FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
|_| 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
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(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 22, 1999, the aggregate market value of the voting stock held
by non-affiliates f the registrant, based on the last sales price of $1.00 on
that date, was approximately $3,767,086.
As of June 22, 1999, the registrant had issued and outstanding 6,658,143
shares of common stock.
<PAGE>
The following reflects certain amendments to Items 1,3,7,7A, 10, 11, 12,
13 and the Financial Statements in order to make the presentation therein
more clear to the reader.
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 eighteen operating offices in New York,
New Jersey, Illinois, California, Pennsylvania, Connecticut, Florida and
Georgia to commercial, financial, industrial, aviation and governmental
clients in the United States. Security services represented approximately 98%
(or $58 million) of the Company's revenue for the fiscal year ended March
1999. Secuirity services include providing uniformed guards for access
control, theft prevention, surveillance, vehicular and foot patrol and crowd
control. Approximately 2% (or $1 million of the Company's revenue for the
fiscal year ended March 1999) was generated from administrative service
agreements (formerly referred to as "security service agreements" or "service
company agreements") with other security guard companies (formerly referred
to as "service company clients"). Administrative service agreements are
contracts with other security guard companies which provide security guard
services to their clients. The administrative services provided by the
Company include (i) scheduling, billing, collection and payroll and (ii)
accounts receivable financing and insurance resources.
The Company employs approximately 65 employees indirectly attributable
to guard services including supervisors and dispatchers, another
approximately 65 administrative employees including the executive staff, and
approximately 2,810 hourly guards. For Internal Revenue reporting purposes,
the Company was, as of March 31, 1999, the employer of record for an
additional approximately 190 guards under administrative service agreements.
The employees employed by the Company under administrative service agreements
are similar to employees employed by employee leasing companies under
employee leasing arrangements.
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 a program to provide back office services to service
company clients.
The Company provides its security services to a wide range of industries
which the Company has categorized into three groups. The first includes
aviation and airport related clients to which the Company provides boarding
security and baggage handling services in accordance with Air Transportation
Association and Federal Aviation Administration standards. The second group
includes industrial and commercial clients such as retail chains,
construction sites and health care institutions. The third group includes
governmental and quasi-governmental clients such as cities and statewide
institutions.
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In 1990, the Company began offering administrative service agreements to
other security guard companies. Pursuant to written "administrative service
agreements", the Company provides computerized scheduling and information
system and programs, as well as accounts receivable financing and insurance
resources. Accounts receivable financing is secured by the administrative
service company's clients accounts receivable, customer lists, contracts, all
other assets and the personal guarantee of the owner(s) of the administrative
service company. The Company charges a fee equal to a percentage of the
administrative service company client's revenue or gross profits.
Administrative service clients are classified into two categories: the
employer of record and non-employer of record. The security guards of an
employer of record client are employed by the Company and receive W2 forms at
year end with the Company's EIN number. This is similar to an employee
leasing arrangement. GAAP principals are similar for both employer of record
and non-employer of record categories: neither the sales revenue generated by
the administrative service client nor the associated expenses are accounted
for within the Company's operations. Financed receivables are included in the
Company's accounts receivable figures. Administrative service revenue is
shown as a separate revenue line item in the Company's Statement of
Operations.
In 1998, the Company began developing and implementing a national
network of independent security guard companies to service clients with sites
throughout the United States. The Company offers these services in 47 states
through approximately 256 affiliates and believes this is a growing niche
business.
Operations
As a licensed watchguard and patrol agency, the Company furnishes guards
to its security service customers to protect people or property and to
prevent the theft of property. In this regard, the Company principally
conducts business by providing guards and other personnel who are, depending
on the particular requirements of the customer, uniformed or 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 for
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.
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
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their employment. The nature of some of the services provided by the Company
(eg. crowd control and armed guard services) potentially exposes it to risks
of liability for employee conduct. The Company currently maintains general
liability insurance in the amount of $1.0 million per occurrence and umbrella
liability insurance in the amount of $30 million per occurrence and $30
million in the aggregate, which it believes is suitable and at a level
customary for the industry for a business of its size.
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.
The Company generally renders its security guard services pursuant to a
standard form security services agreement which specifies the personnel
and/or equipment to be provided by the Company at designated locations and
the rates therefor, which typically are hourly rates per person. Rates vary
depending on base, overtime and holiday time worked, and the term of
engagement. The Company assumes responsibility for a variety of functions
including scheduling each customer site, paying all guards and providing
uniforms, equipment, instruction, supervision, fringe benefits, bonding and
workers' compensation insurance. These security services agreements also
provide customers with flexibility by permitting reduction or expansion of
the guard force on relatively short notice. The Company is responsible for
preventing the interruption of security 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 security services agreement may be
terminated by the customer, typically with no prior notice or short notice
(usually 30 days). In addition, the Company may terminate an agreement
immediately upon default by the customer in payment of monies due thereunder
or if there is filed by or against the customer a bankruptcy petition or if
any other act of bankruptcy occurs.
The Company has its own proprietary computerized scheduling and
information system. The scheduling of guards, while time-consuming, is a most
important function of any guard company. Management believes the system
substantially reduces the time a manager must spend on scheduling daily guard
hours and allows the Company to fulfill customer needs by automatically
selecting those guards that fit the customer's requirements.
Employee Recruitment and Training
The Company believes that the quality of its guards is essential to its
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ability to offer effective and reliable service, and it believes diligence in
their selection and training produces the level of performance required to
maintain customer satisfaction and internal growth.
The Company's policy requires that all selected applicants for Company
guard positions undergo a detailed pre-employment interview and a background
investigation covering such areas as employment, education, military service,
medical history and, subject to applicable state laws, criminal record. In
certain cases the Company employs psychological testing and, where permitted,
uses pre-employment polygraph examinations. Personnel are selected based upon
physical fitness, maturity, experience, personality, stability and
reliability. Medical examinations and substance abuse testing may also be
performed. Prerequisites for all Company guards include a good command of the
English language and the ability to communicate well and write a
comprehensive and complete report. Preference is given to applicants with
previous experience, either as a military or a civilian security-police
officer.
The Company trains accepted applicants in three phases: Pre-assignment;
On-the-job; and Refresher. The Company's training programs utilize current
curricula and audio-visual materials. Pre-assignment training explains the
duties and powers of a security guard, report preparation, emergency
procedures, general orders, regulations, grounds for discharge, uniforms,
personal appearance and basic post responsibilities. On-the-job assignment
training covers specific duties as required by the post and job orders.
Ongoing refresher training is given on a periodic basis as determined by the
local area supervisor and manager.
Command treats all employees and applicants for employment without
unlawful discrimination as to race, creed, color, national origin, sex, age,
disability, marital status or sexual orientation in all employment-related
decisions.
Significant Customers
No customer of the Company accounted for more than 10% of its gross
revenue in the fiscal year ended March 31, 1999.
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
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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.
Employees
The Company employs approximately 65 employees indirectly attributable
to guard services including supervisors and dispatchers, another
approximately 65 administrative employees including the executive staff, and
approximately 2,810 hourly guards. For Internal Revenue reporting purposes,
the Company was, as of March 31, 1999, the employer of record for an
additional approximately 190 guards under administrative service agreements.
The employees employed by the Company under administrative service agreements
are similar to employees employed by employee leasing companies under
employee leasing arrangements.
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 70% 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 30% of the Company's employees for
guard service customers, work under collective bargaining agreements with the
following unions: Allied International; and Special & Superior 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
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and Trademark Office. Once registered, the mark is expected to appear on the
principal register.
ITEM 2. PROPERTIES
As of March 31, 1999, the Company owned and used in connection with its
business approximately 65 vehicles.
As of March 31, 1999, the Company did not own any real property. It
occupies executive offices at Route 55, Lexington Park, Lagrangeville, New
York, of approximately 6,600 square feet with a base annual rental of $99,000
under a five year lease expiring September 30, 2003. The Company also
occupies the following offices:
Annual Square Base
Location When Opened Footage Rent
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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
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 1,538 $27,443
5505 Main Street
Suite #2
Williamsville, NY 5/1/93 680 $ 5,400
10 West 35th Street 1/31/98 988 $13,552
Chicago, IL
5801 E. Slauson Avenue 11/9/94 1,689 $28,375
Suite G-160
Commerce, CA
1450 Barnum Avenue 2/1/99 2,300 $19,250
Bridgeport, CT
91 N. Franklin St. 2/1/99 1,300 $13,800
Hempstead, NY
2222 Morris Avenue 2/1/99 1,983 $22,500
Union, NJ
JFK International Airport 4/1/98 1,700 $64,800
175-01 Rockaway Boulevard
Jamaica, NY
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Los Angeles International 8/15/96 647 $17,236
Airport
380 World Way
Los Angeles, CA
1237 Central Avenue #210 10/19/93 400 $ 4,800
Albany, NY
2144 Doubleday Avenue 4/1/93 800 $12,840
Ballston Spa, NY
2777 Summer Street 3/13/95 1515 $30,300
Stamford, CT
224 Datura Street 9/17/96 250 $ 4,452
West Palm Beach, FL
124 Chestnut Street, Suite 5 11/25/96 500 $ 8,460
Philadelphia, PA
8181 North West 36th St. 9/5/97 300 $10,800
Miami, FL
800 Virginia Avenue 7/17/97 400 $ 7,881
Fort Pierce, FL
3500 North State Road 7/17/97 300 $ 7,130
Lauderdale Lakes, FL
954 South Main Street 4/27/98 900 $ 8,100
Conyers, GA
The Company believes its properties are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The nature of the Company's business subjects it to claims or litigation
alleging that it is liable for damages as a result of the conduct of its
employees or others. Except for such litigation incidental to its business,
other claims or actions that are not material and the lawsuits described
below, there are no pending legal proceedings to which the Company is a party
or to which any of its property is subject. See "EXHIBITS, FINANCIAL
STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K."
On or about December 4, 1997, an outside shareholder and four of the
Company's directors (Sands, P. Kikis, Saunders, and T. Kikis) commenced an
action in the Supreme Court of the State of New York, County of New York
(Index No. 606166/97) against the other four directors (Vassell, Robinett,
Nekos and Miller), the Company's outside corporate and securities counsel and
the Company itself in a lawsuit characterized as a derivative action. The
complaint alleges that one or more of the defendant-directors engaged in
improper activities, including ultra-vires acts, breach of fiduciary duty,
fraud against the Company, constructive fraud, waste of corporate assets.
These charges are based upon claims that the defendant-directors concealed
information from the plaintiff-directors regarding the Company's earnings,
lacked power to enter into an employment agreement on behalf of the Company
with Mr. Robinett, and entered into administrative service agreements
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with financially unstable companies without performing due diligence. The
plaintiff further alleges that the Company has failed to appoint a
replacement to the office of president and that the directors have entered
into a shareholder agreement which is violative of public policy. Plaintiffs
seek the award of money damages in an amount which is "not less than" $11
million from the individual defendants, a declaratory judgment that the
shareholder agreement is void, an order for an accounting, certain other
injunctive relief and attorneys' fees and disbursements.
The Company has interposed an answer denying the allegations contained
in the complaint. The individual defendants have stated that they believe the
allegations are completely without merit and intend to vigorously defend
against each and every claim. The Company's Certificate of Incorporation and
the Business Corporation Law of New York provide for indemnification of
officers and directors with respect to damages and legal fees incurred in
connection with lawsuits against them arising by reason of serving the
Company. Due to the fact that certain members of the board have chosen to
participate as plaintiffs in this lawsuit, the Company's insurance carrier
has reserved its rights with respect to the defense and indemnity of Command
based on a claimed exclusion from coverage. Command may have a claim against
its carrier based on the carrier's failure to timely disclaim coverage. The
defendant-directors intend to seek indemnification, and have received
advancements of legal fees incurred in connection with their defense, from
the Company. Through March 31, 1999, the Company has expended approximately
$204,000 in legal fees ($84,000 during the year ended March 31, 1999) in
defense of this matter on its own behalf as well as on behalf of the
defendant officers and directors. In addition, the Company has expended
$100,000 for legal fees on behalf of the plaintiff directors in December,
1998, and accrued $92,000 for contingent legal fees incurred by one of the
defendants, where Management has determined that indemnification by the
Company is probable. On or about March 25, 1998, the plaintiffs filed a
motion for the appointment of a temporary receiver. On June 5, 1998, the
Court ordered the appointment of a temporary receiver, but prior to the order
taking effect, the parties agreed to a stipulation pursuant to which Franklyn
H. Snitow, Esq., was appointed acting President and Chief Executive Officer
and acting ninth Board member during the pendency of the defendants' appeal
to the Appellate Division of the decision to appoint a receiver. Based on the
stipulation, the defendants' request to the Appellate Division for a stay
pending the appeal of the order appointing the receiver was granted. At a
duly convened meeting of the board of directors on June 22, 1998, the board
voted unanimously to elect Mr. Snitow as an acting director and to appoint
him acting president and chief executive officer pending the outcome of the
appeal. On January 12, 1999, the Appellate Division dismissed the appeal and
modified the lower court's order to continue Mr. Snitow's authority to
discharge his responsibilities as Acting President, Chief Executive Officer
and Director pending the underlying litigation. Mr. Snitow is a partner in
the law firm of Snitow & Cunningham, LLP, located in New York, New York.
The Company is unable to reasonably estimate the potential continued
impact on the Company's financial condition and results of operations from
this lawsuit. The parties are currently in agreement that future proceedings
will be held in abeyance while management is exploring the possible sale of
the Company. The Company's management has made contact with parties
interested in a transaction but none of these contacts have, to date, been of
a material nature.
In May, 1996, a complaint was filed in Queens County Civil Court by
three former employees alleging emotional distress, anguish, mental distress
and injury to their professional reputation due to retaliatory discharge and
related matters. Plaintiffs each seek $2 million for compensatory damages and
$2 million in punitive damages in addition to payment of overtime wages of
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$25,000. The Company's customer, also a defendant and a former employer, has
engaged counsel representing all defendants. On November 27, 1998, the Kings
County Supreme Court ruled on a motion dismissing three counts concerning
contractual allegations but allowed the remaining nine counts to proceed to
findings. At this time the Company is unable to estimate the possible loss,
if any, that may be incurred as a result of this action. The ultimate outcome
may or may not have a material impact on the Company's financial position or
results of operations.
The Company has been named as a defendant in several other employment
related claims, including claims of sexual harassment by current and former
employees, which are currently under investigation by the New York State
Division of Human Rights. At this time the Company is unable to determine the
impact on the financial position and results of operations that these claims
may have should the investigation conclude that they are valid.
In August, 1997, a complaint was filed in Los Angeles County Superior
Court by six former employees alleging discrimination, wrongful termination,
breach of employment contract and intentional infliction of emotional
distress. The complaint alleges that plaintiffs have suffered damages in
excess of $1 million. After filing the complaint, the plaintiffs, through
counsel, agreed to submit the dispute to binding arbitration and a request
for dismissal, without prejudice, was filed with the Court. At this time the
Company is unable to estimate the possible loss, if any, that may be incurred
as a result of such arbitration. The ultimate outcome of such arbitration may
or may not have a material impact on the Company's financial position or
results of operations.
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 under the symbol "CMMD". 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 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<F1> Last Sales Price
--------- ----------------
1998 High Low
---- ---- ---
First Quarter 2.125 1.343
Second Quarter 1.50 0.968
Third Quarter 1.125 0.687
Fourth Quarter 1.437 0.750
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1999 High Low
---- ---- ---
First Quarter 1.312 0.812
Second Quarter 0.968 0.625
Third Quarter 1.281 0.625
Fourth Quarter 1.812 0.937
<F1> 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 17, 1999 there were approximately 239 holders of record of the
Company's common stock. Management believes there are approximately 1,450
beneficial holders of the Company's common stock.
The last sales price of the Company's common stock on June 22, 1999, was
$1.00.
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 approval of its principle
lender, earnings, capital requirements and the operating and financial
condition of the Company. At present, the Company's anticipated capital
requirements are such that it intends to follow a policy of retaining
earnings, if any, in order to finance, in part, the development of its
business.
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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, 1999, 1998,
1997, 1996, and 1995, 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.
<TABLE>
Statement of Operations Data
Years Ended March 31,
<CAPTION>
1999 1998 1997 1996<F1> 1995<F2>
<S> <C> <C> <C> <C> <C>
Revenue (excluding service
company revenue) $57,642,041 $51,796,882 $49,237,418 $54,995,444 $39,595,272
Gross profit $ 9,716,418 $ 7,340,096 $ 8,443,578 $ 8,496,499 $ 4,527,365
Administrative service revenue $ 913,498 $ 1,450,592 $ 1,471,313 $ 1,519,803 $ 1,291,943
Operating profit/(loss) $ 877,434 $(2,915,001) $ 1,267,805 $ 1,250,713 $(2,412,603)
Net income/(loss) $ (15,399) $(4,013,890) $ 450,030 $ 511,650 $(2,983,823)
Income/(loss) per common share $ (.02) $ (.62) $ .05 $ .06 $ (.70)
Weighted average number of common
shares outstanding 6,658,143 6,689,352 6,955,548 6,663,986 4,274,657
Balance Sheet Data as of March 31,
1999 1998 1997 1996 1995
Working capital/(deficiency) $ 200,236 $(1,122,869) $ 1,413,212 $ 218,968 $ (531,602)
Total assets $16,187,980 $17,697,259 $23,188,576 $22,384,414 $20,267,099
Short-term debt<F3> $ 7,557,957 $ 7,994,445 $ 8,817,997 $ 8,506,911 $ 6,095,183
Long-term debt<F4> $ 471,701 $ 531,323 $ 1,284,423 $ 1,194,505 $ 1,229,773
Redeemable convertible
preferred stock $ -0- $ -0- $ 1,743,555 $ 1,614,525 $ 1,495,065
Stockholders' equity $ 3,119,075 $ 3,134,474 $ 5,731,180 $ 5,189,226 $ 4,993,859
<FN>
--------
<F1> Includes the operations of United Security Group Inc. from its
acquisition date of February 24, 1995.
<F2> Includes the operations of ISS International Service System, Inc. and
Madison Detective Bureau, Inc. from the acquisition dates of October 27, 1993
and November 1, 1993, respectively.
<F3> 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, 8 and 14 of "Notes to Financial Statements."
<F4> The Company's long-term debt includes the long-term portion of
obligations under capital leases.
</FN>
</TABLE>
11
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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.
The following can be interpreted as including forward looking statements
under the Private Securities Litigation Reform Act of 1995. Such statements
are typically identified by the words "intends", "plans", "efforts",
"anticipates", "believes", "expects", or words of similar import. Various
important factors that could cause actual results to differ materially from
those expressed in the forward looking statements are identified below and
may vary significantly based on a number of factors including, but not
limited to, availability of labor, marketing success, competitive conditions
and the change in economic conditions of the various markets the Company
serves. Actual future results may differ materially from those suggested in
the following statements.
For the fiscal year ended March 31, 1999, the Company's operations resulted
in a net loss of $15,399 after charges for amortization of intangibles of
$1,280,687 and prior to preferred stock dividends, compared to a loss of
$4,013,890 for the fiscal year ended March 31, 1998. In addition, as of March
31, 1999, the Company had positive working capital of $200,236 and cash of
$122,470, compared to a working capital deficit of $1,122,869 and cash
overdraft of $449,895 as of March 31, 1998. As a result, the Company's public
accounting firm has removed the "going concern" modification which was
included in the prior year's audit report.The improved operating results were
due to the combination of the following factors: non-recurring charges in
fiscal 1998, impact of increased sales and improved internal operations. The
significant charges in fiscal 1998 include a $764,000 charge in connection
with the Chapter 7 bankruptcy filing of GFM Bayview - a former administrative
service client, a $745,516 charge for impairment of long-lived assets and
$354,000 of unusually high labor claims and self-insurance claims which did
not recur in fiscal 1999. In addition, income tax expense of $259,835
representing an increased valuation allowance and reserves for deferred tax
assets in fiscal 1998 which did not recur in fiscal 1999 as well as a
$371,200 charge reduction regarding amortization of intangibles in fiscal
1999. Fiscal 1999's gross profit improved by $2,376,322 due to increased
sales as a result of management's continued implementation of a national
network of independent security guard companies to service clients with sites
throughout the United States as well as the execution of a plan to sign new
contracts in existing markets. Revenue was partially offset by the decrease
of $537,094 in administrative service revenue. Furthermore, improved control
over operating expenses had in effect reduced General & Administrative
expenses by approximately $240,000. In addition, the implementation of a
centralized, pro-active credit management and collection policy has reduced
bad debt expense by $67,000 and led to the increase by $54,600 of recovered
receivables previously reserved as compared to fiscal 1998. The Company also
recovered $250,000 from Guard Services of Amarillo, Inc., a former
administrative service client in fiscal 1999 which was reserved in a previous
year. Management expects continued favorable financial impact from the above
mentioned strategies as well as improved cash flow as a result of the final
$375,000 payment on the Deltec Development Corporation debt during fiscal
1999.
On November 30, 1998, the Company announced that it intended to engage in
discussions concerning the possible sale of the Company. As of March 31,
1999, these discussions have not led to any agreements with respect to a sale
of the Company but are ongoing.
12
<PAGE>
The Company's press release of November 30, 1998 also referenced open market
purchases of the Company's stock to be made by two members of the Company's
Board of Directors Messrs. Peters T. Kikis and William C. Vassell. As of
January 19, 1999, a total of 32,000 shares have been purchased by Messrs.
Peter T. Kikis and William C. Vassell. These Directors are part of the
management group which, as of approximately January 19, 1999, became engaged
in discussions concerning the possible sale of the Company. They may
therefore possess non-public information which renders inappropriate their
continued purchases of the Company's stock. Messrs. Vassell and Kikis have
not made any purchases of the Company's common stock subsequent to January
19, 1999.
Results of Operations
Fiscal Year ended March 31, 1999 Compared with March 31, 1998
During the fiscal year ended March 31, 1999, revenue increased by $5,845,159
to $57,642,041 from $51,796,882 for the fiscal year ended March 31, 1998. The
major components of this increase are: approximately $2,435,000 increase
primarily due to the additional sales impact in fiscal 1999 for accounts
acquired as a result of four acquisitions completed within different periods
in fiscal 1998; approximately $2,850,000 increase due to new contract starts
net of contract cancellation; approximately $350,000 increase due to rate
increases and approximately $210,000 of non-recurring revenue due to the
Goodwill Games.
Gross profit increased by $2,376,322 to $9,716,418 or 16.9% of revenue for
the fiscal year ended March 31, 1999, compared to $7,340,096 or 14.2% of
revenue for the fiscal year ended March 31, 1998. The gross profit increase
resulted from reduction in the self-insurance reserve for general liability
claims of $392,000, reduction in unemployment costs of $378,000, uniform
costs of $277,000, workers' compensation losses of $100,000, auto expense of
$99,000, indirect payroll costs of $93,000, security supplies and other costs
of $128,000, and an approximately $828,000 increase attributed to sales
growth. The Company insures against general liability claims and lawsuits
through a general liability insurance policy with a third-party insurance
carrier. The policy has a limit of $1,000,000 per occurrence while the
Company retains the risk for the first $50,000 for each occurrence and an
additional limit of $10,000,000 in the aggregate. The Company has an excess
general liability insurance policy covering an additional $30,000,000 in the
aggregate. The general liability self-insurance reserve is based on existing
claims, actuarial computations and the timing of reported claims which are
all facored to estimate losses incurred but not yet reported to the Company.
At this time, it is not known if the decrease will continue in future
periods.
Management expects margins to stabilize at between 16% and 17% of revenue as
long as the economy remains strong. Should a recession develop, margins will
trend lower due to, among other things, increased competition for accounts
and potentially higher unemployment costs.
The Company provides payroll and billing services and accounts receivable
financing through contracts with administrative service 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 of the guards who provide the
services to the customers of the administrative service client. Whenever
contracted as the employer of record, the legal liability for tax
withholdings including FICA and unemployment insurance taxes is borne by
13
<PAGE>
the Company. Additionally, the Company is responsible for worker's
compensation and general liability claims for damages which result from the
employees' conduct and/or negligence. The administrative service client
manages its internal operations including sales and marketing of its guard
contracts. The caption "Administrative Service Revenue" represents the income
earned on the Administrative Service Agreements.
Administrative Service revenue decreased by $537,094 to $913,498 for the
fiscal year ended March 31, 1999, compared to $1,450,592 for the fiscal year
ended March 31, 1998. The decrease is due to the termination of the GFM
Bayview administrative service agreement (revenue from GFM prior to filing
Chapter 7 bankruptcy on August 28, 1997 was ($89,464)), the termination of
three other administrative service contracts ($175,050) and the renegotiation
of a contract for a large "employer of record" administrative service
agreement client effective August, 1998, as a "non employer of record"
contract at a lower service charge ($272,580). As a result, revenue from
employer of record contracts decreased to $446,828, or 49% of total
administrative service revenue for the year ended March 31, 1999, compared to
$1,074,431, or 74% of administrative service revenue for the year ended March
31, 1998. Costs associated with the administrative service revenue are
primarily clerical and administrative in nature and are not readily
segregated from the Company's total general and administrative costs.
Although there are potential new administrative service clients, the Company
did not sign any new administrative service agreements in this fiscal year.
The Company currently services four administrative service clients. No
contracts are scheduled to expire during fiscal 2000, however, management
expects that one contract with current annualized administrative service
revenue of $165,000 will terminate as a result of the potential sale of the
business of this administrative service client.
General and administrative expenses increased by $628,952 to $8,377,678 in
the fiscal year ended March 31, 1999, from $7,748,726 in the fiscal year
ended March 31, 1998. The major areas of increase were administrative
salaries ($470,000) and professional fees ($337,000); offset by a reduction
in health insurance ($144,000) due to unusually high claims in fiscal year
ended March 31, 1998. Office and administrative salaries increases are due to
additional staffing in the Company's corporate and branch offices as a result
of adding branches in Georgia, Florida and Pennsylvania, as well as general
merit and cost of living increases. The increase in professional fees is
primarily due to legal fees expended in connection with the derivative action
disclosed in footnote 13 to the financial statements and "Legal Proceedings",
above, as well as legal and compliance-related consulting fees incurred in
connection with the Miami airport employee background verification matter
also disclosed in footnote 13 to the financial statements.
Amortization of intangibles decreased by $371,202 to $1,280,687 for the
fiscal year ended March 31, 1999 from $1,651,889 for the fiscal year ended
March 31, 1998. This decrease is primarily due to the write-down in the
fiscal year ended March 31, 1998, of intangible assets which was the result
of management's re-evaluation of the business retained from certain prior
acquisitions as well as some intangibles from prior acquisitions being fully
amortized. Amortization charges are expected to continue at fiscal 1999
levels through March, 2000, with significant reductions thereafter as
purchased customer lists become fully amortized.
The provisions for bad debts decreased by $1,083,235 to $367,916 for the
fiscal year ended March 31, 1999, from $1,451,151 for the fiscal year ended
March 31, 1998. The decrease is primarily due to the Chapter 7 bankruptcy
filing of GFM Bayview, an administrative a service client, in August, 1997.
The Company periodically evaluates the requirement for providing for credit
14
<PAGE>
losses on its accounts receivables. Criteria used by management to evaluate
the adequacy of the allowance for doubtful accounts include, among others,
the creditworthiness of the customer, prior payment performance, the age of
the receivables and the Company's overall historical loss experience. It is
not known if bad debts will decrease in future periods nor is this decrease
necessarily indicative of a trend.
Bad debt recoveries increased by $70,452 to $316,045 for the fiscal year
ended March 31, 1999 from $245,593 for the fiscal year ended March 31, 1998.
This increase is primarily due to a significant bad debt recovery from Guard
Services of Amarillo, Inc., a former administrative service client in Texas.
The decrease in labor claims contingencies and settlements is primarily due
to a labor claim settlement in fiscal 1998 which resulted from a default
judgment against the Company in the amount of $314,377 by the Eastern
District Court of New York in favor of a guard who alleged unjust
termination. The claim was settled for $180,000. In addition, the Company has
accrued $174,000 for loss contingencies in connection with certain labor
claims in fiscal 1998. Some of these claims were settled for lower amounts in
fiscal 1999. No similar claims were presented to the Company in fiscal 1999.
The Company recorded a loss on the value of intangible assets of $58,646 for
the fiscal year ended March 31, 1999 due to management's re-evaluation of the
business retained in New Jersey from the Pro-Tech Security Services, Inc.
acquisition. This is compared to the loss on the value of intangible assets
of $745,516 for fiscal year ended March 31, 1998, primarily with respect to
business retained from the ISS International Service System, Inc. acquisition
in Illinois ($246,288) and California ($319,963), as well as several smaller
acquisitions in Illinois ($179,265).
Interest income decreased by $78,277 to $151,216 for the fiscal year ended
March 31, 1999 compared to $229,493 for the fiscal year ended March 31, 1998
primarily due to the lower number of active administrative service clients
and the Chapter 7 bankruptcy of GFM Bayview, a former administrative service
client. Interest expense decreased by $77,005 to $992,218 for the fiscal year
ended March 31, 1999 compared to $1,069,223 for the fiscal year ended March
31, 1998. This decrease is due primarily to reductions in long-term debt.
Loss on equipment dispositions primarily represents older vehicles sold or
retired from service. Other income of $35,000 for the fiscal year ended March
31, 1998 represents a fee earned by the Company for its assistance in a
financial transaction involving one of its administrative service clients.
Management expects the Company to incur modest losses at least through the
fiscal year ending March 31, 2000 in part due to continuing amortization
charges (see footnote 4 to the Company's Financial Statements) and legal fees
incurred in connection with the shareholder's derivative suit and the Miami
Airport matter. (See footnote 13 to the Company's Financial Statements). The
Company's performance will be dependent on its ability to reduce corporate
overhead costs, develop new higher margin product lines and to obtain
profitability for under-performing branches through acquisitions and/or
internal sales. The Company's Board of Directors has not agreed on a policy
with respect to the Company's capacity for integrating acquisitions on a
profitable basis. Management regularly evaluates the feasibility of selling
existing branch offices, with emphasis on those four of the Company's
nineteen offices which are generating losses prior to the allocation of
corporate overhead.
15
<PAGE>
Fiscal Year ended March 31, 1998 Compared with March 31, 1997
During the fiscal year ended March 31, 1998, revenue increased by $2,559,464
to $51,796,882 from $49,237,418 for fiscal year ended March 31, 1997. The
major components of this increase are: approximately $1,840,000 increase due
to acquisitions; approximately $1,040,000 decrease due to the sale of the
Miami business in December, 1996; and approximately $1,760,000 increase due
to new contract starts net of contract cancellations. Changes in revenue as a
result of rate changes were not material.
Gross profit decreased by $1,103,483 to $7,340,096 or 14.2% of revenue for
the fiscal year ended March 31, 1998 compared to $8,443,578 or 17.1% of
revenue for the fiscal year ended March 31, 1997. This decrease resulted from
higher payroll costs of approximately $497,000 due to new contracts replacing
old contracts at lower prices and margins and the current shortage of
qualified labor and increases in overtime. Insurance costs increased by
approximately $607,000 primarily due to higher general liability self-insured
reserves. The charges for self-insurance reserves are based on actuarial
computations and the timing of reported claims and it is, therefore, not
known at this time if these increases will continue in future periods.
Administrative service contract revenue decreased by $20,721 to $1,450,592
for the fiscal year ended March 31, 1998 compared to $1,471,313 for the
fiscal year ended March 31, 1997. The decrease is primarily due to the
termination of the administrative service agreement with GFM Bayview who
filed Chapter 7 bankruptcy on August 28, 1997 as well as the terminations of
three other lower volume administrative service contracts, and offset by an
increase of $194,000 generated by one employer of record administrative
service contract. Currently over seventy percent of administrative service
revenue is generated from one contract which is currently being renegotiated
and is expected to result in less revenue as the result thereof. The Company
did not sign any new administrative service agreements during the fiscal year
ended March 31, 1998.
General and administrative expenses increased by $634,248 to $7,748,726 in
the fiscal year ended March 31, 1998 from $7,114,478 in the fiscal year ended
March 31, 1997. The major areas of increase were insurance costs ($206,000),
rent, utilities & telephone ($157,000), professional fees ($167,000) and
travel costs ($84,000).
Amortization of intangibles decreased by $121,710 to $1,651,889 for the
fiscal year ended March 31, 1998 from $1,773,599 for the fiscal year ended
March 31, 1997. This decrease is primarily due to the full amortization of
capitalized borrowing costs incurred in 1995.
The provisions for bad debts increased by $1,003,992 to $1,451,151 for the
fiscal year ended March 31, 1998 from $447,159 for the fiscal year ended
March 31, 1997. The increase of approximately $764,000 was caused by the
Chapter 7 bankruptcy filing of GFM Bayview, an administrative service client,
in August, 1997. The remaining increase of approximately $240,000 is based on
the Company's periodic evaluation of the requirement to provide for credit
losses on its accounts and other receivables. Criteria used by management to
evaluate the adequacy of the allowance for doubtful accounts include, among
others, the creditworthiness of the customer, prior payment performance, the
age of the receivables and the Company's overall historical loss experience.
Bad debt recoveries increased by $155,582 to $245,593 for the fiscal year
ended March 31, 1998 from $90,011 for the fiscal year ended March 31, 1997.
16
<PAGE>
Significant bad debt recoveries during fiscal 1998 were realized from the
accounts of former administrative service clients in Texas (Guard Services of
Amarillo, Inc. ($120,000) and Florida ($60,000).
A labor claim settlement resulted from a default judgment against the Company
in the amount of $314,377 by the Eastern District Court of New York in favor
of a guard who alleged unjust termination. The claim was settled for
$180,000. In addition, the Company has accrued $174,000 for loss
contingencies in connection with certain labor claims.
There was no insurance rebate for the fiscal year ended March 31, 1998
compared with $598,139 received in the fiscal year ended March 31, 1997.
Insurance rebates received by the Company for the 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 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 been paid to the Company in full. The policies in
effect for periods after September 30, 1995 are also loss sensitive but
provide for a contractual obligation on the part of the insurance carrier to
refund premiums paid, in excess of actually determined premiums. As such, the
Company has calculated its insurance expense for the fiscal years ended March
31, 1998 and 1997 on the basis of estimated losses plus the basic insurance
premium amounts. The worker's compensation basic premium is determined by the
insurance carrier and includes its overhead costs and insurance premium. The
insurance premium portion is insurance coverage for Company annual losses in
excess of $2,225,000 for policy year October 1, 1997 through September 30,
1998 and $1,875,000 in policy year October 1, 1998 through September 30,
1999, plus losses exceeding the $500,000 limit for one occurrence.
The Company recorded a loss on the value of intangible assets of $745,516 for
the fiscal year ended March 31, 1998 which is the result of management's
re-evaluation of the business retained from certain prior acquisitions in
Illinois and California.
Interest income increased by $49,894 to $229,493 for the fiscal year ended
March 31, 1998 compared to $179,599 for the fiscal year ended March 31, 1997
primarily due to interest earned on restricted cash deposits for the benefit
of the Company's insurance carrier as collateral for workers compensation
claims. Interest expense increase by $3,371 to $1,069,223 for the fiscal year
ended March 31, 1998 compared to $1,065,852 for the fiscal year ended March
31, 1997.
Loss on equipment dispositions primarily represents older vehicles sold or
retired from service.
Other income of $35,000 for the fiscal year ended March 31, 1998 represents a
fee earned by the Company for its assistance in a financial transaction
involving one of its administrative service clients.
Liquidity and Capital Resources
The Company pays its guard employees and those of its Administrative Service
Clients on a weekly basis, while its customers and the customers of
administrative service clients pay for the services of such employees
generally within 60 days after billing by the Company. In order to provide
funds for payment to its guard employees, on February 24, 1995, the Company
17
<PAGE>
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 an initial
two year renewal to February 23, 1999 and automatic two year renewal terms
thereafter 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. 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. As a consequence of the shareholder derivative action
described below, the Supreme Court of the State of New York, County of New
York ordered on June 5, 1998 the appointment of a temporary receiver. The
interested parties, however, agreed to a stipulation allowing the appointment
of Franklyn H. Snitow, Esq. as acting President, Chief Executive Officer and
a Director prior to the court order taking effect. The change in executive
management and the filing of the petition for the appointment of a receiver
each constitute an event of default under the CIT loan agreement. Subsequent
to fiscal year-end, the Company obtained a waiver from CIT for these
violations.
At March 31, 1999, the Company had borrowed $6,943,883 representing virtually
100% of its maximum borrowing capacity based on the definition of "eligible
accounts receivable" under the terms of the revolving loan agreement.
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).
Long term debt (including current maturities) was reduced by $765,592 to
$917,826 at March 31, 1999 from $1,683,418 at March 31, 1998. $375,000 of
this reduction represents the final payments to Deltec Development
Corporation (Deltec), an original $1.5 million loan, the proceeds of which
were used primarily to acquire the assets of United Security Group Inc.
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 together
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.
18
<PAGE>
The Private Placement Memorandum issued by the Company in connection with
both the 1993 and 1995 Private Placements and the interim financial reports
for the first three quarters in the fiscal year ended March 31, 1994 and
1995, filed by the Company contained financial information which has since
been restated. A legal action has been filed against the Company and is
described in greater detail below. It includes claims based on the
restatements. It is possible that other 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 further claims against the
Company, alleging as the basis, among other possible claims, the above
mentioned restatements.
On or about December 4, 1997, an outside shareholder and four of the
Company's directors (Sands, P. Kikis, Saunders, and T. Kikis) commenced an
action in the Supreme Court of the State of New York, County of New York
(Index No. 606166/97) against the other four directors (Vassell, Robinett,
Nekos and Miller), the Company's outside corporate and securities counsel and
the Company itself in a lawsuit characterized as a derivative action. The
complaint alleges that one or more of the defendant-directors engaged in
improper activities, including ultra-vires acts, breach of fiduciary duty,
fraud against the Company, constructive fraud, waste of corporate assets and
concealment of information from the plaintiff-directors regarding the
Company's earnings, lacked power to enter into an employment agreement on
behalf of the Company with Mr. Robinett, and entered into service contracts
with financially unstable companies without performing due diligence. The
complaint further alleges that the Company has failed to appoint a
replacement to the office of president and that the directors have entered
into a shareholder agreement which is violative of public policy. Plaintiffs
seek the award of money damages in an amount which is "not less than" $11
million from the individual defendants, a declaratory judgment that the
shareholder agreement is void, an order for an accounting, certain other
injunctive relief and attorneys' fees and disbursements.
The Company has interposed an answer denying the allegations contained in the
complaint. The individual defendants have stated that they believe the
allegations are completely without merit and intend to vigorously defend
against each and every claim. The Company's Certificate of Incorporation and
the Business Corporation Law of New York provide for indemnification of
officers and directors with respect to damages and legal fees incurred in
connection with lawsuits against them arising by reason of serving the
Company. Due to the fact that certain members of the board have chosen to
participate as plaintiffs in this lawsuit, the Company may not have coverage
under its officers and directors liability insurance policy. The
defendant-directors intend to seek indemnification, and have received
advancements of legal fees incurred in connection with their defense, from
the Company. Through March 31, 1999, the Company has expended approximately
$204,000 in legal fees ($84,000 during the year ended March 31, 1999) in
defense of this matter on its own behalf as well as on behalf of the
defendant officers and directors. In addition, the Company has expended
$100,000 for legal fees on behalf of the plaintiff directors in December,
1998, and accrued $92,000 for contingent legal fees incurred by one of the
defendants, where Management has determined that indemnification by the
Company is probable. On or about March 25, 1998, the plaintiffs filed a
motion for the appointment of a temporary receiver. On June 5, 1998, the
Court ordered the appointment of a temporary receiver, but prior to the order
taking effect, the parties agreed to a stipulation pursuant to which Franklyn
H. Snitow, Esq., was appointed acting President and Chief Executive Officer
and acting ninth Board member during the pendency of the defendants' appeal
to the Appellate Division of the decision to appoint a receiver. Based on the
19
<PAGE>
stipulation, the defendants' request to the Appellate Division for a stay
pending the appeal of the order appointing the receiver was granted. At a
duly convened meeting of the board of directors on June 22, 1998, the board
voted unanimously to elect Mr. Snitow as an acting director and to appoint
him acting president and chief executive officer pending the outcome of the
appeal. On January 12, 1999, the Appellate Division dismissed the appeal and
modified the lower court's order to continue Mr. Snitow's authority to
discharge his responsibilities as Acting President, Chief Executive Officer
and Director pending the underlying litigation. The Company is unable to
reasonably estimate the potential continued impact on the Company's financial
condition and results of operations from this lawsuit. The parties are
currently in agreement that future proceedings will be held in abeyance while
management is exploring the possible sale of the Company. The Company's
management has made contact with parties interested in a transaction but none
of these contacts have, to date, been of a material nature.
In August of 1998, the Company was informed that the U.S. Department of
Transportation, the Federal Aviation Administration and the United States
Attorneys' Office for the Southern District of Florida were conducting a
criminal investigation of certain activities at the Miami office of its
Aviation Safeguards Division. The investigation concerns the official
certifications of employee background investigations made by Aviation
Safeguards through its branch manager. Indications are that the background
investigations were not properly conducted and hence the certifications were
false and in violation of United States Code and regulations. Both the
Company and branch manager could be liable. The Company is cooperating fully
with the investigation and is taking steps to ensure future compliance in all
areas covered by the investigation. The Company has retained local counsel to
represent the Company in negotiations with the United States Attorneys'
Office and is exploring various options regarding a resolution to this
matter. As of March 31, 1999, in anticipation of a penalty to be issued by
thee federal court, the Company has accrued a $100,000 loss contingency in
connection with this matter. This amount is not covered by insurance.
The Company has been able to eliminate its cash overdraft (defined as checks
drawn in advance of future deposits) as of March 31, 1999, and has positive
working capital of $200,236 compared to negative working capital of
$1,122,869 as of March 31, 1998. The cash overdraft and deficit in working
capital at March 31, 1998 were due primarily to the Chapter 7 bankruptcy of a
former administrative service client (GFM Bayview), reductions in long-term
debt and to finance operating losses. The Company anticipates continued
improvements in working capital with improved operating results and
reductions in long-term debt service requirements. Although the cash
overdraft has been eliminated as of March 31, 1999, the Company still
experiences periodic overdrafts due to the timing of billings, collections
and payroll dates.
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.
In the past, many computer software programs were written using two digits
rather than four digits to define the applicable year. As a result,
date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This situation is generally referred to as the
"Year 2000 Issue." If such a situation occurs, computer-based information
systems will be faced with problems potentially affecting hardware, software,
networks and customer and vendor inter-dependencies. The effects of Year 2000
Issue may be experienced before, on or after January 1, 2000 and if not
addressed, the impact on operations and financial reporting may range from
20
<PAGE>
minor errors to significant systems failures which could effect a Company's
ability to conduct normal business operations.
As of April 15, 1999, the Company has completed the Year 2000 system
evaluation, testing and implementation and found that we are fully Year 2000
compliant. The only Y2K problems that we have encountered were in the General
Ledger programs, which reside only on the Company's headquarters mainframe
system. This problem was corrected and tested prior to April 15, 1999. We
have not encountered any other problems with regard to Year 2000 issues since
the fixes were implemented.
Most of the Company's desktop PC's are less than three years old and will not
have a Y2K compatibility issue at all. There are minimal desktop PC's that
are older than three years, which may have a problem with sorting or
searching for documents that are stored on the hard drive. This potential
problem will not warrant purchasing replacement PC's.
The Company is in the process of determining its contingency plans which will
include identification of its most reasonably likely worst-case scenarios.
Once the Company receives replies to its third party inquiries, it will be in
a better position to evaluate the impact of reasonably likely worst-case
scenarios. Based on currently available information, given reasonably likely
worse-case scenarios, the Company's Year 2000 Issues and any potential
interruptions, costs, damages or losses related thereto, are not expected to
be material. The Company believes that its compliance efforts have and will
reduce the impact of such issues on the Company.
The Company has expended $27,900 through March 31, 1999, in connection with
outside consultants for services related to Year 2000 Issues. All such
expenditures have been charged to the Company's financial statements as an
expense. In the event the Company has any unanticipated equipment purchases
to replace non-compliant systems, those expenditures will be capitalized. Any
costs associated with replacement equipment are not expected to be material.
The Company has not tracked internal labor costs because the Company believes
these costs to be immaterial. The balance of internal labor costs associated
with Year 2000 compliance is also expected to be immaterial but there can be
no assurance that unanticipated costs will not be incurred.
Cautionary Statement
As provided for under the Private Securities Litigation Reform Act of 1995,
the Company wishes to caution shareholders and investors that the following
important factors, among others, could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements in this
report.
1. The Company's assumptions regarding projected results depend largely
upon the Company's ability to retain substantially all of the Company's
current clients. Retention is affected by several factors including but
not limited to the quality of the services provided by the Company, the
quality and pricing of comparable services offered by competitors,
continuity of management and continuity of non-management personnel.
There are several major national competitors with resources far greater
than those of the Company which therefore have the ability to provide
service, cost and compensation incentives to clients and employees which
could result in the loss of such clients and/or employees.
21
<PAGE>
2. The Company's ability to realize its projections will be largely
dependent upon its ability to maintain margins, which in turn will be
determined in large part by management's control over costs. To a
significant extent, certain costs are not within the control of
management and margins may be adversely affected by such items as
significant inflation, labor unrest, increased payroll and related costs
and Year 2000 failures by third party vendors.
3. Although management currently has no reasonable basis of information
upon which to conclude that any significant service company client or
security guard customers will default in payment for the services
rendered by the Company, any such default by a significant client due to
bankruptcy or otherwise, would have a material adverse impact on the
Company's liquidity, results of operations and financial condition.
Additional detailed information concerning a number of factors that could
cause actual results to differ materially from the information contained
herein is readily available in the Company's most recent reports on Forms
10-K, 10-Q and 8-K and its current registration statement on Form S-3 and any
amendments thereto (all as filed with the Securities and Exchange Commission
from time to time).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk in connection with changes in
interest rates, primarily in connection with outstanding balances under its
revolving line of credit and term loan with CIT Group/Finance, Inc. Based on
the Company's interest rate at March 31, 1999, and average outstanding
balances during the fiscal year then ended, a 1% change in the prime lending
rate would impact the Company's financial position and results of operations
by approximately $88,200 over the next fiscal year.
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
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
On or about December 4, 1997, an outside shareholder and four of the
Company's directors commenced an action against the other four directors, the
Company's outside corporate and securities counsel and the Company itself in
a lawsuit characterized as a derivative action. Please refer to Item 3, Legal
Proceedings, above, for a more complete description of this action. 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 Thomas P. Kikis. The second class consists of Franklyn H. Snitow, 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 2000 or until their successors have been elected and
22
<PAGE>
qualified. The terms of the directors in the second class will expire at the
annual meeting of shareholders in 1999 or until their successors are elected
and qualified. Although Mr. Snitow's term is controlled by the Company's
Bylaws, the directors have agreed that in conformance with the Appellate
Division's modification of the lower Court's order, Mr. Snitow will continue
in office and be renominated through the duration of the lawsuit referred to
above. He will also continue in office as Acting President and Chief
Executive Officer. Each director's term, with the exception of Mr. Snitow, 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, with the exception of Mr. Snitow, has entered
into a Shareholder Voting Agreement dated March 8, 1995, which was finally
revised on March 24, 1995, and thereafter amended on June 2, 1995 and on
September 22, 1997. It provides that each person then on the Board and a
party to the agreement 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. The
validity of this Shareholder Voting Agreement is being litigated as part of
the lawsuit discussed in Item 3, Legal Proceedings.
The provisions of the Agreement will make it more difficult for
Shareholders to replace the current directors. The Agreement provides that it
will remain in effect so long as the parties thereto continue to hold Shares.
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. Thomas Kikis, Sands and Saunders were
given the authority to nominate their replacements; and Mr. Peter 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 was
an executive officer or director of the Company as of March 31, 1999.
Name Age Title
---- --- -----
Franklyn H. Snitow 52 Acting President, CEO and Director
William C. Vassell 41 Chairman of the Board
Gordon Robinett 63 Vice Chairman of the Board
Gregory J. Miller 39 Director
Peter J. Nekos 71 Director
Peter T. Kikis 76 Director
23
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Steven B. Sands 40 Director
Lloyd H. Saunders, III 45 Director
Thomas P. Kikis 38 Director
Eugene U. McDonald 49 Sr. Vice President--Operations
Debra M. Miller 44 Secretary
Franklyn H. Snitow was elected Acting President, Chief Executive Officer
and Director by the Board at a meeting conducted on June 22, 1998. As
disclosed under Item 3, Legal Proceedings, above, Mr. Snitow's election was
the result of a stipulation entered into by the other eight members of the
Board of Directors pursuant to the derivative action commenced on or about
December 4, 1997. On January 12, 1999, the Appellate Division modified the
lower Court's order to continue Mr. Snitow's authority to discharge his
responsibilities as Acting President, Chief Executive Officer and Director
pending the underlying litigation. From 1993 through 1998, Mr. Snitow was a
partner in the law firm of Snitow & Pauley. On July 1, 1998 he became a
partner in the law firm of Snitow & Cunningham, LLP. Mr. Snitow is being
compensated at the rate of $300 per hour for services rendered to the
Company. He is reimbursed for any expenses incurred in connection with the
rendering of such services and is authorized to engage the services of others
at the expense of Command to assist in performance of his duties and
responsibilities. Mr. Snitow will be indemnified by the Company pursuant to
an Indemnification Agreement to the extend permitted in accordance with New
York law, the Company's Certificate of Incorporation and its Bylaws. Mr.
Snitow has been a director of Tofutti Brands, Inc. since 1990. Mr. Snitow
obtained a Bachelor of Arts Degree from American University in 1967 and a
Juris Doctor Degree from New York Law School in 1970.
William C. Vassell has been Chairman of the Board since 1983. Mr.
Vassell had been Chairman of the Board, President and Chief Executive Officer
of the Company since 1983, when the Company repurchased the remaining 50% of
its then-outstanding common stock (he became a 50% owner of the Company in
1980). In connection with the 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
was twice 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 served as Treasurer of the Company from May, 1990 until
August 1, 1996 when Mr. Robinett and the Company agreed to mutually terminate
his employment. In August, 1997, Mr. Robinett was engaged as Acting Treasurer
until a replacement for the Company's former Chief Financial Officer, H.
Richard Dickinson was approved by the Board. He has been a director since
1990. From May 1989 to April 1990, Mr. Robinett was a consultant to Uniforce
Temporary Personnel, Inc., a publicly held national temporary personnel
agency and managed his personal investments. From 1968 to April 1989, he was
employed by Uniforce, initially as Controller and thereafter as Vice
President of Finance, Secretary and Treasurer, and he continues to serve as a
24
<PAGE>
member of its Board of Directors. Mr. Robinett also is currently a director
of Comforce Corporation.
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 former 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. Mr. Kikis is the father of Thomas P.
Kikis who is also a director of the Company.
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. From July 1984 to June 1986
he was a partner of Nekos & Kilduff, an accounting firm located in New
Rochelle, New York. He operated his own accounting firm in Mamaroneck, New
York from July 1986 until September 1996. At present he operates in Valhalla,
New York.
Steven B. Sands was appointed to the Board on March 30, 1994, in
accordance with the provisions of an agreement with Sands Brothers executed
in connection with the Company's 1993 Private Placement. Mr. Sands is
Chairman of the Board of 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. These entities include Katie and Adam
Bridge Partners, L.P.; Owl-1 Parnters, L.P.; Jenna Partners, L.P.; Jenna
Partners II, L.P.; and Lily Capital Appreciation Parnters, L.P. Mr. Sands is
also currently on the board of directors of the following publicly-traded
companies: The Village Green Bookstore, Inc.; and Semi-Conductor Packaging
Materials, 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. From 1989 to 1990, he was a
private investor and from 1986 to 1988 he was the Director of Corporate
Finance for Whale Securities, New York, New York.
Thomas P. Kikis became a Director of the Company on September 22, 1997
in accordance with the terms of the Shareholders Voting Agreement entered
into by the Directors of the Company as of March 8, 1995. For the last six
years, Mr. Kikis' principal occupation has been president of Kikis Asset
Management located in New York, New York. In September, 1998, he formed
Arcadia Securities, LLC, a New York registered broker-dealer. Mr. Kikis is
the son of Mr. Peter T. Kikis who is also a director of the Company.
Eugene U. McDonald has more than 26 years experience in the security
business. He joined the Company in October of 1992 as Vice President of
25
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Corporate Services, and in 1995, he 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 personal experience with the handling of
specialized security personnel for cleared facilities as evidenced by his
duties as Group Vice President of 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, 1999, the Company is not aware of any person who, at any time
during the fiscal year ended March 31, 1999, 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,
1999, except that: Messrs. Sands and Saunders have not filed a Form 5 for the
fiscal year ended March 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended March 31, 1999,
all plan and non-plan compensation paid to, earned by, or awarded to William
C. Vassell, Chairman of the Board, Gordon Robinett, Vice Chairman of the
Board and Former Treasurer, Eugene U. McDonald, Senior Vice President --
Operations, and Martin Blake, Vice-President -- Aviation. No other executive
officer of the Company received total annual salary and bonus in excess of
$100,000 for the fiscal year ended March 31, 1999, and, therefore,
compensation for such other executive officers is not disclosed.
<TABLE>
SUMMARY COMPENSATION TABLE
FOR THE FISCAL YEAR ENDED March 31, 1999
<CAPTION>
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
-------- -------- ------------- ------------ ----- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
William C. Vassell<F1>
Chairman of the Board
1997 $150,000 <F2> 0 0 0
1998 $174,579 <F2> 0 0 0
1999 $175,000 <F2> 0 0 0
Gordon Robinett
Vice Chairman
of the Board and Former
Treasurer 1997 $ 37,692 <F2> 0 0 0
1998 $ 36,923 $52,500<F2><F4> 0 0 227,500<F3>
1999 $ 60,000 $37,500<F2><F4> 0 0 0
26
<PAGE>
Eugene U. McDonald
Senior Vice President -
Operations 1997 $105,270 <F2> $10,000 0 0
1998 $125,794 <F2> $ 6,620 0 0
1999 $112,116 <F2> 38,016 0 0
Martin Blake
Senior Vice President -
Aviation 1997 $100,000 <F2> $22,500 0 0
1998 $100,000 <F2> $15,000 0 0
1999 $114,539 <F2> $64,384 0 0
<FN>
<F1> As of May 31, 1999, Mr. Vassell held a total of 981,000 shares of the
Company's common stock.
<F2> All perquisites and other personal benefits, securities or property do
not exceed either $50,000, or 10% of the total annual salary and bonus of the
executive officer. All perquisites and other personal benefits, securities or
property are properly indicated in the "Other Annual Salary Compensation"
column, as they all fit into the categories set forth in Item 402 of
Regulation S-K.
<F3> 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 5, 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.
<F4> Mr. Robinett received $37,500 under his termination agreement.
</FN>
</TABLE>
Stock Options/Warrants
The Company did not grant any stock options or warrants during the
fiscal year ending March 31, 1999 to the Company's chief executive officer or
to any 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 ending March
31, 1999.
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
Gorden Robinett, who serves on the compensation committee of Uniforce
Temporary 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.
27
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On February 24, 1995 in connection with the acquisition of United, the
Company entered into a subordinated loan agreement with Deltec Development
Corporation, a subsidiary of Deltec International S.A. Peter T. Kikis, a
director of the Company, is a director of Deltec International S.A. The
original principal balance of the loan was $1,500,000 payable over four years
at 14% interest. This loan has been satisfied. The $1.5 million of
subordinated secured indebtedness was repaid in full on or about March 1,
1999.
Steven B. Sands is Chairman of Sands Brothers & Co., Ltd. ("Sands
Brothers") a broker-dealer and investment banking firm with which the Company
has entered into numerous agreements. Sands Brothers was engaged as private
placement agent in connection with the Company's 1993 and 1995 private
placements. All agreements which the Company entered into with Sands Brothers
are no longer operative, and are of no force and effect, with the exception
of the Shareholder Voting Agreement dated March 8, 1995, as amended
(described in Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.)
Employment Agreements and Warrants and Termination of Employment and Change of
Control Agreements.
The Company has entered into an engagement letter and an indemnification
agreement with Mr. Snitow. In accordance with the engagement letter, Mr.
Snitow shall be compensated at the rate of $300.00 per hour, plus
reimburseable expenses, based on his hourly billing to the Company. The
indemnification agreement between the Company and Mr. Snitow provides for the
maximum indemnification permitted under New York law, and the Company's
Certificate of Incorporation and By-Laws. The inclusion of the foregoing
information is intended to comply with Section 725(d) of the New York
Business Corporation Law.
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. Following the
resignation in August of 1997 of H. Richard Dickinson, the Company's former
Chief Financial Officer and Executive Vice President, Mr. Robinett was
engaged on a per diem proration of his prior employment agreement to
temporarily perform the functions of Mr. Dickinson until a replacement was
approved by the Board. Mr. Robinett works an average of three days per week
and is compensated therefor at the rate of $385 per day. See Item 13.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
Pursuant to his employment agreement, as amended as of February 24,
1995, Mr. Vassell serves as Chairman of the Board of the Company and received
an annual salary of $175,000 in fiscal years ended March 31, 1998 and March
31, 1999. The Board has determined that as of April 1, 1999, Mr. Vassell's
salary shall be $150,000 annually. 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. The
warrant expired in April, 1998. In addition, Mr. Vassell received a warrant
28
<PAGE>
to purchase 125,000 shares of Common Stock at a price of $3.25 per share,
exercisable on or after May 15, 1992. This warrant expired in May, 1999.
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 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. Mr. Vassell's five-year warrant to purchase 125,000 shares expired
in May, 1999. Mr. Nekos' five-year warrant to purchase 10,000 shares expired
in May, 1999.
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
options 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 approximately $175,000 for the fiscal year ended March 31,
1999, or approximately $525,000.
Other than pursuant to the Employment Agreement 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
29
<PAGE>
No executive officer receives any additional compensation for serving as
a director, except in the case of Mr. Snitow who is compensated at the rate
of $300 per hour in accordance with the engagement letter referenced above in
this Item 11. Directors who are not employees of the Company, and excluding
Mr. Snitow, 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, 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. Peter 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 1999, Mr. Miller performed miscellaneous legal
services on behalf of the Company and was compensated therefor in an amount
approximating $2,400.
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. These warrants
expired in May, 1999. 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. Peter 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 May 31, 1999, (ii)
each director and executive officer and (iii) all of said beneficial owners,
officers and directors as a group, as of May 31, 1999. The address for each
director and executive officer is the Company's principal office at Lexington
Park, Route 55, Lagrangeville, New York 12540.
Other than as set forth in the following table 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
30
<PAGE>
Securities Exchange Act of 1934) who owns more than 5% of the common stock of
the Company.
Amount and
Nature of
Beneficial
Name Ownership<F1> Percent of Class<F11>
---- ------------- ---------------------
William C. Vassell 981,000 12.3%
Steven B. Sands/ 949,912<F2> 11.9%
Sands Brothers &
Co., Ltd.
101 Park Avenue
New York, NY
Franklyn H. Snitow 0 <F11>
Gordon Robinett 262,500<F3> 3.3%
Peter T. Kikis 371,332<F4> 4.6%
Peter Nekos 12,500<F5> <F11>
Debra Miller 17,600<F6> <F11>
Lloyd H. Saunders, III 500 <F11>
Gregory J. Miller 10,000<F7> <F11>
Thomas P. Kikis 640,795<F8> 8.0%
Eugene U. McDonald 16,250<F9> <F11>
All Officers and 2,891,057 36.2%
Directors as a Group <F2><F3><F4>
(11 Persons) <F5><F6><F7>
<F8><F9>
<F1> The Company has been advised that all individuals listed above, except
Steven B. Sands (see Note (2), below) and Peter T. Kikis (see Note (4), and
(8) below) have the sole power to vote and dispose of the number of shares
set forth opposite their names. According to the most recent Schedule 13D
filed on their behalf, Steven B. Sands and Martin S. Sands share both voting
and dispositive power over the shares set forth next to Steven Sands' name.
Peter T. Kikis shares voting and dispositive power over his shares with
Thomas P. Kikis. Thomas P. Kikis exercises voting and dispositive power over
all shares held by Kikis Asset Management Corporation (KAMC).
<F2> Includes 924,412 shares (824,412 shares of which are issuable upon
conversion of shares of the Company's Series A Preferred Stock) owned by
Katie and Adam Bridge Partners, L.P. Mr. Sands may be deemed to control the
corporate general partner of this entity. Also includes 25,000 shares owned
by Owl-Partners, L.P. Mr. Sands may be deemed to control the corporate
general partner of this entity. Does not include 192,550 shares owned by
31
<PAGE>
partnerships in which an affiliate of Sands Brothers & Co., Ltd., other than
Mr. Sands, may be deemed to be the beneficial owner. Mr. Sands is the
Co-Chairman and Chief Executive Officer of Sands Brothers & Co., Ltd. On
March 30, 1994, Mr. Sands was elected to the Company's Board. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS." The above information was provided
to the Company by Mr. Sands.
<F3> Includes 107,500 shares underlying presently exercisable non-qualified
stock options and 120,000 shares underlying warrants that are currently
exercisable.
<F4> Includes 150,000 shares underlying warrants currently exercisable,
108,832 shares issuable upon conversion of Series A Preferred Stock.
<F5> Includes 10,000 shares underlying options currently exercisable.
<F6> Includes 17,500 shares underlying options currently exercisable.
<F7> Includes 10,000 shares underlying warrants currently exercisable.
<F8> A schedule 13D filed by Thomas P. Kikis, President of Kikis Asset
Management Corporation (KAMC), filed with the Commission on or about March
12, 1998, indicates that these shares are beneficially owned by KAMC on
behalf of its clients: Peter T. Kikis, 285,306 shares; and Thomas P. Kikis,
136,653 shares. Of the 285,306 shares owned beneficially by Peter T. Kikis,
162,000 are issuable on exercise of currently exercisable warrants held by
him and 93,306 are issuable on conversion of shares of Series A Preferred
Stock held by him which are currently convertible. Of the 136,653 shares
owned beneficially by Thomas P. Kikis, 46,653 are issuable on conversion of
shares of the Series A Preferred Stock held by him which are currently
convertible. KAMC, as investment advisor to its advisory clients, has sole
voting power and dispositive power over all 677,559 shares. Such power is
exercised by Thomas P. Kikis. Notwithstanding the above disclosures, as a
result of certain transactions and preferred stock dividends, the Company
believes that the shares beneficially owned by KAMC on behalf of its clients
are as follows: Peter T. Kikis, 371,332 shares; and Thomas P. Kikis, 199,463
shares. Of the 371,332 shares owned beneficially by Peter T. Kikis, 150,000
are issuable on exercise of currently exercisable warrants held by him and
108,832 are issuable on conversion of shares of Series A Preferred Stock held
by him which are currently convertible. Of the 199,463 shares owned
beneficially by Thomas P. Kikis, 54,416 are issuable on conversion of shares
of the Series A Preferred Stock held by him which are currently convertible.
KAMC, as investment advisor to its advisory clients, has sole voting power
and dispositive power over all 570,795 shares. Thomas P. Kikis is a principal
of Acadia Securities, LLC which beneficially owns 70,000 shares on behalf of
its clients.
<F9> Includes 15,000 shares underlying options currently exercisable.
<F10> 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 6,658,143. 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 7,993,803.
<F11> Less than 1 percent.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
32
<PAGE>
A description of the engagement letter and indemnification agreement
between the Company and Franklyn H. Snitow, acting president, chief executive
and director of the Company is found in Item 11 herein.
The Company and its Board of Directors (except Mr. Snitow) are party to
a legal proceeding characterized as a derivative action. See "Item 3. LEGAL
PROCEEDINGS". Certain indemnification rights are afforded these parties under
the Company's Certificate of Incorporation and the Business Corporation Law
of New York. Due to the fact that certain members of the board have chosen to
participate as plaintiffs in this lawsuit, the Company may not have coverage
under its officers and directors liability insurance policy. The
defendant-directors intend to seek indemnification, and have received
advancements of legal fees incurred in connection with their defense, from
the Company. Through March 31, 1999, the Company has expended approximately
$204,000 in legal fees ($84,000 during the year ended March 31, 1999) in
defense of this matter on its own behalf as well as on behalf of the
defendant officers and directors. In addition, the Company has expended
$100,000 for legal fees on behalf of the plaintiff directors in December,
1998, and accrued $92,000 for contingent legal fees incurred by one of the
defendants, where Management has determined that indemnification by the
Company is probable.
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
former 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.
The $1.5 million of subordinated secured indebtedness was repaid in full on
or about March 1, 1999.
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. In
August of 1997, Mr. Robinett was engaged by the Company on a per diem
proration of his prior employment agreement to temporarily perform the
functions of Mr. Dickinson until a replacement was approved by the Board. Mr.
33
<PAGE>
Robinett works an average of three days per week and is compensated therefor
at the rate of $385 per day.
34
<PAGE>
PART IV
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
----
Report of Independent Accountants F-1
Balance Sheets - March 31, 1999 and 1998 F-2
Statements of Operations - Years Ended F-3
March 31, 1999, 1998, and 1997
Statements of Changes in Stockholders' F-4
Equity - Years Ended March 31, 1999, 1998, and 1997
Statements of Cash Flows - Years Ended F-5 - F-7
March 31, 1999, 1998, and 1997
Notes to Financial Statements F-8 - F-22
(2) Financial statement schedule filed as part of this report:
Valuation and qualifying accounts - years ended F-23
March 31, 1999, 1998, 1997****
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.
35
<PAGE>
3.1 Amended & Restated Articles Incorporated by reference to Exhibit
of Incorporation 3.3 of the form 10-K for the fiscal year
ending March 31, 1993 (the "1993 10-K")
3.2 By-Laws Incorporated by reference to Exhibit
3.3 of the Form 10-K for the fiscal
year ended March 31, 1991 (the "1991
10-K")
3.3 Amendments to By-Laws Incorporated by reference to Exhibit 3.3
of the Form 10-K/A for the fiscal year
ended March 31, 1994 (the "1994 10-K/A")
3.4 Certificate of Amendment of Incorporated by reference to Exhibit 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 Incorporated by reference to Exhibit
Employment Agreement for 10.1 of the 10-K for the fiscal year
William C. Vassell dated ended March 31, 1992 (the "1992 10-K")
April 8, 1991
10.2 Amended and Restated Incorporated by reference to Exhibit
Employment Agreement for 10.3 of the 1992 10-K
William C. Vassell dated
June 18, 1991
10.3 Amendment #1 to Amended & Incorporated by reference to Exhibit
Restated Employment 10.5 to the 1993 10-K
Agreement for William C.
Vassell dated September 25,
1992
36
<PAGE>
10.4 Form of Amendment to Incorporated by reference to Exhibit
Employment Agreement for 10.2 of the 1992 10-K
Gordon Robinett dated
April 8, 1991
10.5 Amended and Restated Incorporated by reference to Exhibit
Employment Agreement for 10.4 of the 1992 10-K
Gordon Robinett dated
June 18, 1991
10.6 Amendment #1 to Amended Incorporated by reference to Exhibit &
Restated Employment 10.6 of the 1993 10-K Agreement for Gordon
Robinett dated September 25,
1992
10.7 Form of Warrant Agreement Incorporated by reference to Exhibit
and Warrant for William C. 10.3 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
dated May 15, 1992 10.7 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
Agreement for William 10.9 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
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
37
<PAGE>
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,
or Succession of Madison 1993
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.
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
38
<PAGE>
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
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.
27.00 Financial Data Schedule E-1
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
39
<PAGE>
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, Incorporated by reference to Exhibit
1997 re: FYE 1997 results 99.11 to the 1997 10-K.
99.12 Press Release dated June 29, E-2
1999
(b) Reports on Form 8-K
(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
(vii) Report on Form 8-K dated August 15, 1997 Item 7(c) - Exhibits
Press release dated August 11, 1997
(viii) Report on Form 8-K dated September 11, 1997 Item 7(c) - Exhibits
Press release dated September 10, 1997
(ix) Report on Form 8-K dated November 19, 1997 Item 7(c) - Exhibits
Press release dated November 19, 1997
(x) Report on Form 8-K dated December 18, 1997 Item 5
40
<PAGE>
(xi) Report on Form 8-K dated July 8, 1998 (item 7(c) - Exhibits Press
Release dated July 7, 1998.
(xii) Report on Form 8-K dated July 29, 1998 Item 7(c) - Exhibits Press
Release dated July 17, 1998.
(xiii) Report on Form 8-K dated September 15, 1998 Item 7(c) Press release
dated August 17, 1998.
(xiv) Report on Form 8-K dated December 1, 1998 Item 7(c) Press release
dated November 30, 1998.
41
<PAGE>
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/ Franklyn H. Snitow
-------------------------------------
Franklyn H. Snitow
Acting President and Chief Executive Officer
Date: May ___, 2000
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/ Franklyn H. Snitow Director, Acting May __, 2000
----------------------------- President and Chief Executive
Franklyn H. Snitow Officer
/s/ William C. Vassell Chairman of the May ___, 2000
----------------------------- Board and Director
William C. Vassell
/s/ Nathan Nelson Chief Financial Officer May __, 2000
----------------------------- and Executive Vice President
Nathan Nelson
/s/ Gordon Robinett Vice Chairman of the May __, 2000
----------------------------- Board and Director
Gordon Robinett
/s/ Peter T. Kikis Director May __, 2000
-----------------------------
Peter T. Kikis
/s/ Peter J. Nekos Director May __, 2000
-----------------------------
Peter J. Nekos
/s/ Gregory J. Miller Director May __, 2000
-----------------------------
Gregory J. Miller
42
<PAGE>
Director May __, 2000
-----------------------------
Steven B. Sands
Director May __, 2000
-----------------------------
Lloyd H. Saunders, III
/s/ Thomas P. Kikis Director May __, 2000
-----------------------------
Thomas P. Kikis
The Registrant has not sent an annual report or proxy material to its
shareholders for 1999. The Registrant intends to send an annual report and
proxy material to its shareholders subsequent to the date hereof in
connection with its 1999 annual meeting to be conducted later this year.
43
<PAGE>
COMMAND SECURITY CORPORATION
FINANCIAL STATEMENTS
(and Independent Auditor's Report )
YEARS ENDED
MARCH 31, 1999 AND 1998
<PAGE>
CONTENTS
Page No.
INDEPENDENT AUDITOR'S REPORT F-1
FINANCIAL STATEMENTS
Balance sheets F-2
Statements of operations F-3
Statements of changes in stockholders' equity F-4
Statements of cash flows F-5 - F-7
Notes to financial statements F-8 - F-23
FINANCIAL STATEMENT SCHEDULE
Valuation and qualifying accounts F-24
<PAGE>
Independent Auditor's Report
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, 1999 and 1998, and for each of the three years in the period ended
March 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended March 31, 1999, 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.
June 10, 1999, except for Note 26, as to which the date is September 6, 2000
Poughkeepsie, New York
F-1
<PAGE>
Command Security Corporation
Balance Sheets
March 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 122,470 $ -0-
Accounts receivable from guard service customers, less allowance for
doubtful accounts of $492,372 and $414,851, respectively 8,693,441 8,877,428
Accounts receivable from service contract customers, less allowance for
doubtful accounts of $208,953 and $301,496, respectively 2,767,439 2,628,838
Prepaid expenses 396,227 493,870
Notes receivable, current maturities, less allowance for doubtful
accounts of $267,790 and $273,715, respectively -0- 12,272
Other receivables, less allowance for doubtful accounts
of $987,192 and $1,024,319, respectively 53,381 92,376
----------- -----------
Total current assets 12,032,958 12,104,784
Furniture and equipment at cost, net 1,031,042 1,176,246
Intangible assets, net 1,606,511 2,714,550
Deferred income taxes -0- -0-
Restricted cash 1,091,527 1,040,853
Other assets 425,942 660,826
----------- -----------
Total assets $16,187,980 $17,697,259
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ -0- $ 449,895
Current maturities of long-term debt 492,677 1,224,423
Current maturities of obligations under capital leases 69,428 71,115
Short-term borrowings 6,995,852 6,698,907
Accounts payable and accrued expenses 3,707,162 4,050,758
Due to administrative service clients 567,603 732,555
----------- -----------
Total current liabilities 11,832,722 13,227,653
Self-insurance reserves 764,482 803,809
Long-term debt, net 425,149 458,995
Obligations under capital leases, net 46,552 72,328
----------- -----------
13,068,905 14,562,785
Commitments and contingencies (Notes 13 and 14)
Stockholders' equity:
Preferred stock, convertible Series A, $.0001 par value per share,
authorized 1,000,000 shares, 12,325 and 11,412 shares issued and
outstanding, liquidation value of $2,033,682
and $1,883,039, respectively 2,033,682 1,883,039
Common stock, $.0001 par value per share, authorized 20,000,000
shares, issued 6,658,143 and 8,013,543, respectively 666 801
Paid-in capital 9,277,997 9,431,505
Deficit (8,193,270) (8,177,871)
----------- -----------
3,119,075 3,137,474
Common stock in treasury, at cost, 1,355,400 shares in 1998 -0- (3,000)
----------- -----------
3,119,075 3,134,474
----------- -----------
Total liabilities and stockholders' equity $16,187,980 $17,697,259
=========== ===========
</TABLE>
See accompanying notes and auditor's report
F-2
<PAGE>
Command Security Corporation
Statements of Operations
Years Ended March 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenue $57,642,041 $51,796,882 $49,237,418
Cost of revenue 47,925,623 44,456,786 40,793,840
----------- ----------- -----------
Gross profit 9,716,418 7,340,096 8,443,578
Administrative service revenue 913,498 1,450,592 1,471,313
----------- ----------- -----------
10,629,916 8,790,688 9,914,891
----------- ----------- -----------
Operating expenses
General and administrative expenses 8,377,678 7,748,726 7,114,478
Amortization of intangibles 1,280,687 1,651,889 1,773,599
Provision for doubtful accounts and notes 367,916 1,451,151 447,159
Bad debt recoveries (316,045) (245,593) (90,011)
Labor claims contingencies and settlements (16,400) 354,000 -0-
Insurance rebates -0- -0- (598,139)
Loss on value of intangible assets 58,646 745,516 -0-
----------- ----------- -----------
9,752,482 11,705,689 8,647,086
----------- ----------- -----------
Operating income/(loss) 877,434 (2,915,001) 1,267,805
----------- ----------- -----------
Other income/(expense)
Interest income 151,216 229,493 179,599
Interest expense (992,218) (1,069,223) (1,065,852)
Loss on equipment dispositions (51,831) (34,324) (71,882)
Other income -0- 35,000 -0-
----------- ----------- -----------
(892,833) (839,054) (958,135)
----------- ----------- -----------
Income/(loss) before
income tax (expense)/benefit (15,399) (3,754,055) 309,670
Income tax (expense)/benefit -0- (259,835) 140,360
----------- ----------- -----------
Net income/(loss) (15,399) (4,013,890) 450,030
Preferred stock dividends (150,643) (139,484) (129,030)
----------- ----------- -----------
Net income/(loss)
applicable to common stockholders $ (166,042) $(4,153,374) $ 321,000
=========== =========== ===========
Income/(loss) per share of common stock $ (.02) $ (.62) $ .05
=========== =========== ===========
Weighted average number of
common shares outstanding 6,658,143 6,689,352 6,955,548
=========== =========== ===========
</TABLE>
See accompanying notes and auditor's report
F-3
<PAGE>
Command Security Corporation
Statements of Changes in Stockholders' Equity
Years Ended March 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Retained
Preferred Common Paid-In Earnings Stock In
Stock Stock Capital (Deficit) Treasury Total
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1996 $ -0- $ 812 $9,805,425 $(4,614,011) $(3,000) $ 5,189,226
Exercise of
common stock put (218,765) (218,765)
Common stock issued 21 439,198 439,219
Issuance/(return) of
escrowed common stock
o Note collateral 24 (24) -0-
o Accrued fees (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 -0- 842 9,897,319 (4,163,981) (3,000) 5,731,180
Common stock issued 5 54,008 54,013
Return of escrowed
common stock
o Note collateral (35) 35 -0-
o Retention adjustment (11) (294,394) (294,405)
Cash paid in lieu of
compensatory stock warrants (85,979) (85,979)
Transfer of
preferred stock 1,813,297 1,813,297
Preferred stock dividends 69,742 (139,484) (69,742)
Net loss (4,013,890) (4,013,890)
---------- ----- ---------- ----------- ------- -----------
Balance at
March 31, 1998 1,883,039 801 9,431,505 (8,177,871) (3,000) 3,134,474
Retirement of common
stock in treasury (135) (2,865) 3,000 -0-
Preferred stock dividends 150,643 (150,643) -0-
Net loss (15,399) (15,399)
---------- ----- ---------- ----------- ------- -----------
Balance at
March 31, 1999 $2,033,682 $ 666 $9,277,997 $(8,193,270) $ -0- $ 3,119,075
========== ===== ========== ============ ======= ===========
</TABLE>
See accompanying notes and auditor's report
F-4
<PAGE>
Command Security Corporation
Statements of Cash Flows
Years Ended March 31, 1999, 1998 and 1997
<TABLE>
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income/(loss) $ (15,399) $(4,013,890) $ 450,030
Adjustments to reconcile net income/(loss) to net
cash provided by operating activities:
Depreciation and amortization 1,720,197 2,038,794 2,133,715
Provision for doubtful accounts and
notes receivable, net of recoveries 51,871 1,451,151 447,159
Loss on equipment dispositions 51,831 34,324 71,882
Loss on value of intangible assets 58,646 745,516 -0-
Deferred income taxes -0- 259,835 (140,360)
Self-insurance reserves 572,833 900,128 293,238
Changes in operating assets and liabilities, net
of effects of business acquisitions:
Accounts receivable, current and long-term (322,530) 780,602 (854,845)
Prepaid insurance 460,896 880,665 (38,813)
Other receivables 38,995 (88,574) (413,779)
Other assets (71,944) (244,246) (336,850)
Accounts payable and accrued expenses (1,005,756) 124,665 (611,286)
Income taxes -0- -0- -0-
Due to administrative service clients 105,971 28,495 105,139
----------- ----------- -----------
Net cash provided by
operating activities 1,645,611 2,897,465 1,105,230
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (101,372) (153,298) (98,760)
Business acquisitions and purchase of
intangible assets (45,735) (116,521) (281,246)
Proceeds from equipment dispositions 2,278 27,122 75,902
Proceeds from sale of intangible assets -0- -0- 210,000
Issuance of notes by administrative service
clients and other third parties (5,000) -0- (252,208)
Principal collections on notes receivable 62,394 113,828 246,207
----------- ----------- -----------
Net cash used in investing activities (87,435) (128,869) (100,105)
----------- ----------- -----------
FINANCING ACTIVITIES
Net borrowings/(payments) on line of credit 326,955 (533,908) 1,186,632
Proceeds from long-term debt -0- -0- 500,000
Repayments on other short and long-term debt (1,237,369) (1,763,505) (2,480,414)
Repayments on capital lease obligations (75,397) (81,455) (96,762)
Net proceeds from issuance of stock -0- -0- 45,219
Proceeds from common stock warrants subscribed -0- -0- 500
Cash paid in lieu of compensatory stock warrants -0- (85,979) -0-
Cash overdraft (449,895) (303,749) (160,300)
----------- ----------- -----------
Net cash used in financing activities (1,435,706) (2,768,596) (1,005,125)
----------- ----------- -----------
Net increase in cash and cash equivalents 122,470 -0- -0-
Cash and cash equivalents, beginning of year -0- -0- -0-
----------- ----------- -----------
Cash and cash equivalents, end of year $ 122,470 $ -0- $ -0-
=========== =========== ===========
</TABLE>
See accompanying notes and auditor's report
F-5
<PAGE>
Command Security Corporation
Statements of Cash Flows, Continued
Years Ended March 31, 1999, 1998 and 1997
1. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the period for:
1999 1998 1997
Interest $997,779 $1,100,903 $1,045,238
Income Taxes -0- -0- -0-
2. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
For the years ended March 31, 1999, 1998 and 1997, the Company purchased
transportation and security equipment with direct installment and lease
financing of $247,043, $365,825 and $566,709, respectively.
The Company generally obtains short-term financing to meet its insurance
needs. For the years ended March 31, 1999, 1998 and 1997, $107,099, $133,055
and $576,991, respectively, have been borrowed for this purpose. These
borrowings have been excluded from the statements of cash flows.
For the years ended March 31, 1999, 1998 and 1997, the Company accrued
accumulated dividends of $150,643, $139,484 and $129,030 and issued 913, 845
and 782 additional shares of its Series A convertible preferred stock for the
years ended March 31, 1999, 1998 and 1997, 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.
In June, 1998, the Company purchased certain guard service accounts and
related equipment and supplies for a total consideration of $222,098. The
Company paid $55,525 and issued two notes for $55,525 and $111,049,
respectively. The second note was subsequently reduced by $31,015 as a
retention adjustment. The non-cash portions have been excluded from the
purchase of accounts and issuance of notes in the statement of cash flows.
In March, 1998, the Company settled the retention adjustment in connection
with the sale of certain customer lists originally closed in December, 1996.
The resultant charge to deferred income of $103,989 and credits to notes
receivable and accrued expenses of $63,159 and $40,830, respectively, have
been excluded from the statement of cash flows.
During the year ended March 31, 1998, the Company settled various retention
issues related to customer list purchased with the issuance of the Company's
common stock. The resultant net charge to equity and credit to intangible
assets of $240,392 have been excluded from the statement of cash flows.
During the year ended March, 1998, the Company acquired certain guard service
accounts from three former administrative service clients in settlement of
outstanding advances and the assumption of certain loan guarantees. Debt
assumed of $150,006 and net advances of $94,655 have been excluded from the
purchase of intangible assets in the statement of cash flows.
In June, 1997, the Company purchased certain guard service accounts for a
total consideration of $144,684. The Company paid $56,717, issued a note for
$56,717 and entered into an agreement for consulting services for $31,250 to
effect the transition of the accounts. The non-cash portions have been
excluded from the purchase of accounts and issuance of notes in the statement
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.
See accompanying notes and auditor's report
F-6
<PAGE>
Command Security Corporation
Statements of Cash Flows, Continued
Years Ended March 31, 1999, 1998 and 1997
2. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES,
continued
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 auditor's report
F-7
<PAGE>
Command Security Corporation
Notes to Financial Statements
March 31, 1999, 1998 and 1997
1. Business Description and Summary of Accounting Policies
The following is a description of the principal business activities and
significant accounting policies employed by Command Security Corporation.
Principal business activities
Command Security Corporation (the Company) is a uniformed security guard
service company operating in New York, Connecticut, California, Florida,
Georgia, Illinois and New Jersey. 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.
Such estimates include provisions for uncollectible accounts and notes
receivable, recoverability and attrition rates of purchased customer lists,
and reserves for general liability and workers' compensation claims. Actual
results could differ from those estimates.
Revenue recognition
The Company records revenue as services are provided to its customers and to
its administrative service clients. Revenue consists primarily of security
guard services which are typically billed at hourly rates. These rates may
vary depending on base, overtime and holiday time worked. Revenue for
administrative services provided to all administrative service clients are
based on a percentage of the administrative service client's guard service
revenue or gross profit and are recognized as billings for the related guard
services are generated. Costs associated with the Company's guard service
revenue consist of direct and indirect payroll and related expenses,
subcontract costs, vehicle and other costs directly related to the guard
service revenue generated. Costs related to the administrative service
revenue are primarily clerical and administrative in nature and are not
readily segregated from the Company's total general and administrative costs.
In December, 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements". Management believes that the Company's practices and
policies are in compliance with SAB 101.
Cash and cash equivalents
For purposes of the cash flows statements, the Company defines cash and cash
equivalents as cash and investments with maturities of three months or less.
Furniture and equipment
Furniture and equipment are stated at cost. Depreciation is accumulated using
the straight-line method over the estimated useful lives of the equipment
ranging from three to seven years.
Intangible assets
Intangible assets are stated at cost and consist primarily of customer lists
which are being amortized on a straight-line basis over five years. The life
assigned to customer lists acquired is based on management's estimate of the
attrition rate. The attrition rate is estimated based on historical contract
longevity and management's operating experience. Any possible impairment is
evaluated annually based on anticipated undiscounted future cash flows and
actual customer attrition in accordance with the provisions of SFAS 121.
F-8
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
1. Business Description and Summary of Accounting Policies, continued
Reserve for doubtful accounts
The Company periodically evaluates the requirement for providing for credit
losses on its accounts receivables. Criteria used by management to evaluate
the adequacy of the allowance for doubtful accounts include, among others,
the creditworthiness of the customer, prior payment performance, the age of
the receivables and the Company's overall historical loss experience.
Advertising costs
The Company expenses advertising costs as incurred. Amounts incurred for
recruitment and general business advertising were $133,553, $129,400 and
$140,600 for the years ended March 31, 1999, 1998 and 1997, respectively.
Income/(loss) per common share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 (SFAS 128), "Earnings Per Share," which is required to be adopted for
periods ending after December 15, 1997. Under the new requirements for
calculating basic earnings per share, the dilutive effect of potential common
shares, if any, is excluded. No diluted earnings per share are presented
because the effect of assumed issuance of common shares in connection with
warrants and stock options outstanding and preferred stock conversions was
antidilutive. The implementation of SFAS 128 had no effect on the calculation
of the Company's earnings per share for the years ended March 31, 1998 and
1997.
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 for the periods presented. Stock-based compensation
issued to non employees are accounted for based on the fair value and nature
of goods and/or services received.
2. Continuity of Operations
The Company's financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. The Company's operations resulted in a net loss of $4,013,890 for
the year ended March 31, 1998, and a working capital deficit at March 31,
1998, of $1,122,869. As described in Note 6, the Company was not in
compliance with certain of its debt covenants and, as described in Notes 13
and 18, there is litigation and a contingency for which the outcomes are
uncertain. As a result, the independent auditor's report on the March 31,
1998, financial statements was modified, indicating that these factors raised
substantial doubt about the Company's ability to continue as a going concern
for a reasonable period of time. The Company's viability as a going concern
is dependent on its ability to achieve profitability from its operations, to
generate sufficient working capital to meet its obligations as they become
due, the forbearance of its lenders and its ability to resolve the litigation
and contingency.
F-9
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
2. Continuity of Operations, continued
As of March 31, 1999, the Company had positive working capital of $200,236
and its operations resulted in a significantly reduced net loss of $15,399
for the year ended March 31, 1999. These improved results are due, in part,
to significant charges in fiscal 1998 in connection with the Chapter 7
bankruptcy filing of a former administrative service client, charges for
impairment of long-lived assets, unusually high labor claims and
self-insurance claims which did not recur in fiscal 1999, as well as
management's development and implementation in fiscal 1999 of a national
network of independent security guard companies to service clients with sites
throughout the United States. The implementation of this network has
increased its ability to compete against larger national companies and
increased its profit margins. In addition, the Company has implemented a plan
to actively seek rate increases from its existing clients and to sign new
contracts in existing markets. Furthermore, it has implemented a centralized
purchasing function in order to better control operating costs and the
implementation of a centralized, pro-active credit management and collection
policy has significantly reduced bad debt expense and led to the recovery of
receivables previously reserved.
Management expects continued favorable financial impact from the above
mentioned strategies as well as improved cash flow as a result of the
repayment in full of certain acquisition indebtedness in February, 1999.
Furthermore, subsequent to year-end the Company has obtained a waiver from
its principal lender, CIT Group/Finance, Inc., in connection with its
non-compliance with certain non-financial covenants and management is of the
opinion that the probability that contractual termination of its lending
arrangement diminishes with improvements in operating results and working
capital and that the probability of claims in connection with certain
restatements and a resultant negative impact on operations and financial
condition diminishes with time.
3. Furniture and Equipment
Furniture and equipment at March 31, consist of the following:
1999 1998
Transportation equipment $ 1,142,334 $ 1,095,712
Security equipment 537,658 438,311
Office furniture and equipment 1,560,805 1,520,997
----------- -----------
3,240,797 3,055,020
Accumulated depreciation (2,209,755) (1,878,774)
----------- -----------
$ 1,031,042 $ 1,176,246
=========== ===========
Depreciation expense for the years ended March 31, 1999, 1998 and 1997 was
$429,238, $386,905 and $360,116, respectively, and includes amortization of
assets purchased under capital lease arrangements (see Note 14).
4. Intangible Assets
Intangible assets at March 31, consist of the following:
1999 1998
Customer lists $ 5,657,732 $ 6,048,491
Borrowing costs 50,000 165,000
Covenant not to compete 180,000 180,000
Goodwill 34,007 34,007
----------- -----------
5,921,739 6,427,498
Accumulated amortization (4,315,228) (3,712,948)
----------- -----------
$ 1,606,511 $ 2,714,550
=========== ===========
F-10
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
4. Intangible Assets, continued
Amortization expense for the years ended March 31, 1999, 1998 and 1997, was
$1,280,687, $1,651,889 and $1,773,599, respectively. During the years ended
March 31, 1999 and 1998, the Company removed intangibles of $83,780 and
$1,743,880 and related accumulated amortization of $25,134 and $998,364,
respectively, from its accounts and recognized impairment losses of $58,646
and $745,516, respectively, on its purchased customer lists due to lack of
retention in some of its branches. Management believes that the future
expected cash flows will not be sufficient to recover the remaining
unamortized costs associated with these lists.
5. Other Assets
Other assets at March 31, consist of the following:
1999 1998
Restricted cash $1,091,527 $1,040,853
========== ==========
Insurance deposits 295,142 551,296
Security deposits 120,116 99,420
Other 10,684 10,110
---------- ----------
$ 425,942 $ 660,826
========== ==========
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.
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at March 31, consist of the following:
1999 1998
Trade accounts payable $ 701,296 $ 980,993
Payroll and related expenses 2,027,968 2,190,237
Insurance 456,705 409,348
Interest -0- 5,480
Sales tax 73,997 119,392
Accrued professional fees 152,000 60,000
Accrued loss contingencies 160,000 174,000
Liabilities assumed in acquisitions 29,578 27,816
Other 105,618 83,492
---------- ----------
$3,707,162 $4,050,758
========== ==========
As of March 31, 1999, the Company has accrued $160,000 for loss contingencies
in connection with certain legal proceedings and labor claims where
management has determined that it is probable that a liability has been
incurred. As of March 31, 1998, accruals in connection with such labor claims
amounted to $174,000.
F-11
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
7. Short-Term Borrowings
Short-term borrowings at March 31, consist of the following:
1999 1998
Bank line of credit $6,943,883 $6,616,928
Various insurance financing arrangements,
interest ranging from 7.04% to 8.53% 35,630 49,029
Other obligations 16,339 32,950
---------- ----------
$6,995,852 $6,698,907
========== ==========
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, 1999, the Company had used
$6,943,883 of this line, representing virtually 100% of its maximum borrowing
capacity. Interest is payable monthly at 1.5% over prime, or 9.25% at March
31, 1999. 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 Company relies heavily on its revolving loan from CIT which contains
numerous non-financial covenants. As of March 31, 1999, the Company was not
in compliance with several of the non-financial covenants. Subsequent to
year-end, the Company obtained a waiver from CIT for these violations.
8. Long-Term Debt
Long-term debt at March 31, consists of the following:
1999 1998
Deltec Development Corporation, due February 24,
1999, interest at 14% $ -0- $ 375,000
Gordon Robinett (Director), due October, 1999,
no interest, collateralized by related covenant 45,000 82,500
Capital Resource Company, (four notes and five notes)
due April, 1998, to June, 2001, interest at 14%,
unsecured 166,017 294,107
Various installment loans due at various dates
through March, 2002, with interest ranging
from 3.8% to 11.75% (a) 415,142 540,144
CIT Group/Credit Finance, Inc., due February 1, 2002
interest at prime plus 1.5%, currently 9.25% (b) 291,667 391,667
--------- -----------
917,826 1,683,418
Current maturities (492,677) (1,224,423)
--------- -----------
$ 425,149 $ 458,995
========= ===========
(a) Payable to General Motors Acceptance Corporation, Ford Motor Credit
Corporation and Chase Manhattan Bank. The notes are collateralized by
automobiles and security equipment.
(b) 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).
F-12
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
8. Long-Term Debt, continued
The aggregate amount of required principal payments of long-term debt is as
follows:
Year ending: March 31, 2000 $492,677
March 31, 2001 289,563
March 31, 2002 135,586
--------
$917,826
========
9. Stockholders' Equity
Changes in the number of equity shares of the Company's preferred and common
stock for the years ended March 31, 1999, 1998 and 1997, are as follows:
Preferred Common Treasury
Stock Stock Stock
------ ---------- ----------
Balance at April 1, 1996 -0- 8,119,606 1,355,400
Common stock issued 219,500
Issuance/(return) of escrowed
common stock
o Note collateral 238,000
o Accrued fees (152,774)
------ ---------- ----------
Balance at March 31, 1997 -0- 8,424,332 1,355,400
Transfer of preferred stock 10,567
Preferred stock dividend
shares issued 845
Common stock issued 57,447
Return of escrowed common stock
o Note collateral (350,911)
o Retention adjustment (117,325)
------ ---------- ----------
Balance at March 31, 1998 11,412 8,013,543 1,355,400
Preferred stock dividend
shares issued 913
Retirement of common
stock in treasury (1,355,400) (1,355,400)
------ ---------- ----------
Balance at March 31, 1999 12,325 6,658,143 -0-
====== ========== ==========
10. Concentration of Risk
The Company extends credit to the various administrative service clients for
which it administers billing, collection and payroll functions. As of March
31, 1999, the Company had advances and loans outstanding to former
administrative service clients of $1,270,308, which were fully reserved. At
March 31, 1998, such loans amounted to $10,000, net of reserves of
$1,194,110. The notes are collateralized by customer lists and other general
intangibles in accordance with the administrative service agreements. The
administrative service clients operate in New York, Florida, Illinois, New
Jersey, Texas, Virginia, Arizona, California, Massachusetts and Washington.
F-13
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
10. Concentration of Risk, continued
Geographic concentrations of credit risk with respect to trade receivables
are primarily in the New York Metropolitan area consisting of 41% and 45% of
total receivables as of March 31, 1999 and 1998, respectively. The remaining
trade receivables consist of a large number of customers dispersed across
many different geographic regions. During the years ended March 31, 1999,
1998 and 1997, the Company generated 31%, 31% and 24%, respectively, of its
revenue from the commercial airline industry. During the years ended March
31, 1999, 1998 and 1997, 53%, 52% and 38% of administrative service revenue,
respectively, was earned from one administrative service client. 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.
11. Insurance Rebates
In January, 1997, the Company received a rebate of $598,139, 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.
12. 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 69 employees, or
$278,600), that the Company can be responsible for. A stop-loss insurance
policy covers all claims in excess of the above amounts. Amounts accrued for
health insurance under this program and included in general and
administrative expenses were $328,938 and $324,752 for the policy years ended
February 28, 1999 and 1998, respectively, and are based on the maximum
aggregate for each year presented.
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. Estimated accrued liabilities are based on the
Company's historical loss experience and the ratio of claims paid to industry
standard payout profiles. Charges for estimated workers compensation related
losses incurred included in cost of sales were $984,037, $1,176,128 and
$1,116,382 for the years ended March 31, 1999, 1998 and 1997, respectively.
The nature of the Company's business also subjects it to claims or litigation
alleging that it is liable for damages as a result of the conduct of its
employees or others. The Company insures against such claims and suits
through general liability insurance policies with third-party insurance
companies. Such policies have limits of $1,000,000 per occurrence and
$10,000,000 in the aggregate. In addition, the Company has obtained an excess
general liability insurance policy that covers claims for an additional
$30,000,000 in the aggregate ($25,000,000 prior to October 1, 1997). The
Company retains the risk for the first $50,000 per occurrence. Charges for
general liability self-insurance expense of $572,833, $900,128 and $293,238,
are included in cost of sales for the years ended March 31, 1999, 1998 and
1997, respectively. Estimated accrued liabilities are based on specific
reserves in connection with existing claims as determined by third party risk
management consultants and actuarial factors to provide for estimated losses
incurred but not yet reported.
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 health, general liability risk retention and workers' compensation
policies have been accrued as liabilities. Such accrued liabilities are
necessarily based on estimates; thus, the Company's ultimate liability may
exceed or be less than the amounts accrued. The methods of making such
estimates and establishing the resultant accrued liability are reviewed
continually and any adjustments resulting therefrom are reflected in current
earnings.
F-14
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
13. Contingent Liabilities
The Company has guaranteed certain installment loans extended to various
administrative service clients and customer list purchasers by Capital
Resources Company. The total outstanding balance of such loans as of March
31, 1999, was approximately $471,400. The notes mature between September,
2000, and November, 2001, and are guaranteed by customer lists.
In August, 1997, a complaint was filed in Los Angeles County Superior Court
by six former employees alleging discrimination, wrongful termination, breach
of employment contract and intentional infliction of emotional distress. The
complaint alleges that plaintiffs have suffered damages in excess of $1
million. After filing the complaint, the plaintiffs, through counsel, agreed
to submit the dispute to binding arbitration and a request for dismissal,
without prejudice, was filed with the Court. At this time the Company is
unable to estimate the possible loss, if any, that may be incurred as a
result of such arbitration. The ultimate outcome of such arbitration may or
may not have a material impact on the Company's financial position or results
of operations.
In May, 1996, a complaint was filed in Queens County Civil Court by three
former employees alleging emotional distress, anguish, mental distress and
injury to their professional reputation due to retaliatory discharge and
related matters. Plaintiffs each seek $2 million for compensatory damages and
$2 million in punitive damages in addition to payment of overtime wages of
$25,000. The Company's customer, also a defendant and a former employer, has
engaged counsel representing all defendants. On November 27, 1998, the Kings
County Supreme Court ruled on a motion dismissing three counts concerning
contractual allegations but allowed the remaining nine counts to proceed to
findings. At this time the Company is unable to estimate the possible loss,
if any, that may be incurred as a result of this action. The ultimate outcome
may or may not have a material impact on the Company's financial position or
results of operations.
The Company has been charged with unfair labor practices by a labor union
representing some of its employees claiming the Company refused to bargain
with the union and that the Company unilaterally changed terms and conditions
of employment without bargaining. The charge has been arbitrated and it has
been determined that the Company has responsibility for some back payments to
union funds. The final amount has not yet been assessed. As of March 31,
1999, the Company has accrued $60,000 for loss contingencies in connection
with this matter.
The Company has been named as a defendant in several other employment related
claims, including claims of sexual harassment by current and former
employees, which are currently under investigation by the New York State
Division of Human Rights. At this time the Company is unable to determine the
impact on the financial position and results of operations that these claims
may have should the investigation conclude that they are valid.
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 to
correct the accounting for advances to administrative service clients as well
as union and insurance accruals. A legal action has been filed against the
Company and is described in greater detail below. It includes claims based on
the restatements. It is possible that other 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 further claims
against the Company, alleging, as the basis, among other possible claims the
above-mentioned restatements.
On or about December 4, 1997, an outside shareholder and four of the
Company's directors (Sands, P. Kikis, Saunders and T. Kikis) commenced an
action in the Supreme Court of the State of New York, County of New York
(Index No. 606166/97) against the other four directors (Vassell, Robinett,
Nekos and Miller), the Company's outside corporate and securities counsel and
the Company itself in a lawsuit characterized as a derivative action. The
complaint alleges that one or more of the defendant-directors engaged in
improper activities, including ultra-vires acts, breach of fiduciary duty,
fraud against the Company, constructive fraud and waste of corporate assets.
These charges are based upon claims that the defendant directors concealed
information from the plaintiff-directors regarding the Company's earnings,
lacked power to enter into an employment agreement on behalf of the Company
with Mr. Robinett, and entered into administrative service agreements with
financially unstable companies without performing due diligence. The
plaintiffs further allege that the Company has failed to appoint a
replacement to the office of president and that the directors have entered
into a shareholder agreement which is violative of public policy. Plaintiffs
seek the award of money damages in an amount which is "not less than" $11
million from the individual defendants, a declaratory judgment that the
shareholder agreement is void, an order for an accounting, certain other
injunctive relief and attorneys' fees and disbursements.
F-15
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
13. Contingent Liabilities, continued
The Company has interposed an answer denying the allegations contained in the
complaint. The individual defendants have stated that they believe the
allegations are completely without merit and intend to vigorously defend
against each and every claim. The Company's Certificate of Incorporation and
the Business Corporation Law of New York provide for indemnification of
officers and directors with respect to damages and legal fees incurred in
connection with lawsuits against them arising by reason of serving the
Company. Due to the fact that certain members of the board have chosen to
participate as plaintiffs in this lawsuit, the Company's insurance carrier
has reserved its rights with respect to the defense and indemnity of the
Company based on a claimed exclusion from coverage. The Company may have a
claim against the carrier based on the carrier's failure to timely disclaim
coverage. The defendant-directors intend to seek indemnification, and have
received advancements of legal fees incurred in connection with their
defense, from the Company. Through March 31, 1999, the Company has expended
approximately $204,000 in legal fees ($84,000 during the year ended March 31,
1999) in defense of this matter on its own behalf as well as on behalf of the
defendant officers and directors. In addition, the Company has expended
$100,000 for legal fees on behalf of the plaintiff directors in December,
1998, and accrued $92,000 for contingent legal fees incurred by one of the
defendants, where management has determined that indemnification by the
Company is probable . On or about March 25, 1998, the plaintiffs filed a
motion for the appointment of a temporary receiver. On June 5, 1998, the
Court ordered the appointment of a temporary receiver, but prior to the order
taking effect, the parties agreed to a stipulation pursuant to which Franklyn
H. Snitow, Esq., was appointed acting President and Chief Executive
Officer and acting ninth Board member during the pendency of the defendants'
appeal to the Appellate Division of the decision to appoint a receiver. Based
on the stipulation, the defendants' request to the Appellate Division for a
stay pending the appeal of the order appointing the receiver was granted. On
January 12, 1999, the Appellate Division dismissed the appeal and modified
the lower court's order to continue Mr. Snitow's authority to discharge his
responsibilities as Acting President, Chief Executive Officer and Director
pending the underlying litigation. The Company is unable to reasonably
estimate the potential impact on the Company's financial condition and
results of operations from this lawsuit.
In August of 1998, the Company was informed that the United States Attorneys'
Office for the Southern District of Florida was conducting a criminal
investigation of certain activities at the Miami office of its Aviation
Safeguards Division. The investigation concerns the accuracy and completeness
of forms submitted in connection with Miami airport employee background
verifications. The Company is cooperating with the investigation and is
taking steps to ensure future compliance in all areas covered by the
investigation. The Company has also instructed its local counsel to represent
the Company in negotiations with the United States Attorneys' Office and is
exploring various options regarding a resolution to this matter. As of March
31, 1999, the Company has accrued $100,000 for loss contingencies in
connection with this matter.
14. 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 $569,200, $605,000 and $631,000, for the years ended
March 31, 1999, 1998 and 1997, 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,
1999, are $381,320 and $178,259 and at March 31, 1998, $345,444 and $120,409,
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, 2000 $ 80,678 $332,944
March 31, 2001 36,941 251,887
March 31, 2002 14,394 209,219
March 31, 2003 -0- 131,038
March 31, 2004 -0- 58,215
-------- --------
132,013 $983,303
========
Amounts representing interest (16,033)
--------
$115,980
========
F-16
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
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.
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 20), 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. The options expired in
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. The Company had fully expensed the
consulting fee by October, 1994. 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 expired in July, 1997,
however, the Company has reserved 150,000 shares of common stock to provide
the consultant with up to $300,000 of compensation. During the year ended
March 31, 1998, $85,979 has been paid in cash, reducing the stock to be
released to a value not to exceed $214,021. As of March 31, 1999, no shares
of common stock have been released.
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 expired 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. All of the warrants expired
during the year ended March 31, 1998.
F-17
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
15. Stock Option Plan and Warrants, continued
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 expired 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 issued to the firm expired in February,
1998. The warrants issued to the lender are exercisable at $2.10 per share
and expire in February 2001.
On October 4, 1996, the Company issued warrants for 35,000, 150,000, 10,000
and 10,000 shares of common stock to the Company's then Chief Financial
Officer and three Board members, respectively. The 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.
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, 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
Expired 1.87 - 2.25 (1,570,000)
------------- ------- ------------- ----------
Outstanding at
March 31, 1998 2.25 - 2.50 160,000 1.87 - 3.75 960,000
Expired 3.25 - 3.75 (400,000)
------------- ------- ------------- ----------
Outstanding at
March 31, 1999 $2.25 - $2.50 160,000 $1.87 - $3.25 560,000
============= ======= ============= ==========
At March 31, 1999, there were 160,000 and 560,000 options and warrants
outstanding, respectively, exercisable at prices ranging from $1.87 to $3.25,
and 767,500 shares reserved for issuance under all stock arrangements.
F-18
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
15. Stock Option Plan and Warrants, continued
Significant option and warrant groups outstanding at March 31, 1999, and the
related weighted average exercise price and life information are as follows:
Weighted Weighted
Options/ Options/ Average Average
Range of Warrants Warrants Exercise Remaining
Exercise Price Outstanding Exercisable Price Life (years)
-------------- ----------- ----------- -------- ------------
$1.875 205,000 205,000 $1.875 2.50
2.10 to 2.50 380,000 380,000 2.380 1.07
3.25 135,000 135,000 3.250 .12
----------- -----------
1.875 to 3.25 720,000 720,000 2.400 1.31
=========== ===========
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, there would have
been no effect on the net income or loss of the Company for the years ended
March 31, 1999 or 1998. For the year ended March 31, 1997, net income would
have been reduced by approximately $45,000, or $.01 per share. The impact of
the fair value method takes into account options and warrants granted since
April 1, 1995. 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 years ended March 31, 1999 or 1998. For the year ended
March 31, 1997, the fair value was estimated using the exercise 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. Income Taxes
Income tax expense/(benefit) for the years ended March 31 consists of the
following:
1999 1998 1997
Current:
Federal $-0- $ -0- $(181,066)
State and local -0- -0- -0-
---- -------- ---------
-0- -0- (181,066)
Deferred: ---- -------- ---------
Federal -0- 181,283 28,400
State and local -0- 78,552 12,306
---- -------- ---------
-0- 259,835 40,706
---- -------- ---------
Income tax expense/(benefit) $-0- $259,835 $(140,360)
==== ======== =========
The deferred tax expense for March, 1998, represents an increase in the
beginning-of-year valuation allowance for deferred tax assets. 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:
1999 1998 1997
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 (20.7) (50.7) (82.9)
Permanent differences (23.1) (0.5) (6.2)
----- ----- -----
Effective tax rate 0.0% (7.4)% (45.3)%
===== ===== =====
F-19
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
16. Income Taxes, continued
The significant components of deferred tax assets and liabilities as of March
31, 1999 and 1998, are as follows:
1999 1998
Current deferred tax assets:
Accounts receivable $ 124,114 $ 150,769
Accrued expenses 297,289 272,459
----------- -----------
421,403 423,228
Valuation allowance (421,403) (423,228)
----------- -----------
Net current deferred tax asset $ -0- $ -0-
=========== ===========
Non-current deferred tax assets/(liabilities):
Equipment $ (80,086) $ (100,280)
Intangible assets 1,131,567 1,196,499
Self-insurance 328,727 345,638
Net operating loss carryover 1,835,867 1,757,431
----------- -----------
3,216,075 3,199,288
Valuation allowance (3,216,075) (3,199,288)
----------- -----------
Net non-current deferred tax asset $ -0- -0-
=========== ===========
The valuation allowance increased by $14,962 and $1,874,080 during the years
ended March 31, 1999 and 1998, respectively, and decreased by $429,464 during
the year ended March 31, 1997. Federal and State net operating loss
carry-overs were approximately $3,989,000 and $4,374,200, respectively, at
March 31, 1999. They begin to expire in 2010.
17. Administrative Service Agreements
The Company has entered into agreements with various security guard companies
(administrative service clients) whereby the Company administers the billing,
collection and payroll functions and the administrative service clients
administer the operations of the respective guard contracts. Under these
arrangements, the Company receives title to all the receivables generated and
is obligated to pay the administrative service clients' guards and related
expenses. The transfer of receivables are accounted for as a sale/purchase in
accordance with SFAS No. 125, relating to transfers and servicing of
financial assets. Under some arrangements the Company may for Internal
Revenue reporting, workers compensation, general liability and disability
insurance coverage purposes become the employer of record for all applicable
guard personnel. Where the Company provides insurance resources, such costs
are allocated to the administrative service clients based on payroll. All
contracts contain renewal provisions based on the volume of business
generated by the respective service companies. Although title to the
receivables generated belong to the Company, the rights to service the guard
contracts are retained by the service company.
The Company records the billings for administrative service client contracts
in accounts receivable with a corresponding liability, "due to administrative
service clients", net of the Company's administrative service fees and
payroll and related expenses paid by the Company, at the time the services
are provided to the administrative service clients' customers. Receivables
not collected are charged back to the administrative service clients
generally after 90 days. The administrative service fees charged to the
administrative service clients, which are based on either a percentage of
guard service revenue or gross profit, are recognized as "administrative
service revenue" on the Company's statements of operations.
F-20
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
17. Administrative Service Agreements, continued
The following is a summary of the administrative service clients' activities
for the years ended March 31, 1999, 1998 and 1997, respectively, the
components of which have been excluded from the Company's financial
statements:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Employer of record administrative service revenue
Administrative service clients' guard service revenue $ 7,528,163 $17,913,206 $17,241,188
Cost of revenue 5,612,727 13,286,869 13,757,683
----------- ----------- -----------
Gross profit 1,915,436 4,626,337 3,483,505
Administrative service clients' share of gross profit 1,468,608 3,551,906 2,455,187
----------- ----------- -----------
446,828 1,074,431 1,028,318
Non employer of record administrative service revenue 466,670 376,161 442,995
----------- ----------- -----------
Administrative service revenue $ 913,498 $ 1,450,592 $ 1,471,313
=========== =========== ===========
</TABLE>
The Company has extended various operating loans to these administrative
service clients. 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 13).
18. Private Placements
During January and February, 1995, the Company completed several private
equity offerings including the issuance of 9,061 shares of convertible
preferred stock with a liquidation value of $165 per share for a total of
$1,495,065 (each share of preferred stock is convertible into 100 shares of
the Company's common stock, provides a yield of 8% per annum and is
redeemable upon certain future financing events); 950,002 shares of common
stock for a total of $1,377,500 pursuant to an offering exempt from
registration under Regulation D; and 1,137,506 shares of common stock for a
total of $1,287,174 pursuant to various offerings exempt from registration
under Regulation S promulgated under the Securities Act of 1933. In addition,
the Company issued warrants to purchase 250,000 shares to the placement
agent. Proceeds to the Company, net of placement agent fees of $356,000 and
offering costs of $281,397, amounted to $3,522,342.
In October, 1993, the Company completed a private placement of 1,600,000
units, at $2.50 per unit, each consisting of one share of the Company's
common stock and one three year redeemable warrant to purchase one-half
common share. In addition, the Company issued warrants to purchase 160,000
shares to the placement agent (see Note 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 13.
19. Preferred Stock
The Board of Directors has been authorized to issue preferred stock in series
and to fix the number, designation, relative rights, preferences and
limitations of each series of such preferred stock. Of the 1,000,000 shares
authorized for issuance, 11,412 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 8) have been paid in full and then in cash thereafter. The
$1.5 million Deltec indebtedness was repaid in full in February, 1999. During
the years ended March 31, 1999, 1998 and 1997, 913, 845 and 782 Series A
shares have been issued, representing dividends accrued through February 24,
1999, 1998 and 1997, respectively.
F-21
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
19. Preferred Stock, continued
Accrued dividends at March 31, 1999, approximated $15,200. 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 was obligated to redeem any unconverted Series A shares at such
time as the Deltec debt is paid in full. However, no redemption was required
until all outstanding warrants issued in the Company's October 1993 private
placement were exercised. All such warrants expired in October, 1997, and the
Company is no longer obligated to redeem the Series A preferred stock.
Consequently, the preferred stock has been transferred and included with
stockholders' equity on the balance sheets as of March 31, 1999 and 1998.
20. Fair Value
The fair value of the Company's long-term notes receivable is based on the
current rates offered by the Company for notes of the same remaining
maturities. 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, 1999 and 1998, the fair value of
long-term notes receivable and long-term debt approximates their carrying
amounts.
21. Related Party Transactions
The Company's former general counsel is also a member of the Board of
Directors. Legal fees paid amounted to $2,394, $6,238 and $4,202 for the
years ended March 31, 1999, 1998 and 1997, respectively.
A director of Deltec International SA, the parent of Deltec Development
Corporation, the former subordinated debt lender to the Company (see Note 8),
is also a member of the Board of Directors of the Company. Interest paid in
connection with this debt amounted to $32,813, $85,312 and $137,813 for the
years ended March 31, 1999, 1998 and 1997, respectively. In addition, Deltec
acquired 3,000 shares of the Company's preferred stock at a cost of $495,000
(see Note 19). Dividends accrued and paid in additional shares of preferred
stock for the years ended March 31, 1999, 1998 and 1997, amounted to $49,882,
$46,035 and $42,735, or 302, 279 and 259 shares, respectively. Expenses of
$20,800, $28,100 and $28,670 were paid on behalf of this director as
compensation for services rendered for the years ended March 31, 1999, 1998
and 1997, respectively.
22. 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.
23. Acquisitions
During fiscal years 1999 and 1998, the Company acquired several smaller
security guard businesses, principally customer lists, for an aggregate final
cost of approximately $181,000 and $378,000, respectively, payable in cash
and notes. The Company accounted for these acquisitions using the purchase
method. The financial statements include the operations of these businesses
from the respective acquisition dates. The customer lists are being amortized
over a five year period, the estimated economic lives of the lists.
F-22
<PAGE>
Command Security Corporation
Notes to Financial Statements, Continued
March 31, 1999, 1998 and 1997
24. Year 2000 Conversion
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000
date are known risks. The Company is addressing this risk to the availability
and integrity of financial systems and the reliability of operational
systems. The Company has evaluated the risks and costs associated with this
problem and has reviewed both internal as well as key third party systems.
Through March 31, 1999, the Company has expended $27,900 in connection with
outside consultants for services related to Year 2000 issues. Additional
costs associated with achieving Year 2000 compliance are estimated to be
immaterial and, as of April 15, 1999, management has determined that all
critical internal systems are fully year 2000 compliant. Year 2000 related
expenditures are charged to operations as they are incurred. Associated
internal labor costs have not been tracked and are considered to be
immaterial.
25. Reclassifications
Certain 1998 amounts have been reclassified to conform with 1999
presentations.
26. Revisions
The Company has modified its financial statements for the year ended March
31, 1999, to provide for additional disclosure in connection with its
accounting policies for revenue recognition, reserves for doubtful accounts
and accounting for stock options and to clarify its accounting for intangible
assets (see Note 1), the basis for providing self-insurance reserves (see
Note 12), and its accounting for administrative service client contracts (see
Note 17). The Company has also clarified its reference to service agreement
companies and now refers to them as administrative service clients throughout
the financial statements. These revisions had no impact on the Company's
financial condition or results of operations for the year ended March 31,
1999.
F-23
<PAGE>
COMMAND SECURITY CORPORATION
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Against
Amounts Uncollectible
Balance at Charged to Due Charged Accounts Balance
Beginning Costs and to Service to Other Written at End of
of Period Expenses Companies Accounts Recoveries Off Period
---------- ---------- ---------- -------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended March 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts
receivable - current maturities $ 716,347 $309,348 $ (36,143) $ $ $288,227 $ 701,325
Allowance for doubtful notes
receivable - current maturities 273,715 88,447 60,448 33,924 267,790
Allowance for other doubtful
receivables - current maturities 1,024,319 58,568 (88,447) 250,000<F1> 255,597 1,650 987,192
Allowance for doubtful notes
and long-term receivables,
net of current maturities -0- -0-
Year ended March 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts
receivable - current maturities $ 619,621 $376,404 $ 119,847 $ $ 5,837 $393,688 $ 716,347
Allowance for doubtful notes
receivable - current maturities 450,653 180,360 37,867<F2> 1,978 393,187 273,715
Allowance for other doubtful
receivables - current maturities 104,138 837,129 7,000 196,829<F2> 7,000 113,777 1,024,319
Allowance for doubtful notes
and long-term receivables,
net of current maturities 785,360 57,258 230,778 611,839 -0-
Year ended March 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts
receivable - current maturities 842,006 316,828 47,024 90,011 496,226 619,621
Allowance for doubtful notes
receivable - current maturities 362,164 43,565 11,000<F3> 450,653
33,924<F4>
Allowance for other doubtful
receivables - current maturities 17,372 86,766 104,138
Allowance for doubtful notes
and long-term receivables,
net of current maturities -0- 737,436 (11,000)<F3> 785,360
58,924<F4>
<FN>
<F1> Represents cash received for item previously removed from accounts.
<F2> Represents deferred revenue reduction related to non-performing receivable.
<F3> Represents reclassifications between short-term and long-term receivables.
<F4> Represents retention and other adjustments related to customer list purchases.
</FN>
</TABLE>
F-24
