FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ______
Commission File Number 0-18684
COMMAND SECURITY CORPORATION
----------------------------
(Exact name of registrant as specified in its charter)
New York 14-1626307
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Lexington Park, Lagrangeville, New York 12540
- --------------------------------------- -----
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 454-3703
-------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_]
<PAGE>
As of September 10, 1996, the aggregate market value of the voting
stock held by non-affiliates of the registrant, based on the last sales price
$1.875 on that date, was approximately $8,963,334.
As of September 10, 1996 the registrant had issued and outstanding
6,936,706 shares of Common Stock.
<PAGE>
PART III
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended March 31,
1996, all plan and non-plan compensation paid to, earned by, or awarded to
William C. Vassell, Chairman of the Board, H. Richard Dickinson, Executive Vice
President and Chief Financial Officer, Gordon Robinett, Vice Chairman of the
Board and Treasurer and Eugene U. McDonald, Senior Vice President - Operations,
as well as John B. Goldsborough who served as the Company's President and Chief
Executive Officer from February 24, 1995 until May 1, 1995, when he resigned
from the Company to pursue other interests. No other executive officer of the
Company received total annual salary and bonus in excess of $100,000 for the
fiscal year ended March 31, 1996, and, therefore, compensation for such other
executive officers is not disclosed.
In December of 1993, William C. Vassell pledged 510,000 of his Shares
to ISS in connection with the Company's acquisition of certain security guard
assets from ISS. Mr. Vassell pledged said Shares as additional collateral to
secure the Company's $1.0 million in promissory notes to ISS for the balance of
the purchase price of the ISS security guard assets. Pursuant to an
indemnification agreement between Mr. Vassell and the Company, the Company has
agreed to indemnify Mr. Vassell for any liability, loss or expense incurred by
him as a result of his pledge of Shares. Furthermore, the Company has issued a
warrant for 500,000 Shares in consideration of Mr. Vassell's undertaking to
pledge his personal holdings as security for the Company's obligations to ISS.
The Company is in default on the $500,000 payments due to ISS on each of March
31, 1995 and October 27, 1995. While ISS has not exercised its right to
foreclose on the pledged shares it has the right to do so at any time that the
default is continuing. The Company believes that ISS has breached certain
provisions of the various agreements associated with the acquisition of the ISS.
The Company and ISS are engaged in negotiations to resolve these issues. The
warrant expires in December of 1998 and is exercisable at $3.75 per share, the
fair market value of the Company's common stock as of the date of issuance of
the warrant. In connection with the United Acquisition and pursuant to the
Placement Agent Agreement dated February 24, 1995 between the Company and Sands
Brothers, Mr. Vassell agreed to reduce the number of shares covered by the
Warrant to 225,000.
(Balance of Page Intentionally Left Blank)
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
FOR THE FISCAL YEAR ENDED 3/31/96
Annual Compensation Long-Term Compensation
Other Annual Shares Underlying
Name and Principal Position Fiscal Year Ended Salary Warrants Shares Underlying
-------- March 31 Annual Salary Compensation Bonus Granted Repriced Warrants
----------------- ------------- ------------ ----- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
William C. Vassell (1)
Chairman of the Board 1994 $117,692 $12,540 (3) 0 500,000 (4) 300,000 (5)
1995 $152,885 (2) 0 0 0
1996 $150,000 (2) 0 0 0
H. Richard Dickinson 1996 $131,593 (2) 0 0 0
Chief Financial Officer
Executive Vice-President
Gordon Robinett 1994 $ 81,538 (2) 0 0 227,500 (6)
Vice Chairman 1995 $101,923 (2) 0 0 0
of the Board and Treasurer 1996 $100,000 (2) 0 0 0
Eugene U. McDonald 1994 $ 69,577.00 (2) 0 15,000 (7) 0
Senior Vice-President - 1995 $ 78,172.72 (2) 0 0 0
Operations 1996 $ 88,461.76 (2) 15,000 0 0
John B. Goldsborough (8) 1996 $ 3,331.00 0 0 0 0
President, Chief Executive
Officer
</TABLE>
(1) As of March 31, 1995, Mr. Vassell held a total of 961,950 shares and
warrants for 525,000 shares of the Company's common stock. He resigned as
President and Chief Executive Officer on February 24, 1995.
(2) All perquisites and other personal benefits, securities or property do not
exceed 10% of the total annual salary and bonus of the executive officer.
(3) Includes auto allowance of $9,840.
(4) The exercise price of $3.75 per share was the market value of the
Company's shares on the date of grant. Reduced to 225,000 shares as of
approximately March 31, 1995.
(5) Includes repricing of the 175,000 and 125,000 shares covered by the
warrants issued in 1992 and 1993, respectively.
(6) Includes repricing of the: 107,500 shares issued on January 19, 1991, with
exercise price at market value of $5.00 and reduced to market value of
$3.25 as of August 16, 1993; 60,000 shares issued on April 8, 1991, with
exercise price at market value of $3.375 and reduced to market value of
$3.25 as of August 16, 1993; and 60,000 shares issued on May 15, 1992,
with exercise price at market value of $3.88 and reduced to market value
of $3.25 as of August 16, 1993.
(7) The exercise price of $2.25 per share was the market value of the
Company's shares on the date of grant, December 27, 1994.
(8) On February 24, 1995 the Company retained the services of John B.
Goldsborough, the former president and chief executive officer of United,
to serve the Company in the same capacity. On May 1, 1995 Mr. Goldsborough
resigned to pursue other interests. The Board has not named a replacement
for Mr. Goldsborough.
<PAGE>
Stock Options/Warrants
The following table sets forth information with respect to all stock
option and warrant grants made during the last fiscal year to the Company's
Chief executive officer and to each of the Company's executive officers whose
total annual salary and bonus exceeded $100,000. There were no tandem or free
standing stock appreciation rights granted to any person during the fiscal year
shown.
OPTIONS/WARRANTS GRANTED IN LAST FISCAL YEAR (1)
FOR FISCAL YEAR ENDED 3/31/96
<TABLE>
<CAPTION>
Potential Realizable
% of Total Options Value
Shares Underlying Granted To all 0% 5% 10%
Name Warrants Granted Employees Exercise Price Expiration Date --------------------
- ---- ---------------- --------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
William C. Vassell None
Chairman of the Board(2)
H. Richard Dickinson None
Chief Financial Officer
Executive Vice-President
Gordon Robinett None
Vice Chairman of the
Board and Treasurer
Eugene U. McDonald None
Senior Vice-President -
Operations
John B. Goldsborough None
President, Chief
Executive Officer(3)
</TABLE>
(1) No options were exercised by executive officers during the fiscal year
ended March 31, 1996.
(2) Mr. Vassell resigned as President and Chief Executive Officer on February
24, 1995.
(3) On February 24, 1995 the Company retained the services of John B.
Goldsborough, the former president and chief executive officer of United,
to serve the Company in the same capacity. On May 1, 1995 Mr. Goldsborough
resigned to pursue other interests. The Board has not named a replacement
for Mr. Goldsborough.
<PAGE>
The following table sets forth the information for the fiscal year
ended March 31, 1996, with respect to each exercise of stock options and
warrants, and the fiscal year end value of unexercised options and warrants for
the Company's chief executive officer and each of the Company's executive
officers whose total annual salary and bonus exceed $100,000. There were no
tandem or free stock appreciation rights outstanding.
March 31, 1996
OPTION/WARRANT VALUES
<TABLE>
<CAPTION>
Number of Shares Underlying Value of Unexercised in-the-money
Warrants Outstanding (1) Options at 3/31/96 (2)
Name Exercisable Exercisable
- ---- ----------- -----------
<S> <C> <C>
William C. Vassell 225,000 (3) $ 0
Chairman of the Board (4) 175,000 $ 0
125,000 $ 0
H. Richard Dickinson None $ 0
Chief Financial Officer
Executive Vice-President
Gordon Robinett 227,500 $ 0
Vice Chairman of the
Board and Treasurer
Eugene U. McDonald None $ 0
Senior Vice-President - Operations
John B. Goldsborough(5)
President, Chief Executive Officer
</TABLE>
(1) No warrants were exercised by executive officers during the fiscal year
ended March 31, 1996.
(2) Values based on the $1.25 closing sales price of the Company's common
stock on March 31, 1996.
(3) Originally 500,000 reduced to 225,000 as of approximately March 31, 1995.
Mr. Vassell reduced his warrants to minimize the dilution to shareholders
that resulted from the issuances that were consummated in February, 1995
in connection with the acquisition of the security guard assets of United
Security Group Inc.
(4) Mr. Vassell resigned as President and Chief Executive Officer on February
24, 1995.
(5) On February 24, 1995 the Company retained the services of John B.
Goldsborough, the former president and chief executive officer of United,
to serve the Company in the same capacity. On May 1, 1995 Mr. Goldsborough
resigned to pursue other interests. The Board has not named a replacement
for Mr. Goldsborough.
<PAGE>
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company's Compensation Committee makes all recommendations related
to compensation issues with respect to executive officers and is comprised of
William C. Vassell, Peter T. Kikis and Steven B. Sands. While Mr. Vassell will
participate in decisions relating to compensation for executive officers, he
will not vote on matters relating to his own compensation. Likewise, none of the
directors or executive officers serve on the Compensation Committee of any other
entity with the exception of Gordon Robinett who serves on the Compensation
Committee of Uniforce Services, Inc. None of the other members of the Company's
Board of Directors are an officer, director or employee of Uniforce Services,
Inc.
Employment Agreements and Warrants and Termination of Employment and Change of
Control Agreements
The Company has entered into employment agreements with Messrs. Vassell
and Robinett. These agreements were amended in April of 1991 and were amended
and restated in June of 1991. In September 1992, the terms of these agreements
were extended for two years to July 19, 1996, and were further amended as of
February 24, 1995, to extend the terms to July 19, 2000.
Pursuant to his employment agreement, as amended as of February 24,
1995, Mr. Vassell serves as Chairman of the Board of the Company and is entitled
to an annual salary of $150,000. Mr. Vassell is also entitled to an annual bonus
equal to 5% of the Company's pre-tax profit for each fiscal year exclusive of
(a) capital gains and losses; (b) the annual bonus; and (c) federal state and
local income and franchise taxes for that year ("Pre-Tax Operating Profit") from
$.5 million to $1.0 million, and 2% of all additional Pre-Tax Operating Profit
in excess of $1.0 million and is provided with the use of a Company-owned
automobile and reimbursement for automobile insurance and operating expenses.
Also pursuant to the employment agreement, Mr. Vassell was awarded a warrant to
purchase 175,000 Shares of Common Stock at a price of $3.375 per Share,
exercisable on or after March 31, 1992.
Pursuant to his employment agreement, as amended and restated, Mr.
Robinett serves as Vice Chairman and Treasurer of the Company at an annual
salary of $100,000. He is also entitled to an annual bonus equal to 5% of the
Company's Pre-Tax Operating Profit for each fiscal year from $.5 million to $1.0
million, and 1% of all additional Pre-Tax Operating Profit in excess of $1.0
million. His employment agreement also provided Mr. Robinett a non-qualified,
non-forfeitable five year stock option to purchase 107,500 Shares at a price of
$5.00 per Share, a warrant to Purchase 60,000 Shares at a price of $3.375 per
Share and a five-year warrant to purchase 75,000 Shares at a price of $6.00 per
Share. The 75,000 Share warrant was cancelled as a result of certain financial
goals not being met for the fiscal year ended March 31, 1992.
In May, 1992 in recognition of sales and profit achievements for fiscal
1992, the Board of Directors issued to Mr. Vassell a five year warrant to
purchase 125,000 Shares at an exercise price of $3.88 per Share and issued to
Mr. Robinett a five year warrant to purchase 60,000 Shares at an exercise price
of $3.88 per Share. Also in May 1992, as an incentive for outside directors, the
Board of Directors issued to Peter J. Nekos a five year
<PAGE>
warrant to purchase 10,000 Shares at an exercise Price of $3.88 per Share. The
exercise price of the foregoing warrants was the market value on the date of
grant.
In recognition of certain voluntary salary reductions by Messrs.
Vassell and Robinett during 1993, and the contributions of Mr. Nekos, the Board
of Directors authorized the extension of Mr. Robinett's option and all of
Messrs. Vassell's, Robinett's and Nekos' outstanding warrants by two years and
the adjustment of the exercise prices under all of their warrants and option to
$3.25, the fair market value of the Company's stock as of August 16, 1993 (the
date of the extension).
In September of 1992, the Company entered into a Compensation
Continuation Agreement with Mr. Vassell in consideration for his agreement to
extend the term of his employment for two years. This Agreement provides that,
if, within specified periods of a Change of Control of the Company (as defined
in the Agreement) Mr. Vassell's employment is terminated by the Company without
Cause (as defined in said Agreement), or if Mr. Vassell terminates his
employment for Good Reason (as defined in the Agreement), Mr. Vassell will be
paid 2.99 times the greater of his annual compensation as in effect on the date
of the Agreement or the highest annual compensation for any of the three years
preceding the termination. All awards previously granted under any performance
incentive plan, the actual payment of which may be deferred, will be vested as a
result of the Change of Control and all options and warrants held by Mr. Vassell
will become immediately exercisable. Currently, the aggregate amount payable to
Mr. Vassell upon his termination in the event of a change in control would be
2.99 times his total compensation of $150,000 for the fiscal year ended March
31, 1996, or approximately $448,500.
In connection with the acquisition of the ISS security guard assets in
October of 1993, Mr. Vassell pledged 510,000 of his own Shares as collateral for
the Company's promissory note for $1.75 million to ISS in escrow. The Company
has compensated Mr. Vassell for, among other things, making said pledge by
issuing him a five-year Warrant for 500,000 Shares with an exercise price of
$3.75. On or about March 31, 1996, Mr. Vassell agreed to reduce to 225,000 the
number of Shares covered by such Warrant. In addition, the Company has entered
into an indemnification agreement with Mr. Vassell providing that in the event
the collateral he has pledged to ISS is sold upon the Company's default, he will
be reimbursed by the Company for the number of Shares so sold. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and Note 13 to "Notes to
Financial Statements".
The Company contemplates entering into an employment agreement with Mr.
Dickinson. Said agreement is currently being negotiated. His employment is
currently at will.
Other than pursuant to the Employment Agreements for Messrs. Vassell,
Robinett and Dickinson, the Compensation Continuation Agreement for Mr. Vassell
and the Severance Agreement with Mr. Goldsborough (see "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS"), there is no compensation plan or arrangement for the
benefit of any person named in the Summary Compensation Table that would result
from the resignation, retirement or other termination of such person's
employment.
<PAGE>
Other than the compensation described above, there are no long term
incentive plans for the persons named in the Summary Compensation Table.
Furthermore, the Company does not have a pension plan.
Limited Directors' Liability
Pursuant to the New York Business Corporation Law, the Company's
Certificate of Incorporation, as amended, eliminates to the fullest extent of
such Law the liability of the Company's Directors, acting in such capacity, for
monetary damages if they should fail through negligence or gross negligence to
satisfy their duty of exercising proper business judgment in discharging their
duties, but not for acts or omissions in bad faith, or involving intentional
misconduct or amounting to a knowing violation of law or under other limited
circumstances.
<PAGE>
BOARD REPORT ON EXECUTIVE COMPENSATION
The foregoing report has been submitted by the Company's board of
directors. No director has dissented to any information contained herein.
William C. Vassell
Gordon Robinett
H. Richard Dickinson
Gregory J. Miller
Peter J. Nekos
Peter T. Kikis
Steven B. Sands
Lloyd H. Saunders, III
The Compensation Committee determines compensation for other management
personnel based on its understanding of the market rate for similar positions in
an effort to attract and retain qualified personnel. Raises are granted based on
performance.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
Other than as disclosed above relating to the amendments to Messrs.
Vassell's and Robinett's employment agreements, the Company's Compensation
Committee advises the board on all matters related to compensation issues with
respect to executive officers and is currently comprised of William C. Vassell,
Peter T. Kikis and Steven B. Sands. While Mr. Vassell and Mr. Robinett may
participate in discussions and/or decisions relating to compensation for
executive officers, neither of them will vote on matters relating to his own
compensation. None of the directors or executive officers serve on the
Compensation Committee of any other entity with the exception of Gordon Robinett
who serves on the Compensation Committee of Uniforce Services, Inc. None of the
other members of the Company's board of directors are an officer, director or
employee of Uniforce Services, Inc.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
In May 1992, as an incentive for outside directors, the board of
directors issued to Peter J. Nekos a five-year Warrant to purchase 10,000 shares
at an initial exercise price of $3.88 per share, the fair market value on the
date of grant. In recognition of Mr. Nekos' contributions to the Company, in
August 1993, the board of directors authorized the extension of Mr. Nekos'
outstanding Warrant by two years and reduced the purchase price to $3.25 per
share, the fair market value on the date of the extension.
<PAGE>
Comparison of Five Year-Cumulative Total Returns
Performance Graph for
COMMAND SECURITY CORPORATION
Produced on 09/10/96 including data to 03/29/96
[The following table was represented as a line graph in the printed material]
<TABLE>
<CAPTION>
LEGEND
CRSP Total Returns Index for: 3/28/91 3/31/92 3/31/93 3/31/94 3/31/95 3/31/96
- ---------------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
COMMAND SECURITY CORPORATION 100.0 133.3 93.3 101.7 51.7 33.3
NASDAQ Stock Market (US Companies) 100.0 127.5 146.5 158.1 175.9 238.8
NASDAQ Stocks (SIC 7380-7389 US Companies) 100.0 106.9 85.2 79.0 89.9 190.2
Miscellaneous Business Services
</TABLE>
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day issued.
D. The index level for all series was set to $100.0 on 03/28/91.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K/A
13.1 Annual Report E-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Lagrangeville, State of New York, on September 11, 1996.
COMMAND SECURITY CORPORATION
BY:/s/ William C. Vassell
------------------------------
WILLIAM C. VASSELL
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William C. Vassell Chairman of the September 11, 1996
-------------------------- Board of Directors
William C. Vassell (Principal Executive
Officer)
/s/ Gordon Robinett Director September 11, 1996
--------------------------
Gordon Robinett
/s/ H. Richard Dickinson Executive Vice September 11, 1996
-------------------------- President, Director
H. Richard Dickinson and Chief Financial
Officer (Principal
Financial Officer)
/s/ Gregory J. Miller Director September 11, 1996
--------------------------
Gregory J. Miller
/s/ Peter J. Nekos Director September 11, 1996
--------------------------
Peter J. Nekos
/s/ Steven B. Sands Director September 11, 1996
--------------------------
Steven B. Sands
/s/ Peter T. Kikis Director September 11, 1996
--------------------------
Peter T. Kikis
/s/ Lloyd H. Saunders, III Director September 11, 1996
--------------------------
Lloyd H. Saunders, III
COMMAND SECURITY
CORPORATION
[Logo] CSC
[Photograph]
1996
ANNUAL
REPORT
<PAGE>
ABOUT THE COMPANY
- -----------------
Command Security Corporation is one of the fastest growing companies in the
security service business today. The Company relies heavily on innovative and
proprietary technology to deliver the highest level of security services for a
wide range of corporate and institutional clients. We further differentiate
ourselves by our dedication to meticulous personnel selection and training,
which results in the high quality standards of our people for which Command
Security has become known.
Command Security's four major Divisions will be discussed in detail below.
The past year was one in which the acquisition of United Security Group
substantially increased the size of the Company. Senior management's objective
was to provide an environment in which each Division executive has the authority
to manage his respective operation with considerable autonomy while conforming
to a high standard of corporate responsibility and profitability. We continue to
look for ways to streamline overall operations and to increase returns.
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
Statement of Operations Data
Years Ended March 31,
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Revenue (excluding service company revenue) $ 54,995,444 $ 39,595,272 $ 25,393,933
Gross profit 8,496,499 4,527,365 2,914,928
Service contract revenue 1,519,803 1,291,943 1,022,684
Operating profit (loss) 1,250,713 (2,412,603) (2,227,936)
Net income (loss) 511,650 (2,983,823) (2,727,102)
Income (loss) per common share - primary .06 (.70) (.96)
Weighted average number of common
shares outstanding - primary 6,663,986 4,274,657 2,827,297
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data as of March 31,
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Working capital (deficiency) $ 218,968 $ (531,602) $ (772,143)
Total assets 22,384,414 20,267,099 17,733,634
Redeemable convertible preferred stock 1,614,525 1,495,065
Stockholders' equity 5,189,226 4,993,859 5,135,744
</TABLE>
REVENUE
in millions
[The following table was represented as a bar graph in the printed material]
94 95 96
- ----- ----- -----
$25.4 $39.6 $54.9
TOTAL ASSETS
in millions
[The following table was represented as a bar graph in the printed material]
94 95 96
- ----- ----- -----
$17.7 $20.3 $22.4
STOCKHOLDERS'
EQUITY
in millions
[The following table was represented as a bar graph in the printed material]
94 95 96
- ----- ----- -----
$5.1 $5.0 $5.2
1
<PAGE>
TO OUR SHAREHOLDERS:
- --------------------
We are happy to report that fiscal 1996 was a year of considerable
corporate activity and financial progress. Revenues increased by 39% to $55.0
million compared to $39.6 million in fiscal 1995. We reported net income of
$512,000 in fiscal 1996 compared to a net loss of $3.0 million registered in the
prior year. Earnings before interest, taxes, depreciation and amortization
(EBITDA) was $2,812,000, a sharp improvement from a loss of $1,441,000 recorded
in fiscal 1995. Contributing significantly to Command's profit rebound were the
results from the United Security Group, whose assets were acquired in February,
1995. This was the first full year USG was under our management and we were able
to realize considerable cost savings from operational efficiencies.
EBITDA
in millions
[The following table was represented as a bar graph in the printed material]
94 95 96
- ----- ----- -----
- -$1.5 -$1.4 $2.8
Operating expenses rose by just 6.5% in fiscal 1996, reflecting our cost
reduction efforts as well as a drop in professional fees, the result of
resolving several disputes that were in litigation.
We will continue to seek overhead cost savings as we assimilate United's
operations. However, we will also look to enhance revenues by aggressively
marketing the wider scope of services that United brought to Command. United's
Aviation Security Division, which in its first year with the Company accounted
for 25% of total revenue, places the Company in an important position in this
critical security market and provides us with a platform from which to expand
internationally.
A key element in Command Security's business plan is our industry
consolidation strategy. We look for "stand-alone" opportunities, typically with
larger firms, as was the case of United Security, that can bring us into new,
growth markets, as we did with both aviation security and private investigation.
We also look for "fold-in" acquisitions, which we can readily absorb into our
own operations with little or no additional fixed cost. We completed two such
"fold-ins" during the past year. We target markets, either from a geographic or
service standpoint, in which we believe we have a strong competitive or a niche
position. We enjoy a strong capability to accomplish "fold-ins." Given our
extensive experience providing turn-key back office and scheduling services to
independent security companies through our COMGUARD Servicing Agreements, we
have the infrastructure and capacity to handle such transactions seamlessly. We
will also exit a market if these criteria are not met. Accordingly, after a
review of the market and our competitive position, we sold our Boston office
last year. Management is constantly monitoring the Company's acquisition
strategy in order ensure that our decisions add to shareholder value.
Command Security enters fiscal 1997 a stronger company by several measures.
In addition to our documented financial improvement, we have strengthened our
management team by the addition
2
<PAGE>
of many talented security industry professionals, many of whom joined Command
from United Security. Moreover, in the past two years, we have more than doubled
the number of security guards we employ, from 1,750 to 3,800.
We continue to invest our resources in technology to maintain a competitive
edge in operations, product development and interactive training programs.
The security industry is a $6.5 billion business comprised of some 13,500
firms. Three "conglomerates" account for approximately 37% of total annual
revenues, while 37 national firms, such as Command account for about 35% of the
market. There are more than 13,400 smaller firms which represent a little less
than 30% of the market. We like the position we occupy as a leading national
firm. We believe our size enables us to be more innovative and more responsive
to the specific needs of our customers than the industry giants. On the other
hand, we possess the critical mass of stable client contracts to continue to
grow in our focused markets and to provide unique, technology-driven services.
And, we are large enough to implement successfully our acquisition strategy to
participate in the consolidation of this fragmented industry.
We are grateful to our loyal employees and customers for enabling Command
Security to pursue the exciting growth strategy we have planned. We wish to
thank our shareholders for their continued confidence and support in our
efforts. Sincerely,
/s/ William C. Vassell
William C. Vassell
Chairman of the Board
July 8, 1996
[Photograph of H. Richard Dickinson, Executive Vice President and Chief
Financial Officer, Gordon Robinett, Vice Chairman, Eugene McDonald, Senior Vice
President, Debra Miller, Corporate Secretary, William Vassell, Chairman of the
Board]
standing left to right:
H. Richard Dickinson,
Executive Vice President and
Chief Financial Officer,
Gordon Robinett,
Vice Chairman,
Eugene McDonald,
Senior Vice President,
seated left to right:
Debra Miller,
Corporate Secretary William
Vassell
Chairman of the Board
3
<PAGE>
GUARD SERVICES
- --------------
This Division represents the largest segment of Command Security's
operations, accounting for approximately 72% of total revenue. It includes the
traditional uniformed and plainclothes guards, security system console
operators, crowd control and special events personnel, vehicle and traffic
control and visitor control and parcel inspection services. Command Security's
guards are trained and prepared to respond to emergency situations such as
natural disasters, fires, accidents and medical crises, as well as to handle the
more traditional security tasks including access control and theft prevention.
The Company has also created a pro-active security program for labor unrest
called Strike Team for Occupational Protection(TM) or S.T.O.P.(TM). S.T.O.P.(TM)
preventive services include pre-strike analysis and security surveys designed to
assist managements in their planning and preparation for possible labor
disturbances. In the event of an actual or threatened dispute, S.T.O.P.(TM)
services include security officers specially trained to deal with access
control, executive protection, fire prevention, theft and vandalism. In
addition, there are documentation teams that collect evidence to support pleas
for restraining orders, injunctions and other legal actions. There is also a
Technical Services Unit that uses surveillance counter measures to assure
confidentiality of customer communications during strikes or sensitive
negotiations.
The Company analyzes each prospective customer's location and particular
security needs prior to recommending an appropriate security program. This
typically involves a review of the customer's physical layout, lighting, visitor
controls, electronic alarm reporting systems, safety, emergency and personnel
and vehicle identification procedures.
At Command Security we place enormous value on employee recruitment and
training. Applicants for guard positions undergo extensive background screening,
testing and interviews and are ultimately selected based on maturity, physical
fitness, experience, stability and reliability. Training is equally as
demanding. Accepted applicants undergo three phases of comprehensive,
multi-media training. Pre-assignment training topics include report writing,
personal appearance, law and ethics, regulations, search and seizure and
emergency procedures and the duties and powers of security guards. On-the-Job
assignment training covers the specific duties as required by the post and
customer needs. Refresher training is on-going, provided at the discretion of
local area supervisors. The Company developed STAIRS(TM) (Security Training And
Information
[Photograph]
- --------------------------------------------------------------------------------
Quality employees
Command Security carefully screens each applicant. We remain committed to
individuals who demonstrate the skills necessary for only the best in
performance.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Superior Training
Command Security has invested in state-of-the art multimedia training software.
This interactive program can be customized to each client's needs. Our guards
are better prepared for every possible circumstance.
- --------------------------------------------------------------------------------
Reference System), which is a state-of-the-art, interactive, multi-media
training and support service system. This technology enables the Company to
train it's own personnel as well to provide an "outsource" option for customers.
STAIRS(TM) technology enables training programs to be either generalized or
customer-specific and has proven successful in increasing comprehension and
retention of instructional materials. Its internal feedback system enables
managers to measure and document each guard's learning process.
The Security Guard Division is structured on a decentralized basis,
operating out of fourteen locations in New York, New Jersey, Connecticut,
Florida, Illinois and California. Offices are typically established in urban
markets in which there is concentration of businesses and institutions likely to
require security services. Management looks for niche markets which offer a
combination of attractive business opportunities and a reasonable competitive
atmosphere. This decentralized structure also enables supervisory personnel to
maintain close contact with customers, in both the initial program development
stage and on an on-going basis to provide a high level of customer service and
support.
The scheduling of guards is a most critical function of every security
company. Command Security developed a proprietary computerized scheduling and
management information system called COMGUARD(TM). This system not only reduces
the time our managers would typically spend scheduling daily guard hours, it
automatically matches guards to meet our customer's requirements and
specifications. It also handles all "back-office" functions, further reducing
the time needed for administrative matters. This means our regional managers
have more time to spend on customer service issues and marketing.
[4 Photographs]
5
<PAGE>
- --------------------------------------------------------------------------------
Value added
The use of Safe Passage(TM) is a good illustration of management's operating
strategy of providing value-added service delivered by a top-of-the-industry
security force trained with the most advanced technology available.
- --------------------------------------------------------------------------------
AVIATION SERVICES
- -----------------
This Division, which accounted for 25% of revenues in fiscal 1996, provides
specialized security and corollary support services for the air transport
industry. Aviation Safeguards was a key factor in the 1995 acquisition of United
Security Group. Services provided include Preboard Passenger Screening, Positive
Baggage Claim Security, Skycap Service and Wheelchair Escorts, Curbside and Air
Cargo Security. Recent events have drawn considerable attention to aviation
security. At most European airports, stringent security services, including
passenger and cargo screening, are mandated by local authorities who require the
airlines to provide such services. Specialists such as Aviation Safeguards are
typically brought in to provide these services. We think enhanced federal
security programs at US airports could evolve along the lines of this European
experience, which could ultimately lead to increased business opportunities for
the Company. Once again, the use of leading edge technology as well as exacting
standards for personnel selection and training set our services apart. Aviation
Safeguards serves fifty-eight domestic and international air carriers, operating
from John F. Kennedy International Airport and Los Angeles International
Airport.
In 1990, Aviation Safeguards began using a training and certification
program called Safe Passage(TM) for preboard security screeners. Safe
Passage(TM) is a computer-based, interactive learning system that puts a trainee
through a battery of twenty four tests to prepare him or her to recognize
unlawful or dangerous items going through an x-ray machine. Since its
installation at both airports, Safe Passage(TM) has dramatically increased the
operating performance and detection efficiency of Aviation Safeguards' passenger
and baggage screening services. The use of Safe Passage(TM) is a good
illustration of management's operating strategy of providing value-added service
delivered by a top-of-the-industry security force trained with the most advanced
technology available.
Another example of technology-based, value-added service is SmartWheel(TM).
This is a proprietary management system that schedules, tracks and monitors
wheelchair escort services in airport terminals. The Company also provides a
comprehensive Wheelchair Training and Customer Service Program for handling
disadvantaged personnel to comply with the Americans with Disabilities Act.
[2 Photographs]
6
<PAGE>
INVESTIGATIVE SERVICES
- ----------------------
This is Command Security's loss prevention and investigation arm. The
Management Services Division provides fraud audits, insurance claims and
recovery work, substance abuse, theft and arson investigations, undercover and
surveillance operations, background checks, pre- and post-acquisition due
diligence and in-store detective programs. This Division, which accounted for
.5% of 1996 revenue, also provides security consulting services for threat
assessment and risk analysis, physical security and controls auditing, loss
prevention analysis and security systems planning and design. Its customers are
businesses and institutions, including hospitals.
Management Services rounds out Command Security's product line with its
focus on white collar crime investigations and has stepped up its marketing
efforts to existing Company clients. Another marketing initiative has identified
a growing need by retailers and supermarkets for undercover store detectives.
Unlike traditional investigative work which has a finite term, this has the
potential of being a recurring source of revenue. Management Services has a
unique ability to tap a national network of specialized technical, investigation
professionals to respond to a wide variety of customer demands.
[2 Photographs]
- --------------------------------------------------------------------------------
Unique Ability
Management Services has a unique ability to tap a national network of
specialized technical, investigation professionals to respond to a wide variety
of customer demands.
- --------------------------------------------------------------------------------
<PAGE>
BACK OFFICE SERVICES
- --------------------
This Division, which accounted for 2.5% of 1996 revenues, capitalizes on
Command Security's COMGUARD(TM) program to provide computerized scheduling,
information and administrative systems to independent security companies. Having
begun this activity in 1990, Command Security currently has eleven clients. By
providing clients turn-key back office support, they are freed from the
administrative burdens of running their companies. There are additional benefits
as well, such as more favorable insurance coverage and rates and accounts
receivable financing. Command Security charges a fee equal to a percentage of
the service client's revenue, in exchange for enabling these companies to reduce
their general and administrative expenses and to free up the owners to
concentrate on expanding their business.
These service agreements have helped the Company offset the cost of
developing the COMGUARD(TM) program. They have also enabled Command Security to
reach out to smaller security operations across the country. This has several
advantages. First, it diversifies the Company's revenue stream by geographic
region, which reduces the exposure to individual markets. Also, it provides the
Company with a source of regional and market intelligence, providing helpful
input on a variety of issues. And finally, it introduces Command Security to
private companies whose management may ultimately conclude that a brighter
future exists as a part of a larger operation.
Our back-office staff possesses broad based knowledge of service-related
issues, an understanding of law-enforcement and contractual requirements, a
history of innovative programming and proven ability to respond effectively to
meet changing service needs. This has established our outstanding track record
as evidenced by the excellent ratings CSC receives from our service agreement
clients.
In November, Command Security Corporation was pleased to announce that it
had signed it's first back office service agreement for special duty police work
in Stamford, Connecticut. We are excited about the opportunity of working with
the Stamford Police Department, assisting them with out-sourcing their
back-office services for their special duty work for local businesses and
residents.
Command Security is a member of the International Association of Chiefs of
Police and attends the national conference as an exhibitor annually. We
anticipate a rapid expansion in our Special Duty Police Service Agreement client
base with this key association. An affiliation with Command Security allows the
Police Department to concentrate and focus on what it does best - Law
Enforcement.
[2 Photographs]
- --------------------------------------------------------------------------------
Technological edge
With COMGUARD(TM) we can rapidly select the right people for our customer's
needs and facilitate accurate billing.
- --------------------------------------------------------------------------------
<PAGE>
SELECTED FINANCIAL DATA
The financial data included in this table have been derived from the financial
statements as of and for the years ended March 31, 1996, 1995, 1994, 1993 and
1992, which have been audited by independent certified public accountants. The
information should be read in conjunction with "Managements Discussion and
Analysis of Financial Condition and Results of Operations" and with the
financial statements and related notes included in the Report. See Note 21,
"Acquisitions", for factors affecting the comparability of the financial data.
<TABLE>
<CAPTION>
Statement of Operations Data
Years Ended March 31, 1996 1995 1994 1993 1992
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue (excluding service company revenue) $54,995,444 $39,595,272 $25,393,933 $ 9,760,092 $16,714,464
Gross profit 8,496,499 4,527,365 2,914,928 1,939,632 2,699,355
Service contract revenue 1,519,803 1,291,943 1,022,684 1,527,670 1,431,455
Operating profit (loss) 1,250,713 (2,412,603) (2,227,936) (311,477) 322,357
Net income (loss) 511,650 (2,983,823) (2,727,102) (315,469) 114,102
Income (loss) per common share - primary .06 (.70) (.96) (.15) .05
Weighted average number of common
shares outstanding - primary 6,663,986 4,274,657 2,827,297 2,053,075 2,137,000
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data as of March 31,
1996 1995 l994 1993 1992
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital (deficiency) $ 218,968 $ (531,602) $ (772,143) $ 1,063,648 $ 2,306,790
Total assets 22,384,414 20,267,099 17,733,634 11,909,890 10,806,072
Short-term debt(1) 8,506,911 6,095,183 6,936,086 3,940,092 3,024,587
Long-term debt(2) 1,194,505 1,229,773 1,106,221 69,252
Redeemable convertible preferred stock 1,614,525 1,495,065
Stockholders' equity 5,189,226 4,993,859 5,135,744 4,182,472 4,371,016
</TABLE>
(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 6 and 9 of "Notes to Financial Statements."
(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
Management's Discussion and Analysis should be read in conjunction with the
Financial Statements and Notes to Financial Statements.
Results of Operations
For the fiscal year ended March 31, 1996, the Company's operations resulted in a
net profit of $511,650 after a net income tax benefit of $300,541. In addition,
as of that date, the Company had positive working capital of $218,968 and its
public accounting firm has removed the "going concern" modification which was
included in the prior auditor's report. The operating results for the year were,
in part, due to management's development and implementation of a plan to reduce
administrative expenses primarily through synergies realized with the
elimination of duplicative overhead costs following the acquisition of United.
The Company plans to grow through internal sales expansion, through
acquisitions and by selling its Service Agreements. The Company intends to
finance this growth through its existing lines of credit; cash realized from the
exercise of stock options and warrants; and/or private placement or public issue
of stock. Management will continue to seek cost reductions in its direct labor,
payroll tax rates and insurance expense, as well as administrative savings where
appropriate.
Fiscal Year Ended March 31, 1996 Compared with
March 31, 1995
During the fiscal year ended March 31, 1996, revenue increased by $15.4 million
or 39.0% over the fiscal year ended March 31, 1995. Revenue increased by
approximately $24.4 million as a result of the acquisition of United in February
24, 1995 and other, smaller acquisitions closed during fiscal year 1996. This
increase was offset by $5.9 million resulting from contract cancellations net of
new contract starts, $0.4 million resulting from the sale of the Company's
Boston operation and $2.7 million attributable to the special event security
provided for WOODSTOCK '94 (see "--Liquidity and Capital Resources") which was
reported in the prior year and did not recur in the fiscal year ended March 31,
1996.
Gross profit as a percentage of revenue increased to 15.4% in fiscal 1996
from 11.4% in fiscal 1995. This increase is primarily attributable to lower
direct labor costs, as well as lower costs for union benefits. Offsetting this
increase was the high margin special event security provided for WOODSTOCK '94
(see "--Liquidity and Capital Resources") that did not recur in the fiscal year
ended March 31, 1996.
The Company provides payroll and billing services and accounts receivable
financing through contracts with service company clients for a percentage of the
revenue or gross profit generated from their business. The Company owns the
accounts receivable and, depending on the individual contract, may be the
employer of record. The caption "Service Contract Revenue" represents the income
earned on the Service Agreements.
Service Contract Revenue increased by $227,860 to $1,519,803 in fiscal year
1996 compared to $1,291,943 fiscal year 1995. $275,034 of this increase is
attributable to the Company's non-employer of record program, new in fiscal year
1996. Fees also increased by another $229,221 due to higher volume generated by
existing Service Agreements, offset by the loss during the third quarter of
fiscal year 1995 of a contract with one service company client, revenue from
which amounted to $276,395 in fiscal year 1995.
General administrative expenses increased by $2,788,500 to $9,339,191 in
fiscal 1996 from $6,550,691 in fiscal 1995. The major areas of increase are the
ongoing general and administrative costs of $1,649,135 resulting from the
addition of the United operations; depreciation and amortization expense of
$615,719; bank service fees of $202,224; and administrative salary expense of
$158,263.
9
<PAGE>
The provision for doubtful accounts decreased by $1,424,153 from $1,777,460
to $353,307. This decrease is primarily due to provisions established during
fiscal year 1995 for the collection of the WOODSTOCK '94 receivables of
$639,530, as well as for various service accounts and notes receivable. During
fiscal year 1996, the Company reported bad debt recoveries of $220,918 compared
with $111,107 for the prior fiscal year. This caption represents the amounts
collected on accounts receivable in excess of the value carried, net of
established provisions for doubtful accounts. Of the amount reported for fiscal
year 1996, $200,000 represents the amount collected in excess of book value of
the WOODSTOCK '94 receivable.
Insurance rebates received by the Company for fiscal years ended March 31,
1996 and 1995 of $742,305 and $150,238 represent dividends received from the
Company's former worker's compensation insurance carrier for a multi-state
program that was in effect for the three years ended September 30, 1995. The net
premium paid by the Company was based on ultimate losses pursuant to a
predetermined calculation with rebates of excess premiums refundable to the
Company in the form of dividends at the discretion of the insurance carrier.
Although the insurance carrier has no legal obligation to declare a dividend,
the Company believes that it is likely that it will receive a similar dividend
during the fourth quarter of fiscal year ended 1997 for an amount ranging from
$600,000 to $800,000. The policy for the current policy year is also loss
sensitive but provides for a contractual obligation on the part of the insurance
carrier to refund premiums paid in excess of actually determined premiums. As
such, the Company has calculated its insurance expense for the last six months
of the 1996 fiscal year on the basis of estimated losses plus certain minimum
premium amounts. Therefore, no significant rebates will be forthcoming in the
future with respect to the current policy year.
The loss on value of intangible assets represents a write-down of an
acquired customer list for the value of the customers lost (see Note 4 to "Notes
to Financial Statements").
Net interest increased by $389,911 to $1,013,502 in fiscal year 1996 from
$623,591 in fiscal year 1995. This increase is attributable to the interest
required to service the increased debt resulting from the acquisition of United
and higher working capital requirements.
Equipment dispositions primarily represent older cars sold or taken out of
service.
Fiscal Year Ended March 31, 1995 Compared with
March 31, 1994
During the fiscal year ended March 31, 1995, revenue increased by $14,201,339 or
55.9% over the fiscal year ended March 31, 1994. Approximately $9.3 million of
the increase was attributable to the acquisition of the security guard business
of ISS International Service System, Inc., ("ISS"), approximately $2.7 million
of the increase was attributable to the special event security provided for
WOODSTOCK '94 (gross profit is calculated prior to adjustment for provisions for
doubtful accounts) (see "--Liquidity and Capital Resources"); and approximately
$2.1 million of the increase was attributable to the acquisition of United.
After giving effect to a reclassification of insurance rebates applicable
to prior years, gross profit as a percentage of revenue decreased to 11.4% in
fiscal year 1995 from 11.5% in fiscal year 1994. This decrease was primarily
attributable to higher union costs in connection with the Company's New York
City operation offset by the high margin special event security provided for
WOODSTOCK '94 and the higher margin business acquired from United. Without the
special event security and the higher margin business acquired from United,
gross profit would have declined by .4% to 11.0% of revenue.
Service Contract Revenue increased by $269,259 in fiscal year 1995 compared
to fiscal year 1994. Approximately two-thirds of the increase in fiscal year
1995 compared to fiscal year 1994 was due to increased volume generated by
existing Service Agreements and one-third was attributable to new Service
Agreements. A contract with one service company client ended in December, 1994.
Revenue for this client amounted to $276,395 in fiscal year 1995.
General administrative expenses increased by $1,419,076 to $6,550,691 in
fiscal year 1995 from $5,131,615 in fiscal year 1994. The major areas of
increase were the ongoing general and administrative costs of the acquisitions
of ISS, Madison and United of $411,000, $159,000 and $177,000, respectively;
depreciation and amortization expense of $239,000; and administrative salary
expense of $460,000 ($312,500 of which represents provision for former employee
arbitration potential liability). The provision for doubtful accounts increased
by $727,420 from $938,933 to $1,666,353. The major components of this increase
were provisions established for the collection of WOODSTOCK '94 receivables
$639,530 with the remainder attributable to service accounts and notes
receivable. The loss on value of intangible assets represents a write-down of an
acquired customer list for the value of the customers lost.
Net interest increased by $218,471 to $623,591 in fiscal year 1995 from
$405,120 in fiscal year 1994. This increase was attributable to the interest
required to service the increased debt resulting from the acquisition of ISS and
United.
Equipment dispositions primarily represent older cars sold or taken out of
service.
Liquidity and Capital Resources
The Company pays its guard employees and those of its Service Agreement Clients
on a weekly basis, while its customers and the customers of service company
clients pay for the services of such employees generally between 50 to 60 days
after billing by the Company. In order to provide funds for payment to its guard
employees, on February 24, 1995, the Company entered into a commercial revolving
loan arrangement with CIT Group/Credit Finance (CIT). Under this agreement,
borrowings may be made in an amount up to 80% of eligible accounts receivable,
but in no event more than $10,000,000. During the quarter ended December 31,
1995, this agreement was amended to increase the borrowing availability from 80%
to 82.5%. Outstanding balances bear interest at per annum rate of 2% in excess
of the "prime rate" and are collateralized by a pledge of the Company's accounts
receivable and other assets. Prior to the existing agreement, the Company
utilized a commercial revolving loan agreement with another institutional
lender.
At March 31, 1996, the Company had borrowed $5,964,204 or approximately 52%
of its billed accounts receivable (after allowance for bad debts, but before
accrued and unbilled receivables) and virtually 100% of its maximum borrowing
capacity based on the definition of "eligible accounts receivable" under the
terms of the revolving loan arrangement.
Generally, the Company borrows a high percentage of its available
borrowing, which can fluctuate materially from day to day due to changes in the
status of the factors used to determine availability (such as billing, payments
and aging of accounts receivable).
The Company entered into a subordinated loan arrangement on February 24,
1995, with Deltec Development Corporation (Deltec) pursuant to which the Company
borrowed $1.5 million, the proceeds of which were used primarily to acquire the
assets of United. The subordinated loan has a term of four years, calls for
quarterly principal and interest payments and bears interest at fourteen percent
(14%) per annum. It is collateralized, on a subordinated basis, by all the
Company's assets, properties and other revenue.
The loan agreements with CIT and Deltec contain numerous non-financial
covenants. For the year ended March 31, 1996, the Company was not in compliance
with several of the administrative requirements. Subsequent to the year end, the
Company obtained a waiver of these violations from both CIT and Deltec. (See
Notes 6 and 9 to "Notes to Financial Statements".)
Other short-term borrowings of $502,000 as of March 31, 1996, consisted of
insurance premium financing of $383,000 with the remainder primarily consisting
of service account acquisition indebtedness.
Long-term debt as of March 31, 1996 consisted of $1,000,000 due to ISS;
$1,125,000 due to Deltec Development Corporation; $478,764 (net of imputed
interest of $36,383) due to 32B-J Pension, Health and Annuity Fund with which
the Company reached agreement in January, 1996 (see Note 9 to "Notes to
Financial Statements"); and $42,500 due to William C. Vassell, the Company's
Chairman of the Board; with the remainder of $471,000 primarily representing
various auto and other installment loans.
The ISS debt of $1,000,000 created in connection with the purchase of
various guard service accounts consists of two notes in the amount of $500,000
each due, on March 31, 1995 and October 27, 1995, respectively. The Company has
defaulted on both payments and is engaged in nego-
10
<PAGE>
tiations with ISS to settle the obligation. The Company believes that ISS has
breached certain provisions of the various agreements associated with the
acquisition. ISS has the right to foreclose on certain shares of the Company's
common stock owned by Mr. Vassell, the Company's Chairman of the Board. The
Company has entered into an agreement to indemnify Mr. Vassell in the event of
foreclosure whereby the Company would issue to Mr. Vassell such number of shares
as were delivered to ISS in foreclosure. This would result in a reduction of the
ISS-related debt and a corresponding increase in stockholders' equity. There
would be no impact to the Company's net income except a decrease in earnings per
share due to the increased number of shares outstanding. See "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT--Change in Ownership".
The Company completed a series of private placements of 2,087,508 shares of
Common Stock and 9,061 shares of Series A Preferred Stock as of February 24,
1995. The total capital raised was approximately $4,160,000. The capital was
used for working capital purposes as well as for the acquisition of United.
Expenses incurred in connection with the acquisition and private placements were
approximately $1,150,000. Approximately $500,000 was used for working capital
purposes.
On October 27, 1993, the Company completed a private placement of 1.6
million units at $2.50 per unit. Each unit consists of one share of common stock
and one warrant for one-half share exercisable at $3.50 per full share. The
private placement raised $4,000,000 of which $2,250,000 was used along with debt
financing to close the acquisition of the security guard business of ISS.
Expenses in connection with the private placement were approximately $677,000.
Expenses relating to the acquisition were approximately $146,000. The remainder
of $927,000 was used for working capital purposes.
The Private Placement Memorandum issued by the Company in connection with
both the 1993 and 1995 Private Placements contained financial information which
has since been restated. It is possible that under federal and/or state
securities laws, the purchasers of Units pursuant to the 1993 offering and the
purchasers of shares in connection with the offerings that consummated in
February, 1995, may allege that they have a right to the return of their
investment, which totaled $4.0 million and $4.16 million respectively, with
interest. (See Note 13 to "Notes to Financial Statements".) Management believes
that the probability of such claims and the resultant negative impact on the
Company's financial condition is diminishing with time.
During the fiscal year ended March 31, 1995, the Company established a
reserve in the amount of $629,530 against a gross receivable balance of $940,833
plus interest and legal fees owed to it on its security contract for WOODSTOCK
'94. During the third quarter of fiscal year 1996, the Company reached an
agreement with Polygram Diversified Ventures, Inc. and Woodstock Ventures, Inc.,
as a result of which the Company received a final cash settlement of $650,000.
Accounts receivable, net of allowance for doubtful accounts, increased by
approximately $2.6 million primarily as a result of new business generated by
existing service agreement clients ($1.5 million) as well as the addition of new
service agreements ($0.7 million) signed during fiscal year 1996. This increase
was financed primarily by borrowings on the line of credit. Accounts payable and
accrued expenses decreased by approximately $1.0 million due in substantial part
to payment during the fiscal year 1996 of certain liabilities assumed pursuant
to the acquisition of United and a reduction in accounts payable resulting from
the more timely payment of the Company's obligations to its vendors.
The Company had positive working capital as of March 31, 1996 of $218,968
as compared to a working capital deficit of $531,602 as of March 31, 1995. This
improvement during the fiscal year 1996 was primarily due to earnings, as well
as the favorable settlement with the 32BJ union over past benefits. (See Note 9
to "Notes to Financial Statements".)
The Company finances vehicle purchases typically over three years and
insurance through short-term borrowings. The Company has no additional lines of
credit other than discussed herein.
The Company has no present material commitments for capital expenditures.
During fiscal year 1995, the Company adopted the provisions of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). This statement
requires that the long-lived assets (e.g., certain intangibles) be reviewed for
impairment whenever events indicate that the carrying amount of an asset may not
be recoverable and provides guidelines for measuring the impairment. The
adoption of SFAS 121 had no material impact on the financial position or results
of operations of the Company.
However, in light of the recent increase in the attrition rate of certain
acquired customer accounts, the Company will be required to re-evaluate the
estimated remaining lives of its customer lists (intangibles) and may therefore
increase the rate of amortization in future periods. Such increase in
amortization would represent a non-cash expense, and would therefore not have an
impact on the cash flow of the Company.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
On February 5, 1996, at the direction of its Board of Directors, the
Company advised Coopers & Lybrand L.L.P. ("Coopers") that due to cost
containment efforts, its engagement of Coopers as its independent public
accountants was terminated. The Board also determined to engage D'Arcangelo &
Co. L.L.P. ("D'Arcangelo"), as its new independent public accountants, effective
as of February 8, 1996.
The following information concerns prior opinions and disagreements with
the Company's former accountants during the two most recent fiscal years.
Cooper's report on the financial statements for the fiscal years ended
March 31, 1994 and March 31, 1995 contained an opinion modified to disclose
substantial doubt about the Company's continuation as a going concern. Coopers'
report on the financial statements for the year ended March 31, 1994 also
contained a modification to disclose the restatement of the Company's March 31,
1992 and March 31, 1993 year-end financial statements. The restatements were
made in connection with the application of an accounting principle related to
the method of recognizing gain on sales of the Company's customer lists and
advances to service companies in exchange for notes. Previously, the Company
recognized gain associated with the sale of a customer list at the date the
transaction was consummated if certain conditions, such as the adequacy of
collateral and a reasonable expectation of performance, were met. Advances to
service companies were recorded as a current or long term asset, depending on
the term of the note. Upon reconsideration, the Company determined that, absent
an adequate down payment at closing, such gain should be recognized only when
cash collections are received. Advances to customer list purchasers are charged
to operations and recognized only upon recovery.
The above-mentioned application of an accounting principle was the subject
of a disagreement between the Company and Coopers in early February 1994. The
disagreement was resolved to the satisfaction of Coopers and the Company's Board
of Directors. The Company has authorized Coopers to respond fully to the
inquiries of the successor accounting firm, D'Arcangelo, regarding the
disagreement.
In connection with the disagreement with Coopers, the Company consulted
with D'Arcangelo concerning the recognition of earnings generated by the Company
from one of its service agreement clients. D'Arcangelo, which had been providing
supplemental accounting and consulting services to the Company, expressed its
view regarding this matter of disagreement with Coopers. D'Arcangelo's views
were that the Company's method of recognizing earnings from its service
agreement clients was correct. As stated above, Coopers' view was that certain
earnings reported by the Company in connection with one of its service agreement
clients was not the correct manner of accounting for those transactions.
Upon final disposition of the matters which were the subject of the
disagreement, all parties, including the Company, Coopers and D'Arcangelo, were
in agreement with the manner in which the subject matter was accounted for.
11
<PAGE>
Command Security Corporation
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
ASSETS 1996 1995
----------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 0 $ 0
Accounts receivable from guard service customers, less allowance for
doubtful accounts of $519,220 and $657,135, respectively 8,040,826 7,641,122
Accounts receivable from service contract customers, less allowance for
doubtful accounts of $322,786 and $246,764, respectively 4,279,586 2,077,461
Prepaid expenses 1,176,972 910,238
Notes receivable, current maturities, less allowance for doubtful
accounts of $362,164 and $340,045, respectively 260,547 191,259
Other receivables, less allowance for doubtful accounts
of $17,372 and $122,513, respectively 285,469 290,650
Income taxes receivable 0 144,188
----------------------------
Total current assets 14,043,400 11,254,918
Furniture and equipment at cost, net 975,832 953,245
Notes and long-term receivables, less allowance for doubtful
accounts of $737,436 and $1,650,272, respectively 210,659 708,686
Intangible assets, net 6,270,440 7,179,955
Deferred income taxes 300,541 0
Other assets 583,542 170,295
----------------------------
Total assets $ 22,384,414 $ 20,267,099
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 913,944 $ 711,199
Current maturities of long-term debt 1,938,273 1,555,998
Current maturities of obligations under capital leases 102,811 91,924
Short-term borrowings 6,465,827 4,447,261
Accounts payable and accrued expenses 3,761,633 4,885,722
Due to service companies 641,944 94,416
----------------------------
Total current liabilities 13,824,432 11,786,520
Deferred gain 133,303 56,799
Self-insurance reserves (Note 13) 428,423 705,083
Long-term debt, net 1,178,962 1,187,330
Obligations under capital leases, net 15,543 42,443
----------------------------
15,580,663 13,778,175
----------------------------
Commitments and contingencies (Notes 12, 13 and 18) Redeemable, convertible
Series A preferred stock, $.0001 par value
per share, 9,785 and 9,061 shares designated, issued and outstanding in
1996 and 1995, redemption and liquidation value of $1,614,525
and $ 1,495,065, respectively 1,614,525 1,495,065
----------------------------
Stockholders' equity:
Preferred stock $.0001 par value per share, authorized 1,000,000 shares,
including redeemable Series A preferred stock
Common stock, $.0001 par value per share, authorized 20,000,000
shares, issued 8,119,606 and 7,989,332, respectively 812 799
Paid-in capital 9,805,425 10,121,721
Deficit (4,614,011) (5,125,661)
----------------------------
5,192,226 4,996,859
Common stock in treasury, at cost, 1,355,400 shares (3,000) (3,000)
----------------------------
5,189,226 4,993,859
Total liabilities and stockholders' equity $ 22,384,414 $ 20,267,099
============================
</TABLE>
See accompanying notes and accountant's report.
12
<PAGE>
Command Security Corporation
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
Revenue (excluding service company revenue-see Note 17) $ 54,995,444 $ 39,595,272 $ 25,393,933
Cost of revenue 46,498,945 35,067,907 22,479,005
--------------------------------------------
Gross profit 8,496,499 4,527,365 2,914,928
--------------------------------------------
Service contract revenue (Note 17) 1,519,803 1,291,943 1,022,684
10,016,302 5,819,308 3,937,612
--------------------------------------------
Operating expenses:
General and administrative expenses 9,339,191 6,550,691 5,131,615
Provision for doubtful accounts 353,307 1,777,460 1,098,007
Bad debt recoveries (220,918) (111,107) (159,074)
Insurance rebates (742,305) (150,238) 0
Loss on value of intangible assets, net (Note 4) 36,314 165,105 95,000
--------------------------------------------
8,765,589 8,231,911 6,165,548
--------------------------------------------
Operating income/(loss) 1,250,713 (2,412,603) (2,227,936)
--------------------------------------------
Other expense/(income):
Interest expense 1,182,779 717,204 492,685
Interest income (169,277) (93,613) (87,565)
Loss on equipment dispositions 28,952 5,296 20,745
Other income (2,850) (4,219) (9,141)
--------------------------------------------
1,039,604 624,668 416,724
--------------------------------------------
Income/(loss) before income tax (benefit)/expense 211,109 (3,037,271) (2,644,660)
Income tax (benefit)/expense (300,541) (53,448) 82,442
--------------------------------------------
Net income/(loss) 511,650 (2,983,823) (2,727,102)
Preferred stock dividends 119,460 0 0
--------------------------------------------
Net income/(loss)applicable to common stockholders $ 392,190 $ (2,983,823) $ (2,727,102)
============================================
Income/(loss) per share of common stock $ .06 $ (.70) $ (.96)
============================================
Weighted average number of common and
common equivalent shares outstanding 6,663,986 4,274,657 2,827,297
============================================
</TABLE>
See accompanying notes and accountant's report.
13
<PAGE>
Command Security Corporation
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended March 31, 1996, 1995 and 1994
Common Stock Retained
-------------------- Paid-In Earnings Stock In
Shares Amount Capital (Deficit) Treasury Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1993 3,437,900 $344 $ 3,599,864 $ 585,264 $(3,000) $ 4,182,472
Issuance of Common stock
o Private placement, net (Note 18) 1,600,000 160 3,322,914 3,323,074
o Other 14,000 1 41,999 42,000
Deferred stock compensation expense 77,800 77,800
Common stock purchase warrants exercised 95,000 10 237,490 237,500
Net loss (2,727,102) (2,727,102)
-------------------------------------------------------------------------------
Balance at March 31, 1994 5,146,900 515 7,280,067 (2,141,838) (3,000) 5,135,744
Issuance of common stock
o Private placements, net (Note 18) 2,087,508 209 2,042,227 2,042,436
o Other 754,924 75 773,627 773,702
Deferred stock compensation expense 25,800 25,800
Net loss (2,983,823) (2,983,823)
-------------------------------------------------------------------------------
Balance at March 31, 1995 7,989,332 799 10,121,721 (5,125,661) (3,000) 4,993,859
Deferred stock compensation expense 4,300 4,300
Common stock registration costs (136,436) (136,436)
Issuance/(return) of escrowed common stock
o Accrued fees 152,774 15 (15) 0
o Retention settlement (22,500) (2) (64,685) (64,687)
Preferred stock dividends (119,460) (119,460)
Net income 511,650 511,650
-------------------------------------------------------------------------------
Balance at March 31, 1996 8,119,606 $812 $ 9,805,425 $(4,614,011) $(3,000) $ 5,189,226
===============================================================================
</TABLE>
See accompanying notes and accountant's report.
14
<PAGE>
Command Security Corporation
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Years Ended March 31,
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income/(loss) $ 511,650 $(2,983,823) $(2,727,102)
Adjustments to reconcile net income/(loss) to net
cash provided by/(used in) operating activities:
Depreciation and amortization 1,587,832 972,653 733,873
Provision for doubtful accounts and notes receivable 353,307 1,777,460 1,098,007
Deferred income 15,734 (131,613) (4,102)
Loss on equipment dispositions 28,952 5,296 20,745
Loss on value of intangible assets, net 36,314 165,105 95,000
Deferred income taxes (300,541) 434,314 (130,460)
Compensatory common stock purchase warrants 4,300 25,800 77,800
Self insurance reserves 171,704 (38,817) 435,826
Changes in operating assets and liabilities,
net of effects of business acquisitions:
Accounts receivable, current and long-term (2,300,578) 474,960 (2,891,109)
Prepaid insurance 326,796 (149,616) (224,702)
Other receivables 168,365 (207,019) (57,428)
Other assets (379,972) (87,453) (52,273)
Accounts payable and accrued expenses (1,036,351) 350,272 1,675,859
Income taxes 0 (130,695) (45,372)
Due to service companies 259,382 6,595 (333,542)
-----------------------------------------
Net cash provided by/(used in) operating activities (553,106) 483,419 (2,328,980)
-----------------------------------------
INVESTING ACTIVITIES
Purchase of equipment (124,838) (256,718) (322,486)
Business acquisitions and purchase of intangible assets (249,034) (4,719,399) (3,551,888)
Proceeds from equipment dispositions 18,153 3,329 5,646
Proceeds from sale of intangible assets 69,825 0 0
Issuance of notes by service companies and other third parties (138,450) (168,883) (59,738)
Principal collections on notes receivable 258,039 260,286 322,204
-----------------------------------------
Net cash used in investing activities (166,305) (4,881,385) (3,606,262)
-----------------------------------------
FINANCING ACTIVITIES
Net borrowings/(payments) on line of credit 2,149,686 (783,529) 2,082,989
Proceeds from other short-term borrowings 0 482,644 330,731
Proceeds from long-term debt 0 1,639,000 1,202,239
Repayments on other short and long-term debt (1,380,126) (1,694,757) (1,263,744)
Repayments on capital lease obligations (116,458) (505) 0
Net proceeds from/(cost of) issuance of stock (136,436) 3,862,751 3,365,074
Proceeds from common stock warrants exercised 0 0 237,500
Cash overdraft 202,745 711,199 0
-----------------------------------------
Net cash provided by financing activities 719,411 4,216,803 5,954,789
-----------------------------------------
Net (decrease)/increase in cash and cash equivalents 0 (181,163) 19,547
Cash and cash equivalents, beginning of year 0 181,163 161,616
-----------------------------------------
Cash and cash equivalents, end of year $ 0 $ 0 $ 181,163
=========================================
</TABLE>
See accompanying notes and accountant's report
1. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the period for:
1996 1995 1994
-----------------------------------------
Interest $ 1,190,675 $ 731,455 $ 459,642
Income Taxes 0 2,719 258,274
15
<PAGE>
Command Security Corporation
STATEMENTS OF CASH FLOWS continued
2. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
For the years ended March 31, 1996, 1995 and 1994, the Company purchased
transportation and security equipment with direct installment and lease
financing of $354,493, $54,000 and $159,374, respectively.
For the year ended March 31, 1996, the Company accrued accumulated
dividends of $119,460 and issued 724 additional shares of its Series A
convertible preferred stock to its preferred stockholders. This charge to
paid-in capital and credit to preferred stock has been excluded from the
statement of cash flows.
In March, 1996, the Company purchased certain guard service accounts from a
former service company for a total consideration of $224,764. A portion of the
purchase price was paid via the assumption of long-term debt ($104,770) and
cancellation of cash statement deficits ($42,013) and notes receivable ($7,650).
The Company has retained a reserve of $30,525 to be adjusted based on client
retention. These amounts have been excluded from the purchase of intangibles,
proceeds from long-term debt, collection of notes and increase in amounts due to
service companies.
In January, 1996, the Company reached an agreement with a union covering
certain guard service sites whereby it has converted amounts owed for past union
contract health and welfare benefit obligations in the amount of $579,541 to a
non interest bearing note payable over one and one-half years. The discounted
amount of $536,103 has been reclassified to long-term debt and has been excluded
from proceeds from other borrowings in the statement of cash flows.
In December, 1995, the Company purchased certain guard service accounts and
related assets for a total consideration of $201,497. The Company paid $120,254
and issued a short-term note for $81,243, payable in three quarterly
installments. This amount has been excluded from the purchase of intangible
assets in the statement of cash flows.
In October, 1995, the Company sold its Boston office for a total
consideration of $146,925. The Company received $75,000 in cash and a note for
$71,925, which has been excluded from the proceeds from the sale of intangible
assets in the statement of cash flows.
On March 20, 1995, the Company purchased certain customer lists and
accounts receivable of National Security, Ltd. A portion of the purchase price
was paid through the issuance of 112,911 shares of the Company's common stock
which was valued at $218,764 at the date of acquisition. This amount has been
excluded from the purchase of intangible assets ($186,487), changes in operating
assets and liabilities ($32,277) and proceeds from issuance of stock ($218,764).
On February 24, 1995, the Company purchased certain assets of United
Security Group, Inc. A portion of the purchase price was paid in the form of
assumed liabilities ($1,000,000) and short-term borrowings ($170,924). These
amounts have been excluded from the purchase of intangible assets, changes in
operating assets and liabilities and proceeds from other short-term borrowings.
As part of the acquisition, the Company assumed certain capital lease
obligations amounting to $134,872. This amount has been excluded from the
purchase of equipment and proceeds from long-term debt.
On December 14, 1994, the Company purchased certain customer lists and a
covenant not to compete from McVey Security Agency, Inc., a portion of which was
paid in the form of a note payable of $39,000 and 20,513 shares of the Company's
common stock which was valued at $50,000 at the date of acquisition. These
amounts have been excluded from the purchase of intangible assets, proceeds from
other short-term borrowings and proceeds from issuance of stock.
On August 29, 1994, the Company purchased certain customer lists of Applied
Security Corporation in exchange for 64,500 shares of the Company's common stock
which was valued at $179,688 at the date of acquisition. In June, 1996, the
Company reached an agreement with the seller, whereby 22,500 shares of the
Company's common stock held by the escrow agent will be returned to the Company
in connection with a customer retention adjustment. The issuance and subsequent
partial return of the common stock have been excluded in the statement of cash
flows.
In July, 1994, the Company reached an agreement with ISS International
Service System, Inc., whereby it has adjusted the purchase price for accounts
lost in connection with its October, 1993, acquisition of certain security guard
assets. Under this agreement, the purchase price for customer lists has been
reduced by $750,000 and the note in said amount, originally due on October 22,
1994 has been cancelled. This amount has been excluded in the statement of cash
flows from principal payments on other borrowings.
In June, 1994, the Company purchased certain guard service accounts and
entered into a non-compete agreement with the seller for a total consideration
of $130,000. The Company paid $85,000 and issued a short-term note for $45,000,
payable by December, 1994. The note was reduced by $29,575 in connection with a
customer retention adjustment and the balance paid in full in November, 1995.
The issuance of the note and subsequent adjustment have been excluded in the
statement of cash flows.
During the year ended March 31, 1994, the Company sold certain intangible
assets in exchange for notes. These sales increased notes receivable ($186,704)
and deferred income ($114,754) and decreased intangible assets ($71,950). These
amounts have been excluded from issuance of notes to service companies and other
third parties, deferred income and proceeds from sale of intangible assets.
On November 1, 1993, the Company purchased the customer list of Madison
Detective Bureau, Inc. A portion of the purchase price was paid through the
discharging of amounts owed the Company by Madison. The purchase caused an
increase in intangible assets ($313,495) and decreases in accounts receivable
($162,645), notes receivable ($1,239,509), due to service companies ($95,594)
and deferred income ($993,065). These amounts have been excluded from purchase
of intangibles, principal collections on notes receivable, deferred income and
changes in operating assets and liabilities.
On October 22, 1993, the Company purchased the security guard service
customer list of ISS International Service System, Inc. A portion of the
purchase price was paid in the form of short-term borrowings ($750,000) and
long-term debt ($1,000,000). These amounts have been excluded from the purchase
of intangible assets, proceeds from other short-term borrowings and proceeds
from long term debt.
See accompanying notes and accountant's report.
16
<PAGE>
Command Security Corporation
NOTES TO FINANCIAL STATEMENTS
March 31, 1996, 1995 and 1994
1. Business Description and Summary of Accounting Policies
The following is a description of the principal business activities and
significant accounting policies employed by Command Security Corporation.
Principal business activities:
Command Security Corporation (the Company) is a uniformed security guard service
company operating in New York, Florida, Connecticut, California, New Jersey and
Illinois. In addition, the Company also provides other security guard companies
(service companies) in various states with administrative services, such as
billing, collection and payroll, for a percentage of the related gross revenue
or gross profit.
Estimates:
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that were used.
Revenue recognition:
The Company records revenue as services are provided to its customers and to its
service companies. Revenue consists primarily of security guard services and
administrative services provided to service companies. Sale of service contracts
to service companies is recognized as cash is received and is recorded as other
income. Any proceeds given in the form of notes are deferred pending the
collection of the principal portion of such notes.
Cash and cash equivalents:
For purposes of the cash flows statement, the Company defines cash and cash
equivalents as cash and investments with maturities of three months or less.
Equipment:
Equipment is stated at cost. Depreciation is accumulated using the straight-line
method over the estimated useful lives of the equipment ranging from 3 to 7
years.
Intangible assets:
Intangible assets are stated at cost and consist primarily of customer lists
which are being amortized on a straight-line basis over five to fifteen 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. Recoverability is
evaluated annually based on anticipated expected future cash flows and actual
customer attrition. Due to a significant recent increase in the attrition rate
in connection with some of the Company's New York area customer lists, it is at
least reasonably possible that the estimated remaining lives of these customer
lists will change in the near term.
During fiscal l995, the Company adopted the provisions of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of" (SFAS 121). This statement
requires that long-lived assets (e.g., certain intangibles) be reviewed for
impairment whenever events indicate that the carrying amount of the assets may
not be recoverable and provides guidelines for measuring the impairment. The
adoption of SFAS 121 had no material impact on the financial position or results
of operations of the Company.
Income/(loss) per common share:
Income/(loss) per common share is based on the weighted average number of shares
of common stock and common stock equivalents outstanding during the period.
Warrants and stock options outstanding and preferred stock conversions were
excluded from the computation for each period presented because their effect was
antidilutive.
2. Continuity of Operations
The Company's financial statements have been presented on a going concern basis.
The Company's operations resulted in net losses of $2,983,823 and $2,727,102 for
the years ended March 31, 1995 and 1994, respectively, and working capital
deficits at March 31, 1995 and 1994, of $531,602 and $772,143, respectively. The
Company is in default of certain of its debt covenants; and, as described in
Notes 13 and 18, there is litigation and a contingency for which the outcomes
are uncertain. As a result, the independent accountant's report on the March 31,
1995 and 1994, financial statements was modified, indicating that these factors
raised substantial doubt about the Company's ability to continue as a going
concern. The Company's viability as a going concern is dependent on it's ability
to achieve profitability from its operations, the forbearance of its lenders and
it's ability to continue to obtain adequate financing and to favorably resolve
the litigation and contingency.
The Company's operations resulted in an operating profit for the year ended
March 31, 1996, in part due to management's development and implementation of a
plan to reduce its administrative expenses primarily through synergies realized
as a result of the elimination of duplicative overhead costs following the
acquisition of United Security Group Inc. (United), increased profit margins and
the reduction of professional fees expended in conjunction with certain
litigation and regulatory requirements. The Company has working capital of
$218,968 as of March 31, 1996, and its lenders have agreed to waive the existing
non-financial covenant defaults.
Management anticipates a continued favorable financial impact from the
United acquisition as well as additional savings from certain changes in its
insurance arrangements, including the procurement of a workers compensation
retro insurance policy based on incurred losses. Furthermore, management is of
the opinion that the probability of claims and a resultant negative impact on
operations and financial condition in connection with contingencies diminishes
with time.
3. Furniture and Equipment
Furniture and equipment at March 31, consist of the following:
1996 1995
-----------------------------
Transportation equipment $ 750,751 $ 637,262
Security equipment 481,191 345,929
Office furniture and equipment 1,360,275 1,314,378
Leasehold improvements 0 27,125
-----------------------------
2,592,217 2,324,694
Less: Accumulated depreciation 1,616,385 1,371,449
-----------------------------
$ 975,832 $ 953,245
=============================
Depreciation expense for the years ended March 31, 1996, 1995 and 1994 was
$388,904, $335,306 and $311,748, respectively.
17
<PAGE>
4. Intangible Assets
Intangible assets at March 31, consist of the following:
1996 1995
-----------------------------
Customer Lists $7,834,914 $7,498,131
Borrowing costs 497,233 509,516
Other intangibles 59,007 130,007
-----------------------------
8,391,154 8,137,654
Less: Accumulated amortization 2,120,714 957,699
----------------------------
$6,270,440 $7,179,955
=============================
Amortization expense for the years ended March 31, 1996, 1995 and 1994, was
$1,198,928, $637,347 and $422,125, respectively. During fiscal years 1996, 1995
and 1994, the Company realized impairment losses of $101,002, $165,105 and
$95,000, respectively on its purchased customer lists. During the year ended
March 31, 1996, the Company recovered $64,688 in connection with a purchased
customer list previously written off.
5. Other Assets
Other assets at March 31, consist of the following:
1996 1995
----------------------------
Restricted cash $393,678 $ 0
Deposits 156,589 170,295
Other receivables 33,273 0
----------------------------
$583,540 $170,295
============================
Restricted cash represents deposits for the benefit of the Company's
insurance carrier as collateral for workers compensation insurance claims.
6. Short-Term Borrowings
Short-term borrowings at March 31, consist of the following:
1996 1995
----------------------------
Bank line-of-credit $5,964,204 $3,814,518
Various insurance financing
arrangements, interest ranging
from 7.99% to 8.29% 382,774 405,612
Other obligations 118,849 227,131
----------------------------
$6,465,827 $4,447,261
============================
In February, 1995, the Company entered into an agreement with the CIT
Group/Finance, Inc. ("CIT") under a revolving loan and security agreement. The
agreement as amended on December 1, 1995, provides for a discretionary line of
credit of up to 82.5% of eligible accounts receivable as defined, but in no
event in excess of $10,000,000. At March 31, 1996, the Company had used
$5,964,204 of this line, representing virtually 100% of its maximum borrowing
capacity. Interest is payable monthly at 2.0% over prime, or 10.25% at March 31,
1996. The line is collateralized by customer accounts receivable and
substantially all other assets of the Company. The term of the agreement is two
years, expiring in February, 1997.
The Company relies heavily on its revolving loan from CIT which contains
numerous non-financial covenants. As of March 31, 1996, the Company was not in
compliance with several of the non-financial covenants. Subsequently, the
Company obtained a waiver from CIT for these violations.
The Company has obtained short-term financing in order to meet its
insurance needs. Required monthly principal payments range from $63,916 in
April, 1996 to $43,631 in October, 1996.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at March 31, consist of the following:
1996 1995
----------------------------
Trade accounts payable $ 629,710 $ 828,781
Payroll and related expenses 2,281,946 2,973,267
Insurance 155,372 51,854
Interest 33,250 41,145
Sales tax 87,807 237,647
Accrued professional fees 203,165 285,806
Liabilities assumed in acquisitions 123,003 456,539
Other 247,380 10,683
----------------------------
$3,761,633 $4,885,722
============================
Accrued professional fees at March 31, 1996 includes $128,165 owed to a
former employee in connection with an arbitration award issued. In accordance
with the agreement, the Company issued on January 19, 1996, 152,774 shares of
its common stock to an escrow agent as collateral for this debt.
8. Deferred Gain
Deferred gain of $133,303 and $56,799 included on the balance sheet at March 31,
1996 and 1995, represents gain on the sale of certain of the Company's service
contracts and billings for services to service companies in exchange for notes
and interest thereon. These gains have been deferred pending cash collections on
the notes and elimination of certain debt guarantees extended (see Note 13).
9. Long-Term Debt
Long-Term Debt at March 31, consists of the following:
1996 1995
----------------------------
ISS International Service
System, Inc., due March and
October, 1995, interest at prime,
currently 8.25% (a) $1,000,000 $1,000,000
32 B-J Pension, Health and
Annuity Fund, due July, 1997, net
of imputed interest of $36,383 (b) 478,764 0
Deltec Development Corporation,
due February 24, 1999, interest
at 14% (c) 1,125,000 1,500,000
Capital Resource Company, due
January 5, 2000, interest at 14% 103,083 0
Various installment loans due
at various dates through
October, 2000, with interest
ranging from 7.9% to 15.90% 367,888 158,328
William C. Vassell (Chairman of
the Board), due February, 1996,
interest at 8%, unsecured (d) 42,500 85,000
----------------------------
3,117,235 2,743,328
Less: Current maturities 1,938,273 1,555,998
----------------------------
$1,178,962 $1,187,330
============================
(a) In October, 1993, the Company acquired the security guard business of ISS
International Service System, Inc. ("ISS") and is obligated to ISS for a
$1,000,000 note, originally due October, 1995. This note was renegotiat-
18
<PAGE>
ed resulting in an agreement on July 22, 1994, whereby the purchase price for
the customer list has been reduced by $750,000, a related short-term note
canceled and the $1,000,000 owed to ISS was modified to require a principal
payment of $500,000 in March, 1995 with the remaining $500,000 due in October,
1995. As of June 12, 1996, the Company has not made the March, 1995, and the
October, 1995 payment and is currently in negotiations to extend the payment
terms. The note is collateralized by shares of the Company's common stock owned
by the Chairman of the Board (see Note 13).
(b) In January, 1996, the Company reached an agreement in connection with
arbitration of certain union contract health and welfare benefit obligations
whereby it paid $400,000 and signed a note with a face amount of $579,541
payable in eighteen monthly installments of $32,197 without interest. The
installment obligation balance of $515,147 is shown on the balance sheet at
March 31, 1996, net of a $36,383 discount based on the Company's current average
cost of borrowing, or 10.5%.
(c) The term loan from Deltec Development Corporation ("Deltec"), payable in
quarterly installments of $93,750, is collateralized by substantially all of the
assets of the Company and is subordinate to the CIT borrowings. As of March 31,
1996, the Company was not in compliance with several of the non-financial
covenants contained in the loan agreement. Subsequently, the Company obtained a
waiver from Deltec for these violations.
(d) Final payment on the loan from William C. Vassell has been deferred in
accordance with the Company's loan agreement with CIT, requiring certain minimum
availability under its borrowing arrangement.
The aggregate amount of required principal payments of long-term debt is as
follows:
Year Ending: March 31, 1997 $1,938,273
March 31, 1998 649,247
March 31, 1999 484,251
March 31, 2000 40,017
March 31, 2001 5,447
-----------
$3,117,235
===========
10. Reclassifications
Certain 1995 amounts have been reclassified to conform with the 1996
presentations.
11. Concentration of Risk
The Company extends credit to the various service companies for which it
administers billings, collection and payroll functions. At March 31, 1996 and
1995 the Company had loans and advances outstanding to current and former
service companies of $457,195 and $250,303, net of reserves of $761,305 and
$706,748, respectively. The notes are collateralized by customer lists and other
general intangibles in accordance with the service company agreements. The
service companies operate in New York, Florida, Illinois, New Jersey, Texas,
Virginia, Arizona, California, Massachusetts and Washington.
Geographic concentrations of credit risk with respect to trade receivables
are primarily in the New York Metropolitan area consisting of 45% and 51% of
total receivables as of March 31, 1996 and l995, respectively. The remaining
trade receivables consist of a large number of customers dispersed across many
different geographic regions. During the year ended March 31, 1996, the Company
generated 24% of its revenue from the commercial airline industry. The Company's
remaining customers are not concentrated in any specific industry.
The Company maintains its cash accounts in commercial banks. Accounts at
each bank are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up
to $100,000.
12. 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 $778,000, $609,000 and $410,000 for the years ended March 31, 1996,
1995 and 1994, respectively.
The future minimum rental commitments under long-term noncancelable
operating lease agreements are $309,679, $89,768, $18,999 and $11,154 for the
years ending March 31, 1997 to 2000, respectively, for a total of $429,600.
13. Contingent Liabilities
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. The Company insures against such claims and suits through
policies with third-party insurance companies. Such policies have limits of
$1,000,000 per occurrence and $2,000,000 in aggregate. In addition, the Company
has obtained an excess liability policy that covers claims for an additional
$25,000,000 in the aggregate. The Company retains the risk for the first $50,000
per occurrence. The Company has included liabilities of $428,423 and $705,083
for the estimated losses incurred under these risk retentions at March 31, 1996
and 1995, respectively.
The Company has guaranteed certain installment loans extended to various
service companies by Capital Resources Company. The total outstanding balance of
such loans as of March 31, 1996, was approximately $815,000.
An action was commenced against the Company and the City of New York on or
about August 20, 1992. This action seeks $3 million in damages together with $9
million in punitive damages arising from injuries allegedly sustained by the
plaintiff as a result of an assault by one of the Company's guards, while said
guard was on duty. This suit has been turned over to the insurance carrier for
defense. Insurance coverage is limited to $6 million covering this claim.
Punitive damages, if any, may not be covered under the Company's insurance
policy. The Company denies any culpability and asserts an affirmative defense
that its liability, if any, does not exceed 50% of the liability of all
defendants and hence seeks apportionment of liability. Management is of the
opinion that the results of this litigation will not have a material effect on
the Company's financial condition or results of operations.
In March, 1996, the NSC Shareholder Trust (successor in interest to
National Security, Ltd.) pursuant to the agreement dated March 20, 1995 for the
purchase and sale of certain assets has requested that the Company redeem
112,911 shares issued to National at the agreed upon price of $2.50 per share,
for a total of $282,278. In order to satisfy the request for redemption, Command
and National have negotiated an agreement whereby the Company's obligations
would be modified to include the issuance of an additional 185,867 shares of its
common stock to National. In the event that the proceeds from the sale of these
and the original securities by National by December 31, 1996, is less than the
redemption price, the Company would be obligated to pay the difference in cash
and the Company's working capital would be reduced accordingly.
In August, 1992, the Company commenced action against a former service
company client for non-payment of obligations owed by the service company to the
Company. At approximately the same time, the service company initiated suit for
non-performance of the Company in connection with the terms of the service
agreement seeking compensatory damages in an unspecified amount. Management has
reviewed both suits with legal counsel and is of the opinion that the likelihood
of loss on the suit against the Company is remote. Accordingly, no adjustment
has been made to the accompanying financial statements. In addition, management
is of the opinion that all amounts due to the Company from the former service
company are bona fide claims for services provided by the Company and are col-
19
<PAGE>
lectible, subject to the financial viability of the service company and the
value of related collateral. Amounts due from this service company, which
approximate $495,000 plus interest and legal fees, have been fully reserved.
The Chairman of the Board of the Company has pledged his personally owned
shares of Company stock (510,000 shares are currently in escrow) to ISS
International Service System, Inc. (ISS) in connection with the Company's
acquisition of certain security guard assets from ISS. The number of shares is
subject to adjustment. Such shares have been pledged as collateral to secure the
Company's $1 million in promissory notes to ISS for the balance of the purchase
price of the ISS security guard assets. In the event of default, as defined by
the ISS agreement, ISS is entitled to the transfer of so much of the pledged
stock as is equal in value to the amounts outstanding on the defaulted note(s).
The Company has defaulted on the payment of $500,000 due on March 31, 1995 and
on the payment of $500,000 due October 27, 1995. ISS has not exercised its right
to foreclose on the pledged shares and may look for arbitration in an effort to
settle this matter. In conjunction with this pledge, the Company has entered
into an indemnification agreement with the Chairman of the Board whereby the
Company would issue to the Chairman of the Board such number of shares as were
delivered to ISS in the event of default. This event would result in a reduction
of the ISS related debt and a corresponding increase in stockholders' equity.
There would be no impact on the Company's results of operations, except a
dilution of per share amounts.
The Private Placement Memorandum issued in connection with the Company's
1993 Private Placement and the interim financial reports for the first three
quarters in the fiscal years ended March 31, 1994 and 1995, filed by the Company
contained financial information which has since been restated. It is possible
that the purchasers of Units pursuant to the 1993 offering and the purchasers of
Shares in connection with the offerings that were consummated in February 1995,
may make a claim for, among other things, rescission of their investment, which
totaled $4,000,000 in the 1993 offering and approximately $4,160,000 in the 1995
offerings, plus interest, alleging, in each case, as the basis, the
above-mentioned restatements. Additional expenditures in the form of damages and
fees, if any, are not quantifiable. Other causes of action against the Company
based on federal and/or state securities laws are also possible. No such claims
have been received by the Company to date. If the Company were to become
involved in litigation arising from these circumstances, the Company's results
of operations and financial condition may be materially adversely affected due
to the drain on cash and management resources. Management is of the opinion that
the probability of claims and a resultant negative impact on the Company's
operations and financial condition is diminishing with time.
14. Stock Option Plan and Warrants
In May 1990, the Company's Board of Directors and stockholders approved the
adoption of a qualified stock option plan. Under the option plan, substantially
all employees are eligible to receive options to purchase up to an aggregate of
107,500 shares at an exercise price which cannot be less than the fair market
value of the shares on the date the options are granted. During the year ended
March 31, 1996, options to purchase 7,500 shares expired.
In conjunction with its initial public offering in July, 1990, the Company
issued warrants to the underwriter of its common stock to acquire 75,000 shares
of its common stock at $6 per share, which expired in July, 1995. The Company
also issued options to its Treasurer to purchase 107,500 shares of its common
stock at an exercise price of $5 per share. The exercise price of these warrants
was adjusted to $3.25, the fair value on date of adjustment during fiscal 1994.
On April 8, 1991, the Company issued to an officer of the Company for $100, a
warrant to purchase 50,000 shares of common stock at an exercise price of $3.375
per share, the market value at the time of grant, exercisable for the shorter of
a period of 5 years or termination of employment.
On April 8, 1991, as amended on June 18, 1991, the Board of Directors
approved the issuance to each of the Company's President (now Chairman of the
Board) and Treasurer, for $100, a five-year warrant to purchase 175,000 and
60,000 shares of common stock, respectively, at an exercise price of $3.375 per
share, the market value at the time of the grant. The warrants vested on March
31, 1992. The exercise price was adjusted to $3.25, fair value on date of
adjustment during fiscal 1994. In May 1992, the Board of Directors approved the
issuance to the Company's Chairman, Treasurer and Board member a five year
warrant to Purchase 125,000, 60,000 and 10,000 shares of common stock,
respectively, at an exercise price of $3.88 per share, the fair market value at
the time of the grant. The exercise price was adjusted to $3.25, the fair value
on date of adjustment, during fiscal 1994.
Pursuant to the 1993 Private Placement (see Note 18), the Company issued
Unit Warrants to purchase an aggregate of up to 800,000 shares to investors and
warrants to purchase 160,000 shares to the placement agent. Each Unit Warrant
represents the right to purchase one-half of a share at a price of $4.50 per
full share. The placement agent warrants are exercisable at $2.50 per share and
expire in October, 1996. The Company has the right to redeem the Unit Warrants
at $0.10 per warrant at any time after April 27, 1994, if, at any time, the mean
of the closing market price quotations for the shares over 20 consecutive
trading days is at least $6.00 or the closing market price quotations for the
shares is at least $6.00 for 10 consecutive trading days. During the fiscal year
ended March 31, 1995, the exercise price of the Unit Warrants was adjusted from
$4.50 to $3.50 per full share, the fair value on the date of adjustment.
The Company entered into a Consultant's Agreement dated November 1, 1993,
under which the Company has agreed to issue stock or warrants in exchange for
consulting services. The aggregate value of such stock or warrants to be granted
will not exceed $300,000. During the fiscal year ended March 31, 1994, the
Company issued warrants for 200,000 shares and in July, 1994 issued additional
warrants for 100,000 shares. The warrants are exercisable at $2.375 per share
and expire in July 1997. The Company has reserved 150,000 common shares to
provide for the exercise of the rights represented by these warrants. At the
consultant's election, either the warrants can be exercised or the common shares
may be released out of escrow to the extent that either will provide the
consultant $300,000 of compensation. As of March 31, 1996, neither election has
been exercised by the consultant.
On December 16, 1993, the Company granted to the President (now Chairman of
the Board) a five-year warrant for 500,000 shares of common stock at an exercise
price of $3.75 the fair value at time of grant, for services rendered in
connection with the ISS acquisition. On March 31, 1995, the Chairman
relinquished and waived his right to purchase 275,000 shares underlying this
warrant. The warrant expires in December, 1998.
On September 12, 1994, the Company entered into a consulting agreement with
a firm owned by a member of the Company's Board of Directors to provide
stockholder relations for a term of one year. In conjunction with this
agreement, the Company issued certain employees of this firm warrants to
purchase up to 100,000 shares of common stock, exercisable through September 30,
1997, at exercise prices of $3.00 per share. Warrants for 65,000 shares under
this agreement expired during the fiscal year ended March 31, 1995.
20
<PAGE>
On September 28, 1994, the Company issued a warrant for 25,000 shares of
common stock exercisable at $3.63 per share and expiring in October, 1997, in
connection with the signing of a non-employer of record service agreement to
provide scheduling, payroll, billing and receivable financing services for an
independent guard service company.
On February 24, 1995, the Company issued warrants for 250,000 shares of
common stock to a firm owned by a member of the Company's Board of Directors and
warrants for 50,000 shares of common stock to a lender whose director is also a
member of the Company's Board of Directors, in connection with the equity and
debt financing for the acquisitions of the security guard business of United
Security Group Inc. The warrants are exercisable at $2.22 and $2.10 per share,
and expire in February, 1998 and 1999, respectively.
Certain of the option and warrant agreements contain anti-dilution
adjustment clauses.
The following is a summary of activity related to all Company stock option
and warrant arrangements:
Options Warrants
-----------------------------------------------------
Exercise Number of Exercise Number of
Price Shares Price Shares
-----------------------------------------------------
Outstanding at
April 1, 1993 $3.81-$5.00 122,500 $2.50-$6.00 600,000
Granted 2.375-3.75 1,660,000
Expired/Cancelled 2.50 (95,000)
-----------------------------------------------------
Outstanding at
March 31, 1994 3.25*-5.00 122,500 2.38-6.00 2,165,000
Granted 2.25 45,000 2.10-3.63 725,000
Expired/Cancelled 3.00-3.75 (540,000)
-----------------------------------------------------
Outstanding at
March 31, 1995 2.25-5.00 167,500 2.10-6.00 2,350,000
Expired/Cancelled 5.00 (7,500) 6.00 (75,000)
-----------------------------------------------------
Outstanding at
March 31, 1996 $2.25-$3.81 160,000 $2.10-$3.75 2,275,000
=====================================================
*Adjusted
At March 31, 1996, there were 160,000 and 2,275,000 options and warrants
outstanding, respectively, exercisable at prices ranging from $2.10 to $3.81,
and 2,482,500 shares reserved for issuance under all stock arrangements.
15. Deferred Stock Compensation Expense
In May 1990, the President (now Chairman of the Board) and then sole shareholder
of the Company sold 43,000 shares of his stock in the Company to the Treasurer
of the Company at a price below that of the anticipated public offering. As a
result, the Company recognized deferred compensation expense of $129,000 and has
amortized the deferred cost over five years, the vesting period, with a
corresponding credit to paid-in capital. At March 31, 1996, the amount was fully
amortized.
16. Income Taxes
Income taxes expense/(benefit) for the years ended March 31 consists of the
following:
1996 1995 1994
-------------------------------------------
Current:
Federal $ 0 $(451,955) $ 146,394
State and local 0 (35,807) 66,508
-------------------------------------------
0 (487,762) 212,902
-------------------------------------------
Deferred:
Federal (209,680) 434,317 (207,744)
State and local (90,861) (3) 77,284
-------------------------------------------
(300,541) 434,314 (130,460)
-------------------------------------------
Income tax
expense/(benefit) $(300,541) $ (53,448) $ 82,442
===========================================
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:
1996 1995 1994
-----------------------------------
Statutory federal income tax rate 34.0 34.0 34.0
State and local income taxes,
Net of federal benefit 9.8 9.8 9.7
Valuation allowance (178.0) (40.7) (47.0)
Permanent differences (8.2) (1.3) .2
-----------------------------------
Effective tax rate (142.4)% 1.8% (3.1)%
===================================
The significant components of deferred tax assets and liabilities as of
March 31, 1996 and 1995 are as follows:
1996 1995
------------------------------
Current deferred assets:
Accounts receivable $ 164,225 $ 50,623
Accrued expenses 336,502 310,829
------------------------------
500,727 361,452
Valuation allowance (500,727) (361,452)
------------------------------
Net current deferred asset 0 0
==============================
Long-term deferred assets/(liabilities):
Notes receivable 293,875 589,883
Equipment (64,890) (83,266)
Intangible assets 657,136 840,008
Self-insurance 184,222 303,186
Deferred revenue 36,753 0
Deferred compensation 0 53,621
Net operating loss carryover 870,618 413,557
------------------------------
1,977,714 2,116,989
Valuation allowance (1,677,173) (2,116,989)
------------------------------
Net long-term deferred asset $ 300,541 $ 0
==============================
During the year ended March 31, 1994, a net valuation allowance of
$1,243,300 was recorded. The valuation allowance increased by $1,235,141 during
the year ended March 31, 1995, and decreased by $300,541 during the year ended
March 31, 1996.
Federal and State net operating loss carryovers were approximately
$1,896,000 and $2,746,000, respectively, at March 31, 1996. They begin to expire
in 2010.
21
<PAGE>
17. Service Agreements
The Company has entered into agreements with various security guard companies
(service companies) whereby the Company administers the billing, collection and
payroll functions and the service companies administer the operations of the
respective guard contracts. Under these arrangements, the Company receives title
to all the receivables generated and under some arrangements may become the
employer of record for all applicable guard personnel. All contracts contain
renewal provisions based on the volume of business generated by the respective
service companies.
The Company records the billings for service company contracts in accounts
receivable with a corresponding liability, "due to service companies", net of
the Company's administrative fees and payroll and related expenses paid by the
Company, at the time the services are provided to the service companies'
customers. The administrative fees charged to the service companies are included
in "service contract revenue" on the Company's statements of operations.
The following is a summary of the service companies' activities for the
years ended March 31, 1996, 1995 and 1994, respectively, the components of which
have been excluded from the Company's financial statements:
1996 1995 1994
--------------------------------------------
Service companies'
guard service revenue $20,267,157 $19,671,179 $23,082,851
Cost of revenue 16,657,284 15,600,251 18,313,558
--------------------------------------------
Gross profit 3,609,873 4,070,928 4,769,293
Service companies' share
of gross profit 2,365,104 2,778,985 3,746,609
--------------------------------------------
1,244,769 1,291,943 1,022,684
Other service revenue 275,034 0 0
--------------------------------------------
Service contract revenue $ 1,519,803 $ 1,291,943 $ 1,022,684
============================================
The Company has extended various operating loans to these service
companies. Interest charged varies between 2% above the prime lending rate of
the Chase Manhattan Bank and 14% per annum. Principal repayment terms extend
through the fiscal year ending March 31, 2000. In addition, the Company has
guaranteed bank loans to certain service companies (see Note 13).
18. Private Placements
During January and February, 1995, the Company completed several private equity
offerings including the Issuance of 9,061 shares of convertible preferred stock
with a liquidation value of $165 per share for a total of $1,495,065 (each share
of preferred stock is convertible into 100 shares of the Company's common stock
provides a yield of 8% per annum and is redeemable upon certain future financing
events); 950,002 shares of common stock for a total of $1,377,500 pursuant to an
offering exempt from registration under Regulation D; and 1,137,506 shares of
common stock for a total of $1,287,174 pursuant to various offerings exempt from
registration under Regulation S promulgated under the Securities Act of 1933. In
addition, the Company issued warrants to purchase 250,000 shares to the
placement agent. Proceeds to the Company, net of placement agent fees of
$356,000 and offering costs of $281,397, amounted to $3,522,342.
In October, 1993, the Company completed a private placement of 1,600,000
units, at $2.50 per unit, each consisting of one share of the Company's common
stock and one three year redeemable warrant to purchase one-half common share.
In addition, the Company issued warrants to purchase 160,000 shares to the
placement agent (see Note 14). Proceeds to the Company, net of placement agent
fees of $520,000 and offering costs of $156,926, amounted to $3,323,074. The
Company was obligated to register the shares issued in connection with this
offering by February, 1994 and has attempted to do so. The registration,
however, was not completed until November, 1995, and in December, 1994, the
Company authorized the issuance of an additional 400,000 shares to the initial
investors in accordance with the provisions of the private placement agreement.
In connection with the above private placement offerings, the Company has
certain risks that are described in Note 13.
19. 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, 9,785 have been designated as Series A Convertible Preferred Stock
("Series A").
The Series A shareholders are entitled to receive annual dividends equal to
8% of the liquidation value of their shares, payable by the issuance of
additional Series A stock until such time as all amounts due on the Deltec debt
(see Note 9) have been paid in full and then in cash thereafter. During the year
ended March 31, 1996, 724 Series A shares have been issued representing
dividends accrued through February 24, 1996. Accrued dividends at March 31,
1996, approximated 77 shares of Series A stock ($12,700). Upon liquidation or
redemption the Series A shareholders are entitled to $165 per share.
Any holder of Series A shares may at any time convert their shares into
common stock of the Company at a conversion ratio of 100 shares of common stock
for each share of Series A stock.
The Company is obligated to redeem any unconverted Series A shares at such
time as the Deltec debt is paid in full. However, no redemption shall be
required until all outstanding warrants issued in the Company's October 1993
private placement are exercised, and only if the proceeds received are
sufficient to redeem all outstanding Series A shares.
20. Fair Value
The fair value of the Company's long-term notes receivable is based on the
current rates offered by the Company for notes of the same remaining maturities.
At March 31, 1996, the fair value of long-term notes receivable approximates
their carrying amount.
21. Acquisitions
On October 27, 1993, the Company acquired certain security guard assets of ISS,
consisting primarily of a customer list, for $3,250,000 in cash and notes for
$1,000,000, as renegotiated, for an adjusted total purchase price of $4,250,000
(see Note 9). This acquisition was accounted for as a purchase. The financial
statements include the operations of ISS from the acquisition date. The customer
list is included in intangible assets and is being amortized on a straight-line
basis over 15 years, the estimated economic life of the list.
On November 1, 1993, the Company purchased the customer list of Madison
Detective Bureau, Inc. (Madison), a former service client. The purchase price of
$340,272 was paid by the discharge of amounts owed by Madison to the Company and
$26,777 in cash. The acquisition was accounted for as a purchase. The financial
statements include the operations of Madison from the acquisition date. The
customer list is being amortized on a straight-line basis over 5 years, the
estimated economic life of the list.
On February 24, 1995, the Company acquired the security guard and related
businesses of United Security Group Inc. The assets acquired consist primarily
of accounts receivable, customer lists and equipment. The $5 million purchase
price was provided by payment of $4 million in cash and $1 million in assumed
liabilities. This acquisition was accounted for as a purchase. The financial
statements include the operations of United from
22
<PAGE>
the acquisition date. The customer list is included in intangible assets and is
being amortized on a straight-line basis over 5 years, the estimated economic
life of the list.
During fiscal year 1995, the Company acquired several smaller security
guard businesses, principally customer lists for an aggregate cost of
approximately $845,000, payable in cash, notes and Company stock. Common stock
issued in connection with these acquisitions amounted to 195,724 shares with a
fair value of $457,000 on date of issue. One contract provides the seller with
the right to put 112,911 shares for a fixed price of $2.50 per share (see Note
13).
22. Related Party Transactions
The Company's former general counsel is also a member of the Board of Directors.
Legal fees paid amounted to $1,826, $28,074 and $24,869 for the years ended
March 31, 1996, 1995 and 1994, respectively.
A director of Deltec International SA, the parent of Deltec Development
Corporation, the subordinated debt lender to the Company, is also a member of
the Board of Directors of the Company. Interest paid in connection with this
debt amounted to $192,318 for the year ended March 31, 1996. Fees paid to Deltec
in connection with the February 24, 1995 financing amounted to $180,000 and a
warrant for the purchase of 50,000 shares of common stock. In addition, Deltec
acquired 3,000 shares of the Company's preferred stock at a cost of $495,000
(see Note 19). Dividends accrued and paid in additional shares of preferred
stock for the year ended March 31, 1996 amounted to $39,600, or 240 shares.
Another member of the Company's Board of Directors and a shareholder is an
officer/director of Sands Brothers & Co. (Sands), which has provided financial
advisory services and acted as private placement agent in connection with the
Company's private placement offerings. Fees paid to Sands in connection with
these offerings and other consulting services amounted to $664,000 and $520,000
during the years ended March 31, 1995 and 1994, respectively. In addition, Sands
received warrants for the purchase of 350,000 and 160,000 shares of the
Company's common stock in fiscal 1995 and 1994, respectively (see Note 14).
23. Fourth Quarter Adjustments
During 1995, the Company had fourth quarter adjustments which included an
increase in self-insurance reserves ($188,000), establishment of reserves for
litigation ($154,000), an increase in reserve for doubtful accounts and notes
receivable ($1,225,000), write-off of intangible assets ($165,000) and accrual
for employee health and welfare benefits ($683,000). The aggregate effect of
such adjustments was to increase net loss and net loss per share by
approximately $2,415,000 and $.56, respectively.
24. Operating Licenses
The Company is subject to regulation and licensing by various state government
agencies. The Chairman of the Company currently holds virtually all of the
required state operating licenses. In the event the Company were to lose the
services of the Chairman, an officer of the Company would have to obtain the
necessary licenses, or the Company would have to hire someone who holds the
required licenses for the Company to continue to conduct its business.
Market for the Registrant's Common Stock
and Related Stockholder Matters
Since July 10, 1995 the Company's Common Stock has been traded on the
over-the-counter NASDAQ SmallCap market. For several years prior to that time
the Company's common stock was traded on the NASDAQ National Market.
The following table sets forth, for the calendar periods indicated, the
high and low bid quotations or last sales price for the Common Stock as reported
by the National Quotation Bureau, Inc. for each full quarterly period within the
two most recent fiscal Years.
Period(1) Last Sales Price
- --------------------------------------------------------------------------------
High Low
1995 ---------------------
- ---------------
First Quarter 3 5/8 2 3/8
Second Quarter 4 1/8 1 7/8
Third Quarter 3 3/4 2 3/8
Fourth Quarter 2 7/8 1 37/64
1996
- ---------------
First Quarter 2 3/4
Second Quarter 1 7/16 7/8
Third Quarter 1 9/32 23/32
Fourth Quarter 1 7/16 7/8
(1) Reflects fiscal years ended March 31 of the year indicated.
The above quotations do not include retail mark-ups, mark-downs or
commissions and represent prices between dealers and not necessarily actual
transactions. The past performance of the Company's securities is not
necessarily indicative of future performance.
As of June 24, 1996, there were approximately 232 holders of record of the
Company's Common Stock. Management believes there are in excess of 1,000
beneficial holders of the Company's Common Stock.
The last sales price of the Company's Common Stock on June 24, 1996, was
$1.4375.
The Company has never paid cash dividends on its Common Stock. Payment of
dividends, if any, will be within the discretion of the Company's Board of
Directors and will depend, among other factors, on earnings, capital
requirements and the operating and financial condition of the Company. At the
present time, the Company's anticipated capital requirements are such that it
intends to follow a policy of retaining earnings, if any, in order to finance,
in part, the development of its business.
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Command Security Corporation
We have audited the financial statements of Command Security Corporation listed
in Item 14(a) of this Form 10-K as of March 31, 1995 and for the year ended
March 31, 1995 and 1994. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Command Security Corporation
as of March 31, 1995 and the results of its operations and its cash flows for
each of the two years in the period ended March 31, 1995 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Notes 2, 6 and 9 to
the financial statements, the Company incurred losses for the years ended March
31, 1995 and 1994 and a working capital deficit at March 31, 1995, is in default
on certain of its debt covenants; and, as described in Notes 13 and 18, there is
a contingency and litigation for which the outcomes are uncertain. The Company's
continuation is dependent on the forbearance of its lenders, and its ability to
continue to obtain adequate financing, to achieve profitability from its
operations and to favorably resolve the contingency and litigation. These
factors raise substantial doubt about the Company's ability to continue as a
going concern Management's plans in regard to these matters are described in
Note 2. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern or
satisfactorily resolve the contingency and litigation.
/s/ Coopers & Lybrand LLP
Albany, New York
July 8, 1995, except for Notes 13 and 23
for which the date is September 19, 1995.
To the Board of Directors and Stockholders
of Command Security Corporation
We have audited the financial statements and financial statement schedule of
Command Security Corporation listed in item 14(a) of this Form 10-K as of March
31, 1996, and for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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, 1996 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ D'Arcangelo & Co., LLP
June 12, 1996
Poughkeepsie, New York
24
<PAGE>
CORPORATE DIRECTORY
Officers and Directors
William C. Vassell
Chairman of the Board
Gordon Robinett
Vice Chairman of the Board,
Treasurer and Director
H. Richard Dickinson
Executive Vice President,
Chief Financial Officer and Director
Eugene U. McDonald
Senior Vice President--Operations
Debra M. Miller
Secretary
Gregory J. Miller
Director
General Counsel
Goldline Connectors, Inc.
Peter J. Nekos
Director
Certified Public Accountant
Peter T. Kikis
Director
President, Spencer
Management Company
Steven B. Sands
Director
Chairman, Sands
Brothers & Co., Ltd.
Lloyd H. Saunders, III
Director
Managing Director, Sands
Brothers & Co. Ltd.
Corporate Counsel
Herzog, Engstrom & Koplovitz
Albany, New York
Independent Auditor
D'Arcangelo & Co. LLP
Poughkeepsie, New York
Transfer Agent
American Securities Transfer, Inc.
938 Quail Street, Suite 101
Lakewood, Colorado 80215-5513
Corporate Office and Data Center
Route 55
Lexington Park
Lagrangeville, NY 12540
Tel: (914) 454-3703
Fax:(914) 454-0075
Executive Office
386 Park Avenue South
New York, NY 10016
Tel: (212) 689-6565
Fax: (212) 689-6490
Operating Divisions
Command Security Corporation
Albany, New York
(518) 459-1845
Balston Spa, New York
(518) 885-0677
Buffalo, New York
(716) 631 -5305
Farmingdale, New York
(516) 753-6098
Hartford, Connecticut
(203) 493-2553
Miami, Florida
(305) 597-9752
New York, New York
(212) 387-0212
Poughkeepsie, New York
(914) 454-4414
Shelton, Connecticut
(203) 929-8050
Union, New Jersey
(908) 686-1400
White Plains, New York
(914) 948-0118
CSC Security Services
Chicago, Illinois
(312) 881-0055
Los Angeles, California
(213) 722-1605
Management Services Division/
Investigation and Undercover
New York, New York
(212) 689-6565
Aviation Safeguards Division
JFK International Airport
Jamaica, New York
(800) 272-6483
LAX International Airport
Los Angeles, California
(310) 646-1179
STAIRS(TM) Division
New York, New York
(212) 689-6565
Service Company Locations
Albuquerque, New Mexico
Chicago, lllinois
Fort Pierce, Florida
Indianapolis, Indiana
Jamaica, New York
Los Angeles, California
Minneapolis, Minnesota
Newport News, Virginia
Phoenix, Arizona
Providence, Rhode Island
Quincy, Massachusetts
Richmond, Virginia
Seattle, Washington
Sparta, New Jersey
Tucson, Arizona
Virginia Beach, Virginia
W. Springfield, Massachusetts
Worchester, Massachusetts
Form 10-K
Copies of the Company's Annual Report
on Form 10-K may be obtained at no
cost by writing to the Company at:
Lexington Park
PO Box 340
Lagrangeville, NY 12540
Stock Listing
Command Security Corp. common stock
is traded in the over-the-counter
securities market on NASDAQ under the
symbol CMMD.
Augusta Design Group Inc./NYC
