**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q/A**

**AmendmentNo. 1**

 

**ý****          ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2003**

 

**OR**

 

**o****          ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from                    to                    **

 

**CommissionFile Number  0-29798**

 

**CompuDyne Corporation**

(Exact name of registrantas specified in its charter)

 

| **Nevada**                                                                         |   | **23-1408659**                        |
|------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                   |   | (I.R.S. Employer  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 markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

|   | Yes         ý | No           o |   |
|--------|------------------------------------------------------------|------------------------------------------------------------------|--------|

 

 

Indicate by checkmarkwhether the registrant is an accelerated filer (as defined in rule 12b-2 of theExchange Act)

 

|   | Yes         ý | No           o |   |
|--------|------------------------------------------------------------|------------------------------------------------------------------|--------|

 

As of May 13, 2003, a total of 7,898,171 shares of Common Stock, $.75par value, were outstanding.

 

 

----

 

Explanatory Note

 

Subsequent to theissuance of CompuDyne’s Form 10-Q for the period ended March 31, 2003,CompuDyne determined that the purchase price of its acquisition of Tiburon,Inc. was incorrectly reduced in the quarter ended March 31, 2003 resulting inan understatement of goodwill at March 31, 2003 in the amount of $3,430,000with a corresponding understatement of additional paid-in-capital. This amendedForm 10-Q includes the restated purchase price amounts.  Such restatement had no effect on previouslyreported results of operations or cash flows.

 

Except asdiscussed above, all information contained herein is as originallyreported.  No changes have been made toItems 3 and 4, which have not been reported in this amendment.

 

2

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COMPUDYNE CORPORATION ANDSUBSIDIARIESINDEX

 
| Part I.   Financial Information                                                                                   |                                                                                                                              |
|------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                   |                                                                                                                              |
|    Item 1.  Financial Statements - Unaudited                                                            |                                                                                                                              |
|                                                                                                                   |                                                                                                                              |
|                                                                                                                   | Condensed Consolidated  Balance Sheets — March 31, 2003 (as restated)and December 31, 2002                                   |   |
|                                                                                                                   |                                                                                                                              |   |
|                                                                                                                   | Condensed Consolidated  Statements of Operations - Three Months Ended March 31, 2003 and 2002                                     |   |
|                                                                                                                   |                                                                                                                              |   |
|                                                                                                                   | Condensed Consolidated Statement  of Changes in Shareholders’ Equity (as restated) – Three Months Ended March  31, 2003 |   |
|                                                                                                                   |                                                                                                                              |   |
|                                                                                                                   | Condensed Consolidated  Statements of Cash Flows - Three Months Ended March 31, 2003 and 2002                                     |   |
|                                                                                                                   |                                                                                                                              |   |
|                                                                                                                   | Notes  to Condensed Consolidated Financial Statements                                                                             |   |
|                                                                                                                   |                                                                                                                              |
|    Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations |                                                                                                                              |
|                                                                                                                   |                                                                                                                              |   |
|                                                                                                                   | Signature  and Certifications                                                                                                     |   |

 

3

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ITEM 1. FINANCIAL STATEMENTSCOMPUDYNE CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCESHEETS(unaudited)

 
|                                                                                                                                                                |   | **March 31,  2003**             |       | **December  31,  2002** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|------------|-------------------------|------------|
|                                                                                                                                                                |   | **(dollars  in thousands)**     |       |
|                                                                                                                                                                |   | **(as  restated,  see note 9)** | ** ** |                    | ** ** |
| **ASSETS**                                                                                                                                                          |   |                            |       |                    |       |
| Current Assets                                                                                                                                                      |   |                            |       |                    |       |
| Cash and cash  equivalents                                                                                                                                          |   | $                               | 1,335      |                    | $          | 1,274 |   |
| Accounts  receivable, net                                                                                                                                           |   | 42,536                          |       | 45,168                  |       |
| Contract costs  in excess of billings                                                                                                                               |   | 16,477                          |       | 18,297                  |       |
| Inventories                                                                                                                                                         |   | 5,521                           |       | 6,401                   |       |
| Deferred tax  assets                                                                                                                                                |   | 1,220                           |       | 1,220                   |       |
| Prepaid expenses  and other                                                                                                                                         |   | 2,017                           |       | 2,510                   |       |
| Total Current  Assets                                                                                                                                               |   | 69,106                          |       | 74,870                  |       |
|                                                                                                                                                                |   |                            |       |                    |       |
| Property, plant  and equipment, net                                                                                                                                 |   | 11,675                          |       | 12,171                  |       |
| Goodwill, net                                                                                                                                                       |   | 21,623                          |       | 21,938                  |       |
| Other intangible  assets, net                                                                                                                                       |   | 10,043                          |       | 10,171                  |       |
| Deferred tax  assets                                                                                                                                                |   | 978                             |       | 987                     |       |
| Other                                                                                                                                                               |   | 669                             |       | 667                     |       |
| Total Assets                                                                                                                                                        |   | $                               | 114,094    |                    | $          | 120,804 |   |
|                                                                                                                                                                |   |                            | ** ** |                    | ** ** |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                                                      |   |                            | ** ** |                    | ** ** |
|                                                                                                                                                                |   |                            | ** ** |                    | ** ** |
| Current  Liabilities                                                                                                                                                |   |                            |       |                    |       |
| Accounts payable  and accrued liabilities                                                                                                                           |   | $                               | 22,788     |                    | $          | 22,235 |   |
| Billings in  excess of contract costs incurred                                                                                                                      |   | 13,350                          |       | 13,602                  |       |
| Deferred revenue                                                                                                                                                    |   | 5,553                           |       | 5,812                   |       |
| Current portion  of notes payable                                                                                                                                   |   | 2,402                           |       | 2,402                   |       |
| Total Current  Liabilities                                                                                                                                          |   | 44,093                          |       | 44,051                  |       |
|                                                                                                                                                                |   |                            |       |                    |       |
| Notes payable                                                                                                                                                       |   | 17,692                          |       | 25,108                  |       |
| Deferred tax  liabilities                                                                                                                                           |   | 2,114                           |       | 2,114                   |       |
| Other                                                                                                                                                               |   | 303                             |       | 327                     |       |
| Total  Liabilities                                                                                                                                                  |   | 64,202                          |       | 71,600                  |       |
|                                                                                                                                                                |   |                            |       |                    |       |
| Commitments and  contingencies                                                                                                                                      |   |                            |       |                    |       |
|                                                                                                                                                                |   |                            |       |                    |       |
| Shareholders’  Equity                                                                                                                                          |   |                            |       |                    |       |
| Preferred stock,  2,000,000 shares authorized and unissued                                                                                                          |   | —                          |       | —                  |       |
| Common stock,  par value $.75 per share: 15,000,000 shares authorized; 8,448,222 and  8,391,522 shares issued at March 31, 2003 and December 31, 2002, respectively |   | 6,336                           |       | 6,294                   |       |
| Additional  paid-in-capital                                                                                                                                         |   | 42,198                          |       | 42,508                  |       |
| Retained  earnings                                                                                                                                                  |   | 5,460                           |       | 4,518                   |       |
| Accumulated  other comprehensive loss                                                                                                                               |   | (182                            | )          | (196                    | )          |
| Treasury stock,  at cost; 573,930 shares at March 31, 2003 and December 31, 2002                                                                                    |   | (3,920                          | )          | (3,920                  | )          |
| Total  Shareholders’ Equity                                                                                                                                    |   | 49,892                          |       | 49,204                  |       |
| Total  Liabilities and Shareholders’ Equity                                                                                                                    |   | $                               | 114,094    |                    | $          | 120,804 |   |

 

The accompanying notesare an integral part of these financial statements.

 

4

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COMPUDYNECORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)

 
|                                                      |   | **Three  Months Ended  March 31,**         |   |
|-----------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                      |   | **2003**                                   |   | **2002** |   |
|                                                      |   | **(in  thousands, except per share data)** |   |
|                                                      |   |                                       |   |   |   |
| Net sales                                                 |   | $                                          | 46,767 |   | $ | 30,490 |   |
| Cost of goods  sold                                       |   | 34,984                                     |   | 24,495 |   |
| Gross profit                                              |   | 11,783                                     |   | 5,995 |   |
|                                                      |   |                                       |   |   |   |
| Operating  expenses                                       |   | 7,987                                      |   | 4,519 |   |
| Research and  development                                 |   | 1,862                                      |   | 7 |   |
| Operating income                                          |   | 1,934                                      |   | 1,469 |   |
|                                                      |   |                                       |   |   |   |
| Other expense  (income)                                   |   |                                       |   |   |   |
| Interest expense                                          |   | 378                                        |   | 313 |   |
| Other (income)  expense                                   |   | (16                                        | )      | (62 | ) |
| Total other  expense                                      |   | 362                                        |   | 251 |   |
|                                                      |   |                                       |   |   |   |
| Income before  income taxes                               |   | 1,572                                      |   | 1,218 |   |
| Income taxes                                              |   | 630                                        |   | 437 |   |
| Net income                                                |   | $                                          | 942    |   | $ | 781 |   |
|                                                      |   |                                       |   |   |   |
| Earnings per  share:                                      |   |                                       |   |   |   |
| Basic earnings  per share                                 |   | $                                          | .12    |   | $ | .12 |   |
|                                                      |   |                                       |   |   |   |
| Weighted average  number of common shares outstanding     |   | 7,822                                      |   | 6,673 |   |
|                                                      |   |                                       |   |   |   |
| Diluted earnings  per share                               |   | $                                          | .12    |   | $ | .11 |   |
|                                                      |   |                                       |   |   |   |
| Weighted average  number of common shares and equivalents |   | 8,073                                      |   | 7,246 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

5

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COMPUDYNECORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITY(unaudited)(in thousands)

 
|                                                                        |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive**

**Loss** |       | **Treasury  Stock** |       |   |      |
|-----------------------------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|------------------------|--------|-------------------------------------------------|------------|---------------------|------------|--------|-----------|
|                                                                        |   |              |   |                             |   |                   |   |
|                                                                        |   | **Shares**        |   | **Amount**                       |   |                   |   |                                            | **Shares** |                | **Amount** |   | **Total** |   |
|                                                                        |   |              |   |                             |   |                   |   |                                            |       |                |       |   |      |   |   |   |   |
| December 31,  2002                                                          |   | 8,392             |   | $                                | 6,294  |                   | $      | 42,508                                          |       | $                   | 4,518      |   | $         | (196 | ) | 574 |   | $ | (3,920 | ) | $ | 49,204 |   |
|                                                                        |   |              |   |                             |   |                   |   |                                            |       |                |       |   |      |   |   |   |   |
| Acquisition of  Tiburon purchase price adjustment (As restated, see note 9) |   |              |   |                             |   | (370                   | )      |                                            |       |                |       |   |      |   |   | (370 | ) |
|                                                                        |   |              |   |                             |   |                   |   |                                            |       |                |       |   |      |   |   |   |   |
| Stock options  exercised                                                    |   | 56                |   | 42                               |   | 60                     |   |                                            |       |                |       |   |      |   |   | 102 |   |
|                                                                        |   |              |   |                             |   |                   |   |                                            |       |                |       |   |      |   |   |   |   |
| Net income                                                                  |   |              |   |                             |   |                   |   | 942                                             |       |                |       |   |      |   |   | 942 |   |
|                                                                        |   |              |   |                             |   |                   |   |                                            |       |                |       |   |      |   |   |   |   |
| Other  comprehensive income, net of tax:                                    |   |              |   |                             |   |                   |   |                                            |       |                |       |   |      |   |   |   |   |
| Loss on interest  rate swap agreement                                       |   |              |   |                             |   |                   |   |                                            |       | 21                  |       |   |      |   |   | 21 |   |
| Translation  adjustment                                                     |   |              |   |                             |   |                   |   |                                            |       | (7                  | )          |   |      |   |   | (7 | ) |
| Balance at March  31, 2003 (As restated, see note 9)                        |   | 8,448             |   | $                                | 6,336  |                   | $      | 42,198                                          |       | $                   | 5,460      |   | $         | (182 | ) | 574 |   | $ | (3,920 | ) | $ | 49,892 |   |

 

The accompanying notesare an integral part of these financial statements.

 

6

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COMPUDYNECORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)

 
|                                                                               |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                               |   | **2003**                           |   | **2002** |   |
|                                                                               |   | **(in  thousands)**                |   |
| Cash flows from  operating activities:                                             |   |                               |   |   |   |
| Net income                                                                         |   | $                                  | 942    |   | $ | 781 |   |
|                                                                               |   |                               |   |   |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operations: |   |                               |   |   |   |
| Depreciation and  amortization                                                     |   | 751                                |   | 405 |   |
| Equity earnings  in affiliated company                                             |   | —                             |   | 1 |   |
| Gain from  disposition of property, plant and equipment                            |   | —                             |   | (2 | ) |
| Deferred tax  asset                                                                |   | (1                                 | )      | — |   |
|                                                                               |   |                               |   |   |   |
| Changes in  assets and liabilities:                                                |   |                               |   |   |   |
| Accounts  receivable                                                               |   | 2,632                              |   | 1,384 |   |
| Contract costs  in excess of billings                                              |   | 1,820                              |   | 371 |   |
| Inventories                                                                        |   | 880                                |   | (49 | ) |
| Prepaid expenses  and other current assets                                         |   | 493                                |   | 297 |   |
| Other assets                                                                       |   | (2                                 | )      | (24 | ) |
| Accounts payable  and accrued liabilities                                          |   | 553                                |   | (2,643 | ) |
| Billings in  excess of contract costs incurred                                     |   | (252                               | )      | (1,065 | ) |
| Deferred revenue                                                                   |   | (259                               | )      | — |   |
| Other  liabilities                                                                 |   | —                             |   | (1 | ) |
| Net cash flows  provided by (used in) operating activities                         |   | 7,557                              |   | (545 | ) |
|                                                                               |   |                               |   |   |   |
| Cash flows from  investing activities:                                             |   |                               |   |   |   |
| Additions to  property, plant and equipment                                        |   | (128                               | )      | (1,725 | ) |
| Proceeds from  sale of property, plant and equipment                               |   | 1                                  |   | 4 |   |
| Net payment for  acquisition                                                       |   | (55                                | )      | — |   |
| Net cash flows  used in investing activities                                       |   | (182                               | )      | (1,721 | ) |
|                                                                               |   |                               |   |   |   |
| Cash flows from  financing activities:                                             |   |                               |   |   |   |
| Issuance of  common stock                                                          |   | 102                                |   | 100 |   |
| Borrowings of  bank notes                                                          |   | —                             |   | 3,000 |   |
| Repayment of  bank notes                                                           |   | (7,416                             | )      | — |   |
| Net cash (used  in) provided by financing activities                               |   | (7,314                             | )      | 3,100 |   |
|                                                                               |   |                               |   |   |   |
| Net change in  cash and cash equivalents                                           |   | 61                                 |   | 834 |   |
| Cash and cash  equivalents at beginning of period                                  |   | 1,274                              |   | 296 |   |
| Cash and cash  equivalents at end of period                                        |   | $                                  | 1,335  |   | $ | 1,130 |   |
|                                                                               |   |                               |   |   |   |
| Supplemental  disclosures of cash flow information:                                |   |                               |   |   |   |
| Cash paid during  the period for:                                                  |   |                               |   |   |   |
| Interest                                                                           |   | $                                  | 294    |   | $ | 214 |   |
| Income taxes                                                                       |   | $                                  | 128    |   | $ | 161 |   |

 

The accompanying notesare an integral part of these financial statements.

 

7

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COMPUDYNECORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(UNAUDITED)

 

1.             BASISOF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statementsof CompuDyne Corporation and its subsidiaries (the “Company”) have beenprepared pursuant to the rules and regulations of the Securities and ExchangeCommission. The condensed consolidated balance sheet as of December 31, 2002has been derived from the Company’s December 31, 2002 audited financialstatements.  Certain information andnote disclosures included in the annual financial statements, prepared inaccordance with accounting principles generally accepted in the United Statesof America, have been condensed or omitted pursuant to those rules andregulations, although the Company believes that the disclosures made areadequate to make the information presented not misleading.

 

In the opinion of management, the accompanying unaudited condensedconsolidated financial statements reflect all necessary adjustments andreclassifications (all of which are of a normal, recurring nature) that arenecessary for the fair presentation of the periods presented.  It is suggested that these condensedconsolidated unaudited financial statements be read in conjunction with theconsolidated financial statements and the notes thereto included in the Company’sannual report filed with the Securities and Exchange Commission on Form 10-Kfor the year ended December 31, 2002. Operating results for the three monthsended March 31, 2003 are not necessarily indicative of operating results forthe entire fiscal year.

 

New Accounting Pronouncements:

 

In April 2003, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment ofSFAS No. 133 on Derivative Instruments and Hedging Activities”.  The Statement amends and clarifiesaccounting for derivative instruments, including certain derivative instrumentsembedded in other contracts, and for hedging activities under Statement133.  The amendments set forth in SFAS149 improve financial reporting by requiring that contracts with comparablecharacteristics be accounted for similarly. In particular, this Statementclarifies under what circumstances a contract with an initial net investmentmeets the characteristic of a derivative as discussed in Statement 133. Inaddition, it clarifies when a derivative contains a financing component thatwarrants special reporting in the statement of cash flows. Statement 149 amendscertain other existing pronouncements. Those changes will result in moreconsistent reporting of contracts that are derivatives in their entirety orthat contain embedded derivatives that warrant separate accounting.  This Statement is effective for contractsentered into or modified after June 30, 2003 and for hedging relationshipsdesignated after June 30, 2003. Management does not expect that adoption ofthis pronouncement will have a material effect on the financial position,results of operations or cash flow of CompuDyne.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation —Transition and Disclosure, an amendment of FASBStatement No. 123” which amends SFAS No. 123 (“SFAS 123”), “Accounting forStock-Based Compensation” and the reporting provisions of APB Opinion No. 30,“Interim Financial Reporting.”  SFAS 148provides alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation andrequires prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the method used on reported results. Adoption of this statement was required at the beginning of fiscal year2003.  The adoption of thispronouncement did not have a material effect on the financial position, resultsof operations or cash flow of CompuDyne.

 

In July 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities”. The statement is effective forfiscal years beginning after December 31, 2002.  SFAS No. 146 requires companies to recognize costs associatedwith exit or disposal activities when they are incurred, rather than at thedate of a commitment to an exit or disposal plan. The adoption of this standarddid not have a material impact on the Company’s financial position or resultsof operations or cash flow of CompuDyne.

 

8

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In April 2002, the FASB issued SFAS No. 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.”  This statement iseffective for fiscal years beginning after May 15, 2002.  SFAS 145 requires, among other things, eliminatingreporting debt extinguishments as an extraordinary item in the income statement.  The adoption of this standard did not have amaterial impact on the Company’s financial position or results of operations orcash flow of CompuDyne.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidationof Variable Interest Entities.”  TheInterpretation clarifies the application of Accounting Research Bulletin No.51, “Consolidated Financial Statements,” to certain entities in which theequity investors do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties.  The Interpretation appliesimmediately to variable interest entities created after January 31, 2003, or inwhich the Company obtains an interest after that date.  The Interpretation is effective July 1, 2003to variable interest entities in which the Company holds a variable interestacquired before February 1, 2003.  TheCompany has assessed the impact of adopting this Interpretation. The adoptionof this standard did not have a material impact on the Company’s financialposition or results of operations or cash flow of CompuDyne.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires therecognition of liabilities for guarantees that are issued or modifiedsubsequent to December 31, 2002. The liabilities should reflect the fair value,at inception, of the guarantors’ obligations to stand ready to perform, in theevent that the specified triggering events or conditions occur. The adoption ofthis standard did not have a material impact on the Company’s financial positionor results of operations.

 

Reclassifications:

Certain prior period amounts have been reclassified to conform to thecurrent period’s presentation.

 

2.             OPERATING SEGMENTINFORMATION

 
|                            |   | **Revenues**                       |   | **Gross  Profit** |       | **Pre-tax  Income/(Loss)** |       |
|---------------------------------|--------|------------------------------------|--------|-------------------|------------|----------------------------|------------|
|                            |   | **(Three  Months ended March 31)** |   |
|                            |   | **(in  thousands)**                |   |
|                            |   | **2003**                           |   | **2002**          | ** ** | **2003**                   | ** ** | **2002** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Institutional  Security Systems |   | $                                  | 23,448 |              | $          | 20,220                     |       | $ | 3,277 |   | $ | 3,691 |   | $ | 737 |   | $ | 1,138 |   |
| Attack  Protection              |   | 8,343                              |   | 6,174             |       | 1,975                      |       | 1,327 |   | 562 |   | 7 |   |
| Federal Security  Systems       |   | 3,489                              |   | 2,968             |       | 522                        |       | 451 |   | 207 |   | 49 |   |
| Public Safety  and Justice      |   | 11,487                             |   | 1,128             |       | 6,009                      |       | 526 |   | 68 |   | 2 |   |
| CompuDyne  Corporate            |   | —                             |   | —            |       | —                     |       | — |   | (2 | ) | 22 |   |
|                            |   | $                                  | 46,767 |              | $          | 30,490                     |       | $ | 11,783 |   | $ | 5,995 |   | $ | 1,572 |   | $ | 1,218 |   |

 

3.             EARNINGSPER SHARE

 

Earnings per share are presented in accordance with SFAS No. 128,“Earnings Per Share.”  This Statementrequires dual presentation of basic and diluted earnings per share on the faceof the statement of operations.  Basicearnings per share excludes dilution and is computed by dividing net income bythe weighted-average number of common shares outstanding during theperiod.  Diluted earnings per share alsoreflects the potential dilution that could occur if securities or othercontracts to issue common stock were exercised or converted into commonstock.  Stock options and warrants topurchase 1,037,656 shares and 57,500 shares for the three month periods endedMarch 31, 2003 and 2002 respectively, were not dilutive and, therefore, werenot included in the computation of diluted earnings per common share.

 

9

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The computations of the Company’s basic and diluted earnings per shareamounts for the Company’s operations were as follows:

 
|                                                |   | **Three  Months Ended March 31,**                    |   |
|-----------------------------------------------------|--------|------------------------------------------------------|--------|
|                                                |   | **2003**                                             |   | **2002** |   |
|                                                |   | **(in  thousands, except share and per share data)** |   |
|                                                |   |                                                 |   |   |   |
| Net income                                          |   | $                                                    | 942    |   | $ | 781 |   |
|                                                |   |                                                 |   |   |   |
| Weighted average  common shares outstanding         |   | 7,822                                                |   | 6,673 |   |
| Effect of  dilutive stock options and warrants      |   | 251                                                  |   | 573 |   |
| Diluted weighted  average common shares outstanding |   | 8,073                                                |   | 7,246 |   |
|                                                |   |                                                 |   |   |   |
| Net income per  common share                        |   |                                                 |   |   |   |
| Basic                                               |   | $                                                    | .12    |   | $ | .12 |   |
| Diluted                                             |   | $                                                    | .12    |   | $ | .11 |   |

 

4.             INVENTORIES

 

Inventories consist of the following:

 
|             |   | **March 31,  2003** |   | **December  31,  2002** |   |
|------------------|--------|---------------------|--------|-------------------------|--------|
|             |   | **(in  thousands)** |   |
| Raw materials    |   | $                   | 3,817  |                    | $      | 3,937 |   |
| Work in progress |   | 1,314               |   | 2,197                   |   |
| Finished goods   |   | 390                 |   | 267                     |   |
|             |   | $                   | 5,521  |                    | $      | 6,401 |   |

 

5.             GOODWILL ANDINTANGIBLE ASSETS

 

Intangible assets include trade name, customer relationships andbacklog from the acquisition of Tiburon, Inc. Other intangibles includeDepartment of State Certifications, Underwriters Laboratories, Inc. listings,and patents related to the acquisition of Norment and Norshield.  Except for goodwill and the Tiburon tradename, which have indefinite lives, all intangibles are being amortized usingthe straight-line method.

 

Goodwill and intangible assets consist of the following:

 
|                            |   | **March 31  2003**  |   | **December  31  2002** |   | **Amortizable  Lives** |   |
|---------------------------------|--------|---------------------|--------|------------------------|--------|------------------------|--------|
|                            |   | **(in  thousands)** |   | **(in years)**         |   |
| Goodwill                        |   | $                   | 21,728 |                   | $      | 22,043                 |   | Indefinite |   |
| Trade name                      |   | 6,913               |   | 6,913                  |   | 25 - Indefinite        |   |
| Customer  relationships         |   | 2,500               |   | 2,500                  |   | 14                     |   |
| Backlog                         |   | 300                 |   | 300                    |   | 2                      |   |
| Other  intangibles              |   | 1,220               |   | 1,220                  |   | 2 - 20                 |   |
|                            |   | 32,661              |   | 32,976                 |   |                   |   |
| Less:  accumulated amortization |   | (995                | )      | (867                   | )      |                   |   |
|                            |   | $                   | 31,666 |                   | $      | 32,109                 |   |   |   |

 

Goodwill consisted of $ 20.2 million and $20.5   million for the Public Safety and Justicesegment at March 31, 2003 and December 2002, respectively, and $0.8 million forthe Institutional Security Systems segment and $0.8 million for the AttackProtection segment for both March 31, 2003 and December 31, 2002.

 

10

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Amortization expense for the three months ended March 31, 2003 was $128 thousand.  The following schedulelists the expected amortization expense for each of the years ending December31:

 
|     |   | **(in  thousands)** |   |
|----------|--------|---------------------|--------|
| **Year** |   | **Expense**         |   |
| 2003     |   | $                   | 386    |   |
| 2004     |   | 350                 |   |
| 2005     |   | 270                 |   |
| 2006     |   | 225                 |   |
| 2007     |   | 225                 |   |
| Total    |   | $                   | 1,456  |   |

 

6.             ACQUISITIONOF TIBURON, INC.

 

On January 25, 2002, the Company and Tiburon,Inc. (“Tiburon”) entered into a First Amendment Agreement whereby upon thesatisfaction of certain conditions, the Company agreed to purchase all of theissued and outstanding common shares and other common stock equivalents it didnot already own for a combination of cash and stock.  All requisite conditions were met and the Company completed thepurchase of Tiburon on May 2, 2002. CompuDyne distributed approximately 1.1 million shares of CompuDynecommon stock and approximately 91,000 warrants to purchase shares of theCompany’s stock, valued collectively at $14.3 million and approximately $10.4million, net in cash to acquire the portion of Tiburon that the Company did notpreviously own.  Including the Company’sinitial investment of $6.0 million in Tiburon and transaction costs resulted inthe Company recording $33.4 million as the value of the consideration paid forthis acquisition.  To fund the cashportion of the Tiburon acquisition, the Company negotiated a $10.0 millionincrease in its borrowing facility from its banks.  The remainder of the cash consideration paid was funded from theCompany’s working capital.

 

Tiburon provides a fully integrated suite ofproducts including computer-assisted dispatch, records management and court andprobation software systems for the law enforcement, fire and rescue,corrections and justice environments. Tiburon is a worldwide market leader inthe development, implementation and support of public safety and justiceautomation systems.

 

The Company reduced the purchase price of Tiburon by $370,000.  The Company is still in the process ofcompleting the valuation of fair value of the fixed assets acquired.  The Company expects to complete thevaluation in the second quarter of 2003. The final valuations may differ fromthe amounts included herein.  Currentlygoodwill is estimated to be approximately $20.2 million.

 

In conjunction with preliminary estimates, the purchase price wasrecorded as follows (in thousands):

 
| Goodwill                      |   | $       | 20,155 |   |
|-------------------------------|--------|---------|--------|--------|
| Current assets                |   | 19,638  |   |
| Property plant  and equipment |   | 4,197   |   |
| Other long term  assets       |   | 8,917   |   |
| Liabilities  assumed          |   | (19,477 | )      |
| Purchase price                |   | $       | 33,430 |   |

 

The following are the Company’s unaudited proforma results assuming the acquisition of Tiburon had occurred on January 1,2002:

 
|                 |   | **Three  Months Ended March 31,**          |   |
|----------------------|--------|--------------------------------------------|--------|
|                 |   | **2003**                                   |   | **2002** |   |
|                 |   | **(in  thousands, except per share data)** |   |
|                 |   |                                       |   |   |   |
| Revenue              |   | $                                          | 46,767 |   | $ | 40,915 |   |
| Net income           |   | $                                          | 942    |   | $ | 933 |   |
| Earnings per  share: |   |                                       |   |   |   |
| Basic                |   | $                                          | .12    |   | $ | .12 |   |
| Diluted              |   | $                                          | .12    |   | $ | .11 |   |

 

11

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These unaudited pro forma results have beenprepared for comparative purposes only and do not purport to be indicative ofthe results of operations which would have actually resulted had thecombination been effective on January 1, 2002, or of future results ofoperations.

 

7.             STOCK-BASEDCOMPENSATION

 

At March 31, 2003, the Company continues to account for its stock-basedcompensation plans, which are described more fully in the Company’s 2002 AnnualReport, using the intrinsic value method and in accordance with the recognitionand measurement principles of APB Opinion No. 25, “Accounting for Stock Issuedto Employees,” and related Interpretations. No stock-based employee compensation cost is reflected in net income, asall options granted had an exercise price equal to fair market value of theunderlying common stock on the date of grant. The following table illustrates, in accordance with the provisions ofSFAS No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure,” the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123,  “Accounting for Stock-Based Compensation,”to stock-based employee compensation.

 
|                                                                                                                                               |   | **For the Three  Months  Ended March 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                                                                               |   | **2003**                                   |   | **2002** |   |
|                                                                                                                                               |   | **(in  thousands, except per share data)** |   |
|                                                                                                                                               |   |                                       |   |   |   |
| Net income, as  reported                                                                                                                           |   | $                                          | 942    |   | $ | 781 |   |
| Deduct:  Total stock-based employee compensation  expense determined under fair value based method for all awards net of  related tax effects |   | (363                                       | )      | (258 | ) |
|                                                                                                                                               |   |                                       |   |   |   |
| Pro forma net  income                                                                                                                              |   | $                                          | 579    |   | $ | 523 |   |
|                                                                                                                                               |   |                                       |   |   |   |
| Earnings per  share:                                                                                                                               |   |                                       |   |   |   |
| Basic – as  reported                                                                                                                          |   | $                                          | .12    |   | $ | .12 |   |
| Basic – pro  forma                                                                                                                            |   | $                                          | .07    |   | $ | .08 |   |
|                                                                                                                                               |   |                                       |   |   |   |
| Diluted – as  reported                                                                                                                        |   | $                                          | .12    |   | $ | .11 |   |
| Diluted – pro  forma                                                                                                                          |   | $                                          | .07    |   | $ | .07 |   |

 

The fair value of the Company’s stock-based option awards to employeeswas estimated assuming no expected dividends and the following weighted-averageassumptions:

 
|                     |   | **2003** |   | **2002** |   |
|--------------------------|--------|----------|--------|----------|--------|
| Expected  volatility     |   | 73.0     | %      | 75.0     | %      |
| Risk-free interest  rate |   | 3.9      | %      | 4.7      | %      |
| Expected life in  years  |   | 7.5      |   | 7.5      |   |

 

8.             PRODUCTWARRANTIES

 

Accruals forestimated expenses related to warranties are made at the time products are soldor services are rendered. These accruals are established using historical informationon the nature, frequency, and average cost of warranty claims. The Companywarrants numerous products, the terms of which vary widely. In general, theCompany warrants its products against defect and specific non- performance. AtMarch 31, 2003, the Company has a product warranty accrual in the amount of$476 thousand.

 

12

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|                                   |   | **Product Warranty Liabilities** |   |
|----------------------------------------|--------|----------------------------------|--------|
|                                   |   | **(in thousands)**               |   |
| Beginning balance at December 31, 2002 |   | $                                | 482    |   |
| Plus accruals for product              |   | (6                               | )      |
| Ending balance at March 31, 2003       |   | $                                | 476    |   |

 

9.             AMENDMENTTO QUARTERLY FINANCIAL STATEMENTS

 

Subsequent to the issuance of the Company’s condensed consolidatedfinancial statements for the three month period ended March 31, 2003, theCompany determined that the purchase price of Tiburon was incorrectly reducedin the quarter ended March 31, 2003 resulting in an understatement of goodwillin the amount of $3,430,000 with a corresponding understatement of additionalpaid-in-capital.  The accompanying condensedconsolidated balance sheet as of March 31, 2003 includes the restated purchaseprice amounts.  Such restatement had noeffect on previously reported results of operations or cash flows.

 

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ITEM 2

COMPUDYNECORPORATION AND SUBSIDIARIES

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OFOPERATIONS

 

**Overview**

 

CompuDyne Corporation,(“CompuDyne” or the “Company”) was reincorporated in Nevada in 1996, and is aleading provider of products and services to the Public Security market. TheCompany operates in four (4) distinct segments in this marketplace:Institutional Security Systems (formerly known as Corrections), AttackProtection, Federal Security Systems and Public Safety and Justice.

 

The InstitutionalSecurity Systems segment is headquartered in Montgomery, Alabama and is knownto the trade as Norment Security Group (“Norment”).  This segment provides physical and electronic security productsand services to the corrections industry (prisons and jails) and to thecourthouse, municipal and commercial markets. Norment serves as a contractor, responsible for most installation workon larger projects.  Installationsinvolve hard-line (steel security doors, frames, locking devices, etc.) andsophisticated electronic security systems, including software, electronics,touch-screens, closed circuit TV, perimeter alarm devices and other securitymonitoring controls.  Norment alsodeveloped a product called MaxWall. MaxWall is a modular steel, concrete filled prefabricated jailcell.  It allows for constructionprojects to use considerably less space and can save the project ownersignificant amounts of money.  Norment,through a network of regional offices provides field level design, installationand maintenance of both physical and electronic security products.

 

Included in theInstitutional Security Systems segment is the TrenTech line which designs,manufactures and integrates electronic security systems.  TrenTech integrates generally availableproducts and software as well as designing its own proprietary systems.TrenTech has developed a sophisticated proprietary video badging system, whichhas become the virtual standard for the United States Air Force and has beeninstalled at over 200 United States Air Force facilities throughout the world.

 

The InstitutionalSecurity Systems segment also manufactures a complete line of locks and lockingdevices under the brand name Airteq. Airteq is an industry leader in pneumatic and electro-mechanical slidingdevices used in the corrections industry.

 

The Attack Protectionsegment is the country’s largest Original Equipment Manufacturer (OEM) ofbullet, blast and attack resistant windows and doors designed for high securityapplications such as embassies, courthouses, Federal buildings, banks,corporate headquarters and other facilities that insist on having the highestlevel of protection currently available. CompuDyne is a premier provider of Level 8 security products, thehighest rating level of commercial security products. The product manufacturedis an integrated and structurally secure product where the rated protectioncomes not only from the glass but also from the frame and encasement, which arespecifically designed to become integral parts of the structure into which theyare to be installed.  Existing productinstallations number in the thousands and range from the Middle East to theWhite House.  Working under contractsfrom the United States Department of State, the segment’s largest customer,Attack Protection is the largest supplier of bullet and blast resistant windowsand doors to United States embassies throughout the world.  Products are also sold to drug stores,convenience stores, and banks to secure drive through facilities.  Other commercial applications include guardbooths, tollbooths, cash drawers and other similar items.  Additionally, this segment designs andinstalls both fixed and pop-up bollards and barrier security systems.

 

The Attack Protectionsegment also manufactures a highly sophisticated fiber optic sensor system,known as Fiber SenSys, used to detect physical intrusion.  This application is designed to protectlarge perimeters including such applications as Federal facilities, oil fields,airport tarmacs, public utilities, nuclear reactors and water systems.  In addition, it has been installed toprotect the perimeters of numerous private estates and other similarproperties.  A related product isSecurLan, which protects data lines from physical intrusion using a fiber optictechnology similar to the Fiber SenSys technology.

 

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The Federal SecuritySystems segment is known as Quanta Systems Corporation.  This segment has been serving the Federalgovernment’s security needs since 1952. Its customer base includes military, governmental agencies, and stateand local governmental units.  FederalSecurity Systems provides turnkey systems integration of public security andsafety systems.  This segment is a classicsecurity integrator and specializes in a wide range of customized accesscontrol and badging, intrusion detection, surveillance and assessment,communications, command and control, fire and life safety, and asset trackingsystems.  Federal Security Systemsprovides central station oversight and control of multiple and separatefacilities as well as security and public life safety systems and equipment.

 

The Public Safety andJustice segment consists of two subsidiaries known to the industry as CorrLogic,Inc., (“CorrLogic”) and Tiburon, Inc. (“Tiburon”).  CorrLogic is a leading developer of inmate management andinstitutional medical software systems. CorrLogic specializes in thedevelopment, implementation and support of complex, integrated inmate managementsoftware systems, including inmate medical management that improves theefficiency and accuracy of correctional facility operations.  CorrLogic’s focus is entirely on informationsolutions for the corrections industry.

 

CompuDyne expanded itsofferings in the Public Safety and Justice sector through the completion of itsacquisition of Tiburon, on May 2, 2002. Tiburon provides a fullyintegrated suite of products including computer-assisted dispatch, recordsmanagement, court and probation software systems for the law enforcement, fireand rescue, corrections and justice environments.  Tiburon is a worldwide market leader in the development,implementation and support of public safety and justice automation systems.  In business since 1980, with more than 450systems supporting over 700 agencies, Tiburon is a leader in public safety andjustice solutions.

 

15

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The Company has restatedthe three month period ended March 31, 2003 as discussed in footnote 9 tothe condensed consolidated financial statements.  Management’s Discussion and Analysis reflects the effects of thisrestatement.

 

**RESULTS OF OPERATIONS**

 

Three months endedMarch 31, 2003 and 2002

 

*Revenues*. The Company had revenues of $46.8 million and $30.5 million for thethree-month periods ended March 31, 2003 and March 31, 2002,respectively.  This was an increase of$16.3 million or 53.4%.

 

Revenues from theInstitutional Security Systems segment increased from $20.2 million in thefirst quarter of 2002 to $23.4 million in the first quarter of 2003.  This was an increase of 16.0%.  The Institutional Security Systems segmentis largely a construction driven business. Much of its revenue is obtained by working on new and retrofitconstruction projects in the corrections industry, as opposed to from sourcesof recurring revenue.  As such, theincrease in revenue experienced by this segment is largely attributable to itsability to win and work on more projects than it did in the comparable quarterof the previous year. One of the reasons it was able to do this was because itsbacklog had grown from $92.3 million at December 31, 2001 to $99.5 millionat December 31, 2002 thus providing it with the ability to engage in morework in the first quarter of 2003 than it did in the first quarter of2002.  At March 31, 2003, thebacklog for the Institutional Security System’s segment had declined to $91.6million.  The first quarter of 2003 wasa slow bidding period, which the Company attributes to the seasonal nature ofthe bidding process.

 

Revenues from the AttackProtection segment increased from $6.2 million during the quarter endedMarch 31, 2002 to $8.3 million in the quarter ended March 31,2003.  This was an increase of 35.1%.  The Attack Protection segment was largelycapacity constrained during 2001.  As aresult, the Company purchased an existing 75,000 square foot factory on 20acres of land in close proximity to its existing factory in Montgomery,Alabama.  This expansion provides thesegment with the necessary capacity to generate incremental revenue ofapproximately $10 million per year.  Ofthe $2.2 million of increased revenue generated by the Attack Protectionsegment, $2.7 million of the increase came from its Norshield product linewhile its Fiber SenSys product line saw a decrease in revenue of $0.5million.  The Norshield product lineencompasses the segment’s bullet and blast resistant windows and doors, guardbooths, bollards, barriers and other related products.  During the first quarter of 2003, the AttackProtection segment experienced an increased demand for its products, as theslow down in the government building process experienced during the firstquarter of 2002 appeared to end. Now it appears that projects are beingreleased for construction, and thus the Attack Protection segment experiencedan increased demand for its products. The Segment’s Fiber SenSys product line consists primarily of fiberoptic perimeter protection products. These products experienced significant growth in 2002 as revenues fromthis product line grew from $1.5 million in 2001 to $4.9 million in 2002, ofwhich $1.8 million occurred in the first quarter of 2002.  Orders received for the Fiber SenSys linetend to be large dollar orders. Although fewer orders were received and shipped for these productsduring the first quarter of 2003 as compared to the first quarter of 2002, theCompany continues to see heightened interest for these products and expectssales for these items to continue to experience significant growth in 2003.

 

Revenues from the FederalSecurity Systems segment increased from $3.0 million during the first quarterof 2002 to $3.5 million during the first quarter of 2003.  This was an increase of 17.6%.  At December 31, 2001 the Federal SecuritySystems segment backlog was a relatively small $380 thousand.  Substantially all of this segment’s revenueis backlog driven.  Its backlog istherefore a precursor to future revenues. The Federal Security Systemssegment’s failure to have any meaningful backlog at December 31, 2001resulted in substantially all of its first quarter 2002 revenue being driven bycontract awards it received during the first quarter of 2002.  This inherently caused the segment’s revenueto be low during that period.  The FederalSecurity Segment ended 2002 with a significantly improved backlog level of$11.7 million.  As such it entered thefirst quarter of 2003 with a much greater book of business from which togenerate its increased revenue in the first quarter of 2003.

 

16

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Revenues from the PublicSafety and Justice segment increased $10.4 million from $1.1 million during thefirst quarter of 2002 to $11.5 million during the first quarter of 2003.  On May 2, 2002 the Company completedits acquisition of Tiburon, Inc.  Priorthereto, the Company controlled approximately 20% of Tiburon and recorded itsinvestment in Tiburon under the equity method of accounting.  Subsequent to May 2, 2002, Tiburonbecame a wholly owned subsidiary of the Company and thus its results are nowconsolidated with those of the Company. Tiburon’s revenues for the three months ended March 31, 2003amounted to $10.4 million, which accounts for substantially all of the increasein revenue experienced by this segment during the first quarter of 2003compared to the first quarter of 2002.

 

*Expenses*. Cost of goods sold increased from $24.5 million during the first quarterof 2002 to $35.0 million during the first quarter of 2003.  This increase was largely a result of theacquisition of Tiburon on May 2, 2002, which added $4.7 million of cost ofgoods sold to the results of the Company, as well as increased costs of goodssold of $3.7 million at the Institutional Security Systems segment, $1.6million at the Attack Protection segment and $0.5 million at Federal SecuritySystems, all largely attributable to the increased sales levels attained bythese segments.

 

The smaller percentageincrease in cost of goods sold as compared to the percentage increase in salesresulted in an increased gross profit percentage of 25.2% in 2003 as comparedto 19.7% during the first quarter of 2002.

 

Cost of goods sold in theInstitutional Security Systems segment increased from $16.5 million in thefirst quarter of 2002 to $20.2 million in the first quarter of 2003.  This was an increase of $3.7 million or22.0%, This increase was larger than the related sales increase of this segmentof 16.0% resulting in a decline in the gross profit percentage from 18.3% inthe first quarter of 2002 to 14.0% in the first quarter of 2003.  During 2002, the West Coast operations ofthe Institutional Security Systems segment experienced significant costoverruns on many of its projects.  Thesecost overruns were incurred and recorded during the third and fourth quartersof 2002 and amounted to approximately $1.8 million.  As a result, manyof the projects needed to be completed with little or no margin remaining inthem.  As these projects were brought tocompletion, many in the first quarter of 2003, the revenues generated by themresulted in very little gross margin. This was the primary reason for the decrease in gross profit percent byInstitutional Security Systems.  Toaddress this situation, the Company implemented more centralized controls andhas replaced certain personnel at its West Coast operations.

 

Cost of goods sold in theAttack Protection segment increased from $4.8 million in the first quarter of2002 to $6.4 million in the first quarter of 2003.  This was an increase of $1.6 million or 31.4%. This increase wassmaller than the related sales increase of this segment of 35.1%, resulting inan increase in the gross profit percentage from 21.5% in the first quarter of2002 to 23.7% in the first quarter of 2003. During the first quarter of 2002 the Attack Protection segmentexperienced lower-than-expected volume in its bullet and blast resistantwindows and doors product line which was exacerbated by excess plant capacitywhich resulted from the addition of its new 75,000 square foot factory that wasplaced in service during the first quarter of 2002.  As a result of the terrorist attacks of September 11, 2001,the Company had geared up in anticipation of increased demand for thissegment’s products, which is only now beginning to materialize.  This new factory was provisioned andstaffed, via new equipment and hires as well as by the movement of equipmentand staff from its existing factory. This resulted in the Company running both of its factories at levelssignificantly below optimum capacity, resulting in operational inefficiencies.As a result, the Company experienced incremental expenses in excess of thecommensurate sales volume increase resulting in the lower gross profitpercentage during the first quarter of 2002.

 

Cost of goods sold in theFederal Security Systems segment increased from $2.5 million in the firstquarter of 2002 to $3.0 million in the first quarter of 2003.  This was an increase of $0.5 million or17.9%.  This increase was consistentwith the related sales increase of this segment of 17.6%.  The Federal Security Systems segment grossprofit percentage was 15.2% and 15.0% during the first quarters of 2002 and2003 respectively.  Substantially all ofthe projects awarded in this segment are discrete projects.

 

Cost of goods sold in thePublic Safety and Justice segment increased from $0.6 million in the firstquarter of 2002 to $5.5 million in the first quarter of 2003.  This was an increase of $4.9 million.  Substantially all of this increase was aresult of the Company’s May 2, 2002 acquisition of Tiburon.

 

17

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Operating expensesincreased from $4.5 million in the first quarter of 2002 to $8.0 million in thefirst quarter of 2003.  This was anincrease of $3.5 million or 76.7%. Substantially all of the change in operating expenses was a result ofthe Company’s May 2, 2002 acquisition of Tiburon.

 

*Amortization of Intangible Assets and Capitalized SoftwareAcquired in the Tiburon Acquisition*    In conjunction with the acquisition on May 2, 2002, ofTiburon, Inc. and in compliance with Statement of Financial AccountingStandards No. 141, (SFAS 141) Business Combinations, the Company determined thefair value of the following identifiable assets and assigned the indicatedlives thereto for purposes of amortization and depreciation.

 
|                    |   | **Amount**          |   | **Life**       |       |
|-------------------------|--------|---------------------|--------|----------------|------------|
|                    |   | **(in  thousands)** |   | **(in years)** |       |
| Trade  name             |   | $                   | 5,340  |           | Indefinite |   |
| Customer  relationships |   | $                   | 2,500  |           | 14         |   |
| Software                |   | $                   | 3,000  |           | 5          |   |
| Backlog                 |   | $                   | 300    |           | 2          |   |
| Other                   |   | $                   | 135    |           | 3          |   |

 

The amortization of theabove intangibles for the three months ended March 31, 2003 resulted inthe Company recording amortization expense related to the intangibles andsoftware included in property, plant and equipment of $243 thousand, which isincluded in operating expenses.

 

Research and Developmentexpenses increased from $7 thousand in the first quarter of 2002 to $1.9million in the first quarter of 2003. Historically, the Company did not expend significant monies on researchand development.  With the acquisitionof Tiburon, the Company expends significantly more dollars on softwaredevelopment.  Being a technology drivenenterprise, Tiburon is required to continually update and enhance its softwareofferings thus causing it to incur significant research and development costs.

 

Interest expenseincreased from $313 thousand in the first quarter of 2002 to $378 thousand inthe first quarter of 2003. The increase in the Company’s interest expenseduring the first quarter of 2003 is a result of the Company having a greateraverage level of borrowings in the first quarter of 2003 as compared to thefirst quarter of 2002.

 

The following tablecompares the weighted average of the Company’s the first quarter of 2003 andthe first quarter of 2002 interest bearing borrowings and the related interestrates charged thereon.

 
|                                             |   | **Average  first quarter of 2003** |   | **Average  first quarter of 2002** |   |
|--------------------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
| **(in thousands)**                               |   | **Amount**                         |   | **Rate**                           |   | **Amount** |   | **Rate** |   |
| Bank  borrowings                                 |   | $                                  | 25,089 |                               | 6      | % | $ | 16,636 |   | 7 | % |
| Subordinated  borrowings                         |   | $                                  | — |                               | — |   | $ | 1,762 |   | 6 | % |
| Amortization  and write-off of financing charges |   | $                                  | 50     |                               |   |   | $ | 38 |   |   |   |
|                                                  |        |                                    |        |                                    |        |  |  |  |  |  |  |  |

 

*Taxes on Income*  The effective tax rate in the first quarter of 2003 was 40.0% ascompared to 35.9 % in the first quarter of 2002.  The primary reason for this change in effective tax rates is dueto a change in the mix in the states in which the Company’s earnings occur andbecause of lower levels of tax deductions received from same day sales fromemployees exercising and selling stock purchased under the Company’s stockoption plan.

 

*Net Income.*  The Company reported net income of $942 thousand and  $781 thousand in the first quarters of 2003and 2002, respectively.  Fully dilutedearnings per share increased to  $.12 inthe first quarter of 2003 from $.11 in the first quarter of 2002.  The weighted average number of common sharesoutstanding and equivalents increased from 7.2 million in the first quarter of2002 to $8.1 million in the first quarter of 2003.

 

18

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**Liquidity and Capital Resources**

 

The Company funds itsoperations through cash flows generated from its operations, bank financing,and the sale of its common stock.  TheCompany’s liquidity requirements arise from cash necessary to carry its inventoriesand billed and unbilled receivables, for capital expenditures, to repurchaseshares of its common stock under its share repurchase program, for payments ofprincipal and interest on outstanding indebtedness and for acquisitions. Theultimate customers of the Company are primarily Federal, State and localgovernmental units.  In the event thefunding of these governmental units is reduced for any reason, includingbudgetary reductions due to economic conditions, there is a risk that thedemand for the Company’s goods and services would decrease which would reducethe availability of funds to the Company.

 

As of March 31,2003, the Company had working capital of $25 million compared with $31 millionas of December 31, 2002. The most significant changes in working capitalwere decreases in accounts receivable and contract costs in excess of billings.

 

Net cash provided byoperating activities was $7.6 million in the first three months of 2003 versus$545 thousand used in operating activities in the first three months of 2002.

 

Net cash used forinvesting activities was $182 thousand in the first three months of 2003compared to $1.7 million in the first three months of 2002.  Capital expenditures of $1.7 million weremade in 2002 for the acquisition and provisioning of the Attack Protectionsegment’s new 75,000 square foot factory in Montgomery, Alabama to increasecapacity of the Attack Protection segment.

 

Net cash used infinancing activities amounted to $7.3 million in the first three months of 2003compared with $3.1 million provided by financing in 2002. The decrease in cashprovided by financing activities is primarily a result of repayments under theCompany’s bank credit facilities.

 

The following tablesummarizes the contractual obligations of the Company as of March 31, 2003and the payments due by period.

 
|              |   | **Payments  Due by Period** |   |
|-------------------|--------|-----------------------------|--------|
|              |   | **(in  thousands)**         |   |
|              |   | **Long-Term  Debt**         |   | **Operating  Leases** |   |
| December 31: |   |                        |   |   |   |
| 2003              |   | $                           | 1,986  |   | $ | 2,130 |   |
| 2004              |   | 14,103                      |   | 2,619 |   |
| 2005              |   | 440                         |   | 1,840 |   |
| 2006              |   | 440                         |   | 777 |   |
| 2007              |   | 440                         |   | 556 |   |
| Thereafter        |   | 2,685                       |   | 380 |   |
| Totals            |   | $                           | 20,094 |   | $ | 8,302 |   |

 

The Company’s totaloutstanding borrowings at March 31, 2003 amounted to $20.1 million.  These borrowings were at variable rates.

 

The Company had two (2)borrowings from banks, both made under a Credit Agreement that provides forboth term borrowings and a line of credit. The first borrowing is a 3-year term loan due in quarterly installmentsthrough November 2004.  Thisborrowing of $5.0 million was entered into on November 16, 2001.  The amount outstanding as of March 31,2003 was $2.9 million.  The interestrate is variable and can range from LIBOR +1.75% to 3.5% or prime +0.5% to2.25%.  The rate charged the Company isbased on the Company’s leverage ratio at the end of each quarter.  The leverage ratio is defined as the ratioof consolidated indebtedness for borrowed money, capital leases, guaranties ofborrowed money and reimbursement obligations in respect of letters

 

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of credit divided by theCompany’s earnings before interest, taxes, depreciation, and amortization(EBITDA).

 

The second borrowingavailable from banks under the Credit Agreement is a $28.0 million line ofcredit, due November 16, 2004. Borrowings outstanding under this line of credit at March 31, 2003were $12.0 million.  Its interest rateis variable and can range from LIBOR + 1.50% to 3.25% or prime +0.25% to2.0%.  The rate charged the Company isbased on the Company’s leverage ratio at the end of each quarter as defined above.

 

The Company also had (2)two industrial revenue bonds outstanding at March 31, 2003 in the amountsof $1.7 million and $3.5 million.  Theseborrowings bore interest at variable rates between 1.1% and 1.9% for the firstquarter of 2003 based on weekly market conditions.  These bonds are fully collateralized by bank letters of creditissued under the bank Credit Agreement. The Company’s banks consider letters of credit as outstanding borrowingswhen considering the amount of availability the Company has remaining under itsline of credit.

 

Other than the Company’s$5.6 million of letters of credit, $4.0 million of which was entered into inApril, 2002, primarily to secure an Industrial Revenue Bond Borrowing on theCompany’s new Attack Protection facility, the Company has no other material offbalance sheet liabilities.

 

The Company had $10.4million of unused availability under its line of credit at March 31, 2003.

 

As a result of thevariable nature of the interest rate on the Company’s Bank borrowings, anyincrease in the amount of outstanding borrowings and/or decreases in theCompany’s EBITDA (an increase in the “leverage ratio”) will result in theCompany’s interest rate increasing and thus the amount of interest expenseincurred also increasing.

 

The Company anticipatesthat cash generated from operations and borrowings under the working capitalline of credit will enable the Company to meet its liquidity, working capitaland capital expenditure requirements during the next 12 months.  The Company, however, may require additionalfinancing to pursue its strategy of growth through acquisitions.  If such financing is required, there are noassurances that it will be available, or if available, that it can be obtainedon terms favorable to the Company.  TheCompany presently has no binding commitment or binding agreement with respectto any acquisition or strategic investment. However, from time to time, theCompany may be party to one or more non-binding letters of intent regardingmaterial acquisitions, which, if consummated, may be paid for with cash orthrough the issuance of a significant number of shares of the Company’s commonstock.  On May 2, 2002, the Companycompleted the acquisition of Tiburon, Inc. CompuDyne distributed approximately1.1 million shares of CompuDyne common stock and approximately 91,000 warrantsto purchase shares of the Company’s stock, valued collectively at $14.3 millionand approximately $10.4 million, net in cash to acquire the portion of Tiburonthat the Company did not previously own. Including the Company’s initial investment of $6.0 million in Tiburonand transaction costs resulted in the Company recording $33.4 million as thevalue of the consideration paid for this acquisition.  To fund the cash portion of the Tiburon acquisition, the Companynegotiated an increase in its bank line of credit of $10.0 million effectiveMay 2, 2002.  Borrowings made bythe Company under this increased facility may result in increased interestrates charged to the Company, to the extent its leverage ratio changesresulting in increased interest charges. As a result of the approval of this borrowing, the Company had adequatecash available to complete this transaction.

 

On March 21, 2003,the Company and its banks amended the Company’s loan agreements, which includeda waiver of compliance with a variety of its loan covenants as ofDecember 31, 2002.  In conjunctionwith the amendment, the Company agreed to raise $7.0 million of new equity orborrowings, or a combination thereof, subordinate to its existing bankborrowings, by June 30, 2003.  TheCompany does not know what the raising of this subordinate capital will cost orwhat its terms may be.  In lieu ofraising the $7.0 million of new equity or borrowings, the Company is indiscussions to replace one of its lenders and to further amend its loanagreements.

 

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Additional Considerations

 

**Cost Containment**

 

Due to current economicconditions, and in light of a very strong competitive environment, the Companyrecognizes that its ability to increase the prices it charges its customers islimited.  As a result, in order toenhance its profitability, the Company recognizes the need to continue to seek waysto reduce its costs.

 

**Office Closures and Consolidations**

 

In January 2003, theCompany closed its Midwest Regional Office, located in Wauwatusa, Wisconsin,and consolidated its operations into its Montgomery, Alabama office.  The Company does not believe this office closurewill have a negative impact on its ability to generate sales in the Midwestregion.  The Company anticipates thatclosure of this office will result in annual overhead savings of approximately$100 thousand.

 

**Pension Plan**

 

Prior to this year theCompany maintained a money purchase pension plan which covers employees at oneof its divisions.  Salaried employees atthis division were eligible to participate in this plan after one year ofservice.  Annual contributions ofbetween 3% and 5% of annual compensation were made by the Company depending onthe employees’ years of service.  Theexpense related to the plan was $126 thousand during the first quarter of2002.  Effective December 31, 2002,the Company ceased contributions to this plan. The balances in this plan will be 100% vested and rolled into theCompuDyne 401K plan in 2003.

 

**CompuDyne’sTotal Backlog**

 

CompuDyne’s total backlogamounted to $184 million at March 31, 2003.  The break down of the Company’s backlog by business segment is asfollows:

 
|                            |   | **March 31,  2003** |    | **December,  31,  2002** |   |
|---------------------------------|--------|--------------------------|---------|--------------------------|--------|
|                            |   | **(in thousands)**       |    | **(in thousands)**       |   |
| Institutional  Security Systems |   | $                        | 91,602  |                     | $      | 99,527 |   |
| Attack  Protection              |   | 14,827                   |    | 18,478                   |   |
| Federal  Security Systems       |   | 11,667                   |    | 11,440                   |   |
| Public  Safety and Justice      |   | 66,007                   |    | 74,867                   |   |
| Totals                          |   | $                        | 184,103 |                     | $      | 204,312 |   |

 

Included in the backlogof the Public Safety and Justice segment at March 31, 2003 is $13.1million representing awards received by the segment, for which the customershave not yet entered into signed contracts. These awards are expected to result in signed contracts over the nexttwelve (12) months.

 

**Critical Accounting Policies**

 

A complete description ofthe Company’s significant accounting policies appears in the Company’s AnnualReport to its stockholders and incorporated by reference in its Annual Reporton Form 10-K for the year ended December 31, 2002.

 

Percentage of CompletionAccounting

 

Approximately 85.0% ofthe Company’s revenues are derived from long term contracts where revenue isrecognized under the percentage of completion method of accounting.  The Company’s software related contractsutilize labor hours incurred to date on a project, divided by the totalexpected project hours to determine the completion percentage.  The Company’s manufacturing, construction,and service contracts utilize costs incurred to date on a project, divided bythe total expected project costs to determine the completion percentage.  Both of these methods require considerablejudgment and as such, the estimates derived at any point in time could differsignificantly from actual results. These estimates effect many of the balance sheet and statement ofoperations accounts including net sales, cost of goods sold, accountsreceivable, contract costs in excess of billings and billings in excess ofcontract costs incurred.

 

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Provisions for estimatedlosses on uncompleted contracts are recognized in the period such losses aredetermined.

 

Goodwill and IntangibleAssets

 

The Company reviews thecarrying value of goodwill and intangible assets annually, utilizing adiscounted cash flow model.  Changes inestimates of future cash flows caused by items such as unforeseen events orchanges in market conditions could negatively affect the reporting unit’s fairvalue and result in an impairment charge. The Company cannot predict the occurrence of events that might adverselyaffect the reported value of goodwill and intangible assets that totaled $21.7million and $10.9 million, respectively at March 31, 2003.

 

**Economic Conditions and the After Effect of theSeptember 11, 2001 Terrorist Attacks**

 

Much of the workCompuDyne performs is for State and local governmental units.  These entities have been particularly hardhit by recent economic conditions and the resultant contraction of the taxbases of these governmental units.  Thishas caused these governmental units to carefully evaluate their budgets anddefer expenses and projects where possible. Much of the work of the Company’s Public Safety and Justice and InstitutionalSecurity Systems segments is contracted with these State and local governmentalunits.  As a result, these segments,although building a strong backlog, have seen delays in new work available tobe bid and worked on.  In addition, evenwork that has been contracted for, where possible is being deferred by thecustomer into the future, presumably when the economy experiences more robusttimes.

 

After the occurrence ofthe tragic events of the September 11, 2001 terrorist attacks, there was ageneral perception that CompuDyne’s Federal Security Systems and AttackProtection segments would see a significant increase in order flow.  To the contrary, in the months subsequent tothe terrorist attacks these segments actually saw a slowing in new work opportunitiesas the various Federal agencies and other customers that are the usual sourceof business for the Company slowed their procurement processes waiting fordefinitive direction as to how to proceed in the post September 11 world.Now further complicated by the military action in Iraq, the Company’s customersare reevaluating priorities and budgets and are funding only their mostpressing demands while also making key decisions as to which projects can bedeferred.

 

Over time the Companybelieves these units will start to see a significant increase in business whichhas only recently begun.

 

As a result of the abovefactors, the Company is experiencing a more challenging marketplace than it hasexperienced in several years.

 

**Impactof Inflation**

 

Inflation did not have asignificant effect on CompuDyne’s operations during the quarter endedMarch 31, 2003.

 

**MarketRisk**

 

The Company is exposed tomarket risk related to changes in interest rates.  At March 31, 2003, the Company had a total of $20.1 millionof notes payable outstanding. These borrowings were all at variable rates. TheCompany entered into an interest rate swap agreement on June 26, 2001 inthe initial amount of $11.5 million. The amount of this swap agreement declines by $676 thousand on a quarterlybasis until it becomes $0 on October 1, 2005.  At March 31, 2003 the amount of the swap agreement haddeclined to $7.4 million at a fixed rate of 4.9%.  As such, approximately $12.7 million of the Company’s variablerate borrowings were not hedged with an interest rate swap agreement.  The effects of a 100 basis point change ininterest rates would not be material to the results of operations of theCompany.

 

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**RecentAccounting Pronouncements**

 

In April 2003, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 149, “Amendment of SFAS No. 133 on DerivativeInstruments and Hedging Activities”.  TheStatement amends and clarifies accounting for derivative instruments, includingcertain derivative instruments embedded in other contracts, and for hedgingactivities under Statement 133.  Theamendments set forth in SFAS 149 improve financial reporting by requiring thatcontracts with comparable characteristics be accounted for similarly. Inparticular, this Statement clarifies under what circumstances a contract withan initial net investment meets the characteristic of a derivative as discussedin Statement 133. In addition, it clarifies when a derivative contains afinancing component that warrants special reporting in the statement of cashflows. Statement 149 amends certain other existing pronouncements. Thosechanges will result in more consistent reporting of contracts that arederivatives in their entirety or that contain embedded derivatives that warrantseparate accounting.  This Statement iseffective for contracts entered into or modified after June 30, 2003 andfor hedging relationships designated after June 30, 2003. Management doesnot expect that adoption of this pronouncement will have a material effect onthe financial position, results of operations or cash flow of CompuDyne.

 

In December 2002,the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123” whichamends SFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” andthe reporting provisions of APB Opinion No. 30, “Interim FinancialReporting.”  SFAS 148 providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation and requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. Adoption of this statement was required at the beginning of fiscal year2003.  The adoption of this pronouncementdid not have a material effect on the financial position, results of operationsor cash flow of CompuDyne.

 

In July 2002, theFASB issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities”. The statement is effective for fiscal years beginningafter December 31, 2002.  SFAS No.146 requires companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of a commitment to anexit or disposal plan. The adoption of this standard did not have a materialimpact on the Company’s financial position or results of operations or cashflow of CompuDyne.

 

In April 2002, theFASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.”  This statement is effective for fiscal yearsbeginning after May 15, 2002.  SFAS145 requires, among other things, eliminating reporting debt extinguishments asan extraordinary item in the income statement. The adoption of this standard did not have a material impact on theCompany’s financial position or results of operations or cash flow ofCompuDyne.

 

In January 2003, theFASB issued FASB Interpretation No. 46, “Consolidation of Variable InterestEntities.”  The Interpretation clarifiesthe application of Accounting Research Bulletin No. 51, “Consolidated FinancialStatements,” to certain entities in which the equity investors do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additional subordinatedfinancial support from other parties. The Interpretation applies immediately to variable interest entitiescreated after January 31, 2003, or in which the Company obtains aninterest after that date.  TheInterpretation is effective July 1, 2003 to variable interest entities inwhich the Company holds a variable interest acquired before February 1,2003. The Company has assessed the impact of adopting this Interpretation. Theadoption of this standard did not have a material impact on the Company’sfinancial position or results of operations or cash flow of CompuDyne.

 

In November 2002,the FASB issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” (“FIN 45”). FIN 45 requires the recognition of liabilities forguarantees that are issued or modified subsequent to December 31, 2002.The liabilities should reflect the fair value, at inception, of the guarantors’obligations to stand ready to perform, in the event that the specifiedtriggering events or conditions occur. The adoption of this standard did nothave a material effect on the results of operations or financial condition orcash flow of CompuDyne.

 

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**Safe Harbor Statement Under the Private Securities LitigationReform Act of 1995**

Certain statements madein this amended Quarterly Report with regard to the Company’s expectations asto future revenues, expenses, financial position and industry conditions, theCompany’s ability to secure new contracts, its goals for future operations,implementation of business strategy and other future events constitute“forward-looking statements” within the meaning of the federal securities law.  When used in this Form 10Q/A, words such as“anticipate,” “believe,” “estimate,” “expect,” “intend” and similarexpressions, as they relate to management, identify forward-lookingstatements.  Although the Company makessuch statements based on current information and assumptions it believes to bereasonable, there can be no assurance that actual results will not differmaterially from those expressed or implied by such forward-lookingstatements.  Actual results could differmaterially from those contemplated by the forward-looking statements as aresult of certain important factors, including but not limited to, demand forthe Company’s products, competitive factors and pricing pressures, changes inlegal and regulatory requirements, government budget problems, ability to finalizeits agreement with its banks, the ability to remain in compliance with its bankcovenants and its amended bank covenants, delays in government procurementprocesses, ability to obtain bid, payment and performance bonds on various ofthe Company’s projects, technological change or difficulties, productdevelopment risks, commercialization difficulties, adverse results inlitigation and general economic conditions. Risks inherent in the Company’s business and with respect to futureuncertainties are further described in our other filings with the Securitiesand Exchange Commission.

 

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PART II - OTHERINFORMATION

 

Item 6: Exhibits

(a)  Exhibits –

31.1 Certification by Mr.Martin Roenigk, Chief Executive Officer pursuant to Rule 13a-14(a), filedherewith

31.2 Certification by Mr.Geoffrey Feidelberg, Chief Financial Officer pursuant to Rule 13a-14(a), filedherewith

32.1 CertificationPursuant To Section 906 Of The Sarbanes-Oxley

Act of 2002, 18U.S.C. Section 1350, for Mr. Martin Reonigk, Chief Executive Officer

32.2 CertificationPursuant To Section 906 Of The Sarbanes-Oxley

Act of 2002, 18 U.S.C.Section 1350, for Mr. Geoffrey F. Feidelberg, Chief Financial Officer

 

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SIGNATURE

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| COMPUDYNE  CORPORATION        |
|-------------------------------|
|                          |   |
|                          |   |
| Date: November 24,  2003 | /s/ Geoffrey F.  Feidelberg |   |
|                          | Geoffrey F. Feidelberg |
|                          | Chief Financial Officer |

 

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