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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ______
Commission File Number 0-18684
COMMAND SECURITY CORPORATION
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(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
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(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
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |_|
As of June 18, 1997, the aggregate market value of the voting stock held
by non-affiliates of the registrant, based on the last sales price $1.406 on
that date, was approximately $6,511,989.
As of June 18, 1997, the registrant had issued and outstanding 6,783,932
shares of common stock, which does not include 47,000 shares to be issued
pursuant to a contractual obligation.
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PART I
ITEM 1. BUSINESS
Command Security Corporation ("Company") is a corporation formed under the
laws of the State of New York on May 9, 1980. It principally provides uniformed
security services from its fifteen operating offices in New York, New Jersey,
Illinois, California, Pennsylvania and Connecticut to commercial, financial,
industrial, aviation and governmental clients in the United States. Security
services include providing uniformed guards for access control, theft
prevention, surveillance, vehicular and foot patrol and crowd control. The
Company employs a total of approximately 3,600 hourly guards, including those
employed under security service agreements with other security guard companies
for which the Company administers billing, collection and payroll ("service
company clients") and approximately 63 other employees indirectly attributable
to guard services including supervisors and dispatchers. The Company also
employs approximately 71 administrative employees, including the executive
staff.
Management believes there is heightened attention to security matters due
to the ongoing threat of criminal and terrorist activities. As a result of such
attention, management further believes that the urban commercial centers served
by the Company provide an opportunity for increased market participation and
growth.
From 1983, when William C. Vassell, the Company's Chairman of the Board
acquired control, to June 1990, the Company expanded its business through
internal sales efforts and by acquisitions of the customer lists of smaller
security firms in markets the Company was already serving. In July 1990, the
Company implemented an expansion program emphasizing growth by providing back
office services to service company clients.
This program capitalizes on the Company's proprietary computerized
scheduling and information systems, which incorporates administrative programs
and other data processing procedures. Pursuant to written "Service Agreements",
the Company provides service company clients with the benefits of its
proprietary computerized scheduling and information system and programs, as well
as its accounts receivable financing and insurance resources, for a fee equal to
a percentage of the service company clients' revenue or gross profits. Under
these agreements, the Company's program is designed to take over the "back
office" functions of these clients, enabling them to reduce their general and
administrative expenses and thereby increase profitability, while also freeing
their managers to service existing customers and to solicit new business.
In connection with these service agreements, the Company may provide to
its service company clients financial accommodations, typically in the form of
loans. The loans are secured by accounts receivable, customer lists, contracts
and all other assets of the independent firm and are personally guaranteed by
the owner(s) of the service company.
Operations
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As a licensed watchguard and patrol agency, the Company furnishes guards
to its customers to protect people or property and to prevent the theft of
property. In this regard, the Company principally conducts business by providing
guards and other personnel who are, depending on the particular requirements of
the customer, uniformed or plainclothed, armed or unarmed, and who patrol in
marked radio cars or stand duty on the premises at stationary posts such as fire
stations, reception areas or video monitors. The Company's guards maintain
contact with headquarters or supervisors via car radio or hand-held radios. In
addition to the more traditional tasks associated with access control and theft
prevention, guards respond to emergency situations and report to appropriate
authorities fires, natural disasters, work accidents and medical crises. The
Company also provides private investigation services.
The Company provides a variety of uniformed services for domestic and
international air carriers including pre-board passenger screeners, checkpoint
security supervisors, wheelchair escorts, skycaps, baggage handlers and
uniformed guards for cargo security areas.
The Company provides guard services to many of its industrial and
commercial customers on a 24-hour basis, 365 days per year. For these customers,
guards are on hand to provide plant security, access control, personnel security
checks and traffic and parking control and to protect against fire, theft,
sabotage and safety hazards. The remaining customers include retail
establishments, hospitals, governmental units and promoters of special events.
The services provided to these customers may require armed as well as unarmed
guards. The Company also provides specialized vehicle patrol and inspection
services and personal protection services to key executives and high profile
personalities from time to time.
To ensure that adequate protection requirements have been established
prior to commencing service to a customer, the Company evaluates the customer's
site and prepares a recommendation for any needed changes to existing security
programs or services. Surveys typically include an examination and evaluation of
perimeter controls, lighting, personnel and vehicle identification and control,
visitor controls, electronic alarm reporting systems, safety and emergency
procedures, key controls and security force manning levels. While surveys and
recommendations are prepared by the Company, the security plan and coverage
requirements are determined by the customer. Operational procedures and
individual post orders are reviewed and/or rewritten by the Company to meet the
requirements of the security plan and coverage determined by the customer.
In order to provide a high level of service without incurring large
overhead expenses, the Company establishes offices close to its customers and
delegates responsibility and decision making to its local managers. The Company
emphasizes the role of its managers by assigning to each one responsibility for
both sales and service. The Company believes that in most situations the
combination of both sales and service responsibilities in a single individual
results in better supervision and quality control and greater responsiveness to
customer concerns.
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The Company generally renders its security services pursuant to a standard
form security services agreement which specifies the personnel and/or equipment
to be provided by the Company at designated locations and the rates therefor,
which typically are hourly rates per person. Rates vary depending on base,
overtime and holiday time worked, and the term of engagement. In most cases, the
Company assumes responsibility for scheduling and paying all guards and to
provide uniforms, equipment, instruction, supervision, fringe benefits, bonding
and workers' compensation insurance. These agreements also provide customers
with flexibility by permitting reduction or expansion of the guard force on
relatively short notice. The Company is responsible for preventing the
interruption of security service as a consequence of illness, vacations or
resignations. In most cases the customer also agrees not to hire any security
personnel used by the Company for at least one year after the termination of the
engagement. Each agreement may be terminated by the customer, typically with no
prior notice or short notice (usually 30 days). In addition, the Company may
terminate an agreement immediately upon default by the customer in payment of
monies due thereunder or if there is filed by or against the customer a
bankruptcy petition or if any other act of bankruptcy occurs.
The Company has its own proprietary computerized scheduling and
information system. The scheduling of guards, while time-consuming, is a most
important function of any guard company. Management believes the system
substantially reduces the time a manager must spend on scheduling daily guard
hours and allows the Company to fulfill customer needs by automatically
selecting those guards that fit the customer's requirements.
Employee Recruitment and Training
The Company believes that the quality of its guards is essential to its
ability to offer effective and reliable service, and it believes diligence in
their selection and training produces the level of performance required to
maintain customer satisfaction and internal growth.
All selected applicants for Company guard positions undergo a detailed
pre-employment interview and a background investigation covering such areas as
employment, education, military service, medical history and, subject to
applicable state laws, criminal record. In certain cases the Company employs
psychological testing and, where permitted, uses pre-employment polygraph
examinations. Personnel are selected based upon physical fitness, maturity,
experience, personality, stability and reliability. Medical examinations and
substance abuse testing may also be performed. Prerequisites for all Company
guards include a good command of the English language and the ability to
communicate well and write a comprehensive and complete report. Preference is
given to applicants with previous experience, either as a military or a civilian
security-police officer.
The Company trains accepted applicants in three phases: Pre-assignment;
On-the-job; and Refresher. The Company's training programs utilize current
curricula and audio-visual materials. Pre-assignment training explains the
duties and powers of a security guard, report preparation, emergency procedures,
general orders, regulations, grounds
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for discharge, uniforms, personal appearance and basic post responsibilities.
On-the-job assignment training covers specific duties as required by the post
and job orders. Ongoing refresher training is given on a periodic basis as
determined by the local area supervisor and manager.
Command treats all employees and applicants for employment without
unlawful discrimination as to race, creed, color, national origin, sex, age,
disability, marital status or sexual orientation in all employment-related
decisions.
Significant Customers
No customer of the Company accounted for more than 10% of its gross
revenue in the fiscal year ended March 31, 1997.
Competition
Competition in the security service business is intense. It is based
primarily on price and the quality of service provided, the scope of services
performed, name recognition and the extent and quality of security guard
supervision, recruiting and training. As the Company has expanded its operations
it has had to compete more frequently against larger national companies, such as
Pinkerton's, Inc., The Wackenhut Corporation, Burns International Security
Services, Inc. and Wells Fargo Guard Services, which generally have
substantially greater financial resources, personnel and facilities than the
Company. These competitors also offer a range of security and investigative
services which are at least as extensive as, and directly competitive with,
those offered by the Company. In addition, the Company competes with numerous
regional and local organizations which offer substantially all of the services
provided by the Company. Although management believes that, especially with
respect to certain of its markets, the Company enjoys a favorable competitive
position because of its emphasis on customer service, supervision and training
and is able to compete on the basis of the quality of its service, personal
relationships with customers and reputation, there can be no assurance that it
will be able to maintain its competitive position in the industry.
Government Regulation
The Company is subject to city, county and state firearm and occupational
licensing laws that apply to security guards and private investigators. In
addition, many states have laws requiring training and registration of security
guards, regulating the use of badges and uniforms, prescribing the use of
identification cards or badges, and imposing minimum bond, surety or insurance
standards. The Company may be subjected to penalties or fines as the result of
licensing irregularities or the misconduct of one of its guards or investigators
from time to time in the ordinary course of its business. Management believes
the Company is in material compliance with all applicable laws and regulations.
Under the law of negligence, the Company can be liable for acts or omissions of
its agents or employees performed or occurring in the course of their
employment. In addition, some states have statutes that expressly impose legal
responsibility on the Company for the conduct of its employees. The nature of
the services provided by
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the Company potentially exposes it to greater risks of liability for employee
conduct than are experienced by non-security businesses. The Company currently
maintains general liability insurance in the amount of $1.0 million per
occurrence and umbrella liability insurance in the amount of $25.0 million per
occurrence and $25.0 million in the aggregate, which it believes is suitable and
at a level customary for the industry for a business of its size.
New York State's Security Guard Act of 1992 ("Security Guard Act"),
previously known as the "Mega Bill", has been implemented in stages since
December 26, 1993. The purpose of the Security Guard Act is to regulate the
security guard industry by insuring proper screening, hiring and training of
security guards through the implementation of minimum recruitment and training
standards. This legislation affects all in-house (or proprietary) guard forces
as well as security guard companies such as the Company. Legislation has also
been introduced at the federal level which would be expected to require
regulations similar to those imposed under the Security Guard Act. The New York
regulation has created, and the federal regulation is expected to create,
increased marketing opportunities for the Company's guard business since
compliance with increased training requirements by in-house security forces
results in disproportionately large cost increases for them compared to the
Company. Compliance with the Security Guard Act has not, and with respect to the
proposed federal legislation is not expected to materially increase the cost of
the Company's operations. The Committee of National Security Companies supports
the federal legislation and management believes the prospects for its eventual
passage are good.
Employees
The Company currently employs approximately 3,600 hourly workers
performing guard services and approximately 63 other employees indirectly
attributable to guard services including supervisors and dispatchers. The
Company also employs approximately 71 executive, sales, administrative or
clerical staff, most of whom are salaried.
The Company's business is labor intensive and, as a result, is affected by
the availability of qualified personnel and the cost of labor. Although the
security guard industry is characterized by high turnover, the Company believes
its experience compares favorably with that of the industry. The Company has not
experienced any material difficulty in employing suitable numbers of qualified
security guards, although, when labor has been in short supply, it has been
required to pay higher wages and incur overtime charges.
Approximately 74% of the Company's employees hired for guard service
customers do not belong to a labor union. The Company's New York City employees,
who represent approximately 26% of the Company's employees for guard service
customers, work under collective bargaining agreements with the following
unions: Local 32B-32J, Service Employees International Union; Allied
International; and Special & Superior
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Officers Benevolent Association. Most of the Company's New York City and Chicago
competitors also are unionized. The Company has experienced no work stoppages
attributable to labor disputes. The Company believes that its relations with its
employees are satisfactory. Guards and other personnel supplied by the Company
to its customers are employees of the Company, even though they may be stationed
regularly at the customer's premises.
Service Marks
The Company believes itself to be the owner of the service marks
"Command", "CSC" and "CSC Plus" design for security guard, detective, private
investigation services and related consulting services. On October 22, 1991, the
mark "CSC" for the above services was registered with the U.S. Patent and
Trademark Office, Registration No. 1,662,089. It appears on the principal
register. The service mark registration applications for "Command" and "CSC
Plus" design relative to the above services are pending before the United States
Patent and Trademark Office. Once registered, the marks are expected to appear
on the principal register.
The Company also believes itself to be the owner of the service marks
"STAIRS", "Smart Guard" and "Smartwheel." The respective registration dates and
numbers for "STAIRS" and "Smart Guard" are September 15, 1992; No. 1,715,363 and
December 19, 1992; No. 1,742,892. The service mark application filed on March
24, 1994, for "Smartwheel" is pending before the U.S. Patent and Trademark
Office. Once registered, the mark is expected to appear on the principal
register.
ITEM 2. PROPERTIES
As of March 31, 1997, the Company owned and used in connection with its
business approximately 67 vehicles. The Company also owns three vehicles used in
connection with the business of one of its service company clients.
As of March 31, 1997, the Company did not own any real property. It
occupies executive offices at Route 55, Lexington Park, Lagrangeville, New York,
of approximately 4,760 square feet with a base annual rental of $71,400 under a
five-year lease expiring November 1, 2000. The Company also occupies the
following offices:
Square Base Annual
Location When Opened Footage Rent
- -------- ----------- ------- -----------
The Poughkeepsie Plaza Mall
Poughkeepsie, NY 9/1/83 920 $12,000
17 Lewis Street
Hartford, CT 5/1/92 1,075 $13,320
331 Park Avenue South
10th Floor
New York, NY 11/1/91 3,400 $60,300
8
331 Park Avenue South 2/1/93 3,400 $60,300
11th Floor
New York, NY
300 Hamilton Avenue
White Plains, NY 8/15/96 960 $13,920
505 Main Street
Suite #2
Williamsville, NY 5/1/93 680 $ 5,400
9415 S. Western Avenue 9/10/95 1,444 $20,820
Chicago, IL
5801 E. Slauson Avenue 11/9/94 1,689 $28,375
Suite G-160
Commerce, CA
One Corporate Drive 2/1/93 1,712 $34,634
Suite 218
Shelton, CT
96A Allen Boulevard 1/1/94 950 $10,381
East Farmingdale, NY
386 Park Avenue South 9/1/95 4,000 $70,000
New York, NY
1185 Morris Avenue 1/1/96 1,983 $20,340
Suite 301A
Union, NJ
Cargo Building 78 6/10/93 1,642 $43,205
JFK International Airport
Jamaica, NY
Los Angeles International 8/15/96 647 $17,236
Airport
Los Angeles, CA
1237 Central Avenue #210 10/19/93 400 $ 4,800
Albany, NY
2144 Doubleday Avenue 4/1/93 800 $12,420
Ballston Spa, NY
2777 Summer Street 3/13/95 1515 $30,300
Stamford, CT
224 Datura Street 9/17/96 250 $ 4,134
West Palm Beach, FL
124 Chestnut Street, Suite 5 11/25/96 500 $ 4,260
Philadelphia, PA
The Company believes its properties are adequate for its current
9
needs.
ITEM 3. LEGAL PROCEEDINGS
The nature of the Company's business subjects it to claims or litigation
alleging that it is liable for damages as a result of the conduct of its
employees or others. Except for such litigation incidental to its business,
other claims or actions that are not material and the lawsuits described below,
there are no pending legal proceedings to which the Company is a party or to
which any of its property is subject. See "EXHIBITS, FINANCIAL STATEMENTS,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K."
In August, 1992, the Company commenced an action in the State of New York
Supreme Court, County of Dutchess, against Guard Services of America, Inc.
("GSA"), a former service company client for non-payment of obligations owed by
the service company client to the Company. The Company seeks $965,000 in
damages. At approximately the same time, GSA initiated suit in the Potter County
District Court, Texas, for non-performance of the Company in connection with the
terms of the service agreement seeking compensatory damages in an unspecified
amount. In April 1997 the Company and the former service company client entered
into a settlement where all claims against the Company were resolved without
payment of any money by the Company. The Company has retained the services of
local counsel in Texas to continue the Company's claims against GSA's related
entities and guarantors for the amount in dispute, approximately $495,000. The
Company has established reserves for the full amount due to the Company in
connection with GSA. (See Note 14 to "Notes to Financial Statements").
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. 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 NASDAQ Stock Market, Inc. for each full quarterly period within the two
most recent fiscal Years.
Period(1) Last Sales Price
--------- ----------------
10
High Low
---- ---
1996
----
First Quarter 2 .750
Second Quarter 1.437 .875
Third Quarter 1.281 .718
Fourth Quarter 1.437 .875
1997
----
First Quarter 1.625 1.125
Second Quarter 2.156 1.250
Third Quarter 2 1.125
Fourth Quarter 2.844 1.125
(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 18, 1997 there were approximately 302 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 18, 1997, was
$1.406.
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
present, the Company's anticipated capital requirements are such that it intends
to follow a policy of retaining earnings, if any, in order to finance, in part,
the development of its business.
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COMMAND SECURITY CORPORATION
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in this table have been derived from the financial
statements as of and for the years ended March 31, 1997, 1996, 1995, 1994 and
1993, which have been audited by independent certified public accountants. The
information should be read in conjunction with "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and with the
financial statements and related notes included in the Report.
See Note 22, "Acquisitions", for factors affecting the comparability of the
financial data.
Statement of Operations Data
Years Ended March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenue (excluding service company revenue) $49,237,418 $54,995,444 $ 39,595,272 $ 25,393,933 $ 9,760,092
Gross profit $ 8,443,578 $ 8,496,499 $ 4,527,365 $ 2,914,928 $ 1,939,632
Service contract revenue $ 1,471,313 $ 1,519,803 $ 1,291,943 $ 1,022,684 $ 1,527,670
Operating profit/(loss) $ 1,267,805 $ 1,250,713 $ (2,412,603) $ (2,227,936) $ (311,477)
Net income/(loss) $ 450,030 $ 511,650 $ (2,983,823) $ (2,727,102) $ (315,469)
Income/(loss) per common share - primary $ .05 $ .06 $ (.70) $ (.96) $ (.15)
Weighted average number of common shares outstanding - primary 6,955,548 6,663,986 4,274,657 2,827,297 2,053,075
Balance Sheet Data as of March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Working capital/(deficiency) $ 1,413,212 $ 218,968 $ (531,602) $ (772,143) $ 1,063,648
Total assets $23,188,576 $22,384,414 $ 20,267,099 $ 17,733,634 $ 11,909,890
Short-term debt(1) $ 8,817,997 $ 8,506,911 $ 6,095,183 $ 6,936,086 $ 3,940,092
Long-term debt(2) $ 1,284,423 $ 1,194,505 $ 1,229,773 $ 1,106,221 $ -0-
Redeemable convertible preferred stock $ 1,743,555 $ 1,614,525 $ 1,495,065 $ -0- $ -0-
Stockholders' equity $ 5,731,180 $ 5,189,226 $ 4,993,859 $ 5,135,744 $ 4,182,472
- ----------
(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.
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ITEM 7. 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, 1997, the Company's operations
resulted in a net profit of $321,000 after a net income tax benefit of $140,360.
In addition, as of that date, the Company had positive working capital of
$1,413,000.
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 new lines of credit 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, 1997 Compared with March 31, 1996
During the fiscal year ended March 31, 1997, revenue decreased by
$5,758,026 to $49,237,418 from $54,995,444 for the fiscal year ended March 31,
1996. Of this decrease, approximately $967,000 represents revenue lost as a
result of the sale of the Company's Boston operation (sold October, 1995) and
Miami operation (sold December, 1996). Approximately $1,200,000 of the decrease
is due to the loss of an aviation client on October 1, 1995, $2,400,000 resulted
from low-margin contracts that were not renewed during the year and $2,900,000
due to other contract cancellations net of new contract starts. This was
partially offset by approximately $1,700,000 of revenue generated by
acquisitions closed throughout the fiscal year ended March 31, 1997.
Gross profit as a percentage of revenue decreased by $52,921 to $8,443,578
or 17.1% of revenue for the fiscal year ended March 31, 1997, compared to
$8,496,499 or 15.4% of revenue for the prior fiscal year. Gross profit decreased
by approximately $900,000 as a result of lower revenue. This decrease was offset
by cost savings in the areas of insurance expense ($895,000), union benefits
($222,000), and payroll taxes ($155,000).
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 decreased by $48,490 to $1,471,313 for the fiscal
year ended March 31, 1997 from $1,519,803 for the fiscal year ended March 31,
1996. $216,451 of this decrease is attributable to lower fees earned from
existing contracts due to contract terminations offset by higher fees earned
from the Company's non-employer of record
13
program of $167,961. The Company purchased the customer lists from two service
companies in October, 1996 and in March, 1996, and converted one service company
from an "employer of record" to a "non-employer of record" arrangement.
General administrative expenses decreased by $1,021,485 to $7,114,478 in
fiscal year 1997 from $8,135,963 in fiscal 1996. The major areas of decrease are
administrative salaries and related payroll taxes ($643,000), rents and
utilities ($106,000), insurance ($140,000), professional fees ($96,000), and
bank fees ($75,000). These decreases were offset by increases in various other
expenses categories of $40,000.
Amortization of intangibles increased by $570,371 to $1,773,599 for fiscal
year 1997 compared to $1,203,228 for the fiscal year 1996. Of the total increase
$393,600 is the result of management's re-evaluation, during the quarter ended
June 30, 1996, of the useful lives of the customer lists acquired from ISS in
October, 1993. Based on the contract retention since the acquisition, the
Company has reduced the useful life from 15 years to 5 years. The remaining
increase is due to the amortization of new customer lists purchased and a
non-compete covenant.
The provision for doubtful accounts increased by $93,852 to $447,159 for
the fiscal year ended March 31, 1997 compared to $353,307 for fiscal year 1996.
This increase in the provision is management's estimates of accounts that may be
uncollectible, based on continuous monitoring of accounts outstanding in excess
of 60 days. It is not known if bad debts will increase in future periods nor is
the increase necessarily indicative of a trend.
Bad debt recoveries decreased by $130,907 to $90,011 for the fiscal year
ended March 31, 1997 compared to $220,918 for fiscal year 1996. The amount
reported for fiscal year 1997 represents funds collected on an old receivable
from a former client that had been previously written off. Of the amount
reported for fiscal year 1996, $200,000 represented the amount collected, in
excess of book value, from Polygram Diversified Ventures, Inc. and Woodstock
Ventures, Inc., on the WOODSTOCK `94 receivable.
Insurance rebates received by the Company for fiscal years ended March 31,
1997 and 1996 of $598,139 and $742,305 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.
Those excess premiums have now been paid to the Company in full. 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 premium deposits paid,
in excess of actual losses and costs as finally determined. As such, the Company
has calculated its insurance expense for the last six months of the fiscal year
ended March 31, 1996 and for the entire fiscal year ended March 31, 1997 on the
basis of estimated losses plus certain minimum premium amounts. Therefore,
although the Company anticipates
14
that it will receive future cash rebates of premiums for the policy years ended
September 30, 1996 and 1997, those rebates will only be reflected on the
Statements of Operations in future periods to the extent that actual losses
differ from estimated losses.
Interest expense decreased by $116,927 to $1,065,852 for the fiscal year
ended March 31, 1997 compared to $1,182,779 for the prior fiscal year. This
decrease is due to lower debt levels, as well as the elimination of interest
accruals in connection with the Company's settlement agreement with ISS
International Service System, Inc. (ISS) in October, 1996, under which all
pending issues between the two companies, including interest on the note payable
to ISS, were settled (See Note 9 to "Notes to Financial Statements").
Interest income increased by $10,322 to $179,599 for the fiscal year ended
March 31, 1997 compared to $169,277 for the prior fiscal year.
Equipment dispositions primarily represent older cars sold or taken out of
service
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 Security
Group Inc. on 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 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 was 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
that did not recur in the fiscal year ended March 31, 1996.
Service Contract Revenue increased by $227,860 to $1,519,803 in fiscal
1996 compared to $1,291,943 in fiscal 1995. $275,034 of this increase was
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 1995.
General administrative expenses increased by $2,248,057 to $8,135,963 in
fiscal year 1996 from $5,887,906 in fiscal year 1995. The major areas of
increase were the ongoing general and administrative costs of $1,649,135
resulting from the addition of the United operations; depreciation of $53,598;
bank service fees of $202,224; and
15
administrative salary expense of $158,263.
Amortization expense increased by $540,443 to $1,203,228 in fiscal year
1996 compared to $662,785 in fiscal year 1995. This increase is primarily
attributable to the ISS and United customer list acquisitions in October 1994
and February 1996, respectively.
The provision for doubtful accounts decreased by $1,424,153 from
$1,777,460 to $353,307. This decrease was primarily due to provisions
established during fiscal year 1995 for the collection of WOODSTOCK `94
receivable 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 on the Company's books 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, from Polygram Diversified Ventures,
Inc. and Woodstock Ventures, Inc., on 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. 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 premium
deposits paid, in excess of actual losses and costs as finally determined. As
such, the Company has calculated its insurance expense for the last six months
of the fiscal year ended March 31, 1996 and forward on the basis of estimated
losses plus certain minimum premium amounts. Therefore, although the Company
anticipates that it will receive future cash rebates of premiums for the policy
year ended September 30, 1996, those rebates will only be reflected on the
Statements of Operations in future periods to the extent that actual losses
differ from estimated losses.
The loss on value of intangible assets represented 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 1996 from
$623,591 in fiscal 1995. This increase was attributable to the interest required
to service the increased debt resulting from the acquisition of United and
higher working capital requirements.
Equipment dispositions primarily represented 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
16
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).
This agreement was amended as of January 30, 1997 to provide for a two
year renewal to February 23, 1999 as well as other changes in terms and
conditions. Under this agreement, borrowings may be made in an amount up to 85%
(previously 82.5%) of eligible accounts receivable, but in no event more than
$10,000,000. The amendment also provides for a term loan in the amount of
$500,000 to be repaid in equal monthly installments over five years. The Company
uses those funds for working capital purposes. Outstanding balances under the
revolving loan and the term loan bear interest at a per annum rate of 1 and 1/2%
(previously 2% on the revolving loan) in excess of the "prime rate" and are
collateralized by a pledge of the Company's accounts receivable and other
assets.
At March 31, 1997, the Company had borrowed $7,150,836 or approximately
69% 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).
In February, 1995 the Company entered into a subordinated loan arrangement
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 of the
Company's assets, properties and other revenue.
Other short-term borrowings of $612,742 as of March 31, 1997, consisted of
insurance premium financing of $403,167 with the remainder primarily consisting
of service accounts acquisitions indebtedness.
Long term debt as of March 31, 1997 was $2,172,606 (including current
Maturities) and consisted of $750,000 due to Deltec Development Corporation;
$126,018 (net of imputed interest of $2,769) 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"); $88,911 due to NSC Shareholder Trust
(NSC) relative to a settlement in June, 1996 in connection with a put offer
given for common stock issued in consideration for the purchase of customer
lists; $135,000 due to Gordon Robinett, a Director and former Treasurer of the
Company, issued in consideration of a covenant; $81,246 due to Capital Resource
Company assumed in connection with the purchase of certain guard service
accounts from a former service company in March, 1996;
17
and, $491,667 due to CIT Group/Credit Finance; with the remainder of $499,764
representing various auto and other installment loans.
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 a
$1,000,000 bank term loan and promissory notes to the seller for $750,000 and
$1,000,000 due October 27, 1994 and October 27, 1995, respectively, 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 Company and ISS have agreed to a reduction of
$1,250,000 in the purchase price of the ISS acquisition for accounts lost during
the guarantee period and other offsets.
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 claims arising out of, among other things, the
restatements. (See Note 14 to "Notes to Financial Statements"). Management
believes that the probability of claims and a resultant negative impact on the
Company's financial condition is diminishing with time.
Accounts receivable, net of allowance for doubtful accounts, from guard
service customers decreased by approximately $450,000 primarily as a result of
lower revenue. Net accounts receivable from service contract customers increased
by approximately $900,000 primarily due to new business generated by existing
service agreement clients This net increase was financed primarily by borrowings
on the line of credit. Accounts payable and accrued expenses decreased by
approximately $420,000 due to generally lower levels of expense.
The Company had positive working capital as of March 31, 1997 of
$1,431,000 as compared to $219,000 as of March 31, 1996. This improvement during
the fiscal year 1997 was primarily due to earnings, as well as, the favorable
settlement with ISS and the term loan of $500,000 granted by the Company's
senior lender.
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
18
expenditures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See ITEM 14, "EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
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 would be 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 1994 and 1995.
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 l994. 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 has 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
19
clients was correct. As stated above, Cooper's 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's by-laws provide for a two-class Board of Directors. The
first class consists of directors Steven B. Sands, Peter T. Kikis, Lloyd H.
Saunders, III and H. Richard Dickinson. The second class consists of William C.
Vassell, Gordon Robinett, Peter J. Nekos and Gregory J. Miller. The terms of the
directors in the first class will expire at the annual meeting of shareholders
in 1998 or until their successors have been elected and qualified. The terms of
the directors in the second class will expire at the annual meeting of
shareholders in 1997 or until their successors are elected and qualified. Each
director's term is for two years. A classified board makes it more difficult for
shareholders to change the majority of directors. Depending on the number of
people in each class it could take two (2) annual meetings to replace a majority
of the Board. This provision is applicable to every election of directors after
the initial classification.
Each member of the Board entered into a Shareholder Voting Agreement on
March 8, 1995, which was finally revised on March 24, 1995, and thereafter
amended on June 2, 1995. It provides that each person then on the Board will (i)
vote all shares beneficially owned by him (his "Shares") for the election to
directorships of each of the other members of the Board, (ii) refrain from
voting any of his Shares for any action that would result in the increase or
decrease of the number of positions on the Board or for the removal, without
cause, of any member of the Board, and (iii) in the event of death, resignation
or removal of any director, vote all of his Shares in favor of the election of
the person designated as replacement in accordance with the Shareholders Voting
Agreement.
Simultaneously with the execution of the Shareholders Voting Agreement,
all of the persons then on the Board signed a Unanimous Written Consent which
provides for them to designate certain members of the Board as replacements for
any current director upon death, resignation, removal or inability to serve.
Messrs. Vassell, Nekos, Miller and Robinett were given the authority to nominate
their replacements; Messrs. Dickinson, Sands and Saunders were given the
authority to nominate their replacements; and Mr. Kikis was given the authority
to nominate his replacement. The Board members agreed that their respective
nominees of any replacements could be provided at a later date.
The following table provides information concerning each person who
20
was an executive officer or director of the Company as of June 18, 1997.
Name Age Title
- ---- --- -----
William C. Vassell 39 Chairman of the Board
Gordon Robinett 61 Vice Chairman of the Board
H. Richard Dickinson 50 Executive Vice President, Chief Financial
Officer and Director
Gregory J. Miller 39 Director
Peter J. Nekos 69 Director
Peter T. Kikis 74 Director
Steven B. Sands 38 Director
Lloyd H. Saunders, III 43 Director
Eugene U. McDonald 47 Sr. Vice President--Operations
Debra M. Miller 42 Secretary
William C. Vassell had been Chairman of the Board, President and Chief
Executive Officer of the Company since 1983, when the Company repurchased the
remaining 50% of its then-outstanding common stock (he became a 50% owner of the
Company in 1980). In connection with the acquisition of United, Mr. Vassell
resigned as President and Chief Executive Officer on February 24, 1995, and
retained his position as Chairman of the Board. He has been a director of the
Company since 1980, and has been a member of the Executive Committee since March
1995. Mr. Vassell is active in various industry and trade associations. He twice
was Chairman of the Mid-Hudson Chapter of the American Society for Industrial
Security (the nationally recognized security association), and he is a Certified
Protection Professional within the Society. He is also a director of the
Associated Licensed Detectives of New York State and a member of the Committee
of National Security Companies.
Gordon Robinett was appointed Vice Chairman of the Board of Directors on
February 24, 1995. He was Treasurer of the Company from May, 1990 through July,
1996 and has been a director since 1990.
H. Richard Dickinson was appointed Executive Vice President and Chief
Financial Officer of the Company on February 25, 1995, in connection with the
acquisition of United. Before joining the Company, Mr. Dickinson had been the
Vice President and Chief Financial Officer of United Security Group Inc. since
1989 and a director of United since 1993. Mr. Dickinson has 19 years of security
industry experience. From 1978 to 1982 he was employed by Burns International
Security Services, initially as Director of Corporate Taxation and thereafter as
Vice President and Treasurer, where his responsibilities included corporate
accounting and SEC reporting. In 1982, when Borg Warner acquired Burns,
21
Mr. Dickinson remained at Burns until 1984 when he became Assistant Treasurer
and then assumed the role of Treasurer of the Protective Services Group. Mr.
Dickinson was named to the Board as of May 4, 1995 and has been a member of the
Executive Committee since that date.
Peter T. Kikis became a director of the Company on February 24, 1995 in
connection with the acquisition of United. He has also served as Chairman of the
Company's Executive Committee of the Board of Directors since March, 1995. He is
a director of Deltec International S.A., the parent of Deltec Development
Corporation, the subordinated debt lender to the Company. Since 1950, Mr. Kikis
has been the President and a principal in Spencer Management Company, a real
estate development and management company in New York, New York. From 1972 to
1992, Mr. Kikis was Chairman of the Board of Directors and a principal of
McRoberts Protective Agency, a New York based provider of security guard
services.
Gregory James Miller has been a director of the Company since September
1992. Since 1987 he has served as General Counsel for Goldline Connectors, Inc.,
a Connecticut-based electronics manufacturer, and sits on its board of
directors. Mr. Miller also serves "of counsel" to Benenson & Kates, in New York,
handling labor law and contract negotiations for security guard clients, and has
handled various legal matters for the Company since 1985. Mr. Miller is
currently employed by Goldline Connectors, Inc. He has a Bachelors Degree from
Kalamazoo College, and a Juris Doctor degree from New York Law School, where he
was an Editor of the Journal of Human Rights. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
Peter J. Nekos has been a director of the Company since March 1991. Mr.
Nekos is a certified public accountant and, since July 1986, he has operated his
own accounting firm in Mamaroneck, New York, from July 1984 to June 1986 he was
a partner of Nekos & Kilduff, an accounting firm located in New Rochelle, New
York.
Steven B. Sands was placed on the Board on April 13, 1994, in accordance
with the provisions an agreement with Sands Brothers executed in connection with
the Company's 1993 Private Placement. Mr. Sands is Chairman of the Sands
Brothers & Co., Ltd., a Delaware corporation, registered as a broker-dealer. Mr.
Sands also has interests in certain entities which own the Company's stock. Mr.
Sands is also currently on the board of directors of the following
publicly-traded companies: The Village Green Bookstore, Inc.; Semi-Conductor
Packaging Materials, Inc.; and Digital Solutions, Inc.
Lloyd H. Saunders, III, became a director of the Company on February 24,
1995, in connection with the acquisition of United. He is a managing director at
Sands Brothers and has been so since 1991. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
Eugene U. McDonald has more than 20 years experience in the security
business. He joined the Company in October of 1992 as Vice President of
Corporate Services, and recently took over the position of Senior Vice
President-Operations. Mr. McDonald has held senior management positions with
Globe Security (1973-1990) and Burns International Security Services
(1990-1992). He has extensive direct
22
personal experience with the handling of specialized security personnel for
cleared facilities as evidenced by his duties as Group Vice President - Energy
Services for Globe Security. He is active in the American Nuclear Society,
Institute of Nuclear Materials Management, American Society for Industrial
Security and the Connecticut Police Chiefs Association.
Debra Miller has been employed by the Company since September 1983,
initially as Office Manager and, since March 1986, as Corporate Secretary.
Based solely on a review of Forms 3, 4 and 5 and any amendments thereto,
and written representations to the Company with respect to the fiscal year ended
March 31, 1997, the Company is not aware of any person who, at any time during
the fiscal year ended March 31, 1997, was a director, officer or beneficial
owner of more than ten percent (10%) of the Company's common stock and who
failed to file reports required by Section 16(a) of the Securities Exchange Act
of 1934, as amended, during the fiscal year ended March 31, 1997. The following
event was reported late: Mr. Vassell's wife sold 10,000 shares of common stock
in February 1997.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended March 31, 1997,
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
Former Treasurer and Eugene U. McDonald, Senior Vice President -- Operations. 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.
(Balance of Page Intentionally Left Blank)
23
SUMMARY COMPENSATION TABLE
FOR THE FISCAL YEAR ENDED 3/31/97
Annual Compensation Long-Term Compensation
Other Annual Shares Underlying
Name and Principal Fiscal Year Ended Salary Warrants Shares Underlying
Position March 31 Annual Salary Compensation Bonus Granted Repriced Warrants
- -------- -------- ------------- ------------ ----- ------- -----------------
William C. Vassell(1)
Chairman of the Board
1995 $152,885 (2) 0 0 0
1996 $150,000 (2) 0 0 0
1997 $150,000 (2) 0 0 0
H. Richard Dickinson 1996 131,593 (2) 0 0 0
Chief Financial Officer 1997 130,000 (2) 0 35,000 0
Executive Vice President
Gordon Robinett
Vice Chairman 1995 $101,923 (2) 0 0 0
of the Board and Former 1996 $100,000 (2) 0 0 0
Treasurer 1997 $37,692 (2) 0 0 227,500 (3)
Eugene U. McDonald
Senior Vice President - 1995 $ 78,172 (2) 0 0 0
Operations 1996 $ 88,461 (2) $15,000 0 0
1997 $105,270 (2) $10,000 0 0
(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 repricing of the: 107,500 shares issued on January 19, 1991, with
exercise price at market value of $5.00, reduced to market value of $3.25
as of August 16, 1993 and reduced on July 15, 1996 to $2.50; 60,000 shares
issued on April 8, 1991, with exercise price at market value of $3.375,
reduced to market value of $3.25 as of August 16, 1993 and reduced on July
15, 1996 to $2.50; and 60,000 shares issued on May 15, 1992, with exercise
price at market value of $3.88, reduced to market value of $3.25 as of
August 16, 1993 and reduced on July 15, 1996 to $2.50.
24
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 3/31/97
% of Total Options Potential Realizable
Shares Underlying Granted to all Value
Name Warrants Granted Employees Exercise Price Expiration Date 5% 10%
- ---- ---------------- --------- -------------- --------------- --------------------
William C. Vassell None
Chairman of the Board(2)
H. Richard Dickinson 35,000 $1.875 09/31/01 $ 17,850 $ 39,550
Chief Financial Officer
Executive Vice President
Gordon Robinett 227,500 $2.50 07/19/00 $ 0 $ 77,430
Vice Chairman of the
Board and Former Treasurer
Eugene U. McDonald None
Senior Vice President -
Operations
(1) No options were exercised by executive officers during the fiscal year
ended March 31, 1997.
(2) Mr. Vassell resigned as President and Chief Executive Officer on February
24, 1995.
25
The following table sets forth the information for the fiscal year ended
March 31, 1997, 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, 1997
OPTION/WARRANT VALUES
Number of Shares Underlying Value of Unexercised in-the-money
Warrants Outstanding(1) Options at 3/31/97(2)
Name Exercisable Exercisable
- ---- ----------- -----------
William C. Vassell 225,000 (3) $ 0
Chairman of the Board (4) 175,000 $ 0
125,000 $ 0
H. Richard Dickinson 35,000 $ 1,085
Chief Financial Officer
Executive Vice President
Gordon Robinett 227,500 $ 0
Vice Chairman of the
Board and Former Treasurer
Eugene U. McDonald None $ 0
Senior Vice President - Operations
(1) No warrants were exercised by executive officers during the fiscal year
ended March 31, 1997.
(2) Values based on the $1.906 closing sales price of the Company's common
stock on March 31, 1997.
(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.
26
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company's Compensation Committee is intended to make all
recommendations to the Board related to compensation issues with respect to
executive officers. It 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 UniforceTemporary
Personnel, Inc. None of the other members of the Company's Board of Directors is
an officer, director or employee of Uniforce Temporary Personnel, 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. Mr. Robinett's
employment agreement terminated on July 19, 1996.
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 Pre-Tax Operating Profit in excess of
$1.0 million. Mr. Vassell 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.
Mr. Robinett's former employment agreement provided 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 canceled 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
year 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 warrant to purchase
10,000 shares
27
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 of 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, 1997, or
approximately $448,500.
The Company has entered into a two-year employment agreement with Mr.
Dickinson which provides for an annual base compensation of $130,000. Mr.
Dickinson is also entitled to an annual bonus equal to 5% of the Company's
Pre-Tax Operating Profit from $.5 million to $1.0 million, and 1% of all Pre-Tax
Operating Profit in excess of $1.0 million.
Other than pursuant to the Employment Agreements for Messrs. Vassell and
Dickinson, and the Compensation Continuation Agreement for Mr. Vassell (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.
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.
Board of Directors Compensation
No executive officer receives any additional compensation for serving as a
director. Directors who are not employees of the Company receive a meeting fee
of $1,000 for each meeting attended, and all directors are reimbursed for
expenses incurred in attending Board meetings. With the exception of Gregory J.
Miller and Peter T. Kikis,
28
no other directors who are not also executive officers received any plan or
non-plan compensation from the Company during the last three fiscal years.
On April 30, 1997, the Board voted to pay Mr. Kikis $2,500 per month
starting as of April 1, 1996 in recognition of his successfully negotiating
certain matters on the Company's behalf and for his continuing contributions to
the Company, particularly in his capacity as chairman of the Executive Committee
of the Board of Directors.
During the fiscal year 1997, Mr. Miller performed miscellaneous legal
services on behalf of the Company and was compensated therefor in an amount
approximating $4,200.
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 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
warrants by two years and reduced the purchase price to $3.25 per share, the
fair market value on the date of the extension. In October 1996 the Board of
Directors granted Messrs. Nekos and Miller five-year warrants for 10,000 shares
with a purchase price of $1.875 per share, the fair market value at the time of
issuance. On that same date the Board granted to Mr. Kikis a warrant for 150,000
shares, also with a purchase price of $1.875 per share, the fair market value at
the time of issuance.
Limited Directors' Liability
Pursuant to the New York Business Corporation Law, the Company's
certificate of incorporation, as amended, eliminates to the fullest extent of
such Law the liability of the Company's Directors, acting in such capacity, for
monetary damages if they should fail through negligence or gross negligence to
satisfy their duty of exercising proper business judgment in discharging their
duties, but not for acts or omissions in bad faith, or involving intentional
misconduct or amounting to a knowing violation of law or under other limited
circumstances.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the number
and percentage of common stock (being the Company's only voting securities)
beneficially owned by (i) each person who owns of record (or is known by the
Company to own beneficially) 5% or more of the Company's common stock or as to
which he has the right to acquire within 60 days of June 18, 1997, (ii) each
director and executive officer and (iii) all of said beneficial owners, officers
and directors as a group, as of June 18, 1997. The address for each director and
executive officer is the Company's principal office at Lexington Park, Route 55,
Lagrangeville, New York 12540.
29
Other than as set forth in the following table or pursuant to the
Shareholders Voting Agreement, the Company is not aware of any person (including
any "group" as that term is used in Section 13(d)(3) of the Securities Exchange
Act of 1934) who owns more than 5% of the common stock of the Company.
Amount and
Nature of
Beneficial
Name Ownership (1) Percent of Class (11)
- ---- ------------- ---------------------
William C. Vassell 1,486,950 (2) 20.3%
Steven B. Sands/ 1,261,311 (3) 18.1%
Sands Brothers &
Co., Ltd.
101 Park Avenue
New York, NY
Gordon Robinett 262,500 (4) 3.8%
Peter T. Kikis 231,000 (5) 3.3%
H. Richard Dickinson 37,000 (6) *
Peter Nekos 22,500 (7) *
Eugene U. McDonald 6,000 *
Debra Miller 17,600 (8) *
Lloyd H. Saunders, III 7,500 (9) *
Gregory J. Miller 10,000 (10) *
All Officers and 3,342,361 43.0%
Directors as a Group (2)(3)(4)
(10 Persons) (5)(6)(7)
(8)(9)(10)
- ----------
* Less than 1 percent.
(1) The Company has been advised that all individuals listed above, except
Steven B. Sands (see Note (3), below) and Peter T. Kikis (see Note (5),
below) have the sole power to vote and dispose of the number of shares set
forth opposite their names.
(2) Includes 525,000 shares underlying warrants that are currently
exercisable.
(3) A Schedule 13D filed by Mr. Sands, Sands Brothers and the parties listed
below, filed with the Commission on or about November 8, 1993, and amended
on April 7, 1994, December 13, 1994, March 31,
30
1995 and November 9, 1995, indicates that these shares are beneficially
owned by: Katie and Adam Bridge Partners, L.P.; Jenna Partners, L.P.;
Jenna Partners, II, L.P.; Owl-I Partners, L.P.; Lily Capital Appreciation
Partners, LP and Ponderosa Partners, LP ("Ponderosa"). The corporate
general partners of the above-named limited partnerships are,
respectively, K & A Bridge Partners Corp., Jenna Capital Corp., Jenna II
Capital Corp., Owl Capital Management, Inc., Lily Capital Corp. and
Ponderosa Capital Corp. Mr. Steven B. Sands is the chief executive officer
of Sands Brothers as well as a director and the owner of 50% of the
capital stock of K & A Bridge Partners Corp., Jenna Capital Corp., Jenna
II Capital Corp. and Owl Capital Management, Inc. Mr. Martin S. Sands is
the President of Sands Brothers as well as a director and 50% owner of the
above-referred corporate general partners. Steven B. Sands and Martin P.
Sands are the only executive officers, directors and controlling persons
of Sands Brothers. Based on information provided by Sands Brothers to the
Company, Steven B. Sands and Martin S. Sands each share voting power over
1,261,311 shares. This amount includes (i) 64,390 shares issuable upon
exercise of the Sands Warrant issued to Sands Brothers in connection with
the Company's 1993 Private Placement; (ii) 100,610 shares issuable upon
exercise of the Sands 95 Placement Warrant, issued to Sands Brothers in
connection with the Company's 1996 Private Placement that have been
transferred to Ponderosa; and (iii) 7,000 shares issuable upon exercise of
the Sands Consulting Warrant, issued to Sands Brothers in connection with
consulting services provided to the Company. As disclosed in the November,
1995 13D Sands Brothers transferred to its designees warrants to purchase
95,610 shares underlying the Sands Warrant and approximately 149,390 under
the Sands 95 Placement Warrant. Katie and Adam Bridge Partners, L.P. has
sole voting and dispositive power over 746,061 shares; Jenna Partners,
L.P. has sole voting and dispositive power over 122,500 shares; Jenna
Partners, II, L.P. has sole voting and dispositive power over 85,750
shares; Owl-I Partners, L.P. has sole voting and dispositive power over
35,000 shares; Lily Capital Appreciation Partners, L.P. has sole voting
and dispositive power over 100,000 shares and Ponderosa has sole voting
and dispositive power over 165,000 shares. On March 30, 1994, Mr. Steven
B. Sands was elected to the Company's Board of Directors. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS".
(4) Includes 107,500 shares underlying presently exercisable non-qualified
stock options and 120,000 shares underlying warrants that are currently
exercisable.
(5) Includes 162,000 shares underlying warrants currently exercisable, 4,000
shares issuable upon conversion of Series A Preferred Stock and 5,000
shares owned by his spouse.
(6) Includes 35,000 shares underlying warrants currently exercisable.
(7) Includes 20,000 shares underlying options currently exercisable.
(8) Includes 17,500 shares underlying warrants currently exercisable.
31
(9) Includes 7,000 shares underlying warrants currently exercisable.
(10) Includes 10,000 shares underlying warrants currently exercisable.
(12) Percent of class for each shareholder is calculated as if all options and
warrants included in the table for such shareholder are outstanding. The
number of outstanding shares of common stock is 6,783,932, which does not
include 47,000 shares to be issued pursuant to a contractual obligation.
The percent of class for all executive officers and directors as a group
is calculated as if all options and warrants held by any shareholders
included in the group are outstanding. The denominator for the group
calculation is 7,767,432.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Steven B. Sands, a member of the Company's Board of Directors, is the
Chairman of the Board and controlling person of Sands Brothers. In accordance
with the Company's Placement Agent Agreements dated October 27, 1993 and
February 24, 1995, Sands Brothers has been engaged by the Company as private
placement agent. The agreements also provide for Sands Brothers to serve in
various capacities including providing the Company with financial advisory
services in the event of mergers, restructurings or similar transactions
originated by Sands Brothers. For such services, Sands Brothers would be
compensated according to a graduated scale depending on the amount of the total
consideration.
In connection with the services Sands Brothers provided the Company during
the 1993 Private Placement, the Company paid Sands Brothers a $400,000 placement
fee (up to 1/2 of which was allowed to other broker-dealers), a $120,000
non-accountable expense allowance and warrants to purchase 160,000 shares of the
Company's common stock at $2.50 per share. Sands Brothers has conveyed a portion
of the warrants to certain of its employees. The Company has also agreed to
engage Sands Brothers as the Company's solicitation agent with respect to the
warrants sold to the Company's private placement investors. Sands Brothers will
be paid a fee equal to 5% of the amount received by the Company pursuant to
Sands Brothers warrant solicitation.
In accordance with the Letter Agreement dated on or about April 20, 1994,
Sands Brothers was engaged to act as the Company's financial advisor in
connection with the acquisition of the security guard assets of United. Under
this Agreement, Sands Brothers was to receive $250,000 as well as reimbursement
for certain out-of-pocket expenses upon consummation of said acquisition. The
Agreement also provides for the payment of 5% of the exercise price of the unit
warrants solicited by Sands Brothers. If all unit warrants are exercised, Sands
Brothers would receive a fee of $140,000.
On September 12, 1994, the Company entered into an agreement to engage
Sands Brothers as an investor relations consultant ("Sands Consulting
Agreement"). Accordingly, Sands Brothers provided services
32
intended to heighten the public's awareness of the Company and to enhance
Stockholder value. In consideration for these services, the Company issued Sands
Brothers and its designees, W. Terrance Schreier and Lloyd H. Saunders, III,
warrants covering a total of 100,000 shares and has agreed to pay Sands Brothers
a fee of $5,000 per month and certain reimbursable expenses. The warrants are
exercisable at $3.00 per share. The warrants expired with respect to 32,500
shares on December 31, 1994 and with respect to the 32,500 shares on March 31,
1995; 35,000 shares will expire on September 30, 1997. Pursuant to an agreement
with Sands Brothers dated on or about December 10, 1994, the Sands Consulting
Agreement was terminated. The total number of shares covered by said warrants
after March 31, 1995, is 35,000. This warrant is held as follows: 7,000 by Sands
Brothers ("Sands Consulting Warrant"); 7,000 by Lloyd H. Saunders, III, a
director of the Company and 21,000 by Terrance Schreier. Management believes
that the terms of the various transactions between the Company and Sands
Brothers were as favorable as those which might have been obtained from an
unaffiliated party.
In connection with the February 24, 1995, Placement Agent Agreement, Sands
Brothers was engaged to raise equity financing for the acquisition of United.
Sands Brothers received $650,000 in compensation and expense allowance and a
three-year warrant to purchase 250,000 shares at $2-7/32 per share. This warrant
has been partially assigned by Sands Brothers to certain of its employees.
Gregory J. Miller has been a director of the Company since 1992. Mr.
Miller is general counsel for Goldline Connectors, Inc. and has rendered legal
services to the Company during his tenure as a director. Mr. Miller has rendered
legal services in connection with various litigation and contractual matters
during the last three fiscal years. During each of the last three fiscal years,
payments to Mr. Miller for legal services were minimal. It is expected that Mr.
Miller will continue to render minimal legal services to the Company from time
to time. Management believes that the terms of the various transactions between
the Company and Mr. Miller were as favorable as those which might have been
obtained from an unaffiliated party.
Peter T. Kikis became a director of the Company on February 24, 1995, in
connection with the acquisition of United. Mr. Kikis is a director of Deltec
International, S.A., of which Deltec Development Corporation ("Deltec"), the
lender of the Company's $1.5 million subordinated secured indebtedness obtained
in connection with the United acquisition, is an indirect, wholly-owned
subsidiary. The terms of the loan agreement provide for interest at the rate of
14% per annum and 16 equal quarterly payments of principal. Deltec received a
financing fee of $180,000 in connection with the loan to help defray certain
costs, including legals fees, associated with the transaction. Deltec also
purchased 3,000 shares of the Company's Series A Convertible Preferred Stock at
$165 per share. Management believes that the terms of the various transactions
between the Company and Deltec were as favorable as those which might have been
obtained from an unaffiliated party.
Gordon Robinett, a member of the Company's Board of Directors and former
Treasurer, entered into a Covenant Not to Compete with the Company on July 23,
1996 in connection with his termination of employment with the Company. Under
that agreement, the Company is to make periodic payments to Mr. Robinett over
four years totalling $180,000, the exercise price of Mr. Robinett's options and
warrants was reduced to $2.50, and an expiration date was fixed at July 19,
2000. In return, Mr. Robinett is prohibited from directly or indirectly
competing with the Company until July 19, 2000.
PART IV
33
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) Financial statements filed as part of this report:
Page
----
Reports of Independent Accountants F-1 - F-2
Balance Sheets - March 31, 1997 and 1996 F-3
Statements of Operations - Years Ended F-4
March 31, 1997, 1996, and 1995
Statements of Stockholders' Equity - Years Ended F-5
March 31, 1997, 1996 and 1995
Statements of Cash Flows - Years Ended F-6 - F-8
March 31, 1997, 1996 and 1995
Notes to Financial Statements F-9 - F-22
(2) Financial statement schedule filed as part of this report:
Valuation and qualifying accounts - years ended F-23
March 31, 1997, 1996 and 1995
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
3.1 Amended & Restated Articles Incorporated by reference to Exhibit 3.3
of Incorporation of the form 10-K for the fiscal year
ending March 31, 1993 (the "1993 10-K")
3.2 By-Laws Incorporated by reference to Exhibit 3.3
of the Form 10-K for the fiscal year
ended March 31, 1991 (the "1991 10-K")
34
3.3 Amendments to By-Laws Incorporated by reference to Exhibit 3.3
of the Form 10-K/A for the fiscal year
ended March 31, 1994 (the "1994 10-K/A)
3.4 Certificate of Amendment of Incorporated by reference to Exhibit 3.4
Certificate of of the Eighth Amendment to the
Incorporation Registration Statement filed on Form S-1,
File No. 33-75336 (the "S-1").
4.1 Specimen Stock Certificate Incorporated by reference to Exhibit 4.A
to amendment #1 to Registrant's
Registration Statement on Form S-18, file
number 33, 35007-NY (the "S-18")
4.2 Reclassified as Exhibit
10.37
4.3 Reclassified as Exhibit
10.38
4.4 Reclassified as Exhibit
10.39
4.5 Reclassified as Exhibit
10.40
4.6 Warrant (50,000) to the CIT Incorporated by reference to Exhibit 4.2
Group/Credit Finance of the Form 8-K filed on March 13, 1996.
4.7 Specimen Series A Preferred Incorporated by reference to Exhibit 4.2
Stock Certificate of the Third Amendment to the S-1
10.1 Form of Amendment to
Employment Agreement for Incorporated by reference to Exhibit 10.1
William C. Vassell dated of the 10-K for the fiscal year ended
April 8, 1991 March 31, 1992 (the "1992 10-K")
10.2 Amended and Restated
Employment Agreement for Incorporated by reference to Exhibit 10.3
William C. Vassell dated of the 1992 10-K
June 18, 1991
35
10.3 Amendment #1 to Amended & Incorporated by reference to Exhibit 10.5
Restated Employment to the 1993 10-K
Agreement for William C.
Vassell dated September 25,
1992
10.4 Form of Amendment to Incorporated by reference to Exhibit 10.2
Employment Agreement for of the 1992 10-K
Gordon Robinett dated
April 8, 1991
10.5 Amended and Restated Incorporated by reference to Exhibit 10.4
Employment Agreement for of the 1992 10-K
Gordon Robinett dated
June 18, 1991
10.6 Amendment #1 to Amended Incorporated by reference to Exhibit 10.6
& Restated Employment of the 1993 10-K
Agreement for Gordon
Robinett dated
September 25, 1992
10.7 Form of Warrant Agreement Incorporated by reference to Exhibit 10.3
and Warrant for William C. of the 1991 10-K
Vassell (175,000 shares)
and Gordon Robinett
(60,000 shares)
10.8 Form of Warrant Agreement Incorporated by reference to Exhibit 10.7
dated May 15, 1992 to the 1992 10-K
for William C. Vassell
(125,000 shares), Gordon
Robinett (60,000 shares)
and Peter J. Nekos (10,000
shares)
10.9 Compensation Continuation Incorporated by reference to Exhibit 10.9
Agreement for William of the 1993 10-K
C. Vassell dated September
25, 1992
10.10 Consulting Agreement with Incorporated by reference to Exhibit
Robert Ellin dated 10.10 of the 1992 10-K
December 2, 1992
10.11 Warrant Agreement for Incorporated by reference to Exhibit
William C. Vassell 10.16 of the Form 10-K for fiscal year
(500,000) ended March 31, 1994 (the "1994 10-K")
10.12 Franchise Offering Incorporated by reference to Exhibit
Prospectus dated 10.11 of the 1993 10-K
December 1, 1992
10.13 Warrant Agreement and Incorporated by reference to Exhibit 4.B
Warrant for Stuart James of S-18
36
Company, Inc.
10.14 Form of Second Amendment to Incorporated by reference to Exhibit
May 15, 1992 Warrant 10.13 in 1994 10-K
Agreement and Warrant
Certificate for William
C. Vassell and Gordon Robinett
10.15 Form of Third Amendment to Incorporated by reference to Exhibit
April 8, 1991 Warrant 10.14 in the 1994 10-K
Agreement and Warrant
Certificate for William C.
Vassell and Gordon Robinett
10.16 Form of Third Amendment to Incorporated by reference to Exhibit
May 15, 1992 Warrant Agreement 10.15 in the 1994 10-K
and Warrant Certificate for
William C. Vassell and Gordon
Robinett
10.17 Placement Agent Agreement Incorporated by reference to Exhibit 1.1
of the Form 8-K filed October 17, 1993
10.18 Registration Agreement Incorporated by reference to Exhibit 4.1
to the Form 8-K filed October 17, 1993
10.19 Form of Warrant for Private Incorporated by reference to Exhibit
Placement 4.2 to the Form 8-K filed October 27,
1993
10.20 Warrant Agreement Incorporated by reference to Exhibit
(Placement Agreement) 4.3 to the Form 8-K filed October 27,
1993
10.21 William C. Vassell Indemnity Incorporated by reference to Exhibit
Agreement 10.17 of the 1994 10-K
10.22 Plan of Acquisition, Incorporated by reference to Exhibit
Reorganization, Liquidation 2 of the Form 8-K filed October 27, 1993
or Succession of ISS
International Service
Systems, Inc.
10.23 Amendment to ISS Purchase Incorporated by reference to Exhibit
Agreement 10.23 of the 1994 10-K/A
10.24 Plan of Acquisition, Incorporated by reference to Exhibit
Reorganization, Liquidation 2 of the Form 8-K filed November 12, 1993
or Succession of Madison
10.25 Purchase and Sale Agreement Incorporated by reference to Exhibit
dated February 24, 1996, for 2.1 of the Form 8-K filed March 24, 1996
the acquisition of United
Security Group Inc.
37
10.26 Placement Agent Agreement Incorporated by reference to Exhibit
dated February 24, 1996, 10.26 to the Third Amendment to the
between the Company and Form S-1.
Sands Brothers & Co., Ltd.
with Amendment as of
March 24, 1996
10.27 Shareholders Voting Agreement Incorporated by reference to Exhibit
dated March 8, 1996, by all 10.27 of the Third Amendment to the S-1
directors in their capacities
as Shareholders
10.28 Amendment No. 2 to Amended and Incorporated by reference to Exhibit
Restated Employment Agreement 10.28 of the Third Amendment to the S-1
for William C. Vassell dated
February 24, 1996
10.29 Amendment No. 2 to Amended and Incorporated by reference to Exhibit
Restated Employment Agreement 10.29 of the Third Amendment to the S-1
for Gordon Robinett dated
February 24, 1996
10.31 Form of Warrant (250,000) to Incorporated by reference to Exhibit
Sands Brothers & Co., Ltd. 10.31 of the Third Amendment to the S-1
10.32 Warrant Reduction Agreement Incorporated by reference to Exhibit
(275,000) William C. Vassell 10.32 of the Third Amendment to the S-1
10.34 Loan and Security Agreement Incorporated by reference to Exhibit
with CIT Group/Credit Finance, 4.7 of the Third Amendment to the S-1
Inc.
10.35 Term Loan Agreement with Incorporated by reference to Exhibit
Deltec Development Corp. 4.8 of the Third Amendment to the S-1
10.36 Promissory Note to William C. Incorporated by reference to Exhibit
Vassell ($85,000) dated August Exhibit 10.36 of the form 10-K for the
22, 1994 fiscal year ending March 31, 1995 (the
"1995 10-K")
10.37 Notes Payable - ISS Incorporated by reference as Exhibit
4.2 to the 1994 10-K/A
10.38 Bank Note - September 1, 1992 Incorporated by reference as Exhibit
maturity 4.2 to the l994 l0-K/A
10.39 Bank Note - November 1, 1997 Incorporated by reference as Exhibit
maturity 4.4 of the 1994 10-K/A
38
10.40 Mehlich Notes Incorporated by reference as Exhibit
4.5 of the 1994 10-K/A
11.00 Computation of Income Per Incorporated by reference to Exhibit
Share of Common Stock 11 annexed to Financial Statements.
24.00 Power of Attorney E-1
27.00 Financial Data Schedule E-2
99.2 Placement Agent Agreement Incorporated by reference to Exhibit
dated February 24, 1995 1.1 to the Form 8-K/A dated February 24,
1995
99.3 Amendment to Exhibit C to the Incorporated by reference to Exhibit
Placement Agent Agreement 1.2 to the Form 8-K dated March 24, 1995
dated March 24, 1995
99.4 Agreement with John B. Incorporated by reference to Exhibit
Goldsborough 99.3 to the Fourth Amendment to the S-1
99.5 Warrant Standstill Agreement Incorporated by reference to Exhibit
from William C. Vassell 99.4 to the Fourth Amendment to the S-1
99.6 Shareholders Voting Agreement Incorporated by reference to Exhibit
dated March 8, 1995 99 to the Form 8-K dated March 24, 1995
99.7 Letter to Company from Incorporated by reference to Exhibit
D'Arcangelo & Co. L.L.P. 99.7 to the Form 8-K dated February 9,
dated February 28, 1994. 1996
99.8 Letter to Company from Incorporated by reference to Exhibit
Coopers & Lybrand L.L.P. 99.8 to the Form 8-K dated February 9,
dated February 7, 1996 1996.
confirming termination
of engagement.
99.9 Letter to Company from Incorporated by reference to Exhibit
Coopers & Lybrand,L.L.P. 99.9 to the Form 8-K dated February 9,
dated February 9, 1996. 1996.
99.10 Letter (revised) to Commission Incorporated by reference to Exhibit
from Coopers & Lybrand L.L.P. 99.10 to the Form 8-K/A filed March 11,
dated March 8, 1996. 1996.
99.11 Press Release dated June 25, E-3
1997 re: FYE 1997 results
(b) Reports on Forms 8-K
39
(i) Report on Form 8-K dated April 16, 1996 Item 7 (c) - Exhibit Press
release dated April 15, 1996
(ii) Report on Form 8-K dated September 10, 1996 Item 7(c) - Exhibits
Press release dated August 19, 1996 Press release dated September
05, 1996 Press release dated September 09, 1996
(iii) Report on Form 8-K dated September 26, 1996 Item 7(c) - Exhibit
Press release dated September 17, 1996
(iv) Report on Form 8-K dated November 13, 1996 Item 7(c) - Exhibits
Press release dated October 23, 1996 Press release dated November
06, 1996
(v) Report on Form 8-K dated November 19, 1996 Item 7(c) - Exhibit Press
release dated November 13, 1996
(vi) Report on Form 8-K dated February 14, 1997 Item 7(c) - Exhibits
Press release dated February 07, 1997 Press release dated February
10, 1997
40
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
COMMAND SECURITY CORPORATION
By: /s/ William C. Vassell
-------------------------------------
William C. Vassell
Chairman of the Board and
Principal Executive
Officer
Date: June 30, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATE INDICATED.
/s/ William C. Vassell Chairman of the Board June 30, 1997
- ------------------------------ and Principal Executive
William C. Vassell Officer
/s/ H. Richard Dickinson Executive Vice President June 30, 1997
- ------------------------------ Chief Financial Officer
H. Richard Dickinson and Principal Financial
Officer
/s/* Director June 30, 1997
- ------------------------------
Peter T. Kikis
/s/* Vice Chairman of the June 30, 1997
- ------------------------------ Board and Director
Gordon Robinett
/s/* Director June 30, 1997
- ------------------------------
Peter Nekos
Director June 30, 1997
- ------------------------------
Gregory J. Miller
Director June 30, 1997
- ------------------------------
Steven B. Sands
/s/* Director June 30, 1997
- ------------------------------
Lloyd H. Saunders, III
* Signed on behalf of the signator by H. Richard Dickinson pursuant to Power of
Attorney.
/s/ H. Richard Dickinson
- ------------------------------ June 30, 1997
H. Richard Dickinson,
Attorney-in-Fact
The Registrant has not sent an annual report or proxy material to its
shareholders. The Registrant intends to send an annual report and proxy material
to its shareholders subsequent to the date hereof in connection with its 1997
annual meeting to be conducted later this year.
COMMAND SECURITY CORPORATION
FINANCIAL STATEMENTS
(and Reports of Independent Accountants)
YEARS ENDED
MARCH 31, 1997 AND 1996
CONTENTS
Page No.
--------
REPORTS OF INDEPENDENT ACCOUNTANTS F-1 - F-2
FINANCIAL STATEMENTS
Balance sheets F-3
Statements of operations F-4
Statements of stockholders' equity F-5
Statements of cash flows F-6 - F-8
Notes to financial statements F-9 - F-22
FINANCIAL STATEMENT SCHEDULE
Valuation and qualifying accounts F-23
[LETTERHEAD OF D'ARCANGELO & CO., LLP]
Report of Independent Accountants
on the Financial Statements
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, 1997 and 1996, and for the years then ended. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule 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, 1997 and 1996, and the results of its operations and its cash flows
for the years 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'Archangelo & Co., LLP
June 10 , 1997
Poughkeepsie, New York
F-1
[Letterhead of Coopers & Lybrand]
Report of Independent Accountants
To the Board of Directors and
Stockholders
Command Security Corporation
We have audited the financial statements and the financial statement schedules
of Command Security Corporation listed in Item 14(a) of this Form 10-K for the
year ended March 31, 1995. 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 results of Command Security Corporation's operations
and its cash flows for the year ended March 31, 1995 in conformity with
generally 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, 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 1, 2, 6 and 9 to
the financial statements, the Company incurred losses for the year ended March
31, 1995 and a working capital deficit at March 31, 1995, is in default on
certain of its debt covenants; and, as described in Notes 17 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 L.L.P.
Albany, New York
July 8, 1995, except for Notes 17 and 23
for which the date is September 19, 1995.
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a
limited liability association incorporated in Switzerland.
F-2
Command Security Corporation
Balance Sheets
March 31, 1997 and 1996
ASSETS 1997 1996
Current assets:
Cash and cash equivalents $ -0- $ -0-
Accounts receivable from guard service customers, less allowance for
doubtful accounts of $337,273 and $519,220, respectively 7,591,010 8,040,826
Accounts receivable from service contract customers, less allowance for
doubtful accounts of $282,348 and $322,786, respectively 5,180,682 4,279,586
Prepaid expenses 1,322,918 1,176,972
Notes receivable, current maturities, less allowance for doubtful
accounts of $450,653 and $362,164, respectively 218,267 260,547
Other receivables, less allowance for doubtful accounts
of $104,138 and $17,372, respectively 699,248 285,469
------------ ------------
Total current assets 15,012,125 14,043,400
Furniture and equipment at cost, net 1,105,473 975,832
Notes and long-term receivables, less allowance for doubtful
accounts of $785,360 and $737,436, respectively 387,327 210,659
Intangible assets, net 5,033,566 6,270,440
Deferred income taxes 259,835 300,541
Other assets 1,390,250 583,542
------------ ------------
Total assets $ 23,188,576 $ 22,384,414
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 753,644 $ 913,944
Current maturities of long-term debt 977,372 1,938,273
Current maturities of obligations under capital leases 77,047 102,811
Short-term borrowings 7,763,578 6,465,827
Accounts payable and accrued expenses 3,342,122 3,761,633
Due to service companies 685,150 641,944
------------ ------------
Total current liabilities 13,598,913 13,824,432
Deferred revenue 391,685 133,303
Self-insurance reserves 438,820 428,423
Long-term debt, net 1,195,234 1,178,962
Obligations under capital leases, net 89,189 15,543
------------ ------------
15,713,841 15,580,663
Commitments and contingencies (Notes 13, 14 and 19)
Redeemable, convertible Series A preferred stock, $.0001 par value per share,
10,567 and 9,785 shares designated, issued and outstanding in 1997 and 1996,
redemption and liquidation value of $1,743,555
and $1,614,525, respectively 1,743,555 1,614,525
------------ ------------
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 8,424,332 and 8,119,606, respectively 842 812
Paid-in capital 9,897,319 9,805,425
Deficit (4,163,981) (4,614,011)
------------ ------------
5,734,180 5,192,226
Common stock in treasury, at cost, 1,355,400 shares (3,000) (3,000)
------------ ------------
5,731,180 5,189,226
------------ ------------
Total liabilities and stockholders' equity $ 23,188,576 $ 22,384,414
============ ============
See accompanying notes and accountant's report
F-3
Command Security Corporation
Statements of Operations
Years Ended March 31, 1997, 1996 and 1995
1997 1996 1995
Revenue $ 49,237,418 $ 54,995,444 $ 39,595,272
Cost of revenue 40,793,840 46,498,945 35,067,907
------------ ------------ ------------
Gross profit 8,443,578 8,496,499 4,527,365
Service contract revenue 1,471,313 1,519,803 1,291,943
------------ ------------ ------------
9,914,891 10,016,302 5,819,308
------------ ------------ ------------
Operating expenses:
General and administrative expenses 7,114,478 8,135,963 5,887,906
Amortization of intangibles 1,773,599 1,203,228 662,785
Provision for doubtful accounts and notes 447,159 353,307 1,777,460
Bad debt recoveries (90,011) (220,918) (111,107)
Insurance rebates (598,139) (742,305) (150,238)
Loss on value of intangible assets, net -0- 36,314 165,105
------------ ------------ ------------
8,647,086 8,765,589 8,231,911
------------ ------------ ------------
Operating income/(loss) 1,267,805 1,250,713 (2,412,603)
------------ ------------ ------------
Other expense/(income)
Interest expense 1,065,852 1,182,779 717,204
Interest income (179,599) (169,277) (93,613)
Loss on equipment dispositions 71,882 28,952 5,296
Other income -0- (2,850) (4,219)
------------ ------------ ------------
958,135 1,039,604 624,668
------------ ------------ ------------
Income/(loss) before income tax benefit 309,670 211,109 (3,037,271)
Income tax benefit 140,360 300,541 53,448
------------ ------------ ------------
Net income/(loss) 450,030 511,650 (2,983,823)
Preferred stock dividends 129,030 119,460 -0-
------------ ------------ ------------
Net income/(loss)
applicable to common stockholders $ 321,000 $ 392,190 $ (2,983,823)
============ ============ ============
Income/(loss) per share of common stock $ .05 $ .06 $ (.70)
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 6,955,548 6,663,986 4,274,657
============ ============ ============
See accompanying notes and accountant's report
F-4
Command Security Corporation
Statements of Stockholders' Equity
Years Ended March 31, 1997, 1996 and 1995
Common Stock Retained
----------------- Paid-In Earnings Stock In
Shares Amount Capital (Deficit) Treasury Total
------ ------ ------- --------- -------- -----
Balance at
April 1, 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 19) 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
Exercise of common
stock put (218,765) (218,765)
Common stock issued 219,500 21 439,198 439,219
Issuance/(return) of
escrowed common stock
o Note collateral 238,000 24 (24) -0-
o Accrued fees (152,774) (15) 15 -0-
Common stock
warrants subscribed 500 500
Preferred stock
dividends (129,030) (129,030)
Net income 450,030 450,030
--------- ------ ---------- ----------- ------------ ----------
Balance at
March 31, 1997 8,424,332 $ 842 $9,897,319 $(4,163,981) $ (3,000) $5,731,180
========= ====== ========== =========== ============ ==========
See accompanying notes and accountant's report
F-5
Command Security Corporation
Statements of Cash Flows
Years Ended March 31, 1997, 1996 and 1995
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
1997 1996 1995
OPERATING ACTIVITIES
Net income/(loss) $ 450,030 $ 511,650 $(2,983,823)
Adjustments to reconcile net income/(loss) to net
cash provided by/(used in) operating activities:
Depreciation and amortization 2,133,715 1,587,832 972,653
Provision for doubtful accounts and
notes receivable 447,159 353,307 1,777,460
Deferred income -0- 15,734 (131,613)
Loss on equipment dispositions 71,882 28,952 5,296
Loss on value of intangible assets, net -0- 36,314 165,105
Deferred income taxes (140,360) (300,541) 434,314
Compensatory common stock purchase warrants -0- 4,300 25,800
Self insurance reserves 293,238 171,704 (38,817)
Changes in operating assets and liabilities,
net of effects of business acquisitions:
Accounts receivable, current and long-term (854,845) (2,300,578) 474,960
Prepaid insurance (38,813) 326,796 333,028
Other receivables (413,779) 168,365 (207,019)
Other assets (336,850) (379,972) (87,453)
Accounts payable and accrued expenses (611,286) (1,036,351) 350,272
Income taxes -0- -0- (130,695)
Due to service companies 105,139 259,382 6,595
----------- ----------- -----------
Net cash provided by/(used in)
operating activities 1,105,230 (553,106) 966,063
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (98,760) (124,838) (256,718)
Business acquisitions and purchase of
intangible assets (281,246) (249,034) (4,719,399)
Proceeds from equipment dispositions 75,902 18,153 3,329
Proceeds from sale of intangible assets 210,000 69,825 -0-
Issuance of notes by service companies
and other third parties (252,208) (138,450) (168,883)
Principal collections on notes receivable 246,207 258,039 260,286
----------- ----------- -----------
Net cash used in investing activities (100,105) (166,305) (4,881,385)
----------- ----------- -----------
FINANCING ACTIVITIES
Net borrowings/(payments) on line of credit 1,186,632 2,149,686 (783,529)
Proceeds from long-term debt 500,000 -0- 1,639,000
Repayments on other short and long-term debt (2,480,414) (1,380,126) (1,694,757)
Repayments on capital lease obligations (96,762) (116,458) (505)
Net proceeds from/(cost of) issuance of stock 45,219 (136,436) 3,862,751
Proceeds from common stock warrants subscribed 500 -0- -0-
Cash overdraft (160,300) 202,745 711,199
----------- ----------- -----------
Net cash provided by/(used in)
financing activities (1,005,125) 719,411 3,734,159
----------- ----------- -----------
Net (decrease)/increase in cash and cash equivalents -0- -0- (181,163)
Cash and cash equivalents, beginning of year -0- -0- 181,163
----------- ----------- -----------
Cash and cash equivalents, end of year $ -0- $ -0- $ -0-
=========== =========== ===========
See accompanying notes and accountant's report
F-6
Command Security Corporation
Statements of Cash Flows (Continued)
Years Ended March 31, 1997, 1996 and 1995
1. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the period for:
1997 1996 1995
Interest $1,045,238 $1,190,675 $731,455
Income Taxes -0- -0- 2,719
2. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
For the years ended March 31, 1997, 1996 and 1995, the Company purchased
transportation and security equipment with direct installment and lease
financing of $566,709, $354,493 and $54,000, respectively.
The Company generally obtains short-term financing to meet its insurance
needs. For the years ended March 31, 1997, 1996 and 1995, $576,991,
$593,530, and $482,644, respectively, have been borrowed for this purpose.
These borrowings have been excluded from the statements of cash flows.
For the years ended March 31, 1997 and 1996, the Company accrued
accumulated dividends of $129,030 and $119,460 and issued 782 and 724
additional shares of its Series A convertible preferred stock for the
years ended March 31, 1997 and 1996, respectively, to its preferred
stockholders. These charges to paid-in capital and credits to preferred
stock have been excluded from the statements of cash flows.
On December 30, 1996, the Company entered into an agreement for the sale
of its Miami operations for a total consideration of $318,878, including
$40,000 for related transportation and other equipment. The Company
received $250,000 in cash and a note for $68,878. The resultant gain of
$76,866 has been deferred pending collection of the note and the reduction
of a guarantee provided by the Company in connection with this
transaction. The deferred gain and the receipt of the note have been
excluded from the statement of cash flows.
In November, 1996, the Company finalized an agreement reached with ISS
International Service System, Inc., whereby it has adjusted the notes
payable to ISS from $1,000,000 to $500,000 in consideration for lost
accounts and settlement of certain other claims. The resultant decreases
in intangibles of $410,000 and notes payable of $500,000, offset by a net
increase in accrued expenses of $90,000, have been excluded from the
statement of cash flows.
In November, 1996, the Company purchased certain guard service accounts
for a total consideration of $144,966. The Company paid $36,241 and issued
two short-term notes for $108,725. The cost of the guard service accounts
and one of the related notes were subsequently reduced by $26,390 due to a
retention adjustment. The issuance of the notes and subsequent retention
adjustment have been excluded from the purchase of intangible assets in
the statement of cash flows.
In October, 1996, the Company purchased certain guard service accounts for
a total consideration of $169,590. The Company paid $75,590 and issued
47,000 shares of its common stock at a capitalized value of $94,000. The
issuance of common stock has been excluded from the purchase of intangible
assets in the statement of cash flows.
In August, 1996, the Company purchased certain guard service accounts for
a total consideration of $606,164. The Company paid $115,000, issued two
short-term notes for $191,164 and issued 150,000 shares of its common
stock at a capitalized value of $300,000. The issuance of the notes and
the common stock have been excluded from the purchase of intangible assets
in the statement of cash flows.
In July, 1996, the Company entered into a non-compete agreement with its
former Treasurer for $180,000. This charge to intangible assets and credit
to notes payable has been excluded from the statement of cash flows.
In June, 1996, the Company negotiated a settlement with NSC Shareholder
Trust in connection with a put offer given for common stock issued in
consideration for the purchase of customer accounts. The resultant charge
to paid-in capital and intangibles of $218,765 and $3,512, respectively,
and credit to notes payable of $222,277 have been excluded from the
statement of cash flows.
See accompanying notes and accountant's report
F-7
Command Security Corporation
Statements of Cash Flows (Continued)
Years Ended March 31, 1997, 1996 and 1995
2. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
(Continued)
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). 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. The issuance of the common stock has been excluded from the
purchase of intangible assets 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 canceled. 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.
See accompanying notes and accountant's report
F-8
Command Security Corporation
Notes to Financial Statements
March 31, 1997, 1996 and 1995
1. Business Description and Summary of Accounting Policies
The following is a description of the principal business activities and
significant accounting policies employed by Command Security Corporation.
Principal business activities:
Command Security Corporation (the Company) is a uniformed security guard
service company operating in New York, Connecticut, California, New Jersey
and Illinois. In December, 1996, the Company discontinued its operations
in Florida. 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:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
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, the Company has
reduced the estimated remaining lives of these customer lists from 15
years to 5 years, resulting in an increase in amortization expense of
$393,600 for the year ended March 31, 1997.
During fiscal 1995, the Company adopted the provisions of the Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of." 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.
F-9
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1997, 1996 and 1995
1. Business Description and Summary of Accounting Policies, continued
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.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be adopted
on December 31, 1997. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be excluded.
The impact of Statement No. 128 on the calculation of the Company's
primary and fully diluted earnings per share is not expected to be
material.
Accounting for stock options:
During the year ended March 31, 1997, the Company adopted the Financial
Accounting Standards Board Statement No. 123 (SFAS 123), "Accounting for
Stock Based Compensation." SFAS 123 provides companies with a choice to
follow the provisions of SFAS 123 in the determination of stock-based
compensation expenses or to continue with the provisions of APB 25,
"Accounting for Stock Issued to Employees." The Company will continue to
follow APB 25 and will provide pro forma disclosures as required by SFAS
123. SFAS 123 did not have an impact on the Company's financial condition
or results of operations.
2. Continuity of Operations
The Company's financial statements had been presented on a going concern
basis. The Company's operations resulted in a net loss of $2,983,823 for
the year ended March 31, 1995, and working capital deficit at March 31,
1995, of $531,602. At March 31, 1996 and 1995, the Company was in default
of certain of its debt covenants; and, as described in Notes 14 and 19,
there was litigation and a contingency for which the outcomes were
uncertain. As a result, the independent accountant's report on the March
31, 1995, 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, 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 each of the
years ended March 31, 1997 and 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
$1,413,000 as of March 31, 1997, has cured previous non-financial covenant
defaults and has been able to favorably resolve certain litigation in
connection with an alleged assault by one of the Company's guards (see
Note 14).
Management anticipates a continued favorable financial impact from the
United acquisition as well as continued 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.
F-10
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1997, 1996 and 1995
3. Furniture and Equipment
Furniture and equipment at March 31, consist of the following:
1997 1996
Transportation equipment $ 955,195 $ 750,751
Security equipment 397,746 481,191
Office furniture and equipment 1,476,536 1,360,275
---------- ----------
2,829,477 2,592,217
Less: Accumulated depreciation 1,724,004 1,616,385
---------- ----------
$1,105,473 $ 975,832
========== ==========
Depreciation expense for the years ended March 31, 1997, 1996 and 1995 was
$360,116, $388,904, and $335,306, respectively.
4. Intangible Assets
Intangible assets at March 31, consist of the following:
1997 1996
Customer lists $7,713,983 $7,834,914
Borrowing costs 165,000 497,233
Covenant not to compete 180,000 25,000
Goodwill 34,007 34,007
---------- ----------
8,092,990 8,391,154
Less: Accumulated amortization 3,059,424 2,120,714
---------- ----------
$5,033,566 $6,270,440
========== ==========
Amortization expense for the years ended March 31, 1997, 1996 and 1995,
was $1,773,599, $1,198,928, and $637,347, respectively. During fiscal
years ended March 31, 1996 and 1995, the Company realized impairment
losses of $101,002 and $165,105, 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:
1997 1996
Restricted cash $ 813,430 $ 393,678
Insurance deposits 469,858 -0-
Other deposits 92,707 156,589
Other receivables 14,255 33,275
---------- ----------
$1,390,250 $ 583,542
========== ==========
Restricted cash represents deposits for the benefit of the Company's
insurance carrier as collateral for workers compensation claims. Insurance
deposits represent estimated premium amounts returnable to the Company
over a period of two to seven years based on the excess of premium
deposits over actual workers compensation claims.
F-11
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1997, 1996 and 1995
6. Short-Term Borrowings
Short-term borrowings at March 31, consist of the following:
1997 1996
Bank line of credit $7,150,836 $5,964,204
Various insurance financing arrangements,
interest ranging from 7.04% to 8.53% 403,167 382,774
Other obligations 209,575 118,849
---------- ----------
$7,763,578 $6,465,827
========== ==========
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 January 30, 1997, provides for a
discretionary line of credit of up to 85% of eligible accounts
receivable, as defined, but in no event in excess of $10,000,000. At
March 31, 1997, the Company had used $7,150,836 of this line,
representing virtually 100% of its maximum borrowing capacity. Interest
is payable monthly at 1.5% over prime, or 10.0% at March 31, 1997. The
line is collateralized by customer accounts receivable and substantially
all other assets of the Company. The term of the agreement is initially
until February, 1999, with automatic two year renewal terms thereafter.
The Corporation has obtained short-term financing in order to meet its
insurance needs. Current required monthly payments are $59,654 through
August, 1997, and $40,652 thereafter until November 1, 1997.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at March 31, consist of the
following:
1997 1996
Trade accounts payable $ 654,339 $ 629,710
Payroll and related expenses 2,187,132 2,281,946
Insurance 18,925 155,372
Interest 37,160 33,250
Sales tax 249,411 87,807
Accrued professional fees 50,000 203,165
Liabilities assumed in acquisitions 33,067 123,003
Other 112,088 247,380
---------- ----------
$3,342,122 $3,761,633
========== ==========
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. Upon payment of the obligation, these shares were returned to
the Company and canceled in January, 1997.
8. Deferred Revenue
Deferred revenue of $391,685 and $133,303 included on the balance sheet at
March 31, 1997 and 1996, represents gain on the sale of certain of the
Company's service contracts and billings for services to service companies
in exchange for notes and interest thereon. These gains have been deferred
pending cash collections on the notes and elimination of certain debt
guarantees extended (see Note 14).
F-12
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1997, 1996 and 1995
9. Long-Term Debt
Long-term debt at March 31, consists of the following:
1997 1996
ISS International Service System, Inc., due March and
October, 1995, interest at prime, currently 8 5% (a)$ -0- $1,000,000
William C. Vassell (Chairman of the Board), due
February, 1996, interest at 8%, unsecured -0- 42,500
NSC Shareholder Trust, due July, 1997, interest at 6%,
collateralized by common stock 88,911 -0-
32 B-J Pension, Health and Annuity Fund, due
July, 1997, net of imputed interest of $2,769 and
$36,383, respectively (b) 126,018 478,764
Deltec Development Corporation, due February 24,
1999, interest at 14% (c) 750,000 1,125,000
Gordon Robinett (Director), due October, 1999,
no interest, collateralized by related covenant 135,000 -0-
Capital Resource Company, due January 5, 2000,
interest at 14% 81,246 103,083
Various installment loans due at various dates
through October, 2000, with interest ranging
from 3.8% to 15.90% 499,764 367,888
CIT Group/Credit Finance, Inc., due February 1, 2002
interest at prime plus 1.5%, currently 10.0% (d) 491,667 -0-
---------- ----------
2,172,606 3,117,235
Less: Current maturities 977,372 1,938,273
---------- ----------
$1,195,234 $1,178,962
========== ==========
(a) In October, 1993, the Company acquired the security guard business
of ISS International Service System, Inc. ("ISS") and was obligated
to ISS for a $1,000,000 note, originally due October, 1995. This
note was renegotiated resulting in an agreement on July 22, 1994,
whereby the purchase price for the customer list was 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. In
September, 1996, the Company renegotiated the balance due and
finalized an agreement with ISS in October, 1996, whereby it has
reduced the balance due to $500,000 in consideration for lost
accounts and settlement of certain other claims. As of March 31,
1997, the balance has been paid in full and the related 238,000
shares of common stock given as collateral was returned to the
Company in April, 1997.
(b) In January, 1996, the Company reached an agreement in connection
with the 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
$128,787 is shown on the balance sheet at March 31, 1997, net of a
$2,769 discount based on the Company's average cost of borrowing at
the time of the agreement, or 10.5%.
F-13
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1997, 1996 and 1995
9. Long-Term Debt, continued
(c) The term loan from Deltec Development Corporation ("Deltec"),
payable in quarterly installments of $93,750 plus interest at 14%
per annum, is collateralized by substantially all of the assets of
the Company and is subordinate to the CIT borrowings.
(d) The term loan from CIT Group/Credit Finance, Inc., payable in
monthly installments of $8,333 plus interest at prime plus 1.5% per
annum, is collateralized with security pledged under the revolving
loan and security agreement (see Note 6).
The aggregate amount of required principal payments of long-term debt is
as follows:
Year ending: March 31, 1998 $ 977,372
March 31, 1999 748,404
March 31, 2000 246,309
March 31, 2001 108,054
March 31, 2002 92,467
-------------
$ 2,172,606
=============
10. Insurance Rebates
In January, 1997 and 1996, the Company received rebates of $598,139 and
$603,033, respectively, on its workers' compensation policies for the
three year period ended September 30, 1995, based on a favorable loss
ratio experience. Such rebates are non-contractual and are recorded when
the amounts are ascertainable. As of October 1, 1995, the Company has
procured a workers' compensation retro insurance policy and pays premiums
based on incurred losses and, therefore, is no longer eligible for such
rebates.
11. Self-Insurance
The Company adopted a partially self-insured health insurance program that
covers all eligible administrative personnel, effective as of March 1,
1997. There is a maximum of $30,000 per year per employee and an aggregate
amount per year, based on the number of participants (currently 112
employees, or $385,700), that the Company can be responsible for. A
stop-loss insurance policy covers all claims in excess of the above
amounts.
The Company has an insurance policy to cover workers compensation claims
in most states that the Company performs services. Annual premiums are
based on incurred losses as determined at the end of the coverage period,
subject to a minimum and maximum premium. Insurance providers assist the
Company in determining its estimated liability for these claims.
The nature of the Company's business also subjects it to claims or
litigation alleging that it is liable for damages as a result of the
conduct of its employees or others. The Company insures against such
claims and suits through policies with third-party insurance companies.
Such policies have limits of $1,000,000 per occurrence and $2,000,000 in
the 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.
Cumulative amounts estimated to be payable by the Company with respect to
pending and potential claims for all years in which the company is liable
under its self-insurance retention and retro workers compensation policies
have been accrued as liabilities. Such accrued liabilities are necessarily
based on estimates; thus, the Company's ultimate liability may exceed or
be less than the amounts accrued. The methods of making such estimates and
establishing the resultant accrued liability are reviewed continually and
any adjustments resulting therefrom are reflected in current earnings.
F-14
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1997, 1996 and 1995
12. Concentration of Risk
The Company extends credit to the various service companies for which it
administers billings, collection and payroll functions. At March 31, 1997
and 1996 the Company had loans and advances outstanding to current and
former service companies of $1,137,453 and $569,195, net of reserves of
$909,007 and $778,677, 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 40% and 45%
of total receivables as of March 31, 1997 and 1996, respectively. The
remaining trade receivables consist of a large number of customers
dispersed across many different geographic regions. During the year ended
March 31, 1997, 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.
13. 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 $631,000, $778,000, and $609,000 for the
years ended March 31, 1997, 1996 and 1995, respectively.
The Company leases certain equipment and vehicles under agreements which
are classified as capital leases. Most equipment leases have purchase
options at the end of the original lease term. Cost and related
accumulated depreciation of leased capital assets included in furniture
and equipment at March 31, 1997, are $355,054 and $95,939, respectively.
The future minimum payments under long-term noncancellable capital and
operating lease agreements are as follows:
Capital Operating
Leases Leases
----------- -----------
Year ending: March 31, 1998 $ 77,047 $ 437,412
March 31, 1999 58,089 226,790
March 31, 2000 27,123 211,790
March 31, 2001 2,932 177,509
March 31, 2002 1,045 120,567
----------- -----------
$ 166,236 $ 1,174,068
=========== ===========
14. Contingent Liabilities
The Company has guaranteed certain installment loans extended to various
service companies and customer list purchasers by Capital Resources
Company. The total outstanding balance of such loans as of March 31, 1997,
was approximately $1,140,200.
An action was commenced against the Company and the City of New York on or
about August 20, 1992. This action sought $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. On February 7, 1997, the
Company was informed that this suit was settled by the insurance carrier
for $175,000. The remaining liability of the Company under its risk
retention in connection with this claim of $7,271 has been accrued in the
financial statements as of March 31, 1997.
F-15
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1997, 1996 and 1995
14. Contingent Liabilities, continued
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. In April, 1997, the Company and the former service
company client entered into a settlement where all claims against the
Company were resolved without payment of any money by the Corporation. The
Company continues to pursue its own claims against related entities and
guarantors for recovery of accounts and notes receivable, rights to
service fees and legal expenses. Amounts due in connection with these
claims, which approximate $495,000 plus interest and legal fees, have been
fully reserved.
In October, 1996, the Company reached an agreement with ISS International
Service System, Inc. (ISS) to settle all pending issues in connection with
its October, 1993, acquisition of certain security guard assets. Under the
terms of the agreement, the purchase price of the assets has been adjusted
and the amount owed by the Company to ISS has been reduced from $1,000,000
to $500,000, $100,000 of which was paid at the time of the agreement and
the remaining $400,000 was paid in February, 1997. The 238,000 newly
issued shares of the Company's common stock which it held as collateral
were returned in April, 1997.
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 has diminished with time.
15. 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.
The Company issued warrants to its former Treasurer to purchase 107,500
shares of its common stock at an exercise price of $5 per share. In July,
1996, the exercise price of these warrants was adjusted to $2.50 and the
expiration date extended to July, 2000.
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 former 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, and the expiration date extended
to April, 1998, during fiscal 1994. The exercise price for the warrant
extended to the former Treasurer was adjusted again in July, 1996 to $2.50
per share and the expiration date extended to July, 2000.
F-16
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1997, 1996 and 1995
15. Stock Option Plan and Warrants, continued
In May 1992, the Board of Directors approved the issuance to the Company's
Chairman, former 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, and the expiration date extended to May, 1999, during
fiscal 1994. The exercise price for the warrant extended to the former
Treasurer was adjusted again in July, 1996 to $2.50 per share and the
expiration date extended to July, 2000.
Pursuant to the 1993 Private Placement (see Note 19), 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. 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 to $3.50 per full share,
the fair value on the date of adjustment. On October 4, 1996, the Board
extended the expiration date of the warrants to October, 1997.
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, 1997, neither election has been exercised by
the consultant.
On December 16, 1993, the Company granted to the 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.
On September 28, 1994, the Company issued a warrant for 25,000 shares of
common stock exercisable at $3.63 per share 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. The warrant expires in October, 1997.
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 who
provides the Company's working capital line of credit, respectively, in
connection with the 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 2001,
respectively.
On October 4, 1996, the Company issued warrants for 35,000, 150,000,
10,000 and 10,000 shares of common stock to the Company's Chief Financial
Officer and three Board members, respectively. The warrants are
exercisable at $1.875 and expire on September 30, 2001.
On November 25, 1996, warrants to purchase 50,000 shares of common stock
were subscribed to for $500 by the Company's public relations firm. The
warrants are exercisable at $2.25 per share and expire in November, 2001.
F-17
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1997, 1996 and 1995
15. Stock Option Plan and Warrants, continued
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, 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/Canceled 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/Canceled 5.00 (7,500) 6.00 (75,000)
------------- ------- ------------- ---------
Outstanding at
March 31, 1996 2.25 - 2.50* 160,000 2.10 - 3.75 2,275,000
Granted 1.87 - 2.25 255,000
------------- ------- ------------- ---------
Outstanding at
March 31, 1997 $2.25 - $2.50 160,000 $1.87 - $3.75 2,530,000
============= ======= ============= =========
* Adjusted
At March 31, 1997, there were 160,000 and 2,530,000 options and warrants
outstanding, respectively, exercisable at prices ranging from $1.87 to
$3.75, and 2,737,500 shares reserved for issuance under all stock
arrangements.
As disclosed in Note 1, the Company continues to follow the provisions of
APB 25, "Accounting for Stock Issued to Employees," when determining the
value of stock based compensation. Accordingly, no compensation expense
has been recognized for its stock based compensation. If the Company had
used the fair value method of accounting for stock based compensation,
net income would have been reduced by approximately $45,000, or $.01 per
share, for the year ended March 31, 1997. The impact of the fair value
method takes into account options and warrants granted since April 1,
1995. This amount is likely to increase in the future as additional
options and warrants are granted and amortized ratably over the vesting
periods. The weighted fair value of options and warrants granted during
the year ended March 31, 1997, was $.18. There were no options or
warrants issued during the year ended March 31, 1996. For the year ended
March 31, 1997, the fair value was estimated using the excercise price on
the date of the grant and the following assumptions: risk free interest
rate of 5.41%, volatility of 64.30% and a dividend yield of 0.00%.
16. 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 then 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, 1997, the amount was fully amortized.
F-18
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1997, 1996 and 1995
17. Income Taxes
Income tax expense/(benefit) for the years ended March 31 consists of the
following:
1997 1996 1995
Current:
Federal $(181,066) $ -0- $(451,955)
State and local -0- -0- (35,807)
--------- --------- ---------
(181,066) -0- (487,762)
--------- --------- ---------
Deferred:
Federal 28,400 (209,680) 434,317
State and local 12,306 (90,861) (3)
--------- --------- ---------
40,706 (300,541) 434,314
--------- --------- ---------
Income tax benefit $(140,360) $(300,541) $ (53,448)
========= ========= =========
The current income tax benefit for March, 1997, consists of the reversal
of a previously established allowance in connection with certain Federal
net operating loss carry-backs.
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:
1997 1996 1995
Statutory federal income tax rate 34.0 34.0 34.0
State and local income taxes,
net of federal benefit 9.8 9.8 9.8
Valuation allowance and reserves (82.9) (178.0) (40.7)
Permanent differences (6.2) (8.2) (1.3)
---- ----- ----
Effective tax rate (45.3)% (142.4)% 1.8%
==== ===== ====
The significant components of deferred tax assets and liabilities as of
March 31, 1997 and 1996 are as follows:
1997 1996
Current deferred assets:
Accounts receivable $ 98,377 $ 164,225
Accrued expenses 269,404 336,502
---------- ----------
367,781 500,727
Valuation allowance (367,781) (500,727)
---------- ----------
Net current deferred asset $ -0- $ -0-
========== ==========
Non-current deferred assets/(liabilities):
Notes receivable $ 312,608 $ 293,875
Equipment (79,138) (64,890)
Intangible assets 591,649 657,136
Self-insurance 188,693 184,222
Deferred revenue 99,127 36,753
Net operating loss carryover 527,551 870,618
---------- ----------
1,640,490 1,977,714
Valuation allowance (1,380,655) (1,677,173)
---------- ----------
Net non-current deferred asset $ 259,835 $ 300,541
========== ==========
The valuation allowance increased by $1,235,141 during the year ended
March 31, 1995 and decreased by $300,541 and $429,464 during the years
ended March 31, 1996 and 1997, respectively. Federal and State net
operating loss carry-overs were approximately $1,094,800 and $1,479,000,
respectively, at March 31, 1997.
They begin to expire in 2010.
F-19
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1997, 1996 and 1995
18. 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, 1997, 1996 and 1995, respectively, the components
of which have been excluded from the Company's financial statements:
1997 1996 1995
Service companies' guard
service revenue $17,241,188 $20,267,157 $19,671,179
Cost of revenue 13,757,683 16,657,284 15,600,251
----------- ----------- -----------
Gross profit 3,483,505 3,609,873 4,070,928
Service companies' share of gross profit 2,455,187 2,365,104 2,778,985
----------- ----------- -----------
1,028,318 1,244,769 1,291,943
Other service revenue 442,995 275,034 -0-
----------- ----------- -----------
Service contract revenue $ 1,471,313 $ 1,519,803 $ 1,291,943
=========== =========== ===========
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, 2002. In addition,
the Company has guaranteed bank loans to certain service companies (see
Note 14).
19. 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 15). 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 14.
F-20
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1997, 1996 and 1995
20. 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, 10,567 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 years ended March 31, 1997 and 1996, 782 and 724 Series A
shares have been issued, representing dividends accrued through February
24, 1997 and 1996, respectively. Accrued dividends at March 31, 1997,
approximated 81 shares of Series A stock ($13,400). 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.
21. Fair Value
The fair value of the Company's long-term notes receivable is based on the
current rates offered by the Company for notes of the same remaining
maturities. The fair value of the Company's long-term debt is based on the
borrowing rates currently available to the Company for loans with similar
terms and average maturities. At March 31, 1997, the fair value of
long-term notes receivable and long-term debt approximates their carrying
amounts.
22. Acquisitions
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
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.
23. Related Party Transactions
The Company's former general counsel is also a member of the Board of
Directors. Legal fees paid amounted to $4,202, $1,826 and $28,074 for the
years ended March 31, 1997, 1996 and 1995, respectively.
A director of Deltec International SA, the parent of Deltec Development
Corporation, the subordinated debt lender to the Company (see Note 9), is
also a member of the Board of Directors of the Company. Interest paid in
connection with this debt amounted to $137,813 and $192,318 for the years
ended March 31, 1997 and 1996, respectively. Fees paid to Deltec in
connection with the February 24, 1995 financing amounted to $180,000. In
addition, Deltec acquired 3,000 shares of the Company's preferred stock at
a cost of $495,000 (see Note 20). Dividends accrued and paid in additional
shares of preferred stock for the years ended March 31, 1997 and 1996,
amounted to $42,735 and $39,600, or 259 and 240 shares, respectively.
Expenses of $28,670 were paid on behalf of this director as compensation
for services rendered.
F-21
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1997, 1996 and 1995
23. Related Party Transactions, continued
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 during the year ended March 31, 1995. In addition,
Sands received warrants for the purchase of 350,000 shares of the
Company's common stock in fiscal 1995 (see Note 15).
24. Fourth Quarter Adjustments
During the year ended March 31, 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.
25. 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.
F-22
COMMAND SECURITY CORPORATION
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
Against
Amounts
Balance at Charged to Due Charged
Beginning Costs and to Service to Other
of Period Expenses Companies Accounts
--------- -------- --------- --------
Year ended March 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts receivable - current maturities $ 842,006 $316,828 $ 47,024 $
Allowance for doubtful notes receivable - current maturities 362,164 43,565 11,000(1)
Allowance for other doubtful receivables - current maturities 17,372 86,766 33,924(2)
Allowance for doubtful notes and long-
net of current maturities 737,436 (11,000)(1)
58,924(2)
Year ended March 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts receivable - current maturities 903,899 203,307 57,285 58,608(1)
Allowance for doubtful notes receivable - current maturities 340,045 22,119(1)
Allowance for other doubtful receivables - current maturities 122,513 69,280 (54,557)(1)
Allowance for doubtful notes and long-term receivables,
net of current maturities 1,650,272 150,000 115,616(3) (26,170)(1)
Year ended March 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts receivable - current maturities 680,613 637,065 82,375
Allowance for doubtful notes receivable - current maturities 274,652 65,393
Allowance for other doubtful receivables - current maturities 122,513
Allowance for doubtful notes and long-term receivables,
net of current maturities 398,351 952,489 194,291 $105,141(3)
Uncollectible
Accounts Balance
Written at End of
Recoveries Off Period
---------- --- ------
Year ended March 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts receivable - current maturities $90,011 $496,226 $ 619,621
Allowance for doubtful notes receivable - current maturities 450,653
Allowance for other doubtful receivables - current maturities 104,138
Allowance for doubtful notes and long-
net of current maturities 785,360
Year ended March 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts receivable - current maturities 381,093 842,006
Allowance for doubtful notes receivable - current maturities 362,164
Allowance for other doubtful receivables - current maturities 18,253 101,611 17,372
Allowance for doubtful notes and long-term receivables,
net of current maturities 220,918 931,364 737,436
Year ended March 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts receivable - current maturities 111,107 385,047 903,899
Allowance for doubtful notes receivable - current maturities 340,045
Allowance for other doubtful receivables - current maturities 122,513
Allowance for doubtful notes and long-term receivables,
net of current maturities 1,650,272
- ----------
(1) Represents reclassifications between short-term and long-term receivables.
(2) Represents retention and other adjustments related to customer list
purchases.
(3) Represents interest income reduction related to non-performing receivable.
F-23