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, 1998
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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 0-29798
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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.)
7249 National Drive, Hanover, Maryland 21076
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410)712-0275
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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 $20.7 million as of March 23, 1999 (based upon the average of
the bid and asked prices on the over-the-counter market for CompuDyne common
stock on March 23, 1999 which was $8.312 per share, as quoted on the OTC
Bulletin Board(see ITEM 5.).
As of March 22, 1999, a total of 5,121,413 shares of Common Stock, $.75 par
value, were outstanding.
Documents incorporated by reference: Portions of the Proxy Statement
relating to the 1998 Annual Meeting of Shareholders are incorporated in Part
III.
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PART I
ITEM 1. BUSINESS
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Description of Business
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 six wholly owned subsidiaries Norment Industries, Inc.
("Norment"), Norshield Corporation, ("Norshield"), Quanta Systems
Corporation, ( Quanta Systems ), Quanta SecurSystems Inc., ( SecurSystems ),
MicroAssembly Systems, Inc., ( MicroAssembly ), and SYSCO Security Systems,
Inc. ( SYSCO ).
Current Developments
- --------------------
As a result of the November 28, 1998 acquisition of Norment and Norshield
("Norment/Norshield"), CompuDyne intends to consolidate its existing
SecurSystems regional based operations and most of the newly acquired
operations under the new name "The Norment Security Group", ("NSG"). It is
intended that within the next six months all of those operations, other than
Norshield, will be renamed and consolidated into this highly focused group
representing the premier name in the industry.
Norment,
- -------
headquartered in Montgomery, Alabama, is a comprehensive security
and detention systems manufacturer, integrator and contractor with national
and international experience serving the corrections and judicial markets
primarily in the United States and includes the following divisions:
SESCO is a detention system contractor in the United States.
Trentech is an electronic security systems manufacturer and
integrator serving the corrections industry.
Airteq manufactures pneumatic locks and markets sliding devices made
by Norshield primarily to the corrections industry.
Engineered Maximum Security Systems, ("EMSS") is a leading detention
system and electronic security contractor located on the West Coast.
Norshield
- ---------
is a manufacturer and supplier of high-end U/L rated ballistic, attack and
blast resistant products, and offers the broadest range of these security
products and services available from one source in the United States.
As discussed above, CompuDyne has decided to rename certain operations.
Going forward, most of CompuDyne's non-military security business will be
conducted under the NSG name. The SecurSystems regional offices will be
designated as NSG regional offices and maintenance operations. The SESCO
and EMSS names previously used by Norment will operate under the NSG name.
The Trentech name will continue to be used for branding security electronic
products and will also operate under the NSG name.
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 includes the Data Control Systems, Inc., ("DCS")
division.
DCS manufactures telemetry, satellite command and control systems and
radio frequency 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.
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 are located in Hanover, Maryland. Other offices
are located in 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.
MicroAssembly,
- -------------
located in Willimantic, Connecticut, is a manufacturer of a proprietary
automated process called the Stick-Screw(TM)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
System provides insertion of the fasteners at a faster speed than can be
accomplished by comparably priced competing systems or processes.
SYSCO
- -----
is a distributor of high technology security systems formed by CompuDyne in
October 1997 to contract with security product manufacturers and to become
the exclusive distributor of these products in North America. Security
products distributed by SYSCO include the Shorrock line of control and
detection equipment, the SYSCO (Germany) digital microphonic cable systems,
the DETEC video motion detection system manufactured by Helgesen Corporation
and the FOSS fiber optic perimeter security system manufactured by Imatran
Voima OY. SYSCO has dealers and manufacturing representatives throughout
North America.
See Note 16 Operating Segment Information to the Consolidated Financial
Statements of CompuDyne for more information about the results of operations
from the seven operating segments.
General Information
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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 Norment's, Quanta Systems and DCS' products are electronic
components and steel or aluminum sheets, stampings and castings. These
materials are generally available from a number of different suppliers.
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, 1998 was $80.4 million
compared to $19.7 million as of December 31, 1997. Quanta Systems backlog
of $3.9 million, SecurSystems' backlog of $13.5 million (includes $3.0
million of multi year maintenance contracts), DCS backlog of $65 thousand,
and MicroAssembly s backlog of $483 thousand as of December 31, 1998
compared to $4.7 million, $13.8 million, $625 thousand and $551 thousand
respectively as of December 31, 1997. Norment's backlog of $53.9 million
and Norshield's backlog of $8.0 million as of December 31, 1998 were
additions this year due to the acquisition in on November 28, 1998.
For the year ended December 31, 1998, direct sales to the U.S. Government
amounted to $7.8 million or 24% of the Company's total net sales from
continuing operations, compared with $9.3 million and $15.5 million in
fiscal years 1997 and 1996, respectively, or 47% and 70% of the Company's
total net sales. No other single customer accounted for greater than 10% of
the Company's net sales.
The Company is currently undertaking research and development activities at
DCS to expand and improve its product lines. Research and development
expenditures were $169 thousand during the fiscal year ended December 31,
1998 compared with $172 thousand and $234 thousand during 1997 and 1996,
respectively. In 1998 expenditures were made by DCS to develop three new
products, a configurable communications modem (the 2200), a high data rate
modem (the 2250E) and a highly complex signal analysis modem (the 7500E).
At December 31, 1998, the Company had 508 employees. None of the permanent
employees are subject to collective bargaining agreements. Norment
regularly hires union personnel on a temporary basis for field projects.
These personnel are subject to various collective bargaining agreements
depending on their skills and locale. At December 31, 1998 there were 78 of
these employees covered under collective bargaining agreements.
Year 2000 Compliance
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State of readiness - The Company has developed and is well into implementing
a company wide Year 2000 Plan (the "Plan") with the intent to ensure that
it's computer equipment and software will be able to distinguish between the
year 1900 and the year 2000 and will function properly with respect to all
dates, whether in the twentieth or the twenty-first centuries (such
functionality is referred to below as being "Year 2000 compliant").
The Company's plan initially focused on the accounting systems of the
operating divisions. Norment/Norshield are currently implementing a new
financial and accounting software system called PENTA. This implementation
includes Year 2000 compliant hardware as well as software. Implementation
is planned to be completed by June 1999. Quanta Systems implemented a Year
2000 compliant Deltek system in 1998. This was implemented with Year 2000
compliant hardware as well as software. Additional computers were
identified and replaced in 1998. SecurSystems has installed a new network
which has Year 2000 compliant hardware and software. The accounting package
used by SecurSystems is Timberline. Timberline is currently working on a
Year 2000 compliant version and we have been advised this new version will
be available in 1999. MicroAssembly is currently installing a new
accounting system including Year 2000 compliant software and hardware, in
addition it has periodically upgraded computers within the organization
during 1998. MicroAssembly's new system is expected to be implemented by
June 1999.
The Company presently believes that it's planned replacements and
modifications of certain existing computer equipment and software will be
completed by January 1, 2000 so as to avoid any of the Year 2000 related
disruptions or malfunctions of its computer equipment and software that it
has identified.
(in thousands)
The costs to address the Company's Year
2000 Issues: Costs Prior Estimate to
to 1999 Complete
----------- ------------
Norment/Norshield Hardware/Software $ 975 $ 425
Quanta Systems/DCS Hardware/Software 85 18
SecurSystems Hardware/Software
/Phone Equipment 64 50
MicroAssembly Hardware/Software
/Office Equipment 6 30
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$ 1,130 $ 523
========== ==========
The Company will use both internal and external resources to reprogram or
replace its IT systems and non-IT systems for the Year 2000 modifications.
Costs - The Company does not separately track the internal costs incurred on
the Year 2000 project. Such costs are principally payroll and related costs
for its internal personnel. The total cost of the Year 2000 project,
excluding these internal costs is estimated at $1.7 million and is being
funded through operating cash flows. Over $1.1 million, which includes
costs expended by Norment/Norshield prior to the Company's acquisition on
November 28, 1998, was spent in 1998 and the balance will be expended in
1999.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best
estimates, which are derived using numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
Risks - Management believes that based on the information currently
available to the Company, that the most likely worst case scenario that
could be caused by failures relating to Year 2000 could pose a significant
threat not only to CompuDyne, its customers and suppliers, but to all
businesses. Risks include:
-Legal risks, including customer, supplier, employee or shareholder
lawsuits over failure to deliver contracted services, product
failure, or health and safely issues.
-Loss of sales due to failure to meet customer quality expectations
or inability to ship products.
-Increased operational costs due to manual processing, data
corruption or disaster recovery.
-Inability to bill or invoice.
Contingency plans - As part of its continuous assessment process, the
Company will develop contingency plans as necessary. These plans could
include, but are not limited to, material stockpiling, use of alternate
suppliers and development of alternate means to process orders. The Company
currently plans to complete such planning by December 1999.
CompuDyne is using its best efforts to ensure that the Year 2000 impact on
its critical systems and processes will not affect its supply of product,
quality or service. However, in the event that the Company is unable to
complete its remedial actions described above and is unable to implement
adequate contingency plans in the event problems arise, there could be a
material adverse effect on the Company's business, financial position,
results of operations, or cash flows.
Financial Information About Foreign and Domestic Operations
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Export sales for the Company were $2.5 million, $257 thousand and $576
thousand, for the years ended December 31, 1998, 1997 and 1996,
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.
ITEM 2. PROPERTIES
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The following table sets forth the main facilities of the Company's
operations:
<TABLE>
<CAPTION>
Approximate
Primary Owned or Square Feet
Location Purpose Leased (1) of Space
- ---------------------- ---------------------- ---------- ----------
<S> <C> <C> <C>
Corporate Office
- ----------------
Hanover Maryland Administrative Leased 3,200
Quanta Systems
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Gaithersburg, Maryland 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
Willimantic, Connecticut Administrative Owned 2,900
SecurSystems
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Hanover, Maryland Engineering Leased 9,500
Garner, North Carolina Engineering Leased 2,000
Tucson, Arizona Engineering Leased 1,500
Chandler, Arizona Engineering Leased 2,500
Norment
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Montgomery, Alabama Administrative/Manufacturing Owned 64,703
Montgomery, Alabama Accounting Office Leased 2,850
Montgomery, Alabama Apartment Leased 875
Montgomery, Alabama Assembly Leased 12,400
Montgomery, Alabama Storage Leased 10,000
Airteq
- ------
Lake Oswego, Oregon Administrative/Manufacturing Leased 10,515
Lake Oswego, Oregon Storage Leased 300
Trentech/Norshield
- ------------------
Montgomery, Alabama Office/Assembly Leased 30,000
Montgomery, Alabama Office/Modular Leased 3,000
Montgomery, Alabama Office/Modular Leased 3,000
EMSS
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Livermoore, California Office/Assembly Leased 15,795
</TABLE>
(1) See Note 13 to the Consolidated Financial Statements for additional
information relating to lease expense and commitments.
CompuDyne's corporate headquarters operated out of a building owned by
MicroAssembly in Willimantic, Connecticut. The Company has leased space in
Hanover, Maryland and is in the process of relocating the corporate office
from Willimantic, Connecticut to Hanover, Maryland. The new office in
Hanover, Maryland will also be used to accommodate administrative functions
of SecurSystems and give more room to the expanding Northeast region by
moving out of the building currently used by the Northeast regional office.
Norment is headquartered in Montgomery, Alabama in a building owned by the
Company. Norment also leases four additional spaces in the Montgomery,
Alabama area to house its assembly/fabrication operations, storage,
administrative functions and its Trentech operation.
Norshield leases two buildings and is headquartered in Montgomery, Alabama.
The two leased locations are used for assembly/fabrication and engineering
operations.
Airteq has its headquarters in Lake Oswego, Oregon in a leased building used
for administration and manufacturing. Airteq also leases a small space in
Lake Oswego, Oregon used for storage.
EMSS operates out of a leased building in Livermoore, California with
combined office and assembly space.
Quanta Systems leases three buildings in Gaithersburg, Maryland. One
building is used by its services group, which provides engineering services
and administrative staff and was consolidated with the DCS products group
which manufactures telemetry and communications equipment. The second
building which had been used by DCS is currently being vacated and will be
sub-leased when a new tenant can be located. Quanta Systems leases a third
building in Gaithersburg which it subleases to Orion Network Systems
Corporation.
SecurSystems leases four spaces. The Northeast regional office is located
in Hanover, Maryland and provides office, engineering and storage space.
The Southeast regional office is located in Garner, North Carolina and
provides office, engineering and storage space. Two offices are located in
Arizona, one in Tucson and the other outside of Phoenix in Chandler. These
two locations provide bases to service the Arizona maintenance operations
and also to service any projects in the Midwestern and Western United
States. 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.
MicroAssembly operates out of owned facilities in Willimantic, Connecticut
that currently houses the corporate headquarters. The corporate
headquarters is currently being moved to Hanover, Maryland.
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 required 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, results of future operations or cash flows.
Quanta Systems settled its claim against the Army for change orders at the
Fort Bragg installation. Quanta received $400 thousand in fiscal 1998 in
settlement of this claim.
SecurSystems settled a dispute with a subcontractor resulting from the
Sonoma settlement made in 1997. SecurSystems paid $100 thousand in 1998 as
final settlement to end the dispute. An additional $31 thousand for a
subcontractor's claim related to the Sonoma contract was reserved for in
1998 and paid in 1999.
The Company has been served over the past several years with a number of New
York, New Jersey and Pennsylvania lawsuits involving asbestosis related
personal injury and death claims in which York-Shipley, Inc. and/or
CompuDyne Corporation and/or CompuDyne, Inc. is a defendant. The complaints
against CompuDyne, Inc. have been referred to the trustee in bankruptcy for
CompuDyne, Inc. The Company itself has been named as a defendant more
frequently in 1998 and 1999 in New York state litigation and has advised its
insurers of each of these cases for which the insurers are providing a
defense pursuant to agreement with the Company, subject to reservation of
rights by the insurer. The insurers have advised that claims in such
litigation for punitive damages and intentional conduct are not covered.
The Company cannot ascertain the total amount of potential liability with
respect to these matters, but does not believe that any such liability
should have a material effect on its financial position, future operations
or future cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None
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PART II
ITEM 5. MARKET FOR COMPUDYNE COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
- ----------------------------------------
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 1,929 common
shareholders of record as of March 22, 1999.
The following table sets forth the high and low bids for CompuDyne Common
Stock from January 1, 1997 to December 31, 1998 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, 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
Quarter Ended High Low
- ------------------- -------- ---------
March 31, 1998 $ 3 3/4 $ 1 57/64
June 30, 1998 3 7/8 2 1/4
September 30, 1998 3 7/16 2 3/8
December 31, 1998 5 1/2 2 1/32
The Company has not paid any dividends on its Common Stock during the years
ended December 31, 1998 and 1997, and its Board of Directors has no
intention of declaring a dividend in the foreseeable future. Under the
terms of the financing agreement for the purchase of Norment/Norshield, any
intended declaration of common stock dividends must first be approved by
LaSalle National Bank and William Blair Mezzanine Capital Partners II,
L.L.C., and cash dividends are not allowed to be paid.
Recent Sales of Unregistered Securities
- ---------------------------------------
On December 3, 1998 (effective November 28, 1998), CompuDyne acquired
Norment Industries and Norshield Corporation. In connection with this
purchase CompuDyne issued 1,075,507 unregistered shares of common stock at
$2.79 per share, a warrant to purchase 297,924 shares of common stock
exercisable at $3.25 per share and secured $9.0 million of subordinated debt
to William Blair Mezzanine Capital Partners II L.L.C.. See Note 8 to
Consolidated Financial Statements of CompuDyne for further details.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following is a consolidated summary of operations of CompuDyne and its
subsidiaries for the years ended December 31, 1998, 1997, 1996, 1995 and
1994. 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,
<TABLE> ------------------------------------------------
<CAPTION>
1998 (c) 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net sales $ 31,916 $ 20,016 $ 22,142 $ 10,308 $ 9,699
======= ======= ======= ======= ======
Gross profit $ 6,052 $ 3,279 $ 2,132 $ 1,516 $ 1,586
Sonoma settlement costs - 270 - - -
Selling, general and
administrative 4,415 2,257 1,431 1,214 1,095
Research and development 169 172 234 359 66
------- ------- ------- ------- ------
Operating income $ 1,468 $ 580 $ 467 $ (57) $ 425
======= ======= ======= ======= ======
Interest expense, net
of interest income $ 295 $ 62 $ 39 $ 22 $ (7)
======= ======= ======= ======= ======
Income (loss) from con-
tinuing operations before
extraordinary items $ 847 $ 696 $ 391 $ (210) $ 2,065
Loss from discontinued
operations - - (60) (453) (860)
Extraordinary items (a) - - - - 523
------- ------- ------- ------- -------
Net income (loss) $ 847 $ 696 $ 331 $ (663) $ 1,728
======= ======= ======= ======= ======
Earnings (loss) per
share (b):
Basic
- -----
Continuing operations $ .20 $ .23 $ .17 $ (.13) $ 1.18
Discontinued operations - - (.03) (.27) (.49)
Extraordinary items - - - - .30
------- ------- ------- ------- ------
Net income (loss) $ .20 $ .23 $ .14 $ (.40) $ .99
======= ======= ======= ======= ======
Weighted average number
of common shares out-
standing 4,166 3,005 2,294 1,657 1,748
======= ======= ======= ======= ======
Diluted
- -------
Continuing operations $ .20 $ .16 $ .10 $ (.13) $ 1.18
Discontinued operations - - (.02) (.27) (.49)
Extraordinary items - - - - .30
------- ------- ------- ------- ------
Net income (loss) $ .20 $ .16 $ .08 $ (.40) $ .99
======= ======= ======= ======= ======
Weighted average number
of common shares and
equivalents 4,343 4,364 3,762 1,657 1,748
======= ======= ======= =======
Total assets $ 43,570 $ 7,598 $ 7,575 $ 3,947 $ 2,114
======= ======= ======= ======= ======
Long-term debt $ 20,515 $ 30 $ 50 $ 470 $ -
======= ======= ======= ======= ======
Total shareholders equity $ 5,890 $ 2,162 $ 1,776 $ 421 $ -
======= ======= ======= ======= ======
</TABLE>
Notes:
(a) The extraordinary item in 1994 is a debt forgiveness.
(b) No dividends have been paid on Common Stock during the above periods.
(c) Includes the operations of Norment/Norshield from November 28, 1998, the
date of acquisition.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ----------------------------------------------------------
Financial Condition
- -------------------
Long-term debt was $19.4 million and the current portion of long-term debt
was $1.1 million at December 31, 1998 compared with no long-term debt and
short term debt of $1.4 million at December 31, 1997. The increased debt is
attributable to the borrowings made for the acquisition of
Norment/Norshield. Working capital also increased as a result of the
acquisition from $1.9 million at December 31, 1997 to $18.8 million at
December 31, 1998.
During 1998 CompuDyne had net income of $847 thousand compared with $696
thousand in 1997. The results for 1998 included one month of operating
results for the newly acquired Norment and Norshield.
Results of Operations 1998 compared with 1997
- ---------------------------------------------
CompuDyne's net sales increased from $20.0 million in 1997 to $32.0 million
in 1998. Sales at Norment/Norshield were $6.9 million in 1998. This was
incremental since Norment and Norshield were acquired by CompuDyne effective
November 28, 1998. Sales at SecurSystems increased 71% in 1998, up $4.4
million to $10.6 million compared with $6.2 million in 1997. SecurSystems
has been completing work from the backlog it has been building since their
acquisition in July 1996. Quanta Systems' sales increased from $10.7
million in 1997 to $11.1 million in 1998 due to work done on a non-recurring
fixed price contract in 1998 for Montgomery County, Maryland. Sales at DCS
increased to $1.5 million in 1998 from $1.3 million in 1997. This increase
was attributable to the sale of a replacement base band unit to an existing
customer in 1998. MicroAssembly's sales were flat at $1.8 million in 1998,
the same as 1997. SYSCO had sales of $170 thousand in 1998. These sales
are incremental since SYSCO had no sales in 1997.
CompuDyne's gross margin increased $2.8 million to $6.1 million in 1998 up
from $3.3 million in 1997. Norment/Norshield contributed $1.7 million of
this increase and is incremental due to its acquisition on November 28,
1998. SecurSystems added another $865 thousand to the increase, up from
$1.1 million in 1997 to $1.9 million in 1998. This increased margin is
directly related to the increase in sales from 1997 to 1998. Gross margins
at Quanta Systems increased $200 thousand in 1998 to $1.5 million, up from
$1.3 million in 1997. At $373 thousand in 1998, DCS showed a slight
increase of $9 thousand over the $364 thousand reported in 1997.
MicroAssembly's margin decreased by $97 thousand in 1998 to $462 thousand in
1998 from $559 thousand in 1997. SYSCO contributed $62 thousand to the 1998
margin increase which was incremental having its first sales in 1998.
CompuDyne's selling, general and administrative costs increased $1.9
million, up from $2.5 million in 1997 to $4.4 million in 1998.
Norment/Norshield incrementally added $1.1 million to selling, general and
administrative expense, again due to its acquisition on November 28, 1998.
Selling, general and administrative expenses at SecurSystems were $1.0
million in 1998, the same as 1997. Quanta Systems' selling, general and
administrative expenses were $767 thousand in 1998, up $258 thousand from
$509 thousand in 1997. DCS' selling, general and administrative expenses
were down $138 thousand to $36 thousand in 1998 compared with $174 thousand
in 1997. Selling, general and administrative costs at MicroAssembly were
$412 thousand in 1998, up $61 thousand from $351 thousand in 1997 due to
increased staffing and advertising costs. SYSCO's selling, general and
administrative expenses increased $227 thousand to $374 thousand in 1998
compared with $147 thousand in 1997, reflecting a continuing acceleration of
activities.
Research and development costs, which related to Quanta Systems' DCS product
division were $169 thousand in 1998 compared with $172 thousand in 1997.
The costs in 1998 were expended to develop three new products.
Interest expense in 1998 totalled $295 thousand, an increase of $233
thousand over the 1997 total of $62 thousand. This increase was due to the
expanded borrowings to finance the acquisition of Norment/Norshield. See
"Liquidity".
CompuDyne's 1998 income from continuing operations increased $151 thousand
or 21.7% in 1998 to $847 thousand, up from $696 thousand in 1997. Net
income for 1997 benefitted from a tax credit resulting in a negative tax
rate, while 1998 net income was taxed at an overall rate of 30.0%.
Norment/Norshield incrementally added $237 thousand to the net income in
1998. SecurSystems increased net income by $384 thousand to $434 thousand
in 1998 from $50 thousand in 1997. This is attributed to increased sales
while holding the increase in overhead costs to a minimum. Quanta Systems
net income decreased in 1998 to $322 thousand, down $198 thousand from $520
thousand in 1997. DCS's net income increased $79 thousand in 1998 from a
break even in 1997. MicroAssembly's net income decreased to approximately
break even in 1998, down from a net profit of $106 thousand in 1997. SYSCO
had a net loss of $221 thousand in 1998, an additional loss of $74 thousand
over the $147 thousand lost in 1997. SYSCO is still in its start up period
(operations started in October 1997) and has just begun booking orders and
posting sales.
Results of Operations - 1997 compared with 1996
- -----------------------------------------------
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 than
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 at the end of 1997 was $13.8 million
(including a $5 million multi-year maintenance contract).
CompuDyne's gross margins increased $1.2 million to $3.3 million, up from
$2.1 million in 1996 even though net sales for 1997 decreased. Quanta
Systems contributed $491 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' gross 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 $348 thousand to the increase in gross margin. This was due to
increasing sales by 18.9 % and only increasing cost of goods sold by 5.3%.
Selling, general and administrative expenses increased $1.1 million in 1997
to $2.5 million from $1.4 million in 1996. Quanta Systems' expenses
increased $264 thousand in 1997 to $508 thousand from $244 thousand in 1996.
This is due to the treatment of legal costs related to the Fort Bragg claim
as unallowable costs. 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 $297 thousand to $520 thousand in 1997 from $223 thousand in 1996.
This increase was primarily due to increased margins of 11.9% in 1997
compared to 5.0% in 1996. SecurSystems had a decrease of $63 thousand to
$50 thousand in 1997 compared with a profit of $113 thousand in 1996.
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.
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, state and local
governments or subcontracts thereunder.
To finance the acquisition of Norment/Norshield the Company secured a term
loan from LaSalle National Bank in the amount of $11.5 million. The term
loan was borrowed at a rate of LIBOR (variable) plus a fixed credit spread
of 2.5%. In an agreement dated December 11, 1998 between LaSalle National
Bank and CompuDyne, $6.75 million of this term loan was swapped to a fixed
rate of 5.08% plus the 2.5% fixed credit spread. The term loan principal
payments are to be made according to the following schedule:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
March 31 $ - $ 375,000 $ 500,000 $ 625,000 $ 625,000 $ 750,000
June 30 $ 375,000 $ 500,000 $ 625,000 $ 625,000 $ 750,000 $ -
September 30 $ 375,000 $ 500,000 $ 625,000 $ 625,000 $ 750,000 $ -
December 31 $ 375,000 $ 500,000 $ 625,000 $ 625,000 $ 750,000 $ -
</TABLE>
At the same time the Company secured the term loan, it secured a revolving
loan with LaSalle National Bank of up to $6.5 million. This revolving loan
was secured to pay off the old revolving credit line with Chevy Chase Bank
and supply operating cash for the existing businesses as well as the new
acquisition. The borrowing rate on the revolving credit line is contingent
upon covenants relating to the senior debt, to EBITDA ratio and the
submission of timely financial data. The current rate is Prime plus 1.0% or
the Eurodollar rate plus 2.5%, whichever the Company chooses. On December
31, 1998 the Company had no balance borrowed on the revolving loan. Also in
connection with the acquisition of Norment/Norshield, the Company secured a
senior subordinated term note in the amount of $9.0 million due on December
31, 2005 with William Blair Mezzanine Capital Partners II, L.L.C. at a fixed
rate of 13.15%. Repayment of the principal balance is to be made in
accordance with the following schedule:
2004 2005
---------- -----------
March 31 $ 500,000 $ 500,000
June 30 $ 500,000 $ 500,000
September 30 $ 500,000 $ 500,000
December 31 $ 500,000 $ 5,500,000
The Company also issued 1,075,507 shares of common stock and a warrant to
purchase an additional 297,924 shares of common stock at a price of $3.25
per share to William Blair Mezzanine Capital Partners II, L.L.C., for a
purchase price of $3.0 million.
As required by the new financing agreements, MicroAssembly repaid and closed
the unsecured line of credit with Fleet Bank and CompuDyne repaid the
borrowings at Chevy Chase.
Net cash flows provided by operations was $3.8 million in 1998 compared with
$838 thousand used in operations in 1997. Cash from net income increased
from $696 thousand in 1997 to $847 thousand in 1998. Increases in accounts
payable and accrued liabilities account for $2.3 million of the cash
provided by operations. Another effect on cash from operations is $250
thousand in depreciation and amortization. A total of $432 thousand was
used to purchase capital equipment in 1998. Cash paid for the acquisition
of Norment/Norshield of $23.8 million was primarily financed by long-term
debt of $20.5 million.
CompuDyne entered into an Automatic Investment Service Agreement dated
December 23, 1998 with LaSalle National Bank. This agreement allows LaSalle
National Bank to transfer funds over $100 thousand from the main CompuDyne
account to an investment account on a daily basis. The investment account
earns interest at a variable rate determined by the bank on a daily basis,
based on the current days market rate for commercial paper, less a spread
for providing the service. The experience to date has been an average of
4.15%.
Capital Resources
- -----------------
Capital expenditures totalled $432 thousand in 1998 compared with $195
thousand in 1997. The Company has projected spending up to $3.1 million for
capital expenditures in fiscal 1999. These projected expenditures includes
$2.0 million for the expansion of the Norshield plant, $400 thousand for the
implementation of the new IR system (PENTA) at Norment and $680 thousand for
normal asset purchases and replacements.
Recently Issued Accounting Standards
- ------------------------------------
In July 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes the accounting definition of a derivative and specifies
measurements, recognition, and disclosure of changes in the fair value of
derivatives, ("hedges") held by a company. This standard will require
derivatives designated as hedges to be recorded on the balance sheet at fair
value with the change in fair value of the underlying hedged item. This
standard will be adopted by the Company in the year 2000 and the Company has
not determined what impact, if any, this standard will have when it is
adopted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Interest Rate Risk
- ------------------
CompuDyne used fixed and variable rate notes payable to finance its
acquisition of Norment/Norshield. These on-balance sheet financial
instruments, to the extent they provide for variable rates of interest,
expose the Company to interest rate risk, with the primary interest rate
exposure resulting from changes in the LIBOR rate used to determine the
interest rate applicable to the borrowing under the Company's loan from
LaSalle National Bank.
The information below summarizes CompuDyne's sensitivity to market risks
associated with fluctuations in interest rates as of December 31, 1998. To
the extent that the Company's financial instruments expose the Company to
interest rate risk, they are presented in the table below. The table
presents principal cash flows and related interest rates by year of maturity
of the Company's notes payable with variable rates of interest in effect at
December 31, 1998. Note 8 to the consolidated financial statements contain
descriptions of the Company's notes payable and should be read in
conjunction with the table below.
Financial Instruments by Expected Maturity Date
<TABLE>
<CAPTION>
Year Ending December 31 1999 2000 2001 2002
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Notes Payable:
Variable rate ($) $1,125,000 $ 1,875,000 $ 2,375,000 $2,500,000
Average interest rate 7.74% 7.79% 7.85% 7.90%
Fixed rate ($) $ - $ - $ - $ -
Average interest rate 13.15% 13.15% 13.15% 13.15%
Year Ending December 31 2003 Thereafter Total Fair Value
---------- ------------ ---------- ----------
Notes Payable:
Variable rate ($) $2,875,000 $ 750,000 $11,500,000 $11,500,000
Average Interest Rate 7.96% 8.0%
Fixed rate ($) $ - $ 9,000,000 $ 9,000,000 $ 9,000,000
Average Interest Rate 13.15% 13.15% 13.15% 13.15%
Year Ending December 31 1999 2000 2001 2002
----------- ----------- ----------- ----------
Interest Rate Swaps:
Variable to Fixed ($) $6,750,000 $6,750,000 $ 6,750,000 $ -
Average pay rate 7.55% 7.55% 7.55% -
Average receive rate 7.74% 8.0% 8.0% -
Year Ending December 31 2003 Thereafter Total Fair Value
---------- ----------- ---------- ----------
Interest Rate Swaps:
Variable to Fixed ($) $ - $ - $ - $6,753,000
Average pay rate - - - -
Average receive rate - - - -
</TABLE>
The Company uses a foreign exchange contract to partially hedge their
exposure to exchange rate risk related to one firmly committed sales
contract. The foreign exchange contract was entered into for non-trading
purposes and is matched to the underlying transaction and does not
constitute speculative or leveraged positions independent of this exposure.
The table below summarizes the transaction that is sensitive to foreign
currency exchange rates, including foreign currency forward exchange
agreements. The forward exchange, shown in South African Rand, is the
amount of rands that are expected to be exchanged into U.S. dollars based on
the expected month of conversion. These amounts represent the contract
sales revenue in rand, less contract expenses paid in rand.
Expected Date
December 31, Fair
(rand in thousands) 1999 2000 Total Value
------- ------- -------- ------
Forward exchange agreement (in South
African rand) 14,050 1,568 15,618 15,618
Average contractual exchange rate
(Receive U.S. dollars for South
African rand) $ US 0.16 $ US 0.14 $ US 0.16 $ US 0.16
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, 1998, or April 30, 1999, relating to its 1998
Annual Meeting of Stockholders.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS
AND REPORTS ON FORM 8-K
(a) Financial Statements
(1) The financial statements listed in the accompanying index to
financial statements are filed as part of this Annual Report on
Form 10-K.
(2) Schedule II - Schedule of valuation and qualifying accounts
(b) Reports on Form 8-K
A Current Report on Form 8-K regarding the acquisition of
Norment/Norshield dated December 11, 1998 and filed
February 12, 1999 and amended on 8-KA on February 18, 1999.
(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 (B) Credit Agreement dated November 30, 1998 among CompuDyne Corporation
and LaSalle National Bank is incorporated by reference to Exhibit (99.2) to
Registrant's Form 8-K filed February 12, 1999.
10 (C) Subordinated Loan and Investment Agreement dated November 30, 1998
among CompuDyne Corporation and William Blair Mezzanine Capital Fund II,
L.P. is incorporated by reference to Exhibit (99.3) to Registrant's Form 8-K
filed February 12, 1999.
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.
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 18
Consolidated Balance Sheets at December 31, 1998
and 1997 19
Consolidated Statements of Operations for the
years ended December 31, 1998, 1997 and 1996 20
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996 21
Consolidated Statements of Changes in Shareholders'
Equity for the years ended
December 31, 1998, 1997 and 1996 22
Notes to Consolidated Financial Statements 23-36
(Item 14(a)(2))
Schedule II - Valuation and Qualifying
Accounts for the Years Ended December
31, 1998, 1997 and 1996 37
(Item 14(a)(3)
Financial Statement Schedule
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, 1998 and 1997, and the
related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1998. Our audits 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 financial
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 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, 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 11, 1999
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION> December 31,
1998 1997
------ ------
(In Thousands)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,528 $ -
Accounts receivable 27,451 4,757
Costs in excess of billings 2,610 521
Inventories
Finished goods 112 72
Work in progress 499 536
Raw materials and supplies 3,611 612
------- -------
Total Inventories 4,222 1,220
------- -------
Prepaid expenses and other current assets 127 95
------- -------
Total Current Assets 35,938 6,593
------- -------
Non-current receivable related parties 72 60
Property, plant and equipment, at cost
Land and improvements 1,081 26
Buildings and leasehold improvements 383 250
Machinery and equipment 2,334 1,055
Furniture and fixtures 182 287
Automobiles 299 84
Construction in progress 939 -
------- -------
5,218 1,702
Less accumulated depreciation and amortization 295 990
------- -------
Net property, plant and equipment 4,923 712
------- -------
Deferred tax asset 88 124
Intangible assets, net of accumulated
amortization 2,474 -
Goodwill, net of accumulated amortization 62 66
Other assets 13 43
------- -------
Total other assets 2,637 233
------- -------
Total Assets $43,570 $ 7,598
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 5,707 $ 2,104
Bank notes payable - 1,339
Accrued payroll expenses 1,240 -
Other accrued expenses 2,222 1,015
Billings in excess of contract
costs incurred 6,492 169
Accrued income taxes 346 35
Current portion of term loan 1,125 -
Current portion of deferred compensation - 26
Current portion of notes payable-related
parties 20 20
------ -------
Total Current Liabilities 17,152 4,708
Term loan 10,375 -
Subordinated note 9,000 -
Notes payable-related parties 15 30
Warranty reserves 463 -
Long term pension liability 484 489
Other liabilities 191 209
------ ------
Total Liabilities 37,680 5,436
------ ------
Shareholders' Equity
Common stock, par value $.75 per share:
10,000,000 shares authorized; 5,200,049
and 4,124,542 shares issued at December 31,
1998 and 1997, respectively 3,900 3,093
Other capital 10,397 8,203
Treasury shares, at cost; 78,636 shares at
December 31, 1998 and 16,666 shares at
December 31, 1997 (120) -
Receivable from management (90) (90)
Accumulated Deficit (8,197) (9,044)
------ ------
Total Shareholders' Equity 5,890 2,162
------ ------
Total Liabilities and Shareholders' Equity $43,570 $ 7,598
====== ======
</TABLE>
See notes to consolidated financial statements
- ---------------------------------------------------------------------------
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
-------- -------- --------
(thousands except per share data)
<S> <C> <C> <C>
Net sales $ 31,916 $ 20,016 $ 22,142
Cost of goods sold 25,864 16,737 20,010
------- ------- --------
Gross margin 6,052 3,279 2,132
Sonoma settlement costs - 270 -
Selling, general and administrative
expenses 4,415 2,257 1,431
Research and development 169 172 234
-------- ------- --------
Operating income 1,468 580 467
-------- ------- --------
Other (income) expense
Interest expense 295 62 55
Interest income - - (16)
Other income (37) (20) (33)
------- ------- --------
Total other (income) expense 258 42 6
------- ------- --------
Income from continuing operations
before income taxes 1,210 538 461
Income tax provision (benefit) 363 (158) 70
------- ------- -------
Income from continuing operations 847 696 391
Discontinued Operations:
Loss from discontinued operations - - (60)
------- ------- -------
Net income $ 847 $ 696 $ 331
======= ======= =======
Earnings per share
Basic:
Continuing operations $ .20 $ .23 $ .17
Discontinued operations - - (.03)
------- ------- -------
Net income $ .20 $ .23 $ .14
======= ======= =======
Weighted average number of common
shares outstanding 4,166 3,005 2,294
======= ======= =======
Diluted:
Continuing operations $ .20 $ .16 $ .10
Discontinued operations - - (.02)
------- ------- -------
Net income $ .20 $ .16 $ .08
======= ======== =======
Weighted average number of common
shares and equivalents 4,343 4,364 3,762
======= ======== =======
</TABLE>
See notes to consolidated financial statements
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------------------------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 847 $ 696 $ 391
Adjustments to reconcile net income to
net cash from operations:
Depreciation and amortization 250 114 104
Deferred income tax (benefit) - (189) (25)
Changes in assets and liabilities:
Accounts receivable (3,004) 516 (2,123)
Costs in excess of billings 608 - -
Inventory 11 (285) (423)
Prepaid expenses (14) (38) 52
Other assets 54 (28) -
Accounts payable 634 (913) 1,240
Accrued expenses 1,701 (104) 553
Accrued income taxes 311 (35) -
Billings in excess of costs incurred 414 (562) 562
Other liabilities 2,001 (10) 27
------- ------- -------
Net cash flows provided by (used in)
continuing operations 3,813 (838) 358
------- ------- -------
Loss on discontinued operations - - (60)
Decrease in net assets of discontinued
operations - - 3
------- ------- -------
Net cash flows used in discontinued
operations - - (57)
------- ------- -------
Net cash flows provided by (used in)
operations 3,813 (838) 301
------- ------- -------
Cash flows from investing activities:
Net cash used for acquisitions (23,880) - (566)
Additions to property, plant and
equipment (432) (195) (33)
------- ------- -------
Net cash flows used in investing
activities (24,312) (195) (599)
------- ------- -------
Cash flows from financing activities:
Conversion of series D preference stock - (310) -
Issuance of common stock 3,001 - 600
Payment of receivable from management - - 1
Increase/(decrease) in short term debt (1,339) 1,177 (97)
Proceeds from long term debt 20,500 - -
Purchase of treasury stock (120) - -
Repayment of note payable related parties (15) (20) (20)
------- ------- -------
Net cash flows provided by financing
activities 22,027 847 484
------- ------- -------
Net increase (decrease) in cash and cash
equivalents 1,528 (186) 186
Cash and cash equivalents at the
beginning of the year - 186 -
------- ------- -------
Cash and cash equivalents at the end
of the year $ 1,528 $ - $ 186
======= ======= ======
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 308 $ 62 $ 55
Income taxes, net of refunds $ 25 $ 70 $ -
</TABLE>
See notes to consolidated financial statements.
- ---------------------------------------------------------------------------
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Receivable
(In Thousands) Preferred Common Other From Accumulated Treasury
Stock Stock Capital Management Deficit Shares Total
------- ----- ------- ---------- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1996, 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
---- ----- ----- ----- ----- -----
Balance 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)
----- ----- ----- ----- ------ ----- -----
Balance at December
31, 1997 $ - $ 3,093 $ 8,203 $ (90) $(9,044) $ - $ 2,162
Net Income - - - - 847 - 847
Shares issued-
Common shares - 807 2,194 - - - 3,001
Purchase of
treasury stock - - - - - (120) (120)
----- ------ ------ ----- ------ ----- ------
Balance at December
31, 1998 $ - $ 3,900 $10,397 $ (90) $(8,197) $ (120) $ 5,890
===== ====== ====== ===== ====== ===== ======
</TABLE>
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 six wholly owned subsidiaries: Norment Industries, Inc.
(Norment"), Norshield Corporation, ("Norshield"), Quanta Systems Corporation
( Quanta Systems ), Quanta SecurSystems, Inc., ( SecurSystems ),
MicroAssembly Systems, Inc. ( MicroAssembly ) and SYSCO Security Systems,
Inc. ( SYSCO ).
Norment Industries, headquartered in Montgomery, Alabama, is a comprehensive
security and detention systems manufacturer, integrator and contractor with
national and international experience serving the corrections industry
primarily in the United States and includes the following divisions:
SESCO a detention system contractor in the United States.
Trentech is an electronic security systems manufacturer and integrator
serving the corrections industry.
Airteq manufactures pneumatic locks and markets sliding devices made by
Norshield primarily to the corrections industry.
Engineered Maximum Security Systems, ("EMSS") is a leading detention
system and electronic security contractor located on the West Coast.
Norshield is a manufacturer and supplier of high-end U/L rated ballistic,
attack and blast resistant products, and offers the broadest range of these
security products and services available from one source in the United
States.
As a result of the November 28, 1998 acquisition of Norment and Norshield,
CompuDyne has decided to rename certain operations. Norment and
SecurSystems will be consolidated under the new name "The Norment Security
Group", ("NSG"). Going forward, most of CompuDyne's non-military security
business will be conducted under the NSG name. The SecurSystems regional
offices will be designated as NSG regional offices and maintenance
operations. The SESCO and EMSS names previously used by Norment will
operate under the NSG name. The Trentech name will continue to be used for
branding security electronic products and will also operate under the NSG
name.
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 are located in Hanover, Maryland. Other offices
are located in, 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.
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.
Data Control Systems ( DCS ), a division of Quanta Systems, manufactures
telemetry, satellite command and control systems and radio frequency
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.
MicroAssembly, located in Willimantic, Connecticut, is a manufacturer of a
proprietary automated process called the Stick-Screw(TM) 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.
SYSCO is a distributor of high technology security systems formed by
CompuDyne in October 1997 to contract with security product manufacturers
and to become the exclusive distributor of these products in North America.
Security products distributed by SYSCO include the Shorrock line of control
and detection equipment, the SYSCO (Germany) digital microphonic cable
systems, the DETEC video motion detection system manufactured by Helgesen
Corporation and the FOSS fiber optic perimeter security system manufactured
by Imatran Voima OY.
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. Costs and estimated earnings in excess of billings on
uncompleted contracts represent the excess of contract revenues recognized
to date over billings to date on certain contracts. Billings in excess of
costs and estimated earnings on uncompleted contracts represent the excess
of billings to date over the amount of revenue recognized to date on certain
contracts.
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 $14 thousand and ($51) thousand
respectively at December 31, 1998. In conjunction with the acquisition of
Norment and Norshield, additional intangible assets have been recorded on
the balance sheet, including trade names, trademarks, Department of State
Certifications, UL listings, patents and ASTM standards. These are
amortized on a straight-line basis over periods ranging from 20 to 25 years.
Accumulated amortization was $9 thousand as of December 31, 1998.
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, ("SFAS")
No. 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 -
- ------------------------
The Company continues to account for stock based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, "Accounting For Stock Issued to Employees", ("APB No. 25") for the
recognition and measurement of employees stock-based compensation and has
adopted only the disclosure requirements of SFAS No. 123, "Accounting For
Stock Based Compensation", ("SFAS No. 123").
New Accounting Pronouncements -
- -------------------------------
In July 1998, the Financial Accounting Standard Board, ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
("SFAS No. 133"), which establishes the accounting definition of a
derivative and specifies measurements, recognition, and disclosure of
changes in the fair value of derivatives (hedges) held by a company. This
standard will require derivatives designated as hedges to be recorded on the
balance sheet at fair value with the change in fair value of the underlying
hedged item. SFAS No. 133 will be adopted by the Company in the year 2000
and the Company has not determined what impact, if any, this standard will
have when it is adopted.
Reclassifications -
- -------------------
Certain prior period amounts have been reclassified to conform to the
current year presentation.
3. EARNINGS PER SHARE
- ----------------------
Earnings per share are presented in accordance with SFAS No. 128, Earnings
Per Share. This statement requires dual presentation of basic and diluted
earnings per share on the face of the income statement. Basic earnings per
share excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common 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. Options
to purchase 303,000 shares of common stock at $4.31 and warrants to purchase
297,924 shares of common stock at $3.25 were outstanding during 1998 but
were not included in the computation of diluted earnings per common share
because the exercise price was greater than the average market price of the
common shares. 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 earnings per common share for 1997 because the options' exercise
price was greater than the average market price of the common shares.
Options to purchase 200,000, 56,290 and 25,000 shares of common stock at
$1.50, $1.81 and $2.00, respectively were outstanding during 1996 but were
not included in the computation of diluted earnings per common share for
1996 because the options' exercise prices were greater than the average
market price of the common shares.
The following is a reconciliation of the amounts used in calculating basic
and diluted earnings per common share:
<TABLE>
<CAPTION>
Per Share
Income Shares Amount
($ in thousands)
-------- -------- ------
<S> <C> <C> <C>
Basic earnings per common share for the year
ended December 31, 1998:
Income available to common stockholders $ 847 4,166,250 $ .20
Effect of dilutive stock options 177,024 ----
---------
Diluted earnings per common share for the
year ended December 31, 1998 $ 847 4,343,274 $ .20
------ --------- -----
Basic earnings 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 earnings per common share for the
year ended December 31, 1997 $ 696 4,364,201 $ .16
------ --------- -----
Basic earnings 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
------ --------- -----
</TABLE>
5. ACQUISITIONS OF BUSINESSES
- -------------------------------------------
Acquisition of Norment Industries, Inc. and Norshield Corporation -
- -------------------------------------------------------------------
On December 3, 1998, (effective November 28, 1998, CompuDyne entered into
and consummated a Stock Purchase Agreement by and between Apogee
Enterprises, Inc., ("the seller") and CompuDyne, ("the purchaser") to
purchase all of the capital stock of Norment Industries, Inc., ("Norment")
and Norshield Corporation, ("Norshield") from the seller, effective November
28, 1998. Norment and Norshield, headquartered in Montgomery, Alabama
operate a number of separate businesses which collectively are engaged in
the design, manufacture, installation and distribution of locks, bullet
resistant glass, metal window surrounds, electronic control systems and
similar products that are integrated into detention security systems under
the names Norment Industries, Norshield, SESCO, EMSS, Airteq and Trentech.
The consideration paid to the seller for the stock of Norment and Norshield
was $22.5 million. CompuDyne has accounted for the acquisition of Norment
and Norshield using the purchase method of accounting. The purchase price
was allocated to the net assets acquired based upon their estimated fair
market values. The financial statements reflect the preliminary allocation
of the purchase price. The allocation has not been finalized due to certain
valuations in process, therefore in 1999, the allocation may change. The
accompanying financial statements include the operations of Norment and
Norshield for the period from November 28, 1998, the effective date of
acquisition.
Following are the Company's unaudited pro forma results for 1998 and 1997
assuming the acquisition occurred on January 1, 1997.
(in thousands except for per share data) 1998 1997
---------- -----------
Revenue $ 104,077 $ 99,363
Net Income $ 1,421 $ 1,403
Earnings Per Share
------------------
Basic $ .27 $ .27
Diluted $ .25 $ .24
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations which would have actually resulted had the combination been in
effect on January 1, 1997, or of future results of operations.
In conjunction with the acquisition, liabilities were
assumed as follows: (in thousands)
Fair value of assets acquired $ 32,283
Cash paid for capital stock 23,880
--------
Liabilities assumed $ 8,403
========
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 accompanying financial statements include the operations
for SES for the period from July 11, 1996, the date of acquisition.
5. ACCOUNTS RECEIVABLE
- -----------------------
Accounts Receivable consist of the following:
(In thousands) December 31, December 31,
1998 1997
------------ ------------
U.S. Government Contracts:
Billed $ 1,622 $ 1,712
Unbilled 818 1,054
--------- --------
2,440 2,766
Commercial
Billed 19,756 2,084
Unbilled 5,695 207
--------- --------
25,451 2,291
--------- --------
Total Accounts Receivable 27,891 5,057
Less Allowance for Doubtful Accounts (440) (300)
--------- --------
Net Accounts Receivable $ 27,451 $ 4,757
========= =========
Unbilled receivables include retainages of approximately $5.2 million and
$185 thousand at December 31, 1998 and 1997, respectively.
Substantially all of the U.S. Government billed and unbilled receivables are
derived from cost reimbursable or time-and-material contracts. Direct sales
to the U.S. Government for the years ended December 31, 1998, 1997 and 1996
were approximately $7.8 million, $9.3 million and $15.5 million,
respectively, or 24%, 47% and 70% of the Company's total net sales for the
same years. The sales to the U.S. Government were in the following
segments: Norment, Norshield, Quanta Systems, SecurSystems and
MicroAssembly. 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 1995 from DCAA on September 30, 1998. No significant payments or
billings were made as a result of the approval of the 1995 rates.
6. CONTRACTS IN PROCESS
- ------------------------
Amounts included in the financial statements which relate to recoverable
costs and accrued profits not yet billed on contracts in process are
classified as current assets. Billings on uncompleted contracts in excess
of incurred cost and accrued profits are classified as current liabilities.
Summarized below are the components of the amounts:
December 31,
(in thousands)
1998 1997
-------- ----------
Costs incurred on uncompleted contracts $ 108,543 $ 2,292
Accrued profits 27,904 684
---------- ---------
$ 136,447 $ 2,976
Less customer progress payments 140,329 2,624
---------- ---------
$ (3,882) $ 352
========== ========
Included in the statements of
financial position:
Recoverable costs and accrued
profits not yet billed $ 2,610 $ 521
Billings on uncompleted contracts in
excess of incurred costs (6,492) (169)
----------- --------
$ (3,882) $ 352
=========== ========
7. 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, 1998 and
December 31, 1997 were $35 and $50 thousand respectively. Interest expense
pertaining to the notes for 1998, 1997 and 1996 were $5, $6 and $8 thousand
respectively.
8. LONG-TERM DEBT
- ---------------------- December 31, 1998
Term note, interest at LIBOR ----------------
(5.2% at December 31, 1998) (in thousands)
plus a fixed credit spread of 2.5%,
collateralized by virtually
all of the Company's assets due in
quarterly installments
beginning June 30, 1999. (see the rate
swap agreement in Note 9) $ 11,500
Subordinated note, interest at a fixed rate
of 13.15% collateralized by virtually all
of the Company's assets, subordinated to the term
note, due in quarterly installments beginning
March 31, 2004. 9,000
---------
Total long-term debt 20,500
Less amount due within one year 1,125
---------
$ 19,375
=========
Maturities of long-term debt
Year Ending December 31,
------------------------
1999 $ 1,125
2000 1,875
2001 2,375
2002 2,500
2003 2,875
Thereafter 9,750
---------
$ 20,500
========
The term note and subordinated note agreements contain various financial
covenants, including among other things, maintenance of fixed charge
coverage ratios, interest coverage ratios, maximum senior debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA") ratios, and
maximum permitted capital expenditures, certain minimum quarterly and annual
EBITDA for 1999 and a restriction against paying dividends.
At December 31, 1997, the Company had $1.3 million outstanding from a
secured working capital line of credit which allowed borrowings of up to 75%
of eligible accounts receivable.
9. 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.
Long-Term Debt - The carrying amounts reported in the balance sheet
approximate fair value as the amounts were obtained close to December 31,
1998.
Rate Swap Agreement - The Company entered into an interest rate swap
agreement on December 15, 1998 to limit the effect of increases in the
interest rates on the floating rate of the term note. The differential is
accrued as interest rates change and is recorded in interest expense. The
effect of this agreement is to limit the interest rate exposure to 7.55% on
$6.75 million of the Company's term loan. The fair value as of December 31,
1998 as estimated by dealers was a favorable $3.0 thousand.
Foreign Exchange Contract - The Company entered into a foreign
exchange contract in December 1998 and estimates its fair value to
approximate its cost.
10. INCOME TAXES
- ----------------
The components of the income tax provision (benefit) from continuing
operations for the years ended December 31, 1998, 1997, and 1996 are as
follows:
(in thousands) 1998 1997 1996
------- ------ ------
Current $ 333 $ 31 $ 84
Deferred 30 (189) (14)
------ ----- -----
$ 363 $ (158) $ 70
====== ===== =====
The tax effects of the primary temporary differences giving rise to the
Company's net deferred tax assets and liabilities at December 31, 1998 and
1997 are summarized as follows:
December 31,
-------------------
1998 1997
------- -------
Assets:
Accrued expenses and deferred compensation $ 116 $ 142
Tax operating loss carryforward 10,151 10,341
Tax credit carryforward 459 459
Book reserves in excess of tax 304 315
Accrued pension liability 186 184
------- -------
Total deferred assets 11,216 11,441
Valuation allowance (11,063) (11,254)
------- -------
Net deferred assets $ 153 $ 187
======= =======
Net deferred liabilities:
Tax depreciation in excess of book
depreciation $ (65) $ (64)
======= =======
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:
1998 1997 1996
------ ----- ------
Statutory federal income tax rates 34.0% 35.0% 34.0%
State income taxes, net of
Federal benefit 7.0 2.9 4.6
Change in valuation allowance (14.5) (51.2) -
Tax effect of NOL utilization - (18.6) (27.0)
Tax effect of non-deductible items 3.5 2.5 3.6
----- ----- -----
Tax 30.0% (29.4)% 15.2%
===== ===== =====
At December 31, 1998, the Company and its subsidiaries have net operating
loss carryforwards available to offset future taxable income of
approximately $28 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.
11. 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 December 31, 1996, the Company purchased 16,666 shares of CompuDyne
common stock (see note 14).
On May 21 1997, the Compensation and Stock Option Committee granted options
for 52,000 shares of CompuDyne Common Stock to key employees of Quanta
Systems and to a key employee of SecurSystems in accordance with the terms
and conditions of the 1996 Stock Incentive Compensation Plan for employees
at a price of $2.81 per share, the fair market value at such time. The
number of shares granted was reduced to 40,000 shares when an optionee
resigned and did not exercise his options within 30 days following the date
on which he ceased to be am employee, as defined under the terms of the
plan.
On January 1, 1998, the Company purchased 61,970 shares of its common stock
for $1.9375 per share for a total cost of $120 thousand.
On May 1, 1998, the Compensation and Stock Option Committee granted options
for 46,000 shares of CompuDyne Common Stock to key employees of Quanta
Systems and a key employee of SecurSystems in accordance with the terms and
conditions of the 1996 Stock Incentive Compensation Plan for employees at a
price of $2.56 per share, the fair market value at such time.
On September 23, 1998, the Compensation and Stock Option Committee granted
options for 45,000 shares of CompuDyne Common Stock to a key employee of
CompuDyne and a key employee of SecurSystems in accordance with the terms
and conditions of the 1996 Stock Incentive Compensation Plan for employees
at a price of $2.50 per share, the fair market value at such time.
On November 30, 1998, the Compensation and Stock Option Committee granted
options for 303,000 shares of CompuDyne Common Stock to key employees of the
newly acquired companies Norment and Norshield, in accordance with the terms
and conditions of the 1996 Stock Incentive Compensation Plan for employees
at a price of $4.31 per share, the fair market value at such time. Such
options grants are subject to shareholder approval at the 1999 Annual
meeting of Shareholders of an amendment to increase the total number of
shares of Common Stock which may be issued or transferred under this plan to
900,000 shares.
On September 18, 1996 the Company issued options to purchase 1,050 shares of
common stock for $1.625 per share to non-employee 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 non-employee 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 non-employee directors of the Company.
On May 20, 1998 the Company issued options to purchase 2,500 shares of
Common Stock for $2.63 per share to non-employee directors of the Company.
On August 31, 1998, the Company issued options to purchase 1,000 shares of
Common Stock for $2.875 per share to non-employee directors of the Company.
On October 26, 1998, the Company issued options to purchase 2,000 shares of
Common Stock for $2.50 per share to non-employee 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.
The transactions for shares under options were:
<TABLE>
<CAPTION>
Year Weighted Year Year
ended Average ended ended
December 31, Exercise December 31, December 31,
1998 Price 1997 1996
------------ -------- ------------ ------------
<S> <C> <C> <C> <C>
Outstanding, Beginning
of Period
Shares 404,150 $1.73 375,050 225,500
Prices $1.50-2.81 $1.50-2.00 $1.50-14.125
Granted
Shares 694,424 $3.62 54,100 160,050
Prices $2.63-4.31 $1.69-2.81 $1.81
Exercised
Shares - - - -
Prices - - - -
Expired or Canceled 13,000 $2.73 25,000 10,500
Outstanding, End of Period
Shares 1,085,574 $2.93 404,150 375,050
Prices $1.50-$4.31 $1.50-2.81 $1.50-2.00
Options Exercisable 573,448 253,775 375,050
</TABLE>
Information with respect to stock options outstanding and stock options
exercisable at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
Range Number Weighted Weighted Average
of Exercise Outstanding Average Remaining
Price at December 31, 1998 Exercise Price Contractual Life
- ------------- -------------------- -------------- -----------------
<C> <C> <C> <C>
$1.50 - $2.00 350,100 $1.57 4.52
$2.00 - $3.00 134,550 $2.62 6.64
$3.25 297,924 $3.25 7.42
$4.31 303,000 $4.31 7.42
----------------
1,085,574
===========
OPTIONS EXERCISABLE
Range Number Weighted Weighted
of Exercise Outstanding Average Average Remaining
Price at December 31, 1998 Exercise Price Contractual Life
- ------------- -------------------- -------------- -----------------
$1.50 - $2.00 267,524 $1.54 4.36
$2.00 - $3.00 8,000 $2.81 5.92
$3.25 297,924 $3.25 7.42
----------
573,448
==========
</TABLE>
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 109%. Using these
assumptions, the fair value of the stock options granted in 1998, 1997 and
1996 is $2,700,000, $0 and $165,000, 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 and earnings per
share for the years ended December 31, 1998, 1997 and 1996 would have been
reduced to the following pro forma amounts:
(In thousands except per share data) 1998 1997 1996
Net Income (loss): ------ ------ ------
As Reported $ 847 $ 696 $ 331
Pro Forma $ 778 $ 696 $ 294
Earnings per share:
As Reported $ 0.20 $ 0.23 $ 0.09
Pro Forma $ 0.18 $ 0.23 $ 0.08
The resulting pro forma compensation cost may not be representative of that
expected in future years.
12. EMPLOYEE BENEFIT PLANS
- ---------------------------
The Company has a 401(k) retirement savings plan covering 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 30% of employee contributions up
to a maximum of 6% of annual earnings for all Norment/Norshield employees
enrolled in the plan. CompuDyne currently matches employee contributions up
to the first 2.5% contributed for all other employees enrolled in the plan.
Expense for matching contributions to the Plan was $128 thousand, $114
thousand and $76 thousand for 1998, 1997, and 1996, respectively.
The Company money purchase pension plan covering salaried Norment/Norshield
employees. All salaried Norment/Norshield employees are eligible to
participate in the plan after one year of service. The Company makes annual
contributions of 3% of annual compensation for employees with less than 10
years of service, 4% for 10 to 20 years of service and 5% for 20 years or
more of service. There were no contributions to this plan in 1998.
13. 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 Ending December 31,
Total Sub-Lease Net
------ -------- -------
1999 $ 742 $ (87) $ 655
2000 267 (15) 252
2001 64 - 64
2002 5 - 5
2003 - - -
----- ------ ------
$1,078 $ (102) $ 976
====== ======= =======
Rental expense was $542 thousand, $452 thousand and $468 thousand in 1998,
1997, and 1996, 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.
14. 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. LyDall sold all of the stock in 1998 thereby negating the
requirement for CompuDyne to register the 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.
15. 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.
December 31,
1998 1997
--------- --------
Reconciliation of Benefit Obligation (in thousands)
- ------------------------------------
Beginning balance $ 801 $ 785
Interest cost 53 52
Change in assumptions
December 31, 1998 (1) 16 -
Actuarial gain/loss 16 41
Benefits paid (78) (77)
-------- --------
Ending balance $ 808 $ 801
======== ========
Reconciliation of Fair Value of Plan Assets
- -------------------------------------------
Beginning balance $ 313 $ 353
Return on assets 14 13
Contributions By CompuDyne 92 25
Benefits paid (91) (77)
-------- --------
Ending balance $ 328 $ 314
======== ========
Funded Status of Plan $ 484 $ 489
- --------------------- ======== ========
Net Periodic Benefit Cost Recognized
- ------------------------------------
Service cost $ 13 $ -
Interest cost 53 52
Expected return on assets (24) (26)
Recognized gains or losses - -
Amortization of unrecognized
net transition (asset) or
obligation 29 29
-------- --------
$ 71 $ 55
======== ========
Assumptions on Weighted Average Basis
- -------------------------------------
Assumed discount rate 7.0% - 6.5% 7.9%
Expected long term rate of return
on assets 8.0% 8.0%
(1) Reflects a change in the discount rate from 7.00% to 6.75% due to a
decrease in interest rates.
16. OPERATING SEGMENT INFORMATION
- ---------------------------------
Segment information has been prepared in accordance with the Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments of
an Enterprise and Related Information", ("SFAS No. 131"). SFAS No. 131
defines "operating segments" to be those components of a business about
which separate financial information is available that is regularly
evaluated by management in deciding how to allocate resources and in
assessing performance. SFAS No. 131 further requires that the segment
information presented be consistent with the basis and manner in which
management internally desegregates financial information for the purpose of
assisting in making internal operating decisions. The adoption by CompuDyne
of SFAS No. 131 did not result in a change in the reportable segments.
The following segment information includes operating information for Quanta
Systems, government engineering services, DCS's telemetry and
telecommunications products and Corporate activities for the three years
ended December 31, 1998, 1997 and 1996. Also included is operating
information from SecurSystems' physical security services for the years
ended December 31, 1998, 1997 and from its July 11, 1996 acquisition through
December 31, 1996, SYSCO's product sales operations for the year ended
December 31, 1998 and from it's inception, October 11, 1997 through December
31, 1997, MicroAssembly's Stick-Screw product sales during the years ended
December 31, 1998, 1997 and 1996 and Norment and Norshield, manufacturers
and installers of security and detention systems and ballistic and blast
resistant products for December 31, 1998, since their acquisition on
November 28, 1998.
<TABLE>
<CAPTION>
Revenues Gross Profit
(in thousands) 1998 1997 1996 1998 1997 1996
------- ------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Norment/Norshield $ 6,880 $ - $ - $ 1,686 $ - $ -
Quanta Systems 11,082 10,714 15,644 1,520 1,273 782
Data Control
Systems 1,453 1,317 1,480 373 364 462
SecurSystems 10,560 6,217 3,530 1,949 1,084 677
SYSCO 170 - - 62 - -
MicroAssembly 1,771 1,768 1,488 462 558 211
CompuDyne Corporate - - - - - -
------- ------- ------- ------ ----- -----
$ 31,916 $ 20,016 $ 22,142 $ 6,052 $ 3,279 $ 2,132
======= ======= ======= ====== ====== ======
Total Assets, at Year End Operating Income/(Loss)
------------------------- -----------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------ ------
Norment/Norshield $ 37,400 $ - $ - $ 338 $ - $ -
Quanta Systems 2,197 2,234 3,157 459 764 538
Data Control
Systems(1) - 1,375 812 130 18 13
SecurSystems 3,599 2,229 1,961 620 82 245
SYSCO 39 - - (316) (147) -
MicroAssembly 1,224 1,286 2,300 3 208 3
CompuDyne Corporate (889) 474 (655) 234 (345) (332)
------- ------ ------- ------- ------ ------
$ 43,570 $ 7,598 $ 7,575 $ 1,468 $ 580 $ 467
======= ====== ====== ====== ====== ======
Capital Expenditures Depreciation
------------------------ -----------------------
1998 1997 1996 1998 1997 1996
------- ------ ------- ------ ------ ------
Norment/Norshield $ - $ - $ - $ 46 $ - $ -
Quanta Systems 70 78 9 36 13 3
Data Control Systems 138 55 4 43 26 13
SecurSystems 88 55 8 67 11 30
SYSCO - - - - - -
MicroAssembly 57 7 12 71 80 79
Norment 79 - - - - -
Norshield - - - - - -
CompuDyne Corporate - - - - - -
------ ------ ------- ------ ------ -------
$ 432 $ 195 $ 33 $ 263 $ 130 $ 125
====== ===== ====== ===== ===== ======
</TABLE>
(1) Beginning with 1998, assets of Data Control Systems are reported
together with Quanta Systems.
17. FOREIGN CURRENCY AND EXCHANGE CONTRACT
- ------------------------------------------
The Company has a long-term contract in South Africa which requires payments
to the Company in South African rand. The Company has entered into a
foreign exchange contract to hedge its risk in converting rands into U.S.
dollars. The foreign currency exchange contract entered into expires on
April 18, 2000 and requires the Company to convert approximately 15,600,000
rand to U.S. dollars at rates ranging from 5.9 to 7.0. At December 31,
1998, net hedging gains of approximately $189,000 have been deferred and are
being amortized over the contract term. Gains and losses from foreign
currency transactions, such as those resulting from the settlement of
foreign receivables and payables, are included in the consolidated statement
of operations.
- ---------------------------------------------------------------------------
SCHEDULE II
COMPUDYNE CORPORATION AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, and 1996
($ Thousands)
<TABLE>
<CAPTION>
Balance at Norment Charged to Balance
Beginning Acquisi- Costs and at End of
Description of Period tion Expenses Deduction Period
- ----------------------- ---------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December
31, 1998
Reserve and allowances
deducted from asset
accounts:
Obsolescence reserve
for inventory $ 313 $ 263 $ 39 $ - $ 615
Reserve for accounts
receivable 300 92 236 (188) 440
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
</TABLE>
- ---------------------------------------------------------------------------
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 31, 1999 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 31, 1999.
/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
- --------------------- ---------------------- Exec. VP
Miles P. Jennings Philip M. Blackmon
/s/ William C. Rock Chief Financial Officer
- ------------------- and Principle Accounting
William C. Rock Officer
- ----------------------------------------------------------------------------
EXHIBIT I
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage
of voting
securities
Incorporated owned by
under the immediate
Name laws of Parent parent
- ---------------------------- ------------ -------------- ---------
<S> <C> <C> <C>
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%
Norment Industries, Inc. Delaware CompuDyne Corp. 100%
Norshield Corporation Alabama CompuDyne Corp. 100%
Norment Industries S.A. (Pty) Ltd. South Africa Norment 100%
------------------------
</TABLE>
Note: * All subsidiaries of the Registrant as of December 31, 1998, are
included in the consolidated financial statements of the
Registrant.
** CompuDyne, Inc. filed for petition in bankruptcy on December 31,
1991.
<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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,528
<SECURITIES> 0
<RECEIVABLES> 27,523
<ALLOWANCES> 440
<INVENTORY> 4,222
<CURRENT-ASSETS> 35,938
<PP&E> 5,218
<DEPRECIATION> 295
<TOTAL-ASSETS> 43,570
<CURRENT-LIABILITIES> 17,152
<BONDS> 0
0
0
<COMMON> 3,900
<OTHER-SE> 1,990
<TOTAL-LIABILITY-AND-EQUITY> 43,570
<SALES> 0
<TOTAL-REVENUES> 31,916
<CGS> 25,864
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 295
<INCOME-PRETAX> 1,210
<INCOME-TAX> 363
<INCOME-CONTINUING> 847
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 847
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
