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MOC > SEC Filings for MOC > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for COMMAND SECURITY CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for COMMAND SECURITY CORP


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed financial statements and the related notes contained in this quarterly report.

Forward Looking Statements

Certain of our statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations section of this quarterly report and, in particular, those under the heading "Outlook," contain forward-looking statements. The words "may," "will," "should," "expect," "anticipate," "believe," "plans," "intend" and "continue," or the negative of these words or other variations on these words or comparable terminology typically identify such statements. These statements are based on our management's current expectations, estimates, forecasts and projections about the industry in which we operate generally, and other beliefs of and assumptions made by our management, some or many of which may be incorrect. In addition, other written or verbal statements that constitute forward-looking statements may be made by us or on our behalf. While our management believes these statements are accurate, our business is dependent upon general economic conditions and various conditions specific to the industries in which we operate. Moreover, we believe that the current business environment is more challenging and difficult than it has been in the past several years, if not longer. Many of our customers, particularly those that are primarily involved in the aviation industry, are currently experiencing substantial financial and business difficulties. If the business of any substantial customer or group of customers fails or is materially and adversely affected by the current economic environment or otherwise, they may seek to substantially reduce their expenditures for our services. Any loss of business from our substantial customers could cause our actual results to differ materially from the forward-looking statements that we have made in this quarterly report. Further, other factors, including, but not limited to, those relating to the shortage of qualified labor, competitive conditions and adverse changes in economic conditions of the various markets in which we operate, could adversely impact our business, operations and financial condition and cause our actual results to fail to meet our expectations, as expressed in the forward-looking statements that we have made in this quarterly report. These forward-looking statements are not guarantees of future performance, and involve certain risks, uncertainties and assumptions that we may not be able to accurately predict. We undertake no obligation to update publicly any of these forward-looking statements, whether as a result of new information, future events or otherwise.

As provided for under the Private Securities Litigation Reform Act of 1995, we wish to caution shareholders and investors that the important factors under the heading "Risk Factors" in our Annual Report on Form 10-K filed with the Securities and Exchange Commission with respect to our fiscal year ended March 31, 2012 could cause our actual financial condition and results from operations to differ materially from our anticipated results or other expectations expressed in our forward-looking statements in this quarterly report.

Critical Accounting Policies and Estimates

Critical accounting policies are defined as those most important to the portrayal of a company's financial condition and results and that require the most difficult, subjective or complex judgments. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. The estimates that we make include allowances for doubtful accounts, depreciation and amortization, income tax assets and insurance reserves. Estimates are based on historical experience, where applicable or other assumptions that management believes are reasonable under the circumstances. We have identified the policies described below as our critical accounting policies. Due to the inherent uncertainty involved in making estimates, actual results may differ from those estimates under different assumptions or conditions.

Revenue Recognition

We record revenues as services are provided to our customers. Revenues consist primarily of aviation and security services, which are typically billed at hourly rates. These rates may vary depending on base, overtime and holiday time worked. Revenue for administrative services provided to other security companies are calculated as a percentage of the administrative service customer's revenue and are recognized when billings for the related security services are generated. Revenue is reported net of applicable taxes.

Accounts Receivable

We periodically evaluate the requirement for providing for billing adjustments and/or reflect the extent to which we will be able to collect our accounts receivable. We provide for billing adjustments where management determines that there is a likelihood of a significant adjustment for disputed billings. Criteria used by management to evaluate the adequacy of the allowance for doubtful accounts include, among others, the creditworthiness of the customer, current trends, prior payment performance, the age of the receivables and our overall historical loss experience. Individual accounts are charged off against the allowance as management deems them to be uncollectible.

Intangible Assets

Intangible assets are stated at cost and consist primarily of customer lists and borrowing costs that are being amortized on a straight-line basis over a period of three to ten years, and goodwill, which is reviewed annually for impairment. The life assigned to customer lists acquired is based on management's estimate of our expected customer attrition rate. The attrition rate is estimated based on historical contract longevity and management's operating experience. We test for impairment annually or when events and circumstances warrant such a review, if earlier. Any potential impairment is evaluated based on anticipated undiscounted future cash flows and actual customer attrition in accordance with FASB ASC 360, Property, Plant and Equipment.

Insurance Reserves

General liability estimated accrued liabilities are calculated on an undiscounted basis based on actual claim data and estimates of incurred but not reported claims developed utilizing historical claim trends. Projected settlements and incurred but not reported claims are estimated based on pending claims, historical trends and related data.

Workers' compensation annual premiums are based on the incurred losses as determined at the end of the coverage period, subject to minimum and maximum premiums. Estimated accrued liabilities are based on our historical loss experience and the ratio of claims paid to our historical payout profiles.

Income Taxes

Income taxes are based on income (loss) for financial reporting purposes and reflect a current tax liability (asset) for the estimated taxes payable (recoverable) in the current year tax return and changes in deferred taxes. Deferred tax assets or liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax laws and rates. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the asset will not be realized.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. In the event that interest and/or penalties are assessed in connection with our tax filings, interest will be recorded as interest expense and penalties as selling, general and administrative expense. We did not have any unrecognized tax benefits as of September 30, 2012 and 2011.

Stock Based Compensation

FASB ASC 718, Stock Compensation, requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values at grant date and the recognition of the related expense over the period in which the share-based compensation vests. We use the modified-prospective transition method. Under the modified-prospective transition method, we recognize compensation expense in our financial statements issued subsequent to the date of adoption for all share-based payments granted, modified or settled. Non-cash charges of $156,448 and $132,157 for stock based compensation have been recorded for the six months ended September 30, 2012 and 2011, respectively.

Overview

We principally provide uniformed security officers and aviation services to commercial, residential, financial, industrial, aviation and governmental customers through approximately 35 offices throughout the United States. In conjunction with providing these services, we assume responsibility for a variety of functions, including recruiting, hiring, training and supervising all operating personnel as well as paying such personnel and providing them with uniforms, benefits and workers' compensation insurance.

Our customer-focused mission is to provide the best personalized supervision and management attention necessary to deliver timely and efficient security solutions so that our customers can operate in safe environments without disruption or loss. Technology underpins our efficiency, accuracy and dependability. We use a sophisticated software system that integrates scheduling, payroll and billing functions, giving customers the benefit of customized programs using the personnel best suited to the job.

Renewing and extending existing contracts and obtaining new contracts are crucial to our ability to generate revenues, earnings and cash flow. In addition, our growth strategy involves the acquisition and integration of complementary businesses in order to increase our scale within certain geographical areas, increase our market share in the markets in which we operate, gain market share in the markets in which we do not currently operate and improve our profitability. We intend to pursue suitable acquisition opportunities for contract security officer businesses. We frequently evaluate acquisition opportunities and, at any given time, may be in various stages of due diligence or preliminary discussions with respect to a number of potential acquisitions. However, we cannot assure you that we will identify any suitable acquisition candidates or, if identified, that we will be able to complete the acquisition of such candidates on favorable terms or at all.

The global security industry has grown we believe largely due to an increasing desire for security to combat crime and terrorism. In the United States, the demand for security-related products and central station monitoring services also has grown steadily. We believe that there is continued heightened attention to and demand for security due to worldwide events, and the ensuing threat, or perceived threat, of criminal and terrorist activities. For these reasons, we expect that security will continue to be a key area of focus both domestically in the United States and abroad.

Demand for security officer services is dependent upon a number of factors, including, among other things, demographic trends, general economic variables such as growth in the gross domestic product, unemployment rates, consumer spending levels, perceived and actual crime rates, government legislation, terrorism sensitivity, war/external conflicts and technology.

Results of Operations

Revenues

Our revenues increased by $2,056,311, or 5.7%, to $38,164,921 for the three months ended September 30, 2012 from $36,108,610 in the corresponding period of the prior year. The increase in revenues for the three months ended September 30, 2012 was due mainly to: (i) expansion of services provided under a contract with a major transportation company of approximately $435,000; (ii) expansion of aviation services with an existing customer at a domestic airport location of approximately $1,300,000; (iii) expansion of services to new and existing security and aviation customers that resulted in additional aggregate revenues of approximately $960,000, including a new contract with a large municipal agency which commenced during the fourth quarter of the prior fiscal year, a new contract with an international air freight carrier at four domestic airport locations, a new contract with a community college which commenced during the second half of the prior fiscal year and a large construction contract at a major New York metropolitan area airport and (iv) a new contract to provide security services to an airport facility located in upstate New York of approximately $240,000. The increase in revenues was partially offset by: (i) reductions in service hours and rates of approximately $326,000 associated with the renewal of a contract with a major international carrier; (ii) the absence in the current period of a large airport construction contract of approximately $76,000; (iii) reduction in service hours at a major hospital of approximately $160,000 and (iv) the loss of a service contract with a large international carrier in the fourth quarter of the prior fiscal year of approximately $170,000.

Our revenues increased by $2,912,387, or 4.1%, to $73,806,600 for the six months ended September 30, 2012 from $70,894,213 in the corresponding period of the prior year. The increase in revenues for the six months ended September 30, 2012 was due mainly to: (i) expansion of services provided under a contract with a major transportation company of approximately $1,000,000; (ii) expansion of aviation services with an existing customer at a domestic airport location of approximately $1,700,000; (iii) expansion of services to new and existing security and aviation customers as noted above that resulted in aggregate revenues of approximately $1,900,000 and (iv) a new contract to provide security services to an airport facility located in upstate New York of approximately $240,000. The increase in revenues was partially offset by: (i) the previously reported loss of a security services contract for a semiconductor equipment manufacturer's facility of approximately $216,000; (ii) reductions in service hours and rates of approximately $526,000 associated with the renewal of a contract with a major international carrier; (iii) the absence in the current period of a large airport construction contract of approximately $270,000; (iv) reduction in service hours at a major hospital of approximately $330,000 and (v) the loss of a service contract with a large international carrier in the fourth quarter of the prior fiscal year of approximately $340,000.

Gross Profit

Our gross profit increased $296,555, or 5.8%, to $5,384,954 (14.1% of revenues) for the three months ended September 30, 2012, from $5,088,399 (14.1% of revenues) in the corresponding period of the prior year. The increase was primarily due to: (i) expansion of services provided under a contract with a major transportation company; (ii) expansion of aviation services with an existing customer at a domestic airport location; (iii) expansion of services to new and existing security and aviation customers including. a new contract with a large municipal agency which commenced during the fourth quarter of the prior fiscal year, a new contract with an international air freight carrier at four domestic airport locations, a new contract with a community college which commenced during the second half of the prior fiscal year and a large construction contract at a major New York metropolitan area airport; (iv) a new contract to provide security services to an airport facility located in upstate New York and (v) the absence in the current period of professional and related fees principally associated with settlement of employment related claims in the comparable prior year period. The increase in gross profit was partially offset by: (i) reductions in service hours and rates associated with the renewal of a contract with a major international carrier; (ii) the absence in the current period of a large airport construction contract; (iii) reduction in service hours at a major hospital and (iv) the loss of a service contract with a large international carrier in the fourth quarter of the prior fiscal year.

Our gross profit increased $174,251, or 1.8%, to $9,913,054 (13.4% of revenues) for the six months ended September 30, 2012, from $9,738,803 (13.7% of revenues) in the corresponding period of the prior year. The increase was primarily due to: (i) expansion of services provided under a contract with a major transportation company; (ii) expansion of aviation services with an existing customer at a domestic airport location; (iii) expansion of services to new and existing security and aviation customers as noted above; (iv) a new contract to provide security services to an airport facility located in upstate New York and
(v) the absence in the current year of professional and related fees principally associated with settlement of employment related claims in the comparable prior year. The increase in gross profit was partially offset by: (i) the previously reported loss of a security services contract for a semiconductor equipment manufacturer's facility; (ii) reductions in service hours and rates associated with the renewal of a contract with a major international carrier; (iii) the absence in the current period of a large airport construction contract; (iv) reduction in service hours at a major hospital and (v) the loss of a service contract with a large international carrier in the fourth quarter of the prior fiscal year.

General and Administrative Expenses

Our general and administrative expenses increased by $718,595, or 18.4%, to $4,618,290 (12.1% of revenues) for the three months ended September 30, 2012, from $3,899,695 (10.8% of revenues) in the corresponding period of the prior year. The increase in general and administrative expenses for the three months ended September 30, 2012 resulted primarily from accrued labor (mainly employee severance) and other related expenses associated with our previously disclosed plan to consolidate and relocate our corporate headquarters to Herndon, Virginia.

Our general and administrative expenses increased by $561,325, or 7.0%, to $8,560,321 (11.6% of revenues) for the six months ended September 30, 2012, from $7,998,996 (11.3% of revenues) in the corresponding period of the prior year. The increase in general and administrative expenses for the six months ended September 30, 2012 resulted primarily from accrued labor mainly (employee severance) and other related expenses associated with our previously disclosed plan to consolidate and relocate our corporate headquarters to Herndon, Virginia.

Provision for Doubtful Accounts

The provision for doubtful accounts increased $71,325 to $74,728 for the three months ended September 30, 2012 from $3,403 in the corresponding period of the prior year. The increase in the provision for doubtful accounts for the three months ended September 30, 2012 related primarily to stock that we received in the comparable prior year period under our claim related to the bankruptcy filing of a security services customer, which was valued at approximately $72,000.

The provision for doubtful accounts increased $69,369 to $147,014 for the six months ended September 30, 2012 from $77,645 in the corresponding period of the prior year. The increase in the provision for doubtful accounts for the six months ended September 30, 2012 related primarily to stock that we received in the comparable prior year period under our claim related to the bankruptcy filing of a security services customer as noted above.

We periodically evaluate the requirement for providing for billing adjustments and/or credit losses on our accounts receivable. We provide for billing adjustments in cases where our management determines that there is a likelihood of a significant adjustment for disputed billings. Criteria used by management to evaluate the adequacy of the allowance for doubtful accounts include, among others, the creditworthiness of the customer, current trends, prior payment performance, the age of the receivables and our overall historical loss experience. Individual accounts are charged off against the allowance for doubtful accounts as our management deems them to be uncollectible. We do not know if bad debts will increase in future periods nor do we believe that the increase in the provision for doubtful accounts during the six months ended September 30, 2012 compared with the corresponding period of the prior year is indicative of a trend.

Interest Income

Interest income for the three and six months ended September 30, 2012 principally represents interest earned on cash balances and was comparable with the corresponding period of the prior year and not deemed significant to our condensed financial statements.

Interest Expense

Interest expense decreased by $42,411, or 60.2%, to $28,002 for the three months ended September 30, 2012, from $70,413 in the corresponding period of the prior year. The decrease in interest expense for the three months ended September 30, 2012 was due primarily to lower average outstanding borrowings under our credit agreement with Wells Fargo and reduced borrowing rates.

Interest expense decreased by $80,614, or 56.3%, to $62,461 for the six months ended September 30, 2012, from $143,075 in the corresponding period of the prior year. The decrease in interest expense for the six months ended September 30, 2012 was due primarily to lower average outstanding borrowings under our credit agreement with Wells Fargo and reduced borrowing rates.

Asset Dispositions

Asset dispositions result primarily from the sale of vehicles, office equipment and security equipment in the ordinary course of business at prices above or below book value.

The gains on asset dispositions for the three and six months ended September 30, 2012 and 2011 were primarily due to the disposition of transportation equipment at amounts in excess of their respective book values and were not deemed significant to our condensed financial statements.

Provision for income taxes

Provision for income taxes decreased by $255,000 for the three months ended September 30, 2012 compared with the corresponding period of the prior year due mainly to the decrease in our pre-tax earnings for the three months ended September 30, 2012.

Provision for income taxes decreased by $205,000 for the six months ended September 30, 2012 compared with the corresponding period of the prior year due mainly to the decrease in our pre-tax earnings for the six months ended September 30, 2012 partially offset by the loss of deferred tax assets resulting from the cancellation of stock options previously held by former employees.

Liquidity and Capital Resources

During fiscal 2012, we began paying employees and administrative service clients on a bi-weekly basis, except for one operating location at which employees are paid weekly. Customers generally pay for our services within approximately 60 days after we bill them. We maintain a commercial revolving loan arrangement, currently with Wells Fargo. We fund our payroll and operations primarily through borrowings under our $20,000,000 credit facility with Wells Fargo (the "Credit Agreement"), described below under "Wells Fargo Revolving Credit Facility."

We principally use short-term borrowings under our Credit Agreement to fund our accounts receivable. Our short-term borrowings have supported the increase in accounts receivable associated with our organic growth. We intend to continue to use short-term borrowings to support our working capital requirements.

We believe that our existing funds, cash generated from operations, and existing sources of and access to financing are adequate to satisfy our working capital, capital expenditure and debt service requirements for the foreseeable future. However, we cannot assure you that this will be the case, and we may be required to obtain alternative or additional financing to maintain and expand our existing operations through the sale of our securities, an increase in the amount of available borrowings under our Credit Agreement, obtaining additional financing from other financial institutions or otherwise. The failure by us to obtain such financing, if needed, would have a material adverse effect upon our business, financial condition and results of operations.

Wells Fargo Revolving Credit Facility

On February 12, 2009, we entered into a $20,000,000 Credit Agreement with Wells Fargo. This credit facility, which was amended in October 2011 and November 2012 as described below, matures in October 2016, and contains customary affirmative and negative covenants, including, among other things, covenants requiring us to maintain certain financial ratios and is collateralized by customer accounts receivable and certain other assets of the Company as defined in the Credit Agreement.

The Credit Agreement provides for a letter of credit sub-line in an aggregate amount of up to $3,000,000. The Credit Agreement also provides for interest to be calculated on the outstanding principal balance of the revolving loans at the Prime Rate (as defined in the Credit Agreement) plus 1.50%. For LIBOR loans, interest will be calculated on the outstanding principal balance of the LIBOR loans at the LIBOR rate (as defined in the Credit Agreement) plus 2.75% (see below).

On October 18, 2011, we entered into an amendment (the "Amendment") to our Credit Agreement. The Amendment (i) extends the term of the $20,000,000 Credit Facility to October 2016, (ii) decreases the interest rate spreads on the outstanding principal balance of the revolving loans to LIBOR plus 1.75% and amends certain covenants including: (a) increasing the amount of capital expenditures that can be incurred in the aggregate during any fiscal year or in any one transaction and (b) permitting us to repurchase up to $2,000,000 of our common stock subject to certain conditions.

As of September 30, 2012, the interest rates were 2.00% and 2.125% for LIBOR and revolving loans, respectively. At September 30, 2012, we had $4,000,000 and $697,809 in LIBOR and revolving loans, respectively, and $202,807 under our letters of credit sub-line outstanding under the Credit Agreement, representing approximately 30% of the maximum borrowing capacity under the Credit Agreement based on our "eligible accounts receivable" (as defined under the Credit Agreement) as of such date.

On November 6, 2012, the Company entered into an amendment (the "Subsequent Amendment") to the Credit Agreement. The Subsequent Amendment (i) allows for the Company to repurchase up to an additional $2,000,000 of its common stock, subject to certain conditions; (ii) provides for the consent of Wells Fargo to the consolidation and relocation of the Company's headquarters and (iii) amends a financial covenant of the Credit Agreement for certain expenses associated with the consolidation and relocation of the Company's headquarters.

We rely on our revolving loan from Wells Fargo which contains a fixed charge covenant and various other financial and non-financial covenants. If we breach a covenant, Wells Fargo has the right to immediately request the repayment in full of all borrowings under the Credit Agreement, unless Wells Fargo waives the breach. For the six months ended September 30, 2012, we were in compliance with all covenants under the Credit Agreement.

Other Borrowings

During the six months ended September 30, 2012, we decreased our bank borrowings by $302,191 and decreased our insurance borrowing by $1,830,951.

We may obtain short-term premium financing to assist with meeting our annual property and casualty insurance needs. At September 30, 2012, we had no . . .

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