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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 March 31, 2003
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_____
Indicate by check mark whether the registrant is an accelerated
filer (as defined in rule 12b-2 of the Exchange Act)
Yes X NO_____
As of May 13, 2003, a total of 7,898,171 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 - March 31, 2003
and December 31, 2002
Consolidated Statements of Operations -
Three Months Ended
March 31, 2003 and 2002
Consolidated Statement of Changes in
Shareholders' Equity - Three Months Ended
March 31, 2003
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Signature and Certifications
ITEM 1. FINANCIAL STATEMENTS
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
2003 2002
ASSETS ---- ----
(dollars in thousands)
Current Assets
Cash and cash equivalents $ 1,335 $ 1,274
Accounts receivable, net 42,536 45,168
Contract costs in excess of billings 16,477 18,297
Inventories 5,521 6,401
Deferred tax assets 1,220 1,220
Prepaid expenses and other 2,017 2,510
------- -------
Total Current Assets 69,106 74,870
Property, plant and equipment, net 11,675 12,171
Goodwill and intangible assets, net 28,236 32,109
Deferred tax assets 978 987
Other 669 667
------- -------
Total Assets $ 110,664 $ 120,804
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and
accrued liabilities $ 22,788 $ 22,235
Billings in excess of contract
costs incurred 13,350 13,602
Deferred revenue 5,553 5,812
Current portion of notes payable 2,402 2,402
------- -------
Total Current Liabilities 44,093 44,051
Notes payable 17,692 25,108
Deferred tax liabilities 2,114 2,114
Other 303 327
------- -------
Total Liabilities 64,202 71,600
------- -------
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;
8,448,222 and 8,391,522 shares issued
at March 31, 2003 and
December 31, 2002, respectively 6,336 6,294
Additional paid-in-capital 38,768 42,508
Retained earnings 5,460 4,518
Accumulated other comprehensive loss (182) (196)
Treasury stock, at cost; 573,930 shares at
March 31, 2003 and December 31, 2002 (3,920) (3,920)
-------- --------
Total Shareholders' Equity 46,462 49,204
-------- --------
Total Liabilities and
Shareholders' Equity $ 110,664 $ 120,804
======= =======
The accompanying notes are an integral part of
these financial statements.
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
2003 2002
---- ----
(in thousands, except per share data)
Net sales $ 46,767 $ 30,490
Cost of goods sold 34,984 24,495
------- -------
Gross profit 11,783 5,995
Operating expenses 7,987 4,519
Research and development 1,862 7
------- -------
Operating income 1,934 1,469
------- -------
Other expense (income)
Interest expense 378 313
Other (income) expense (16) (62)
------- -------
Total other expense 362 251
------- -------
Income before income taxes 1,572 1,218
Income taxes 630 437
------- -------
Net income $ 942 $ 781
======= =======
Earnings per share:
- ------------------
Basic earnings per share $ .12 $ .12
======= =======
Weighted average number of common
shares outstanding 7,822 6,673
======= =======
Diluted earnings per share $ .12 $ .11
======= =======
Weighted average number of common
shares and equivalents 8,073 7,246
======= =======
The accompanying notes are an integral part of
these financial statements.
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Accumulated
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings
------- ------- ------- --------
December 31, 2002 8,392 $ 6,294 $ 42,508 $ 4,518
Acquisition of Tiburon
Purchase price
Adjustment (3,800)
Stock options exercised 56 42 60
Net income 942
Other comprehensive
income, net of tax:
Loss on interest rate
swap agreement
Translation adjustment
Balance at
--------------------------------------------------
March 31, 2003 8,448 $ 6,336 $ 38,768 $ 5,460
====== ====== ======= ======
Accumulated
Other
Comprehensive Treasury Stock
Loss Shares Amount Total
------------- ------ ------ -----
December 31, 2002 $ (196) 574 $ (3,920) $ 49,204
Acquisition of Tiburon
Purchase price
Adjustment (3,800)
Stock options exercised 102
Net income 942
Other comprehensive
income, net of tax:
Loss on interest rate
swap agreement 21 21
Translation adjustment (7) (7)
Balance at
--------------------------------------------------
March 31, 2003 $ (182) 574 $ (3,920) $ 46,462
======= ====== ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
2003 2002
---- ----
(in thousands)
Cash flows from operating activities:
Net income $ 942 $ 781
Adjustments to reconcile net income to
net cash used in operations:
Depreciation and amortization 751 405
Equity earnings in affiliated company - 1
Gain from disposition of property,
plant and equipment - (2)
Deferred tax asset (1) -
Changes in assets and liabilities:
Accounts receivable 2,632 1,384
Contract costs in excess of billings 1,820 371
Inventories 880 (49)
Prepaid expenses and other current assets 493 297
Other assets (2) (24)
Accounts payable and accrued liabilities 553 (2,643)
Billings in excess of contract costs incurred (252) (1,065)
Deferred revenue (259) -
Other liabilities - (1)
-------- -------
Net cash flows provided by (used in)
operating activities 7,557 (545)
-------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (128) (1,725)
Proceeds from sale of property, plant and equipment 1 4
Net payment for acquisition (55) -
-------- --------
Net cash flows used in investing activities (182) (1,721)
-------- --------
Cash flows from financing activities:
Issuance of common stock 102 100
Borrowings of bank notes - 3,000
Repayment of bank notes (7,416) -
-------- --------
Net cash (used in) provided by financing activities (7,314) 3,100
-------- --------
Net change in cash and cash equivalents 61 834
Cash and cash equivalents at beginning of period 1,274 296
-------- --------
Cash and cash equivalents at end of period $ 1,335 $ 1,130
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 294 $ 214
Income taxes $ 128 $ 161
The accompanying notes are an integral part of
these financial statements.
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, 2002 has been derived from the Company's December 31,
2002 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 the fair presentation of the periods presented.
It is suggested that these consolidated unaudited 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, 2002. Operating results for the three months ended
March 31, 2003 are not necessarily indicative of operating results for
the entire fiscal year.
New Accounting Pronouncements:
In April, 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
149, "Amendment of SFAS No. 133 on Derivative Instruments and
Hedging Activities." The Statement amends and clarifies accounting
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under
Statement 133. The amendments set forth in SFAS 149 improve financial
reporting by requiring the contracts with comparable characteristics
be accounted for similarly. In particular, this Statement clarifies
under what circumstances a contract with an initial net investment
meets the characteristics of a derivative as discussed in Statement
133. In addition, it clarifies when a derivative contains a
financing component that warrants special reporting in the statement
of cash flows. Statement 149 amends certain other existing
pronouncements. Those changes will result in more consistent
reporting of contracts that are derivatives in their entirety into or
modified after June 30, 2003 and for hedging relationships designated
after June 20, 2003. Management does not expect that adoption of
this pronouncement will have a material effect on the financial
position, results of operations or cash flow of CompuDyne.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation --Transition and Disclosure, an amendment
of FASB Statement No. 123" which amends SFAS No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation" and the reporting provisions
of APB No. 30, "Interim Financial Reporting." SFAS 148 provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation
and requires prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
Adoption of this statement is required at the beginning of fiscal year
2003. The adoption of this pronouncement did not have a material effect
on the financial position, results of operations or cash flow of
CompuDyne.
In July 2002, the FASB 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. The adoption of
this standard did not have a material impact on the Company's financial
position or results of operations or cash flow of CompuDyne.
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. The adoption of this standard did not
have a material impact on the Company's financial position or results
of operations or cash flow of CompuDyne.
In January, 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities." The Interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidation Financial
Statements," to certain entities in which the equity investors do not
have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.
The Interpretation applies immediately to variable interest entities
created after January 31, 2003 to variable interest entities in which
the Company obtains an interest after that date. The Interpretation
is effective July 1, 2003 to variable interest entities in which the
Company holds a variable interest acquired before February 1, 2003.
The Company has assessed the impact of adopting this Interpretation.
The adoption of this standard did not have a material impact on the
Company's financial position of results of operations or cash flow
of CompuDyne.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45
requires the recognition of liabilities for guarantees that are issued
or modified subsequent to December 31, 2002. The liabilities should
reflect the fair value, at inception, of the guarantors' obligations to
stand ready to perform, in the event that the specified triggering
events or conditions occur. The adoption of this standard did not have
a material impact on the Company's financial position or results of
operations.
Reclassifications:
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
2. OPERATING SEGMENT INFORMATION
Pre-tax
Revenues Gross Profit
-------- ------------
(Three Months ended
March 31)
(in thousands)
2003 2002 2003 2002
---- ---- ---- ----
Institutional Security
Systems $ 23,448 $ 20,220 $ 3,277 $ 3,691
Attack Protection 8,343 6,174 1,975 1,327
Federal Security Systems 3,489 2,968 522 451
Public Safety and Justice 11,487 1,128 6,009 526
CompuDyne Corporate - - - -
------- ------- ------- -------
$ 46,767 $ 30,490 $ 11,783 $ 5,995
======= ======= ======= =======
Pre-tax
Pre-Tax
Income/(Loss)
-------------
(Three Months ended
March 31)
(in thousands)
2003 2002
---- ----
Institutional Security
Systems $ 737 $ 1,138
Attack Protection 562 7
Federal Security Systems 207 49
Public Safety and Justice 68 2
CompuDyne Corporate (2) 22
------- -------
$ 1,572 $ 1,218
======= =======
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 and warrants to purchase 1,037,656 shares and 57,500 shares
for the three month period ended March 31, 2003 and 2002 respectively,
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:
Three Months Ended
March 31,
2003 2002
---- ----
(in thousands, except share and per share data)
Net income $ 942 $ 781
====== ======
Weighted average common shares
outstanding 7,822 6,673
Effect of dilutive stock options
and warrants 251 573
------ ------
Diluted weighted average common shares
outstanding 8,073 7,246
====== ======
Net income per common share
Basic $ .12 $ .12
Diluted $ .12 $ .11
4. INVENTORIES
Inventories consist of the following:
March 31, December 31,
2003 2002
---- ----
(in thousands)
Raw materials $ 3,817 $ 3,937
Work in progress 1,314 2,197
Finished goods 390 267
------- --------
$ 5,521 $ 6,401
======= ========
5. GOODWILL AND INTANGIBLE ASSETS
Intangible assets include trade name, customer relationships
and backlog from the acquisition of Tiburon, Inc. Other intangibles
include Department of State Certifications, Underwriters Laboratories,
Inc. listings, and patents related to the acquisition of Norment and
Norshield. Except for goodwill and the Tiburon trade name, which have
indefinite lives, all intangibles are being amortized using the
straight-line method.
Goodwill and intangible assets consist of the following:
March 31 December 31 Amortizable
2003 2002 Lives
-------- ----------- -----------
(in thousands) (in years)
Goodwill $ 18,298 $ 22,043 Indefinite
Trade name 6,913 6,913 25 - Indefinite
Customer relationships 2,500 2,500 14
Backlog 300 300 2
Other intangibles 1,220 1,220 2 - 20
------- -------
29,231 32,976
Less: accumulated amortization (995) (867)
------- -------
$ 28,236 $ 32,109
======= =======
6. 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
$10.4 million, net in cash and approximately 1.1 million shares of
CompuDyne common stock for a total acquisition cost of $30.0 million.
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 a fully integrated suite of products including
computer-assisted dispatch, records management and court and probation
software systems for the 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 Company has determined that the consideration received is the
best representation of the fair value of the purchase price of
Tiburon. As such, the Company engaged an independent third party
to complete a valuation of the business as of the acquisition date
(May 2, 2002). During the first quarter of 2003, the valuation
was completed and resulted in a reduction of the goodwill recorded
of $3.8 million. The Company is still in the process of completing
the valuation of fair value of the fixed assets acquired. The
Company expects to complete the valuation in the second quarter of
2003. The final valuations may differ from the amounts included
herein. Currently goodwill is estimated to be approximately
$16.7 million.
In conjunction with preliminary estimates, the purchase price was
recorded as follows (in thousands):
Purchase Price $ 30,000
Net assets acquired (13,275)
------
Goodwill $ 16,725
======
The following are the Company's unaudited pro forma results
assuming the acquisition of Tiburon had occurred on January 1, 2002:
Three Months Ended
March 31,
2003 2002
---- ----
(in thousands, except per share data)
Revenue $ 46,767 $ 40,915
Net income $ 942 $ 933
Earnings per share:
Basic $ .12 $ .12
Diluted $ .12 $ .11
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, 2002, or of
future results of operations.
7. STOCK-BASED COMPENSATION
At March 31, 2003, the Company continues to account for its
stock-based compensation plans, which are described more fully
in the Company's 2002 Annual Report, using the intrinsic value
method and in accordance with the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted
had an exercise price equal to fair market value of the underlying
common stock on the date of grant. The following table illustrates,
in accordance with the provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," the effect on
net income and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
For the Three Months
Ended March 31,
2003 2002
---- ----
Net income, as reported $ 942 $ 781
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards net of related
tax effects (363) (258)
-------- --------
Pro forma net income $ 579 $ 523
======== ========
Earnings per share:
Basic - as reported $ .12 $ .12
Basic - pro forma $ .07 $ .08
Diluted - as reported $ .12 $ .11
Diluted - pro forma $ .07 $ .07
The fair value of the Company's stock-based option awards to
employees was estimated assuming no expected dividends and the
following weighted-average assumptions:
2003 2002
------ ------
Expected volatility 73.0% 75.0%
Risk-free interest rate 3.9% 4.7%
Expected life in years 7.5 7.5
8. PRODUCT WARRANTIES
Accruals for estimated expenses related to warranties are made at
the time products are sold or services are rendered. These accruals
are established using historical information on the nature, frequency,
and average cost of warranty claims. The Company warrants numerous
products, the terms of which vary widely. In general, the Company
warrants its products against defect and specific non-performance.
At March 31, 2003, the Company has a product warranty accrual in
the amount of $476 thousand.
Product Warranty Liabilities
----------------------------
(in thousands)
Beginning balance at December 31, 2002 $ 482
Plus accruals for product (6)
--------
Ending balance at March 31, 2003 $ 476
========
ITEM 2
COMPUDYNE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
- --------
CompuDyne Corporation, ("CompuDyne" or the "Company") was
reincorporated in Nevada in 1996, and is a leading provider
of products and services to the Public Security market. The
Company operates in four (4) distinct segments in this
marketplace: Institutional Security Systems (formerly known as
Corrections), Attack Protection, Federal Security Systems and
Public Safety and Justice.
The Institutional Security Systems 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. Norment also developed a product called
MaxWall. 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 Institutional Security Systems 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 United States Air Force facilities throughout the world.
The Institutional Security Systems 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 a premier
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 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
segment's largest customer, Attack Protection is the largest supplier of
bullet and blast resistant windows and doors to 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, tollbooths, cash
drawers and other similar items. Additionally, this segment designs
and installs both fixed and pop-up bollards and 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 protect 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 segment 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 and Justice segment consists of two subsidiaries known
to the industry as CorrLogic, Inc., ("CorrLogic") and Tiburon, Inc.
("Tiburon"). 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 and Justice sector
through the completion of its acquisition of Tiburon, on May 2, 2002.
Tiburon provides a fully integrated suite of products including
computer-assisted dispatch, records management, court and probation
software systems for the 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 450 systems
supporting over 700 agencies, Tiburon is a leader in public safety and
justice solutions.
RESULTS OF OPERATIONS
Three months ended March 31, 2003 and 2002
Revenues. The Company had revenues of $46.8 million and $30.5 million
for the three-month periods ended March 31, 2003 and March 31, 2002,
respectively. This was an increase of $16.3 million or 53.4%.
Revenues from the Institutional Security Systems segment increased from
$20.2 million in the first quarter of 2002 to $23.4 million in the first
quarter of 2003. This was an increase of 16.0%. The Institutional
Security Systems segment is largely a construction driven business.
Much of its revenue is obtained by working on new and retrofit
construction projects in the corrections industry, as opposed to from
sources of recurring revenue. As such, the increase in revenue
experienced by this segment is largely attributable to its ability to
win and work on more projects than it did in the comparable quarter of
the previous year. One of the reasons it was able to do this was
because its backlog had grown from $92.3 million at December 31, 2001
to $99.5 million at December 31, 2002 thus providing it with the
ability to engage in more work in the first quarter of 2003 than it did
in the first quarter of 2002. At March 31, 2003, the backlog for the
Institutional Security System's segment had declined to $91.6 million.
The first quarter of 2003 was a slow bidding period, which the Company
attributes to the seasonal nature of the bidding process.
Revenues from the Attack Protection segment increased from $6.2 million
during the quarter ended March 31, 2002 to $8.3 million in the quarter
ended March 31, 2003. This was an increase of 35.1%. The Attack
Protection segment was largely capacity constrained during 2001.
As a result, the Company purchased an existing 75,000 square foot
factory on 20 acres of land in close proximity to its existing factory
in Montgomery, Alabama. This expansion provides the segment with the
necessary capacity to generate incremental revenue of approximately
$10 million per year. Of the $2.2 million of increased revenue
generated by the Attack Protection segment, $2.7 million of the
increase came from its Norshield product line while its Fiber Sensys
product line saw a decrease in revenue of $0.5 million. The Norshield
product line encompasses the segment's bullet and blast resistant
windows and doors, guard booths, bollards, barriers and other related
products. During the first quarter of 2003, the Attack Protection
segment experienced an increased demand for its products, as the slow
down in the government building process experienced during the first
quarter of 2002 appeared to end. Now it appears that projects are
being released for construction, and thus the Attack Protection segment
experienced an increased demand for its products. The Segment's Fiber
Sensys product line consists primarily of fiber optic perimeter
protection products. These products experienced significant growth in
2002 as revenues from this product line grew from $1.5 million in 2001
to $4.9 million in 2002, of which $1.8 million occurred in the first
quarter of 2002. Orders received for the Fiber Sensys line tend to be
large dollar orders. Although fewer orders were received and shipped
for these products during the first quarter of 2003 as compared to the
first quarter of 2002, the Company continues to see heightened interest
for these products and expects sales for these items to continue to
experience significant growth in 2003.
Revenues from the Federal Security Systems segment increased from
$3.0 million during the first quarter of 2002 to $3.5 million during the
first quarter of 2003. This was an increase of 17.6%. At December 31,
2001 the Federal Security Systems segment backlog was a relatively small
$380 thousand. Substantially all of this segment's revenue is backlog
driven. Its backlog is therefore a precursor to future revenues. The
Federal Security Systems segment's failure to have any meaningful
backlog at December 31, 2001 resulted in substantially all of its first
quarter 2002 revenue being driven by contract awards it received during
the first quarter of 2002. This inherently caused the segment's revenue
to be low during that period. The Federal Security Segment ended 2002
with a significantly improved backlog level of $11.7 million. As such
it entered the first quarter of 2003 with a much greater book of
business from which to generate its increased revenue in the first
quarter of 2003.
Revenues from the Public Safety and Justice segment increased
$10.4 million from $1.1 million during the first quarter of 2002 to
$11.5 million during the first quarter of 2003. On May 2, 2002 the
Company completed its acquisition of Tiburon, Inc. Prior thereto,
the Company controlled approximately 20% of Tiburon and recorded its
investment in Tiburon under the equity method of accounting.
Subsequent to May 2, 2002, Tiburon became a wholly owned subsidiary
of the Company and thus its results are now consolidated with those of
the Company. Tiburon's revenues for the three months ended March 31,
2003 amounted to $10.4 million, which accounts for substantially all
of the increase in revenue experienced by this segment during the first
quarter of 2003 compared to the first quarter of 2002.
Expenses. Cost of goods sold increased from $24.5 million during the
first quarter of 2002 to $35.0 million during the first quarter of 2003.
This increase was largely a result of the acquisition of Tiburon on
May 2, 2002, which added $4.7 million of cost of goods sold to the
results of the Company, as well as increased costs of goods sold of
$3.7 million at the Institutional Security Systems segment, $1.6 million
at the Attack Protection segment and $0.5 million at Federal Security
Systems, all largely attributable to the increased sales levels attained
by these segments.
The smaller percentage increase in cost of goods sold as compared to the
percentage increase in sales resulted in an increased gross profit
percentage of 25.2% in 2003 as compared to 19.7% during the first quarter
of 2002.
Cost of goods sold in the Institutional Security Systems segment
increased from $16.5 million in the first quarter of 2002 to $20.2
million in the first quarter of 2003. This was an increase of $3.7
million or 22.0%, This increase was larger than the related sales
increase of this segment of 16.0% resulting in a decline in the gross
profit percentage from 18.3% in the first quarter of 2002 to 14.0% in the
first quarter of 2003. During 2002, the West Coast operations of the
Institutional Security Systems segment experienced significant cost
overruns on many of its projects. These cost overruns were incurred and
recorded during the third and fourth quarters of 2002 and amounted to
approximately $1.8 million. As a result, many of the projects needed to
be completed with little or no margin remaining in them. As these
projects were brought to completion, many in the first quarter of 2003,
the revenues generated by them resulted in very little gross margin.
This was the primary reason for the decrease in gross profit percent by
Institutional Security Systems. To address this situation, the Company
implemented more centralized controls and has replaced certain personnel
at its West Coast operations.
Cost of goods sold in the Attack Protection segment increased from $4.8
million in the first quarter of 2002 to $6.4 million in the first quarter
of 2003. This was an increase of $1.6 million or 31.4%. This increase
was smaller than the related sales increase of this segment of 35.1%,
resulting in an increase in the gross profit percentage from 21.5% in the
first quarter of 2002 to 23.7% in the first quarter of 2003. During the
first quarter of 2002 the Attack Protection segment experienced
lower-than-expected volume in its bullet and blast resistant windows and
doors product line which was exacerbated by excess plant capacity which
resulted from the addition of its new 75,000 square foot factory that was
placed in service during the first quarter of 2002. As a result of the
terrorist attacks of September 11, 2001, the Company had geared up in
anticipation of increased demand for this segment's products, which is
only now beginning to materialize. This new factory was provisioned
and staffed, via new equipment and hires as well as by the movement of
equipment and staff from its existing factory. This resulted in the
Company running both of its factories at levels significantly below
optimum capacity, resulting in operational inefficiencies. As a result,
the Company experienced incremental expenses in excess of the
commensurate sales volume increase resulting in the lower gross profit
percentage during the first quarter of 2002.
Cost of goods sold in the Federal Security Systems segment increased
from $2.5 million in the first quarter of 2002 to $3.0 million in the
first quarter of 2003. This was an increase of $0.5 million or 17.9%.
This increase was consistent with the related sales increase of this
segment of 17.6%. The Federal Security Systems segment gross profit
percentage was 15.2% and 15.0% during the first quarters of 2002 and
2003 respectively. Substantially all of the projects awarded in this
segment are discrete projects.
Cost of goods sold in the Public Safety and Justice segment increased
from $0.6 million in the first quarter of 2002 to $5.5 million in the
first quarter of 2003. This was an increase of $4.9 million.
Substantially all of this increase was a result of the Company's May 2,
2002 acquisition of Tiburon.
Operating expenses increased from $4.5 million in the first quarter of
2002 to $8.0 million in the first quarter of 2003. This was an increase
of $3.5 million or 76.7%. Substantially all of the change in operating
expenses was a result of the Company's May 2, 2002 acquisition of Tiburon.
Amortization of Intangible Assets and Capitalized Software Acquired in
the Tiburon Acquisition In conjunction with the acquisition on May 2,
2002, of Tiburon, Inc. and in compliance with Statement of Financial
Accounting Standards No. 141, (SFAS 141) Business Combinations, the
Company determined the fair value of the following identifiable assets
and assigned the indicated lives thereto for purposes of amortization
and depreciation.
Amount Life
------ ----
(in thousands) (in years)
Trade name $ 5,340 Indefinite
Customer relationships $ 2,500 14
Software $ 3,000 5
Backlog $ 300 2
Other $ 135 3
The amortization of the above intangibles for the three months ended
March 31, 2003 resulted in the Company recording amortization expense
related to the intangibles of $243 thousand, which is included in
operating expenses.
Research and Development expenses increased from $7 thousand in the
first quarter of 2002 to $1.9 million in the first quarter of 2003.
Historically, the Company did not expend significant monies on research
and development. With the acquisition of Tiburon, the Company expends
significantly more dollars on software development. Being a technology
driven enterprise, Tiburon is required to continually update and enhance
its software offerings thus causing it to incur significant research and
development costs.
Interest expense increased from $313 thousand in the first quarter of
2002 to $378 thousand in the first quarter of 2003. The increase in the
Company's interest expense during the first quarter of 2003 is a result
of the Company having a greater average level of borrowings in the first
quarter of 2003 as compared to the first quarter of 2002.
The following table compares the weighted average of the Company's the
first quarter of 2003 and the first quarter of 2002 interest bearing
borrowings and the related interest rates charged thereon.
Average first quarter Average first quarter
of 2003 of 2002
Amount Rate Amount Rate
------ ---- ------ ----
(in thousands)
Bank borrowings $ 25,089 6% $ 16,636 7%
Subordinated borrowings $ - - $ 1,762 6%
Amortization and write-off
of financing charges $ 50 $ 38
Taxes on Income The effective tax rate in the first quarter of 2003
was 40.0% as compared to 35.9 % in the first quarter of 2002. The
primary reason for this change in effective tax rates is due to a
change in the mix in the states in which the Company's earnings occur
and because of lower levels of tax deductions received from same day
sales from employees exercising and selling stock purchased under the
Company's stock option plan.
Net Income. The Company reported net income of $942 thousand and
$781 thousand in the first quarters of 2003 and 2002, respectively.
Fully diluted earnings per share increased to $.12 in the first
quarter of 2003 from $.11 in the first quarter of 2002. The weighted
average number of common shares outstanding and equivalents increased
from 7.2 million in the first quarter of 2002 to $8.1 million in the
first quarter of 2003.
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 necessary to
carry its inventories and billed and unbilled receivables, for capital
expenditures, to repurchase shares of its common stock under its share
repurchase program, 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 March 31, 2003, the Company had working capital of $25 million
compared with $31 million as of December 31, 2002. The most significant
changes in working capital were decreases in accounts receivable and
contract costs in excess of billings.
Net cash provided by operating activities was $7.6 million in the first
three months of 2003 versus $545 thousand used in operating activities
in the first three months of 2002.
Net cash used for investing activities was $182 thousand in the first
three months of 2003 compared to $1.7 million in the first three months
of 2002. Capital expenditures of $1.7 million were made in 2002 for the
acquisition and provisioning of the Attack Protection segment's new
75,000 square foot factory in Montgomery, Alabama to increase capacity
of the Attack Protection segment.
Net cash used in financing activities amounted to $7.3 million in the
first three months of 2003 compared with $3.1 million provided by
financing in 2002. The decrease in cash provided by financing activities
is primarily a result of repayments under the Company's bank credit
facilities.
The following table summarizes the contractual obligations of the
Company as of March 31, 2003 and the payments due by period.
Payments Due by Period
(in thousands)
Long-Term Debt Operating Leases
-------------- ----------------
December 31:
2003 $ 1,986 $ 2,130
2004 14,103 2,619
2005 440 1,840
2006 440 777
2007 440 556
Thereafter 2,685 380
--------- ---------
Totals $ 20,094 $ 8,302
========= =========
The Company's total outstanding borrowings at March 31, 2003 amounted
to $20.1 million. These borrowings were at variable rates.
The Company had two (2) borrowings from banks, both made under a Credit
Agreement that provides for both term borrowings and a line of credit.
The first borrowing is a 3-year term loan due in quarterly installments
through November 2004. This borrowing of $5.0 million was entered into
on November 16, 2001. The amount outstanding as of March 31, 2003 was
$2.9 million. The interest rate is variable and can range from LIBOR
+1.75% to 3.5% or prime +0.5% to 2.25%. The rate charged the Company
is based 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 available from banks under the Credit Agreement
is a $28.0 million line of credit, due November 16, 2004. Borrowings
outstanding under this line of credit at March 31, 2003 were $12.0
million. Its interest rate is variable and can range from LIBOR
+ 1.50% to 3.25% or prime +0.25% to 2.0%. 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
March 31, 2003 in the amounts of $1.7 million and $3.5 million. These
borrowings bore interest at variable rates between 1.1% and 1.9% for
the first quarter of 2003 based on weekly market conditions. These
bonds are fully collateralized by bank letters of credit issued under
the bank Credit Agreement. The Company's banks consider letters of
credit as outstanding borrowings when considering the amount of
availability the Company has remaining under its line of credit.
Other than the Company's $5.6 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 facility, the Company has no other material off balance
sheet liabilities.
The Company had $10.4 million of unused availability under its line
of credit at March 31, 2003.
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 (an increase in the
"leverage ratio") 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 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 $10.4 million, net in cash and approximately 1.1 million
shares of CompuDyne common stock for a total acquisition cost of
$30.0 million. To fund the cash portion of the Tiburon acquisition,
the Company negotiated an increase in its bank line of credit of
$10.0 million effective May 2, 2002. Borrowings made by the Company
under this increased facility may result in increased interest rates
charged to 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.
On March 21, 2003, the Company and its banks amended the Company's loan
agreements, which included a waiver of compliance with a variety of its
loan covenants as of December 31, 2002. In conjunction with the
amendment, the Company agreed to raise $7.0 million of new equity or
borrowings, or a combination thereof, subordinate to its existing bank
borrowings, by June 30, 2003. The Company does not know what the raising
of this subordinate capital will cost or what its terms may be. In lieu
of raising the $7.0 million of new equity or borrowings, the Company is
in discussions to replace one of its lenders and to further amend its
loan agreements.
Additional Considerations
Cost Containment
Due to current economic conditions, and in light of a very strong
competitive environment, the Company recognizes that its ability to
increase the prices it charges its customers is limited. As a result,
in order to enhance its profitability, the Company recognizes the need
to continue to seek ways to reduce its costs.
Office Closures and Consolidations
In January 2003, the Company closed its Midwest Regional Office,
located in Wauwatusa, Wisconsin, and consolidated its operations into
its Montgomery, Alabama office. The Company does not believe this
office closure will have a negative impact on its ability to generate
sales in the Midwest region. The Company anticipates that closure of
this office will result in annual overhead savings of approximately
$100 thousand.
Pension Plan
Prior to this year the Company maintained a money purchase pension
plan which covers employees at one of its divisions. Salaried employees
at this division were eligible to participate in this plan after one
year of service. Annual contributions of between 3% and 5% of annual
compensation were made by the Company depending on the employees' years
of service. The expense related to the plan was $126 thousand during
the first quarter of 2002. Effective December 31, 2002, the Company
ceased contributions to this plan. The balances in this plan will be
100% vested and rolled into the CompuDyne 401K plan in 2003.
CompuDyne's Total Backlog
CompuDyne's total backlog amounted to $184 million at March 31, 2003.
The break down of the Company's backlog by business segment is as
follows:
March 31, December, 31,
2003 2002
-------- ------------
(in thousands) (in thousands)
Institutional Security Systems $ 91,602 $ 99,527
Attack Protection 14,827 18,478
Federal Security Systems 11,667 11,440
Public Safety and Justice 66,007 74,867
-------- --------
Totals $ 184,103 $ 204,312
======== ========
Included in the backlog of the Public Safety and Justice segment
at March 31, 2003 is $13.1 million representing awards received by
the segment, for which the customers have not yet entered into
signed contracts. These awards are expected to result in signed
contracts over the next twelve (12) months.
Critical Accounting Policies
A complete description of the Company's significant accounting
policies appears in the Company's Annual Report to its stockholders
and incorporated by reference in its Annual Report on Form 10-K for
the year ended December 31, 2002.
Percentage of Completion Accounting
Approximately 85.0% of the Company's revenues are derived from long
term contracts where revenue is recognized under the percentage of
completion method of accounting. The Company's software related
contracts utilize labor hours incurred to date on a project, divided
by the total expected project hours to determine the completion
percentage. The Company's manufacturing, construction, and service
contracts utilize costs incurred to date on a project, divided by the
total expected project costs to determine the completion percentage.
Both of these methods require considerable judgment and as such, the
estimates derived at any point in time could differ significantly from
actual results. These estimates effect many of the balance sheet and
statement of operations accounts including net sales, cost of goods
sold, accounts receivable, contract costs in excess of billings and
billings in excess of contract costs incurred.
Provisions for estimated losses on uncompleted contracts are recognized
in the period such losses are determined.
Goodwill and Intangible Assets
The Company reviews the carrying value of goodwill and intangible assets
annually, utilizing a discounted cash flow model. Changes in estimates
of future cash flows caused by items such as unforeseen events or changes
in market conditions could negatively affect the reporting unit's fair
value and result in an impairment charge. The Company cannot predict
the occurrence of events that might adversely affect the reported value
of goodwill and intangible assets that totaled $18.3 million and $10.9
million, respectively at March 31, 2003.
Economic Conditions and the After Effect of the September 11, 2001
Terrorist Attacks
Much of the work CompuDyne performs is for State and local governmental
units. These entities have been particularly hard hit by recent
economic conditions and the resultant contraction of the tax bases of
these governmental units. This has caused these governmental units to
carefully evaluate their budgets and defer expenses and projects where
possible. Much of the work of the Company's Public Safety and Justice
and Institutional Security Systems segments is contracted with these
State and Local governmental units. As a result, these segments,
although building a strong backlog, have seen delays in new work
available to be bid and worked on. In addition, even work that has been
contracted for, where possible is being deferred by the customer into
the future, presumably when the economy experiences more robust times.
After the occurrence of the tragic events of the September 11, 2001
terrorist attacks, there was a general perception that CompuDyne's
Federal Security Systems and Attack Protection segments would see a
significant increase in order flow. To the contrary, in the months
subsequent to the terrorist attacks these segments actually saw a
slowing in new work opportunities as the various Federal agencies and
other customers that are the usual source of business for the Company
slowed their procurement processes waiting for definitive direction as
to how to proceed in the post September 11 world. Now further complicated
by the military action in Iraq, the Company's customers are reevaluating
priorities and budgets and are funding only their most pressing demands
while also making key decisions as to which projects can be deferred.
Over time the Company believes these units will start to see a
significant increase in business which has only recently begun.
As a result of the above factors, the Company is experiencing a more
challenging marketplace than it has experienced in several years.
Impact of Inflation
Inflation did not have a significant effect on CompuDyne's operations
during the quarter ended March 31, 2003.
Market Risk
The Company is exposed to market risk related to changes in interest
rates. At March 31, 2003, the Company had a total of $20.1 million of
notes payable outstanding. These borrowings were all at variable rates.
The Company entered into an interest rate swap agreement on June 26,
2001 in the initial amount of $11.5 million. The amount of this swap
agreement declines by $676 thousand on a quarterly basis until it
becomes $0 on October 1, 2005. At March 31, 2003 the amount of the
swap agreement had declined to $7.4 million at a fixed rate of 4.9%.
As such, approximately $12.7 million 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 April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment
of SFAS No. 133 on Derivative Instruments and Hedging Activities". The
Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities under Statement 133. The amendments set forth
in SFAS 149 improve financial reporting by requiring that contracts with
comparable characteristics be accounted for similarly. In particular,
this Statement clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative as
discussed in Statement 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the
statement of cash flows. Statement 149 amends certain other existing
pronouncements. Those changes will result in more consistent reporting
of contracts that are derivatives in their entirety or that contain
embedded derivatives that warrant separate accounting. This Statement
is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. Management
does not expect that adoption of this pronouncement will have a material
effect on the financial position, results of operations or cash flow of
CompuDyne.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation --Transition and Disclosure, an amendment of
FASB Statement No. 123" which amends SFAS No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation" and the reporting provisions
of APB No. 30, "Interim Financial Reporting." SFAS 148 provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation
and require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
Adoption of this statement was required at the beginning of fiscal
year 2003. The adoption of this pronouncement did not have a material
effect on the financial position, results of operations or cash flow
of CompuDyne.
In July 2002, the FASB 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. The adoption of this standard
did not have a material impact on the Company's financial position or
results of operations or cash flow of CompuDyne.
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. The adoption of this standard did not
have a material impact on the Company's financial position or results
of operations or cash flow of CompuDyne.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities." The Interpretation
clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which
the equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated
financial support from other parties. The Interpretation applies
immediately to variable interest entities created after January 31,
2003, or in which the Company obtains an interest after that date.
The Interpretation is effective July 1, 2003 to variable interest
entities in which the Company holds a variable interest acquired
before February 1, 2003. The Company has assessed the impact of
adopting this Interpretation. The adoption of this standard did not
have a material impact on the Company's financial position or results
of operations or cash flow of CompuDyne.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45
requires the recognition of liabilities for guarantees that are
issued or modified subsequent to December 31, 2002. The liabilities
should reflect the fair value, at inception, of the guarantors'
obligations to stand ready to perform, in the event that the
specified triggering events or conditions occur. The adoption of
this standard did not have a material effect on the Company's future
results of operations or financial condition or cash flow of
CompuDyne.
Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995
Certain statements made in this Quarterly Report with regard to
the Company's expectations as to future revenues, expenses, financial
position and industry conditions, the Company's ability to secure new
contracts, its goals for future operations, implementation of business
strategy and other future events constitute "forward-looking statements"
within the meaning of the federal securities law. When used in this
Form 10-Q, words such as "anticipate," "believe," "estimate,"
"expect," "intend" and similar expressions, as they relate to
management, identify forward-looking statements. Although the Company
makes such statements based on current information and assumptions it
believes to be reasonable, there can be no assurance that actual results
will not differ materially from those expressed or implied by such
forward-looking statements. Actual results could differ materially from
those contemplated by the forward-looking statements as a result of
certain important factors, including but not limited to, demand for the
Company's products, competitive factors and pricing pressures, changes
in legal and regulatory requirements, government budget problems,
ability to finalize its agreement with its banks, the ability to remain
in compliance with its bank covenants and its amended bank covenants,
delays in government procurement processes, ability to obtain bid,
payment and performance bonds on various of the Company's projects,
technological change or difficulties, product development risks,
commercialization difficulties, adverse results in litigation and
general economic conditions. Risks inherent in the Company's business
and with respect to future uncertainties are further described in our
other filings with the Securities and Exchange Commission.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
CompuDyne has 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
borrowing under the Company's bank borrowings.
The information below summarizes CompuDyne's sensitivity to market
risks associated with fluctuations in interest rates as of
March 31, 2003. 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 March 31, 2003.
Financial Instruments by Expected Maturity Date
Year Ending December 31 2003 2004 2005
---- ---- ----
Notes Payable:
Variable rate ($) $ 1,986,000 $14,103,000 $ 440,000
Average interest rate 4.5% 5.0% 6.0%
Fixed rate ($) $ - $ - $ -
Average interest rate - - -
2006 2007
---- ----
Notes Payable:
Variable rate ($) $ 440,000 $ 440,000
Average interest rate 6.5% 7.5%
Fixed rate ($) $ - $ -
Average interest rate - -
Year Ending December 31 Thereafter Total Fair Value
---------- ----- ----------
Notes Payable:
Variable rate ($) $ 2,685,000 $ 20,094,000 $ 20,094,000
Average Interest Rate 7.0% 5.5% 5.5%
Fixed rate ($) $ - $ - $ -
Average Interest Rate - - -
Year Ending December 31 2003 2004 2005
---- ---- ----
Interest Rate Swaps:
Variable to Fixed ($) $ 2,029,410 $ 2,705,880 $ 2,705,890
Average pay rate 4.90% 4.90% 4.90%
Average receive rate 2.00% 3.00% 4.00%
2006 2007
---- ----
Interest Rate Swaps:
Variable to Fixed ($) $ - $ -
Average pay rate - -
Average receive rate - -
Year Ending December 31 Thereafter Total Fair Value
---------- ----- ----------
Interest Rate Swaps:
Variable to Fixed ($) $ - $ 7,441,180 ($ 302,824)
Average pay rate - - -
Average receive rate - - -
ITEM 4
CONTROLS AND PROCEDURES
As of April 24, 2003, CompuDyne's management conducted an evaluation,
under the supervision and with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and
procedures. Based on this evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that (i) the Company's disclosure
controls and procedures are effective in alerting them in a timely
manner to material information required to be included in the Company's
SEC reports and (ii) such information is recorded, processed, summarized
and prepared within the time periods specified in the SEC rules and
forms.
In addition, CompuDyne's management, including the Chief Executive
Officer and Chief Financial Officer, reviewed the internal controls,
and there have been no significant changes or deficiencies or material
weaknesses in the Company's internal controls or in other factors that
could significantly affect those controls subsequent to April 24, 2003.
The Company continually strives to improve its disclosure controls and
procedures to enhance the quality of its financial reporting.
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits -
99.1 Certification Pursuant To Section 906 Of The Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350, for Mr. Martin Reonigk,
Chief Executive Officer
99.2 Certification Pursuant To Section 906 Of The Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350, for Mr. Geoffrey F.
Feidelberg, Chief Financial Officer
(b) Reports on Form 8-K
Current Report on Form 8-K filed March 31, 2003 attaching Fourth
Amendment to Credit Agreement dated March 21, 2003 by and
among CompuDyne Corporation, its subsidiaries, certain
participating lenders and PNC Bank, National Association in its
capacity as agent for the lenders.
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: May 15, 2003 /s/ Geoffrey F. Feidelberg
--------------------------
Geoffrey F. Feidelberg
Chief Financial Officer
CERTIFICATION
I, Martin Roenigk, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
CompuDyne Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Martin Roenigk
-------------------------
Martin Roenigk
Chief Executive Officer
CERTIFICATION
I, Geoffrey F. Feidelberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
CompuDyne Corporation;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Geoffrey F. Feidelberg
-------------------------------
Geoffrey F. Feidelberg
Chief Financial Officer