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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] 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 0-29798
CompuDyne Corporation
(Exact name of registrant as specified in its charter)
Nevada 23-1408659
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7249 National Drive, Hanover, Maryland 21076
(Address of principal executive offices)
Registrant's telephone number, including area code: (410) 712-0275
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_____
As of August 14, 2002, a total of 7,896,553 shares of Common Stock, $.75
par value, were outstanding.
COMPUDYNE CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements - Unaudited
Consolidated Balance Sheets June 30, 2002
and December 31, 2001 3
Consolidated Statements of Operations -
Three Months and Six Months
Ended June 30, 2002 and 2001 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
Part II. Other Information 27
Signature 29
2
ITEM 1. FINANCIAL STATEMENTS
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, December 31,
ASSETS 2002 2001
---- ----
(in thousands, except share data)
Current Assets
Cash and cash equivalents $ 1,456 $ 296
Accounts receivable, net 47,590 34,188
Contract costs in excess of billings 24,308 14,564
Inventories 6,172 6,243
Deferred taxes 843 843
Prepaid expenses and other 1,670 2,093
------- -------
Total Current Assets 82,039 58,227
Property, plant and equipment, net 13,423 7,322
Goodwill and other intangible assets, net 24,820 3,753
Investment in affiliated company - 6,076
Deferred taxes 1,103 570
Other 667 483
------- -------
Total Assets $ 122,052 $ 76,431
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 25,354 $ 21,929
Billings in excess of contract costs incurred 21,004 6,504
Deferred tax liability 1,552 -
Current portion of notes payable 2,920 2,394
------ ------
Total Current Liabilities 50,830 30,827
Notes payable 25,377 11,593
Subordinated notes payable 588 1,175
Other 252 199
------ ------
Total Liabilities 77,047 43,794
------ ------
3
Commitments and contingencies
Shareholders' Equity
Preferred stock, 2,000,000 shares authorized
and unissued - -
Common stock, par value $.75 per share:
15,000,000 shares authorized; 8,367,622 and
7,133,334 shares issued at June 30, 2002
and December 31, 2001, respectively 6,275 5,350
Additional paid-in-capital 38,022 27,976
Retained earnings 4,198 2,704
Accumulated other comprehensive loss (147) (114)
Treasury stock, at cost; 481,530 and 477,869
shares at June 30, 2002 and December 31, 2001,
respectively (3,343) (3,279)
------- -------
Total Shareholders' Equity 45,005 32,637
------- -------
Total Liabilities and Shareholders' Equity $ 122,052 $ 76,431
======= =======
The accompanying notes are an integral part of these
financial statements.
4
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except share and per share data)
Net sales $ 39,416 $ 31,319 $ 69,906 $ 61,193
Cost of goods sold 29,978 25,060 54,473 48,657
------ ------ ------ ------
Gross profit 9,438 6,259 15,433 12,536
Operating expenses 7,981 4,376 12,507 8,851
------ ------ ------ ------
Operating income 1,457 1,883 2,926 3,685
------ ------ ------ ------
Other expense (income)
Interest expense 346 549 659 1,069
Other income (77) (85) (139) (96)
------ ------ ------ ------
Total other expense 269 464 520 973
------ ------ ------ ------
Income before income taxes 1,188 1,419 2,406 2,712
Income taxes 475 473 912 958
------ ------ ------ ------
Net income $ 713 $ 946 $ 1,494 $ 1,754
====== ====== ====== ======
Earnings per share:
- ------------------
Basic earnings per share $ .10 $ .19 $ .21 $ .34
====== ====== ====== ======
Weighted average number of common
shares outstanding 7,427 5,130 7,050 5,224
====== ====== ====== ======
Diluted earnings per share $ .09 $ .16 $ .20 $ .30
====== ====== ====== ======
Weighted average number of common
shares and equivalents 8,065 5,799 7,656 5,875
====== ====== ====== ======
The accompanying notes are an integral part of these
financial statements.
5
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
2002 2001
---- ----
(in thousands)
Cash flows from operating activities:
Net income $ 1,494 $ 1,754
Adjustments to reconcile net income to
net cash used in operations:
Depreciation and amortization 1,073 926
Equity earnings in affiliated company (23) (7)
Gain from disposition of property, plant
and equipment (5) (63)
Changes in assets and liabilities:
Accounts receivable (6,560) 7,294
Contract costs in excess of billings 2,335 (4,742)
Inventories 71 241
Prepaid expenses and other current assets 786 (418)
Other assets (49) (395)
Accounts payable and accrued liabilities (1,493) (3,000)
Billings in excess of contract costs incurred 2,324 (2,226)
Other liabilities (4) (105)
------- -------
Net cash flows used in operating activities (51) (741)
------- -------
Cash flows from investing activities:
Additions to intangibles - (112)
Additions to property, plant and equipment (2,464) (232)
Proceeds from sale of property, plant
and equipment 25 395
Net payment for acquisition (10,374) (6,073)
------- -------
Net cash flows used in investing activities (12,813) (6,022)
------- -------
Cash flows from financing activities:
Issuance of common stock 527 749
Warrants exercised 64 -
Purchase of treasury stock (64) (2,292)
Repayment of subordinated notes payable (587) (171)
6
Borrowings of bank notes 14,500 14,050
Repayment of bank notes (416) (5,474)
------- -------
Net cash provided by financing activities 14,024 6,862
------- -------
Net increase in cash and cash equivalents 1,160 99
Cash and cash equivalents at beginning of period 296 1,077
------- -------
Cash and cash equivalents at end of period $ 1,456 $ 1,176
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 604 $ 917
Income taxes $ 696 $ 932
The accompanying notes are an integral part of these
financial statements.
7
COMPUDYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of CompuDyne
Corporation and its subsidiaries (the "Company"), have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. The consolidated balance sheet as of December 31, 2001 has
been derived from the Company's December 31, 2001 audited financial
statements. Certain information and note disclosures included in the
annual financial statements, prepared in accordance with accounting
principles generally accepted in the United States of America, have been
condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading.
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all necessary adjustments and
reclassifications (all of which are of a normal, recurring nature) that
are necessary for fair presentation for the periods presented. It is
suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's annual report filed with the Securities
and Exchange Commission on Form 10-K for the year ended December 31,
2001. Operating results for the six months ended June 30, 2002 are not
necessarily indicative of operating results for the entire fiscal year.
New Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets", which is effective January 1, 2002. SFAS
No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of
assessing potential future impairments of goodwill. SFAS No. 142 also
required the Company to complete a transitional goodwill impairment test
six months from the date of adoption. During the second quarter of 2002,
the Company completed the first step of the required initial test for
potential impairment of goodwill recorded at January 1, 2002. The
results indicate no potential impairment exists, based on the current
market capitalization of the company. Amortization of this goodwill for
the three and six months ended June 30, 2001 was $13 thousand and $33
thousand, respectively.
8
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The
Company has not yet determined the impact that adopting SFAS No. 143 will
have on its financial position or on the results of its operations when
such statement is adopted.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. It supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", and the accounting and reporting provisions of APB 30, "Reporting
the Results of Operations Reporting the Effects of Disposal of a
Segment of a Business", and "Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". The Company adopted SFAS No. 144 on
January 1, 2002. Adoption of SFAS No. 144 did not have a significant
impact on its results of operations or its financial position.
In April 2002, the FASB issued SFAS No. 145 , "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement is effective for fiscal years
beginning after May 15, 2002. SFAS 145 requires, among other things,
eliminating reporting debt extinguishments as an extraordinary item in
the income statement. Management does not believe the adoption of this
standard will have a material impact on the Company's financial position
or results of operations.
In July 2002, the FASB has issued SFAS No. 146,"Accounting for Costs
Associated with Exit or Disposal Activities". The statement is effective
for fiscal years beginning after December 31, 2002. SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan. Management does not believe the adoption of
this standard will have a material impact on the Company's financial
position or results of operations.
Reclassifications:
Certain prior period amounts have been reclassified to conform with the
current period's presentation.
9
2. OPERATING SEGMENT INFORMATION
Pre-tax
Revenues Gross Profit Income/(Loss)
-------- ------------ -------------
(Three Months ended June 30)
(in thousands)
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Corrections $ 21,981 $ 18,802 $ 3,539 $ 3,323 $ 1,040 $ 678
Attack Protection 5,598 6,213 795 1,880 (696) 735
Federal Security Systems 3,893 5,234 689 595 252 273
Public Safety 7,944 1,070 4,415 461 491 (196)
CompuDyne Corporate - - - - 101 (71)
------- ------- ------ ------ ------ -------
$ 39,416 $ 31,319 $ 9,438 $ 6,259 $ 1,188 $ 1,419
======= ======= ====== ====== ====== =======
Pre-tax
Revenues Gross Profit Income/(Loss)
-------- ------------ -------------
(Six Months ended June 30)
(in thousands)
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Corrections $ 42,201 $ 38,080 $ 7,230 $ 6,931 $ 2,178 $ 1,415
Attack Protection 11,772 11,679 2,122 3,443 (689) 1,242
Federal Security Systems 6,861 8,984 1,140 1,160 301 488
Public Safety 9,072 2,450 4,941 1,002 493 (362)
CompuDyne Corporate - - - - 123 (71)
------- ------- ------- ------- ------ -------
$ 69,906 $ 61,193 $ 15,433 $ 12,536 $ 2,406 $ 2,712
======= ======= ======= ======= ====== =======
10
3. EARNINGS PER SHARE
Earnings per share are presented in accordance with SFAS No. 128,
"Earnings Per Share." This Statement requires dual presentation of
basic and diluted earnings per share on the face of the statement of
operations. Basic earnings per share excludes dilution and is computed
by dividing net income by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share also reflects
the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock.
Stock options to purchase approximately 25,500 shares for 2002 and
107,710 shares for 2001 were not dilutive and, therefore, were not
included in the computation of diluted earnings per common share.
The computations of the Company's basic and diluted earnings per share
amounts for the Company's operations were as follows:
June 30
(in thousands, except per share data)
-----------------------------------
2002 2001
---- ----
Three Months Six Months Three Months Six Months
------------ ---------- ------------ ----------
Net income $ 713 $ 1,494 $ 946 $ 1,754
Weighted average common
shares outstanding 7,427 7,050 5,130 5,224
Effect of dilutive stock
options and warrants 638 606 669 651
------- ------- ------- -------
Diluted weighted average
common shares outstanding 8,065 7,656 5,799 5,875
------- ------- ------- -------
Net income per common share
Basic $ .10 $ .21 $ .19 $ .34
Diluted $ .09 $ .20 $ .16 $ .30
11
4. GOODWILL
The FASB recently issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires that goodwill no longer be amortized
against earnings, but instead analyzed periodically for impairment. The
Company has adopted SFAS No. 142 effective January 1, 2002, and as a
result, amortization of goodwill was discontinued. Goodwill amortization
for the three months and six months ended June 30, 2001 was $13 thousand
and $33 thousand, respectively. Net income and fully diluted earnings
per share for the six months ended June 30, 2001, assuming goodwill was
not amortized during this period, would have been $1.8 million and $.30
per share, respectively.
5. ACQUISITION OF TIBURON, Inc.
On January 25, 2002, the Company and Tiburon, Inc. ("Tiburon") entered
into a First Amendment Agreement whereby upon the satisfaction of certain
conditions, the Company agreed to purchase all of the issued and
outstanding common shares and other common stock equivalents it did not
already own for a combination of cash and stock. All requisite
conditions were met and the Company completed the purchase of Tiburon on
May 2, 2002. Total consideration paid for the purchase of the portion of
Tiburon that the Company did not previously own amounted to approximately
$12 million in cash and 1.2 million shares of CompuDyne common stock. To
fund the cash portion of the Tiburon acquisition, the Company negotiated
a $10 million increase in its borrowing facility from its banks. The
remainder of the cash consideration paid was funded from the Company's
working capital.
Tiburon provides Command and Control and Records Management software
systems for law enforcement, fire and rescue, corrections and justice
environments. Tiburon is a worldwide market leader in the development,
implementation and support of public safety and justice automation
systems.
The June 30, 2002 unaudited consolidated financial statements include
preliminary estimates of the fair market value of the assets acquired and
liabilities assumed and the related allocations of the purchase price
related to the acquisition of Tiburon. Final valuations and allocations,
which are expected to be completed by March 31, 2003, may differ from the
amounts included herein. Currently goodwill is estimated to be
approximately $20.0 million.
12
In conjunction with preliminary estimates, the purchase price was
recorded as follows (in thousands):
Fair value of assets acquired $ 28,501
Goodwill 20,037
Fair value of stock issued (10,380)
Cash (19,211)
------
Liabilities assumed $ 18,947
The following are the Company's unaudited pro forma results assuming
the acquisition had occurred on January 1, 2001:
Three Months Ended Six Months Ended
June 30 June 30
(in thousands, except share data) (in thousands, except share data)
------------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenue $ 42,739 $ 42,055 $ 83,654 $ 82,086
Net income 824 1,402 1,757 2,459
Earnings per share:
Basic $ .10 $ .22 $ .22 $ .39
Diluted $ .10 $ .20 $ .21 $ .35
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations which would have actually resulted had the combination been
effective on January 1, 2001, or of future results of operations.
13
ITEM 2
COMPUDYNE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
CompuDyne Corporation is a leading provider of products and services to
the Public Security market. The Company operates in four (4) specific
segments in this marketplace: Corrections, Attack Protection, Federal
Security Systems and Public Safety.
The Corrections segment is headquartered in Montgomery, Alabama and is
known to the trade as Norment Security Group ("Norment"). This segment
provides physical and electronic security products and services to the
corrections industry (prisons and jails) and to the courthouse, municipal
and commercial markets. Norment serves as a contractor, responsible for
most installation work on larger projects. Installations involve
hard-line (steel security doors, frames, locking devices, etc.) and
sophisticated electronic security systems, including software,
electronics, touch-screens, closed circuit TV, perimeter alarm devices
and other security monitoring controls. In 2001, Norment received its
first order for its newly introduced MaxWall product. MaxWall is a
modular steel, concrete filled prefabricated jail cell. It allows for
construction projects to use considerably less space and can save
the project owner significant amounts of money. Norment, through a
network of regional offices provides field level design, installation and
maintenance of both physical and electronic security products.
Included in the Corrections segment is the Trentech line which designs,
manufactures and integrates electronic security systems. Trentech
integrates generally available products and software as well as designing
its own proprietary systems. Trentech has developed a sophisticated
proprietary video badging system which has become the virtual standard
for the United States Air Force and has been installed at over 200 US Air
Force facilities throughout the world.
The Corrections segment also manufactures a complete line of locks and
locking devices under the brand name Airteq. Airteq is an industry
leader in pneumatic and electro-mechanical sliding devices used in the
corrections industry.
The Attack Protection segment is the country's largest Original Equipment
Manufacturer (OEM) of bullet, blast and attack resistant windows and
doors designed for high security applications such as embassies,
courthouses, Federal buildings, banks, corporate headquarters and other
facilities that insist on having the highest level of protection
currently available. CompuDyne is the premiere provider of
Level 8 security products, the highest rating level of commercial
security products. The product manufactured is an integrated and
structurally secure product where the rated protection comes not only
14
from the glass but also from the frame and encasement, which are
specifically designed to become integral parts of the structure into
which they are to be installed. Existing product installations number in
the thousands and range from the Middle East to the White House. Working
under contracts from the United States Department of State, the Company's
largest customer, Attack Protection is the largest supplier of bullet and
blast resistant windows and doors to the United States embassies
throughout the world. Products are also sold to drug stores,
convenience stores, and banks to secure drive through facilities. Other
commercial applications include guard booths, toll-booths, cash drawers
and other similar items. Additionally, this division is finalizing plans
to manufacture both fixed and pop-up barrier security systems.
The Attack Protection segment also manufactures a highly sophisticated
fiber optic sensor system, known as Fiber SenSys, used to detect physical
intrusion. This application is designed to protect large perimeters
including such applications as Federal facilities, oil fields, airport
tarmacs, public utilities, nuclear reactors and water systems. In
addition, it has been installed to guard the perimeters of numerous
private estates and other similar properties. A related product is
SecurLan, which protects data lines from physical intrusion using a fiber
optic technology similar to the Fiber SenSys technology.
The Federal Security Systems segment is known as Quanta Systems
Corporation. This segment has been serving the federal government's
security needs since 1952. Its customer base includes military,
governmental agencies, and state and local governmental units. Federal
Security Systems provides turnkey systems integration of public
security and safety systems. This group is a classic security integrator
and specializes in a wide range of customized access control and badging,
intrusion detection, surveillance and assessment, communications,
command and control, fire and life safety, and asset tracking systems.
Federal Security Systems provides central station oversight and control
of multiple and separate facilities as well as security and public life
safety systems and equipment.
The Public Safety segment consists of two subsidiaries known to the
industry as CorrLogic, Inc. and Tiburon, Inc.. CorrLogic is a leading
developer of inmate management and institutional medical software
systems. CorrLogic specializes in the development, implementation and
support of complex, integrated inmate management software systems,
including inmate medical management that improves the efficiency
and accuracy of correctional facility operations. CorrLogic's focus is
entirely on information solutions for the corrections industry.
CompuDyne expanded its offerings in the Public Safety sector through the
completion of its acquisition of Tiburon, on May 2, 2002. The Company
elected to complete the purchase for 50% cash consideration and 50% stock
consideration. Total consideration paid for the purchase of the portion
of Tiburon that the Company did not previously own amounted to
approximately $12 million in cash and 1.2 million shares of CompuDyne
common stock.
15
Tiburon provides Command and Control and Record Management software
systems for law enforcement, fire and rescue, corrections and justice
environments. Tiburon is a worldwide market leader in the development,
implementation and support of public safety and justice automation
systems. In business since 1980, with more than 350 systems supporting
over 1,000 agencies, Tiburon is a leader in public safety and justice
solutions.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30,
2001
Revenues. The Company had revenues of $39.4 million and $31.3 million
for the 3-month periods ended June 30, 2002 and June 30, 2001,
respectively. This was an increase of $8.1 million or 25.9%. Revenues
from the Corrections segment increased from $18.8 million in 2001 to
$22.0 million in 2002. This was an increase of 17.0%. This increase was
a result of this segment's ability to perform additional contracting work
from its backlog over that which it was able to perform in the previous
year. Revenues from the Attack Protection segment decreased from
$6.2 million in 2001 to $5.6 million in 2002. This was a decrease of
9.7%. This decrease was largely a result of a slow down by its
government customers in approving project submittals drawings as various
government entities have been forced to focus their attention on other
higher priorities which came about as a result of assessing the
risks and threats identified as a result of September 11, as well as the
uncertainty surrounding the government's proposed homeland security
reorganization. Revenues from the Federal Security Systems segment
declined from $5.2 million in 2001 to $3.9 million in 2002. This was a
decline of 25.0%. The Federal Security Systems segment entered the year
with a very small order backlog and as a result its revenue for the first
half of fiscal 2002 suffered. Their backlog has, however been steadily
growing through 2002. The Public Safety segment's revenues increased
from $1.1 million in 2001 to $7.9 million in 2002 as a result of the
acquisition by the Company of Tiburon, Inc., which occurred on May 2,
2002. The results of operations of Tiburon have been included in the
Financial Statements of the Company as of that date.
Expenses. Cost of goods sold increased from $25.1 million in 2001 to
$30.0 million in 2002. This was an increase of $4.9 million or 19.5%.
This smaller percentage increase in cost of goods sold compared to the
percentage increase in revenue resulted in a gross profit percentage of
23.9% in 2002 as compared to 20.0% in 2001. The principle reason for the
increase in cost of goods sold was the acquisition of Tiburon, which
occurred on May 2, 2002.
16
Gross Profit. The increase in the gross profit percentage is a result of
the Tiburon acquisition. Tiburon, a component of the Company's Public
Safety Segment, has inherently higher gross profit percentages than do
the Company's other business segments. The increase in the gross profit
percentage was partially offset by operating inefficiencies in the
Company's Attack Protection segment. During the first quarter of 2002
the Attack Protection segment, purchased an existing 75,000 square foot
building on 20 acres of land in Montgomery, Alabama near its present
facility and set up this facility as a new manufacturing facility
to enable it to handle additional capacity. In the process of overseeing
this new factory coming on line, the segment did not adequately manage
the existing work in its existing facility which resulted in many of the
in-process jobs being run inefficiently, resulting in cost overruns. The
Company is in the process of correcting the identified inefficiencies. In
addition, this new manufacturing capacity was largely underutilized as
the expected volume of business was not yet available to be manufactured
in the Company's new factory. As a result, the Attack Protection segment
recorded a pre-tax loss whereas in the prior year it had attained
significant pre-tax income.
Operating Expenses. Operating expenses increased from $4.4 million in
2001 to $8.0 million in 2002. This was an increase of $3.6 million or
81.8%. This increase was primarily a result of the May 2, 2002
acquisition of Tiburon.
Interest expense decreased from $549 thousand in 2001 to $346 thousand in
2002. This decrease is largely a result of the Company repaying its
13.15% subordinated note borrowing with a portion of the proceeds from
the Private Investment, Public Equity ("PIPE") transaction which occurred
in October 2001.
Taxes on income. During the second quarter of 2001 the Company provided
for income taxes at a 33.3% effective tax rate, while in 2002 the Company
provided for taxes at a rate of 40.0%. The effective tax rate for the 3
months ended June 30, 2002 is higher than the comparable period in 2001
due to the partial release of a valuation allowance in the prior year,
which was recorded against various deferred tax assets.
Net income. The Company reported net income of $713 thousand in 2002 and
$946 thousand in 2001. Fully diluted earnings per share decreased from
$.16 per share in 2001 to $.09 per share in 2002. The fully diluted
weighted average number of common shares and equivalents increased from
5.8 million in 2001 to 8.1 million in 2002. This increase was primarily
the result of the new shares issued by the Company in its PIPE
transaction which occurred in late October 2001 and the shares issued on
May 2, 2002 in connection with the acquisition of Tiburon, Inc.
17
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Revenues. The Company had revenues of $69.9 million and $61.2 million
for the 6-month periods ended June 30, 2002 and June 30, 2001,
respectively. This was an increase of $8.7 million or 14.2%. Revenues
from the Corrections segment increased from $38.1 million in 2001 to
$42.2 million in 2002. This was an increase of 10.8%. This increase was
a result of this segment's ability to perform additional contracting work
from its backlog over that which it was able to perform in the previous
year. Revenues from the Attack Protection segment increased from $11.7
million in 2001 to $11.8 million in 2002. This was an increase of 0.9%.
Revenues from the Federal Security Systems segment declined from $9.0
million in 2001 to $6.9 million in 2002. This was a decline of 23.3%.
The Federal Security Systems segment entered the year with a very small
order backlog and as a result its revenue for the first half of fiscal
2002 suffered. Their backlog, however has been steadily growing through
2002. The Public Safety segment's revenues increased from $2.5 million
in 2001 to $9.1 million in 2002. This was an increase of $6.6 million
and is due mainly to the acquisition of Tiburon on May 2, 2002.
Expenses. Cost of goods sold increased from $48.7 million in 2001 to
$54.5 million in 2002. This was an increase of $5.8 million or 11.9%.
The smaller percentage increase in cost of goods sold as compared to the
percentage increase in revenues resulted in a gross profit percentage of
22.1% in 2002 as compared to 20.5% in 2001. The principal reason for
this increase in cost of goods sold and the related decrease in gross
profit percentage was a result of operating inefficiencies in the
Company's Attack Protection segment. During the first quarter of 2002
the Attack Protection segment, which had largely been capacity
constrained, purchased an existing 75,000 square foot building on 20
acres of land and set up this facility as a new manufacturing facility
to enable it to handle additional capacity. In the process of overseeing
this new factory coming on line, the segment did not adequately manage
the existing work in its existing facility which resulted in many of the
in-process jobs being run inefficiently, resulting in cost overruns. The
Company is in the process of correcting the identified inefficiencies. In
addition, this new manufacturing capability was largely underutilized as
the expected volume of business was not yet available to be manufactured
in the Company's new factory. As a result, this segment recorded a
pre-tax loss whereas in the prior year this segment had attained
significant pre-tax income.
Operating Expenses. Operating expenses increased from $8.9 million in
2001 to $12.5 million in 2002. This was an increase of $3.6 million or
40.5%. This increase was a result of the May 2, 2002 acquisition of
Tiburon.
Interest expense decreased from $1.1 million in 2001 to $659 thousand in
2002. This decrease is largely a result of the Company repaying its
13.15% subordinated note borrowing with a portion of the proceeds from
the PIPE transaction, which occurred in October 2001.
18
Taxes on income. During the first half of 2001 the Company provided for
income taxes at a 35.3% effective tax rate, while in 2002 the Company
provided for taxes at a rate of 37.9%. The effective tax rate for the
first 6 months of 2002 is higher than the first 6 months of 2001 due to
the partial release of a valuation allowance in the prior year, which was
recorded against various tax assets.
Net income. The Company reported net income of $1.5 million in 2002 and
$1.8 million in 2001. Fully diluted earnings per share decreased from
$.30 per share in 2001 to $.20 per share in 2002. The fully diluted
weighted average number of common shares and equivalents increased from
5.9 million in 2001 to 7.7 million in 2002. This increase was primarily
the result of the new shares issued by the Company in its PIPE
transaction, which occurred in late October 2001 and the shares issued on
May 2, 2002 in connection with the acquisition of Tiburon, Inc.
Liquidity and Capital Resources
The Company funds its operations through cash flows generated from its
operations, bank financing, and the sale of its common stock. The
Company's liquidity requirements arise from cash to carry its
inventories, billed and unbilled receivables, and for payments of
principal and interest on outstanding indebtedness and for acquisitions.
The ultimate customers of the Company are primarily Federal, State and
local governmental units. In the event the funding of these governmental
units is reduced for any reason, including budgetary reductions due to
economic conditions, there is a risk that the demand for the Company's
goods and services would decrease which would reduce the availability of
funds to the Company.
As of June 30, 2002, the Company had working capital of $31.2 million
compared with $27.4 million as of December 31, 2001. The most significant
changes in working capital were increases in accounts receivable,
contract costs in excess of billings, billings in excess of contract
costs incurred, accounts payable and other accrued expenses. Most of
these increases can be attributed to the Company's May 2, 2002
acquisition of Tiburon. At June 30, 2002, the Company had a line of
credit of $30 million, of which $25.8 million was either used or
committed.
Net cash used in operating activities was $51 thousand in 2002 versus
$741 thousand in 2001.
Net cash used in investing activities was $12.8 million in 2002 compared
to $6.0 million in 2001. Capital expenditures of $2.5 million were made
in 2002 primarily for the acquisition and provisioning of the Attack
Protection segment's new 75,000 square foot manufacturing facility in
Montgomery, Alabama to increase capacity of the Attack Protection
segment. The Company has projected spending up to an additional $1.0
million during fiscal 2002 for normal equipment and upgrades and for the
completion and outfitting of its new facility.
19
Net cash provided by financing activities amounted to $14.0 million in
2002 compared with $6.9 million in 2001. The increase in cash provided by
financing activities is due to additional borrowings under the Company's
bank credit facilities.
Much of the Company's cash flows from its operating, investing, and
financing activities resulted from the Company's May 2, 2002 acquisition
of Tiburon.
The following table summarizes the contractual obligations of the Company
as of June 30, 2002 and the payments due by period.
Payments Due by Period
----------------------
(in thousands)
Long-Term Debt Operating Leases Letters of Credit
-------------- ---------------- -----------------
December 31:
2002 $ 833 $ 1,625 $ -
2003 2,921 2,644 376
2004 20,691 1,857 5,395
2005 440 1,048 -
2006 440 232 -
Thereafter 3,560 574 -
------- ------- -------
Totals $ 28,885 $ 7,980 $ 5,771
The Company's total outstanding borrowings at June 30, 2002 amounted to
$28,885,000. The fixed rate portion of these borrowings consisted of a
$341,000 subordinated borrowing bearing interest at 7.50% and a $225,000
note bearing interest at 9%. The remaining borrowings were all at
variable rates. One of these borrowings is a subordinated borrowing in
the amount of $833,000, which bears interest at the prime rate.
The Company had two (2) additional borrowings from Banks. The first
borrowing from Banks is a 3 year term loan due in quarterly installments
through November 2004. This borrowing was entered into on November 16,
2001 in an original amount of $5,000,000. The amount outstanding at June
30, 2002 was $4,163,000. Its interest rate is variable and can range
from LIBOR +1.75% to prime + 1.5%. The rate charged the Company is based
20
on the Company's leverage ratio at the end of each quarter. The leverage
ratio is defined as the ratio of consolidated indebtedness for borrowed
money, capital leases, guaranties of borrowed money and reimbursement
obligations in respect of letters of credit divided by the Company's
earnings before interest, taxes, depreciation, and amortization
(EBITDA).
The second borrowing from Banks is a $30,000,000 line of credit due
November 16, 2004. The amount outstanding under this line of credit at
June 30, 2002 was $20,000,000. Its interest rate is variable and can
range from LIBOR + 1.50% to prime +1.25%. The rate charged the Company
is based on the Company's leverage ratio at the end of each quarter as
defined above.
The Company also had (2) two industrial revenue bonds outstanding at June
30, 2002 in the amounts of $1.8 million and $3.5 million. These
borrowings bear interest at variable rates based on weekly market
conditions. These bonds are fully collateralized by Bank letters of
credit. The Company's bank considers letters of credit as outstanding
borrowings when considering the amount of availability the Company has
remaining under its line of credit.
The Company had $4.2 million of unused availability under its line of
credit at June 30, 2002.
As a result of the variable nature of the interest rate on the Company's
Bank borrowings, any increase in the amount of outstanding borrowings
and/or decreases in the company's EBITDA will result in the Company's
interest rate increasing and thus the amount of interest expense incurred
also increasing.
The Company anticipates that cash generated from operations and
borrowings under the working capital line of credit will enable the
Company to meet its liquidity, working capital and capital expenditure
requirements during the next 12 months. The Company, however, may
require additional financing to pursue its strategy of growth
through acquisitions. If such financing is required, there are no
assurances that it will be available, or if available, that it can be
obtained on terms favorable to the Company. The Company presently has no
binding commitment or binding agreement with respect to any material
acquisition or strategic investment. However, from time to time, the
Company may be party to one or more non-binding letters of intent
regarding material acquisitions, which, if consummated, may be paid for
with cash or through the issuance of a significant number of shares of
the Company's common stock. On May 2, 2002, the Company completed the
acquisition of Tiburon, Inc. Total consideration paid for the purchase
of the portion of Tiburon that the Company did not previously own
amounted to approximately $12 million in cash and 1.2 million shares of
CompuDyne common stock. To fund the cash portion of the Tiburon
acquisition, the Company negotiated an increase in its bank line of
credit to $30 million effective May 2, 2002. Borrowings made by the
Company under this increased facility may result in increased interest
21
rates charged the Company to the extent its leverage ratio changes
resulting in increased interest charges. As a result of the approval of
this borrowing, the Company had adequate cash available to complete this
transaction.
Other than the Company's $5.8 million of letters of credit, $4.0 million
of which was entered into in April, 2002, primarily to secure an
Industrial Revenue Bond Borrowing on the Company's new Attack Protection
factory, the Company has no other material off balance sheet liabilities.
Backlog
The Company's backlog of orders was $194 million at June 30, 2002 and
$110 million at December 31, 2001. Effective with the March 31, 2002 Form
10-Q, the Company has started reporting its backlog on a revenue backlog
basis. Prior thereto the Company reported its backlog on a billing
basis. The backlog reported on a billing basis on December 31, 2001 was
$118 million.
Impact of Inflation
Inflation has not had a significant effect on CompuDyne's operations
during the quarter ended June 30, 2002.
Market Risk
The Company is exposed to market risk related to changes in interest
rates and, to an immaterial extent, to foreign currency exchange rates.
At June 30, 2002, the Company had a total of $28,885,000 of notes payable
outstanding. Of this amount $341,000 was at a fixed rate of 7.5%,
$225,000 was at a fixed rate of 9.0% and the remainder of $28,319,000 was
at variable rates. The Company entered into an interest rate swap
agreement on June 26, 2001 in the initial amount of $11,500,000. The
amount of this swap agreement declines by $676,470 on a quarterly basis
until it becomes $0 on October 1, 2005. At June 30, 2002 the amount of
the swap agreement had declined to $8,794,000 at a fixed rate of 4.90%.
As such, approximately $19,525,000 of the Company's variable rate
borrowings were not hedged with an interest rate swap agreement. In the
event interest rates increase dramatically, the increase in interest rate
expense to the Company could be material to the results of operations of
the Company.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets", which is effective January 1, 2002. SFAS
No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
22
reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of
assessing potential future impairments of goodwill. SFAS No. 142 also
required the Company to complete a transitional goodwill impairment test
six months from the date of adoption. During the second quarter of 2002,
the Company completed the first step of the required initial test for
potential impairment of goodwill recorded at January 1, 2002. The
results indicate no potential impairment exists, based on the current
market capitalization of the Company. Amortization for the three and six
months ended June 30, 2001 was $13 thousand and $33 thousand,
respectively.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The
Company has not yet determined the impact that adopting SFAS No. 143 will
have on its financial position or on the results of its operations when
such statement is adopted.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. It supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", and the accounting and reporting provisions of APB 30, "Reporting
the Results of Operations Reporting the Effects of Disposal of a
Segment of a Business", and "Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". The Company adopted SFAS No. 144 on
January 1, 2002. Adoption of SFAS No. 144 did not have a significant
impact on its results of operations or its financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement is effective for fiscal years
beginning after May 15, 2002. SFAS 145 requires, among other things,
eliminating reporting debt extinguishments as an extraordinary item in
the income statement. Management does not believe the adoption of this
standard will have a material impact on the Company's financial position
or results of operations.
In July 2002, the FASB has issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The statement is effective
for fiscal years beginning after December 31, 2002. SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan. Management does not believe the adoption
of this standard will have a material impact on the Company's financial
position or results of operations.
23
Safe Harbor Statement under the Private Securities Litigation Reform Act
of 1995
Certain statements made in this Form 10-Q constitute "forward-looking
statements" within the meaning of the federal securities law, including
those statements concerning the Company's expectations with respect to
future events. These statements involve risks and uncertainties that
cannot be predicted or quantified and consequently, actual results may
differ materially from those expressed or implied by such forward-looking
statements. All statements other than statements of historical fact
included in this Form 10-Q, including without limitation statements under
"Management's Discussion and Analysis of Financial Condition and Results
of Operations"regarding our financial position, business strategy and
plans and objectives of our management for future operations, are
forward-looking statements. When used in this Form 10-Q, words such as
"anticipate", "believe", "estimate", "expect", 'intend" and similar
expressions, as they relate to us or our management, identify
forward-looking statements. Such forward-looking statements are based on
the beliefs of our management, as well as assumptions made by and
information currently available to our management. Actual results could
differ materially from those contemplated by the forward-looking
statements as a result of certain factors, including but not limited to,
competitive factors and pricing pressures, changes in legal and
regulatory requirements, technological change or difficulties, product
development risks, commercialization difficulties and general economic
conditions. Such statements reflect our current views with respect to
future events and are subject to these and other risks, uncertainties and
assumptions relating to our operation, results of operations, growth
strategy and liquidity. Risks inherent in CompuDyne's business and with
respect to future uncertainties are further described in its filings with
the Securities and Exchange Commission, such as the Company's Form 10-K,
Form 10-Q, and Form 8-K reports.
24
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
CompuDyne has fixed and variable rate notes payable. These on-balance
sheet financial instruments expose the Company to interest rate risk,
with the primary interest rate exposure resulting from changes in the
LIBOR rate used to determine the interest rate applicable to the
borrowings under the Company's loans from its banks.
The information below summarizes CompuDyne's sensitivity to market risks
associated with fluctuations in interest rates as of June 30, 2002. To
the extent that the Company's financial instruments expose the Company
to interest rate risk, they are presented in the table below. The table
presents principal cash flows and related interest rates by year of
maturity of the Company's notes payable with variable rates of interest
in effect at June 30, 2002.
Financial Instruments by Expected Maturity Date
Period Ending June 30 2003 2004 2005 2006
---- ---- ---- ----
Notes Payable:
Variable rate ($) $ 2,523,335 $2,523,337 $19,271,997 $ 440,000
Average interest rate 4.5% 5.0% 6.0% 6.0%
Fixed rate ($) $ 395,583 $ 170,583 $ - $ -
Average interest rate 8.4% 7.5% - -
Period Ending June 30 Thereafter Total Fair Value
---------- ----- ----------
Notes Payable:
Variable rate ($) $ 3,560,000 $ 28,318,669 $ 28,318,669
Average Interest Rate 6.0% 5.8% 5.8%
Fixed rate ($) $ - $ 566,166 $ 566,166
Average Interest Rate - 8.1% 5.0%
25
Period Ending June 30 2003 2004 2005 2006
---- ---- ---- ----
Interest Rate Swaps:
Variable to Fixed ($) $ 2,705,880 $ 2,705,880 $ 2,705,880 $ 676,480
Average pay rate 4.90% 4.90% 4.90% 4.90%
Average receive rate 2.00 % 3.00% 4.00% 5.00%
Period Ending June 30 Thereafter Total Fair Value
---------- ----- ----------
Interest Rate Swaps:
Variable to Fixed $ - $ 8,794,120 ($ 246,970)
Average pay rate - - -
Average receive rate - - -
26
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
Proposal #1 The Merger
At the Annual Meeting of Shareholders on May 2, 2002, the shareholders
approved and adopted the Agreement and Plan of Merger, dated as of May
10,
001, as amended by the First Amendment to the Agreement and Plan of
Merger, dated as of January 25, 2002, by and among CompuDyne, New
Tiburon, Inc., a wholly owned subsidiary of CompuDyne, and Tiburon, Inc.,
with respect to the Merger of Tiburon into New Tiburon, and the other
transactions contemplated by the Merger Agreement.
The votes were cast as follows:
For - 3,806,548 Against - 20,311 Abstain - 14,006
Proposal #2 Amendment of the 1996 Stock Incentive Compensation Plan For
Employees
At the Annual Meeting of Shareholders on May 2, 2002, the shareholders
approved an amendment of the 1996 Stock Incentive Plan to increase the
number of shares of Common Stock, which may be issued or transferred
under
the Plan upon exercise of options or other rights to 1,800,000 shares.
The votes were cast as follows:
For - 2,936,696 Against - 864,572 Abstain - 36,458
Proposal #3 Election of Directors
At the Annual Meeting of Shareholders on May 2, 2002, the shareholders
elected Bruce Kelling, Director, for a period of three years to expire at
the 2005 Annual Meeting. The votes were cast as follows:
For - 5,747,662 Withheld - 187,878
At the Annual Meeting of Shareholders on May 2, 2002, the shareholders
elected David Clark, Director, for a period of three years to expire at
the
2005 Annual Meeting. The votes were cast as follows:
For - 5,927,854 Withheld - 7,686
27
At the Annual Meeting of Shareholders on May 2, 2002, the shareholders
elected Philip Blackmon, Director, for a period of three years to expire
at the 2005 Annual Meeting. The votes were cast as follows:
For - 5,747,257 Withheld - 188,283
28
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits None
(b) Reports on Form 8-K
(i) Current Report on Form 8-K filed May 2, 2002 disclosing in Item 5
that the Registrant had completed the merger of Tiburon, Inc., a Virginia
corporation with and into New Tiburon, Inc., a Virginia corporation
and wholly owned subsidiary of the Registrant pursuant to the Merger
Agreement dated May 10, 2001, as amended by the First Amendment to Merger
Agreement dated January 25, 2002 by and among Tiburon, New Tiburon and
Registrant.
SIGNATURE
Pursuant to the requirements 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.
COMPUDYNE CORPORATION
Date: August 14, 2002 /s/ Geoffrey F. Feidelberg
---------------------------
Geoffrey F. Feidelberg
Chief Financial Officer
29