SEC Company Response from COMPUDYNE CORP (CIK 0000022912) — Nov 15, 2005
COMPUDYNE CORP (CIK 0000022912)
Date: Nov. 15, 2005 · CIK: 0000022912 · Accession: 0001157523-05-010158
AI Filing Summary & Sentiment
Referenced dates: October 24, 2005
Letter
November 14, 2005 VIA EDGAR, U.S. MAIL AND FACSIMILE (202) 772-9202 ------------------------------------------------- Ms. Beverly A. Singleton Staff Accountant Division of Corporation Finance U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D. C. 20549-3581
RE: CompuDyne Corporation Item 4.01 Form 8-K Filed October 12, 2005 File No. 0-32369 --------------------------
Dear Ms. Singleton:
On behalf of CompuDyne Corporation, this letter responds to the Staff's comment letter dated October 24, 2005 regarding the Company's above-captioned Form 8-K. We have repeated each comment of the Staff in all caps below, and followed each comment with the response of the Company.
1. SEE THE FOURTH PARAGRAPH REGARDING THE DISCLOSURE OF THE MATERIAL WEAKNESSES. PLEASE PROVIDE US WITH A COPY OF ANY LETTERS OR WRITTEN COMMUNICATION TO AND FROM THE FORMER ACCOUNTANTS, PRICEWATERHOUSECOOPERS, LLP, TO MANAGEMENT, THE BOARD OF DIRECTORS OR THE AUDIT COMMITTEE REGARDING THE MATERIAL WEAKNESSES IN YOUR INTERNAL CONTROLS.
RESPONSE: PricewaterhouseCoopers LLP discussed the identified material weaknesses in its Report of Independent Registered Public Accounting Firm which is included in CompuDyne Corporation's Annual Report on Form 10-K/A for the year ended December 31, 2004. In addition, the identified material weaknesses were mentioned within the bodies of two documents. PricewaterhouseCoopers made a presentation on March 18, 2005 to the Company's Audit Committee, which included discussion of material weaknesses. The portion of the written summary of the presentation addressing material weaknesses is attached as Attachment
<PAGE>
I. In CompuDyne's June 24, 2005 representation letter to PricewaterhouseCoopers LLP issued in connection with the filing of the Company's Form 10-K/A, CompuDyne represented that "The items summarized in the accompanying schedule are appropriately (1) classified as significant deficiencies or material weaknesses in internal control over financial reporting, both individually and in the aggregate; and (2) reflected as to the status of the remediation as of December 31, 2004." The accompanying schedule appears as Attachment II to this letter. This letter was also provided to the Audit Committee. There were no other letters or written communications to or from our former accountants, PricewaterhouseCoopers, and the Company's management, Board of Directors or Audit Committee regarding the material weaknesses in our internal controls.
During the audit process numerous meetings occurred between management, the Audit Committee and PricewaterhouseCoopers where preliminary observations were discussed, and draft versions of Attachment II were reviewed, but no other written materials were prepared as conclusions had not yet been finalized.
2. IN DETAIL, DESCRIBE FOR US THE NATURE OF EACH MATERIAL WEAKNESS IN INTERNAL CONTROLS CITED BY THE FORMER AUDITORS AND THE AMOUNTS INVOLVED, IF ANY. ALSO, TELL US IN WHAT PERIOD THE REPORTABLE EVENT OCCURRED AND WHETHER OR NOT YOU RESTATED (OR INTEND TO RESTATE) ANY PRIOR PERIOD FOR ANY ADJUSTMENT RESULTING FROM THE REPORTABLE EVENT; AND IF NOT, WHY NOT. TELL US IN DETAIL THE STEPS YOU HAVE TAKEN (OR PLAN TO TAKE) AND PROCEDURES YOU IMPLEMENTED (OR PLAN TO IMPLEMENT) TO CORRECT EACH REPORTABLE EVENT.
RESPONSE: As stated in Item 9A of the Company's Form 10-K/A filed for the year ended December 31, 2004, management of the Company identified three material weaknesses in internal control over financial reporting as of December 31, 2004.
The first material weakness was that the Company did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of accounting principles generally accepted in the United States of America (GAAP) commensurate with the Company's financial reporting requirements to support the size, complexity, operating activities, and locations of the Company.
The Company is a very small company. In 2004, its revenues were approximately $143 million and as of today, its total market cap is less than $45 million. In spite of these small numbers, the Company operates in a highly decentralized and therefore complex environment. The Company utilizes six distinct accounting systems and MIS platforms geographically dispersed throughout the United States. Accounting staffs are located at each of these geographically dispersed locations. In light of the relative complexity of our operations, the conclusion was reached that the level of our staff and the complement thereof was not adequate.
<PAGE>
In theory, certain of the adjustments indicated on Attachment III may in part be attributable to this material weakness, however, there were no amounts directly related to this weakness. The material weakness occurred in 2004.
To address this material weakness the Company has upgraded and supplemented the talent of its accounting staff throughout the organization by hiring and promoting qualified candidates, including a number of external candidates. Through management's review of the accounting personnel and additions to the accounting staff, management believes it has made substantial progress in addressing this material weakness. Management considers this material weakness pervasive to the organization and even though management feels it has taken adequate steps to remediate the control deficiency it will not be able to identify all of the control objectives affected and will not be able to formally conclude as to the remediation of this control deficiency until completion of its assessment of internal control over financial reporting for 2005.
The second material weakness was that the Company did not maintain effective controls over the accounting for income taxes, including income taxes payable, deferred income tax assets and liabilities and the related income tax provision. Specifically, the Company did not have effective controls over the reconciliation between the tax and financial reporting bases of the Company's assets and liabilities with its deferred income tax assets and liabilities. Additionally, there was a lack of oversight and review over the income taxes payable, deferred income tax assets and liabilities and the related income tax provision accounts by accounting personnel with appropriate expertise in income tax accounting. This control deficiency resulted in an audit adjustment to the fourth quarter 2004 consolidated financial statements. Additionally, this control deficiency could result in a misstatement of the income taxes payable, deferred income tax assets and liabilities and the related income tax provision accounts that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected.
The material weakness resulted in an audit adjustment related to an acquisition which occurred in 2002. On May 2, 2002, the Company purchased Tiburon, Inc. At the time the Company recorded the transaction, the Company failed to provide deferred taxes on the indefinite lived intangibles in accordance with SFAS 109. As a result, since 2002, the Company's goodwill and deferred tax liabilities were understated by $2,070,000. The entry required to correct this situation was a balance sheet reclassification which had no effect on previously reported net income. In addition, we concluded that this amount was not material to the balance sheets. As a result, we concluded that no restatement was necessary.
To address this material weakness the Company has engaged an outside tax consultant, other than from the Company's independent registered public accounting firm, and has implemented an ongoing training program to enhance the capabilities of its internal tax personnel. As it relates to this engagement of the outside tax consultant, the analysis and reconciliation of the various tax accounts is not yet complete, therefore the remediation of this control deficiency is not complete and thus this matter continues to be classified as a material weakness.
<PAGE>
The third material weakness was that the Company did not maintain effective control over the accounting for and review of significant, non-routine transactions. Specifically, the Company did not have effective controls over the accounting for a non-routine change order to a customer contract to ensure that the accounting for the change order was in accordance with generally accepted accounting principles. Additionally, this control deficiency could result in a misstatement of contract revenues, contract costs in excess of billings and accounts receivables that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected.
The amount involved as it related to the Statement of Operations was $1.5 million. The reportable event occurred during the fourth quarter of 2004. This transaction impacted contract revenues, contract costs in excess of billings and accounts receivables. This control deficiency resulted in an audit adjustment to the fourth quarter 2004 financial statements to reverse the recognition of this transaction. We did not restate nor do we intend to restate any prior period for this adjustment because as a result of recording this adjustment the transaction was recorded in the first quarter of 2005, which was the appropriate reporting period.
To address this material weakness, the Company has instituted new formal procedures requiring the accounting for all significant, non-routine transactions to be documented and submitted to the Corporate Accounting Group for approval. CompuDyne management has implemented controls to achieve the control objective related to the material weakness; therefore, we have concluded that the material weakness related to Ineffective Controls over the Accounting for Non-Routine Change Orders has been fully remediated and no longer is considered to represent an internal control deficiency.
3. PLEASE PROVIDE US WITH A SCHEDULE OF YOUR FISCAL YEAR END DECEMBER 31, 2004 FOURTH QUARTER ADJUSTMENTS RECORDED IN CONNECTION WITH OR AS A RESULT OF THE AUDIT. CLEARLY EXPLAIN THE REASON FOR EACH ADJUSTMENT. FOR EACH ADJUSTMENT, SHOW US THE IMPACT ON PRE-TAX NET LOSS. QUANTIFY THE NET EFFECT OF ALL ADJUSTMENTS ON PRE-TAX NET INCOME (LOSS). ALSO, TELL US IF ANY OF THE ADJUSTMENTS RELATE TO A PRIOR PERIOD. EXPLAIN IN DETAIL WHY YOU BELIEVE THE TIMING OF EACH ADJUSTMENT IS APPROPRIATE.
RESPONSE: Attached is a schedule (Attachment III) of the Company's fiscal year end fourth quarter adjustments recorded in connection with or as a result of the audit.
<PAGE>
As requested in your letter, CompuDyne Corporation acknowledges that:
o the Company is responsible for the adequacy and accuracy of the disclosure in the filing;
o staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and
o the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities law of the United States.
Please contact the undersigned at (410) 224-4415 (x312) should you have any questions regarding this response.
Sincerely,
/s/ W.C. Rock
Show Raw Text
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<TEXT>
November 14, 2005
VIA EDGAR, U.S. MAIL AND FACSIMILE (202) 772-9202
-------------------------------------------------
Ms. Beverly A. Singleton
Staff Accountant
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D. C. 20549-3581
RE: CompuDyne Corporation
Item 4.01 Form 8-K
Filed October 12, 2005
File No. 0-32369
--------------------------
Dear Ms. Singleton:
On behalf of CompuDyne Corporation, this letter responds to the Staff's comment
letter dated October 24, 2005 regarding the Company's above-captioned Form 8-K.
We have repeated each comment of the Staff in all caps below, and followed each
comment with the response of the Company.
1. SEE THE FOURTH PARAGRAPH REGARDING THE DISCLOSURE OF THE MATERIAL
WEAKNESSES. PLEASE PROVIDE US WITH A COPY OF ANY LETTERS OR WRITTEN
COMMUNICATION TO AND FROM THE FORMER ACCOUNTANTS,
PRICEWATERHOUSECOOPERS, LLP, TO MANAGEMENT, THE BOARD OF DIRECTORS OR
THE AUDIT COMMITTEE REGARDING THE MATERIAL WEAKNESSES IN YOUR INTERNAL
CONTROLS.
RESPONSE: PricewaterhouseCoopers LLP discussed the identified material
weaknesses in its Report of Independent Registered Public Accounting
Firm which is included in CompuDyne Corporation's Annual Report on
Form 10-K/A for the year ended December 31, 2004. In addition, the
identified material weaknesses were mentioned within the bodies of two
documents. PricewaterhouseCoopers made a presentation on March 18,
2005 to the Company's Audit Committee, which included discussion of
material weaknesses. The portion of the written summary of the
presentation addressing material weaknesses is attached as Attachment
<PAGE>
I. In CompuDyne's June 24, 2005 representation letter to
PricewaterhouseCoopers LLP issued in connection with the filing of the
Company's Form 10-K/A, CompuDyne represented that "The items
summarized in the accompanying schedule are appropriately (1)
classified as significant deficiencies or material weaknesses in
internal control over financial reporting, both individually and in
the aggregate; and (2) reflected as to the status of the remediation
as of December 31, 2004." The accompanying schedule appears as
Attachment II to this letter. This letter was also provided to the
Audit Committee. There were no other letters or written communications
to or from our former accountants, PricewaterhouseCoopers, and the
Company's management, Board of Directors or Audit Committee regarding
the material weaknesses in our internal controls.
During the audit process numerous meetings occurred between
management, the Audit Committee and PricewaterhouseCoopers where
preliminary observations were discussed, and draft versions of
Attachment II were reviewed, but no other written materials were
prepared as conclusions had not yet been finalized.
2. IN DETAIL, DESCRIBE FOR US THE NATURE OF EACH MATERIAL WEAKNESS IN
INTERNAL CONTROLS CITED BY THE FORMER AUDITORS AND THE AMOUNTS
INVOLVED, IF ANY. ALSO, TELL US IN WHAT PERIOD THE REPORTABLE EVENT
OCCURRED AND WHETHER OR NOT YOU RESTATED (OR INTEND TO RESTATE) ANY
PRIOR PERIOD FOR ANY ADJUSTMENT RESULTING FROM THE REPORTABLE EVENT;
AND IF NOT, WHY NOT. TELL US IN DETAIL THE STEPS YOU HAVE TAKEN (OR
PLAN TO TAKE) AND PROCEDURES YOU IMPLEMENTED (OR PLAN TO IMPLEMENT) TO
CORRECT EACH REPORTABLE EVENT.
RESPONSE: As stated in Item 9A of the Company's Form 10-K/A filed for
the year ended December 31, 2004, management of the Company identified
three material weaknesses in internal control over financial reporting
as of December 31, 2004.
The first material weakness was that the Company did not maintain a
sufficient complement of personnel with an appropriate level of
accounting knowledge, experience and training in the application of
accounting principles generally accepted in the United States of
America (GAAP) commensurate with the Company's financial reporting
requirements to support the size, complexity, operating activities,
and locations of the Company.
The Company is a very small company. In 2004, its revenues were
approximately $143 million and as of today, its total market cap is
less than $45 million. In spite of these small numbers, the Company
operates in a highly decentralized and therefore complex environment.
The Company utilizes six distinct accounting systems and MIS platforms
geographically dispersed throughout the United States. Accounting
staffs are located at each of these geographically dispersed
locations. In light of the relative complexity of our operations, the
conclusion was reached that the level of our staff and the complement
thereof was not adequate.
<PAGE>
In theory, certain of the adjustments indicated on Attachment III may
in part be attributable to this material weakness, however, there were
no amounts directly related to this weakness. The material weakness
occurred in 2004.
To address this material weakness the Company has upgraded and
supplemented the talent of its accounting staff throughout the
organization by hiring and promoting qualified candidates, including a
number of external candidates. Through management's review of the
accounting personnel and additions to the accounting staff, management
believes it has made substantial progress in addressing this material
weakness. Management considers this material weakness pervasive to the
organization and even though management feels it has taken adequate
steps to remediate the control deficiency it will not be able to
identify all of the control objectives affected and will not be able
to formally conclude as to the remediation of this control deficiency
until completion of its assessment of internal control over financial
reporting for 2005.
The second material weakness was that the Company did not maintain
effective controls over the accounting for income taxes, including
income taxes payable, deferred income tax assets and liabilities and
the related income tax provision. Specifically, the Company did not
have effective controls over the reconciliation between the tax and
financial reporting bases of the Company's assets and liabilities with
its deferred income tax assets and liabilities. Additionally, there
was a lack of oversight and review over the income taxes payable,
deferred income tax assets and liabilities and the related income tax
provision accounts by accounting personnel with appropriate expertise
in income tax accounting. This control deficiency resulted in an audit
adjustment to the fourth quarter 2004 consolidated financial
statements. Additionally, this control deficiency could result in a
misstatement of the income taxes payable, deferred income tax assets
and liabilities and the related income tax provision accounts that
would result in a material misstatement to annual or interim financial
statements that would not be prevented or detected.
The material weakness resulted in an audit adjustment related to an
acquisition which occurred in 2002. On May 2, 2002, the Company
purchased Tiburon, Inc. At the time the Company recorded the
transaction, the Company failed to provide deferred taxes on the
indefinite lived intangibles in accordance with SFAS 109. As a result,
since 2002, the Company's goodwill and deferred tax liabilities were
understated by $2,070,000. The entry required to correct this
situation was a balance sheet reclassification which had no effect on
previously reported net income. In addition, we concluded that this
amount was not material to the balance sheets. As a result, we
concluded that no restatement was necessary.
To address this material weakness the Company has engaged an outside
tax consultant, other than from the Company's independent registered
public accounting firm, and has implemented an ongoing training
program to enhance the capabilities of its internal tax personnel. As
it relates to this engagement of the outside tax consultant, the
analysis and reconciliation of the various tax accounts is not yet
complete, therefore the remediation of this control deficiency is not
complete and thus this matter continues to be classified as a material
weakness.
<PAGE>
The third material weakness was that the Company did not maintain
effective control over the accounting for and review of significant,
non-routine transactions. Specifically, the Company did not have
effective controls over the accounting for a non-routine change order
to a customer contract to ensure that the accounting for the change
order was in accordance with generally accepted accounting principles.
Additionally, this control deficiency could result in a misstatement
of contract revenues, contract costs in excess of billings and
accounts receivables that would result in a material misstatement to
annual or interim financial statements that would not be prevented or
detected.
The amount involved as it related to the Statement of Operations was
$1.5 million. The reportable event occurred during the fourth quarter
of 2004. This transaction impacted contract revenues, contract costs
in excess of billings and accounts receivables. This control
deficiency resulted in an audit adjustment to the fourth quarter 2004
financial statements to reverse the recognition of this transaction.
We did not restate nor do we intend to restate any prior period for
this adjustment because as a result of recording this adjustment the
transaction was recorded in the first quarter of 2005, which was the
appropriate reporting period.
To address this material weakness, the Company has instituted new
formal procedures requiring the accounting for all significant,
non-routine transactions to be documented and submitted to the
Corporate Accounting Group for approval. CompuDyne management has
implemented controls to achieve the control objective related to the
material weakness; therefore, we have concluded that the material
weakness related to Ineffective Controls over the Accounting for
Non-Routine Change Orders has been fully remediated and no longer is
considered to represent an internal control deficiency.
3. PLEASE PROVIDE US WITH A SCHEDULE OF YOUR FISCAL YEAR END DECEMBER 31,
2004 FOURTH QUARTER ADJUSTMENTS RECORDED IN CONNECTION WITH OR AS A
RESULT OF THE AUDIT. CLEARLY EXPLAIN THE REASON FOR EACH ADJUSTMENT.
FOR EACH ADJUSTMENT, SHOW US THE IMPACT ON PRE-TAX NET LOSS. QUANTIFY
THE NET EFFECT OF ALL ADJUSTMENTS ON PRE-TAX NET INCOME (LOSS). ALSO,
TELL US IF ANY OF THE ADJUSTMENTS RELATE TO A PRIOR PERIOD. EXPLAIN IN
DETAIL WHY YOU BELIEVE THE TIMING OF EACH ADJUSTMENT IS APPROPRIATE.
RESPONSE: Attached is a schedule (Attachment III) of the Company's
fiscal year end fourth quarter adjustments recorded in connection with
or as a result of the audit.
<PAGE>
As requested in your letter, CompuDyne Corporation acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
o staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities law of the United States.
Please contact the undersigned at (410) 224-4415 (x312) should you have any
questions regarding this response.
Sincerely,
/s/ W.C. Rock
W.C. Rock
Corporate Secretary
Attachments
cc: Geoffrey Feidelberg, CFO
PricewaterhouseCoopers LLP
<PAGE>
--------------------------------------------------------------------------------
Deficiencies in Internal Controls The Company is in the process of
evaluating its control deficiencies
identified in its evaluation of internal
controls over financial reporting. As a
result, there are believed to be 2
material weaknesses and 56 significant
deficiencies based on management's most
recent version of the summary of
aggregated deficiencies (SAD) provided
on March 14, 2005. We are in the process
of evaluating the SAD and will report
our conclusions on material weaknesses
and significant deficiencies at a
subsequent meeting.
Material weaknesses identified are for
accounting for income taxes and
accounting for significant or unusual
transactions and are planned to be
reported in an 8-K by the Company.
See SAD for additional details on the
significant deficiencies.
--------------------------------------------------------------------------------
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ATTACHMENT II
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CompuDyne Corporation Updated 6/27/2005
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SAD - Attachment to the Representation Letter
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Summary Of Aggregated Differences (SAD)
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December 31, 2004
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