(Cover)
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SECURING YOUR WORLD.
1998 ANNUAL REPORT
(Logo) COMPUDYNE CORPORATION
(Inside Front Cover
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A Market Review.
Three-Year Summary of Selected Financial Data
(See Appendix)
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Securing Your World.
Dear Shareholder:
1998 has been a momentous year for CompuDyne and its shareholders. Our
operating earnings were up substantially, and we made an acquisition
which quadrupled our size which will be accretive to earnings per share
while giving us a market leadership position in a very attractive
industry. Concurrently, we developed lender and investor relations which
mirror our operating strategies and management strengths.
Financial Review
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Revenues in 1998 were $32.0 million, up 60% from $20.0 million in 1997.
This increase was partly due to the December acquisition of Norment
Industries (Norment Security Group and Norshield Security Products)
benefiting our revenue by $7.4 million. Even without the additional
revenues from the Norment Industries acquisition, our existing businesses
had a revenue increase of 23% in 1998, paced by a 70% increase at Quanta
SecurSystems, our prison security electronics subsidiary. Income before
taxes, at $1.2 million, represented a 125% increase over $0.5 million in
1997. Net Income, after an increase in our tax rate from a 29% credit to
a 30% charge, increased from $0.7 million to $0.85 million, or 22%.
Diluted earnings per share, despite the additional shares and warrants
issued in the Norment Industries acquisition, rose $0.04 to $0.20 or
25%. Norment Industries' contribution was extremely significant to our
December earnings as well as earnings per share.
Norment /Norshield Acquisition
- -------------------------------
The Norment Industries acquisition represents a realization of important
goals in our targeted markets... jails, prisons and courthouse security.
The acquisition established a position of market leadership. We could
confidently make such a significant acquisition due to our broadened
range of expertise in this field. The purchase price was realistic, and
our existing operations and management had acquired additional
credibility in both our industry and among prospective lenders and
investors. As a result, these new and established relationships provided
the financing for the leveraged transaction. This is not an acquisition
which depends upon a "turn-around" or severe cost-cutting to make sense;
rather, it is a fine strategic fit. Already earning at a level that
comfortably justifies the financing involved, it is a business we
understand. Its vast installed base of security systems around the
country provides an enormous opportunity to execute our long-standing
strategic objective of increasing our security maintenance base. In
addition to the prison detention hardware and security electronics
businesses acquired with Norment Security Group, the Norshield
acquisition brings us the market leader in high-end, embassy-grade
bullet, blast and attack resistant windows and doors. This particular
aspect of the industry has seen a significant increase in potential
business due to the rash of attacks on U.S. embassies and federal
facilities throughout the world. We have just announced a $2 million
expansion at Norshield, increasing manufacturing capacity by 50% to
85,000 square feet, slated for completion in late 1999. Our objective is
to continue Norment and Norshield's market leadership positions through
internal growth and acquisitions which parallel their strengths.
Acquisition Financing
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Considering CompuDyne's acquisition of a company three times its size, at
a total cost of approximately $24 million, our finances remain in
remarkably solid condition. While our balance sheet reflects the impact
of the financing, income is at a level which should handle the financing
requirements reasonably well. The total financing package was:
. $3.0 million of equity, 1.076 million common shares sold at $2.79
per share.
. $9.0 million of 13.15% Subordinated Debt, 297,924 warrants
exercisable at $3.25.
. $11.5 million of term bank debt at LIBOR plus 2.50% (a portion has
been hedged at 7.55%)
. $6.5 million of a bank revolving credit line at LIBOR plus 2.50%.
At the end of 1998, none of the revolving credit was in use and we had
$1.5 million of cash, suggesting a conservative approach to the financing
requirements. The financing was arranged by William Blair & Company and
was provided by William Blair Mezzanine Capital Partners and LaSalle
National Bank. With the assistance of Atlantic Risk Management, we also
established a new performance bonding facility with Liberty Mutual,
raising our direct capacity to $80 million with provisions to exceed that
to handle unusually large projects. These financial and bonding
arrangements provide considerable flexibility for future growth, both
internally as well as through acquisition. They also provide important
relationships which should help us as CompuDyne progresses. These
arrangements would not have been possible without the investors'
confidence in CompuDyne's existing operations and management. This proves
true for the long-term reputation of performance and market leadership at
Norment Industries and its management as well. In this regard, we are
pleased that the Board of Directors has invited David Jones, from William
Blair Mezzanine Capital Partners, to join our Board subject to
shareholder approval. David brings a wealth of experience and insight
from years of investing activity.
Strategic Focus
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We plan to continue our program of targeted acquisitions. Specifically,
we are looking at regional security integrators to broaden our geographic
reach, including Europe. We expect to enhance our regional service
network by expanding to 12-15 offices over the next 3-5 years. In
addition to expanding security integration and maintenance capabilities,
we also continue to look for advanced security products companies,
especially those with large installed bases at correctional facilities.
Our strategy for CompuDyne is straightforward. We will focus on:
. Security systems for jail, prison, courthouse, military and large
commercial customers.
. State-of-the-art security products which support our customer
focus.
. Expand our network of regional offices.
. Building our base of recurring revenue from security maintenance
contracting.
We believe this strategy, coupled with our focus on security, ensures a
successful future for CompuDyne. Prison occupancy has grown steadily over
an extended period. Demographics project a sharp increase in the most
crime-prone age range. Federal studies suggest the severe lack of
recommended levels of prison capacity will continue. Prison security
systems have become extraordinarily complex, supporting the outsourcing
to highly skilled providers like Norment. The security technology in
facilities built as recently as 15 years ago is becoming obsolete. Not
solely characteristic to the prison industry, Government buildings here
and abroad have become terrorist targets. In these instances as well, the
seasoned services of Norment and Quanta Systems has been required to
provide current security systems, and Norshield for bullet, blast and
attack resistant products. We live in an uncertain world, demanding an
ever increasing need for sophisticated and extensive security.
Shareholder Value
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The creation of shareholder value is our most important objective. We
believe the Norment Industries acquisition is a significant step in this
direction, and the marketplace seems to agree. In addition to our efforts
to continue to improve earnings, further plans to increase shareholder
value include an application for listing on the NASDAQ marketplace. We
also anticipate an underwriting to reduce debt, increase our flexibility
to make acquisitions, and expand the share float.
Martin Roenigk, Chairman & CEO
"The" Security Group
A Formula For Success...
Norment Security Group
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The acquisition of Norment Industries, founded in 1952, represents a
unique opportunity to combine CompuDyne's existing security electronics
business (Quanta SecurSystems) with Norment's leadership in both
detention hardware and security electronics. In the process, we
strategically expand capabilities to develop our security maintenance
business. In order to consolidate our efforts in the marketplace and
maintain a focus on our strengths, we have reorganized both Norment and
Quanta SecurSystems. We have combined Norment's Trentech (security
electronics), SESCO and EMSS (detention electronics and detention
hardware) businesses with Quanta SecurSystems (security electronics and
regional offices for maintenance),under a single security brand -
"Norment Security Group." Norment Security Group is now the largest
provider of security and detention hardware to the jail, prison and
courthouse markets. To understand the strength of the organization,
please read our advertisement promoting the combination, which we have
included on page 7. Concentrating on the Norment Security Group name
rather than five separate brands will enhance our already significant
advertising and marketing leverage.
Not only is Norment Security Group positioned as a leader in the
detention and security electronics markets, it is the only company that
can offer a broad and rapidly growing regional support base. This
network of offices is equipped to handle most installation jobs. More
importantly, it is positioned geographically to provide security system
maintenance on a rapid response contract basis with our Security
Assurance program. These offices represent our previously named Quanta
SecurSystems operations, which increased revenues by 70% in 1998,
accompanied by sharply improved earnings. They allow Norment Security
Group's Montgomery, Alabama headquarters to focus on major installations.
Simultaneously, the regional offices provide quick, cost effective
capabilities for smaller projects and maintenance.
Norment Security Groups' size and capacity for diversification and
flexibility provide great opportunities for the cross selling of products
and services. For instance:
. The regional offices over time can add detention hardware to their
electronic security offering, more than doubling their average
participation in a project.
. The regional offices can offer an in-house electronic security
product as well as systems from third parties.
. SYSCO product sales can generate installation work throughout the
organization.
Norment Security Group is also uniquely positioned to service the ever
increasing private operator segment of the corrections industry. We can
offer nationwide installation and maintenance services, with standardized
products, to simplify the task of operating large numbers of prisons in a
variety of locations. These same strengths result in the opportunity for
Norment Security Group to provide nationwide multiple facility security
services for large corporations, financial institutions, and utility,
telecommunications and pharmaceutical companies.
NEW PROJECTS
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Norment Security Group had a very successful year in 1998. Major projects
included:
. Lewis SW Regional and Dakota Prisons in Arizona, $18 million
project.
. Red Onion Mountain Prison, Virginia - built on top of a mountain.
. Snake River Correctional, Oregon - 56 Trentech touchscreens.
. Orange County Courthouse, Florida - 600 card readers, 300 cameras,
fully integrated security.
. Federal Detention Center, Federal Bureau of Prisons, high rise in
downtown Philadelphia.
. Baviannsport Prison, South Africa - continuing our dominant
participation in that market.
Norment Security Group continued its very successful string of
installations in South Africa, further bolstering their collective
reputation for timely completion of major projects anywhere in the world.
Norment Security Group has recently completed three prisons in South
Africa, two are in process, and at least two more are under negotiation.
1999 begins with a strong backlog of projects, and some recent
significant "wins":
. Clayton County Justice Complex, Georgia - $10.4 million
. Toledo Correctional Institution, Ohio - $6.8 million
. Fayette - Lexington Detention Center, Kentucky - $10.6 million
. Coleman, FL - Federal Bureau of Prisons - $3.75 million
. Petersburg, VA - Federal Bureau of Prisons - $3.6 million
We started a Y2K software group in 1998 and continue our successful
program of Y2K upgrades at existing installations.
Norment Security Group's formula for success in the new project market is
simple... As the market leader, we have the scope, reputation and
finances to bond and complete the very largest jobs... Having the largest
and best qualified staff allows us to accurately quote, precisely design,
and efficiently execute jobs on time for our customers and within budget
for us. Finally, the on-going process of developing state-of-the-art
technology for our products gives us a unique edge in marketing to
customers.
The Services.
Integrated Systems...
MAINTENANCE
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Integrated security systems for jails, prisons and courthouses have
become enormously complex over the past fifteen years. Security
electronics design, manufacture and installation requires electronic
engineers, software engineers, and extensive factory training on multiple
systems. These installations can no longer be effectively maintained by
the prison electrician, or the local alarm company, and specially trained
technical staffs are difficult to support. Increasingly, wardens and
maintenance supervisors are realizing that the risk of security system
failure (injury, escape, political repercussions) far outweighs any
advantages of attempting to sustain an in-house maintenance staff.
Norment Security Group is uniquely positioned to provide these security
maintenance services with the largest and best trained staff in the
industry, strategically spread across the country in our rapidly
expanding regional network of offices. This network of offices represents
the business of Quanta SecurSystems, which has been combined under the
better known Norment name, and will manage the field and maintenance
operations.
This growing nationwide coverage, combined with the fact that Norment has
installed more prison security systems than any other contractor over the
past 20 years, results in a potent combination of capabilities and
contacts which we expect to pursue aggressively. Norment Security Group's
Security Assurance program offers wardens and administrators one-stop
shopping for security system protection in the form of an annual fixed
price contract covering routine and preventive maintenance and all
repairs on their systems. We're working to make their world more secure.
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THE NORMENT SECURITY GROUP...
"SECURING YOUR WORLD" Advertisement.
A Single Source. A World of Security.
The 1998 merger of CompuDyne Corporation and Norment Industries has
created the largest force in the corrections and judicial security
industry with the deepest experience and broadest geographical coverage.
Our greatly expanded Norment Security Group team can solve your security
needs faster and better, and will maintain our work for you long after
the job is done.
Working To Make Your World More Secure
Total Security Solutions - The single source for the design, integration,
installation and maintenance of high-end security systems for Jails,
Prisons, Courthouses and large Commercial/Industrial applications.
Largest in the Industry - The market leadership position in the
corrections and courthouse markets, backed up by the largest technical
staff in the industry, with the most experience, and the most complete
product line.
Regional Office Network - The only regional office network staffed
specifically to design, install and maintain integrated security systems
for Jails, Prisons and Courthouses, and large Commercial/ Industrial
applications.
Advanced Technology - Norment has long been the detention security
technology leader with innovations such as pneumatic locking devices, the
IDEAS distributed processing security electronics system, and the
advanced design electromechanical slider. CompuDyne, through existing and
new European alliances, brings additional state-of-the-art software,
digital, and fibre-optic technology to the security market.
Maintenance - Formerly as our Quanta SecurSystems subsidiary, Norment
has been maintaining prison security systems for 15 years and is the
largest in the field, a position made possible by its regional network of
offices, unique in the industry. With the largest staff of security
electronics specialists by a very wide margin, offices are being
continually added to provide all of your security maintenance on a rapid
response contract basis under our Security Assurance program.
Financial Strength - With over $100 million of revenues, $40 million of
assets, and $100 million of bonding capacity, we are uniquely positioned
to handle the largest and most complex projects.
Norment Security Group
A CompuDyne Company
Norment Security Group - 3224 Mobile Highway - Montgomery, AL 36108
334-281-5440 phone - 334-288-5485 fax
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The Products.
Market Prominence...
(Logo) NORSHIELD SECURITY PRODUCTS, founded in 1979, is the largest
supplier of highly rated bullet, blast and attack resistant windows and
doors. Norshield achieved this market prominence by continually improving
the quality and survivability of its products when under attack.
Norshield's capabilities in this arena are so highly regarded that
Norshield helped to establish the standards. These standards are so
demanding, that Norshield is the only supplier qualified to produce
Underwriter's Laboratories' "Level 8" bullet, blast and attack resistant
products, the highest grade. Norshield also manufactures detention
hardware.
Norshield's business is tied to a regrettable trend in today's world.
With increased terrorist actions here and abroad, and high crime rates,
the demand for protection from bullets and bombs has never been higher.
Whether it is a ubiquitous ATM or drive through window, a subway toll
booth, a local courthouse, a Federal Reserve building, a District of
Columbia Congressional office, or an East African Embassy building,
increasingly the security provisions are being upgraded and retrofitted.
And increasingly the customers, both the Government and commercial, are
calling on Norshield because of their longstanding reputation for high
quality products and rapid turnaround. The recent recommendations by the
State Department for dramatically improved security provisions at U.S.
Embassies abroad, a market in which Norshield has clear market
leadership, is a precursor of future activity. Demand is so strong that
one of the first things CompuDyne did upon acquiring Norment was to
approve a $2 million expansion at Norshield that will expand
manufacturing capacity by 50% to 85,000 square feet and will
significantly improve efficiencies in the manufacturing process. We are
also installing a new manufacturing control software system which will
tie into Norment's new Enterprise Resource Program.
(Logo) AIRTEQ SYSTEMS
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Norment, in conjunction with Airteq, pioneered the development and
marketing of pneumatic detention locks and sliding door devices. Norment
recognized much earlier than the rest of the detention hardware industry
that pneumatics would result in simpler, quieter, and less expensive
installations for their customers, and that the technology would require
less maintenance. Airteq Systems was eventually acquired by Norment
because they had developed a superior product line. Airteq production is
supplemented by manufacturing capacity at Norshield. Norment and Airteq
expended tremendous effort in influencing the corrections industry to
embrace pneumatics, to the point where they currently account for more
than 40% of new installations on major projects, a penetration rate which
is still growing. While mechanical and electromechanical competitors
eventually introduced similar products, Airteq remains the market leader
in design and technology in pneumatics. Airteq continues to build its
distribution and make inroads against two larger and deeply entrenched
competitors. The addition of a newly designed electromechanical sliding
device gives Airteq a much stronger entry in the balance of the prison
marketplace. The new slider is smaller, simpler and less expensive to
make than competing products.
(Logo) SYSCO SECURITY SYSTEMS
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When CompuDyne acquired Shorrock Electronic Systems from its English
parent, BET/Rentokil, in 1996, we also acquired exclusive rights to sell
many of Shorrock's security products in North America. Most
significantly, this included the ADACS security management system which
is an extremely powerful product which accomplishes total integration of
security management functions including alarms, access control, CCTV,
video badging, lighting, evacuation, perimeter, fire, building management
and others. After starting from scratch with no distribution, in 1998
SYSCO finally began achieving market success with several Air Force Base
contracts and discussions with multi-location commercial customers. Our
proprietary SecurLan product, which brings together several component
products in a unique manner to protect Local Area Networks ("LANs"), has
met with particularly strong reception. These sales often bring
installation revenues along with the product revenues.
Since the Shorrock acquisition, SYSCO has been continually adding to its
product offerings. In 1998 an exclusive North American arrangement was
signed with SYSCO in the United Kingdom and Germany giving SYSCO
state-of-the-art perimeter detection products. Several other product
distribution agreements are in advanced stages of negotiation. We have
found that in certain segments of the market, especially in the
commercial and perimeter sectors, European technology is more advanced
than that in the U.S., and the European manufacturers are anxious to
achieve distribution in the much larger U.S. market. SYSCO also continues
to look for opportunities to acquire security product companies outright.
The Resources.
Diverse Services...
EUROPE
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Europe remains SYSCO's principle source of security products for U.S.
distribution, and we are represented there by a senior manager with many
years of experience in the security industry. We also plan to establish a
physical presence in Europe in anticipation of growing requirements for
prison cells as a result of an alarming increase in crime rates. We have
registered several Norment trade names in Europe in anticipation of
building or acquiring a security systems integration business there.
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"The population of Europe is significantly larger than that of the U.S.
Portions of Europe are currently experiencing the sort of sharply
increasing crime rates that were halted and reversed in the U.S. with
harsher penalties and stricter sentencing requirements.
With Norment's worldwide reputation, CompuDyne plans to fully participate
in expected increased judicial security requirements in Europe."
- ------------------------------- Martin A. Roenigk, Chairman & CEO
(Logo) DATA CONTROL SYSTEMS
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Data Control Systems, a manufacturer of telemetry and telecommunications
equipment for the aerospace, military and satellite communications
markets, had a successful, stabilizing year of growth and improved
profitability in 1998. Revenues increased 10.3% while operating earnings,
at a respectable 8.9% of sales, increased far more sharply. An important
factor in DCS's improving profitability was the integration of its
engineering and manufacturing operations with those of Quanta Systems.
DCS's engineering staff, working in Quanta System's new R&D lab,
developed and delivered three new, state-of-the-art communications
products: 1) A configurable communications modem (the 2200) for use with
geostationary satellites; 2) a high data-rate modem (the 2250E) for
demodulating signals at very high speeds from Low Earth Orbiting (LEO)
satellites (currently being launched by NASA and other international
space agencies); and 3) a highly complex signal analysis modem (the
7500E) used for a wide variety of worldwide signal intelligence
operations.
(Logo) MICROASSEMBLY SYSTEMS
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MicroAssembly Systems, acquired in 1995 by CompuDyne, provided the base
of stability and capital that permitted CompuDyne to go on to acquire
Shorrock Electronic Systems and Norment. MicroAssembly's proprietary
Stick-Screw system remains the fastest and least expensive means of
automating small screw insertion in many assembly operations. These
advantages are exemplified by a "household name" advanced electronics
company which, in one short year, has become MicroAssembly's largest
customer - highlighting the potential for the system. While the company
met with good success under CompuDyne ownership, it is clear that to
realize its tremendous potential, it requires broader distribution and
support from a parent in an allied field. Thus the decision was made to
sell MicroAssembly in response to an inquiry by a particularly
appropriate purchaser.
The Reputation.
Diverse Services...
(Logo) Quanta Systems
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Quanta Systems, founded in 1950, has a long and proud history of
providing products and services to the Government's intelligence
community. Foremost, Quanta designs and installs comprehensive physical
security systems for use in classified facilities throughout the world.
Quanta also provides electronic black box manufacturing, tactical systems
integrations, and design and production of proprietary communications
products (through its Data Control Systems division, discussed on page
11).
In 1998 Quanta's revenues increased 3.4%; however, operating profits
declined due to increased corporate allocations. In a difficult defense
contracting environment, Quanta has invested in and achieved enhanced
efficiencies in its corporate infrastructure. These efficiencies were a
result of: 1) a new, flatter organizational structure; 2) the
implementation of a new Deltec management information system (which also
effectively addressed year 2000 issues); and 3) the full integration of
Data Control Systems and Quanta's engineering and manufacturing
operations. The benefits of these infrastructure improvements will
continue to enhance margins in coming years. Reserves were also
strengthened in 1998.
Quanta's most significant contract awards in 1998 were two omnibus
technical services contracts from the Space and Naval Warfare Systems
Command (SPAWAR ). Each contract has a one-year term contract with four
additional option years; one has an annual ceiling value of $5 million,
while the other has an annual ceiling value of $3 million. Under these
contracts, Quanta helped a variety of the Navy's Southern California
commands consolidate their physical security monitoring requirements into
a centralized monitoring location. The outstanding success of this
physical security regionalization achievement is currently unfolding
promising opportunities for additional regionalization projects in other
parts of the world. The SPAWAR contracts are essentially follow-ons to
worldwide physical security support efforts, for which SPAWAR has relied
on Quanta for the past 18 years. These contracts continue to provide an
established customer network and revenue base from which to further
penetrate the Federal Government's physical security marketplace.
In other areas of significant note for 1998, Quanta received a favorable
settlement to its claim against the Fort Bragg contract, established a
new Research and Development laboratory, and broadened its network of
sales representatives.
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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. 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 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.
/s/Deloitte & Touche LLP
Washington, D.C.
March 11, 1999
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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 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 Accumu- Treas-
(In Thousands) Preferred Common Other From lated ury
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 Decem-
ber 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 Decem-
ber 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 Decem-
ber 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 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 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>
4. 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 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: ------ ------ ------
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's money purchase pension plan covers 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, 1998, 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 $ 314 $ 353
Return on assets 14 13
Contributions By CompuDyne 92 25
Benefits paid (91) (77)
-------- --------
Ending balance $ 329 $ 314
======== ========
Funded Status of Plan $ 479 $ 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 $ 79 $ - $ - $ 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
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.
- ------------------------------------------------------------------------
(Inside Back Cover)
Corporate Profile
- -----------------
CompuDyne Corporation, listed Over-the-Counter under the symbol "CDCY",
is composed of seven businesses. Norment Security Group is the market
leader in designing, installing and maintaining detention hardware and
security systems for Jails, Prisons, Courthouses, and large commercial
customers under the Norment and Trentech brands and incorporates the
regional offices of the former Quanta SecurSystems; Norshield Security
Products manufactures bullet, blast and attack resistant windows and
doors for worldwide security applications; Quanta Systems provides
sophisticated engineering and security related services worldwide,
primarily to branches of the U.S. Government, generally of a classified
nature; Airteq manufactures locks and locking devices for the
correctional market; Data Control Systems manufactures advanced telemetry
and telecommunications products for military, aeronautic and satellite
applications; SYSCO Security Systems sells advanced physical security
products sourced primarily from Europe; MicroAssembly Systems
manufactures proprietary automated fastening systems.
- -------------------------------------------------------------------------
Officers
- --------
Martin A. Roenigk Chief Executive Officer & President
Philip M. Blackmon Executive Vice President
William C. Rock Chief Financial Officer & Secretary
- -------------------------------------------------------------------------
Directors
- ---------
Martin A. Roenigk Chairman CompuDyne Corporation
Philip M. Blackmon Executive Vice President CompuDyne Corporation
David W. Clark, Jr. Managing Directors Pryor & Clark Company
Miles P. Jennings, Jr. Vice President-Investments Advest, Inc.
Alan Markowitz Private Investor
Millard H. Pryor, Jr. Managing Director Pryor & Clark Company
- -------------------------------------------------------------------------
Shareholders may request a free copy of the Company's detailed annual
report filed with the Securities and Exchange Commission on Form 10-K by
writing to:
William C. Rock, Secretary
CompuDyne Corporation
7249 National Drive
Hanover, Maryland 21076
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, acquisitions, 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 and services, general economic conditions, competitive
products and services, and product and technology development. There can
be no assurance that such objectives will be achieved.
Corporate Directory
- -------------------
Corporate Headquarters
CompuDyne Corporation
7249 National Drive
Hanover, MD 21076
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Bank
LaSalle National Bank
135 South LaSalle Street
Chicago, IL 60603
General Counsel
Tyler Cooper & Alcorn
CityPlace-35th Floor
185 Asylum Street
Hartford, CT 06103
Auditor
Deloitte & Touche LLP
8201 Greensboro Drive
McLean, VA 22102
- ------------------------------------------------------------------------
(On the back cover)
Corporate Headquarters
7249 National Drive
Hanover, MD 21076
410-712-0275 phone
410-712-0677 fax
Norment Security Group
322 Mobile Highway
Montgomery, AL 36108
334-281-8440 phone
334-288-5485 fax
Norment Regional Offices
(formerly Quanta SecurSystems)
7249 National Drive
Hanover, MD 21076
410-712-0275 phone
410-712-0677 fax
Norshield Security Products
3224 Mobile Highway
Montgomery, AL 36108
334-281-8440 phone
334-288-5485 fax
Quanta Systems
213 Perry Parkway
Gaithersburg, MD 20877
301-509-3300 phone
301-590-3325 fax
Airteq Systems
6285 S.W. Lakeview Blvd.
Lake Oswego, OR 97035
503-639-3007 phone
503-620-2469 fax
SYSCO Security Systems
7255 Standard Drive
Hanover, MD 21076
410-712-0333 phone
410-712-6045 fax
Data Control Systems
213 Perry Parkway
Gaithersburg, MD 20877
301-590-3300 phone
301-590-3343 fax
MicroAssembly Systems
120 Union Street
Willimantic, CT 06226
860-456-0200 phone
860-456-1187 fax
(Logo) CompuDyne Corporation
Corporate Headquarters - 7249 National Drive - Hanover, MD 21076
410-712-0275 phone - 410-712-0677 fax - http//www.compudyne.com
- -------------------------------------------------------------------------
APPENDIX
On the inside front cover of the printed version, six bar graphs appear
reflecting operating results for 1998, 1997 and 1996 respectively as
follows (in $000's, except for per share amounts): Revenues (31,916;
20,016; 22,143); Net Income (847; 696; 331); Net Income Per Diluted Share
(0.20; 0.16; 0.08); Order Backlog (80,057; 20,504; 5,650); Shareholder
Equity (5,888; 2,162; 1,776); Return on Equity (32.5%; 34.8%; 18.6%).
A photo of protesters attacking the U.S. Embassy in Macedonia is provided
on page 1 of the printed version.
A photo of a touch screen control panel and an electronics security
installation is shown on page 2 of the printed version.
A photo of the globe, the U.S. map, and a stock exchange type ticker
board is shown on page 3 of the printed version.
A photo of two prisons, in Red Onion Mountain, VA and in Malmesbury,
South Africa is shown on page 4 of the printed version.
A photo of a prison security control center and Norment s demonstration
room in Montgomery, AL is shown on page 5 of the printed version.
A photo of a security control panel installation and a sliding locking
device is shown on page 6 of the printed version. Also on page 6 of the
printed version are two bar charts showing 1998, 1997 and 1996
respectively, for: Norment Security Group Revenue in millions (61,698;
61,810; 42,049); Quanta SecurSystems Revenues in millions for Maintenance
(1,993; 1,948; 1,014), Projects (8,637; 4,269; 2,515), and Total (10,560;
6,217; 3,529).
A photo of a globe, two prisons, a prison control center, a bullet
riddled glass pane, and Norment s demonstration center in Montgomery, AL
is shown on page 7 of the printed version.
A photo of the exterior of the U.S. Embassy in Russia and of a bullet
riddled pane of glass appears on page 8 of the printed version, along
with a bar chart showing Norshield Security Products Revenues for 1998,
1997 and 1996 respectively in millions (61,697; 61,810; 42,049).
A photo of some Airteq locks and a representation of the operator
intontrol system appear on page 9 of the printed version along with a bar
graph of the Airteq Systems Revenues for 1998, 1997 and 1996 respectively
in millions (3,573; 4,525; 3,474).
A photo of the globe and a U.S. Embassy and a dynamite bomb and a prison
interior appear on page 10 of the printed version.
A photo of a satellite and of seven stick-screws appears on page 11 of
the printed version along with a bar graph of Data Control Systems
Revenues for 1998, 1997 and 1996 respectively in millions (1,453; 1,317;
1,480).
A photo montage of various services performed by Quanta Systems appears
on page 12 of the printed version along with a bar chart of Quanta
Systems Corporation Revenues for 1998, 1997 and 1996 respectively in
millions (11,082; 10,713, 15,644).
