Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|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, 2005
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________
Commission File Number 0-18684
COMMAND SECURITY CORPORATION
(Exact name of registrant as specified in its charter)
New York 14-1626307
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Lexington Park, Lagrangeville, New York 12540
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 454-3703
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001
par value
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 definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes | | No |X|
The aggregate market value of common stock held by non-affiliates of the
registrant as of June 22, 2005 was approximately $7,861,327.
As of June 22, 2005, the registrant had issued and outstanding 7,779,878 shares
of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, which will be filed
within 120 days of March 31, 2005, are incorporated by reference into Part III.
Command Security Corporation
Annual Report on Form 10-K
For the Fiscal Year Ended March 31, 2005
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 Equity 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
Disclosure.
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, Financial Statement Schedules and
Reports on Form 8-K
1
PART I
ITEM 1. BUSINESS
General
Command Security Corporation (the "Company") principally provides uniformed
guard, aviation and support security services to commercial, financial,
industrial, aviation and governmental clients in the United States from its 28
operating offices in California, Connecticut, Delaware, Florida, Illinois,
Maine, Maryland, Massachusetts, New Jersey, New York, Oregon and Pennsylvania.
The Company operates as a provider of security services to a wide range of
clients that the Company has categorized into three groups; guard services,
aviation services and support services. The latter includes services provided to
security services firms under administrative service agreements and back office
support services provided to police departments.
The guard services division provides its services to governmental,
quasi-governmental, health, educational and financial institutions, residential
and commercial property management, and industrial, distribution, logistics and
retail clients. Guard services generated approximately $28.9 million, or 36.2%,
of the Company's revenues for the fiscal year ended March 31, 2005. Guard
services include providing armed and unarmed uniformed security personnel for
access control, mobile patrols, traffic control, security console/system
operators, fire safety directors, communication, reception, concierge and front
desk/doorman operations.
The aviation services division provides its services to airlines, airports,
airport authorities and the general aviation community. Aviation services
generated approximately $50.5 million, or 63.3%, of the Company's revenues for
the fiscal year ended March 31, 2005. Aviation services include providing
uniformed guard services to airport and airport-related clients, including
document verifiers, skycaps, wheelchair escorts, general security and baggage
handling services.
The support services division provides its services to security services firms
and police departments. Support services generated approximately $.3 million, or
..4%, of the Company's revenues for the fiscal year ended March 31, 2005 and
encompass back office support to three police departments and two administrative
service clients.
Operations
As a licensed watch guard 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, hand-held radios or cell phones. 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, commercial and
residential property management 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. Our 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 U.S. Government
made the decision to federalize the pre-board screening process at airport
locations in the United States and in February 2002, the Federal Aviation
Administration (the "FAA") took over responsibility for managing the contracts
with security services providers, including the Company. Completion of the
federalization process was achieved by the U.S. Government set deadline of
November 2002. The termination of the Company's contract for pre-board screening
at five airport locations in the United States has had a significant adverse
impact on the revenues and earnings of the Company's aviation services division.
Subsequently, 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 since secured work at four new airport
locations - San Jose (California), Portland (Maine), Baltimore-Washington
(Maryland) and Portland (Oregon).
The nature of the Company's business also subjects it to claims or litigation
alleging that it is liable for damages as a result of the conduct of its
employees or others. The Company insures against such claims and suits through
general liability policies with third-party insurance companies. Such policies
have limits of $5,000,000 per occurrence. On the aviation related business, the
Company currently has a policy with a $30,000,000 limit per occurrence. The
Company retains the risk for the first $25,000 per occurrence on the
non-aviation related policy which includes airport wheelchair operations and
$5,000 on the aviation related policy except $25,000 for damage to aircraft and
$100,000 for skycap and electric cart operations.
2
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 as 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's managers
each play an important role as highlighted by their responsibility for both
service quality and sales. The Company believes that in most situations
providing a single individual with responsibility for service quality and sales,
results in better supervision, 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 applicable rates,
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 for 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
180 days after the termination of the engagement. Each security services
agreement may be terminated by the customer or the Company, typically with not
less than thirty days written notice. In addition, the Company may also
terminate an agreement immediately upon default by the customer in payment of
monies due thereunder, or if the customer is involved in a bankruptcy or similar
event.
The Company has its own proprietary computerized scheduling and information
system. The scheduling of guards, while time-consuming, is an important function
of any security 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.
The Company's corporate policy requires that all selected applicants for 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. Personnel are selected
based upon the Company's evaluation of their 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 training. Pre-assignment training covers topics such as
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.
The Company 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 year ended March 31, 2005, Delta Airlines ("Delta") accounted for
approximately $12,604,000 of the Company's total revenue.
Several of the Company's aviation clients filed for bankruptcy protection during
fiscal 2005 and 2003. The aviation industry continues to struggle with various
challenges including the cost of security and higher fuel prices. Additional
bankruptcy filings by aviation and non-aviation clients could have a material
adverse impact on the Company's liquidity, results of operations and financial
condition. The possibility of bankruptcy filings by Delta and Northwest Airlines
remain. Certain consequences of such filings are discussed below in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the "Outlook" section.
3
Competition
Competition in the security service business is intense. It is based primarily
on price, quality of services provided, scope of services performed, name
recognition, recruiting, training and the extent and quality of security guard
supervision. As the Company has expanded its operations it has had to compete
more frequently against larger national companies, such as Securitas North
America, the Wackenhut Corporation, AlliedBarton Security and Guardsmark, LLC,
which 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 security 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 11th tragedy, the U.S. Government passed a bill in
November 2001, outlining their proposal to federalize the pre-board screening
process at all airport locations within the United States. This process of
federalization has been completed, the impact of which is discussed above in
"Item 1. Business-Operations." Also see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Employees
The Company has approximately 70 employees indirectly attributable to guard
services, including supervisors and dispatchers, 100 administrative employees,
including the executive staff, and 3,130 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 has not
experienced any material difficulty in hiring suitable numbers of qualified
security guards, although, when labor has been in short supply, it has been
required to pay higher wages and/or 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: Chicago and New York City guard offices; and John F. Kennedy, La
Guardia, Los Angeles and Philadelphia airport offices. Together, the unionized
employees account for approximately 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 Chicago, Los Angeles and New York City
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. Security 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 business 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.
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. In addition, the Company
believes itself to be the owner of the service marks "STAIRS" and "Smart Guard."
ITEM 2. PROPERTIES
As of March 31, 2005, the Company owned and used in connection with its business
approximately 48 vehicles.
As of March 31, 2005, 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 $105,600 under a
five-year lease expiring September 30, 2010. The Company also leases the
following offices:
4
- --------------------------------------------------------------------------------
Location
- --------------------------------------------------------------------------------
2450 S. Atlantic Blvd.
Suite #207
Commerce, CA
8939 S. Sepulveda Blvd.
Suite #201
Los Angeles, CA
7841 Balboa Avenue
Suite 208
San Diego, CA
San Jose Int'l. Airport
1400 Coleman Ave.
Suites D24 & D25
Santa Clara, CA
1470 Barnum Avenue
Suite 304
Bridgeport, CT
100 Wells St.
#2E
Hartford, CT
2777 Summer Street
Suite 503
Stamford, CT
Suite 208 Wilson Bldg.
3511 Silverside Road
Concord Plaza
Wilmington, DE 19810
4901 N.W. 17th Way
Suite 504
Ft. Lauderdale, FL
800 Virginia Avenue
Suite 53
Ft. Pierce, FL
5
8181 NW 36th Street
Unit #21-A
Miami, FL
8452 South Stony Island
2nd Floor
Chicago, IL
780 Elkridge Landing Road
Suite 220
Linthicum Heights, MD
21 Cummings Park
Suite 224
Woburn, MA
186 Stafford St
Springfield, MA
2222 Morris Avenue
Union, NJ
52 Oswego Road
Baldwinsville, NY
2144 Doubleday Avenue
Ballston Spa, NY
Laguardia Int'l. Airport
United Hangar #2, Room 328 &329
Flushing, NY
JFK International Airport
175-01 Rockaway Boulevard
Jamaica, NY
17 Battery Place
Suite 223
New York, NY
22 IBM Road
Suite 105
Poughkeepsie, NY
6
Two Gannett Drive
Suite 208
White Plains, NY
5505 Main Street
Suite 2
Williamsville, NY
700 NE Airport Way
Suite B2420
Portland, OR
29 Bala Avenue
Suite 118
Bala Cynwyd, PA
2 International Plaza
Suite 242
Philadelphia, PA
We believe that our existing properties are in good condition and are suitable
for the conduct of our business.
ITEM 3. LEGAL PROCEEDINGS
Except as described below, the Company is not a party to any material pending
proceedings, other than ordinary routine litigation incidental to its business.
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 is such that there is a significant volume
of routine claims and lawsuits that are issued against it, the vast majority of
which never lead to substantial damages being awarded. The Company maintains
general liability and 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 and airport wheelchair
operations related claims and $5,000 per occurrence on the aviation related
claims except $25,000 for damage to aircraft and $100,000 for skycap and
electric cart operations. Any punitive damage award would not be covered by the
general liability insurance policy. The only other potential impact would be on
future premiums, which may be adversely affected by an unfavorable claims
history.
In addition to such cases, the Company has been named as a defendant in several
uninsured employment related claims which are currently before various courts,
the EEOC or various state and local agencies. The Company has instituted
policies to minimize these occurrences and monitor those that do occur. At this
time the Company is unable to determine the impact on its financial position and
results of operations that these claims may have, should the investigations
conclude that they are valid.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the last
quarter of our fiscal year ended March 31, 2005.
7
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) Common stock market price
High Low
---- ---
2005
First Quarter $1.69 $1.12
Second Quarter 1.70 1.21
Third Quarter 1.38 1.05
Fourth Quarter 2.20 1.31
2004
First Quarter $1.20 $0.93
Second Quarter 1.20 0.90
Third Quarter 1.10 0.91
Fourth Quarter 1.70 1.02
(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 3, 2005 there were approximately 210 holders of record of the
Company's common stock. The last sales price of the Company's common stock on
June 22, 2005 was $1.80.
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 principal 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.
8
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in this table has been derived from the financial
statements as of and for the years ended March 31, 2005, 2004, 2003, 2002, and
2001, which have been audited by independent certified public accountants. The
information should be read in conjunction with "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and with the
financial statements and related notes included in the Report.
Statements of Operations Data
Years Ended March 31,
- ------------------------------------------- ---------------- -------------- --------------- ------------- ---------------
In $ Thousands 2005 2004 2003 2002 2001
- ------------------------------------------- ---------------- -------------- --------------- ------------- ---------------
Revenue 79,655 75,905 94,315 84,162 71,595
Gross Profit 10,523 10,960 19,558 13,805 11,805
Operating Income (Loss) (289) 195 3,266 1,752 328
Net Income (Loss) (390) (310) 1,327 2,376 (439)
Income (Loss) per common share (.06) (.08) 0.14 0.38 (0.08)
Weighted average number
of common shares 7,302,738 6,287,343 6,287,343 6,287,343 6,287,343
- ------------------------------------------- ---------------- -------------- --------------- ------------- ---------------
All of the above statistics are in $ thousands except for "Income (Loss) per
common share" and "Weighted average number of common shares" outstanding which
are expressed in $'s and number, respectively.
Balance Sheet Data At March 31,
- ------------------------------------------- ---------------- -------------- --------------- ------------- ---------------
In $ Thousands 2005 2004 2003 2002 2001
- ------------------------------------------- ---------------- -------------- --------------- ------------- ---------------
Working Capital 3,679 2,549 3,591 1,525 1,874
Total Assets 20,237 21,927 20,707 26,317 17,991
Short-term debt (1) 4,866 9,519 9,248 13,570 8,489
Long-term debt (2) 81 221 88 291 1,801
Stockholders' equity 4,409 4,494 4,967 4,087 1,712
- ------------------------------------------- ---------------- -------------- --------------- ------------- ---------------
(1) 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, "Short-Term Borrowings", "Long-Term Debt" and "Lease
Commitments", respectively, to the financial statements for further
discussion.
(2) 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
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's financial statements
and related notes thereto contained in this report. In this discussion, the
words "Company", "we", "our" and "us" refer to Command Security Corporation.
The following can be interpreted as including forward-looking statements under
the Private Securities Litigation Reform Act of 1995. The words "outlook",
"intend", "plans", "efforts", "anticipates", "believes", "expects" or words of
similar import typically identify such statements. Various important factors
that could cause actual results to differ materially from those expressed in the
forward-looking statements are identified at the end of this Item 7. The
Company's actual results may vary significantly from the results contemplated by
these forward looking statements based on a number of factors including, but not
limited to, availability of labor, marketing success, competitive conditions and
the change in economic conditions of the various markets the Company serves.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosure of contingent assets and liabilities. We believe
the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our financial statements. Actual
results may differ from these estimates under different assumptions and
conditions.
9
Revenue Recognition
The Company records revenues as services are provided to its customers. Revenues
consist primarily of aviation and security guard services which are typically
billed at hourly rates. These rates may vary depending on base, overtime and
holiday time worked. Revenue for administrative services provided to other guard
companies are calculated as a percentage of the administrative service client's
revenue and are recognized when billings for the related guard services are
generated.
Trade Receivables
The Company periodically evaluates the requirement for providing for billing
adjustments and/or credit losses on its accounts receivable. The Company
provides for billing adjustments where management determines that there is a
likelihood of a significant adjustment for disputed billings. Criteria used by
management to evaluate the adequacy of the allowance for doubtful accounts
include, among others, the creditworthiness of the customer, current trends,
prior payment performance, the age of the receivables and the Company's overall
historical loss experience. Individual accounts are charged off against the
allowance as management deems them as uncollectible.
Insurance reserves
General liability estimated accrued liabilities are calculated on an
undiscounted basis based on actual claim data and estimates of incurred but not
reported claims developed utilizing historical claim trends. Projected
settlements and incurred but not reported claims are estimated based on pending
claims, historical trends and data.
Workers' compensation annual premiums are based on the incurred losses as
determined at the end of the coverage period, subject to minimum and maximum
premium. Estimated accrued liabilities are based on the Company's historical
loss experience and the ratio of claims paid to the Company's historical payout
profiles.
Income taxes
Income taxes are based on income (loss) for financial reporting purposes and
reflect a current tax liability (asset) for the estimated taxes payable
(recoverable) in the current year tax return and changes in deferred taxes.
Deferred tax assets or liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax laws and rates. A valuation allowance is provided on deferred
tax assets if it is determined that it is more likely than not that the asset
will not be realized.
OVERVIEW
Command Security Corporation is a provider of uniformed security services from
our twenty-eight operating offices in twelve states throughout the United
States. The biggest change to our business occurred in fiscal year 2003, with
the federalization of pre-board screening services by the U.S. Government at all
airports located in the United States. This process was completed in November
2002 and resulted in the loss of significant revenues for the Company's aviation
services division. Although the Company partially replaced these lost revenues
during fiscal year 2003, war in Iraq, the SARS epidemic and a variety of other
factors have adversely affected the airline industry and hence demand for our
aviation related services, which currently accounts for approximately 63% 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 complemented the efforts of our sales force with local branch management
who have been incentivized to secure new business at stronger margins. We expect
that security will continue to be a key area of focus for the U.S. Government
and that this will provide opportunities for security companies such as the
Company to bid and win profitable Government contracts. However, we cannot
assure you as to the level of our success in this regard.
RESULTS OF OPERATIONS
Earnings
The Company reported a net loss for the fiscal year ended March 31, 2005 of
$390,255. The loss includes approximately $685,000 of costs incurred by the
Company in connection with (i) the change in the Company's management and Board
of Directors in August 2004, and related legal fees and (ii) the payment by the
Company of certain legal fees and expenses primarily in connection with the
conversion of the Company's preferred stock into common stock by certain
shareholders.
In fiscal year 2004, the Company suffered a net loss of $310,408. The major
factors contributing to this loss were higher workers' compensation insurance
costs and State and Federal unemployment insurance rates. The workers'
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 insurance rates were caused by the numerous layoffs and
terminations due to the federalization of pre-board screening at all airports
located in the United States during fiscal year 2003.
10
Revenues
Revenues for the fiscal year ended March 31, 2005 increased by $3,749,962, or
4.9%, to $79,654,744 from $75,904,782 in fiscal year 2004. The increase is
primarily due to higher revenues of approximately $7,500,000 in the aviation
division from: (i) a contract with Delta Airlines which commenced in August 2003
and (ii) new airline customers at the Company's existing terminal operations at
John F. Kennedy International Airport in New York and Los Angeles International
Airport in California. The increase was partially offset by lower revenues of
approximately $4,200,000 due to the losses in the prior year of: (i) a
wheelchair contract at Los Angeles International Airport; (ii) temporary
security guard strike work associated with a California based grocery market
chain and (iii) an escort program transporting international passengers without
United States visas within terminals at certain of the Company's airport
locations.
Revenues for the fiscal year ended March 31, 2004 decreased by $18,409,733, or
19.5%, 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 all airports
located in the United States in November 2002. These services accounted for
approximately $27,322,000 of fiscal year 2003 revenues. Underlying revenues
excluding these services increased by approximately $8,912,000, or 13.3%, due
primarily to additional revenues from other services provided to the airline
industry and an increase of approximately $2,000,000 in guard division services
reflecting temporary security guard strike work in California. Guard division
revenues decreased by $4,000 to $30,216,000 from $30,220,000 in fiscal year
2003, which reflects termination of lower margin business, partially offset by
the temporary higher margin security guard strike work in California which ended
in March 2004.
Gross Profit
Gross profit for the fiscal year ended March 31, 2005 decreased by $437,143 to
$10,522,526 (13.2% of revenues) from $10,959,669 (14.4% of revenues) for fiscal
year 2004. The decrease was due mainly to: (i) the loss of temporary security
guard strike work with a California based grocery market chain; (ii) higher
state unemployment insurance rates as a result of layoffs of personnel in 2003
due to the federalization of aviation pre-board screening services; (iii) term
discounts with airline customers for prompt payment of accounts receivable; (iv)
lower gross profit margins on aviation services contracts due to competitive
pressures and (v) the loss of the wheelchair and escort program contracts noted
above. Partially offsetting these decreases were lower workers' compensation and
vehicle related costs.
Gross profit for the fiscal year ended March 31, 2004 decreased by $8,597,987 to
$10,959,669 (14.4% of revenues) from $19,557,656 (20.7% of revenues) 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 profit margin was due to: (i) loss of pre-board
screening services in fiscal year 2003; (ii) new aviation services contracts at
lower gross profit margins and (iii) higher workers compensation costs as a
result of a serious accident involving an employee.
The Company has an insurance policy covering workers' compensation claims in
States in which the Company performs services. Estimated accrued liabilities are
based on the Company's historical loss experience and the ratio of claims paid
to the Company's historical payout profiles. Charges for estimated workers'
compensation related losses incurred and included in cost of sales were
$3,257,608, $3,630,004 and $2,252,921, for the years ended March 31, 2005, 2004
and 2003, respectively.
The nature of the Company's business also subjects it to claims or litigation
alleging that it is liable for damages as a result of the conduct of its
employees or others. The Company insures against such claims and suits through
general liability policies with third-party insurance companies. Such policies
have limits of $5,000,000 per occurrence. On the aviation related business, as
of October 1, 2002, the Company acquired a policy with a $25,000,000 limit per
occurrence. From October 17, 2003 to October 17, 2004, the Company had an excess
general liability insurance policy covering aviation claims for an additional
$25,000,000 in the aggregate. As of October 1, 2004, the Company acquired a
policy with a $30,000,000 limit per occurrence. The Company retains the risk for
the first $25,000 per occurrence on the non-aviation related policy which
includes airport wheelchair operations and $5,000 on the aviation related policy
except $25,000 for damage to aircraft and $100,000 for skycap and electric cart
operations. Estimated accrued liabilities are based on specific reserves in
connection with existing claims as determined by third party risk management
consultants and actuarial factors and the timing of reported claims. These are
all factored into estimated losses incurred but not yet reported to the Company.
General and Administrative Expenses
General and administrative expenses decreased by $217,606 to $10,590,778 (13.3%
of revenues) for the fiscal year ended March 31, 2005 from $10,808,384 (14.2% of
revenues) in fiscal year 2004. The decrease was primarily due to lower payroll
and related costs. Included in general and administrative expenses are: (i)
approximately $685,000 of costs incurred by the Company in connection with (a)
the change in the Company's management and Board of Directors in August 2004,
and related legal fees and (b) the payment by the Company of certain legal fees
and expenses primarily in connection with the conversion of the Company's
preferred stock into common stock by certain shareholders; and (ii) a non-cash
charge for employee compensation cost in the amount of $106,400.
General and administrative expenses decreased by $2,824,996 to $10,808,384
(14.2% of revenues) in fiscal year 2004, from $13,633,380 (14.5% of revenues) in
fiscal year 2003. The reduction primarily resulted from the removal of costs
associated with the increase in revenues in fiscal year 2002 and a cost
reduction program implemented in June 2003.
11
Provision for Doubtful Accounts
The provision for doubtful accounts increased by $122,804 to $277,205 for the
fiscal year ended March 31, 2005 compared with $154,401 in fiscal year 2004. The
increase was primarily due to a $150,000 charge in October 2004 associated with
ATA Airlines filing for protection under Chapter 11 of the U.S. Bankruptcy Code
and the effect of benefits recorded in the prior year period associated with
estimated recoveries on bankrupt customers' receivables.
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 Company periodically evaluates the requirement for providing for billing
adjustments and/or credit losses on its accounts receivable. The Company
provides for billing adjustments where management determines that there is a
likelihood of a significant adjustment for disputed billings. Criteria used by
management to evaluate the adequacy of the allowance for doubtful accounts
include, among others, the creditworthiness of the customer, current trends,
prior payment performance, the age of the receivables and the Company's overall
historical loss experience. Individual accounts are charged off against the
allowance as management deems them as uncollectible. It is not known if bad
debts will increase in future periods nor is it believed by management that the
increase during the fiscal year ended March 31, 2005 compared with the same
period of the prior year is necessarily indicative of a trend.
Bad Debt Recoveries
Bad debt recoveries decreased for the fiscal year ended March 31, 2005 by
$142,573 to $55,974 from $198,547 in fiscal year 2004 due mainly to recoveries
in fiscal year 2004 associated with airlines that filed for protection under the
bankruptcy laws in fiscal year 2003.
Bad debt recoveries increased in fiscal year 2004 by $196,601 to $198,547 from
$1,946 in fiscal year 2003. The bad debt recoveries include $74,144 and $59,529
from the Air Canada and Hawaiian Airlines bankruptcies, respectively.
Interest Income
Interest income, which principally represents financing income from the
Company's service agreement customers and interest earned on trust funds for
potential future workers' compensation claims, for the fiscal year ended March
31, 2005 increased by $6,931 to $96,731 from $89,800 in fiscal year 2004.
Interest income of $89,800 for fiscal year 2004 was comparable with the same
period of the prior year.
Interest Expense
Interest expense for the fiscal year ended March 31, 2005 decreased by $56,658
to $460,105 from $516,763 in fiscal year 2004. The decrease principally
represents lower average outstanding borrowings under the Company's commercial
revolving loan agreement, partially offset by an increase in the weighted
average interest rate.
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.
Equipment Dispositions
The $4,848 loss on equipment dispositions was due mainly to the sale of a
Company vehicle to its former Chief Financial Officer as provided for in his
Employment Agreement with the Company. Equipment dispositions are a result of
vehicles, office equipment and security equipment sold at prices above or below
book value.
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.
Income Tax Benefit (Expense)
Income tax expense decreased from $91,543 in fiscal year 2004 to an income tax
benefit of $267,450 in fiscal year 2005 due to a reduction in the valuation
allowance attributable primarily to net operating loss benefits. The Company has
determined based on its expectations for the future, that it is more likely than
not that future taxable income will be sufficient to utilize fully the net
deferred tax assets at March 31, 2005.
Management believed that in fiscal year 2003, the Company would be able to use
100% of its 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.
12
LIQUIDITY AND CAPITAL RESOURCES
The Company pays employees and administrative service clients on a weekly basis,
while customers pay for services generally within 55 days after billing by the
Company. In order to fund our payroll and operations, the Company maintains a
commercial revolving loan arrangement, currently with CIT Group/Business Credit,
Inc. ("CIT").
We believe that existing funds, cash generated from operations, and existing
sources of and access to financing are adequate to satisfy our working capital,
capital expenditure and debt service requirements for the foreseeable future.
However, in order to provide for greater financial flexibility and liquidity, we
may raise additional capital from time to time.
CIT Revolving Loan
The CIT financing agreement (the "Agreement") has a term of 3 years ending
December 12, 2006 and provides for borrowings in an amount up to 85% of the
Company's eligible accounts receivable, but in no event more than $15,000,000.
The Agreement also provides for advances against unbilled revenue (primarily
monthly invoiced accounts) although this benefit is offset by a reserve against
all outstanding payroll checks. The revolving loan bears interest at the prime
rate, as defined, plus 1.25% per annum on the greater of: (i) $5,000,000 or (ii)
the average of the net balances owed by the Company to CIT in the loan account
at the close of each day during such month (see below). Costs to close the loan
totaled $279,963 and are being amortized over the three year life of the
Agreement.
At March 31, 2005, the Company had borrowed $4,522,355, representing
approximately 61% of its maximum borrowing capacity based on the definition of
"eligible accounts receivable" under the terms of the Agreement. However, as the
business grows and produces new receivables, up to $10,477,645 could
additionally be available to borrow under the Agreement.
The Company relies on its revolving loan from CIT, which contains a fixed charge
covenant and various other financial and non-financial covenants. If the Company
breaches a covenant, CIT has the right to call the line unless CIT waives the
breach. GCM Security Partners LLC's ("GCM") acquisition of the Company's
securities owned by Reliance Security Group plc ("Reliance") resulted in a
violation of a covenant restricting Reliance from selling such securities absent
CIT's consent, and may be deemed a "change in control" of the Company requiring
CIT's consent, the absence of which may also be deemed to violate a covenant
under the Agreement. Further, the Agreement included covenants requiring William
C. Vassell, formerly the Chairman, President and Chief Executive Officer of the
Company, to maintain ownership of at least 500,000 shares of voting common stock
of the Company and to remain as Chairman of the Board of Directors and Chief
Executive Officer of the Company or actively engaged in the management of the
Company. The resignation by Mr. Vassell from all positions he held with the
Company on October 7, 2004 and his agreement to sell 400,000 shares of the
Company's common stock may also be deemed to violate the foregoing covenant.
In September 2004, the Company received a Notice of Default/Reservation of
Rights letter from its lender CIT (the "Letter"). The Letter notified management
that the Company was not in compliance with the fixed charge covenant for the
month of July 2004 and was also in violation of a non-financial covenant since
Mr. Vassell was no longer Chairman of the Board of Directors and Chief Executive
Officer of the Company. Further, the Letter advised that CIT was not at this
time terminating the Agreement but was notifying management that: (i) such
defaults and/or events of defaults (the "Defaults") exist, (ii) CIT at this time
did not intend to waive the Defaults, (iii) the Company inform CIT of actions
taken or to be taken to remedy the Defaults, (iv) effective September 1, 2004 a
default rate of interest of 2% over the bank rate of interest, as defined, would
be charged on all obligations under the Agreement and (v) all future loans,
advances and other extensions of credit under the Agreement will be at CIT's
sole discretion in accordance with the provisions thereof.
On February 2, 2005, the Company received a Waiver and Amendment letter (the
"Waiver") from CIT. The Waiver confirms that (i) the Company's previously
reported failure to comply with a fixed charge coverage ratio and a non-financed
covenant related to the change in management and stock ownership of the Company
shall not constitute defaults and/or events of default under the Agreement and
(ii) CIT waives any and all rights they may have to accelerate any of the
obligations and exercise any other remedies against the Company or the
collateral as a result thereof.
In addition, CIT (i) rescinded and revoked the Letter effective as of February
1, 2005 and (ii) confirmed that they will cease charging the default rate of
interest effective as of January 1, 2005.
Cash Flows
The following table summarizes our cash flow activity for the fiscal years ended
March 31, 2005, 2004 and 2003:
- ------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
---- ---- ----
- -------------------------------------------------------- --------------------------- ------------------------ ----------------------
Net cash provided by operating activities $ 8,042,604 $ 2,169,247 $ 6,633,858
- -------------------------------------------------------- --------------------------- ------------------------ ----------------------
Net cash provided by (used in) investing activities 30,091 31,320 (60,972)
- -------------------------------------------------------- --------------------------- ------------------------ ----------------------
Net cash used in financing activities (5,571,946) (2,190,266) (6,572,886)
- ------------------------------------------------------------------------------------------------------------------------------------
13
Investing
The Company finances vehicle purchases typically over three years and insurance
through short-term borrowings. The Company has no present material commitments
for capital expenditures.
Financing
During the fiscal year ended March 31, 2005, the Company issued 260,000 shares
of common stock upon the exercise of warrants to purchase common stock at
exercise prices ranging from $.75 to $1.03125 per share. The proceeds from such
exercises of $237,887 were included in common stock and additional paid-in
capital at March 31, 2005.
Working Capital
Working capital increased by $1,129,993 to $3,679,071 as of March 31, 2005, from
$2,549,078 as of March 31, 2004 primarily due to airline customer prepayments
received in advance of services to be performed at applicable airport locations.
The Company experienced checks issued in advance of deposits (defined as checks
drawn in advance of future deposits) of $495,249 as of March 31, 2005, compared
with $566,611 at March 31, 2004. Cash balances and book overdrafts can fluctuate
materially from day to day depending on such factors as collections, timing of
billing and payroll dates, and are covered via advances from the revolving loan
as checks are presented for payment.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that are currently
material or reasonably likely to be material to our financial position or
results of operations.
Contractual Obligations
The impact that our contractual obligations as of March 31, 2005 are expected to
have on our liquidity and cash flow in future periods is as follows:
Payments Due by Period
---------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years
----- ---------------- --------- --------- -----------------
- -------------------------------- ---------------- ---------------------- ------------------ ------------------ -------------------
Long-term debt obligations $ 67,765 $ 26,699 $ 41,066 $ -- $ --
- -------------------------------- ---------------- ---------------------- ------------------ ------------------ -------------------
Capital lease obligations 67,538 27,475 40,063 -- --
- -------------------------------- ---------------- ---------------------- ------------------ ------------------ -------------------
Operating lease obligations 2,899,772 785,821 1,178,284 569,347 366,320
- -------------------------------- ---------------- ---------------------- ------------------ ------------------ -------------------
Purchase obligations (1) 516,333 91,322 182,644 182,644 59,723
- -------------------------------- ---------------- ---------------------- ------------------ ------------------ -------------------
Total $3,551,408 $ 931,317 $1,442,057 $ 751,991 $ 426,043
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Purchase obligations include an agreement to purchase uniform cleaning
services that is legally binding on the Company and that specifies all
significant terms, including fixed or minimum quantities to be purchased;
fixed, minimum or variable price provisions; and the approximate timing of
the transaction.
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".
Financial Results
Future revenue will be largely dependent upon the Company's ability to gain
additional revenues in the guard and aviation services divisions at acceptable
margins while minimizing terminations of existing clients. The revenues of the
guard division have stabilized over recent months after a reduction over the
past few years as contracts with unacceptable margins were cancelled. Our
current focus is on increasing revenues while branch managers work to sell new
business and retain profitable contracts. The airline industry continues to
increase its demand for services provided by the Company. During the current
quarter, the Company's aviation services division has been successful in
obtaining two new service contracts, one of which represents a new airport
location for such division.
The Company is continuing its attempts to secure contracts from the Department
of Homeland Security and other government departments. The Company believes this
to be an area of opportunity over the next few years, given the heightened focus
on security in the United States.
14
Gross profit margins decreased during the fiscal year ended March 31, 2005 to
13.2% of revenues compared with an average gross profit margin of 14.4% for the
fiscal year ended March 31, 2004 primarily due to: (i) the loss of temporary
security guard strike work with a California based grocery market chain; (ii)
higher state unemployment insurance rates as a result of layoffs due to the
federalization of pre-board screening services; (iii) term discounts with
airline customers for prompt payment of accounts receivable; (iv) lower gross
profit margins on aviation services contracts due to competitive pressures and
(v) lost contracts for a wheelchair operation at Los Angeles International
Airport and an escort program transporting international passengers without
United States visas within terminals at certain of the Company's airport
locations. Management expects gross profit to remain under pressure due
primarily to continued price competition. However, management expects these
effects to be moderated by continued operational efficiencies resulting from
better management of the Company's cost structures and workers' compensation
experience ratings.
A cost reduction program was instituted in October 2004 which is expected to
reduce the Company's general and administrative expenses in future periods.
Additional cost reduction opportunities are being pursued as they are
determined. However, costs associated with the change in the Company's
management and Board of Directors in August 2004, including the resignation of
the Company's former Chief Executive Officer, and related legal expenses; and
the payment by the Company of certain legal fees and expenses primarily in
connection with the conversion of the Company's preferred stock into common
stock by certain shareholders had an unfavorable impact on the Company's results
of operations for the fiscal year ended March 31, 2005.
The aviation division represents approximately 63% of the Company's total
revenues and Delta, at annual billings of approximately $12,604,000, is the
largest customer of the aviation division at approximately 25% of the aviation
division's and 16% of the Company's total revenues. Due to the existing
limitations under the CIT credit line, discussed below, the Company is
restricted from borrowing against Delta's accounts receivable. In the event of a
bankruptcy by Delta, Northwest or another airline customer, the Company's
earnings could be adversely affected to the extent of the accounts receivable
with such airline(s), as well as from lost future revenues if such airline(s)
cease operations. Liquidity would also be affected, but to a limited extent due
to existing limitations under the CIT credit line.
The Company is concerned about the possibility of Delta and/or Northwest
Airlines filing for bankruptcy, and to reduce exposure to such potential
bankruptcy filings, management proposed and Delta accepted during October 2004
an amendment to their contract whereby Delta shall pay the Company by electronic
funds transfer in advance without invoice on the last day of the month preceding
the month in which services will be performed at applicable airport locations,
as defined. Such services with Delta are subject to a 3% term discount. In the
event of a Delta and/or Northwest Airlines bankruptcy, payments received in the
90 days prior to Delta and/or Northwest's filing for bankruptcy may be alleged
preferential payments under the federal bankruptcy rules and a demand could be
made on the Company to return some or all of the payments made by Delta and/or
Northwest within such 90-day period. CIT has established specific reserves for
all Delta, US Air and ATA Airlines accounts receivable; United Airlines accounts
receivable in excess of $350,000; Northwest Airlines accounts receivable in
excess of $550,000, $300,000 effective in June 2005; and an additional general
airline reserve of $1,000,000 thereby reducing the Company's current cash
availability for borrowing by approximately $1,400,000. As of the close of
business, June 24, 2005, the Company's cash availability was approximately
$3,100,000 which is believed to be sufficient to meet its needs for the
foreseeable future barring further increased reserves imposed by CIT.
We believe that existing funds, cash generated from operations, and existing
sources of and access to financing are adequate to satisfy our working capital,
capital expenditure and debt service requirements for the foreseeable future.
However, in order to provide for greater financial flexibility and liquidity,
management is currently evaluating potential additional sources of capital to
further strengthen the Company's balance sheet and cash availability.
Reliance's sale of its securities in the Company makes the Company eligible to
pursue certain federal privatization contracts for the provision of security
services in the airline industry. No such contracts have, to management's
knowledge, been bid to date.
Forward Looking Statements
Certain of the statements contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations section of the Form 10-K and in
particular those under the heading "Outlook," contain forward-looking
statements. These are based on current expectations, estimates, forecasts and
projections about the industry in which the Company operates, management's
beliefs, and assumptions made by management. In addition, other written or oral
statements that constitute forward-looking statements may be made by or on
behalf of the Company. While management believes these statements are accurate,
the Company's business is dependent upon general economic conditions and various
conditions specific to the industries in which the Company operates. Future
trends and these factors could cause actual results to differ materially from
the forward-looking statements that have been made. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, the actual outcomes and
results may differ materially from what is expressed or forecast in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
As provided for under the Private Securities Litigation Reform Act of 1995, the
Company wishes to caution shareholders and investors that the following
important factors, among others, could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements in this
report.
15
Airline Industry Concerns
Several of the Company's aviation clients filed for bankruptcy protection during
fiscal 2005 and 2003. The aviation industry continues to struggle with various
challenges including the cost of security and higher fuel prices. Additional
bankruptcy filings by aviation and non-aviation clients could have a material
adverse impact on the Company's liquidity, results of operations and financial
condition. The possibility of bankruptcy filings by Delta and Northwest Airlines
remain. Certain consequences of such filings are discussed above in the
"Outlook" section.
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 its current clients. Retention
is affected by several factors including but not limited to, regulatory
limitations, the quality of the services provided by the Company, the quality
and pricing of comparable services offered by competitors, continuity of
management and non-management personnel. There are several major national
competitors with resources greater than those of the Company which, therefore,
have the ability to provide service, cost and compensation incentives to clients
and employees which could result in a loss of such clients and/or employees.
Cost Management
The Company's ability to realize expectations will be largely dependent upon
management and its ability to maintain margins, which in turn will be determined
in large part by management's control over costs and increased pressure on its
vendors to cut their costs. To a significant extent, certain costs are not
within the control of management and margins may be adversely affected by such
items as litigation expenses, fees incurred in connection with extraordinary
business transactions, inflation, labor unrest, increased payroll and related
costs.
Collection of Accounts Receivable
Management has no definite basis to believe that default in payment of accounts
receivable by the Company's aviation and security guard customers or
administrative service clients will occur. However, the aviation industry in
general and Delta and Northwest Airlines, in particular, pose a high degree of
risk. Any such default by one or more significant clients due to bankruptcy or
otherwise, could have a material adverse impact on the Company's liquidity,
results of operations and financial condition.
Catastrophic Events
The Company is exposed to potential claims for catastrophic events, such as acts
of terrorism, or based upon allegations that the Company failed to perform its
services in accordance with contractual or industry standards. The Company's
insurance coverage limits are currently $5,000,000 and $30,000,000 per
occurrence for guard and aviation services, respectively. The Company retains
the risk for the first $25,000 per occurrence on the non-aviation related policy
which includes airport wheelchair operations and $5,000 on the aviation related
policy (except $25,000 for damage to aircraft and $100,000 for skycap and
electric cart operations). The Terrorism Risk Insurance Act of 2002 established
a program within the United States Department of the Treasury, under which the
federal government shares, with the insurance industry, the risk of loss from
future "acts of terrorism," as defined in the Act. The Company does not
currently maintain additional insurance coverage for losses arising from "acts
of terrorism".
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, 2005, 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 CIT. Based on the Company's average outstanding balances
during the fiscal year ended March 31, 2005, a 1% change in the prime lending
rate would impact the Company's financial position and results of operations by
approximately $44,000 over the next fiscal year.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference to the
financial statements and schedule listed in Item 15 (a)(1) and (a)(2) of Part IV
of this Form 10-K Annual Report.
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", as such term is
defined under Exchange Act Rule 13a-15(e), that are designed to ensure that
information required to be disclosed in the Company's Exchange Act reports 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 Chairman of the Board
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures.
We believe that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives and our Chairman of the Board
and our Chief Financial Officer have concluded that such controls and procedures
are effective at the reasonable assurance level.
An evaluation was performed under the supervision and with the participation of
management, including the Company's Chairman of the Board and its Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation and
subject to the foregoing, the Chairman of the Board and the Chief Financial
Officer concluded that our disclosure controls and procedures were effective as
of March 31, 2005. There have been no changes in the Company's internal control
over financial reporting that occurred during the fourth quarter of fiscal 2005
that has materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names of the executive officers of the Company and their ages, titles and
biographies as of the date hereof is set forth under "Directors and Executive
Officers of the Registrant" in the Proxy Statement for its 2005 Annual Meeting
of Stockholders, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the Company's compensation of its named executives is set
forth under "Executive Compensation" in the Proxy Statement for its 2005 Annual
Meeting of Stockholders, which information is incorporated herein by reference.
Information regarding the Company's compensation of its directors is set forth
under "Director Compensation and Stock Ownership Guidelines" in the Proxy
Statement for its 2005 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners, directors
and executive officers is set forth under "Common Stock Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement for its 2005 Annual
Meeting of Stockholders, which information is incorporated herein by reference.
Information regarding the Company's equity compensation plans, including both
stockholder approved plans and non-stockholder approved plans, is set forth in
the section entitled "Executive Compensation-Equity Compensation Plan
Information" in the Proxy Statement for its 2005 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is set
forth under "Certain Relationships and Related Transactions" in the Proxy
Statement for its 2005 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
17
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding certain principal auditor fees and services is set forth
under "Principal Accountant Fees and Services" in the Proxy Statement for its
2005 Annual Meeting of Stockholders, which information is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a)
(1) Financial Statements: Page Number From
This Form 10-K
--------------
Independent auditor's report........................... F-1
Balance Sheets - March 31, 2005 and 2004............... F-2
Statements of Operations - years ended................. F-3
March 31, 2005, 2004 and 2003
Statements of changes in stockholders' equity.......... F-4
years ended March 31, 2005, 2004 and 2003
Statements of cash flows - years ended................. F-5 - F-6
March 31, 2005, 2004 and 2003
Notes to Financial Statements.......................... F-7 - F-19
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts........ F-20
Schedules not listed above have been omitted as either not applicable,
immaterial or disclosed in the Financial Statements or notes thereto.
(3) Exhibits:
A list of exhibits filed or furnished with this report on Form 10-K (or
incorporated by reference to exhibits previously filed or furnished by the
Company) is provided in the Exhibit Index on page 20 of this report.
(b) Reports on Form 8-K
A Form 8-K was furnished on February 4, 2005, under Items 8.01 and 9.01,
relating to the Waiver and Amendment letter to CIT Group/Business Credit Inc.
Financing Agreement dated February 2, 2005.
A Form 8-K was furnished on February 18, 2005, under Items 2.02 and 9.01,
relating to financial results for the third quarter ended December 31, 2004.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMAND SECURITY CORPORATION
Date: June 29, 2005
By: /s/ Barry I. Regenstein
-----------------------------
Barry I. Regenstein
Executive Vice President and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities an on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Bruce Galloway Chairman of the Board June 29, 2005
- ----------------------
Bruce Galloway
/s/ Barry I. Regenstein Chief Financial Officer June 29, 2005
- ----------------------
Barry I. Regenstein
/s/ Martin C. Blake, Jr. Director June 29, 2005
- ----------------------
Martin C. Blake, Jr.
/s/ Robert S. Ellin Director June 29, 2005
- ----------------------
Robert S. Ellin
/s/ Peter Kikis Director June 29, 2005
- ----------------------
Peter Kikis
/s/ Thomas Kikis Director June 29, 2005
- ----------------------
Thomas Kikis
/s/ Martin Wade, III Director June 29, 2005
- ----------------------
Martin Wade, III
19
COMMAND SECURITY CORPORATION
EXHIBIT INDEX
Exhibit
Number Exhibit Description
- ---------------------------------------------------------------------------------------------------------------------------
3.1 Amended & Restated Articles Incorporated by reference to Exhibit of Incorporation 3.3 of
the form 10-K for the fiscal year ended 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 3.4 of the Eighth
Certificate of Incorporation 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 Specimen Series A Preferred Stock Certificate Incorporated by reference to Exhibit 4.2 of the Third
Amendment to the S-1.
10.1 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.
10.2 CIT Group/Business Credit Inc. Financing Incorporated by reference to Exhibit 10.41
Agreement dated December 12, 2003 of the Form 10-K for the fiscal year ended
March 31, 2004 filed on July 14, 2004.
11 Computation of Income Per Incorporated by reference to Note 11
Share of Common Stock of the Financial Statements.
14 Command Code of Ethics Incorporated by reference to Exhibit 14
of the Form 10-K for the fiscal year ended
March 31, 2004 filed on July 14, 2004.
31 Certifications Pursuant to Exhibit 31 attached hereto.
Rule 13(a)-14(a)/15(d)-14(a)
32 Section 1350 Certifications Exhibit 32 attached hereto.
99.1 Reliance Warrant Incorporated by reference to Exhibit 99.14
of the Form 8-K filed September 27, 2000.
99.2 Registration Rights Agreement Incorporated by reference to Exhibit 99.22
of the Form 8-K filed September 27, 2000.
99.3 Audit Committee of the Board Incorporated by reference to Exhibit 99.23
of Directors Charter and Powers of the Form 10-K for the fiscal year ended
March 31, 2001 filed on July 3, 2001.
99.4 2000 Stock Option Plan Incorporated by reference to Exhibit 99.25
of the Form 10-K for the fiscal year ended
March 31, 2001 filed on July 3, 2001.
99.5 Blake Warrant Incorporated by reference to Exhibit 99.27
of the Form 10-K for the fiscal year ended
March 31, 2001 filed on July 3, 2001.
99.6 Gordon Robinett Employment Agreement Incorporated by reference to Exhibit 99.31
of the Form 10-K for the fiscal year ended
March 31, 2004 filed on July 14, 2004.
99.7 Press Release dated June 29, 2005 Exhibit 99.7 attached hereto.
20
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, 2005 and 2004, 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, 2005. Our audits also included the financial statement schedule
II - Valuation and Qualifying Accounts. 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, 2005 and 2004, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 2005, 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 27, 2005
Poughkeepsie, New York
21
Command Security Corporation
Balance Sheets
March 31, 2005 and 2004
2005 2004
ASSETS
Current assets:
Cash and cash equivalents $ 2,511,050 $ 10,301
Accounts receivable from guard service customers, less allowance for
doubtful accounts of $275,223 and $282,822, respectively 12,452,428 15,471,135
Accounts receivable from administrative service client customers, less
allowance for doubtful accounts of $26,242 and $79,043, respectively 623,529 607,115
Accounts receivable disputed, net allowance for billing adjustment of
$965,373 -- 1,965,006
Prepaid expenses 788,045 936,454
Other assets 2,627,540 369,058
----------- -----------
Total current assets 19,002,592 19,359,069
Furniture and equipment at cost, net 427,673 645,592
Intangible assets, net 174,896 270,217
Restricted cash 72,010 107,676
Other assets 560,255 1,544,855
----------- -----------
Total assets $20,237,426 $21,927,409
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks issued in advance of deposits $ 495,249 $ 566,611
Current maturities of long-term debt 26,699 361,540
Current maturities of obligations under capital leases 27,475 66,270
Short-term borrowings 4,811,774 9,091,628
Accounts payable 399,374 771,042
Due to service companies 160,115 248,205
Preferred dividends payable -- 40,674
Accrued expenses and other liabilities 9,402,835 5,664,021
----------- -----------
Total current liabilities 15,323,521 16,809,991
Insurance reserves 423,449 402,290
Long-term debt, due after one year 41,066 153,882
Obligations under capital leases, due after one year 40,063 67,538
----------- -----------
Total liabilities 15,828,099 17,433,701
----------- -----------
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 in 2004, liquidation value of $2,033,682 -- 2,033,682
Common stock, $.0001 par value per share, 20,000,000 shares
authorized, 7,779,878 and 6,287,343 shares issued and
outstanding, respectively 778 629
Additional paid-in capital 10,348,582 8,009,175
Accumulated deficit (5,940,033) (5,549,778)
----------- -----------
Total stockholders' equity 4,409,327 4,493,708
----------- -----------
Total liabilities and stockholders' equity $20,237,426 $21,927,409
=========== ===========
See accompanying notes and auditor's report
F-2
Command Security Corporation
Statements of Operations
Years Ended March 31, 2005, 2004 and 2003
2005 2004 2003
Revenues $79,654,744 $75,904,782 $94,314,515
Cost of revenues 69,132,218 64,945,113 74,756,859
----------- ----------- -----------
Gross profit 10,522,526 10,959,669 19,557,656
----------- ----------- -----------
Operating expenses
General and administrative expenses 10,590,778 10,808,384 13,633,380
Provision for doubtful accounts and notes 277,205 154,401 2,659,830
Bad debt recoveries (55,974) (198,547) (1,946)
----------- ----------- -----------
10,812,009 10,764,238 16,291,264
----------- ----------- -----------
Operating income (loss) (289,483) 195,431 3,266,392
----------- ----------- -----------
Other income (expenses)
Interest income 96,731 89,800 89,499
Interest expense (460,105) (516,763) (561,035)
(Loss)gain on equipment dispositions (4,848) 12,667 17,203
----------- ----------- -----------
(368,222) (414,296) (454,333)
----------- ----------- -----------
Income (loss) before income
tax benefit(expense) (657,705) (218,865) 2,812,059
Income tax benefit (expense) 267,450 (91,543) (1,485,323)
----------- ----------- -----------
Net income (loss) (390,255) (310,408) 1,326,736
Preferred stock dividends (38,413) (162,695) (447,416)
----------- ----------- -----------
Net income (loss) applicable to common stockholders $ (428,668) $ (473,103) $ 879,320
=========== =========== ===========
Income (loss) per share of common stock
Basic $ (.06) $ (.08) $ .14
=========== =========== ===========
Diluted $ n/a $ (.08) $ .14
=========== =========== ===========
Weighted average number of common
shares outstanding
Basic 7,302,738 6,287,343 6,287,343
=========== =========== ===========
Diluted 7,862,786 6,390,525 6,358,342
=========== =========== ===========
See accompanying notes and auditor's report
F-3
Command Security Corporation
Statements of Changes in Stockholders' Equity
Years Ended March 31, 2005, 2004 and 2003
Preferred Common Paid-In Accumulated
Stock Stock Capital Deficit Total
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
Preferred stock dividends (38,413) (38,413)
Preferred stock conversion (2,033,682) 123 2,033,559 --
Warrants exercised 26 237,861 237,887
Employee stock compensation 106,400 106,400
Net loss (390,255) (390,255)
---------- -------- ----------- ----------- ----------
Balance at March 31, 2005 $ -- $ 778 $10,348,582 $(5,940,033) $4,409,327
========== ======== =========== =========== ==========
See accompanying notes and auditor's report
F-4
Command Security Corporation
Statements of Cash Flows
Years Ended March 31, 2005, 2004 and 2003
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
2005 2004 2003
OPERATING ACTIVITIES
Net income (loss) $ (390,255) $ (310,408) $1,326,736
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 396,471 477,314 612,591
Provision for doubtful accounts and
notes receivable, net of recoveries 221,231 (44,146) 2,657,884
Loss (gain) on equipment dispositions 4,848 (12,667) (17,203)
Deferred income taxes (267,450) -- 1,300,000
Insurance reserves (21,805) (7,182) 124,249
Changes in operating assets and liabilities:
Accounts receivable 4,746,068 (471,715) 1,744,185
Prepaid expenses 1,073,142 794,950 347,572
Other receivables (2,313,596) (843,583) (170,765)
Other assets 1,271,930 209,234 (103,848)
Accounts payable and other current liabilities 3,410,110 2,317,340 (1,210,844)
Due to administrative service clients (88,090) 60,110 23,301
----------- ----------- -----------
Net cash provided by operating activities 8,042,604 2,169,247 6,633,858
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of equipment (61,659) (47,078) (139,185)
Purchase of intangible assets -- -- (1,975)
Proceeds from equipment dispositions 20,850 20,164 53,323
Issuance of notes by administrative service client -- -- (30,500)
Principal collections on notes receivable 70,900 58,234 57,365
----------- ----------- -----------
Net cash provided by (used) in investing activities 30,091 31,320 (60,972)
----------- ----------- -----------
FINANCING ACTIVITIES
Net repayments on line-of-credit (4,275,669) (7,814) (2,866,081)
Decrease in checks issued in advance of deposits (71,362) (514,457) (982,293)
Debt issuance costs -- (277,988) --
Proceeds from warrant exercises 237,887 -- --
Principal payments on other borrowings (1,423,845) (1,113,560) (2,215,980)
Principal payments on capital lease obligations (66,270) (73,076) (142,465)
Payment of preferred stock dividends (79,087) (203,371) (366,067)
Employee stock compensation 106,400 -- --
----------- ----------- -----------
Net cash used in financing activities (5,571,946) (2,190,266) (6,572,886)
----------- ----------- -----------
Net change in cash and cash equivalents 2,500,749 10,301 --
Cash and cash equivalents, beginning of year 10,301 -- --
----------- ----------- -----------
Cash and cash equivalents, end of year $ 2,511,050 $ 10,301 $ --
=========== =========== ===========
See accompanying notes and auditor's report
F-5
Command Security Corporation
Statements of Cash Flows, Continued
Years Ended March 31, 2005, 2004 and 2003
1. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the years for:
2005 2004 2003
Interest $470,595 $516,763 $578,726
Income Taxes 45,328 229,063 100,000
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 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, 2005, 2004 and 2003, the Company purchased
transportation equipment with direct installment and lease financing of $47,270,
$162,417 and $29,355, respectively. These amounts have been excluded from the
purchases of equipment and proceeds from long-term debt on the statements of
cash flows.
The Company may obtain short-term financing to meet its insurance needs. For the
years ended March 31, 2005, 2004 and 2003, $924,733, $910,104 and $670,669,
respectively, were borrowed for this purpose. 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. These
charges to additional paid-in capital and credits to dividends payable have 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, 2005, 2004 and 2003
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 Connecticut, California, Delaware, Florida,
Illinois, Maine, Maryland, Massachusetts, New Jersey, New York, 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 revenue and expenses during the years reported.
Estimates are used when accounting for certain items such as allowances for
doubtful accounts, depreciation and amortization, income tax assets and
insurance reserves. Estimates are based on historical experience, where
applicable or other assumptions that management believes are reasonable under
the circumstances. Due to the inherent uncertainty involved in making estimates,
actual results may differ from those estimates under different assumptions or
conditions.
Revenue recognition
The Company records revenues as services are provided to its customers. Revenues
consist primarily of security guard services which are typically billed at
hourly rates. These rates may vary depending on base, overtime and holiday time
worked. Revenues for administrative services provided to other guard companies
are calculated as a percentage of the administrative service client's revenues
and are recognized when billings for the related guard services are generated.
Cash and cash equivalents
The Company defines cash and cash equivalents as operating cash (non-restricted)
and highly liquid investments with maturities of ninety (90) days or less. The
carrying amounts of our cash equivalents approximate their fair values.
Furniture and equipment
Furniture and equipment are stated at cost. Depreciation is generally recorded
using the straight-line method over 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. We
test for impairment annually or when events and circumstances warrant such a
review. Any potential impairment is evaluated based on anticipated undiscounted
future cash flows and actual customer attrition in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 144.
Advertising costs
The Company expenses advertising costs as incurred. Amounts incurred for
recruitment and general business advertising were $37,375, $33,159 and $77,114
for the years ended March 31, 2005, 2004 and 2003, respectively.
F-7
Command Security Corporation
Notes to Financial Statements, Continued March 31, 2005, 2004 and 2003
Trade receivables
The Company periodically evaluates the requirement for providing for billing
adjustments and/or credit losses on its accounts receivable. The Company
provides for billing adjustments where management determines that there is a
likelihood of a significant adjustment for disputed billings. Criteria used by
management to evaluate the adequacy of the allowance for doubtful accounts
include, among others, the creditworthiness of the customer, current trends,
prior payment performance, the age of the receivables and the Company's overall
historical loss experience. Individual accounts are charged off against the
allowance as management deems them as uncollectible.
Insurance reserves
General liability estimated accrued liabilities are calculated on an
undiscounted basis based on actual claim data and estimates of incurred but not
reported claims developed utilizing historical claim trends. Projected
settlements and incurred but not reported claims are estimated based on pending
claims, historical trends and data.
Workers' compensation annual premiums are based on the incurred losses as
determined at the end of the coverage period, subject to minimum and maximum
premium. Estimated accrued liabilities are based on the Company's historical
loss experience and the ratio of claims paid to the Company's historical payout
profiles.
Income taxes
Income taxes are based on income (loss) for financial reporting purposes and
reflect a current tax liability (asset) for the estimated taxes payable
(recoverable) in the current year tax return and changes in deferred taxes.
Deferred tax assets or liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax laws and rates. A valuation allowance is provided on deferred
tax assets if it is determined that it is more likely than not that the asset
will not be realized.
Income (loss) per common share
Under the requirements of SFAS No. 128, "Earnings Per Share," the dilutive
effect of potential common shares, if any, is excluded from the calculation for
basic earnings per share. Diluted earnings per share are presented for the years
ended March 31, 2004 and 2003 because of the effect the assumed issuance of
common shares would have if the outstanding stock options and warrants were
exercised.
Accounting for stock options
In December 2002 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, ("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and
Disclosure", an amendment of SFAS No. 123, ("SFAS 123"), "Accounting for
Stock-Based Compensation" to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. Since SFAS 148 was adopted during fiscal year ended March
31, 2003, the Company could 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. The adoption of SFAS 148 resulted in
a non-cash charge of $60,650 (net of tax benefit) for employee compensation cost
for the fiscal year ended March 31, 2005.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS 123. SFAS 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values at grant
date and the recognition of the related expense over the period in which the
share-based compensation vest. The Company is required to adopt the provisions
of SFAS 123R effective July 1, 2005 and use the modified-prospective transition
method. Under the modified-prospective method, the Company will recognize
compensation expense in the financial statements issued subsequent to the date
of adoption for all share-based payments granted, modified or settled after July
1, 2005. The impact of the adoption of SFAS 123R cannot be predicted because it
will depend on levels of stock options and any other forms of share-based
payments granted in the future.
Fair Value
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, 2005 and 2004, the fair value of long-term debt
approximates its carrying amount.
F-8
Command Security Corporation
Notes to Financial Statements, Continued March 31, 2005, 2004 and 2003
Reclassifications
Certain amounts have been reclassified to conform to the fiscal 2005
presentation. Administrative service revenues of $329,984, $336,010 and $331,854
for the years ended March 31, 2005, 2004 and 2003, respectively, have been
included with total revenue. Amortization of intangibles of $95,321, $83,093 and
$122,563 for the years ended March 31, 2005, 2004 and 2003, respectively, have
been included within general and administrative expenses. These
reclassifications had no effect on the Company's financial position or results
of operations.
2. Accounts Receivable Disputed
Accounts receivable disputed in the amount of $1,965,006 net of a $965,373
billing adjustment for the years ended March 31, 2004 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. On
June 14, 2004, the Company collected $1,965,000 from the Defense Contract
Management Agency in complete settlement of this dispute.
3. Furniture and Equipment
Furniture and equipment at March 31, 2005 and 2004 consist of the following:
2005 2004
Transportation equipment $ 741,113 $ 1,003,272
Security equipment 479,668 516,955
Office furniture and equipment 1,239,980 1,213,961
----------- -----------
2,460,761 2,734,188
Accumulated depreciation (2,033,088) (2,088,596)
----------- -----------
Total $ 427,673 $ 645,592
=========== ===========
Depreciation expense for the years ended March 31, 2005, 2004 and 2003, was
$301,150, $394,221 and $490,028, respectively, and includes amortization of
assets purchased under capital lease arrangements in the amounts of $93,086,
$105,254 and $83,617 for each of the respective years then ended (see Note 17).
4. Intangible Assets
Intangible assets at March 31, 2005 and 2004 consist of the following:
2005 2004
Customer list $ 30,000 $ 211,293
Borrowing cost 279,963 469,997
Goodwill 20,402 20,402
--------- ---------
330,365 701,692
Accumulated amortization (155,469) (431,475)
--------- ---------
Total $ 174,896 $ 270,217
========= =========
Amortization expense for the years ended March 31, 2005, 2004 and 2003, was
$95,321, $83,093 and $122,563, respectively. During the year ended March 31,
2005, the Company removed fully amortized customer lists and borrowing costs
with initial costs of $181,293 and $190,034, respectively, from its accounts.
Amortization expense for the years ending March 31, 2006 and 2007 will be
$93,321 and $61,173, respectively.
For the years ended March 31, 2005 and 2004, respectively, the balance of the
intangible assets represents the value of goodwill in the amount of $20,402
which is not subject to amortization and net borrowing costs in the amount of
$154,494 and $247,815, respectively, which is subject to amortization on a
straight line basis over the life of the Company's financing agreement (see Note
8).
F-9
Command Security Corporation
Notes to Financial Statements, Continued March 31, 2005, 2004 and 2003
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 $36,817 from the restrictions in September 2004.
6. Other Assets
Other assets at March 31, 2005 and 2004 consist of the following:
2005 2004
Workers' compensation insurance $2,438,274 $1,339,608
Note receivable -- 70,900
Other receivables 321,654 331,426
Security deposits 159,284 165,370
Deferred tax asset 267,450 --
Other 1,133 6,609
---------- ----------
3,187,795 1,913,913
Current portion (2,627,540) (369,058)
---------- ----------
Total non-current portion $ 560,255 $1,544,855
========== ==========
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at March 31, 2005 and 2004 consist of the
following:
2005 2004
Payroll and related expenses $3,242,696 $3,501,693
Insurance 2,279,948 1,495,987
Customer prepayments, net 3,170,195 --
Taxes and fees payable 391,682 537,031
Accrued interest payable 32,952 43,442
Other 285,362 85,868
---------- ----------
Total $9,402,835 $5,664,021
========== ==========
8. Short-Term Borrowings
Short-term borrowings at March 31, 2005 and 2004 consist of the following:
2005 2004
Line of credit $4,522,355 $8,798,024
Various insurance
financing arrangements,
interest at 5.55% and 5.86%
for 2005 and 6.46% for 2004 289,419 293,604
---------- ----------
Total $4,811,774 $9,091,628
========== ==========
F-10
Command Security Corporation
Notes to Financial Statements, Continued March 31, 2005, 2004 and 2003
On December 12, 2003, the Company entered into a three year agreement with CIT
Group/Business Credit, Inc. ("CIT") under a financing agreement (the
"Agreement"), which provides for borrowings in an amount of up to 85% of the
Company's eligible accounts receivable, as defined in the Agreement, but in no
event more than $15,000,000. The Agreement also provides for advances against
unbilled revenue (primarily monthly invoiced accounts) although this benefit is
offset by a reserve against all outstanding payroll checks. The revolving loan
bears interest at the prime rate, as defined, plus 1.25% per annum (7.00% at
March 31, 2005) on the greater of: (i) $5,000,000 or (ii) the average of the net
balances owed by the Company to CIT in the loan account at the close of each day
during such month (see below). Costs to close the loan totaled $279,963 and are
being amortized over its 3 year life.
At March 31, 2005, the Company had borrowed $4,522,355 representing
approximately 61% of its maximum borrowing capacity based on the definition of
"eligible accounts receivable" under the terms of the Agreement. However, as the
business grows and produces new receivables, up to $10,477,645 could
additionally be available to borrow under the Agreement.
The Company relies on its revolving loan from CIT which contains a fixed charge
covenant and various other financial and non-financial covenants. If the Company
breaches a covenant, CIT has the right to call the line unless CIT waives the
breach.
9. Long-Term Debt
Long-term debt at March 31, 2005 and 2004 consist of the following:
2005 2004
Office of General
Services (OGS) settlement,
due August 2005,
interest at 9% (a) $ -- $ 408,919
Various installment loans
due at various dates
through March 2008,
with interest ranging
from 4.5% to 8.75% (b) 67,765 106,503
--------- ---------
67,765 515,422
Current maturities (26,699) (361,540)
--------- ---------
Total $ 41,066 $ 153,882
========= =========
(a) During September 2003, the Company signed a note related to a settlement
with the Office of General Services in the amount of $527,000. The note called
for twenty-one monthly payments in the amount of $27,217 including interest at
9% per annum. On December 29, 2004, the Company paid the remaining outstanding
balance of $210,568 on such note.
(b) Payable to General Motors Acceptance Corporation and Ford Motor Credit
Corporation. The notes are collateralized by automobiles.
The aggregate amount of required principal payments of long-term debt is as
follows:
Year ending: March 31, 2006 $ 26,699
March 31, 2007 36,630
March 31, 2008 4,436
--------
Total $ 67,765
========
F-11
Command Security Corporation
Notes to Financial Statements, Continued March 31, 2005, 2004 and 2003
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 had been designated as Series A Convertible Preferred Stock
("Series A"). The Series A shareholders were entitled to receive annual
dividends equal to 8% of the liquidation value of their shares, payable
quarterly in cash. Upon liquidation or redemption the Series A shareholders were
entitled to $165 per share or $2,033,682. As of June 25, 2004, the preferred
stock was converted into 1,232,535 shares of the Company's common stock.
During the years ended March 31, 2005 and 2004, $79,087 and $203,371,
respectively, in preferred dividends were paid representing the outstanding
accruals for dividends payable at March 31, 2004 together with the June 2004
quarter and March 31, 2003 together with the June through December 2003
quarters.
11. Net Income (Loss) per Share
The following is a reconciliation of the numerators and the denominators of the
basic and diluted per-share computations for net income (loss) for the years
ended March 31, 2005, 2004 and 2003:
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
Year ended March 31, 2005
Basic EPS $ (428,668) 7,302,738 $ (.06)
Options issued November 2000,
February 2001, March 2002 and
August 2004 560,048
---------- ---------
Diluted EPS $(428,668) 7,862,786 $ n/a
========== =========
Year ended March 31, 2004
Basic EPS $ (473,103) 6,287,343 $ (.08)
Effect of dilutive shares:
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
========== =========
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, 2005, 2004 and
2003, no discretionary amounts have been accrued or paid.
F-12
Command Security Corporation
Notes to Financial Statements, Continued March 31, 2005, 2004 and 2003
13. Concentrations of Credit Risk
Geographic concentrations of credit risk with respect to trade receivables are
primarily in California with 26% and 22% and in the New York Metropolitan area
with 40% and 55% of total receivables as of March 31, 2005 and 2004,
respectively. The remaining trade receivables consist of a large number of
customers dispersed across many different geographic regions. During the years
ended March 31, 2005, 2004 and 2003, the Company generated 63%, 60% and 68%,
respectively, of its revenue from aviation and related services. Trade
receivables due from the commercial airline industry comprised 47% and 61% of
net receivables as of March 31, 2005 and 2004, respectively. The Company's
remaining customers are not concentrated in any specific industry.
The Company maintains its cash accounts in bank deposit accounts, which at times
may exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes they are not exposed to any significant
credit risk.
14. Significant Customers
The Company operates as a provider of security guard 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 revenues from
administrative service agreements and back office support to police departments.
Net revenues for the groups noted above were as follows for the three years
ended March 31:
2005 2004 2003
- ------------------------------------------------------------------------------
Guard Services $28,858,519 $30,047,546 $30,213,702
Aviation Services 50,466,240 45,521,225 63,768,959
Support Services 329,985 336,011 331,854
- ------------------------------------------------------------------------------
Total $79,654,744 $75,904,782 $94,314,515
- ------------------------------------------------------------------------------
For the year ended March 31, 2005, one airline customer accounted for
approximately $12,604,000 of the Company's total revenue. For the year ended
March 31, 2004, two airline industry customers accounted for approximately
$6,913,000 and $6,810,000, respectively, of the Company's total revenue. For the
year ended March 31, 2003 one customer accounted for approximately $28,000,000
of the Company's total revenue, which consisted primarily of airport pre-board
screening services. The contract to provide these services terminated in
November 2002.
15. Insurance Reserves
The Company has an insurance policy covering workers' compensation claims in
states that the Company performs services. Estimated accrued liabilities are
based on the Company's historical loss experience and the ratio of claims paid
to the Company's historical payout profiles. Charges for estimated workers'
compensation related losses incurred and included in cost of sales were
$3,257,608, $3,630,004 and $2,252,921, for the years ended March 31, 2005, 2004
and 2003, respectively.
The nature of the Company's business also subjects it to claims or litigation
alleging that it is liable for damages as a result of the conduct of its
employees or others. The Company insures against such claims and suits through
general liability policies with third-party insurance companies. Such policies
have limits of $5,000,000 per occurrence. On the aviation related business, as
of October 1, 2002, the Company acquired a policy with a $25,000,000 limit per
occurrence. From October 17, 2003 to October 17, 2004, the Company had an excess
general liability insurance policy covering aviation claims for an additional
$25,000,000 in the aggregate. As of October 1, 2004, the Company acquired a
policy with a $30,000,000 limit per occurrence. The Company retains the risk for
the first $25,000 per occurrence on the non-aviation related policy which
includes airport wheelchair operations and $5,000 on the aviation related policy
except $25,000 for damage to aircraft and $100,000 for skycap and electric cart
operations. Estimated accrued liabilities are based on specific reserves in
connection with existing claims as determined by third party risk management
consultants and actuarial factors and the timing of reported claims. These are
all factored into estimated losses incurred but not yet reported to the Company.
Cumulative amounts estimated to be payable by the Company with respect to
pending and potential claims for all years in which the Company is liable under
its general liability retention and workers' compensation policies have been
accrued as liabilities. Such accrued liabilities are necessarily based on
estimates; thus, the Company's ultimate liability may exceed or be less than the
amounts accrued. The methods of making such estimates and establishing the
resultant accrued liability are reviewed continually and any adjustments
resulting there from are reflected in current results of operations.
F-13
Command Security Corporation
Notes to Financial Statements, Continued March 31, 2005, 2004 and 2003
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 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 and airport wheelchair
operations related claims and $5,000 per occurrence on the aviation related
claims except $25,000 for damage to aircraft and $100,000 for skycap and
electric cart operations. Any punitive damage award would not be covered by the
general liability insurance policy. The only other potential impact would be on
future premiums, which may be adversely affected by an unfavorable claims
history.
In addition to such cases, the Company has been named as a defendant in several
uninsured employment related claims which are currently before various courts,
the EEOC or various state and local agencies. The Company has instituted
policies to minimize these occurrences and monitor those that do occur. At this
time the Company is unable to determine the impact on the financial position and
results of operations that these claims may have, should the investigations
conclude that they are valid.
The Company has employment agreements with its Executive Vice President/Chief
Operating Officer (COO) and its Vice-President of Aviation (VP). The agreement
with the COO is for a three year period expiring September 2007. The terms of
the agreement call for severance payments and specified benefits of
approximately $270,000 depending upon the reason for termination. 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.
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 $952,166, $947,539 and $872,980, for the years ended March 31,
2005, 2004 and 2003, 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, 2005 are
$714,149 and $625,421 and at March 31, 2004 are $762,083 and $573,422,
respectively.
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, 2006 $ 31,726 $ 785,821
March 31, 2007 33,982 669,718
March 31, 2008 8,501 508,566
March 31, 2009 -- 332,836
March 31, 2010 -- 236,511
Later years -- 366,320
-------- ----------
74,209 2,899,772
Amounts representing interest (6,671) --
-------- ----------
Total $ 67,538 $2,899,772
======== ==========
F-14
Command Security Corporation
Notes to Financial Statements, Continued March 31, 2005, 2004 and 2003
18. Other Commitments
On March 31, 2004, the Company settled a dispute with a uniform cleaning service
which calls for the Company to pay $1,756 per week for 344 weeks or a total
amount of $604,133 ending in fiscal 2011. The expense recorded in connection
with weekly payments under this agreement amounted to $87,800 for the year ended
March 31, 2005.
The required future minimum payments under the agreement are as follows:
Year ending: March 31, 2006 $ 91,322
March 31, 2007 91,322
March 31, 2008 91,322
March 31, 2009 91,322
March 31, 2010 91,322
Later years 59,723
--------
Total $516,333
========
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. In February 2001 and
August 2004, options to purchase 225,000 and 200,000 shares, respectively, of
common stock were issued and in April 2002, August 2003 and April 2004, options
to purchase 50,000, 20,000 and 75,000 shares, respectively, were cancelled due
to terminations of employment. The outstanding options are exercisable at any
time before January 31, 2011, at $.75 per share.
On May 21, 2004, GCM Securities Partners, LLC ("GCM") purchased from Reliance
Security Group, plc ("Reliance") securities which included: (i) a warrant to
purchase 150,000 shares of the Company's common stock at an exercise price of
$1.03125 per share and (ii) a warrant to acquire 2,298,092 shares of the
Company's common stock at an exercise price of $1.25 per share. In November
2004, the Company received proceeds of $154,687 in connection with the exercise
of the warrant to purchase 150,000 shares of the Company's common stock. The
remaining outstanding warrants expire on November 12, 2005.
On August 30, 2004 (the "Effective Date"), the Company issued stock options to
the Chief Operating Officer (the "Executive") to purchase 500,000 shares of the
Company's common stock at an exercise price of $1.35 per share. The options
vest, and may be exercised by the Executive with respect to 200,000 shares on
the Effective Date and commencing one year after the Effective Date, 12,500
shares per month through August 2007.
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. In February 2005, the Company
received proceeds of $8,200 in connection with the exercise of warrants to
purchase 10,000 shares of the Company's common stock. The remaining warrants
expired on February 28, 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.
During the three months ended March 31, 2005, the Company received proceeds of
$75,000 in connection with the exercises of warrants to purchase 100,000 shares
of the Company's common stock.
F-15
Command Security Corporation
Notes to Financial Statements, Continued March 31, 2005, 2004 and 2003
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, 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
Forfeited .75 - 1.25 (1,032,959)
-------------- ---------- --------------- ---------
Outstanding at March 31, 2004 .75 155,000 .75 - 1.25 2,782,577
Issued 1.35 700,000
Exercised .75 - 1.03 (260,000)
Forfeited .75 (75,000) 1.25 (204,485)
Expired .82 (20,000)
-------------- ---------- --------------- ---------
Outstanding at March 31, 2005 $.75 - $1.35 780,000 $1.25 2,298,092
============== ========== =============== =========
At March 31, 2005 there were 780,000 and 2,298,092 options and warrants
outstanding, respectively, exercisable at prices ranging from $.75 to $1.35, and
3,298,092 shares reserved for issuance under all stock arrangements.
Significant option and warrant groups outstanding at March 31, 2005 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 - $1.350 780,000 360,000 $1.288 8.13
1.250 2,298,092 2,298,092 1.250 .62
--------- ---------
$.75 - $1.350 3,078,092 2,658,092 1.260 2.52
========= =========
As discussed in Note 1, the Company adopted the provisions of SFAS 148 for the
fiscal year ended March 31, 2003. 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. For the fiscal year ended March 31, 2005, the fair value of
stock options granted is estimated on the date of the grant using the
Black-Scholes option pricing model and amortized ratably to expense over the
options' vesting periods. Because the estimated value is determined as of the
date of grant, the actual value ultimately realized by the employee may be
significantly different.
The weighted average estimated value of employee stock options granted during
fiscal year 2005 was $.38. The value of options granted in fiscal 2005 was
estimated at the date of grant using the following weighted average assumptions:
dividend yield of 0.00%; stock price historical volatility factor of 42.9%;
expected life of 3 years; and risk-free interest rate of 3.64%. There was no
cost related to stock-based employee compensation included in the determination
of net income (loss) for the fiscal years ended March 31, 2004 and 2003 since
there were no employee awards granted during these years.
F-16
Command Security Corporation
Notes to Financial Statements, Continued March 31, 2005, 2004 and 2003
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS 123. SFAS 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values at grant
date and the recognition of the related expense over the period in which the
share-based compensation vest. The Company is required to adopt the provisions
of SFAS 123R effective July 1, 2005 and use the modified-prospective transition
method. Under the modified-prospective method, the Company will recognize
compensation expense in the financial statements issued subsequent to the date
of adoption for all share-based payments granted, modified or settled after July
1, 2005. The impact of the adoption of SFAS 123R cannot be predicted because it
will depend on levels of stock options and any other forms of share-based
payments granted in the future.
20. Income Taxes
Income tax benefit (expense) for the years ended March 31 consists of the
following:
2005 2004 2003
Current:
Federal $ -- $ (76,203) $ --
State and local -- (15,340) (185,323)
-------- ----------- ----------
-- (91,543) (185,323)
-------- ----------- ----------
Deferred:
Federal 207,875 -- (1,020,000)
State and local 59,575 -- (280,000)
-------- ----------- ----------
267,450 -- (1,300,000)
-------- ----------- ----------
Income tax benefit (expense) $267,450 $ (91,543) $(1,485,323)
======== =========== ==========
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:
2005 2004 2003
Statutory federal income tax rate 34.0 34.0 34.0
State and local income taxes 9.8 9.8 9.8
Valuation allowance and reserves 1.8 16.7 7.0
Permanent differences (4.9) (18.5) 2.2
Other -- (.2) (.2)
----- ----- -----
Effective tax rate 40.7% 41.8% 52.8%
===== ===== =====
F-17
Command Security Corporation
Notes to Financial Statements, Continued March 31, 2005, 2004 and 2003
The significant components of deferred tax assets and liabilities as of March
31, 2005 and 2004 are as follows:
2005 2004
Current deferred tax assets:
Accounts receivable $ 38,185 $ 64,953
Accrued expenses 106,207 102,835
Contingency reserves 11,610 187,445
----------- -----------
156,002 355,233
Valuation allowance (140,216) (355,233)
----------- -----------
Net current deferred tax asset $ 15,786 $ --
=========== ===========
Non-current deferred tax assets (liabilities):
Equipment $ (76,614) $ (77,399)
Intangible assets 606,973 710,236
Self-insurance 182,083 172,985
Workers compensation reserve 195,158 67,243
Net operating loss carryover 1,042,484 639,102
Income tax credits 84,790 84,790
Employee stock compensation 45,750 --
----------- -----------
2,080,624 1,596,957
Valuation allowance (1,828,960) (1,596,957)
----------- -----------
Net non-current deferred tax asset $ 251,664 $ --
=========== ===========
The valuation allowance increased by $16,986 during the year ended March 31,
2005 and decreased by $89,270 and $20,377 during the years ended March 31, 2004
and 2003, respectively. The Company has determined based on its expectations for
the future, that it is more likely than not that future taxable income will be
sufficient to utilize fully the net deferred tax assets at March 31, 2005.
Federal net operating loss carryforwards were approximately $2,424,381 at March
31, 2005. This amount may be limited on an annual basis due to the change in
ownership during the fiscal year. 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. Related Party Transactions
In addition to an annual directors fee of $10,000 effective September 2004 and
payment of fees for attending board meetings in the amount of $1,000, for each
meeting attended, for the years ended March 31, 2005, 2004 and 2003, various
former directors received fees for their services on various committees of the
Company. The expenses paid in connection with services rendered for committees
by such former directors amounted to $33,253, $77,201 and $101,855 for the years
ended March 31, 2005, 2004 and 2003, respectively.
F-18
Command Security Corporation
Notes to Financial Statements, Continued March 31, 2005, 2004 and 2003
22. Quarterly Results (unaudited)
Summary data relating to the results of operations for each quarter for the
years ended March 31, 2005 and 2004 follows:
Three Months Ended
--------------------------------------------------------------------
June 30 Sept. 30 Dec. 31 March 31
----------- ----------- ----------- -----------
Fiscal year 2005
Guard service revenue $19,087,924 $20,373,272 $20,172,717 $19,690,847
Administrative service revenue 80,823 81,899 84,907 82,355
----------- ----------- ----------- -----------
Total revenue 19,168,747 20,455,171 20,257,624 19,773,202
----------- ----------- ----------- -----------
Gross profit 2,379,967 2,932,873 2,821,125 2,388,561
Net income (loss) (440,048) (112,862) 183,997 (21,342)
Net income (loss)
per common share (basic) (0.08) (0.02) 0.02 0.00
per common share (diluted) n/a n/a 0.02 0.00
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)
The fourth quarter 2005 loss includes: (i) an accrual in the amount of $210,315
arising from the payment by the Company of certain legal fees and expenses
primarily in connection with the conversion of the Company's preferred stock
into common stock by certain shareholders and (ii) a non-cash charge for
recognition of employee stock compensation cost in the amount of $60,650 (net of
tax benefit).
The fourth quarter 2004 loss includes a decrease in provisions for contingencies
in the amount of $238,000 relating to the removal of 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.
F-19
Schedule II
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, 2005:
Deducted from asset accounts:
Allowance for
doubtful accounts
receivable - current
maturities $ 361,865 $277,205 $(52,800) $(17,185) $55,974 $211,646 $ 301,465
Allowance for
billing adjustments 965,373 965,373
Year ended March 31, 2004:
Deducted from asset accounts:
Allowance for
doubtful accounts
receivable - current
maturities 2,432,337 154,401 43,015 43,752 198,547 2,113,093 361,865
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
See auditor's report
F-20