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, 1999
----------------------------------
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)
(410) 712-0275
---------------------------------------------------
(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 May 12, 1999, a total of 5,121,413 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 - March 31, 1999
(unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited) -
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows (unaudited) -
Three Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 12-13
Part II. Other Information 14
Signature 15
Index to Exhibits 16
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ - $ 1,528
Accounts receivable, net 26,263 27,451
Costs in excess of billings 2,578 2,610
Inventories:
Finished Goods 122 112
Work in process 534 499
Raw materials and supplies 3,691 3,611
------- -------
Total inventories 4,347 4,222
------- -------
Prepaid expenses and other current assets 298 213
------- -------
Total Current Assets 33,486 36,024
------- -------
Non-current receivables, related parties 72 72
Property, plant and equipment, at cost 5,597 5,218
Less: accumulated depreciation and
amortization 502 295
------- -------
Net property, plant and equipment 5,095 4,923
------- -------
Deferred tax asset 88 88
Intangible assets, net of accumulated
amortization 2,435 2,474
Goodwill, net of accumulated amortization 59 62
Other assets, net - 13
------- -------
Total other assets 2,582 2,637
------- -------
Total Assets $ 41,235 $ 43,656
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,731 $ 5,707
Accrued payroll expense 1,056 1,326
Accrued income taxes 65 346
Other accrued expenses 2,139 2,222
Billings in excess of contract costs
incurred 6,306 6,492
Current portion of long term loan 1,125 1,125
Current portion of notes payable, related
parties 20 20
------- -------
Total Current Liabilities 14,442 17,238
------- -------
Term loan 10,375 10,375
Subordinated note 9,000 9,000
Notes payable, related parties 5 15
Warranty reserves 463 463
Long term pension liability 468 484
Deferred taxes and other liabilities 182 191
------- -------
Total Liabilities 34,935 37,766
------- -------
SHAREHOLDERS' EQUITY:
Common stock, par value $.75 per share
10,000,000 shares authorized; 5,200,049
shares issued and outstanding 3,900 3,900
Paid in capital 10,397 10,397
Treasury shares, at cost; 78,636 shares at cost (120) (120)
Receivable from management (90) (90)
Accumulated deficit (7,787) (8,197)
------- -------
Total Shareholders' Equity 6,300 5,890
------- -------
Total Liabilities and Shareholders'
Equity $ 41,235 $ 43,656
======= =======
See Notes to Consolidated Financial Statements
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
March, 31,
1999 1998
-------- ---------
Net sales $ 21,987 $ 5,035
Cost of sales 16,609 3,888
-------- --------
Gross margin 5,378 1,147
Selling, general and administrative expenses 4,159 995
Research and Development 40 8
-------- --------
Operating income 1,179 144
-------- --------
Other (income) expense
Interest expense 516 28
Other (income) expense (12) 5
-------- --------
Total other (income) expense, net 504 33
-------- --------
Income before income tax provision 675 111
Income tax provision 265 10
-------- --------
Net income $ 410 $ 101
======== ========
Basic earnings per share $ .08 $ .02
======== ========
Weighted average number of common shares
outstanding 5,121 4,046
======== ========
Diluted earnings per share $ .07 $ .02
======== ========
Weighted average number of common shares
and equivalents 5,711 4,450
======== ========
See Notes to Consolidated Financial Statements
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------
1999 1998
Cash flows from operating activities:
Net income $ 410 $ 101
Adjustments to reconcile net income to net
cash provided by (used in) continuing
operations:
Depreciation and amortization 249 33
Deferred income taxes - (16)
Changes in assets and liabilities:
Accounts receivable 1,188 622
Costs in excess of billings 32 -
Prepaid expenses (85) (38)
Inventories (125) (21)
Other assets 13 -
Accounts payable (1,976) (366)
Accrued liabilities (353) (157)
Accrued income taxes (281) (14)
Billings in excess of costs (186) -
Other liabilities (25) 40
------- -------
Net cash flows (used in) provided by operations (1,139) 184
------- -------
Cash flows used in investing activities:
Additions to property, plant and equipment (379) (44)
------- -------
Cash flows used in financing activities:
Decrease in short term debt - (20)
Payments on long term debt, related parties (10) -
Repurchase of common stock - (120)
------- -------
Net cash used in financing activities (10) (140)
------- -------
Net decrease in cash (1,528) -
Cash and cash equivalents at beginning of period 1,528 -
------- -------
Cash and cash equivalents at end of period $ - $ -
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 516 $ 28
Income taxes $ 308 $ 14
See Notes to Consolidated Financial Statements
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,
1998.
Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
2. ACCOUNTS RECEIVABLE
- -----------------------
Accounts receivable consist of the following:
(dollars in thousands) March 31, December 31,
1999 1998
--------- ------------
U.S. Government Contracts:
Billed $ 1,907 $ 1,622
Unbilled 840 818
-------- ---------
2,747 2,440
Commercial
Billed 17,811 19,756
Unbilled 6,157 5,695
-------- ---------
23,968 25,451
Total Accounts Receivable 26,715 27,891
Less Allowance for Doubtful Accounts (452) (440)
-------- ---------
Net Accounts Receivable $ 26,263 $ 27,451
======== =========
3. NET INCOME 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 income statement.
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of
shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock.
The following is a reconciliation of the amounts used in calculating
basic and diluted net income per common share:
Per Share
Income Shares Amount
--------- ---------- ---------
(dollars in thousands)
Basic net income per common share for the
three months ended March 31, 1999:
Income available to common stockholders $ 410 5,122,049 $ .08
Effect of dilutive stock options 589,474 -----
Diluted net income per common share for the ---------
three months ended March 31, 1999 $ 410 5,711,523 $ .07
----- --------- -----
Basic net income per common share for the
three months ended March 31, 1998:
Income available to common stockholders $ 101 4,045,906 $ .02
Effect of dilutive stock options 404,150 -----
Diluted net income per common share for the ---------
three months ended March 31, 1998 $ 101 4,450,056 $ .02
----- --------- -----
4. ACQUISITIONS/DISPOSITIONS
- -----------------------------
On April 5, 1999 the Company signed a letter of intent to acquire
Correctional Information Systems ("CIS"), a division of BI Incorporated,
for a maximum purchase price of $4 million. Also, the Company is
actively negotiating with a potential purchaser to sell its MicroAssembly
Systems, Inc. subsidiary.
COMPUDYNE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Net sales for CompuDyne Corporation, ( CompuDyne ) or the Company ) were
$21.9 million for the first quarter of 1999. This was an increase of
$16.9 million from the first quarter of 1998. Norment Industries,
( Norment ) had net sales of $15.8 million in the first quarter of 1999.
These sales attributed to most of this increase since Norment was
acquired on November 28, 1998. Quanta SecurSystems, Inc.
( SecurSystems ) net sales were $3.1 million in the first quarter of 1999
up $1.5 million from $1.6 million in the first quarter of 1998. This is
a result of new work being completed from the backlog accumulated in
1998. Net sales for Quanta Systems, Corporation ( Quanta Systems ) were
down $174 thousand from $2.6 million in the first quarter of 1998 to $2.4
million in the same period of 1999. It appears that government funding,
which normally would be awarded to Quanta Systems has been temporarily
redirected towards Year 2000 issues. Net sales for Data Control Systems,
Inc. ( DCS ) were down $292 thousand from $402 thousand in the first
quarter of 1998 to $110 thousand in the first quarter of 1999. Expected
sales from NASA have been delayed. MicroAssembly Systems, Inc.
( MicroAssembly ) had sales of $400 thousand in the first quarter of
1999, down $54 thousand from $454 thousand in the first quarter of 1998.
SYSCO Security Systems, Inc. ( SYSCO ) had incremental net sales of $201
thousand in the first quarter of 1999 since almost no sales were made in
the first quarter of 1998.
CompuDynes gross margin increased $4.3 million in the first quarter of
1999 to $5.4 million, up from $1.1 million in the first quarter of 1998.
Norment contributed $4.1 million to CompuDynes increased gross margin
and most of this increase is attributed to Norment being acquired on
November 28, 1998. SecurSystems gross margin increased $227 thousand
from $506 thousand in the first quarter of 1998 to $733 thousand in the
first quarter of 1999 due to increased revenues in new construction work.
Gross margin at Quanta Systems decreased $63 thousand from $375 thousand
in the first quarter of 1998 to $312 thousand in the first quarter of
1999, a direct result of decreased revenues. DCS had a gross margin of
$(2) thousand in the first quarter of 1999, a decrease of $125 thousand
from $123 thousand in the first quarter of 1998 due to reduced sales.
MicroAssembly had a gross margin of $131 thousand in the first quarter of
1999, down $11 thousand from $143 thousand in the first quarter of 1998.
SYSCO had a gross margin of $71 thousand in the first quarter of 1999,
incremental since almost no sales were made in the first quarter of 1998.
CompuDyne selling, general and administrative expenses were up $3.2
million to $4.2 million in the first quarter of 1999 from $984 thousand
in the first quarter of 1998. Norments' selling, general and
administrative expense, of $2.9 million in the first quarter of 1999
attributed to most of this increase as a result of its' acquisition on
November 28, 1998. SecurSystems had an increase of $63 thousand in
selling, general and administrative expenses from $488 thousand in the
first quarter of 1998 to $551 thousand in the first quarter of 1999.
Quanta Systems selling, general and administrative expenses were $141
thousand in the first quarter of 1999, down $64 thousand from $205
thousand in the first quarter of 1998. Quanta Systems paid $41 thousand
in the first quarter of 1998 for non-recurring Fort Bragg legal costs.
DCS had a decrease of $33 thousand in selling, general and administrative
expenses, at $2 thousand in the first quarter of 1999 from $35 thousand
in the first quarter of 1998. MicroAssemblys selling, general and
administrative expenses were down $27 thousand to $88 thousand in the
first quarter of 1999, from $115 thousand in the first quarter of 1998.
SYSCO had an increase of $95 thousand in selling, general and
administrative expenses to $152 thousand in the first quarter of 1999
from $57 thousand in the first quarter of 1998 due to increased selling
and advertising activities. CompuDyne corporate selling, general and
administrative expenses were up $218 thousand from $84 thousand in the
first quarter of 1998 to $302 thousand in the first quarter of 1999 due
to the increase in staff and related costs primarily related to the
acquisition of Norment.
Research and development costs were up $32 thousand from $8 thousand in
the first quarter of 1998 to $40 thousand in the first quarter of 1999.
All costs were spent at DCS for improvements to their current product
line.
Net income for the first quarter of 1999 for CompuDyne was $410 thousand,
up $309 thousand from $101 thousand in the first quarter of 1998.
Norment had an incremental addition of $386 thousand in the first quarter
of 1999, since its acquisition on November 28, 1998. SecurSystems had an
increase of $63 thousand in net income to $44 thousand in the first
quarter of 1999 from a loss of $19 thousand in the first quarter of 1998.
Quanta Systems net income decreased $50 thousand, down from $100 thousand
in the first quarter of 1998 to $50 thousand in the first quarter of
1999. Net income at DCS decreased to a net loss of $34 thousand in the
first quarter of 1999, down $92 thousand from a net income of $58
thousand in the first quarter of 1998. MicroAssemblys net income
increased $4 thousand from $12 thousand in the first quarter of 1998 to
$16 thousand in the first quarter of 1999. SYSCO had a net loss of $45
thousand in the first quarter of 1999, up $17 thousand from a net loss of
$62 thousand in the first quarter of 1998.
Interest expense was $516 thousand in the first quarter of 1999, up $ 488
thousand from $28 thousand in the first quarter of 1998. This is
attributable to the financing for the Norment acquisition.
The Company had a backlog at the end of the first quarter of 1999 of $93
million up $74 million from $19 million at the end of the first quarter
of 1998. Norment accounts for $76 million of the backlog.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash used in operations was $1.1 million in the first quarter of
1999, down $1.3 million from $184 thousand provided by operations in the
first quarter of 1998. The primary uses of cash included a decrease in
accounts payable and miscellaneous accruals including income taxes of
$2.6 million, an increase in prepaid expenses and inventories of $210
thousand and property and equipment purchases of $379 thousand. The
primary sources of cash were from net income of $410 thousand and a
decrease in accounts receivable of $1.1 million.
YEAR 2000 COMPLIANCE
- --------------------
State of readiness - The Company has developed and is well into
implementing a company wide Year 2000 Plan (the "Plan") with the intent
to ensure that it's computer equipment and software will be able to
distinguish between the year 1900 and the year 2000 and will function
properly with respect to all dates, whether in the twentieth or the
twenty-first centuries (such functionality is referred to below as being
"Year 2000 compliant").
The Company's plan initially focused on the accounting systems of the
operating divisions. Norment/Norshield are currently implementing a new
financial and accounting software system called PENTA. This
implementation includes Year 2000 compliant hardware as well as software.
Implementation is planned to be completed by August 1999. Quanta Systems
implemented a Year 2000 compliant Deltek system in 1998. This was
implemented with Year 2000 compliant hardware as well as software.
Additional computers were identified and replaced in 1998. SecurSystems
has installed a new network which has Year 2000 compliant hardware and
software. The accounting package used by SecurSystems is Timberline.
Timberline is currently working on a Year 2000 compliant version and we
have been advised this new version will be available in 1999.
MicroAssembly is currently installing a new accounting system including
Year 2000 compliant software and hardware, in addition it has
periodically upgraded computers within the organization during 1998.
MicroAssembly's new system is expected to be implemented by June 1999.
The Company presently believes that it's planned replacements and
modifications of certain existing computer equipment and software will be
completed by January 1, 2000 so as to avoid any of the Year 2000 related
disruptions or malfunctions of its computer equipment and software that
it has identified.
(in thousands)
The costs to address the Company's Year
2000 Issues: Costs Prior Estimate to
to 1999 Complete
----------- -----------
Norment/Norshield Hardware/Software $ 1,050 $ 350
Quanta Systems/DCS Hardware/Software 90 13
SecurSystems Hardware/Software/
Phone Equipment 94 20
MicroAssembly Hardware/Software/
Office Equipment 16 20
--------- ---------
$ 1,250 $ 403
========== =========
The Company will use both internal and external resources to reprogram or
replace its IT systems and non-IT systems for the Year 2000
modifications.
Costs - The Company does not separately track the internal costs incurred
on the Year 2000 project. Such costs are principally payroll and related
costs for its internal personnel. The total cost of the Year 2000
project, excluding these internal costs is estimated at $1.7 million and
is being funded through operating cash flows. Over $1.2 million, which
includes costs expended by Norment/Norshield prior to the Company's
acquisition on November 28, 1998, was spent in 1998 and the balance will
be expended in 1999.
The cost of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which are derived using numerous assumptions of future events,
including the continued availability of certain resources and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant
computer codes and similar uncertainties.
Risks - Management believes that based on the information currently
available to the Company, that the most likely worst case scenario that
could be caused by failures relating to Year 2000 could pose a
significant threat not only to CompuDyne, its customers and suppliers,
but to all businesses. Risks include:
- - Legal risks, including customer, supplier, employee or shareholder
lawsuits over failure to deliver contracted services, product failure,
or health and safely issues.
- - Loss of sales due to failure to meet customer quality expectations or
inability to ship products.
- - Increased operational costs due to manual processing, data corruption
or disaster recovery.
- - Inability to bill or invoice.
Contingency plans - As part of its continuous assessment process, the
Company will develop contingency plans as necessary. These plans could
include, but are not limited to, material stockpiling, use of alternate
suppliers and development of alternate means to process orders. The
Company currently plans to complete such planning by December 1999.
CompuDyne is using its best efforts to ensure that the Year 2000 impact
on its critical systems and processes will not affect its supply of
product, quality or service. However, in the event that the Company is
unable to complete its remedial actions described above and is unable to
implement adequate contingency plans in the event problems arise, there
could be a material adverse effect on the Company's business, financial
position, results of operations, or cash flows.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
Interest Rate Risk
- ------------------
CompuDyne used fixed and variable rate notes payable to finance its
acquisition of Norment/Norshield. These on-balance sheet financial
instruments, to the extent they provide for variable rates of interest,
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 loan from
LaSalle National Bank.
The information below summarizes CompuDyne's sensitivity to market risks
associated with fluctuations in interest rates as of March 31, 1999. 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, 1999.
Financial Instruments by Expected Maturity Date
Year Ending December 31 1999 2000 2001 2002
---------- --------- --------- ---------
Notes Payable:
Variable rate ($) $1,125,000 $ 1,875,000 $2,375,000 $2,500,000
Average interest rate 7.74% 7.79% 7.85% 7.90%
Fixed rate ($) $ - $ - $ - $ -
Average interest rate 13.15% 13.15% 13.15% 13.15%
Year Ending December 31 2003 Thereafter Total Fair Value
--------- ---------- --------- ----------
Notes Payable:
Variable rate ($) $2,875,000 $ 750,000 $11,500,000 $11,500,000
Average Interest Rate 7.96% 8.0%
Fixed rate ($) $ - $ 9,000,000 $ 9,000,000 $ 9,000,000
Average Interest Rate 13.15% 13.15% 13.15% 13.15%
Year Ending December 31 1999 2000 2001 2002
---------- ---------- ---------- -----------
Interest Rate Swaps:
Variable to Fixed ($) $6,750,000 $ 6,750,000 $ 6,750,000 $ -
Average pay rate 7.55% 7.55% 7.55% -
Average receive rate 7.74% 8.0 % 8.0 % -
Year Ending December 31 2003 Thereafter Total Fair Value
----------- ---------- --------- ----------
Interest Rate Swaps:
Variable to Fixed ($) $ - $ - $ - $6,753,000
Average pay rate - - - -
Average receive rate - - - -
The Company uses a foreign exchange contract to partially hedge their
exposure to exchange rate risk related to one firmly committed sales
contract. The foreign exchange contract was entered into for non-trading
purposes and is matched to the underlying transaction and does not
constitute speculative or leveraged positions independent of this
exposure. The table below summarizes the transaction that is sensitive
to foreign currency exchange rates, including foreign currency forward
exchange agreements. The forward exchange, shown in South African rand,
is the amount of rands that are expected to be exchanged into U.S.
dollars based on the expected month of conversion. These amounts
represent the contract sales revenue in rand, less contract expenses paid
in rand.
Expected Date
Year Ending December 31, Fair
(rand in thousands) 1999 2000 Total Value
---------- ---------- ------- ----------
Forward exchange agreement
(in South African rand) 14,050 1,568 15,618 15,618
Average contractual exchange
rate
(Receive U.S. dollars for
South African rand) $ US 0.16 $ US 0.14 $ US 0.16 $ US 0.16
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(27) Financial Data Schedule
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 13, 1999 /s/ William C. Rock
-------------------
William C. Rock
Chief Financial Officer