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MOC > SEC Filings for MOC > Form 10-K on 27-Jun-2013All Recent SEC Filings

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Form 10-K for COMMAND SECURITY CORP


27-Jun-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes thereto contained in this Annual Report. In this discussion, the words "Company", "we", "our" and "us" refer to Command Security Corporation.

FORWARD- LOOKING STATEMENTS

This section, Management's Discussion and Analysis of Financial Condition and Results of Operations, other sections of this Annual Report on Form 10-K and other reports and verbal statements made by our representatives from time to time may contain forward-looking statements that are based on our assumptions, expectations and projections about us and the security industry. These include statements regarding our expectations about revenues, our liquidity, or expenses and our continued growth, among others. You can identify these statements by forward-looking words such as "may," "expect," "anticipate," "contemplate," "believe," "estimate," "intends," and "continue" or similar words. You should read statements that contain these words carefully because they:

discuss future expectations;

contain projections of future results of operations or financial condition; and

state other "forward-looking" information.

Such forward-looking statements by their nature involve a degree of risk and uncertainty. We caution you to not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We further caution you that a variety of factors, including but not limited to the factors described under Item 1A, "Risk Factors" and the following, could cause business conditions and our results to differ materially from what is contained in forward-looking statements:

changes in general economic conditions in the United States and abroad;

changes in the financial condition of our customers;

legislation or regulatory environments, requirements or changes adversely affecting our business or the businesses in which our customers are engaged;

cancellations and non-renewals of existing contracts;

changes in our estimates of costs;

war and/or terrorist attacks on facilities where services are or may be provided;

outcomes of pending and future litigation;

increasing competition by other companies;

changes in interest rates;

compliance with our loan covenants;

changing interpretations of GAAP;

the general volatility of the market price of our securities;

the availability of qualified personnel;

recoverability of claims against our customers and others by us and claims by third parties against us; and

changes in estimates used in our critical accounting policies.

Other factors and assumptions not identified above were also involved in the formation of these forward-looking statements and the failure of such other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described above in connection with any forward-looking statements that may be made by us.

All forward-looking statements included herein attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We have based the forward-looking statements included in this Annual Report on information available to us on the date of this annual report and, except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we make directly to you or through reports that we in the future may file with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors including, but not limited to, those presented under "Risk Factors" included in Item 1A and elsewhere in this Annual 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. See "Notes to Financial Statements-Note 1 Business Description and Summary of Accounting Policies."

Revenue Recognition

We record revenues as services are provided to our customers. Revenues relate primarily to the provision 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 credit losses on 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 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 costs are comprised of premiums as well as incurred losses as determined at the end of the coverage period, subject to minimum and maximum amounts. Workers' compensation insurance claims and reserves include accruals of estimated settlements for known claims, as well as accruals of estimates for claims incurred but not yet reported as provided by a third party. In estimating these accruals, we consider historical loss experience and make judgments about the expected levels of costs per claim. We believe our estimates of future liability are reasonable based upon our methodology; however, changes in health care costs, accident frequency and severity and other factors could materially affect the estimate for these liabilities. The Company continually monitors changes in claim type and incident and evaluates the workers' compensation insurance accrual, making necessary adjustments based on the evaluation of these qualitative data points.

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 basis 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. 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.

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 $191,250 and $160,730 for stock based compensation have been recorded for the fiscal years ended March 31, 2013 and 2012, respectively.

OVERVIEW

We principally provide uniformed security officers and aviation services to commercial, residential, financial, industrial, aviation and governmental customers through approximately 30 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, fringe 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 largely due to an increasing fear of 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

Earnings

Our net income for the fiscal years ended March 31, 2013 and 2012 was $496,320 and $140,760, respectively. Our net income was favorably impacted primarily by
(i) the 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 other new and existing security and aviation customers as noted below; (iv) a new contract to provide security services to an airport facility located in the upstate New York; lower amortization costs; and (v) lower interest expense. The increase in net income was partially offset by: (i) the previously reported loss of a security services contract for a semiconductor equipment manufacturer; (ii) reductions in service hours and rates coincident with the renewal of a contract with a major international carrier; (iii) the absence in the current period of two large airport construction contracts; (iv) reduction in service hours at a major hospital; (v) the loss of a service contract with a large international carrier in the fourth quarter of the prior fiscal year; (vi) an increase in general and administrative expenses primarily as a result of the previously announced and recently completed relocation and consolidation of the company's corporate headquarters to Herndon, VA; and (vii) an increase in income tax expense.

Revenues

Our revenues increased by $8,660,798, or 6.1%, to $150,218,967 for the fiscal year ended March 31, 2013, from $141,558,169 in the prior year. The increase in revenues for the fiscal year ended March 31, 2013 was mainly due to: (i) expansion of services provided under a contract with a major transportation company of approximately $2,200,000; (ii) expansion of aviation services with an existing customer at a domestic airport location of approximately $4,900,000;
(iii) expansion of services to new and existing security and aviation customers as noted above that resulted in aggregate revenues of approximately $3,770,000 and (iv) a new contract to provide security services to an airport facility located in upstate New York of approximately $700,000. 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 $382,000; (ii) reductions in service hours and rates of approximately $422,000 associated with the renewal of a contract with a major international carrier;
(iii) the absence in the current period of two large airport construction contracts of approximately $1,139,000; (iv) reduction in service hours at a major hospital of approximately $357,000 and (v) the loss of a service contract with a large international carrier in the fourth quarter of the prior fiscal year of approximately $567,000.

Gross Profit

Our gross profit for the fiscal year ended March 31, 2013 increased $2,457,027 to $19,555,408 (13.0% of revenues) from $17,098,381 (12.1% of revenues) for fiscal 2012. This positive result was primarily driven by: (i) expansion of services provided under a contract with a major transportation company; (ii) the expansion of aviation services with an existing customer at a domestic airport location; (iii) the 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 manufacturers facility; (ii) reductions in service hours and rates associated with the renewal of a contract with a a major international carrier; (iii) the absence in the current period of two large airport construction contracts, (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.

We have an insurance policy covering workers' compensation claims in states in which we perform services. Estimated accrued liabilities are based on our historical loss experience and the ratio of claims paid to our historical payout profiles. Charges for estimated workers' compensation related losses incurred and included in cost of sales were $2,903,270 and $2,800,455 for the fiscal years ended March 31, 2013 and 2012, respectively.

The nature of our business also subjects us to claims or litigation alleging that we are liable for damages as a result of the conduct of our employees or others. We insure against such claims and suits through general liability policies with third-party insurance companies. Our insurance coverage limits are currently $1.0 million per occurrence for non-aviation related business (with additional umbrella and excess liability policies of $5.0 million and $10.0 million, respectively) and $30.0 million per occurrence for aviation related business. We retain the risk for the first $25,000 of general liability non-aviation related operations, $50,000 on airport wheelchair and electric cart operations, $25,000 for damage to aircraft and $100,000 for skycap operations. Estimated accrued liabilities are based on specific reserves in connection with existing claims as determined by third party risk management consultants and actuarial factors and the timing of reported claims. These are all factored into estimated losses incurred but not yet reported to us.

General and Administrative Expenses

Our general and administrative expenses for the fiscal year ended March 31, 2013 increased by $1,605,920 to $17,496,639 (11.7% of revenues) from $15,890,719 (11.2% of revenues) in fiscal 2012. The increase in general and administrative expenses resulted primarily from salaries and wages, mainly employee severance, duplicate personnel costs, duplicate facility costs and other expenses incurred in connection with our previously disclosed plan to consolidate and relocate our corporate headquarters to Herndon, VA. This relocation was completed in January 2013 and the total cost including the aforementioned items was approximately $1.9 million. These increases were partly offset by lower amortization costs related to prior year acquisitions, lower legal costs and from reductions in other facility related costs.

Provision for Doubtful Accounts

The provision for doubtful accounts, net of recoveries, for the fiscal year ended March 31, 2013 increased by $162,045 to $389,616 from $227,571 in fiscal 2012. The increase is due to the timing and amounts of uncollectible accounts charged and/or credited to expense between the current and prior year period and a reduction in bad debt recoveries. Bad debt recoveries for the years ending March 31, 2013 and March 31, 2012 were $15,938 and $74,846, respectively.

We periodically evaluate the requirement for providing for billing adjustments and/or credit losses on our accounts receivable. We provide for billing adjustments 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 as management deems them as uncollectible. We do not know if bad debts will increase in future periods nor does our management believe that the increase during the fiscal year ended March 31, 2013 compared with the same period of the prior year is necessarily indicative of a trend.

Interest Income

Interest income was comparable for the fiscal years ended March 31, 2013 and 2012, and principally represents interest earned on cash balances.

Interest Expense

Interest expense for the fiscal year ended March 31, 2013 decreased by $122,032 to $139,381 from $261,413 in fiscal 2012. The decrease in interest expense was due to lower average outstanding borrowings under our credit agreement with Wells Fargo and reduced borrowing rates, as described below.

Equipment Dispositions

Equipment dispositions are a result of the sale of vehicles, office equipment and security equipment at prices above or below book value.

The $7,211 and $4,915 gain on equipment dispositions for the fiscal years ended March 31, 2013 and 2012, respectively, were primarily due to the disposition of Company vehicles at amounts in excess of their respective book values.

Loss/Gain on Sale of Investments

The $167,958 loss on sale of investments for the fiscal year ended March 31, 2012 primarily represents carrying value in excess of proceeds for the sale of stock received under our claim related to the bankruptcy filings of Delta and Northwest Airlines in September 2005.

Provision for Income Taxes

The Company's effective income rate decreased by 6.9% to 67.8% for the fiscal year ended March 31, 2013 from 74.7% reported for fiscal 2012. Pretax income increased by $981,560 to $1,537,320 in the fiscal year ended March 31, 2013 from $555,760 in fiscal 2012.

The provision for income taxes increased by $626,000 to $1,041,000 for the fiscal year ended March 31, 2013 from $415,000 in fiscal 2012 primarily as a result of the aforementioned increase in pretax income, the recording of an allowance for the capital loss carry-forward and a deferred tax charge for removing deferred tax assets related to expired stock options which, at the applicable statutory rate, added $405,000, $55,000 and $15,000 respectively, to the company's provision for income taxes. The remaining increase is related to non-deductible expenses and other adjustments.

LIQUIDITY AND CAPITAL RESOURCES

During fiscal 2012, we began paying employees and administrative service customers on a bi-weekly basis, except for one operating location at which employees are paid weekly, while customers pay for services generally within 60 days after billing by us. We maintain a commercial revolving loan arrangement, currently with Wells Fargo Bank, National Association ("Wells Fargo"). We fund our payroll and operations primarily through borrowings under our $20.0 million credit facility with Wells Fargo (as amended, 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 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 expenditures and debt service requirements for the foreseeable future. However, we cannot assure you that this will be the case, and we may be required to obtain 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 $20.0 million Credit Agreement with Wells Fargo. This Credit Agreement, which was amended in 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 $3.0 million. 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%.

On November 6, 2012, we entered into a third amendment (the "Third Amendment") to the Credit Agreement. The Third 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.

As of March 31, 2013, the interest rate was 2.0% for LIBOR loans and 2.125% for revolving loans. Closing costs for the Credit Agreement totaled $314,706 and were amortized over the original three year term of the Credit Agreement which ended in February 2012. At March 31, 2013, we had $6,500,000 in LIBOR loans, $1,480,555 of revolving loans and $202,807 under our letters of credit sub-line outstanding under the Credit Agreement, representing approximately 50% 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.

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 fiscal year ended March 31, 2013, we were in compliance with all covenants under the Credit Agreement. See "Notes to Financial Statements-Note 7 Borrowings."

Other Borrowings

During the fiscal year ended March 31, 2013, we increased our LIBOR borrowings by $1,500,000, increased our borrowings under the revolving loan by $1,480,555 and decreased our insurance financing borrowing by $1,329,174.

We may obtain short-term financing to meet our annual property and casualty insurance needs. For the fiscal years ended March 31, 2013 and 2012, $998,770 and $3,644,447, respectively, was borrowed for this purpose at annual interest rates of 2.3% during both years At March 31, 2013 and 2012, we had $501,777 and . . .

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