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 September 30, 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
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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 November 12, 1999 a total of 5,380,466 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, 1999 (unaudited)
and December 31, 1998 3
Consolidated Statements of Operations - Three Months and Nine
Months Ended September 30, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
(unaudited)
5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 9-12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1999 1998
--------------- --------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 1528 $ 1,528
Accounts receivable, net 28,148 27,451
Costs in excess of billings 5,760 2,610
Inventories:
Finished Goods - 112
Work in process 502 499
Raw materials and supplies 4,059 3,611
-------------- --------------
Total inventories 4,561 4,222
-------------- --------------
Prepaid expenses and other 335 127
current assets -------------- --------------
Total Current Assets 40,332 35,938
-------------- --------------
Non-current receivables,
related parties 72 72
-------------- --------------
Property, plant and equipment, at cost
Land and improvements 250 276
Buildings and leasehold improvements 1,125 1,188
Machinery and equipment 3,721 2,334
Furniture and fixtures 720 182
Automobiles 368 299
Construction in progress 1.665 939
Software 2,009 -
--------------- --------------
Total property, plant and equipment 9,858 5,218
Less: accumulated depreciation
and amortization (1,283) (295)
--------------- -------------
Net property, plant and equipment 8,575 4,923
--------------- -------------
Deferred tax asset 88 88
Intangible assets, net of accumulated
amortization 2,381 2,474
Goodwill, net of accumulated
amortization - 62
Other assets, net 171 13
--------------- --------------
Total other assets 2,640 2,637
--------------- --------------
Total Assets $ 51,619 $ 43,570
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,085 $ 6,891
Other accrued expenses 1,981 735
Accrued payroll expenses 1,431 1,543
Billing in excess of contract costs
incurred 7,119 6,492
Accrued income taxes 1,121 346
Reserve for losses on acquired CorrLogic
contracts 1,938 -
Current portion of term loan 1,890 1,125
Current portion of notes payable related
parties - 20
---------------- ------------
Total Current Liabilities 23,565 17,152
Term loan 6,000 10,375
Long term notes 12,098 9,000
Notes payable, related parties - 15
Warranty reserves 463 463
Long term pension liability 484 484
Other liabilities 183 191
---------------- -------------
Total Liabilities 42,793 37,680
---------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, par value $.75 per
share 10,000,000 shares authorized;
5,380,466 and 5,200,049 shares issued
and outstanding at September 30, 1999
and December 31, 1998 4,035 3,900
Other capital 11,536 10,397
Treasury shares, at cost; 85,119 shares
as of September 30, 1999; 78,636 shares
as of December 31, 1998 (177) (120)
Receivable from management (50) (90)
Accumulated Deficit (6,518) (8,197)
---------------- -------------
Total Shareholders' Equity 8,826 5,890
---------------- -------------
Total Liabilities and Shareholders'
Equity $ 51,619 $ 43,570
================ =============
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,
1999 1998 1999 1998
--------- ---------- --------- ---------
Net sales $ 27,827 $ 6,461 $ 77,511 $ 17,688
Cost of sales 22,354 4,927 61,777 13,641
--------- ---------- --------- ---------
Gross margin 5,473 1,534 15,734 4,047
Selling, general
and administrative
expenses 3,887 1,093 11,584 3,069
Research and Development - 113 81 181
--------- ----------- --------- ---------
Operating income 1,586 328 4,069 797
--------- ----------- --------- ---------
Other(income)expense
Interest expense 573 37 1,676 82
Other income (78) (14) (369) (18)
--------- ---------- --------- ----------
Total other (income)
expense, net 495 23 1,307 64
---------- ---------- --------- -----------
Income before income
tax provision 1,091 305 2,762 733
Income tax provision 437 93 1,083 228
----------- ---------- ------------ -------------
Net income $ 654 $ 212 $ 1,679 $ 505
=========== ========== ============ =============
Basic EPS:
Net income $ .12 $ .06 $ .32 $ .13
=========== ========== =========== ==============
Weighted average
number of common
shares outstanding 5,290 3,845 5,214 3,845
=========== ========== =========== ==============
Diluted EPS:
Net income $ .11 $ .04 $ .29 $ .11
=========== ========== =========== ===============
Weighted average number of
common shares and
equivalents 5,934 4,447 5,856 4,447
=========== ========== =========== ==============
See Notes to Consolidated Financial Statements (unaudited).
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------------
1999 1998
----------- ----------
Cash flows provided by (used in) operating activities:
Net income $ 1,679 $ 505
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and Amortization 1079 137
Gain on the sale of assets ( 170) -
Changes in assets and liabilities
Accounts receivable 560 (1,162)
Deferred income taxes - 20
Costs in excess of billings (722) -
Prepaid expenses (30) (2)
Inventories (820) 450
Other assets (158) (53)
Accounts payable 1,282 66
Accrued liabilities 1,133 (118)
Accrued income taxes 777 211
Billings in excess of costs 258 -
Other liabilities (620) (35)
---------- ---------
Net cash flows provided by
operating activities 4,248 19
---------- ----------
Cash flows provided by (used in) investing activities:
Additions to property, plant and equipment (2,801) (252)
Sale of MicroAssembly assets 1,400 -
Purchase of CorrLogic (1,170) -
----------- ----------
Net cash flows used in investing activities (2,571) (252)
----------- ----------
Cash flows provided by (used in) financing activities:
(Repayment)borrowings of long term debt (3,750) 363
Proceeds from bond issuance 2,100 -
Sale of common stock 24 -
Purchase of treasury stock (56) (120)
Repayment of current debt,related parties (35) (10)
Collection on note receivable, related parties 40 -
------------ ----------
Net cash(used in) provided by financing activities (1,677) 233
------------ ---------
Net increase in cash - -
Cash and cash equivalents
at beginning of period 1,528 -
----------- ---------
Cash and cash equivalents at end of period $ 1,528 $ -
=========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,590 $ 82
Taxes $ 321 $ 29
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.
Certain prior amounts have been changed to conform to the current period
presentation.
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.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
($ in thousands)
September 30, December 31,
1999 1998
------------ ------------
U.S. Government Contracts:
Billed $ 2,012 $ 1,622
Unbilled 919 818
------------ ------------
2,931 2,440
Commercial Contracts:
Billed 19,805 19,756
Unbilled 5,888 5,695
------------ ------------
25,693 25,451
Total Accounts Receivable $ 28,624 $ 27,891
Less Allowance for Doubtful Accounts (476) (440)
------------ ------------
Net Accounts Receivable $ 28,148 $ 27,451
============ ============
3. COMMON STOCK AND COMMON STOCK OPTIONS
On August 17,1999 the Compensation and Stock Options Committee
("Committee") granted options to purchase 2,000 shares of common stock to
non-employee directors at a price of $7.00 per share, the then current
market price.
On August 18, 1999 the Committee granted options to purchase up to 26,000
shares of CompuDyne common stock to key employees of Norment/Norshield at a
price of $6.875 per share, the then current market price.
On May 03, 1999 the Committee granted options to purchase up to 30,000
shares of CompuDyne common stock to a key employee of Norment at a price of
$7.375 per share.
4.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
nine months ended September 30, 1999:
Income available to common stockholders $ 1,679 5,214,151 $ .32
Effect of dilutive stock options 641,474 ---------
Diluted net income per common share for ---------
the nine months ended September 30, 1999 $ 1,679 5,855,625 $ .29
-------- --------- ---------
Basic net income per common share for
the nine months ended September 30, 1998:
Income available to common stockholders $ 505 3,845,323 $ .13
Effect of dilutive stock options 601,749 ---------
Diluted net income per common share for ---------
the nine months ended September 30, 1998 $ 505 4,447,072 $ .11
-------- --------- -------
Basic net income per common share for the
three months ended September 30, 1999:
Income available to common stockholders $ 654 5,289,597 $ .12
Effect of dilutive stock options 644,801 --------
Diluted net income per common share for ----------
the three months ended September 30, 1999 $ 654 5,934,398 $ .11
------- ---------- --------
Basic net income per common share for
the three months ended September 30, 1998:
Income available to common stockholders $ 212 3,845,323 $ .06
Effect of dilutive stock options 601,749 --------
Diluted net income per common share for -------- ----------
the three months ended September 30, 1998 $ 212 4,447,072 $ .04
-------- ---------- --------
5. OPERATING SEGMENT INFORMATION
Segment information has been prepared in accordance with the Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments
of an Enterprise and Related Information", ("SFAS No. 131"). SFAS No. 131
defines "operating segments to be those components about which separate
financial information is available that is regularly evaluated by
management in deciding how to allocate resources and in assessing
performance. SFAS No. 131 further requires that the segment information
presented be consistent with the basis and manner in which management
internally desegregates financial information for the purposes of assisting
in making internal operating decisions.
Revenues
----------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- ---------- --------- ---------
Norment/Norshield $ 18,731 $ - $ 54,890 $ -
Quanta Systems 2,879 3,391 7,809 9,366
SecurSystems 3,568 2,592 10,079 6,866
SYSCO 150 40 410 94
MicroAssembly - 438 670 1,362
CorrLogic 2,499 - 3,653 -
--------- ---------- -------- ---------
$ 27,827 $ 6,461 $ 77,511 $ 17,688
========= ========== ======== =========
Pre-Tax Profit
----------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- ---------- -------- ---------
Norment/Norshield $ 620 $ - $ 1,954 $ -
Quanta Systems 163 187 263 495
SecurSystems 324 259 593 479
SYSCO (43) (116) (222) (256)
MicroAssembly - (36) 165 13
CorrLogic - - - -
CompuDyne Corporate 27 11 9 2
--------- --------- -------- ---------
$ 1,091 $ 305 $ 2,762 $ 733
========= ========= ======== =========
COMPUDYNE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Third Quarter 1999 and 1998 Comparison
- ---------------------------------------
CompuDyne's net sales increased $21.4 million from $6.4 million in the
third quarter of 1998 to $27.8 million in the third quarter of 1999. A
large portion of the increase in net sales was attributable to Norment
Industries ("Norment"). Norment had net sales of $18.7 million in the
third quarter of 1999. All of Norment's third quarter results are
incremental since Norment was purchased on November 30, 1998. Quanta
SecurSystems, Inc. ("SecurSystems") net sales were $3.6 million in the
third quarter of 1999 compared with $2.6 million in the third quarter of
1998, an increase of $976 thousand. Quanta Systems Corporation ("Quanta
Systems") net sales decreased $513 thousand to $2.9 million in the third
quarter of 1999 compared with $3.4 million in the same period for 1998.
MicroAssembly Systems, Inc. ("MicroAssembly") was sold on May 30, 1999 and
therefore had no sales in the third quarter of 1999. MicroAssembly had
sales of $438 thousand in the third quarter of 1998. SYSCO Security
Systems ("SYSCO") had $150 thousand in net sales for the third quarter of
1999, a $110 thousand increase over $40 thousand in the third quarter of
1998. CorrLogic, Inc. ("CorrLogic") had net sales of $2.5 million in the
third quarter of 1999. This was incremental since CorrLogic was purchased
on April 30, 1999.
Gross margin for CompuDyne increased $4.0 million from $1.5 million in the
third quarter of 1998 to $5.5 million in the third quarter of 1999.
Norment had a gross margin of $3.1 million in the third quarter of 1999.
Gross margin for SecurSystems increased $205 thousand from $813 thousand in
the third quarter of 1998 to $1.0 million in the third quarter of 1999.
This was due to the increase in net sales. Quanta Systems had a decrease
in gross margin of $207 thousand, down from $627 thousand in the third
quarter of 1998 to $420 thousand in the third quarter of 1999.
MicroAssembly had no gross margin in the third quarter of 1998 since it was
sold on May 30, 1999. SYSCO had a gross margin of $34 thousand in the
third quarter of 1999 up slightly from $16 thousand in the same period of
1998. CorrLogic had a gross margin of $855 thousand in the third quarter
of 1999. This margin is net of $405 thousand of losses on acquired
contracts charged against reserves established when the contracts were
acquired. This was incremental since CorrLogic was purchased on April 30,
1999.
Selling, general and administrative expenses increased $2.8 million for
CompuDyne in the third quarter of 1999, increasing from $1.1 million in
1998 to $3.9 million in 1999. Norment's selling, general and
administrative expenses of $2.0 million accounted for a large portion of
this increase. These costs were incremental since Norment was acquired on
November 30, 1998. SecurSystems had an increase in selling, general and
administrative costs of $70 thousand, increasing from $519 thousand in the
third quarter of 1998 to $589 thousand in 1999. Quanta Systems' selling,
general and administrative costs decreased from $249 thousand in the third
quarter of 1998 to $156 thousand in the third quarter of 1999, a $93
thousand decrease. There were no selling, general and administrative
expenses for MicroAssembly since it was sold on May 30, 1999. SYSCO's
selling, general and administrative expenses decreased to $65 thousand in
the third quarter of 1999, down $60 thousand from $125 thousand in the
third quarter of 1998. CorrLogic had incremental selling, general and
administrative expenses of $836 thousand in the third quarter of 1999.
CompuDyne's corporate selling, general and administrative expenses
increased $174 thousand in the third quarter of 1999 to $271 thousand, up
from $97 thousand in 1998.
Research and development costs, which are related only to Quanta Systems'
DCS product division decreased $113 thousand to $0 in the third quarter of
1999 from $113 thousand in 1998.
Interest expense for the third quarter of 1999 was $573 thousand compared
to $37 thousand in the third quarter of 1998, an increase of $536 thousand.
This increase is attributable to the financing of the Norment/Norshield
acquisition. Other income for the third quarter of 1999 was $78 thousand
compared to $14 thousand in 1998. This included $22 thousand in interest
income and $44 thousand gain on the sale of assets.
CompuDyne's third quarter 1999 profit before taxes was $1.1 million,
increasing $787 thousand from the third quarter of 1998, which was $305
thousand. This was a 258% increase. Norment had pre-tax profit of $620
thousand in the third quarter of 1999. SecurSystems increased $64 thousand
from $259 thousand in the third quarter of 1998 to $324 thousand in the
third quarter of 1999. Quanta Systems pre-tax profit was $163 thousand in
the third quarter of 1999 down $24 thousand from a profit of $187 thousand
in the third quarter of 1998. We feel this is a result of the government
diverting funds, which would have been spent on security to Year 2000
problems. MicroAssembly was sold on May 30, 1999 and therefore had no pre-
tax profit in the third quarter of 1999. SYSCO had a pre-tax loss of $43
thousand in the third quarter of 1999 compared with a loss of $116 thousand
during the same period in 1998. CorrLogic had no pre-tax profit or loss
since losses from its contracts were charged against the reserves set up
for expected future losses when CorrLogic was purchased.
Year-to-Date Comparison
CompuDyne's net sales increased $59.8 million or 325% in the first nine
months of 1999. Net sales were $77.5 million in the first nine months of
1999 compared with $17.7 million in the first nine months of 1998. Norment
had $54.9 million in net sales in the first nine months of 1999. All of
Norment's results for the first nine months are incremental since it was
purchased on November 30, 1998. SecurSystems had $10.1 million in net
sales in the first nine months of 1999 compared with $6.9 million for the
same period in 1998, an increase of $3.2 million. Quanta Systems net sales
for the first nine months of 1999 totaled $7.8 million. This was a
decrease of $1.6 million from the first nine months of 1998 net sales of
$9.4 million. MicroAssembly's net sales decreased $692 thousand from $1.4
million in the first nine months of 1998 to $670 thousand in the first nine
months of 1999. The first nine months of 1999 reflects only five months of
operations for MicroAssembly since the assets of MicroAssembly were sold
effective May 30, 1999 and it has been discontinued. SYSCO had $410
thousand in net sales for the first nine months of 1999. This was up $316
thousand from $94 thousand in the first nine months of 1998. CorrLogic had
net sales of $3.7 million in the first nine months of 1999. These sales
were incremental since CorrLogic was purchased on April 30, 1999.
CompuDyne's gross margins increased $11.7 million in the first nine months
of 1999 to $15.7 million, up from $4.0 million during the same period in
1998. Gross margin at Norment was $10.5 million for the first nine months
of 1999. SecurSystem's gross margins increased $583 thousand to $2.6
million in the first nine months of 1999 from $2.1 million in the first
nine months of 1998. Quanta Systems gross margins were $1.1 million in the
first nine months of 1999, down $485 thousand from 1998 first nine months
gross margins of $1.6 million. MicroAssembly's gross margins decreased
$200 thousand from $352 thousand in the first nine months of 1998 to $152
thousand during the same period for 1999. The first nine months of 1999
only reflects five months of operations for MicroAssembly since the assets
of MicroAssembly were sold effective May 30, 1999 and it has been be
discontinued. SYSCO had a $109 thousand gross margin for the first nine
months of 1999 compared with $26 thousand in the first nine months of 1998.
Gross margin at CorrLogic was $1.2 million in the first nine months of
1999. This margin is net of $612 thousand of losses on acquired contracts
charged against reserves established when the contracts were acquired.
This was incremental because CorrLogic was purchased on April 30, 1999.
CompuDyne's selling, general and administrative costs increased $8.5
million to $11.6 million in the first nine months of 1999 up from $3.1
million in the same period in 1998. Norment had $6.9 million in selling,
general and administrative expenses for the first nine months of 1999.
SecurSystems had an increase of $208 thousand in the first nine months of
1999, $1.7 million in 1999 compared with $1.5 million for 1998. Quanta
Systems selling, general and administrative expenses decreased by $217
thousand to $478 thousand in the first nine months of 1999, down from $695
thousand in the same period for 1998. This decrease was the result of
staff reductions due to slow sales. MicroAssembly's selling, general and
administrative costs were $148 thousand in the first nine months of 1999
decreasing $163 thousand from $311 thousand in the first nine months of
1998. The assets of MicroAssembly were sold effective May 30, 1999 and it
has been discontinued. Selling, general and administrative costs for SYSCO
increased $29 thousand in the first nine months of 1999, up from $265
thousand for the same period in 1998. CorrLogic had $1.2 million in
selling, general and administrative costs in the first nine months of 1999.
These costs were incremental since it was purchased on April 30, 1999.
Research and development costs, which are related only to Quanta Systems'
DCS product division, were $81 thousand in the first nine months of 1999.
This is down $100 thousand from $181 thousand for the same period in 1998.
The costs in 1999 were spent primarily on improvements to one of its
products.
Interest expense increased $1.6 million in the first nine months of 1999
compared to the same period for 1998. This increase was attributable to
the financing of the Norment/Norshield acquisition. Other income for the
first half of 1999 was $369 thousand compared to $18 thousand in 1998. The
increase is attributable to the $184 thousand gain resulting from the sale
of MicroAssembly's net assets, $100 thousand interest income, and $43
thousand gain on the sale of assets.
Pre-tax profit before taxes for CompuDyne increased $2.0 million to $2.8
million in the first nine months of 1999 up from $733 thousand in the same
period for 1998. Pre-tax profit for Norment was $2.0 million in the first
nine months of 1999. SecurSystems pre-tax profit increased $114 thousand
to $593 thousand in the first nine months of 1999 from $479 thousand in the
first nine months of 1998. Quanta Systems pre-tax profit was $263 thousand
in the first nine months of 1999. This was a decrease of $232 thousand
from $495 thousand in the first half of 1998. We feel this is a result of
the government diverting funds, which would have been spent on security to
Year 2000 problems. MicroAssembly's pre-tax profit for the first nine
months of 1999 was $165 thousand, increasing $152 thousand from $13
thousand in the same period of 1998. This includes a gain on the sale of
MicroAssembly's assets of $184 thousand and only reflects five months of
operations for MicroAssembly since the assets of MicroAssembly were sold
effective May 30, 1999 and it will be discontinued. SYSCO had a pre-tax
loss of $222 thousand in the first nine months of 1999 compared with a $256
thousand loss in the first nine months of 1998, a decreased loss of $34
thousand. CorrLogic had no pre-tax profit or loss since all losses were
charged against the reserves set up for expected future losses when
CorrLogic was purchased.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principle 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, the majority of which are due
under prime contracts with the United States Government, state and local
governments or subcontracts thereunder.
Net cash flows provided by operating activities was $4.4 million in the
first nine months of 1999, an increase of $4.4 million from the 1998 cash
flow provided by operating activities $19 thousand. Net income increased
from $505 thousand in the first nine months of 1998 to $1.7 million during
the same period in 1999. The sale of MicroAssembly assets realized $1.4
million of cash, which includes $200 thousand that was initially escrowed,
in the first nine months of 1999. The purchase of CorrLogic cost $1.2
million in cash. Capital additions totaled $2.8 million in the first nine
months of 1999. This was $2.5 million more than in the same period of
1998.
YEAR 2000 READINESS
- -------------------
State of readiness - The Company has completed the implementation of 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 ready").
The Company's plan initially focused on the accounting systems of the
operating divisions. Norment/Norshield has implemented a new financial and
accounting software system called PENTA. This implementation includes Year
2000 ready hardware as well as software. Quanta Systems implemented a Year
2000 ready Deltek system in 1998. This was implemented with Year 2000
ready hardware as well as software. Additional computers were identified
and replaced in 1998. SecurSystems has installed a new network, which has
Year 2000 ready hardware and software. The accounting package used by
SecurSystems is Timberline. Timberline has supplied and SecurSystems has
installed the Year 2000 ready version of this software. MicroAssembly's
assets have been sold and it is the Company's intention to collapse the
shell of MicroAsembly, therefore there are no Year 2000 issues.
The Company presently believes that it's replacements and modifications of
certain existing computer equipment and software is now complete 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)
Costs to address the Company's Year 2000 Issues: Costs Prior to
September 30 1999
-----------------
Norment/Norshield Hardware/Software $ 1,400
Quanta Systems/DCS Hardware/Software 113
SecurSystems Hardware/Software/
Phone Equipment 114
------------
$ 1,627
============
The Company has used 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 $1.6 million and is being
funded through operating cash flows. Of this amount, 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.
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 safety 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
The Company believes that there have been no material changes in exposure
to market risk during the third quarter of 1999 from those set forth in the
Company's annual report filed with the Securities and Exchange Commission
on Form 10-K for the year ended December 31, 1998.
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. 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 it's 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
On August 2, 1999 the Company closed on an industrial revenue bond with the
Industrial Development Board of the City of Montgomery. The amount of the
issue is $2.1 million for a term of 15 years, with a tax exempt floating
rate, which may be converted to a fixed rate with 30 days notice. The
initial rate is 3.4% and varies weekly. There is an additional .25% to be
paid for a remarketing fee. The bond issue is guaranteed by an irrevocable
letter of credit issued by LaSalle National Bank at a rate of 2.5%.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit (27) - Financial Data Schedule
SIGNATURE
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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 12, 1999 /s/ William C. Rock
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William C. Rock