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 September 30, 1996
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 1-4245
CompuDyne Corporation
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(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.)
120 Union Street, Willimantic, Connecticut 06226
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(Address of principal executive offices)
(860) 456-4187
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(Registrant's telephone number, including area code)
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 November 14, 1996 a total of 2,864,082 shares of Common Stock, $.75
par value, were outstanding.
COMPUDYNE CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1996
(unaudited) and December 31, 1995 3
Consolidated Statements of Operations - Three
Months and Nine Months Ended September 30, 1996
and 1995 (unaudited) 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996
and 1995 (unaudited) 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 9-11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
Index to Exhibits 14
Computation of Net Income Per Share
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash $ - $ -
Accounts receivable, net 4,858 2,122
Inventories:
Finished Goods 69 144
Work in process 258 473
Raw materials and supplies 589 405
------- -------
Total inventories 916 1,022
Prepaid expenses and other
current assets 105 97
------- -------
Total Current Assets 5,879 3,241
Non-current receivables, related parties 60 60
Property, plant and equipment, at cost 2,372 1,279
Less: accumulated depreciation and
amortization 1,558 691
------- -------
Net property, plant and equipment 814 588
------- -------
Goodwill & other intangibles, net of
accumulated amortization 757 1,127
Other assets, net 15 17
------- -------
Total Assets $ 7,525 $ 5,033
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,056 $ 1,515
Bank line payable 52 259
Accrued pension costs 40 40
Accrued income taxes 38 -
Other accrued expenses 1,020 641
Current portion of deferred
compensation 47 61
Current portion of notes payable
related parties 19 20
------- -------
Total Current Liabilities $ 4,272 $ 2,536
Notes payable, related parties $ 55 $ 470
Long term pension liability 354 370
Deferred compensation, net of
current portion 31 59
Deferred taxes and other liabilities 205 231
------- -------
Total Liabilities $ 4,917 $ 3,666
SHAREHOLDERS' EQUITY:
Convertible Preference stock, Series D, 1,891 1,891
no par value, 1,260,460 shares
issued and outstanding as of
September 30, 1996
Common stock, par value $.75 per share 2,148 1,355
10,000,000 shares authorized; 2,864,082
and 1,807,832 shares issued and outstanding
as of September 30, 1996 and December 31,
1995, respectively
Paid in capital 8,204 7,973
Receivable from management (90) (91)
Deficit (9,545) (9,761)
------- -------
Total Shareholders' Equity 2,608 1,367
Total Liabilities and Shareholders'
Equity $ 7,525 $ 5,033
======= =======
See Notes to Consolidated Financial Statements (unaudited).
- -------------------------------------------------------------------------
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September, 30, September 30
1996 1995 1996 1995
------------------- -----------------
Net sales $ 6,954 $ 2,758 $ 15,335 $ 7,373
Cost of sales 6,144 2,357 13,526 6,350
------- ------- -------- ------
Gross margin 810 401 1,809 1,023
Selling, general and
administrative expenses 643 288 1,344 745
Research and Development 44 43 184 82
------- ------- -------- ------
Operating income 123 70 281 196
------- ------- -------- ------
Other (income) expense
Interest (income) expense 3 6 37 16
Other (income) expense (5) - (10) 1
------- ------- -------- ------
Total other (income)
expense, net (2) 6 27 22
------- ------- -------- ------
Income (loss) from continuing
operations before income tax
provision or benefit 125 64 254 168
Income tax provision (benefit) 30 (4) 13 (4)
------- ------- -------- ------
Income from continuing operations 95 68 241 172
Loss from discontinued operations - (106) (25) (352)
------ ------- ------- -----
Net income (loss) $ 95 $ (38) $ 216 $ (180)
====== ======= ======= =====
Weighted average common and
common equivalent shares:
Primary 3,997 1,750 3,651 1,750
====== ======= ====== =====
Fully Diluted 3,997 1,750 3,651 1,750
====== ======= ====== =====
Income per common and dilutive
common equivalent share:
Continuing operations .02 .04 .07 .10
Discontinued operations - (.06) (.01) (.20)
------ ------- ------- -----
Net income (loss) per share $ .02 $ (.02) $ .06 $ (.10)
====== ======= ======= =====
Income per common share assuming
full dilution:
Continuing operations $ .02 $ .04 $ .07 $ .10
Discontinued operations - (.06) (.01) (.20)
------ ------- ------- ------
Net income (loss) per share $ .02 $ (.02) $ .06 $ (.10)
====== ======= ======= ======
See Notes to Consolidated Financial Statements (unaudited).
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COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------------
1996 1995
-------- --------
Cash flows provided by (used for)
operating activities:
Income (loss) from continuing operations $ 241 $ 172
Adjustments to reconcile net income to
net cash provided by (used in)
continuing operations:
Depreciation and amortization 111 22
Increase in accounts receivable (1,708) (534)
Increase in accounts receivable,
related parties - (67)
Increase in prepaid expenses 4 32
(Increase) decrease in inventories - (262)
Increase (decrease) in accounts payable 1,279 267
Increase (decrease) in accrued liabilities 228 31
Increase (decrease) in accrued income taxes 38 -
Increase (decrease) in other, net 2 (23)
------- ------
Cash flows provided by (used in)
continuing operations 195 (362)
------- ------
Loss from discontinued operations (25) 352
Depreciation and amortization - -
(Increase) decrease in net current assets - 132
------ ------
Cash flows provided (used in) discontinued
operations (25) (220)
------ ------
Net cash flows provided by (used in) operations 170 (582)
------ ------
Cash flows from investing activities:
Acquisitions of subsidiaries (562) 52
Additions to property, plant and equipment (11) (45)
------ ------
Net cash flows used for investing activities (573) 7
------ ------
Cash flows from financing activities:
Proceeds from former management on
stock related notes 25 -
Cash from sale of common stock 1,000 -
Net payment on short term debt (207) (1)
Proceeds from long term debt,
related parties - 400
Repayment on long term debt, related parties (415) -
------ ------
Net cash provided by financing activities 403 399
Net increase (decrease) in cash - (176)
Cash and cash equivalents at beginning of period - 176
------ ------
Cash and cash equivalents at end of period $ - $ -
====== ======
Supplemental Schedule of Cash Flow Information:
Cash paid during the period for:
Interest $ 54 $ 13
Income taxes $ - $ -
See Notes to Consolidated Financial Statements (unaudited).
COMPUDYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.BASIS OF PRESENTATION
- -----------------------
The accompanying unaudited consolidated financial statements of CompuDyne
Corporation and subsidiaries (the "Company"), have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in the annual
financial statements, prepared in accordance with generally accepted
accounting principles, 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 latest annual report to the Securities
and Exchange Commission on Form 10-K for the year ended December 31,
1995.
2. ACCOUNTS RECEIVABLE
- ------------------------
Accounts receivable consist of the following:
($ in thousands) September 30, December 31,
1996 1995
------------- ------------
U.S. Government Contracts:
Billed $ 1,539 $ 974
Unbilled 1,580 701
--------- --------
3,119 1,675
Commercial 2,084 483
--------- --------
Total Accounts Receivable $ 5,203 $ 2,158
Less Allowance for Doubtful Accounts (345) (36)
--------- --------
Net Accounts Receivable $ 4,858 $ 2,122
========= ========
The increase in Allowance for Doubtful Accounts was almost entirely due
to a receivable that is in dispute recorded on the books of the newly
acquired subsidiary, Quanta SecurSystems, Inc. ("Quanta SecurSystems").
3.COMMON STOCK AND COMMON STOCK OPTIONS
- ---------------------------------------
On February 2, 1996 the Compensation and Stock Option Committee (the
"Committee") granted options to purchase 16,290 shares of CompuDyne
Common Stock to key employees of CompuDyne's subsidiary, MicroAssembly
Systems, Inc. ("MicroAssembly"), at a price of $1.81 per share (the fair
market value of such shares at the date of grant) and in accordance with
the terms and conditions of the 1986 Incentive Compensation Plan. In May
1996 the number of shares granted was reduced to 12,040 shares when an
optionee resigned and did not exercise his options within 30 days
following the date on which he ceased to be an employee, as defined under
the terms of the plan.
In addition, on February 2, 1996 the Committee granted options to
purchase 21,710 shares of CompuDyne Common Stock to key employees of
MicroAssembly at a price of $1.81 per share and in accordance with the
terms and conditions of the 1996 Incentive Compensation Plan, upon
approval of the Plan by CompuDyne's shareholders at its annual meeting on
June 5, 1996. In May 1996 the number of shares granted was reduced to
15,960 shares when an optionee resigned and did not exercise his options
within 30 days following the date on which he ceased to be an employee,
as defined under the terms of the plan.
On July 11, 1996 the Committee granted options to purchase 121,000 shares
of CompuDyne Common Stock to key employees of the newly acquired company,
Shorrock Electronic Systems ("SES"), (now Quanta SecurSystems), and to a
key employee of Data Control Systems, in accordance with the terms and
conditions of the 1996 Incentive Compensation Plan at a price of $1.625
per share (the fair market value of such shares at the date of grant).
In July 1996, before the acquisition of SES, the holders of CompuDyne's
$400 thousand Senior Convertible Notes (which includes the Chairman)
agreed to convert the notes into 400,000 common shares. The same
investors also agreed to purchase 600,000 additional common shares for
$600 thousand. This financing, which was completed on July 12, 1996,
added $1 million to the company's equity, reduced interest charges, and
provided the cash required to make the acquisition and provided working
capital for SES operation.
At the time the Senior Convertible Notes were issued in August 1995, they
had a conversion price of $1.50 per share. On May 23, 1996, the
CompuDyne Board approved an amendment to the Senior Convertible Notes
that reduced the conversion price to $1.00 per share based upon the price
of the CompuDyne common stock at the time, the restricted nature of the
stock issued upon conversion, the market for CompuDyne common stock
existing at the time, an evaluation of CompuDyne's balance sheet and the
need to strengthen CompuDyne's balance sheet in view of the proposed
acquisition of SES.
4. DISCONTINUED OPERATIONS
- --------------=------------
On August 21, 1995, Quanta Systems, a wholly owned subsidiary of the
Company, transferred all of the assets and liabilities of Quanta's
Suntec division to Suntec Service Corporation ("SSC"), a newly-formed
corporation, in return for (i) all of SSC's issued and outstanding common
stock and (ii) SSC's agreement to pay to Quanta a royalty of 2% of SSC's
net sales and other revenues for thirty (30) years from the date of the
closing. Quanta then sold all of SSC's Common Stock to Norman
Silberdick, who resigned on that date as CompuDyne's Chairman, President,
Chief Executive Officer and Director.
As a result of the disposal of Suntec in August of 1995, the consolidated
statements of operations for the second quarter and six months ended June
30, 1995 have been restated to reflect Suntec as a discontinued
operation.
At the time of separation, CompuDyne and SSC signed a sublease agreement
for SSC to continue using the facility it operated in. In May of 1996,
SSC moved to Baltimore after SSC had missed paying the rent for over four
months and CompuDyne had located a prospective new tenant. We were
notified by Mr. Silberdick in September that SSC had discontinued its
operations.
After extended negotiations, a sublease was agreed to with the
prospective new tenant and the landlord. The facility is currently under
renovation for the new tenant to occupy in November. Total expenditures
including rent payments between June and November, sales commission to be
paid to the real estate agent who assisted in locating the new tenant,
and the construction expenses are estimated to be about $70 thousand. As
of September 30, 1996, all associated lease expenses have been accrued.
The remaining expenses will be recorded as they are incurred.
5. OTHER INFORMATION
- --------------------
On July 11, 1996 CompuDyne acquired all of the stock of Shorrock
Electronic Systems from BET Public Limited Company ("BET"). Prior to the
acquisition, SES was affiliated with Shorrock Integrated Systems, a large
British based supplier of physical security and surveillance equipment
and installation services owned by BET. SES had sales of approximately
$4.9 million in the fiscal year ended March 31, 1996, almost entirely
related to the sale, installation and maintenance of physical security
systems for the U.S. correctional facility market. Effective with the
acquisition, SES's name has been changed to Quanta SecurSystems, Inc.
The consideration paid to BET for the stock of SES was $290 thousand for
the purchase of the stock of SES plus $258 thousand to repay interim
advances made by BET to SES. The $290 thousand purchase price
represented the adjusted net asset value of SES less $400 thousand. The
Company made an additional cash investment in SES of $52 thousand
immediately after the acquisition for its working capital purposes.
CompuDyne has accounted for the acquisition using the purchase method of
accounting.
CompuDyne also signed a long term exclusive distribution agreement
covering all of North America with Shorrock Integrated Systems. This
agreement gives CompuDyne exclusive access to a world-class group of
physical security and surveillance products., comprised of the ADACS
Security Management System, Microwave Fence, and T-Line fence security
system. This product line, which is continually updated and expanded by
Shorrock's research and development staff, should provide a significant
advantage to Quanta SecurSystems in marketing to correctional facilities
and other markets. CompuDyne plans to significantly expand the product
marketing effort. Continuation of the distribution agreement is
dependent upon reaching minimum volume levels.
COMPUDYNE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Third Quarter 1996 and 1995 comparison
- --------------------------------------
1996's third quarter was one of substantial progress and one significant
but temporal setback. Sales increased 152% to $7.0 million. Net income
from continuing operations was up 40% to $95 thousand. Income did not
track revenue due to significant losses and reserves on a single large
fixed price contract which is just about complete as well as a provision
for taxes. Since the end of last year, the current ratio has improved
from 1.28X to 1.38X, the bank borrowings were only $54 thousand as of the
end of September, 1996, the long term debt is down to $55 thousand from
$470 thousand, and the shareholder equity has almost doubled to $2.6
million.
The third quarter 1996 increase in income from continuing operations of
$61 thousand from the same period 1995 was primarily due to the addition
of Quanta SecurSystems, which had an income before taxes of $87 thousand
during this period. Quanta SecurSystems booked some important jobs early
in the quarter. There are bids out or are in the process of bidding on
several large new prison security installations.
Quanta Systems government services division ("QSC") increased its sales
for the quarter by 96% from the same quarter in 1995 primarily due to
revenue generated from new major material purchase jobs for the
Government in the third quarter of 1996. Cost overruns on a large fixed
price contract more than offset the additional income generated from the
increased sales resulting in a decrease of $94 thousand in income from
the same period in 1995. QSC was selected to join a prestigious team
headed by GTE which, in October 1996, won an important long-term contract
with a government security agency.
Quanta Systems' Data Control Systems division ("DCS") continues its
turnaround from significant losses last year. It had a 40% increase in
sales from third quarter 1995 to the same period 1996 due primarily to
additional sales of the newly developed Satellite Test Modem.
MicroAssembly's net income of $1 thousand for the third quarter of 1996
compares with a net loss of $13 thousand in the same quarter 1995 and is
after $26 thousand of non-cash purchase accounting charges. The increase
was primarily due to the addition of some important new customers as well
as the purchase of the Foredom electric screwdriver line early in the
third quarter of 1996.
Net sales from continuing operations in the third quarter of 1996
increased 152% to $7.0 million from $2.8 million for the same period in
1995. Quanta SecurSystems had $1.6 million in sales in its first quarter
with the Company. Quanta Systems increased its sales from $2.3 million
to $4.5 million. MicroAssembly had an increase of $192 thousand in sales
this quarter compared with the same quarter of 1995 after it was acquired
by the Company in August 1995.
Gross margin from continuing operations for the third quarter of 1996
increased $409 thousand, or 102%, to $810 thousand from $401 thousand for
the third quarter of 1995. SecurSystems' gross margin of $322 thousand
was 20% of sales. Although Quanta Systems' gross margin increased by $73
thousand due to increased sales, the gross margin percentage decreased
from 14% of sales to 9% of sales. The decline was due to increased
material content which had a lower margin percentage, and the significant
loss recognized on a fixed price contract.
Total selling, general and administrative expenses for the third quarter
of 1996 increased by $355 thousand from the same period in 1995. The
Company increased its expenses primarily as a result of the operations of
Quanta SecurSystems. Quanta Systems also increased its expenses due to
the additional costs involved in the sublease of the vacant SSC space.
Research and development expenditures, at $44 thousand, were about the
same level as the third quarter of 1995.
Total interest expense for the third quarter of 1996 was decreased by $3
thousand from the third quarter of 1995. The reduction reflects
decreased interest expense due to conversion of the long-term notes into
common stock in July 1996.
RESULTS OF OPERATIONS - year-to-date comparison
- -----------------------------------------------
CompuDyne had income before taxes from continuing operations of $241
thousand for the nine months ended September 30, 1996 compares with $172
thousand for the same period in 1995. The increase is primarily
attributable to the net income of $51 thousand from operations of the
newly acquired Quanta SecurSystems. Quanta Systems showed a decrease in
net income of $19 thousand. The cost overruns on the fixed price
security equipment installation job more than offset the additional
income generated by its $5.5 million increase in sales. DCS doubled its
1995 sales level, but the income from the additional sales was offset by
an increase of $102 thousand in R&D expenditures, resulting in a much
smaller profit ratio. MicroAssembly finished the period with a net loss
of $47 thousand due to lower-than-anticipated sales and to purchase
accounting charges.
CompuDyne is currently undergoing an audit by the Defense Contract Audit
Agency ("DCAA") covering the years 1988 through 1994. The DCAA has
questioned costs related to previous billings. CompuDyne is currently
challenging the basis for questioning these costs. Management believes
that the company has provided sufficient reserves for potential loss
resulting from this audit, and the outcome of the audit will not have
material impact upon the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's principal source of cash is from operating activities and
bank borrowings. The Company's primary requirement for working capital
is to carry billed and unbilled receivables, a majority of which are due
under prime contracts with the U.S. Government, or subcontracts
thereunder. The Company has a $750 thousand secured line of credit with
the Asian American Bank and Trust Company of Boston, Massachusetts.
Net cash provided by operations in the nine months of 1996 was $170
thousand, a $752 thousand increase from the same period of 1995. The
increase of $60 thousand in net income, adjusted by the increase in non-
cash depreciation and amortization expenses of $89 thousand, and the
reduction in funding the losses from discontinued operations of $195
thousand were primary reasons for this significant increase. The changes
in accounts receivable, accounts payable and accrued liabilities were
primarily caused by the timing of the invoice cycles of Quanta System's
major material purchases for the Government.
When MicroAssembly was acquired in August 1995, $400 thousand was
received for convertible long-term notes issued to the sellers, the
Chairman, Martin Roenigk and Alan Markowitz. In July 1996, the notes
were converted to common stock; and $600 thousand was received from the
same persons in exchange for 600,000 shares of CompuDyne common stock.
Net cash of $562 thousand was used to purchase SES, which was renamed
Quanta SecurSystems. after the acquisition.
- ------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
The Company is party to certain legal actions and inquiries for
environmental and other matters resulting from the normal course of
business. It is also party to certain legal actions and inquiries from
certain Suntec creditors due to claims of existing guaranties before
Suntec was sold. Although the total amount of liability with respect to
these matters cannot be ascertained, management of the Company believes
that any resulting liability should not have a material effect on its
financial position or results of future operations.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit (11) - Consolidated Computation of Net Income (Loss)
Per Share
(b) Exhibit (27) - Financial Data Schedule
(c) Reports on Form 8-K
July 25, 1996 report on acquisition of Shorrock Electronics
Systems, Inc.; conversion of $400 thousand debentures into common stock;
and issuance of additional 600,000 shares of common stock.
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: November 15, 1996 /s/ I. Elaine Chen
I. Elaine Chen
Controller
/s/ William C. Rock
William C. Rock
Chief Financial Officer
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INDEX TO EXHIBITS
Computation of Net Income Per Common Share
Financial Data Schedule