SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
| For the fiscal year ended March 31, 2007 | |
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ___________________________________ to ______________________________________ | |
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Commission
File Number 001-33525
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COMMAND
SECURITY CORPORATION
(Exact
name of registrant as specified in its charter)
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New
York
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14-1626307
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(State
or other jurisdiction of
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(IRS
Employer Identification
No.)
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incorporation
or organization)
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Lexington
Park, Lagrangeville, New York
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12540
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(Address
of Principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (845) 454-3703
Securities
registered pursuant to Section 12(b) of the Act: Common Stock, $.0001 par value
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes o
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o
No x
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. Yesx|
No o
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 the 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 x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No
x
The
aggregate market value of common stock held by non-affiliates of the registrant
as of June 20, 2007 was approximately
$13,732,878.
As
of
June 20, 2007, the registrant had issued and outstanding 10,752,216 shares
of
common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
information required by Items 10, 11, 12, 13 and 14 of Form 10-K is incorporated
by reference into Part III hereof from the registrant’s proxy statement relating
to the registrant’s 2007 Annual Meeting of Shareholders, which is expected to be
filed with the Securities and Exchange Commission (the “SEC”) within 120 days of
the close of the registrant’s fiscal year ended March 31, 2007.
1
Command
Security Corporation
Annual
Report on Form 10-K
For
the Fiscal Year Ended March 31, 2007
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TABLE
OF CONTENTS
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PART
I
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1.
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Business
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1A.
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Risk
Factors
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1B.
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Unresolved
Staff Comments
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2.
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Properties
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3.
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Legal
Proceedings
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4.
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Submission
of Matters to a Vote of Security Holders
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PART
II
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5.
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Market
for the Registrant's Common Equity and Related Stockholder Matters
And
Issuer Purchases of Equity Securities
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6.
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Selected
Financial Data
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7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operation
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7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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8.
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Financial
Statements and Supplementary Data
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9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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9A.
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Controls
and Procedures
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9B.
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Other
Information
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PART
III
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10.
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Directors,
Executive Officers and Corporate Governance
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11.
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Executive
Compensation
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12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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13.
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Certain
Relationships and Related Transactions, and Director
Independence
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14.
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Principal
Accounting Fees and Services
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PART
IV
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15.
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Exhibits,
Financial Statement Schedules
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1
General
Command
Security Corporation (the "Company") principally provides uniformed security
officers, aviation and support security services to commercial, financial,
industrial, aviation and governmental clients in the United States from its
over
thirty company-owned offices in California, Connecticut, Delaware, Florida,
Illinois, Maine, Maryland, Massachusetts, Nevada, New Jersey, New York, Oregon,
Pennsylvania and Washington.
The
Company operates as a provider of security services to a wide range of clients
that the Company has categorized into three groups; security 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
security services division provides its services to governmental,
quasi-governmental, health, educational and financial institutions, residential
and commercial property management companies, and industrial, distribution,
logistics and retail clients. Security services generated approximately $31.4
million, or 33.5%, of the Company's revenues for the fiscal year ended March
31,
2007. Security 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 $62.1 million, or 66.2%, of the Company's revenues for the fiscal
year ended March 31, 2007. Aviation services include providing uniformed
security 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
.3%, of the Company’s revenues for the fiscal year ended March 31, 2007 and
encompassed back office support to three police departments and two
administrative service clients. Contracts with both administrative service
clients were discontinued during the fiscal year ended March 31, 2007. While
not
a key focus of the Company, the Company would consider additional administrative
service clients if such opportunities arise.
Operations
As
a
licensed watch guard and patrol agency, the Company's security services division
furnishes security officers to its security service customers to protect people
or property and to prevent the theft of property. The Company principally
conducts its security services business by providing security officers 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 security officers 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, the Company’s security officers respond to emergency
situations and report to appropriate authorities for fires, natural disasters,
work accidents and medical crises.
The
Company provides security services to many of its industrial, commercial and
residential property management customers on a 24-hour basis, 365 days per
year.
For these customers, security officers are on hand to provide plant security,
access control, personnel security checks and traffic and parking control and
to
protect against fire, theft, sabotage and safety hazards. The Company’s
remaining customers include retail establishments, hospitals and governmental
units. The services provided to these customers may require armed as well as
unarmed security officers. 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. Recently, the Company’s security
services division has been successful in obtaining a new security services
contract for a major medical center that commenced in November 2006.
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 security
officers for cargo security areas. Recently, the Company’s aviation division has
been successful in obtaining three new service contracts that commenced in
August 2006, October 2006 and March 2007, respectively.
The
nature of the Company’s business subjects it to claims and litigation alleging
that it is liable for damages as a result of the conduct of its employees or
other parties that the Company indemnifies against such claims. 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. Effective October 1, 2006, the policy limit was increased to
$7,000,000 per occurrence with an additional excess umbrella policy of
$5,000,000. On the aviation related business, as of October 1, 2004, the Company
acquired an insurance policy with a $30,000,000 limit per occurrence. Effective
as of October 1, 2006, the Company retains the risk for the first $25,000 per
occurrence on the non-aviation related policy that includes airport wheelchair
and electric cart operations and $5,000 on the aviation related policy except
for $25,000 for damage to aircraft and $100,000 for skycap
operations.
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, the Company frequently establishes offices
close to its customers and delegates responsibility and decision making
authority to its local managers. The Company’s managers each play an important
role as highlighted by their responsibility for both service quality and
assisting with sales and marketing efforts. The Company believes that, in most
situations, providing a single individual with responsibility for service
quality results in better supervision, quality control and greater
responsiveness to customer needs.
The
Company generally renders its security services pursuant to a standard form
security services agreement that 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 security officers 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 security 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
funds due thereunder, or if the customer is involved in a bankruptcy or similar
insolvency event.
The
Company has its own proprietary computerized scheduling and information system.
The scheduling of security officers, while time-consuming, is an important
function of the Company. Management believes that the Company’s system
substantially reduces the time a manager must spend on scheduling daily security
officer hours and allows the Company to fulfill customer needs by automatically
selecting those security officers that fit the customer's requirements.
Employee
Recruitment and Training
The
Company believes that the quality of its security officers 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 security
officer 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. 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 officer, 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
fiscal year ended March 31, 2007, Delta Airlines (“Delta”) accounted for
approximately $14,700,000, or 16%, of the Company’s total revenues. See
“Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources - Financing.”
Several
of the Company's aviation clients filed for bankruptcy protection during fiscal
2007, 2006 and 2005. The aviation industry continues to struggle with various
challenges including the cost of security and higher fuel prices. Additional
bankruptcy filings by aviation and non-aviation clients could have a material
adverse impact on the Company's liquidity, results of operations and financial
condition.
3
Competition
Competition
in the security service business is intense. A customer’s selection of a company
to provide security services is based primarily on price, quality of services
provided, scope of services performed, name recognition, recruiting, training
and the extent and quality of security officer 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, all which have substantially greater
financial and other resources, personnel and facilities than the Company. These
competitors also offer a range of security and investigative services that
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 that 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 officers and private investigators. In addition,
many states have laws requiring training and registration of security officers,
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 security officers 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.
Employees
The
Company has approximately 3,650 employees of which 150 employees include
managers, administrative employees and executive staff; and an additional 3,500
employees consisting primarily of hourly personnel.
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
services industry is characterized by high turnover, the Company has not
experienced any material difficulty in hiring suitable numbers of qualified
security officers, although, when labor has been in short supply, it has been
required to pay higher wages and/or incur overtime charges.
Approximately
55% 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: New York
City security services office; and John F. Kennedy, La Guardia, Los Angeles
and
Philadelphia airport offices. Together, the unionized employees account for
approximately 45% 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 Los Angeles and New York City competitors are also unionized. The
Company has experienced no work stoppages attributable to labor disputes. The
Company believes that its relations with its employees are satisfactory.
Security officers 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 that it owns the service marks "Command Security Corporation",
"CSC" and "CSC Plus" design for security officer, detective, private
investigation services and security consulting services.
The
Company also believes that it owns 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
that
it owns the service marks "STAIRS" and "Smart Guard."
ITEM
1A. RISK FACTORS.
In
addition to the other information set forth in this report, you should carefully
consider the following factors that could materially affect our business,
financial condition or future results. The risks described below are not the
only risks facing our Company. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and/or operating
results.
4
Airline
Industry Concerns
Several
of the Company's aviation clients filed for bankruptcy protection during fiscal
2007, 2006 and 2005. The aviation industry continues to struggle with various
challenges including the cost of security and higher fuel prices. Additional
bankruptcy filings by aviation and non-aviation clients could have a material
adverse impact on the Company's liquidity, results of operations and financial
condition.
Acquisitions
Part
of
the Company’s growth strategy involves acquiring other quality security services
companies. Our acquisition strategy entails numerous risks. The pursuit of
acquisition candidates is expensive and may not be successful. Our ability
to
complete future acquisitions will depend on our ability to identify suitable
acquisition candidates, negotiate acceptable terms for their acquisition and,
if
necessary, finance those acquisitions, in each case, before any attractive
candidates are purchased by other parties, some of whom may have greater
financial and other resources than us. Whether or not any particular acquisition
is successfully completed, each of these activities is expensive and time
consuming and would likely require our management to spend considerable time
and
effort to accomplish them, which would detract from their ability to run our
current business. Although we may spend considerable expense and effort to
pursue acquisitions, we may not be successful in completing them. Further,
the
Company’s ability to grow through acquisitions will depend in part on whether it
can identify suitable acquisition candidates and reach attractive prices and
terms.
Acquisitions
could result in the occurrence of one or more of the following
events:
| · |
dilutive
issuances of equity securities,
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| · |
additional
debt and contingent liabilities,
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| · |
increased
amortization expenses related to intangible
assets,
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| · |
difficulties
in the assimilation of the operations, technologies, services and
products
of the acquired companies and
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| · |
the
diversion of management’s attention from other business
activities.
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The
Company currently has no commitments or agreements with respect to any
acquisition. Nor is it certain that it will complete other acquisitions
necessary to complement its growth strategy on acceptable terms, or at all.
Further, if the Company does not successfully integrate the operations of any
companies that it has acquired or subsequently acquires, it may not achieve
the
potential benefits of such acquisitions.
Additional
Financing
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 expenditures and debt service requirements for the foreseeable future.
However, we cannot assure you that this will be the case, and we may be required
to obtain additional financing to maintain and expand our existing operations
through the sale of our securities, an increase in our credit facilities or
otherwise. The failure by us to obtain such financing, if needed, would have
a
material adverse effect upon our business, financial condition and results
of
operations.
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 that, therefore,
have the ability to provide more attractive service, cost and compensation
incentives to clients and employees than those provided by the Company. Our
ability to gain or maintain sales, gross margins and/or employees may be limited
as a result of actions by competitors.
Service
Contracts
Our
largest expenses are for payroll and related taxes and employee benefits. Most
of our service contracts provide for fixed hourly billing rates. Competitive
pressures in the security and aviation services industries may prevent us from
increasing our hourly billing rates on contract anniversary or renewal dates.
If, due to inflation or other reasons, we must increase the wages, salaries
and
related taxes and benefits of our employees at rates in excess of what we can
increase the billing rates charged under our service contracts, then our
profitability would be adversely affected.
In
many
cases, our security and aviation services contracts require us to indemnify
our
clients or may otherwise subject us to additional liability for events occurring
on client premises. While we maintain insurance programs that we believe provide
appropriate coverage for certain liability risks, including personal injury,
death and property damage, the laws of many states limit or prohibit insurance
coverage for punitive damages arising from willful or grossly negligent conduct.
Therefore, insurance may not be adequate to cover all potential claims or
damages. If a plaintiff brings a successful claim against us for punitive
damages in excess of our insurance coverage, then we could incur substantial
liabilities that would have a material adverse affect on our business, financial
condition and results of operations.
5
Staffing
Our
business involves the labor-intensive delivery of contract security and aviation
services. We derive our revenues primarily from contract security and aviation
services performed by our hourly employees. Our future performance depends in
large part upon our ability to attract, train, motivate and retain our skilled
operational and administrative staffs. The loss of the services of, or the
failure to recruit, the required complement of operational and administrative
staff would have a material adverse effect on our business, financial condition
and results of operations, including our ability to secure and complete service
contracts. Additionally, if we do not successfully manage our existing
operational and administrative staffs, we may not be able to achieve the
anticipated gross margins, service quality, overtime levels and other
performance measures that are important to our business, financial condition
and
results of operations.
Changes
in Accounting Standards and Taxation Requirements
New
accounting standards or pronouncements that may become applicable to our Company
from time to time, and changes in the interpretation of existing standards
and
pronouncements, could have a significant effect on our reported results for
the
affected periods. We are also subject to income and various other taxes in
the
numerous jurisdictions where we generate revenues. Increases in income or other
tax rates could reduce our after-tax results from affected jurisdictions in
which we operate.
Collective
Bargaining Agreements and Organized Labor Action
Many
of
our employees at our operating locations are covered by collective bargaining
agreements. If we are unable to renew such agreements on satisfactory terms,
our
labor costs could increase, which would affect our gross margins.
Our
industry has been the subject of campaigns to increase the number of unionized
employees. In addition, strikes or work stoppages at our locations could impair
our ability to provide contracted services to our customers, which would reduce
our revenues and could expose us to customer claims. Although we believe that
our relationships with our employees are good, we cannot provide you with any
assurances that organized labor action at one or more of our operating locations
will not occur, or that any such activities, or any other labor difficulties
at
our operating locations, would not materially affect our business, financial
condition and results of operations.
Consulting
Agreement with Giuliani Security & Safety
In
January 2006, the Company entered into a consulting agreement (the “Consulting
Agreement”) with Giuliani Security & Safety LLC (“Giuliani Security”) to
provide a broad range of guidance and assistance to the Company to help grow
its
business in the areas of security, crisis management, fire and life safety
and
counterterrorism. As compensation for Giuliani Security’s performance of its
obligations under the Consulting Agreement, the Company agreed to pay Giuliani
Security a monthly cash fee during the term of the engagement of one hundred
seventy five thousand dollars ($175,000). The Consulting Agreement had a term
of
one year. Management expected that fees paid under the Consulting Agreement
would have a negative impact on the Company’s current year results of
operations.
Cost
Management
The
Company's ability to realize expectations will be largely dependent upon
management and its ability to maintain gross 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, which would adversely affect the Company’s business,
financial condition and results of operations.
Collection
of Accounts Receivable
The
aviation industry in general poses a high degree of customer credit 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.
Loss
of a Large Customer
Our
success depends in part upon the retention of our large security and aviation
services customers. In general, security services companies such as ours face
the risk of losing customers as a result of the expiration, or termination
of a
contract, or as a result of a merger or acquisition, business failure or the
selection of another provider of security services. We generate a significant
portion of our revenues from large airline and security services customers
some
of which are experiencing substantial financial difficulties. We cannot assure
you that we will be able to retain all or a substantial portion of our long-term
customers or develop relationships with new customers in the
future.
Loss
of Key Management Personnel
Our
success depends upon the talents and efforts of key management personnel,
several of whom have been with our company or our industry for decades,
including Barry I. Regenstein, Martin C. Blake, Jr., Debra M. Miller, John
C.
Reed and William A. Vigna. The loss of any such management personnel, due to
retirement or otherwise, and our inability to attract and retain highly
qualified technical and management personnel in the future, could have a
material adverse effect on our business, financial condition and results of
operations.
6
Concentration
of Stock Ownership
Although
none of the Company’s directors and officers has any agreements relating to the
manner in which they will vote their shares of the Company’s common stock, such
parties together own shares representing approximately 57% of the combined
voting power of our outstanding capital stock. The concentration of ownership
among these shareholders could give them the power to influence the outcome
of
substantially all matters subject to a vote of the Company’s shareholders,
including mergers, consolidations and the sale of all or substantially all
of
our assets. Such decisions may conflict with the interests of our other
shareholders.
Stock
Price Volatility
The
stock
markets have experienced price and volume fluctuations that have affected and
continue to affect the market prices of equity securities of many companies.
These fluctuations often have been unrelated or disproportionate to the
operating performance of those companies. The market price of the Company’s
common stock may also fluctuate as a result of variations in our operating
results. Due to the nature of our business, the market price of the common
stock
may fall in response to a number of factors, some of which are beyond our
control, including: announcements of competitive developments by others; changes
in estimates of our financial performance or changes in recommendations by
securities analysts; a loss of a major customer; additions or departures of
key
management or other personnel; future sale of our common or preferred stock;
acquisitions or strategic alliances by us or our competitors; our historical
and
anticipated operating results; quarterly fluctuations in our financial and
operating results; changes in market valuations of other companies that operate
in our business markets or industry sector; and general market and economic
conditions.
Information
Systems
We
are
increasingly dependent on information technology networks and systems, including
the Internet, to process, transmit and store electronic information. In
particular, we depend on our information technology infrastructure for
electronic communications among our locations around the country and between
Company personnel and our customers and suppliers. Security breaches of this
infrastructure can create disruptions, shutdowns or unauthorized disclosure
of
confidential information. If we are unable to prevent such breaches, our
operations could be disrupted or we may suffer financial damage or loss because
of lost or misappropriated information.
Regulation
If
the
current regulation and federalization of pre-board screening services provided
by the Company is expanded into other areas such as general security and baggage
handling at aviation facilities, the Company's business, financial condition
and
results of operations could be materially, adversely affected.
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. Effective October
1,
2006, the policy limit for guard services was increased to $7,000,000 per
occurrence with an additional excess umbrella policy of $5,000,000. The Company
retains the risk for the first $25,000 per occurrence on the non-aviation
related policy that includes airport wheelchair and electric cart operations
and
$5,000 on the aviation related policy (except $25,000 for damage to aircraft
and
$100,000 for skycap 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.”
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES.
As
of
March 31, 2007, the Company did not own any real property. The Company occupies
executive offices at Route 55, Lexington Park, Lagrangeville, New York,
consisting 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:
7
|
Location
|
|
2450
S. Atlantic Boulevard
|
|
Suites
#206 & #207
|
|
Commerce,
CA
|
|
|
|
8939
S. Sepulveda Boulevard
|
|
Suite
#201
|
|
Los
Angeles, CA
|
|
|
|
Norman
Y. Mineta San Jose Int’l Airport
|
|
1661
Airport Boulevard
|
|
San
Jose, CA
|
|
|
|
San
Jose Int'l. Airport
|
|
1400
Coleman Avenue
|
|
Suites
D24 & D25
|
|
Santa
Clara, CA
|
|
|
|
2194
Edison Avenue
|
|
Suite
1
|
|
San
Leandro, CA
|
|
|
|
100
Wells Street
|
|
#2A
|
|
Hartford,
CT
|
|
|
|
2777
Summer Street
|
|
Suite
208A
|
|
Stamford,
CT
|
|
|
|
Suite
208 Wilson Building
|
|
3511
Silverside Road
|
|
Concord
Plaza
|
|
Wilmington,
DE
|
|
|
|
4901
N.W. 17th Way
|
|
Suite
505
|
|
Ft.
Lauderdale, FL
|
|
|
|
800
Virginia Avenue
|
|
Suite
53
|
|
Ft.
Pierce, FL
|
|
5775
Blue Lagoon Drive
|
|
Suite
310
|
|
Miami,
FL
|
|
|
8
|
8452
South Stony Island
|
|
2nd
Floor
|
|
Chicago,
IL
|
|
|
|
Portland
International Airport
1001
Westbrook Street
|
|
Portland,
ME
|
|
780
Elkridge Landing Road
|
|
Suite
220
|
|
Linthicum
Heights, MD
|
|
|
|
21
Cummings Park
|
|
Suite
224
|
|
Woburn,
MA
|
|
|
|
186
Stafford Street
|
|
Springfield,
MA
|
|
|
|
1280
Route 46
|
|
3rd
Floor
|
|
Parsippany,
NJ
|
|
|
|
2204
Morris Avenue
|
|
Suite
302, 3rd
Floor
|
|
Union,
NJ
|
|
|
|
52
Oswego Road
|
|
Baldwinsville,
NY
|
|
|
|
2144
Doubleday Avenue
|
|
Ballston
Spa, NY
|
|
|
|
Laguardia
Int'l. Airport
|
|
United
Hangar #2, Rooms 328 & 329
|
|
Flushing,
NY
|
|
|
|
JFK
International Airport
|
|
175-01
Rockaway Boulevard
|
|
Jamaica,
NY
|
|
|
|
17
Battery Place
|
|
Suite
223
|
|
New
York, NY
|
|
|
|
720
Fifth Avenue
|
|
10th
Floor
|
|
New
York, NY
|
9
|
22
IBM Road
|
|
Suite
105
|
|
Poughkeepsie,
NY
|
|
|
|
Two
Gannett Drive
|
|
Suite
208
|
|
White
Plains, NY
|
|
|
|
700
NE Airport Way
|
|
Suite
B2420
|
|
Portland,
OR
|
|
|
|
29
Bala Avenue
|
|
Suite
118
|
|
Bala
Cynwyd, PA
|
|
|
|
2
International Plaza
|
|
Suite
242
|
|
Philadelphia,
PA
|
|
|
|
Pittsburgh
International Airport
|
|
Ticketing
Level of the Landside Terminal Building
|
|
Pittsburgh,
PA
|
|
|
|
Seattle-Tacoma
Int’l. Airport
|
|
Main
Terminal Building Ticketing Level
|
|
Seattle,
WA
|
|
|
We
believe that our existing properties are in good condition and are suitable
for
the conduct of our business.
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 and
electric cart 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 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.
No
matters were submitted to a vote of our security holders during the last quarter
of our fiscal year ended March 31, 2007.
10
PURCHASES
OF EQUITY SECURITIES.
The
Company's common stock was quoted on the OTC Bulletin Board Service, until
June
7, 2007, under the symbol "CMMD.OB." On June 6, 2007, the Company announced
that
its shares of common stock had been approved for listing on the American Stock
Exchange (the “AMEX”). The Company’s common stock has been trading on the AMEX
under the ticker symbol “MOC” since June 8, 2007.
The
following table sets forth, for the calendar periods indicated, the high and
low
sales price for the Company’s 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
|
||||||
|
2007
|
|||||||
|
First
Quarter
|
$
|
2.68
|
$
|
2.20
|
|||
|
Second
Quarter
|
2.80
|
2.20
|
|||||
|
Third
Quarter
|
2.90
|
2.40
|
|||||
|
Fourth
Quarter
|
3.40
|
2.65
|
|||||
|
2006
|
|||||||
|
First
Quarter
|
$
|
2.05
|
$
|
1.20
|
|||
|
Second
Quarter
|
3.42
|
1.76
|
|||||
|
Third
Quarter
|
2.30
|
1.65
|
|||||
|
Fourth
Quarter
|
2.90
|
1.75
|
|||||
(1)
Reflects fiscal years of the Company ended March 31, 2006 and 2007 as indicated.
The
above
quotations do not include retail mark-ups, markdowns or commissions and
represent prices between dealers and may not represent actual transactions.
The
past performance of the Company's common stock is not necessarily indicative
of
the price at which it may trade in the future.
As
of
June 20, 2007 there were approximately 1,000 holders of the Company's common
stock.
The
Company has never paid cash dividends on its common stock. Payment of dividends
on the Company’s 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 its business operations and any growth
in
its business.
11
The
graph
below compares the cumulative total shareholder return on common shares with
the
cumulative total return of (1) the Nasdaq Stock Market Index (U.S.) (the “Nasdaq
Index”) and (2) an index of publicly traded companies with a Standard Industrial
Classification Code (“SIC Code”) of between 7380 and 7389 (the “SIC Code
Index”). The graph assumes that $100 was invested in each of (A) shares of the
Company’s common stock, (B) the Nasdaq Index and (C) the SIC Code Index on March
31, 2002 and reflects the return through March 31, 2007 and assumes the
reinvestment of dividends, if any. The comparisons in the graph below are based
on historical data and are not indicative of, or intended to forecast, possible
future performance of our Common Stock.
THE
INFORMATION CONTAINED IN THE STOCK PERFORMANCE GRAPH SHALL NOT BE DEEMED TO
BE
“SOLICITING MATERIAL” OR TO BE FILED WITH THE SEC, NOR SHALL SUCH INFORMATION BE
INCORPORATED BY REFERENCE INTO ANY FUTURE FILING UNDER THE SECURITIES ACT OR
THE
EXCHANGE ACT, EXCEPT TO THE EXTENT WE SPECIFICALLY INCORPORATE IT BY REFERENCE
INTO SUCH FILING.
12
The
financial data included in this table has been derived from the financial
statements as of and for the fiscal years ended March 31, 2007, 2006, 2005,
2004
and 2003, 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 Annual
Report
on Form
10-K. The dollar amounts presented below in this Item 6 are in thousands of
dollars, except for weighted average number of common shares and per share
data.
|
|
Statements
of Operations Data
|
|||||||||||||||
|
|
Years
Ended March 31,
|
|||||||||||||||
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|||||||
|
Revenue
|
93,823
|
85,209
|
79,655
|
75,905
|
94,315
|
|||||||||||
|
Gross
profit
|
13,665
|
11,420
|
10,523
|
10,960
|
19,558
|
|||||||||||
|
Operating
income (loss)
|
1,135
|
8
|
(289
|
)
|
195
|
3,266
|
||||||||||
|
Net
income (loss)
|
1,240
|
(100
|
)
|
(390
|
)
|
(310
|
)
|
1,327
|
||||||||
|
Income
(loss) per common share
|
.12
|
(.01
|
)
|
(.06
|
)
|
(.08
|
)
|
0.14
|
||||||||
|
Weighted
average number
|
||||||||||||||||
|
of
common shares
|
10,137,970
|
8,834,952
|
7,302,738
|
6,287,343
|
6,287,343
|
|||||||||||
|
|
||||||||||||||||
|
|
Balance
Sheet Data At March 31,
|
|||||||||||||||
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|||||||
|
Working
capital
|
6,514
|
6,838
|
3,679
|
2,549
|
3,591
|
|||||||||||
|
Total
assets
|
25,330
|
18,113
|
16,511
|
21,927
|
20,707
|
|||||||||||
|
Short-term
debt (1)
|
8,751
|
3,475
|
4,866
|
9,519
|
9,248
|
|||||||||||
|
Long-term
debt (2)
|
16
|
57
|
81
|
221
|
88
|
|||||||||||
|
Stockholders'
equity
|
9,104
|
7,625
|
4,409
|
4,494
|
4,967
|
|||||||||||
|
(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 7, 8 and 16, “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.
|
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.
13
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosure of contingent assets and liabilities. We believe
the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our financial statements. Actual
results may differ from these estimates under different assumptions and
conditions.
Revenue
Recognition
The
Company records revenues as services are provided to its customers. Revenues
consist primarily of aviation and security services, which are typically billed
at hourly rates. These rates may vary depending on base, overtime and holiday
time worked. Revenue for administrative services provided to other security
companies are calculated as a percentage of the administrative service client's
revenue and are recognized when billings for the related security services
are
generated.
Trade
Receivables
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.
Accounting
for Stock Options
In
December 2002 the Financial Accounting Standards Board (“FASB”) issued SFAS No.
148, (“SFAS 148”), "Accounting for Stock-Based Compensation-Transition and
Disclosure", an amendment of SFAS No. 123, (“SFAS 123”), “Accounting for
Stock-Based Compensation” to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
compensation. Since SFAS 148 was adopted during fiscal year ended March 31,
2003, the Company could elect to adopt any of the three transitional recognition
provisions. The Company adopted the prospective method of accounting for
stock-based compensation. The adoption of SFAS 148 resulted in a non-cash charge
of $19,600 for stock compensation cost for the three months ended June 30,
2005.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123R”), which replaced SFAS 123. SFAS 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values at
grant
date and the recognition of the related expense over the period in which the
share-based compensation vests. The Company was 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 recognizes
compensation expense in its financial statements issued subsequent to the date
of adoption for all share-based payments granted, modified or settled after
July
1, 2005. The adoption of SFAS 123R resulted in a non-cash charge of $377,750
for
stock based compensation for the nine months ended March 31, 2006. Such non-cash
charge would have been the same under the provisions of SFAS 148.
14
OVERVIEW
We
provide uniformed security officers, aviation and support security services
to
commercial, residential, financial, industrial, aviation and governmental
clients through over thirty company-offices in fourteen states throughout the
United States. In conjunction with providing these services, we assume
responsibility for a variety of functions, including recruiting, hiring,
training and supervising all operating personnel as well as paying such
personnel and providing them with uniforms, fringe benefits and workers’
compensation insurance.
Command’s
client focused mission is to provide the best personalized supervision and
management attention necessary to deliver timely and efficient security
solutions so that our clients can operate in safe environments without
disruption or loss. Technology underpins our efficiency, accuracy and
dependability. Operations are handled by a refined software system that
integrates scheduling, payroll and billing functions, giving clients the benefit
of customized programs using the personnel best suited to the job.
In
light
of current world conditions, we expect that security will continue to be a
key
area of focus both domestically in the United States and internationally.
Earnings
The
Company reported net income for the fiscal year ended March 31, 2007 of
$1,240,039. The net income primarily results from: (i) the Company’s continuing
growth and expansion of its aviation and security services divisions; (ii)
lower
workers’ compensation insurance costs associated with a company-wide focus on
safety and accident prevention in the workplace and (iii) internal cost
reduction programs. Partially offsetting the net income were expenses associated
with: (i) higher professional fees of approximately $1,640,000 related primarily
to a one-year consulting agreement with Giuliani Security & Safety LLC that
expired in December 2006 and (ii) a non-cash charge of $226,550 for stock
compensation costs.
The
Company reported a net loss for the fiscal year ended March 31, 2006 of $99,595.
The loss reflects, among other items,: (i) an additional provision for bad
debts
of $850,000 related to the filing by Delta Air Lines and Northwest Airlines
of
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code and (ii) approximately $560,000 of professional fees and a non-cash charge
of $280,000 for stock compensation costs both of which relate primarily to
the
Company entering into a consulting agreement with Giuliani Security & Safety
LLC, a leading security consulting firm.
Revenues
Revenues
for the fiscal year ended March 31, 2007 increased by $8,613,931, or 10.1%,
to
$93,822,546 from $85,208,615 in fiscal year 2006. The increase is primarily
due
to higher revenues of approximately $6,500,000 in the aviation division from:
(i) new and existing airline customers at the Company’s terminal operations at
John F. Kennedy International Airport in New York, Los Angeles and San Jose
International Airports in California and LaGuardia Airport in New York totaling
approximately $3,000,000 and (ii) new contracts that commenced in November
2005,
May 2006 and September 2006 with groups of airlines at new airport locations
in
Pittsburgh, Pennsylvania, Oakland, California and Seattle, Washington totaling
approximately $3,300,000. In addition, the security services division
experienced higher revenues of approximately $2,150,000 due mainly to: (i)
the
purchase of a security services business in Florida of approximately $1,760,000
(net); (ii) a new contract with a major medical center in Manhattan, New York
for approximately $600,000 and (iii) a short-term contract with a national
insurance company at multiple domestic locations of approximately $840,000,
that
terminated during September 2006. These increases in security service revenues
were partially offset by lower revenues from: (i) the Company discontinuing
services at its Buffalo, New York location during fiscal 2007 of approximately
$520,000; (ii) the Company’s Ft. Pierce, Florida, Hartford, Connecticut and
Commerce, California branch locations of approximately $500,000.
Revenues
for the fiscal year ended March 31, 2006 increased by $5,553,871, or 7.0%,
to
$85,208,615 from $79,654,744 in fiscal year 2005. The increase is primarily
due
to higher revenues of approximately $5,100,000 in the aviation division from:
(i) new and existing airline customers at the Company’s terminal operations at
John F. Kennedy International Airport in New York, Baltimore/Washington
International Airport in Maryland and Los Angeles International Airport in
California and (ii) new contracts that commenced in January and November 2005
with groups of airlines at new airport locations in Portland, Maine and
Pittsburgh, Pennsylvania. In addition, the security services division
experienced higher revenues of approximately $400,000 due mainly to rate
increases with existing customers as well as a net growth in new customers.
Gross
Profit
Gross
profit for the fiscal year ended March 31, 2007 increased by $2,244,873 to
$13,665,232 (14.6% of revenues) from $11,420,359 (13.4% of revenues) for fiscal
year 2006. The increase was due mainly to: (i) expanded services with new and
existing customers at John F. Kennedy International and LaGuardia Airports
in
New York and San Jose International Airport in California; (ii) new contracts
at
Pittsburgh, Oakland and Seattle Tacoma International Airports; (iii) a new
contract with a major medical center as noted above; (iv) improved labor ratio
margins in the security services division; (v) the purchase of a security
services business in Florida; (vi) a short-term contract to provide security
services to a national insurance company at multiple domestic locations; (vii)
the Company discontinuing services at its Buffalo, New York location; (viii)
lower State of New York payroll taxes related to the elimination of prior year
reductions in Federal Unemployment tax credits and (ix) lower workers’
compensation and automotive insurance costs.
15
Gross
profit for the fiscal year ended March 31, 2006 increased by $897,833 to
$11,420,359 (13.4% of revenues) from $10,522,526 (13.2% of revenues) for fiscal
year 2005. The increase was due mainly to: (i) expanded services with new and
existing customers as noted above and (ii) lower workers’ compensation and
automotive insurance costs. Partially offsetting these increases were increased
labor and related costs associated with the Company’s security services
division.
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
$2,042,618, $2,881,041 and $3,257,608, for the fiscal years ended March 31,
2007, 2006 and 2005, 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. Effective October 1, 2006, the policy
limit was increased to $7,000,000 per occurrence with an additional excess
umbrella policy of $5,000,000. On the aviation related business, as of October
1, 2004, the Company acquired a policy with a $30,000,000 limit per occurrence.
Effective as of October 1, 2006, the Company retains the risk for the first
$25,000 per occurrence on the non-aviation related policy that includes airport
wheelchair and electric cart operations and $5,000 on the aviation related
policy, except for $25,000 for damage to aircraft and $100,000 for skycap
operations. Estimated accrued liabilities are based on specific reserves in
connection with existing claims as determined by third party risk management
consultants and actuarial factors and the timing of reported claims. These
are
all factored into estimated losses incurred but not yet reported to the
Company.
General
and Administrative Expenses
General
and administrative expenses increased by $2,061,713 to $12,315,745 (13.1% of
revenues) for the fiscal year ended March 31, 2007 from $10,254,032 (12.0%
of
revenues) in fiscal year 2006. The increase was primarily due to higher: (i)
professional fees of approximately $1,640,000 related primarily to a one-year
consulting agreement that the Company entered into with Giuliani Security &
Safety LLC that expired in December 2006; (ii) administrative payroll and
related costs and (iii) facility costs. Partially offsetting the increase were:
(i) lower bank service charges and (ii) a decrease of approximately $171,000
in
non-cash charges for stock based compensation costs.
General
and administrative expenses decreased by $336,746 to $10,254,032 (12.0% of
revenues) for the fiscal year ended March 31, 2006 from $10,590,778 (13.3%
of
revenues) in fiscal year 2005. The decrease was primarily due to lower: (i)
payroll and related costs; (ii) legal fees due mainly to absence of the prior
year payment by the Company of certain legal fees and expenses primarily in
connection with litigation relating to the conversion of the Company’s preferred
stock into common stock by certain shareholders; (iii) administrative automobile
insurance costs; (iv) facility and communication costs; (v) bank fees and
service charges; and (vi) depreciation charges on administrative furniture
and
fixtures. Partially offsetting the decrease were: (i) approximately $560,000
of
professional fees related primarily to the Company entering into a consulting
agreement with Giuliani Security & Safety LLC and (ii) an increase of
$290,950 in non-cash charges for stock based compensation costs.
Provision
for Doubtful Accounts
The
provision for doubtful accounts decreased by $894,055 to $268,118 for the fiscal
year ended March 31, 2007 compared with $1,162,173 in fiscal year 2006. The
decrease was due mainly to the absence of an additional provision for bad debts
of $850,000 in fiscal 2006 as noted below.
The
provision for doubtful accounts increased by $884,968 to $1,162,173 for the
fiscal year ended March 31, 2006 compared with $277,205 in fiscal year 2005.
The
increase was due mainly to an additional provision for bad debts of $850,000
in
September 2005 related to the filing by Delta Air Lines and Northwest Airlines
of voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code.
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
decrease during the fiscal year ended March 31, 2007 compared with the same
period of the prior year is necessarily indicative of a trend.
16
Bad
Debt Recoveries
Bad
debt
recoveries increased for the fiscal year ended March 31, 2007 by $49,238 to
$53,229 from $3,991 in fiscal year 2006 as a result of a recovery of
approximately $45,000 related to the Company’s claim against a former service
agreement customer that ceased operations in a previous year.
Bad
debt
recoveries decreased for the fiscal year ended March 31, 2006 by $51,983 to
$3,991 from $55,974 in fiscal year 2005 as a result of higher recoveries in
the
previous fiscal year.
Interest
Income
Interest
income for the fiscal year ended March 31, 2007 principally represents interest
earned on: (i) cash balances; (ii) trust funds for potential future workers’
compensation claims and (iii) financing income from the Company’s service
agreement customers. Interest income in fiscal year 2007 was comparable with
the
same period of the prior year.
Interest
income for the fiscal year ended March 31, 2006 principally represents interest
earned on: (i) cash balances; (ii) trust funds for potential future workers’
compensation claims and (iii) financing income from the Company’s service
agreement customers. Interest income in fiscal year 2006 increased by $142,156
to $238,887 from $96,731 in fiscal year 2005.
Interest
Expense
Interest
expense for the fiscal year ended March 31, 2007 increased by $135,606 to
$567,765 from $432,159 in fiscal year 2006. The increase is due mainly to:
(i)
higher average outstanding borrowings and an increase in the weighted average
interest rate under the Company’s commercial revolving loan agreement and (ii)
interest expense on the note payable related to the Company’s purchase of a
security guard business during June 2006.
Interest
expense for the fiscal year ended March 31, 2006 decreased by $27,946 to
$432,159 from $460,105 in fiscal year 2005. 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.
Equipment
Dispositions
Equipment
dispositions are a result of the sale of vehicles, office equipment and security
equipment at prices above or below book value.
The
$2,851 loss on equipment dispositions for the fiscal year ended March 31, 2007
was primarily due to the disposition of Company vehicles at amounts below their
respective book values.
The
$19,137 gain on equipment dispositions for the fiscal year ended March 31,
2006
was primarily due to the disposition of Company vehicles at amounts in excess
of
their respective book values.
Income
Tax Benefit (Expense)
Income
tax benefit for the fiscal year ended March 31, 2006 increased $383,605 to
$450,000 from $66,395 in fiscal year 2006 due primarily to the Company’s
recognition of a portion of its deferred tax assets. 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, 2007 and 2006.
Income
tax benefit for the fiscal year ended March 31, 2006 decreased $201,055 to
$66,395 from $267,450 in fiscal year 2005 due mainly to a reduction in the
Company’s pre-tax loss. 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, 2006 and
2005.
17
The
Company pays employees and administrative service clients on a weekly basis,
while customers pay for services generally within 60 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").
The
Company’s principal use of short-term borrowings is for carrying accounts
receivable. The Company’s short-term borrowings have supported the increase in
accounts receivable associated with: (i) its ongoing expansion and growth;
and
(ii) the October 1, 2006 change in a majority of Delta Airline’s billing and
payment terms from monthly invoices prepaid in advance to weekly invoices due
in
thirty (30) days. The Company will continue to use its short-term borrowings
to
support its working capital requirements.
We
believe that existing funds, cash generated from operations, and existing
sources of and access to financing are adequate to satisfy our working capital,
capital expenditure and debt service requirements for the foreseeable future.
However, we cannot assure you that this will be the case, and we may be required
to obtain additional financing to maintain and expand our existing operations
through the sale of our securities, an increase in our credit facilities or
otherwise. We cannot assure you that such financing will be available upon
commercially acceptable terms or otherwise. The failure by us to obtain such
financing, if needed, would have a material adverse effect upon our business,
financial condition and results of operations.
CIT
Revolving Loan
Until
March 21, 2006, we were parties to a financing agreement (the “Agreement”) with
CIT that had a term of 3 years ending December 12, 2006 and provided 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 provided for advances
against unbilled revenue (primarily monthly invoiced accounts) although this
benefit was offset by a reserve against all outstanding payroll checks. The
revolving loan bore 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. Costs to close the loan totaled $279,963 and are being amortized over
the
three year life of the Agreement.
On
March
22, 2006, the Company entered into an Amended and Restated Financing Agreement
with CIT (the “Amended Agreement”), which provides for borrowings as noted
above, but in no event more that $12,000,000. The Amended Agreement provides
for
a letter of credit sub-line in an aggregate amount of up to $1,500,000. Letters
of credit are subject to a two percent (2%) per annum fee on the face amount
of
each letter of credit. The Amended Agreement provides that interest will be
calculated on the outstanding principal balance of the revolving loans at the
prime rate, as defined, plus .25% if EBITDA, as defined, is equal to or less
than $500,000 for the most recently completed fiscal quarter; otherwise, at
the
prime rate, as defined. For LIBOR loans interest will be calculated on the
outstanding principal balance of the LIBOR loans at the LIBOR rate, as defined,
plus 2.75% if EBITDA, as defined, is equal to or less than $500,000 for the
most
recently completed fiscal quarter; otherwise, at the LIBOR rate, as defined,
plus 2.50%. As of March 31, 2007, the interest rate was 8.25% per annum.
At
March
31, 2007, the Company had borrowed $8,487,065 representing approximately 87%
of
its maximum borrowing capacity based on the definition of “eligible accounts
receivable” under the terms of the Amended Agreement. However, up to $3,512,935
could additionally be available to borrow under the Amended Agreement to finance
growth and increased receivables, if any.
On
April
12, 2007, the Company entered into an Amendment to its Financing Agreement
(the
“Financing Agreement”) with CIT (the “Amendment”) in connection with the closing
of the transactions (the “Transactions”) under the Stock Purchase Agreement and
the Merger Agreement described in Note 21 to the Company’s financial statements
listed in Item 15 (a)(1) and (a)(2) of Part IV of this Form 10-K Annual Report.
Pursuant to the Amendment, the aggregate line of credit under the Financing
Agreement was increased from $12,000,000 to $16,000,000, and the Company was
provided with a $2,400,000 acquisition advance to fund the cash requirements
of
the Transactions. The Amendment also provides for an extension of the maturity
date of the Financing Agreement to December 12, 2008, and for reductions in
interest rates, fees and availability reserves and an increase in the letter
of
credit sub-line to an aggregate amount of up to $3,000,000. Costs to close
the
Amendment totaled $125,000 payable $45,000 at closing, $40,000 six months after
closing and $40,000 twelve months after closing. Such costs are being amortized
over the remaining life of the Financing Agreement.
The
Company relies on its revolving loan from CIT that 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. Under such circumstances, the Company’s business would be materially
adversely affected if we were not able to obtain suitable alternative financing.
For the fiscal year ended March 31, 2007, the Company was in compliance with
all
covenants under the Amended Agreement.
18
Cash
Flows
The
following table summarizes our cash flow activity for the fiscal years ended
March 31, 2007, 2006 and 2005:
|
2007
|
2006
|
2005
|
||||||||
|
Net
cash (used in) provided by operating activities
|
$
|
(4,001,190
|
)
|
$
|
(4,941,428
|
)
|
$
|
8,149,004
|
||
|
Net
cash (used in) provided by investing activities
|
(639,633
|
)
|
(179,988
|
)
|
36,637
|
|||||
|
Net
cash provided by (used in) financing activities
|
4,828,620
|
2,642,609
|
(5,684,892
|
)
|
||||||
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, 2007, the Company increased its short-term
borrowings principally to support higher accounts receivable associated with:
(i) its ongoing expansion and growth; and (ii) the October 1, 2006 change in
a
majority of Delta Airline’s billing and payment terms from monthly invoices
prepaid in advance to weekly invoices due in thirty (30) days.
Working
Capital
Working
capital decreased by $324,082 to $6,513,663 as of March 31, 2007, from
$6,837,745 as of March 31, 2006.
The
Company experienced checks issued in advance of deposits (defined as checks
drawn in advance of future deposits) of $1,760,155 as of March 31, 2007,
compared with $1,828,802 at March 31, 2006. 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, 2007 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
|
$
|
252,956
|
$
|
247,054
|
$
|
5,902
|
$
|
--
|
$
|
--
|
||||||
|
Capital
lease obligations
|
26,417
|
16,774
|
9,643
|
--
|
--
|
|||||||||||
|
Operating
lease obligations
|
2,487,388
|
989,542
|
1,033,998
|
463,648
|
200
|
|||||||||||
|
Purchase
obligations (1)
|
330,164
|
91,322
|
182,644
|
56,198
|
--
|
|||||||||||
|
Total
|
$
|
3,096,925
|
$
|
1,344,692
|
$
|
1,232,187
|
$
|
519,846
|
$
|
200
|
||||||
| (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 Financial Condition and Results
of Operations, contains a number of forward-looking statements, all of which
are
based upon current expectations. Actual results may differ materially from
the
results contemplated by these forward-looking statements and are qualified
by
the section below entitled “Forward Looking Statements” and Part I, Item 1A of
this report entitled “Risk Factors.”
19
Financial
Results
Future
revenue will be largely dependent upon the Company’s ability to gain additional
revenues in the security and aviation services divisions at acceptable margins
while minimizing terminations of existing clients. The revenues of the security
services division has stabilized and begun to experience both organic and
transactional growth over recent months after a reduction over the past few
years as contracts with unacceptable margins were cancelled. On April 18, 2007,
the Company announced completing a merger with Brown Security Industries, Inc.,
including its subsidiaries Strategic Security Services, Inc. and Rodgers Police
Patrol. Our current focus is on increasing revenues while our sales and
marketing team and branch managers work to sell new business and retain
profitable contracts. The airline industry continues to increase its demand
for
services provided by the Company.
The
Company’s gross profit margin increased during the fiscal year ended March 31,
2007 to 14.6% of revenues compared with 13.4% for the fiscal year ended March
31, 2006. The increase is due mainly to: (i) expanded services with new and
existing customers at Los Angeles and San Jose International Airports and
LaGuardia Airport; (ii) new contracts at Pittsburgh, Oakland and Seattle Tacoma
International Airports; (iii) improved labor ratio margins principally in the
security services division; (iv) lower workers’ compensation insurance costs;
(v) the purchase of a security services business in Florida; (vi) lower State
of
New York payroll taxes related to the elimination of prior year reductions
in
Federal Unemployment Tax credits. Also, contributing to the increase in gross
profit for the fiscal year was: (a) a short-term contract to provide security
services to a national insurance company at multiple domestic locations; (b)
temporary strike coverage for doormen and elevator operators in New York City
and (c) lower automotive insurance costs. The Company expects gross profit
margins to average between 14.0% and 15.0% of revenue for fiscal year 2008
based
on current business conditions. Management expects gross profit to remain under
pressure due primarily to continued price competition. However, management
expects these effects to be moderated by continued operational efficiencies
resulting from better management of the Company’s cost structures and workers’
compensation experience ratings.
A
cost
reduction program was instituted in October 2004 that is expected to continue
to
reduce the Company’s general and administrative expenses in future periods.
Additional cost reduction opportunities are being pursued as they are
determined.
The
aviation services division represents approximately 66% of the Company's total
revenues and Delta, at annual billings of approximately $14,700,000, is the
largest customer of the aviation division at approximately 24% of the aviation
services division and 16% of the Company’s total revenues. Due to the existing
limitations under the Amendment with CIT, the Company is limited to borrowing
against Delta’s accounts receivable of up to (but not exceeding) approximately
$2,060,000, so long as such accounts do not remain unpaid for more than sixty
(60) days from the invoice date. In the event of a bankruptcy by another airline
customer(s), the Company’s earnings and liquidity could be adversely affected to
the extent of the accounts receivable with such airline(s), as well as from
lost
future revenues if such airline(s) cease operations or reduce their requirements
from the Company.
As
of the
close of business on June 20, 2007, the Company’s cash availability was
approximately $4,900,000, which is believed to be sufficient to meet its needs
for the foreseeable future barring any increase in 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, we cannot assure you that this will be the case, and we may be required
to obtain additional financing to maintain and expand our existing operations
through the sale of our securities, an increase in our credit facilities or
otherwise. We cannot assure you that such financing will be available upon
commercially acceptable terms or otherwise. The failure by us to obtain such
financing, if needed, would have a material adverse effect upon our business,
financial condition and results of operations.
SAFE
HARBOR STATEMENT
This
management’s discussion and analysis of financial condition and results of
operations, other sections of this annual report on Form 10-K and other reports
and oral statements made by our representatives from time to time may contain
forward-looking statements that are based on our assumptions, expectations
and
projections about the Company and the security industry. These include
statements regarding our expectations about revenues, our liquidity, or expenses
and our continued growth, among others. Such forward-looking statements by
their
nature involve a degree of risk and uncertainty. We caution that a variety
of
factors, including but not limited to the factors described under Item 1A,
“Risk
Factors” and the following, could cause business conditions and our results to
differ materially from what is contained in forward-looking
statements:
| · |
changes
in the rate of economic growth in the United
States;
|
| · |
changes
in the financial condition of our
customers;
|
| · |
changes
in regulatory environment;
|
| · |
contract
cancellations;
|
| · |
changes
in our estimates of costs;
|
| · |
war
and/or terrorist attacks on facilities where services are or may
be
provided;
|
| · |
outcomes
of pending and future litigation;
|
| · |
increasing
competition by other companies;
|
| · |
compliance
with our loan covenants;
|
| · |
recoverability
of claims against our customers and others by us and claims by third
parties against us; and
|
20
| · |
changes
in estimates used in our critical accounting
policies.
|
Other
factors and assumptions not identified above were also involved in the formation
of these forward-looking statements and the failure of such other assumptions
to
be realized, as well as other factors, may also cause actual results to differ
materially from those projected. Most of these factors are difficult to predict
accurately and are generally beyond our control. You should consider the areas
of risk described above in connection with any forward-looking statements that
may be made by us.
We
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any additional disclosures we make in proxy
statements, quarterly reports on Form 10-Q, annual reports on Form 10-K and
current reports on Form 8-K filed with the Securities and Exchange
Commission.
During
the fiscal year ended March 31, 2007, 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, 2007, a 1% change in the prime lending rate would
impact the Company's financial position and results of operations by
approximately $65,000 over the next fiscal year.
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.
None.
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 President and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures.
We
believe that a control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control system are met,
and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.
Our
disclosure controls and procedures are designed to provide reasonable assurance
of achieving their objectives and our President and Chief Financial Officer
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 President and 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 President and Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of March 31, 2007. There have been no changes
in the Company’s internal control over financial reporting that occurred during
the fourth quarter of fiscal 2007 that has materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM
9b. OTHER INFORMATION.
None.
21
PART
III
The
information required by this Item 10 will be set forth in our Proxy Statement
for our 2007 Annual Meeting of Stockholders (the “2007 Proxy Statement”) under
the caption “Directors, Executive Officers and Corporate Governance,” and is
incorporated herein by reference.
The
information required by this Item 11 will be set forth in the 2007 Proxy
Statement under the caption “Executive Compensation,” and is incorporated herein
by reference.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED
STOCKHOLDER
MATTERS.
The
information required by this Item 12 will be set forth in the 2007 Proxy
Statement under the caption “Executive Compensation-Equity Compensation Plan
Information,” and is incorporated herein by reference.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The
information required by this Item 13 will be set forth in the 2007 Proxy
Statement under the caption “Certain Relationships and Related Transactions, and
Director Independence,” and is incorporated herein by reference.
The
information required by this Item 14 will be set forth in the 2007 Proxy
Statement under the caption “Principal Accountant Fees and Services,” and is
incorporated herein by reference.
22
(a)
|
(1)
|
Financial
Statements:
|
Page
Number From
This
Form 10- K
|
|
|
Independent
auditor's report
|
F-1
|
||
|
Balance
Sheets - March 31, 2007 and 2006
|
F-2
|
||
|
Statements
of Operations - years ended
|
F-3
|
||
|
March
31, 2007, 2006 and 2005
|
|||
|
Statements
of Changes in Stockholders' Equity and
Comprehensive Income
|
F-4
|
||
|
years
ended March 31, 2007, 2006 and 2005
|
|||
|
Statements
of Cash Flows - years ended
|
F-5
- F-6
|
||
|
March
31, 2007, 2006 and 2005
|
|||
|
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
pages
25-26 of this report.
|
|||
23
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 27, 2007
| By: |
/s/
Barry I. Regenstein
|
|
|
Barry
I. Regenstein
President
and
Chief
Financial 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 and on the dates indicated:
|
Signature
|
Title
|
Date
|
|||||
|
/s/
Bruce
Galloway
|
Co-Chairman
of the Board
|
June
27,
2007
|
|||||
|
Bruce
Galloway
|
|
|
|||||
|
/s/
Peter
Kikis
|
Co-Chairman
of the Board
|
June
27,
2007
|
|||||
|
Peter
Kikis
|
|
|
|||||
|
/s/
Barry
I. Regenstein
|
Chief
Financial Officer
|
June
27,
2007
|
|||||
|
Barry
I. Regenstein
|
|
|
|||||
|
/s/
Martin
C. Blake, Jr.
|
Director
|
June
27,
2007
|
|||||
|
Martin
C. Blake, Jr.
|
|
|
|||||
|
/s/
Robert
S. Ellin
|
Director
|
June
27,
2007
|
|||||
|
Robert
S. Ellin
|
|
|
|||||
|
/s/
Thomas
Kikis
|
Director
|
June
27,
2007
|
|||||
|
Thomas
Kikis
|
|
|
|||||
|
/s/
Martin
Wade, III
|
Director
|
June
27,
2007
|
|||||
|
Martin
Wade, III
|
|
|
|||||
24
COMMAND
SECURITY CORPORATION
EXHIBIT
INDEX
|
Exhibit Number |
ExhibitDescription
|
|||
|
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 3.1 of the Form 8-K filed September 20,
2006.
|
||
|
3.4
|
Certificate
of Amendment of
Certificate
of Incorporation
|
Incorporated
by reference to Exhibit 3.4 of the Eighth Amendment to the Registration
Statement filed on Form S-1, File No. 33-75336 (the
"S-1").
|
||
|
4.1
|
Specimen
Stock Certificate
|
Incorporated
by reference to Exhibit 4.A to Amendment #1 to Registrant's Registration
Statement on Form S-18, file number 33, 35007-NY (the "S-18").
|
||
|
4.2
|
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
February
24, 1996, for the acquisition
of
United Security Group Inc.
|
Incorporated
by reference to Exhibit 2.1 of the Form 8-K filed March 23, 1996.
|
||
|
10.2
|
CIT
Group/Business Credit, Inc. Financing
Agreement
dated December 12, 2003
|
Incorporated
by reference to Exhibit 10.41 of the Form 10-K for the fiscal
year ended
March 31, 2004 filed on July 14, 2004.
|
||
|
10.3
|
Amended
and Restated Financing Agreement with CIT Group/Business Credit,
Inc.
dated March 21, 2006
|
Incorporated
by reference to Exhibit 10.4 of the Form 8-K filed March 21,
2006.
|
||
|
10.4
|
Consulting
Agreement with Giuliani Security & Safety LLC dated January 9,
2006
|
Incorporated
by reference to Exhibit 10.3 of the Form 8-K filed January 9,
2006.
|
||
|
10.5
|
Consulting
Agreement with Jericho State Capital Consulting LLC dated February
3,
2006
|
Incorporated
by reference to Exhibit 10.4 of the Form 8-K filed February 3,
2006.
|
||
|
10.6
|
First
Amendment and Consent to Amended and Restated Financing Agreement
with CIT
Group/Business Credit, Inc. dated June 13, 2006
|
Incorporated
by preference to Exhibit 10.5 of the Form 8-K filed June 13,
2006.
|
||
|
10.7
|
Agreement
for Purchase and Sale of Assets dated June13, 2006, for the acquisition
of
Sterling Protective Group, Inc.
|
Incorporated
by reference to Exhibit 10.6 of the Form 8-K filed June 13, 2006.
|
||
|
10.8
|
Second
Amendment to the Amended and Restated Financing Agreement with
CIT
Group/Business Credit, Inc. dated September 30, 2006
|
Incorporated
by reference to Exhibit 10.7 of the Form 10-Q filed February
13, 2007.
|
||
|
10.9
|
Third
Amendment to Amended and Restated Financing Agreement with CIT
Group/Business Credit, Inc. Inc. dated April 12, 2007
|
Incorporated
by reference to Exhibit 10.1 of the Form 8-K filed April 12,
2007.
|
||
|
10.10
|
Stock
Purchase Agreement dated April 12, 2007, for the acquisition
of Brown
Security Industries, Inc.
|
Incorporated
by reference to Exhibit 10.2 of the Form 8-K filed April 12,
2007.
|
||
|
10.11
|
Amended
and Restated Plan of Merger dated April 12, 2007, for the acquisition
of
Brown Security Indus- tries, Inc.
|
Incorporated
by reference to Exhibit 10.3 of the Form 8-K filed April 12,
2007.
|
||
|
11
|
Computation
of Loss Per Share of Common Stock
|
Incorporated
by reference to Note 11 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.
|
||
|
23.1
|
Auditor
Consent
|
Exhibit
23.1 attached hereto.
|
||
|
31.1
|
Certifications
Pursuant to
Rule
13(a)-14(a)/15(d)-14(a)
|
Exhibit
31.1 attached hereto.
|
||
|
31.2
|
Certifications
Pursuant to
Rule
13(a)-14(a)/15(d)-14(a)
|
Exhibit
31.2 attached hereto.
|
||
|
32.1
|
Section
1350 Certifications
|
Exhibit
32.1 attached hereto.
|
||
25
|
32.2
|
Section
1350 Certifications
|
Exhibit
32.2 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 of Directors Charter and Powers
|
Incorporated
by reference to Exhibit 99.23 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
|
2005
Stock Incentive Plan
|
Incorporated
by reference to Exhibit 99.5 of the Form 10-K for the fiscal
year ended
March 31, 2006 filed on June 28, 2006.
|
|
|
99.6
|
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.
|
|
|
99.7
|
Barry
I. Regenstein Employment Agreement
|
Incorporated
by reference to Exhibit 10.1 of the Form 8-K/A filed on August
27, 2004.
|
|
|
99.8
|
Marc
W. Brown Employment Agreement
|
Incorporated
by reference to Exhibit 10.4 of the Form 8-K filed on April 12,
2007.
|
26
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, 2007 and 2006, and the related statements of operations, changes
in
stockholders' equity and
comprehensive income and cash flows for each of the three years in the
period ended March 31, 2007. 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. The
Company is not required to have, nor were we engaged to perform, an audit of
its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the financial statements, 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, 2007 and 2006, and the results of its operations and its cash flows
for each of the three fiscal years ended March 31, 2007, 2006 and 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,
2007
Poughkeepsie,
New York
Command
Security Corporation
Balance
Sheets
March
31,
2007 and 2006
|
|
2007
|
2006
|
|||||
|
ASSETS
|
|
|
|||||
|
Current
assets:
|
|
|
|||||
|
Cash
and cash equivalents
|
$
|
220,040
|
$
|
32,243
|
|||
|
Accounts
receivable from security services customers, less allowance
for
|
|||||||
|
doubtful
accounts of $624,808 and $252,689, respectively
|
17,978,737
|
13,103,581
|
|||||
|
Accounts
receivable from administrative service client customers,
less
|
|||||||
|
allowance
for doubtful accounts of $206,589 and $80,203,
respectively
|
--
|
700,519
|
|||||
|
Prepaid
expenses
|
556,953
|
721,451
|
|||||
|
Other
current assets
|
3,428,626
|
2,291,135
|
|||||
|
Total
current assets
|
22,184,356
|
16,848,929
|
|||||
|
Furniture
and equipment at cost, net
|
529,042
|
405,179
|
|||||
|
Intangible
assets, net
|
782,621
|
79,450
|
|||||
|
Restricted
cash
|
78,126
|
74,447
|
|||||
|
Other
assets
|
1,755,432
|
705,294
|
|||||
|
Total
assets
|
$
|
25,329,577
|
$
|
18,113,299
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Checks
issued in advance of deposits
|
$
|
1,760,155
|
$
|
1,828,802
|
|||
|
Current
maturities of long-term debt
|
247,054
|
52,614
|
|||||
|
Current
maturities of obligations under capital leases
|
16,774
|
38,680
|
|||||
|
Short-term
borrowings
|
8,487,065
|
3,383,740
|
|||||
|
Accounts
payable
|
639,783
|
939,526
|
|||||
|
Due
to service companies
|
--
|
101,391
|
|||||
|
Accrued
expenses and other liabilities
|
4,519,862
|
3,666,431
|
|||||
|
Total
current liabilities
|
15,670,693
|
10,011,184
|
|||||
|
Insurance
reserves
|
539,503
|
420,781
|
|||||
|
Long-term
debt, due after one year
|
5,902
|
27,957
|
|||||
|
Obligations
under capital leases, due after one year
|
9,643
|
28,680
|
|||||
|
Total
liabilities
|
16,225,741
|
10,488,602
|
|||||
|
Commitments
and contingencies (Notes 15, 16 and 17)
|
|||||||
|
Stockholders'
equity:
|
|||||||
|
Preferred
stock, convertible Series A,
|
|||||||
|
$.0001
par value per share, 1,000,000
|
|||||||
|
shares
authorized
|
--
|
--
|
|||||
|
Common
stock, $.0001 par value per share, 20,000,000 shares
|
|||||||
|
authorized,
10,137,970 shares issued and
|
|||||||
|
outstanding
|
1,014
|
1,014
|
|||||
|
Additional
paid-in capital
|
13,889,861
|
13,663,311
|
|||||
|
Accumulated
deficit
|
(4,799,589
|
)
|
(6,039,628
|
)
|
|||
|
Accumulated
other comprehensive income
|
12,550
|
--
|
|||||
|
Total
stockholders' equity
|
9,103,836
|
7,624,697
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
25,329,577
|
$
|
18,113,299
|
|||
See
accompanying notes and auditor's report
F-2
Command
Security Corporation
Statements
of Operations
Years
Ended March 31, 2007, 2006 and 2005
|
|
2007
|
|
2006
|
|
2005
|
|||||
|
Revenues
|
$
|
93,822,546
|
$
|
85,208,615
|
$
|
79,654,744
|
||||
|
Cost
of revenues
|
80,157,314
|
73,788,256
|
69,132,218
|
|||||||
|
Gross
profit
|
13,665,232
|
11,420,359
|
10,522,526
|
|||||||
|
Operating
expenses
|
||||||||||
|
General
and administrative expenses
|
12,315,745
|
10,254,032
|
10,590,778
|
|||||||
|
Provision
for doubtful accounts and notes
|
268,118
|
1,162,173
|
277,205
|
|||||||
|
Bad
debt recoveries
|
(53,229
|
)
|
(3,991
|
)
|
(55,974
|
)
|
||||
|
|
12,530,634
|
11,412,214
|
10,812,009
|
|||||||
|
Operating
income (loss)
|
1,134,598
|
8,145
|
(289,483
|
)
|
||||||
|
Other
income (expenses)
|
||||||||||
|
Interest
income
|
226,057
|
238,887
|
96,731
|
|||||||
|
Interest
expense
|
(567,765
|
)
|
(432,159
|
)
|
(460,105
|
)
|
||||
|
Gain
(loss) on equipment dispositions
|
(2,851
|
)
|
19,137
|
(4,848
|
)
|
|||||
|
|
(344,559
|
)
|
(174,135
|
)
|
(368,222
|
)
|
||||
|
Income
(loss) before income tax benefit
|
790,039
|
(165,990
|
)
|
(657,705
|
)
|
|||||
|
Income
tax benefit
|
450,000
|
66,395
|
267,450
|
|||||||
|
Net
income (loss)
|
1,240,039
|
(99,595
|
)
|
(390,255
|
)
|
|||||
|
Preferred
stock dividends
|
--
|
--
|
(38,413
|
)
|
||||||
|
Net
income (loss) applicable to common stockholders
|
$
|
1,240,039
|
$
|
(99,595
|
)
|
$
|
(428,668
|
)
|
||
|
Income
(loss) per share of common stock
|
||||||||||
|
Basic
|
$
|
.12
|
$
|
(.01
|
)
|
$
|
(.06
|
)
|
||
|
Diluted
|
$
|
.12
|
$
|
(.01
|
)
|
$
|
n/a
|
|||
|
Weighted
average number of common
|
||||||||||
|
shares
outstanding
|
||||||||||
|
Basic
|
10,137,970
|
8,834,952
|
7,302,738
|
|||||||
|
Diluted
|
10,620,756
|
9,646,915
|
7,862,786
|
|||||||
See
accompanying notes and auditor's report
F-3
Command
Security Corporation
Statements
of Changes in Stockholders' Equity and Comprehensive Income
Years
Ended March 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
||||||
|
|
|
Preferred
|
|
Common
|
|
Paid-In
|
|
Accumulated
|
|
Comprehensive
|
|
|
|
||||||
|
|
|
Stock
|
|
Stock
|
|
Capital
|
|
Deficit
|
|
Income
|
|
Total
|
|||||||
|
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
|
||||||||||||||||
|
Stock
compensation cost
|
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
|
||||||||||||
|
Warrants
exercised
|
236
|
2,917,379
|
2,917,615
|
||||||||||||||||
|
Stock
compensation cost
|
397,350
|
397,350
|
|||||||||||||||||
|
Net
loss
|
(99,595
|
)
|
(99,595
|
)
|
|||||||||||||||
|
Balance
at March 31, 2006
|
--
|
1,014
|
13,663,311
|
(6,039,628
|
)
|
--
|
7,624,697
|
||||||||||||
|
Other
comprehensive income (a)
|
12,550
|
12,550
|
|||||||||||||||||
|
Stock
compensation cost
|
226,550
|
226,550
|
|||||||||||||||||
|
Net
income
|
1,240,039
|
1,240,039
|
|||||||||||||||||
|
Balance
at March 31, 2007
|
$
|
--
|
$
|
1,014
|
$
|
13,889,861
|
$
|
(4,799,589
|
)
|
$
|
12,550
|
$
|
9,103,836
|
||||||
|
(a)
– Represents unrealized gain on marketable
security.
|
See
accompanying notes and auditor's report
F-4
Command
Security Corporation
Statements
of Cash Flows
Years
Ended March 31, 2007, 2006 and 2005
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
2007
|
|
2006
|
|
2005
|
|||||
|
OPERATING
ACTIVITIES
|
|
|
|
|||||||
|
Net
income (loss)
|
$
|
1,240,039
|
$
|
(99,595
|
)
|
$
|
(390,255
|
)
|
||
|
Adjustments
to reconcile net income (loss) to net
|
||||||||||
|
cash
provided by operating activities:
|
||||||||||
|
Depreciation
and amortization
|
315,222
|
296,797
|
396,471
|
|||||||
|
Stock
based compensation costs
|
226,550
|
397,350
|
106,400
|
|||||||
|
Provision
for doubtful accounts and
|
||||||||||
|
notes
receivable, net of recoveries
|
214,888
|
1,158,182
|
221,231
|
|||||||
|
(Gain)
loss on equipment dispositions
|
2,851
|
(19,137
|
)
|
4,848
|
||||||
|
Deferred
income taxes
|
(450,000
|
)
|
(66,395
|
)
|
(267,450
|
)
|
||||
|
Insurance
reserves
|
237,439
|
(10,279
|
)
|
(21,805
|
)
|
|||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Accounts
receivable
|
(4,389,524
|
)
|
(3,332,443
|
)
|
6,192,186
|
|||||
|
Prepaid
expenses
|
164,496
|
173,489
|
1,073,142
|
|||||||
|
Other
receivables
|
(1,253,293
|
)
|
(1,827,741
|
)
|
(49,434
|
)
|
||||
|
Other
assets
|
(643,438
|
)
|
(90,357
|
)
|
1,287,716
|
|||||
|
Accounts
payable and other current liabilities
|
434,971
|
(1,462,575
|
)
|
(315,956
|
)
|
|||||
|
Due
to administrative service clients
|
(101,391
|
)
|
(58,724
|
)
|
(88,090
|
)
|
||||
|
Net
cash (used in) provided by operating activities
|
(4,001,190
|
)
|
(4,941,428
|
)
|
8,149,004
|
|||||
|
INVESTING
ACTIVITIES
|
||||||||||
|
Purchases
of equipment
|
(344,986
|
)
|
(74,780
|
)
|
(55,113
|
)
|
||||
|
Proceeds
from equipment dispositions
|
2,050
|
10,595
|
20,850
|
|||||||
|
Acquisition
of businesses
|
(412,500
|
)
|
--
|
--
|
||||||
|
Issuance
of note to administrative service client
|
--
|
(125,000
|
)
|
--
|
||||||
|
Principal
collections on notes receivable
|
115,803
|
9,197
|
70,900
|
|||||||
|
Net
cash (used in) provided by investing activities
|
(639,633
|
)
|
(179,988
|
)
|
36,637
|
|||||
|
FINANCING
ACTIVITIES
|
||||||||||
|
Net
advances (repayments) on line-of-credit
|
5,116,687
|
(1,151,976
|
)
|
(4,275,669
|
)
|
|||||
|
Increase
(decrease) in checks issued in advance of deposits
|
(68,647
|
)
|
1,333,553
|
(71,362
|
)
|
|||||
|
Proceeds
from warrant exercises
|
--
|
2,917,615
|
237,887
|
|||||||
|
Principal
payments on other borrowings
|
(178,477
|
)
|
(419,855
|
)
|
(1,430,391
|
)
|
||||
|
Principal
payments on capital lease obligations
|
(40,943
|
)
|
(36,728
|
)
|
(66,270
|
)
|
||||
|
Payment
of preferred stock dividends
|
--
|
--
|
(79,087
|
)
|
||||||
|
Net
cash provided by (used in) financing activities
|
4,828,620
|
2,642,609
|
(5,684,892
|
)
|
||||||
|
Net
change in cash and cash equivalents
|
187,797
|
(2,478,807
|
)
|
2,500,749
|
||||||
|
Cash
and cash equivalents, beginning of year
|
32,243
|
2,511,050
|
10,301
|
|||||||
|
Cash
and cash equivalents, end of year
|
$
|
220,040
|
$
|
32,243
|
$
|
2,511,050
|
||||
See
accompanying notes and auditor's report
F-5
Command
Security Corporation Statements of Cash Flows, Continued Years Ended
March 31,
2007, 2006 and 2005
1.
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash
paid
during the years for:
|
|
2007
|
|
2006
|
|
2005
|
|||||
|
Interest
|
$
|
527,024
|
$
|
440,696
|
$
|
470,595
|
||||
|
Income
Taxes
|
208,223
|
22,634
|
45,328
|
|||||||
2.
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
For
the
fiscal years ended March 31, 2006 and 2005, the Company purchased transportation
equipment with direct installment and lease financing of $86,259 and
$47,270,
respectively. These amounts have been excluded from the purchases of
equipment
and proceeds from long-term debt on the statements of cash flows presented.
The
Company may obtain short-term financing to meet its insurance needs.
For the
fiscal years ended March 31, 2006 and 2005, $106,895 and $924,733, respectively,
were borrowed for this purpose. These borrowings have been excluded from
the
statements of cash flows presented.
During
the year ended March 31, 2005, the holder of 12,325.35 shares of the
Company’s
Series A convertible preferred stock converted such shares into 1,232,535
shares
of common stock. The decrease in preferred stock of $2,033,682 and increase
to
common stock of $123 and additional paid-in capital of $2,033,559 has
been
excluded from the statements of cash flows presented.
During
the year ended March 31, 2007, the Company acquired a security services
business
for a purchase price of $750,000. At the closing, the Company paid $412,500
of
the purchase price in cash and issued a note payable in the amount of
$337,500
for the remaining balance of the purchase price. This note payable amount
has
been excluded from acquisition of business and proceeds from long-term
debt on
the condensed statements of cash flows.
See
accompanying notes and auditor's report
F-6
Command
Security Corporation
Notes
to
Financial Statements
March
31,
2007, 2006 and 2005
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 officer service
company operating in Connecticut, California, Delaware, Florida, Illinois,
Maine, Maryland, Massachusetts, Nevada, New Jersey, New York, Oregon,
Pennsylvania and Washington. In addition, the Company also provides other
security officer 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 aviation and security services that 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 security officer
companies are calculated as a percentage of the administrative service client's
revenues and are recognized when billings for the related security officer
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 at the
date of purchase. The carrying amounts of our cash equivalents approximate
their
fair values.
Investments
We
account for our investments in marketable securities under the provisions of
Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for
Certain Investments in Debt and Equity Securities.” Other investments in
marketable equity are classified as available-for-sale and reported in the
balance sheet at fair value, with changes in fair value reported in accumulated
other comprehensive income.
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 that are being amortized on a straight-line basis over three to ten 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, if sooner.
Any
potential impairment is evaluated based on anticipated undiscounted future
cash
flows and actual customer attrition in accordance with SFAS No. 144.
Advertising
costs
The
Company expenses advertising costs as incurred. Amounts incurred for recruitment
and general business advertising were $87,375, $62,750 and $37,375 for the
fiscal years ended March 31, 2007, 2006 and 2005, respectively.
F-7
Command
Security Corporation
Notes
to
Financial Statements, Continued March 31, 2007, 2006 and 2005
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 fiscal
years ended March 31, 2007 and 2006 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
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 $19,600 for stock compensation cost for the three months ended June
30, 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 was 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 recognizes
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 adoption of SFAS 123R resulted in a non-cash charge of $226,550
and
$377,750 for stock based compensation for the year ended March 31, 2007 and
nine
months ended March 31, 2006, respectively. Such non-cash charge would have
been
the same under the provisions of SFAS 148.
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, 2007 and 2006, the fair value of long-term debt approximates its
carrying amount.
F-8
Command
Security Corporation
Notes
to
Financial Statements, Continued March 31, 2007, 2006 and 2005
2.
Furniture and Equipment
Furniture
and equipment at March 31, 2007 and 2006 consist of the following:
|
|
2007
|
2006
|
|||||
|
Transportation
equipment
|
$
|
600,859
|
$
|
682,088
|
|||
|
Security
equipment
|
579,033
|
512,337
|
|||||
|
Office
furniture and equipment
|
1,551,686
|
1,274,916
|
|||||
|
|
2,731,578
|
2,469,341
|
|||||
|
Accumulated
depreciation
|
(2,202,536
|
)
|
(2,064,162
|
)
|
|||
|
Total
|
$
|
529,042
|
$
|
405,179
|
|||
Depreciation
expense for the fiscal years ended March 31, 2007, 2006 and 2005, was $216,222,
$192,075 and $301,150, respectively, and includes amortization of assets
purchased under capital lease arrangements in the amounts of $35,408, $35,751
and $93,086 for each of the respective years then ended (see Note 16).
3.
Intangible Assets
Intangible
assets at March 31, 2007 and 2006 consist of the following:
|
|
2007
|
|
2006
|
||||
|
Customer
list
|
$
|
831,248
|
$
|
30,000
|
|||
|
Borrowing
cost
|
290,163
|
289,240
|
|||||
|
Goodwill
|
20,402
|
20,402
|
|||||
|
|
1,141,813
|
339,642
|
|||||
|
Accumulated
amortization
|
(359,192
|
)
|
(260,192
|
)
|
|||
|
Total
|
$
|
782,621
|
$
|
79,450
|
|||
Amortization
expense for the fiscal years ended March 31, 2007, 2006 and 2005, was $99,000,
$104,722 and $95,321, respectively. Amortization expense for the years ending
March 31, 2008 and 2009 for the intangible assets noted above will be $105,827
and $80,125, respectively.
For
the
fiscal years ended March 31, 2007 and 2006, respectively, the balance of the
intangible assets represents the value of goodwill in the amount of $20,402
that
is not subject to amortization and net borrowing costs in the amount of $25,702
and $59,048, respectively, which is subject to amortization on a straight line
basis over the life of the Company’s financing agreement (see Note
7).
4.
Restricted Cash
Restricted
cash represents deposits for the benefit of the Company's insurance carrier
as
collateral for workers' compensation claims.
F-9
Command
Security Corporation
Notes
to
Financial Statements, Continued March 31, 2007, 2006 and 2005
5.
Other
Assets
Other
assets at March 31, 2007 and 2006 consist of the following:
|
|
2007
|
|
2006
|
||||
|
Workers’
compensation insurance
|
$
|
3,249,549
|
$
|
2,135,460
|
|||
|
Note
receivable
|
--
|
115,803
|
|||||
|
Other
receivables
|
138,187
|
215,558
|
|||||
|
Security
deposits
|
210,184
|
195,499
|
|||||
|
Deferred
tax asset
|
1,358,845
|
333,845
|
|||||
|
Other
|
227,293
|
264
|
|||||
|
|
5,184,058
|
2,996,429
|
|||||
|
Current
portion
|
(3,428,626
|
)
|
(2,291,135
|
)
|
|||
|
Total
non-current portion
|
$
|
1,755,432
|
$
|
705,294
|
|||
6.
Accrued Expenses and Other Liabilities
Accrued
expenses and other liabilities at March 31, 2007 and 2006 consist of the
following:
|
|
2007
|
|
2006
|
||||
|
Payroll
and related expenses
|
$
|
3,367,775
|
$
|
2,408,927
|
|||
|
Customer
prepayments, net
|
--
|
811,256
|
|||||
|
Taxes
and fees payable
|
800,687
|
317,097
|
|||||
|
Accrued
interest payable
|
71,143
|
24,415
|
|||||
|
Other
|
280,257
|
104,736
|
|||||
|
Total
|
$
|
4,519,862
|
$
|
3,666,431
|
|||
7.
Short-Term Borrowings
Short-term
borrowings at March 31, 2007 and 2006 consist of the following:
|
|
2007
|
|
2006
|
|
|||
|
Line
of credit
|
$
|
8,487,065
|
$
|
3,370,379
|
|||
|
Various
insurance
|
|||||||
|
financing
arrangements,
|
|||||||
|
interest
at 6.36%
|
--
|
13,361
|
|||||
|
Total
|
$
|
8,487,065
|
$
|
3,383,740
|
|||
Until
March 21, 2006, we were parties to a financing agreement (the “Agreement”) with
CIT Group/Business Credit, Inc. ("CIT") that had a term of three years ending
December 12, 2006 and provided for borrowings in an amount 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 provided 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
bore 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. Costs
to
close the loan totaled $279,963 and are being amortized over the three year
life
of the Agreement.
F-10
Command
Security Corporation
Notes
to
Financial Statements, Continued March 31, 2007, 2006 and 2005
On
March
22, 2006, the Company entered into an Amended and Restated Financing Agreement
with CIT (the “Amended Agreement”), that provides for borrowings as noted above,
but in no event more that $12,000,000. The Amended Agreement provides for a
letter of credit sub-line in an aggregate amount of up to $1,500,000. Letters
of
credit are subject to a two percent (2%) per annum fee on the face amount of
each letter of credit. The Amended Agreement provides that interest will be
calculated on the outstanding principal balance of the revolving loans at the
prime rate, as defined, plus .25% if EBITDA, as defined, is equal to or less
than $500,000 for the most recently completed fiscal quarter; otherwise, at
the
prime rate, as defined. For LIBOR loans interest will be calculated on the
outstanding principal balance of the LIBOR loans at the LIBOR rate, as defined,
plus 2.75% if EBITDA, as defined, is equal to or less than $500,000 for the
most
recently completed fiscal quarter; otherwise, at the LIBOR rate, as defined,
plus 2.50%. As of March 31, 2007, the interest rate was 8.25% per annum.
At
March
31, 2007, the Company had borrowed $8,417,065 and had a $70,000 letter of credit
outstanding representing approximately 87% of its maximum borrowing capacity
based on the definition of “eligible accounts receivable” under the terms of the
Amended Agreement. However, as the business grows and produces new receivables,
up to $3,512,935 could additionally be available to borrow under the Amended
Agreement.
The
Company relies on its revolving loan from CIT that 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. For the fiscal year ended March 31, 2007, the Company was in compliance
with all covenants under the agreement.
8.
Long-Term Debt
Long-term
debt at March 31, 2007 and 2006 consist of the following:
|
|
2007
|
2006
|
|||||
|
Promissory
note due at
|
|||||||
|
June
13 and December 13, 2007
|
|||||||
|
with
interest at 7.75%
|
225,000
|
--
|
|||||
|
Various
installment loans
|
|||||||
|
due
at various dates through March
|
|||||||
|
2009,
with interest ranging from
|
|||||||
|
8.24%
to 10.25% (a)
|
$
|
27,956
|
$
|
80,571
|
|||
|
|
252,956
|
80,571
|
|||||
|
Current
maturities
|
(247,054
|
)
|
(52,614
|
)
|
|||
|
Total
|
$
|
5,902
|
$
|
27,957
|
|||
(a)
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, 2008
|
$
|
247,054
|
||||
|
|
March
31, 2009
|
5,902
|
|||||
|
Total
|
$
|
252,956
|
9.
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.
F-11
Command
Security Corporation
Notes
to
Financial Statements, Continued March 31, 2007, 2006 and 2005
10.
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 fiscal
years ended March 31, 2007, 2006 and 2005:
|
|
Income
(Loss)
|
|
Shares
|
|
Per-Share
|
|
||||
|
|
|
(Numerator)
|
|
(Denominator)
|
|
Amount
|
||||
|
Year
ended March 31, 2007
|
|
|
|
|||||||
|
Basic
EPS
|
$
|
1,240,039
|
10,137,970
|
$
|
.12
|
|||||
|
Options
issued February 2001,
|
||||||||||
|
August
2004, May 2005,
|
||||||||||
|
September
2005, February 2006,
|
||||||||||
|
September
2006 and October 2006
|
482,786
|
|||||||||
|
Diluted
EPS
|
$
|
1,240,039
|
10,620,756
|
$
|
.12
|
|||||
|
Year
ended March 31, 2006
|
||||||||||
|
Basic
EPS
|
$
|
(99,595
|
)
|
8,834,952
|
$
|
(.01
|
)
|
|||
|
Effect
of dilutive shares:
|
||||||||||
|
Options
issued November 2000,
|
||||||||||
|
February
2001, August 2004, May 2005
|
||||||||||
|
September
2005 and February 2006
|
811,963
|
|||||||||
|
Diluted
EPS
|
$
|
(99,595
|
)
|
9,646,915
|
$
|
(.01
|
)
|
|||
|
Year
ended March 31, 2005
|
||||||||||
|
Basic
EPS
|
$
|
(428,668
|
)
|
7,302,738
|
$
|
(.06
|
)
|
|||
|
Effect
of dilutive shares:
|
||||||||||
|
Options
issued November 2000,
|
||||||||||
|
February
2001, March 2002 and August 2004
|
560,048
|
|||||||||
|
Diluted
EPS
|
$
|
(428,668
|
)
|
7,862,786
|
$
|
n/a
|
||||
11.
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. During the fiscal year ended March 31,
2007, the plan was revised to allow for employer matching of elective deferrals,
only for certain employees working under a specific customer contract, as
defined. For the fiscal year ended March 31, 2007, discretionary contributions
in the amount of $2,168 were paid. No discretionary amounts were accrued or
paid
for the fiscal years ended March 31, 2006 and 2005.
12.
Concentrations of Credit Risk
Geographic
concentrations of credit risk with respect to trade receivables are primarily
in
California with 32% and 28% and in the New York Metropolitan area with 42%
and
32% of total receivables as of March 31, 2007 and 2006, respectively. The
remaining trade receivables consist of a large number of customers dispersed
across many different geographic regions. During the fiscal years ended March
31, 2007, 2006 and 2005, the Company generated 66%, 65% and 63%, respectively,
of its revenue from aviation and related services. Trade receivables due from
the commercial airline industry comprised 67% and 38% of net receivables as
of
March 31, 2007 and 2006, 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. Company management believes they are not exposed to any
significant credit risk.
13.
Significant Customers
The
Company operates as a provider of security officer services to a wide range
of
industries which the Company has categorized into three groups; security officer
services, aviation services and support services. The latter includes revenues
from administrative service agreements and back office support to police
departments.
F-12
Command
Security Corporation
Notes
to
Financial Statements, Continued March 31, 2007, 2006 and 2005
Net
revenues for the groups noted above were as follows for the three years ended
March 31:
|
2007
|
2006
|
2005
|
||||||||
|
Security
Officer Services
|
$
|
31,413,964
|
$
|
29,269,512
|
$
|
28,858,519
|
||||
|
Aviation
Services
|
62,086,936
|
55,588,468
|
50,466,240
|
|||||||
|
Support
Services
|
321,646
|
350,635
|
329,985
|
|||||||
|
Total
|
$
|
93,822,546
|
$
|
85,208,615
|
$
|
79,654,744
|
||||
For
the
fiscal years ended March 31, 2007 and 2006, one airline customer accounted
for
approximately $14,700,000 and $14,309,000, respectively, of the Company’s total
revenue.
14.
Insurance Reserves
The
Company has an insurance policy covering workers’ compensation claims in states
that the Company performs services. Estimated accrued liabilities are based
on
the Company’s historical loss experience and the ratio of claims paid to the
Company’s historical payout profiles. Charges for estimated workers’
compensation related losses incurred and included in cost of sales were
$2,042,618, $2,881,041 and $3,257,608, for the fiscal years ended March 31,
2007, 2006 and 2005, 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. Effective October 1, 2006, the policy
limit was increased to $7,000,000 per occurrence with an additional excess
umbrella policy of $5,000,000. On the aviation related business, as of October
1, 2004, the Company acquired a policy with a $30,000,000 limit per occurrence.
Effective as of October 1, 2006, the Company retains the risk for the first
$25,000 per occurrence on the non-aviation related policy that includes airport
wheelchair and electric cart operations and $5,000 on the aviation related
policy except for $25,000 for damage to aircraft and $100,000 for skycap
operations. Estimated accrued liabilities are based on specific reserves in
connection with existing claims as determined by third party risk management
consultants and actuarial factors and the timing of reported claims. These
are
all factored into estimated losses incurred but not yet reported to 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.
15.
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, airport wheelchair and
electric cart 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 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 that are currently before various courts,
the Equal Employment Opportunities Commission 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 President and its Chief Operating
Officer (“COO”). The agreement with the President is for a three year period
expiring September 7, 2007. Commencing on September 7, 2007, and on the first
day of each one-year anniversary thereafter, the agreement shall automatically
be extended for one additional year unless either party shall have given notice
to the other party, at least 60 days prior to such anniversary that it does
not
wish to extend the term of the agreement.
The
terms
of the agreement call for severance payments and specified benefits of
approximately $315,000 depending upon the reason for termination. The agreement
with the COO is for a three year period that was extended to March 31, 2007. The
terms of this agreement call for severance payments and specified benefits
of
approximately $285,000 depending upon the reason for termination.
F-13
Command
Security Corporation
Notes
to
Financial Statements, Continued March 31, 2007, 2006 and 2005
16.
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 $1,148,894, $962,687 and $952,166, for the fiscal years ended
March
31, 2007, 2006 and 2005, respectively.
The
Company leases certain equipment and vehicles under agreements that 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, 2007
are
$718,257 and $664,138 and at March 31, 2006 are $718,257 and $628,730,
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, 2008
|
$
|
18,688
|
$
|
989,542
|
|||||
|
March
31, 2009
|
10,116
|
637,260
|
||||||||
|
March
31, 2010
|
--
|
396,738
|
||||||||
|
March
31, 2011
|
--
|
274,557
|
||||||||
|
March
31, 2012
|
--
|
189,091
|
||||||||
|
Later
years
|
--
|
200
|
||||||||
|
|
28,804
|
2,487,388
|
||||||||
|
Amounts
representing interest
|
(2,387
|
)
|
--
|
|||||||
|
Total
|
$
|
26,417
|
$
|
2,487,388
|
||||||
17.
Other
Commitments
On
March
31, 2004, the Company settled a dispute with a uniform cleaning service that
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 $93,079, $93,079 and $87,800 for
the
fiscal years ended March 31, 2007, 2006 and 2005, respectively.
The
required future minimum payments under the agreement are as follows:
|
Year
ending:
|
March
31, 2008
|
$
|
91,322
|
||||
|
March
31, 2009
|
91,322
|
||||||
|
March
31, 2010
|
91,322
|
||||||
|
March
31, 2011
|
56,209
|
||||||
|
Total
|
$
|
330,175
|
18.
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 stock option plan,
substantially all employees are eligible to receive options to purchase up
to an
aggregate of 500,000 shares at an exercise price that cannot be less than the
fair market value of the shares on the date the options are granted. In February
2001, August 2004 and May 2005, options to purchase 225,000, 200,000 and 40,000
shares, respectively, of common stock were issued and in April 2002, August
2003, April 2004 and January 2007, options to purchase 50,000, 20,000, 75,000
and 25,000 shares, respectively, were cancelled due to terminations of
employment. During fiscal 2006, the Company received proceeds of $45,000 in
connection with the exercise of stock options to purchase 60,000 shares of
the
Company’s common stock at an exercise price of $.75 per share. The outstanding
options are exercisable at any time before January 31, 2011, August 29, 2014
and
May 23, 2015 at $.75, $1.35 and $1.49 per share with respect to the February
2001, August 2004 and May 2005 issuances, respectively.
F-14
Command
Security Corporation
Notes
to
Financial Statements, Continued March 31, 2007, 2006 and 2005
In
September 2005, the Company’s Board of Directors and stockholders approved the
adoption of a qualified stock incentive plan. Under the stock incentive plan,
substantially all employees of and consultants to, the Company, are eligible
to
receive options to purchase up to an aggregate of 1,000,000 shares of the
Company’s common stock at an exercise price that cannot be less than the fair
market value of the shares on the date the options are granted. In September
2006 and 2005, options to purchase 80,000 shares of the Company’s common stock
were issued. The outstanding options are exercisable at any time before
September 19, 2016 at $2.67 per share and September 21, 2015 at $2.05 per share,
respectively.
In
February and October 2006, the Company granted consultants warrants to purchase
an aggregate of 350,000 and 100,000 shares of the Company’s common stock at
exercise prices of $2.00 and $2.70 per share, respectively. The outstanding
warrants are exercisable at any time before February 2, 2009 and September
30,
2009, respectively.
On
May
21, 2004, GCM Securities Partners, LLC (“GCM”) purchased from Reliance Security
Group, plc (“Reliance”) securities that 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. During fiscal 2006, the
Company received proceeds of $2,872,615 in connection with the warrant to
purchase 2,298,092 shares of the Company’s common stock.
On
August
30, 2004 (the “Effective Date”), the Company issued stock options to its
President and former 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 fiscal year 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.
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
Price
|
Number
of
Shares
|
Exercise
Price
|
Number
of
Shares
|
|||||||||||||||||||||
|
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
|
|||||||||||||||||||
|
Issued
|
1.49
|
-
|
2.05
|
120,000
|
2.00
|
350,000
|
|||||||||||||||||||
|
Exercised
|
.75 |
|
(60,000
|
)
|
1.25
|
(2,298,092
|
)
|
||||||||||||||||||
|
Outstanding
at March 31, 2006
|
.75
|
-
|
2.05
|
840,000
|
2.00
|
350,000
|
|||||||||||||||||||
|
Issued
|
2.67 |
|
80,000
|
2.70
|
100,000
|
||||||||||||||||||||
|
Forfeited
|
1.49 |
|
(25,000
|
)
|
|||||||||||||||||||||
|
Outstanding
at March 31, 2007
|
$
|
.75
|
-
|
$
|
2.67
|
895,000
|
$
|
2.00
|
-
|
2.70
|
450,000
|
||||||||||||||
F-15
Command
Security Corporation
Notes
to
Financial Statements, Continued March 31, 2007, 2006 and 2005
At
March
31, 2007 there were 895,000 and 450,000 options and warrants outstanding,
respectively, exercisable at prices ranging from $.75 to $2.70, and 2,390,000
shares reserved for issuance under all stock arrangements.
Significant
option and warrant groups outstanding at March 31, 2007 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
|
-
|
$
|
2.67
|
895,000
|
807,500
|
$
|
1.52
|
7.63
|
|||||||||||
|
2.00
|
-
|
2.70
|
450,000
|
450,000
|
2.16
|
1.98
|
|||||||||||||
|
$.75
|
-
|
$
|
2.70
|
1,345,000
|
1,257,500
|
1.73
|
5.74
|
||||||||||||
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 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 values of stock options granted during fiscal 2007,
2006 and 2005 were $.88, $.75 and $.38, respectively. The weighted average
assumptions used in the Black-Scholes option-pricing model were as
follows:
|
|
2007
|
|
2006
|
|
2005
|
|||||
|
Risk-free
interest rate
|
3.97
|
%
|
3.64
|
%
|
3.64
|
%
|
||||
|
Years
until exercise
|
3.00
|
3.00
|
3.00
|
|||||||
|
Volatility
|
41.4
|
%
|
42.9
|
%
|
42.9
|
%
|
||||
|
Dividend
yield
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
||||
|
Termination
rate
|
n/a
|
n/a
|
n/a
|
|||||||
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 was 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 recognizes
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 adoption of SFAS 123R resulted in a non-cash charge of $226,550
and
$377,750 for stock based compensation for the year ended March 31, 2007 and
nine
months ended March 31, 2006, respectively. Such non-cash charge would have
been
the same under the provisions of SFAS 148.
The
Company recorded total stock based compensation costs of $226,550, $397,350
and
$106,400 for the fiscal years ended March 31, 2007, 2006 and 2005, respectively.
F-16
Command
Security Corporation
Notes
to
Financial Statements, Continued March 31, 2007, 2006 and 2005
19.
Income Taxes
Income
tax benefit (expense) for the fiscal years ended March 31 consists of the
following:
|
|
2007
|
|
2006
|
|
2005
|
|||||
|
Current:
|
|
|
|
|||||||
|
Federal
|
$
|
(375,000
|
)
|
$
|
--
|
$
|
--
|
|||
|
State and local
|
(200,000
|
)
|
--
|
--
|
||||||
|
|
(575,000
|
)
|
--
|
--
|
||||||
|
Deferred:
|
||||||||||
|
Federal
|
730,000
|
51,545
|
207,875
|
|||||||
|
State and local
|
295,000
|
14,850
|
59,575
|
|||||||
|
|
1,025,000
|
66,395
|
267,450
|
|||||||
|
Income
tax benefit (expense)
|
$
|
450,000
|
$
|
66,395
|
$
|
267,450
|
||||
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:
|
|
2007
|
|
2006
|
|
2005
|
|||||
|
Statutory
federal income tax rate
|
34.0
|
34.0
|
34.0
|
|||||||
|
State
and local income taxes
|
9.0
|
9.0
|
9.8
|
|||||||
|
Valuation
allowance and reserves
|
(51.4
|
)
|
9.3
|
1.8
|
||||||
|
Permanent
differences
|
9.7
|
(12.3
|
)
|
(4.9
|
||||||
|
Utilization
of net operating loss carryforwards
|
(52.7
|
)
|
--
|
--
|
||||||
|
Effective tax rate
|
(51.4
|
)%
|
40.0
|
%
|
40.7
|
|||||
The
significant components of deferred tax assets and liabilities as of March 31,
2007 and 2006 are as follows:
|
|
2007
|
|
2006
|
||||
|
Current
deferred tax assets:
|
|
|
|||||
|
Accounts receivable
|
$
|
357,501
|
$
|
59,291
|
|||
|
Accrued expenses
|
106,207
|
106,207
|
|||||
|
Contingency reserves
|
4,300
|
55,900
|
|||||
|
|
468,008
|
221,398
|
|||||
|
Valuation
allowance
|
--
|
(189,048
|
)
|
||||
|
Net current deferred tax assets
|
$
|
468,008
|
$
|
32,350
|
|||
|
Non-current
deferred tax assets (liabilities):
|
|||||||
|
Equipment
|
$
|
(55,830
|
)
|
$
|
(70,393
|
)
|
|
|
Intangible assets
|
400,449
|
503,711
|
|||||
|
Self-insurance
|
231,986
|
180,937
|
|||||
|
Workers compensation reserve
|
1,108,879
|
459,016
|
|||||
|
Net operating loss carryover
|
--
|
688,654
|
|||||
|
Income tax credits
|
--
|
84,790
|
|||||
|
Employee stock compensation
|
314,029
|
216,614
|
|||||
|
|
1,999,513
|
2,063,329
|
|||||
|
Valuation
allowance
|
(1,108,676
|
)
|
(1,761,834
|
)
|
|||
|
Net
non-current deferred tax assets
|
890,837
|
301,495
|
|||||
|
Total deferred tax assets
|
$
|
1,358,845
|
$
|
333,845
|
|||
The
valuation allowance decreased by $842,205 and $18,294 during the fiscal years
ended March 31, 2007 and 2006, respectively, and increased by $16,986 during
the
year ended March 31, 2005. 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, 2007
and
2006. Federal net operating loss carryforwards were fully utilized during the
year ended March 31, 2007.
F-17
Command
Security Corporation
Notes
to
Financial Statements, Continued March 31, 2007, 2006 and 2005
20.
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 fiscal year ended March 31, 2005, 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 for the fiscal year ended March 31,
2005.
21.
Subsequent Events
On
April
12, 2007, the Company entered into an Amendment to its Financing Agreement
(the
“Financing Agreement”) with its current lender, The CIT Group/Business Credit,
Inc. (the “Amendment”) in connection with the closing of the transactions (the
“Transactions”) under the Stock Purchase Agreement and the Merger Agreement
described below. Pursuant to the Amendment, the aggregate line of credit under
the Financing Agreement was increased from $12.0 to $16.0 million, and the
Company was provided with a $2.4 million acquisition advance to fund the cash
requirements of the Transactions. The Amendment also provides for an extension
of the maturity date of the Financing Agreement to December 12, 2008, and for
reductions in interest rates, fees and availability reserves and an increase
in
the letter of credit sub-line to an aggregate amount of up to $3.0 million.
Costs to close the Amendment totaled $125,000 payable $45,000 at closing,
$40,000 six months after closing and $40,000 twelve months after closing. Such
costs are being amortized over the remaining life of the Financing
Agreement.
On
April
12, 2007, the Company entered into the Amended and Restated Stock Purchase
Agreement among the Company, Brown Security Industries, Inc., a California
Corporation, (“BSI”), and Hal Brown and Marc Brown (collectively, the
“Shareholders”), individually and as the Trustees of the Rodgers Police Patrol,
Inc./Strategic Security Services, Inc. Employee Stock Ownership Plan and Trust
Agreement (the “ESOP”) (the “Stock Purchase Agreement”), pursuant to which the
Company purchased (the “Stock Purchase”) from the ESOP 30% of the issued and
outstanding shares of common stock (the “Shares”) of BSI for a purchase price
(the “Purchase Price”) of (i) $900,000 plus (ii) 30% of BSI’s consolidated
Tangible Net Worth (as defined in the Stock Purchase Agreement), subject to
adjustment as provided in the Stock Purchase Agreement, and in each case paid
or
payable in cash. The closing of the Stock Purchase occurred immediately prior
to
the closing of the Merger described below.
On
April
12, 2007, the Company entered into the Amended and Restated Agreement and Plan
of Merger by and among the Company, Command Security Services, Inc., a New
York
corporation that is a wholly-owned subsidiary of the Company (“CSS”), BSI, and
the Shareholders (the “Merger Agreement”), pursuant to which BSI merged with and
into CSS (the “Merger”), and BSI’s wholly-owned subsidiaries Rodgers Police
Patrol, Inc. and Strategic Security Services, Inc. became wholly-owned
subsidiaries of CSS. The closing of the Merger was completed immediately after
the closing of the Stock Purchase described above.
Pursuant
to the Merger Agreement, the Company issued to the Shareholders an aggregate
of
(i) $2,100,000 plus (ii) 70% of BSI’s consolidated Tangible Net
Worth
(as
defined in the Merger Agreement),
subject to adjustment as provided in the Merger Agreement (such consideration
is
referred to herein as the “Merger Consideration”). The Company paid 25% of the
Merger Consideration in cash and 75% of the Merger Consideration by the delivery
of shares of the Company’s common stock, valued at a price per share of $2.906,
representing the average closing price of the Company’s common stock on the OTC
Bulletin Board for the five consecutive trading days immediately preceding
the
date that the Merger Agreement was initially executed and delivered by the
parties thereto.
F-18
Command
Security Corporation
Notes
to
Financial Statements, Continued March 31, 2007, 2006 and 2005
22.
Quarterly Results (unaudited)
Summary
data relating to the results of operations for each quarter for the fiscal
years
ended March 31, 2007 and 2006 follows:
|
|
Three
Months Ended
|
||||||||||||
|
|
June
30
|
|
Sept.
30
|
|
Dec.
31
|
|
March
31
|
||||||
|
Fiscal
year 2007
|
|
|
|
|
|||||||||
|
Security
officer service revenue
|
$
|
22,210,245
|
$
|
23,822,667
|
$
|
24,002,844
|
$
|
23,465,144
|
|||||
|
Administrative
service revenue
|
95,649
|
88,021
|
89,923
|
48,053
|
|||||||||
|
Total revenue
|
22,305,894
|
23,910,688
|
24,092,767
|
23,513,197
|
|||||||||
|
Gross
profit
|
3,223,570
|
3,426,577
|
3,809,192
|
3,205,893
|
|||||||||
|
Net
income
|
204,325
|
174,788
|
225,341
|
635,585
|
|||||||||
|
Net
income
|
|||||||||||||
|
per
common share (basic)
|
0.02
|
0.02
|
0.02
|
0.06
|
|||||||||
|
per
common share (diluted)
|
0.02
|
0.02
|
0.02
|
0.06
|
|||||||||
|
Fiscal
year 2006
|
|||||||||||||
|
Security
officer service revenue
|
20,816,042
|
21,844,720
|
21,316,977
|
20,880,241
|
|||||||||
|
Administrative
service revenue
|
92,595
|
88,127
|
86,587
|
83,326
|
|||||||||
|
Total revenue
|
20,908,637
|
21,932,847
|
21,403,564
|
20,963,567
|
|||||||||
|
Gross
profit
|
2,722,081
|
3,139,834
|
2,952,171
|
2,606,273
|
|||||||||
|
Net
income (loss)
|
250,182
|
(278,474
|
)
|
301,147
|
(372,450
|
)
|
|||||||
|
Net
income (loss)
|
|||||||||||||
|
per
common share (basic)
|
0.03
|
(0.03
|
)
|
0.03
|
(0.04
|
)
|
|||||||
|
per
common share (diluted)
|
0.03
|
n/a
|
0.03
|
(0.04
|
)
|
||||||||
The
second quarter 2006 includes an additional provision for bad debts of $850,000
related to the filing by Delta Air Lines and Northwest Airlines of voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code.
The
fourth quarter 2006 loss includes: (i) approximately $560,000 of professional
fees related to the Company entering into a consulting agreement with Giuliani
Security & Safety LLC, a leading security consulting firm and (ii) a
non-cash charge for recognition of stock-based compensation cost in the amount
of $174,620 (net of tax benefit).
F-19
Schedule
II
COMMAND
SECURITY CORPORATION
SCHEDULE
OF VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
Against
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
Additions
|
|
Amounts
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
(Reductions)
|
|
Due
to
|
|
|
|
|
|
|
|
||||||
|
|
|
Balance
at
|
|
Charged
or
|
|
Administrative
|
|
Charged
|
|
Deductions
|
|
Balance
|
|
||||||
|
|
|
Beginning
|
|
Credited
to
|
|
Service
|
|
to
Other
|
|
from
|
|
at
End of
|
|
||||||
|
|
|
of
Period
|
|
Expenses
|
|
Clients
|
|
Accounts
|
|
Reserve
|
|
Period
|
|||||||
|
Year
ended March 31, 2007:
|
|||||||||||||||||||
|
Deducted
from asset accounts:
|
|||||||||||||||||||
|
Allowance
for
|
|||||||||||||||||||
|
doubtful
accounts
|
|||||||||||||||||||
|
receivable
- current
|
|||||||||||||||||||
|
maturities
|
$
|
332,892
|
$
|
214,889
|
$
|
126,386
|
$
|
187,979
|
$
|
(30,749
|
)
|
$
|
831,397
|
||||||
|
Year
ended March 31, 2006:
|
|||||||||||||||||||
|
Deducted
from asset accounts:
|
|||||||||||||||||||
|
Allowance
for
|
|||||||||||||||||||
|
doubtful
accounts
|
|||||||||||||||||||
|
receivable
- current
|
|||||||||||||||||||
|
maturities
|
301,465
|
1,158,182
|
53,960
|
(16,901
|
)
|
(1,163,814
|
)
|
332,892
|
|||||||||||
|
Year
ended March 31, 2005:
|
|||||||||||||||||||
|
Deducted
from asset accounts:
|
|||||||||||||||||||
|
Allowance
for
|
|||||||||||||||||||
|
doubtful
accounts
|
|||||||||||||||||||
|
receivable
- current
|
|||||||||||||||||||
|
maturities
|
361,865
|
221,231
|
(52,800
|
)
|
(17,185
|
)
|
(211,646
|
)
|
301,465
|
||||||||||
|
Allowance
for
|
|||||||||||||||||||
|
billing
adjustments
|
965,373
|
(965,373
|
)
|
--
|
|||||||||||||||
See
auditor's report
End
of Filing
F-20