-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TpzwvI7gqDRWx+9PBuSp4C5NIUmQf9A+/R1FRj1ZjC4IuYDLvrw3TZJSjCZ/TV50 BZtBewFJc/1IDPtmB3EofA== 0000022912-96-000002.txt : 19960409 0000022912-96-000002.hdr.sgml : 19960409 ACCESSION NUMBER: 0000022912-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 DATE AS OF CHANGE: 19960408 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUDYNE CORP CENTRAL INDEX KEY: 0000022912 STANDARD INDUSTRIAL CLASSIFICATION: 3812 IRS NUMBER: 231408659 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04245 FILM NUMBER: 96543717 BUSINESS ADDRESS: STREET 1: 90 STATE HOUSE SQ CITY: HARTFORD STATE: CT ZIP: 06103-3720 BUSINESS PHONE: 2032477611 MAIL ADDRESS: STREET 1: 90 STATE HOUSE SQ CITY: HARTFORD STATE: CT ZIP: 06103 FORMER COMPANY: FORMER CONFORMED NAME: CDC CONTROL SERVICES INC DATE OF NAME CHANGE: 19680510 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 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 1-4245 CompuDyne Corporation (Exact name of registrant as specified in its charter) Pennsylvania 23-1408659 State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 120 Union Street, Willimantic, Connecticut 06226 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (860)456-4187 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock $.75 par value Over-The-Counter Securities registered pursuant to section 12(g) of the Act: None (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]. The aggregate market value of the voting stock held by nonaffiliates of the Registrant was $3.1 million as of March 25, 1996 (based upon the average of the bid and asked prices on the over-the-counter market for CompuDyne common stock on March 25, 1996 which was $1.69 per share, as quoted on the OTC Bulletin Board (see ITEM 5.). As of March 25, 1996, a total of 1,807,832 shares of Common Stock, $.75 par value, were outstanding. Documents incorporated by reference: Portions of the Proxy Statement relating to the 1995 Annual Meeting of Shareholders are incorporated in Part III. PART I ITEM 1. BUSINESS Current Developments On August 21, 1995, CompuDyne Corporation ("CompuDyne" or "the Company") entered into and consummated a Stock Purchase Agreement by and among it, Martin A. Roenigk and Alan Markowitz (Messrs. Roenigk and Markowitz are, collectively,the "Sellers") and MicroAssembly Systems, Inc. ("MicroAssembly"), pursuant to which CompuDyne issued to the Sellers 1,260,460 shares of its Convertible Preference Stock, Series D ("Series D Preference Stock") in exchange for all of the Sellers' shares of capital stock of MicroAssembly, which shares represented all of MicroAssembly's issued and outstanding capital stock. The issuance by CompuDyne of the Series D Preference Stock, together with the issuance of certain Notes, as defined below, and certain options to purchase Common Stock, all as described below and in accordance with the terms of the Stock Purchase Agreement, are referred to as the "Transaction". Of the 1,260,460 Shares of Series D Preference Stock issued to the Sellers, 945,345 shares were issued to Mr. Roenigk, and 315,115 shares were issued to Mr. Markowitz. The Series D Preference Stock has rights to vote on a share for share basis with the Company's Common Stock on all corporate issues other than the election of directors; it is also convertible to Common Stock on a share for share basis at any time prior to redemption by the Company. For the election of directors, each share of Series D Preference Stock is entitled to 1/3.08 of a vote as compared to the Company's Common Stock, which is entitled to one vote per share. Pursuant to the terms of the Series D Preference Stock, each share of Preference Stock will be entitled to one vote per share with respect to the election of directors, effective as of August 1, 1996, unless the Board of Directors of the Company, in its sole and absolute discretion, approves a resolution prior to such date prohibiting such change in voting rights, in which case each share of Preference Stock will continue to have 1/3.08 vote per share. In the event the Board of Directors of the Company approves such a resolution, on May 1 of each subsequent year, each share of Preference Stock will have one vote. As a result of the Transaction, MicroAssembly is a wholly-owned subsidiary of CompuDyne. For a description of the business of MicroAssembly, see "Description of Business" below. As part of the Transaction, in return for $400 thousand paid to CompuDyne at the closing, CompuDyne issued to the Sellers Senior Convertible Promissory Notes (the "Notes") in the aggregate principal amount of $400 thousand, which Notes are convertible, prior to redemption by CompuDyne, into CompuDyne Common Stock at a conversion rate of $1.50 per share of Common Stock, or 266,667 shares of Common Stock if the entire principal amount of the Notes is converted. Of the $400 thousand principal amount of Notes issued, $300 thousand principal amount of the Notes was issued to Mr. Roenigk, and $100 thousand principal amount of the Notes was issued to Mr. Markowitz. As described in a report filed by the Sellers with the Securities and Exchange Commission and with the Company pursuant to Section 13(d) of the Securities Exchange Act of 1934, the source of the Sellers' $400 thousand investment in the Company was personal funds. As a further part of the Transaction, Norman Silberdick, the Company's Chairman, President and Chief Executive Officer, resigned as such and as a director of the Company effective as of August 21, 1995. The Company's Board of Directors elected Mr. Roenigk to fill Mr. Silberdick's seat on the Board of Directors, and to become its Chairman, President and Chief Executive Officer. Mr. Markowitz was also elected to the Company's six member Board of Directors. In recognition of Mr. Roenigk's position as Chairman, President and CEO, the Company has issued to him options to purchase up to 200,000 shares of the Company's Common Stock for $1.50 per share. The options expire in ten (10) years. Mr. Silberdick, as part of a related transaction described below, turned in to the Company 60,000 shares of the Company's Common Stock issued pursuant to a Stock Purchase Agreement, dated August 1, 1993, between the Company and Mr. Silberdick, and he relinquished his rights to purchase an additional 50,000 shares pursuant to such Agreement. Immediately prior to the Transaction, but after the exercise by Corcap, Inc. ("Corcap") of a warrant to acquire 150,000 shares of CompuDyne Common Stock, Corcap held 670,881 shares of CompuDyne's voting shares, or approximately 37.1% of CompuDyne's 1,807,832 issued and outstanding shares of Common Stock. On September 15, 1995, Corcap contributed to the Corcap, Inc. Pooled Pension Investment Trust, Plans 1A and 6B, 224,000 shares of CompuDyne Common Stock to satisfy its unpaid pension contributions for the years 1992, 1993, and 1994. On June 3, 1993, the Corcap Board of Directors authorized the sale of shares of its holdings of CompuDyne Common Stock under Rule 144. In 1993 pursuant to such rule, Corcap sold 27,000 shares of CompuDyne Common Stock, 40,500 shares in 1994 and 40,500 shares in 1995. After the transactions described above, Corcap's ownership of CompuDyne Common Stock decreased from 35% of the issued and outstanding shares of CompuDyne Common Stock as of December 31, 1994 to 24.7% as of December 31, 1995. After assuming (i) the conversion of 1,260,460 shares of Series D Preference Stock to Messrs. Martin A. Roenigk and Alan Markowitz, which shares are convertible by the holders into 1,260,460 shares of CompuDyne Common Stock, (ii) the conversion of $400 thousand principal amount of Senior Convertible Promissory Notes to Messrs. Roenigk and Markowitz which promissory notes are convertible by the holders into 266,667 shares of CompuDyne Common Stock and, (iii) the exercise of an option to purchase 200,000 shares of CompuDyne Common Stock issued by the Company to Mr. Roenigk at an exercise price of $1.50 per share as part of the transaction, and (iv) the purchase of an additional 56,250 shares of CompuDyne Common Stock on August 1, 1996 by certain members of CompuDyne management pursuant to a Stock Purchase Agreement dated August 1, 1993, between CompuDyne and such members of management, assuming certain conditions are met and (v) the exercise of stock options for 25,000 shares of CompuDyne Common Stock issued to an officer of the Company, Corcap's ownership will be decreased to 12.4% on a fully diluted basis. Prior to the Transaction, the Sellers held no voting shares of CompuDyne, although Mr. Roenigk held 70,000 shares of Corcap Common Stock, which is approximately 2.4% of Corcap's voting shares. At December 31, 1995, the Sellers held 1,260,460 shares of CompuDyne's voting stock (including the Series D Preference Stock), or approximately 41.1% of the voting power of issued and outstanding shares for all issues other than the election of directors and 18.5% of the voting power of issued and outstanding shares for the election of directors. Assuming conversion by the Sellers of all of the shares of Series D Preference Stock, the conversion of the full principal amount of the Notes and the exercise by Mr. Roenigk of his options to purchase 200,000 shares of the Company's Common Stock, the Sellers would hold 1,727,127 shares of the Company's voting stock, or approximately 47.8% of the Company's voting stock on a fully diluted basis. In addition, in connection with the Transaction, Mr. Roenigk became a director of Corcap and was issued options to purchase 450,000 additional shares of Corcap Common Stock which, if exercised, would, together with Mr. Roenigk's prior holdings, result in his holding approximately 15.4% of Corcap's Common Stock. The Sellers have, in their filing with the Securities and Exchange Commission pursuant to Section 13(d) of the Securities and Exchange Act of 1934, disclaimed any arrangements or understandings among themselves or their associates with respect to the future election of the Company's directors or other matters in connection with the operation and management of the Company. Upon consummation of the transaction, in addition to Mr. Roenigk, CompuDyne's executive officers are, respectively, Philip M. Blackmon, Vice President, and Elaine Chen, Treasurer and Chief Financial Officer. Each of the 1,260,460 shares of Series D Preference Stock issued to the Sellers as consideration for MicroAssembly carries an annual aggregate dividend equal to the lower of: (a) sixty percent (60%) of MicroAssembly's after-tax net income in the previous calendar year, divided by 1,260,460, or (b) eight percent (8%) of the Redemption Value of $1.50 per share of the Series D Preference Stock. Dividends may be paid on the Series D Preference Stock, at the Company's option, in cash, CompuDyne Common Stock, or a combination thereof, based upon the average closing price, or closing bid prices, of CompuDyne's Common Stock for the prior thirty (30) trading days. Beginning on August 21 in the year 2000, the Company may, at its option, redeem all or any part of the Series D Preference Stock for a price of $1.80 per share, that being one hundred twenty percent (120%) of the Redemption Value, plus accrued and unpaid dividends. On August 21, 1995, Quanta Systems Corporation ("Quanta" or "Quanta Systems"), a wholly-owned subsidiary of CompuDyne, transferred all of the assets and liabilities of Quanta's Suntec division to Suntec Service Corporation, a newly-formed corporation ("Suntec"), in return for (i) all of Suntec's issued and outstanding Common Stock and (ii) Suntec's agreement to pay to Quanta a royalty of 2% of Suntec's net sales and other revenues for thirty (30) years from the date of the closing. Quanta then sold all of Suntec's Common Stock to Norman Silberdick, who resigned on that date as CompuDyne's Chairman, President, CEO and Director. Suntec is engaged in the business of telemarketing home improvements in the middle Atlantic states. As consideration for the shares of Suntec, Mr. Silberdick executed a nonrecourse promissory note in the initial principal amount of $79,000 (the "Silberdick Note"), payment of which was secured by a pledge of all Suntec shares held by Mr. Silberdick, which shares must at all times equal or exceed 33% of all outstanding shares of Suntec capital stock. The Silberdick Note bears interest at an annual rate equal to the Wall Street Journal prime rate, plus 2%. Through August 31, 2000, the principal of the Silberdick Note is payable annually in amounts equal to 25% of Suntec's net, after-tax income for the year in question. Thereafter, the unpaid principal balance, as of that date, shall be paid in five equal annual installments. As a condition precedent to the sale of the Suntec shares to Mr. Silberdick, he turned in to CompuDyne 60,000 shares of CompuDyne Common Stock and relinquished purchase rights held by him to acquire an additional 50,000 shares of CompuDyne Common Stock. The amount of consideration determined by Quanta to be appropriate for the sale of the Suntec Common Stock to Mr. Silberdick resulted from a number of factors. While a division of Quanta, Suntec's business had never produced a profit. As a result, and in light of Quanta's retention of the 2% royalty on Suntec's net sales and other revenues for 30 years, Quanta decided that the business should be valued at its net book value at the closing date. The amount of the Silberdick Note was, at the closing date, based upon Suntec's net book value at June 30, 1995 and was subject to adjustment to its net book value based upon a closing date balance sheet to be completed on or before September 20, 1995. A subsequent review of the financial statements as of August 21, 1995 indicated that there was no equity in the assets transferred to Suntec and Mr. Silberdick thereafter purchased the shares of Suntec for $100. As part of the transaction, Quanta loaned $50 thousand to Suntec payable at the end of three years at prime plus 2% with interest due at the anniversary date of the loan. The loan is a senior obligation of Suntec with rights to security. As a result of the sale of Suntec, the balance sheet and statement of operations for CompuDyne have been restated to reflect the treatment of Suntec as a discontinued operation for the years 1993-1995. As a result of the acquisition of MicroAssembly, the corporate offices of CompuDyne were moved to MicroAssembly at 120 Union Street, Willimantic, Connecticut in December 1995. All corporate office and overhead costs are allocated in 1995. In December 1995, CompuDyne Corporation ("CompuDyne" or the "Company") issued 58,210 shares of CompuDyne Common Stock, par value $.75 per share (the "Common Stock"), under the 1986 Stock Incentive Compensation Plan to certain employees as partial payment of accrued bonuses for 1994, the balance of which was paid in cash. During 1995, CompuDyne incurred a net loss of $663 thousand. An important part of CompuDyne revenues and future results are dependent upon the Navy renewing the NISE East and Teton Contracts under similar terms and conditions as it had previously (See "General Information"), and Quanta's ability to improve the present level of sales and profits of its Data Control Systems division (See "Results of Operations-1995 compared with 1994"), generate positive cash flows, realize the projected sales and profits of its MicroAssembly subsidiary, reduce the level of existing payables and other obligations, and collect receivables in a timely manner. Description of Business CompuDyne, a Pennsylvania corporation, incorporated on December 8, 1952, operates in three industry segments through its wholly owned subsidiaries Quanta Systems Corporation and MicroAssembly. Quanta Systems is an engineering services firm providing turn-key design, fabrication, installation, training, maintenance, documentation, and systems integration services to government and industry. Quanta specializes in physical security applications, i.e., systems integration of CCTV, access control and intrusion detection. The Company also provides Original Equipment Manufacturing (OEM) and worldwide Quick Reaction Capability (QRC) to respond to the urgent/emergent and unique requirements of customers' with critical missions. Quanta is currently providing these services to the Naval In-Service Engineering Center (NISE East), the Naval Facilities Engineering Services Center, the National Security Agency (NSA), the Federal Bureau of Investigation (FBI), the Naval Criminal Investigative Services, the Defense Mapping Agency, the Space and Naval Warfare Systems Command, the Aberdeen Proving Grounds, the Defense Courier Service, the Social Security Administration, the Montgomery County Government (Maryland), and Mitel Corporation. Data Control Systems ("DCS"), a division of Quanta, manufactures telemetry, satellite command and control systems, RF and telecommunications products. These products and systems are used for data acquisition, control, test programs and laboratory environments having a variety of military, intelligence and commercial applications. In 1994 DCS began marketing its Automatic Power Controller ("APC") which automatically compensates for signal fade during periods of inclement weather for satellite uplink stations using Ku band transmissions. Refinement of the APC continued in 1995 and a full marketing rollout is underway in early 1996. DCS is also completing its QPSK model 7500 satellite test modem. To date DCS has received orders for ten 7500's and shipped five. Most of the research and development spending in 1995 related to the 7500, which is an extremely sophisticated satellite transmissions test modem. The 7500 incorporates advanced technology which is expected to result in related product derivatives in the telecommunications and telemetry market. Orders to date for the 7500 are believed to be primarily for review and testing purposes. The market for the 7500 itself is mainly with U.S. and foreign governments. MicroAssembly, located in Willimantic, Connecticut, is a manufacturer of a proprietary automated process called the "Stick-Screw System". The Stick-Screw System uses custom designed screws in a stick format for the insertion of fasteners in electronic and other assembly environments. The Stick-Screw System provides insertion of the fasteners at a faster speed than can be accomplished by comparably priced competing systems or processes. MicroAssembly operates out of owned facilities, utilizing automatic screw machines to manufacture the Stick- Screws. MicroAssembly also assembles the specially designed pneumatic drivers for inserting the screws. Micro Assembly has recently developed drill press and drill stand based models of the driver, one of which is electric and will permit sales in "clean room" environments. MicroAssembly is in the process of developing a hand operated Stick-Screw driver which will facilitate customer rework and maintenance. Sales are primarily in the United States via a network of independent sale representatives, with modest sales in Europe and South America. The largest customer accounted for 14.5% of MicroAssembly volume in 1995 during the period that was owned by CompuDyne See Note 11. "Industry Segment Information" to the Consolidated Financial Statements of CompuDyne for more information about the results of operations from the three industry segments. General Information Quanta Systems and DCS purchase most of the parts and raw materials used in their products from various suppliers. The primary raw materials used in the manufacturing of Quanta's products are electronic components. MicroAssembly's products are purchased from either distributors or manufacturers of metal products. While the bulk of such raw material is purchased from relatively few sources of supply, the Company believes that alternative sources are readily available. There is no significant seasonality in CompuDyne's business. The backlog of orders as of December 31, 1995 of $6.0 million, which excludes MicroAssembly, was lower than 1994 levels of $6.5 million. The decrease in the backlog is primarily due to the completion of the final option year for the NISE East contract in September 1996. Quanta had a $5.023 million backlog and DCS had a backlog of $986 thousand. MicroAssembly had a backlog of $500 thousand. It is expected that all orders included in the current backlog will be filled by the end of 1996. During the year ended December 31, 1995, direct sales to the U.S. Federal Government amounted to $8.9 million or 86% of the Company's total net sales from continuing operations, compared with $9.0 million and $8.3 million in fiscal years 1994 and 1993, respectively, or 90% and 84% of the Company's total net sales from continuing operations for the same years. No other single customer accounted for greater than 10% of the Company's net sales. Substantially all of the Company's government related business is with the U.S. Department of Defense. Within the Department of Defense there are various agencies which are customers of the Company, with the largest being the U.S. Navy. At December 31, 1995, the Company had two major multi-year contracts, the NISE East Contract and Teton, with the U.S. Government which accounted for revenue of $7.0 million in 1995. On March 31, 1992, Quanta was awarded the NISE East Contract which is a one year contract with four one year renewal options. NISE East has renewed the contract for the fiscal year ended September 30, 1996. The Teton Contract was awarded in September 1995 and is valued up to $9.4 million over five years. The contract is a one year contract with four renewal options. If NISE East and Teton do not continue to renew their contracts, or if the terms and conditions of such contract are substantially modified, Quanta will be required to modify its operations accordingly. Although most of Quanta's contracts are subject to government audit, management of the Company does not believe such audits will result in any material adjustments to the financial statements. The Company is subject to intense competition from numerous companies which sell both on a national and regional level, as well as in international markets. Many of these competitors are substantially larger than the Company. Also, there have been significant international political changes which could have a major impact on the market for Quanta's products. During the last several years dramatic changes have taken place throughout the world which have had, and will continue to have, an impact on future U.S. Defense spending. In addition, current budget constraints have affected the overall U.S. economy which have impacted Quanta's operations. The Company has significant sales to various organizations involved in the country's security and intelligence efforts. The Company has intensified its efforts to market to other agencies of the government to counteract the projected decline in defense spending. The company believes that overall U.S. expenditures for physical security installations will continue to out pace the general economy. The Company is currently undertaking research and development activities to expand and improve its product lines. Research and development expenditures were $359 thousand during the fiscal year ended December 31, 1995 compared with $66 thousand and $113 thousand during 1994 and 1993, respectively. Current year expenditures were made solely by DCS to complete the design and efficacy of its APC and QPSK product lines. The Company also engages in reimbursed research and development. At December 31, 1995, the Company had 118 full-time employees. None of the employees is subject to collective bargaining agreements. Financial Information About Foreign and Domestic Operations Export sales for the Company were $125 thousand, $30 thousand and $2 thousand, for the years ended December 31, 1995, 1994 and 1993, respectively. ITEM 2. PROPERTIES The following table sets forth the main facilities of the Company's operations:
Primary Owned or Approximate Location Purpose Leased (1) of Space Square Feet Corporate Office Willimantic, Connecticut Administrative Owned 2,900 Primary Owned or Approximate Location Purpose Leased (1) of Space Square Feet Defense & Electronics Gaithersburg, Maryland Engineering Leased 14,690 Gaithersburg, Maryland Manufacturing Leased 8,000 Gaithersburg, Maryland Warehouse Leased 1,500 MicroAssembly Willimantic, Connecticut Manufacturing Owned 7,000 (1) See Note 8 to the Consolidated Financial Statements for additional information relating to lease expense and commitments. Quanta leases three buildings in Gaithersburg, Maryland. One building is used by Data Control Systems products group which manufactures telemetry, satellite and telecommunications equipment. The second building is used by its services group, which provides engineering services and administrative staff. Quanta leases a third building in Gaithersburg which it subleases to Suntec Service Corporation and also uses for storage. The Company leases only those properties necessary to conduct its business and does not invest in real estate or interests in real estate on a speculative basis. The Company believes its properties are suitable and adequate for its current operations.
ITEM 3. LEGAL PROCEEDINGS The Company is party to certain legal actions and inquiries for environmental and other matters resulting from the normal course of business. Although the total amount of liability with respect to these matters cannot be ascertained, management of the Company believes that any resulting liability should not have a material effect on its financial position or results of future operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR COMPUDYNE COMMON STOCK AND RELATED SHAREHOLDER MATTERS CompuDyne Common Stock is traded in the over-the-counter market, and in January 1993 began being quoted on the OTC Bulletin Board, an inter-dealer quotation medium maintained by the National Association of Securities Dealers, Inc., under the symbol "CDCY". There were 2011 common shareholders of record as of February 21, 1996. The following table sets forth the high and low bids for CompuDyne Common Stock from March 31, 1994 to December 31, 1995 on the over-the-counter market, as quoted on the OTC Bulletin Board. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily reflect actual transactions.
Quarter Ended High Low March 31, 1995 $ 1 3/8 $ 1 1/4 June 30, 1995 2 1/4 1 1/2 September 30, 1995 2 1/4 1 1/2 December 31, 1995 1 3/4 1 High Low March 31, 1994 $ 2 3/4 $ 1 June 30, 1994 2 1/4 1 1/2 September 30, 1994 3 1 1/2 December 31, 1994 3 2 1/2 The Company has not paid any dividends on its Common Stock during the past three fiscal years, and its Board of Directors has no intention of declaring a dividend in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA The following is a consolidated summary of operations of CompuDyne and its subsidiaries for the years ended December 31, 1995, 1994, 1993, 1992 and 1991. 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, 1995 1994 1993 1992 1991 Net sales $ 10,308 $ 9,699 $ 9,571 $9,330 $ 10,762 Gross margin $ 1,516 $ 1,586 $ 1,884 $1,746 $ 2,255 Interest expense, net of interest income $ 22 $ (7) $ 111 $ 112 $ 58 /TABLE ITEM 6. SELECTED FINANCIAL DATA (continued)
1995 1994 1993 1992 1991 Income (loss) from continuing operations before extraordinary items $(210) $ 2,065 $ 253 $ 122 $862 Loss from discontinued operations (453) (860) (211) - 174) Extraordinary items (Note a) - 523 161 79 2,418 ------ ------- ------- ------ ---- Net income (loss) $(663) $ 1,728 $ 203 $ 201 $3,106 Total shareholders equity (deficit) $1,367 $ - $(1,736) $(1,939) $(2,140) Average common shares and equivalents outstanding assuming full dilution 1,657 1,748 1,686 1,353 1,366 Income (loss) per common share assuming full dilution (Note b): Continuing operations before extraordinary items $ (.13) $ 1.18 $ .15 $ .09 $ .63 Discontinued operations (.27) (.49) (.13) - (.13) Extraordinary items - .30 .10 .06 1.77 Net income (loss) $ (.40) $ .99 $ .12 $ .15 $ 2.27 Dividends on preferred stocks $ - $ - $ - $ - $ 635 Total assets $ 5,033 $ 2,114 $ 1,993 $ 2,652 $ 3,165 Long-term debt, net $ 470 $ - $ 1,050 $ 1,201 $ 1,306 Notes: (a) The extraordinary items are a debt forgiveness in 1991, utilization of net operating loss carryforwards in 1992, a rent settlement in 1993 and debt forgiveness in 1994. (b) For the year ended December 31, 1995, the conversions of Common Stock equivalents into common shares would result in net (loss) per share amounts which are anti-dilutive and are therefore not included as common equivalent shares. Income per common share was determined by dividing net income (loss), after deduction of dividend requirements on the CompuDyne Preference Stock, by the weighted average number of common shares. For the year ended December 31, 1991, net income per common share assumes the conversion of Preferred Stock into Common Stock. Accordingly, net income is not reduced for the related preferred dividend requirement. In November 1992, the Preferred Stock was converted to Common Stock. In August 1995, CompuDyne issued a new series of Preference Stock. There was no dividend requirement on the preference shares for 1995 due to the effect of purchase accounting on MicroAssembly's results. /TABLE ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition During 1995, CompuDyne's net worth increased $1.367 million from a $-0- net worth at December 31, 1994. Debt outstanding was $749 thousand as of December 31, 1995, compared to $-0- at December 31, 1994. Working capital was $705 thousand at December 31, 1995 compared to $410 thousand at December 31, 1994. The $295 thousand working capital improvement is mainly attributable to the effect of the purchase of MicroAssembly, whereby working capital was decreased by the increase in fixed assets $531 thousand, and intangible assets and goodwill $1.144 million offset by the issuance of notes to related parties $490 thousand, the issuance of preferred stock $1.891 million and the assumption of a deferred tax liability of $252 thousand resulting in an overall effect of an increase in working capital by $968 thousand. Other items affecting working capital was the writeoff of the loan to Suntec for $50 thousand and the loss for the year of $663 thousand. During 1995, CompuDyne incurred a net loss of $663 thousand. An important part of CompuDyne revenues are dependent upon the Navy renewing the NISE East and Teton Contracts under similar terms and conditions as it had previously (See "General Information"), and Quanta's ability to improve the present level of sales and profits of its Data Control Systems division (See "Results of Operations-1995 compared with 1994"), generate positive cash flows, realize the projected sales and profits of its MicroAssembly subsidiary, reduce the level of existing payables and other obligations, and collect receivables in a timely manner. Results of Operations - 1995 compared with 1994 The loss from continuing operations of $210 thousand in 1995 compares with income from continuing operations before extraordinary items of $2.065 million in 1994. The decrease in income from continuing operations of $2.275 million was primarily due to the receipt in 1994 of net insurance proceeds of $1.389 million from the death of Frank Kelley after payment of deferred compensation payments to nine former executives of the Company, the non-recurring effect of accrual reversals of $263 thousand in 1994, a comparative higher loss at DCS of $434 thousand in 1995 due to $359 thousand of research and development costs, a loss at MicroAssembly in 1995 of $34 thousand due to $91 thousand of purchase accounting adjustment changes and lower profits in 1995 at Quanta by $216 thousand offset by lower corporate costs. CompuDyne's net sales, which increased from $9.7 million in 1994 to $10.3 million in 1995, a 6% increase, were comprised of service revenue, telemetry and data acquisition product sales at Quanta and Stick-Screw products at MicroAssembly. Quanta's service revenue in 1995 was $8.9 million, $100 thousand more than 1994. The increase in service revenue was attributable to increases in task spending on government contracts. Service revenue represented 86% of 1995 revenues compared to 90% of 1994 revenues. Quanta's product sales at its Data Control Systems division of $863 thousand was $144 thousand lower than 1994 as a result of a delay in delivering its new QPSK high-speed satellite test modem and APC. The Company has received several orders for its new QPSK but experienced development delays for this highly sophisticated instrument resulting in increased research and development spending and delivery delays. DCS finished the year with a backlog of $986 thousand. MicroAssembly's results were only for the period of August 21 (date of acquisition) to December 1995. Earnings were decreased by $91 thousand in purchase accounting effects. During the five month period MicroAssembly had sales of $567 thousand. Gross margins decreased $70 thousand from $1.6 million, 16% of sales, in 1994 to $1.5 million, 15% of sales, in 1995. The gross margin at Quanta decreased $193 thousand from 16% of sales to 13% of sales. The decline at Quanta was due to increased material content in service contracts and start-up costs for several new contracts. DCS margins increased by $45 thousand from 22% of sales to 31% of sales, however the margin was offset by lower volume and a larger allocation to research and development costs. MicroAssembly's gross margin was $78 thousand and incremental since it was the first year of inclusion in CompuDyne's financial statements. Total 1995 selling, general and administrative expenses increased $119 thousand from 1994 levels. The Company increased its expenses as a result of the operations of MicroAssembly by $123 thousand which was offset by lower expenses at Quanta Systems, DCS and Corporate of $21 thousand. Corporate expenses have been reduced at an annual rate of $125 thousand since August. The Company undertook intensified research and development activities to complete the development of the QPSK. Research and development expenditures were $359 thousand during the fiscal year ended December 31, 1995 compared with $66 thousand in 1994. Total interest expense for 1995 was $31 thousand compared with $21 thousand for 1994. The increase was due to the expanded use of credit during the year and the new $400 thousand notes related to the MicroAssembly transaction in August. Interest income for 1995 was $9 thousand compared with $28 thousand for 1994. The decline in interest income was due to lower cash balances as a result of funding the losses at Suntec during the period that the division was part of Quanta. Other income decreased $1.848 million from $1.662 million in 1994 to expense of $186 thousand in 1995. In 1994, the Company benefitted from the Kelley life insurance proceeds in the amount of $1.389 million after paying deferred compensation payments to former executives at the Company. The Company also reduced certain accruals totaling $115 thousand and reversed its workmen's compensation accrual after receiving a final refund from the insurance carrier of $148 thousand in 1994. In 1994 CompuDyne had extraordinary income of $523 thousand resulting from debt forgiveness from Clipper of $413 thousand and from deferred compensation beneficiaries of $110 thousand. Loss from discontinued operations in 1995 was $453 thousand including disposal reserves, compared with 1994's loss of $860 thousand. The loss from discontinued operations reflects the sale of the Suntec division in August 1995. Results of Operations - 1994 compared with 1993 Income from continuing operations before extraordinary items of $2.065 million in 1994 compares with income from continuing operations before extraordinary items of $253 thousand in 1993. The increase in income from continuing operations of $1.812 million was due to the net insurance proceeds of $1.389 million from the death of Frank Kelley after payment of deferred compensation payments to nine former executives of the Company, a larger profit than normal at Quanta Systems $176 thousand and adjustments of certain accruals $263 thousand. CompuDyne's net sales, which increased from $9.6 million in 1993 to $9.7 million in 1994, a 1% increase, were comprised of service revenue, telemetry and data acquisition product sales at Quanta. Quanta's service revenue in 1994 was $8.7 million, $600 thousand more than 1993. The increase in service revenue was attributable to increases in task spending on other government contracts. Service revenue represented 90% of 1994 revenues compared to 84% of 1993 revenues. DCS sales decreased $400 thousand between 1994 and 1993. Quanta's product sales at its Data Control Systems division of $1.0 million was $400 thousand lower than 1993 as a result of a decline in bookings resulting from defense spending reductions and delays DCS incurred bringing new products into the market. The Company reduced the costs of its product operations in reaction to the decline in business and has spent considerable time and effort in developing new commercial products. During 1994 DCS continued the development of its automatic power controller ("APC") and sold several units. DCS also continued the development of its high speed satellite test modem QPSK Model 7500 and sold two units. DCS finished the year with a strong backlog of $600 thousand. Gross margins decreased $298 thousand from $1.9 million, 20% of sales, in 1993 to $1.6 million, 16% of sales, in 1994. The primary reason was DCS which had a margin decline of $376 thousand due to lower volume and higher costs which was offset by higher margins at Quanta of $77 thousand. The increase at Quanta was due to higher volume but at lower margins. Total 1994 selling, general and administrative expenses decreased $397 thousand from 1993 levels. The Company decreased its expenses at Quanta Systems, DCS and Corporate. The Company undertook research and development activities to develop new products for the telecommunications industry. Research and development expenditures were $66 thousand during the fiscal year ended December 31, 1994 compared with $113 thousand in 1993. Total interest expense for 1994 was $21 thousand or $104 thousand lower than 1993 levels of $125 thousand. The decline was due to the repayment of all outstanding debt. Interest income for 1994 was $28 thousand, or an increase of $14 thousand from 1993's interest income of $14 thousand. The increase was due to a larger amount of invested funds. Other income increased $1.560 million from $102 thousand in 1993 to $1.662 million in 1994. The Kelley life insurance proceeds after paying deferred compensation payments to former executives of the Company amounted to $1.389 million. CompuDyne also reduced certain accruals totaling $115 thousand and closed out its workmen's compensation accrual with its insurer, AIG, Inc., after receiving a final refund from the insurance carrier, $148 thousand. Extraordinary income of $523 thousand resulted from debt forgiveness from Clipper of $413 thousand and from deferred compensation beneficiaries $110 thousand compared with debt forgiveness in 1993 of $161 thousand primarily due to a settlement of its lease obligation at 90 State House Square in Hartford. Liquidity On November 18, 1994, CompuDyne obtained a $350 thousand secured working capital line of credit agreement with the Asian American Bank and Trust Company of Boston, Massachusetts. The credit agreement requires the Company to maintain a working capital ratio of 1.1 to 1, with which the Company was in compliance. In July 1995 the line was increased to $500 thousand and the advance rate increased from 50% of eligible accounts receivable to 75% of eligible accounts receivable. In January 1996, the interest rate on the loan was reduced to 2% above prime. In February 1996, the line was increased to $750 thousand. At December 31, 1995 the Company had outstanding borrowings of $259 thousand. MicroAssembly has an unsecured line of credit with Fleet Bank for $100 thousand. The line of credit is guaranteed by Mr. Roenigk. The rate is prime plus 1.5% and as of December 31, 1995 the line had not been used. MicroAssembly has a subordinated unsecured serial term loan of $100 thousand that was made by Mr. Markowitz to MicroAssembly. The loan is at prime plus 1.5% and requires quarterly payments of $5 thousand beginning in December 1995 and ending in 2001. During 1995, CompuDyne incurred a net loss of $663 thousand. An important part of CompuDyne revenues and future results are dependent upon the Navy renewing the NISE East and Teton Contracts under similar terms and conditions as currently exists (See "General Information"), and Quanta's ability to improve the present level of sales and profits of its Data Control Systems division (See "Results of Operations-1995 compared with 1994"), generate positive cash flows, realize the projected sales and profits of its MicroAssembly subsidiary, reduce the level of existing payables and other obligations, and collect receivables in a timely manner. The Company made considerable progress in reducing its reliance upon one contract through the award of Teton and several other contracts. Accounts receivable net of allowance for doubtful accounts were $2.1 million at December 31, 1995 compared with $1.3 million at December 31, 1994. The increase in accounts receivable of $800 thousand is due to the inclusion of MicroAssembly $238 thousand, the timing of billings at Quanta $820 thousand, offset by lower receivables at DCS $258 thousand. Capital Resources There were capital expenditures of $78 thousand in 1995 compared with $3 thousand in 1994. The Company does not expect to incur more than $200 thousand of capital expenditures in 1996, which represents a normal level of expenditures to maintain its technology and manufacturing base. RECENTLY ISSUED ACCOUNTING STANDARDS In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The new standard defines a fair value method of accounting for stock-based employee compensation plans. Under this method, compensation cost is measured based on the fair value of the stock award when granted and is recognized as an expense over the service period, which is usually the vesting period. This standard will be effective for the Company beginning in 1996 and requires measurement of awards made beginning in 1995. The new standard permits companies to continue to account for equity transactions with employees under existing accounting rules, but requires disclosure in a note to the financial statements of the pro forma net income and earnings per share as if the company had applied the new method of accounting. The Company intends to implement these disclosure requirements beginning 1996. Adoption of the new standard will not impact reported net income or cash flows. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This standard will be effective for the Company beginning in 1996 and is not expected to have a significant impact on the Company's financial statement. 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, 1995, or April 30, 1996, relating to its 1995 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (a) Financial Statements The financial statements listed in the accompanying index to financial statements are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K (c) Exhibits The Exhibits listed on the index below are filed as a part of this Annual Report. COMPUDYNE CORPORATION INDEX TO EXHIBITS (Item 14(c)) 3(A). Articles of Amendment and Restatement of Articles of Incorporation of Registrant effective March 13, 1969, incorporated herein by reference to Registrant's Form 10-K Report filed for the fiscal year ended September 30, 1975, Item 10(b)(1)(A). 3(B). Articles of Amendment to Articles of Incorporation effective April 9, 1973, incorporated herein by reference to Registrant's Form 10-K Report filed for the fiscal year ended September 30, 1975, Item 10(b)(1)(C). 3(C). Articles of Amendment to Articles of Incorporation effective June 23, 1978, incorporated herein by reference to Registrant's Form 10-K Report filed for the fiscal year ended September 30, 1978, Item 12(a)(1)(E). 3(D). Statement of Shares Issued in Series - Statement as to Preference Stock, Series A, incorporated herein by reference to Registrant's Form 10-K Report filed for the fiscal year ended September 30, 1978, Item 12(a)(2)(1)(F). 3(E). Statement of Shares Issued in Series - Statement as to Preference Stock Series C, incorporated herein by reference to Registrant's Proxy Statement dated April 22, 1987 for its 1987 Annual Meeting of Shareholders. 3(F). By-Laws, as amended through May 27, 1987 and as presently in effect, incorporated herein by reference to Registrant's Form 10-K Report filed for the fiscal year ended December 31, 1987, Item 3(F). 10 (A). 1986 Stock Incentive Compensation Plan incorporated herein by reference to Registrant's Proxy Statement dated January 24, 1986 for its 1986 Annual Meeting of Shareholders. 10 (B). Amendment to Loan and Security Agreement dated March 10, 1993 between Clipper and Quanta incorporated herein by reference to Exhibit (K) to Registrants's Form 10-K filed for the fiscal year December 31, 1992. 10 (C). Voluntary Petition in Bankruptcy dated December 31, 1991 filed by CompuDyne Inc., in the Hartford District of Connecticut, incorporated by reference to Exhibit (I) to Registrant's Form-8-K filed January 14, 1992. 10 (D) Warrant dated, March 10, 1993 issued to Clipper (the "Clipper Warrant"), is incorporated herein by reference to Exhibit (L) to Registrant's Form 10-K filed December 31, 1992. 10 (E) Amendment No. One, dated April 1, 1993, to the Clipper Warrant is filed herewith. 10 (F) Warrant, dated March 10, 1993, issued to Corcap (the "Corcap Warrant"), is incorporated herein by reference to Exhibit (M) to Registrant's Form 10-K filed December 31, 1992. 10 (G) Amendment No. One, dated April 1, 1993, to the Corcap Warrant is filed herewith. 10 (H) Credit Agreement dated November 18, 1994 between Asian American Bank and Trust and CompuDyne and Quanta is filed herewith. 10 (I) Form of Management Stock Purchase Agreement. 10 (J) 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 (K) CompuDyne Corporation Senior Convertible Promissory Notes is incorporated by reference to Exhibit (4.2) to Registrant's Form 8-K filed September 5, 1995. 10 (L) Stock Purchase Agreement dated August 21, 1995 between CompuDyne Corporation, MicroAssembly Systems, Inc., Martin A. Roenigk and Alan Markowitz is incorporated by reference to Exhibit (4.3) to Registrant's Form 8-K filed September 5, 1995. 10 (M) Asset Purchase and Sale Agreement dated as of August 21, 1995 by and among Quanta Systems Corporation, Suntec Service Corporation and Norman Silberdick is incorporated by reference to Exhibit (4.4) to Registrant's Form 8-K filed September 5, 1995. 10 (N) 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. 11 Computation of Earnings per Common and Common Equivalent Share (refer to Exhibit XI, Page 36). 22. Subsidiaries of the Registrant is filed herewith. COMPUDYNE CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS (Item 14(a)(1))
Page(s) Independent Auditors' Report 17 Consolidated Balance Sheets at December 31, 1995 and 1994 18 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 19 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 20 Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the years ended December 31, 1995, 1994 and 1993 21 Notes to Consolidated Financial Statements 22-33 (Item 14(a)(2)) Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1995, 1994 and 1993 34 /TABLE INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders of CompuDyne Corporation: We have audited the accompanying consolidated balance sheet of CompuDyne Corporation and subsidiaries, as of December 31, 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the accompanying index. These financial statements and schedule as of and for the year ended December 31, 1995 are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. The consolidated financial statements and schedule as of December 31, 1994 and for the two years in the period then ended, before the adjustments described in Note 1 to the consolidated financial statements, were audited by other auditors whose report, dated March 29, 1995, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule as of and for the year ended December 31, 1995, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We also audited the adjustments described in Note 1 that were applied to restate the 1994 and 1993 financial statements and schedule for the discontinued operations. In our opinion, such adjustments are appropriate and have been properly applied. /s/DELOITTE & TOUCHE LLP Washington D.C. March 29, 1996 COMPUDYNE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
December 31, 1995 1994 (In Thousands) Current Assets Cash and cash equivalents $ - $ 176 Accounts receivable 2,122 1,300 Inventories Finished goods 144 - Work in progress 473 194 Raw materials and supplies 405 254 Total Inventories 1,022 448 Net current assets of discontinued operations - 132 Prepaid expenses and other current assets 97 36 Total Current Assets 3,241 2,092 Non-current receivable,related parties 60 5 Property, Plant and Equipment, at cost Land and improvements 26 - Buildings and leasehold improvements 190 27 Machinery and equipment 871 480 Furniture and fixtures 192 163 ----- ------ 1,279 670 Less accumulated depreciation and amortization 691 663 Net Property, Plant and Equipment 588 7 Goodwill and other intangible assets, net of accumulated amortization 1,127 - Other assets 17 10 Total Assets $ 5,033 $ 2,114 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 1,515 $ 992 Bank line payable 259 - Accrued pension costs 40 25 Other accrued expenses 641 594 Current portion of deferred compensation 61 71 Current portion of notes payable related parties 20 - Total Current Liabilities 2,536 1,682 Notes payable related parties 470 - Long term pension liability 370 304 Deferred compensation, net of current portion 59 128 Deferred taxes 231 - Total Liabilities 3,666 2,114 Shareholders' Equity Convertible preference stock, Series D, 1,260,460 issued and outstanding as of December 31, 1995 1,891 - Common stock, par value $.75 per share: 10,000,000 shares authorized; 1,749,622 and 1,603,372 shares issued and outstanding at December 31, 1995 and 1994, respectively 1,355 1,202 Other capital 7,973 7,988 Receivable from management (91) (92) Accumulated Deficit (9,761) (9,098) Total Shareholders' Equity 1,367 - Total Liabilities and Shareholders' Equity $ 5,033 $ 2,114 See notes to consolidated financial statements.
COMPUDYNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995 1994 1993 In thousands except per share amounts) Net sales $10,308 $9,699 $ 9,571 Cost of goods sold 8,792 8,113 7,687 Gross margin 1,516 1,586 1,884 Selling, general and administrative expenses 1,214 1,095 1,492 Research and development 359 66 113 Operating income (loss) (57) 425 279 Other (income) expense Interest expense 31 21 125 Interest income (9) (28) (14) Other income related parties - - (57) Other income 186 (1,662) (45) Total other (income) expense 208 (1,669) 9 Income (loss) from continuing operations before income taxes and extraordinary items (265) 2,094 270 Income tax provision (benefit) (55) 29 17 Income (loss) from continuing operations before extraordinary item (210) 2,065 253 Loss from discontinued operations (453) (860) (211) Income (loss) before extraordinary item $ (663) $1,205 $ 42 Extraordinary item, debt forgiveness - 523 161 Net income (loss) $ (663) $1,728 $ 203 Weighted average common equivalent shares: Primary 1,657 1,748 1,686 Fully diluted 1,657 1,748 1,686 Income per common and dilutive common equivalent share: Continuing operations before extraordinary items $ (.13) $ 1.18 $ .15 Discontinued operations (.27) (.49) (.13) Extraordinary items - .30 .10 Net Income (loss) per share $ (.40) $ .99 $ .12 Income per common share assuming full dilution: Continuing operations before extraordinary items $ (.13) $ 1.18 $ .15 Discontinued operations (.27) (.49) (.13) Extraordinary items - (.30) .10 Net income (loss) per share $ (.40) $ .99 $ .12 See notes to consolidated financial statements. /TABLE COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, December 31, December 31, December 31 1995 1994 1993 (In Thousands) Cash flows from operating activities: Net income (loss) from continuing operations $ (210) $ 2,588 $ 414 Adjustments to reconcile net income to net cash from operations: Depreciation and amortization 45 10 26 Reduction in allowance for doubtful accounts - (13) - Reduction in reserve for contract disallowances - (214) - Reduction in litigation reserve - (115) - Debt forgiveness - (523) (161) (Increase) decrease in accounts receivable (393) (241) 735 Decrease in accounts receivable-related party 5 - - (Increase) decrease in inventory (138) (16) 44 Decrease (increase) in prepaid expenses 15 (12) 39 (Increase) decrease in accounts payable 338 159 (275) Decrease in accrued expenses, related parties - - (107) Increase (decrease) in accrued expenses (131) (208) 149 Other (9) (207) (61) Net cash flows provided by (used in) continuing operations (478) 1,208 803 Loss on discontinued operations (453) (860) (211) (Increase) decrease in net assets of discontinued operations 132 147 (279) Cash flows used in discontinued operations (321) (713) (490) Net cash flows provided by (used in) operations (797) 495 313 Cash flows from investing activities: Net cash received from acquisition of MicroAssembly 52 - - Additions to property, plant and equipment (78) (1) - Receivable from related parties - 10 (15) Net cash flows provided by (used in) investing activities (26) 9 (15) Cash flows from financing activities: Payment of receivable from management 1 8 - Increase in short term debt 258 - - Repayment of long term debt - (680) (105) Proceeds from note payable, related parties 400 - - Repayment of note payable related parties (10) - (132) Net cash flows provided by (used in) financing activities 649 (672) (237) Net increase (decrease) in cash and cash equivalents (176) (168) 61 Cash and cash equivalents at the beginning of the year 176 344 283 Cash and cash equivalents at the end of the year $ - $ 176 $ 344 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 15 $ 21 $ 130 Income taxes, net of refunds $ (30) $ 4 $ 17 See notes to consolidated financial statements. /TABLE COMPUDYNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Prefer- Receivable ($Thousands) ence Common Other From Stock Stock Capital Management Deficit Total Balance at January 1, 1993 $ - $ 1,015 $ 8,075 $ - $(11,029)$(1,939) Net income - - - - 203 203 Shares issued - 94 (44) - - 50 Receivable from management - - - (50) - (50) Balance at December 31, 1993 - 1,109 8,031 (50) (10,826) (1,736) Net income - - - - 1,728 1,728 Shares issued - 93 (43) - - 50 Receivable from management - - - (50) - (50) Payments from management - - - 8 - 8 Balance at December 31, 1994 - 1,202 7,988 (92) (9,098) - Net loss - - - - (663) (663) Shares issued-common shares - 153 (15) 1 - 139 Shares issued- preference shares 1,891 - - - - 1,891 Balance at December 31, 1995 $ 1,891 $ 1,355 $ 7,973 $ (91) $(9,761) $ 1,367 See notes to consolidated financial statements. /TABLE COMPUDYNE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Description of Business CompuDyne Corporation ("CompuDyne" or "the Company"), a Pennsylvania corporation, incorporated on December 8, 1952, operates in three industry segments through its wholly owned subsidiaries Quanta Systems Corporation ("Quanta") which provides engineering and field services primarily to the U.S. government, Data Control systems ("DCS") a division of Quanta, which manufacturers telemetry and telecommunications products, and MicroAssembly Systems, Inc. ("MicroAssembly") which manufactures a proprietary automated process called the "Stick-Screw System". The Stick-Screw System uses custom designed screws in a stick format for the insertion of fasteners in electronic and other assembly environments. MicroAssembly operates out of owned facilities, utilizing automatic screw machines to manufacture the Stick-Screws. MicroAssembly also assembles the specially designed pneumatic drivers for inserting the screws. Quanta's products are provided at one location in Gaithersburg, Maryland. Quanta provides engineering and field services ranging from small, single function projects to comprehensive turnkey programs involving design, fabrication, installation, training, maintenance, documentation and system integration services for the U.S. Military and U.S. Government worldwide. Through its Data Control Systems division, Quanta manufactures telemetry equipment, satellite command and control subsystems and telecommunications products. These products and systems are used for data acquisition, control, test programs and laboratory environments having a variety of military, intelligence and commercial applications. Acquisition of MicroAssembly Systems, Inc. On August 21, 1995, CompuDyne entered into and consummated a Stock Purchase Agreement by and among the Company, Martin A. Roenigk and Alan Markowitz (Messrs. Roenigk and Markowitz are, collectively,the "Sellers") and MicroAssembly, pursuant to which CompuDyne issued to the Sellers 1,260,460 shares of its Convertible Preference Stock, Series D ("Series D Preference Stock") in exchange for all of the Sellers' shares of capital stock of MicroAssembly, which shares represented all of MicroAssembly's issued and outstanding capital stock. This transaction represents a non-cash investing activity and, therefore, has not been included in the Statement of Cash Flows. The issuance by CompuDyne of the Series D Preference Stock, together with the issuance of certain Notes, as defined below, and certain options to purchase Common Stock, all as described below and in accordance with the terms of the Stock Purchase Agreement, are referred to as the "Transaction" in which MicroAssembly became a wholly-owned subsidiary of CompuDyne. Of the 1,260,460 Shares of Series D Preference Stock issued to the Sellers, 945,345 shares were issued to Mr. Roenigk, and 315,115 shares were issued to Mr. Markowitz. The Series D Preference Stock has rights to vote on a share for share basis with the Company's Common Stock on all corporate issues other than the election of directors; it is also convertible to common stock on a share for share basis at any time prior to redemption by the Company. On March 29, 1996, the holders of the preference stock waived their rights to the mandatory redemption by the Company. For the election of directors, each share of Series D Preference Stock is entitled to 1/3.08 of a vote as compared to the Company's Common Stock, which is entitled to one vote per share. Pursuant to the terms of the Series D Preference Stock, each share of Preference Stock will be entitled to one vote per share with respect to the election of directors, effective as of August 1, 1996, unless the Board of Directors of the Company, in its sole and absolute discretion, approves a resolution prior to such date prohibiting such change in voting rights, in which case each share of Preference Stock will continue to have 1/3.08 vote per share. In the event the Board of Directors of the Company approves such a resolution, on May 1 of each subsequent year each share of Preference Stock will have one vote. Each share of Series D Preference Stock carries an annual aggregate dividend equal to the lower of: (a) sixty percent (60%) of MicroAssembly's after-tax net income in the previous calendar year, divided by 1,260,460, or (b) eight percent(8%) of the Redemption Value of $1.50 per share of the Series D Preference Stock. Dividends may be paid on the Series D Preference Stock, at the Company's option, in cash, CompuDyne Common Stock, or a combination thereof, based upon the average closing price of CompuDyne's Common Stock for the prior thirty (30) trading days. There were no dividends accrued or paid for 1995. CompuDyne has accounted for the acquisition of MicroAssembly using the purchase method of accounting. The purchase price was allocated to the net assets acquired based on preliminary estimates of their fair values at the date of acquisition. The fair values of these assets and liabilities are summarized as follows (in thousands):
Cash $ 118 Accounts Receivable 261 Inventories 436 Other Assets 76 Property, Plant and Equipment 531 Intangible Assets 430 Goodwill 714 Accounts Payable and Accrued Expenses ( 358) Deferred Tax Liabilities (251) Total $1,957
The preliminary purchase price allocation is subject to change during the next year as additional information concerning asset and liability valuation is obtained. Therefore, the final allocation may differ from the preliminary allocation. The accompanying financial statements include the operations of MicroAssembly for the period from August 21, 1995 through December 31, 1995. The excess of the purchase price over the net tangible assets and liabilities acquired of $1.144 million has been allocated to intangible assets and goodwill and is being amortized on a straight line basis over 25 years. Beginning on August 21 in the year 2000, the Company may, at its option, redeem all or any part of the Series D Preference Stock for a price of $1.80 per share, that being one hundred twenty percent (120%) of the Redemption Value, plus accrued and unpaid dividends. As part of the Transaction, in return for $400 thousand paid to CompuDyne at the closing, CompuDyne issued to the Sellers Senior Convertible Promissory Notes (the "Notes") in the aggregate principal amount of $400 thousand, which Notes are convertible, prior to redemption by CompuDyne, into CompuDyne Common Stock at a conversion rate of $1.50 per share of common stock, or 266,667 shares of common stock if the entire principal amount of the Notes is converted. Of the $400 thousand principal amount of Notes issued, $300 thousand principal amount of the Notes were issued to Mr. Roenigk, and $100 thousand principal amount of the Notes were issued to Mr. Markowitz. As described in a report filed by the Sellers with the Securities and Exchange Commission and with the Company pursuant to Section 13(d) of the Securities Exchange Act of 1934, the source of the Sellers' $400 thousand investment in the Company was personal funds. As a further part of the Transaction, Norman Silberdick, the Company's Chairman, President and Chief Executive Officer, resigned as such and as a director of the Company. The Company's Board of Directors elected Mr. Roenigk to fill Mr. Silberdick's seat on the Board of Directors, and to become its Chairman, President and Chief Executive Officer. Mr. Markowitz was also elected to the Company's six member Board of Directors. In recognition of Mr. Roenigk's position as Chairman, President and CEO, the Company has issued to him options to purchase up to 200,000 shares of the Company's Common Stock for $1.50 per share. The options expire in ten (10) years. Mr. Silberdick, as part of a related transaction described below, turned in to the Company 60,000 shares of the Company's Common Stock issued pursuant to a Stock Purchase Agreement, dated August 1, 1993, between the Company and Mr. Silberdick, and he relinquished his rights to purchase an additional 50,000 shares pursuant to such Agreement. Prior to the Transaction, the Sellers held no voting shares of CompuDyne, although Mr. Roenigk held 70,000 shares of Corcap, Inc. ("Corcap") Common Stock, which is approximately 2.4% of Corcap's voting shares. Corcap is a holder of shares in CompuDyne. Immediately after the Transaction, the Sellers held 1,260,460 shares of CompuDyne's voting stock (the Series D Preference Stock), or approximately 41.9% of the voting power of issued and outstanding shares for all issues other than the election of directors and 19% of the voting power of issued and outstanding shares for the election of directors. Assuming conversion by the Sellers of all of the shares of Series D Preference Stock, the conversion of the full principal amount of the Notes and the exercise by Mr. Roenigk of his options to purchase 200,000 shares of the Company's Common Stock, the Sellers would hold 1,727,127 shares of the Company's voting stock, or approximately 48.5% of the Company's voting stock on a fully diluted basis. In addition, in connection with the Transaction, Mr. Roenigk became a director of Corcap and was issued options to purchase 450,000 additional shares of Corcap Common Stock which, if exercised, would, together with Mr. Roenigk's prior holdings, result in his holding approximately 15.4% of Corcap's Common Stock. The Sellers have, in their filing with the Securities and Exchange Commission pursuant to Section 13(d) of the Securities and Exchange Act of 1934, disclaimed any arrangements or understandings among themselves or their associates with respect to the future election of the Company's directors or other matters in connection with the operation and management of the Company. Divestiture of Suntec Division On August 21, 1995, Quanta Systems transferred all of the assets and liabilities of Quanta's Suntec division to Suntec Service Corporation, a newly-formed corporation ("Suntec"), in return for (i) all of Suntec's issued and outstanding common stock and (ii) Suntec's agreement to pay to Quanta a royalty of 2% of Suntec's net sales and other revenues for thirty (30) years from the date of the closing. Quanta then sold all of Suntec's Common Stock to Norman Silberdick, who resigned on that date as CompuDyne's Chairman, President, CEO and Director. As a condition precedent to the sale of the Suntec shares to Mr. Silberdick, he turned in to CompuDyne 60,000 shares of CompuDyne Common Stock and relinquished purchase rights held by him to acquire an additional 50,000 shares of CompuDyne Common Stock. As consideration for the shares of Suntec, Mr. Silberdick executed a nonrecourse promissory note in the initial principal amount of $79,000 (the "Silberdick Note"), payment of which was secured by a pledge of all Suntec shares held by Mr. Silberdick, which shares must at all times equal or exceed 33% of all outstanding shares of Suntec capital stock. The Silberdick Note bears interest at an annual rate equal to the Wall Street Journal prime rate, plus 2%. Through August 31, 2000, the principal of the Silberdick Note is payable annually in amounts equal to 25% of Suntec's net, after-tax income for the year in question. Thereafter, the unpaid principal balance, as of that date, shall be paid in five equal annual installments. The amount of consideration determined by Quanta to be appropriate for the sale of the Suntec Common Stock to Mr. Silberdick resulted from a number of factors. While a division of Quanta, Suntec's business had never produced a profit. As a result, and in light of Quanta's retention of the 2% royalty on Suntec's net sales and other revenues for 30 years, Quanta decided that the business should be valued at its net book value at the closing date. The amount of the Silberdick Note was, at the closing date, based upon Suntec's net book value at June 30, 1995 and was subject to adjustment to its net book value based upon a closing date balance sheet to be completed on or before September 20, 1995. A subsequent review of the financial statements as of August 21, 1995 indicated that there was no equity in the assets transferred to Suntec and Mr. Silberdick thereafter purchased the shares of Suntec for $100. As part of the transaction, Quanta loaned $50 thousand to Suntec payable at the end of three years at prime plus 2% with interest due at the anniversary date of the loan. The loan is a senior obligation of Suntec with rights to security. As of December 31, 1995, the Company provided a reserve for the full amount of this loan. As a result of the disposal of Suntec in 1995, the consolidated statements of operations for the years ended December 31, 1994 and 1993 have been restated to reflect Suntec as a discontinued operation. Loss from Discontinued Operations were $453 thousand, $860 thousand and $211 thousand for the years ended December 31, 1995, 1994, and 1993, respectively. In addition, the net assets and liabilities of the Suntec division of $132 thousand have been reclassified to Net Current Assets of Discontinued Operations at December 31, 1994 in the consolidated balance sheet. Loss from Discontinued Operations includes a provision of approximately $85 thousand in 1995 for the loss on disposal of the Suntec Division. Revenues included in loss on discontinued operations were $656 thousand, $2.588 million, and $2.269 million in 1995, 1994 and 1993, respectively. Pro-Forma Financial Information The following pro-forma financial information of CompuDyne Corporation reflects the acquisition of MicroAssembly and the disposition of Suntec Service Corporation as if these transactions had occurred on January 1, 1995 and January 1, 1994:
(In Thousands) 1995 1994 Revenues $11,335 $11,104 Income (loss) before Extraordinary Items (276) 2,085 Net Income (Loss) (276) 2,608 Earnings (Loss) Per Share (.17) .88
2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of CompuDyne Corporation and its subsidiaries, all of which are wholly-owned. All material intercompany transactions have been eliminated. On August 21, 1995, CompuDyne sold the assets of its Suntec Division and acquired MicroAssembly. For comparison purposes, the December 31, 1994 balance sheet has been restated to reflect the net assets and liabilities of the Suntec Division as Net Current Assets of Discontinued Operations and the year ended December 31, 1994 and 1993 Statements of Operations and of Cash Flows as a Discontinued Operation. Use of Estimates Certain estimates used by management are susceptible to significant changes in the economic environment. These include estimates of percentage-of-completion on long term contracts and valuation allowances for contracts accounts receivable. Each of these estimates, as well as the related amounts reported in the financial statements, are sensitive to near-term changes in the factors used to determine them. A significant change in any one of those factors could result in the determination of amounts different than those reported in the financial statements. Management believes that as of December 31, 1995, the estimates used in the financial statements are adequate based on the information currently available. Revenue Recognition Revenue under cost reimbursement contracts is recognized to the extent of costs incurred to date plus a proportionate amount of the fee earned. Revenue under time and materials contracts are recognized to the extent of billable rates times hours delivered plus materials expenses incurred. Revenues from fixed price contracts are recognized under the percentage of completion method. Revenues from the sale of manufactured products are recognized based on shipment date. Provisions for estimated losses on uncompleted contracts are recognized in the period such losses are determined. Inventories Raw material inventories are valued at the lower of cost (first-in, first-out) or market. Work-in-process represents direct labor, materials and overhead incurred on products not yet delivered. Finished goods are valued at the lower of cost or market. Property, Plant and Equipment Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is computed using principally the straight-line method based on the estimated useful lives of the related assets. The estimated useful lives are as follows: Buildings and improvements 7-39 years Machinery and equipment 3-10 years Furniture and fixtures 3-10 years Leasehold improvements are amortized over their estimated useful lives or the term of the underlying lease, whichever is shorter. Maintenance and repair costs are charged to operations as incurred; major renewals and betterments are capitalized. Goodwill and Other Intangibles Goodwill and other intangibles are being amortized on a straight-line basis over 25 years. Accumulated amortization was $17 thousand and $0 at December 31, 1995 and 1994, respectively. Income Taxes CompuDyne and its subsidiaries file a consolidated federal income tax return. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes". Under SFAS 109, deferred income taxes are recognized for the future tax consequences of differences between tax bases of assets and liabilities and financial reporting amounts, based upon enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. The adoption of SFAS 109 had no impact on operations. Cash and Cash Equivalents For purposes of the statements of cash flows, the company considers temporary investments with original maturities of three months or less to be cash equivalents. Net Income (Loss) Per Share Net income (loss) per share has been computed using the weighted average number of common shares outstanding during the periods including the effect of common stock equivalents where such effect would be dilutive. Reclassifications Certain reclassifications have been made in the 1993 and 1994 financial statements to conform to the 1995 presentation.
3. ACCOUNTS RECEIVABLE Accounts Receivable consist of the following: (In thousands) December 31, December 31, 1995 1994 U.S. Government Contracts: Billed $ 974 $ 390 Unbilled 701 476 1,675 866 Commercial 483 468 Total Accounts Receivable $ 2,158 $ 1,334 Less Allowance for Doubtful Accounts (36) (34) Net Accounts Receivable $ 2,122 $ 1,300
Substantially all of the U.S. Government billed and unbilled receivables are derived from cost reimbursable or time-and-material contracts. Unbilled receivables include retainages of approximately $175 thousand and $125 thousand at December 31, 1995 and 1994, respectively. Direct sales to the U.S. Federal Government for the years ended December 31, 1995, 1994 and 1993 were approximately $8.9 million, $9.0 million and $8.3 million, respectively, or 86%, 90% and 84% of the Company's total net sales for the same years. No other single customer accounted for greater than 10% of the Company's net sales. Contract costs for services provided to the U.S. Government, including indirect expenses, are subject to audit by the Defense Contract Audit Agency. All contract revenues are recorded in amounts expected to be realized upon final settlement. In the opinion of management, adequate provisions have been made for adjustments, if any, that may result from the government audits. Substantially all of the Company's government related business is with the U.S. Department of Defense, specifically under one major contract, the NISE East contract that was awarded to Quanta in March 1992 as a one-year contract with four one-year renewal options. The contract has been renewed through September 30, 1996. Sales under the NISE East contract totaled approximately $7.0 million in 1995. The Teton Contract was awarded in September 1995 and is valued at up to $9.5 million over five years. This contract is a one year contract with four renewal options. If NISE East and Teton do not continue to renew the contracts, or if the terms and conditions of such contracts are substantially modified, Quanta will be required to modify its operations accordingly. Management believes that the NISE East and Teton contracts will be renewed under similar terms and conditions. 4. NOTES PAYABLE RELATED PARTIES On August 21, 1995 CompuDyne issued to Martin A. Roenigk and Alan Markowitz Senior Convertible Promissory Notes (the "Notes") in the aggregate principal amount of $400 thousand, which Notes are convertible, prior to redemption by CompuDyne, into CompuDyne Common Stock at a conversion rate of $1.50 per share of Common Stock, or 266,667 shares of common stock if the entire principal amount of the Notes is converted. Of the $400 thousand principal amount of Notes issued, $300 thousand principal amount of the Notes was issued to Mr. Roenigk, and $100 thousand principal amount of the Notes was issued to Mr. Markowitz. Under the terms of the Notes, interest is due quarterly in arrears at prime plus 2% with the principal due August 21, 2005. The Notes are Senior Obligations of CompuDyne. In addition, on April 29, 1995, MicroAssembly converted a Subordinated Revolving Promissory Note with an outstanding balance of $100 thousand into a Subordinated Term Loan with Alan Markowitz. It is a 5 year loan with interest at Prime plus 1% payable quarterly. Principle payments are $5 thousand per quarter. At December 31, 1995, $90 thousand was outstanding on this note. In May 1994, CompuDyne negotiated a modification to the Loan agreement ("Clipper Agreement") Quanta had with JM Clipper Polymers Corporation ("Clipper") whereby the Company agreed to pay $1 million in full satisfaction of its debt of $1.163 million. On May 17, 1994 CompuDyne made a payment of $700 thousand, established six quarterly payments of $50 thousand for the balance due and terminated its working capital line of credit of $150 thousand with Clipper. Clipper further agreed to surrender its warrant to purchase 100,000 shares of CompuDyne Corporation Common Stock upon final payment of the outstanding debt which occurred in November 1994. On July 27, 1994, Clipper, Corcap Eastern, Inc. ("CE"), a wholly owned subsidiary of Corcap, and Quanta entered into an agreement whereby CE, as lessor under a lease to Clipper for property located in Dayville, Connecticut (the "Dayville Property"), terminated the lease in consideration for which Clipper cancelled a promissory note from CE to Clipper in the amount of $1.744 million and released a mortgage securing such note. As further consideration for the termination of the lease, Clipper forgave an additional $250 thousand of debt owed from Quanta to Clipper under the Clipper Agreement. Quanta's indebtedness to Clipper under the Clipper Agreement had thereby been reduced to $50 thousand, payable in five quarterly installments of $10 thousand commencing on September 30, 1994 and ending on September 30, 1995. In July 1991, the Dayville real estate and buildings were leased to Clipper under a "triple net" lease at an annual rental of $250 thousand, with an option to renew for one additional ten-year term and an additional option to purchase the facility for an amount equal to the principal amount of the mortgage plus $100 thousand. As part of the foregoing transaction and as consideration for Corcap causing CE to terminate the lease, CompuDyne entered into an agreement with Corcap to provide to Corcap management services and use of office facilities and to absorb the cost of certain legal services for a period of four years without charge to Corcap. On October 4, 1994 Clipper, CompuDyne and Corcap entered into a letter agreement that provided for $20 thousand of obligations by Clipper for environmental costs associated with the Dayville Property be offset against indebtedness due Clipper from Quanta. CompuDyne in turn reduced the amount of moneys due it from Corcap for $20 thousand and Corcap then established a liability for the environmental costs. Corcap required, as a condition to its conversion of the Preferred Stock to CompuDyne Common Stock and the relinquishment and waiver of accrued dividends on the Preferred Stock, that CompuDyne issue a warrant (the "Corcap Warrant") for 150,000 shares of CompuDyne Common Stock to Corcap. The exercise price of the Corcap Warrant is $.40 per share. On August 21, 1995 Corcap exercised the warrant by issuing a promissory note to CompuDyne in the amount of $60 thousand secured by the stock. This transaction represents a non-cash investing activity and, therefore, has not been reflected in the Statement of Cash Flows. 5. BANK NOTE PAYABLE On November 18, 1994, CompuDyne obtained a $350 thousand secured working capital line of credit agreement with the Asian American Bank and Trust Company of Boston, Massachusetts. The credit agreement requires the Company to maintain a working capital ratio of 1.1 to 1, with which the Company was in compliance. In July 1995 the line was increased to $500 thousand and the advance rate increased from 50% of eligible accounts receivable to 75% of eligible accounts receivable. At December 31, 1995 the Company had outstanding borrowings on this line of credit of $259 thousand. In February 1996, the line was increased to $750 thousand and the interest rate on the loan was reduced to prime plus 2%. The line of credit expires on June 30, 1996. MicroAssembly has an unsecured line of credit with Fleet Bank for $100 thousand. The line of credit is guaranteed by Mr. Roenigk. The rate is prime plus 1.5% and at December 31, 1995, the line had not been used. 6. INCOME TAXES The components of the income tax provision (benefit) from continuing operations for the years ended December 31, 1995, 1994, and 1993 are as follows:
$ thousands 1995 1994 1993 Current $ (29) $ 29 $ 101 Deferred (26) - (84) ----- ----- ----- $ (55) $ 29 $ 17 The tax effects of the primary temporary differences giving rise to the Company's net deferred tax assets and liabilities at December 31, 1995 and 1994 are summarized as follows: December 31, 1995 1994 Assets: Accrued expenses and deferred compensation $ 273 $ 297 Tax operating loss carryforward 9,510 8,702 Tax credit carryforward 459 459 Book reserves in excess of tax 93 93 Total deferred assets 10,335 9,551 Valuation allowance (10,335) (9,551) Net deferred assets 0 0 Liabilities: Book depreciation in excess of tax (3) - Investment in subsidiary (228) - Total deferred liabilities (231) - Net deferred liabilities $ (231) $ -
A valuation allowance is provided to reduce the deferred tax assets to a level more likely than not, under the rules in SFAS 109, will be realized. The difference between the statutory tax rate and CompuDyne's effective tax rate from continuing operations are summarized as follows:
1995 1994 1993 Statutory federal income tax rates 34.0% 34.0% 34.0% State income taxes, net of Federal benefit - 2.4 0.5 Change in valuation allowance 34.0 - - Tax effect of NOL utilization - - (34.0) Non-taxable life insurance proceeds - (36.0) - Reversal of prior year taxes (10.9) - - Tax effect of non-deductible items (9.9) 1.0 5.8 Tax (20.8)% 1.4% 6.3%
At December 31, 1995, the Company and its subsidiaries have net operating loss carryforwards available to offset future taxable income of approximately $28 million, subject to certain limitations. These carryforwards expire between 2000 and 2010. The utilization of substantially all of these tax loss carryforwards is limited to approximately $200 thousand each year as a result of the ownership change which occurred in 1995. The Company also has carryforwards available for alternative minimum tax purposes which do not differ significantly from regular net operating loss carryforwards. 7. COMMON STOCK AND COMMON STOCK OPTIONS On November 12, 1992 the CompuDyne Board authorized the issuance of 300,000 shares of Common Stock to key employees of CompuDyne and Quanta at a price of $.40 per share, the fair market value at such time. In January 1993, the Board subsequently authorized the issuance of an additional 200,000 shares of Common Stock to a key employee at the same price and on the same terms as those authorized on November 12, 1992. These authorizations were formalized in Stock Purchase Agreements, dated August 1, 1993, under which the employees may purchase an aggregate of 125,000 shares on August 1, of each of the years 1993 through 1996 provided certain conditions are met including continued employment by CompuDyne, by paying cash for such shares or by giving the Company a five-year non-recourse promissory note, collateralized by the stock and bearing interest at 2% per annum over the rate designated by the First National Bank of Maryland as its prime commercial rate. The Stock Purchase Agreements further provide that within 90 days of any Change of Control of CompuDyne, as defined, the employees will be entitled to purchase all of the shares of CompuDyne Common Stock not yet purchased under such Agreements by delivering a written notice to CompuDyne. On August 1, 1993, August 1, 1994 and August 1, 1995 an aggregate of 306,250 shares of CompuDyne Common Stock were issued to management, (the "Management Shares") in exchange for promissory notes pursuant to the Stock Purchase Agreements. In August 1995 as part of the agreement to acquire Suntec, Norman Silberdick former Chairman and President of CompuDyne returned 60,000 shares to CompuDyne in exchange for the cancellation of the promissory notes securing those shares thereby reducing the amount of shares issued to 246,250. Mr. Silberdick also cancelled his right to receive 50,000 shares on August 1, 1995. The remaining 56,250 shares issuable to management will be offered to such employees over the next year at $.40 per share so long as such persons are employed by the Company. In August 1995, the Company issued Martin A. Roenigk options to purchase up to 200,000 shares of the Company's Common Stock for $1.50 per share. The options expire in ten (10) years. The Company's stock option plans established in fiscal 1986 provide for the granting of options to purchase shares of Common Stock to eligible employees, of which 7,833 shares remained available for grant at December 31, 1994. Stock options have been and may be granted at not less than the market price on the dates of grant. At December 31, 1994, 91,667 shares were exercisable. In accordance with the provisions of the plan, subsequent to his resignation, Mr. Dominic had until January 31, 1995 to exercise his options. Mr. Dominic did not exercise his options thus causing his 91,667 options to lapse during 1995. During 1995 the Company issued options to purchase 25,000 shares of common stock for $2 per share to an officer of the Company. In addition, in December 1995, CompuDyne issued 58,210 shares under the 1986 Stock Incentive Compensation Plan to certain employees as partial payment of accrued bonuses for 1994, the balance of which was paid in cash. This transaction represents a non-cash investing activity and, therefore, has not been included in the Statement of Cash Flows.
The transactions for shares under options were: Year Year Year ended ended ended December 31, December 31, December 31, 1995 1994 1993 Outstanding, Beginning of Period Shares 92,167 92,167 500 Prices $.75-14.125 $.75-14.125 $14.125 Granted Shares 283,210 - 91,667 Prices $1.375-2.00 - .75 Exercised Shares 58,210 - - Prices $1.375 - - Expired or Cancelled 91,667 - - Outstanding, End of Period Shares 225,500 92,167 92,167 Prices $2-14.125 $.75-14.125 $.75-14.125 Options Exercisable 225,500 92,167 92,167
8. EMPLOYEE BENEFIT PLANS The Company has a 401(k) retirement savings plan covering substantially all employees. All employees are eligible to participate in the plan after completing one year of service. Participants may make before tax contributions of up to 15% of their annual compensation subject to Internal Revenue Service limitations. CompuDyne currently matches employee contributions up to the first 2% contributed. Expense for matching contributions to the Plan were $46 thousand, $45 thousand and $49 thousand for 1995, 1994, and 1993, respectively. 9. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain of its subsidiaries are obligated as lessees under various operating leases for office, distribution and manufacturing facilities. As of December 31, 1995, future minimum rental payments required under operating leases that have initial or remaining noncancellable terms in excess of one year are as follows (in thousands):
Year Ended December 31, 1996 $ 330 1997 340 1998 350 1999 361 2000 61 $1,442
Rental expense was $399 thousand, $466 thousand and $409 thousand in 1995, 1994, and 1993, 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 should not have a material effect on its financial position or results of future operations. 10. RELATED PARTIES CompuDyne charged management advisory service fees to Corcap for the years ended December 31, 1995, 1994 and 1993 of $-0-, $36 thousand and $60 thousand, respectively. Corcap sublet to CompuDyne all of the Corcap corporate office space until Corcap and CompuDyne moved to Willimantic, Connecticut at the offices of MicroAssembly in November 1995. As of December 31, 1995, Corcap owed CompuDyne $60 thousand for a promissory note for the exercise of its warrant to purchase 150,000 shares of CompuDyne Common Stock. In August 1995, Corcap exercised its warrant to purchase 150,000 shares of CompuDyne Common Stock by issuing CompuDyne a promissory note secured by the shares. Prior to the exercise of the warrant, Corcap held 670,881 shares of CompuDyne's voting shares, or approximately 38.3% of CompuDyne's 1,749,622 issued and outstanding shares of Common Stock. On September 14, 1995, Corcap contributed to the Corcap, Inc. Pooled Pension Investment Trust, Plans 1A and 6B, 224,000 shares of CompuDyne Common Stock to satisfy its unpaid pension contributions for the years 1992, 1993, and 1994. On June 3, 1993, the Corcap Board of Directors authorized the sale of shares of its holdings of CompuDyne Common Stock under Rule 144. In 1993 Corcap sold 27,000 shares of CompuDyne Common Stock, 40,500 shares in 1994 and 40,500 shares in 1995. After the MicroAssembly transaction and the sale of 54,000 shares by Corcap of CompuDyne Common Stock under Rule 144 of the Securities Act of 1933, Corcap's ownership of CompuDyne Common Stock decreased from 35% of the issued and outstanding shares of CompuDyne Common Stock as of December 31, 1994 to 24.7% as of December 31, 1995. After assuming (i) the conversion of 1,260,460 shares of Series D Preference Stock to Messrs. Martin A. Roenigk and Alan Markowitz, which shares are convertible by the holders into 1,260,460 shares of CompuDyne Common Stock, (ii) the conversion of $400 thousand principal amount of Senior Convertible Promissory Notes to Messrs. Roenigk and Markowitz which promissory notes are convertible by the holders into 266,667 shares of CompuDyne Common Stock and, (iii) the exercise of an option to purchase 200,000 shares of CompuDyne Common Stock issued by the Company to Mr. Roenigk at an exercise price of $1.50 per share as part of the Transaction, and (iv) the purchase of an additional 56,250 shares of CompuDyne Common Stock on August 1, 1996 by certain members of CompuDyne management pursuant to a Stock Purchase Agreement, dated August 1, 1993, between CompuDyne and such members of management, assuming certain conditions are met and (v) the exercise of stock options for 25,000 shares of CompuDyne Common Stock issued to an officer of the company, Corcap's ownership will be decreased to 12.4% on a fully diluted basis. 11. KOLUX PENSION PLAN In March 1987, the Company ceased its Kolux plant operations resulting in a curtailment of the defined benefit pension plan covering certain plant employees. As of December 31, 1995, the actuarial present value of accumulated plan benefits was estimated to be $793 thousand, based upon an 7.2% interest rate assumption; the 1984 Unisex Mortality table with a five year age setback for females; and the March 1, 1995 (latest actuarial valuation) employee database projected forward to December 31, 1995. All benefits under the plan are fully vested. The market value of plan assets as of December 31, 1995 was $383 thousand. Accordingly, the plan's unfunded accrued liability as of December 31, 1995 of $410 thousand ($329 thousand at December 31, 1994) has been reflected in the balance sheet as accrued pension costs. 12. INDUSTRY SEGMENT INFORMATION The Company currently operates in three business segments: engineering and security services, the manufacture of telemetry and telecommunications equipment and the manufacturing and marketing of the Stick-Screw System. During the years ended December 31, 1995, 1994, and 1993 sales to the U.S. Federal Government amounted to 86%, 90% and 84%, respectively, of the Company's total net sales. No other single customer accounted for greater than 10% of the Company's net sales. Revenues and related costs from engineering and security services during the three years ended December 31, 1995, 1994 and 1993 are detailed below:
($ Thousands) 1995 1994 1993 Revenues $ 8,878 $ 8,691 $ 8,128 Cost of Services 7,709 7,326 6,840 Gross Profit 1,169 1,365 1,288 Operating income (loss) 546 794 617 Total Assets, at year end 1,621 703 596 Depreciation - 10 16 Capital Expenditures 4 - -
Revenues and related costs from Data Control Division telemetry and telecommunications products during the three years ended 1995, 1994 and 1993 are detailed below:
($ Thousands) 1995 1994 1993 Revenues $ 863 $ 1,008 $ 1,443 Cost of Services 594 787 847 Gross Profit 269 221 596 Operating income (loss) (311) (15) 75 Total Assets, at year end 758 887 534 Depreciation - - 10 Capital Expenditures - - -
Revenues and related costs from the sale of Stick-Screw products from its August 21 acquisition through December 31, 1995 are detailed below:
($ Thousands) 1995 Revenues $ 567 Cost of Services 489 Gross Profit 78 Operating income (loss) (46) Total Assets, at year end 2,392 Depreciation 28 Capital Expenditures 74
There were no revenues from Corporate activities. Costs related to corporate activities for the three years ended December 31, 1995, 1994 and 1993 are detailed below:
($ Thousands) 1995 1994 1993 Operating loss $(246) $(354) $(413) Total Assets, at year end 262 392 584 Depreciation - - - Capital Expenditures - - -
13. RECENTLY ISSUED ACCOUNTING STANDARDS In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The new standard defines a fair value method of accounting for stock-based employee compensation plans. Under this method, compensation cost is measured based on the fair value of the stock award when granted and is recognized as an expense over the service period, which is usually the vesting period. This standard will be effective for the Company beginning in 1996 and requires measurement of awards made beginning in 1995. The new standard permits companies to continue to account for equity transactions with employees under existing accounting rules, but requires disclosure in a note to the financial statements of the pro forma net income and earnings per share as if the company had applied the new method of accounting. The Company intends to implement these disclosure requirements beginning 1996. Adoption of the new standard will not impact reported net income or cash flows. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This standard will be effective for the Company beginning in 1996 and is not expected to have a significant impact on the Company's financial statement. SCHEDULE II
COMPUDYNE CORPORATION AND SUBSIDIARIES SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995, 1994, and 1993 ($ Thousands) Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deduction Period Year Ended December 31, 1995 Reserve and allowances deducted from asset accounts: Obsolescence reserve for inventory $ 201 $ 15 $ 0 $ 216 Reserve for accounts receivable 207 3 (5) 205 Year Ended December 31, 1994 Reserve and allowances deducted from asset accounts: Obsolescence reserve for inventory $ 197 $ 4 $ 0 $ 201 Reserve for accounts receivable 220 0 (13) 207 Year Ended December 31, 1993 Reserve and allowances deducted from asset accounts: Obsolescence reserve for inventory $ 207 $ 0 $ ( 9) $ 198 Reserve for accounts receivable 217 3 0 220
EXHIBIT XI COMPUDYNE CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(In thousands, except per share amounts) Year Ended December 31, 1995 1994 1993 Primary (loss) earnings per share: (Loss) earnings from continuing operations before extraordinary item $ (210) $2,065 $ 253 Discontinued operations (453) (860) (211) Extraordinary item - 523 161 Net (loss) earnings $ (663) $1,728 $ 203 Weighted average common and common equivalent share 1,657 1,748 1,686 Adjustment to options - - - Primary shares 1,657 1,748 1,686 (Loss) earnings per share: Continuing operations before extraordinary item $ (.13) $ 1.18 $ .15 Discontinued operations (.27) (.49) (.13) Extraordinary item - .30 .10 Net (loss) earnings $ (.40) $ .99 $ .12 Fully diluted (loss) earnings per share: (Loss) earnings from continuing operations before extraordinary item $ (210) $2,069 $ 293 Adjustment for interest on promissory notes 13 - - Discontinued operations (453) (860) (211) Extraordinary item - 523 161 Net (loss) earnings $ (650) $1,728 $ 203 Weighted average common and common equivalent share 1,657 1,748 1,686 Conversion of preferred shares and promissory notes 509 - - Fully diluted shares 2,166 1,748 1,686 (Loss) earnings per share: Continuing operations before extraordinary item $ (.09) $ 1.18 $ .15 Discontinued operations (.21) (.49) (.13) Extraordinary item - .30 .10 Net (loss) earnings $ (.30) $ .99 $ .12 /TABLE SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPUDYNE CORPORATION (Registrant) By:/s/ I. Elaine Chen I. Elaine Chen Dated: March 29, 1996 Corporate Controller 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 29 , 1996. /s/ Martin A. Roenigk Director, Chairman, President Martin A. Roenigk and Chief Executive Officer /s/ Marjorie E. Morrissey Director /s/ Millard H. Pryor, Jr. Director Marjorie E. Morrissey Millard H. Pryor, Jr. /s/ David W. Clark, Jr. Director /s/ Philip M. Blackmon Director and David W. Clark, Jr. Philip M. Blackmon Executive Vice-President /s/ I. Elaine Chen Corporate Controller/s/ Alan Markowitz Director I. Elaine Chen Alan Markowitz (2) EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT Percentage of voting securities Incorporated owned by under the immediate Name laws of Parent parent CompuDyne Corporation * Pennsylvania Registrant CompuDyne Corp. of Maryland * Maryland CompuDyne Corp. 100% Quanta Systems Corporation * Colorado CompuDyne Corp. 100% CompuDyne, Inc.** Delaware CompuDyne Corp. 100% MicroAssembly Systems, Inc. ConnecticutCompuDyne Corp. 100% ___________________ Note: * All subsidiaries of the Registrant as of December 31, 1995, are included in the consolidated financial statements of the Registrant. ** CompuDyne, Inc. filed for petition in bankruptcy on December 31, 1991.
EX-11 2 EXHITIB XI COMPUDYNE CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (In thousands, except per share amounts)
Year Ended December 31, 1995 1994 1993 Primary (loss) earnings per share: (Loss) earnings from continuing operations before extraordinary item $ (210) $2,065 $ 253 Discontinued operations (453) (860) (211) Extraordinary item - 523 161 Net (loss) earnings $ (663) $1,728 $ 203 Weighted average common and common equivalent share 1,657 1,748 1,686 Adjustment to options - - - Primary shares 1,657 1,748 1,686 (Loss) earnings per share: Continuing operations before extraordinary item $ (.13) $ 1.18 $ .15 Discontinued operations (.27) (.49) (.13) Extraordinary item - .30 .10 Net (loss) earnings $ (.40) $ .99 $ .12 Fully diluted (loss) earnings per share: (Loss) earnings from continuing operations before extraordinary item $ (210) $2,069 $ 293 Adjustment for interest on promissory notes 13 - - Discontinued operations (453) (860) (211) Extraordinary item - 523 161 Net (loss) earnings $ (650) $1,728 $ 203 Weighted average common and common equivalent share 1,657 1,748 1,686 Conversion of preferred shares and promissory notes 509 - - Fully diluted shares 2,166 1,748 1,686 (Loss) earnings per share: Continuing operations before extraordinary item $ (.09) $ 1.18 $ .15 Discontinued operations (.21) (.49) (.13) Extraordinary item - .30 .10 Net (loss) earnings $ (.30) $ .99 $ .12
EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF OPERATIONS AND THE CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1995 DEC-31-1995 0 0 2,329 207 1,022 3,241 1,279 692 5,033 2,536 470 1,355 0 1,891 (1,879) 5,033 1,430 10,308 1,083 8,792 1,573 0 31 (265) (55) (210) (453) 0 0 (663) (.40) (.40)
EX-99 4 Dear Shareholders: Welcome to a restructured and revitalized CompuDyne! Your company has gone through a series of difficult times and less than successful transformations over the past ten years. There have been a series of downsizings, divestitures, debilitating operating losses and write-offs. Throughout this period, one operation at CompuDyne has been consistently profitable - Quanta Systems Corporation. Through a somewhat complicated transaction last August, CompuDyne has hopefully finally gotten it "right". We have divested a loss operation, improved our balance sheet, diversified our operations, and brought in new investor based management. In August 1995 CompuDyne acquired MicroAssembly Systems Inc, a small company with a very exciting proprietary assembly automation product. Along with MicroAssembly, we received financing of $400 thousand, a vastly improved balance sheet, and a new Chairman. We also disposed of a home remodeling unit which had caused us grievous losses during the prior two years. While this transaction alone did not solve all of our problems, it went a long ways towards giving us the tools and the time to rebuild CompuDyne. Since the acquisition, we have begun the following: Reduced corporate overhead by over $150 thousand per year through the elimination of positions, combining headquarters with MicroAssembly, reducing expenditures related to Corcap, and a general tightening of spending. Made a series of personnel changes designed to strengthen our organization and reduce operating overheads. Begun a process leading to the consolidation of manufacturing and assembly operations at DCS and Quanta. Changed auditors, and in connection therewith did a comprehensive review of the adequacy of all accruals and reserves. We are also instituting a series of additional controls and budgeting processes to assure that unexpected "surprises" become a thing of the past. Initiated discussions with three companies, all of which are in the physical security business, about potentially acquiring one or more of them. Embarked on a "crash" program to complete the development of our two key new products at DCS, the Automatic Power Controller and the satellite test modem. These efforts had their impact on 1995, with increased accruals and an extraordinarily high level of R&D spending. Results were further penalized by the usual "front ending" of purchase accounting for MicroAssembly due to inventory valuation write-ups being fully amortized in 1995. We also needed to acknowledge that the now independent Suntec operation was not going as well as planned, with the potential for further very contained write-offs related to the sublease of space and our note to Suntec. All of this left us with higher levels of payables, and less free capital going into 1996 than we had planned for, thus pushing out the turnaround a bit. Nevertheless, actions taken in 1995 permit us to enter 1996 with great optimism. We are very enthusiastic about our three businesses: Quanta Systems has a long record of solid profitability and is by far our biggest business. Management at Quanta has exceeded our objectives for diversifying beyond the historically dominant NISE East contract. While much of Quanta's activities are classified, suffice it to say we are proud to have won a $9.4 million five year contract (code-named "Teton") as well as several other contracts, all of which contributed mightily to our customer diversification effort. Our bookings in January of 1996 were very strong. We have reiterated our desire to select one or two commercial industries to offer custom designed physical security programs to, and hope to launch at least one offering later in 1996. We signed an agreement with IriScan, a very impressive new biometrics identification process, which we have high hopes for. While margins will be lower in 1996, volume should be higher, and it should on balance be a good year for Quanta. We have positioned Quanta as a preeminent supplier of physical security integration in its market, where not only what you do, but who does it is important - our high security customer base has learned that the quality and character of installation personnel are what assure a secure installation. Many of our personnel have very high security clearances. We expect to move down market to non-military customers with this same very high quality approach. Data-Control Systems has been in a difficult development period for several years now. DCS took on two major R&D projects several years ago which proved to overwhelm their limited resources. Because these two products, the Automatic Power Controller for signal rain fade and the satellite test modem were reconfirmed as representing the future for DCS, the decision was made to do whatever was necessary to complete development quickly - thus the extraordinary level of R&D spending in 1995 and continuing into early 1996. Our efforts have met with success in the laboratory and in the marketplace. We have basically completed pre- production level models of both products, and have sold four satellite test modems in recent months. In February 1996 we re-introduced the Automatic Power Controller at the Via Satellite show and elicited considerable interest. These are truly "make or break" products for DCS. We expect that 1996 will be a transition year, with significantly improved results. We plan to build on our developing position in the burgeoning telecommunications industry. MicroAssembly Systems brings commercial diversification and a stable customer base to CompuDyne. While MicroAssembly traces its roots back 40 years, it has only been in the last few years that new management has infused life into a very interesting technology. The proprietary Stick- Screw System significantly eases the handling and insertion of small screws in factory assembly environments. It has met with strong interest wherever it has been shown, and MicroAssembly has added a series of important customers in recent years. While it is a slow process to convince customers to change to a radically new system, they usually stay with us for a long time once they do convert. While volume flattened out in 1995 due to a change in marketing managers and the significant decline of a single very important customer in Mexico where labor costs are less relevant, the outlook is bright. There are a number of good prospects in the pipeline. As products get smaller, assembly costs rise, and factories move to more flexible cell based production, our system with its low capital cost and great labor savings really shines. "Information Through Technology Creates Security". We have thought a lot about strategy for CompuDyne during this first few months under new management. We have concluded that our core future growth should have the unifying focus of high end physical security based activities. We have great skills in this area, we are well positioned in the most sophisticated and most secure end of the business where margins should be better, and the market is growing very rapidly due to the increased threats to security in the U.S. and around the world. We believe that, ultimately, security depends on information - if you know what is happening in your environment, you can defend against it. And increasingly, information is being gathered or protected via technology - whether it is an infra-red sensor on the ground, or a satellite in the sky. To strengthen and expand our position in the physical security industry, we are: Seeking selected acquisitions to benefit from normal consolidation in the industry, both for installation and products. This consolidation effort should also bring us the customer diversification we are seeking. Committed to developing or acquiring a high end, fully integrated access control and alarm monitoring product line. We believe such an offering will help us retain and expand our existing customer base, and is a better way to attract new customers. We further believe that having a high quality system to offer through independent systems integrators will give us greater marketing leverage and better margins. We will focus on the high end of the security market, where sophisticated technology, strong technical skills, and cleared personnel provide a competitive advantage. We will enter non-military physical security markets, either through acquisition or internal product development, on a very selected basis with a clearly differentiated "product" offering, meaning a custom designed fully integrated system. Industries which we are considering for custom security product offerings include corrections, biotech, universities and hospitals. Continue to develop strategic and tactical alliances with important product suppliers to the security industry, such as our recently announced arrangement with IriScan. The challenges for CompuDyne are many, however we are building strong management, have excellent people, and we are well positioned to take advantage of strong industry trends in security, telecommunications and automation. We believe our plans and strategies are sound, but execution and external factors will play critical roles in our success. In closing, I want to say that we are all optimistic about the future. We understand our challenges, and our opportunities. I also want to stress a fundamental philosophical change which took place at Quanta last August. You now have directing your company a Chairman who is also the largest single shareholder by a very wide margin. This aligns my interests squarely with yours. I will do everything I can to increase shareholder value over the coming years. Martin Roenigk, Chairman & CEO -----END PRIVACY-ENHANCED MESSAGE-----