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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-4245
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CompuDyne Corporation
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(Exact name of registrant as specified in its charter)
Nevada 23-1408659
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
120 Union Street, Willimantic, Connecticut 06226
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (860)456-4187
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock $.75 par value Over-The-Counter
Securities registered pursuant to section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-
K. [ ].
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant was $2.5 million as of March 25, 1997 (based upon the
average of the bid and asked prices on the over-the-counter market for
CompuDyne common stock on March 25, 1997 which was $1.375 per share, as
quoted on the OTC Bulletin Board(see ITEM 5.).
As of March 25, 1997, a total of 2,847,416 shares of Common Stock, $.75
par value, were outstanding.
Documents incorporated by reference: Portions of the Proxy Statement
relating to the 1996 Annual Meeting of Shareholders are incorporated in
Part III.
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PART I
ITEM 1. BUSINESS
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Current Developments
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On July 11, 1996 CompuDyne Corporation ("CompuDyne" or "the Company")
acquired all of the stock of Shorrock Electronic Systems ("SES") from BET
Public Limited Company ("BET"). Prior to the acquisition, SES was
affiliated with Shorrock Integrated Systems, a large British based
supplier of physical security and surveillance equipment and installation
services owned by BET. SES had sales of approximately $4.9 million in
the fiscal year ended March 31, 1996, almost entirely related to the
sale, installation and maintenance of physical security systems for the
U.S. correctional facility market. Effective with the acquisition, SES's
name has been changed to Quanta SecurSystems, Inc.
The consideration paid for the stock of SES was approximately $613
thousand. The Company has accounted for the acquisition using the
purchase method of accounting.
CompuDyne also signed a long term exclusive distribution agreement
covering all of North America with Shorrock Integrated Systems. This
agreement gives CompuDyne exclusive access to a world-class group of
physical security and surveillance products, comprised of the ADACS
Security Management System, Microwave Fence, and T-Line fence security
system. This product line, which is continually updated and expanded by
Shorrock's research and development staff, should provide a significant
advantage to SecurSystems in marketing to correctional facilities and
other markets. CompuDyne plans to significantly expand the product
marketing effort.
In July 1996, before the acquisition of SES, the holders of CompuDyne's
$400 thousand Senior Convertible Notes (which includes the Chairman)
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 million to the company's equity, reduced interest charges, and
provided the cash required to make the acquisition and provided working
capital for SES operation.
Description of Business
- -----------------------
COMPUDYNE, a Nevada corporation, incorporated in Pennsylvania on December
8, 1952, changed its state of incorporation to Nevada on May 8, 1996.
CompuDyne operates in four business segments through its three wholly
owned subsidiaries Quanta Systems Corporation, ( Quanta Systems ), Quanta
SecurSystems Inc., ( SecurSystems ) and MicroAssembly Systems, Inc.,
( MicroAssembly ).
QUANTA SYSTEMS is an engineering services firm providing turn-key design,
fabrication, installation, training, maintenance, documentation, and
systems integration services to government and industry. Quanta Systems
also provides original equipment manufacturing and worldwide quick
reaction capability to respond to the urgent, emergent and unique
requirements of customers' with critical missions. Quanta Systems is
currently providing these services to the Naval In-Service Engineering
Center (NISE East), the Naval Facilities Engineering Services Center, the
National Security Agency (NSA), the Federal Bureau of Investigation
(FBI), the Naval Criminal Investigative Services, the Space and Naval
Warfare Systems Command, the Aberdeen Proving Grounds, the Social
Security Administration, and the Montgomery County Government (Maryland).
Through these customers and through its continuing efforts to team with
other contractors in the pursuit of more comprehensive and complex
Government programs, Quanta Systems has significantly broadened its
customer and contract base.
DATA CONTROL SYSTEMS ("DCS"), a division of Quanta Systems, manufactures
telemetry, satellite command and control systems, radio frequency and
telecommunications products. These products and systems are used for data
acquisition, control, test programs and laboratory environments having a
variety of military, intelligence and commercial applications. In 1994
DCS began marketing its Automatic Power Controller which automatically
compensates for signal fade during periods of inclement weather for
satellite uplink stations using Ku band transmissions. Refinement of the
APC was completed in 1996 and marketing began in June. DCS has also
completed development of its QPSK model 7500 satellite test modem. As of
March, 1997 DCS has received orders and has shipped ten 7500s. Most of
the research and development spending in 1996 related to the 7500, which
is an extremely sophisticated satellite transmissions test modem. The
7500 incorporates advanced technology which is expected to result in
related product derivatives in the telecommunications and telemetry
market. The Company believes that the orders for the 7500 are primarily
for review and testing purposes. The market for the 7500 itself is mainly
with U.S. and foreign governments.
SecurSystems primarily focuses on the installation, maintenance and
system integration of highly technical security systems. Although the
majority of SecurSystems work is related to detention facilities,
SecurSystems has also performed work in areas such as colleges, court
houses and the transportation market. SecurSystems has offices
strategically located within the United States. The home office and the
office for the Northeast region is located in Hanover, Maryland. Other
offices are located in Riverside, California, Tucson, 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 $2.0 million in
annual recurring maintenance work within the United States and the
balance of the Company's revenue is made up of new installation and refit
work. SecurSystems customers include the Federal Bureau of Prisons, the
State of Arizona, Riverside County (California), Prince Georges County
(Maryland), Suffolk County (Massachusetts), Letterkenny Army Depot
(Maryland), Wake County (North Carolina) and North Carolina State
University.
MicroAssembly, located in Willimantic, Connecticut, is a manufacturer of
a proprietary automated process called the "Stick-Screw System". The
Stick-Screw System uses custom designed screws in a stick format for the
insertion of fasteners in electronic and other assembly environments. The
Stick-Screw System provides insertion of the fasteners at a faster speed
than can be accomplished by comparably priced competing systems or
processes. MicroAssembly operates out of owned facilities, utilizing
automatic screw machines to manufacture the Stick-Screws . MicroAssembly
also assembles the specially designed pneumatic drivers for inserting the
screws. MicroAssembly has recently developed drill press and drill stand
based models of the driver, one of which is electric and will permit
sales in "clean room" environments. MicroAssembly is in the process of
introducing an electric Stick Screwdriver which is expected to expand
its market significantly. Sales are primarily in the United States via a
network of independent sales representatives, with modest sales in Europe
and South America. In August 1996 MicroAssembly acquired the power
screwdriver product line from Blackstone Industries for $50,000. This is
a complementary line of automatic screwdrivers with vacuum pick-up.
CompuDyne acquired all of the capital stock of MicroAssembly on August
21, 1995.
See Note 15 "Industry Segment Information" to the Consolidated Financial
Statements of CompuDyne for more information about the results of
operations from the four industry segments.
General Information
- -------------------
The Company purchases most of the parts and raw materials used in its
products from various suppliers. The primary raw materials used in the
manufacturing of Quanta Systems and SecurSystems' products are
electronic components. MicroAssembly's products are purchased from
either distributors or manufacturers of metal products. While the bulk of
such raw material is purchased from relatively few sources of supply, the
Company believes that alternative sources are readily available.
There is no significant seasonality in CompuDyne's business.
The Company s backlog of orders as of December 31, 1996 was $5.7 million,
consisting of Quanta Systems backlog of $3.14 million, SecurSystems'
backlog of $1.74 million, DCS backlog of $344 thousand, and
MicroAssembly s backlog of $523 thousand. As of March 24, 1997 Quanta
Systems had booked an additional $2.6 million, SecurSystems had booked an
additional $1.2 million, and DCS had booked an additional $400 thousand.
It is expected that all orders included in the current backlog will be
filled by December 31, 1997. For the year ended December 31, 1996,
direct sales to the U.S. Federal Government amounted to $15.5 million or
70% of the Company's total net sales from continuing operations, compared
with $8.9 million and $9.0 million in fiscal years 1995 and 1994,
respectively, or 86% and 90% of the Company's total net sales from
continuing operations for the same years. No other single customer
accounted for greater than 10% of the Company's net sales.
A significant majority of Quanta Systems' Government related business is
with the United States Department of Defense. Within the Department of
Defense there are various agencies which are customers of the Company.
Whereas, two years ago, Quanta Systems had only one major multi-year
contract, at December 31, 1996, Quanta Systems had four major multi-year
contracts. These contracts, all with the Federal Government (and known
as NISE East, NSA, K3 and TETON) accounted for revenues of $13.3 million
in 1996. On March 31, 1992, Quanta Systems was awarded the NISE East
contract, a one-year contract with four one-year renewal options. NISE
East has provided a bridge contract to continue this effort for the
Government s fiscal year ending September, 1997 and intends to recompete
for a new contract beginning in fiscal year 1998. Quanta Systems is well
positioned for this recompetition. The Teton contract was awarded in
September, 1995 and is valued up to $9.4 million over five years. This
is a one-year contract with options to renew yearly for four years;
Quanta Systems is operating in the first renewal option year of the
contract. The NSA contract is a one-year contract with options to renew
yearly for four years; Quanta Systems is operating in the second renewal
option year of the contract and the contract is valued at $5.9 million.
The K3 contract is a one-year contract with options to renew yearly;
Quanta Systems is performing on the initial order of the base year. The
value of the order is $500 thousand. If renewals under these contracts
do not continue, or if terms and conditions under the contracts are
substantially modified Quanta Systems will be required to modify its
operations accordingly. Although most of Quanta Systems contracts are
subject to Government audit, management of the Company does not believe
such audits will result in any material adjustments to the financial
statements.
Most of the Federal Government contracts with the Company include a
termination for Convenience clause which allows the Federal Government to
unilaterally terminate a contract if it is considered to be in the best
interests of the Government to do so. If the Government were to
terminate a contract, the clause provisions allow the Company to submit a
Termination Settlement Proposal for recovery of costs; this proposal
would reflect all direct costs to the contract, all allowable indirect
costs and as applicable, other costs such as idle facility costs,
abnormal severance costs and unabsorbed indirect costs resulting from the
termination. Because of cost recovery from the aforementioned process,
the Company believes that the immediate financial impact of a termination
would be negligible. It would, however, mean that additional contracts
would need to be entered into to offset the longer term negative effects
of the termination on revenues and profits. The Company, trying to
mitigate the effects, has made considerable progress in diversifying its
contracts and customer base over the past two years.
The Company is subject to intense competition from numerous companies
which sell both on a national and regional level, as well as in
international markets. Many of these competitors are substantially larger
than the Company. Also, there have been significant international
political changes which could have a major impact on the market for
Quanta Systems's products. During the last several years dramatic changes
have taken place throughout the world which have had, and will continue
to have, an impact on future U.S. Defense spending. In addition, current
budget constraints have affected the overall U.S. economy which have
impacted Quanta Systems's operations. The Company has significant sales
to various organizations involved in the country's security and
intelligence efforts. The Company has intensified its efforts to market
to other agencies of the government to counteract the projected decline
in defense spending. The company believes that overall U.S. expenditures
for physical security installations will continue to out pace the general
economy.
The Company is currently undertaking research and development activities
to expand and improve its product lines. Research and development
expenditures were $234 thousand during the fiscal year ended December 31,
1996 compared with $359 thousand and $66 thousand during 1995 and 1994,
respectively. 1996 expenditures were made primarily by DCS to refine and
upgrade the operating capabilities of the APC, QPSK and bit synchronizer
product lines.
At December 31, 1996, the Company had 165 full-time employees. None of
the employees is subject to collective bargaining agreements.
Financial Information About Foreign and Domestic Operations
Export sales for the Company were $576 thousand, $125 thousand and $30
thousand, for the years ended December 31, 1996, 1995 and 1994,
respectively.
Cautionary Statement Regarding Forward-Looking Information
Any statements in this Annual Report that are not statements of
historical fact are forward-looking statements that are subject to a
number of important risks and uncertainties that could cause actual
results to differ materially. Specifically, any forward-looking
statements in this Annual Report related to the Company s objectives of
future growth, profitability and financial returns are subject to a
number of risks and uncertainties, including, but not limited to, risks
related to a growing market demand for the Company s existing and new
products, continued growth in sales and market share of the Company s
products, pricing, market acceptance of existing and new products,
general economic conditions, competitive products, and product and
technology development. There can be no assurance that such objectives
will be achieved. In addition, the Company s objectives of future
growth, profitability and financial returns are also subject to the
uncertainty of the continuation and renewal of the NISE East Contract and
the Teton Contract.
ITEM 2. PROPERTIES
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The following table sets forth the main facilities of the Company's
operations:
Approximate
Primary Owned or Square Feet
Location Purpose Leased (1) of Space
- --------- -------------- ---------- -----------
Corporate Office
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Willimantic, Connecticut Administrative Owned 2,900
Quanta Systems
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Gaithersburg, Maryland/Admin. Engineering Leased 14,690
Gaithersburg, Maryland Manufacturing Leased 8,000
Gaithersburg, Maryland Warehouse Leased 1,500
MicroAssembly
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Willimantic, Connecticut Manufacturing Owned 7,000
SecurSystems
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Hanover, Maryland Admin/Whse Leased 9,500
Garner, North Carolina Engineering Leased 8,000
Tucson, Arizona Engineering Leased 1,500
Riverside, California Engineering Leased 1,300
(1) See Note 11 to the Consolidated Financial Statements for additional
information relating to lease expense and commitments.
Quanta Systems leases three buildings in Gaithersburg, Maryland. One
building is used by the DCS products group which manufactures telemetry,
satellite and telecommunications equipment. The second building is used
by its services group, which provides engineering services and
administrative staff. Quanta Systems leases a third building in
Gaithersburg which it subleases to Orion Network Systems Corporation.
SecurSystems leases four buildings within the United States. The
Northeast region and Home office is located in Hanover, Maryland. This
location provides office space, engineering and storage space providing
service for the Northeastern United States as well as the administrative
functions of the Home office. The Southeast office is located in Garner,
North Carolina. This provides office space, engineering and storage
space to service the Southeastern United States. The Midwest office is
located in Tucson, Arizona. This location provides office space,
engineering and storage space to service the Midwestern and Western
United States. The California office is located in Riverside,
California. This office performs maintenance contracts and installation
work in Southern California and is under the direct control of the
Midwest regional office. The Company is currently looking at establishing
offices in other areas of the country in order to take advantage of
contract security maintenance work available in other areas of the United
States.
The Company leases only those properties necessary to conduct its
business and does not invest in real estate or interests in real estate
on a speculative basis. The Company believes its properties are suitable
and adequate for its current operations.
ITEM 3. LEGAL PROCEEDINGS
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The Company is party to certain legal actions and inquiries for
environmental and other matters resulting from the normal course of
business. Although the total amount of liability with respect to these
matters cannot be ascertained, management of the Company believes that
any resulting liability should not have a material effect on its
financial position or results of future operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR COMPUDYNE COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
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CompuDyne Common Stock is traded in the over-the-counter market, and in
January 1993 began being quoted on the OTC Bulletin Board, an inter-
dealer quotation medium maintained by the National Association of
Securities Dealers, Inc., under the symbol "CDCY". There were 1,971
common shareholders of record as of March 12, 1997.
The following table sets forth the high and low bids for CompuDyne Common
Stock from March 31, 1995 to December 31, 1996 on the over-the-counter
market, as quoted on the OTC Bulletin Board. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not necessarily reflect actual transactions.
Quarter Ended High Low
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March 31, 1996 $ 1 3/8 $ 1 1/4
June 30, 1996 1 3/8 7/8
September 30, 1996 1 1/4 1 1/4
December 31, 1996 1 1/4 3/4
Quarter Ended High Low
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March 31, 1995 $ 1 3/8 $ 1 1/4
June 30, 1995 2 1/4 1 1/2
September 30, 1995 2 1/4 1 1/2
December 31, 1995 1 3/4 1
The Company has not paid any dividends on its Common Stock during the
past three fiscal years, and its Board of Directors has no intention of
declaring a dividend in the foreseeable future.
Recent Sales of Unregistered Securities
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None
ITEM 6. SELECTED FINANCIAL DATA
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The following is a consolidated summary of operations of CompuDyne and
its subsidiaries for the years ended December 31, 1996, 1995, 1994, 1993
and 1992. The information in the table below is based upon the audited
consolidated financial statements of CompuDyne and its subsidiaries for
the years indicated appearing elsewhere in this annual report and in
prior annual reports on Form 10-K filed by the Company with the SEC, and
should be read in conjunction therewith and the notes thereto.
(In thousands except per share data):
For the years ended December 31,
1996 1995 1994 1993 1992
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Net sales $ 22,142 $ 10,308 $ 9,699 $ 9,571 $ 9,330
====== ======= ====== ====== ======
Gross margin $ 2,803 $ 1,516 $ 1,586 $ 1,884 $ 1,746
====== ======= ====== ====== ======
Interest expense, net of
interest income $ 39 $ 22 $ (7) $ 111 $ 112
====== ======= ====== ====== ======
Income (loss) from
continuing operations
before extraordinary
items $ 391 $ (210) $ 2,065 $ 253 $ 122
Loss from discontinued
operations (60) (453) (860) (211) -
Extraordinary items
(Note a) - - 523 161 79
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Net income (loss) $ 331 $ (663) $ 1,728 $ 203 $ 201
====== ======= ====== ====== ======
Total shareholders equity
/(deficit) $ 1,776 $ 421 $ - $(1,736) $(1,939)
====== ======= ====== ====== ======
Average common shares
and equivalents out-
standing assuming full
dilution 3,771 1,657 1,748 1,686 1,353
====== ======= ====== ====== ======
Income (loss) per common share
assuming full dilution (Note b):
Continuing operations
before extraordinary
items $ .11 $ (.13) $ 1.18 $ .15 $ .09
Discontinued operations (.02) (.27) (.49) (.13) -
Extraordinary items - - .30 .10 .06
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Net income (loss) $ .09 $ (.40) $ .99 $ .12 $ .15
======= ====== ====== ====== ======
Dividends on preferred
stocks $ - $ - $ - $ - $ -
======= ====== ====== ====== ======
Total assets $ 7,575 $ 3,947 $ 2,114 $ 1,993 $ 2,652
======= ====== ====== ====== ======
Long-term debt, net $ 50 $ 470 $ - $ 1,050 $ 1,201
======= ====== ====== ====== ======
Notes:
(a) The extraordinary items are utilization of net operating loss
carryforwards in 1992, a rent settlement in 1993 and debt forgiveness in
1994.
(b) For the year ended December 31, 1995, the conversions of Common Stock
equivalents into common shares would result in an increased net (loss)
per share amounts which are anti-dilutive and are therefore not included
as common equivalent shares. Income per common share was determined by
dividing net income (loss), after deduction of dividend requirements on
the CompuDyne Convertible Preference Stock, ( Preferred Stock ), which
was issued in August 1995, by the weighted average number shares of
Common Stock. Accordingly, net income is not reduced for the related
preferred dividend requirement. In November 1992, the Preferred Stock was
converted into Common Stock. There was no dividend requirement on the
preferred stock for 1996 or 1995 due to the effect of purchase accounting
on MicroAssembly's results.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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Financial Condition
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During 1996, CompuDyne's net worth increased by $1.4 million to $1.8
million at December 31, 1996. Debt outstanding was $232 thousand at
December 31, 1996 compared to $749 thousand at December 31, 1995.
Working capital was $1.8 million at December 31, 1996 compared to $705
thousand at December 31, 1995.
During 1996 CompuDyne had net income of $331 thousand. This was realized
even though the Company recognized a loss of approximately $550 thousand
on the fixed-price Ft. Bragg contract at Quanta Systems; a claim is being
processed to recover a substantial position of the loss.
CompuDyne has recently reached an agreement with the Defense Contract
Audit Agency ("DCAA") on incurred cost audit results for fiscal years
1988 through 1994. Quanta Systems will be able to close-out completed
contracts for those years based on audited costs and indirect rates. The
outcome of the audits was fair and is not expected to have a material
impact on earnings.
Results of Operations - 1996 compared with 1995
- -----------------------------------------------
The 1996 income from continuing operations before extraordinary items of
$391 thousand compares with a loss in 1995 of $210 thousand. The
increase in such income is attributable to the increased sales and
profitability of Quanta Systems and the purchase of SecurSystems.
SecurSystems contributed $192 thousand before taxes to profits since it
was purchased by CompuDyne in July 1996. Although a loss of $550
thousand was recorded on a Ft. Bragg fixed-price contract at Quanta
Systems in 1996, increased sales of $7.4 million at Quanta Systems (from
$9.7 million to $17.1 million) combined with an expense-reducing
corporate reorganization resulted in an increase in profits at Quanta
Systems of $416 thousand compared with 1995. Contributing to the
improved performance at Quanta Systems was an increase in sales and
elimination of losses at its DCS division.
CompuDyne's net sales, which increased significantly from $10.3 million
in 1995 to $22.1 million in 1996, a $114% increase, were comprised of
services revenue, telemetry and data acquisition product sales at Quanta
Systems, Stick-Screw products at MicroAssembly, and services revenue at
newly acquired SecurSystems. Quanta Systems's services revenue in 1996
was $15.6 million, $6.8 million more than 1995. This increase in
services revenue was attributable to increases in task spending on
Government contracts, particularly on materials intensive facilities
improvement tasks at naval facilities. Quanta Systems services revenue
represented 70% of 1996 total CompuDyne revenues compared to 86% of 1995
revenues. MicroAssembly's product sales increased from $567 thousand in
1995 to $1.5 million in 1996, an increase of 164%, but not totally
comparable since 1995 data for MicroAssembly reflected results only from
August 21 (acquisition date) through December, 1995. SecurSystems
contributed sales of $3.5 million for the six-month period following its
acquisition in July, 1996.
Quanta Systems's product sales at it's DCS division increased from $863
thousand in 1995 to $1.5 million in 1996, an increase of 74%. The
improvement in sales is primarily attributable to increased deliveries of
the new QPSK Model 7500 high-speed satellite test modem and of the APC-
2000 automatic power controller.
Net sales for MicroAssembly for 1995 reflected data from the acquisition
date of August 21, 1995 through December, 1995. Annualizing the 1995
sales shows that sales for MicroAssembly remained at about the same level
in 1996.
Gross margins increased $1.3 million from $1.5 million, 15% of sales in
1995, to $2.8 million, 13% of sales in 1996. The gross margin at Quanta
Systems increased $474 thousand to $1.9 million, with the gross margin
rate decreasing from 15% of sales to 11% of sales. The increase in
amounts is attributable to the significant increase in overall sales and
the decline in rate was due to the fact that most of the sales increase
was in lower-margin material and subcontract Government task orders.
Even though the increased sales showed a lower margin rate, the increased
base was important in absorbing indirect costs, thus affording higher
profitability on some fixed-rate contracts. DCS margins increased by
$193 thousand from $269 thousand in 1995 to $462 thousand in 1996; the
increase in gross margin can be attributable entirely to the $617
thousand increase in sales since the gross margin rate remained stable at
31%. MicroAssembly's gross margin increased by $133 thousand to $210
thousand, most of which is attributable to the increased sales (1995 was
only for 4 1/3 months) but some of which is attributable to an increased
rate from 13.7% to 14.1%. SecurSystems contributed $677 thousand in
gross margin and is incremental since it was the first year of inclusion
in CompuDyne's financial statements.
Total 1996 selling and general and administrative expenses increased $889
thousand from 1995 levels, $423 thousand of which is attributable to the
incremental increase caused by the acquisition of SecurSystems. A full
year's operating results for MicroAssembly resulted in an increase of $86
thousand in selling and general and administrative expenses. Corporate
expenses increased $61 thousand, with the remainder attributable to
increased general and administrative expenses at Quanta Systems. The
increase at Quanta Systems is primarily attributable to costs associated
with the default of a lease agreement between Quanta Systems and an
insolvent tenant. Idle facility costs include rent payments ($43
thousand), build-out costs for a new tenant ($42 thousand). and real
estate agent commissions of $22 thousand. Other expenses were additional
personnel costs caused by the significant increase in sales volume and
increased repair and renovation costs for other Quanta Systems
facilities.
Research and development activities, which are related only to Quanta
Systems' DCS product division, decreased by $125 thousand from the 1995
level of $359 thousand to $234 thousand in 1996. The 1995 expenses were
devoted primarily to the development of DCS' QPSK model 7500 and APC-
2000. Those activities continued into 1996, but at a reduced level aimed
at refining and upgrading the operating capabilities of the QPSK,APC and
the bit synchronizer product lines.
Total interest expense for 1996 was $55 thousand compared with $31
thousand for 1995. The increase was due to the expanded use of credit to
provide working capital.
Loss from discontinued operations in 1996 was $60 thousand compared with
1995's los of $453 thousand. the loss for 1996 reflects settlements of
Suntec-incurred, Quanta Systems-liable obligations and reserves for
potential future Suntec-related obligations.
Results of Operations - 1995 compared with 1994
- -----------------------------------------------
The loss from continuing operations of $210 thousand in 1995 compares
with income from continuing operations before extraordinary items of
$2.07 million in 1994. The decrease in income from continuing operations
of $2.28 million was primarily due to the receipt in 1994 of net
insurance proceeds of $1.389 million from the death of Frank Kelley after
payment of deferred compensation payments to nine former executives of
the Company, the non-recurring effect of accrual reversals of $263
thousand in 1994, a comparatively higher loss at DCS of $434 thousand in
1995 due to $359 thousand of research and development costs, a loss at
MicroAssembly in 1995 of $34 thousand due to $91 thousand of purchase
accounting adjustment changes and lower profits in 1995 at Quanta Systems
by $216 thousand offset by lower corporate costs.
CompuDyne's net sales, which increased from $9.7 million in 1994 to $10.3
million in 1995, a 6% increase, were comprised of service revenue,
telemetry and data acquisition product sales at Quanta Systems and Stick-
Screw products at MicroAssembly. Quanta Systems's service revenue in 1995
was $8.9 million, $100 thousand more than 1994. The increase in service
revenue was attributable to increases in task spending on government
contracts. Service revenue represented 86% of 1995 revenues compared to
90% of 1994 revenues.
Quanta Systems's product sales at its DCS division of $863 thousand was
$144 thousand lower than 1994 as a result of a delay in delivering its
new QPSK high-speed satellite test modem and APC. The Company has
received several orders for its new QPSK but experienced development
delays for this highly sophisticated instrument resulting in increased
research and development spending and delivery delays. DCS finished the
year with a backlog of $986 thousand.
MicroAssembly's results were only for the period of August 21 (date of
acquisition) to December 1995. Earnings were decreased by $91 thousand
of purchase accounting effects. During the five month period
MicroAssembly had sales of $567 thousand.
Gross margins decreased $70 thousand from $1.6 million, 16% of sales, in
1994 to $1.5 million, 15% of sales, in 1995. The gross margin at Quanta
Systems decreased $193 thousand from 16% of sales to 13% of sales. The
decline at Quanta Systems was due to increased material content in
service contracts and start-up costs for several new contracts. DCS
margins increased by $45 thousand from 22% of sales to 31% of sales,
however the margin was offset by lower volume and a larger allocation to
research and development costs. MicroAssembly's gross margin was $78
thousand and incremental since it was the first year of inclusion in
CompuDyne's financial statements.
Total 1995 selling, general and administrative expenses increased $119
thousand from 1994 levels. The Company increased its expenses as a result
of the operations of MicroAssembly by $123 thousand which was offset by
lower expenses at Quanta Systems, DCS and Corporate of $21 thousand.
Corporate expenses have been reduced at an annual rate of $125 thousand
since August.
The Company undertook intensified research and development activities to
complete the development of the QPSK. Research and development
expenditures were $359 thousand during the fiscal year ended December 31,
1995 compared with $66 thousand in 1994.
Total interest expense for 1995 was $31 thousand compared with $21
thousand for 1994. The increase was due to the expanded use of credit
during the year and the new $400 thousand notes related to the
MicroAssembly transaction in August, 1995.
On August 21, 1995, Quanta Systems transferred all of the assets and
liabilities of Quanta Systems s Suntec division to Suntec Service
Corporation, (Suntec ), a newly formed corporation, in return for all of
Suntec s issued and outstanding Common Stock and Suntec s agreement to
pay to Quanta Systems a royalty of 2% of Suntec s net sales and other
revenues for thirty (30) years from the date of the closing. Quanta
Systems then sold all of Suntec s Common Stock to Norman Silberdick, who
resigned on that date as CompuDyne s Chairman, President, CEO and
Director. Interest income for 1995 was $9 thousand compared with $28
thousand for 1994. The decline in interest income was due to lower cash
balances as a result of funding the losses at Suntec during the period
that the division was part of Quanta Systems.
Other income decreased $1.848 million from $1.662 million in 1994 to
expense of $186 thousand in 1995. In 1994, the Company benefitted from
the Kelley life insurance proceeds in the amount of $1.389 million after
paying deferred compensation payments to former executives of the
Company. The Company also reduced certain accruals totaling $115
thousand and reversed its workmen's compensation accrual after receiving
a final refund from the insurance carrier of $148 thousand in 1994.
In 1994 CompuDyne had extraordinary income of $523 thousand resulting
from debt forgiveness from Clipper of $413 thousand and from deferred
compensation beneficiaries of $110 thousand.Loss from discontinued
operations in 1995 was $453 thousand including disposal reserves,
compared with 1994's loss of $860 thousand. The loss from discontinued
operations reflects the sale of the Suntec division in August 1995.
Liquidity
- ---------
The Company's principle source of cash is from operating activities and
bank borrowings. The Company's primary requirement for working capital
is to carry billed and unbilled receivables, the majority of which are
due under prime contracts with the United States Government, or
subcontracts thereunder.
On November 18, 1994, CompuDyne obtained a $350 thousand secured working
capital line of credit agreement with the Asian American Bank and Trust
Company of Boston, Massachusetts. The credit agreement requires the
Company to maintain a working capital ratio of 1.1 to 1, with which the
Company was in compliance. In July 1995 the line was increased to $500
thousand and the advance rate increased from 50% of eligible accounts
receivable to 75% of eligible accounts receivable. In January 1996, the
interest rate on the loan was reduced to 2% above prime. In February
1996, the line was increased to $750 thousand. In December 1996 the line
was increased to $850 thousand. At December 31, 1996 the Company had
outstanding borrowings of $162 thousand. The current line is due to
expire on July 1, 1997.
MicroAssembly has an unsecured line of credit with Fleet Bank for $100
thousand. The line of credit is guaranteed by Mr. Roenigk. The rate is
prime plus 1.5% and as of December 31, 1996 $41,400 was borrowed on the
line, with the provision having been used to acquire the power
screwdriver line from Blackstone Industries.
MicroAssembly has a subordinated unsecured serial term loan of $100
thousand that was made by Mr. Markowitz to MicroAssembly. The loan is at
prime plus 1.5% and requires quarterly payments of $5 thousand beginning
in December 1995 and ending in 2001.
Net cash flows provided by operations increased by $890 thousand from a
negative $797 thousand in 1995 to a positive $93 thousand in 1996. The
increase of $601 thousand in net income from continuing operations,
adjusted by the increase of $27 thousand in non-cash depreciation and
amortization expenses and the reduction in providing for the losses from
discontinued operations of $264 thousand were the primary reasons for
this significant increase. The changes in accounts receivable, accounts
payable and accrued liabilities were primarily caused by the timing of
the invoice cycles of Quanta System's major material purchases for the
Government.
When MicroAssembly was acquired in August, 1995, $400 thousand in cash
was received for convertible long-term notes issued to the sellers, the
Company's chairman, Martin Roenigk and Alan Markowitz. In July, 1996 the
notes were converted to Common Stock and $600 thousand was received from
the same persons in exchange for 600,000 shares of compuDyne Common
Stock. Net cash of $566 thousand was used to purchase SES, now
SecurSystems.
The net decrease in cash flows of $176 thousand in 1995 is about the same
as the net decrease of $168 thousand in 1994. Positive cash flows in
1995 were primarily provided by the bank credit line of $259 thousand and
a convertible note of $400 thousand; $797 thousand was used for
operations to cover the loss from continuing operations of $210 thousand,
an increase in inventory of $138 thousand, a reduction in accrued
expenses of $131 thousand and the net usage for the discounted operations
of $321 thousand.
Capital Resources
- -----------------
There were capital expenditures of $33 thousand in 1996 compared with $78
thousand in 1995. The Company does not expect to incur more than $250
thousand of capital expenditures in 1997, which represents a normal level
of expenditures to maintain its technology and manufacturing base.
Recently Issued Accounting Standards
- ------------------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." The new standard defines a fair value method
of accounting for stock-based employee compensation plans. Under this
method, compensation cost is measured based on the fair value of the
stock award when granted and is recognized as an expense over the service
period, which is usually the vesting period.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net
income and earnings per share as if the company had applied the new
method of accounting. The Company has disclosed the pro forma impact
that the adoption of this standard has on net income and earnings/(loss)
per share for fiscal years 1995 and 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
See Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
None.
PART III
Information required by Items 10, 11, 12 and 13 about CompuDyne is
incorporated herein by reference from the definitive proxy statement of
CompuDyne to be filed with the SEC within 120 days following the end of
its fiscal year ended December 31, 1996, or April 30, 1997, relating to
its 1997 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS
AND REPORTS ON FORM 8-K
- ---------------------------------------
(a) Financial Statements
The financial statements listed in the accompanying index to financial
statements are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
None
(c) Exhibits
The Exhibits listed on the index below are filed as a part of this
Annual Report.
- ------------------------------------------------------------------------
COMPUDYNE CORPORATION
INDEX TO EXHIBITS
(Item 14(c))
3(A) Articles of Incorporation of CompuDyne Corporation filed with the
Secretary of State of the State of Nevada on May 8, 1996 herein
incorporated by reference to Registrant's Proxy Statement dated May 15,
1996 for its 1996 Annual Meeting of Shareholders.
3(B) Agreement and Plan of Merger dated May 8, 1996 is filed herewith.
3(C). By-Laws, as amended through January 28, 1997 and as presently in
effect, is filed herewith.
10 (A). 1986 Stock Incentive Compensation Plan incorporated herein by
reference to Registrant's Proxy Statement dated January 24, 1986 for its
1986 Annual Meeting of Shareholders.
10 (B). Amendment to Loan and Security Agreement dated March 10, 1993
between Clipper and Quanta Systems incorporated herein by reference to
Exhibit (K) to Registrants's Form 10-K filed for the fiscal year December
31, 1992.
10 (C). Voluntary Petition in Bankruptcy dated December 31, 1991 filed
by CompuDyne Inc., in the Hartford District of Connecticut, incorporated
by reference to Exhibit (I) to Registrant's Form-8-K filed January 14,
1992.
10 (D) Credit Agreement dated November 18, 1994 between Asian American
Bank and Trust and CompuDyne and Quanta Systems is filed herewith.
10 (E) Form of Management Stock Purchase Agreement dated August 1, 1993
between CompuDyne Corporation and each of Messrs. Silberdick, Dominic,
Blackmon, Manz and Mrs. Burns is incorporated by reference as Exhibit
10.1 of Registrant's Form 10-Q filed September 30, 1993.
10 (F) CompuDyne Corporation Certificate of Designations of the
Convertible Preference Stock, Series D is incorporated herein by
reference to Exhibit (4.1) to Registrant's Form 8-K filed September 5,
1995.
10 (G) CompuDyne Corporation Senior Convertible Promissory Notes is
incorporated by reference to Exhibit (4.2) to Registrant's Form 8-K filed
September 5, 1995.
10 (H) Stock Purchase Agreement dated August 21, 1995 between CompuDyne
Corporation, MicroAssembly Systems, Inc., Martin A. Roenigk and Alan
Markowitz is incorporated by reference to Exhibit (4.3) to Registrant's
Form 8-K filed September 5, 1995.
10(I) Asset Purchase and Sale Agreement dated as of August 21, 1995 by
and among Quanta Systems Corporation, Suntec Service Corporation and
Norman Silberdick is incorporated by reference to Exhibit (4.4) to
Registrant's Form 8-K filed September 5, 1995.
10 (J) Stock Option Agreement dated August 21, 1995 by and between
Martin A. Roenigk and CompuDyne Corporation is incorporated by reference
to Exhibit (4.5) to Registrant's Form 8-K filed September 5, 1995.
10(K) Stock Purchase Agreement dated July 11, 1996 between CompuDyne
Corporation and SES Corp. USA is incorporated by reference to Exhibit
(99.1) to Registrant's Form 8-K filed July 25, 1996.
10(L) Notice and Agreement of Conversion with respect to Senior
convertible Promissory Note by and between CompuDyne Corporation and
Martin A. Roenigk is incorporated by reference to Exhibit (99.2) to
Registrant's Form 8-K filed July 25, 1996.
10(M) Notice and Agreement of Conversion with respect to Senior
Convertible Promissory Note by and between CompuDyne Corporation and Alan
Markowitz is incorporated by reference to Exhibit (99.3) to Registrant's
Form 8-K filed July 25, 1996.
10(N) Stock Purchase Agreement dated July 11, 1996 by and among
CompuDyne Corporation, Martin Roenigk and Alan Markowitz is incorporated
by reference to Exhibit (99.4) to Registrant's Form 8-K filed July 25,
1996.
10(O) Stock Purchase Agreement dated July 11, 1996 between CompuDyne
Corporation and SES Corp. USA is incorporated by reference to Exhibit
(99.1) to Registrant's Form 8-K filed July 25, 1996.
10(P) Notice and Agreement of Conversion with respect to Senior
Convertible Promissory Note by and between CompuDyne Corporation and
Martin A. Roenigk is incorporated by reference to Exhibit (99.2) to
Registrant's Form 8-K filed July 25, 1996.
10(Q) Notice and Agreement of Conversion with respect to Senior
Convertible Promissory Note by and between CompuDyne Corporation and Alan
Markowitz is incorporated by reference to Exhibit (99.3) to Registrant's
Form 8-K filed July 25, 1996.
10(R) Stock Purchase Agreement dated of July 11, 1996 by and among
CompuDyne Corporation, Martin Roenigk and Alan Markowitz is incorporated
by reference to Exhibit (99.4) to Registrant's Form 8-K filed July 25,
1996.
11. Computation of Earnings per Common and Common Equivalent Share
(refer to Exhibit XI, Page 38).
21. Subsidiaries of the Registrant is filed herewith.
27.Financial Data Schedule
- ------------------------------------------------------------------------
COMPUDYNE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
(Item 14(a)(1))
Page(s)
-------
Independent Auditors' Report 17-18
Consolidated Balance Sheets at December 31, 1996
and 1995 19
Consolidated Statements of Operations for the
years ended December 31, 1996, 1995 and 1994 20
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 21
Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the years ended
December 31, 1996, 1995 and 1994 22
Notes to Consolidated Financial Statements 23-36
(Item 14(a)(2))
Financial Statement Schedule
Schedule II - Valuation and Qualifying
Accounts for the Years Ended December
31, 1996, 1995 and 1994 37
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of CompuDyne Corporation:
We have audited the accompanying consolidated balance sheet of CompuDyne
Corporation and subsidiaries as of December 31, 1996 and 1995 (as
restated), and the related consolidated statements of operations,
shareholders' equity, and cash flows for the years then ended. Our audit
also included the financial statement schedule listed in the accompanying
index at Item 14(a)(2). These financial statements and financial
statement schedule as of and for the years ended December 31, 1996 and
1995 are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. The consolidated
financial statements and schedule as of December 31, 1994 and for the
year then ended, before the adjustments described in Note 3 to the
consolidated financial statements, were audited by other auditors whose
report, dated March 25, 1995, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by the management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CompuDyne Corporation
and subsidiaries at December 31, 1996 and 1995 (as restated), and the
results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule as of and for the years
ended December 31, 1996 and 1995, when considered in relation to the
basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
We also audited the adjustments described in Note 3 that were applied to
restate the 1994 financial statements and schedule for the discontinued
operations. In our opinion, such adjustments are appropriate and have
been properly applied.
As discussed in Note 17 to the consolidated financial statements, the
1995 financial statements have been restated.
/s/Deloitte & Touche LLP
Washington D.C.
March 28, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board
of Directors of CompuDyne Corporation
We have audited the consolidated financial statements of CompuDyne
Corporation and Subsidiaries ("the Company") for the year ended December
31, 1994, prior to the restatement for the divestiture of the Suntec
division, as listed in Item 14(a) of this Form 10-K. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit 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 statement are
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 audit provideS a reasonable basis for
our opinion.
In our opinion, the financial statements referred to the above present
fairly, in all material respects, the consolidated results of operations
and cash flows of CompuDyne Corporation and Subsidiaries for the year
ended December 31, 1994, in conformity with generally accepted
accounting principles.
/s/COOPERS & LYBRAND L.L.P.
Washington, D.C.
March 29, 1995
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1996 1995
(Restated)
------ --------
(In Thousands)
Current Assets
Cash and cash equivalents $ 186 $ -
Accounts receivable 5,273 2,122
Inventories
Finished goods 93 144
Work in progress 778 473
Raw materials and supplies 471 405
------ ------
Total Inventories 1,342 1,022
------ ------
Prepaid expenses and other current assets 57 97
------ ------
Total Current Assets 6,858 3,241
------ ------
Non-current receivable related parties 60 60
Property, plant and equipment, at cost
Land and improvements 26 26
Buildings and leasehold improvements 190 190
Machinery and equipment 948 871
Furniture and fixtures 210 192
Automobiles 78 -
------ ------
1,452 1,279
Less accumulated depreciation and amortization 863 691
------ ------
Net property, plant and equipment 589 588
------ ------
Intangible assets, net of accumulated amortization 53 41
------ ------
Other assets 15 17
------ ------
Total Assets $ 7,575 $ 3,947
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,017 $ 1,515
Bank notes payable 162 259
Accrued pension costs 32 40
Other accrued expenses 1,249 641
Billings in excess of contract costs incurred 562 -
Current portion of deferred compensation 38 61
Current portion of notes payable-related parties 20 20
------ ------
Total Current Liabilities 5,080 2,536
Notes payable-related parties 50 470
Long term pension liability 393 370
Deferred compensation, net of current portion 25 59
Other liabilities 185 -
Deferred income taxes 66 91
------ ------
Total Liabilities 5,799 3,526
------ ------
Shareholders' Equity
Convertible preference stock, Series D, Redemption
value of $1.50 per share, 1,260,460 Shares
authorized, issued and outstanding 945 945
Common stock, par value $.75 per share:
10,000,000 shares authorized; 2,864,082
and 1,807,832 shares issued and outstanding
at December 31, 1996 and 1995, respectively 2,148 1,355
Other capital 8,203 7,973
Receivable from management (90) (91)
Treasury Shares, at cost; 16,666 shares - -
Accumulated Deficit (9,430) (9,761)
------ ------
Total Shareholders' Equity 1,776 421
------ ------
Total Liabilities and Shareholders' Equity $ 7,575 $ 3,947
======= ======
See notes to consolidated financial statements
- -------------------------------------------------------------------------
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1996 1995 1994
(In thousands, except per
share amounts)
------- ------- ------
Net sales $22,142 $10,308 $ 9,699
Cost of goods sold 19,339 8,792 8,113
------ ------ ------
Gross margin 2,803 1,516 1,586
Selling, general and administrative expenses 2,102 1,214 1,095
Research and development 234 359 66
------ ------ ------
Operating income (loss) 467 (57) 425
------ ------ ------
Other (income) expense
Interest expense 55 31 21
Interest income (16) (9) (28)
Other (income)expenses (33) 186 (1,662)
------ ------ ------
Total other (income) expense 6 208 (1,669)
------ ------ ------
Income (loss) from continuing operations
before income taxes and extraordinary item 461 (265) 2,094
Income tax provision (benefit) 70 (55) 29
------ ------ ------
Income (loss) from continuing operations
before extraordinary item 391 (210) 2,065
Discontinued Operations:
Loss from discontinued operations (60) (352) (860)
Loss on disposal of discontinued operations - (101) -
------ ------ ------
Loss from discontinued operations (60) (453) (860)
------ ------ ------
Income (loss) before extraordinary item $ 331 $ (663) $ 1,205
Extraordinary item, debt forgiveness - - 523
------ ------ ------
Net income (loss) $ 331 $ (663) $ 1,728
====== ====== ======
Income per common and common equivalent share:
Continuing operations before extra-
ordinary item $ .11 $ (.13) $ 1.18
Discontinued operations (.02) (.27) (.49)
Extraordinary items - - .30
------ ------ ------
Net Income (loss) per share $ .09 $ (.40) $ .99
====== ====== ======
Weighted average common equivalent
shares outstanding 3,554 1,657 1,748
====== ====== ======
See notes to consolidated financial statements
- -------------------------------------------------------------------------
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
December 31, December 31, December 31,
1996 1995 1994
---------------------------------------
(In Thousands)
Cash flows from operating activities:
Net income (loss) from continuing
operations $ 391 $ (210) $ 2,588
Adjustments to reconcile net
income to net cash from operations:
Depreciation and amortization 104 45 10
Reduction in allowance for
doubtful accounts - - (13)
Deferred income tax (25) (20) -
Reduction in reserve for
contract disallowances - - (214)
Reduction in litigation reserve - - (115)
Debt forgiveness - - (523)
Changes in assets and liabilities:
Accounts receivable (2,123) (393) (241)
Accounts receivable-related party - 5 -
Inventory (423) (138) (16)
Prepaid expenses 52 15 (12)
Accounts payable 1,240 338 159
Accrued expenses 553 (131) (208)
Billings in excess of
costs incurred 562 - -
Other liabilities 27 11 (207)
------ ------ ------
Net cash flows provided by (used
in) continuing operations 358 (478) 1,208
------ ------ ------
Loss on discontinued operations (60) (453) (860)
(Increase) decrease in net assets
of discontinued operations 3 132 147
------ ------ ------
Cash flows used in discontinued
operations (57) 321) (713)
------ ------ ------
Net cash flows provided by
(used in) operations 301 (799) 495
------ ------ ------
Cash flows from investing activities:
Net cash (used for) received
from acquisitions (566) 52 -
Additions to property, plant
and equipment (33) (78) (1)
Receivable from related parties - - 10
------ ------ ------
Net cash flows provided by
(used in) investing activities (599) (26) 9
------ ------ ------
Cash flows from financing activities:
Issuance of common stock 600 - -
Payment of receivable from
management 1 1 8
Increase/(decrease) in short
term debt (97) 258 -
Repayment of long term debt - - (680)
Proceeds from note payable,
related parties - 400 -
Repayment of note payable
related parties (20) (10) -
------ ------ ------
Net cash flows provided by
(used in) financing activities 484 649 (672)
------ ------ ------
Net increase (decrease) in cash
and cash equivalents 186 (176) (168)
Cash and cash equivalents at
the beginning of the year - 176 344
------ ------ ------
Cash and cash equivalents at the
end of the year $ 186 $ - $ 176
====== ======= =======
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 55 $ 15 $ 21
Income taxes, net of refunds $ - $ (30) $ 4
See notes to consolidated financial statements.
- ----------------------------------------------------------------------------
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Prefer- Receiv. Accumu-
($ In Thousands) ence Common Other From lated Treasury
Stock Stock Capital Mgmt. Deficit Shares TTL
----- ------ ------- ------ ------- ------ -----
Balance January 1, 1994 $ - $1,109 $8,031 $ (50) $(10,826)$ - $(1,736)
Net income - - - - 1,728 - 1,728
Shares issued-common
stock - 93 (43) - - - 50
Receivable from management - - - (50) - - (50)
Payments from management - - - 8 - - 8
---- ----- ----- ----- ------- ----- ------
Balance December 31, 1994 - 1,202 7,988 (92) (9,098) - -
Net loss - - - - (663) - (663)
Shares issued-common stock - 153 (15) 1 - - 139
Shares issued-preference
stock 945 - - - - - 945
---- ----- ----- ---- ------- ----- ------
Balance December 31,
1995, as restated 945 1,355 7,973 (91) (9,761) - 421
Net Income - - - - 331 - 331
Shares issued- Common
shares - 793 230 - - - 1,023
Purchase of treasury
stock - - - - - - -
Payments from management - - - 1 - - 1
---- ------ ----- ----- ------- ---- ------
Balance at December 31,
1996 $ 945 $ 2,148 $8,203 $ (90) $ (9,430) $ - $ 1,776
==== ====== ===== ===== ======= ==== ======
See notes to consolidated financial statements.
COMPUDYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
- ---------------------------
Description of Business
- -----------------------
COMPUDYNE, 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 four business
segments through its wholly owned subsidiaries Quanta Systems Corporation
("Quanta Systems"), Quanta SecurSystems, Inc., ("SecurSystems") and
MicroAssembly Systems, Inc. ("MicroAssembly").
QUANTA SYSTEMS is an engineering services firm providing turn-key design,
fabrication, installation, training, maintenance, documentation, and
systems integration of closed circuit television, access control and
intrusion detection. Quanta Systems also provides original equipment
manufacturing and worldwide quick reaction capability to respond to the
urgent and unique requirements of customers' with critical missions.
Quanta Systems is currently providing these services primarily to the
Federal Government.
Quanta Systems' DATA CONTROL SYSTEMS ("DCS") division, manufactures a
proprietary line of telemetry, satellite command and control systems,
radio frequency and telecommunications products. These products and
systems are used for data acquisition, control, test programs and
laboratory environments having a variety of military, intelligence and
commercial applications. The market for DCS' current products itself is
mainly with U.S. and foreign governments.
SECURSYSTEMS primarily focuses on the installation, maintenance and
system integration of highly technical security systems. Although the
majority of SecurSystems work is related to detention facilities,
SecurSystems has also performed work in areas such as colleges, court
houses and the transportation market.
MICROASSEMBLY, located in Willimantic, Connecticut, is a manufacturer of
a proprietary automated process called the "Stick-Screw System". The
Stick-Screw System uses custom designed screws in a stick format for the
insertion of fasteners in electronic and other assembly environments. The
Stick-Screw System provides insertion of the fasteners at a faster speed
than can be accomplished by comparably priced competing systems or
processes. Sales are primarily in the United States via a network of
independent sales representatives, with modest sales in Europe and South
America. In 1996 MicroAssembly acquired the power screwdriver product
line from Blackstone Industries for $50,000. This is a complementary
line of automatic screwdrivers with vacuum pick-up.
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.
Use of Estimates
- ----------------
Certain estimates used by management are susceptible to significant
changes in the economic environment. These include estimates of
percentage-of-completion on long term contracts and valuation allowances
for contracts accounts receivable. Each of these estimates, as well as
the related amounts reported in the financial statements, are sensitive
to near-term changes in the factors used to determine them. A
significant change in any one of those factors could result in the
determination of amounts different than those reported in the financial
statements. Management believes that as of December 31, 1996 and 1995,
the estimates used in the financial statements are reasonable based on
the information currently available.
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.
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.
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 and are being amortized on a
straight-line basis over 15 years. Accumulated amortization was $5
thousand at December 31, 1996.
Income Taxes
- ------------
The Company follows Statement of Financial Accounting Standards No. 109
(SFAS 109), "Accounting for Income Taxes". Under SFAS 109, deferred
income taxes are recognized for the future tax consequences of
differences between tax bases of assets and liabilities and financial
reporting amounts, based upon enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts expected to be realized. Income tax
expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
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.
Net Income (Loss) Per Share
- ---------------------------
Net income (loss) per share has been computed using the weighted average
number of common shares outstanding during the periods including the
effect of common stock equivalents where such effect would be dilutive.
New Accounting Pronouncements
- -----------------------------
As of January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for Impairment of Long-
Lived Assets to be Disposed Of. The adoption had no effect on the
financial position or the results of operations of the Company. SFAS No.
123, Accounting for Stock-Based Compensation, has been adopted by the
Company as of December 31, 1996. However, the Company continues to apply
the recognition and measurement provisions of APB No. 25 and, therefore,
has provided the disclosures required by SFAS No. 123.
3. ACQUISITIONS AND DISPOSAL OF BUSINESSES
- -------------------------------------------
Acquisition of Shorrock Electronic Systems, Inc.
- ------------------------------------------------
On July 11, 1996, CompuDyne Corporation entered into and consummated a
Stock Purchase Agreement by and between SES Corporation USA ("the
seller") and CompuDyne to purchase all of the capital stock of Shorrock
Electronic Systems, Incorporated ("SES") from the seller. The seller is
an indirect subsidiary of BET Public Limited Company. SES, located in
Hanover, Maryland, is engaged in the sale, installation and maintenance
of physical security systems for correctional and other facilities. The
consideration paid to the seller for the stock of SES was approximately
$613 thousand. CompuDyne has accounted for the acquisition of SES using
the purchase method of accounting. The purchase price was allocated to
the net assets acquired based upon their estimated fair value at the date
of acquisition which resulted in an excess of net assets acquired over
cost (negative goodwill) of approximately $336 thousand. As a result,
the assigned values of the non-current assets of $231 thousand were
written down to zero and negative goodwill of $105 thousand was recorded.
The resulting purchase price allocation was based on the fair values as
follows:
Cash $ 47
Accounts receivable 1,028
Inventory 109
Prepaid expenses 12
Contract billings in excess of costs (150)
Accounts payable and accrued expenses (328)
Negative goodwill (105)
-------
$ 613
=======
The accompanying financial statements include the operations for SES for
the period from July 11, 1996 through December 31, 1996.
Acquisition of MicroAssembly Systems, Inc.
- ------------------------------------------
On August 21, 1995, CompuDyne entered into and consummated a Stock
Purchase Agreement by and among the Company, Martin A. Roenigk and Alan
Markowitz (Messrs. Roenigk and Markowitz are, collectively, the
"Sellers") and MicroAssembly, pursuant to which CompuDyne issued to the
Sellers 1,260,460 shares of its Convertible Preference Stock, Series D
("Series D Preference Stock") in exchange for all of the outstanding
shares of capital stock of MicroAssembly. This transaction represents a
non-cash investing activity and, therefore, has not been included in the
Statement of Cash Flows. The issuance by CompuDyne of the Series D
Preference Stock, together with the issuance of certain Notes, as defined
below, and certain options to purchase Common Stock, all as described
below and in accordance with the terms of the Stock Purchase Agreement,
are referred to as the "Transaction" in which MicroAssembly became a
wholly-owned subsidiary of CompuDyne. Of the 1,260,460 Shares of Series
D Preference Stock issued to the Sellers, 945,345 shares were issued to
Mr. Roenigk, and 315,115 shares were issued to Mr. Markowitz. The Series
D Preference Stock has rights to vote on a share for share basis with the
Company's Common Stock. Each share of Series D Preference Stock carries
an annual aggregate dividend equal to the lower of: (a) sixty percent
(60%) of MicroAssembly's after-tax net income in the previous calendar
year, divided by 1,260,460, or (b) eight percent(8%) of the Redemption
Value of $1.50 per share of the Series D Preference Stock. Dividends may
be paid on the Series D Preference Stock, at the Company's option, in
cash, CompuDyne Common Stock, or a combination thereof, based upon the
average closing price of CompuDyne's Common Stock for the prior thirty
(30) trading days. There were no dividends accrued or paid for in 1996
or 1995.
CompuDyne has accounted for the acquisition of MicroAssembly using the
purchase method of accounting. The purchase price, as restated (See Note
17), was allocated to the net assets acquired based on their estimated
fair values at the date of acquisition. The fair values of these assets
and liabilities are summarized as follows (in thousands):
Cash, net $ 52
Accounts Receivable 261
Inventories 436
Other Assets 76
Property, Plant and Equipment 531
Intangible Assets 58
Accounts Payable and Accrued Expenses ( 358)
Deferred Tax Liabilities ( 111)
------
Total - value assigned to Series D preferred stock $ 945
======
The accompanying financial statements include the operations of
MicroAssembly for the period from August 21, 1995, the date of
acquisition.
Beginning on August 21 in the year 2000, the Company may, at its option,
redeem all or any part of the Series D Preference Stock for a price of
$1.80 per share, that being one hundred twenty percent (120%) of the
Redemption Value, plus accrued and unpaid dividends.
As part of the Transaction, in return for $400 thousand paid to CompuDyne
at the closing, CompuDyne issued to the Sellers Senior Convertible
Promissory Notes (the "Notes") in the aggregate principal amount of $400
thousand, which Notes are convertible, prior to redemption by CompuDyne,
into CompuDyne Common Stock at a conversion rate of $1.50 per share of
common stock, or 266,667 shares of common stock if the entire principal
amount of the Notes is converted. Of the $400 thousand principal amount
of Notes issued, $300 thousand principal amount of the Notes were issued
to Mr. Roenigk, and $100 thousand principal amount of the Notes were
issued to Mr. Markowitz. As described in a report filed by the Sellers
with the Securities and Exchange Commission and with the Company pursuant
to Section 13(d) of the Securities Exchange Act of 1934, the source of
the Sellers' $400 thousand investment in the Company was personal funds.
As a further part of the Transaction, Norman Silberdick, the Company's
Chairman, President and Chief Executive Officer, resigned as such and as
a director of the Company. The Company's Board of Directors elected Mr.
Roenigk to fill Mr. Silberdick's seat on the Board of Directors, and to
become its Chairman, President and Chief Executive Officer. Mr.
Markowitz was also elected to the Company's six member Board of
Directors. In recognition of Mr. Roenigk's position as Chairman,
President and CEO, the Company has issued to him options to purchase up
to 200,000 shares of the Company's Common Stock for $1.50 per share. The
options expire in ten (10) years. Mr. Silberdick, as part of a related
transaction described below, turned in to the Company 60,000 shares of
the Company's Common Stock issued pursuant to a Stock Purchase Agreement,
dated August 1, 1993, between the Company and Mr. Silberdick, and he
relinquished his rights to purchase an additional 50,000 shares pursuant
to such Agreement.
Divestiture of Suntec Division
- ------------------------------
On August 21, 1995, Quanta Systems transferred all of the assets and
liabilities of Quanta Systems's Suntec division to Suntec Service
Corporation, a newly-formed corporation ("Suntec"), in return for (i) all
of Suntec's issued and outstanding common stock and (ii) Suntec's
agreement to pay to Quanta Systems a royalty of 2% of Suntec's net sales
and other revenues for thirty (30) years from the date of the closing.
Quanta Systems then sold all of Suntec's Common Stock to Norman
Silberdick, who resigned on that date as CompuDyne's Chairman, President,
CEO and Director.
As a condition precedent to the sale of the Suntec shares to Mr.
Silberdick, he relinquished to CompuDyne 60,000 shares of CompuDyne
Common Stock and purchase rights held by him to acquire an additional
50,000 shares of CompuDyne Common Stock.
As consideration for the shares of Suntec, Mr. Silberdick executed a
nonrecourse promissory note in the initial principal amount of $79
thousand (the "Silberdick Note"), payment of which was secured by a
pledge of all Suntec shares held by Mr. Silberdick, which shares must at
all times equal or exceed 33% of all outstanding shares of Suntec capital
stock. The Silberdick Note bears interest at an annual rate equal to the
Wall Street Journal prime rate, plus 2%. Through August 31, 2000, the
principal payments on the Silberdick Note are payable annually in
amounts equal to 25% of Suntec's net, after-tax income for the year in
question. Thereafter, the unpaid principal balance, as of that date,
shall be paid in five equal annual installments. Suntec has now ceased
all operations.
As part of the transaction, Quanta Systems loaned $50 thousand to Suntec
payable at the end of three years at prime plus 2% with interest due at
the anniversary date of the loan. The loan is a senior obligation of
Suntec with rights to security. As of December 31, 1996, the Company has
written off the full amount of this loan because Suntec ceased
operations. The effective interest rate was 10.5% at December 31, 1995.
As a result of the disposal of Suntec in 1995, the consolidated
statements of operations for the year ended December 31, 1994 has been
restated to reflect Suntec as a discontinued operation. Loss from
Discontinued Operations includes a provision of $85 thousand in 1995 for
the loss on disposal. Revenues included in loss from discontinued
operations,were $0, $656 thousand, and $2.588 million in 1996, 1995 and
1994, respectively.
Pro-Forma Financial Information
- -------------------------------
The following unaudited pro-forma financial information of CompuDyne
Corporation reflects the acquisition of MicroAssembly and the disposition
of Suntec Service Corporation as if these transactions had occurred on
January 1, 1995 and January 1, 1994, and the acquisition of Shorrock (now
SecurSystems, Inc.) as if this transaction had occurred on January 1,
1996 and January 1, 1995:
(In Thousands) 1996 1995 1994
Revenues $ 23,818 $ 15,833 $ 11,104
Income (loss) before Extraordinary Items (1,226) (7,151) 2,085
Net Income (Loss) (145) (3,667) 2,608
Earnings (Loss) Per Share (.04) (2.21) .88
ACCOUNTS RECEIVABLE
- -------------------
Accounts Receivable consist of the following:
(In thousands) December 31, December 31,
1996 1995
----------- -----------
U.S. Government Contracts:
Billed $ 2,420 $ 974
Unbilled 1,031 869
------- -------
3,451 1,843
Commercial 2,360 483
------- -------
Total Accounts Receivable $ 5,811 $ 2,326
Less Allowance for Doubtful Accounts (538) (204)
------- -------
Net Accounts Receivable $ 5,273 $ 2,122
======= =======
Substantially all of the U.S. Government billed and unbilled receivables
are derived from cost reimbursable or time-and-material contracts.
Unbilled receivables include retainages of approximately $301 thousand
and $175 thousand at December 31, 1996 and 1995, respectively.
Direct sales to the U.S. Federal Government for the years ended December
31, 1996, 1995 and 1994 were approximately $15.5 million, $8.9 million
and $9.0 million, respectively, or 70%, 86% and 90% of the Company's
total net sales for the same years. No other single customer accounted
for greater than 10% of the Company's net sales.
Contract costs for services provided to the U.S. Government, including
indirect expenses, are subject to audit by the Defense Contract Audit
Agency. 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.
Substantially all of Quanta System s Government related business is with
the United States Department of Defense ( the Department ). Within the
Department there are various agencies which are customers of the Company,
with the largest being the United States Navy. At December 31, 1996, the
Company had four major multi-year contracts (NISE East, NSA, K3, and
Teton) with the United States Government, accounting for revenues of
$11.9 million in 1996. On March 31, 1992, Quanta Systems was awarded the
NISE East contract, a one-year contract with four one year renewal
options. NISE East has provided a bridge contract to continue this
effort for the Government s fiscal year ending September, 1997 and
intends to recompete for a new contract beginning in fiscal year 1998.
The Teton contract was awarded in September, 1995 and is valued up to
$9.4 million over five years. This is a one-year contract with options
to renew yearly for four years; Quanta Systems is operating in the first
renewal option year of the contract. The NSA contract is a one-year
contract with options to renew yearly for four years; Quanta Systems is
operating in the second renewal option year of the contract and the
contract is valued at $5.9 million. The K3 contract is a one-year
contract with options to renew yearly; Quanta Systems is performing on
the initial order of the base year. The value of the order is $500
thousand. If renewals under these contracts do not continue, or if terms
and conditions under the contracts are substantially modified Quanta
Systems will be required to modify its operations accordingly.
5. NOTES PAYABLE RELATED PARTIES
- ---------------------------------
In July, 1996, the holders of CompuDyne's $400 thousand Senior
Convertible Notes (which includes the Chairman) 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 million to the
company's equity, reduced interest charges, and provided the cash
required to make the acquisition and 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 the CompuDyne common stock at the time, the restricted nature of the
stock issued upon conversion, the market 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. At December 31, 1995, the effective interest rate of
the Notes was 10.5%.
6. BANK NOTES PAYABLE
- ----------------------
On November 18, 1994, CompuDyne obtained a $350 thousand secured working
capital line of credit agreement with the Asian American Bank and Trust
Company of Boston, Massachusetts. The credit agreement requires the
Company to maintain a working capital ratio of 1.1 to 1, with which the
Company was in compliance. In July 1995 the line was increased to $500
thousand and the advance rate increased from 50% of eligible accounts
receivable to 75% of eligible accounts receivable. In February 1996, the
line was increased to $750 thousand and the interest rate on the loan was
reduced to prime plus 2% (10.25% at December 31, 1996). In December,
1996 the line was increased an additional $100 thousand to a total of
$850 thousand. At December 31, 1996 and 1995, the Company had
outstanding borrowings on this line of credit of $121 thousand and $259
thousand, respectfully.The line is due to expire on July 1, 1997.
MicroAssembly has an unsecured line of credit with Fleet Bank for $100
thousand. The line of credit is guaranteed by Mr. Roenigk. The interest
rate is prime plus 1.5% (9.75% at December 31, 1996) and as of December
31, 1996 $41,400 was borrowed on the line. There were no borrowings on
the line as of December 31, 1995.
7. INCOME TAXES
- ----------------
The components of the income tax provision (benefit) from continuing
operations for the years ended December 31, 1996, 1995, and 1994 are as
follows:
$ thousands
1996 1995 1994
------ ------ ------
Current $ 84 $ (29) $ 29
Deferred (14) (26 -
----- ----- -----
$ 70 $ (55) $ 29
===== ===== =====
The tax effects of the primary temporary differences giving rise to the
Company's net deferred tax assets and liabilities at December 31, 1996
and 1995 are summarized as follows:
December 31,
1996 1995
------- --------
Assets:
Accrued expenses and deferred compensation $ 189 $ 273
Tax operating loss carryforward 9,416 9,510
Tax credit carryforward 408 459
Book reserves in excess of tax 122 93
Book depreciation in excess of tax 28 -
------ ------
Total deferred assets 10,163 10,335
Valuation allowance (10,163) (10,335)
------ ------
Net deferred assets 0 0
Liabilities:
Tax Book depreciation in excess of book - (3)
Investment in subsidiary (66) (88)
------ ------
Total deferred liabilities (66) (91)
------ ------
Net deferred liabilities $ (66) $ (91)
====== ======
A valuation allowance is provided to offset fully the recorded deferred
tax assets as management cannot conclude that such deferred tax assets
are more likely of realization than not.
The difference between the statutory tax rate and CompuDyne's effective
tax rate from continuing operations are summarized as follows:
1996 1995 1994
----- ----- -----
Statutory federal income tax rates 34.0% 34.0% 34.0%
State income taxes, net of
Federal benefit 4.6 - 2.4
Change in valuation allowance - (34.0) -
Tax effect of NOL utilization (27.0) - -
Non-taxable life insurance proceeds - - (36.0)
Reversal of prior year taxes - (10.9) -
Tax effect of non-deductible items 3.6 (9.9) 1.0
---- ---- ----
Tax (15.2)% (20.8)% 1.4%
====== ====== =====
At December 31, 1996, the Company and its subsidiaries have net operating
loss carryforwards available to offset future taxable income of
approximately $27.6 million, subject to certain limitations. These
carryforwards expire between 2000 and 2010. 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.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents - The carrying amounts reported in the balance
sheets for cash and cash equivalents approximates fair value.
Accounts Receivable and Accounts Payable - The carrying amounts reported
in the balance sheets for accounts receivable and accounts payable
approximate fair value.
Notes Payable - The carrying amounts reported in the balance sheet
approximate fair value as the bank lines of credit are renewed annually
at current interest rates.
9. 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
immediately. 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 four years,
to purchase 121,000 shares, which vest over four years, 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).
During 1996 the Company issued options, which vest over four years, to
purchase 1,050 shares of common stock for $1.625 per share to directors
of the Company.
The transactions for shares under options were:
Year Year Year
ended ended ended
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
Outstanding, Beginning
of Period
Shares 225,500 92,167 92,167
Prices $1.50-14.25 $.75-14.125 $.75-14.125
Granted
Shares 160,050 283,210 -
Prices $1.81 $1.375-2.00 -
Exercised
Shares - 58,210 -
Prices - $1.375 -
Expired or Canceled 10,500 91,667 -
Outstanding, End
of Period
Shares 375,050 225,500 92,167
Prices $1.50-$2.00 $1.50-14.125 $.75-14.125
Options Exercisable 375,050 225,500 92,167
As permitted under SFAS No. 123, the Company continues to account for its
employee stock-based compensation plans and options granted under APB No.
25. No compensation expense has been recognized in connection with
options, as all options have been granted with an exercise price equal to
fair value of the Company s common stock on the date of grant.
Accordingly, the Company has provided below the additional disclosures
specified in SFAS No. 123 for 1996 and 1995. For SFAS No. 123 purposes,
the fair value of each option grant has been estimated as of the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest rate of 6.00%, expected
life of 7 years, dividend rate of zero percent and expected volatility of
60%. Using these assumptions, the fair value of the stock options
granted in 1996 and 1995 is $165,000 and $231,000, respectively, which
would be amortized as compensation expense over the vesting period of the
options. Had compensation expense been determined consistent with SFAS
No. 123, utilizing the assumptions detailed above, the Company s net
income (loss) and earnings (loss) per share for the years ended December
31, 1996 and 1995 would have been reduced to the following pro forma
amounts:
(In thousands) 1996 1995
------ ------
Net Income (loss):
As Reported $ 331 $ (663)
Pro Forma $ 294 $ (836)
Net Income (Loss) per share:
As Reported $0.09 $(0.40)
Pro Forma $0.08 $(0.50)
The resulting pro forma compensation cost may not be representative of
that expected in future years.
10.EMPLOYEE BENEFIT PLANS
- -------------------------
The Company has a 401(k) retirement savings plan covering substantially
all employees. All employees are eligible to participate in the plan
after completing one year of service. Participants may make before tax
contributions of up to 15% of their annual compensation subject to
Internal Revenue Service limitations. CompuDyne currently matches
employee contributions up to the first 2.5% contributed. Expense for
matching contributions to the Plan was $76 thousand, $46 thousand and $45
thousand for 1996, 1995, and 1994, respectively.
11. 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.
As of December 31, 1996, future minimum rental payments required under
operating leases that have initial or remaining noncancellable terms in
excess of one year are as follows (in thousands):
Year Ended December 31,
1997 $ 420
1998 416
1999 428
2000 129
2001 45
-----
$1,438
=====
Rental expense was $468 thousand, $399 thousand and $466 thousand in
1996, 1995, and 1994, 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.
12. RELATED PARTIES
- --------------------
Corcap entered into a Settlement Agreement, dated March 25, 1996 (the
"Settlement Agreement"), with Lydall, Inc. ("Lydall") pursuant to which
Corcap transferred 120,000 shares (the "Transferred Shares") of CompuDyne
Common Stock to Lydall in settlement of certain claims.
As part of the Settlement Agreement, Lydall required as a condition to
signing, that CompuDyne enter into a registration rights agreement with
Lydall obligating CompuDyne to register the Transferred Shares upon
demand of Lydall two years following the date of the Agreement or in a
"piggyback registration" at any time upon the proposed registration by
CompuDyne of its stock. In order to induce CompuDyne to enter into such
agreement, Corcap agreed to issue an option (the "Corcap Option") to
CompuDyne to purchase 16,666 shares of CompuDyne Common Stock at a price
of $.01 per share exercisable immediately for a period of five years
under a Stock Option Agreement, dated March 25, 1996, between Corcap and
CompuDyne. In addition, Corcap agreed to limit CompuDyne's support of
its legal services to $1 thousand per month for 24 months. On December
31, 1996 CompuDyne exercised its option to purchase 16,666 shares of
CompuDyne Stock pursuant to the Option Agreement, which has been recorded
as treasury stock.
13. KOLUX PENSION PLAN
- -----------------------
In March 1987, the Company ceased its Kolux plant operations resulting in
a curtailment of the defined benefit pension plan covering certain plant
employees. As of December 31, 1996, the actuarial present value of
accumulated plan benefits was estimated to be $786 thousand, based upon
an 7.0% interest rate assumption; the 1984 Unisex Mortality table with a
five year age setback for females; and the March 1, 1996 (latest
actuarial valuation) employee database projected forward to December 31,
1996. All benefits under the plan are fully vested. The market value of
plan assets as of December 31, 1996 was $361 thousand. Accordingly, the
plan's unfunded accrued liability as of December 31, 1996 of $425
thousand has been reflected in the balance sheet as accrued pension
costs.
14. OTHER INCOME AND EXTRAORDINARY ITEMS
Other income of $1,662,000 in 1994 consists of (1) $1,389,000 of life
insurance proceeds of a former executive after paying deferred
compensation payments to former executives of the Company; (2) reduction
of certain accruals totalling $115,000 and (3) closing out the Company's
workers compensation accrual of $148,000 after receiving a final refund
from the insurance carrier for the "retroactive adjustment insurance" of
1987.
Extraordinary income of $523,000 on 1994 resulted from debt forgiveness
of $413,000 and from deferred compensation beneficiaries of $110,000.
15. INDUSTRY SEGMENT INFORMATION
- ---------------------------------
The Company currently operates in four business segments: government
engineering services, physical security services, the manufacture of
telemetry and telecommunications equipment and the manufacturing and
marketing of the Stick-Screw System. During the years ended December 31,
1996, 1995, and 1994 sales to the United States Federal Government
amounted to 70%, 86% and 90%, respectively, of the Company's total net
sales. No other single customer accounted for greater than 10% of the
Company's net sales.
Revenues and related costs from Quanta Systems' government engineering
services during the three years ended December 31, 1996, 1995 and 1994
are detailed below:
($ Thousands) 1996 1995 1994
Revenues $15,644 $ 8,878 $ 8,691
Cost of Services 14,191 7,706 7,326
------ ------ ------
Gross Profit 1,453 1,172 1,365
Operating income (loss) 538 546 794
Total Assets, at year end 3,157 1,251 703
Depreciation 3 - 10
Capital Expenditures 9 4 -
Revenues and related costs from Data Control Division telemetry and
telecommunications products during the three years ended 1996, 1995 and
1994 are detailed below:
($ Thousands) 1996 1995 1994
------ ------- -------
Revenues $1,480 $ 863 $ 1,008
Cost of Services 1,018 594 787
----- ------ ------
Gross Profit 462 269 221
Operating income (loss) 13 (311) (15)
Total Assets, at year end 812 758 887
Depreciation 13 - -
Capital Expenditures 4 - -
Revenues and related costs from SecurSystems physical security services
from its July 11, 1996 acquisition through December 31, 1996 are
detailed below:
($ Thousands) 1996
-----
Revenues $ 3,530
Cost of Services 2,853
------
Gross Profit 677
Operating income 245
Total Assets, at year end 1,961
Depreciation 30
Capital Expenditures 8
Revenues and related costs from the sale of Stick-Screw products during
the year ended December 31, 1996 and from its August 21, 1995 acquisition
through December 31, 1995 are detailed below:
($ Thousands) 1996 1995
----- ------
Revenues 1,488 $ 567
Cost of Services 1,277 489
----- ------
Gross Profit 211 78
Operating income (loss) 3 (46)
Total Assets, at year end 2,300 2,392
Depreciation 79 28
Capital Expenditures 12 74
There were no revenues from Corporate activities. Costs related to
corporate activities for the three years ended December 31, 1996, 1995
and 1994 are detailed below:
($ Thousands) 1996 1995 1994
Operating loss $ (332) $(246) $(354)
Total Assets, at year end (655) 262 392
Depreciation - - -
Capital Expenditures - - -
16. RECENTLY ISSUED ACCOUNTING STANDARDS
- -----------------------------------------
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share". The new standard specifies the computation, presentation and
disclosure requirements for entities with publicly held common stock.
The objective of the statement is to simplify the computation of earnings
per share and to make the U.S. standard for comparing earnings per share
more compatible with standards of other countries and within that of the
International Accounting Standards Committee. This standard will be
effective for the Company beginning in 1997. Management has not yet
determined the impact that the adoption of this statement will have on
earnings per share.
17. RESTATEMENT OF SERIES D PREFERENCE SHARES
- ----------------------------------------------
In the fourth quarter of 1996, the Company determined that the fair value
assigned to the Series D Preference shares issued in the MicroAssembly
acquisition on August 21, 1995 should be reduced from $1.50 per share
($1,891 thousand) to $.75 per share ($945 thousand) at the issuance date.
As a result, the consolidated balance sheet at December 31, 1995 has been
restated as follows:
In Thousands
As Previously As
Reported Restated
-------------- --------
Goodwill and intangible assets $ 1,127 $ 41
Deferred income tax liabilities 231 91
Series D preferred shares 1,891 945
The effect of the restatement on the statement of operations for the year
ended December 31, 1995 was not significant.
- -------------------------------------------------------------------------
SCHEDULE II
COMPUDYNE CORPORATION AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
($ Thousands)
Balance at Charged to Balance
Beginning Costs and Deduc- at End
Description of Period Expenses tion of Period
--------- ------ ------- ---------
Year Ended December 31, 1996
Reserve and allowances deducted
from asset accounts:
Obsolescence reserve for inventory $ 216 $ 83 $ - $ 299
Reserve for accounts receivable 205 343 - 538
Year Ended December 31, 1995
Reserve and allowances deducted
from asset accounts:
Obsolescence reserve for inventory $ 201 $ 15 $ 0 $ 216
Reserve for accounts receivable 207 3 (5) 205
Year Ended December 31, 1994
Reserve and allowances deducted
from asset accounts:
Obsolescence reserve for inventory $ 197 $ 4 $ 0 $ 201
Reserve for accounts receivable 220 0 (13) 207
- ------------------------------------------------------------------------
EXHIBIT XI
COMPUDYNE CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE
(In thousands, except per share amounts)
Year Ended December 31,
1996 1995 1994
Primary (loss) earnings per share:
(Loss) earnings from continuing operations
before extraordinary item $ 391 $(210) $2,065
Discontinued operations (60) (453) (860)
Extraordinary item - - 523
----- ----- -----
Net (loss) earnings $ 331 (663) $1,728
===== ===== =====
Weighted average common and common
equivalent share 2,285 1,657 1,748
Conversion of preferred shares 1,260 472 -
Adjustment to options 9 - -
----- ----- -----
Primary shares 3,554 2,129 1,748
===== ===== =====
(Loss) earnings per share:
Continuing operations before
extraordinary item $ .11 $ (.10) $ 118
Discontinued operations (.02) (.21) (.49)
Extraordinary item - - .30
----- ----- -----
Net (loss) earnings $ .09 $ (.31) $ .99
===== ===== =====
Fully diluted (loss) earnings per share:
(Loss) earnings from continuing operations
before extraordinary item $ 391 (210) $2,065
Adjustment for interest on promissory notes 26 13 -
Discontinued operations (60) (453) (860)
Extraordinary item - - 523
----- ----- -----
Net (loss) earnings $ 357 $ (650) $1,728
===== ===== =====
Weighted average common and common
equivalent share 3,554 2,129 1,748
Conversion of preferred shares and
promissory notes 217 37 -
----- ----- -----
Fully diluted shares 3,771 2,166 1,748
===== ===== =====
(Loss) earnings per share:
Continuing operations before
extraordinary item $ .11 $ (.09) $ 118
Discontinued operations (.02) (.21) (.49)
Extraordinary item - - .30
----- ----- -----
Net (loss) earnings $ (.09) $ (.30) $ .99
===== ===== =====
- -------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COMPUDYNE CORPORATION
---------------------
(Registrant)
By:/s/ William C. Rock
William C. Rock
Dated: April 3, 1997 Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April 1, 1997.
/s/ Martin A. Roenigk Director, Chairman, Pres. and Chief Exec. Officer
- ---------------------
Martin A. Roenigk
/s/ David W. Clark, Jr. Director
- ----------------------
David W. Clark, Jr.
/s/ Millard H. Pryor, Jr. Director /s/ Alan Markowitz Director
- ------------------------- ------------------
Millard H. Pryor, Jr. Alan Markowitz
/s/ Philip M. Blackmon Director and Executive Vice President
- ----------------------
Philip M. Blackmon
/s/ William C. Rock Chief Financial Officer
- -------------------
William C. Rock
/s/ Elaine Chen Controller
- ---------------
Elaine Chen