase services offered by the Company, or to provide any
customer services offered by the Company.
Any such termination, absent "cause", (as defined in Mr. Vassell's employment
agreement), would subject the Company to a claim for the severance pay
described above. Based on the advice of Company Counsel, this severance pay
is expected to be at least $600,000 and is required to be paid in cash within
30 days of the termination. GCM has indicated that whether or not Mr. Vassell
is terminated it would like the Board to engage Mr. Barry Regenstein as the
Company's Chief Operating Officer. No replacement for Mr. Vassell, in his
position as CEO, has been proposed by GCM. GCM has indicated that it would
take action to appoint Mr. Bruce Galloway as Chairman of the Board. The
Company's legal counsel has expressed their belief that, absent a written
waiver from Mr. Vassell, both the appointment of a COO and/or the removal of
Mr. Vassell as Chairman of the Board would likely result in a constructive
discharge under the employment agreement and subject the Company to the claim
described above.
Subject to the results of the pending litigation, Reliance's sale of its
securities in the Company makes the Company eligible to bid on certain
federal privatization contracts for the provision of security services in the
airline industry. No such contracts have, to Management's knowledge, been
awarded to date. However, the Company is actively pursuing these
possibilities.
FORWARD LOOKING STATEMENTS
Certain of the statements contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations section of the Form
10K and in particular this report including those under the heading
"Outlook," contain forward-looking statements that are based on current
expectations, estimates, forecasts and projections about the industry in
which the Company operates, management's beliefs, and assumptions made by
management. In addition, other written or oral statements that constitute
forward-looking statements may be made by or on behalf of the Company. While
we believe these statements are accurate, our business is dependent upon
general economic conditions and various conditions specific to our industry.
Future trends and these factors could cause actual results to differ
materially from the forward-looking statements that have been made. These
statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that are difficult to predict.
Therefore, the actual outcomes and results may differ materially from what is
expressed or forecast in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
As provided for under the Private Securities Litigation Reform Act of 1995,
the Company wishes to caution shareholders and investors that the following
important factors, among others, could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements in this
report.
Consequences of Change in Control
According to the second amendment to Schedule 13D filed by GCM Security
Partners, LLC ("GCM") Managing Member Bruce Galloway on May 26, 2004, Mr.
Galloway owns or has voting control over 2,528,639 shares (excluding the
unissued voting shares underlying the preferred stock tendered by GCM as
discussed in Item 3 - Legal Proceedings above) which represent approximately
40.2% of all outstanding voting shares. Although GCM owns warrants
exercisable for an additional 2,448,092 voting shares, GCM has not attempted
to exercise these warrants to date and may be subject to the same statutory
limitations as the preferred stock as discussed in Item 3 above.
Unless Mr. Vassell is successful in his appeal, the goal of which is to
reinstate his right to purchase the securities sold by Reliance to GCM
representing approximately 53.1% of the voting stock on a fully diluted
basis, GCM will very likely gain control of the Company's board of directors
at the Annual Shareholder's meeting scheduled for August 27, 2004. It is
expected that the directors nominated to the board by Reliance will resign at
the time and GCM will appoint replacement directors and control the entire
board. With control of the board, GCM will have the power, and has stated its
intention to terminate Mr. Vassell as President and CEO and to appoint Mr.
Barry Reggenstein COO and Mr. Bruce Galloway as Chairman as per the second
amended Schedule 13D filed May 26, 2004. Neither Mr. Galloway nor Mr.
Reggenstein have experience in the security guard business. Mr. Regenstein
does have experience in the airline services industry having formerly been
Senior Vice President and Chief Financial Officer of GlobeGround North
America (previously Hudson General Corporation) a company offering airline
ramp services, cargo handling, airline refueling, and winter-related services
to airlines.
It is not possible for management to currently assess whether GCM's
acquisition of Command shares will result in positive or negative effects on
the Company, its minority shareholders, its employees, its customers, its
financial condition or its results of operations.
The current uncertainties with regard to management and control of the
company arise from the litigation and the applicability of NYBCL ss. 912
(see, Item 3 - Legal Proceedings). Shareholders are directed to the SEC
filings of the Company and the controlling shareholders. Furthermore, the
Company expects to file and distribute a proxy statement with respect to the
Annual Meeting of the Shareholders scheduled for August 27, 2004. The proxy
statement will contain additional updated information concerning the change
of control, the litigation, the effect of NYBCL ss. 912 and the biographical
background of the GCM nominees up for election.
CIT Default/Airline Industry Concerns/Potential for Insolvency
In the event CIT terminates the Company's revolving loan (see, Liquidity
and Capital Resources - CIT Revolving Loan, above) the Company's access to
working capital would be eliminated and would likely result in the Company's
insolvency. Several of the Company's aviation clients filed for bankruptcy
protection during fiscal year 2003. The aviation industry continues to
struggle with various challenges including the cost of security and decreased
volumes due to SARS and the threat of terrorism. Additional bankruptcy
filings by aviation and non-aviation clients would have a material adverse
impact on the Company's liquidity, results of operations and financial
condition. A bankruptcy filing by Delta Airlines within the next several
months could lead to the Company's insolvency.
Increased Legal Expense
Due to the legal proceedings referenced in Item 3 - Legal Proceedings, it is
expected that the Company will incur higher than usual costs including, but
not limited to those associated with the defense of legal actions against it
by Mr. Vassell and GCM, the possible advancement and/or indemnification of
legal costs to directors Nekos and Miller in connection with the claims
against them by GCM, increased costs associated with the preparation of this
form 10K and increased costs associated with the preparation of the Company's
proxy in connection with the Annual Shareholders meeting scheduled for
August 27, 2004.
Regulation
The Company's management assumes that the current regulation and
federalization of pre-board screening services provided by the Company will
not be expanded into other areas such as general security and baggage
handling at aviation facilities. Such increased regulation or federalization
would have a material adverse impact on the Company's results of operations
and financial condition.
Competition
The Company's assumptions regarding projected results depend largely upon the
Company's ability to retain substantially all of the Company's current
clients. Retention is affected by several factors including but not limited
to, regulatory limitations, the quality of the services provided by the
Company, the quality and pricing of comparable services offered by
competitors, continuity of Management and continuity of non-management
personnel. There are several major national competitors with resources far
greater than those of the Company which, therefore, have the ability to
provide service, cost and compensation incentives to clients and employees
which could result in a loss of such clients and/or employees.
Cost Management
The Company's ability to realize its projections will be largely dependent
upon its ability to maintain margins, which in turn will be determined in
large part by management's control over costs and increased pressure on its
customers to cut their costs. To a significant extent, certain costs are not
within the control of management and margins may be adversely affected by
such items as litigation expenses, fees incurred in connection with
extraordinary business transactions, inflation, labor unrest, increased
payroll and related costs.
Collection of Accounts Receivable
Management has no reasonable basis to believe that default in payment of
accounts receivable by the Company's security guard customers or
administrative service clients will occur. However, any such default by a
significant client due to bankruptcy or otherwise, would have a material
adverse impact on the Company's liquidity, results of operations, and
financial condition.
Catastrophic Events
The Company is exposed to potential claims for catastrophic events, such as a
hijacked airplane, based upon allegations that the Company failed to perform
its services in accordance with contractual or industry standards. The
Company's insurance coverage limits are currently $5 million per occurrence
for guard services and $25 million in the aviation division. As of October 1,
2003, the Company has an excess general liability insurance policy that
covers aviation claims for an additional $25 million in the aggregate. The
Company retains the risk for the first $25,000 per claim on the non-aviation
related policy and $5,000 on the aviation related policy (except $25,000 for
damaged aircraft).
Officers and Directors Potential to Control Matters Requiring
Stockholder Approval
Our executive officers, directors and 5% or greater stockholders currently
own beneficially 3,135,439 shares or approximately 49.9% (excluding any
shares issuable upon exercise of warrants or conversion of preferred stock)
and at a future date have the potential through the exercise of warrants,
options and preferred stock, to beneficially own approximately 7,100,551
shares or approximately 69.3% of the outstanding shares of the Company's
common stock.. These stockholders, acting together would be able to
effectively control matters requiring approval by stockholders, including the
election or removal of directors and the approval of mergers or other
business combination transactions. This concentration of ownership could have
the effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquirer from attempting to obtain control of us,
which in turn could have an adverse effect on the market price of our common
stock or prevent our stockholders from realizing a premium over the market
price for their shares of common stock. The estimates stated above are not
expected change to any substantial degree as a result of any reversal on
appeal of the district court's ruling in the litigation brought by William
Vassell against Reliance and GCM (see Item 3 - Legal Proceedings).
These are representative of the factors that could affect the outcome of the
forward-looking statements. In addition, such statements could be affected by
general industry and market conditions and growth rates, general economic
conditions, including interest rate fluctuations and other factors.
Additional detailed information concerning a number of factors that could
cause actual results to differ materially from the information contained
herein is readily available in the Company's most recent reports on Forms
10-K, 10-Q and 8-K and any amendments thereto (all as filed with the
Securities and Exchange Commission from time to time).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
During the fiscal year ended March 31, 2004, the Company did not hold a
portfolio of securities instruments for either trading or for other purposes.
The Company is exposed to market risk in connection with changes in interest
rates, primarily in connection with outstanding balances under its revolving
line of credit with the CIT Group/Business Credit, Inc. Based on the
Company's interest rate at March 31, 2004 and average outstanding balances
during the fiscal year then ended, a 1% change in the prime lending rate
would impact the Company's financial position and results of operations by
approximately $67,000 over the next fiscal year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See ITEM 15, "EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9a. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports
filed with the Securities and Exchange Commission is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to the
Company's management, including its CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosure.
As of March 31, 2004, an evaluation was performed under the supervision and
with the participation of the Company's management, including the CEO and
CFO, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective as of March 31, 2004. There
have been no changes in the Company's internal controls over financial
reporting during the most recent quarter that have materially affected, or
are reasonably likely to materially affect, the Company's internal controls
over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's by-laws require that the Board of Directors be divided into two
classes. The first class consists of directors Neil French, Jeremy Simon and
Graeme R. Halder. The second class consists of William C. Vassell, Peter J.
Nekos, Carl E. Painter and Gregory J. Miller. The terms of the directors in
the second class will expire at the annual meeting of shareholders scheduled
for August 27, 2004. The terms of the directors in the first class will
expire at the annual meeting of shareholders for the fiscal year ended March
31, 2004. Each director's term is for two years. A classified board makes it
more difficult for shareholders to change the majority of directors.
Depending on the number of people in each class it could take two (2) annual
meetings to replace a majority of the Board. This provision is applicable to
every election of directors after the initial classification.
The following table provides information concerning each person who was an
executive officer or director of the Company as of June 24, 2004.
Name Age Title
- ------------------- -- -------------------------------------
William C. Vassell 45 Chairman of the Board, President and
Chief Executive Officer
Gregory J. Miller 44 Director
Peter J. Nekos 76 Director
Neil French 53 Director
Graeme R. Halder 41 Director
Carl E. Painter 58 Director
Martin Blake 50 Vice President Aviation Services
Gordon Robinett 68 Chief Financial Officer
Jeremy P. Simon 48 Director
William C. Vassell is the Company's President, Chief Executive Officer and
Chairman of the Board. Mr. Vassell had been Chairman of the Board, President
and Chief Executive Officer of the Company since 1983, when the Company
repurchased the remaining 50% of its then-outstanding common stock (he became
a 50% owner of the Company in 1980). In connection with the Company's
acquisition of United Security Group Inc. ("United"), Mr. Vassell resigned
from the offices of President and Chief Executive Officer on February 24,
1995, and retained his position as Chairman of the Board. He has been a
director of the Company since 1980, and has been a member of the Executive
Committee since March 1995. He was reappointed as President and Chief
Executive Officer on November 13, 2000 in conjunction with the Reliance
transaction. Mr. Vassell is active in various industry and trade
associations. He twice was Chairman of the Mid-Hudson Chapter of the American
Society for Industrial Security (the nationally recognized security
association), and he is a Certified Protection Professional within the
Society. He is also a director of the Associated Licensed Detectives of New
York State and a member of the Committee of National Security Companies.
Gregory James Miller has been a director of the Company since September 1992.
Since 1987 he has served as General Counsel for Goldline Connectors, Inc., a
Connecticut-based electronics manufacturer, and sits on its board of
directors. Mr. Miller also serves "of counsel" to Benenson & Kates, in New
York, handling labor law and contract negotiations for security guard
clients, and has handled various legal matters for the Company since 1985.
Mr. Miller is currently employed by Goldline Connectors, Inc. He has a
Bachelors Degree from Kalamazoo College, and a Juris Doctor Degree from New
York Law School, where he was an Editor of the Journal of Human Rights.
Peter J. Nekos has been a director of the Company since March 1991. Mr. Nekos
is a certified public accountant. From July 1984 to June 1986 he was a
partner of Nekos & Kilduff, an accounting firm located in New Rochelle, New
York. He operated his own accounting firm in Mamaroneck, New York from July
1986 until September 1996. He is Chair of the Company's Audit Committee.
Neil French was appointed as a director to replace and finish the term of
Geoffrey P. Haslehurst who voluntarily resigned in January 2003. Neil French
was appointed Group Finance Director of Reliance Security Group plc in April
2001. A graduate of Edinburgh University, he is an experienced public company
finance director having held that position with Perry Group plc and APV plc.
Prior to that, he held several senior finance positions with Lex Services
plc. He is a member of the Company's Audit Committee.
Graeme R. Halder has been a director of the Company since January 2001 and
served as its Chief Financial Officer from January 2001 until April 2004 when
he voluntarily resigned from that office. Mr. Halder is qualified as a
Chartered Accountant in the United Kingdom and worked from 1987 to 1988 with
Touche Ross at their London office. In 1988, he moved to the corporate head
office of Granada Group plc where he worked for eight years culminating in a
position as Finance Director of Granada Hospitality which had $2 billion of
revenue and $3 billion in assets. Granada is involved in retail, hotels and
catering. His final role at Granada Group plc was to spearhead the
integration of the accounting systems of several companies following the $6
billion acquisition of Forte plc in 1996. He moved to Reliance Security Group
plc in 1996 as Finance Director of the guard division before moving to the
United States to take up his current position as Chief Financial Officer of
Command.
Carl E. Painter has been a director of the Company since April 2001. Mr.
Painter was most recently Chairman, President and Chief Executive Officer of
BICC Cables Corporation which was a leading manufacturer of electrical cables
in the United States and Canada with revenues in excess of $750 million. BICC
Cables was a subsidiary of the London based BICC Group. In 1984, Mr. Painter
was a co-founder of Cablec Corporation, a company formed to complete the
management buy-out of the power cable business of the Phelps Dodge Cable &
Wire Company. At the time of the MBO, revenues were $50 million. By 1989,
revenues had increased to over $500 million as a result of internal growth
and several acquisitions and the company was acquired by the BICC Group.
During his time with the company, Mr. Painter held positions in
manufacturing, sales, marketing and general management and led a number of
acquisitions and the integration process following the acquisitions. He
served as a director on the main board of the BICC Group and was a director
on the board of Phillips Cables, Ltd., a Canadian subsidiary. He was also a
director for the National Electrical Manufacturers Association, the trade
association for the U.S. electrical industry. Mr. Painter received a Bachelor
of Science degree in electrical engineering from Lehigh University in 1968
and an MBA degree from the Harvard Business School in 1975. He served four
years as a Flight Officer in the U.S. Navy.
Martin C. Blake, Jr. has over twenty-eight years of experience in aviation
security services. Prior to joining the company in 1995, Mr. Blake retired as
a Major in the United States Air Force, where he served in a variety of
senior management positions. Mr. Blake's last assignment was as the Program
Manager for Electronic Security Systems, Electronic Systems Division. In this
capacity he managed a $20 million annual program responsible for global
marketing, procurement, and deployment of electronic security systems. He was
responsible for integrating security systems and programs at international
airports in Germany, Turkey, and the United Kingdom. Previously, Mr. Blake
was the Director of Security at the Department of Defense's largest
classified air flight facility, incorporating over 1,200 square miles of
restricted air space. Establishing aviation security programs for major
aircraft defense contractors was an integral responsibility of his position.
Mr. Blake also served as the Security Program Manager for Air Force space
programs, including security for the Space Shuttle and expendable space
launch vehicles. He also led the effort to integrate a shared automated entry
control system for use at Cape Canaveral, Kennedy Space Center, and the
Johnson Space Center.
William Dunn voluntarily resigned as Secretary and General Counsel for
Command Security Corporation in August 2004. No replacement has been
identified for either position.
Gordon Robinett was hired as of April 5, 2004 as the Company's interim CFO
following the voluntary resignation of former CFO Graeme Halder. From July
1999 until his April 2004 employment with the Company, Mr. Robinett was
retired and living in Arizona. Mr. Robinett formerly served the Company as
Vice Chairman of the Board of Directors and Treasurer until August 1, 1996
when Mr. Robinett and the Company agreed to mutually terminate his
employment. In August 1997, Mr. Robinett was engaged again by the Company as
Acting Treasurer until he resigned on July 1, 1999, in conjunction with the
Board's approval of a then-new Chief Financial Officer and Executive Vice
President. Prior to his initial service to the Company, Mr. Robinett was an
employee of Uniforce Temporary Personnel, Inc., a publicly held national
temporary personnel agency from 1968 to April 1989, initially as Controller
and thereafter as Vice President of Finance, Secretary and Treasurer. Mr.
Robinett is currently a director of Comforce Corporation which acquired
Uniforce in 1996.
Jeremy P. Simon was appointed as a director to replace and finish the term of
Kenneth Allison who voluntarily resigned in April 2004. Mr. Simon has been
Group Legal Counsel and Company Secretary of Reliance Security Group plc
since January 2002. Prior to his position with Reliance, Mr. Simon worked for
over 4 years as the Corporate Services Director and Company Secretary of
Prism Rail PLC, a UK publicly quoted provider of passenger railway services.
Mr. Simon has been a corporate attorney for nearly 25 years and for much of
his career was a partner in a substantial UK law firm where he specialized in
corporate finance and other business-related fields.
Audit Committee
The Audit Committee was comprised of Messrs. Haslehurst, Miller and
Nekos (Chair) as of March 31, 2002. As of January 2003, Mr. French assumed
Mr. Haslehurst's duties on the Audit Committee. Messrs. Nekos and Miller are
independent directors and it is believed that Mr. Nekos' credentials satisfy
the requirements of a financial expert.
Code of Ethics
The Code of Ethics was adopted by unanimous vote of the Board on July 6, 2004
and is attached hereto as Exhibit 14.
Section 16(a) Beneficial Ownership Reporting Compliance
Each director and executive officer of the Company who is subject to Section
16 of the Securities Exchange Act of 1934, and each other person who
beneficially owns more than 10% of the Company's common stock, is required by
Section 16(a) of that Act to report to the Securities and Exchange Commission
by a specified date his or her ownership of and transactions in the Company's
common stock. Copies of such reports on Forms 3, 4, and 5 must also be
provided to the Company. Based on management's knowledge of the holdings and
transactions of reporting persons, a review of Forms 3, 4 and 5 and any
amendments thereto, and a review of written representations to the Company
with respect to the fiscal year ended March 31, 2004, the Company is not
aware of any person who, at any time during the fiscal year ended March 31,
2004, was a director, officer or beneficial owner of more than ten percent
(10%) of the Company's common stock and who failed to file reports required
by Section 16(a) of the Securities Exchange Act of 1934, as amended, during
the fiscal year ended March 31, 2004.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended March 31, 2004, all
plan and non-plan compensation paid to, earned by, or awarded to William C.
Vassell, Chairman of the Board and Chief Executive Officer, Graeme R. Halder,
Chief Financial Officer and Martin C. Blake, Jr., Vice-President - Aviation.
No other executive officer of the Company received total annual salary and
bonus in excess of $100,000 for the fiscal year ended March 31, 2004 and,
therefore, compensation for such other executive officers is not disclosed.
SUMMARY COMPENSATION TABLE
FOR THE FISCAL YEAR ENDED MARCH 31, 2004
SUMMARY COMPENSATION TABLE
FOR THE FISCAL YEAR ENDED MARCH 31, 2004
Annual Compensation Long-Term
Compensation
Shares
Fiscal Year Other Annual Underlying
Name and Principal Ended Salary Warrants
Position March 31 Annual Salary Compensation Bonus Granted
- ------------------ -------- ------------- ------------ ----- ----------
William C. Vassell 2004 $250,000 0 204,485
President, Chairman 2003 $193,268 $50,000
of the Board & Chief 2002 $146,280 $45,000
Executive Officer
Graeme R. Halder 2004 $146,280 $295,733
Chief Financial Officer 2003 $260,834 $172,287
2002 $163,083 $120,320
Martin C. Blake, Jr. 2004 $150,000 $94,200 50,000
Vice President- 2003 $187,417 $150,000
- Aviation 2002 $119,678 $114,312
In November 2000, Mr. Vassell was granted two warrants covering
1,217,444 shares of the Company's common stock in connection with the
Reliance transaction. The first warrant issued to Mr. Vassell in
connection with the Reliance transaction covers 204,485 shares at an
exercise price of $1.25 per share. The shares became exercisable on
November 12, 2000, but cannot be exercised until after the exercise by
the holder of the warrant issued to Reliance and then only in the same proportion
as to which the Reliance warrant is then exercised. This warrant expires on
November 12, 2005. The second warrant issued to Mr. Vassell in
connection with the Reliance transaction covered 1,012,159 shares at an
exercise price of $1.25 per share. It was exercisable only to the
following extent: (i) with respect to one-third of the warrant shares if
the Company's earnings had satisfied certain "Confidential Performance
Targets" (defined below under Item 11 - "Employment Agreements and
Warrants and Termination of Employment and Change of Control Agreement -
William C. Vassell") for the fiscal year ended March 31, 2002; (ii) with
respect to two-thirds of the warrant shares if the Company's earnings
were satisfied the Confidential Performance Targets for the fiscal year ended
March 31, 2003; and (iii) with respect to all of the warrant shares if
the Company's earnings had satisfied the Confidential Performance Targets for
the fiscal year ended March 31, 2004. These targets were not met and the warrant
is now void.
All perquisites and other personal benefits, securities or property do
not exceed either $50,000, or 10% of the total annual salary and bonus
of the executive officer. All perquisites and other personal benefits,
securities or property are properly indicated in the "Other Annual
Salary Compensation" column, as they all fit into the categories set
forth in Item 402 of Regulation S-K.
Mr. Halder's additional compensation is comprised of (i) $11,688 annual
vehicle reimbursement; (ii) $13,800 annual disturbance allowance;
(iii) $6,000 annual travel allowance; (iv) $109,494 housing allowance for
(v) $8,471 annual health insurance deduction reimbursement; and
(vi) $146,280 one-time payment for the buyout of Mr. Halder's employment
contract resulting from Mr. Halder's resignation in April 2004. Also,
as a result of this resignation, Mr. Halder's 75,000 warrants have
become void.
Mr. Blake received a warrant in 2000 pursuant to the Company's Stock Option
Plan. This warrant is for 50,000 shares at an exercise price of $.75 became
exercisable on May 1, 2004.
Stock Options/Warrants
The Company did not grant any stock warrants pursuant to its 2000 Stock
Option Plan during the fiscal year ended March 31, 2003.
Employment Agreements, Warrants, Termination of Employment and Change of
Control Agreements
William C. Vassell
The Company entered into an Employment Agreement with Mr. Vassell dated as of
September 12, 2000. The Agreement went into effect when the Reliance
transaction was consummated on November 13, 2000. The Employment Agreement
provides that Mr. Vassell be employed as the Company's Chairman of the Board
of Directors, Chief Executive Officer and President. The Employment Agreement
will end on the earlier of the third anniversary of the effective date or the
date on which Mr. Vassell's employment is terminated under the Employment
Agreement. Unless either party gives ninety (90) days notice to the other
party prior to an anniversary of the effective date, the three-year rolling
Employment Period shall be automatically extended for one (1) year on such
anniversary date. The Company served a non-renewal notice 90 days prior to
the anniversary date of November 13, 2004. Mr. Vassell's base salary is
currently $250,000 per annum. Pursuant to the Reliance transaction and the
Employment Agreement, the Compensation Continuation Agreement entered into
between the Company and Mr. Vassell was terminated as of September 2000.
Mr. Vassell became eligible to receive incentive compensation commencing as
of the fiscal year ended March 31, 2002. Pursuant to this incentive
compensation, he was eligible to receive incentive compensation equal to 20%
of his base salary if the Company's earnings before taxes for a given year
equaled or exceeded certain Confidential Performance Targets. Said
Confidential Performance Targets were set forth in a confidential letter
agreement between Mr. Vassell and the Company, dated September 12, 2000. Said
Letter Agreement referenced the Company's confidential Business Plan dated
March 13, 2000 and was approved by the Company's Board of Directors in
November, 2000 following the Reliance Transaction. For each percentage
increase in earnings before taxes above the stated targets, the incentive
compensation would have been increased by three percentage points of the base
salary up to a maximum incentive compensation equal to 50% of base salary. As
of the end of fiscal year 2004 the Confidential Targets had not been met and
Mr. Vassell is no longer eligible to receive the foregoing incentive
compensation.
Mr. Vassell also received two warrants which are described in "Security
Ownership of Certain Beneficial Owners and Management" and in the annotations
to the table above. Mr. Vassell's employment may be terminated by the Board
with or without cause or by Mr. Vassell in the event of a material breach by
the Company or Reliance of the Shareholders' Agreement dated September 12,
2000, a material diminution in his duties and/or authority under the
Employment Agreement, or a relocation of the Company's headquarters more than
fifty (50) miles away from its his current location. Any such diminution,
relocation or other uncured breach is referred to as constructive discharge.
Mr. Vassell may also terminate his employment upon one hundred eighty (180)
days notice or under certain circumstances following a change in control. As
a result of the GCM purchase of Reliance's shares (see, Item 3 - Legal
Proceedings) a change of control might have occurred.
In the event Mr. Vassell is terminated for cause or he terminates other than
for constructive discharge or following a change of control, death or
disability, the Company shall have no further obligation except to pay those
accrued obligations arising prior to the date of termination. In the event
the Company terminates Mr. Vassell without cause or Mr. Vassell terminates as
a result of constructive discharge, the Company will have no obligation to
Mr. Vassell other than to pay all accrued obligations such as salary and
benefits, the payment of the balance of his base salary for the remainder of
his Employment Period plus incentive compensation under certain
circumstances. Based on the advice of the Company's counsel, it is believed
that a termination of Mr. Vassell in the near future could cause the Company
to incur a charge of approximately $600,000 (based on 28 months remaining in
the Employment Period.
The Employment Agreement provides that Mr. Vassell shall be subject to a
Confidentiality Agreement with respect to any confidential or proprietary
information, knowledge or data relating to the Company. In addition, for one
(1) year following termination of his employment for any reason, Mr. Vassell
shall not solicit for employment or employ any person who is a senior
executive or branch manager of the Company, solicit any customer of the
Company or provide to any customer of the Company services of the type
offered by the Company as of the date of such termination except under
certain circumstances.
The Employment Agreement goes on to provide Mr. Vassell with extensive
indemnification with respect to any action taken or omission occurring after
the effective date of the contract. Such indemnification provisions provide
for advancement of expenses and costs.
Graeme R. Halder
Mr. Halder voluntarily resigned from his position as Chief Financial Officer
of the Company on April 4, 2004 and accordingly, his Employment Agreement was
terminated without further obligation on the Company's part. During the
fiscal year covered by this report, Mr. Halder was employed pursuant to an
Employment Agreement effective from August 20, 2001. This superseded the
prior agreement that was effective from January 1, 2001. The Agreement
provided that Mr. Halder was to be employed as the Company's Chief Financial
Officer and was to report to Mr. Vassell. Under this Agreement, Mr. Halder's
base salary was $146,280 per annum, and in fiscal year 2004 he received other
compensation in the amount of $295,733 (see F3 to Item 11 - Executive
Compensation). The perquisites offered to Mr. Halder included a Tax
Equalization Agreement, an automobile, a $13,800 disturbance allowance per
annum, the reasonable costs of private education for his two eldest children
(which was not required 2003/2004 school year as they had returned to the UK)
and a $6,000 per annum air travel allowance. The Company also paid him a
mortgage allowance towards his US property which was offset by rental income
received on his property in the UK.
Martin C. Blake, Jr.
The Company has executed an Employment Agreement with Mr. Blake dated as of
March 1, 2003. The Agreement went into effect on March 1, 2003 and superseded
a prior Employment Agreement dated March 20, 2000 and as amended on March 20,
2002. The Agreement provides that Mr. Blake be employed as the Company's Vice
President and General Manager of the Company's Aviation Division. The
contract will end on the earlier of the third anniversary of the date of the
Agreement or the date on which Mr. Blake's employment is terminated under the
Agreement. Mr. Blake's base salary is $150,000 per annum. He is also eligible
to receive a performance-related bonus. The perquisites offered to Mr. Blake
include an automobile and reimbursement for all out-of-pocket business
expenses.
In the event Mr. Blake is terminated for cause, the Company shall have no
further obligation except to pay those accrued obligations arising prior to
the date of termination. In the event the Company terminates Mr. Blake's
employment without cause, the Company is obligated to provide twelve (12)
months of health insurance and pay a lump sum severance amount of $150,000.
The Agreement further provides that Mr. Blake will execute the Company's
standard form of Confidentiality and Non-Compete Agreement pursuant to which,
for one year following termination of his employment for any reason, he will
not engage in any employment or business in competition with the Company. For
one additional year he will not solicit any of the Company's aviation clients
or potential clients or hire or influence Company employees to leave the
Company.
Gordon Robinett
The Company has executed an Employment Agreement with Mr. Robinett
commencing April 5, 2004 and terminating on October 5, 2004. Mr. Robinett was
hired as the Company's interim CFO following the voluntary resignation of
former CFO Graeme Halder. Under the Agreement Mr. Robinett receives a salary
of $125,000.00 per annum. The perquisites offered to Mr. Robinett under the
Agreement include use of an automobile with purchase option, a $750 monthly
housing allowance and reimbursement for all out-of-pocket business expenses.
If the Company terminates Mr. Robinett's employment for any reason other than
death the Company is obligated to pay Mr. Robinett 60% of the remaining
salary due. If Mr. Robinett dies during the term of the Agreement, the
Company will be obligated to pay his widow 50% of the remaining salary due.
The Agreement also contains a non-compete clause providing that, during the
term of his employment, Mr. Robinett will not engage in business with, be
employed by or serve as an officer or director of any other business or
enterprise (except for ComForce Corporation). The clause further provides
that during the term and for an additional two years thereafter, Mr. Robinett
will not solicit any of the Company's employees or hire or influence Company
employees to leave the Company.
William Dunn
William Dunn voluntarily resigned as Secretary and General Counsel for
Command Security Corporation on August 29, 2003. Mr. Dunn's warrants for
20,000 shares of common stock (issued in connection with his employment) were
cancelled pursuant to their terms.
Other Agreements
Other than pursuant to the Employment Agreement and the Compensation
Continuation Agreement for Mr. Vassell and the employment agreements with
Messrs. Robinett and Blake, there is no compensation plan or arrangement for
the benefit of any person named in the Summary Compensation Table that would
result from the resignation, retirement or other termination of such person's
employment.
Other than the compensation described above, there are no long-term incentive
plans for the persons named in the Summary Compensation Table. In November
1999, the Company adopted a qualified Retirement Plan which became effective
beginning calendar year 1999 and provided for elective employee deferrals and
discretionary employer contributions to non-highly compensated participants.
The Plan does not allow for employer matching of elective deferrals. For the
period ended March 31, 2003, no discretionary amounts have been accrued or
paid.
Board of Directors' Compensation
No executive officer receives any additional compensation for serving as a
director. Directors who are not employees of the Company or the Reliance
Security Group received a meeting fee of $2,500 for each meeting attended,
and all directors were reimbursed for expenses incurred in attending Board
meetings. Directors Gregory J. Miller and Peter J. Nekos receive $1,000 per
month in connection with services they provide to the Company in their
capacity as members of the audit committee. No other directors who are not
also executive officers received any plan or non-plan compensation from the
Company during the last three fiscal years. In recognition of their service
as Directors, Messrs. Nekos and Painter, and Miller were each granted a
warrant covering 10,000 shares of the Company's Common Stock exercisable at
$0.82 per share in February 2002. The warrants expire on February 28, 2005.
In July 2002, an Independent Committee of Directors was established to
consider various options available to the Company to maximize shareholder
value. The Committee comprised of Gregory J. Miller (Chair), Peter J. Nekos
and Carl E. Painter. Fees received for fulfilling their duties on this
Committee were $44,045, $9,186 and $2,779 respectively. The Independent
Committee has met extensively over several months during fiscal year end
March 31, 2004 due in large part to the GCM purchase of Reliances share and
the surrounding issues.
Limited Directors' Liability
Pursuant to the New York Business Corporation Law, the Company's Certificate
of Incorporation, as amended, eliminates to the fullest extent of such Law
the liability of the Company's Directors, acting in such capacity, for
monetary damages if they should fail through negligence or gross negligence
to satisfy their duty of exercising proper business judgment in discharging
their duties, but not for acts or omissions in bad faith, or involving
intentional misconduct or amounting to a knowing violation of law or under
other limited circumstances.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the number and
percentage of common stock (being the Company's only voting securities)
beneficially owned by (i) each person who owns of record (or is known by the
Company to own beneficially) 5% or more of the Company's common stock or as
to which he has the right to acquire within sixty (60) days of June 24, 2004,
(ii) each director and executive officer and (iii) all of said beneficial
owners, officers and directors as a group, as of June 24, 2004. Except as
indicated below, the address for each director and executive officer is the
Company's principal office at Lexington Park, Route 55, Lagrangeville, New
York 12540.
Other than as set forth in the following table, the Company is not aware of
any person (including any "group" as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934) who owns more than 5% of the
common stock of the Company. It should be noted however, that action taken by
the Court of Appeals in the William Vassell litigation (see Item 3 - Legal
Proceedings) could alter the ownership of the stock identified below as being
owned by GCM Securities Partners LLC.
Amount and Nature
Of Beneficial
Name Ownership(1) Percent of Class(2)
- ----- ----------------- -------------------
William C. Vassell 1,020,785 (3) 15.7% (2)
Peter J. Nekos 12,500 (4) (12)
Gregory J. Miller 10,000 (5) (12)
Carl E. Painter 10,000 (6) (12)
Martin C. Blake, Jr. 50,000 (8) (12)
Bruce Galloway 5,997,266 (2),(9) 60.2% (2)
c/o Galloway Capital
Management, LLC
1325 Avenue of the Americas
26th Floor
New York, NY 10019
GCM Security Partners LLC 5,297,966 (2),(10) 53.15% (2)
c/o Galloway Capital
Management, LLC
1325 Avenue of the Americas
26th Floor
New York, NY 10019
All Officers and 1,103,285 (2),(3),(4) 16.7% (11)
Directors as a Group (5),(6),(7)
(5 Persons) (8),(11)
(1) The Company has been advised that all individuals listed have the sole
power to vote and dispose of the number of shares set forth opposite their
names except as indicated.
(2) Percent of class for each shareholder is calculated as if all shares
underlying Preferred Stock, options and warrants included in the table for
such shareholder are outstanding. The number of outstanding shares of common
stock is 6,287,343. The percent of class for all executive officers and
directors as a group is calculated as if all shares underlying Preferred
Stock, options and warrants held by any shareholders included in the group
are outstanding.
(3) The shares included under the beneficial ownership of Mr. Vassell include
204,485 shares at an exercise price of $1.25 per share, covered by a warrant
that became exercisable November 12, 2001 but then only to the extent of the
exercise by GCM Security Partners, LLC of a warrant GCM holds. Mr. Vassell
also shares voting and dispository power over 16,300 shares with his wife.
Mr. Vassell previously held a warrant covering 1,012,159 shares at an
exercise price of $1.25 per share. It was exercisable only to the following
extent: (i) with respect to one-third of the warrant shares if the Company's
earnings had satisfied certain "Confidential Performance Targets" (defined
below under Item 11 - "Employment Agreements and Warrants and Termination of
Employment and Change of Control Agreement - William C. Vassell") for the
fiscal year ended March 31, 2002; (ii) with respect to two-thirds of the
warrant shares if the Company's earnings were satisfied the Confidential
Performance Targets for the fiscal year ended March 31, 2003; and (iii) with
respect to all of the warrant shares if the Company's earnings had satisfied
the Confidential Performance Targets for the fiscal year ended March 31,
2004. These targets were not met and the warrant is now void.
(4) Includes 10,000 shares covered by a warrant issued March 1, 2002 and
which expires on February 28, 2005.
(5) Includes 10,000 shares covered by a warrant issued March 1, 2002 and
which expires on February 28, 2005.
(6) Includes 10,000 shares covered by a warrant issued March 1, 2002 and
which expires on February 28, 2005.
(7) Intentionally omitted.
(8) Includes 50,000 shares covered by a warrant issued pursuant to the
Company's 2000 Stock Option Plan that became exercisable May 1, 2004.
(9) Based upon information contained in the Schedule 13D Amendments number 2
and 6 filed by Mr. Galloway on May 26, 2004 and July 12, 2004 respectively.
Includes i) Mr. Galloway's beneficial ownership of 212,000 shares of Common
Stock pursuant to a Proxy, dated July 1, 2004, from Europa International Inc.
("Europa") pursuant to which Mr. Galloway was appointed the proxy of Europa,
with full power and sole discretion to vote the shares of Common Stock held
by Europa for a period of one year; ii) Mr. Galloway's beneficial ownership
of 239,500 shares of Common Stock pursuant to a Proxy, dated July 7, 2004,
from Sandra Pessin pursuant to which Mr. Galloway was appointed the proxy of
Ms. Pessin, with full power and sole discretion to vote the shares of Common
Stock held by Ms. Pessin for a period of one year; iii) Mr. Galloway's
beneficial ownership of 75,300 shares of Common Stock pursuant to a Proxy,
dated July 1, 2004, from Edwin and Carol Levy pursuant to which Mr. Galloway
was appointed the proxy of Mr. and Mrs. Levy, with full power and sole
discretion to vote the shares of Common Stock held by Mr. and Mrs. Levy for a
period of one year; (iv) 172,500 shares of Common Stock over which Mr.
Galloway has full dispositive power; and (v) the shares beneficially owned by
Mr. Galloway through GCM Security Partners, LLC, a limited liability company
of which Mr. Galloway is a managing Member (see, footnote 10 below).
(10) Based upon information contained in the Schedule 13D Amendments number 2
and 5 filed by Managing Member Bruce Galloway on May 26,2004 and July 9, 2004
respectively. The shares included under the beneficial ownership for GCM
Security Partners, LLC include 1,617,339 shares of common stock and 12,325.35
shares of preferred stock convertible into 1,232,535 shares of Common Stock.
Also included is a currently exercisable warrant for 150,000 shares at an
exercise price of $1.03125 per share and a warrant covering 2,298,092 shares,
at an exercise price of $1.25 per share which became exercisable on November
12, 2001. Based on the advice of outside legal counsel (see, Item 3 - Legal
Proceedings), Command's board of directors has decided not to allow
conversion of the preferred stock. Consequently, it is expected that GCM will
pursue an adjudication of its rights to convert its preferred stock. In the
event the board's conclusion with respect to the applicability of NYBCL ss.
912(b) were upheld by a court, GCM would be further limited in its exercise
of its warrants covering 2,298,092 shares of common stock, future investments
in the Company as well as any other "business combinations" with the Company.
(11) The denominator for the group calculation is 6,590,628.
(12) Less than 1 percent of class.
Equity Compensation Plan Information
- ------------------------------------------------------------------------------------------
Plan category Number of Weighted-average Number of
securities to exercise price securities
be issued upon of outstanding remaining
exercise of options, warrants available for
outstanding and rights future issuance
options, warrants under equity
and rights compensation plans
(excluding securities
reflected in
column (a) )
(a) (b) (c)
Equity compensation
plans approved by
security holders 1,392,444 1.19 275,000
Equity compensation
plans not approved
by security holders 280,000 0.91 -0-
Total 1,672,444 1.14 275,000
- ------------------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Shareholder Agreement
In connection with the purchase of its interests in the Company on September
12, 2000, Reliance, William Vassell and the Company entered into a
Shareholder Agreement which provides in part that Reliance and Mr. Vassell
must vote in favor of each of the three directors chosen by the other party
and mutually agree to the selection of a seventh board member. It is believed
that this Agreement terminated upon the sale by Reliance of its interests in
the Company to GCM. However, in the event Mr. Vassell is successful with his
appeal as discussed in Item 3 - Legal Proceedings, it is believed that said
Agreement will be reinstated.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Following are the aggregate fees billed by our principal accountants for
professional services rendered for each of the last two fiscal years:
2004 2003
Audit fees $103,486 $94,932
Audit related fees -0- -0-
Tax fees $19,893 $28,408
All other fees $7,038(1) -0-
(1) Accounting research and consultation
None of the audit services performed were performed by persons other than the
principal accountant's full-time permanent employees. The engagement of the
principal accountants was approved by the Company's audit committee before
the engagement was formalized. Said approval covered all services provided by
the accountants.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(A) (1) Financial statements filed as part of this report:
Page No.
Independent auditor's report........................... F-1
Balance Sheets - March 31, 2004 and 2003............... F-2
Statements of Operations - years ended................. F-3
March 31, 2004, 2003, and 2002
Statements of changes in stockholders' equity.......... F-4
years ended March 31, 2004, 2003, and 2002
Statements of cash flows - years ended................. F-5 - F-6
March 31, 2004, 2003, and 2002
Notes to Financial Statements.......................... F-7 - F-20
(2) Financial statement schedule filed as part of
this report:
Valuation and qualifying accounts - years ended........ F-21
March 31, 2004, 2003, 2002
(3)
All other schedules are omitted since the required information is not present
or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
3.1 Amended & Restated Articles Incorporated by reference to Exhibit of Incorporation 3.3 of
the form 10-K for the fiscal year ending March 31, 1993 (the
"1993 10-K")
3.2 By-Laws Incorporated by reference to Exhibit 3.3 of the Form 10-K
for the fiscal year ended March 31, 1991 (the "1991 10-K")
3.3 Amendments to By-Laws Incorporated by reference to Exhibit 3.3 of the Form 10-K/A
for the fiscal year ended March 31, 1994 (the "1994 10-K/A")
3.4 Certificate of Amendment of Incorporated by reference to Exhibit Certificate of
Incorporation 3.4 of the Eighth Amendment to the
Registration Statement filed on Form S-1, File No. 33-75336
(the "S-1").
4.1 Specimen Stock Certificate Incorporated by reference to Exhibit 4.A to amendment #1 to
Registrant's Registration Statement on Form S-18,
file number 33, 35007-NY (the "S-18")
4.2 Reclassified as Exhibit 10.37
4.3 Reclassified as Exhibit 10.38
4.4 Reclassified as Exhibit 10.39
4.5 Reclassified as Exhibit 10.40
4.6 Warrant (50,000) to the CIT Incorporated by reference to Exhibit 4.2
Group/Credit Finance of the Form 8-K filed on March 13, 1996
4.7 Specimen Series A Preferred Stock Certificate Incorporated by reference to Exhibit 4.2
of the Third Amendment to the S-1.
10.1 Form of Amendment to Employment Agreement Incorporated by reference to Exhibit
for William C. Vassell dated April 8, 1991 10.1 of the 10-K for the fiscal year
ended March 31, 1992 (the "1992 10-K")
10.2 Amended and Restated Employment Agreement Incorporated by reference to Exhibit 10.3
for William C. Vassell dated June 18, 1991 of the 1992 10-K
10.3 Amendment #1 to Amended & Restated Employment Incorporated by reference to Exhibit 10.5
Agreement for William C. Vassell to the 1993 10-K
dated September 25, 1992
10.4 Form of Amendment to Employment Agreement Incorporated by reference to Exhibit 10.2
for Gordon Robinett dated April 8, 1991 of the 1992 10-K
10.41 Financing Agreement with CIT Group/Business Exhibit 10.41 attached hereto
Credit, Inc. dated December 12, 2003
10.5 Amended and Restated Employment Agreement Incorporated by reference to Exhibit
for Gordon Robinett dated June 18, 1991 10.4 of the 1992 10-K
10.6 Amendment #1 to Amended Restated Employment Incorporated by reference to Exhibit &
Agreement for Gordon Robinett 10.6 of the 1993 10-K dated
September 25, 1992
10.7 Form of Warrant Agreement and Warrant Incorporated by reference to Exhibit
for William C. Vassell (175,000 shares) 10.3 of the 1991 10-K
and Gordon Robinett (60,000 shares)
10.8 Form of Warrant Agreement dated May 15, 1992 Incorporated by reference to Exhibit
for William C. Vassell (125,000 shares), 10.7 to the 1992 10-K
Gordon Robinett (60,000 shares) and
Peter J. Nekos (10,000 shares)
10.9 Compensation Continuation Agreement for Incorporated by reference to Exhibit 10.9
William C. Vassell dated September 25, 1992 of the 1993 10-K
10.10 Consulting Agreement with Robert Ellin Incorporated by reference to Exhibit 10.10
dated December 2, 1992 of the 1992 10-K
10.11 Warrant Agreement for William C. Vassell Incorporated by reference to Exhibit 10.16
(500,000) of the Form 10-K for fiscal year ended
March 31, 1994 (the "1994 10-K
10.12 Franchise Offering Prospectus dated Incorporated by reference to Exhibit 10.11
December 1, 1992 of the 1993 10-K
10.13 Warrant Agreement and Warrant for Incorporated by reference to Exhibit 4.B of S-18
Stuart James Company, Inc.
10.14 Form of Second Amendment to May 15, 1992 Incorporated by reference to Exhibit
Warrant Agreement and Warrant Certificate 10.13 in 1994 10-K
for William C. Vassell and Gordon Robinett
10.15 Form of Third Amendment to April 8, 1991 Incorporated by reference to Exhibit 10.14
Warrant Agreement and Warrant Certificate in the 1994 10-K
for William C. Vassell and Gordon Robinett
10.16 Form of Third Amendment to May 15, 1992 Incorporated to Exhibit 10.15
Warrant Agreement and Warrant Certificate in the 1994 10-K
for William C. Vassell and Gordon Robinett
10.17 Placement Agent Agreement Incorporated by reference to Exhibit 1.1 of
the Form 8-K filed October 17, 1993
10.18 Registration Agreement Incorporated by reference to Exhibit 4.1 to
the Form 8-K filed October 17, 1993
10.19 Form of Warrant for Private Placement Incorporated by reference to Exhibit
4.2 to the Form 8-K filed October 27, 1993
10.20 Warrant Agreement (Placement Agreement) Incorporated by reference to Exhibit
4.3 to the Form 8-K filed October 27, 1993
10.21 William C. Vassell Indemnity Agreement Incorporated by reference to Exhibit
10.17 of the 1994 10-K
10.22 Plan of Acquisition, Reorganization, Incorporated by reference to Exhibit 2
Liquidation or Succession of ISS of the Form 8-K filed October 27, 1993
International Service Systems, Inc.
10.23 Amendment to ISS Purchase Agreement Incorporated by reference to Exhibit 10.23
of the 1994 10-K/A
10.24 Plan of Acquisition, Reorganization, Incorporated by reference to Exhibit 2
Liquidation or Succession of Madison of the Form 8-K filed November 12, 1993
10.25 Purchase and Sale Agreement dated Incorporated by reference to Exhibit 2.1
February 24, 1996, for the acquisition of the Form 8-K filed march 23, 1996
of United Security Group Inc.
10.26 Placement Agent Agreement dated Incorporated by reference to Exhibit 10.26
February 24, 1996, between the to the Third Amendment to the Form S-1
Company and Sands Brothers & Co., Ltd.
with Amendment as of March 24, 1996
10.27 Shareholders Voting Agreement dated Incorporated by reference to Exhibit
March 8, 1996, by all directors in their 10.27 of the Third Amendment to the S-1
capacities as Shareholders
10.28 Amendment No. 2 to Amended and Incorporated by reference to Exhibit 10.28
Restated Employment Agreement for of the Third Amendment to the S-1
William C. Vassell dated February 24, 1996
10.29 Amendment No. 2 to Amended and Incorporated by reference to Exhibit 10.29
Restated Employment Agreement for of the Third Amendment to the S-1
Gordon Robinett dated February 24, 1996
10.31 Form of Warrant (250,000) to Incorporated by reference to Exhibit 10.31
Sands Brothers & Co., Ltd. of the Third Amendment to the S-1
10.32 Warrant Reduction Agreement Incorporated by reference to Exhibit 10.32
(275,000) William C. Vassell the Third Amendment to the S-1
10.34 Loan and Security Agreement Incorporated by reference to Exhibit 4.7
with CIT Group/Credit Finance, Inc. of the Third Amendment to the S-1
10.35 Term Loan Agreement with Incorporated by reference to Exhibit 4.8
Deltec Development Corp. of the Third Amendment to the S-1
10.36 Promissory Note to William C. Incorporated by reference to Exhibit 10.36
Vassell ($85,000) dated of the form 10-K for the fiscal year ending
August 22, 1994 March 31, 1995 (the "1995 10-K")
10.37 Notes Payable - ISS Incorporated by reference as Exhibit 4.2
to the 1994 10-K/A
10.38 Bank Note - September 1, 1992 maturity Incorporated by reference as Exhibit 4.2
to the l994 l0-K/A
10.39 Bank Note - November 1, 1997 maturity Incorporated by reference as Exhibit 4.4
of the 1994 10-K/A
10.40 Mehlich Notes Incorporated by reference as Exhibit 4.5
of the 1994 10-K/A
10.41 CIT Group/Business Credit Inc. Financing Exhibit 10.41 attached hereto
Agreement dated December 12, 2003
11.00 Computation of Income Per Incorporated by reference to Exhibit 11
Share of Common Stock annexed to Financial Statements.
14 Command Code of Ethics Exhibit 14 attached hereto
27.00 Financial Data Schedule
31 Certifications Pursuant to
Rule 13(a)-14(a)/15(d)-14(a)
32 Section 1350 Certifications
99.2 Placement Agent Agreement Incorporated by reference to Exhibit 1.1
dated February 24, 1995 to the Form 8-K/A dated February 24, 1995
99.3 Amendment to Exhibit C to the Incorporated by reference to Exhibit 1.2
Placement Agent Agreement dated to the Form 8-K dated March 24, 1995
March 24, 1995
99.4 Agreement with John B. Goldsborough Incorporated by reference to Exhibit 99.3
to the Fourth Amendment to the S-1
99.5 Warrant Standstill Agreement Incorporated by reference to Exhibit 99.4
from William C. Vassell to the Fourth Amendment to the S-1
99.6 Shareholders Voting Agreement Incorporated by reference to Exhibit 99
dated March 8, 1995 to the Form 8-K dated March 24, 1995
99.7 Letter to Company from Incorporated by reference to Exhibit 99.7
D'Arcangelo & Co. L.L.P. to the Form 8-K dated February 9, 1996
dated February 28, 1994.
99.8 Letter to Company from Coopers Incorporated by reference to Exhibit 99.8
& Lybrand L.L.P. dated to the Form 8-K dated February 9, 1996.
February 7, 1996 confirming
termination of engagement
99.9 Letter to Company from Coopers Incorporated by reference to Exhibit 99.9
& Lybrand,L.L.P. dated February 9, 1996. to the Form 8-K dated February 9, 1996.
99.10 Letter (revised) to Commission Incorporated by reference to Exhibit 99.10
from Coopers & Lybrand L.L.P. to the Form 8-K/A filed March 11, 1996.
dated March 8, 1996.
99.11 Press Release dated June 25, 1997 Incorporated by reference to Exhibit 99.11
re: FYE 1997 results to the 1997 10-K.
99.12 Press Release dated June 29, 1999 Incorporated by reference to Exhibit 99.12
to the 10-K for year ended March 31, 1999.
99.13 Stock Purchase Agreement Incorporated by reference to Exhibit 99.13 of the Form 8-K
filed September 27, 2000.
99.14 Reliance Warrant Incorporated by reference to Exhibit 99.14 of the Form 8-K
filed September 27, 2000.
99.15 Vassell Warrant Incorporated by reference to Exhibit 99.15 of the Form 8-K
filed September 27, 2000.
99.16 Vassell Warrant Incorporated by reference to Exhibit 99.16 of the Form 8-K
filed September 27, 2000.
99.17 Kikis Voting Agreement Incorporated by reference to Exhibit 99.17 of the Form 8-K
filed September 27, 2000.
99.18 Sands Voting Agreement Incorporated by reference to Exhibit 99.18 of the Form 8-K
filed September 27, 2000.
99.19 Shareholders' Agreement Incorporated by reference to Exhibit 99.19 of the Form 8-K
filed September 27, 2000.
99.20 Vassell Employment Agreement Incorporated by reference to Exhibit 99.20 of the Form 8-K
filed September 27, 2000.
99.21 Stipulation Incorporated by reference to Exhibit 99.21 of the Form 8-K
filed September 27, 2000.
99.22 Registration Rights Agreement Incorporated by reference to Exhibit 99.22 of the Form 8-K
filed September 27, 2000.
99.23 Audit Committee of the Board Incorporated by reference to Exhibit 99.23 of the Form
of Directors Charter and Powers 10-K filed July 3, 2001.
99.24 Halder Employment Agreement Incorporated by reference to Exhibit 99.24 of the Form 10-K
filed July 3, 2001.
99.25 2003 Stock Option Plan Incorporated by reference to Exhibit 99.25 of the Form 10-K
filed July 3, 2001.
99.26 Halder Warrant Incorporated by reference to Exhibit 99.26 of the Form 10-K
filed July 3, 2001.
99.27 Blake Warrant Incorporated by reference to Exhibit 99.27 of the Form 10-K
filed July 3, 2001.
99.28 Dunn Warrant Incorporated by reference to Exhibit 99.28 of the Form 10-K
filed July 3, 2001.
99.29 McDonald Warrant Incorporated by reference to Exhibit 99.29 of the Form 10-K
filed July 3, 2001.
99.30 Press Release dated June 23, 2003 Incorporated by reference to Exhibit 99.30 of the Form 10-K
filed June 30, 2003.
99.31 Gordon Robinett Employment Agreement Exhibit 99.31 attached hereto
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on and dated March 3, 2004 with
an Exhibit press release dated February 13, 2004 containing financial
statements covering the third fiscal quarter ended December 31, 2003.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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
/s/ William C. Vassell
-----------------------------
William C. Vassell
President, Chairman and Chief
Executive Office
Date: July 13, 2004
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT
AND IN THE CAPACITIES AND ON THE DATE INDICATED.
President, Chairman and
/s/ William C. Vassell Chief Executive Officer July 13, 2004
- ----------------------
William C. Vassell
/s/ Gordon Robinett Chief Financial Officer July 13, 2004
- ----------------------
Gordon Robinett
/s/ Gregory J. Miller Director July 13, 2004
- ----------------------
Gregory J. Miller
/s/ Peter J. Nekos Director July 13, 2004
- ----------------------
Peter J. Nekos
/s/ Neil French Director July 13, 2004
- ----------------------
Neil French
/s/ Jeremy P. Simon Director July 13, 2004
- ----------------------
Jeremy P. Simon
/s/ Graeme R. Halder Director July 13, 2004
- ----------------------
Graeme R. Halder
/s/ Carl E. Painter Director July 13, 2004
- ----------------------
Carl E. Painter
Exhibit 31
Certification (pursuant to Rule 13a-14 of the Securities Exchange Act of
1934, as amended)
I, William C. Vassell certifying individual, certify that:
1. I have reviewed the annual report on Form 10-K of Command Security
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's' auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: July 13, 2004
/s/ William C. Vassell
- ----------------------------
William C. Vassell
Principal Executive Officer
Exhibit 31
Certification (pursuant to Rule 13a-14 of the Securities Exchange Act of
1934, as amended)
I, Gordon Robinett certifying individual, certify that:
1. I have reviewed the annual report on Form 10-K of Command Security
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's' auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: July 13, 2004
/s/ Gordon Robinett
- ----------------------------
Gordon Robinett
Principal Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report on Command Security
Corporation (the "Company") on Form 10-K for the period ended March 31, 2004
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, William C. Vassell, Chairman of the Board of Directors,
President and Chief Executive Officer of the Company, certify, pursuant to 18
U. S. C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report
fully complies with the requirements of section 13 (a) or 15 (d) of the
Securities Exchange Act of 1934, and (2) The information contained in the
Report fairly presents, in all material respects, the financial condition and
result of operations of the Company.
Date: July 13, 2004 By: /s/ William C. Vassell
----------------------
William C. Vassell,
President, CEO and
Chairman of the Board
Exhibit 32
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report on Command Security
Corporation (the "Company") on Form 10-K for the period ended March 31, 2004
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Gordon Robinett, Chief Financial Officer of the Company,
certify, pursuant to 18 U. S. C. section 1350, as adopted pursuant to section
906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1)
The Report fully complies with the requirements of section 13 (a) or 15 (d)
of the Securities Exchange Act of 1934, and (2) The information contained in
the Report fairly presents, in all material respects, the financial condition
and result of operations of the Company.
Date: July 13, 2004 By: /s/ Gordon Robinett
----------------------
Gordon Robinett,
Chief Financial Officer
Independent Auditor's Report
on the Financial Statements
To the Board of Directors
and Stockholders of
Command Security Corporation
We have audited the accompanying balance sheets of Command Security
Corporation as of March 31, 2004 and 2003, and the related statements of
operations, changes in stockholders' equity and cash flows for each of the
three years in the period ended March 31, 2004. Our audits also included the
financial statement schedule listed in the index at Item 14(A). These
financial statements and the schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Command Security Corporation
as of March 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the three years in the period ended March 31, 2004, in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ D'Arcangelo & Co., LLP
June 18, 2004
Poughkeepsie, New York
Command Security Corporation
Balance Sheets
March 31, 2004 and 2003
2004 2003
ASSETS
Current assets:
Accounts receivable from guard service customers, less allowance for
doubtful accounts of $282,822 and $2,361,674, respectively $15,471,135 $14,883,413
Accounts receivable from administrative service client customers, less
allowance for doubtful accounts of $79,043 and $70,663, respectively 607,115 713,603
Accounts receivable disputed, net allowance for billing adjustment of
$965,373 and $1,000,000, respectively 1,965,006 1,930,379
Prepaid expenses 936,454 821,300
Other receivables 369,058 330,930
----------- -----------
Total current assets 19,348,768 18,679,625
Furniture and equipment at cost, net 645,592 837,814
Intangible assets, net 270,217 75,322
Restricted cash 107,676 256,308
Other assets 1,544,855 858,236
----------- -----------
Total assets $21,917,108 $20,707,305
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 556,310 $ 1,081,068
Current maturities of long-term debt 361,540 133,983
Current maturities of obligations under capital leases 66,270 67,819
Short-term borrowings 9,091,628 9,046,106
Accounts payable and accrued expenses 6,475,737 4,571,729
Due to administrative service clients 248,205 188,095
----------- -----------
Total current liabilities 16,799,690 15,088,800
Self-insurance reserves 402,290 563,815
Long-term debt, net 153,882 44,596
Obligations under capital leases, net 67,538 43,283
----------- -----------
Total liabilities 17,423,400 15,740,494
----------- -----------
Commitments and contingencies (Notes 16, 17 and 18)
Stockholders' equity:
Preferred stock, convertible Series A,
$.0001 par value per share, 1,000,000
shares authorized, 12,325 shares
issued and outstanding, liquidation value of $2,033,682 2,033,682 2,033,682
Common stock, $.0001 par value per share, 20,000,000 shares
authorized, 6,287,343 shares issued and outstanding 629 629
Paid-in capital 8,009,175 8,171,870
Accumulated deficit (5,549,778) (5,239,370)
----------- -----------
Total stockholders' equity 4,493,708 4,966,811
----------- -----------
Total liabilities and stockholders' equity $21,917,108 $20,707,305
=========== ===========
See accompanying notes and auditor's report
F-2
Command Security Corporation
Statements of Operations
Years Ended March 31, 2004, 2003 and 2002
2004 2003 2002
Revenue $75,904,782 $94,314,515 $84,161,855
Cost of revenue 64,945,113 74,756,859 70,356,400
----------- ----------- -----------
Gross profit 10,959,669 19,557,656 13,805,455
----------- ----------- -----------
Operating expenses:
General and administrative expenses 10,808,384 13,633,380 11,471,406
Provision for doubtful accounts and notes 154,401 2,659,830 581,679
Bad debt recoveries (198,547) (1,946) 0
----------- ----------- -----------
10,764,238 16,291,264 12,053,085
----------- ----------- -----------
Operating income 195,431 3,266,392 1,752,370
----------- ----------- -----------
Other income/(expense)
Interest income 89,800 89,499 93,201
Interest expense (516,763) (561,035) (780,155)
Gain on equipment dispositions 12,667 17,203 10,344
----------- ----------- -----------
(414,296) (454,333) (676,610)
----------- ----------- -----------
Income/(loss) before income
tax benefit/(expense) (218,865) 2,812,059 1,075,760
Income tax benefit/(expense) (91,543) (1,485,323) 1,300,000
----------- ----------- -----------
Net income/(loss) (310,408) 1,326,736 2,375,760
Preferred stock dividends (162,695) (447,416) 0
----------- ----------- -----------
Net income/(loss) applicable to common stockholders $ (473,103) $ 879,320 $ 2,375,760
=========== =========== ===========
Income/(loss) per share of common stock
Basic $ (.08) $ .14 $ .38
=========== =========== ===========
Diluted $ (.08) $ .14 $ .32
=========== =========== ===========
Weighted average number of common
shares outstanding
Basic 6,287,343 6,287,343 6,287,343
=========== =========== ===========
Diluted 6,390,525 6,358,342 7,524,868
=========== =========== ===========
See accompanying notes and auditor's report
F-3
Command Security Corporation
Statements of Changes in Stockholders' Equity
Years Ended March 31, 2004, 2003 and 2002
Preferred Common Paid-In Accumulated
Stock Stock Capital Deficit Total
Balance at March 31, 2001 $2,033,682 $ 629 $8,619,286 $(8,941,866) $1,711,731
Net income 2,375,760 2,375,760
---------- -------- ---------- ----------- ----------
Balance at March 31, 2002 2,033,682 629 8,619,286 (6,566,106) 4,087,491
Preferred stock dividends (447,416) (447,416)
Net income 1,326,736 1,326,736
---------- -------- ---------- ----------- ----------
Balance at March 31, 2003 2,033,682 629 8,171,870 (5,239,370) 4,966,811
Preferred stock dividends (162,695) (162,695)
Net loss (310,408) (310,408)
---------- -------- ---------- ----------- ----------
Balance at March 31, 2004 $2,033,682 $ 629 $8,009,175 $(5,549,778) $4,493,708
========== ======== ========== =========== ==========
See accompanying notes and auditor's report
F-4
Command Security Corporation
Statements of Cash Flows
Years Ended March 31, 2004, 2003 and 2002
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
2004 2003 2002
OPERATING ACTIVITIES
Net income/(loss) $ (310,408) $ 1,326,736 $ 2,375,760
Adjustments to reconcile net income/(loss) to net
cash provided by/(used in) operating activities:
Depreciation and amortization 477,314 612,591 702,963
Provision for doubtful accounts and
notes receivable, net of recoveries (44,146) 2,657,884 581,679
Gain on equipment dispositions (12,667) (17,203) (10,344)
Deferred income taxes 0 1,300,000 (1,300,000)
Self-insurance reserves (7,182) 124,249 241,247
Changes in operating assets and liabilities:
Accounts receivable (471,715) 1,744,185 (8,018,174)
Prepaid expenses 794,950 347,572 371,947
Other receivables (843,583) (170,765) (70,011)
Other assets 209,234 (103,848) 335,805
Accounts payable and accrued expenses 2,317,340 (1,210,844) 1,036,823
Due to administrative service clients 60,110 23,301 77,637
----------- ----------- -----------
Net cash provided by/(used in) operating activities 2,169,247 6,633,858 (3,674,668)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (47,078) (139,185) (230,855)
Purchase of intangible assets 0 (1,975) 0
Proceeds from equipment dispositions 20,164 53,323 45,436
Issuance of notes by administrative service client 0 (30,500) (35,000)
Principal collections on notes receivable 58,234 57,365 132,272
----------- ----------- -----------
Net cash provided by/(used) in investing activities 31,320 (60,972) (88,147)
----------- ----------- -----------
FINANCING ACTIVITIES
Net borrowings/(payments) on line of credit (7,814) (2,866,081) 4,846,734
Repayments on other short and long-term debt (1,113,560) (2,215,980) (1,965,243)
Repayments on capital lease obligations (73,076) (142,465) (142,339)
Increase/(decrease) in cash overdraft (524,758) (982,293) 1,023,663
Costs associated with refinance (277,988) 0 0
Payment of preferred stock dividends (203,371) (366,067) 0
----------- ----------- -----------
Net cash provided by/(used in) financing activities (2,200,567) (6,572,886) 3,762,815
----------- ----------- -----------
Net change in cash and cash equivalents 0 0 0
Cash and cash equivalents, beginning of year 0 0 0
----------- ----------- -----------
Cash and cash equivalents, end of year $ 0 $ 0 $ 0
=========== =========== ===========
See accompanying notes and auditor's report
F-5
Command Security Corporation
Statements of Cash Flows, Continued
Years Ended March 31, 2004, 2003 and 2002
1. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the year for:
2004 2003 2002
Interest $516,763 $578,726 $773,347
Income Taxes 229,063 100,000 0
2. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended March 31, 2004, the line of credit with LaSalle
Business Credit, Inc. (LaSalle) was terminated and replaced with a line of
credit from CIT Group/Business Credit, Inc. (CIT). The proceeds from CIT to
LaSalle in the amount of $8,723,102 have been excluded from net
advances/(repayments) on the line of credit, on the statements of cash flows
presented.
During the year ended March 31, 2004, the Company reclassified
$1,930,379 from accounts receivable in connection with the FAA disputed
billings. This amount has been excluded from the statements of cash flows
presented.
During the year ended March 31, 2003, the Company accrued $600,000 in
other payables in reference to a dispute with the Office of General Services
(OGS). During the year ended March 31, 2004, the Company agreed to a
settlement with the OGS in the same amount. A portion of the agreement calls
for 21 monthly payments totaling $527,000, commencing December 1, 2003. This
amount has been excluded from the change in other payables and proceeds from
long-term debt financing on the statements of cash flows presented.
For the years ended March 31, 2004, 2003 and 2002, the Company purchased
equipment with direct installment and lease financing of $162,417, $29,355
and $315,698, respectively. These amounts have been excluded from the
statements of cash flows.
For the years ended March 31, 2004, 2003 and 2002, the Company obtained
short-term financing to meet its insurance needs in the amounts of $910,104,
$670,669 and $516,228, respectively. These borrowings have been excluded from
the statements of cash flows.
As of March 31, 2004 and 2003, the Company accrued dividends of $40,674
and $81,349, respectively, on its Series A convertible preferred stock. This
charge to paid-in capital and credit to dividends payable has been excluded
from the statements of cash flows.
See accompanying notes and auditor's report
F-6
Command Security Corporation
Notes to Financial Statements
March 31, 2004, 2003 and 2002
1. Business Description and Summary of Accounting Policies
The following is a description of the principal business activities and
significant accounting policies employed by Command Security Corporation.
Principal business activities
Command Security Corporation (the Company) is a uniformed security guard
service company operating in New York, Connecticut, California, Florida,
Illinois, Maryland, Massachusetts, New Jersey, Oregon and Pennsylvania. In
addition, the Company also provides other security guard companies
(administrative service clients) and police departments in various states
with administrative services, such as billing, collection and payroll, for a
percentage of the related gross revenue.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 the reported amounts of revenue
and expenses during the reporting period. Such estimates include provisions
for potential billing adjustments, provisions for uncollectible accounts
receivable including allowances related to airline customers, valuation
allowances for deferred tax assets and reserves for general liability and
workers' compensation claims, among others. Actual results could differ from
those estimates.
Revenue recognition
The Company records revenue as services are provided to its customers
and to its administrative service clients. Revenue consists primarily of
security guard services which are typically billed at hourly rates. These
rates may vary depending on base, overtime and holiday time worked. Revenue
for administrative services provided to other guard companies are based on a
percentage of the administrative service client's revenue and are recognized
as billings for the related guard services are generated. Costs associated
with the Company's guard service revenue consist of direct and indirect
payroll and related expenses, subcontractor costs, vehicle and other costs
directly related to the guard service revenue generated. Costs related to the
administrative service revenue are primarily clerical and administrative in
nature and are not readily segregated from the Company's total general and
administrative costs.
Cash and cash equivalents
For purposes of the cash flows statements, the Company defines cash and
cash equivalents as operating cash (non-restricted) and investments with
maturities of three months or less.
Prepaid expenses
A significant new contract commenced in August 2003, $264,781 of the
costs relating to the contract have been capitalized and are being amortized
over a one year period. The expense reported in connection with this amounted
to $176,520 for the year ended March 31, 2004.
Furniture and equipment
Furniture and equipment are stated at cost. Depreciation is accumulated
using the straight-line method over the estimated useful lives of the
equipment ranging from three to seven years.
Intangible assets
Intangible assets are stated at cost and consist primarily of customer
lists and borrowing costs which are being amortized on a straight-line basis
over three to five years. 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. Any possible impairment is evaluated annually based on
anticipated undiscounted future cash flows and actual customer attrition in
accordance with the provisions of SFAS 121 and SFAS 144.
F-7
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
1. Business Description and Summary of Accounting Policies, continued
Intangible assets, continued
In June 2001, the FASB issued SFAS 141, "Business Combinations." SFAS
141 addresses financial accounting and reporting for business combinations
and supercedes APB No. 16, "Business Combinations" and SFAS No. 38,
"Accounting for Pre-acquisition Contingencies of Purchased Enterprises." All
business combinations in the scope of SFAS 141 are to be accounted for under
the purchase method. SFAS 141 is effective June 30, 2001. The adoption of
SFAS 141 did not have an impact on the Company's financial position, results
of operations or cash flows.
In June 2001, the FASB also issued SFAS 142, "Goodwill and Other
Intangible Assets." SFAS 142 addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets (but
not those acquired in a business combination) at acquisition. SFAS 142 also
addresses financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. With the adoption of SFAS
142, goodwill is no longer subject to amortization. Rather, goodwill is
subject to at least an annual assessment for impairment by applying a fair
value test. The impairment loss is the amount, if any, by which the implied
fair value of goodwill is less than the carrying or book value. SFAS 142 is
effective for fiscal years beginning after December 15, 2001. Impairment loss
for goodwill arising from the initial application of SFAS 142 is to be
reported as resulting from a change in accounting principle. There was no
impact to its financial position, results of operations or cash flows upon
adoption of SFAS 142.
In August 2001, the FASB also issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS 144 is effective for fiscal years beginning after
December 15, 2001. For long-lived assets to be held and used, SFAS 144
retains the existing requirements to (a) recognize an impairment loss only if
the carrying amount of a long-lived asset is not recoverable from its
discounted cash flows and (b) measure an impairment loss as the difference
between the carrying amount and the fair value of the asset. SFAS 144
establishes one accounting model to be used for the long-lived asset to be
disposed of by sale and revises guidance for assets to be disposed of other
than by sale. There was no impact to its financial position, results of
operations or cash flows upon adoption of SFAS 144.
Advertising costs
The Company expenses advertising costs as incurred. Amounts incurred for
recruitment and general business advertising were $33,159, $77,114 and
$131,266 for the years ended March 31, 2004, 2003 and 2002, respectively.
Reserve for doubtful accounts
The Company periodically evaluates the requirement for providing for
credit losses on its accounts receivables. Criteria used by management to
evaluate the adequacy of the allowance for doubtful accounts include, among
others, the creditworthiness of the customer, prior payment performance, the
age of the receivables and the Company's overall historical loss experience.
Individual accounts are charged off against the allowance as management deems
them as uncollectible.
Income/(loss) per common share
Under the requirements of Financial Accounting Standards Board Statement
No. 128 (SFAS 128), "Earnings Per Share," the dilutive effect of potential
common shares, if any, is excluded from the calculation for basic earnings
per share. Diluted earnings per share are presented for the years ended March
31, 2004, 2003 and 2002 because of the effect the issuance of common shares
would have if the outstanding stock options and warrants were exercised. The
preferred stock conversations were not included in the diluted earnings per
share for the years ended March 31, 2004 and 2003 as they were anti-dilutive.
F-8
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
1. Business Description and Summary of Accounting Policies, continued
Accounting for stock options
In December 2002 the Financial Accounting Standards Board (FASB) issued
Statement No. 148, (SFAS 148), "Accounting for Stock-Based
Compensation-Transition and Disclosure", an amendment of FASB Statement No.
123, to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. Since SFAS 148 was adopted during the fiscal year ended March
31, 2003, the Company can elect to adopt any of the three transitional
recognition provisions. The Company has chosen to adopt the prospective
method of accounting for stock-based compensation.
Prior to the adoption of SFAS 148, the Company followed the provisions
of Financial Accounting Standards Board Statement No. 123 (SFAS 123) which
provides companies with a choice to follow the provisions of SFAS 123 in the
determination of stock-based compensation expenses or to continue with the
provisions of APB 25, "Accounting for Stock Issued to Employees." The Company
continued to follow APB 25 and provided pro forma disclosures as required by
SFAS 123. The adoption of SFAS 148 did not have an impact on the Company's
financial condition or results of operations for the periods presented.
Stock-based compensation issued to non employees are accounted for based on
the fair value and nature of goods and/or services received.
2. Accounts Receivable disputed
Accounts receivable disputed in the amount of $1,965,006 and $1,930,379,
net of a $965,373 and $1,000,000 billing adjustment for the years ended March
31, 2004 and 2003, respectively, represents the balance reported by the
Company, as due from the FAA in connection with pre-board screening services
rendered under a contract completed during November 2002. The final contract
amount was settled subsequent to year end. Refer to Note 16 contingencies for
details regarding the settlement.
3. Furniture and Equipment
Furniture and equipment at March 31, consist of the following:
2004 2003
Transportation equipment $ 1,003,272 $ 1,048,001
Security equipment 516,955 475,894
Office furniture and equipment 1,213,961 1,204,210
----------- -----------
2,734,188 2,728,105
Accumulated depreciation (2,088,596) (1,890,291)
----------- -----------
Total $ 645,592 $ 837,814
=========== ===========
Depreciation expense for the years ended March 31, 2004, 2003 and 2002,
was $394,221, $490,028 and $546,217, respectively, and includes amortization
of assets purchased under capital lease arrangements in the amounts of
$105,254, $83,617 and $89,534 for each of the respective years ended (see
Note 17). During the year ended March 31, 2002, the Company removed fully
depreciated equipment with an original cost of $1,383,390 from its accounts.
The equipment was considered obsolete.
4. Intangible Assets
Intangible assets at March 31, consist of the following:
2004 2003
Customer list $ 211,293 $ 211,293
Borrowing cost 469,997 192,009
Goodwill 34,007 34,007
--------- ---------
715,297 437,309
Accumulated amortization (445,080) (361,987)
--------- ---------
Total $ 270,217 $ 75,322
========= =========
F-9
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
4. Intangible Assets, continued
Amortization expense for the years ended March 31, 2004, 2003 and 2002,
was $83,093, $122,563 and $156,746, respectively. During the years ended
March 31, 2003 and 2002, the Company removed fully amortized customer lists
with an initial cost of $193,588 and $142,403, respectively, from its
accounts.
5. Restricted Cash
Restricted cash represents deposits for the benefit of the Company's
insurance carrier as collateral for workers' compensation claims. The
Company's insurance carrier released $466,403 from the restrictions in June,
2001 and $150,000 from the restrictions in September, 2003.
6. Other Assets
Other assets at March 31, consist of the following:
2004 2003
Prepaid workers compensation $1,131,547 $229,850
Other receivables 216,929 352,369
Security deposits 159,770 190,966
Note receivable (see Note 21) 30,000 78,442
Investment in security 6,609 6,609
---------- --------
Total $1,544,855 $858,236
========== ========
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at March 31, consist of the
following:
2004 2003
Trade accounts payable $ 771,042 $ 602,096
Payroll and related expenses 3,501,693 2,543,371
Insurance 1,495,987 122,155
Port Authority fees 266,440 0
Sales tax 161,889 69,114
Accrued interest payable 43,442 39,797
Accrued corporate taxes 19,215 178,000
Accrued professional fees 89,487 60,327
Accrued loss contingencies
and settlements 27,000 838,000
Accrued dividend payable 40,674 81,349
Other 58,868 37,520
---------- ----------
Total $6,475,737 $4,571,729
========== ==========
As of March 31, 2004 and 2003, the Company has accrued $27,000 and
$838,000, respectively, for loss contingencies and settlements in connection
with certain legal proceedings and labor claims where either a monetary
settlement has been reached or management has determined that it is probable
that a liability has been incurred.
F-10
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
8. Short-Term Borrowings
Short-term borrowings at March 31, consist of the following:
2004 2003
Line of credit $8,798,024 $8,805,839
Various insurance
financing arrangements,
interest at 6.46% for 2004,
5.92% and 6.46% for 2003 293,604 240,267
---------- ----------
Total $9,091,628 $9,046,106
========== ==========
On December 12, 2003, the Company entered into a three year agreement
with CIT Group/Business Credit, Inc. ("CIT") under a loan and security
agreement (the "agreement"), providing for a line of credit of up to 85% of
eligible accounts receivable, as defined in the agreement, but in no event in
excess of $15 million. At March 31, 2004, the Company had used $8,798,024 of
this line, representing approximately 83% of its maximum borrowing capacity.
Interest is payable at prime plus 1.25% (5.25% at March 31, 2004). The line
is collateralized by customer accounts receivable and substantially all other
assets of the Company.
The Company relies on its revolving loan from CIT for its operating and
working capital. The loan contains a fixed charge covenant and various other
financial and non-financial covenants. The Company was not in compliance with
the fixed charge covenant. Subsequent to year end, the Company has obtained a
waiver from CIT for this violation. The non-financial covenants give CIT the
right to call the line if a change in control of the Company occurs, if
Reliance Security Group, plc sells any shares without prior written consent
from CIT or if the current Chairman of the Board/President/Chief Executive
Officer does not remain actively engaged in the management of the Company. As
a result of the subsequent event described in Note 25, the Company is in
violation of the CIT covenants and has not obtained a waiver.
In November, 2000, the Company entered into a three year agreement with
LaSalle Business Credit, Inc. ("LaSalle") under a loan and security agreement
(the "agreement"), providing for a line of credit of up to 85% of eligible
accounts receivable, as defined in the agreement, but in no event in excess
of $15 million. The agreement was modified in January, 2002, and again in
March, 2002, to provide for a $250,000 over advance and to expand the
definition of eligible accounts receivable. At March 31, 2003, the Company
had used $8,805,839 of this line, representing approximately 88% of its
maximum borrowing capacity. Interest was payable at prime plus .5% (4.75% at
March 31, 2003) on the outstanding balance. The line was collateralized by
customer accounts receivable and substantially all other assets of the
Company. The agreement with LaSalle was scheduled to expire on November 1,
2003, but was extended to December 12, 2003 to enable the Company to complete
the closing with CIT. At that point the agreement with LaSalle was terminated
and replaced with a line of credit from CIT as noted in the previous
paragraph.
F-11
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
9. Long-Term Debt
Long-term debt at March 31, consist of the following:
2004 2003
Office of General
Services (OGS) settlement,
due August, 2005,
interest at 9% (a) $ 408,919 $ 0
Various installment loans
due at various dates
through March, 2007,
with interest ranging
from 4.5% to 11.75% (b) 106,503 178,579
--------- ---------
515,422 178,579
Current maturities (361,540) (133,983)
--------- ---------
Total $ 153,882 $ 44,596
========= =========
(a) Settlement with the Office of General Services (OGS) in the amount of
$600,000, $73,000 was paid in a three month period. The balance $527,000
to be paid in 21 monthly payments beginning December 1, 2003, in the
amount of $27,217, including principal and interest at 9%. The note is
unsecured.
(b) Payable to General Motors Acceptance Corporation, Ford Motor Credit
Corporation and Chrysler. The notes are collateralized by automobiles.
The aggregate amount of required principal payments of long-term debt
is as follows:
Year ending: March 31, 2005 $361,540
March 31, 2006 125,747
March 31, 2007 28,135
--------
Total $515,422
========
10. Preferred Stock
The Board of Directors has been authorized to issue preferred stock in
series and to fix the number, designation, relative rights, preferences and
limitations of each series of such preferred stock. Of the 1,000,000 shares
authorized for issuance, 12,325 have been designated as Series A Convertible
Preferred Stock ("Series A"). The Series A shareholders are entitled to
receive annual dividends equal to 8% of the liquidation value of their
shares, payable in cash, payable quarterly. Upon liquidation or redemption
the Series A shareholders are entitled to $165 per share or $2,033,682. Any
holder of Series A shares may, subject to certain limitations under the law,
at any time convert their shares into common stock of the Company at a
conversion ratio of 100 shares of common stock for each share of Series A
stock. Subsequent to year end, the preferred stock has been tendered for
conversion into common stock (see Note 25).
The Company had suspended payment of preferred dividends as of July 1,
2000, until it could re-establish sufficient surplus in accordance with
applicable regulations. This was achieved and total arrears of $284,720, or
$.05 per common share, were paid during the June 2002 quarter. In addition,
$81,347 in preferred dividends were paid during the year ended March 31, 2003
representing the June 30 and September 30, 2002 quarters. During the year
ended March 31, 2004, $203,371 has been paid representing the outstanding
accrual at March 31, 2003 and June through December 2003 dividends. As of
March 31, 2004 and 2003, the Company has accrued dividends payable in the
amount of $40,674 and $81,349, respectively.
F-12
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
11. Net Income per Share
The following is a reconciliation of the numerators and the denominators
of the basic and diluted per-share computations for net income for the years
ended March 31, 2004 and 2003:
Income/(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
Year ended March 31, 2004
Basic EPS $ (473,103) 6,287,343 $ (.08)
Options issued February 2001
and March 2002 103,182
---------- ---------
Diluted EPS $(473,103) 6,390,525 $ (.08)
========== =========
Year ended March 31, 2003
Basic EPS $ 879,320 6,287,343 $ .14
Effect of dilutive shares:
Options issued February 2001
and March 2002 70,999
---------- ---------
Diluted EPS $ 879,320 6,358,342 $ .14
========== =========
Year ended March 31, 2002
Basic EPS $2,375,760 6,287,343 $ .38
Effect of dilutive shares:
Options issued March 1, 2002 5,025
Convertible preferred stock 1,232,500
---------- ---------
Diluted EPS $2,375,760 7,524,868 $ .32
========== =========
Convertible preferred stock outstanding during the years ended March 31,
2004 and 2003, and additional options and warrants outstanding during the
years ended March 31, 2004 and 2003, respectively, were excluded from the
computation of diluted EPS because the exercise price was greater than the
average market price of the common shares.
12. Retirement Plans
In November, 1999, the Company adopted a qualified retirement plan
providing for elective employee deferrals and discretionary employer
contributions to non-highly compensated participants. The plan does not allow
for employer matching of elective deferrals. For the years ended March 31,
2004, 2003 and 2002, no discretionary amounts have been accrued or paid.
13. Concentration of Risk
Geographic concentrations of credit risk with respect to trade
receivables are primarily in California with 22% and 47% and in the New York
Metropolitan area with 55% and 27% of total receivables as of March 31, 2004
and 2003, respectively. The remaining trade receivables consist of a large
number of customers dispersed across many different geographic regions.
During the years ended March 31, 2004, 2003 and 2002, the Company generated
60%, 68% and 55%, respectively, of its revenue from aviation and related
services. Trade receivables due from the commercial airline industry
comprised 61% and 70% of net receivables as of March 31, 2004 and 2003,
respectively. The Company's remaining customers are not concentrated in any
specific industry.
F-13
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
14. Significant Customers
For the years ended March 31, 2004 and 2003, two and one customers,
respectively, accounted for approximately 20% and 30% of total revenue. For
the year ended March 31, 2004, the two customers were in the airline
industry, one of the significant customers' has reported to be having
on-going financial difficulties (see Note 25). For the year ended March 31,
2003 the one customer was (FAA), which consisted primarily of airport
pre-board screening services. As discussed in Note 16, the contract
terminated in November 2002. For the year ended March 31, 2002 no customer
accounted for 10% or more of revenue.
15. Self-Insurance
The Company has an insurance policy covering workers' compensation
claims in most states that the Company performs services. Annual premiums are
based on incurred losses as determined at the end of the coverage period,
subject to a minimum and maximum premium. Estimated accrued liabilities are
based on the Company's historical loss experience and the ratio of claims
paid to the Company's historical payout profiles. Charges for estimated
workers' compensation related losses incurred and included in cost of sales
were $3,539,162, $2,229,362 and $2,195,536, for the years ended March 31,
2004, 2003 and 2002, respectively.
The nature of the Company's business also subjects it to claims or
litigation alleging that it is liable for damages as a result of the conduct
of its employees or others. The Company insures against such claims and suits
through general liability policies with third-party insurance companies. Such
policies have limits of $5,000,000 per occurrence and $10,000,000 in the
aggregate. (Reduced to $5,000,000 as of October 1, 2002) on a per project
basis. On the aviation related business, as of October 1, 2002, the Company
acquired a policy with a $25,000,000 limit per occurrence. Prior to December
1, 2001, the Company had limits of $1,000,000 per occurrence and $10,000,000
in the aggregate. Prior to October 1, 2001, the Company also had coverage
under an excess general liability insurance policy that covered claims for an
additional $50,000,000 in the aggregate. The impact of the September 11,
tragedy meant that this umbrella coverage was no longer available to the
Company at an acceptable premium at the time of policy renewal (October 1,
2001). This coverage has become more affordable. As of October 1, 2003, the
Company has an excess general liability insurance policy that covers aviation
claims for an additional $25,000,000 in the aggregate. The Company retains
the risk for the first $25,000 per occurrence on the non-aviation related
policy and $5,000 on the aviation related policy except $25,000 for damaged
aircraft ($50,000 for claims based on losses incurred prior to October 1,
2000). Charges for general liability self-insurance expense of $(7,182),
$124,249 and $241,247, are included in cost of sales for the years ended
March 31, 2004, 2003 and 2002, respectively. Estimated accrued liabilities
are based on specific reserves in connection with existing claims as
determined by third party risk management consultants and actuarial factors
and the timing of reported claims. These are all factored into estimated
losses incurred but not yet reported to the Company.
Cumulative amounts estimated to be payable by the Company with respect
to pending and potential claims for all years in which the Company is liable
under its general liability risk retention and workers' compensation policies
have been accrued as liabilities. Such accrued liabilities are necessarily
based on estimates; thus, the Company's ultimate liability may exceed or be
less than the amounts accrued. The methods of making such estimates and
establishing the resultant accrued liability are reviewed continually and any
adjustments resulting there from are reflected in current earnings.
16. Contingencies
The nature of the Company's business is such that there is a significant
volume of routine claims and lawsuits that are issued against it, the vast
majority of which never lead to substantial damages being awarded. The
Company maintains general liability, casualty and workers' compensation
insurance coverage that it believes is appropriate to the relevant level of
risk and potential liability. Some of the claims brought against the Company
could result in significant payments, however, the exposure to the Company
under general liability is limited to the first $25,000 per occurrence on the
non-aviation related claims and $10,000 per occurrence on the
aviation-related claims. Any punitive damage award would not be covered by
the general liability insurance policy. The only potential impact would be on
future premiums, which may be adversely effected by a poor claims history.
F-14
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
16. Contingencies, continued
In addition to such cases, the Company has been named as a defendant in
several uninsured employment related claims which are currently before
various courts, the EEOC or various state and local agencies. The Company has
instituted policies to minimize these occurrences and monitors those that do
occur. At this time the Company is unable to determine the impact on the
financial position and results of operation that these claims may have should
the investigations conclude that they are valid.
The Company has employment agreements with its Chairman of the
Board/President/Chief Executive Officer (CEO) and the Vice-President of
Aviation (VP). The agreement with the CEO is for a three year rolling period
expiring November 2007. The terms of the agreement call for severance
payments and specified benefits of approximately $850,000 depending upon the
date of termination. Events that trigger termination of the CEO's employment
include such items as termination of employment without cause, a material
diminution of the CEO's duties or termination due to a change of control in
the Company. The agreement with the VP is for a three year period expiring
March 2006. The terms of this agreement call for severance payments and
specified benefits in the approximate range of $175,000 - $200,000 depending
upon the date of termination.
Pursuant to Federal regulation as a result of the terrorist attacks on
September 11, 2001, the Federal government has taken responsibility for
pre-board screening functions effective February 17, 2002. The Company
contracted with the government to continue to provide these functions until
the government installed the infrastructure to hire as direct Federal
employees all persons acting as pre-board screeners. Such services accounted
for approximately $4.4 million, or 48% of revenue, for the month of March,
2002 and $28 million or 30% of revenue for the year ended March 31, 2003. The
contract terminated in November, 2002.
An audit of the Company's FAA contract for the pre-board screening
services was completed during December 2002. Based on initial audit findings
of the Defense Contract Audit Agency (DCAA), the FAA had indicated that
approximately $5.2 million of billing was not supported by the Company's
accounting records and consequently the FAA held back $2.9 million of payment
on final invoices until the audit was resolved. The Company continued
negotiations with the Defense Contract Management Agency (DCMA) over the
disputed billings on the FAA contract for pre-board screening services. Steps
were taken to ensure the Company achieved a fair and equitable solution to
the claim for costs incurred. This included retaining a firm of lawyers based
in Washington to consider the options. They had themselves retained a firm of
accountants who had experience in dealing with the DCMA to settle a dispute
over the same issue with another security company. Subsequent to year end,
the Company reached an agreement indicating revised rates and a total
contract price of $32.9 million. This compared to original billings of $33.8
million results in a difference of approximately $1.0 million. Since the
Company had already reserved $1.0 million, the reserve remains unchanged on
this issue. On June 14, 2004, the Company collected $1,965,000 from the DCMA
in complete settlement of this dispute.
The Company was subject to an audit by the New York State Attorney
General's office relative to the provision of services to New York State
under the Office of General Services (OGS) requirements. A settlement was
reached with the Attorney General's Office calling for a penalty provision in
the amount of $73,000 to be paid over a three month period and a note
provision in the amount of $527,000 to be paid with twenty-one monthly
payments of approximately $27,000 including interest at 9%, commencing
December 1, 2003, as disclosed in Note 9.
17. Lease Commitments
The Company is obligated under various operating lease agreements for
office space, equipment and auto rentals. Rent expense under operating lease
agreements approximated $947,539, $872,980 and $736,400, for the years ended
March 31, 2004, 2003 and 2002, respectively.
The Company leases certain equipment and vehicles under agreements which
are classified as capital leases. Most equipment leases have purchase options
at the end of the original lease term. Cost and related accumulated
depreciation of leased capital assets included in furniture and equipment at
March 31, 2004, are $762,083 and $573,422 and at March 31, 2003, are $666,300
and $468,168, respectively.
F-15
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
17. Lease Commitments, continued
The future minimum payments under long-term non-cancelable capital and
operating lease agreements are as follows:
Capital Operating
Leases Leases
Year ending: March 31, 2005 $ 74,400 $ 721,895
March 31, 2006 31,726 453,488
March 31, 2007 34,524 328,551
March 31, 2008 7,959 227,113
March 31, 2009 0 185,200
Later years 0 754,637
-------- ----------
148,609 2,670,884
Amounts representing interest (14,801) 0
-------- ----------
Total $133,808 $2,670,884
======== ==========
18. Other Commitments
In January, 2003, the Company entered into a contract for uniform
cleaning services. After using the services for approximately 20 weeks, the
Company tried to rescind the contract. In March, 2004, the Company settled an
agreement to complete the 344 weeks of the contract in the amount of $1,756
per week. The expense recorded in connection with this contract amounted to
$12,293 and $22,831 for the years ended March 31, 2004 and 2003,
respectively.
The required future minimum payments under the contract are as follows:
Year ending: March 31, 2005 $ 91,322
March 31, 2006 91,322
March 31, 2007 91,322
March 31, 2008 91,322
March 31, 2009 91,322
Later years 147,521
--------
Total $604,131
========
19. Stock Option Plan and Warrants
In November, 2000, the Company's Board of Directors and stockholders
approved the adoption of a qualified stock option plan. Under the option
plan, substantially all employees are eligible to receive options to purchase
up to an aggregate of 500,000 shares at an exercise price which cannot be
less than the fair market value of the shares on the date the options are
granted. A previous similar plan allowing for the purchase of up to 107,500
shares expired in May, 2000. In February, 2001, options to purchase 225,000
shares of common stock have been issued and in April, 2002 and August 2003,
an option to purchase 50,000 and 20,000 shares, respectively, were cancelled
due to termination of employment. The options are exercisable at any time
after February 1, 2004, and before January 31, 2011, at $.75 per share and
are further restricted based on the achievement of certain financial results
of the Company for the years ending March 31, 2002 through 2004.
On October 4, 1996, the Company issued warrants for 35,000, 150,000,
10,000 and 10,000 shares of common stock to the Company's then Chief
Financial Officer and three Board members, respectively. The warrant for
35,000 shares was canceled due to the termination of the former Chief
Financial Officer's employment. The remaining warrants expired in September,
2001.
F-16
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
19. Stock Option Plan and Warrants, continued
On November 25, 1996, warrants to purchase 50,000 shares of common stock
were subscribed to for $500 by the Company's public relations firm. The
warrants expired in November, 2001.
On November 11, 1999, the Company authorized the issuance of warrants to
purchase 150,000 shares of common stock to a former Board member in
recognition of services to the Company, at an exercise price of $1.031 per
share, the fair market value at the time of the grant. The warrants expire in
November, 2004.
In November, 2000, the Company issued warrants to Reliance to purchase
shares of common stock equal to 20% of the outstanding common stock on a
fully diluted basis, excluding warrants issued to the Chairman of the Board
and current President issued on the same day. The Reliance warrants cover
2,298,092 shares, at $1.25 per share at anytime after November 13, 2001,
expiring November 13, 2005.
In November, 2000, the Company also issued warrants and incentive stock
options to the Chairman of the Board and current President to purchase
204,485 and 1,012,959 shares of common stock, respectively, exercisable at
$1.25 per share after November 13, 2001, and expiring November 13, 2005. The
warrants are exercisable only after the exercise by Reliance of its warrants
and only to the extent of the Reliance exercise. The options are exercisable
with respect to one-third of the shares covered for each of the years ending
March 31, 2002 through 2004, and are further restricted based on the
achievement of certain financial results of the Company for the years ending
March 31, 2002 through 2004. The financial results were not achieved and the
option to issue 1,012,959 shares is now void.
In March, 2002, the Company issued warrants for 10,000 shares of common
stock to each of three of the Company's directors at an exercise price of
$.82 per share, the fair market value at the time of the grant. The warrants
expire in February, 2005.
In March, 2002, the Company issued warrants for 100,000 shares of common
stock to individuals associated with a consulting agreement at an exercise
price of $.75. The warrants expire in March, 2005.
Certain of the option and warrant agreements contain anti-dilution
adjustment clauses.
The following is a summary of activity related to all Company stock
option and warrant arrangements:
Options Warrants
---------------------------- ----------------------------
Exercise Number of Exercise Number of
Price Shares Price Shares
-------------- ---------- --------------- ---------
Outstanding at March 31, 2001 $.75 - $1.25 1,237,959 $1.03 - $2.25 2,872,577
Issued .82 30,000
Expired 1.88 - 2.25 (220,000)
-------------- ---------- --------------- ---------
Outstanding at March 31, 2002 .75 - 1.25 1,237,959 .82 - 1.25 2,682,577
Issued .75 100,000
Expired .75 (50,000)
-------------- ---------- --------------- ---------
Outstanding at March 31, 2003 .75 - 1.25 1,187,959 .75 - 1.25 2,782,577
Issued
Expired .75 - 1.25 (1,032,959)
-------------- ---------- --------------- ---------
Outstanding at March 31, 2004 $.75 155,000 $ .75 - $1.25 2,782,577
============== ========== =============== =========
At March 31, 2004 there were 155,000 and 2,782,577 options and warrants
outstanding, respectively, exercisable at prices ranging from $.75 to $1.25,
and 4,145,536 shares reserved for issuance under all stock arrangements.
F-17
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
19. Stock Option Plan and Warrants, continued
Significant option and warrant groups outstanding at March 31, 2004, and
the related weighted average exercise price and life information are as
follows:
Weighted Weighted
Options/ Options/ Average Average
Range of Warrants Warrants Exercise Remaining
Exercise Price Outstanding Exercisable Price Life (years)
--------------- ----------- ----------- -------- ------------
$ .75 255,000 100,000 $ .750 4.62
.82 30,000 30,000 .820 .92
1.031 150,000 150,000 1.031 .62
1.250 2,502,577 2,298,092 1.250 1.62
--------- ---------
$.75 - $1.250 2,937,577 2,578,092 1.191 3.11
========= =========
As discussed in Note 1, the Company adopted the provisions of SFAS 148
for the fiscal year ending March 31, 2003. Prior to year end 2003, the
Company continued to follow the provisions of APB 25, "Accounting for Stock
Issued to Employees," when determining the value of stock based compensation.
Accordingly, no compensation expense has been recognized for its stock based
compensation for the years ended March 31, 2002. If the Company had used the
fair value method of accounting for stock based compensation, there would
have been no significant effect on the net income or loss of the Company for
the year ended March 31, 2002. Beginning April 1, 2002, the Company adopted
the fair value recognition provisions of SFAS 123, "Accounting for
Stock-Based Compensation", prospectively to all employee awards granted,
modified or settled after April 1, 2002. Since there were no employee awards
granted after April 1, 2002, there is no cost related to stock-based employee
compensation included in the determination of net income for the years ended
March 31, 2004 and 2003. If the Company had applied the fair value based
method since the original effective date of SFAS 123 it would not have had a
significant effect on the net income or loss of the Company for the year
ended March 31, 2002. The weighted fair value of options and warrants granted
during the year ended March 31, 2002 was $.11 per equivalent share,
respectively. For the years ended March 31, 2003 and 2002, the fair value was
estimated using the exercise price on the date of the grant and the following
assumptions: risk free interest rate of 1.40% and 2.93%, volatility of 119.0%
and 93.3% and a dividend yield of 0.00% for each year, respectively.
F-18
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
20. Income Taxes
Income tax benefit/(expense) for the years ended March 31 consists of
the following:
2004 2003 2002
Current:
Federal $(76,203) $ 0 $ 0
State and local (15,340) (185,323) 0
-------- ----------- ----------
(91,543) (185,323) 0
-------- ----------- ----------
Deferred:
Federal 0 (1,020,000) 1,020,000
State and local 0 (280,000) 280,000
-------- ----------- ----------
0 (1,300,000) 1,300,000
-------- ----------- ----------
Income tax benefit/(expense) $(91,543) $(1,485,323) $1,300,000
======== =========== ==========
The deferred tax benefit for the year ended March 31, 2002, consists of
the decrease of a previously established allowance in connection with certain
net operating loss carryovers.
The differences (expressed as a percentage of pretax income) between the
statutory Federal income tax rate and the effective income tax rate as
reflected in the accompanying statements of operations are as follows:
2004 2003 2002
Statutory federal income tax rate 34.0 34.0 34.0
State and local income taxes,
net of federal benefit 9.8 9.8 9.8
Valuation allowance and reserves 16.72 7.0 (166.3)
Permanent differences (18.52) 2.2 1.5
------ ---- ------
Effective tax rate 42.0% 53.0% (121.0)%
====== ==== ======
The significant components of deferred tax assets and liabilities as of
March 31, 2004 and 2003, are as follows:
2004 2003
Current deferred tax assets:
Accounts receivable $ 64,953 $ 93,456
Accrued expenses 102,835 79,221
Contingency reserves 187,445 688,000
----------- -----------
355,233 860,677
Valuation allowance (355,233) (860,677)
----------- -----------
Net current deferred tax asset $ 0 $ 0
=========== ===========
Non-current deferred tax assets/(liabilities):
Equipment $ (77,399) $ (55,072)
Intangible assets 710,236 813,498
Self-insurance 172,985 242,440
Workers compensation reserve 67,243 (161,058)
Net operating loss carryover 639,102 332,388
Income tax credits 84,790 8,587
----------- -----------
1,596,957 1,180,783
Valuation allowance (1,596,957) (1,180,783)
----------- -----------
Net non-current deferred tax asset $ 0 $ 0
=========== ===========
F-19
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
20. Income Taxes, continued
The valuation allowance decreased by $89,270, $20,377 and $1,798,192
during the years ended March 31, 2004, 2003 and 2002, respectively. Federal
net operating loss carry-overs were approximately $1,486,283 at March 31,
2004. They begin to expire in 2010.
The Company has wage tax credits in the amount of $8,587 that expire in
2018 and alternative minimum tax credits in the amount of $76,203 that
carryforward indefinitely.
21. Administrative Service Agreements
The Company has entered into agreements with various security guard
companies (administrative service clients) whereby the Company administers
the billing, collection and payroll functions and the administrative service
clients administer the operations of the respective guard contracts. Under
these arrangements, the Company receives title to all the receivables
generated and is obligated to pay the administrative service clients' guards
and related expenses. The transfer of receivables are accounted for as a
sale/purchase in accordance with SFAS No. 125, relating to transfers and
servicing of financial assets. Although title to the receivables generated
belong to the Company, the rights to service the guard contracts are retained
by the service company. All contracts contain renewal provisions based on the
volume of business generated by the respective service companies.
The Company records the billings for administrative service clients
contracts in accounts receivable with a corresponding liability, "due to
administrative service clients," net of the Company's administrative fees and
payroll and related expenses paid by the Company, at the time the services
are provided to the administrative service clients' customers. Receivables
not collected are charged back to the administrative service clients
generally after 90 days. The administrative fees charged to the
administrative service clients, which are based on either a percentage of
guard revenue or gross profit, are included in revenue on the Company's
statements of operations. Administrative service revenue amounted to
$336,011, $331,854 and $276,652 for the years ended March 31, 2004, 2003 and
2002, respectively.
The Company may extend operating loans to these administrative service
clients. As of March 31, 2004, the Company had one loan outstanding with a
balance of $70,900, providing for monthly payments of $4,000, including
interest at 14 % per annum.
22. Fair Value
The fair value of the Company's long-term notes receivable is based on
the current rates offered by the Company for notes of the same remaining
maturities. The fair value of the Company's long-term debt is based on the
borrowing rates currently available to the Company for loans with similar
terms and average maturities. At March 31, 2004 and 2003, the fair value of
long-term notes receivable and long-term debt approximates their carrying
amounts.
23. Related Party Transactions
In connection with providing security guard services to one of its
multi-national clients, the Company has engaged Reliance Security Group plc,
a significant stockholder, as a subcontractor for these services. Included in
cost of sales for the year ended March 31, 2002, $1,143,717 was charged by
Reliance for these services. The contract terminated in January, 2002 and as
of March 31, 2002, there is no further activity under this arrangement.
In addition to the payment of fees for attending board meetings in the
amount of $2,500, for each meeting attended, for the years ended March 31,
2004 and 2003 and $1,000 for each meeting attended, for the year ended March
31, 2002, various directors receive fees for their services on various
committees of the Company. The expense paid in connection with the committee
service amounted to $77,201, $101,855 and $24,000 for the years ended March
31, 2004, 2003 and 2002, respectively.
F-20
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
24. Reclassifications
Certain 2002 income and expense items have been reclassified to conform
to the 2004 and 2003 presentation. Administrative service revenue of
$336,010, $331,854 and $276,652 for the years ended March 31, 2004, 2003 and
2002, respectively, have been included with total revenue. Amortization of
intangibles of $83,093, $122,563 and $156,746 for the years ended March 31,
2004, 2003 and 2002, respectively, have been included within general and
administrative expenses. These items are no longer considered significant
enough to warrant separate presentation. These reclassifications had no
impact on reported earnings. In addition, $1,930,379 has been reclassified
from accounts receivable to accounts receivable, disputed, for the year ended
March 31, 2003. The amount has been reclassified to conform to the year ended
March 31, 2004 presentation.
25. Subsequent Event
One of the significant customers reported by the Company in Note 14 is
Delta Airlines. Over the past several months, Delta has publicly announced
that they are in financial difficulties and without concessions from the
Pilot's union and other cost cutting measures they may not be able to
continue operating as they are presently organized. If Delta were to announce
a plan to restructure, it would have an impact on the Company's future profit
and loss. The estimated amount of the impact could range from $1,000,000 -
$3,000,000 depending upon timing. As disclosed in Note 8, the Company has a
line of credit financing agreement with CIT Group/Business Credit, Inc.
(CIT). CIT has established reserves of approximately $1,500,000 against the
Delta receivable and general aviation receivables in the new fiscal year
04/05, therefore reducing the Company's borrowing base by that amount. After
the reduction in the borrowing base, the Company has cash availability that
appears to be adequate to meet normal operating needs. However, should the
Delta receivable, in the new fiscal year 04/05, become uncollectible, there
would be an impact on the Company's liquidity.
Subsequent to year end, Reliance Security Group, plc (Reliance) entered
into a securities purchase agreement with GCM Security Partners, LLC (GCM),
calling for GCM to acquire Reliance's holdings in Command Security
Corporation, including Reliance's outstanding common stock, preferred stock,
(see Note 10) and warrants (see Note 19). Concurrently, the Company's
President, Chairman and CEO (CEO) filed a complaint in the United States
District Court seeking a determination that his right of first refusal under
the Shareholder Agreement between himself and Reliance was violated by
Reliance's securities purchase agreement with GCM. On June 18, 2004, a
District Court Judge dismissed the CEO's claims and allowed the transaction
between Reliance and GCM, therefore transferring ownership of the securities.
Subsequently, the Company has been advised that the President/CEO has filed
an appeal with respect to the decision. The appeal decision is expected in
August 2004.
As a result of GCM acquiring the preferred stock from Reliance, GCM has
tendered its preferred stock and demanded its conversion into common stock.
Based on the advice of independent counsel stating that New York Business
Corporation Law Section 912 should be construed to prevent the issuance of
the common stock pursuant to the proposed preferred stock conversion, the
Company has decided not to issue the common stock.. Consequently, it is
expected that GCM will pursue an adjudication of its right to convert its
preferred stock.
F-21
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 2004, 2003 and 2002
26. Quarterly Results (unaudited)
Summary data relating to the results of operations for each quarter for
the years ended March 31, 2004 and 2003, follows:
Three Months Ended
--------------------------------------------------------------------
June 30 Sept. 30 Dec. 31 March 31
----------- ----------- ----------- -----------
Fiscal year 2004
Guard service revenue $16,491,557 $18,897,778 $20,521,150 $19,658,287
Administrative service revenue 82,268 85,658 88,803 79,281
----------- ----------- ----------- -----------
Total revenue 16,573,825 18,983,436 20,609,953 19,737,568
----------- ----------- ----------- -----------
Gross profit 2,744,478 3,003,986 2,800,971 2,410,234
Net income/(loss) (134,977) 247,207 25,134 (447,772)
Net income/(loss)
per common share (basic) (0.03) (0.03) 0.00 (0.08)
per common share (diluted) n/a (0.03) n/a (0.08)
Fiscal year 2003
Guard service revenue 28,190,599 27,385,638 20,887,039 17,519,385
Administrative service revenue 80,553 84,463 82,547 84,291
----------- ----------- ----------- -----------
Total revenue 28,271,152 27,470,101 20,969,586 17,603,676
----------- ----------- ----------- -----------
Gross profit 6,356,740 6,703,770 3,615,618 2,881,528
Net income/(loss) 2,149,721 1,156,623 232,176 (2,211,784)
Net income/(loss)
per common share (basic) .29 .18 .03 (.36)
per common share (diluted) .28 .14 .03 n/a
The fourth quarter 2004 loss includes a decrease in provisions for
contingencies in the amount of $238,000 relating to the removal on an
estimated liability for which a valid agreement did not exist. Also, an
accrual in the amount of $146,280 was recorded during the quarter ended
December 31, 2003 in connection with a severance payment made to the former
Chief Financial Officer.
The fourth quarter 2003 loss includes increases in provisions for
contingencies in connection with the FAA and OGS audits of $900,000 (see Note
16) and increases in bad debt reserves in connection with airline
bankruptcies of $1,085,000.
F-22
COMMAND SECURITY CORPORATION
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
Against
Amounts
Due to Uncollectible
Balance at Charged to Administrative Charged Accounts Balance
Beginning Costs and Service to Other Written at End of
of Period Expenses Clients Accounts Recoveries Off Period
---------- ---------- -------------- --------- ---------- ---------- -------------
Year ended March 31, 2004:
Deducted from asset accounts:
Allowance for
doubtful accounts
receivable - current
maturities $2,432,337 $154,401 $43,015 $43,752 $198,197 $2,113,443 $ 361,865
Allowance for
billing adjustments 1,000,000 34,627 965,373
Year ended March 31, 2003:
Deducted from asset accounts:
Allowance for
doubtful accounts
receivable - current
maturities 383,110 2,659,830 62,315 114,640 1,946 785,612 2,432,337
Allowance for
billing adjustments 1,000,000 1,000,000
Year ended March 31, 2002:
Deducted from asset accounts:
Allowance for
doubtful accounts
receivable - current
maturities 595,785 581,679 11,246 11,193 816,793 383,110
Allowance for
doubtful notes
receivable - current
maturities 2,246 2,246
See auditor's report
F-23