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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number 0-29798
CompuDyne Corporation
(Exact name of registrant as specified in its charter)
Nevada 23-1408659
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7249 National Drive, Hanover, Maryland 21076
(Address of principal executive offices)
Registrant's telephone number, including area code: (410) 712-0275
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X NO
_____ _____
As of May 15, 2002, a total of 6,706,646 shares of Common Stock,
$.75 par value, were outstanding.
COMPUDYNE CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements - Unaudited
Consolidated Balance Sheets March 31, 2002
and December 31, 2001
Consolidated Statements of Operations -
Three Months Ended March 31, 2002 and 2001
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2001
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 Risks
Part II. Other Information
Signature
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
ASSETS 2002 2001
-------- -----------
(dollars in thousands)
Current Assets
Cash and cash equivalents $ 1,130 $ 296
Accounts receivable, net 32,804 34,188
Contract costs in excess of billings 14,193 14,564
Inventories 6,292 6,243
Deferred tax assets 843 843
Prepaid expenses and other 1,796 2,093
------ ------
Total Current Assets 57,058 58,227
Property, plant and equipment, net 8,678 7,322
Goodwill and other intangible assets, net 3,717 3,753
Investment in affiliated company 6,075 6,076
Deferred tax asset 542 570
Other 507 483
------ ------
Total Assets $76,577 $ 76,431
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 19,288 $ 21,929
Billings in excess of contract costs incurred 5,439 6,504
Current portion of notes payable 2,394 2,394
------ ------
Total Current Liabilities 27,121 30,827
Notes payable 14,593 11,593
Subordinated notes payable 1,175 1,175
Other 128 199
------ ------
Total Liabilities 43,017 43,794
------ ------
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; 7,158,134 and 7,133,334 shares issued at
at March 31, 2002 and December 31, 2001, respectively
5,368 5,350
Additional paid-in-capital 28,058 27,976
Retained earnings 3,485 2,704
Accumulated other comprehensive loss (72) (114)
Treasury stock, at cost; 477,869 shares at
March 31, 2002 and December 31, 2001 (3,279) (3,279)
------ ------
Total Shareholders' Equity 33,560 32,637
------ ------
Total Liabilities and Shareholders' Equity $ 76,577 $ 76,431
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
(in thousands, except per share data)
Net sales $ 30,490 $ 29,874
Cost of goods sold 24,495 23,597
------ ------
Gross profit 5,995 6,277
Selling, general and administrative 4,519 4,428
Research and development 7 47
------ ------
Operating income 1,469 1,802
------ ------
Other expense (income)
Interest expense 313 520
Interest income (4) (5)
Dividends (57) -
Equity earnings in affiliated company 1 -
Other income (2) (6)
------ ------
Total other expense 251 509
------ ------
Income before income taxes 1,218 1,293
Income taxes 437 485
------ ------
Net income $ 781 $ 808
====== ======
Earnings per share:
Basic earnings per share $ .12 $ .15
====== ======
Weighted average number of common
shares outstanding 6,673 5,319
====== ======
Diluted earnings per share $ .11 $ .14
====== ======
Weighted average number of common
shares and equivalents 7,246 5,952
====== ======
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,
2002 2001
---- ----
(in thousands)
Cash flows from operating activities:
Net income $ 781 $ 808
Adjustments to reconcile net income to
net cash used in operations:
Depreciation and amortization 405 493
Equity earnings in affiliated company 1 -
Gain from disposition of property, plant
and equipment (2) -
Changes in assets and liabilities:
Accounts receivable 1,384 2,104
Contract costs in excess of billings 371 (489)
Inventories (49) (196)
Prepaid expenses and other current assets 297 (4)
Other assets (24) (556)
Accounts payable and accrued liabilities (2,643) (3,330)
Billings in excess of contract costs incurred (1,065) (695)
Other liabilities (1) 13
------- -------
Net cash flows used in operating activities (545) (1,852)
------- -------
Cash flows from investing activities:
Additions to intangibles - (74)
Additions to property, plant and equipment (1,725) (55)
Proceeds from sale of property, plant
and equipment 4 -
------- -------
Net cash flows used in investing activities (1,721) (129)
------- -------
Cash flows from financing activities:
Issuance of common stock 100 40
Purchase of treasury stock - (76)
Borrowings of bank notes 3,000 1,800
Repayment of bank notes - (500)
------- -------
Net cash provided by financing activities 3,100 1,264
------- -------
Net increase (decrease) in cash and
cash equivalents 834 (717)
Cash and cash equivalents at beginning of period 296 1,077
------- -------
Cash and cash equivalents at end of period $ 1,130 $ 360
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 214 $ 495
Income taxes $ 161 $ 234
The accompanying notes are an integral part of these
consolidated 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, 2001 has
been derived from the Company's December 31, 2001 audited financial
statements. Certain information and note disclosures included in the
annual financial statements, prepared in accordance with accounting
principles generally accepted in the United States of America, have
been condensed or omitted pursuant to those rules and regulations,
although the Company believes that the disclosures made are adequate to
make the information presented not misleading.
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all necessary adjustments and
reclassifications (all of which are of a normal, recurring nature) that
are necessary for fair presentation for the periods presented. It is
suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's annual report filed with the Securities
and Exchange Commission on Form 10-K for the year ended December 31,
2001. Operating results for the three months ended March 31, 2002 are not
necessarily indicative of operating results for the entire fiscal year.
New Accounting Pronouncements:
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 provides that intangible assets with
finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives not be amortized but rather be tested at least
annually for impairment. The Company adopted SFAS No. 142 on January 1,
2002. Adoption of SFAS No. 142 resulted in the Company not recording
amortization expense of $56 thousand, which prior to SFAS No. 142 would
have been recorded in the quarter. Management does not believe the
annual impairment test required by SFAS No. 142 will have a material
impact on its financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The
Company has not yet determined the impact that adopting SFAS No. 143 will
have on its financial position or on the results of its operations when
such statement is adopted.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. It supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", and the accounting and reporting provisions of APB 30, "Reporting
the Results of Operations Reporting the Effects of Disposal of a
Segment of a Business", and "Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". The Company adopted SFAS No. 144 on
January 1, 2002. Adoption of SFAS No. 144 did not have a significant
impact on its results of operations or its financial position.
Reclassifications:
Certain prior period amounts have been reclassified to conform with the
current period's presentation.
2. OPERATING SEGMENT INFORMATION
Pre-tax
Revenues Gross Profit Income/(Loss)
-------- ------------ -------------
(Three Months ended March 31)
(in thousands)
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Corrections $ 20,220 $ 19,278 $ 3,691 $ 3,609 $ 1,138 $ 737
Attack Protection 6,174 5,466 1,327 1,563 7 507
Federal Security Systems 2,968 3,750 451 564 49 215
Public Safety 1,128 1,380 526 541 2 (166)
CompuDyne Corporate - - - - 22 -
------ ------ ------ ------ ------ ------
$ 30,490 $ 29,874 $ 5,995 $ 6,277 $ 1,218 $ 1,293
====== ====== ====== ====== ====== ======
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 for the year. Diluted earnings per share also reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. Stock
options to purchase approximately 58,000 shares for 2002 and 240,000
shares for 2001 were not dilutive and, therefore, were not included in
the computation of diluted earnings per common share amounts.
The computations of the basic and diluted per share amounts for the
Company's operations were as follows:
(For the three months ended March 31, in thousands,
except per share data)
2002 2001
------ ------
Net income $ 781 $ 808
====== ======
Weighted-average common shares outstanding 6,673 5,319
Effect of dilutive stock options and awards 573 633
------ ------
Diluted 7,246 5,952
====== ======
Net income per common share
Basic $ .12 $ .15
Diluted $ .11 $ .14
4. SUBSEQUENT EVENT - Acquisition of Tiburon
On January 25, 2002, the Company and Tiburon entered into a First
Amendment Agreement whereby upon the satisfaction by 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. The Company
elected to complete the purchase for 50% cash consideration and 50% stock
consideration. Total consideration paid for the purchase of the portion
of Tiburon that the Company did not previously own amounted to
approximately $12 million in cash and 1.2 million shares of CompuDyne
common stock. To fund the cash portion of the Tiburon acquisition, the
Company negotiated an increase in its borrowing facility from $25 million
to $35 million.
COMPUDYNE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
CompuDyne Corporation is a leading provider of products and services to
the Public Security market. The Company operates in four (4) specific
segments in this marketplace: Corrections, Attack Protection, Federal
Security Systems and Public Safety.
The Corrections segment is headquartered in Montgomery, Alabama and is
known to the trade as Norment Security Group ("Norment"). This segment
provides physical and electronic security products and services to the
corrections industry (prisons and jails) and to the courthouse, municipal
and commercial markets. Norment serves as a contractor, responsible for
most installation work on larger projects. Installations involve
hard-line (steel security doors, frames, locking devices, etc.) and
sophisticated electronic security systems, including software,
electronics, touch-screens, closed circuit TV, perimeter alarm devices
and other security monitoring controls. In 2001, Norment received its
first order for its newly introduced MaxWall product. MaxWall is a
modular steel, concrete filled prefabricated cell construction system.
It allows for construction projects to use considerably less space and
can save the project owner significant amounts of money. Norment,
through a network of regional offices provides field level design,
installation and maintenance of both physical and electronic security
products.
Included in the Corrections segment is the Trentech line which designs,
manufactures and integrates electronic security systems. Trentech
integrates generally available products and software as well as designing
its own proprietary systems. Trentech has developed a sophisticated
proprietary video badging system which has become the virtual standard
for the United States Air Force and has been installed at over 200 US Air
Force facilities throughout the world.
The Corrections segment also manufactures a complete line of locks and
locking devices under the brand name Airteq. Airteq is an industry
leader in pneumatic and electro-mechanical sliding devices used in the
corrections industry.
The Attack Protection segment is the country's largest manufacturer of
bullet, blast and attack resistant windows and doors designed for high
security applications such as embassies, courthouses, Federal Reserve
buildings, banks, corporate headquarters and other facilities that insist
on having the highest level of protection currently available. CompuDyne
is the premiere provider of Level 8 security products, the highest rating
level of commercial security products. Existing product installations
number in the thousands and range from the Middle East to the White House
to the corner drug store. Additionally, this division is finalizing
plans to manufacture pop-up barrier security systems. The Attack
Protection segment's largest customer to date is the United States
Department of State. The Company is the largest supplier of bullet and
blast resistant windows and doors to United States embassies throughout
the world. 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. The Company also manufactures attack resistant windows and
doors as an Original Equipment Manufacturer (OEM). As an OEM, products
are ultimately sold to drug stores, convenience stores, and banks to
secure drive through facilities. Other commercial applications include
guard booths, toll-booths, cash drawers and other similar items.
In addition, the Attack Protection segment manufactures a highly
sophisticated fiber optic system, known as Fiber SenSys, used to detect
physical intrusion. This application is designed to protect large
perimeters including such applications as oil fields, airport tarmacs,
public utilities, nuclear reactors and water systems. In addition it has
been installed to guard the perimeters of numerous private estates and
other similar properties. A related product is SecurLan, which protects
data lines from physical intrusion using a fiber optic technology similar
to the Fiber SenSys technology.
The Federal Security Systems segment is known as Quanta Systems
Corporation. This segment has been serving the federal government's
security needs since 1952. Its customer base includes military,
governmental agencies, and state and local governmental units. Federal
Security Systems provides turnkey systems integration of public security
and safety systems. This Group is a classic security integrator and
specializes in a wide range of customized access control and badging,
intrusion detection, surveillance and assessment, communications, command
and control, fire and life safety, and asset tracking systems. Federal
Security Systems provides central station oversight and control of
multiple and separate facilities as well as security and public life
safety systems and equipment.
The Public Safety segment currently consists of the subsidiary known to
the industry as CorrLogic, Inc. CorrLogic is a leading developer of
inmate management and institutional medical software systems. CorrLogic
specializes in the development, implementation and support of complex,
integrated inmate management software systems that improve the efficiency
and accuracy of correctional facility operations. CorrLogic's focus is
entirely on information solutions for the corrections industry.
CompuDyne expanded its offerings in the Public Safety sector through the
completion of its acquisition of Tiburon, on May 2, 2002. The Company
elected to complete the purchase for 50% cash consideration and 50% stock
consideration. Total consideration paid for the purchase of the portion
of Tiburon that the Company did not previously own amounted to
approximately $12 million in cash and 1.2 million shares of CompuDyne
common stock.
Tiburon provides sophisticated software products that serve the command
and control, and records management systems for law enforcement, fire and
rescue, corrections and justice environments. Tiburon is a market leader
in the development, implementation and support of public safety and
justice automation systems worldwide since 1980. With more than 350
systems supporting over 1,000 agencies, Tiburon is a leader in public
safety and justice solutions.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to Three Months Ended
March 31, 2001
Revenues. The Company had revenues of $30.5 million and $29.9 million
for the 3-month periods ended March 31, 2002 and March 31, 2001
respectively. This was an increase of $600 thousand or 2.0%. Revenues
from the Corrections segment increased from $19.3 million in 2001 to
$20.2 million in 2002. This was an increase of 4.7%. Revenues from the
Attack Protection segment increased from $5.5 million in 2001 to $6.2
million in 2002. This was an increase of 12.7% resulting from increased
orders for the segment's security products. Revenues from the Federal
Security Systems segment declined from $3.8 million in 2001 to $3.0
million in 2002. This was a decline of 21.1%. The Federal Security
Systems segment entered the year with a very small order backlog and as a
result its revenue for the first quarter of fiscal 2002 suffered. The
Public Safety segment's revenues declined from $1.4 million in 2001 to
$1.1 million in 2002. This was a decline of $300 thousand.
Expenses. Cost of goods sold increased from $23.6 million in 2001 to
$24.5 million in 2002. This was an increase of $900 thousand or 3.8%.
The larger percentage increase in cost of goods sold as compared to the
percentage increase in revenues resulted in a gross profit percentage of
19.7% in 2002 as compared to 21.0% in 2001. The principal reason for
this increase in cost of goods sold and the related decrease in gross
profit percentage was a result of operating inefficiencies in the
Company's Attack Protection segment. During the first quarter of 2002
the Attack Protection segment, which has largely been capacity
constrained, purchased an existing 75,000 square foot building on 20
acres of land and set up this facility as a new manufacturing facility
to enable it to handle additional capacity. In the process of overseeing
this new factory coming on line, the segment did not adequately manage
the existing work in its existing facility which resulted in many of the
in-process jobs being run inefficiently, resulting in cost overruns. The
Company is in the process of correcting the identified inefficiencies.
As a result, the pre-tax earnings of this segment were nominally
profitable whereas in the prior year this segment had attained
significant pre-tax earnings. The Company anticipates its new factory
being fully operational by the end of the second quarter of this year.
Selling, general and administrative expenses increased from $4.4 million
in 2001 to $4.5 million in 2002. This was an increase of $100 thousand
or 2.3%, a result of the increased sales level.
Interest expense decreased from $520 thousand in 2001 to $313 thousand in
2002. This decrease is largely a result of the Company repaying its
13.15% subordinated note borrowing with a portion of the proceeds from
the PIPE transaction which occurred in October 2001.
Taxes on income. During the first quarter of 2001 the Company provided
for income taxes at a 37.5% effective tax rate, while in 2002 the Company
provided for taxes at a rate of only 35.9%. This decrease is a result of
the Company expecting a larger portion of its sales to be subject to tax
credits generated by a higher level of export sales.
Net income. The Company reported net income of $781 thousand in 2002 and
$808 thousand in 2001. Fully diluted earnings per share decreased from
$.14 per share in 2001 to $.11 per share in 2002. The fully diluted
weighted average number of common shares and equivalents increased from
6.0 million in 2001 to 7.2 million in 2002. This increase was primarily
the result of the new shares issued by the Company in its PIPE
transaction which occurred in late October 2001.
Liquidity and Capital Resources.
The Company funds its operations through cash flow generated from its
operations, bank financing, and the sale of its common stock. The
Company's liquidity requirements arise from cash to carry its
inventories, costs in excess of billings, billed and unbilled
receivables, and for payments of principal and interest on outstanding
indebtedness and for acquisitions. The ultimate customers of the Company
are primarily Federal, State and local governmental units. In the event
the funding of these governmental units is reduced for any reason
including budgetary reductions due to economic conditions, there is a
risk that the demand for the Company's goods and services would decrease
which would reduce the availability of funds to the Company.
As of March 31, 2002, the Company had working capital of $29.9 million
compared with $27.4 million as of December 31, 2001. The most significant
changes in working capital were decreases in accounts receivable, offset
by decreases in accounts payable and other accrued expenses. At March 31,
2002, the Company had a line of credit of $20.0 million, of which $13.8
million was being used or was committed.
Net cash used in operations was $545 thousand in 2002 versus $1.9 million
in 2001. This decrease was largely a result of less collections of
accounts receivable in 2001, increased billings in excess of contract
costs incurred, offset by decreases in accounts payable and accrued
liabilities, and billings in excess of contract costs incurred.
Net cash used in investing activities was $1.7 million in 2002 compared
to $129 thousand in 2001. Capital expenditures totaled $1.7 million for
property, plant and equipment in 2002 compared with $55 thousand in 2001,
primarily for the acquisition and provisioning of the Attack Protection
segment's new 75,000 square foot manufacturing facility in Montgomery,
Alabama to increase capacity of the Attack Protection segment. The
Company has projected spending up to an additional $2.8 million during
fiscal 2002 for normal equipment and upgrades and for the completion of
the outfitting of its new facility.
Net cash provided by financing activities amounted to $3.1 million in
2002 compared with $1.3 million in 2001. The increase in cash provided by
financing activities is due to additional borrowings under the Company's
debt with bank.
The following table summarizes the contractual obligations of the Company
as of March 31, 2002 and the payments due by period.
Payments Due by Period
----------------------
(in thousands)
Less
Contractual than 1 1 to 3 4 to 5 After 5
Obligations Total year years years years
- ----------- ----- ------ ------ ------ -------
Long-term debt $ 18,162 $ 2,394 $ 14,508 $ 280 $ 980
Operating leases $ 2,660 $ 1,034 $ 1,626 $ - $ -
Standby letter of credit $ 1,800 $ - $ 1,800 $ - $ -
The Company's total outstanding borrowings at March 31, 2002 amounted to
$18,162,000. Of this amount $512,000 was a subordinated borrowing
bearing interest at 7.50%. The remaining borrowings were all at variable
rates. One of these borrowings is a subordinated borrowing in the
amount of $1,250,000 which bears interest at the prime rate. The Company
had two (2) additional borrowings from banks. The first borrowing from
Banks is a 3 year term loan due in quarterly installments through
November 2004. This borrowing was entered into on November 16, 2001 in
an original amount of $5,000,000. The amount outstanding at March 31,
2002 was $4,580,000. Its interest rate is variable and can range from
LIBOR +1.75% to prime + 1.5%. 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 from Banks was a $20,000,000 line of credit entered
into on November 16, 2001 and is due November 16, 2004. The amount
outstanding under this line of credit at March 31, 2002 was $10,000,000
(which is included in the total outstanding borrowings of $18,162,000).
Its interest rate is variable and can range from LIBOR + 1.50% to prime
+1.25%. The rate charged the Company is based on the Company's leverage
ratio at the end of each quarter as defined above.
The Company also had an industrial revenue bond outstanding at March 31,
2002. This borrowing bears interest at a variable rate based on weekly
market conditions. This bond is fully collateralized by a Bank letter
of credit. The Company's bank considers letters of credit as outstanding
borrowings when considering the amount of availability the Company has
remaining under its line of credit. As such the Company had $6.2 million
of unused availability under this line.
As a result of the variable nature of the interest rate on the Company's
Bank borrowings, any increase in the amount of outstanding borrowings
and/or decreases in the company's EBITDA will result in the Company's
interest rate increasing and thus the amount of interest expense incurred
also increasing.
The Company anticipates that cash generated from operations and
borrowings under the working 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. Other than the acquisition of Tiburon, Inc., and the expansion
of its Attack Protection manufacturing facilities, the Company presently
has no binding commitment or binding agreement with respect to any other
material acquisition or strategic investment. However, from time to time,
the Company may be party to one or more non-binding letters of intent
regarding material acquisitions, which, if consummated, may be paid for
with cash or through the issuance of a significant number of shares of
the Company's common stock. On May 2, 2002, the Company completed the
acquisition of Tiburon, Inc. Total consideration paid for the purchase
of the portion of Tiburon that the Company did not previously own
amounted to approximately $12 million in cash and 1.2 million shares of
CompuDyne common stock. To fund the cash portion of the Tiburon
acquisition, the Company negotiated an increase in its borrowing facility
from $25 million to $35 million effective April 22, 2002. Borrowings
made by the Company under this increased facility may result in increased
interest rates charged the Company to the extent its leverage ratio
changes resulting in increased interest charges. As a result of the
approval of this borrowing, the Company had adequate cash available to
complete this transaction.
Other than the Company's $5.8 million of letters of credit, $4.0 million
of which was entered into subsequent to March 31, 2002, primarily to
secure an Industrial Revenue Bond Borrowing on the Company's new Attack
Protection factory, the Company has no other material off balance sheet
financing.
Backlog
The Company's backlog of orders was $116 million at March 31, 2002 and
$110 million at December 31, 2001. Effective with this March 31, 2002
Form 10-Q, the Company has started reporting its backlog on a revenue
backlog basis. Prior thereto the Company reported its backlog on a
billing basis. The backlog reported on a billing basis on December 31,
2001 was $118 million.
Impact of Inflation
Inflation has not had a significant effect on CompuDyne's operations
during the quarter ended March 31, 2002.
Market Risk
The Company is exposed to market risk related to changes in interest
rates and, to an immaterial extent, to foreign currency exchange rates.
At March 31, 2002, the Company had a total of $18,162,000 of notes
payable outstanding. Of this amount $512,000 was at a fixed rate of 7.5%
and the remainder of $17,650,000 was at variable rates. The Company
entered into an interest rate swap agreement on June 26, 2001 in the
initial amount of $11,500,000. The amount of this swap agreement
declines by $676,470 on a quarterly basis until it becomes $0 on October
1, 2005. At March 31, 2002 the amount of the swap agreement had declined
to $9,471,000. As such, approximately $8,179,000 of the Company's
variable rate borrowings were not hedged with an interest rate swap
agreement. In the event interest rates increase dramatically, the
increase in interest rate expense to the Company could be material to the
results of operations of the Company. The remaining debt of the Company
is covered by an interest rate swap which effectively converts this debt
to a fixed rate borrowing at 4.90%.
Recent Accounting Pronouncements
The Company adopted SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets" on January 1, 2002, and the
adoption of these standards has not had a material effect on the
Company's financial statements. Under the new rules, goodwill is no
longer amortized, but will be subject to annual impairment tests in
accordance with the statements. Other intangible assets will continue to
be amortized over their estimated useful lives. Adoption of SFAS No. 142
resulted in the Company not recording amortization expense of $56
thousand, which prior to SFAS No. 142, would have been recorded in the
quarter. The Company does not believe the annual impairment test
required by SFAS No. 142 will have a material impact on its financial
position or results of operations.
Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995
Certain statements made in this Form 10-Q constitute "forward-looking
statements" within the meaning of the federal securities law, including
those statements concerning the Company's expectations with respect to
future events. These statements involve risks and uncertainties that
cannot be predicted or quantified and consequently, actual results may
differ materially from those expressed or implied by such forward-looking
statements. All statements other than statements of historical fact
included in this Form 10-Q, including without limitation statements under
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" regarding our financial position, business strategy and
plans and objectives of our management for future operations, are
forward-looking statements. When used in this Form 10-Q, words such as
"anticipate", "believe", "estimate", "expect", 'intend" and similar
expressions, as they relate to us or our management, identify
forward-looking statements. Such forward-looking statements are
based on the beliefs of our management, as well as assumptions made by
and information currently available to our management. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors, including but not limited to,
competitive factors and pricing pressures, changes in legal and
regulatory requirements, technological change or difficulties, product
development risks, commercialization difficulties and general economic
conditions. Such statements reflect our current views with respect to
future events and are subject to these and other risks, uncertainties and
assumptions relating to our operation, results of operations, growth
strategy and liquidity. Risks inherent in CompuDyne's business and with
respect to future uncertainties are further described in its filings with
the Securities and Exchange Commission, such as the Company's Form 10-K,
Form 10-Q, and Form 8-K reports.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
- ------------------
CompuDyne has fixed and variable rate notes payable. These on-balance
sheet financial instruments expose the Company to interest rate risk,
with the primary interest rate exposure resulting from changes in the
LIBOR rate used to determine the interest rate applicable to the
borrowings under the Company's loans from PNC Bank and SunTrust Bank.
The information below summarizes CompuDyne's sensitivity to market risks
associated with fluctuations in interest rates as of March 31, 2002. To
the extent that the Company's financial instruments expose the Company
to interest rate risk, they are presented in the table below. The table
presents principal cash flows and related interest rates by year of
maturity of the Company's notes payable with variable rates of interest
in effect at March 31, 2002.
Financial Instruments by Expected Maturity Date
Year Ending March 31 2003 2004 2005 2006
------ ------ ------ ------
Notes Payable:
Variable rate ($) $ 2,223,335 $ 2,223,335 $11,803,332 $140,000
Average interest rate 4.5% 5.0% 6.0% 6.0%
Fixed rate ($) $ 170,583 $ 170,583 $ 170,584 $ -
Average interest rate 7.5% 7.5% 7.5% -
Year Ending March 31 Thereafter Total Fair Value
---------- ----- ----------
Notes Payable:
Variable rate ($) $ 1,260,000 $ 17,650,002 $ 17,650,002
Average Interest Rate 6.0% - -
Fixed rate ($) $ - $ 511,750 $ 511,750
Average Interest Rate - 7.5% 7.5%
Year Ending March 31 2003 2004 2005 2006
------ ------ ------ ------
Interest Rate Swaps:
Variable to Fixed ($) $2,705,880 $2,705,880 $2,705,880 $1,352,950
Average pay rate 4.90% 4.90% 4.90% 4.90%
Average receive rate 2.00% 3.00% 4.00% 5.00%
Year Ending March 31 Thereafter Total Fair Value
---------- ----- ----------
Interest Rate Swaps:
Variable to Fixed ($) $ - $ 9,470,590 ($ 124,664)
Average pay rate - - -
Average receive rate - - -
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
Proposal #1 The Merger
At the annual meeting on May 2, 2002, the shareholders approved and
adopted the Agreement and Plan of Merger, dated as of May 10, 2001, as
amended by the First Amendment to the Agreement and Plan of Merger, dated
as of January 25, 2002, by and among CompuDyne, New Tiburon, Inc., a
wholly owned subsidiary of CompuDyne, and Tiburon, Inc., with respect to
the Merger of Tiburon into New Tiburon, and the other transactions
contemplated by the Merger Agreement.
The votes were cast as follows:
For 3,806,548
Against 20,311
Abstain 14,006
Proposal #2 Amendment of the 1996 Stock Incentive Compensation Plan For
Employees
At the annual meeting on May 2, 2002, the shareholders approved an
amendment of the 1996 Stock Incentive Plan to increase the number of
shares of Common Stock, which may be issued or transferred under the Plan
upon exercise of options or other rights to 1,800,000 shares. The votes
were cast as follows:
For 2,936,696
Against 864,572
Abstain 36,458
Proposal #3 Election of Directors
At the annual meeting on May 2, 2002, the shareholders elected Bruce
Kelling Director for a period of three years to expire at the 2005 Annual
Meeting. The votes were cast as follows:
For 5,747,662
Withheld 187,878
At the annual meeting on May 2, 2002, the shareholders elected David
Clark Director for a period of three years to expire at the 2005 Annual
Meeting. The votes were cast as follows:
For 5,927,854
Withheld 7,686
At the annual meeting on May 2, 2002, the shareholders elected Philip
Blackmon Director for a period of three years to expire at the 2005
Annual Meeting. The votes were cast as follows:
For 5,747,257
Withheld 188,283
Item 5: Other Items - None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
(i) Current Report on Form 8-K filed March 25, 2002 to which the
Registrant's Annual Report to Shareholders for the year ended
December 31, 2001 was attached as an exhibit.
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, 2002 /s/ Geoffrey F. Feidelberg
--------------------------
Geoffrey F. Feidelberg
Chief Financial Officer