FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-4245
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CompuDyne Corporation
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(Exact name of registrant as specified in its charter)
Nevada 23-1408659
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
120 Union Street, Willimantic, Connecticut 06226
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (860)456-4187
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock $.75 par value Over-The-Counter
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Securities registered pursuant to section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-
K. [X].
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant was $5.7 million as of March 23, 1998 (based upon the
average of the bid and asked prices on the over-the-counter market for
CompuDyne common stock on March 23, 1998 which was $3.0625 per share, as
quoted on the OTC Bulletin Board(see ITEM 5.).
As of March 23, 1998, a total of 4,124,542 shares of Common Stock, $.75
par value, were outstanding.
Documents incorporated by reference: Portions of the Proxy Statement
relating to the 1997 Annual Meeting of Shareholders are incorporated in
Part III.
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PART I
ITEM 1. BUSINESS
Description of Business
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CompuDyne Corporation ("CompuDyne" or the "Company"), a Nevada
corporation, incorporated in Pennsylvania on December 8, 1952, changed
its state of incorporation to Nevada on May 8, 1996. CompuDyne operates
in five business segments through its four wholly owned subsidiaries
Quanta Systems Corporation, ("Quanta Systems"), Quanta SecurSystems Inc.,
("SecurSystems"), MicroAssembly Systems, Inc., ("MicroAssembly"), and
SYSCO Security Systems, Inc. ("SYSCO").
Current Developments
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On October 10, 1997, CompuDyne formed SYSCO as a wholly owned subsidiary
to implement the first step in the product sales strategy of the Company.
SYSCO is contracting with distributors throughout North America to sell
CompuDyne's line of physical security products. The North American
distribution rights to the security products of Shorrock Integrated
Systems were acquired by CompuDyne with the acquisition of Shorrock
Electronic Systems ("SES") in July 1996. These products include a world
class group of physical security and surveillance products comprised of
the ADACS Security Management Systems, Microwave fence, and T-line fence
security systems. This agreement has minimum quantity requirements.
CompuDyne is currently negotiating with SYSCO companies of the United
Kingdom and Germany ("SYSCO UK") to acquire the North American
distribution rights to their physical security product line. There are
no assurances that these negotiations will be successful.
Quanta Systems is an engineering services firm providing turn-key design,
fabrication, installation, training, maintenance, documentation, and
systems integration of closed circuit television, access control and
intrusion detection services to government and industry. Quanta Systems
also provides original equipment manufacturing and worldwide quick
reaction capability to respond to the urgent, emergent and unique
requirements of customers with critical missions. Quanta Systems is
currently providing these services to the Space and Navel Warfare Systems
Command, the Naval Facilities Engineering Services Center, the National
Security Agency ("NSA"), the Federal Bureau of Investigation ("FBI"), the
Naval Criminal Investigative Services, the Social Security
Administration, and the Montgomery County Government (Maryland). Through
these customers and through its continuing efforts to team with other
contractors in the pursuit of more comprehensive and complex Government
programs, Quanta Systems has significantly broadened its customer and
contract base.
Data Control Systems ("DCS"), a division of Quanta Systems, manufactures
telemetry, satellite command and control systems, radio frequency and
telecommunications products. These products and systems are used for data
acquisition, control, test programs and laboratory environments having a
variety of military, intelligence and commercial applications. In 1994,
DCS began marketing the Automatic Power Controller ("APC") for satellite
up-link stations using Ku band transmissions which automatically
compensates for signal fade during periods of inclement weather. During
the third quarter of 1997, DCS completed the research, development,
prototyping and first run production of a new iteration of the
proprietary APC 2000. The new APC 2000 incorporates a closed-loop
algorithm to complement the existing open-link algorithm found in the
previous APC 2000. The closed loop is used by the smaller less
sophisticated (but more numerous) ground stations. The newest model of
the APC 2000 was delivered to various aerospace customers. DCS also
completed development of its QPSK/BPSK model 7500 PCM
demultiplexer/demodulator in 1997. The 7500 incorporates advanced
technology which is resulting in related product derivatives in the
telecommunications and telemetry market. During the second quarter of
1997, DCS successfully completed the research, development and
prototyping of two new products derived from the 7500, the 2200 and 2250.
The 2200 provides bit error rate testing. During the third quarter of
1997, DCS delivered the first 2250 and first runs of the 2200's to
aerospace customers. The market for DCS's equipment is mainly with the
aerospace industry and U.S. and foreign governments.
SecurSystems primarily focuses on the installation, maintenance and
systems integration of highly technical security systems. Although the
majority of SecurSystems work is related to detention facilities,
SecurSystems also performs work in areas such as colleges, court houses,
private residences, public buildings and in the transportation market.
SecurSystems has offices strategically located within the United States.
The home office and the Northeast regional office is located in Hanover,
Maryland. Other offices are located in Riverside, California, Tucson and
Chandler, Arizona and Garner North Carolina. These offices act as
regional hubs to perform maintenance and installation contracts on
security systems throughout the United States. SecurSystems currently has
approximately $1.9 million in annual recurring maintenance work and the
balance of the Company's revenue is made up of new installation and refit
work. SecurSystems' customers include the Federal Bureau of Prisons, the
State of Arizona, Prince Georges County (Maryland), Suffolk County
(Massachusetts), The Department of the Army (Pennsylvania), Wake County
(North Carolina) and North Carolina State University. CompuDyne acquired
all of the capital stock of SES, now SecurSystems, on July 11, 1996.
MicroAssembly, located in Willimantic, Connecticut, is a manufacturer of
a proprietary automated process called the "Stick-Screw (TM) System". The
Stick-Screw System uses custom designed screws in a stick format for the
insertion of fasteners in electronic and other assembly environments. The
Stick-Screw System provides insertion of the fasteners at a faster speed
than can be accomplished by comparably priced competing systems or
processes. MicroAssembly operates out of owned facilities, utilizing
automatic screw machines to manufacture the Stick-Screw (TM).
MicroAssembly also assembles the specially designed pneumatic drivers for
inserting the screws. MicroAssembly has recently developed drill press
and drill stand based models of the driver, one of which is electric and
will permit sales in "clean room" environments. MicroAssembly introduced
an electric Stick- Screw(TM) driver which is expected to expand its
market significantly. Sales are primarily in the United States via a
network of independent sales representatives, with modest sales in Europe
and South America. In August 1996, MicroAssembly acquired the power
screwdriver product line from Blackstone Industries for $50,000. This is
a complementary line of automatic screwdrivers with vacuum pick-up.
CompuDyne acquired all of the capital stock of MicroAssembly on August
21, 1995.
SYSCO is a distributor based product sales company. It was formed by
CompuDyne in October, 1997 to contract with distributors for sales of
physical security products. These products already include Shorrock
Integrated Systems' physical security product line and SYSCO has signed a
letter of intent with SYSCO UK to include their physical security product
line. SYSCO has distributors in 80% of the continental United States,
Canada and Mexico.
See Note 15 Industry Segment Information to the Consolidated Financial
Statements of CompuDyne for more information about the results of
operations from the five industry segments.
General Information
The Company purchases most of the parts and raw materials used in its
products from various suppliers. The primary raw materials used in the
manufacturing of Quanta Systems and SecurSystems' products are
electronic components. MicroAssembly's products are purchased from
either distributors or manufacturers of metal products. While the bulk of
such raw material is purchased from relatively few sources of supply, the
Company believes that alternative sources are readily available.
There is no significant seasonality in CompuDyne's business.
The Company s backlog of orders as of December 31, 1997 was $19.7 million
compared to $5.7 million as of December 31, 1996. Quanta Systems
backlog of $4.7 million, SecurSystems' backlog of $13.8 million (includes
$5.0 million of multi year maintenance contracts), DCS backlog of $625
thousand, and MicroAssembly s backlog of $551 thousand as of December 31,
1997 compared to $3.1 million, $1.7 million, $344 thousand and $523
thousand respectively as of December 31, 1996. It is expected that
approximately $14.9 million of all orders included in the current
backlog will be filled by December 31, 1998.
For the year ended December 31, 1997, direct sales to the U.S. Federal
Government amounted to $9.3 million or 47% of the Company's total net
sales from continuing operations, compared with $15.5 million and $8.9
million in fiscal years 1996 and 1995, respectively, or 70% and 86% of
the Company's total net sales. No other single customer accounted for
greater than 10% of the Company's net sales.
Substantially all of Quanta Systems' Government related business is with
the United States Department of Defense. Within the Department of
Defense there are various agencies that are customers of the Company,
with the largest being the United States Navy. At December 31, 1997,
Quanta Systems had five major multi-year contracts (SPAWAR, J, K2, K3 and
TETON) with the United States Government, which accounted for revenues of
$9.3 million in 1997. On March 31, 1992, Quanta Systems was awarded the
NISE East contract, now SPAWAR, a one-year contract with four one-year
renewal options. SPAWAR provided a bridge contract to continue this
effort through February 28, 1998. Quanta Systems is in negotiations for
a follow-on contract to begin in March of 1998. This contract will be
one year with four one year option periods. The TETON contract was
awarded in September, 1995 and has increased in value from $9.5 million
to $13.5 million. This is a one year contract with options to renew
yearly for four years. Quanta Systems is operating in the second option
year of the contract. The J contract is a one year contract with options
to renew yearly for four years. Quanta Systems is operating in the
fourth renewal year of the contract. This contract is currently valued
at $6.4 million. The K2 contract is a one year contract with options to
renew yearly. Quanta Systems is currently performing in the initial base
year. The K3 contract is a one year contract with options to renew
yearly. Quanta Systems is performing in the first option year of the
contract. The value of the contract to date is $1.3 million. If
renewals under these contracts do not continue, or if terms and
conditions under the contracts are substantially modified Quanta Systems
will be required to modify its operations accordingly. Although most of
Quanta Systems' contracts are subject to Government audit, management of
the Company does not believe such audits will result in any material
adjustments to the financial statements.
Most of the Federal Government contracts with the Company include a
termination for convenience clause, which allows the Federal Government
to unilaterally terminate a contract if it is considered to be in the
best interests of the Government to do so. If the Government were to
terminate a contract, the clause provisions allow the Company to submit a
Termination Settlement Proposal for recovery of costs. This proposal
would reflect all direct costs to the contract; all allowable indirect
costs; and as applicable, other costs such as idle facility costs,
abnormal severance costs and unabsorbed indirect costs resulting from the
termination. Because of cost recovery from the aforementioned process,
the Company believes that the immediate financial impact of a termination
would be negligible. It would, however, mean that additional contracts
would need to be entered into to offset the longer-term, negative effects
of the termination on revenues and profits. The Company, trying to
mitigate this minimal threat, has made considerable progress in
diversifying its contracts and customer base over the past three years.
The Company is subject to intense competition from numerous companies
that sell in regional, national and international markets. Many of these
competitors are substantially larger than the Company. There have been
significant international political changes that could have a major
impact on the market for CompuDyne's products and services. During the
last several years, dramatic changes have taken place throughout the
world that have had, and will continue to have, an impact on future U.S.
Defense spending. In addition, current budget constraints which have
affected the overall U.S. economy have impacted CompuDyne's operations.
The Company has significant sales to various organizations involved in
the Country's security and intelligence efforts. The Company has
intensified its efforts to market to other agencies of the government to
counteract the projected decline in defense spending. The Company
believes that overall U.S. expenditures for physical security
installations and intelligence gathering will continue to out pace the
general economy.
The Company is currently undertaking research and development activities
at DCS to expand and improve its product lines. Research and development
expenditures were $172 thousand during the fiscal year ended December 31,
1997 compared with $234 thousand and $359 thousand during 1996 and 1995,
respectively. In 1997 expenditures were made by DCS to expand the
demodulation/demultiplexor product lines.
At December 31, 1997, the Company had 172 employees. None of the
employees is subject to collective bargaining agreements.
Year 2000 Compliance
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The Company has identified all significant software and hardware
applications that will require modification to ensure Year 2000
compliance. Internal and external resources are being used to make the
required modifications and test Year 2000 compliance. The modification
process of all significant applications and operational systems is
substantially complete. The Company plans on completing the process of
modifying all significant applications by December 31, 1998. The total
cost to the Company of these Year 2000 compliance activities has not been
and is not anticipated to be material to its financial position or
results of operations in any given year.
Financial Information About Foreign and Domestic Operations
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Export sales for the Company were $257 thousand, $576 thousand and $125
thousand, for the years ended December 31, 1997, 1996 and 1995,
respectively.
Cautionary Statement Regarding Forward-Looking Information
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Any statements in this Annual Report that are not statements of
historical fact are forward-looking statements that are subject to a
number of important risks and uncertainties that could cause actual
results to differ materially. Specifically, any forward-looking
statements in this Annual Report related to the Company s objectives of
future growth, profitability and financial returns are subject to a
number of risks and uncertainties, including, but not limited to, risks
related to a growing market demand for the Company s existing and new
products, continued growth in sales and market share of the Company s
products, pricing, market acceptance of existing and new products,
general economic conditions, competitive products, and product and
technology development. There can be no assurance that such objectives
will be achieved. In addition, the Company s objectives of future
growth, profitability and financial returns are also subject to the
uncertainty of the continuation and renewal of the SPAWAR Contract and
the Teton Contract.
ITEM 2. PROPERTIES
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The following table sets forth the main facilities of the Company's
operations:
Approximate
Primary Owned or Square Feet
Location Purpose Leased (1) of Space
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Corporate Office
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Willimantic, Connecticut Administrative Owned 2,900
Quanta Systems
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Gaithersburg, Maryland/Admin. Engineering Leased 14,690
Gaithersburg, Maryland Manufacturing Leased 8,400
Gaithersburg, Maryland Sub-Leased Leased 7,300
MicroAssembly
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Willimantic, Connecticut Manufacturing Owned 7,000
SecurSystems
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Hanover, Maryland Admin/Whse Leased 9,500
Garner, North Carolina Engineering Leased 2,000
Tucson, Arizona Engineering Leased 1,500
Riverside, California Engineering Leased 1,300
Chandler, Arizona Engineering Leased 2,500
(1) See Note 12 to the Consolidated Financial Statements for additional
information relating to lease expense and commitments.
Quanta Systems leases three buildings in Gaithersburg, Maryland. One
building is used by the DCS products group which manufactures telemetry,
satellite and telecommunications equipment. The second building is used
by its services group, which provides engineering services and
administrative staff. Quanta Systems leases a third building in
Gaithersburg which it subleases to Orion Network Systems Corporation.
SecurSystems leases five buildings within the United States. The
Northeast region and Home office located in Hanover, Maryland provides
office space, engineering and storage space for the Northeastern United
States as well as the administrative functions of the Home office. The
Southeast office located in Garner, North Carolina provides office
space, engineering and storage space to service the Southeastern United
States. The two Arizona offices, one in Tucson and the other outside of
Phoenix in Chandler, Arizona, provide bases to service the Arizona
maintenance operations and also to service any projects in the Midwestern
and Western United States. The California office in Riverside, is
currently being used to service a contract in Western Arizona. It is
anticipated that after the completion of this contract the Riverside
office will be closed in mid 1998. The Company is currently looking at
establishing offices in other areas of the United States in order to take
advantage of contract security maintenance work available in other areas.
The Company leases only those properties necessary to conduct its'
business and does not invest in real estate or interests in real estate
on a speculative basis. The Company believes that its' current properties
are suitable and adequate for its current operations, however, as its
operations grow, additional space may be needed to service contracts in
other areas.
ITEM 3. LEGAL PROCEEDINGS
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The Company is party to certain legal actions and inquiries for
environmental and other matters resulting from the normal course of
business. Although the total amount of liability with respect to these
matters cannot be ascertained, management of the Company believes that
any resulting liability should not have a material effect on its
financial position or results of future operations.
On June 18, 1997, after being denied equitable adjustment consideration
for a series of change order costs, Quanta Systems filed a claim for $
853 thousand with the Aberdeen Proving Grounds (the contracts office) for
work being performed at Fort Bragg. After failing to receive a response
from the Government within the allotted time frame, Quanta filed a deemed
denied appeal on November 10, 1997 with the Armed Services Board of
Contract Appeals ("ASBCA"). Subsequent to Quanta s appeal filing, the
Government formally denied all claim elements. On July 31, 1997, the
Government unilaterally established a September 19, 1997 completion date
for the contract. Quanta forwarded two written responses to this
unilateral action, apprising the Government that overall contract
completion was contingent upon the Vicon Corporation s completion of a
Protech software package (specified in the contract), which was still
being debugged by Vicon. On September 22, 1997, without further
discussion, the Government terminated the contract for default. During
the week preceding the termination, Quanta s representatives had walked
the Contracting Officer s Representative ("COR") through the job to
demonstrate that the job was effectively 99% complete. Quanta Systems
filed an official Notice of Appeal from the termination with the ASBCA on
September 23, 1997. Quanta Systems and U.S. Army counsel are currently
engaged in discovery in both appeals, (Claim and Termination). Legal
costs for the fiscal year ended December 31, 1997, which have been fully
absorbed, were $76 thousand.
On February 20, 1998, SecurSystems settled its claims against and from
the County of Sonoma, California. The net effect of the settlement was a
one time charge of $270 thousand ($158 thousand after taxes) in fiscal
1997 for costs accumulated through the claim settlement date. With this
settlement there will be no additional liabilities to the Company
resulting from these issues in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Proposal to amend the CompuDyne 1996 Stock option plan for non-employee
directors.
PART II
ITEM 5.MARKET FOR COMPUDYNE COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
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CompuDyne Common Stock is traded in the over-the-counter market, and in
January 1993 began being quoted on the OTC Bulletin Board, an inter-
dealer quotation medium maintained by the National Association of
Securities Dealers, Inc., under the symbol "CDCY". There were 1,940
common shareholders of record as of March 23, 1998.
The following table sets forth the high and low bids for CompuDyne Common
Stock from January 1, 1996 to December 31, 1997 on the over-the-counter
market, as quoted on the OTC Bulletin Board. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not necessarily reflect actual transactions.
Quarter Ended High Low
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March 31, 1996 $ 1 3/8 $ 1 1/4
June 30, 1996 1 3/8 7/8
September 30, 1996 1 1/4 1 1/4
December 31, 1996 1 1/4 3/4
Quarter Ended High Low
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March 31, 1997 $ 1 3/4 $ 7/8
June 30, 1997 3 1/2 1
September 30, 1997 3 1 3/4
December 31, 1997 3 1
The Company has not paid any dividends on its Common Stock during the
past three fiscal years, and its Board of Directors has no intention of
declaring a dividend in the foreseeable future.
Recent Sales of Unregistered Securities
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None
ITEM 6. SELECTED FINANCIAL DATA
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The following is a consolidated summary of operations of CompuDyne and
its subsidiaries for the years ended December 31, 1997, 1996, 1995, 1994
and 1993. The information in the table below is based upon the audited
consolidated financial statements of CompuDyne and its subsidiaries for
the years indicated appearing elsewhere in this annual report and in
prior annual reports on Form 10-K filed by the Company with the SEC, and
should be read in conjunction therewith and the notes thereto.
(In thousands except per share data): For the years ended December 31,
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1997 1996 1995 1994 1993
Net sales $ 20,016 $ 22,142 $ 10,308 $ 9,699 $ 9,571
Gross profit $ 3,478 $ 2,803 $ 1,516 $ 1,586 $ 1,884
Selling, general and
administrative 2,456 2,102 1,214 1,095 1,492
Research and development 172 234 359 66 113
Interest expense, net
of interest income $ 62 $ 39 $ 22 $ (7)$ 111
Income (loss) from continuing
operations before extra-
ordinary items $ 696 $ 391 $ (210)$ 2,065 $ 253
Loss from discontinued
operations - (60) (453) (860) (211)
Extraordinary items (Note a) - - - 523 161
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Net income (loss) $ 696 $ 331 $ (663) $1,728 $ 203
======== ====== ======= ===== ======
Basic EPS:
Continuing operations $ .23 $ .17 $ (.13) $ 1.18 $ .15
Discontinued operations - (.03) (.27) (.49) (.13)
Extraordinary items - - - .30 .10
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Net income (loss) $ .23 $ .14 $ (.40) $ .99 $ .12
======= ====== ======= ===== ======
Weighted average number
of common shares
outstanding 3,005 2,294 1,657 1,748 1,686
======= ====== ====== ===== ======
Diluted EPS:
Continuing operations $ .16 $ .10 $ (.13) $ 1.18 $ .15
Discontinued operations - (.02) (.27) (.49) (.13)
Extraordinary items - - - .30 .10
------- ------ ------ ----- ------
Net income (loss) $ .16 $ .08 $ (.40) $ .99 $ .12
======= ====== ====== ===== ======
Weighted average number
of common shares and
equivalents 4,364 3,762 1,657 1,748 1,686
======= ====== ====== ===== ======
Total assets $ 7,429 $ 7,575 $ 3,947 $ 2,114 $ 1,993
======= ======= ======= ====== =======
Long-term debt, net $ 30 $ 50 $ 470 $ - $ 1,050
======= ======= ======= ====== =======
Total shareholders equity/
(deficit) $ 2,162 $ 1,776 $ 421 $ - $ (1,736)
======= ======= ======= ====== =======
Notes:
(a) The extraordinary items are a rent settlement in 1993 and debt
forgiveness in 1994.
(b) For the year ended December 31, 1995, the conversions of Common Stock
equivalents into common shares would result in an increased net (loss)
per share amounts which are anti-dilutive and are therefore not included
as common equivalent shares. Income per common share was determined by
dividing net income (loss), after deduction of dividend requirements on
the CompuDyne Convertible Preference Stock, ( Preferred Stock ), which
was issued in August 1995, by the weighted average number of shares of
Common Stock. Accordingly, net income is not reduced for the related
preferred dividend requirement. In November, 1997 the Series D Preference
Stock was converted into Common Stock. There was no dividend requirement
on the preferred stock for 1996 or 1995 due to the effect of purchase
accounting on MicroAssembly's results.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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Financial Condition
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During 1997, CompuDyne's net worth increased by $386 thousand to $2.2
million at December 31, 1997. Debt outstanding was $1.4 million at
December 31, 1997 compared to $232 thousand at December 31, 1996.
Working capital was $1.9 million at December 31, 1997 compared to $1.8
million at December 31, 1996.
During 1997, CompuDyne had net income of $696 thousand compared to $331
thousand in 1996, or a 110% increase over last year. This was realized
even though the Company recognized an additional loss of approximately
$197 thousand on the fixed-price Ft. Bragg contract at Quanta Systems. A
claim is being pursued to recover a substantial portion of the loss (see
"Legal Proceedings"). In addition, SecurSystems settled a dispute with
the County of Sonoma resulting in a net cost to SecurSystems of $158
thousand after tax in fiscal 1997. SYSCO spent $147 thousand in start-up
costs fiscal 1997. Net income includes twelve months of operations for
SecurSystems in 1997 compared to six months of operations in 1996.
Results of Operations - 1997 compared with 1996
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CompuDyne's net sales decreased $2.1 million in 1997 to $20 million, down
from $22.1 million in 1996. Sales at Quanta Systems decreased to $10.7
million in 1997, down $4.9 million from $15.6 million in 1996. This
decrease was primarily due to the nonrecurring low margin orders
completed during the first nine months of 1996. The balance is due to
slower then normal bookings for the first two quarters of 1997 resulting
in lower output for the year ended December 31, 1997. DCS' sales
decreased $163 thousand to $1.3 million in 1997 from $1.5 million in
1996. MicroAssembly increased sales $281 thousand to $1.8 million in
1997, up from $1.5 million in 1996. This is due to increased sales to
current customers and new customers gained through increased sales
efforts. SecurSystems' sales were $6.2 million for twelve months in 1997
compared to $3.5 million for six months of 1996. SecurSystems was
acquired in July 1996. SecurSystems' sales reflect lower billings due to
low order intake in the fourth quarter of 1996 and the first half of
1997; however, the backlog is currently $13.8 million (including a $5
million multi-year maintenance contract).
CompuDyne's gross margins increased $675 thousand to $3.5 million, up
from $2.8 million in 1996 even though net sales for 1997 decreased.
Quanta Systems contributed $241 thousand to this increase. Although
Quanta Systems' sales decreased in 1997, Quanta Systems' sales were at
higher profit margins in 1997 than in 1996. This was primarily due to
nonrecurring low margin orders completed in 1996 and $117 thousand
additional profit booked due to contract closeouts during the year.
Quanta Systems absorbed a $197 thousand loss on the Fort Bragg contract
in 1997. DCS' profit margin went down $98 thousand in 1997 generating a
gross margin of $364 thousand compared to $462 thousand in 1996. This
decrease in gross margin was due to a decrease in sales and a related
decrease in cost of goods sold. Quanta SecurSystems contributed $1.1
million to 1997 gross margins. This was up from $677 thousand in 1996.
Quanta SecurSystems was acquired in July, 1996 and the margin was 17.4%
in 1997 compared to 19.2% in 1996. This was due to lower margin
installation contracts performed in 1997. MicroAssembly contributed $125
thousand to the increase in gross margin. This was due to increasing
sales by 18.9% and only increasing cost of goods sold by 12.1%.
Selling, general and administrative expenses increased $354 thousand in
1997 to $2.5 million from $2.1 million in 1996. Quanta Systems remained
fairly constant with only a modest increase of $15 thousand, spending
$930 thousand in 1997 compared to $915 thousand in 1996. DCS spent $174
thousand in 1997, $41 thousand less than the $215 thousand spent in 1996.
This savings was due to the consolidation of some facilities and
operations with Quanta Systems. SecurSystems spent $1.0 million in 1997,
up by $569 thousand from the $432 thousand spent in 1996. The 1997
spending, by SecurSystems included twelve months of operations while the
1996 spending only covered six months since SecurSystems was acquired in
July 1996. Included in the 1997 spending was $270 thousand for Sonoma
settlement costs. SYSCO spent $147 thousand in start-up costs in 1997.
Research and development costs, which are related only to Quanta Systems'
DCS product division totalled $172 thousand for 1997. This was a
decrease of $62 thousand compared to the $234 thousand spent in 1996.
The 1997 expenses were spent on expanding the Company's
demodulator/demultiplexor product line.
CompuDyne's 1997 income from continuing operations before extraordinary
items of $696 thousand compares with a profit of $391 thousand in 1996.
This $305 thousand increase is due to the tax effect of net operating
loss carryforwards ("NOLs") and the establishment of a deferred tax
asset. In addition Quanta Systems' increased margins on contracts which
included a more favorable labor mix contributed to the increase and $117
thousand additional profit was realized from contract closeouts.
MicroAssembly's increased sales also contributed to this increase.
Quanta Systems income increased $234 thousand to $517 thousand in 1997
from $283 thousand in 1996. This increase was primarily due to increased
margins of 15.8% in 1997 compared to 9.3 % in 1996. SecurSystems showed
a loss of $97 thousand in 1997 compared to a profit of $113 thousand in
1996. This was a decrease of $210 thousand. SecurSystems absorbed $270
thousand in settlement and legal costs to finalize the Sonoma claim in
fiscal 1997. SYSCO reported a $147 thousand loss in 1997 for start-up
costs with no offsetting revenues. Corporate activities realized a
profit of $169 thousand due to tax issues, including the use of NOLs and
the establishment of a deferred tax asset.
Interest paid in 1997 totalled $62 thousand, an increase of $7 thousand
over the 1996 total of $55 thousand. This increase was due to the
expanded use of credit to finance operations and expansion during 1997.
See "Liquidity".
There were no losses from discontinued operations in 1997. In 1996,
Quanta Systems spent $60 thousand related to a discontinued subsidiary.
Results of Operations - 1996 compared with 1995
- -----------------------------------------------
CompuDyne's net sales, which increased significantly from $10.3 million
in 1995 to $22.1 million in 1996, a 114% increase, were comprised of
services revenue, telemetry and data acquisition product sales at Quanta
Systems, Stick-Screw (TM) products at MicroAssembly, and services
revenue at newly acquired SecurSystems. Quanta Systems's services
revenue in 1996 was $15.6 million, $6.8 million more than 1995. This
increase in services revenue was attributable to increases in task
spending on Government contracts, particularly on materials intensive
facilities improvement tasks at naval facilities. Quanta Systems services
revenue represented 70% of 1996 total CompuDyne revenues compared to 86%
of 1995 revenues. MicroAssembly's product sales increased from $567
thousand in 1995 to $1.5 million in 1996, an increase of 164%, but not
totally comparable since 1995 data for MicroAssembly reflected results
only from August 21 (acquisition date) through December, 1995.
SecurSystems contributed sales of $3.5 million for the six-month period
following its acquisition in July, 1996.
Quanta Systems's product sales at it's DCS division increased from $863
thousand in 1995 to $1.5 million in 1996, an increase of 74%. The
improvement in sales is primarily attributable to increased deliveries of
the new QPSK Model 7500 high-speed satellite test modem and of the APC-
2000 automatic power controller.
Net sales for MicroAssembly for 1995 reflected data from the acquisition
date of August 21, 1995 through December, 1995. Annualizing the 1995
sales shows that sales for MicroAssembly remained at about the same level
in 1996.
Gross margins increased $1.3 million from $1.5 million, 15% of sales in
1995, to $2.8 million, 13% of sales in 1996. The gross margin at Quanta
Systems increased $474 thousand to $1.9 million, with the gross margin
rate decreasing from 15% of sales to 11% of sales. The increase in
amounts is attributable to the significant increase in overall sales and
the decline in rate was due to the fact that most of the sales increase
was in lower-margin material and subcontract Government task orders.
Even though the increased sales showed a lower margin rate, the increased
base was important in absorbing indirect costs, thus affording higher
profitability on some fixed-rate contracts. DCS margins increased by
$193 thousand from $269 thousand in 1995 to $462 thousand in 1996; the
increase in gross margin can be attributable entirely to the $617
thousand increase in sales since the gross margin rate remained stable at
31%. MicroAssembly's gross margin increased by $133 thousand to $210
thousand, most of which is attributable to the increased sales (1995 was
only for 4 1/3 months) but some of which is attributable to an increased
rate from 13.7% to 14.1%. SecurSystems contributed $677 thousand in
gross margin and is incremental since it was the first year of inclusion
in CompuDyne's financial statements.
Total 1996 selling and general and administrative expenses increased $889
thousand from 1995 levels, $423 thousand of which is attributable to the
incremental increase caused by the acquisition of SecurSystems. A full
year's operating results for MicroAssembly resulted in an increase of $86
thousand in selling and general and administrative expenses. Corporate
expenses increased $61 thousand, with the remainder attributable to
increased general and administrative expenses at Quanta Systems. The
increase at Quanta Systems is primarily attributable to costs associated
with the default of a lease agreement between Quanta Systems and an
insolvent tenant. Idle facility costs include rent payments ($43
thousand), build-out costs for a new tenant ($42 thousand). and real
estate agent commissions of $22 thousand. Other expenses were additional
personnel costs caused by the significant increase in sales volume and
increased repair and renovation costs for other Quanta Systems
facilities.
Research and development activities, which are related only to Quanta
Systems' DCS product division, decreased by $125 thousand from the 1995
level of $359 thousand to $234 thousand in 1996. The 1995 expenses were
devoted primarily to the development of DCS' QPSK model 7500 and APC-
2000. Those activities continued into 1996, but at a reduced level aimed
at refining and upgrading the operating capabilities of the QPSK,APC and
the bit synchronizer product lines.
The 1996 income from continuing operations before extraordinary items of
$391 thousand compares with a loss in 1995 of $210 thousand. The
increase in such income is attributable to the increased sales and
profitability of Quanta Systems and the purchase of SecurSystems.
SecurSystems contributed $192 thousand before taxes to profits since it
was purchased by CompuDyne in July 1996. Although a loss of $550
thousand was recorded on a Ft. Bragg fixed-price contract at Quanta
Systems in 1996, increased sales of $7.4 million at Quanta Systems (from
$9.7 million to $15.6 million) combined with an expense-reducing
corporate reorganization resulted in an increase in profits at Quanta
Systems of $416 thousand compared with 1995. Contributing to the
improved performance at Quanta Systems was an increase in sales and
elimination of losses at its DCS division.
Total interest expense for 1996 was $55 thousand compared with $31
thousand for 1995. The increase was due to the expanded use of credit to
provide working capital.
Loss from discontinued operations in 1996 was $60 thousand compared with
1995's loss of $453 thousand. The loss for 1996 reflects settlements of
Suntec-incurred, Quanta Systems-liable obligations and reserves for
potential future Suntec-related obligations.
Liquidity
- ---------
The Company's principle source of cash is from operating activities and
bank borrowings. The Company's primary requirement for working capital
is to carry billed and unbilled receivables, the majority of which are
due under prime contracts with the United States Government, or
subcontracts thereunder.
The Company has a secured working capital line of credit agreement with
the Asian American Bank and Trust Company of Boston, Massachusetts which
allows borrowings of up to 75% of eligible accounts receivable. At
December 31, 1996, the maximum available under the line was $850 thousand
which has been increased to $1.75 million at December 31, 1997. The
credit agreement requires the Company to maintain a working capital ratio
of 1.1 to 1, and a debt service ratio of at least 1.0 to 1 with which the
Company was in compliance. During 1996, the interest rate was 2% above
the prime; the rate was reduced to .5% above prime in August, 1997 (10%
at December 31, 1997.) At December 31, 1997 and 1996, the Company had
outstanding borrowings of $1.3 million and $121 thousand respectively.
The current line is due to expire on July 1, 1998.
MicroAssembly has an unsecured line of credit with Fleet Bank for $100
thousand with no expiration date. The line of credit is guaranteed by Mr.
Roenigk. The rate is prime plus 2% (11.5% at December 31, 1997) and there
was $27 and $41 thousand outstanding as of December 31, 1997 and 1996,
respectively.
Net cash flows used in operations was $838 thousand in 1997, a decrease
of $1.1 million from the 1996 cash flow provided by operations of $301
thousand. Cash from net income increased from $391 thousand in 1996 to
$696 thousand in 1997. A total of $1.4 million was used to pay down
accounts payable and accrued expenses. An additional $195 thousand was
used to purchase capital equipment.
When MicroAssembly was acquired in August, 1995, $400 thousand in cash
was received for convertible long-term notes issued to the sellers, the
Company's chairman, Martin Roenigk and Alan Markowitz. In July, 1996 the
notes were converted to Common Stock and $600 thousand was received from
the same persons in exchange for 600,000 shares of CompuDyne Common
Stock. Net cash of $566 thousand was used to purchase SES, now
SecurSystems.
Capital Resources
- -----------------
Capital expenditures totalled $195 thousand in 1997 compared with $33
thousand in 1996. The Company has projected spending up to $250 thousand
for capital expenditures in fiscal 1998.
Recently Issued Accounting Standards
- ------------------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". The new standard defines a fair value method
of accounting for stock-based employee compensation plans. Under this
method, compensation cost is measured based on the fair value of the
stock award when granted and is recognized as an expense over the service
period, which is usually the vesting period.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net
income and earnings per share as if the company had applied the new
method of accounting. The Company has disclosed the pro forma impact
that the adoption of this standard has on net income and earnings/(loss)
per share for fiscal years 1995, 1996 and 1997.
In February, 1997, the financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share". The statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held
common stock or potential common stock. This standard replaces the
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures. The Company has
restated EPS for fiscal years 1995, 1996 and 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
See Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------------------
None.
PART III
--------
Information required by Items 10, 11, 12 and 13 about CompuDyne is
incorporated herein by reference from the definitive proxy statement of
CompuDyne to be filed with the SEC within 120 days following the end of
its fiscal year ended December 31, 1996, or April 30, 1997, relating to
its 1997 Annual Meeting of Stockholders.
PART IV
-------
ITEM 10. EXHIBITS, FINANCIAL STATEMENTS
AND REPORTS ON FORM 8-K
- ---------------------------------------
(a) Financial Statements
The financial statements listed in the accompanying index to financial
statements are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
None
(c) Exhibits
The Exhibits listed on the index below are filed as a part of this
Annual Report.
COMPUDYNE CORPORATION
INDEX TO EXHIBITS
(Item 10(c))
3(A) Articles of Incorporation of CompuDyne Corporation filed with the
Secretary of State of the State of Nevada on May 8, 1996 herein
incorporated by reference to Registrant's Proxy Statement dated May 15,
1996 for its 1996 Annual Meeting of Shareholders.
3(B) Agreement and Plan of Merger dated May 8, 1996 is incorporated by
reference as Exhibit 3(B) to registrant's 10-K filed March 31, 1997.
3(C). By-Laws, as amended through January 28, 1997 and as presently in
effect, is incorporated by reference as Exhibit 3(C) to registrant's 10-K
filed March 31, 1997.
10 (A). 1996 Stock Incentive Compensation Plan incorporated herein by
reference to Registrant's Proxy Statement dated April 18, 1997 for its
1996 Annual Meeting of Shareholders.
10 (D) The credit Agreement dated December 20, 1996 between Asian
American Bank and Trust, CompuDyne, Quanta Systems, MicroAssembly and
SecurSystems is filed herewith.
10 (E) Form of Management Stock Purchase Agreement dated August 1, 1993
between CompuDyne Corporation and each of Messrs. Blackmon, and Mrs.
Burns is incorporated by reference as Exhibit 10.1 of Registrant's Form
10-Q filed September 30, 1993.
10 (F) CompuDyne Corporation Certificate of Designations of the
Convertible Preference Stock, Series D is incorporated herein by
reference to Exhibit (4.1) to Registrant's Form 8-K filed September 5,
1995.
10 (G) CompuDyne Corporation Senior Convertible Promissory Notes is
incorporated by reference to Exhibit (4.2) to Registrant's Form 8-K filed
September 5, 1995.
10 (H) Stock Purchase Agreement dated August 21, 1995 between CompuDyne
Corporation, MicroAssembly Systems, Inc., Martin A. Roenigk and Alan
Markowitz is incorporated by reference to Exhibit (4.3) to Registrant's
Form 8-K filed September 5, 1995.
10(I) 1996 Stock Non-Employee Director Plan incorporated herein by
reference to Registrant's Proxy Statement dated April 18, 1997 for its
1996 Annual Meeting of Shareholders.
10 (J) Stock Option Agreement dated August 21, 1995 by and between
Martin A. Roenigk and CompuDyne Corporation is incorporated by reference
to Exhibit (4.5) to Registrant's Form 8-K filed September 5, 1995.
10(K) Stock Purchase Agreement dated July 11, 1996 between CompuDyne
Corporation and SES Corp. USA is incorporated by reference to Exhibit
(99.1) to Registrant's Form 8-K filed July 25, 1996.
10(L) Notice and Agreement of Conversion with respect to Senior
convertible Promissory Note by and between CompuDyne Corporation and
Martin A. Roenigk is incorporated by reference to Exhibit (99.2) to
Registrant's Form 8-K filed July 25, 1996.
10(M) Notice and Agreement of Conversion with respect to Senior
Convertible Promissory Note by and between CompuDyne Corporation and Alan
Markowitz is incorporated by reference to Exhibit (99.3) to Registrant's
Form 8-K filed July 25, 1996.
10(N) Stock Purchase Agreement dated July 11, 1996 by and among
CompuDyne Corporation, Martin Roenigk and Alan Markowitz is incorporated
by reference to Exhibit (99.4) to Registrant's Form 8-K filed July 25,
1996.
10(O) Stock Purchase Agreement dated July 11, 1996 between CompuDyne
Corporation and SES Corp. USA is incorporated by reference to Exhibit
(99.1) to Registrant's Form 8-K filed July 25, 1996.
10(P) Notice and Agreement of Conversion with respect to Senior
Convertible Promissory Note by and between CompuDyne Corporation and
Martin A. Roenigk is incorporated by reference to Exhibit (99.2) to
Registrant's Form 8-K filed July 25, 1996.
10(Q) Notice and Agreement of Conversion with respect to Senior
Convertible Promissory Note by and between CompuDyne Corporation and Alan
Markowitz is incorporated by reference to Exhibit (99.3) to Registrant's
Form 8-K filed July 25, 1996.
10(R) Stock Purchase Agreement dated of July 11, 1996 by and among
CompuDyne Corporation, Martin Roenigk and Alan Markowitz is incorporated
by reference to Exhibit (99.4) to Registrant's Form 8-K filed July 25,
1996.
10(S) Amendment number two dated August 29, 1997 to the Asian American
Bank and Trust Credit Agreement dated November 18, 1994 is filed
herewith.
21. Subsidiaries of the Registrant is filed herewith.
27.Financial Data Schedule
COMPUDYNE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
(Item 14(a)(1))
Page(s)
Independent Auditors' Report 16
Consolidated Balance Sheets at December 31, 1997
and 1996 17
Consolidated Statements of Operations for the
years ended December 31, 1997, 1996 and 1995 18
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995 19
Consolidated Statements of Changes in Shareholders'
Equity for the years ended
December 31, 1997, 1996 and 1995 20
Notes to Consolidated Financial Statements 21-34
(Item 14(a)(2))
Financial Statement Schedule
Schedule II - Valuation and Qualifying
Accounts for the Years Ended December
31, 1997, 1996 and 1995 35
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of CompuDyne Corporation:
We have audited the accompanying consolidated balance sheets of CompuDyne
Corporation and subsidiaries as of December 31, 1997, 1996, and the
related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31,
1997. Our audit also included the financial statement schedule listed in
the accompanying index at Item 14(a)(2). These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by the management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CompuDyne Corporation
and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule as
of and for the years ended December 31, 1997, 1996 and 1995, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/Deloitte & Touche LLP
Washington D.C.
March 23, 1998
- -------------------------------------------------------------------
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1997 1996
-------------
(In Thousands)
Current Assets
Cash and cash equivalents $ - $ 186
Accounts receivable 4,757 5,273
Inventories
Finished goods 72 93
Work in progress 888 778
Raw materials and supplies 612 471
------ -----
Total Inventories 1,572 1,342
------ -----
Prepaid expenses and other current assets 95 57
Total Current Assets 6,424 6,858
------ -----
Non-current receivable related parties 60 60
Property, plant and equipment, at cost
Land and improvements 26 26
Buildings and leasehold improvements 250 190
Machinery and equipment 1,055 948
Furniture and fixtures 287 210
Automobiles 84 78
------ -----
1,702 1,452
Less accumulated depreciation and amortization 990 863
------ -----
Net property, plant and equipment 712 589
------ -----
Deferred tax asset 124 -
Intangible assets, net of accumulated amortization 66 53
Other assets 43 15
------ -----
Total other assets 233 68
------ -----
Total Assets $7,429 $7,575
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,104 $3,017
Bank notes payable 1,339 162
Accrued pension costs - 32
Other accrued expenses 1,015 1,249
Billings in excess of contract costs incurred - 562
Accrued income taxes 35 -
Current portion of deferred compensation 26 38
Current portion of notes payable-related parties 20 20
------ -----
Total Current Liabilities 4,539 5,080
Notes payable-related parties 30 50
Long term pension liability 489 393
Deferred compensation, net of current portion - 25
Other liabilities 209 185
Deferred income taxes - 66
------ -----
Total Liabilities 5,267 5,799
------ -----
Shareholders' Equity
Convertible preference stock, Series D,
Redemption value of $1.50 per share, 1,260,460
Shares authorized, issued and outstanding
at December 31, 1996 - 945
Common stock, par value $.75 per share:
10,000,000 shares authorized; 4,124,542
and 2,864,082 shares issued at December 31,
1997 and 1996, respectively 3,093 2,148
Other capital 8,203 8,203
Treasury shares, at cost; 16,666 shares - -
Receivable from management (90) (90)
Accumulated Deficit (9,044) (9,430)
----- -----
Total Shareholders' Equity 2,162 1,776
----- -----
Total Liabilities and Shareholders' Equity $7,429 $7,575
====== ======
See notes to consolidated financial statements
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1997 1996 1995
------------------------
(In thousands, except per share amounts)
Net sales $ 20,016 $ 22,142 $ 10,308
Cost of goods sold 16,538 19,339 8,792
------- ------- -------
Gross margin 3,478 2,803 1,516
Sonoma settlement costs 270 - -
Selling, general and administrative
expenses 2,456 2,102 1,214
Research and development 172 234 359
------ ------ ------
Operating income (loss) 580 467 (57)
------ ------ ------
Other (income) expense
Interest expense 62 55 31
Interest income - (16) (9)
Other (income)expenses (20) (33) 186
------ ------ ------
Total other (income) expense 42 6 208
------ ------ ------
Income (loss) from continuing
operations before income taxes 538 461 (265)
Income tax provision (benefit) (158) 70 (55)
------ ------ ------
Income (loss) from continuing
operations 696 391 (210)
Discontinued Operations:
Loss from discontinued operations - (60) (352)
Loss on disposal of discontinued
operations - - (101)
------ ------ ------
Loss from discontinued operations - (60) (453)
------ ------ ------
Net income (loss) $ 696 $ 331 $ (663)
======= ======= =======
Basic EPS:
Continuing operations $ .23 $ .17 $ (.13)
Discontinued operations - (.03) (.27)
Extraordinary items - - -
------- ------- -------
Net income (loss) $ .23 $ .14 $ (.40)
======= ======= =======
Weighted average number of common
shares outstanding 3,005 2,294 1,657
======= ======= =======
Diluted EPS:
Continuing operations $ .16 $ .10 $ (.13)
Discontinued operations - (.02) (.27)
Extraordinary items - - -
------- ------- -------
Net income (loss) $ .16 $ .08 $ (.40)
======= ======= =======
Weighted average number of common
shares and equivalents 4,364 3,762 1,657
======= ======= =======
See notes to consolidated financial statements
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------
1997 1996 1995
--------------------------
(In Thousands)
Cash flows from operating activities:
Net income (loss) from continuing
operations $ 696 $ 391 $ (210)
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 114 104 45
Deferred income tax (benefit) (189) (25) (20)
Changes in assets and liabilities:
Accounts receivable 516 (2,123) (393)
Accounts receivable-related party - - 5
Inventory (285) (423) (138)
Prepaid expenses (38) 52 15
Other assets (28) - -
Accounts payable (913) 1,240 338
Accrued expenses (104) 553 (131)
Accrued income taxes (35) - -
Billings in excess of costs incurred (562) 562 -
Other liabilities (10) 27 11
----- ----- -----
Net cash flows (used in) provided by
continuing operations (838) 358 (478)
----- ----- -----
Loss on discontinued operations - (60) (453)
(Increase) decrease in net assets
of discontinued operations - 3 132
----- ----- -----
Cash flows used in discontinued
operations - (57) (321)
----- ----- -----
Net cash flows (used in) provided
by operations (838) 301 (799)
----- ----- -----
Cash flows from investing activities:
Net cash (used for) received from
acquisitions - (566) 52
Additions to property, plant and
equipment (195) (33) (78)
----- ----- -----
Net cash flows used in investing
activities (195) (599) (26)
----- ----- -----
Cash flows from financing activities:
Conversion of series D preference
stock (310) - -
Issuance of common stock - 600 -
Payment of receivable from management - 1 1
Increase/(decrease) in short
term debt 1,177 (97) 258
Proceeds from note payable,
related parties - - 400
Repayment of note payable related
parties (20) (20) (10)
----- ----- -----
Net cash flows provided by financing
activities 847 484 649
----- ----- -----
Net (decrease) increase in cash and
cash equivalents (186) 186 (176)
Cash and cash equivalents at the
beginning of the year 186 - 176
----- ----- -----
Cash and cash equivalents at the
end of the year $ - $ 186 $ -
======= ======== =======
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 62 $ 55 $ 15
Income taxes, net of refunds $ 70 $ - $ (30)
See notes to consolidated financial statements.
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
($ In Thousands) Rec. Accumu-
Preference Common Other From lated Treas.
Stock Stock Capital Mgmt. Deficit Shares Total
------ ------- ------- ----- ------- ------ -----
Bal. January 1, 1995 $ - $ 1,202 $ 7,988 $ (92) $(9,098) $ - $ -
Net loss - - - - (663) - (663)
Shares issued-
common stock - 153 (15) 1 - - 139
Shares issued-
preference stock $ 945 $ - $ - $ - $ - $ - $ 945
---- ------ ------ ---- ------ --- ---
Bal. Dec. 31, 1995,
as restated 945 1,355 7,973 (91) (9,761) - 421
Net Income - - - - 331 - 331
Shares issued-
Common shares - 793 230 - - - 1,023
Purchase of treasury
stock - - - - - - -
Payments from
management - - - 1 - - 1
----- ----- ----- ---- ----- --- -----
Bal. at December 31,
1996 $ 945 $ 2,148 $ 8,203 $(90) $(9,430) $ - $1,776
Net Income - - - - 696 - 696
Preferred shares
converted to
Common shares (945) 945 - - (310) - (310)
------ ------ ------ ---- ------ --- ----
Bal. at December 31,
1997 $ - $ 3,093 $ 8,203 $ (90)$(9,044) $ - $2,162
====== ====== ====== ==== ====== ==== =====
See notes to consolidated financial statements.
COMPUDYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
- -----------------------------
Description of Business - CompuDyne Corporation ("CompuDyne" or the
"Company") a Nevada corporation, was incorporated in Pennsylvania on
December 8, 1952. On May 8, 1996, CompuDyne changed its state of
incorporation to Nevada after receiving shareholder approval at the 1996
Annual Meeting of Shareholders. CompuDyne operates in five business
segments through its wholly owned subsidiaries Quanta Systems Corporation
("Quanta Systems"), Quanta SecurSystems, Inc., ("SecurSystems"),
MicroAssembly Systems, Inc. ("MicroAssembly") and SYSCO Security Systems,
Inc. ("SYSCO").
Quanta Systems is an engineering services firm providing turn-key design,
fabrication, installation, training, maintenance, documentation, and
systems integration of closed circuit television, access control and
intrusion detection. Quanta Systems also provides original equipment
manufacturing and worldwide quick reaction capability to respond to the
urgent and unique requirements of customers' with critical missions.
Quanta Systems is currently providing these services primarily to the
Federal Government.
Data Control Systems ( DCS ) a division of Quanta Systems, manufactures a
proprietary line of telemetry, satellite command and control systems,
radio frequency and telecommunications products. These products and
systems are used for data acquisition, control, test programs and
laboratory environments having a variety of telecommunications, military,
intelligence and commercial applications. The market for DCS' current
products is mainly with U.S. and foreign governments as well as aerospace
and telecommunications companies.
SecurSystems primarily focuses on the installation, maintenance and
system integration of highly technical security systems. Although the
majority of SecurSystems work is related to detention facilities,
SecurSystems has also performed work in areas such as colleges, court
houses and in the transportation market.
MicroAssembly, located in Willimantic, Connecticut, is a manufacturer of
a proprietary automated process called the Stick-Screw System . The
Stick-Screw (TM( System uses custom designed screws in a stick format for
the insertion of fasteners in electronic and other assembly environments.
The Stick-Screw (TM) System provides insertion of the fasteners at a
faster speed than can be accomplished by comparably priced competing
systems or processes. Sales are primarily in the United States via a
network of independent sales representatives, with modest sales in Europe
and South America. In 1996 MicroAssembly acquired the power screwdriver
product line from Blackstone Industries for $50,000. This is a
complimentary line of automatic screwdrivers with vacuum pick-up.
SYSCO, located in Hanover, Maryland is a distributor based product sales
company. It was formed by CompuDyne to set up a national network of
sales representatives and dealers. These products include Shorrock
Integrated Systems' physical security product line and will include SYSCO
United Kingdom's physical security product line if negotiations are
completed.
2. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------
Principles of Consolidation - The consolidated financial statements
include the accounts of CompuDyne Corporation and its subsidiaries, all
of which are wholly-owned. All material intercompany transactions have
been eliminated.
Inventories - Raw material inventories are valued at the lower of cost
(first-in, first-out) or market. Work-in-process represents direct
labor, materials and overhead incurred on products not yet delivered.
Finished goods are valued at the lower of cost or market.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Certain estimates used by
management are susceptible to significant changes in the economic
environment. These include estimates of percentage-completion on long
term contracts and valuation allowances for contracts accounts
receivable. Actual results could differ from those estimates.
Revenue Recognition - Revenue under cost reimbursement contracts is
recognized to the extent of costs incurred to date plus a proportionate
amount of the fee earned. Revenue under time and materials contracts are
recognized to the extent of billable rates times hours delivered plus
materials expenses incurred. Revenue from fixed price contracts is
recognized under the percentage of completion method. Revenue from the
sale of manufactured products is recognized based on shipment date.
Provisions for estimated losses on uncompleted contracts are recognized
in the period such losses are determined.
Property, Plant and Equipment - Property, plant and equipment are
recorded at cost less accumulated depreciation and amortization.
Depreciation is computed using principally the straight-line method based
on the estimated useful lives of the related assets. The estimated
useful lives are as follows:
Buildings and improvements 7-39 years
Machinery and equipment 3-10 years
Furniture and fixtures 3-10 years
Leasehold improvements are amortized over their estimated useful lives or
the term of the underlying lease, whichever is shorter. Maintenance and
repair costs are charged to operations as incurred; major renewals and
betterments are capitalized.
Other Intangible Assets - Intangible assets consist of a trademark
amortized on a straight-line basis over 15 years and a deferred credit
for negative goodwill recorded due to the acquisition of SecurSystems
amortized on a straight-line basis over 5 years. Accumulated
amortization was $12 thousand and ($29) thousand respectively at December
31, 1997.
Cash and Cash Equivalents - For purposes of the statements of cash flows,
the company considers temporary investments with original maturities of
three months or less to be cash equivalents.
Income Taxes - The Company follows Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes". Under SFAS
109, deferred income taxes are recognized for the future tax consequences
of differences between tax bases of assets and liabilities and financial
reporting amounts, based upon enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts expected to be realized. Income tax
expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Stock Based Compensation - In 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation. As permitted under this
Statement, the Company continues to follow the Accounting Principles
Board ( APB ) Opinion No. 25 for the recognition and measurement of
employees stock-based compensation and therefore provides only the
disclosures required under SFAS No. 123.
New Accounting Pronouncements - In February 1997, the FASB issued SFAS
No. 129, "Disclosure of Information about Capital Structure." The
Company is required to adopt the provisions of this statement for the
year ending December 31, 1998. This statement extends the previous
requirements to disclose certain information about an entity's capital
structure found in APB Opinion No. 10, "Omnibus Opinion-1996, No. 15,
"Earnings per Share, and FASB Statement No. 47, "Disclosure of Long-Term
Obligations, for entities that were subject to the requirements of those
standards. As the Company has been subject to the requirements of each
of those standards, adoption of SFAS No. 129 will have no impact on the
Company's financial statements.
In June, 1997 the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. The
Company is required to adopt the provisions of the statement for fiscal
periods beginning after December 15, 1997. This statement may require
the company to make additional disclosures.
In June 1997, the FASB issued No. 131, "Disclosures about Segments of an
Enterprise and Related Information, which requires the Company to
present certain information about operating segments and in condensed
financial statements for interim periods. The Company is required to
adopt the provisions of the statement for the year ending December 31,
1998. The statement may require the Company to make additional
disclosures.
3. NET INCOME (LOSS) PER SHARE
- -------------------------------
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This statement requires dual presentation of basic and diluted earnings
per share on the face of the income statement. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. SFAS No. 128 is effective for
fiscal years ending after December 15, 1997, and accordingly, has been
adopted by the Company as of December 31, 1997. The Company has restated
earnings per share for fiscal years 1995 and 1996. Options to purchase
53,050 shares of common stock at $2.81 were outstanding during 1997 but
were not included in the computation of diluted net income per common
share because the options' exercise price was greater than the average
market price of the common shares. The options were still outstanding at
December 31, 1997. Options to purchase 200,000, 56,290 and 25,000 shares
of common stock at $1.50, $1.81 and $2.00, respectively were outstanding
during 1996 but were not included in the computation of diluted net
income per common share because the options' exercise prices were greater
than the average market price of the common shares. Preferred stock
convertible to 1,260,460 shares of common stock was not included in the
computation of diluted net income per share in 1995 because such shares
would have been anti-dilutive.
The following is a reconciliation of the amounts used in calculating
basic and diluted net income per common share:
Per Share
Income Shares Amount
------ ------ -------
($ in thousands)
Basic net income per common share
for the year ended December 31, 1997:
Income available to common stockholders $ 696 3,004,974 $ .23
-----
Effect of dilutive preferred stock 1,102,902
Effect of dilutive stock options - 256,325
------ ---------
Diluted net income per common share
for the year ended December 31, 1997 $ 696 4,364,201 $ .16
------ --------- -----
Basic net income per common share
for the year ended December 31, 1996:
Income available to common
stockholders $ 331 2,293,602 $ .14
-----
Effect of dilutive preferred stock 1,260,460
Effect of dilutive stock options - 207,980
------ ---------
Diluted net income per common share
for the year ended December 31, 1996 $ 331 3,762,042 $ .08
------ --------- -----
Basic net income per common share
for the year ended December 31, 1995:
Income available to common
stockholders $ 663 1,657,000 $ (.40)
-----
Effect of dilutive stock options - -
------ ---------
Diluted net income per common share
for the year ended December 31, 1995 $ 663 1,657,000 $ (.40)
------ --------- -----
4. ACQUISITIONS AND DISPOSAL OF BUSINESSES
- -------------------------------------------
Acquisition of Shorrock Electronic Systems, Inc. - On July 11, 1996,
CompuDyne Corporation entered into and consummated a Stock Purchase
Agreement by and between SES Corporation USA ( the seller ) and CompuDyne
to purchase all of the capital stock of Shorrock Electronic Systems,
Incorporated ("SES ) from the seller. The seller is an indirect
subsidiary of BET Public Limited Company. SES, located in Hanover,
Maryland, is engaged in the sale, installation and maintenance of
physical security systems for correctional and other facilities. The
consideration paid to the seller for the stock of SES was approximately
$613 thousand. CompuDyne has accounted for the acquisition of SES using
the purchase method of accounting. The purchase price was allocated to
the net assets acquired based upon their estimated fair value at the date
of acquisition which resulted in an excess of net assets acquired over
cost (negative goodwill) of approximately $336 thousand. As a result,
the assigned values of the non-current assets of $231 thousand were
written down to zero and negative goodwill of $105 thousand was recorded.
The resulting purchase price allocation was based on the fair values as
follows:
Cash $ 47
Accounts receivable 1,028
Inventory 109
Prepaid expenses 12
Contract billings in excess of costs (150)
Accounts payable and accrued expenses (328)
Negative goodwill (105)
-------
$ 613
========
The accompanying financial statements include the operations for SES for
the period from July 11, 1996, the date of acquisition.
Acquisition of MicroAssembly Systems, Inc. - On August 21, 1995,
CompuDyne entered into and consummated a Stock Purchase Agreement by and
among the Company, Martin A. Roenigk and Alan Markowitz (Messrs. Roenigk
and Markowitz are, collectively, the "Sellers ) and MicroAssembly,
pursuant to which CompuDyne issued to the Sellers 1,260,460 shares of its
Convertible Preference Stock, Series D ("Series D Preference Stock ) in
exchange for all of the outstanding shares of capital stock of
MicroAssembly. This transaction represented a non-cash investing
activity and, therefore, was not been included in the Statement of Cash
Flows. The issuance by CompuDyne of the Series D Preference Stock,
together with the issuance of certain Notes, as defined below, and
certain options to purchase Common Stock, all as described below and in
accordance with the terms of the Stock Purchase Agreement, are referred
to as the "Transaction in which MicroAssembly became a wholly-owned
subsidiary of CompuDyne. Of the 1,260,460 Shares of Series D Preference
Stock issued to the Sellers, 945,345 shares were issued to Mr. Roenigk,
and 315,115 shares were issued to Mr. Markowitz. In November 1997 the
Series D Preference Stock was converted on a share for share basis to
Common Stock with full voting rights. No dividends had been paid on the
Series D Preference Stock. When converted a $0.246 per share Early
Conversion Adjustment was paid to Mr. Roenigk and Mr. Markowitz. The
adjustment totalled approximately $310 thousand and was recorded as a
reduction to accumulated deficit.The Series D Preference Stock had rights
to vote on a share for share basis with the Company's Common Stock. Each
share of Series D Preference Stock carried an annual aggregate dividend
equal to the lower of: (a) sixty percent (60%) of MicroAssembly's
after-tax net income in the previous calendar year, divided by 1,260,460,
or (b) eight percent (8%) of the Redemption Value of $1.50 per share of
the Series D Preference Stock. Dividends could have been paid on the
Series D Preference Stock, at the Company's option, in cash, CompuDyne
Common Stock, or a combination thereof, based upon the average closing
price of CompuDyne's Common Stock for the prior thirty (30) trading days.
There were no dividends accrued or paid in 1997, 1996 or 1995. Beginning
on August 21 in the year 2000, the Company could have, at its option,
redeem all or any part of the Series D Preference Stock for a price of
$1.80 per share, that being one hundred twenty percent (120%) of the
redemption value, plus accrued and unpaid dividends.
CompuDyne has accounted for the acquisition of MicroAssembly using the
purchase method of accounting. The purchase price, as restated, was
allocated to the net assets acquired based on their estimated fair values
at the date of acquisition.
The fair values of these assets and liabilities are summarized as
follows (in thousands):
Cash, net $ 52
Accounts Receivable 261
Inventories 436
Other Assets 76
Property, Plant and Equipment 531
Intangible Assets 58
Accounts Payable and Accrued Expenses ( 358)
Deferred Tax Liabilities ( 111)
------
Total - value assigned to Series D preferred stock $ 945
======
The accompanying financial statements include the operations of
MicroAssembly for the period from August 21, 1995, the date of
acquisition.
As part of the Transaction, in return for $400 thousand paid to CompuDyne
at the closing, CompuDyne issued to the Sellers Senior Convertible
Promissory Notes (the "Notes") in the aggregate principal amount of $400
thousand, which Notes were convertible, prior to redemption by CompuDyne,
into CompuDyne Common Stock at a conversion rate of $1.50 per share of
common stock, or 266,667 shares of common stock if the entire principal
amount of the Notes was converted. Of the $400 thousand principal amount
of Notes issued, $300 thousand principal amount of the Notes were issued
to Mr. Roenigk, and $100 thousand principal amount of the Notes were
issued to Mr. Markowitz. As described in a report filed by the Sellers
with the Securities and Exchange Commission and with the Company pursuant
to Section 13(d) of the Securities Exchange Act of 1934, the source of
the Sellers' $400 thousand investment in the Company was personal funds.
All of the notes were converted into common stock the third quarter of
1996.
As a further part of the Transaction, Norman Silberdick, the Company's
then Chairman, President, Chief Executive Officer and Director, resigned
as such. The Company's Board of Directors elected Mr. Roenigk to fill
Mr. Silberdick's seat on the Board of Directors, and to become its
Chairman, President and Chief Executive Officer. Mr. Markowitz was also
elected to the Company's six member Board of Directors. In recognition
of Mr. Roenigk's position as Chairman, President and CEO, the Company has
issued to him options to purchase up to 200,000 shares of the Company's
Common Stock for $1.50 per share. The options were to expire in ten (10)
years. Mr. Silberdick, as part of a related transaction described below,
turned in to the Company 60,000 shares of the Company's Common Stock
issued pursuant to a Stock Purchase Agreement, dated August 1, 1993,
between the Company and Mr. Silberdick, and he relinquished his rights to
purchase an additional 50,000 shares pursuant to such Agreement.
Divestiture of Suntec Division - On August 21, 1995, Quanta Systems
transferred all of the assets and liabilities of Quanta Systems's Suntec
division to Suntec Service Corporation, a newly-formed corporation
("Suntec"), in return for (i) all of Suntec's issued and outstanding
common stock and (ii) Suntec's agreement to pay to Quanta Systems a
royalty of 2% of Suntec's net sales and other revenues for thirty (30)
years from the date of the closing. Quanta Systems then sold all of
Suntec's Common Stock to Norman Silberdick, who resigned on that date as
CompuDyne's Chairman, President, CEO and Director.
As a condition precedent to the sale of the Suntec shares to Mr.
Silberdick, he relinquished to CompuDyne 60,000 shares of CompuDyne
Common Stock and purchase rights held by him to acquire an additional
50,000 shares of CompuDyne Common Stock.
As consideration for the shares of Suntec, Mr. Silberdick executed a
nonrecourse promissory note in the initial principal amount of $79
thousand (the "Silberdick Note"), payment of which was secured by a
pledge of all Suntec shares held by Mr. Silberdick, which shares must at
all times equal or exceed 33% of all outstanding shares of Suntec capital
stock. The Silberdick Note bears interest at an annual rate equal to the
Wall Street Journal prime rate, plus 2%. Through August 31, 2000, the
principal payments on the Silberdick Note are payable annually in
amounts equal to 25% of Suntec's net, after-tax income for the year in
question. Thereafter, the unpaid principal balance, as of that date,
shall be paid in five equal annual installments. Suntec has now ceased
all operations.
As part of the transaction, Quanta Systems loaned $50 thousand to Suntec
payable at the end of three years at prime plus 2% with interest due at
the anniversary date of the loan. The loan is a senior obligation of
Suntec with rights to security. As of December 31, 1996, the Company has
written off the full amount of this loan because Suntec ceased
operations. The effective interest rate was 10.5% at December 31, 1995.
Loss from Discontinued Operations includes a provision of $85 thousand in
1995 for the loss on disposal. Revenues included in loss from
discontinued operations were $656 thousand in 1995.
Pro-Forma Financial Information - The following unaudited pro-forma
financial information of CompuDyne Corporation reflects the acquisition
of MicroAssembly and the disposition of Suntec Service Corporation as if
these transactions had occurred on January 1, 1995, and the acquisition
of Shorrock (now SecurSystems, Inc.) as if this transaction had occurred
on January 1, 1996 and January 1, 1995:
(In Thousands) 1996 1995
-------- --------
Revenues $ 23,818 $ 15,833
Income (loss) before Extraordinary Items (1,226) (7,151)
Net Income (Loss) (145) (3,667)
Earnings (Loss) Per Share (.04) (2.21)
5. ACCOUNTS RECEIVABLE
- -----------------------
Accounts Receivable consist of the following:
(In thousands) December 31, December 31,
1997 1996
U.S. Government Contracts: ----------- -----------
Billed $ 1,712 $ 2,420
Unbilled 1,054 1,031
--------- -------
2,766 3,451
Commercial
Billed $ 2,084 $ 2,360
Unbilled 207 -
--------- -------
2,291 2,360
Total Accounts Receivable 5,057 5,811
Less Allowance for Doubtful Accounts (300) (538)
--------- -------
Net Accounts Receivable $ 4,757 $ 5,273
========= =======
Substantially all of the U.S. Government billed and unbilled receivables
are derived from cost reimbursable or time-and-material contracts.
Unbilled receivables include retainages of approximately $185 thousand
and $301 thousand at December 31, 1997 and 1996, respectively.
Direct sales to the U.S. Government for the years ended December 31,
1997, 1996 and 1995 were approximately $9.3 million, $15.5 million and
$8.9 million, respectively, or 47%, 70% and 86% of the Company's total
net sales for the same years. No other single customer accounted for
greater than 10% of the Company's net sales.
Contract costs for services provided to the U.S. Government, including
indirect expenses, are subject to audit by the Defense Contract Audit
Agency, ("DCAA"). All contract revenues are recorded in amounts expected
to be realized upon final settlement. In the opinion of management,
adequate provisions have been made for adjustments, if any, that may
result from the government audits. Quanta Systems received final
approval on their indirect rates for 1989 through 1994 from DCAA which
resulted in billings and collections of $350 thousand in 1997.
Included in unbilled receivables at December 31, 1997 is approximately
$457 thousand of costs relating to a certified claim on the Fort Bragg
contract performed by Quanta Systems. The contract was terminated by the
U. S. Government in September, 1997 after Quanta Systems submitted a
claim in May, 1997. Quanta Systems was unable to bill approximately $181
thousand of costs from the available funding of the contract. Of the
remaining $276 thousand of costs included in the unbilled receivables,
management believes that there are sufficient reserves established for
any amounts not recovered, and the outcome of the claim will not have a
material effect on the financial statements.
6. NOTES PAYABLE RELATED PARTIES
- ---------------------------------
In July, 1996, the holders of CompuDyne's $400 thousand Senior
Convertible Notes (which includes the Chairman and a Director) agreed to
convert the notes into 400,000 common shares. The same investors also
agreed to purchase 600,000 additional common shares for $600 thousand.
This financing, which was completed on July 12, 1996, added $1.0 million
to the Company's equity, reduced interest charges, and provided the cash
required to acquire SES and also provided working capital for SES
operations.
At the time the Senior Convertible Notes were issued in August 1995, they
had a conversion price of $1.50 per share. On May 23, 1996, the
CompuDyne Board approved an amendment to the Senior Convertible Notes
that reduced the conversion price to $1.00 per share based upon the price
of CompuDyne common stock at the time, the restricted nature of the stock
issued upon conversion, the limited liquidity for CompuDyne common stock
existing at the time, an evaluation of CompuDyne's balance sheet and the
need to strengthen CompuDyne's balance sheet in view of the proposed
acquisition of SES. The notes were converted into common shares in July,
1996.
CompuDyne entered into a subordinated note agreement on April 29, 1995
with Alan Markowitz, a Director, for $100 thousand. The agreement calls
for CompuDyne to pay $5,000 quarterly plus accrued interest for the
quarter at a rate of Prime plus 1%. Amounts outstanding at December 31,
1997 and December 31, 1996 were $50 and $70 thousand respectively.
Interest expense pertaining to the notes for 1997 and 1996 were $6 and $8
thousand respectively.
7. BANK NOTES PAYABLE
- ----------------------
The Company has a secured working capital line of credit agreement with
the Asian American Bank and Trust Company of Boston, Massachusetts which
allows borrowings of up to 75% of eligible accounts receivable. At
December 31, 1996, the maximum available under the line was $850 thousand
which has been increased to $1.75 million at December 31, 1997. The
credit agreement requires the Company to maintain a working capital ratio
of 1.1 to 1, and a debt service ratio of at least 1.0 to 1 with which the
Company was in compliance. During 1996, the interest rate was 2% above
the prime; the rate was reduced to .5% above prime in June, 1997 (10% at
December 31, 1997.) At December 31, 1997 and 1996, the Company had
outstanding borrowings of $1.3 million and $121 thousand respectively.
The current line is due to expire on July 1, 1998.
MicroAssembly has an unsecured line of credit with Fleet Bank for $100
thousand with no expiration date. The line of credit is guaranteed by Mr.
Roenigk. The rate is prime plus 2% (11.5% at December 31, 1997) and there
was $27 and $41 thousand outstanding as of December 31, 1997 and 1996,
respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents - The carrying amounts reported in the
balance sheets for cash and cash equivalents approximates fair value.
Notes Payable - The carrying amounts reported in the balance sheet
approximate fair value as the bank lines of credit are renewed annually
at current interest rates.
9. INCOME TAXES
- ---------------
The components of the income tax provision (benefit) from continuing
operations for the years ended December 31, 1997, 1996, and 1995 are as
follows:
$ thousands 1997 1996 1995
----------------------
Current $ 31 $ 84 $ (29)
Deferred (189) (14) (26)
------ ----- -----
$ (158) $ 70 $ (55)
====== ===== =====
The tax effects of the primary temporary differences giving rise to the
Company's net deferred tax assets and liabilities at December 31, 1997
and 1996 are summarized as follows:
December 31,
1997 1996
------------------
Assets:
Accrued expenses and deferred compensation $ 142 $ 25
Tax operating loss carryforward 10,341 9,416
Tax credit carryforward 459 408
Book reserves in excess of tax 315 122
Book depreciation in excess of tax - 28
Accrued pension liability 184 164
-------- --------
Total deferred assets 11,441 10,163
Valuation allowance (11,254) (10,163)
------ ------
Net deferred assets 187 -
Liabilities:
Tax depreciation in excess of book depreciation (64) -
Investment in subsidiary - (66)
------ ------
Total deferred liabilities (64) (66)
------ ------
Net deferred liabilities $ (64) $ (66)
======= =======
A valuation allowance is provided to offset fully the recorded current
deferred tax assets as management cannot conclude that such deferred tax
assets are more likely of realization than not. The non-current deferred
tax assets are more likely of realization than not and accordingly, no
valuation allowance is provided.
The difference between the statutory tax rate and CompuDyne's effective
tax rate from continuing operations are summarized as follows:
1997 1996 1995
------ ------ ------
Statutory federal income tax rates 35.0% 34.0% 34.0%
State income taxes, net of
Federal benefit 2.9 4.6 -
Change in valuation allowance (51.2) - (34.0)
Tax effect of NOL utilization (18.6) (27.0) -
Reversal of prior year taxes - - (10.9)
Tax effect of non-deductible items 2.5 3.6 (9.9)
----- ----- -----
Tax (29.4)% (15.2)% (20.8)%
At December 31, 1997, the Company and its subsidiaries have net operating
loss carryforwards available to offset future taxable income of
approximately $29 million, subject to certain severe limitations. These
carryforwards expire between 2000 and 2009. The utilization of
substantially all of these tax loss carryforwards is limited to
approximately $200 thousand each year as a result of the ownership change
which occurred in 1995. The Company also has carryforwards available for
alternative minimum tax purposes which do not differ significantly from
regular net operating loss carryforwards. The Company also has research
and development tax credits of approximately $459 thousand expiring
between 1999 and 2003.
10. COMMON STOCK AND COMMON STOCK OPTIONS
- ------------------------------------------
On November 12, 1992, the CompuDyne Board authorized the issuance of
300,000 shares of Common Stock to key employees of CompuDyne and Quanta
Systems at a price of $.40 per share, the fair market value at such time.
In January 1993, the Board subsequently authorized the issuance of an
additional 200,000 shares of Common Stock to a key employee at the same
price and on the same terms as those authorized on November 12, 1992.
These authorizations were formalized in Stock Purchase Agreements, dated
August 1, 1993, under which the employees may purchase an aggregate of
125,000 shares on August 1, of each of the years 1993 through 1996
provided certain conditions are met including continued employment by
CompuDyne, by paying cash for such shares or by giving the Company a
five-year non-recourse promissory note, collateralized by the stock and
bearing interest at 2% per annum over the rate designated by the First
National Bank of Maryland as its prime commercial rate. As of December
31, 1996, 302,500 shares of CompuDyne Common Stock had been issued to
five members of senior management, (the "Management Shares") in exchange
for promissory notes pursuant to the Stock Purchase Agreements. Due to
the resignation of two of the employees who were parties to the Stock
Purchase Agreements, 225,000 shares of CompuDyne Common Stock have been
issued under the Stock Purchase Agreements with no further shares
remaining.
In August 1995, the Company issued Martin A. Roenigk options, vested
immediately, to purchase up to 200,000 shares of the Company's Common
Stock for $1.50 per share, 100% of the fair market value of such shares
at the date of grant. The options expire in ten (10) years.
On February 2, 1996 the Compensation and Stock Option Committee granted
options to purchase 16,290 shares of CompuDyne Common Stock to key
employees of CompuDyne's subsidiary, MicroAssembly, at a price of $1.81
per share (100% of the fair market value of such shares at the date of
grant) and in accordance with the terms and conditions of the 1986 Stock
Incentive Compensation Plan. In May, 1996 the number of shares granted
was reduced to 12,040 shares when an optionee resigned and did not
exercise his options within 30 days following the date on which he ceased
to be an employee, as defined under the terms of the plan. In addition,
on February 2, 1996 the Compensation and Stock Option Committee granted
options to purchase 21,710 shares of CompuDyne Common Stock to key
employees of CompuDyne's subsidiary, MicroAssembly, at a price of $1.81
per share (100% of the fair market value of such shares at the date of
grant) and in accordance with the terms and conditions of the 1996 Stock
Incentive Plan for Employees (the "Plan"). These options vest over a five
(5) year term. The Plan was subsequently approved by the Shareholders at
its Annual Meeting on June 5, 1996. In May, 1996 the number of shares
granted was reduced to 15,960 shares when an optionee resigned and did
not exercise his options within 30 days following the date on which he
ceased to be an employee, as defined under the terms of the Plan. On
July 11, 1996 the Committee granted options, which vest over five years,
to purchase 121,000 shares, of CompuDyne Common Stock to key employees of
the newly acquired company, SecurSystems, and a key employee of Data
Control Systems, in accordance with the terms and conditions of the 1996
Stock Incentive Compensation Plan for Employees at a price of $1.625 per
share (the fair market value of such shares at the date of grant).
On September 18, 1996 the Company issued options to purchase 1,050 shares
of common stock for $1.625 per share to directors of the Company. On May
21, 1997 the Company issued options to purchase 1,050 shares of common
stock for $2.81 per share to directors of the Company. On November 17,
1997 the Company issued options to purchase 1,050 shares of common stock
for $1.69 per share to directors of the Company. Of the above shares to
the directors, 50% become vested after the second year and the remaining
50% after the third year.
On November 17, 1997 the Company also issued options, which vest over
five years, to purchase 52,000 shares of common stock at $2.81 per share
to selected employees of Quanta Systems and SecurSystems.
The transactions for shares under options were:
Year Weighted Year Year
ended Average ended ended
December 31, Excercise December 31, December 31,
1997 Price 1996 1995
------------- --------- ------------ -----------
Outstanding,
Beginning
of Period
Shares 375,050 $1.60 225,500 92,167
Prices $1.50-2.00 $1.50-14.125 $.75-14.125
Granted
Shares 54,100 $2.79 160,050 283,210
Prices $1.69-2.81 $1.81 $1.375-2.00
Exercised
Shares - - - 58,210
Prices - - - $1.375
Expired or
Canceled 25,000 $2.00 10,500 91,667
Outstanding,
End of Period
Shares 404,150 $1.73 375,050 225,500
Prices $1.50-$2.81 $1.50-2.00 $1.50-14.125
Options
Exercisable 253,775 375,050 225,500
Information with respect to stock options outstanding and stock options
excercisable at December 31, 1997 is as follows:
OPTIONS OUTSTANDING
-------------------
Range of Weighted Weighted
Exercise Number Outstanding Average Aver. Remaining
Price at December 31, 1997 Exer. Price Contractual Life
------------- -------------------- ----------- ----------------
$1.50 - $2.00 351,100 $1.57 1.21
$2.81 53,050 $2.81 4.88
-------
404,150
=======
OPTIONS EXCERCISABLE
Range of Weighted Weighted
Exercise Number Outstanding Average Aver. Remaining
Price at December 31, 1997 Exer. Price Contractual Life
------------- -------------------- ----------- ----------------
$1.50 - $2.00 253,512 $1.94 1.24
$2.81 263 $2.81 4.92
-------
253,775
=======
As permitted under SFAS No. 123, the Company continues to account for its
employee stock-based compensation plans and options granted under APB No.
25. No compensation expense has been recognized in connection with
options, as all options have been granted with an exercise price equal to
fair value of the Company s common stock on the date of grant.
Accordingly, the Company has provided below the additional disclosures
specified in SFAS No. 123 for 1996 and 1995. For SFAS No. 123 purposes,
the fair value of each option grant has been estimated as of the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest rate of 6.00%, expected
life of 7 years, dividend rate of zero percent and expected volatility of
60%. Using these assumptions, the fair value of the stock options
granted in 1997, 1996 and 1995 is $0, $165,000 and $231,000,
respectively, which would be amortized as compensation expense over the
vesting period of the options. Had compensation expense been determined
consistent with SFAS No. 123, utilizing the assumptions detailed above,
the Company s net income (loss) and earnings (loss) per share for the
years ended December 31, 1997, 1996 and 1995 would have been reduced to
the following pro forma amounts:
(In thousands) 1997 1996 1995
------ ------ ------
Net Income (loss):
As Reported $ 696 $ 331 $(663)
Pro Forma $ 696 $ 294 $(836)
Net Income (Loss) per share:
As Reported $ 0.23 $ 0.09 $(.40)
Pro Forma $ 0.23 $ 0.08 $(.50)
The resulting pro forma compensation cost may not be representative of
that expected in future years.
11. EMPLOYEE BENEFIT PLANS
- ---------------------------
The Company has a 401(k) retirement savings plan covering substantially
all employees. All employees are eligible to participate in the plan
after completing one year of service. Participants may make before tax
contributions of up to 15% of their annual compensation subject to
Internal Revenue Service limitations. CompuDyne currently matches
employee contributions up to the first 2.5% contributed. Expense for
matching contributions to the Plan was $114 thousand, $76 thousand and
$46 thousand for 1997, 1996, and 1995, respectively.
12. COMMITMENTS AND CONTINGENT LIABILITIES
- -------------------------------------------
The Company and certain of its subsidiaries are obligated as lessees
under various operating leases for office, distribution, manufacturing
and storage facilities.
The minimum rent payments include space which is sub-leased to Orion
Corporation. As of December 31, 1997, future minimum rental payments
required under operating leases that have initial or remaining
noncancellable terms in excess of one year are as follows (in thousands):
Year Ended December 31,
Sub-Lease Net
--------- ------
1998 $ 462 $ (85) $ 377
1999 476 (87) 389
2000 164 (15) 149
2001 45 - 45
2002 5 - 5
----- ------ ------
$1,152 $ (187) $ 965
Rental expense was $452 thousand, $468 thousand and $399 thousand in
1997, 1996, and 1995, respectively.
The Company is party to certain legal actions and inquiries for
environmental and other matters resulting from the normal course of
business. Although the total amount of liability with respect to these
matters cannot be ascertained, management of the Company believes that
any resulting liability will not have a material effect on its financial
position or results of future operations.
13.RELATED PARTIES
Corcap, Inc. ("Corcap"), entered into a Settlement Agreement, dated March
25, 1996 (the "Settlement Agreement"), with Lydall, Inc. ("Lydall")
pursuant to which Corcap transferred 120,000 shares (the "Transferred
Shares ) of CompuDyne Common Stock to Lydall in settlement of certain
claims.
As part of the Settlement Agreement, Lydall required as a condition to
signing, that CompuDyne enter into a registration rights agreement with
Lydall obligating CompuDyne to register the Transferred Shares upon
demand of Lydall two years following the date of the Agreement or in a
"piggyback registration at any time upon the proposed registration by
CompuDyne of its stock. In order to induce CompuDyne to enter into such
agreement, Corcap agreed to issue an option (the "Corcap Option") to
CompuDyne to purchase 16,666 shares of CompuDyne Common Stock at a price
of $.01 per share exercisable immediately for a period of five years
under a Stock Option Agreement, dated March 25, 1996, between Corcap and
CompuDyne. In addition, Corcap agreed to limit CompuDyne's support of
its legal services to $1 thousand per month for 24 months. On December
31, 1996 CompuDyne exercised its option to purchase 16,666 shares of
CompuDyne Stock pursuant to the Option Agreement, which has been recorded
as treasury stock.
14. KOLUX PENSION PLAN
- ----------------------
In March 1987, the Company ceased its Kolux plant operations resulting in
a curtailment of the defined benefit pension plan covering certain plant
employees. As of December 31, 1997, the actuarial present value of
accumulated plan benefits was estimated to be $801 thousand, based upon
an 7.0% interest rate assumption; the 1984 Unisex Mortality table with a
five year age setback for females; and the March 1, 1997 (latest
actuarial valuation) employee database projected forward to December 31,
1997. All benefits under the plan are fully vested. The market value of
plan assets as of December 31, 1997 was $314 thousand. Accordingly, the
plan's unfunded accrued liability as of December 31, 1997 of $489
thousand has been reflected in the balance sheet as accrued pension
costs.
15. INDUSTRY SEGMENT INFORMATION
- -----------------------------------
The Company currently operates in five business segments: government
engineering services, physical security services, the manufacture of
telemetry and telecommunications equipment, the manufacturing and
marketing of the Stick-Screw (TM) System and distribution of physical
security products. During the years ended December 31, 1997, 1996, and
1995 sales to the United States Federal Government amounted to 47%, 70%
and 86%, respectively, of the Company's total net sales. No other single
customer accounted for greater than 10% of the Company's net sales.
The following segment information includes revenues and related costs for
Quanta Systems, government engineering services, DCS's telemetry and
telecommunications products and Corporate activities for the three years
ended December 31, 1997, 1996 and 1995. Also included are revenues and
related costs from SecurSystems physical security services for the year
ended December 31, 1997 and from its July 11, 1996 acquisition through
December 31, 1996, SYSCO's product sales operations from it's inception,
October 11, 1997 through December 31, 1997 and MicroAssembly's Stick-
Screw product sales during the year ended December 31, 1997, December,
1996 and from its August 21, 1995 acquisition through December 31, 1995.
Revenues Gross Profit
--------------------- ----------------------
1997 1996 1995 1997 1996 1995
-------------------------- -------------------------
Quanta Systems $ 10,714 $ 15,644 $ 8,878 $ 1,694 $ 1,453 $ 1,169
Data Control
Systems 1,317 1,480 863 364 462 269
SecurSystems 6,217 3,530 - 1,084 677 -
SYSCO - - - - - -
MicroAssembly 1,768 1,488 567 336 211 78
CompuDyne Corporate - - - - - -
------- ------ ------- ------ ------ -------
$ 20,016 $ 22,142 $ 10,308 $ 3,478 $ 2,803 $ 1,516
Total Assets, at Year End Operating Income/(Loss)
------------------------- -------------------------
1997 1996 1995 1997 1996 1995
------------------------- -------------------------
Quanta Systems $ 2,234 $ 3,157 $ 1,251 $ 764 $ 538 $ 546
Data Control
Systems 1,375 812 758 18 13 (311)
SecurSystems 2,060 1,961 - 82 245 -
SYSCO - - - (147) - -
MicroAssembly 1,286 2,300 2,392 208 3 (46)
CompuDyne Corporate 474 (655) (454) (385) (332) (246)
------- ------- ------- ------ ------- -------
$ 7,429 $ 7,575 $ 3,947 $ 540 $ 467 $ (57)
Capital Expenditures Depreciation
-------------------- ------------
1997 1996 1995 1997 1996 1995
----------------------- -------------------------
Quanta Systems $ 78 $ 9 $ 4 $ 13 $ 3 $ -
Data Control Systems 55 4 - 26 13 -
SecurSystems 55 8 - 11 30 -
SYSCO - - - - - -
MicroAssembly 63 12 74 80 79 28
CompuDyne Corporate - - - - - -
------ ------ ------- ----- ------ ------
$ 51 $ 33 $ 78 $ 130 $ 125 $ 28
16. SONOMA SETTLEMENT COSTS
- ----------------------------
On February 20, 1998, SecurSystems settled its claim against and from the
County of Sonoma, California. The Company has accrued $270 thousand of
settlement costs and legal fees related to this claim at December 31,
1997. With the settlement management believes there will be no
additional liabilities to the Company from this matter.
SCHEDULE II
COMPUDYNE CORPORATION AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996, and 1995
($ Thousands)
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deduction of Period
- ------------- --------- -------- --------- ---------
Year Ended December 31, 1997
Reserve and allowances
deducted from asset
accounts:
Obsolescence reserve
for inventory $ 299 $ 14 $ - $ 313
Reserve for accounts
receivable 538 60 (298) 300
Year Ended December 31, 1996
Reserve and allowances
deducted from asset
accounts:
Obsolescence reserve
for inventory $ 216 $ 83 $ - $ 299
Reserve for accounts
receivable 205 333 - 538
Year Ended December 31, 1995
Reserve and allowances
deducted from asset
accounts:
Obsolescence reserve
for inventory $ 201 $ 15 $ - $ 216
Reserve for accounts
receivable 207 3 (5) 205
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COMPUDYNE CORPORATION
---------------------
(Registrant)
By:/s/ William C. Rock
-----------------------
William C. Rock
Dated: March 30, 1998 Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March ??, 1998.
/s/ Martin A. Roenigk Director, Chairman, President
- --------------------- and Chief Executive Officer
Martin A. Roenigk
/s/ David W. Clark, Jr. Director
- ----------------------
David W. Clark, Jr.
/s/ Millard H. Pryor, Jr. Director /s/ Alan Markowitz Director
- ------------------------ ------------------
Millard H. Pryor, Jr. Alan Markowitz
/s/ Miles P. Jennings Director /s/ Philip M. Blackmon Director and
- --------------------- ---------------------- Executive Vice-
Miles P. Jennings Philip M. Blackmon President
/s/ William C. Rock Chief Financial Officer
- ------------------ and Principle Accounting
William C. Rock Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS AND THE CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,057
<ALLOWANCES> 300
<INVENTORY> 1,572
<CURRENT-ASSETS> 6,424
<PP&E> 1,703
<DEPRECIATION> 990
<TOTAL-ASSETS> 7,429
<CURRENT-LIABILITIES> 4,529
<BONDS> 0
0
0
<COMMON> 3,093
<OTHER-SE> (931)
<TOTAL-LIABILITY-AND-EQUITY> 7,575
<SALES> 828
<TOTAL-REVENUES> 5,431
<CGS> 608
<TOTAL-COSTS> 4,926
<OTHER-EXPENSES> 768
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> (250)
<INCOME-TAX> (256)
<INCOME-CONTINUING> 6
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
Credit Agreement
CREDIT AGREEMENT is made as of the 20th day of December, 1996, by and
among (i) CompuDyne Corporation, a Nevada corporation ("CompuDyne"), (ii)
MicroAssembly Systems, Inc., a Connecticut corporation ("MicroAssembly"),
(iii) Quanta Systems Corporation, a Connecticut corporation ("Quanta"),
(iv) Quanta SecurSystems, Inc., a Maryland corporation ("SecurSystems"
and, collectively with CompuDyne, Quanta and MicroAssembly, the
Borrowers ), and (v) Asian American Bank & Trust Company, a
Massachusetts trust company with a head office at 68 Harrison Avenue,
Boston, Massachusetts (the Bank ).
1. DEFINITIONS AND RULES OF INTERPRETATION.
1.01 Definitions. The following terms shall have the meanings set forth
in this REF 1 or elsewhere in the provisions of this Credit Agreement
referred to below:
Accounts Receivable.
- --------------------
All rights of the Borrowers to payment for goods sold, leased or
otherwise marketed in the ordinary course of business and all rights of
the Borrowers to payment for services rendered in the ordinary course of
business and all sums of money or other proceeds due thereon pursuant to
transactions with account debtors, except for that portion of the sum of
money or other proceeds due thereon that relates to sales, use or
property taxes in conjunction with such transactions, recorded on books
of account in accordance with generally accepted accounting principles.
Affiliate.
- ---------
Any Person that would be considered to be an affiliate of a Borrower
under Rule 144(a) of the Rules and Regulations of the Securities and
Exchange Commission, as in effect on the date hereof, if such Borrower
were issuing securities.
Assignment of Monies.
- --------------------
An Assignment of Monies Due or to Become Due, to be executed and
delivered by the Borrowers in accordance with REF. 8.12, substantially in
the form of Exhibit A attached hereto.
Balance Sheet Date. [September 30, 1996].
- ------------------
Bank. As defined in the preamble hereto.
- ----
Bank s Head Office.
- ------------------
The Bank s head office located at 68 Harrison Avenue, Boston,
Massachusetts 02111, or at such other location as the Bank may designate
from time to time.
Bank s Special Counsel.
- ----------------------
Lyne, Woodworth & Evarts LLP or such other counsel as may be approved by
the Bank.
Borrower(s). As defined in the preamble hereto.
- -----------
Borrowing Base.
- --------------
At the relevant time of reference thereto, an amount determined by the
Bank by reference to the most recent Borrowing Base Report that is equal
to 75% of Eligible Accounts Receivable for which invoices have been
issued and are payable.
Borrowing Base Report.
- ---------------------
A Borrowing Base Report signed by the chief financial officer of the
Borrowers and in substantially the form of Exhibit B hereto.
Business Day.
- ------------
Any day other than a Saturday, a Sunday, or any other day on which
banking institutions in Boston, Massachusetts, are not required or
permitted to be open for the transaction of banking business.
Capital Assets.
- --------------
Fixed assets, both tangible (such as land, buildings, fixtures, machinery
and equipment) and intangible (such as patents, copyrights, trademarks,
franchises and good will); provided, that Capital Assets shall not
include any item customarily charged directly to expense or depreciated
over a useful life of 12 months or less in accordance with generally
accepted accounting principles.
Capital Expenditures.
- --------------------
Amounts paid or indebtedness incurred by the Borrowers in connection with
the purchase or lease by the Borrowers of Capital Assets that would be
required to be capitalized and shown on the consolidated balance sheet of
CompuDyne and its Subsidiaries in accordance with generally accepted
accounting principles.
Capitalized Leases.
- ------------------
Leases under which any Borrower is the lessee or obligor, the discounted
future rental payment obligations under which are required to be
capitalized on the balance sheet of the lessee or obligor in accordance
with generally accepted accounting principles.
CERCLA. See REF 7.18.
- ------
Closing Date.
- ------------
The first date on which the conditions set forth in REF 11 have been
satisfied.
Code.
- -----
The Internal Revenue Code of 1986.
Collateral.
- -----------
All of the property, rights and interests of the Borrowers that are or
are intended to be subject to the security interests created by the
Security Documents.
Concentration Account. See REF 8.13.
Consolidated or consolidated.
- ----------------------------
With reference to any term defined herein, shall mean that term as
applied to the accounts of CompuDyne and its Subsidiaries, consolidated
in accordance with generally accepted accounting principles.
Consolidated Cash Flow.
- ----------------------
With respect to any fiscal period, an amount equal to the sum of
Consolidated Net Income for such fiscal period plus depreciation and all
other noncash charges made in calculating Consolidated Net Income, all as
determined on a consolidated basis in accordance with generally accepted
accounting principles.
Consolidated Financial Obligations.
- ----------------------------------
With respect to any fiscal period, an amount equal to the sum of all
payments on Indebtedness that become due and payable or that are to
become due and payable during such fiscal period pursuant to any
agreement or instrument to which CompuDyne or any of its Subsidiaries is
a party relating to the borrowing of money or the obtaining of credit or
in respect of Capitalized Leases. Demand obligations shall be deemed to
be due and payable during any fiscal period during which such obligations
are outstanding.
Consolidated Net Income (or Deficit).
- -----------------------------------
The consolidated net income (or deficit) of CompuDyne and its
Subsidiaries, after deduction of all expenses, taxes, and other proper
charges, determined in accordance with generally accepted accounting
principles, after eliminating therefrom all extraordinary nonrecurring
items of income.
Credit Agreement.
- ----------------
This Credit Agreement, including the Schedules and Exhibits hereto.
Current Assets.
- --------------
All assets of CompuDyne and its Subsidiaries on a consolidated basis
that, in accordance with generally accepted accounting principles, are
properly classified as current assets, provided that (a) notes and
accounts receivable shall be included only if good and collectible as
determined by the Borrowers in accordance with established practice
consistently applied and, with respect to such notes, only if payable on
demand or within one year from the date as of which Current Assets are to
be determined and if not directly or indirectly renewable or extendible
at the option of the debtors, by their terms, or by the terms of any
instrument or agreement relating thereto, beyond such year, and, with
respect to such accounts receivable, only if payable and outstanding not
more than 90 days after the date of the shipment of goods or other
transaction out of which any such account receivable arose; and such
notes and accounts receivable shall be taken at their face value less
reserves determined to be sufficient in accordance with generally
accepted accounting principles; and (b) inventory shall be included only
if and to the extent that the same shall consist of saleable finished
goods ready and available for shipment to purchasers thereof.
Current Liabilities.
- -------------------
All consolidated liabilities of CompuDyne and its Subsidiaries maturing
on demand or within one year from the date as of which Current
Liabilities are to be determined, and such other liabilities as may
properly be classified as current liabilities in accordance with
generally accepted accounting principles.
Default. See REF 13.
- ---------
Distribution.
- ------------
The declaration or payment of any dividend on or in respect of any shares
of any class of capital stock of any Borrower, other than dividends
payable solely in shares of common stock of such Borrower; the purchase,
redemption, or other retirement of any shares of any class of capital
stock of such Borrower; the return of capital by such Borrower to its
shareholders as such; or any other distribution on or in respect of any
shares of any class of capital stock of such Borrower.
Dollars or $.
- ------------
Dollars in lawful currency of the United States of America.
Drawdown Date.
- -------------
The date on which any Loan is made or is to be made.
Eligible Accounts Receivable.
- ----------------------------
The aggregate of the unpaid portions of Accounts Receivable (net of any
credits, rebates, offsets, holdbacks or other adjustments or commissions
payable to third parties that are adjustments to such Accounts
Receivable) (a) that the Borrowers reasonably and in good faith determine
to be collectible; (b) that are with account debtors that (i) are not
Affiliates of any Borrower, (ii) purchased the goods or services giving
rise to the relevant Account Receivable in an arm s length transaction,
(iii) are not insolvent or involved in any case or proceeding, whether
voluntary or involuntary, under any bankruptcy, reorganization,
arrangement, insolvency, adjustment of debt, dissolution, liquidation or
similar law of any jurisdiction and (iv) are, in the Bank s reasonable
judgment, creditworthy; (c) that are in payment of obligations that have
been fully performed and are not subject to dispute or any other similar
claims that would reduce the cash amount payable therefor; (d) that are
not subject to any pledge, restriction, security interest or other lien
or encumbrance other than those created by the Loan Documents; (e) in
which the Bank has a valid and perfected first-priority security
interest; (f) that are not outstanding for more than 60 days past the
earlier to occur of (i) the date of the respective invoices therefor and
(ii) the date of shipment thereof in the case of goods or the end of the
calendar month following the provision thereof in the case of services;
(g) that are not due from any single account debtor if more than 15% of
the aggregate amount of all Accounts Receivable owing from such account
debtor would otherwise not be Eligible Accounts Receivable; (h) that are
payable in Dollars; (i) that are not payable from an office outside of
the United States; and (j) in the case of any Account Receivable arising
under any U.S. Government Contract, with respect to which the Borrowers
shall have executed and delivered a duly-completed Assignment of Monies.
Environmental Laws. See REF 7.18.
- ------------------
ERISA.
- ------
The Employee Retirement Income Security Act of 1974.
Event of Default. See REF 13.
- ----------------
generally accepted accounting principles.
- ----------------------------------------
(a) When used in REF 10, whether directly or indirectly through reference
to a capitalized term used therein, means (i) principles that are
consistent with the principles promulgated or adopted by the Financial
Accounting Standards Board and its predecessors, in effect for the fiscal
year ended on the Balance Sheet Date, and (ii) to the extent consistent
with such principles, the accounting practice of the Borrowers reflected
in its financial statements for the year ended on the Balance Sheet Date,
and (b) when used in general, other than as provided above, means
principles that are (i) consistent with the principles promulgated or
adopted by the Financial Accounting Standards Board and its predecessors,
as in effect from time to time, and (ii) consistently applied with past
financial statements of the Borrowers adopting the same principles,
provided, that in each case referred to in this definition of generally
accepted accounting principles , a certified public accountant would,
insofar as the use of such accounting principles is pertinent, be in a
position to deliver an unqualified opinion (other than a qualification
regarding changes in generally accepted accounting principles) as to
financial statements in which such principles have been properly applied.
Guaranteed Pension Plan.
- -----------------------
Any pension plan maintained by any Borrower, or to which any Borrower
contributes, that is required to pay plan termination insurance premiums
to the Pension Benefit Guaranty Corporation.
Hazardous Substances. See REF 7.18.
- --------------------
Indebtedness.
- ------------
All obligations, contingent and otherwise, that in accordance with
generally accepted accounting principles should be classified upon the
obligor s balance sheet as liabilities, or to which reference should be
made by footnotes thereto, including in any event and whether or not so
classified: (a) all debt and similar monetary obligations, whether direct
or indirect; (b) all liabilities secured by any mortgage, pledge,
security interest, lien, charge or other encumbrance existing on property
owned or acquired subject thereto, whether or not the liability secured
thereby shall have been assumed; and (c) all guaranties, endorsements and
other contingent obligations, whether direct or indirect, in respect of
indebtedness of others, including any obligation to supply funds to or in
any manner to invest in, directly or indirectly, the debtor, to purchase
indebtedness, or to assure the owner of indebtedness against loss,
through an agreement to purchase goods, supplies, or services for the
purpose of enabling the debtor to make payment of the indebtedness held
by such owner or otherwise, and the obligations to reimburse the issuer
in respect of any letters of credit.
Investments.
- -----------
All expenditures made and all liabilities incurred (contingently or
otherwise) for the acquisition of stock or Indebtedness of, or for loans,
advances, capital contributions or transfers of property to, or in
respect of any guaranties (or other commitments as described under
Indebtedness), or obligations of, any Person.
Letter of Credit. See REF 4.01(a).
- -----------------
Letter of Credit Application. See REF 4.01(a).
- ----------------------------
Line Cap. $850,000.
- --------
Line Termination Date. June 30, 1997.
- ---------------------
Loan Documents.
- --------------
This Credit Agreement, the Note, the Letter of Credit Applications, the
Letters of Credit, the Subordination Agreement and the Security
Documents.
Loan Request. See REF. 2.04.
Loans.
- -----
Revolving credit loans made or to be made by the Bank to the Borrowers
pursuant to REF 2.
Maximum Drawing Amount.
- ----------------------
The maximum aggregate amount from time to time that the beneficiaries may
draw under outstanding Letters of Credit, as such aggregate amount may be
reduced from time to time pursuant to the terms of the Letters of Credit.
Note. See REF 2.02.
- -----
Obligations.
- -----------
All indebtedness, obligations and liabilities of any Borrower to the
Bank, individually or collectively, existing on the date of this Credit
Agreement or arising thereafter, direct or indirect, joint or several,
absolute or contingent, matured or unmatured, liquidated or unliquidated,
secured or unsecured, arising by contract, operation of law or otherwise,
including those arising or incurred under this Credit Agreement or any of
the other Loan Documents or in respect of any of the Loans made or the
Note or other instruments at any time evidencing any thereof.
outstanding.
- -----------
With respect to the Loans, the aggregate unpaid principal thereof as of
any date of determination.
Perfection Certificates.
- -----------------------
The Perfection Certificates as defined in the Security Agreement.
Permitted Liens.
- ---------------
Liens, security interests and other encumbrances permitted by REF 9.02.
Person.
- ------
Any individual, corporation, partnership, trust, unincorporated
association, business or other legal entity, and any government or any
governmental agency or political subdivision thereof.
Pledge Agreement.
- ----------------
The Pledge Agreement, dated or to be dated on or prior to the Closing
Date, between CompuDyne and the Bank, substantially in the form of
Exhibit H attached hereto.
Prime Rate.
- ----------
The highest rate of interest published from time to time in the Wall
Street Journal as the "prime rate" in its "Money Rates" section.
Record.
- ------
The grid attached to the Note, or the continuation of such grid, or any
other similar record maintained by the Bank with respect to any Loan
referred to in the Note.
Reimbursement Obligation.
- ------------------------
The Borrowers obligation to reimburse the Bank on account of any drawing
under any Letter of Credit as provided in REF 4.02.
Security Agreement.
- ------------------
The Security Agreement, dated or to be dated on or prior to the Closing
Date, between the Borrowers and the Bank, substantially in the form of
Exhibit C attached hereto.
Security Documents.
- ------------------
The Assignments of Monies, the Pledge Agreement and the Security
Agreement.
Subordinated Debt.
- -----------------
Unsecured Indebtedness of any Borrower that is expressly subordinated and
made junior to the payment and performance in full of the Obligations,
and evidenced as such by the Subordination Agreement or by another
written instrument containing subordination provisions in form and
substance approved by the Bank in writing.
Subordination Agreement.
- -----------------------
The Subordination Agreement, dated or to be dated on or prior to the
Closing Date, between the Bank, the Borrowers and Alan Markowitz,
substantially in the form of Exhibit G attached hereto.
Subsidiary.
- ----------
Any corporation, association, trust, or other business entity of which
the designated parent shall at any time own, directly or indirectly,
through a Subsidiary or Subsidiaries, at least a majority (by number of
votes) of the outstanding Voting Stock.
Surety Agreement.
- ----------------
Any agreement between any insurance, surety, bonding or similar entity (a
"surety") and any Borrower, pursuant to which, among other things, such
Borrower agrees to indemnify and reimburse the surety for any and all
costs and expenses incurred by such surety in connection with its
performance of any bonding or similar arrangement on behalf of such
Borrower.
UCC.
- ----
The Uniform Commercial Code as adopted and in effect in the Commonwealth
of Massachusetts.
Uniform Customs.
- ---------------
With respect to any Letter of Credit, the Uniform Customs and Practice
for Documentary Credits (1993 Revision), International Chamber of
Commerce Publication No. 500, or any successor version thereto adopted by
the Bank in the ordinary course of its business as a letter of credit
issuer and in effect at the time of issuance of such Letter of Credit.
Unpaid Reimbursement Obligation.
- -------------------------------
Any Reimbursement Obligation for which the Borrowers do not reimburse the
Bank on the date specified in, and in accordance with, REF 4.02.
U.S. Government Contract.
- ------------------------
Any contract between any Borrower and the United States government or any
of its departments, agencies, bureaus or instrumentalities.
Voting Stock.
- ------------
Stock or similar interests, of any class or classes (however designated),
the holders of which are at the time entitled, as such holders, to vote
for the election of a majority of the directors (or persons performing
similar functions) of the corporation, association, trust or other
business entity involved, whether or not the right so to vote exists by
reason of the happening of a contingency.
1.02 Rules of Interpretation.
- -----------------------------
a. A reference to any document or agreement shall include such document
or agreement as amended, modified or supplemented from time to time in
accordance with its terms and the terms of this Credit Agreement.
b. The singular includes the plural and the plural includes the singular.
c. A reference to any law includes any amendment or modification to such
law.
d. A reference to any Person includes its permitted successors and
permitted assigns.
e. Accounting terms not otherwise defined herein have the meanings
assigned to them by generally accepted accounting principles applied on a
consistent basis by the accounting entity to which they refer.
f. The words "include", "includes" and "including" are not limiting.
g. All terms not specifically defined herein or by generally accepted
accounting principles, which terms are defined in the UCC have the
meanings assigned to them therein.
h. Reference to a particular "REF" refers to that section of this Credit
Agreement unless otherwise indicated.
i. The words "herein", "hereof", "hereunder" and words of like import
shall refer to this Credit Agreement as a whole and not to any particular
section or subdivision of this Credit Agreement.
2. THE REVOLVING CREDIT FACILITY.
- --------------------------------
2.01 Commitment to Lend.
- ---------------------------
Subject to the terms and conditions set forth in this Credit Agreement,
the Bank agrees to lend to the Borrowers, and the Borrowers may borrow,
repay, and reborrow from time to time between the Closing Date and the
Line Termination Date upon notice by the Borrowers to the Bank given in
accordance with REF 2.04, such sums as are requested by the Borrowers up
to a maximum aggregate amount outstanding (after giving effect to all
amounts requested) at any one time equal to the lesser of (a) the Line
Cap less the sum of the Maximum Drawing Amount and all Unpaid
Reimbursement Obligations and (b) the Borrowing Base less the sum of the
Maximum Drawing Amount and all Unpaid Reimbursement Obligations. Each
request for a Loan hereunder shall constitute a representation and
warranty by the Borrowers that the conditions set forth in REFS 11 and
12, in the case of the initial Loan to be made on the Closing Date, and
REF 12, in the case of all other Loans, have been satisfied on the date
of such request.
2.02 The Note.
- -----------------
The Loans shall be evidenced by a promissory note of the Borrowers in
substantially the form of Exhibit D hereto (the "Note"), dated as of the
Closing Date and completed with appropriate insertions. The Note shall
be payable to the order of the Bank in a principal amount equal to the
Line Cap or, if less, the outstanding amount of all Loans, plus interest
accrued thereon, as set forth below. The Borrowers irrevocably authorize
the Bank to make or cause to be made, at or about the time of the
Drawdown Date of any Loan or at the time of receipt of any payment of
principal on the Note, an appropriate notation on the Record reflecting
the making of such Loan or (as the case may be) the receipt of such
payment. The outstanding amount of the Loans set forth on the Record
shall be prima facie evidence of the principal amount thereof owing and
unpaid to the Bank, but the failure to record, or any error in so
recording, any such amount on the Record shall not limit or otherwise
affect the obligations of the Borrowers hereunder or under the Note to
make payments of principal of or interest on the Note when due.
2.03 Interest on Loans.
- --------------------------
a. Except as otherwise provided in REF 5.03, each Loan shall bear
interest for the period commencing with the Drawdown Date thereof and
ending on the date of repayment thereof at the rate of 2% per annum above
the Prime Rate. Any change in the interest rate resulting from a change
in the Prime Rate is to be effective at the beginning of the day of such
change.
b. The Borrowers jointly and severally promise to pay interest on each
Loan in arrears on the 15th day of each calendar month, commencing on
January 15, 1997.
2.04 Requests for Loans.
- ---------------------------
The Borrowers shall give to the Bank written notice (which written notice
may be delivered by telecopy) in the form of Exhibit E hereto (or
telephonic notice confirmed in a writing in the form of Exhibit E hereto)
of each Loan requested hereunder (a "Loan Request") not later than (a)
10:00 a.m. (Boston time) on the proposed Drawdown Date thereof. Each
Loan Request shall be irrevocable and binding on the Borrowers and shall
obligate the Borrowers to accept the Loan requested from the Bank on the
proposed Drawdown Date. Each Loan Request shall be in a minimum
aggregate amount of $10,000 or an integral multiple thereof.
2.05 Change in Borrowing Base.
- ----------------------------------
The Borrowing Base shall be determined weekly (or at such other interval
as may be specified pursuant to REF 8.03(e)) by the Bank by reference to
the Borrowing Base Report.
2.06 Unused Availability Fee.
- ---------------------------------
The Borrowers jointly and severally agree to pay to the Bank an unused
availability fee calculated at the rate of 1/2% per annum on the average
daily amount during each calendar month or portion thereof from the
Closing Date to the Line Termination Date by which the Line Cap exceeds
the outstanding amount of Loans during such calendar month. The unused
availability fee shall be payable monthly in arrears on the first day of
each calendar month for the immediately preceding calendar month
commencing on February 1, 1996, with a final payment on the Line
Termination Date or any earlier date on which the Loans shall become due
and payable in full.
2.07 Origination Fee.
- ------------------------
The Borrowers shall pay to the Bank, on or prior to the Closing Date, an
origination fee in the amount of $1,000.
3. REPAYMENT OF THE LOANS.
- -------------------------
3.01 Line Termination.
- ---------------------
The Borrowers jointly and severally promise to pay on the Line
Termination Date, and there shall become absolutely due and payable on
the Line Termination Date, all of the Loans outstanding on such date,
together with any and all accrued and unpaid interest thereon.
3.02 Mandatory Repayments of Loans.
- ----------------------------------
If at any time while the Loans are outstanding, the outstanding amount of
the Loans, the Maximum Drawing Amount and all Unpaid Reimbursement
Obligations exceeds the lesser of (a) the Line Cap and (b) the Borrowing
Base, then the Borrowers shall immediately pay the amount of such excess
to the Bank for application first, to any Unpaid Reimbursement
Obligations; second, to the Loans; and third, to provide the Bank with
cash collateral for Reimbursement Obligations as contemplated by REF
4.02(b) and (c).
3.03 Automatic Repayment of Loans.
- ---------------------------------
At such times as the Bank may determine, the Bank, by charging the
Concentration Account, shall apply the unrestricted collateral balances
in the Concentration Account (subject to final payment in cash of all
items theretofore credited to the Concentration Account) to the
outstanding Loans. The Bank shall provide the Borrowers with prompt
notice of each such charge and application. To the extent that, after
such application, there are no Loans outstanding, the Bank shall, at the
Borrowers request, transfer the unrestricted collected balances in the
Concentration Account to the Borrowers operating accounts with the Bank.
3.04 Optional Repayments of Loans.
- ---------------------------------
The Borrowers shall have the right, at their election, to repay the
outstanding amount of the Loans, as a whole or in part, at any time
without penalty or premium. Each such partial prepayment of the Loans
shall be in an integral multiple of $10,000 and shall be accompanied by
the payment of accrued interest on the principal prepaid to the date of
prepayment.
4. LETTERS OF CREDIT.
- --------------------
4.01 Letter of Credit Commitments.
- ---------------------------------
a. Subject to the terms and conditions hereof and the execution and
delivery by the Borrowers of a letter of credit application on the Bank s
customary form (a "Letter of Credit Application"), the Bank, in reliance
upon the representations and warranties of the Borrowers contained
herein, agrees to issue, extend and renew for the account of the
Borrowers one or more standby or documentary letters of credit
(individually, a "Letter of Credit"), in such form as may be requested
from time to time by the Borrowers and agreed to by the Bank; provided,
however, that, after giving effect to such request, (i) the sum of the
aggregate Maximum Drawing Amount and all Unpaid Reimbursement Obligations
shall not exceed $100,000 at any one time and (ii) the sum of (A) the
Maximum Drawing Amount on all Letters of Credit, (B) all Unpaid
Reimbursement Obligations, and (C) the amount of all Loans outstanding
shall not exceed the lesser of (1) the Line Cap and (2) the Borrowing
Base.
b. Each Letter of Credit Application shall be completed to the
satisfaction of the Bank. In the event that any provision of any Letter
of Credit Application shall be inconsistent with any provision of this
Credit Agreement, then the provisions of this Credit Agreement shall, to
the extent of any such inconsistency, govern.
c. Each Letter of Credit issued, extended or renewed hereunder shall,
among other things, (i) provide for the payment of sight drafts for honor
thereunder when presented in accordance with the terms thereof and when
accompanied by the documents described therein, and (ii) have an expiry
date no later than the date that is 14 days (or, if the beneficiary is
located outside of the United States of America, 45 days) prior to the
Line Termination Date. Each Letter of Credit so issued, extended or
renewed shall be subject to the Uniform Customs.
4.02 Reimbursement Obligation of the Borrowers.
- ----------------------------------------------
In order to induce the Bank to issue, extend and renew each Letter of
Credit, the Borrowers hereby agree, jointly and severally, to reimburse
or pay to the Bank, with respect to each Letter of Credit issued,
extended or renewed by the Bank hereunder,
except as otherwise expressly provided in REF 4.02(b) and (c), on each
date that any draft presented under such Letter of Credit is honored by
the Bank, or the Bank otherwise makes a payment with respect thereto, (i)
the amount paid by the Bank under or with respect to such Letter of
Credit, and (ii) the amount of any taxes, fees, charges or other costs
and expenses whatsoever incurred by the Bank in connection with any
payment made by the Bank under, or with respect to, such Letter of
Credit,
b. upon the reduction (but not termination) of the Line Cap to an amount
less than the Maximum Drawing Amount, an amount equal to such difference,
which amount shall be held by the Bank as cash collateral for all
Reimbursement Obligations, and
c. upon the termination of the Line Cap, or the acceleration of the
Reimbursement Obligations with respect to all Letters of Credit in
accordance with REF 13, an amount equal to the then Maximum Drawing
Amount on all Letters of Credit, which amount shall be held by the Bank
as cash collateral for all Reimbursement Obligations.
Each such payment shall be made to the Bank at the Bank s Head Office in
immediately available funds. Interest on any and all amounts remaining
unpaid by the Borrower under this REF 4.02 at any time from the date such
amounts become due and payable (whether as stated in this REF 4.02, by
acceleration or otherwise) until payment in full (whether before or after
judgment) shall be payable to the Bank on demand at the rate specified in
REF 5.03 for overdue principal on the Loans.
4.03 Letter of Credit Payments.
- ------------------------------
If any draft shall be presented or other demand for payment shall be made
under any Letter of Credit, the Bank shall notify the Borrowers of the
date and amount of the draft presented or demand for payment and of the
date and time when it expects to pay such draft or honor such demand for
payment. The responsibility of the Bank to the Borrowers shall be only
to determine that the documents (including each draft) delivered under
each Letter of Credit in connection with such presentment shall be in
conformity in all material respects with such Letter of Credit.
4.04 Obligations Absolute.
- -------------------------
The Borrowers obligations under this REF 4 shall be absolute and
unconditional under any and all circumstances and irrespective of the
occurrence of any Default or Event of Default or any condition precedent
whatsoever or any setoff, counterclaim or defense to payment that the
Borrowers may have or have had against the Bank or any beneficiary of a
Letter of Credit. The Borrowers further agree with the Bank that the
Bank shall not be responsible for, and the Borrowers Reimbursement
Obligations under REF 4.02 shall not be affected by, among other things,
the validity or genuineness of documents or of any endorsements thereon,
even if such documents should in fact prove to be in any or all respects
invalid, fraudulent or forged, or any dispute between or among the
Borrowers, the beneficiary of any Letter of Credit or any financing
institution or other party to which any Letter of Credit may be
transferred or any claims or defenses whatsoever of the Borrowers against
the beneficiary of any Letter of Credit or any such transferee. The Bank
shall not be liable for any error, omission, interruption or delay in
transmission, dispatch or delivery of any message or advice, however
transmitted, in connection with any Letter of Credit. The Borrowers
agree that any action taken or omitted by the Bank under or in connection
with each Letter of Credit and the related drafts and documents, if done
in good faith, shall be binding upon the Borrowers and shall not result
in any liability on the part of the Bank to the Borrowers.
4.05 Reliance by Issuer.
- -----------------------
To the extent not inconsistent with REF 4.04, the Bank shall be entitled
to rely, and shall be fully protected in relying upon, any Letter of
Credit, draft, writing, resolution, notice, consent, certificate,
affidavit, letter, cablegram, telegram, telecopy, telex or teletype
message, statement, order or other document believed by it to be genuine
and correct and to have been signed, sent or made by the proper Person or
Persons and upon advice and statements of legal counsel, independent
accountants and other experts selected by the Bank.
4.06 Letter of Credit Fee.
- -------------------------
The Borrowers shall, on the date of issuance or any extension or renewal
of any Letter of Credit and at such other time or times as such charges
are customarily made by the Bank, pay a fee (in each case, a "Letter of
Credit Fee") to the Bank in respect of each Letter of Credit at the rate
set forth in the Bank s standard rate sheet as in effect at the time or
such issuance, extension or renewal.
5. CERTAIN GENERAL PROVISIONS.
5.01 Funds for Payments.
- -----------------------
a. All payments of principal, interest, Reimbursement Obligations and any
other amounts due hereunder or under any of the other Loan Documents
shall be made to the Bank at the Bank s Head Office or at such other
location that the Bank may from time to time designate, in each case in
immediately available funds. The Borrowers shall enter into such
arrangements as are necessary to permit the Bank to deduct such payments
automatically from the Borrowers deposit accounts with the Bank.
b. All payments by the Borrowers hereunder and under any of the other
Loan Documents shall be made without setoff or counterclaim and free and
clear of and without deduction for any taxes, levies, imposts, duties,
charges, fees, deductions, withholdings, compulsory loans, restrictions
or conditions of any nature now or hereafter imposed or levied by any
jurisdiction or any political subdivision thereof or taxing or other
authority therein unless the Borrowers are compelled by law to make such
deduction or withholding. If any such obligation is imposed upon the
Borrowers with respect to any amount payable by it hereunder or under any
of the other Loan Documents, the Borrowers will pay to the Bank, on the
date on which such amount is due and payable hereunder or under such
other Loan Document, such additional amount in Dollars as shall be
necessary to enable the Bank to receive the same net amount that the Bank
would have received on such due date had no such obligation been imposed
upon the Borrowers. The Borrowers will deliver promptly to the Bank
certificates or other valid vouchers for all taxes or other charges
deducted from or paid with respect to payments made by the Borrowers
hereunder or under such other Loan Document.
5.02 Computations.
- -----------------
All computations of interest on the Loans shall be based on a 360-day
year and paid for the actual number of days elapsed. Whenever a payment
hereunder or under any of the other Loan Documents becomes due on a day
that is not a Business Day, the due date for such payment shall be the
immediately preceding Business Day. The outstanding amount of the Loans
as reflected on the Record from time to time shall be considered correct
and binding on the Borrowers unless within five Business Days after
receipt of any notice by the Bank of such outstanding amount, the Bank
shall notify the Borrowers to the contrary.
5.03 Late Fee; Interest after Default.
- -------------------------------------
If any payment hereunder or under any of the other Loan Documents shall
not be paid within 15 days of the due date thereof, there shall
immediately become due and payable a late payment fee in the amount of 5%
of the amount so overdue. During the continuance of any Default or Event
of Default, the Loans shall bear interest at a rate equal to 2% above the
rate that would otherwise be applicable pursuant to REF 2.03.
6. COLLATERAL SECURITY.
- ----------------------
a. The Obligations shall be secured by a perfected first-priority
security interest (subject only to Permitted Liens entitled to priority
under applicable law) in all of the assets of the Borrowers, whether now
owned or hereafter acquired, pursuant to the terms of the Security
Agreement.
b. On or prior to the Closing Date, the Borrowers shall execute and
deliver a duly completed Assignment of Monies with respect to each U.S.
Government Contract, except for any such contract containing specific
provisions that prohibit contract award disclosure.
7. REPRESENTATIONS AND WARRANTIES.
- ---------------------------------
The Borrowers represent and warrant to the Bank as follows:
7.01 Corporate Authority.
- ------------------------
a. Incorporation; Good Standing. CompuDyne (i) is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Nevada, (ii) has all requisite corporate power to own its
property and conduct its business as now conducted and as currently
contemplated, and (iii) is in good standing as a foreign corporation and
is duly authorized to do business in the State of Connecticut and in each
other jurisdiction where such qualification is necessary, except where a
failure to be so qualified would not have a materially adverse effect on
the business, assets or financial condition of CompuDyne. Quanta (i) is
a corporation duly organized, validly existing and in good standing under
the laws of the State of Connecticut, (ii) has all requisite corporate
power to own its property and conduct its business as now conducted and
as currently contemplated, and (iii) is in good standing as a foreign
corporation and is duly authorized to do business in the State of
Maryland and in each other jurisdiction where such qualification is
necessary, except where a failure to be so qualified would not have a
materially adverse effect on the business, assets or financial condition
of Quanta. MicroAssembly (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Connecticut,
(ii) has all requisite corporate power to own its property and conduct
its business as now conducted and as currently contemplated, and (iii) is
in good standing as a foreign corporation and is duly authorized to do
business in each jurisdiction where such qualification is necessary,
except where a failure to be so qualified would not have a materially
adverse effect on the business, assets or financial condition of
MicroAssembly. SecurSystems (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland,
(ii) has all requisite corporate power to own its property and conduct
its business as now conducted and as currently contemplated, and (iii) is
in good standing as a foreign corporation and is duly authorized to do
business in each jurisdiction where such qualification is necessary,
except where a failure to be so qualified would not have a materially
adverse effect on the business, assets or financial condition of
SecurSystems.
b. Authorization. The execution, delivery and performance of this Credit
Agreement and the other Loan Documents to which any Borrower is or is to
become a party and the transactions contemplated hereby and thereby (i)
are within the corporate authority of such Borrower, (ii) have been duly
authorized by all necessary corporate proceedings, (iii) do not conflict
with or result in any breach or contravention of any provision of law,
statute, rule or regulation to which such Borrower is subject or any
judgment, order, writ, injunction, license or permit applicable to such
Borrower and (iv) do not conflict with any provision of the corporate
charter or bylaws of, or any agreement or other instrument binding upon,
such Borrower.
c. Enforceability. The execution and delivery of this Credit Agreement
and the other Loan Documents to which any Borrower is or is to become a
party will result in valid and legally binding obligations of such
Borrower enforceable against it in accordance with the respective terms
and provisions hereof and thereof, except as enforceability is limited by
bankruptcy, insolvency, reorganization, moratorium or other laws relating
to or affecting generally the enforcement of creditors rights and except
to the extent that availability of the remedy of specific performance or
injunctive relief is subject to the discretion of the court before which
any proceeding therefor may be brought.
7.02 Governmental Approvals.
- ---------------------------
The execution, delivery and performance by the Borrowers of this Credit
Agreement and the other Loan Documents to which any Borrower is or is to
become a party and the transactions contemplated hereby and thereby do
not require the approval or consent of, or filing with, any governmental
agency or authority other than those already obtained.
7.03 Title to Properties; Leases.
- --------------------------------
Except as indicated on Schedule 7.03 hereto, the Borrowers own all of the
assets reflected in the balance sheet of the Borrowers as at the Balance
Sheet Date or acquired since that date (except property and assets sold
or otherwise disposed of in the ordinary course of business since that
date), subject to no rights of others, including any mortgages, leases,
conditional sales agreements, title retention agreements, liens or other
encumbrances except Permitted Liens.
7.04 Financial Statements.
- -------------------------
There has been furnished to the Bank a balance sheet of the Borrowers as
at the Balance Sheet Date, and a statement of income of the Borrowers for
the fiscal period then ended. Such balance sheet and statement of income
have been prepared in accordance with generally accepted accounting
principles and fairly present the financial condition of the Borrowers as
at the close of business on the date thereof and the results of
operations for the fiscal period then ended. There are no contingent
liabilities of the Borrowers as of such date involving material amounts,
known to the officers of the Borrowers, that were not disclosed in such
balance sheet and the notes related thereto.
7.05 No Material Changes, Etc.
- -----------------------------
Since the Balance Sheet Date there has occurred no materially adverse
change in the financial condition or business of any Borrower as shown on
or reflected in the balance sheet of the Borrowers as at the Balance
Sheet Date, or the statement of income for the fiscal year then ended,
other than changes in the ordinary course of business that have not had
any materially adverse effect either individually or in the aggregate on
the business or financial condition of any Borrower. Since the Balance
Sheet Date, no Borrower has made any Distribution.
7.06 Franchises, Patents, Copyrights, Etc.
- -----------------------------------------
Each Borrower possesses all franchises, patents, copyrights, trademarks,
trade names, licenses and permits, and rights in respect of the
foregoing, adequate for the conduct of its business substantially as now
conducted without known conflict with any rights of others.
7.07 Litigation.
- ---------------
Except as set forth in Schedule REF 7.07 hereto, there are no actions,
suits, proceedings or investigations of any kind pending or threatened
against any Borrower before any court, tribunal or administrative agency
or board that, if adversely determined, might, either in any case or in
the aggregate, materially adversely affect the properties, assets,
financial condition or business of any Borrower or materially impair the
right of such Borrower, considered as a whole, to carry on business
substantially as now conducted by, or result in any substantial liability
not adequately covered by insurance, or for which adequate reserves are
not maintained on the balance sheet of the Borrowers, or that question
the validity of this Credit Agreement or any of the other Loan Documents,
or any action taken or to be taken pursuant hereto or thereto.
7.08 No Materially Adverse Contracts, Etc.
- -----------------------------------------
No Borrower is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation that has
or is expected in the future to have a materially adverse effect on the
business, assets or financial condition of such Borrower. No Borrower is
a party to any contract or agreement that has or is expected, in the
judgment of such Borrower s officers, to have any materially adverse
effect on the business of such Borrower.
7.09 Compliance With Other Instruments, Laws, Etc.
- -------------------------------------------------
No Borrower is in violation of any provision of its charter documents,
bylaws, or any agreement or instrument to which it may be subject or by
which it or any of its properties may be bound or any decree, order,
judgment, statute, license, rule or regulation, in any of the foregoing
cases in a manner that could result in the imposition of substantial
penalties or materially and adversely affect the financial condition,
properties or business of such Borrower.
7.10 Tax Status.
- ---------------
Each Borrower has (a) made or filed all federal and state income and all
other tax returns, reports and declarations required by any jurisdiction
to which it is subject, (b) paid all taxes and other governmental
assessments and charges shown or determined to be due on such returns,
reports and declarations, except those being contested in good faith and
by appropriate proceedings and (c) set aside on its books provisions
reasonably adequate for the payment of all taxes for periods subsequent
to the periods to which such returns, reports or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Borrowers
know of no basis for any such claim.
7.11 No Event of Default.
- ------------------------
No Default or Event of Default has occurred and is continuing.
7.12 Holding Company and Investment Company Acts.
- ------------------------------------------------
No Borrower is a "holding company", or a "subsidiary company" of a
"holding company", or an "affiliate" of a "holding company", as such
terms are defined in the Public Utility Holding Company Act of 1935; nor
is any Borrower an "investment company", or an "affiliated company" or a
"principal underwriter" of an "investment company", as such terms are
defined in the Investment Company Act of 1940.
7.13 Absence of Financing Statements, Etc.
- -----------------------------------------
Except with respect to Permitted Liens, there is no financing statement,
security agreement, chattel mortgage, real estate mortgage or other
document filed or recorded with any filing records, registry or other
public office, that purports to cover, affect or give notice of any
present or possible future lien on, or security interest in, any assets
or property of any Borrower or any rights relating thereto.
7.14 Perfection of Security Interest.
- ------------------------------------
All filings, assignments, pledges and deposits of documents or
instruments have been made and all other actions have been taken that are
necessary or advisable, under applicable law, to establish and perfect
the Bank s security interest in the Collateral. The Collateral and the
Bank s rights with respect to the Collateral are not subject to any
setoff, claims, withholdings or other defenses. The Borrowers are the
owners of the Collateral free from any lien, security interest,
encumbrance and any other claim or demand, except for Permitted Liens.
7.15 Certain Transactions.
- -------------------------
None of the officers, directors, or employees of any Borrower is
currently a party to any transaction with any Borrower (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services
to or by, providing for rental of real or personal property to or from,
or otherwise requiring payments to or from any officer, director or such
employee or, to the knowledge of any Borrower, any corporation,
partnership, trust or other entity in which any officer, director, or any
such employee has a substantial interest or is an officer, director,
trustee or partner.
7.16 ERISA Compliance.
- ---------------------
Each Borrower has complied in all material respects with ERISA, including
the provisions thereof respecting funding requirements for, and the
termination of, plans and respecting prohibited transactions thereunder,
and the funding of any Guaranteed Pension Plan complies with the minimum
funding standards of Section 412 of the Internal Revenue Code. Except as
set forth on Schedule 7.16 hereto, the current value of all accrued
benefits under each of such plans did not, as of the latest valuation
date, exceed the then current value of the assets of such plans allocable
to such accrued benefits based upon the actuarial methods and assumptions
used for such plans.
7.17 Regulations U and X.
- ------------------------
The proceeds of the Loans shall be used for working capital and general
corporate purposes. No portion of any Loan is to be used for the purpose
of purchasing or carrying any "margin security" or "margin stock" as such
terms are used in Regulations U and X of the Board of Governors of the
Federal Reserve System, 12 C.F.R. Parts 221 and 224.
7.18 Environmental Compliance.
- -----------------------------
a. No Borrower is in violation of any judgment, decree, order, law,
license, rule or regulation pertaining to environmental matters,
including those arising under the Resource Conservation and Recovery Act,
the Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), the Superfund Amendments and Reauthorization Act of
1986, the Federal Water Pollution Control Act, the Federal Clean Air Act,
the Toxic Substances Control Act or any state or local statute,
regulation, ordinance, order or decree relating to health, safety or the
environment (collectively, "Environmental Laws"), which violation would
have a materially adverse effect on the business, assets or financial
condition of any Borrower, except as disclosed on Schedule 7.18 hereto.
b. No Borrower has received notice that it has been identified by the
United States Environmental Protection Agency as a potentially
responsible party under CERCLA with respect to a site listed on the
National Priorities List, 40 C.F.R. Part 300 Appendix B (1986), nor has
any Borrower received any notification that any hazardous waste, as
defined by 42 U.S.C. REF 6903(5), any hazardous substances, as defined by
42 U.S.C. REF 9601(14), any "pollutant or contaminant", as defined by 42
U.S.C. REF 9601(33), or any toxic substance, hazardous materials, oil or
other chemicals or substances regulated by any Environmental Laws
(collectively, Hazardous Substances ) that it has disposed of has been
found at any site at which a federal or state agency has conducted or is
conducting a remedial investigation or other action pursuant to any
Environmental Law except as disclosed on Schedule 7.18 hereto.
7.19 Subsidiaries.
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Attached hereto as Schedule 7.19 is a complete and accurate list of all
Subsidiaries of any of the Borrowers.
7.20 Government Contracts.
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Attached hereto as Schedule 7.20 is a true, correct and complete list of
all U.S. Government Contracts.
8. AFFIRMATIVE COVENANTS OF THE BORROWERS. The Borrowers covenant and
agree that, so long as any Loan, Unpaid Reimbursement Obligation, Letter
of Credit or Note is outstanding or the Bank has any obligation to make
any Loans or to issue, extend or renew Letters of Credit:
8.01 Maintenance of Office.
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Each of CompuDyne and MicroAssembly will maintain its chief executive
office in Willimantic, Connecticut, or at such other place in the United
States of America as such Borrower shall designate upon written notice to
the Bank, where notices, presentations and demands to or upon such
Borrower in respect of the Loan Documents to which such Borrower is a
party may be given or made. Quanta will maintain its chief executive
office in Gaithersburg, Maryland, or at such other place in the United
States of America as Quanta shall designate upon written notice to the
Bank, where notices, presentations and demands to or upon Quanta in
respect of the Loan Documents to which Quanta is a party may be given or
made. SecurSystems will maintain its chief executive office in Hanover,
Maryland, or at such other place in the United States of America as
SecurSystems shall designate upon written notice to the Bank, where
notices, presentations and demands to or upon SecurSystems in respect of
the Loan Documents to which SecurSystems is a party may be given or made.
8.02 Records and Accounts. Each Borrower will (a) keep true and accurate
records and books of account in which full, true and correct entries will
be made in accordance with generally accepted accounting principles and
(b) maintain adequate accounts and reserves for all taxes (including
income taxes), depreciation, depletion, obsolescence and amortization of
its properties, contingencies and other reserves.
8.03 Financial Statements, Certificates and Information. The Borrowers
will deliver to the Bank:
a. as soon as practicable, but in any event not later than 90 days after
the end of each fiscal year of CompuDyne, the consolidated and
consolidating balance sheets of CompuDyne and its Subsidiaries as at the
end of such year, and the related consolidated and consolidating
statements of income and statements of cash flow for such year, each
setting forth in comparative form the figures for the previous fiscal
year and all such statements to be in reasonable detail, prepared in
accordance with generally accepted accounting principles, and certified
without qualification by Deloitte & Touche or by other independent
certified public accountants satisfactory to the Bank, together with a
written statement from such accountants to the effect that they have read
a copy of this Credit Agreement, and that, in making the examination
necessary to such certification, they have obtained no knowledge of any
Default or Event of Default or, if such accountants shall have obtained
knowledge of any then existing Default or Event of Default, they shall
disclose in such statement any such Default or Event of Default; provided
that such accountants shall not be liable to the Bank for failure to
obtain knowledge of any Default or Event of Default;
b. as soon as practicable, but in any event not later than 45 days after
the end of each of the fiscal quarters of CompuDyne, copies of the
unaudited consolidated and consolidating balance sheets of CompuDyne and
its Subsidiaries as at the end of such quarter, and the related
consolidated and consolidating statements of income and statements of
cash flow for the portion of CompuDyne s fiscal year then elapsed, all in
reasonable detail and prepared in accordance with generally accepted
accounting principles, together with a certification by the principal
financial or accounting officer of CompuDyne that the information
contained in such financial statements fairly presents the financial
position of CompuDyne on the date thereof (subject to year-end
adjustments);
c. simultaneously with the delivery of the financial statements referred
to in subsections (a) and (b) above, CompuDyne s 10-K or 10-Q report, as
the case may be, together with a statement certified by the principal
financial or accounting officer of CompuDyne in substantially the form of
Exhibit F hereto and setting forth in reasonable detail computations
evidencing compliance with the covenants contained in REF 10 and (if
applicable) reconciliations to reflect changes in generally accepted
accounting principles since the Balance Sheet Date;
d. contemporaneously with the mailing thereof, copies of all material of
a financial nature sent to the stockholders of any Borrower;
e. on Tuesday of each week or at such earlier time as the Bank may
reasonably request, a Borrowing Base Report setting forth the Borrowing
Base as at the end of the immediately preceding week or other date so
requested by the Bank, signed by the Chief Financial Officer of each of
the Borrowers;
f. within 15 days after the end of each calendar month, an Accounts
Receivable and accounts payable aging report;
g. contemporaneously with the filing thereof, true, correct and complete
copies of each Borrower s federal and state income tax returns
h. from time to time such other financial data and information (including
accountants management letters) as the Bank may reasonably request.
8.04 Notices.
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a. Defaults. The Borrowers will promptly notify the Bank in writing of
the occurrence of any Default or Event of Default. If any Person shall
give any notice or take any other action in respect of a claimed default
(whether or not constituting an Event of Default) under this Credit
Agreement or any other note, evidence of indebtedness, indenture or other
obligation to which or with respect to which any Borrower is a party or
obligor, whether as principal, guarantor, surety or otherwise, the
Borrowers shall forthwith give written notice thereof to the Bank
describing the notice or action and the nature of the claimed default.
b. Environmental Events. The Borrowers will promptly give notice to the
Bank (i) of any violation of any Environmental Law that any Borrower
reports in writing or is reportable by such Person in writing (or for
which any written report supplemental to any oral report is made) to any
federal, state or local environmental agency and (ii) upon becoming aware
thereof, of any inquiry, proceeding, investigation, or other action,
including a notice from any agency of potential environmental liability,
or any federal, state or local environmental agency or board, that has
the potential materially to affect the assets, liabilities, financial
condition or operations of any Borrower, or the Bank s security interests
pursuant to the Security Documents.
c. Notification of Claims against Collateral. The Borrowers will,
immediately upon becoming aware thereof, notify the Bank in writing of
any setoff, claims, withholdings or other defenses to which any of the
Collateral, or the Bank s rights with respect to the Collateral, are
subject.
d. Notice of Litigation and Judgments. The Borrowers will give notice to
the Bank in writing within 15 days of becoming aware of any litigation or
proceedings threatened in writing or any pending litigation and
proceedings affecting any Borrower or to which any Borrower is or becomes
a party involving an uninsured claim against such Borrower that could
reasonably be expected to have a materially adverse effect on such
Borrower and stating the nature and status of such litigation or
proceedings. The Borrowers will give notice to the Bank in writing, in
form and detail satisfactory to the Bank, within ten days of any judgment
not covered by insurance, final or otherwise, against any Borrower in an
amount in excess of $10,000.
8.05 Corporate Existence; Maintenance of Properties. Each Borrower will
do or cause to be done all things necessary to preserve and keep in full
force and effect its corporate existence, rights and franchises. Each
Borrower will (a) cause all of its properties used or useful in the
conduct of its business to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment, (b)
cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in such Borrower s judgment
may be necessary so that the business carried on in connection therewith
may be properly and advantageously conducted at all times, and (c)
continue to engage primarily in the businesses now conducted by it and in
related businesses; provided that nothing in this REF 8.05 shall prevent
any Borrower from discontinuing the operation and maintenance of any of
its properties if such discontinuance is, in the judgment of such
Borrower, desirable in the conduct of its business and that do not in the
aggregate materially adversely affect the business of such Borrower.
8.06 Insurance. Each Borrower will maintain with financially sound and
reputable insurers insurance with respect to its properties and business
against such casualties and contingencies as shall be in accordance with
the general practices of businesses engaged in similar activities in
similar geographic areas and in amounts, containing such terms, in such
forms and for such periods as may be reasonable and prudent and in
accordance with the terms of the Security Agreement.
8.07 Taxes. Each Borrower will duly pay and discharge, or cause to be
paid and discharged, before the same shall become overdue, all taxes,
assessments and other governmental charges imposed upon it and its real
properties, sales and activities, or any part thereof, or upon the income
or profits therefrom, as well as all claims for labor, materials, or
supplies that if unpaid might by law become a lien or charge upon any of
its property; provided that any such tax, assessment, charge, levy or
claim need not be paid if the validity or amount thereof shall currently
be contested in good faith by appropriate proceedings and if such
Borrower shall have set aside on its books adequate reserves with respect
thereto; and provided further that the Borrowers will pay all such taxes,
assessments, charges, levies or claims forthwith upon the commencement of
proceedings to foreclose any lien that may have attached as security
therefor.
8.08 Inspection of Properties and Books. Each Borrower, at its own
expense, shall permit the Bank, through its designated representatives,
to visit and inspect any of the properties of such Borrower, to examine
the books of account of such Borrower (and to make copies thereof and
extracts therefrom), and to discuss the affairs, finances and accounts of
such Borrower with, and to be advised as to the same by, its officers,
all at such reasonable times and intervals as the Bank may reasonably
request.
8.09 Compliance with Laws, Contracts, Licenses and Permits. Each
Borrower will comply with (a) all applicable laws and regulations
wherever its business is conducted, including all Environmental Laws, (b)
the provisions of its charter documents and bylaws, (c) all agreements
and instruments by which it or any of its properties may be bound and (d)
all applicable decrees, orders and judgments. If any authorization,
consent, approval, permit or license from any officer, agency or
instrumentality of any government shall become necessary or required in
order that any Borrower may fulfill any of its obligations hereunder or
any of the other Loan Documents to which such Borrower is a party, such
Borrower will immediately take or cause to be taken all reasonable steps
within the power of such Borrower to obtain such authorization, consent,
approval, permit or license and furnish the Bank with evidence thereof.
8.10 Pension Plans. Each Borrower shall:
a. fund each pension plan as required by Section 412 of the Code;
b. furnish to the Bank a copy of any actuarial statement related to any
pension plan required to be submitted under REF 103(d) of ERISA, no later
than the date on which such statement is submitted to the Department of
Labor or the Internal Revenue Service;
c. furnish to the Bank forthwith a copy of (i) any notice of a pension
plan termination sent to the Pension Benefit Guaranty Corporation under
REF 4041(a) of ERISA and (ii) any notice, report or demand sent or
received by a pension plan under REFS 4041, 4042, 4043, 4063, 4065, 4066
or 4068 of ERISA; and
d. furnish to the Bank a copy of any request for waiver from the funding
standards or extension of the amortization periods required by Section
412 of the Code no later than the date on which the request is submitted
to the Department of Labor or the Internal Revenue Service, as the case
may be.
8.11 Use of Proceeds. The Borrowers will use the proceeds of the Loans
solely for working capital purposes.
8.12 Assignment of U.S. Government Contracts. The Borrowers shall
execute and deliver to the Bank a duly completed Assignment of Monies
with respect to each U.S. Government Contract. With respect to U.S.
Government Contracts entered into subsequent to the Closing Date, such
Assignment of Monies shall be furnished contemporaneously with the
execution thereof. Notwithstanding the foregoing, the Borrowers shall
not be required to deliver an Assignment of Monies with respect to any
U.S. Government Contract containing specific provisions that prohibit
contract award disclosure. The Bank shall not deliver any Assignment of
Monies to the relevant governmental agency except during the continuance
of an Event of Default.
8.13 Depository Accounts. Each Borrower shall maintain its primary
depository accounts with the Bank. In addition, the Borrowers shall open
an account or accounts (the "Concentration Account") with the Bank for
deposits of proceeds of Accounts Receivable. The Borrowers shall make
such arrangements as are satisfactory to the Bank to provide that the
proceeds of all Accounts Receivable are deposited directly into the
Concentration Account. Such deposits shall be made by ACH or direct wire
transfer to the Concentration Account whenever reasonably practicable.
The Borrowers shall have no right to withdraw any funds from the
Concentration Account except as provided in REF 3.03.
8.14 Further Assurances. Each Borrower will cooperate with the Bank and
execute such further instruments and documents as the Bank shall
reasonably request to carry out to its satisfaction the transactions
contemplated by this Credit Agreement and the other Loan Documents.
9 CERTAIN NEGATIVE COVENANTS OF THE BORROWERS.
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The Borrowers covenant and agree that, so long as any Loan, Unpaid
Reimbursement Obligation, Letter of Credit or Note is outstanding or the
Bank has any obligation to make any Loans or to issue, extend or renew
Letters of Credit:
9.01 Restrictions on Indebtedness. No Borrower will create, incur,
assume, guarantee or be or remain liable, contingently or otherwise, with
respect to any Indebtedness other than:
a. Indebtedness to the Bank arising under any of the Loan Documents;
b. current liabilities of such Borrower incurred in the ordinary course
of business and not incurred through (i) the borrowing of money or (ii)
the obtaining of credit except for credit on an open account basis
customarily extended and in fact extended in connection with normal
purchases of goods and services;
c. Indebtedness in respect of taxes, assessments, governmental charges or
levies and claims for labor, materials and supplies to the extent that
payment therefor shall not at the time be required to be made in
accordance with the provisions of REF 8.07;
d. Indebtedness in respect of judgments or awards that have been in force
for less than the applicable period for taking an appeal so long as
execution is not levied thereunder or in respect of which such Borrower
shall at the time in good faith be prosecuting an appeal or proceedings
for review and in respect of which a stay of execution shall have been
obtained and be in effect pending such appeal or review;
e. endorsements for collection, deposit or negotiation and warranties of
products or services, in each case incurred in the ordinary course of
business;
f. loans from shareholders of CompuDyne, to the extent the same are
subordinated to the Obligations pursuant to the Subordination Agreement,
and other Subordinated Debt;
g. Indebtedness incurred in connection with the acquisition after the
date hereof of any real or personal property by such Borrower, provided
that the aggregate principal amount of such Indebtedness of the Borrowers
shall not exceed the aggregate amount of $100,000 at any one time;
h. Indebtedness existing on the date hereof and listed and described on
Schedule 9.01 hereto; and
i. contingent Indebtedness incurred by any Borrower in connection with
the execution of any one or more Surety Agreements.
9.02 Restrictions on Liens. No Borrower will (a) create or incur or
suffer to be created or incurred or to exist any lien, encumbrance,
mortgage, pledge, charge, restriction or other security interest of any
kind upon any of its property or assets of any character, whether now
owned or hereafter acquired, or upon the income or profits therefrom; (b)
transfer any of such property or assets or the income or profits
therefrom for the purpose of subjecting the same to the payment of
Indebtedness or performance of any other obligation in priority to
payment of its general creditors; (c) acquire, or agree or have an option
to acquire, any property or assets upon conditional sale or other title
retention or purchase money security agreement, device or arrangement;
(d) suffer to exist for a period of more than 30 days after the same
shall have been incurred any Indebtedness or claim or demand against it
that if unpaid might by law or upon bankruptcy or insolvency, or
otherwise, be given any priority whatsoever over its general creditors;
or (e) sell, assign, pledge or otherwise transfer any accounts, contract
rights, general intangibles, chattel paper or instruments, with or
without recourse; provided that any Borrower may create or incur or
suffer to be created or incurred or to exist:
i. liens to secure taxes, assessments and other government charges or
claims for labor, material or supplies in respect of obligations not
overdue;
ii. deposits or pledges made in connection with, or to secure payment of,
workmen s compensation, unemployment insurance, old age pensions or other
social security obligations;
iii. liens in respect of judgments or awards, the Indebtedness with
respect to which is permitted by REF 9.01(d);
iv. liens of carriers, warehousemen, mechanics and materialmen, and
other like liens, in existence less than 120 days from the date of
creation thereof in respect of obligations not overdue;
v. encumbrances consisting of easements, rights of way, zoning
restrictions, restrictions on the use of real property and defects and
irregularities in the title thereto, landlord s or lessor s liens under
leases to which such Borrower is a party, and other minor liens or
encumbrances none of which in the opinion of such Borrower interferes
materially with the use of the property affected in the ordinary conduct
of the business of such Borrower, which defects do not individually or in
the aggregate have a materially adverse effect on the business of such
Borrower;
vi. liens existing on the date hereof and listed on Schedule 9.02
hereto;
vii. purchase money security interests in or purchase money mortgages on
real or personal property acquired after the date hereof to secure
purchase money Indebtedness of the type and amount permitted by REF
9.01(g), incurred in connection with the acquisition of such property,
which security interests or mortgages cover only the real or personal
property so acquired;
viii. liens in favor of the Bank under the Loan Documents;
ix. liens securing Subordinated Debt; and
x. unperfected security interests in favor of one or more sureties and
created in connection with the execution of Surety Agreements by any one
or more Borrowers.
9.03 Restrictions on Investments. No Borrower will make or permit to
exist or to remain outstanding any Investment except Investments in:
a. marketable direct or guaranteed obligations of the United States of
America that mature within one year from the date of purchase by such
Borrower;
b. demand deposits, certificates of deposit, bankers acceptances and time
deposits of the Bank or, to the extent the same are fully insured by the
Federal Deposit Insurance Corporation, of other United States banks;
c. securities commonly known as "commercial paper" issued by a
corporation organized and existing under the laws of the United States of
America or any state thereof that at the time of purchase have been rated
and the ratings for which are not less than "P 1" if rated by Moody s
Investors Services, Inc., and not less than "A 1" if rated by Standard
and Poor s; and
d. common stock issued by a corporation organized and existing under the
laws of the United States of America or any state thereof, provided, no
such common stock shall constitute margin stock as such term is used in
Regulation U of the Board of Governors of the Federal Reserve System, 12
C.F.R. Part 221, and provided further that the aggregate outstanding
dollar amount of all such common stock shall not exceed $50,000 at any
time.
9.04 Distributions. CompuDyne will not make any Distributions; provided,
however, that so long as no Default or Event of Default shall have
occurred and be continuing, or shall occur as a result thereof, CompuDyne
may pay dividends on the preferred stock described on Schedule 9.04
hereto at a rate not in excess of the rate set forth on Schedule 9.04.
9.05 Merger and Consolidation. No Borrower will become a party to any
merger or consolidation, or agree to or effect any asset acquisition,
stock acquisition or disposition of assets (other than the acquisition
and disposition of assets in the ordinary course of business consistent
with past practices).
9.06 Sale and Leaseback. No Borrower will enter into any arrangement,
directly or indirectly, whereby such Borrower shall sell or transfer any
property owned by it in order then or thereafter to lease such property
or lease other property that such Borrower intends to use for
substantially the same purpose as the property being sold or transferred.
9.07 Subordinated Debt. No Borrower will amend, supplement or otherwise
modify the terms of any of the Subordinated Debt or prepay, redeem or
repurchase any of the Subordinated Debt.
10 FINANCIAL COVENANTS OF THE BORROWERS.
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The Borrowers covenant and agree that, so long as any Loan, Unpaid
Reimbursement Obligation, Letter of Credit or Note is outstanding or the
Bank has any obligation to make any Loans or to issue, extend or renew
Letters of Credit:
10.01 Debt Service. The Borrowers will not permit the ratio of
Consolidated Cash Flow for any fiscal quarter of CompuDyne ending on or
after December 31, 1996, to Consolidated Financial Obligations as
determined for such fiscal quarter, to be less than 1.1:1.0.
10.02 Current Ratio. The Borrowers will not permit the ratio of Current
Assets to Current Liabilities to be less than 1.0:1.0 at any time.
11 CLOSING CONDITIONS.
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The obligation of the Bank to make the initial Loan and to issue any
initial Letters of Credit shall be subject to the satisfaction of the
following conditions precedent on or prior to December ___, 1996:
11.01 Loan Documents. Each of the Loan Documents shall have been duly
executed and delivered by the respective parties thereto, shall be in
full force and effect and shall be in form and substance satisfactory to
the Bank. The Bank shall have received a fully executed copy of each
such document.
11.02 Certified Copies of Charter Documents. The Bank shall have
received from each Borrower a copy, certified by a duly authorized
officer of such Borrower to be true and complete on the Closing Date, of
each of (a) its charter or other incorporation documents as in effect on
such date of certification, and (b) its by-laws as in effect on such
date.
11.03 Corporate Action. All corporate action necessary for the valid
execution, delivery and performance by each Borrower of this Credit
Agreement and the other Loan Documents to which such Borrower is or is to
become a party shall have been duly and effectively taken, and evidence
thereof satisfactory to the Bank shall have been provided to the Bank.
11.04 Incumbency Certificate. The Bank shall have received from each
Borrower an incumbency certificate, dated as of the Closing Date, signed
by a duly authorized officer of such Borrower, and giving the name and
bearing a specimen signature of each individual who shall be authorized:
(a) to sign, in the name and on behalf of such Borrower, each of the Loan
Documents to which such Borrower is or is to become a party; (b) to make
Loan Requests; and (c) to give notices and to take other action on its
behalf under the Loan Documents.
11.05 Validity of Liens. The Security Agreement shall be effective to
create in favor of the Bank a legal, valid and enforceable first (except
for Permitted Liens entitled to priority under applicable law) security
interest in and lien upon the Collateral. All filings, recordings,
deliveries of instruments and other actions necessary or desirable in the
opinion of the Bank to protect and preserve such security interests shall
have been duly effected. The Bank shall have received evidence thereof
in form and substance satisfactory to the Bank.
11.06 Perfection Certificates and UCC Search Results. The Bank shall
have received from each Borrower a completed and fully executed
Perfection Certificate and the results of Uniform Commercial Code
searches with respect to the Collateral, indicating no liens other than
Permitted Liens and otherwise in form and substance satisfactory to the
Bank.
11.07 Certificates of Insurance. The Bank shall have received a
certificate of insurance from an independent insurance broker as of dated
the Closing Date, identifying insurers, types of insurance, insurance
limits, and policy terms, and otherwise describing all liability
insurance, as well as the insurance obtained in accordance with the
provisions of the Security Agreement.
11.08 Borrowing Base Report. The Bank shall have received from the
Borrowers the initial Borrowing Base Report dated as of the Closing Date.
11.09 Accounts Receivable Aging Report. The Bank shall have received
from the Borrowers the most recent Accounts Receivable aging report of
the Borrowers dated as of a date no more than 15 days prior to the
Closing Date and the Borrowers shall have notified the Bank in writing on
the Closing Date of any material deviation from the Accounts Receivable
values reflected in such Accounts Receivable aging report and shall have
provided the Bank with such supplementary documentation as the Bank may
reasonably request.
11.10 Opinions of Counsel. The Bank shall have received a favorable
legal opinion addressed to the Bank, dated as of the Closing Date, in
form and substance satisfactory to the Bank, from Tyler Cooper & Alcorn,
counsel to the Borrowers, and from ________________, local Nevada counsel
to CompuDyne.
11.11 Origination Fee. The Borrowers shall have paid to the Bank the fee
described in REF 2.07
12 CONDITIONS TO ALL BORROWINGS.
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The obligations of the Bank to make any Loan and to issue, extend or
renew any Letter of Credit, including the initial Loan and any initial
Letters of Credit, in each case whether on or after the Closing Date,
shall also be subject to the satisfaction of the following conditions
precedent:
12.01 Representations True; No Event of Default. Each of the
representations and warranties of any of the Borrowers contained in this
Credit Agreement, the other Loan Documents or in any document or
instrument delivered pursuant to or in connection with this Credit
Agreement shall be true as of the date as of which they were made and
shall also be true at and as of the time of the making of such Loan or
the issuance, extension or renewal of such Letter of Credit, with the
same effect as if made at and as of that time (except to the extent of
changes resulting from transactions contemplated or permitted by this
Credit Agreement and the other Loan Documents and changes occurring in
the ordinary course of business that singly or in the aggregate are not
materially adverse, and to the extent that such representations and
warranties relate expressly to an earlier date) and no Default or Event
of Default shall have occurred and be continuing.
12.02 No Legal Impediment. No change shall have occurred in any law or
regulations thereunder or interpretations thereof that in the reasonable
opinion of the Bank would make it illegal for it to make such Loan.
12.03 Governmental Regulations. The Bank shall have received such
statements in substance and form reasonably satisfactory to the Bank as
it shall require for the purpose of compliance with any applicable
regulations of the Massachusetts Commissioner of Banks, the Federal
Deposit Insurance Corporation or the Board of Governors of the Federal
Reserve System.
12.04 Proceedings and Documents. All proceedings in connection with the
transactions contemplated by this Credit Agreement, the other Loan
Documents and all other documents incident thereto shall be satisfactory
in substance and in form to the Bank and to the Bank s Special Counsel,
and the Bank and such counsel shall have received all information and
such counterpart originals or certified or other copies of such documents
as the Bank may reasonably request.
12.05 Borrowing Base. The Bank shall have received the most recent
Borrowing Base Report required to be delivered to the Bank in accordance
with REF 8.03(e) and, if requested by the Bank, a Borrowing Base Report
dated within five days of the Drawdown Date of such Loan or the date of
the issuance, extension or renewal of such Letter of Credit.
13 EVENTS OF DEFAULT; ACCELERATION; ETC.
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13.01 Events of Default and Acceleration. If any of the following events
("Events of Default" or, if the giving of notice or the lapse of time or
both is required, then, prior to such notice or lapse of time,
"Defaults") shall occur:
a. the Borrowers shall fail to pay any principal of the Loans or any
Reimbursement Obligation when the same shall become due and payable,
whether at the stated date of maturity or any accelerated date of
maturity or at any other date fixed for payment;
b. the Borrowers shall fail to pay any interest on the Loans or other
sums due hereunder or under any of the other Loan Documents within 15
days of the date when the same shall become due and payable, whether at
the stated date of maturity or any accelerated date of maturity or at any
other date fixed for payment;
c. any Borrower shall fail to comply with any of its covenants contained
in REFS. 8.08, 9 or 10;
d. any Borrower shall fail to perform any term, covenant or agreement
contained herein or in any of the other Loan Documents (other than those
specified elsewhere in this REF 13.01) for 30 days after written notice
of such failure has been given to the Borrowers by the Bank;
e. any representation or warranty of any Borrower in this Credit
Agreement or any of the other Loan Documents or in any other document or
instrument delivered pursuant to or in connection with this Credit
Agreement shall prove to have been false in any material respect upon the
date when made or deemed to have been made or repeated;
f. any Borrower shall fail to pay at maturity, or within any applicable
period of grace, any obligation for borrowed money or credit received or
in respect of any Capitalized Leases, or fail to observe or perform any
material term, covenant or agreement contained in any agreement by which
it is bound, evidencing or securing borrowed money or credit received or
in respect of any Capitalized Leases for such period of time as would
permit (assuming the giving of appropriate notice if required) the holder
or holders thereof or of any obligations issued thereunder to accelerate
the maturity thereof;
g. any Borrower shall make an assignment for the benefit of creditors, or
admit in writing its inability to pay or generally fail to pay its debts
as they mature or become due, or shall petition or apply for the
appointment of a trustee or other custodian, liquidator or receiver of
such Borrower or of any substantial part of the assets of such Borrower
or shall commence any case or other proceeding relating to such Borrower
under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation or similar law of any
jurisdiction, now or hereafter in effect, or shall take any action to
authorize or in furtherance of any of the foregoing, or if any such
petition or application shall be filed or any such case or other
proceeding shall be commenced against any Borrower and such Borrower
shall indicate its approval thereof, consent thereto or acquiescence
therein;
h. a decree or order is entered appointing any such trustee, custodian,
liquidator or receiver or adjudicating any Borrower bankrupt or
insolvent, or approving a petition in any such case or other proceeding,
or a decree or order for relief is entered in respect of any Borrower in
an involuntary case under federal bankruptcy laws as now or hereafter
constituted;
i. there shall remain in force, undischarged, unsatisfied and unstayed,
for more than 30 days, whether or not consecutive, any final judgment
against any Borrower that, with other outstanding final judgments,
undischarged, against the Borrowers exceeds in the aggregate $25,000;
j. any Subordinated Debt shall be prepaid, redeemed or repurchased in
whole or in part;
k. if any of the Loan Documents shall be canceled, terminated, revoked or
rescinded otherwise than in accordance with the terms thereof or with the
express prior written agreement, consent or approval of the Bank, or any
action at law, suit in equity or other legal proceeding to cancel, revoke
or rescind any of the Loan Documents shall be commenced by or on behalf
of any Borrower or any of its stockholders, or any court or any other
governmental or regulatory authority or agency of competent jurisdiction
shall make a determination that, or issue a judgment, order, decree or
ruling to the effect that, any one or more of the Loan Documents is
illegal, invalid or unenforceable in accordance with the terms thereof;
or
l. any Borrower shall be indicted for a federal crime, a punishment for
which could include the forfeiture of any assets of such Borrower
included in the Borrowing Base or any assets of such Borrower not
included in the Borrowing Base but having a fair market value in excess
of $10,000;
then, and in any such event, so long as the same may be continuing, the
Bank may, by notice in writing to the Borrowers, declare all amounts
owing with respect to this Credit Agreement, the Note and the other Loan
Documents to be, and they shall thereupon forthwith become, immediately
due and payable without presentment, demand, protest or other notice of
any kind, all of which are hereby expressly waived by the Borrowers;
provided that in the event of any Event of Default specified in REFS.
13.01(g), REF 13.01(h) or REF 13.01(j), all such amounts shall become
immediately due and payable automatically and without any requirement of
notice from the Bank.
13.02 Termination of Line Cap. If any one or more of the Events of
Default specified in REFS. 13.01(g), 13.01(h) or 13.01(j) shall occur,
any unused portion of the credit hereunder shall forthwith terminate and
the Bank shall be relieved of all further obligations to make Loans to
the Borrowers or to issue, extend or renew Letters of Credit. If any
other Event of Default shall have occurred and be continuing the Bank
may, by notice to the Borrowers, terminate the unused portion of the
credit hereunder, and upon such notice being given such unused portion of
the credit hereunder shall terminate immediately and the Bank shall be
relieved of all further obligations to make Loans or to issue, extend or
renew Letters of Credit. No termination of the credit hereunder shall
relieve the Borrowers of any of the Obligations.
13.03 Remedies. In case any one or more of the Events of Default shall
have occurred and be continuing, and whether or not the Bank shall have
accelerated the maturity of the Loans pursuant to REF 13.01, the Bank may
proceed to protect and enforce its rights by suit in equity, action at
law or other appropriate proceeding, whether for the specific performance
of any covenant or agreement contained in this Credit Agreement and the
other Loan Documents or any instrument pursuant to which the Obligations
to the Bank are evidenced, including as permitted by applicable law the
obtaining of the ex parte appointment of a receiver, and, if any amount
owing to the Bank hereunder or under any of the other Loan Documents
shall have become due, by declaration or otherwise, proceed to enforce
the payment thereof or any other legal or equitable right of the Bank.
No remedy herein conferred upon the Bank or the holder of the Note is
intended to be exclusive of any other remedy and each and every remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute
or any other provision of law.
13.04 Distribution of Collateral Proceeds. In the event that, following
the occurrence or during the continuance of any Default or Event of
Default, the Bank receives any monies in connection with the enforcement
of any of the Security Documents, or otherwise with respect to the
realization upon any of the Collateral, such monies shall be distributed
for application as follows:
a. First, to the Obligations in such order or preference as the Bank may
determine;
b. Second, upon payment and satisfaction in full or other provisions for
payment in full satisfactory to the Bank of all of the Obligations, to
the payment of any obligations required to be paid pursuant to REF 9-
504(l)(c) of the UCC; and
c. Third, the excess, if any, shall be returned to the Borrowers or to
such other Persons as are entitled thereto.
14 SETOFF.
- ----------
Regardless of the adequacy of any collateral, any securities, deposits or
other sums credited by or due from the Bank to any Borrower are and shall
be subject to a security interest hereby granted by such Borrower in
favor of the Bank to secure payment of Obligations and any and all other
liabilities, direct, or indirect, absolute or contingent, due or to
become due, now existing or hereafter arising, of such Borrower to the
Bank. Upon the occurrence of any Event of Default, and at any time or
times thereafter, without any demand or notice, except to the extent that
notice may be required by applicable law, the Bank may sell or dispose of
any or all such securities, deposits or other sums, and may exercise any
and all rights accorded the Bank pursuant to the UCC. The Bank may at
any time following the occurrence and during the continuance of any Event
of Default apply or set off such deposits or other sums against the
payment of the Obligations or any other liabilities, direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter
arising, of such Borrower to the Bank, or may apply an administrative
hold or "freeze" to such sums or deposits and hold the same as collateral
security for such liabilities. No single or partial exercise by the Bank
of any right, power or remedy hereunder or under any of the other Loan
Documents shall preclude any other or further exercise thereof or the
exercise of any other right, power or remedy. Each right, power and
remedy specifically granted to the Bank herein or in any of the other
Loan Documents or otherwise available to it, shall be cumulative, and
shall be in addition to every other right, power and remedy specifically
given herein or in any of the other Loan Documents or now or hereafter
existing at law, in equity or otherwise. Each such right, power and
remedy, whether specifically granted herein or otherwise existing, may be
exercised at any time and from time to time and as often and in such
order as may be deemed expedient by the Bank in its sole and absolute
discretion.
15. EXPENSES.
- -------------
The Borrowers agree, jointly and severally, to pay (a) the reasonable
costs of producing and reproducing this Credit Agreement, the other Loan
Documents and the other agreements and instruments mentioned herein, (b)
any taxes (including any interest and penalties in respect thereof)
payable by the Bank (other than taxes based upon the Bank s net income)
on or with respect to the transactions contemplated by this Credit
Agreement (the Borrowers hereby jointly and severally agreeing to
indemnify the Bank with respect thereto), (c) the reasonable fees,
expenses and disbursements of the Bank s Special Counsel or any local
counsel to the Bank incurred in connection with the preparation,
administration or interpretation of the Loan Documents and other
instruments mentioned herein, each closing hereunder, and amendments,
modifications, approvals, consents or waivers hereto or hereunder, (d)
the fees, expenses and disbursements of the Bank incurred by the Bank in
connection with the preparation, administration or interpretation of the
Loan Documents and other instruments mentioned herein, (e) all reasonable
out-of-pocket expenses (including reasonable attorneys fees and costs,
which attorneys may be employees of the Bank) incurred by the Bank in
connection with (i) the enforcement of or preservation of rights under
any of the Loan Documents against any Borrower or the administration
thereof after the occurrence of a Default or Event of Default and (ii)
any litigation, proceeding or dispute, whether arising hereunder or
otherwise, in any way related to the Bank s relationship with any
Borrower and (f) all reasonable fees, expenses and disbursements of the
Bank incurred in connection with title and UCC searches, UCC filings or
mortgage recordings. The covenants of this REF 15 shall survive payment
or satisfaction of payment of amounts owing with respect to the Note.
16 INDEMNIFICATION.
- ------------------
The Borrowers agree, jointly and severally, to indemnify and hold
harmless the Bank from and against any and all claims, actions and suits,
whether groundless or otherwise, and from and against any and all
liabilities, losses, damages and expenses of every nature and character
arising out of this Credit Agreement or any of the other Loan Documents
or the transactions contemplated hereby including, without limitation,
(a) any actual or proposed use by the Borrowers of the proceeds of any of
the Loans, (b) any actual or alleged infringement of any patent,
copyright, trademark, service mark or similar right of any Borrower, (c)
any Borrower s entering into or performing this Credit Agreement or any
of the other Loan Documents or (d) with respect to the Borrowers and
their respective properties and assets, the violation of any
Environmental Law, the presence, disposal, escape, seepage, leakage,
spillage, discharge, emission, release or threatened release of any
Hazardous Substances or any action, suit, proceeding or investigation
brought or threatened with respect to any Hazardous Substances
(including, but not limited to, claims with respect to wrongful death,
personal injury or damage to property), in each case including, without
limitation, the reasonable fees and disbursements of counsel and
allocated costs of internal counsel incurred in connection with any such
investigation, litigation or other proceeding. In litigation, or the
preparation therefor, the Bank shall be entitled to select its own
counsel and, in addition to the foregoing indemnity, the Borrowers agree
to pay promptly the reasonable fees and expenses of such counsel. If and
to the extent that the obligations of any Borrower under this REF 16 are
unenforceable for any reason, the Borrowers hereby agree to make the
maximum contribution to the payment in satisfaction of such obligations
that is permissible under applicable law.
17 SURVIVAL OF COVENANTS, ETC. All covenants, agreements,
representations and warranties made herein, in the Note, in any of the
other Loan Documents or in any documents or other papers delivered by or
on behalf of any Borrower pursuant hereto shall be deemed to have been
relied upon by the Bank, notwithstanding any investigation heretofore or
hereafter made by it, and shall survive the making by the Bank of any of
the Loans as herein contemplated, and shall continue in full force and
effect so long as any amount due under this Credit Agreement or the Note
or any of the other Loan Documents remains outstanding or the Bank has
any obligation to make any Loans. All statements contained in any
certificate or other paper delivered to the Bank at any time by or on
behalf of any Borrower pursuant hereto or in connection with the
transactions contemplated hereby shall constitute representations and
warranties by such Borrower hereunder.
18 ASSIGNMENT AND PARTICIPATION.
- ---------------------------------
18.01 Participations. The Bank may sell participations to one or more
banks or other entities in all or a portion of the Bank s rights and
obligations under this Credit Agreement and the other Loan Documents.
18.02 Disclosure. The Borrowers agree that the Bank may disclose
information obtained by the Bank pursuant to this Credit Agreement to
participants and potential participants hereunder; provided that such
participants or potential participants shall agree (a) to treat in
confidence such information, (b) not to disclose such information to a
third party and (c) not to make use of such information for purposes of
transactions unrelated to such contemplated participation.
18.03 Successors and Assigns. This Agreement and all rights and
obligations hereunder shall be binding upon the Borrowers and their
respective successors and assigns, and shall inure to the benefit of the
Bank and its successors and assigns.
18.04 Assignment by Borrowers. No Borrower shall assign or transfer any
of its rights or obligations under any of the Loan Documents without the
prior written consent of the Bank.
19 CONCERNING JOINT AND SEVERAL LIABILITY.
19.01 Mutual Benefit, Etc. Each of the Borrowers is accepting joint and
several liability hereunder in consideration of the financial
accommodations to be provided by the Bank under this Credit Agreement,
for the mutual benefit, directly and indirectly, of each of the Borrowers
and in consideration of the undertakings of each other Borrower to accept
joint and several liability for the Obligations.
19.02 Acceptance of Joint and Several Liability. Each of the Borrowers,
jointly and severally, hereby irrevocably and unconditionally accepts,
not merely as a surety but also as a co-debtor, joint and several
liability with the other Borrowers, with respect to the payment and
performance of all of the Obligations (including, without limitation, any
Obligations arising under this REF 19), it being the intention of the
parties hereto that all the Obligations shall be the joint and several
Obligations of each of the Borrowers without preferences or distinction
among them.
19.03 Failure to Pay or Perform. If and to the extent that any of the
Borrowers shall fail to make any payment with respect to any of the
Obligations as and when due or to perform any of the Obligations in
accordance with the terms thereof, then in each such event the other
Borrowers will make such payment with respect to, or perform, such
Obligations.
19.04 Full Recourse Obligations. The Obligations of each of the
Borrowers under the provisions of this REF 19 constitute full recourse
Obligations of each of the Borrowers enforceable against each such Person
to the full extent of its properties and assets, irrespective of the
validity, regularity or enforceability of this Agreement or any other
circumstance whatsoever.
19.05 Certain Waivers. Except as otherwise expressly provided in this
Agreement, each of the Borrowers hereby waives notice of acceptance of
its joint and several liability, notice of the Loans, notice of the
occurrence of any Default or Event of Default, or of any demand for any
payment under this Agreement, notice of any action at any time taken or
omitted by the Bank under or in respect of any of the Obligations, any
requirement of diligence or to mitigate damages and, generally, to the
extent permitted by applicable law, all demands, notices and other
formalities of every kind in connection with this Agreement. Each of the
Borrowers hereby assents to, and waives notice of, any extension or
postponement of the time for the payment of any of the Obligations, the
acceptance of any partial payment thereon, any waiver, consent or other
action or acquiescence by the Bank at any time or times in respect of any
default by any of the Borrowers in the performance or satisfaction of any
term, covenant, condition or provision of this Agreement, any and all
other indulgences whatsoever by the Bank in respect of any of the
Obligations, and the taking, addition, substitution or release, in whole
or in part, at any time or times, of any security for any of the
Obligations or the addition, substitution or release, in whole or in
part, of any of the Borrowers. Without limiting the generality of the
foregoing, each of the Borrowers assents to any other action or delay in
acting or failure to act on the part of the Bank with respect to the
failure by any of the Borrowers to comply with any of its respective
Obligations, including, without limitation, any failure strictly or
diligently to assert any right or to pursue any remedy or to comply fully
with applicable laws or regulations thereunder, that might, but for the
provisions of this REF 19, afford grounds for terminating, discharging or
relieving any of the Borrowers, in whole or in part, from any of its
Obligations under this REF 19, it being the intention of each of the
Borrowers that, so long as any of the Obligations hereunder remain
unsatisfied, the Obligations of such Borrowers under this REF 19 shall
not be discharged except by performance and then only to the extent of
such performance. The Obligations of each of the Borrowers under this
REF 19 shall not be diminished or rendered unenforceable by any winding
up, reorganization, arrangement, liquidation, reconstruction or similar
proceeding with respect to any of the Borrowers or of the Bank. The
joint and several liability of the Borrowers hereunder shall continue in
full force and effect notwithstanding any absorption, merger,
amalgamation or any other change whatsoever in the name, membership,
constitution or place of formation of any of the Borrowers or the Bank.
19.06 Successors and Assigns; Provisions Remain in Effect; Etc. The
provisions of this REF 19 are made for the benefit of the Bank and its
successors and assigns, and may be enforced by it from time to time
against any or all of the Borrowers as often as occasion therefor may
arise and without requirement on the part of the Bank first to marshall
any of its claims or to exercise any of its rights against any other
Borrower or to exhaust any remedies available to it against any other
Borrower or to resort to any other source or means of obtaining payment
of any of the Obligations hereunder or to elect any other remedy. The
provisions of this REF 19 shall remain in effect until all of the
Obligations shall have been paid in full or otherwise fully satisfied.
If at any time any payment, or any part thereof, made in respect of any
of the Obligations, is rescinded or must otherwise be restored or
returned by the Bank upon the insolvency, bankruptcy or reorganization of
any of the Borrowers, or otherwise, the provisions of this REF 19 will
forthwith be reinstated in effect, as though such payment had not been
made.
19.07 Subrogation Waiver. Except to the extent provided in REF 19.08,
until the payment and performance in full of all Obligations and any and
all other obligations of each Borrower to the Bank, whether existing on
the date hereof or arising at any time hereafter, each Borrower hereby
agrees that it shall not exercise any rights against any other Borrower
hereunder, by way of contribution, subrogation or otherwise, and will not
prove any claim in competition with the Bank, its affiliates or such
other creditor in respect of any payment hereunder in bankruptcy or
insolvency proceedings of any nature; such Borrower will not claim any
setoff or counterclaim against any other Borrower in respect of any
liability of such Borrower to such other Borrower; and such Borrower
waives any benefit of and any right to participate in any collateral that
may be held by the Bank or any such affiliate. Each Borrower hereby
acknowledges that the waiver contained in the preceding sentence (the
Subrogation Waiver ) is given as an inducement to the Bank to consummate
the transactions contemplated hereby and any other agreement referred to
herein and, in consideration of the willingness of the Bank to consummate
such transactions, such Borrower agrees that it shall not in any way
amend or modify the Subrogation Waiver without the prior written consent
of the Bank. If any payment shall be made to a Borrower on account of
its rights under this REF 19 at any time when the Obligations shall not
have been paid in full, each and every amount so paid will forthwith be
paid over to the Bank to be credited and applied to the Obligations.
19.08 Indemnities. Each of the Borrowers agrees to indemnify each other
Borrower for any losses, costs or expenses that any such other Borrower
may sustain or incur as a result of paying or repaying any of the
obligations of such indemnifying Borrower hereunder or under the Note or
any of the other Loan Documents. All obligations of the Borrowers in
respect of the indemnities set forth in this paragraph (h) shall be fully
subordinated in right of payment to the final payment in full of all of
the Obligations. Each Borrower agrees not to enforce any such
indemnification claim unless and until all of the Obligations have been
fully and finally paid and satisfied in full; provided, however, that
such Borrower shall be entitled, if it so elects, to take from time to
time such procedural actions, such as providing notices of claims and
filing proofs of claim, as such Borrower may reasonably determine to
preserve any such indemnification claim.
19.09 Transfer of Indemnification Rights. Each of the Borrowers is free
to sell, assign or transfer its indemnification rights under REF 19.08 in
connection with any sale, transfer or other disposition of all or
substantially all of the assets of such Borrower to the extent that such
sale, assignment, transfer or other disposition is otherwise expressly
permitted hereunder.
20 NOTICES, ETC.
- -----------------
Except as otherwise expressly provided in this Credit Agreement, all
notices and other communications made or required to be given pursuant to
this Credit Agreement or the Note shall be in writing and shall be
delivered in hand, mailed by United States first class mail, postage
prepaid, sent by overnight courier (e.g., Federal Express or similar
courier), or sent by telegraph, telecopy, facsimile or telex and
confirmed by delivery via hand, courier or postal service, addressed as
follows:
a. if to any Borrower, at c/o CompuDyne Corporation, 120 Union Street,
Willimantic, Connecticut, Attention: Martin A. Roenigk, or at such other
address for notice as such Borrower shall last have furnished in writing
to the Person giving the notice; and
b. if to the Bank, at 68 Harrison Avenue, Boston, Massachusetts 02111,
Attention: Jeffrey S. Hollis, Vice President/Lending, or at such other
address for notice as the Bank shall last have furnished in writing to
the Person giving the notice.
Any such notice or demand shall be deemed to have been duly given or made
and to have become effective (i) if delivered by hand, overnight courier
or facsimile to a responsible officer of the party to which it is
directed, at the time of the receipt thereof by such officer or the
sending of such facsimile and (ii) if sent by first-class mail, postage
prepaid, on the third Business Day following the mailing thereof.
21 GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE; ETC.
- ----------------------------------------------------------
THIS CREDIT AGREEMENT AND, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED
THEREIN, EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF
THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SUCH COMMONWEALTH
(EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). EACH
BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS CREDIT
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS
OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN
AND CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURT AND SERVICE
OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER BY MAIL AT THE
ADDRESS SPECIFIED IN REF 20. EACH BORROWER HEREBY WAIVES ANY OBJECTION
THAT SUCH BORROWER MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH
SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT
COURT.
22 HEADINGS. The captions in this Credit Agreement are for convenience
of reference only and shall not define or limit the provisions hereof.
23 COUNTERPARTS. This Credit Agreement and any amendment hereof may be
executed in several counterparts and by each party on a separate
counterpart, each of which when so executed and delivered shall be an
original, and all of which together shall constitute one instrument. In
proving this Credit Agreement it shall not be necessary to produce or
account for more than one such counterpart signed by the party against
whom enforcement is sought.
24 ENTIRE AGREEMENT, ETC. The Loan Documents and any other documents
executed in connection herewith or therewith express the entire
understanding of the parties with respect to the transactions
contemplated hereby. Neither this Credit Agreement nor any term hereof
may be changed, waived, discharged or terminated, except as provided in
REF 26.
25 WAIVER OF JURY TRIAL, CERTAIN DAMAGES, ETC. EACH OF THE BORROWERS
AND THE BANK HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY
ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS CREDIT
AGREEMENT, THE NOTE OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR
OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND
OBLIGATIONS. EXCEPT AS PROHIBITED BY LAW, EACH BORROWER HEREBY WAIVES
ANY RIGHT SUCH BORROWER MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION
REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO,
ACTUAL DAMAGES. Each Borrower (a) certifies that no representative,
agent or attorney of the Bank has represented, expressly or otherwise,
that the Bank would not, in the event of litigation, seek to enforce the
foregoing waivers and (b) acknowledges that the Bank has been induced to
enter into this Credit Agreement by, among other things, the waivers and
certifications contained in this REF 25.
26 CONSENTS, AMENDMENTS, WAIVERS, ETC. Any consent or approval required
or permitted by this Credit Agreement to be given by the Bank may be
given, and any term of this Credit Agreement, the other Loan Documents or
any other instrument related hereto or mentioned herein may be amended,
and the performance or observance by any Borrower of any terms of this
Credit Agreement, the other Loan Documents or such other instrument or
the continuance of any Default or Event of Default may be waived (either
generally or in a particular instance and either retroactively or
prospectively) with, but only with, the written consent of the Borrowers
and the written consent of the Bank. No waiver shall extend to or affect
any obligation not expressly waived or impair any right consequent
thereon. No course of dealing or delay or omission on the part of the
Bank in exercising any right shall operate as a waiver thereof or
otherwise be prejudicial thereto. No notice to or demand upon the
Borrowers shall entitle any Borrower to other or further notice or demand
in similar or other circumstances.
27 SEVERABILITY. The provisions of this Credit Agreement are severable
and if any one clause or provision hereof shall be held invalid or
unenforceable in whole or in part in any jurisdiction, then such
invalidity or unenforceability shall affect only such clause or
provision, or part thereof, in such jurisdiction, and shall not in any
manner affect such clause or provision in any other jurisdiction, or any
other clause or provision of this Credit Agreement in any jurisdiction.
28 TRANSITIONAL ARRANGEMENTS.
- ----------------------------
28.01 Original Credit Agreement Superseded. This Credit Agreement shall
supersede the Credit Agreement, dated February 9, 1996 (the Original
Credit Agreement ), among CompuDyne, Quanta, MicroAssembly and the Bank
in its entirety, except as provided in this REF 28. On the Closing Date,
the rights and obligations of the parties under the Original Credit
Agreement and the Note as defined therein shall be subsumed within and
be governed by this Credit Agreement and the Note.
28.02 Fees under Superseded Agreement. All unused availability and other
fees and expenses owing or accruing under or in respect of the Original
Credit Agreement shall be calculated as of the Closing Date (prorated in
the case of any fractional periods), and shall be paid in accordance with
the method, and on the dates, specified in the Original Credit Agreement,
as if the Original Credit Agreement were still in effect.
IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as a sealed instrument as of the date first set forth above.
COMPUDYNE CORPORATION QUANTA SYSTEMS CORPORATION
By:/s/ Martin Roenigk By:/s/ Martin Roenigk
Title: Chairman, Pres. & CEO Title: Chairman
MICROASSEMBLY SYSTEMS, INC. QUANTA SECURSYSTEMS, INC.
By: /s/ Martin Roenigk By:/s/ Martin Roenigk
Title: President Title: Chairman
ASIAN AMERICAN BANK & TRUST
COMPANY
By:
Title:
- ------------------------------------------------------------------------
Schedule 7.03
Exceptions to Title
None
- -------------------------------------------------------------------------
Schedule 7.07
Litigation
- -------------------------------------------------------------------------
Schedule 7.16
ERISA Compliance
CompuDyne Corporaton currently has a pension plan which is not fully
funded. The liability for such shortfall is disclosed in CompuDyne's
financial statements.
- -------------------------------------------------------------------
Schedule 7.18
Environmental Matters
1. See Schedule 7.7 to the Agreement
- -------------------------------------------------------------------------
Schedule 7.19
Subsidiaries
Percentage
of voting
securities
Incorporated owned by
under the immediate
Name laws of Parent parent
- ------- -------- --------------- ------
CompuDyne Corp. of Maryland Maryland CompuDyne Corp. 100%
Quanta Systems Corporation Connecticut CompuDyne Corp. 100%
CompuDyne, Inc. Delaware CompuDyne Corp. 100%
MicroAssembly Systems, Inc. Connecticut CompuDyne Corp. 100%
Quanta SecurSystems, Inc. Maryland CompuDyne Corp. 100%
Schedule 7.20
Government Contracts
- -------------------------------------------------------------------------
Schedule 9.01
Existing Indebtedness
- -------------------------------------------------------------------------
Schedule 9.02
Existing Liens
- -------------------------------------------------------------------------
Schedule 9.04
Preferred Stock
Table of Contents
1. 1. DEFINITIONS AND RULES OF INTERPRETATION.....................1
1.01. Definitions...............................................1
1.02. Rules of Interpretation...................................7
2. THE REVOLVING CREDIT FACILITY....................................8
2.01. Commitment to Lend........................................8
2.02. The Note......................................................8
2.03. Interest on Loans.............................................8
2.04. Requests for Loans............................................8
2.05. Change in Borrowing Base......................................9
2.06. Unused Availability Fee......................................9
2.07. Origination Fee...............................................9
3. REPAYMENT OF THE LOANS...........................................9
3.01. Line Termination..............................................9
3.02. Mandatory Repayments of Loans.................................9
3.03. Automatic Repayment of Loans..................................9
3.04. Optional Repayments of Loans..................................9
4. LETTERS OF CREDIT...............................................10
4.01. Letter of Credit Commitments.................................10
4.02. Reimbursement Obligation of the Borrowers....................10
4.03. Letter of Credit Payments....................................11
4.04. Obligations Absolute.........................................11
4.05. Reliance by Issuer...........................................11
4.06. Letter of Credit Fee.........................................12
5. CERTAIN GENERAL PROVISIONS......................................12
5.01. Funds for Payments...........................................12
5.02. Computations.................................................12
5.03. Late Fee; Interest after Default.............................12
6. COLLATERAL SECURITY.............................................13
7. REPRESENTATIONS AND WARRANTIES..................................13
7.01. Corporate Authority..........................................13
(a) Incorporation; Good Standing...................................13
(b) Authorization..................................................14
(c) Enforceability.................................................14
7.02. Governmental Approvals.......................................14
7.03. Title to Properties; Leases..................................14
7.04. Financial Statements.........................................14
7.05. No Material Changes, Etc.....................................14
7.06. Franchises, Patents, Copyrights, Etc.........................15
7.07. Litigation...................................................15
7.08. No Materially Adverse Contracts, Etc.........................15
7.09. Compliance With Other Instruments, Laws, Etc.................15
7.10. Tax Status...................................................15
7.11. No Event of Default..........................................15
7.12. Holding Company and Investment Company Acts..................15
7.13. Absence of Financing Statements, Etc.........................16
7.14. Perfection of Security Interest..............................16
7.15. Certain Transactions.........................................16
7.16. ERISA Compliance.............................................16
7.17. Regulations U and X..........................................16
7.18. Environmental Compliance.....................................16
7.19. Subsidiaries.................................................17
7.20. Government Contracts.........................................17
8. AFFIRMATIVE COVENANTS OF THE BORROWERS..........................17
8.01. Maintenance of Office........................................17
8.02. Records and Accounts.........................................17
8.03. Financial Statements, Certificates and Information...........18
8.04. Notices......................................................19
(a) Defaults.......................................................19
(b) Environmental Events...........................................19
(c) Notification of Claims against Collateral......................19
(d) Notice of Litigation and Judgments.............................19
8.05. Corporate Existence; Maintenance of Properties...............19
8.06. Insurance....................................................20
8.07. Taxes........................................................20
8.08. Inspection of Properties and Books...........................20
8.09. Compliance with Laws, Contracts, Licenses and Permits........20
8.10. Pension Plans................................................21
8.11. Use of Proceeds..............................................21
8.12. Assignment of U.S. Government Contracts......................21
8.13. Depository Accounts..........................................21
8.14. Further Assurances...........................................21
9. CERTAIN NEGATIVE COVENANTS OF THE BORROWERS.....................21
9.01. Restrictions on Indebtedness.................................22
9.02. Restrictions on Liens........................................22
9.03. Restrictions on Investments..................................24
9.04. Distributions................................................24
9.05. Merger and Consolidation.....................................24
9.06. Sale and Leaseback...........................................24
9.07. Subordinated Debt............................................24
10. FINANCIAL COVENANTS OF THE BORROWERS...........................24
10.01. Debt Service................................................25
10.02. Current Ratio...............................................25
11. CLOSING CONDITIONS.............................................25
11.01. Loan Documents..............................................25
11.02. Certified Copies of Charter Documents.......................25
11.03. Corporate Action............................................25
11.04. Incumbency Certificate......................................25
11.05. Validity of Liens...........................................25
11.06. Perfection Certificates and UCC Search Results..............25
11.07. Certificates of Insurance...................................26
11.08. Borrowing Base Report.......................................26
11.09. Accounts Receivable Aging Report............................26
11.10. Opinions of Counsel.........................................26
11.11. Origination Fee.............................................26
12. CONDITIONS TO ALL BORROWINGS...................................26
12.01. Representations True; No Event of Default...................26
12.02. No Legal Impediment.........................................26
12.03. Governmental Regulations....................................26
12.04. Proceedings and Documents...................................27
12.05. Borrowing Base..............................................27
13. EVENTS OF DEFAULT; ACCELERATION; ETC...........................27
13.01. Events of Default and Acceleration..........................27
13.02. Termination of Line Cap.....................................29
13.03. Remedies....................................................29
13.04. Distribution of Collateral Proceeds.........................29
14. SETOFF...............................................29
15. EXPENSES.......................................................30
16. INDEMNIFICATION................................................30
17. SURVIVAL OF COVENANTS, ETC......................................31
18. ASSIGNMENT AND PARTICIPATION...................................31
18.01. Participations..............................................31
18.02. Disclosure..................................................31
18.03. Successors and Assigns......................................31
18.04. Assignment by Borrowers.....................................31
19. CONCERNING JOINT AND SEVERAL LIABILITY.........................32
19.01. Mutual Benefit, Etc.........................................32
19.02. Acceptance of Joint and Several Liability...................32
19.03. Failure to Pay or Perform...................................32
19.04. Full Recourse Obligations...................................32
19.05. Certain Waivers.............................................32
19.06. Successors and Assigns; Provisions Remain in Effect; Etc....33
19.07. Subrogation Waiver..........................................33
19.08. Indemnities.................................................33
19.09. Transfer of Indemnification Rights..........................34
20. NOTICES, ETC...................................................34
21. GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE; ETC........34
22. HEADINGS.......................................................35
23. COUNTERPARTS...................................................35
24. ENTIRE AGREEMENT, ETC..........................................35
25. WAIVER OF JURY TRIAL, CERTAIN DAMAGES, ETC.....................35
26. CONSENTS, AMENDMENTS, WAIVERS, ETC.............................35
27. SEVERABILITY...................................................36
28. TRANSITIONAL ARRANGEMENTS......................................36
28.01. Original Credit Agreement Superseded........................36
28.02. Fees under Superseded Agreement.............................36
- ------------------------------------------------------------------------
List of Schedules and Exhibits
Schedule 7.03 --- Exceptions to Title
Schedule 7.07 --- Litigation
Schedule 7.16 --- ERISA Compliance
Schedule 7.18 --- Environmental Matters
Schedule 7.19 --- Subsidiaries
Schedule 7.20 --- Government Contracts
Schedule 9.01 --- Existing Indebtedness
Schedule 9.02 --- Existing Liens
Schedule 9.04 --- Preferred Stock
Exhibit A --- Assignment of Monies
Exhibit B --- Form of Borrowing Base Report
Exhibit C --- Security Agreement
Exhibit D --- Note
Exhibit E --- Form of Loan Request
Exhibit F --- Form of Compliance Report
Exhibit G --- Form of Subordination Agreement
Exhibit H --- Pledge Agreement
- -----------------------------------------------------------------------
Credit Agreement
Dated as of December ___, 1996
Among
CompuDyne Corporation
Quanta Systems Corporation
MicroAssembly Systems, Inc.
Quanta SecurSystems, Inc.
And
Asian American Bank & Trust Company
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
Percentage
of voting
securities
Incorporated owned by
under the immediate
Name laws of Parent parent
- ---------------------------- ------------ ------------- ---------
CompuDyne Corporation * Nevada Registrant
SYSCO Security Systems, Inc. * Nevada CompuDyne Corp. 100%
CompuDyne Corp. of Maryland * Maryland CompuDyne Corp. 100%
Quanta Systems Corporation * Connecticut CompuDyne Corp. 100%
CompuDyne, Inc.** Delaware CompuDyne Corp. 100%
MicroAssembly Systems, Inc. Connecticut CompuDyne Corp. 100%
Quanta SecurSystems, Inc. Maryland CompuDyne Corp. 100%
Note:
* All subsidiaries of the Registrant as of December 31, 1997, are
included in the consolidated financial statements of the Registrant.
** CompuDyne, Inc. filed for petition in bankruptcy on December 31,
1991.
QUANTA SYSTEMS CORPORATION
COMPUDYNE CORPORATION
MICROASSEMBLY SYSTEMS CORPORATION
QUANTA SECURSYSTEMS, INC.
120 Union Street
Willimantic, CT 06226-0397
As of August 29, 1997
Asian American Bank & Trust Company
17 Kneeland Street
Boston, Massachusetts 02111
Attention: Jeffrey S. Hollis, Vice President/Lending
Re: Credit Agreement -- Amendment No. 2
-------------------------------------
Ladies and Gentlemen:
We refer to the Credit Agreement, dated as of December 20, 1996 (as
amended and in effect from time to time, the "Agreement ), among Quanta
Systems Corporation, a Connecticut corporation, CompuDyne Corporation, a
Nevada corporation, MicroAssembly Systems, Inc., a Connecticut
corporation, Quanta SecurSystems, Inc., a Maryland corporation, and Asian
American Bank & Trust Company (the Bank ). Capitalized terms used
herein and not otherwise defined that are defined in the Agreement shall
have the same respective meanings herein as therein.
1. Amendment to Section 1.01 of the Agreement.
- -------------------------------------------
The undersigned hereby agree, and hereby request your agreement, that
REF 101 of the Agreement be, and hereby is, amended by deleting the figure
$1,250,000" contained in the definition of the term "Line Cap and
substituting therefor the figure $1,750,000. .
2. Conditions to Effectiveness.
- ------------------------------
The foregoing provisions of this Amendment No. 1 shall become effective
as of the date hereof subject to the satisfaction of the following
conditions on or prior to August ___, 1997 (the "Closing Date"):
a.Note.
- ------
The Borrowers shall have executed and delivered to the Bank a new
Promissory Note, substantially in the form of Exhibit A attached hereto.
b. Representations and Warranties.
- ---------------------------------
Except as otherwise set forth on Exhibit B attached hereto, the
representations and warranties contained in the Agreement and the other
Loan Documents (in each case, after giving effect to this Amendment No.
2) shall be true and correct at and as of the date hereof as if made at
and as of the date hereof (except as the same may expressly relate to an
earlier date), and the Bank shall have received from each of the
Borrowers a certificate to such effect.
c. Proof of Corporate Action.
- ----------------------------
The Bank shall have received certified copies of the records of all
actions taken by the Borrowers to authorize the execution and delivery of
this Amendment No. 2 and the performance by the Borrowers of their
respective obligations contained herein.
d. Authorized Signatures.
- ------------------------
Each of the Borrowers shall have delivered to the Bank a certificate
giving the names and specimen signatures of each officer of such Person,
authorized to execute, on behalf of such Person, this Amendment No. 2.
e. Validity of Liens.
- --------------------
The Security Documents shall be effective to create in favor of the Bank
a legal, valid and enforceable first priority security interest in and
lien upon the Collateral (as such term is defined in the Security
Agreement). All filings, recordings, deliveries of instruments and other
actions necessary or desirable in the opinion of the Bank to protect and
preserve such security interests shall have been duly effected. The Bank
shall have received evidence thereof in form and substance satisfactory
to the Bank.
f. Perfection Certificates and UCC Search Results.
- --------------------------------------------------
The Bank shall have received from each Borrower a completed and fully
executed Perfection Certificate and the results of Uniform Commercial
Code searches with respect to the Collateral, indicating no liens and
otherwise in form and substance satisfactory to the Bank.
g. Opinion of Borrower s Counsel.
- --------------------------------
The Bank shall have received favorable legal opinions addressed to the
Bank, dated as of the Closing Date, from each of Tyler, Cooper & Alcorn;
Ober, Kaler, Grimes & Shriver; and Hale, Lane, Peek, Dennison, Howard,
Anderson & Pearl.
If the terms of this letter are acceptable to you, and you agree to honor
our requests made herein, kindly so indicate by executing and returning a
counterpart hereof to the undersigned. Upon your execution and delivery
of a counterpart hereof executed by the undersigned, the agreements made
and waivers granted hereby shall become effective as of the date hereof.
Except as specifically amended hereby, the Agreement shall remain in full
force and effect, and is hereby ratified and confirmed. The execution,
delivery and effectiveness of this Amendment No. 2 shall not, except as
expressly provided herein, operate as a waiver of any of your rights,
powers or remedies under the Agreement.
Very truly yours,
COMPUDYNE CORPORATION QUANTA SYSTEMS CORPORATION
By: By:
----------------------- ----------------------
Title: Title:
MICROASSEMBLY SYSTEMS, INC. QUANTA SECURSYSTEMS, INC.
By: By:
----------------------- ----------------------
Title: Title:
ACCEPTED and AGREED
as of the date of the above letter:
ASIAN AMERICAN BANK & TRUST COMPANY
By:
-----------------------
Title:
- -------------------------------------------------------------------------
Promissory Note
- ---------------
$1,750,000 As of August __, 1997
FOR VALUE RECEIVED, the undersigned (collectively, the Borrowers ),
JOINTLY AND SEVERALLY, promise to pay to the order of ASIAN AMERICAN BANK
& TRUST COMPANY (hereinafter, together with its successors in title and
assigns, called the "Bank ) at its head office at 17 Kneeland Street,
Boston, Massachusetts 02111, on or prior to June 30, 1998, the principal
sum of ONE MILLION SEVEN HUNDRED FIFTY THOUSAND DOLLARS ($1,750,000) or,
if less, the aggregate unpaid principal amount of all Loans made by the
Bank to the Borrowers pursuant to the Agreement to which reference is
hereinafter made.
This Promissory Note ("this Note ) evidences borrowings under and is
entitled to the benefits and subject to the provisions of a certain
Credit Agreement, dated as of December 20, 1996 (as amended and in effect
from time to time, the "Agreement ), by and between the Borrowers and the
Bank. All capitalized terms used herein and not otherwise defined that
are defined in the Agreement shall have the same meanings herein as
therein.
The Borrowers also jointly and severally promise to pay interest on the
unpaid principal amount of the Loans outstanding until paid in full at
the rates per annum set forth in or established pursuant to the
Agreement. Such interest shall be payable on such dates as are
determined from time to time pursuant to the Agreement and shall be
calculated as therein provided. As contemplated by the Agreement, the
Bank may enter on the grid attached to this Note appropriate notations
evidencing advances and payments of principal hereunder.
The Borrowers have the right in certain circumstances and the obligation
in certain circumstances to prepay the principal of this Note on the
terms and conditions specified in the Agreement.
Payment of this Note is secured, inter alia, pursuant to the Security
Documents.
The Borrowers and all guarantors and endorsers hereby waive presentment,
demand, protest and notice of any kind in connection with the delivery,
acceptance, performance and enforcement of this Note, and also hereby
assent to extensions of time of payment or forbearance or other
indulgences without notice.
In case an Event of Default shall occur and be continuing, the entire
unpaid principal amount of this Note and all of the unpaid interest
accrued thereon may become or be declared due and payable in the matter
and with the effect provided for in the Agreement.
THIS NOTE AND THE OBLIGATIONS OF THE BORROWERS HEREUNDER SHALL BE
GOVERNED BY, AND INTERPRETED AND DETERMINED IN ACCORDANCE WITH, THE LAWS
OF THE COMMONWEALTH OF MASSACHUSETTS.
EXHIBIT A
- ---------
IN WITNESS WHEREOF, the Borrowers have caused this Promissory Note to be
executed as an instrument under seal by their duly authorized officers on
the day and in the year first above written.
COMPUDYNE CORPORATION QUANTA SYSTEMS CORPORATION
By: By:
------------------------ ------------------------
Title: Title:
MICROASSEMBLY SYSTEMS, INC. QUANTA SECURSYSTEMS, INC.
By: By:
------------------------- ------------------------
Title: Title:
EXHIBIT A
- ---------
ADVANCES AND
- ------------
REPAYMENTS OF PRINCIPAL
- -----------------------
Advances and payments of principal of this Note were made on the dates in
the amounts specified below:
Date
Amount of Loan
Amount of Principal Prepaid or Repaid
Balance of Principal Unpaid
Notation Made By:
EXHIBIT B
- ---------
Exceptions to Representations and Warranties
