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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission File Number 0-29798
CompuDyne Corporation
(Exact name of registrant as specified in its charter)
Nevada 23-1408659
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7249 National Drive, Hanover, Maryland 21076
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410)712-0275
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g)
of the Act : Common Stock $.75 par value
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].
As of March 30, 2000, a total of 5,324,211 shares of Common Stock, $.75 par
value, were outstanding.
The aggregate market value of Common Stock held by non-affiliates of the
Registrant, based upon the average of the bid and asked prices on the Nasdaq
National Market on March 30, 2000 was approximately $14.1 million
(see ITEM 5).
Documents incorporated by reference: Portions of the Proxy Statement relating to
the 1999 Annual Meeting of Shareholders are incorporated in Part III.
PART I
ITEM 1. BUSINESS
Description of Business
- -------------------------
CompuDyne Corporation ("CompuDyne" or the "Company"), a Nevada corporation,
incorporated in Pennsylvania on December 8, 1952, changed its state of
incorporation to Nevada on May 8, 1996.
Overview
- ---------
CompuDyne operates in three general sectors of the security industry -
Corrections, Attack Protection and Federal Systems:
Corrections - CompuDyne's Norment Security Group ("NSG"), headquartered in
- ------------ Montgomery, AL, provides physical and electronic security products
and services primarily to the corrections industry (jails and prisons) and
secondarily to the courthouse, municipal and commercial markets. NSG operates
through the following subsidiaries and divisions:
Norment is a detention contractor, responsible for most installation work
on larger projects. Installation will involve hardline (steel security
doors, frames, locking devices, etc) and sophisticated electronic security
systems including software, electronics, touchscreens, CCTV, perimeter
alarm devices, etc.
TrenTech is an electronic security systems designer, manufacturer and
integrator. TrenTech integrates generally available products and software
as well as designing proprietary systems such as IDEAS and a video badging
system. TrenTech provides systems to Norment for installation.
Airteq, supplemented by Norshield Corporation's, ("Norshield Security
Products or Norshield") manufacturing capacity, offers a complete
line of locks and locking devices to the corrections industry. Long an
industry leader and innovator in pneumatic locking technology, AirTeq in
January 2000 introduced an innovative new electromechanical sliding
device, which completes its product line.
NSG Regional Offices provide field level design, installation and
maintenance of both hardline (physical) and electronic security products.
Primary offices are in Hanover, MD, Raleigh, NC, Columbia, SC, Phoenix, AZ,
Tucson, AZ, Milwaukee, WI, and Livermore, CA. Smaller offices are located
in Massachusetts and New Jersey.
Combined, NSG is the country's largest supplier of physical and
electronic security products, integration services and maintenance for
jails, prisons and courthouses. Projects range from very small to as large
as $15-$20 million. Security maintenance outsourcing contracts range from
very small to over $1 million per year and provide for the routine
maintenance and emergency repair of sophisticated security control systems
and related equipment.
NSG also includes software based control products. CorrLogic develops,
installs and maintains the most robust and extensive software in the
industry for the management of inmates and other personnel and processes
within the courthouse, jail and prison environment. CorrLogic software is
designed to handle the country's largest jails, with recent installations
including Wayne County (Detroit), MI, Shelby County (Memphis), TN, and
Hennepin County (Minneapolis), MN. SYSCO has exclusive North American
rights to the PC-ADACS (Alarm and Distributed Access Control System)
software based system developed by Shorrock Electronics in England. SYSCO
also has a proprietary product, SecurLan, which is designed to provide
physical protection for Local Area Network conduits and cables for computer
networks.
Attack Protection - Norshield is the country's largest manufacturer of bullet,
- ----------------- blast and attack resistant windows and doors designed for
high security applications such as embassies, courthouses, Federal Reserve
buildings, and banks. Norshield's largest customer is the U.S. Department of
State, and Norshield is a major supplier of bullet, blast and attack resistant
products to U.S. Embassies around the world. Norshield produces an integrated
structurally secure product where the rated protection comes not from just the
glass but from the frame and encasement as well. Norshield also manufactures
bullet, blast and attack resistant products on an Original Equipment
Manufacturer ("OEM") basis for a selected group of corporate clients. Examples
of Norshield commercial products include security doors and windows, transaction
accessories, cash drawers, guard booths, toll booths and drive up windows.
Norshield also manufactures cell door sliding devices for sale under the Airteq
brand.
Federal Systems - Quanta Systems, Inc., ("Quanta") has been serving the federal
- ---------------- government's intelligence community since 1950. Serving the
military, government agencies, and state and local customers, Quanta provides
specialty engineering and security services, often of a classified nature. In
recent years Quanta has developed and emphasized a special competence in
physical and electronic security, which has become its primary focus. Quanta,
along with its Data Control Systems division, ("DCS"), provides electronic black
box manufacturing, tactical systems integrations, and the design and production
of proprietary communications products.
MicroAssembly - Located in Willimantic, Connecticut, MicroAssembly is a
- ------------- manufacturer of a proprietary automated process called the
Stick-Screw System. All of the assets of MicroAssembly were sold on May 31,
1999 and MicroAssembly changed its name to 4 Focus, Inc..
See Note 15 "Operating Segment Information" to the Consolidated Financial
Statements of CompuDyne for more information about the results of operations
from the three operating segments.
Market
- -------
The market for jail and prison security systems is related to new facility
construction, existing facility upgrades, and the trend towards outsourcing
government services. Approximately $3.1 billion is spent annually on
correctional facility construction, of which typically 14%-15% relates to
security hardware and security electronics. Most upgrade and all maintenance
work would be in addition to this. Other security markets, which the Company
serves, including state and local government facilities, federal government
facilities, and large commercial installations are much larger. The commercial
security marketplace is often estimated at $1.8 billion and federal government
expenditures on security are conservatively estimated at $1.7 billion.
The Company faces considerable competition, from large and small companies, in
all of its lines of business. While the Company is the largest supplier of
physical and electronic security to the corrections industry, it does compete
with one other medium sized competitor and many small competitors.
Most of the Company's business is done on a bid or request for proposal basis.
Much of the federal systems work is on a cost plus basis and is subject to
audit.
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
Norment's, Quanta Systems' and DCS' products are electronic components and steel
or aluminum sheets, stampings and castings. These materials are generally
available from a number of different suppliers. 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, 1999 was $100.3 million
compared to $80.4 million as of December 31, 1998. Backlog for Corrections was
$78.4 million at December 31, 1999 compared with $69.6 million at December 31,
1998. Attack protection had $15.4 million in backlog at December 31, 1999
compared with $6.8 million at December 31, 1998 and Federal Systems had $6.5
million at December 31, 1999 compared with $4.0 million at December 31, 1998.
For the year ended December 31, 1999, direct sales to the U.S. Government
amounted to $10.9 million or 10% of the Company's total net sales compared with
$7.8 million and $9.3 million in fiscal years 1998 and 1997, respectively, or
24% and 47% of the Company's total net sales. No other single customer
accounted for greater than 10% of the Company's net sales.
The Company undertakes research and development activities at DCS to expand and
improve its product lines. Research and development expenditures were $80
thousand during the fiscal year ended December 31, 1999, compared with $169
thousand and $172 thousand during 1998 and 1997, respectively. In 1999,
expenditures were made by DCS to upgrade and expand the capabilities of its
products.
At December 31, 1999, the Company had 632 permanent employees. None of the
permanent employees are subject to collective bargaining agreements. NSG
regularly hires union personnel on a temporary basis for field projects. These
personnel are subject to various collective bargaining agreements depending on
their skills and locale. At December 31, 1999, 110 of these employees were
covered under collective bargaining agreements.
Year 2000 Compliance
- --------------------
Subsequent to December 31, 1999 and to date, the Company has not had any adverse
effects to its systems or operations resulting from the Year 2000 issue. As a
result, there has been no need to implement any Year 2000 contingency plans.
Additionally, to date, no customers, vendors, or service providers have informed
the Company that the Year 2000 issue has impacted them. Although no Year 2000
issues have impacted the Company, management intends to continue monitoring its
critical systems so that identification of any Year 2000 issues that may occur
will be identified and remedied on a timely basis.
Financial Information About Foreign and Domestic Operations
- -----------------------------------------------------------
Export sales for the Company were $7.5 million, $2.5 million and $257 thousand,
for the years ended December 31, 1999, 1998 and 1997, respectively.
Cautionary Statement Regarding Forward-Looking Information
- ----------------------------------------------------------
Any statements in this annual report that are not statements of historical fact
are forward-looking statements that are subject to a number of important risks
and uncertainties that could cause actual results to differ materially.
Specifically, any forward-looking statements in this annual report related to
the Company's objectives of future growth, profitability and financial returns
are subject to a number of risks and uncertainties, including, but not limited
to, risks related to a growing market demand for the Company's existing and new
products, continued growth in sales and market share of the Company's products,
pricing, market acceptance of existing and new products, general economic
conditions, competitive products, and product and technology development. There
can be no assurance that such objectives will be achieved.
ITEM 2. PROPERTIES
The Company occupies its principal executive offices adjacent to Baltimore
Washington International Airport in Baltimore, Maryland. The Company leases
approximately 3,200 square feet of office space.
As of March 1, 2000 Corrections leased primary facilities for engineering,
assembly and administration including Alabama - 55,875 square feet, California -
15,795 square feet, Colorado - 15,378 square feet, Oregon - 10,815 square feet,
Maryland - 9,500 square feet, Arizona - 4,000 square feet, North Carolina -
2,000 square feet and South Carolina - 1,800 square feet.
As of March 1, 2000 Attack Protection owned primary facilities for engineering,
manufacturing and administration in Alabama - 100,703 square feet. This
facility is encumbered by the Industrial Revenue Bond.
As of March 1, 2000 Federal Systems leased primary facilities for engineering,
assembly and administration in Maryland - 23,090 square feet.
(1) See Note 13 to the Consolidated Financial Statements for additional
information relating to lease expense and commitments.
The Company leases only those properties necessary to conduct its business and
does not invest in real estate or interests in real estate on a speculative
basis. The Company believes that its current properties are suitable and
adequate for its current operations, however; as its operations grow, additional
space may be required to service contracts in other areas.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain legal actions and inquiries for environmental
and other matters resulting from the normal course of business. Although the
total amount of liability with respect to these matters cannot be ascertained,
management of the Company believes that any resulting liability should not have
a material effect on its financial position, results of future operations or
cash flows.
The Company has been served over the past several years with a number of New
York, New Jersey and Pennsylvania lawsuits involving asbestosis related personal
injury and death claims in which York-Shipley, Inc. and/or CompuDyne Corporation
and/or CompuDyne, Inc. is a defendant. The complaints against CompuDyne, Inc.
have been referred to the trustee in bankruptcy for CompuDyne, Inc. The Company
itself has been named as a defendant more frequently in 1998 and 1999 in New
York state litigation and has advised its insurers of each of these cases for
which the insurers are providing a defense pursuant to agreement with the
Company, subject to reservation of rights by the insurer. The insurers have
advised that claims in such litigation for punitive damages and intentional
conduct are not covered. The Company cannot ascertain the total amount of
potential liability with respect to these matters, but does not believe that any
such liability should have a material effect on its financial position, future
operations or future cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMPUDYNE COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
CompuDyne Common Stock was traded in the over-the-counter market, and in June
1999 began being quoted on the Nasdaq National Market, under the symbol "CDCY".
There were 1,885 common shareholders of record as of March 30, 2000.
The following table sets forth the high and low bids for CompuDyne Common Stock
from January 1, 1998 to June 10, 1999 on the over-the-counter market, as quoted
on the OTC Bulletin Board and from June 11, 1999 to December 31, 1999 on the
Nasdaq National Market. Over -the- counter market quotations reflect
inter-dealer prices, without retail mark-up, or mark-down or commissions and may
not necessarily reflect actual transactions.
1998 1999
----- ----
Quarter Ended High Low High Low
- --------------------------------------------------------------------
March 31 $ 3.3750 $ 1.6250 $ 8.2500 $ 3.8750
June 30 3.8750 2.2500 8.7500 6.3750
September 30 3.4375 2.2500 8.1250 5.7810
December 31 4.5000 2.0313 8.7500 6.2500
The Company has not paid any dividends on its common stock during the years
ended December 31, 1999 and 1998, and its Board of Directors has no intention of
declaring a dividend in the foreseeable future. Under the terms of the
financing agreement for the purchase of Norment/Norshield, any intended
declaration of common stock dividends must first be approved by LaSalle National
Bank and William Blair Mezzanine Capital Partners II, L.L.C., and cash dividends
are not allowed to be paid under this agreement.
Recent Sales of Unregistered Securities
- ---------------------------------------
On December 3, 1998 (effective November 28, 1998), CompuDyne acquired Norment
Industries and Norshield Corporation. In connection with this purchase CompuDyne
issued 1,075,507 unregistered shares of common stock at $2.79 per share, a
warrant to purchase 297,924 shares of common stock exercisable at $3.25 per
share and secured $9.0 million of subordinated debt to William Blair Mezzanine
Capital Partners II L.L.C.. See Note 4 to the Consolidated Financial Statements
of CompuDyne for further details.
On May 7, 1999 (effective April 30, 1999), CompuDyne acquired all of the assets
of the Correctional Information Systems Division, "CIS", of BI Incorporated
("BI"). CompuDyne operates this business under the name CorrLogic. In
connection with this purchase, CompuDyne issued 166,667 unregistered
shares of common stock at $7.50 per share.
On November 12, 1999 CompuDyne acquired all of the assets of Ackley Dornbach,
Inc. In connection with this purchase, CompuDyne issued 15,000 unregistered
shares of common stock at $8.00 per share.
ITEM 6. SELECTED FINANCIAL DATA
The following is a consolidated summary of operations of CompuDyne and its
subsidiaries for the years ended December 31, 1999, 1998,
1997, 1996, and 1995. 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,
---------------------------------
1999(a) 1998(b) 1997 1996 1995
---------- --------- --------- --------- --------
Net sales $ 111,446 $ 31,916 $ 20,016 $ 22,142 $ 10,308
========== ========= ======== ======== ========
Gross profit $ 21,355 $ 6,052 $ 3,279 $ 2,132 $ 1,516
Sonoma settlement costs - - 270 - -
Selling, general
and administrative 15,231 4,415 2,257 1,431 1,214
Research and development 80 169 172 234 359
---------- -------- -------- -------- --------
Operating income(loss) $ 6,044 $ 1,468 $ 580 $ 467 $ (57)
========== ======== ======== ======== ========
Interest expense,
net of interest income $ 2,203 $ 295 $ 62 $ 39 $ 22
========== ======== ======== ======== ========
Income (loss) from
continuing operations $ 2,670 $ 847 $ 696 $ 391 $ (210)
Loss from discontinued
operations - - - (60) (453)
--------- -------- --------- -------- --------
Net income (loss) $ 2,670 $ 847 $ 696 $ 331 $ (663)
========== ======== ========= ======== ========
Earnings (loss) per share(c):
Basic
- -----
Continuing operations $ .51 $ .20 $ .23 $ .17 $ (.13)
Discontinued operations - - - (.03) (.27)
------- -------- --------- --------- -------
Net income (loss) $ .51 $ .20 $ .23 $ .14 $ (.40)
======= ======== ========= ========= =======
Weighted average number
of common shares
outstanding 5,237 4166 3,005 2,294 1,657
======= ======== ========= ======== =======
Diluted
- --------
Continuing operations $ .46 $ .20 $ .16 $ .10 $ (.13)
Discontinued operations - - - (.02) (.27)
Extraordinary items - - - - -
------- -------- -------- --------- -------
Net income (loss) $ .46 $ .20 $ .16 $ .08 $ (.40)
======= ======== ======== ========= =======
Weighted average number
of common shares and
equivalents 5,868 4,343 4,364 3,762 1,657
======= ======== ======== ======== ========
Total assets $ 57,447 $ 43,570 $ 7,598 $ 7,575 $ 3,947
======== ======== ======== ======== ========
Long-term debt $ 17,370 $ 19,390 $ 30 $ 50 $ 470
Total shareholders ======== ======== ======== ======== ========
equity $ 10,030 $ 5,890 $ 2,162 $ 1,776 $ 421
======== ======== ======== ======== ========
Notes:
(a)Includes operations of CorrLogic from May 30, 1999, the date of purchase,
Ackley Dornbach from November 12, 1999, the date of purchase, and
MicroAssembly from January 1, 1999 through May 31, 1999, the date of
disposition.
(b)Includes the operations of Norment/Norshield from November 28, 1998, the
date of acquisition.
(c) No dividends have been paid on Common Stock during the above periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
- -------------------
Long-term debt was $17.4 million and the current portion of long-term debt was
$2.3 million at December 31, 1999 compared with long-term debt of $19.4 million
and current portion of long-term debt of $1.1 million at December 31, 1998.
During 1999 the Company paid down its long-term debt by $2.1 million and
incurred additional long-term debt of $1.1 million for the purchase of
CorrLogic. Working capital decreased from $18.8 million at December 31, 1998 to
$16.1 million at December 31, 1999.
During 1999 CompuDyne had net income of $2.7 million compared with $847 thousand
in 1998. The results for 1999 included twelve months of operating results for
Norment and Norshield whereas 1998 included only one month since they were
acquired in November 1998.
Results of Operations 1999 Compared with 1998
- ---------------------------------------------
CompuDyne's net sales increased $78 million (244%) from $32 million in 1998 to
$111 million in 1999. The Norment Security Group accounted for the largest part
of this increase. Sales in the Corrections group were $82 million in 1999, up
$66 million or 413% from $16 million in 1998. Norment accounted for $57
million, the largest portion of this increase. Norment only operated one month
in 1998 compared with twelve months in 1999, since it was acquired on November
28, 1998. CorrLogic had incremental sales of $4.6 million, since it was
acquired in May of 1999. Attack Protection Group accounted for $13.8 million of
the increase with sales of $15.1 million in 1999 compared with $1.3 million in
1998. The Attack Protection Group also operated twelve months in 1999 compared
with one month in 1998, since it was acquired on November 28, 1998. The Federal
Systems Group's sales increased from $12.5 million in 1998 to $13.2 million in
1999, an increase of $618 thousand. Sales at Micro Assembly were down $1.1
million in 1999, to $670 thousand from $1.8 million in 1998. The assets of
Micro Assembly were sold on May 31, 1999 and therefore it only operated for five
months in 1999 compared with twelve months in 1998.
CompuDyne's gross margin was $21.4 million in 1999, up $15.3 million from $6.1
million in 1998. The Corrections Group's gross margin increased $12.7 million
to $16.1 million in 1999, from $3.4 million in 1998. Norment had an increase of
$8.3 million in 1999 to $9.7 million, up from $1.4 million in 1998. This
reflected operations for twelve months in 1999 compared with one month in 1998.
The Attack Protection Group's gross margin increased $3.0 million in 1999 to
$3.3 million, up from $313 thousand in 1998. This also reflects twelve months
of operation in 1999 compared with one month in 1998. CorrLogic had an
incremental margin of $2.3 million since it was acquired on May 31, 1999. The
Federal Systems group had a decrease in gross margin of $79 thousand from $1.9
million in 1998 to $1.8 million in 1999. MicroAssembly had a $310 thousand
decrease in gross margin decreasing from $462 thousand in 1998 to $152 thousand
in 1999. This reflects operating only five months in 1999 compared with twelve
months in 1998.
CompuDyne's selling, general and administrative expenses increased $10.8 million
at CompuDyne in 1999, up from $4.4 million in 1998 to $15.2 million in 1999. In
the Corrections Group, the selling, general and administrative expenses
increased from $2.3 million in 1998 to $11.2 million in 1999, an increase of
$8.9 million. The largest part of this increase was from Norment's operations.
It had an increase of $5.3 million, up from $874 thousand in 1998 to $6.2
million in 1999. Norment only operated one month in 1998 compared with twelve
months in 1999, since it was acquired on November 28, 1998. CorrLogic also had
an additional $2.3 million of selling, general and administrative costs in
1999. These costs were incremental since it was acquired on May 30, 1999.
The Attack Protection Group had an increase in selling, general and
administrative expenses of $1.5 million to $1.8 million in 1999, up from $278
thousand in 1998. This increase is a result of twelve months of operations in
1999 compared with one month in 1998, since its acquisition on November 28,
1998. The Federal Systems group had a decrease in selling, general and
administrative expenses of $86 thousand, down to $717 thousand in 1999 compared
with $803 thousand in 1998. MicroAssembly's selling, general and administrative
expense was $148 thousand in 1999, down $264 thousand from $412 thousand in
1998. This reflects operations of only five months in 1999 compared with twelve
months in 1998. CompuDyne's corporate selling general and administrative
expense increased from $634 thousand in 1998 to $1.4 million in 1999, an
increase of $753 thousand.
Research and Development costs related to Quanta System's DCS division were $80
thousand in 1999, down $89 thousand from $169 thousand in 1998. The $80
thousand was used to upgrade and expand the capabilities of its equipment.
Interest expense in 1999 was $2.2 million, up $1.9 million from $295 thousand in
1998. This increase was due to expanded borrowings to finance the acquisition
of Norment/Norshield.
CompuDyne operating income increased $4.5 million in 1999 to $6.0 million, up
from $1.5 million in 1998. The Corrections Group had operating income of $4.9
million in 1999, up $3.8 million from $1.1 million in 1998. The largest portion
of this increase was from Norment, which had an increase in operating income of
$3 million from $500 thousand in 1998 to $3.5 million in 1999. This reflects
operations for twelve months in 1999 compared with only one month in 1998 since
Norment was acquired on November 28, 1998. The Attack Protection Group had
operating income of $1.5 million in 1999. This was an increase of $1.5 million
from $34 thousand in 1998. This reflects operations for a full twelve
months in 1999 compared with only one month's operations in 1998. Operating
income for the Federal Systems Group increased $96 thousand in 1999, up from
$920 thousand in 1998 to $1.0 million in 1999.
Results of Operations 1998 Compared with 1997
- ---------------------------------------------
The following discussion has been changed since it was previously issued, in
order to conform to the new operating segments as defined in 1999.
CompuDyne's net sales increased from $20.0 million in 1997 to $32.0 million in
1998, an increase of $11.9 million. Sales in Corrections accounted for $10.1
million of the total increase with sales of $16.3 million in 1998 compared with
$6.2 million in 1997. Quanta SecurSystems, Inc. ("SecurSystems") had an
increase of $4.3 million and Norment had an increase of $5.6 million. These
sales are incremental since Norment was acquired in November 1998. Attack
Protection had net sales of $1.3 million in 1998, which was incremental since it
was also acquired in November 1998. Federal Systems had net sales of $12.5
million in 1998, a $505 thousand increase over $12.0 million in 1997.
CompuDyne's gross margin increased $2.8 million to $6.1 million in 1998 up from
$3.3 million in 1997. Corrections accounted for $2.3 million of this increase,
$865 thousand at SecurSystems and $1.4 million at Norment, which was
incremental. Attack Protection contributed $313 thousand to the total increase,
which was also incremental. Federal Systems accounted for an additional $256
thousand to the increase in gross margin. There was a $97 thousand decrease in
gross margin at MicroAssembly.
CompuDyne's selling, general and administrative costs increased $1.9 million, up
from $2.5 million in 1997 to $4.4 million in 1998.
Corrections added $1.1 million to the increase, $874 thousand of which was due
to the newly acquired Norment. The acquisition of the Attack Protection group
in November 1998 added an additional $278 thousand and the Federal Systems group
added $120 thousand to the increase.
Research and development costs, which related to Quanta Systems' DCS product
division were $169 thousand in 1998 compared with $172 thousand in 1997. The
costs in 1998 were expended to develop three new products.
Interest expense in 1998 totaled $295 thousand, an increase of $233 thousand
over the 1997 total of $62 thousand. This increase was due to the expanded
borrowings to finance the acquisition of Norment/Norshield.
CompuDyne's 1998 income from operations increased $928 thousand or 172% in 1998
to $21.5 million, up from $540 thousand in 1997. The Corrections group had
income of $1.1 million in 1998, up $1.2 million from a loss of $64 thousand in
1997. Attack Protection had incremental income of $34 thousand and the
Federal Systems group had income of $920 thousand in 1998, an increase of $139
thousand over $781 thousand in 1997.
Liquidity
- ----------
The Company's principal source of cash is from operating activities and bank
borrowings. The Company's primary requirement for financing is to carry
inventory, billed and unbilled receivables, the majority of which are due under
prime contracts with the United States Government, state and local governments
or subcontracts thereunder.
Net cash flows provided by operations was $4.5 million in 1999 compared with
$3.8 million in 1998. Net income increased from $847 thousand in 1998 to $2.7
million in 1999. Another effect on cash from operations is $1.5 million in
depreciation and amortization. Accounts receivable account for a net cash out
flow of $4.4 million whereas accounts payable represents $5.1 million of cash
flow. The net of billings in excess of costs and costs in excess of billings
totaled $2.4 million of cash received. A total of $1.4 million was realized on
the sale of the assets of MicroAssembly. The purchase of CIS required $1.2
million in cash. Capital expenditures included $2.1 million for an expansion at
Norment, $225 thousand for the accounting system at Norment and $1.5 million
for other normal capital expenditures. The Company repaid $4.1 million of
borrowings from long-term debt, of which $2.1 million was prepaid, and received
$2.1 million from an Industrial Revenue Bond issued for the expansion at
Norment.
CompuDyne entered into an Automatic Investment Service Agreement dated December
23, 1998 with LaSalle National Bank. This agreement allows LaSalle National
Bank to transfer funds over $100 thousand from the main CompuDyne account to an
investment account on a daily basis. The investment account earns interest at a
variable rate determined by the bank on a daily basis, based on the current days
market rate for commercial paper, less a spread for providing the service. The
experience to date has been an average interest rate earned of 4.4%.
Capital Resources
- -----------------
Capital expenditures totaled $3.6 million in 1999 compared with $432 thousand in
1998. The Company has projected spending up to $2.1 million for capital
expenditures in fiscal 2000. These projected expenditures includes $1.3 million
for the purchase of a new facility to house the Corporate headquarters and the
Northeast regional office of the Norment Security Group and $880 thousand for
normal asset purchases and replacements.
Recently Issued Accounting Standard
- ------------------------------------
In July 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes the accounting definition of a derivative and specifies
measurements, recognition, and disclosure of changes in the fair value of
derivatives, ("hedges") held by a company. This standard will require
derivatives designated as hedges to be recorded on the balance sheet at fair
value with the change in fair value of the underlying hedged item accounted for
depending on the intended use of the derivative. This standard will be adopted
by the Company in the year 2001 and the Company has not determined what impact,
if any, this standard will have when it is adopted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
- -------------------
CompuDyne used fixed and variable rate notes payable to finance its acquisition
of Norment/Norshield. These on-balance sheet financial instruments, to the
extent they provide for variable rates of interest, expose the Company to
interest rate risk, with the primary interest rate exposure resulting from
changes in the LIBOR rate used to determine the interest rate applicable to the
borrowing under the Company's loan from LaSalle National Bank.
The information below summarizes CompuDyne's sensitivity to market risks
associated with fluctuations in interest rates as of December 31, 1999. To the
extent that the Company's financial instruments expose the Company to interest
rate risk, they are presented in the table below. The table presents principal
cash flows and related interest rates by year of maturity of the Company's notes
payable with variable rates of interest in effect at December 31, 1999. Note 8
to the consolidated financial statements contain descriptions of the Company's
notes payable and should be read in conjunction with the table below
Financial Instruments by Expected Maturity Date
Year Ending December 31 2000 2001 2002
---------- ----------- -----------
Notes Payable:
Variable rate ($) $1,875,000 $2,375,000 $2,500,000
Average interest rate 7.79% 7.85% 7.90%
Fixed rate ($) $ - $ - $ -
Average interest rate 13.15% 13.15% 13.15%
Year Ending December 31 2003 Thereafter Total Fair Value
----------- ----------- ----------- ---------
Notes Payable:
Variable rate ($) $625,000 $ - $7,375,000 $7,375,000
Average Interest Rate 7.96% 8.0%
Fixed rate ($) $ - $9,000,000 $9,000,000 $9,000,000
Average Interest Rate 13.15% 13.15% 13.15% 13.15%
Year Ending December 31 2000 2001 2002
----------- ------------ -----------
Interest Rate Swaps:
Variable to Fixed ($) $6,750,000 $ 6,750,000 $ -
Average pay rate 7.55% 7.55% -
Average receive rate 8.0 % 8.0 % -
Year Ending December 31 2003 Thereafter Total Fair Value
---------- ---------- ---------- -----------
Interest Rate Swaps:
Variable to Fixed ($) - $ - $ - -
Average pay rate - - - -
Average receive rate - - - -
The Company used a foreign exchange contract to partially hedge their exposure
to exchange rate risk related to one firmly committed sales contract. The
foreign exchange contract was entered into for non-trading purposes and was
matched to the underlying transaction and did not constitute speculative or
leveraged positions independent of this exposure. As most of this contract was
completed during 1999, no significant exchange risk exists as of December 31,
1999.
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, 1999, or April 29, 2000, relating to its 1999 Annual Meeting of
Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS
AND REPORTS ON FORM 8-K
(a) Financial Statements
(1) The financial statements listed in the accompanying index to financial
statements are filed as part of
this Annual Report on Form 10-K.
(2) Schedule II - Schedule of valuation and qualifying accounts
(b) Reports on Form 8-K - 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 (B) Credit Agreement dated November 30, 1998 among CompuDyne Corporation
and LaSalle National Bank is incorporated by reference to Exhibit (99.2) to
Registrant's Form 8-K filed February 12, 1999.
10 (C) Subordinated Loan and Investment Agreement dated November 30, 1998
among CompuDyne Corporation and William Blair Mezzanine Capital Fund II, L.P. is
incorporated by reference to Exhibit (99.3) to Registrant's Form 8-K filed
February 12, 1999.
10 (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(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.
21. Subsidiaries of the Registrant is filed herewith. Page 33
23. Independent Auditors Consent
27. Financial Data Schedule
COMPUDYNE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
(Item 14(a)(1))
Page(s)
--------
Independent Auditors' Report 14
Consolidated Balance Sheets at December 31, 1999
and 1998 15-16
Consolidated Statements of Operations for the
years ended December 31, 1999, 1998 and 1997 17
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997 18
Consolidated Statements of Changes in Shareholders'
Equity for the years ended
December 31, 1999, 1998 and 1997 19
Notes to Consolidated Financial Statements 20-31
(Item 14(a)(2))
Schedule II - Valuation and Qualifying
Accounts for the Years Ended December
31, 1999, 1998 and 1997 31
(Item 14(a)(3))
Financial Statement Schedule
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of CompuDyne Corporation:
We have audited the accompanying consolidated balance sheets of CompuDyne
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedule listed in the accompanying
index at Item 14(a)(2). These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CompuDyne Corporation and
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/Deloitte & Touche LLP
McLean, Virginia
February 29, 2000
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1999 1998
-------- --------
(in thousands)
Current Assets
Cash and cash equivalents $ 701 $ 1,528
Accounts receivable 33,833 27,451
Costs in excess of billings 5,284 2,610
Inventories
Finished goods - 112
Work in progress 705 499
Raw materials and supplies 3,933 3,611
------- -------
Total Inventories 4,638 4,222
------- -------
Prepaid expenses and other current assets 506 199
------- -------
Total Current Assets 44,962 36,010
------- -------
Property, plant and equipment, at cost
Land and improvements 250 276
Buildings and leasehold improvements 3,037 1,188
Machinery and equipment 3,914 2,334
Furniture and fixtures 928 182
Automobiles 377 299
Construction in progress 88 939
------- -------
8,594 5,218
Less accumulated depreciation
and amortization 1,416 295
------- -------
Net property, plant and equipment 7,178 4,923
------- -------
Capitalized software, net 1,408 -
Deferred tax asset 568 88
Goodwill, net of accumulated amortization 852 62
Other intangible assets, net of
accumulated amortization 2,385 2,474
Other assets 94 13
------- -------
Total other assets 5,307 2,637
------- -------
Total Assets $57,447 $ 43,570
======= ========
See notes to consolidated financial statements
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
1999 1998
-------- -------
(in thousands)
Current Liabilities
Accounts payable $11,827 $ 5,707
Accrued payroll expenses 3,040 1,240
Other accrued expenses 1,319 2,222
Billings in excess of contract
costs incurred 9,498 6,492
Accrued income taxes - 346
Accrued interest 74 -
Deferred losses/revenues on acquired
contracts 859 -
Current portion of term loan 2,243 1,125
Current portion of notes
payable-related parties - 20
------- --------
Total Current Liabilities 28,860 17,152
Term loan 5,500 10,375
Subordinated notes 9,910 9,000
Industrial development bond 1,960 -
Notes payable-related parties - 15
Warranty reserves 532 463
Long term pension liability 489 484
Other liabilities 166 191
------- -------
Total Liabilities 47,417 37,680
------- -------
Shareholders' Equity
Common stock, par value $.75 per share:
10,000,000 shares authorized; 5,412,866
and 5,200,049 shares issued at December 31,
1999 and 1998, respectively 4,060 3,900
Other capital 11,734 10,397
Treasury shares, at cost; 88,655 shares at December
31, 1999 and 78,636 shares at
December 31, 1998 (207) (120)
Receivable from management (30) (90)
Accumulated deficit (5,527) (8,197)
-------- -------
Total Shareholders' Equity 10,030 5,890
-------- ---------
Total Liabilities and Shareholders' Equity $57,447 $ 43,570
======== =========
See notes to consolidated financial statements
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1999 1998 1997
--------- -------- --------
(in thousands except per share data)
Net sales $ 111,446 $ 31,916 $ 20,016
Cost of goods sold 90,091 25,864 16,737
--------- ------- --------
Gross margin 21,355 6,052 3,279
Sonoma settlement costs - - 270
Selling, general and
administrative expenses 15,231 4,415 2,257
Research and development 80 169 172
-------- ------- --------
Operating income 6,044 1,468 580
-------- ------- --------
Other (income) expense
Interest expense 2,203 295 62
Interest income (146) - -
Other income (272) (37) (20)
-------- ------- --------
Total other (income) expense 1,785 258 42
-------- ------- ---------
Income before income taxes 4,259 1,210 538
Income tax provision (benefit) 1,589 363 (158)
--------- ------- --------
Net income $ 2,670 $ 847 $ 696
========= ======== ========
Earnings per share:
Basic earnings per common share $ .51 $ .20 $ .23
========= ======== ========
Weighted average number of common
shares outstanding 5,237 4,166 3,005
========= ======== ========
Diluted earnings per common share $ .46 $ .20 $ .16
========= ======== ========
Weighted average number of common
shares and equivalents 5,868 4,343 4,364
========= ======== ========
See notes to consolidated financial statements
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1999 1998 1997
-------- -------- ---------
(in thousands)
Cash flows from operating activities:
Net income $ 2,670 $ 847 $ 696
Adjustments to reconcile net income to
net cash provided by (used up) operations:
Depreciation and amortization 1,514 250 114
Deferred income tax (benefit) 700 - (189)
Gain on sale of MicroAssembly (180) - -
Loss from disposition of equipment 25 - -
Other, net (26) - -
Changes in assets and liabilities:
Accounts receivable (4,379) (3,004) 516
Costs in excess of billings (191) 608 -
Inventories (897) 11 (285)
Prepaid expenses (108) (14) (38)
Other assets (582) 54 (28)
Accounts payable 5,073 634 (913)
Accrued expenses 603 1,701 (104)
Accrued income taxes (346) 311 (35)
Billings in excess of costs incurred 2,553 414 (562)
Other liabilities (1,916) 2,001 (10)
Net cash flows provided by --------- -------- -------
(used in) operations 4,513 3,813 (838)
--------- -------- -------
Cash flows from investing activities:
Additions to intangibles (60) - -
Net payments for acquisitions (1,128) (23,880) -
Proceeds from sale of business 1,354 - -
Additions to property, plant
and equipment (3,573) (432) (195)
Net cash flows used in -------- -------- --------
investing activities (3,407) (24,312) (195)
-------- -------- --------
Cash flows from financing activities:
Conversion of series D preference stock - - (310)
Issuance of common stock 127 3,001 -
Proceeds from bond issue 2,100 - -
(Decrease)increase in short term debt - (1,339) 1,177
(Repayment of) borrowings from long
term debt (4,125) 20,500 -
Purchase of treasury stock - (120) -
Repayment of current debt -
related parties (35) (15) (20)
Net cash flows (used in)provided -------- -------- --------
by financing activities (1,933) 22,027 847
-------- -------- --------
Net (decrease) increase in cash
and cash equivalents (827) 1,528 (186)
Cash and cash equivalents at the
beginning of the year 1,528 - 186
Cash and cash equivalents at the --------- --------- -----------
end of the year $ 701 $ 1,528 $ -
========= ========= ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,143 $ 308 $ 62
Income taxes, net of refunds $ 1,172 $ 25 $ 70
See notes to consolidated financial statements.
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands) Receivable
Preferred Common Other From Accumulated Treasury
Stock Stock Capital Management Deficit Shares Total
--------- ------ ------- ---------- ----------- -------- ------
Balance at
January 1,
1997 $ 945 $2,148 $8,203 $ (90) $(9,430) $ - $1,776
Net Income - - - - 696 - 696
Preferred
shares converted
to Common
shares (945) 945 - - (310) - (310)
Balance at --------- ------- ------- ---------- ----------- -------- -------
December 31,
1997 - 3,093 8,203 (90) (9,044) - 2,162
Net Income - - - - 847 - 847
Shares issued-
Common shares - 807 2,194 - - - 3,001
Purchase of
treasury stock - - - - - (120) (120)
Balance at
December 31, -------- ------- ------- ---------- ----------- -------- --------
1998 $ - 3,900 10,397 (90) (8,197) (120) 5,890
Net Income - - - - 2,670 - 2,670
Payoff of mgmt
receivable - - - 60 - - 60
Shares issued-
Common shares - 160 1,337 - - - 1,497
Treasury stock
acquired - - - - - (87) (87)
Balance at -------- ------- ------- --------- ---------- --------- --------
December 31,
1999 $ - $ 4,060 $11,734 $ (30) $(5,527) $ (207) $10,030
======== ======= ======= ========= ========== ========== ========
See notes to consolidated financial statements
COMPUDYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
- ----------------------------
Description of Business
CompuDyne operates in three general sectors of the security industry -
Corrections, Attack Protection and Federal Systems:
Corrections - CompuDyne's Norment Security Group ("NSG"), headquartered in
- ----------- Montgomery, AL, provides physical and electronic security products
and services primarily to the corrections industry (jails and prisons) and
secondarily to the courthouse, municipal and commercial markets. NSG operates
through the following subsidiaries and divisions:
Norment is a detention contractor, responsible for most installation work
on larger projects. Installation will involve hardline (steel security
doors, frames, locking devices, etc) and sophisticated electronic security
systems including software, electronics, touchscreens, CCTV, perimeter
alarm devices, etc.
TrenTech is an electronic security systems designer, manufacturer and
integrator. TrenTech integrates generally available products and software
as well as designing proprietary systems such as IDEAS and a video badging
system. TrenTech provides systems to Norment for installation.
Airteq , supplemented by Norshield manufacturing capacity, offers a
complete line of locks and locking devices to the corrections industry.
Long an industry leader and innovator in pneumatic locking technology,
AirTeq in January 2000 introduced an innovative new electromechanical
sliding device, which completes its product line.
NSG Regional Offices provide field level design, installation and
maintenance of both hardline (physical) and electronic security products.
Primary offices are in Hanover, MD, Raleigh, NC, Columbia, SC, Phoenix, AZ,
Tucson, AZ, Milwaukee, WI, and Livermore, CA. Smaller offices are located
in Massachusetts and New Jersey.
Combined, NSG is the country's largest supplier of physical and
electronic security products, integration services and maintenance for
jails, prisons and courthouses. Projects range from very small to as large
as $15-$20 million. Security maintenance outsourcing contracts range from
very small to over $1 million per year and provide for the routine
maintenance and emergency repair of sophisticated security control systems
and related equipment.
NSG also includes software based control products. CorrLogic develops,
installs and maintains the most robust and extensive software in the
industry for the management of inmates and other personnel and processes
within the courthouse, jail and prison environment. CorrLogic software is
designed to handle the country's largest jails, with recent installations
including Wayne County (Detroit), MI, Shelby County (Memphis), TN, and
Hennepin County (Minneapolis), MN. SYSCO has exclusive North American
rights to the PC-ADACS (Alarm and Distributed Access Control System)
software based system developed by Shorrock Electronics in England. SYSCO
also has a proprietary product, SecurLan, which is designed to provide
physical protection for Local Area Network conduits and cables for computer
networks.
Attack Protection - Norshield Security Products ("Norshield") is the country's
- ----------------- largest manufacturer of bullet, blast and attack resistant
windows and doors designed for high security applications such as embassies,
courthouses, Federal Reserve buildings, and banks. Norshield's largest
customer is the U.S. Department of State, and Norshield is a major supplier
of bullet, blast and attack resistant product to U.S. Embassies around the
world. Norshield produces an integrated structurally secure product where the
rated protection comes not from just the glass but from the frame and encasement
as well. Norshield also manufactures bullet, blast and attack resistant products
on an Original Equipment Manufacturer ("OEM") basis for a selected group of
corporate clients. Examples of Norshield commercial products include security
doors and windows,transaction accessories, cash drawers, guard and toll booths
and drive up windows. Norshield also manufactures cell door sliding devices for
sale under the Airteq brand.
Federal Systems - Quanta Systems, Inc., ("Quanta") has been serving the federal
- --------------- government's intelligence community since 1950. Serving the
military, government agencies, and state and local customers, Quanta provides
specialty engineering and security services, often of a classified nature. In
recent years Quanta has developed and emphasized a special competence in
physical and electronic security, which has become its primary focus. Quanta
along with its Data Control Systems division, ("DCS"), provides electronic black
box manufacturing, tactical systems integrations, and the design and production
of proprietary communications products.
MicroAssembly - Located in Willimantic, Connecticut, MicroAssembly is a
- ------------- manufacturer of a proprietary automated process called the
Stick-Screw System.All of the assets of MicroAssembly were sold on May 31, 1999
and MicroAssembly changed its name to 4 Focus, Inc..
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 inter-company
transactions have been eliminated.
Inventories - Raw material inventories are valued at the lower of cost 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. Cost is determined by the first-in, first-out
(FIFO) method. Inventories are net of an obsolesence reserve of $166 thousand
and $313 thousand as of December 31, 1999 and 1998 respectively.
Use of Estimates - The preparation of financial statements in conformity with
- ---------------- generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Certain estimates used by management are
susceptible to significant changes in the economic environment. These include
estimates of percentage-completion on long-term contracts and valuation
allowances for contracts accounts receivable. Actual results could differ from
those estimates.
Revenue Recognition - Revenue under cost reimbursement contracts is recognized
- ------------------- to the extent of costs incurred to date plus a
proportionate amount of the fee earned. Revenue under time and materials
contracts are recognized to the extent of billable rates times hours delivered
plus materials expenses incurred. Revenue from fixed price contracts is
recognized under the percentage of completion method. Revenue from the sale
of manufactured products is recognized based on shipment date. Provisions for
estimated losses on uncompleted contracts are recognized in the period such
losses are determined. Costs and estimated earnings in excess of billings on
uncompleted contracts represent the excess of contract revenues recognized to
date over billings to date on certain contracts. Billings in excess of costs and
estimated earnings on uncompleted contracts represent the excess of billings to
date over the amount of revenue recognized to date on certain contracts.
Property, Plant and Equipment - Property, plant and equipment are recorded at
- ----------------------------- cost less accumulated depreciation and
amortization. Depreciation is computed using principally the straight-line
method based on the estimated useful lives of the related assets. The estimated
useful lives are as follows:
Buildings and improvements 7-39 years
Machinery and equipment 3-10 years
Furniture and fixtures 3-10 years
Leasehold improvements are amortized over their estimated useful lives or the
term of the underlying lease, whichever is shorter. Maintenance and repair
costs are charged to operations as incurred; major renewals and betterments are
capitalized.
Capitalized Software - The Company has capitalized software that was acquired
- -------------------- when it purchased CorrLogic in 1999. The value allocated
resulting from the purchase was $1.6 million. The software is the base product
used in its sales product and is being amortized over 7 years. Accumulated
amortization was $183 thousand at December 31, 1999.
Goodwill - In conjunction with the purchase of the assets of Ackley Dornbach in
- -------- 1999, goodwill has been recorded on the balance sheet and is being
amortized over 25 years. Accumulated amortization was $6 thousand as of
December 31, 1999. Goodwill also includes credit for negative goodwill recorded
due to the acquisition of SecurSystems and is being amortized on a straight-line
basis over 5 years. Accumulated amortization was $(72) thousand and ($51)
thousand at December 31, 1999 and 1998 respectively.
Other Intangible Assets - Other tangible assets consist primarily of amounts
- ----------------------- recorded in conjunction with the acquisition of Norment
and Norshield, including trade names, trademarks, Department of State
Certifications, UL listings, patents and ASTM standards. These are amortized on
a straight-line basis over periods ranging from 15 to 25 years. Accumulated
amortization was $124 thousand and $14 thousand as of December 31, 1999 and
1998, respectively.
Cash and Cash Equivalents - For purposes of the statements of cash flows, the
- ------------------------- Company considers temporary investments with original
maturities of three months or less to be cash equivalents.
Income Taxes - The Company follows Statement of Financial Accounting Standards,
- ------------ ("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS 109,
deferred income taxes are recognized for the future tax consequences of
differences between tax bases of assets and liabilities and financial reporting
amounts, based upon enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to amounts expected to be realized. Income tax expense is the tax payable
for the period and the change during the period in deferred tax assets and
liabilities.
Stock-Based Compensation - The Company continues to account for stock-based
- ------------------------ compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting For Stock
Issued to Employees", ("APB No. 25") for the recognition and measurement of
employees stock-based compensation and has adopted only the disclosure
requirements of SFAS No. 123, "Accounting For Stock Based Compensation",
("SFAS No. 123").
New Accounting Pronouncement - In July 1998, the Financial Accounting Standards
- ---------------------------- Board, ("FASB") issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", ("SFAS No. 133"), which
establishes the accounting definition of a derivative and specifies measurements
recognition, and disclosure of changes in the fair value of derivatives (hedges)
held by a company. This standard will require derivatives designated as hedges
to be recorded on the balance sheet at fair value with the change in fair value
of the underlying hedged item accounted for depending on the intended use of the
derivative. SFAS No. 133 will be adopted by the Company in the year 2001 and
the Company has not determined what impact, if any, this standard will have when
it is adopted.
Reclassifications - Certain prior year amounts have been reclassified to conform
- ----------------- to the current year presentation.
3. EARNINGS PER SHARE
Earnings per share are presented in accordance with SFAS No. 128, "Earnings Per
Share." This Statement requires dual presentation of basic and diluted earnings
per share on the face of the income statement. Basic earnings per share
excludes dilution and is computed by dividing net income available by the
weighted-average number of common shares outstanding for the year. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Options to purchase 122,302 shares of common stock at prices
ranging from $7.38 to $8.75 per share were outstanding during 1999 but were not
included in the computation of diluted earnings per common share for 1999
because the options' exercise price was greater than the average market price
of the common shares. Options to purchase 303,000 shares of common stock at
$4.31 and warrants to purchase 297,924 shares of common stock at $3.25 were
outstanding during 1998 but were not included in the computation of diluted
earnings per common share because the exercise price was greater than the
average market price of the common shares. Options to purchase 53,050 shares of
common stock at $2.81 were outstanding during 1997 but were not included in the
computation of diluted earnings per common share for 1997 because the options'
exercise price was greater than the average market price of the common shares.
The following is a reconciliation of the amounts used in calculating basic and
diluted earnings per common share:
Per Share
Income Shares Amount
-------------- --------- ---------
($ in thousands)
Basic earnings per common share
for the year ended December 31, 1999:
Net income $ 2,670 5,237,042 $ .51
---------
Effect of dilutive stock options 630,814
Diluted earnings per common share for the ---------
year ended December 31, 1999 $ 2,670 5,867,856 $ .46
---------- --------- ----------
Basic earnings per common share for the
year ended December 31, 1998:
Net income $ 847 4,166,250 $ .20
Effect of dilutive stock options ----------
177,024
Diluted earnings per common share for ---------
the year ended December 31, 1998 $ 847 4,343,274 $ .20
---------- --------- ----------
Basic earnings per common share for the
year ended December 31, 1997:
Net income $ 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
---------- --------- ----------
4. ACQUISITIONS/DISPOSITIONS OF BUSINESSES
Acquisition of Ackley Dornbach, Inc. - On November 12, 1999, CompuDyne entered
- ------------------------------------ into and consummated an agreement to
acquire all of the assets of Ackley Dornbach, Inc. The consideration paid for
the assets was 15,000 shares of unregistered, legended CompuDyne common stock at
a value of $8.00 per share, the fair market value at the time of the
acquisition, and the ability to earn an additional 10,000 shares per year
over the next three years depending on the profitability of the division.
This acquisition has been accounted for by the purchase method of accounting.
The purchase price was allocated to the net assets acquired based on their
estimated fair market values. The financial statements reflect the preliminary
allocation of the purchase price and further refinement may be made based on the
completion of final studies. The operating results of Ackley Dornbach have been
included in the Company's results of operations from the date of acquisition.
In conjunction with this acquisition, the following was recorded: (in thousands)
Fair value of assets acquired $ 904
Goodwill recorded 830
Fair value of stock issued (120)
-------
Liabilities assumed $ 1,614
=======
Disposition of MicroAssembly Systems, Inc. - On May 28, 1999 CompuDyne entered
- ----------------------------------------- into and consummated an agreement to
sell all of the assets of MicroAssembly to PENN Engineering & Manufacturing
Corp. ("PEM"). The consideration received was $1.4 million in cash and resulted
in a gain of $180 thousand.
Acquisition of Correctional Information Systems - On May 27, 1999, (effective
- ----------------------------------------------- April 30, 1999) CompuDyne
entered into and consummated an agreement to acquire all of the assets of the
Correctional Information Systems, ("CIS") division of BI Incorporated, ("BI").
CorrLogic, Inc. was formed as a new company to operate in the state of Colorado
with the old CIS assets. CIS located in Boulder, Colorado developed and
installs an inmate management software product used in correctional facilities.
The consideration paid for the assets was $1.2 million in cash, a five year note
in the amount of $1.1 million, at a fixed interest rate of 7.5% and 166,667
shares of unregistered, legended CompuDyne common stock at a value of $7.50 per
share, the fair market value at the date of the acquisition.CompuDyne has
accounted for this acquisition using the purchase method of accounting. The
operating results of CIS have been included in the Company's results of
operation from the date of acquisition. The purchase price was allocated to the
net assets acquired based on their estimated fair market values. Balances for
CIS included in the accompanying balance sheet at December 31, 1999 reflect the
preliminary allocation of the purchase price and further refinement may be made
based on the completion of final studies.
In conjunction with this acquisition the following was recorded (in thousands):
Fair value of assets acquired $ 6,399
Fair value of stock issued (1,250)
Cash (1,170)
---------
Liabilities assumed $ 3,979
=========
Acquisition of Norment Industries, Inc. and Norshield Corporation
- ------------------------------------------------------------------ On December
3, 1998, (effective November 28, 1998), CompuDyne entered into and consummated a
Stock Purchase Agreement by and between Apogee Enterprises, Inc., ("the seller")
and CompuDyne, ("the purchaser") to purchase all of the capital stock of Norment
Industries, Inc., ("Norment") and Norshield Corporation, ("Norshield") from the
seller, effective November 28, 1998. Norment and Norshield, headquartered in
Montgomery, Alabama operate a number of separate businesses which collectively
are engaged in the design, manufacture, installation and distribution of locks,
bullet resistant glass, metal window surrounds, electronic control systems and
similar products that are integrated into detention security systems under the
names Norment Industries, Norshield, SESCO, EMSS, Airteq and Trentech. The
consideration paid to the seller for the stock of Norment and Norshield was
$22.5 million. CompuDyne has accounted for the acquisition of Norment and
Norshield using the purchase method of accounting. The purchase price was
allocated to the net assets acquired based upon their estimated fair market
values. The accompanying financial statements include the operations of Norment
and Norshield for the period from November 28, 1998, the effective date of
acquisition.
In conjunction with the acquisition the following was recorded:
Fair value of assets acquired $ 32,283
Cash paid for capital stock (23,880)
---------
Liabilities assumed $ 8,403
=========
Following are the Company's unaudited pro forma results for 1999 and 1998
assuming the acquisitions of Norment, CIS and Ackley Dornbach and the
disposition of MicroAssembly had all occurred on January 1, 1998.
(in thousands except for per share data)
1999 1998
---------- ----------
Revenue $ 115,471 $ 112,977
Net income $ 2,440 $ 1,725
Earnings per share
Basic .47 .33
Diluted .42 .30
These unaudited pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the
results of operations which would have actually resulted had the acquisitions
and disposition been in effect on January 1, 1998, or of future results of
operations.
5. ACCOUNTS RECEIVABLE
Accounts Receivable consist of the following:
(In thousands) December 31, December 31,
1999 1998
U.S. Government Contracts: ---------- ----------
Billed $ 1,433 $ 1,622
Unbilled 2,636 818
---------- ----------
4,069 2,440
Commercial
Billed 23,598 19,756
Unbilled 6,568 5,695
---------- ----------
30,166 24,451
---------- ----------
Total Accounts Receivable 34,235 27,891
Less Allowance for Doubtful Accounts (402) (440)
---------- ----------
Net Accounts Receivable $ 33,833 $ 27,451
========== ==========
Unbilled receivables include retainages of approximately $6.6 million and $5.2
million at December 31, 1999 and 1998, respectively.
Substantially all of the U.S. Government billed and unbilled receivables are
derived from cost reimbursable or time-and-material contracts. Direct sales to
the U.S. Government for the years ended December 31, 1999, 1998 and 1997 were
approximately $10.9 million, $7.8 million and $9.3 million, respectively, or
10%, 24% and 47% of the Company's total net sales for the same years. The sales
to the U.S. Government were in the following segments: Corrections and Federal
Systems. 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 by Quanta Systems
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 1996 from DCAA on July 8, 1999. No significant payments or billings
were made as a result of the approval of the 1996 rates.
6. CONTRACTS IN PROCESS
Amounts included in the financial statements which relate to recoverable costs
and accrued profits not yet billed on contracts in process are classified as
current assets. Billings on uncompleted contracts in excess of incurred cost
and accrued profits are classified as current liabilities. Summarized below are
the components of the amounts:
December 31,
(in thousands)
1999 1998
----------- ----------
Costs and estimated earnings
on uncompleted contracts $ 302,655 $ 136,447
Less customer progress payments 306,869 140,329
----------- ----------
$ (4,214) $ (3,882)
Included in the statements of =========== ==========
financial position:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 5,284 $ 2,610
Billings in excess of contract costs on
uncompleted contracts (9,498) (6,492)
----------- ----------
$ (4,214) $ (3,882)
=========== ==========
7. NOTES PAYABLE RELATED PARTIES
CompuDyne entered into a subordinated note agreement on April 29, 1995 with Alan
Markowitz, a Director, for $100 thousand. The agreement called 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, 1999 and 1998 were $0 and $35
thousand respectively. Interest expense pertaining to the notes for 1999,
1998 and 1997 was $4, $5 and $6 thousand, respectively. At December 31, 1999
this liability was paid.
8. LONG-TERM DEBT
December 31,
Term note, interest at LIBOR (in thousands)
(6.18% at December 31, 1999)
plus a fixed credit spread of
2.0%, collateralized by virtually 1999 1998
all of the Company's assets, ---------------------------
due in quarterly installments which $ 7,375 $ 11,500
began on June 30, 1999. (see the
rate swap agreement in Note 9)
Subordinated fixed term 5 year note; interest at
7.5% payable in annual installments
including principal. 1,138 -
Industrial development bond, interest
payable quarterly at a variable rate
of 3.2% to 5.7% (5,7% at December 31, 1999)
Principal payable in quarterly installments
of $35,000. The bond is collateralized by a
$2.1 million letter of credit and a bond
guarantee agreement. 2,100 -
Subordinated note, interest at a fixed
rate of 13.15% collateralizedby virtually all
of the Company's assets, subordinated to the term
note, due in quarterly installments beginning
March 31, 2004. 9,000 9,000
-------- -------
Total long-term debt 19,613 20,500
Less amount due within one year 2,243 1,125
---------- ---------
$ 17,370 $ 19,375
========== =========
Maturities of long term debt
Year Ending December 31, Amount
------------------------ --------
2000 2,243
2001 2,743
2002 2,867
2003 992
2004 2,368
Thereafter 8,400
--------
$ 19,613
========
The term note and subordinated note agreements contain various financial
covenants, including among other things, maintenance of fixed charge coverage
ratios, interest coverage ratios, maximum senior debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA") ratios, and maximum
permitted capital expenditures, and a restriction against paying dividends.
At December 31, 1999, the Company had a $6.5 million secured working capital
line of credit which allowed borrowings against eligible accounts receivable.
Of this line, $2.1 million was used for a letter of credit to secure the
Industrial Revenue Bond used for the expansion of the Norment/Norshield
operations.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and Cash Equivalents - The carrying amounts reported in the balance
sheets for cash and cash equivalents approximates fair value.
Long-Term Debt - The carrying amounts reported in the balance sheet
approximate fair value as the amounts are at rates and terms available to the
Company at December 31, 1999 and 1998 for borrowings for similar transactions.
Rate Swap Agreement - The Company entered into an interest rate swap
agreement on December 15, 1999 to limit the effect of increases in the interest
rates on the floating rate of the term note. The differential is accrued as
interest rates change and is recorded in interest expense. The effect of this
agreement is to limit the interest rate exposure to 7.55% on $6.75 million of
the Company's term loan. The fair value as of December 31 ,1999 and 1998 as
estimated by dealers was a favorable $202 thousand and $3 thousand,
respectively.
Foreign Exchange Contract - The Company entered into a foreign exchange
contract in December 1998 and estimates its fair value to approximate its cost
at December 31, 1999 and 1998
10. INCOME TAXES
The components of the income tax provision (benefit) for the years ended
December 31, 1999, 1998, and 1997 are as follows:
(in thousands) 1999 1998 1997
-------- -------- --------
Current $ 889 $ 333 $ 31
Deferred 700 30 (189)
-------- -------- --------
$ 1,589 $ 363 $ (158)
======== ======== ========
The tax effects of the primary temporary differences giving rise to the
Company's net deferred tax assets and liabilities at December 31, 1999 and 1998
are summarized as follows:
December 31,
-----------
1999 1998
Assets: -------- --------
Accrued expenses and deferred
compensation $ 123 $ 116
Tax operating loss carryforward 10,083 10,151
Tax credit carry-forward 459 459
Book reserves in excess of tax 797 304
Accrued pension liability 312 186
-------- -------
Total deferred assets 11,774 11,216
Valuation allowance (11,063) (11,063)
-------- -------
Net deferred assets $ 711 $ 153
Net deferred liabilities:
Tax depreciation in excess of
book depreciation (143) (65)
-------- -------
$ 568 $ 88
======== =======
The Company established a valuation allowance in accordance with FASB No.109.
The Company continually reviews the adequacy of the valuation allowance and is
recognizing these benefits only as reassessment indicates that it is more likely
than not that the benefits will be realized.
The difference between the statutory tax rate and CompuDyne's effective tax rate
are summarized as follows:
1999 1998 1997
-------- -------- --------
Statutory federal income tax rates 34.0% 34.0% 35.0%
State income taxes, net of
Federal benefit 4.0 7.0 2.9
Change in valuation allowance - (14.5) (51.2)
Tax effect of NOL utilization (3.3) - (18.6)
Tax effect of non-deductible items 2.6 3.5 2.5
-------- --------- --------
Tax 37.3% 30.0% (29.4)%
======== ========= ========
At December 31, 1999, the Company and its subsidiaries have net operating loss
carry-forwards available to offset future taxable income of approximately $28
million, subject to certain severe limitations. These carry-forwards expire
between 2000 and 2009. The utilization of substantially all of these tax loss
carry-forwards is limited to approximately $200 thousand each year as a result
of the ownership change, which occurred in 1995. The Company also has carry-
forwards available for alternative minimum tax purposes, which do not differ
significantly from regular net operating loss carry-forwards. The Company also
has research and development tax credits of approximately $459 thousand expiring
between 1999 and 2003.
11. COMMON STOCK AND COMMON STOCK OPTIONS
The Company has various stock option plans. Under these plans, options to
purchase common stock may be granted until 2006. Options generally are granted
at fair market value at the date of grant, are exercisable from 1 to 5 years
from the date of grant, and expire 10 years after the date of grant. The plans
permit the issuance of either incentive stock options or non-qualified stock
options. Under all plans, there were 524,898 shares of common stock reserved
for future grants as of December 31, 1999. Transactions are summarized as
follows:
Year Weighted Year Year
ended Average ended ended
December 31, Exercise December 31, December 31,
1999 Price 1998 1997
------------ --------- ------------ ------------
Outstanding, Beginning
of Period
Shares 1,085,574 $ 2.93 404,150 375,050
Price $1.50-$4.31 $1.50-$2.81 $1.50-$2.00
Granted
Shares 244,302 $ 6.15 694,424 54,100
Prices $5.19-$8.75 $2.63-$4.31 $1.69-$2.81
Exercised
Shares 31,150 $ 2.82 - -
Prices $1.63-$4.31 - -
Expired or Canceled 30,700 $ 5.19 13,000 25,000
Outstanding, End of Period
Shares 1,268,026 $ 3.49 1,085,574 404,150
Prices $2.56-$8.75 $1.50-$4.31 $1.50-$2.81
Options Exercisable 734,774 573,448 253,775
Exercise prices for options outstanding as of December 31, 1999 ranged from
$1.50 to $8.75. The following table provides certain information with respect
to stock options outstanding as of December 31, 1999:
Range of Exercise Number Outstanding Weighted Average Weighted Average
Price at December 31, 1999 Exercise Price Remaining
Contractual Life
- ------------------ -------------------- ---------------- ----------------
$1.50 - 2.00 336,350 $1.56 5.83
$2.00 - 3.00 194,550 $2.59 8.27
$3.25 297,924 $3.25 8.92
$4.31 282,900 $4.31 8.92
$5.19 - 8.75 156,302 $7.77 9.53
--------------------
1,268,026
====================
The following table provides certain information with respect to stock options
exercisable at December 31, 1999:
Range of Exercise Number Outstanding Weighted Average Weighted Average
Price at December 31, 1999 Exercise Price Remaining
Contractual Life
- ------------------ ------------------- ----------------- ----------------
$1.50 - 2.00 287,825 $1.55 5.71
$2.00 - 3.00 99,725 $2.58 8.29
3.25 297,924 $3.25 8.92
$4.31 49,300 $4.31 8.92
-------------------
734,774
===================
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
significant options have been granted with an exercise price equal to the fair
value of the Company's common stock on the date of grant. The Company has
provided below the additional disclosures specified in SFAS No. 123 for 1999
and 1998. 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 10 years, dividend rate of zero percent and expected
volatility of 109%. Using these assumptions, the fair value of the stock
options granted in 1999, 1998 and 1997 is $1,200,000, $2,700,000 and $0,
respectively, which would be amortized as compensation expense over the vesting
period of the options. Had compensation expense been determined consistent with
SFAS No. 123, utilizing the assumptions detailed above, the Company's net income
and earnings per share for the years ended December 31, 1999, 1998 and 1997
would have been reduced to the following pro forma amounts:
(In thousands except per share data) 1999 1998 1997
-------- -------- ---------
Net Income:
As reported $ 2,670 $ 847 $ 696
Pro forma $ 2,328 $ 778 $ 696
Earnings per share:
As reported $ 0.51 $ 0.20 $ 0.23
Pro forma $ 0.45 $ 0.18 $ 0.23
The resulting pro forma compensation cost may not be representative of that
expected in future years.
12. EMPLOYEE BENEFIT PLANS
The Company has established a non-qualified Employee Stock Purchase Plan in
October, 1999, the terms of which allow for qualified employees (as defined) to
participate in the purchase of designated shares of the Company's common stock.
The Company matches at a rate of 15% of the employee purchase at the market
value of the common stock for the monthly purchase period. The Company bought
and distributed 4,466 shares of common stock during fiscal 1999 pursuant
to this plan at an average price of $8.6317 per share.
The Company has a 401(k) retirement savings plan covering all employees. All
employees are eligible to participate in the plan after completing one year of
service. Participants may make before tax contributions of up to 15% of their
annual compensation, subject to Internal Revenue Service limitations. CompuDyne
currently matches 30% of employee contributions up to a maximum of 6% of annual
earnings for all Norment/Norshield employees enrolled in the plan. CompuDyne
currently matches employee contributions up to the first 2.5% contributed for
all other employees enrolled in the plan. Expense for matching contributions to
the Plan was $245 thousand, $128 thousand and $114 thousand for 1999, 1998, and
1997, respectively.
The Company established a money purchase pension plan covering salaried
Norment/Norshield employees. All salaried Norment/Norshield employees are
eligible to participate in the plan after one year of service. The Company
makes annual contributions of 3% of annual compensation for employees with less
than 10 years of service, 4% for 10 to 20 years of service and 5% for 20 years
or more of service. Expense related to this plan was $246 thousand in 1999 and
$24 thousand in 1998.
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain of its subsidiaries are obligated as lessees under
various operating leases for office, distribution, manufacturing and storage
facilities.
As of December 31, 1999, future minimum rental payments required under operating
leases that have initial or remaining noncancellable terms in excess of one year
are as follows (in thousands):
Year Ending December 31,
Total
--------
2000 $ 695
2001 598
2002 516
2003 324
2004 268
-------
$ 2,401
=======
Rental expense was $1.1 million, $542 thousand and $452 thousand in 1999, 1998,
and 1997, respectively.
The Company is party to certain legal actions and inquiries for environmental
and other matters resulting from the normal course of business. Although the
total amount of liability with respect to these matters cannot be ascertained,
management of the Company believes that any resulting liability will not have a
material effect on its financial position or results of future operations.
14. KOLUX PENSION PLAN
In March 1987, the Company ceased its Kolux plant operations resulting in a
curtailment of the defined benefit pension plan covering certain plant
employees.
December 31,
1999 1998
-------- --------
Reconciliation of Benefit Obligation (in thousands)
Beginning balance $ 808 $ 801
Interest cost 52 53
Change in assumptions
December 31 (10) 16
Actuarial gain/loss 8 16
Benefits paid (81) (78)
------- ------
Ending balance $ 777 $ 808
======= ======
Reconciliation of Fair Value of Plan Assets
Beginning balance $ 328 $ 314
Return on assets (3) 14
Contributions by CompuDyne 79 92
Benefits paid (87) (91)
------ ------
Ending balance $ 317 $ 329
====== ======
Funded Status of Plan $ 460 $ 479
====== ======
Net Periodic Cost Recognized
Service cost $ 6 $ 13
Interest cost 52 53
Expected return on assets 3 (24)
Recognized gains or losses - -
Amortization of unrecognized
net transition (asset) or obligation 14 29
------ -------
Ending balance $ 75 $ 71
====== =======
Assumptions on Weighted Average Basis
Assumed discount rate 7.0% - 6.5% 7.0% - 6.5%
Expected long term rate of
return on assets 8.0% 8.0%
In February 2000, the Company purchased an annuity contract to cover the
plan's vested benefits. The purchase of the annuity is irrevocable and relieves
the Company of primary responsibility for pension plan obligations and
eliminates significant risks related to the obligation and the assets used to
effect settlements. The annuity contract cost $848 thousand and the net pension
plan obligation was $808 thousand at the time the annuity was purchased.
15. OPERATING SEGMENT INFORMATION
Segment information has been prepared in accordance with the Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an
Enterprise and Related Information", ("SFAS No. 131"). SFAS No. 131 defines
"operating segments" to be those components of a business about which separate
financial information is available that is regularly evaluated by management in
deciding how to allocate resources and in assessing performance. SFAS No. 131
further requires that the segment information presented be consistent with the
basis and manner in which management internally desegregates financial
information for the purpose of assisting in making internal operating decisions.
During 1999, the Company changed the structure of its internal organization in a
manner that caused the composition of its reportable segments to change.
Accordingly, the Company has restated the corresponding items of segment
information for earlier periods.
The following segment information includes operating information for CompuDyne's
three operating segments, Corrections, Attack Protection, Federal Systems in
addition to Corporate activities for the three years ended December 31, 1999,
1998 and 1997. Also included is operating information from MicroAssembly's
Stick-Screw product sales during the period from January 1, 1999 to May 31, 1999
(date of disposal) and years ended December 31, 1998 and 1997, Norment
(Corrections segment) and Norshield (Attack Protection segment), are included
since their date of acquisition, November 28, 1998 Ackley Dornbach, Inc.
(Corrections segment) and since its date of acquisition, November 12, 1999, and
CorrLogic (Corrections segment) since its date of acquisition, April 30, 1999.
Revenues Gross Profit
---------- ------------
(in thousands) 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Corrections $ 82,498 $ 16,321 $ 6,217 $ 16,112 $ 3,385 $ 1,084
Attack Protection 15,124 1,289 - 3,277 313 -
Federal Systems 13,154 12,535 12,031 1,814 1,892 1,637
MicroAssembly 670 1,771 1,768 152 462 558
CompuDyne Corporate - - - - - -
-------- -------- -------- -------- -------- --------
$111,446 $ 31,916 $ 20,016 $ 21,355 $ 6,052 $ 3,279
======== ======== ======== ======== ======== ========
Total Assets, at Year End Operating Income/(Loss)
------------------------- ----------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Corrections $ 38,346 $ 32,415 $ 2,229 $ 4,903 $ 1,097 $ (65)
Attack Protection 10,914 8,623 - 1,507 34 -
Federal Systems 4,491 2,197 3,609 1,016 920 782
MicroAssembly - 1,224 1,286 4 50 208
CompuDyne Corporate 3,696 (889) 474 (1,386) (633) (345)
-------- --------- -------- -------- -------- -------
$ 57,447 $ 43,570 $ 7,598 $ 6,044 $ 1,468 $ 580
======== ========= ======== ======== ======== ========
Capital Expenditures Depreciation
-------------------- ------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- -------
Corrections $ 1,491 $ 102 $ 55 $ 869 $ 90 $ -
Attack Protection 1,957 65 - 219 23 11
Federal Systems 84 208 133 90 79 39
MicroAssembly 21 57 7 31 71 80
CompuDyne Corporate 20 - - 2 - -
-------- -------- -------- -------- -------- --------
$ 3,573 $ 432 $ 195 $ 1,211 $ 263 $ 130
======== ======== ======== ======== ======== ========
16. FOREIGN CURRENCY AND EXCHANGE CONTRACT
The Company had a long-term contract in South Africa which required payments to
the Company in South African rand. The Company had entered into a foreign
exchange contract to hedge its risk in converting rands into U.S. dollars. The
foreign currency exchange contract entered into expires on April 18, 2000 and
required the Company to convert approximately 15,600,000 rand to U.S. dollars at
rates ranging from 5.9 to 7.0. Gains and losses from foreign currency
transactions, such as those resulting from the settlement of foreign receivables
and payables, are included in the consolidated statement of operations. As most
of this contract was completed during 1999, no significant exchange risk exists
at December 31, 1999.
SCHEDULE II
COMPUDYNE CORPORATION AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998, and 1997
($ Thousands)
Balance
Balance at Charged to at End
Beginning Norment Costs and of
Description of Period Acquisition Expenses Deduction Period
- ---------- ---------- ----------- ---------- --------- --------
Year Ended December 31, 1999
Reserve and allowances
deducted from asset accounts:
Obsolescence reserve
for inventory $ 615 $ - $ - $ (5) $ 610
Reserve for accounts
receivable 440 - - (38) 402
Year Ended December 31, 1998
Reserve and allowances deducted
from asset accounts:
Obsolescence reserve for
inventory $ 313 $ 263 $ 39 $ - $ 615
Reserve for accounts
receivable 300 92 236 (188) 440
Year Ended December 31, 1997
Reserve and allowances deducted
from asset accounts:
Obsolescence reserve for
inventory $ 299 $ - $ 14 $ - $ 313
Reserve for accounts
receivable 538 - 60 (298) 300
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMPUDYNE CORPORATION
---------------------
(Registrant)
By:/s/ William C. Rock
-----------------------
William C. Rock
Dated: March 31, 1999 Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 31, 1999.
/s/ Martin A. Roenigk Director, Chairman, /s/ David W. Clark, Jr. Director
- --------------------- President, Chief -----------------------
Martin A. Roenigk Executive Officer David W. Clark, Jr.
/s/ Millard H. Pryor, Jr. Director /s/ Alan Markowitz Director
- ------------------------- ------------------
Millard H. Pryor, Jr. Alan Markowitz
/s/ Miles P. Jennings, Jr. Director /s/ Philip M. Blackmon Director and
- -------------------------- ---------------------- Executive
Miles P. Jennings Philip M. Blackmon Vice-President
/s/ David M. Jones Director /s/ William C. Rock Chief Financial
- ------------------ ------------------- Officer and
David M. Jones William C. Rock Principle
Accounting Officer
EXHIBIT I
SUBSIDIARIES OF THE REGISTRANT
Percentage
of voting
securities
Incorporated owned by
under the immediate
Name laws of Parent parent
- ----- ------------ ------ -----------
CompuDyne Corporation * Nevada Registrant
SYSCO Security Systems, Inc.* Nevada CompuDyne Corp. 100%
CompuDyne Corp. of Maryland * Maryland CompuDyne Corp. 100%
Quanta Systems Corporation * Connecticut CompuDyne Corp. 100%
CompuDyne, Inc.** Delaware CompuDyne Corp. 100%
4 Focus, Inc. Connecticut CompuDyne Corp. 100%
Quanta SecurSystems, Inc. Maryland CompuDyne Corp. 100%
Norment Industries, Inc. Delaware CompuDyne Corp. 100%
Norshield Corporation Alabama CompuDyne Corp. 100%
Norment Industries S.A.
(Pty) Ltd. South Africa Norment 100%
___________________
Note:* All subsidiaries of the Registrant as of December 31, 1998, are
included in the consolidated financial statements of the
Registrant.
** CompuDyne, Inc. filed for petition in bankruptcy on December 31, 1991.