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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, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-4245
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CompuDyne Corporation
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(Exact name of registrant as specified in its charter)
Nevada 23-1408659
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
120 Union Street, Willimantic, Connecticut 06226
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (860)456-4187
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock $.75 par value Over-The-Counter
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Securities registered pursuant to section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-
K. [X].
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant was $5.7 million as of March 23, 1998 (based upon the
average of the bid and asked prices on the over-the-counter market for
CompuDyne common stock on March 23, 1998 which was $3.0625 per share, as
quoted on the OTC Bulletin Board(see ITEM 5.).
As of March 23, 1998, a total of 4,124,542 shares of Common Stock, $.75
par value, were outstanding.
Documents incorporated by reference: Portions of the Proxy Statement
relating to the 1997 Annual Meeting of Shareholders are incorporated in
Part III.
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PART I
ITEM 1. BUSINESS
Description of Business
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CompuDyne Corporation ("CompuDyne" or the "Company"), a Nevada
corporation, incorporated in Pennsylvania on December 8, 1952, changed
its state of incorporation to Nevada on May 8, 1996. CompuDyne operates
in five business segments through its four wholly owned subsidiaries
Quanta Systems Corporation, ("Quanta Systems"), Quanta SecurSystems Inc.,
("SecurSystems"), MicroAssembly Systems, Inc., ("MicroAssembly"), and
SYSCO Security Systems, Inc. ("SYSCO").
Current Developments
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On October 10, 1997, CompuDyne formed SYSCO as a wholly owned subsidiary
to implement the first step in the product sales strategy of the Company.
SYSCO is contracting with distributors throughout North America to sell
CompuDyne's line of physical security products. The North American
distribution rights to the security products of Shorrock Integrated
Systems were acquired by CompuDyne with the acquisition of Shorrock
Electronic Systems ("SES") in July 1996. These products include a world
class group of physical security and surveillance products comprised of
the ADACS Security Management Systems, Microwave fence, and T-line fence
security systems. This agreement has minimum quantity requirements.
CompuDyne is currently negotiating with SYSCO companies of the United
Kingdom and Germany ("SYSCO UK") to acquire the North American
distribution rights to their physical security product line. There are
no assurances that these negotiations will be successful.
Quanta Systems is an engineering services firm providing turn-key design,
fabrication, installation, training, maintenance, documentation, and
systems integration of closed circuit television, access control and
intrusion detection services to government and industry. Quanta Systems
also provides original equipment manufacturing and worldwide quick
reaction capability to respond to the urgent, emergent and unique
requirements of customers with critical missions. Quanta Systems is
currently providing these services to the Space and Navel Warfare Systems
Command, the Naval Facilities Engineering Services Center, the National
Security Agency ("NSA"), the Federal Bureau of Investigation ("FBI"), the
Naval Criminal Investigative Services, the Social Security
Administration, and the Montgomery County Government (Maryland). Through
these customers and through its continuing efforts to team with other
contractors in the pursuit of more comprehensive and complex Government
programs, Quanta Systems has significantly broadened its customer and
contract base.
Data Control Systems ("DCS"), a division of Quanta Systems, manufactures
telemetry, satellite command and control systems, radio frequency and
telecommunications products. These products and systems are used for data
acquisition, control, test programs and laboratory environments having a
variety of military, intelligence and commercial applications. In 1994,
DCS began marketing the Automatic Power Controller ("APC") for satellite
up-link stations using Ku band transmissions which automatically
compensates for signal fade during periods of inclement weather. During
the third quarter of 1997, DCS completed the research, development,
prototyping and first run production of a new iteration of the
proprietary APC 2000. The new APC 2000 incorporates a closed-loop
algorithm to complement the existing open-link algorithm found in the
previous APC 2000. The closed loop is used by the smaller less
sophisticated (but more numerous) ground stations. The newest model of
the APC 2000 was delivered to various aerospace customers. DCS also
completed development of its QPSK/BPSK model 7500 PCM
demultiplexer/demodulator in 1997. The 7500 incorporates advanced
technology which is resulting in related product derivatives in the
telecommunications and telemetry market. During the second quarter of
1997, DCS successfully completed the research, development and
prototyping of two new products derived from the 7500, the 2200 and 2250.
The 2200 provides bit error rate testing. During the third quarter of
1997, DCS delivered the first 2250 and first runs of the 2200's to
aerospace customers. The market for DCS's equipment is mainly with the
aerospace industry and U.S. and foreign governments.
SecurSystems primarily focuses on the installation, maintenance and
systems integration of highly technical security systems. Although the
majority of SecurSystems work is related to detention facilities,
SecurSystems also performs work in areas such as colleges, court houses,
private residences, public buildings and in the transportation market.
SecurSystems has offices strategically located within the United States.
The home office and the Northeast regional office is located in Hanover,
Maryland. Other offices are located in Riverside, California, Tucson and
Chandler, Arizona and Garner North Carolina. These offices act as
regional hubs to perform maintenance and installation contracts on
security systems throughout the United States. SecurSystems currently has
approximately $1.9 million in annual recurring maintenance work and the
balance of the Company's revenue is made up of new installation and refit
work. SecurSystems' customers include the Federal Bureau of Prisons, the
State of Arizona, Prince Georges County (Maryland), Suffolk County
(Massachusetts), The Department of the Army (Pennsylvania), Wake County
(North Carolina) and North Carolina State University. CompuDyne acquired
all of the capital stock of SES, now SecurSystems, on July 11, 1996.
MicroAssembly, located in Willimantic, Connecticut, is a manufacturer of
a proprietary automated process called the "Stick-Screw (TM) System". The
Stick-Screw System uses custom designed screws in a stick format for the
insertion of fasteners in electronic and other assembly environments. The
Stick-Screw System provides insertion of the fasteners at a faster speed
than can be accomplished by comparably priced competing systems or
processes. MicroAssembly operates out of owned facilities, utilizing
automatic screw machines to manufacture the Stick-Screw (TM).
MicroAssembly also assembles the specially designed pneumatic drivers for
inserting the screws. MicroAssembly has recently developed drill press
and drill stand based models of the driver, one of which is electric and
will permit sales in "clean room" environments. MicroAssembly introduced
an electric Stick- Screw(TM) driver which is expected to expand its
market significantly. Sales are primarily in the United States via a
network of independent sales representatives, with modest sales in Europe
and South America. In August 1996, MicroAssembly acquired the power
screwdriver product line from Blackstone Industries for $50,000. This is
a complementary line of automatic screwdrivers with vacuum pick-up.
CompuDyne acquired all of the capital stock of MicroAssembly on August
21, 1995.
SYSCO is a distributor based product sales company. It was formed by
CompuDyne in October, 1997 to contract with distributors for sales of
physical security products. These products already include Shorrock
Integrated Systems' physical security product line and SYSCO has signed a
letter of intent with SYSCO UK to include their physical security product
line. SYSCO has distributors in 80% of the continental United States,
Canada and Mexico.
See Note 15 Industry Segment Information to the Consolidated Financial
Statements of CompuDyne for more information about the results of
operations from the five industry segments.
General Information
The Company purchases most of the parts and raw materials used in its
products from various suppliers. The primary raw materials used in the
manufacturing of Quanta Systems and SecurSystems' products are
electronic components. MicroAssembly's products are purchased from
either distributors or manufacturers of metal products. While the bulk of
such raw material is purchased from relatively few sources of supply, the
Company believes that alternative sources are readily available.
There is no significant seasonality in CompuDyne's business.
The Company s backlog of orders as of December 31, 1997 was $19.7 million
compared to $5.7 million as of December 31, 1996. Quanta Systems
backlog of $4.7 million, SecurSystems' backlog of $13.8 million (includes
$5.0 million of multi year maintenance contracts), DCS backlog of $625
thousand, and MicroAssembly s backlog of $551 thousand as of December 31,
1997 compared to $3.1 million, $1.7 million, $344 thousand and $523
thousand respectively as of December 31, 1996. It is expected that
approximately $14.9 million of all orders included in the current
backlog will be filled by December 31, 1998.
For the year ended December 31, 1997, direct sales to the U.S. Federal
Government amounted to $9.3 million or 47% of the Company's total net
sales from continuing operations, compared with $15.5 million and $8.9
million in fiscal years 1996 and 1995, respectively, or 70% and 86% of
the Company's total net sales. No other single customer accounted for
greater than 10% of the Company's net sales.
Substantially all of Quanta Systems' Government related business is with
the United States Department of Defense. Within the Department of
Defense there are various agencies that are customers of the Company,
with the largest being the United States Navy. At December 31, 1997,
Quanta Systems had five major multi-year contracts (SPAWAR, J, K2, K3 and
TETON) with the United States Government, which accounted for revenues of
$9.3 million in 1997. On March 31, 1992, Quanta Systems was awarded the
NISE East contract, now SPAWAR, a one-year contract with four one-year
renewal options. SPAWAR provided a bridge contract to continue this
effort through February 28, 1998. Quanta Systems is in negotiations for
a follow-on contract to begin in March of 1998. This contract will be
one year with four one year option periods. The TETON contract was
awarded in September, 1995 and has increased in value from $9.5 million
to $13.5 million. This is a one year contract with options to renew
yearly for four years. Quanta Systems is operating in the second option
year of the contract. The J contract is a one year contract with options
to renew yearly for four years. Quanta Systems is operating in the
fourth renewal year of the contract. This contract is currently valued
at $6.4 million. The K2 contract is a one year contract with options to
renew yearly. Quanta Systems is currently performing in the initial base
year. The K3 contract is a one year contract with options to renew
yearly. Quanta Systems is performing in the first option year of the
contract. The value of the contract to date is $1.3 million. If
renewals under these contracts do not continue, or if terms and
conditions under the contracts are substantially modified Quanta Systems
will be required to modify its operations accordingly. Although most of
Quanta Systems' contracts are subject to Government audit, management of
the Company does not believe such audits will result in any material
adjustments to the financial statements.
Most of the Federal Government contracts with the Company include a
termination for convenience clause, which allows the Federal Government
to unilaterally terminate a contract if it is considered to be in the
best interests of the Government to do so. If the Government were to
terminate a contract, the clause provisions allow the Company to submit a
Termination Settlement Proposal for recovery of costs. This proposal
would reflect all direct costs to the contract; all allowable indirect
costs; and as applicable, other costs such as idle facility costs,
abnormal severance costs and unabsorbed indirect costs resulting from the
termination. Because of cost recovery from the aforementioned process,
the Company believes that the immediate financial impact of a termination
would be negligible. It would, however, mean that additional contracts
would need to be entered into to offset the longer-term, negative effects
of the termination on revenues and profits. The Company, trying to
mitigate this minimal threat, has made considerable progress in
diversifying its contracts and customer base over the past three years.
The Company is subject to intense competition from numerous companies
that sell in regional, national and international markets. Many of these
competitors are substantially larger than the Company. There have been
significant international political changes that could have a major
impact on the market for CompuDyne's products and services. During the
last several years, dramatic changes have taken place throughout the
world that have had, and will continue to have, an impact on future U.S.
Defense spending. In addition, current budget constraints which have
affected the overall U.S. economy have impacted CompuDyne's operations.
The Company has significant sales to various organizations involved in
the Country's security and intelligence efforts. The Company has
intensified its efforts to market to other agencies of the government to
counteract the projected decline in defense spending. The Company
believes that overall U.S. expenditures for physical security
installations and intelligence gathering will continue to out pace the
general economy.
The Company is currently undertaking research and development activities
at DCS to expand and improve its product lines. Research and development
expenditures were $172 thousand during the fiscal year ended December 31,
1997 compared with $234 thousand and $359 thousand during 1996 and 1995,
respectively. In 1997 expenditures were made by DCS to expand the
demodulation/demultiplexor product lines.
At December 31, 1997, the Company had 172 employees. None of the
employees is subject to collective bargaining agreements.
Year 2000 Compliance
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The Company has identified all significant software and hardware
applications that will require modification to ensure Year 2000
compliance. Internal and external resources are being used to make the
required modifications and test Year 2000 compliance. The modification
process of all significant applications and operational systems is
substantially complete. The Company plans on completing the process of
modifying all significant applications by December 31, 1998. The total
cost to the Company of these Year 2000 compliance activities has not been
and is not anticipated to be material to its financial position or
results of operations in any given year.
Financial Information About Foreign and Domestic Operations
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Export sales for the Company were $257 thousand, $576 thousand and $125
thousand, for the years ended December 31, 1997, 1996 and 1995,
respectively.
Cautionary Statement Regarding Forward-Looking Information
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Any statements in this Annual Report that are not statements of
historical fact are forward-looking statements that are subject to a
number of important risks and uncertainties that could cause actual
results to differ materially. Specifically, any forward-looking
statements in this Annual Report related to the Company s objectives of
future growth, profitability and financial returns are subject to a
number of risks and uncertainties, including, but not limited to, risks
related to a growing market demand for the Company s existing and new
products, continued growth in sales and market share of the Company s
products, pricing, market acceptance of existing and new products,
general economic conditions, competitive products, and product and
technology development. There can be no assurance that such objectives
will be achieved. In addition, the Company s objectives of future
growth, profitability and financial returns are also subject to the
uncertainty of the continuation and renewal of the SPAWAR Contract and
the Teton Contract.
ITEM 2. PROPERTIES
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The following table sets forth the main facilities of the Company's
operations:
Approximate
Primary Owned or Square Feet
Location Purpose Leased (1) of Space
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Corporate Office
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Willimantic, Connecticut Administrative Owned 2,900
Quanta Systems
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Gaithersburg, Maryland/Admin. Engineering Leased 14,690
Gaithersburg, Maryland Manufacturing Leased 8,400
Gaithersburg, Maryland Sub-Leased Leased 7,300
MicroAssembly
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Willimantic, Connecticut Manufacturing Owned 7,000
SecurSystems
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Hanover, Maryland Admin/Whse Leased 9,500
Garner, North Carolina Engineering Leased 2,000
Tucson, Arizona Engineering Leased 1,500
Riverside, California Engineering Leased 1,300
Chandler, Arizona Engineering Leased 2,500
(1) See Note 12 to the Consolidated Financial Statements for additional
information relating to lease expense and commitments.
Quanta Systems leases three buildings in Gaithersburg, Maryland. One
building is used by the DCS products group which manufactures telemetry,
satellite and telecommunications equipment. The second building is used
by its services group, which provides engineering services and
administrative staff. Quanta Systems leases a third building in
Gaithersburg which it subleases to Orion Network Systems Corporation.
SecurSystems leases five buildings within the United States. The
Northeast region and Home office located in Hanover, Maryland provides
office space, engineering and storage space for the Northeastern United
States as well as the administrative functions of the Home office. The
Southeast office located in Garner, North Carolina provides office
space, engineering and storage space to service the Southeastern United
States. The two Arizona offices, one in Tucson and the other outside of
Phoenix in Chandler, Arizona, provide bases to service the Arizona
maintenance operations and also to service any projects in the Midwestern
and Western United States. The California office in Riverside, is
currently being used to service a contract in Western Arizona. It is
anticipated that after the completion of this contract the Riverside
office will be closed in mid 1998. The Company is currently looking at
establishing offices in other areas of the United States in order to take
advantage of contract security maintenance work available in other areas.
The Company leases only those properties necessary to conduct its'
business and does not invest in real estate or interests in real estate
on a speculative basis. The Company believes that its' current properties
are suitable and adequate for its current operations, however, as its
operations grow, additional space may be needed to service contracts in
other areas.
ITEM 3. LEGAL PROCEEDINGS
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The Company is party to certain legal actions and inquiries for
environmental and other matters resulting from the normal course of
business. Although the total amount of liability with respect to these
matters cannot be ascertained, management of the Company believes that
any resulting liability should not have a material effect on its
financial position or results of future operations.
On June 18, 1997, after being denied equitable adjustment consideration
for a series of change order costs, Quanta Systems filed a claim for $
853 thousand with the Aberdeen Proving Grounds (the contracts office) for
work being performed at Fort Bragg. After failing to receive a response
from the Government within the allotted time frame, Quanta filed a deemed
denied appeal on November 10, 1997 with the Armed Services Board of
Contract Appeals ("ASBCA"). Subsequent to Quanta s appeal filing, the
Government formally denied all claim elements. On July 31, 1997, the
Government unilaterally established a September 19, 1997 completion date
for the contract. Quanta forwarded two written responses to this
unilateral action, apprising the Government that overall contract
completion was contingent upon the Vicon Corporation s completion of a
Protech software package (specified in the contract), which was still
being debugged by Vicon. On September 22, 1997, without further
discussion, the Government terminated the contract for default. During
the week preceding the termination, Quanta s representatives had walked
the Contracting Officer s Representative ("COR") through the job to
demonstrate that the job was effectively 99% complete. Quanta Systems
filed an official Notice of Appeal from the termination with the ASBCA on
September 23, 1997. Quanta Systems and U.S. Army counsel are currently
engaged in discovery in both appeals, (Claim and Termination). Legal
costs for the fiscal year ended December 31, 1997, which have been fully
absorbed, were $76 thousand.
On February 20, 1998, SecurSystems settled its claims against and from
the County of Sonoma, California. The net effect of the settlement was a
one time charge of $270 thousand ($158 thousand after taxes) in fiscal
1997 for costs accumulated through the claim settlement date. With this
settlement there will be no additional liabilities to the Company
resulting from these issues in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Proposal to amend the CompuDyne 1996 Stock option plan for non-employee
directors.
PART II
ITEM 5.MARKET FOR COMPUDYNE COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
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CompuDyne Common Stock is traded in the over-the-counter market, and in
January 1993 began being quoted on the OTC Bulletin Board, an inter-
dealer quotation medium maintained by the National Association of
Securities Dealers, Inc., under the symbol "CDCY". There were 1,940
common shareholders of record as of March 23, 1998.
The following table sets forth the high and low bids for CompuDyne Common
Stock from January 1, 1996 to December 31, 1997 on the over-the-counter
market, as quoted on the OTC Bulletin Board. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not necessarily reflect actual transactions.
Quarter Ended High Low
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March 31, 1996 $ 1 3/8 $ 1 1/4
June 30, 1996 1 3/8 7/8
September 30, 1996 1 1/4 1 1/4
December 31, 1996 1 1/4 3/4
Quarter Ended High Low
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March 31, 1997 $ 1 3/4 $ 7/8
June 30, 1997 3 1/2 1
September 30, 1997 3 1 3/4
December 31, 1997 3 1
The Company has not paid any dividends on its Common Stock during the
past three fiscal years, and its Board of Directors has no intention of
declaring a dividend in the foreseeable future.
Recent Sales of Unregistered Securities
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None
ITEM 6. SELECTED FINANCIAL DATA
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The following is a consolidated summary of operations of CompuDyne and
its subsidiaries for the years ended December 31, 1997, 1996, 1995, 1994
and 1993. The information in the table below is based upon the audited
consolidated financial statements of CompuDyne and its subsidiaries for
the years indicated appearing elsewhere in this annual report and in
prior annual reports on Form 10-K filed by the Company with the SEC, and
should be read in conjunction therewith and the notes thereto.
(In thousands except per share data): For the years ended December 31,
--------------------------------
1997 1996 1995 1994 1993
Net sales $ 20,016 $ 22,142 $ 10,308 $ 9,699 $ 9,571
Gross profit $ 3,478 $ 2,803 $ 1,516 $ 1,586 $ 1,884
Selling, general and
administrative 2,456 2,102 1,214 1,095 1,492
Research and development 172 234 359 66 113
Interest expense, net
of interest income $ 62 $ 39 $ 22 $ (7)$ 111
Income (loss) from continuing
operations before extra-
ordinary items $ 696 $ 391 $ (210)$ 2,065 $ 253
Loss from discontinued
operations - (60) (453) (860) (211)
Extraordinary items (Note a) - - - 523 161
-------- ------ ------- ------ ------
Net income (loss) $ 696 $ 331 $ (663) $1,728 $ 203
======== ====== ======= ===== ======
Basic EPS:
Continuing operations $ .23 $ .17 $ (.13) $ 1.18 $ .15
Discontinued operations - (.03) (.27) (.49) (.13)
Extraordinary items - - - .30 .10
-------- ------ ------- ----- ------
Net income (loss) $ .23 $ .14 $ (.40) $ .99 $ .12
======= ====== ======= ===== ======
Weighted average number
of common shares
outstanding 3,005 2,294 1,657 1,748 1,686
======= ====== ====== ===== ======
Diluted EPS:
Continuing operations $ .16 $ .10 $ (.13) $ 1.18 $ .15
Discontinued operations - (.02) (.27) (.49) (.13)
Extraordinary items - - - .30 .10
------- ------ ------ ----- ------
Net income (loss) $ .16 $ .08 $ (.40) $ .99 $ .12
======= ====== ====== ===== ======
Weighted average number
of common shares and
equivalents 4,364 3,762 1,657 1,748 1,686
======= ====== ====== ===== ======
Total assets $ 7,429 $ 7,575 $ 3,947 $ 2,114 $ 1,993
======= ======= ======= ====== =======
Long-term debt, net $ 30 $ 50 $ 470 $ - $ 1,050
======= ======= ======= ====== =======
Total shareholders equity/
(deficit) $ 2,162 $ 1,776 $ 421 $ - $ (1,736)
======= ======= ======= ====== =======
Notes:
(a) The extraordinary items are a rent settlement in 1993 and debt
forgiveness in 1994.
(b) For the year ended December 31, 1995, the conversions of Common Stock
equivalents into common shares would result in an increased net (loss)
per share amounts which are anti-dilutive and are therefore not included
as common equivalent shares. Income per common share was determined by
dividing net income (loss), after deduction of dividend requirements on
the CompuDyne Convertible Preference Stock, ( Preferred Stock ), which
was issued in August 1995, by the weighted average number of shares of
Common Stock. Accordingly, net income is not reduced for the related
preferred dividend requirement. In November, 1997 the Series D Preference
Stock was converted into Common Stock. There was no dividend requirement
on the preferred stock for 1996 or 1995 due to the effect of purchase
accounting on MicroAssembly's results.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------
Financial Condition
- -------------------
During 1997, CompuDyne's net worth increased by $386 thousand to $2.2
million at December 31, 1997. Debt outstanding was $1.4 million at
December 31, 1997 compared to $232 thousand at December 31, 1996.
Working capital was $1.9 million at December 31, 1997 compared to $1.8
million at December 31, 1996.
During 1997, CompuDyne had net income of $696 thousand compared to $331
thousand in 1996, or a 110% increase over last year. This was realized
even though the Company recognized an additional loss of approximately
$197 thousand on the fixed-price Ft. Bragg contract at Quanta Systems. A
claim is being pursued to recover a substantial portion of the loss (see
"Legal Proceedings"). In addition, SecurSystems settled a dispute with
the County of Sonoma resulting in a net cost to SecurSystems of $158
thousand after tax in fiscal 1997. SYSCO spent $147 thousand in start-up
costs fiscal 1997. Net income includes twelve months of operations for
SecurSystems in 1997 compared to six months of operations in 1996.
Results of Operations - 1997 compared with 1996
- -----------------------------------------------
CompuDyne's net sales decreased $2.1 million in 1997 to $20 million, down
from $22.1 million in 1996. Sales at Quanta Systems decreased to $10.7
million in 1997, down $4.9 million from $15.6 million in 1996. This
decrease was primarily due to the nonrecurring low margin orders
completed during the first nine months of 1996. The balance is due to
slower then normal bookings for the first two quarters of 1997 resulting
in lower output for the year ended December 31, 1997. DCS' sales
decreased $163 thousand to $1.3 million in 1997 from $1.5 million in
1996. MicroAssembly increased sales $281 thousand to $1.8 million in
1997, up from $1.5 million in 1996. This is due to increased sales to
current customers and new customers gained through increased sales
efforts. SecurSystems' sales were $6.2 million for twelve months in 1997
compared to $3.5 million for six months of 1996. SecurSystems was
acquired in July 1996. SecurSystems' sales reflect lower billings due to
low order intake in the fourth quarter of 1996 and the first half of
1997; however, the backlog is currently $13.8 million (including a $5
million multi-year maintenance contract).
CompuDyne's gross margins increased $675 thousand to $3.5 million, up
from $2.8 million in 1996 even though net sales for 1997 decreased.
Quanta Systems contributed $241 thousand to this increase. Although
Quanta Systems' sales decreased in 1997, Quanta Systems' sales were at
higher profit margins in 1997 than in 1996. This was primarily due to
nonrecurring low margin orders completed in 1996 and $117 thousand
additional profit booked due to contract closeouts during the year.
Quanta Systems absorbed a $197 thousand loss on the Fort Bragg contract
in 1997. DCS' profit margin went down $98 thousand in 1997 generating a
gross margin of $364 thousand compared to $462 thousand in 1996. This
decrease in gross margin was due to a decrease in sales and a related
decrease in cost of goods sold. Quanta SecurSystems contributed $1.1
million to 1997 gross margins. This was up from $677 thousand in 1996.
Quanta SecurSystems was acquired in July, 1996 and the margin was 17.4%
in 1997 compared to 19.2% in 1996. This was due to lower margin
installation contracts performed in 1997. MicroAssembly contributed $125
thousand to the increase in gross margin. This was due to increasing
sales by 18.9% and only increasing cost of goods sold by 12.1%.
Selling, general and administrative expenses increased $354 thousand in
1997 to $2.5 million from $2.1 million in 1996. Quanta Systems remained
fairly constant with only a modest increase of $15 thousand, spending
$930 thousand in 1997 compared to $915 thousand in 1996. DCS spent $174
thousand in 1997, $41 thousand less than the $215 thousand spent in 1996.
This savings was due to the consolidation of some facilities and
operations with Quanta Systems. SecurSystems spent $1.0 million in 1997,
up by $569 thousand from the $432 thousand spent in 1996. The 1997
spending, by SecurSystems included twelve months of operations while the
1996 spending only covered six months since SecurSystems was acquired in
July 1996. Included in the 1997 spending was $270 thousand for Sonoma
settlement costs. SYSCO spent $147 thousand in start-up costs in 1997.
Research and development costs, which are related only to Quanta Systems'
DCS product division totalled $172 thousand for 1997. This was a
decrease of $62 thousand compared to the $234 thousand spent in 1996.
The 1997 expenses were spent on expanding the Company's
demodulator/demultiplexor product line.
CompuDyne's 1997 income from continuing operations before extraordinary
items of $696 thousand compares with a profit of $391 thousand in 1996.
This $305 thousand increase is due to the tax effect of net operating
loss carryforwards ("NOLs") and the establishment of a deferred tax
asset. In addition Quanta Systems' increased margins on contracts which
included a more favorable labor mix contributed to the increase and $117
thousand additional profit was realized from contract closeouts.
MicroAssembly's increased sales also contributed to this increase.
Quanta Systems income increased $234 thousand to $517 thousand in 1997
from $283 thousand in 1996. This increase was primarily due to increased
margins of 15.8% in 1997 compared to 9.3 % in 1996. SecurSystems showed
a loss of $97 thousand in 1997 compared to a profit of $113 thousand in
1996. This was a decrease of $210 thousand. SecurSystems absorbed $270
thousand in settlement and legal costs to finalize the Sonoma claim in
fiscal 1997. SYSCO reported a $147 thousand loss in 1997 for start-up
costs with no offsetting revenues. Corporate activities realized a
profit of $169 thousand due to tax issues, including the use of NOLs and
the establishment of a deferred tax asset.
Interest paid in 1997 totalled $62 thousand, an increase of $7 thousand
over the 1996 total of $55 thousand. This increase was due to the
expanded use of credit to finance operations and expansion during 1997.
See "Liquidity".
There were no losses from discontinued operations in 1997. In 1996,
Quanta Systems spent $60 thousand related to a discontinued subsidiary.
Results of Operations - 1996 compared with 1995
- -----------------------------------------------
CompuDyne's net sales, which increased significantly from $10.3 million
in 1995 to $22.1 million in 1996, a 114% increase, were comprised of
services revenue, telemetry and data acquisition product sales at Quanta
Systems, Stick-Screw (TM) products at MicroAssembly, and services
revenue at newly acquired SecurSystems. Quanta Systems's services
revenue in 1996 was $15.6 million, $6.8 million more than 1995. This
increase in services revenue was attributable to increases in task
spending on Government contracts, particularly on materials intensive
facilities improvement tasks at naval facilities. Quanta Systems services
revenue represented 70% of 1996 total CompuDyne revenues compared to 86%
of 1995 revenues. MicroAssembly's product sales increased from $567
thousand in 1995 to $1.5 million in 1996, an increase of 164%, but not
totally comparable since 1995 data for MicroAssembly reflected results
only from August 21 (acquisition date) through December, 1995.
SecurSystems contributed sales of $3.5 million for the six-month period
following its acquisition in July, 1996.
Quanta Systems's product sales at it's DCS division increased from $863
thousand in 1995 to $1.5 million in 1996, an increase of 74%. The
improvement in sales is primarily attributable to increased deliveries of
the new QPSK Model 7500 high-speed satellite test modem and of the APC-
2000 automatic power controller.
Net sales for MicroAssembly for 1995 reflected data from the acquisition
date of August 21, 1995 through December, 1995. Annualizing the 1995
sales shows that sales for MicroAssembly remained at about the same level
in 1996.
Gross margins increased $1.3 million from $1.5 million, 15% of sales in
1995, to $2.8 million, 13% of sales in 1996. The gross margin at Quanta
Systems increased $474 thousand to $1.9 million, with the gross margin
rate decreasing from 15% of sales to 11% of sales. The increase in
amounts is attributable to the significant increase in overall sales and
the decline in rate was due to the fact that most of the sales increase
was in lower-margin material and subcontract Government task orders.
Even though the increased sales showed a lower margin rate, the increased
base was important in absorbing indirect costs, thus affording higher
profitability on some fixed-rate contracts. DCS margins increased by
$193 thousand from $269 thousand in 1995 to $462 thousand in 1996; the
increase in gross margin can be attributable entirely to the $617
thousand increase in sales since the gross margin rate remained stable at
31%. MicroAssembly's gross margin increased by $133 thousand to $210
thousand, most of which is attributable to the increased sales (1995 was
only for 4 1/3 months) but some of which is attributable to an increased
rate from 13.7% to 14.1%. SecurSystems contributed $677 thousand in
gross margin and is incremental since it was the first year of inclusion
in CompuDyne's financial statements.
Total 1996 selling and general and administrative expenses increased $889
thousand from 1995 levels, $423 thousand of which is attributable to the
incremental increase caused by the acquisition of SecurSystems. A full
year's operating results for MicroAssembly resulted in an increase of $86
thousand in selling and general and administrative expenses. Corporate
expenses increased $61 thousand, with the remainder attributable to
increased general and administrative expenses at Quanta Systems. The
increase at Quanta Systems is primarily attributable to costs associated
with the default of a lease agreement between Quanta Systems and an
insolvent tenant. Idle facility costs include rent payments ($43
thousand), build-out costs for a new tenant ($42 thousand). and real
estate agent commissions of $22 thousand. Other expenses were additional
personnel costs caused by the significant increase in sales volume and
increased repair and renovation costs for other Quanta Systems
facilities.
Research and development activities, which are related only to Quanta
Systems' DCS product division, decreased by $125 thousand from the 1995
level of $359 thousand to $234 thousand in 1996. The 1995 expenses were
devoted primarily to the development of DCS' QPSK model 7500 and APC-
2000. Those activities continued into 1996, but at a reduced level aimed
at refining and upgrading the operating capabilities of the QPSK,APC and
the bit synchronizer product lines.
The 1996 income from continuing operations before extraordinary items of
$391 thousand compares with a loss in 1995 of $210 thousand. The
increase in such income is attributable to the increased sales and
profitability of Quanta Systems and the purchase of SecurSystems.
SecurSystems contributed $192 thousand before taxes to profits since it
was purchased by CompuDyne in July 1996. Although a loss of $550
thousand was recorded on a Ft. Bragg fixed-price contract at Quanta
Systems in 1996, increased sales of $7.4 million at Quanta Systems (from
$9.7 million to $15.6 million) combined with an expense-reducing
corporate reorganization resulted in an increase in profits at Quanta
Systems of $416 thousand compared with 1995. Contributing to the
improved performance at Quanta Systems was an increase in sales and
elimination of losses at its DCS division.
Total interest expense for 1996 was $55 thousand compared with $31
thousand for 1995. The increase was due to the expanded use of credit to
provide working capital.
Loss from discontinued operations in 1996 was $60 thousand compared with
1995's loss of $453 thousand. The loss for 1996 reflects settlements of
Suntec-incurred, Quanta Systems-liable obligations and reserves for
potential future Suntec-related obligations.
Liquidity
- ---------
The Company's principle source of cash is from operating activities and
bank borrowings. The Company's primary requirement for working capital
is to carry billed and unbilled receivables, the majority of which are
due under prime contracts with the United States Government, or
subcontracts thereunder.
The Company has a secured working capital line of credit agreement with
the Asian American Bank and Trust Company of Boston, Massachusetts which
allows borrowings of up to 75% of eligible accounts receivable. At
December 31, 1996, the maximum available under the line was $850 thousand
which has been increased to $1.75 million at December 31, 1997. The
credit agreement requires the Company to maintain a working capital ratio
of 1.1 to 1, and a debt service ratio of at least 1.0 to 1 with which the
Company was in compliance. During 1996, the interest rate was 2% above
the prime; the rate was reduced to .5% above prime in August, 1997 (10%
at December 31, 1997.) At December 31, 1997 and 1996, the Company had
outstanding borrowings of $1.3 million and $121 thousand respectively.
The current line is due to expire on July 1, 1998.
MicroAssembly has an unsecured line of credit with Fleet Bank for $100
thousand with no expiration date. The line of credit is guaranteed by Mr.
Roenigk. The rate is prime plus 2% (11.5% at December 31, 1997) and there
was $27 and $41 thousand outstanding as of December 31, 1997 and 1996,
respectively.
Net cash flows used in operations was $838 thousand in 1997, a decrease
of $1.1 million from the 1996 cash flow provided by operations of $301
thousand. Cash from net income increased from $391 thousand in 1996 to
$696 thousand in 1997. A total of $1.4 million was used to pay down
accounts payable and accrued expenses. An additional $195 thousand was
used to purchase capital equipment.
When MicroAssembly was acquired in August, 1995, $400 thousand in cash
was received for convertible long-term notes issued to the sellers, the
Company's chairman, Martin Roenigk and Alan Markowitz. In July, 1996 the
notes were converted to Common Stock and $600 thousand was received from
the same persons in exchange for 600,000 shares of CompuDyne Common
Stock. Net cash of $566 thousand was used to purchase SES, now
SecurSystems.
Capital Resources
- -----------------
Capital expenditures totalled $195 thousand in 1997 compared with $33
thousand in 1996. The Company has projected spending up to $250 thousand
for capital expenditures in fiscal 1998.
Recently Issued Accounting Standards
- ------------------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". The new standard defines a fair value method
of accounting for stock-based employee compensation plans. Under this
method, compensation cost is measured based on the fair value of the
stock award when granted and is recognized as an expense over the service
period, which is usually the vesting period.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net
income and earnings per share as if the company had applied the new
method of accounting. The Company has disclosed the pro forma impact
that the adoption of this standard has on net income and earnings/(loss)
per share for fiscal years 1995, 1996 and 1997.
In February, 1997, the financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share". The statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held
common stock or potential common stock. This standard replaces the
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures. The Company has
restated EPS for fiscal years 1995, 1996 and 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
See Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------------------
None.
PART III
--------
Information required by Items 10, 11, 12 and 13 about CompuDyne is
incorporated herein by reference from the definitive proxy statement of
CompuDyne to be filed with the SEC within 120 days following the end of
its fiscal year ended December 31, 1996, or April 30, 1997, relating to
its 1997 Annual Meeting of Stockholders.
PART IV
-------
ITEM 10. EXHIBITS, FINANCIAL STATEMENTS
AND REPORTS ON FORM 8-K
- ---------------------------------------
(a) Financial Statements
The financial statements listed in the accompanying index to financial
statements are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
None
(c) Exhibits
The Exhibits listed on the index below are filed as a part of this
Annual Report.
COMPUDYNE CORPORATION
INDEX TO EXHIBITS
(Item 10(c))
3(A) Articles of Incorporation of CompuDyne Corporation filed with the
Secretary of State of the State of Nevada on May 8, 1996 herein
incorporated by reference to Registrant's Proxy Statement dated May 15,
1996 for its 1996 Annual Meeting of Shareholders.
3(B) Agreement and Plan of Merger dated May 8, 1996 is incorporated by
reference as Exhibit 3(B) to registrant's 10-K filed March 31, 1997.
3(C). By-Laws, as amended through January 28, 1997 and as presently in
effect, is incorporated by reference as Exhibit 3(C) to registrant's 10-K
filed March 31, 1997.
10 (A). 1996 Stock Incentive Compensation Plan incorporated herein by
reference to Registrant's Proxy Statement dated April 18, 1997 for its
1996 Annual Meeting of Shareholders.
10 (D) The credit Agreement dated December 20, 1996 between Asian
American Bank and Trust, CompuDyne, Quanta Systems, MicroAssembly and
SecurSystems is filed herewith.
10 (E) Form of Management Stock Purchase Agreement dated August 1, 1993
between CompuDyne Corporation and each of Messrs. Blackmon, and Mrs.
Burns is incorporated by reference as Exhibit 10.1 of Registrant's Form
10-Q filed September 30, 1993.
10 (F) CompuDyne Corporation Certificate of Designations of the
Convertible Preference Stock, Series D is incorporated herein by
reference to Exhibit (4.1) to Registrant's Form 8-K filed September 5,
1995.
10 (G) CompuDyne Corporation Senior Convertible Promissory Notes is
incorporated by reference to Exhibit (4.2) to Registrant's Form 8-K filed
September 5, 1995.
10 (H) Stock Purchase Agreement dated August 21, 1995 between CompuDyne
Corporation, MicroAssembly Systems, Inc., Martin A. Roenigk and Alan
Markowitz is incorporated by reference to Exhibit (4.3) to Registrant's
Form 8-K filed September 5, 1995.
10(I) 1996 Stock Non-Employee Director Plan incorporated herein by
reference to Registrant's Proxy Statement dated April 18, 1997 for its
1996 Annual Meeting of Shareholders.
10 (J) Stock Option Agreement dated August 21, 1995 by and between
Martin A. Roenigk and CompuDyne Corporation is incorporated by reference
to Exhibit (4.5) to Registrant's Form 8-K filed September 5, 1995.
10(K) Stock Purchase Agreement dated July 11, 1996 between CompuDyne
Corporation and SES Corp. USA is incorporated by reference to Exhibit
(99.1) to Registrant's Form 8-K filed July 25, 1996.
10(L) Notice and Agreement of Conversion with respect to Senior
convertible Promissory Note by and between CompuDyne Corporation and
Martin A. Roenigk is incorporated by reference to Exhibit (99.2) to
Registrant's Form 8-K filed July 25, 1996.
10(M) Notice and Agreement of Conversion with respect to Senior
Convertible Promissory Note by and between CompuDyne Corporation and Alan
Markowitz is incorporated by reference to Exhibit (99.3) to Registrant's
Form 8-K filed July 25, 1996.
10(N) Stock Purchase Agreement dated July 11, 1996 by and among
CompuDyne Corporation, Martin Roenigk and Alan Markowitz is incorporated
by reference to Exhibit (99.4) to Registrant's Form 8-K filed July 25,
1996.
10(O) Stock Purchase Agreement dated July 11, 1996 between CompuDyne
Corporation and SES Corp. USA is incorporated by reference to Exhibit
(99.1) to Registrant's Form 8-K filed July 25, 1996.
10(P) Notice and Agreement of Conversion with respect to Senior
Convertible Promissory Note by and between CompuDyne Corporation and
Martin A. Roenigk is incorporated by reference to Exhibit (99.2) to
Registrant's Form 8-K filed July 25, 1996.
10(Q) Notice and Agreement of Conversion with respect to Senior
Convertible Promissory Note by and between CompuDyne Corporation and Alan
Markowitz is incorporated by reference to Exhibit (99.3) to Registrant's
Form 8-K filed July 25, 1996.
10(R) Stock Purchase Agreement dated of July 11, 1996 by and among
CompuDyne Corporation, Martin Roenigk and Alan Markowitz is incorporated
by reference to Exhibit (99.4) to Registrant's Form 8-K filed July 25,
1996.
10(S) Amendment number two dated August 29, 1997 to the Asian American
Bank and Trust Credit Agreement dated November 18, 1994 is filed
herewith.
21. Subsidiaries of the Registrant is filed herewith.
27.Financial Data Schedule
COMPUDYNE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
(Item 14(a)(1))
Page(s)
Independent Auditors' Report 16
Consolidated Balance Sheets at December 31, 1997
and 1996 17
Consolidated Statements of Operations for the
years ended December 31, 1997, 1996 and 1995 18
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995 19
Consolidated Statements of Changes in Shareholders'
Equity for the years ended
December 31, 1997, 1996 and 1995 20
Notes to Consolidated Financial Statements 21-34
(Item 14(a)(2))
Financial Statement Schedule
Schedule II - Valuation and Qualifying
Accounts for the Years Ended December
31, 1997, 1996 and 1995 35
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of CompuDyne Corporation:
We have audited the accompanying consolidated balance sheets of CompuDyne
Corporation and subsidiaries as of December 31, 1997, 1996, and the
related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31,
1997. Our audit also included the financial statement schedule listed in
the accompanying index at Item 14(a)(2). These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by the management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CompuDyne Corporation
and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule as
of and for the years ended December 31, 1997, 1996 and 1995, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/Deloitte & Touche LLP
Washington D.C.
March 23, 1998
- -------------------------------------------------------------------
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1997 1996
-------------
(In Thousands)
Current Assets
Cash and cash equivalents $ - $ 186
Accounts receivable 4,757 5,273
Inventories
Finished goods 72 93
Work in progress 888 778
Raw materials and supplies 612 471
------ -----
Total Inventories 1,572 1,342
------ -----
Prepaid expenses and other current assets 95 57
Total Current Assets 6,424 6,858
------ -----
Non-current receivable related parties 60 60
Property, plant and equipment, at cost
Land and improvements 26 26
Buildings and leasehold improvements 250 190
Machinery and equipment 1,055 948
Furniture and fixtures 287 210
Automobiles 84 78
------ -----
1,702 1,452
Less accumulated depreciation and amortization 990 863
------ -----
Net property, plant and equipment 712 589
------ -----
Deferred tax asset 124 -
Intangible assets, net of accumulated amortization 66 53
Other assets 43 15
------ -----
Total other assets 233 68
------ -----
Total Assets $7,429 $7,575
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,104 $3,017
Bank notes payable 1,339 162
Accrued pension costs - 32
Other accrued expenses 1,015 1,249
Billings in excess of contract costs incurred - 562
Accrued income taxes 35 -
Current portion of deferred compensation 26 38
Current portion of notes payable-related parties 20 20
------ -----
Total Current Liabilities 4,539 5,080
Notes payable-related parties 30 50
Long term pension liability 489 393
Deferred compensation, net of current portion - 25
Other liabilities 209 185
Deferred income taxes - 66
------ -----
Total Liabilities 5,267 5,799
------ -----
Shareholders' Equity
Convertible preference stock, Series D,
Redemption value of $1.50 per share, 1,260,460
Shares authorized, issued and outstanding
at December 31, 1996 - 945
Common stock, par value $.75 per share:
10,000,000 shares authorized; 4,124,542
and 2,864,082 shares issued at December 31,
1997 and 1996, respectively 3,093 2,148
Other capital 8,203 8,203
Treasury shares, at cost; 16,666 shares - -
Receivable from management (90) (90)
Accumulated Deficit (9,044) (9,430)
----- -----
Total Shareholders' Equity 2,162 1,776
----- -----
Total Liabilities and Shareholders' Equity $7,429 $7,575
====== ======
See notes to consolidated financial statements
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1997 1996 1995
------------------------
(In thousands, except per share amounts)
Net sales $ 20,016 $ 22,142 $ 10,308
Cost of goods sold 16,538 19,339 8,792
------- ------- -------
Gross margin 3,478 2,803 1,516
Sonoma settlement costs 270 - -
Selling, general and administrative
expenses 2,456 2,102 1,214
Research and development 172 234 359
------ ------ ------
Operating income (loss) 580 467 (57)
------ ------ ------
Other (income) expense
Interest expense 62 55 31
Interest income - (16) (9)
Other (income)expenses (20) (33) 186
------ ------ ------
Total other (income) expense 42 6 208
------ ------ ------
Income (loss) from continuing
operations before income taxes 538 461 (265)
Income tax provision (benefit) (158) 70 (55)
------ ------ ------
Income (loss) from continuing
operations 696 391 (210)
Discontinued Operations:
Loss from discontinued operations - (60) (352)
Loss on disposal of discontinued
operations - - (101)
------ ------ ------
Loss from discontinued operations - (60) (453)
------ ------ ------
Net income (loss) $ 696 $ 331 $ (663)
======= ======= =======
Basic EPS:
Continuing operations $ .23 $ .17 $ (.13)
Discontinued operations - (.03) (.27)
Extraordinary items - - -
------- ------- -------
Net income (loss) $ .23 $ .14 $ (.40)
======= ======= =======
Weighted average number of common
shares outstanding 3,005 2,294 1,657
======= ======= =======
Diluted EPS:
Continuing operations $ .16 $ .10 $ (.13)
Discontinued operations - (.02) (.27)
Extraordinary items - - -
------- ------- -------
Net income (loss) $ .16 $ .08 $ (.40)
======= ======= =======
Weighted average number of common
shares and equivalents 4,364 3,762 1,657
======= ======= =======
See notes to consolidated financial statements
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------
1997 1996 1995
--------------------------
(In Thousands)
Cash flows from operating activities:
Net income (loss) from continuing
operations $ 696 $ 391 $ (210)
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 114 104 45
Deferred income tax (benefit) (189) (25) (20)
Changes in assets and liabilities:
Accounts receivable 516 (2,123) (393)
Accounts receivable-related party - - 5
Inventory (285) (423) (138)
Prepaid expenses (38) 52 15
Other assets (28) - -
Accounts payable (913) 1,240 338
Accrued expenses (104) 553 (131)
Accrued income taxes (35) - -
Billings in excess of costs incurred (562) 562 -
Other liabilities (10) 27 11
----- ----- -----
Net cash flows (used in) provided by
continuing operations (838) 358 (478)
----- ----- -----
Loss on discontinued operations - (60) (453)
(Increase) decrease in net assets
of discontinued operations - 3 132
----- ----- -----
Cash flows used in discontinued
operations - (57) (321)
----- ----- -----
Net cash flows (used in) provided
by operations (838) 301 (799)
----- ----- -----
Cash flows from investing activities:
Net cash (used for) received from
acquisitions - (566) 52
Additions to property, plant and
equipment (195) (33) (78)
----- ----- -----
Net cash flows used in investing
activities (195) (599) (26)
----- ----- -----
Cash flows from financing activities:
Conversion of series D preference
stock (310) - -
Issuance of common stock - 600 -
Payment of receivable from management - 1 1
Increase/(decrease) in short
term debt 1,177 (97) 258
Proceeds from note payable,
related parties - - 400
Repayment of note payable related
parties (20) (20) (10)
----- ----- -----
Net cash flows provided by financing
activities 847 484 649
----- ----- -----
Net (decrease) increase in cash and
cash equivalents (186) 186 (176)
Cash and cash equivalents at the
beginning of the year 186 - 176
----- ----- -----
Cash and cash equivalents at the
end of the year $ - $ 186 $ -
======= ======== =======
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 62 $ 55 $ 15
Income taxes, net of refunds $ 70 $ - $ (30)
See notes to consolidated financial statements.
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
($ In Thousands) Rec. Accumu-
Preference Common Other From lated Treas.
Stock Stock Capital Mgmt. Deficit Shares Total
------ ------- ------- ----- ------- ------ -----
Bal. January 1, 1995 $ - $ 1,202 $ 7,988 $ (92) $(9,098) $ - $ -
Net loss - - - - (663) - (663)
Shares issued-
common stock - 153 (15) 1 - - 139
Shares issued-
preference stock $ 945 $ - $ - $ - $ - $ - $ 945
---- ------ ------ ---- ------ --- ---
Bal. Dec. 31, 1995,
as restated 945 1,355 7,973 (91) (9,761) - 421
Net Income - - - - 331 - 331
Shares issued-
Common shares - 793 230 - - - 1,023
Purchase of treasury
stock - - - - - - -
Payments from
management - - - 1 - - 1
----- ----- ----- ---- ----- --- -----
Bal. at December 31,
1996 $ 945 $ 2,148 $ 8,203 $(90) $(9,430) $ - $1,776
Net Income - - - - 696 - 696
Preferred shares
converted to
Common shares (945) 945 - - (310) - (310)
------ ------ ------ ---- ------ --- ----
Bal. at December 31,
1997 $ - $ 3,093 $ 8,203 $ (90)$(9,044) $ - $2,162
====== ====== ====== ==== ====== ==== =====
See notes to consolidated financial statements.
COMPUDYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
- -----------------------------
Description of Business - CompuDyne Corporation ("CompuDyne" or the
"Company") a Nevada corporation, was incorporated in Pennsylvania on
December 8, 1952. On May 8, 1996, CompuDyne changed its state of
incorporation to Nevada after receiving shareholder approval at the 1996
Annual Meeting of Shareholders. CompuDyne operates in five business
segments through its wholly owned subsidiaries Quanta Systems Corporation
("Quanta Systems"), Quanta SecurSystems, Inc., ("SecurSystems"),
MicroAssembly Systems, Inc. ("MicroAssembly") and SYSCO Security Systems,
Inc. ("SYSCO").
Quanta Systems is an engineering services firm providing turn-key design,
fabrication, installation, training, maintenance, documentation, and
systems integration of closed circuit television, access control and
intrusion detection. Quanta Systems also provides original equipment
manufacturing and worldwide quick reaction capability to respond to the
urgent and unique requirements of customers' with critical missions.
Quanta Systems is currently providing these services primarily to the
Federal Government.
Data Control Systems ( DCS ) a division of Quanta Systems, manufactures a
proprietary line of telemetry, satellite command and control systems,
radio frequency and telecommunications products. These products and
systems are used for data acquisition, control, test programs and
laboratory environments having a variety of telecommunications, military,
intelligence and commercial applications. The market for DCS' current
products is mainly with U.S. and foreign governments as well as aerospace
and telecommunications companies.
SecurSystems primarily focuses on the installation, maintenance and
system integration of highly technical security systems. Although the
majority of SecurSystems work is related to detention facilities,
SecurSystems has also performed work in areas such as colleges, court
houses and in the transportation market.
MicroAssembly, located in Willimantic, Connecticut, is a manufacturer of
a proprietary automated process called the Stick-Screw System . The
Stick-Screw (TM( System uses custom designed screws in a stick format for
the insertion of fasteners in electronic and other assembly environments.
The Stick-Screw (TM) System provides insertion of the fasteners at a
faster speed than can be accomplished by comparably priced competing
systems or processes. Sales are primarily in the United States via a
network of independent sales representatives, with modest sales in Europe
and South America. In 1996 MicroAssembly acquired the power screwdriver
product line from Blackstone Industries for $50,000. This is a
complimentary line of automatic screwdrivers with vacuum pick-up.
SYSCO, located in Hanover, Maryland is a distributor based product sales
company. It was formed by CompuDyne to set up a national network of
sales representatives and dealers. These products include Shorrock
Integrated Systems' physical security product line and will include SYSCO
United Kingdom's physical security product line if negotiations are
completed.
2. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------
Principles of Consolidation - The consolidated financial statements
include the accounts of CompuDyne Corporation and its subsidiaries, all
of which are wholly-owned. All material intercompany transactions have
been eliminated.
Inventories - Raw material inventories are valued at the lower of cost
(first-in, first-out) or market. Work-in-process represents direct
labor, materials and overhead incurred on products not yet delivered.
Finished goods are valued at the lower of cost or market.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Certain estimates used by
management are susceptible to significant changes in the economic
environment. These include estimates of percentage-completion on long
term contracts and valuation allowances for contracts accounts
receivable. Actual results could differ from those estimates.
Revenue Recognition - Revenue under cost reimbursement contracts is
recognized to the extent of costs incurred to date plus a proportionate
amount of the fee earned. Revenue under time and materials contracts are
recognized to the extent of billable rates times hours delivered plus
materials expenses incurred. Revenue from fixed price contracts is
recognized under the percentage of completion method. Revenue from the
sale of manufactured products is recognized based on shipment date.
Provisions for estimated losses on uncompleted contracts are recognized
in the period such losses are determined.
Property, Plant and Equipment - Property, plant and equipment are
recorded at cost less accumulated depreciation and amortization.
Depreciation is computed using principally the straight-line method based
on the estimated useful lives of the related assets. The estimated
useful lives are as follows:
Buildings and improvements 7-39 years
Machinery and equipment 3-10 years
Furniture and fixtures 3-10 years
Leasehold improvements are amortized over their estimated useful lives or
the term of the underlying lease, whichever is shorter. Maintenance and
repair costs are charged to operations as incurred; major renewals and
betterments are capitalized.
Other Intangible Assets - Intangible assets consist of a trademark
amortized on a straight-line basis over 15 years and a deferred credit
for negative goodwill recorded due to the acquisition of SecurSystems
amortized on a straight-line basis over 5 years. Accumulated
amortization was $12 thousand and ($29) thousand respectively at December
31, 1997.
Cash and Cash Equivalents - For purposes of the statements of cash flows,
the company considers temporary investments with original maturities of
three months or less to be cash equivalents.
Income Taxes - The Company follows Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes". Under SFAS
109, deferred income taxes are recognized for the future tax consequences
of differences between tax bases of assets and liabilities and financial
reporting amounts, based upon enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts expected to be realized. Income tax
expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Stock Based Compensation - In 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation. As permitted under this
Statement, the Company continues to follow the Accounting Principles
Board ( APB ) Opinion No. 25 for the recognition and measurement of
employees stock-based compensation and therefore provides only the
disclosures required under SFAS No. 123.
New Accounting Pronouncements - In February 1997, the FASB issued SFAS
No. 129, "Disclosure of Information about Capital Structure." The
Company is required to adopt the provisions of this statement for the
year ending December 31, 1998. This statement extends the previous
requirements to disclose certain information about an entity's capital
structure found in APB Opinion No. 10, "Omnibus Opinion-1996, No. 15,
"Earnings per Share, and FASB Statement No. 47, "Disclosure of Long-Term
Obligations, for entities that were subject to the requirements of those
standards. As the Company has been subject to the requirements of each
of those standards, adoption of SFAS No. 129 will have no impact on the
Company's financial statements.
In June, 1997 the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. The
Company is required to adopt the provisions of the statement for fiscal
periods beginning after December 15, 1997. This statement may require
the company to make additional disclosures.
In June 1997, the FASB issued No. 131, "Disclosures about Segments of an
Enterprise and Related Information, which requires the Company to
present certain information about operating segments and in condensed
financial statements for interim periods. The Company is required to
adopt the provisions of the statement for the year ending December 31,
1998. The statement may require the Company to make additional
disclosures.
3. NET INCOME (LOSS) PER SHARE
- -------------------------------
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This statement requires dual presentation of basic and diluted earnings
per share on the face of the income statement. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. SFAS No. 128 is effective for
fiscal years ending after December 15, 1997, and accordingly, has been
adopted by the Company as of December 31, 1997. The Company has restated
earnings per share for fiscal years 1995 and 1996. Options to purchase
53,050 shares of common stock at $2.81 were outstanding during 1997 but
were not included in the computation of diluted net income per common
share because the options' exercise price was greater than the average
market price of the common shares. The options were still outstanding at
December 31, 1997. Options to purchase 200,000, 56,290 and 25,000 shares
of common stock at $1.50, $1.81 and $2.00, respectively were outstanding
during 1996 but were not included in the computation of diluted net
income per common share because the options' exercise prices were greater
than the average market price of the common shares. Preferred stock
convertible to 1,260,460 shares of common stock was not included in the
computation of diluted net income per share in 1995 because such shares
would have been anti-dilutive.
The following is a reconciliation of the amounts used in calculating
basic and diluted net income per common share:
Per Share
Income Shares Amount
------ ------ -------
($ in thousands)
Basic net income per common share
for the year ended December 31, 1997:
Income available to common stockholders $ 696 3,004,974 $ .23
-----
Effect of dilutive preferred stock 1,102,902
Effect of dilutive stock options - 256,325
------ ---------
Diluted net income per common share
for the year ended December 31, 1997 $ 696 4,364,201 $ .16
------ --------- -----
Basic net income per common share
for the year ended December 31, 1996:
Income available to common
stockholders $ 331 2,293,602 $ .14
-----
Effect of dilutive preferred stock 1,260,460
Effect of dilutive stock options - 207,980
------ ---------
Diluted net income per common share
for the year ended December 31, 1996 $ 331 3,762,042 $ .08
------ --------- -----
Basic net income per common share
for the year ended December 31, 1995:
Income available to common
stockholders $ 663 1,657,000 $ (.40)
-----
Effect of dilutive stock options - -
------ ---------
Diluted net income per common share
for the year ended December 31, 1995 $ 663 1,657,000 $ (.40)
------ --------- -----
4. ACQUISITIONS AND DISPOSAL OF BUSINESSES
- -------------------------------------------
Acquisition of Shorrock Electronic Systems, Inc. - On July 11, 1996,
CompuDyne Corporation entered into and consummated a Stock Purchase
Agreement by and between SES Corporation USA ( the seller ) and CompuDyne
to purchase all of the capital stock of Shorrock Electronic Systems,
Incorporated ("SES ) from the seller. The seller is an indirect
subsidiary of BET Public Limited Company. SES, located in Hanover,
Maryland, is engaged in the sale, installation and maintenance of
physical security systems for correctional and other facilities. The
consideration paid to the seller for the stock of SES was approximately
$613 thousand. CompuDyne has accounted for the acquisition of SES using
the purchase method of accounting. The purchase price was allocated to
the net assets acquired based upon their estimated fair value at the date
of acquisition which resulted in an excess of net assets acquired over
cost (negative goodwill) of approximately $336 thousand. As a result,
the assigned values of the non-current assets of $231 thousand were
written down to zero and negative goodwill of $105 thousand was recorded.
The resulting purchase price allocation was based on the fair values as
follows:
Cash $ 47
Accounts receivable 1,028
Inventory 109
Prepaid expenses 12
Contract billings in excess of costs (150)
Accounts payable and accrued expenses (328)
Negative goodwill (105)
-------
$ 613
========
The accompanying financial statements include the operations for SES for
the period from July 11, 1996, the date of acquisition.
Acquisition of MicroAssembly Systems, Inc. - On August 21, 1995,
CompuDyne entered into and consummated a Stock Purchase Agreement by and
among the Company, Martin A. Roenigk and Alan Markowitz (Messrs. Roenigk
and Markowitz are, collectively, the "Sellers ) and MicroAssembly,
pursuant to which CompuDyne issued to the Sellers 1,260,460 shares of its
Convertible Preference Stock, Series D ("Series D Preference Stock ) in
exchange for all of the outstanding shares of capital stock of
MicroAssembly. This transaction represented a non-cash investing
activity and, therefore, was not been included in the Statement of Cash
Flows. The issuance by CompuDyne of the Series D Preference Stock,
together with the issuance of certain Notes, as defined below, and
certain options to purchase Common Stock, all as described below and in
accordance with the terms of the Stock Purchase Agreement, are referred
to as the "Transaction in which MicroAssembly became a wholly-owned
subsidiary of CompuDyne. Of the 1,260,460 Shares of Series D Preference
Stock issued to the Sellers, 945,345 shares were issued to Mr. Roenigk,
and 315,115 shares were issued to Mr. Markowitz. In November 1997 the
Series D Preference Stock was converted on a share for share basis to
Common Stock with full voting rights. No dividends had been paid on the
Series D Preference Stock. When converted a $0.246 per share Early
Conversion Adjustment was paid to Mr. Roenigk and Mr. Markowitz. The
adjustment totalled approximately $310 thousand and was recorded as a
reduction to accumulated deficit.The Series D Preference Stock had rights
to vote on a share for share basis with the Company's Common Stock. Each
share of Series D Preference Stock carried an annual aggregate dividend
equal to the lower of: (a) sixty percent (60%) of MicroAssembly's
after-tax net income in the previous calendar year, divided by 1,260,460,
or (b) eight percent (8%) of the Redemption Value of $1.50 per share of
the Series D Preference Stock. Dividends could have been paid on the
Series D Preference Stock, at the Company's option, in cash, CompuDyne
Common Stock, or a combination thereof, based upon the average closing
price of CompuDyne's Common Stock for the prior thirty (30) trading days.
There were no dividends accrued or paid in 1997, 1996 or 1995. Beginning
on August 21 in the year 2000, the Company could have, at its option,
redeem all or any part of the Series D Preference Stock for a price of
$1.80 per share, that being one hundred twenty percent (120%) of the
redemption value, plus accrued and unpaid dividends.
CompuDyne has accounted for the acquisition of MicroAssembly using the
purchase method of accounting. The purchase price, as restated, was
allocated to the net assets acquired based on their estimated fair values
at the date of acquisition.
The fair values of these assets and liabilities are summarized as
follows (in thousands):
Cash, net $ 52
Accounts Receivable 261
Inventories 436
Other Assets 76
Property, Plant and Equipment 531
Intangible Assets 58
Accounts Payable and Accrued Expenses ( 358)
Deferred Tax Liabilities ( 111)
------
Total - value assigned to Series D preferred stock $ 945
======
The accompanying financial statements include the operations of
MicroAssembly for the period from August 21, 1995, the date of
acquisition.
As part of the Transaction, in return for $400 thousand paid to CompuDyne
at the closing, CompuDyne issued to the Sellers Senior Convertible
Promissory Notes (the "Notes") in the aggregate principal amount of $400
thousand, which Notes were convertible, prior to redemption by CompuDyne,
into CompuDyne Common Stock at a conversion rate of $1.50 per share of
common stock, or 266,667 shares of common stock if the entire principal
amount of the Notes was converted. Of the $400 thousand principal amount
of Notes issued, $300 thousand principal amount of the Notes were issued
to Mr. Roenigk, and $100 thousand principal amount of the Notes were
issued to Mr. Markowitz. As described in a report filed by the Sellers
with the Securities and Exchange Commission and with the Company pursuant
to Section 13(d) of the Securities Exchange Act of 1934, the source of
the Sellers' $400 thousand investment in the Company was personal funds.
All of the notes were converted into common stock the third quarter of
1996.
As a further part of the Transaction, Norman Silberdick, the Company's
then Chairman, President, Chief Executive Officer and Director, resigned
as such. The Company's Board of Directors elected Mr. Roenigk to fill
Mr. Silberdick's seat on the Board of Directors, and to become its
Chairman, President and Chief Executive Officer. Mr. Markowitz was also
elected to the Company's six member Board of Directors. In recognition
of Mr. Roenigk's position as Chairman, President and CEO, the Company has
issued to him options to purchase up to 200,000 shares of the Company's
Common Stock for $1.50 per share. The options were to expire in ten (10)
years. Mr. Silberdick, as part of a related transaction described below,
turned in to the Company 60,000 shares of the Company's Common Stock
issued pursuant to a Stock Purchase Agreement, dated August 1, 1993,
between the Company and Mr. Silberdick, and he relinquished his rights to
purchase an additional 50,000 shares pursuant to such Agreement.
Divestiture of Suntec Division - On August 21, 1995, Quanta Systems
transferred all of the assets and liabilities of Quanta Systems's Suntec
division to Suntec Service Corporation, a newly-formed corporation
("Suntec"), in return for (i) all of Suntec's issued and outstanding
common stock and (ii) Suntec's agreement to pay to Quanta Systems a
royalty of 2% of Suntec's net sales and other revenues for thirty (30)
years from the date of the closing. Quanta Systems then sold all of
Suntec's Common Stock to Norman Silberdick, who resigned on that date as
CompuDyne's Chairman, President, CEO and Director.
As a condition precedent to the sale of the Suntec shares to Mr.
Silberdick, he relinquished to CompuDyne 60,000 shares of CompuDyne
Common Stock and purchase rights held by him to acquire an additional
50,000 shares of CompuDyne Common Stock.
As consideration for the shares of Suntec, Mr. Silberdick executed a
nonrecourse promissory note in the initial principal amount of $79
thousand (the "Silberdick Note"), payment of which was secured by a
pledge of all Suntec shares held by Mr. Silberdick, which shares must at
all times equal or exceed 33% of all outstanding shares of Suntec capital
stock. The Silberdick Note bears interest at an annual rate equal to the
Wall Street Journal prime rate, plus 2%. Through August 31, 2000, the
principal payments on the Silberdick Note are payable annually in
amounts equal to 25% of Suntec's net, after-tax income for the year in
question. Thereafter, the unpaid principal balance, as of that date,
shall be paid in five equal annual installments. Suntec has now ceased
all operations.
As part of the transaction, Quanta Systems loaned $50 thousand to Suntec
payable at the end of three years at prime plus 2% with interest due at
the anniversary date of the loan. The loan is a senior obligation of
Suntec with rights to security. As of December 31, 1996, the Company has
written off the full amount of this loan because Suntec ceased
operations. The effective interest rate was 10.5% at December 31, 1995.
Loss from Discontinued Operations includes a provision of $85 thousand in
1995 for the loss on disposal. Revenues included in loss from
discontinued operations were $656 thousand in 1995.
Pro-Forma Financial Information - The following unaudited pro-forma
financial information of CompuDyne Corporation reflects the acquisition
of MicroAssembly and the disposition of Suntec Service Corporation as if
these transactions had occurred on January 1, 1995, and the acquisition
of Shorrock (now SecurSystems, Inc.) as if this transaction had occurred
on January 1, 1996 and January 1, 1995:
(In Thousands) 1996 1995
-------- --------
Revenues $ 23,818 $ 15,833
Income (loss) before Extraordinary Items (1,226) (7,151)
Net Income (Loss) (145) (3,667)
Earnings (Loss) Per Share (.04) (2.21)
5. ACCOUNTS RECEIVABLE
- -----------------------
Accounts Receivable consist of the following:
(In thousands) December 31, December 31,
1997 1996
U.S. Government Contracts: ----------- -----------
Billed $ 1,712 $ 2,420
Unbilled 1,054 1,031
--------- -------
2,766 3,451
Commercial
Billed $ 2,084 $ 2,360
Unbilled 207 -
--------- -------
2,291 2,360
Total Accounts Receivable 5,057 5,811
Less Allowance for Doubtful Accounts (300) (538)
--------- -------
Net Accounts Receivable $ 4,757 $ 5,273
========= =======
Substantially all of the U.S. Government billed and unbilled receivables
are derived from cost reimbursable or time-and-material contracts.
Unbilled receivables include retainages of approximately $185 thousand
and $301 thousand at December 31, 1997 and 1996, respectively.
Direct sales to the U.S. Government for the years ended December 31,
1997, 1996 and 1995 were approximately $9.3 million, $15.5 million and
$8.9 million, respectively, or 47%, 70% and 86% of the Company's total
net sales for the same years. No other single customer accounted for
greater than 10% of the Company's net sales.
Contract costs for services provided to the U.S. Government, including
indirect expenses, are subject to audit by the Defense Contract Audit
Agency, ("DCAA"). All contract revenues are recorded in amounts expected
to be realized upon final settlement. In the opinion of management,
adequate provisions have been made for adjustments, if any, that may
result from the government audits. Quanta Systems received final
approval on their indirect rates for 1989 through 1994 from DCAA which
resulted in billings and collections of $350 thousand in 1997.
Included in unbilled receivables at December 31, 1997 is approximately
$457 thousand of costs relating to a certified claim on the Fort Bragg
contract performed by Quanta Systems. The contract was terminated by the
U. S. Government in September, 1997 after Quanta Systems submitted a
claim in May, 1997. Quanta Systems was unable to bill approximately $181
thousand of costs from the available funding of the contract. Of the
remaining $276 thousand of costs included in the unbilled receivables,
management believes that there are sufficient reserves established for
any amounts not recovered, and the outcome of the claim will not have a
material effect on the financial statements.
6. NOTES PAYABLE RELATED PARTIES
- ---------------------------------
In July, 1996, the holders of CompuDyne's $400 thousand Senior
Convertible Notes (which includes the Chairman and a Director) agreed to
convert the notes into 400,000 common shares. The same investors also
agreed to purchase 600,000 additional common shares for $600 thousand.
This financing, which was completed on July 12, 1996, added $1.0 million
to the Company's equity, reduced interest charges, and provided the cash
required to acquire SES and also provided working capital for SES
operations.
At the time the Senior Convertible Notes were issued in August 1995, they
had a conversion price of $1.50 per share. On May 23, 1996, the
CompuDyne Board approved an amendment to the Senior Convertible Notes
that reduced the conversion price to $1.00 per share based upon the price
of CompuDyne common stock at the time, the restricted nature of the stock
issued upon conversion, the limited liquidity for CompuDyne common stock
existing at the time, an evaluation of CompuDyne's balance sheet and the
need to strengthen CompuDyne's balance sheet in view of the proposed
acquisition of SES. The notes were converted into common shares in July,
1996.
CompuDyne entered into a subordinated note agreement on April 29, 1995
with Alan Markowitz, a Director, for $100 thousand. The agreement calls
for CompuDyne to pay $5,000 quarterly plus accrued interest for the
quarter at a rate of Prime plus 1%. Amounts outstanding at December 31,
1997 and December 31, 1996 were $50 and $70 thousand respectively.
Interest expense pertaining to the notes for 1997 and 1996 were $6 and $8
thousand respectively.
7. BANK NOTES PAYABLE
- ----------------------
The Company has a secured working capital line of credit agreement with
the Asian American Bank and Trust Company of Boston, Massachusetts which
allows borrowings of up to 75% of eligible accounts receivable. At
December 31, 1996, the maximum available under the line was $850 thousand
which has been increased to $1.75 million at December 31, 1997. The
credit agreement requires the Company to maintain a working capital ratio
of 1.1 to 1, and a debt service ratio of at least 1.0 to 1 with which the
Company was in compliance. During 1996, the interest rate was 2% above
the prime; the rate was reduced to .5% above prime in June, 1997 (10% at
December 31, 1997.) At December 31, 1997 and 1996, the Company had
outstanding borrowings of $1.3 million and $121 thousand respectively.
The current line is due to expire on July 1, 1998.
MicroAssembly has an unsecured line of credit with Fleet Bank for $100
thousand with no expiration date. The line of credit is guaranteed by Mr.
Roenigk. The rate is prime plus 2% (11.5% at December 31, 1997) and there
was $27 and $41 thousand outstanding as of December 31, 1997 and 1996,
respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents - The carrying amounts reported in the
balance sheets for cash and cash equivalents approximates fair value.
Notes Payable - The carrying amounts reported in the balance sheet
approximate fair value as the bank lines of credit are renewed annually
at current interest rates.
9. INCOME TAXES
- ---------------
The components of the income tax provision (benefit) from continuing
operations for the years ended December 31, 1997, 1996, and 1995 are as
follows:
$ thousands 1997 1996 1995
----------------------
Current $ 31 $ 84 $ (29)
Deferred (189) (14) (26)
------ ----- -----
$ (158) $ 70 $ (55)
====== ===== =====
The tax effects of the primary temporary differences giving rise to the
Company's net deferred tax assets and liabilities at December 31, 1997
and 1996 are summarized as follows:
December 31,
1997 1996
------------------
Assets:
Accrued expenses and deferred compensation $ 142 $ 25
Tax operating loss carryforward 10,341 9,416
Tax credit carryforward 459 408
Book reserves in excess of tax 315 122
Book depreciation in excess of tax - 28
Accrued pension liability 184 164
-------- --------
Total deferred assets 11,441 10,163
Valuation allowance (11,254) (10,163)
------ ------
Net deferred assets 187 -
Liabilities:
Tax depreciation in excess of book depreciation (64) -
Investment in subsidiary - (66)
------ ------
Total deferred liabilities (64) (66)
------ ------
Net deferred liabilities $ (64) $ (66)
======= =======
A valuation allowance is provided to offset fully the recorded current
deferred tax assets as management cannot conclude that such deferred tax
assets are more likely of realization than not. The non-current deferred
tax assets are more likely of realization than not and accordingly, no
valuation allowance is provided.
The difference between the statutory tax rate and CompuDyne's effective
tax rate from continuing operations are summarized as follows:
1997 1996 1995
------ ------ ------
Statutory federal income tax rates 35.0% 34.0% 34.0%
State income taxes, net of
Federal benefit 2.9 4.6 -
Change in valuation allowance (51.2) - (34.0)
Tax effect of NOL utilization (18.6) (27.0) -
Reversal of prior year taxes - - (10.9)
Tax effect of non-deductible items 2.5 3.6 (9.9)
----- ----- -----
Tax (29.4)% (15.2)% (20.8)%
At December 31, 1997, the Company and its subsidiaries have net operating
loss carryforwards available to offset future taxable income of
approximately $29 million, subject to certain severe limitations. These
carryforwards expire between 2000 and 2009. The utilization of
substantially all of these tax loss carryforwards is limited to
approximately $200 thousand each year as a result of the ownership change
which occurred in 1995. The Company also has carryforwards available for
alternative minimum tax purposes which do not differ significantly from
regular net operating loss carryforwards. The Company also has research
and development tax credits of approximately $459 thousand expiring
between 1999 and 2003.
10. COMMON STOCK AND COMMON STOCK OPTIONS
- ------------------------------------------
On November 12, 1992, the CompuDyne Board authorized the issuance of
300,000 shares of Common Stock to key employees of CompuDyne and Quanta
Systems at a price of $.40 per share, the fair market value at such time.
In January 1993, the Board subsequently authorized the issuance of an
additional 200,000 shares of Common Stock to a key employee at the same
price and on the same terms as those authorized on November 12, 1992.
These authorizations were formalized in Stock Purchase Agreements, dated
August 1, 1993, under which the employees may purchase an aggregate of
125,000 shares on August 1, of each of the years 1993 through 1996
provided certain conditions are met including continued employment by
CompuDyne, by paying cash for such shares or by giving the Company a
five-year non-recourse promissory note, collateralized by the stock and
bearing interest at 2% per annum over the rate designated by the First
National Bank of Maryland as its prime commercial rate. As of December
31, 1996, 302,500 shares of CompuDyne Common Stock had been issued to
five members of senior management, (the "Management Shares") in exchange
for promissory notes pursuant to the Stock Purchase Agreements. Due to
the resignation of two of the employees who were parties to the Stock
Purchase Agreements, 225,000 shares of CompuDyne Common Stock have been
issued under the Stock Purchase Agreements with no further shares
remaining.
In August 1995, the Company issued Martin A. Roenigk options, vested
immediately, to purchase up to 200,000 shares of the Company's Common
Stock for $1.50 per share, 100% of the fair market value of such shares
at the date of grant. The options expire in ten (10) years.
On February 2, 1996 the Compensation and Stock Option Committee granted
options to purchase 16,290 shares of CompuDyne Common Stock to key
employees of CompuDyne's subsidiary, MicroAssembly, at a price of $1.81
per share (100% of the fair market value of such shares at the date of
grant) and in accordance with the terms and conditions of the 1986 Stock
Incentive Compensation Plan. In May, 1996 the number of shares granted
was reduced to 12,040 shares when an optionee resigned and did not
exercise his options within 30 days following the date on which he ceased
to be an employee, as defined under the terms of the plan. In addition,
on February 2, 1996 the Compensation and Stock Option Committee granted
options to purchase 21,710 shares of CompuDyne Common Stock to key
employees of CompuDyne's subsidiary, MicroAssembly, at a price of $1.81
per share (100% of the fair market value of such shares at the date of
grant) and in accordance with the terms and conditions of the 1996 Stock
Incentive Plan for Employees (the "Plan"). These options vest over a five
(5) year term. The Plan was subsequently approved by the Shareholders at
its Annual Meeting on June 5, 1996. In May, 1996 the number of shares
granted was reduced to 15,960 shares when an optionee resigned and did
not exercise his options within 30 days following the date on which he
ceased to be an employee, as defined under the terms of the Plan. On
July 11, 1996 the Committee granted options, which vest over five years,
to purchase 121,000 shares, of CompuDyne Common Stock to key employees of
the newly acquired company, SecurSystems, and a key employee of Data
Control Systems, in accordance with the terms and conditions of the 1996
Stock Incentive Compensation Plan for Employees at a price of $1.625 per
share (the fair market value of such shares at the date of grant).
On September 18, 1996 the Company issued options to purchase 1,050 shares
of common stock for $1.625 per share to directors of the Company. On May
21, 1997 the Company issued options to purchase 1,050 shares of common
stock for $2.81 per share to directors of the Company. On November 17,
1997 the Company issued options to purchase 1,050 shares of common stock
for $1.69 per share to directors of the Company. Of the above shares to
the directors, 50% become vested after the second year and the remaining
50% after the third year.
On November 17, 1997 the Company also issued options, which vest over
five years, to purchase 52,000 shares of common stock at $2.81 per share
to selected employees of Quanta Systems and SecurSystems.
The transactions for shares under options were:
Year Weighted Year Year
ended Average ended ended
December 31, Excercise December 31, December 31,
1997 Price 1996 1995
------------- --------- ------------ -----------
Outstanding,
Beginning
of Period
Shares 375,050 $1.60 225,500 92,167
Prices $1.50-2.00 $1.50-14.125 $.75-14.125
Granted
Shares 54,100 $2.79 160,050 283,210
Prices $1.69-2.81 $1.81 $1.375-2.00
Exercised
Shares - - - 58,210
Prices - - - $1.375
Expired or
Canceled 25,000 $2.00 10,500 91,667
Outstanding,
End of Period
Shares 404,150 $1.73 375,050 225,500
Prices $1.50-$2.81 $1.50-2.00 $1.50-14.125
Options
Exercisable 253,775 375,050 225,500
Information with respect to stock options outstanding and stock options
excercisable at December 31, 1997 is as follows:
OPTIONS OUTSTANDING
-------------------
Range of Weighted Weighted
Exercise Number Outstanding Average Aver. Remaining
Price at December 31, 1997 Exer. Price Contractual Life
------------- -------------------- ----------- ----------------
$1.50 - $2.00 351,100 $1.57 1.21
$2.81 53,050 $2.81 4.88
-------
404,150
=======
OPTIONS EXCERCISABLE
Range of Weighted Weighted
Exercise Number Outstanding Average Aver. Remaining
Price at December 31, 1997 Exer. Price Contractual Life
------------- -------------------- ----------- ----------------
$1.50 - $2.00 253,512 $1.94 1.24
$2.81 263 $2.81 4.92
-------
253,775
=======
As permitted under SFAS No. 123, the Company continues to account for its
employee stock-based compensation plans and options granted under APB No.
25. No compensation expense has been recognized in connection with
options, as all options have been granted with an exercise price equal to
fair value of the Company s common stock on the date of grant.
Accordingly, the Company has provided below the additional disclosures
specified in SFAS No. 123 for 1996 and 1995. For SFAS No. 123 purposes,
the fair value of each option grant has been estimated as of the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest rate of 6.00%, expected
life of 7 years, dividend rate of zero percent and expected volatility of
60%. Using these assumptions, the fair value of the stock options
granted in 1997, 1996 and 1995 is $0, $165,000 and $231,000,
respectively, which would be amortized as compensation expense over the
vesting period of the options. Had compensation expense been determined
consistent with SFAS No. 123, utilizing the assumptions detailed above,
the Company s net income (loss) and earnings (loss) per share for the
years ended December 31, 1997, 1996 and 1995 would have been reduced to
the following pro forma amounts:
(In thousands) 1997 1996 1995
------ ------ ------
Net Income (loss):
As Reported $ 696 $ 331 $(663)
Pro Forma $ 696 $ 294 $(836)
Net Income (Loss) per share:
As Reported $ 0.23 $ 0.09 $(.40)
Pro Forma $ 0.23 $ 0.08 $(.50)
The resulting pro forma compensation cost may not be representative of
that expected in future years.
11. EMPLOYEE BENEFIT PLANS
- ---------------------------
The Company has a 401(k) retirement savings plan covering substantially
all employees. All employees are eligible to participate in the plan
after completing one year of service. Participants may make before tax
contributions of up to 15% of their annual compensation subject to
Internal Revenue Service limitations. CompuDyne currently matches
employee contributions up to the first 2.5% contributed. Expense for
matching contributions to the Plan was $114 thousand, $76 thousand and
$46 thousand for 1997, 1996, and 1995, respectively.
12. COMMITMENTS AND CONTINGENT LIABILITIES
- -------------------------------------------
The Company and certain of its subsidiaries are obligated as lessees
under various operating leases for office, distribution, manufacturing
and storage facilities.
The minimum rent payments include space which is sub-leased to Orion
Corporation. As of December 31, 1997, future minimum rental payments
required under operating leases that have initial or remaining
noncancellable terms in excess of one year are as follows (in thousands):
Year Ended December 31,
Sub-Lease Net
--------- ------
1998 $ 462 $ (85) $ 377
1999 476 (87) 389
2000 164 (15) 149
2001 45 - 45
2002 5 - 5
----- ------ ------
$1,152 $ (187) $ 965
Rental expense was $452 thousand, $468 thousand and $399 thousand in
1997, 1996, and 1995, respectively.
The Company is party to certain legal actions and inquiries for
environmental and other matters resulting from the normal course of
business. Although the total amount of liability with respect to these
matters cannot be ascertained, management of the Company believes that
any resulting liability will not have a material effect on its financial
position or results of future operations.
13.RELATED PARTIES
Corcap, Inc. ("Corcap"), entered into a Settlement Agreement, dated March
25, 1996 (the "Settlement Agreement"), with Lydall, Inc. ("Lydall")
pursuant to which Corcap transferred 120,000 shares (the "Transferred
Shares ) of CompuDyne Common Stock to Lydall in settlement of certain
claims.
As part of the Settlement Agreement, Lydall required as a condition to
signing, that CompuDyne enter into a registration rights agreement with
Lydall obligating CompuDyne to register the Transferred Shares upon
demand of Lydall two years following the date of the Agreement or in a
"piggyback registration at any time upon the proposed registration by
CompuDyne of its stock. In order to induce CompuDyne to enter into such
agreement, Corcap agreed to issue an option (the "Corcap Option") to
CompuDyne to purchase 16,666 shares of CompuDyne Common Stock at a price
of $.01 per share exercisable immediately for a period of five years
under a Stock Option Agreement, dated March 25, 1996, between Corcap and
CompuDyne. In addition, Corcap agreed to limit CompuDyne's support of
its legal services to $1 thousand per month for 24 months. On December
31, 1996 CompuDyne exercised its option to purchase 16,666 shares of
CompuDyne Stock pursuant to the Option Agreement, which has been recorded
as treasury stock.
14. KOLUX PENSION PLAN
- ----------------------
In March 1987, the Company ceased its Kolux plant operations resulting in
a curtailment of the defined benefit pension plan covering certain plant
employees. As of December 31, 1997, the actuarial present value of
accumulated plan benefits was estimated to be $801 thousand, based upon
an 7.0% interest rate assumption; the 1984 Unisex Mortality table with a
five year age setback for females; and the March 1, 1997 (latest
actuarial valuation) employee database projected forward to December 31,
1997. All benefits under the plan are fully vested. The market value of
plan assets as of December 31, 1997 was $314 thousand. Accordingly, the
plan's unfunded accrued liability as of December 31, 1997 of $489
thousand has been reflected in the balance sheet as accrued pension
costs.
15. INDUSTRY SEGMENT INFORMATION
- -----------------------------------
The Company currently operates in five business segments: government
engineering services, physical security services, the manufacture of
telemetry and telecommunications equipment, the manufacturing and
marketing of the Stick-Screw (TM) System and distribution of physical
security products. During the years ended December 31, 1997, 1996, and
1995 sales to the United States Federal Government amounted to 47%, 70%
and 86%, respectively, of the Company's total net sales. No other single
customer accounted for greater than 10% of the Company's net sales.
The following segment information includes revenues and related costs for
Quanta Systems, government engineering services, DCS's telemetry and
telecommunications products and Corporate activities for the three years
ended December 31, 1997, 1996 and 1995. Also included are revenues and
related costs from SecurSystems physical security services for the year
ended December 31, 1997 and from its July 11, 1996 acquisition through
December 31, 1996, SYSCO's product sales operations from it's inception,
October 11, 1997 through December 31, 1997 and MicroAssembly's Stick-
Screw product sales during the year ended December 31, 1997, December,
1996 and from its August 21, 1995 acquisition through December 31, 1995.
Revenues Gross Profit
--------------------- ----------------------
1997 1996 1995 1997 1996 1995
-------------------------- -------------------------
Quanta Systems $ 10,714 $ 15,644 $ 8,878 $ 1,694 $ 1,453 $ 1,169
Data Control
Systems 1,317 1,480 863 364 462 269
SecurSystems 6,217 3,530 - 1,084 677 -
SYSCO - - - - - -
MicroAssembly 1,768 1,488 567 336 211 78
CompuDyne Corporate - - - - - -
------- ------ ------- ------ ------ -------
$ 20,016 $ 22,142 $ 10,308 $ 3,478 $ 2,803 $ 1,516
Total Assets, at Year End Operating Income/(Loss)
------------------------- -------------------------
1997 1996 1995 1997 1996 1995
------------------------- -------------------------
Quanta Systems $ 2,234 $ 3,157 $ 1,251 $ 764 $ 538 $ 546
Data Control
Systems 1,375 812 758 18 13 (311)
SecurSystems 2,060 1,961 - 82 245 -
SYSCO - - - (147) - -
MicroAssembly 1,286 2,300 2,392 208 3 (46)
CompuDyne Corporate 474 (655) (454) (385) (332) (246)
------- ------- ------- ------ ------- -------
$ 7,429 $ 7,575 $ 3,947 $ 540 $ 467 $ (57)
Capital Expenditures Depreciation
-------------------- ------------
1997 1996 1995 1997 1996 1995
----------------------- -------------------------
Quanta Systems $ 78 $ 9 $ 4 $ 13 $ 3 $ -
Data Control Systems 55 4 - 26 13 -
SecurSystems 55 8 - 11 30 -
SYSCO - - - - - -
MicroAssembly 63 12 74 80 79 28
CompuDyne Corporate - - - - - -
------ ------ ------- ----- ------ ------
$ 51 $ 33 $ 78 $ 130 $ 125 $ 28
16. SONOMA SETTLEMENT COSTS
- ----------------------------
On February 20, 1998, SecurSystems settled its claim against and from the
County of Sonoma, California. The Company has accrued $270 thousand of
settlement costs and legal fees related to this claim at December 31,
1997. With the settlement management believes there will be no
additional liabilities to the Company from this matter.
SCHEDULE II
COMPUDYNE CORPORATION AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996, and 1995
($ Thousands)
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deduction of Period
- ------------- --------- -------- --------- ---------
Year Ended December 31, 1997
Reserve and allowances
deducted from asset
accounts:
Obsolescence reserve
for inventory $ 299 $ 14 $ - $ 313
Reserve for accounts
receivable 538 60 (298) 300
Year Ended December 31, 1996
Reserve and allowances
deducted from asset
accounts:
Obsolescence reserve
for inventory $ 216 $ 83 $ - $ 299
Reserve for accounts
receivable 205 333 - 538
Year Ended December 31, 1995
Reserve and allowances
deducted from asset
accounts:
Obsolescence reserve
for inventory $ 201 $ 15 $ - $ 216
Reserve for accounts
receivable 207 3 (5) 205
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COMPUDYNE CORPORATION
---------------------
(Registrant)
By:/s/ William C. Rock
-----------------------
William C. Rock
Dated: March 30, 1998 Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March ??, 1998.
/s/ Martin A. Roenigk Director, Chairman, President
- --------------------- and Chief Executive Officer
Martin A. Roenigk
/s/ David W. Clark, Jr. Director
- ----------------------
David W. Clark, Jr.
/s/ Millard H. Pryor, Jr. Director /s/ Alan Markowitz Director
- ------------------------ ------------------
Millard H. Pryor, Jr. Alan Markowitz
/s/ Miles P. Jennings Director /s/ Philip M. Blackmon Director and
- --------------------- ---------------------- Executive Vice-
Miles P. Jennings Philip M. Blackmon President
/s/ William C. Rock Chief Financial Officer
- ------------------ and Principle Accounting
William C. Rock Officer