-----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, SMV4MRYWAC+eFsnNDbTUuOtsSMoWz11AKtvOxjtrpUACTRSogXU5/zTn7UkdwHua M1YDcMrTQ0/nlZa9jI2lcw== 0000022912-98-000002.txt : 19980401 0000022912-98-000002.hdr.sgml : 19980401 ACCESSION NUMBER: 0000022912-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUDYNE CORP CENTRAL INDEX KEY: 0000022912 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 231408659 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04245 FILM NUMBER: 98582229 BUSINESS ADDRESS: STREET 1: 120 UNION ST CITY: WILLIAMANTIC STATE: CT ZIP: 06226 BUSINESS PHONE: 2032477611 MAIL ADDRESS: STREET 1: 120 UNION ST CITY: WILLIAMANTIC STATE: CT ZIP: 06226 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, 1997 ----------------------------------- 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) Nevada 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 $5.7 million as of March 23, 1998 (based upon the average of the bid and asked prices on the over-the-counter market for CompuDyne common stock on March 23, 1998 which was $3.0625 per share, as quoted on the OTC Bulletin Board(see ITEM 5.). As of March 23, 1998, a total of 4,124,542 shares of Common Stock, $.75 par value, were outstanding. Documents incorporated by reference: Portions of the Proxy Statement relating to the 1997 Annual Meeting of Shareholders are incorporated in Part III. - ------------------------------------------------------------------------- PART I ITEM 1. BUSINESS Description of Business - ----------------------- CompuDyne Corporation ("CompuDyne" or the "Company"), a Nevada corporation, incorporated in Pennsylvania on December 8, 1952, changed its state of incorporation to Nevada on May 8, 1996. CompuDyne operates in five business segments through its four wholly owned subsidiaries Quanta Systems Corporation, ("Quanta Systems"), Quanta SecurSystems Inc., ("SecurSystems"), MicroAssembly Systems, Inc., ("MicroAssembly"), and SYSCO Security Systems, Inc. ("SYSCO"). Current Developments - -------------------- On October 10, 1997, CompuDyne formed SYSCO as a wholly owned subsidiary to implement the first step in the product sales strategy of the Company. SYSCO is contracting with distributors throughout North America to sell CompuDyne's line of physical security products. The North American distribution rights to the security products of Shorrock Integrated Systems were acquired by CompuDyne with the acquisition of Shorrock Electronic Systems ("SES") in July 1996. These products include a world class group of physical security and surveillance products comprised of the ADACS Security Management Systems, Microwave fence, and T-line fence security systems. This agreement has minimum quantity requirements. CompuDyne is currently negotiating with SYSCO companies of the United Kingdom and Germany ("SYSCO UK") to acquire the North American distribution rights to their physical security product line. There are no assurances that these negotiations will be successful. Quanta Systems is an engineering services firm providing turn-key design, fabrication, installation, training, maintenance, documentation, and systems integration of closed circuit television, access control and intrusion detection services to government and industry. Quanta Systems also provides original equipment manufacturing and worldwide quick reaction capability to respond to the urgent, emergent and unique requirements of customers with critical missions. Quanta Systems is currently providing these services to the Space and Navel Warfare Systems Command, the Naval Facilities Engineering Services Center, the National Security Agency ("NSA"), the Federal Bureau of Investigation ("FBI"), the Naval Criminal Investigative Services, the Social Security Administration, and the Montgomery County Government (Maryland). Through these customers and through its continuing efforts to team with other contractors in the pursuit of more comprehensive and complex Government programs, Quanta Systems has significantly broadened its customer and contract base. Data Control Systems ("DCS"), a division of Quanta Systems, manufactures telemetry, satellite command and control systems, radio frequency and telecommunications products. These products and systems are used for data acquisition, control, test programs and laboratory environments having a variety of military, intelligence and commercial applications. In 1994, DCS began marketing the Automatic Power Controller ("APC") for satellite up-link stations using Ku band transmissions which automatically compensates for signal fade during periods of inclement weather. During the third quarter of 1997, DCS completed the research, development, prototyping and first run production of a new iteration of the proprietary APC 2000. The new APC 2000 incorporates a closed-loop algorithm to complement the existing open-link algorithm found in the previous APC 2000. The closed loop is used by the smaller less sophisticated (but more numerous) ground stations. The newest model of the APC 2000 was delivered to various aerospace customers. DCS also completed development of its QPSK/BPSK model 7500 PCM demultiplexer/demodulator in 1997. The 7500 incorporates advanced technology which is resulting in related product derivatives in the telecommunications and telemetry market. During the second quarter of 1997, DCS successfully completed the research, development and prototyping of two new products derived from the 7500, the 2200 and 2250. The 2200 provides bit error rate testing. During the third quarter of 1997, DCS delivered the first 2250 and first runs of the 2200's to aerospace customers. The market for DCS's equipment is mainly with the aerospace industry and U.S. and foreign governments. SecurSystems primarily focuses on the installation, maintenance and systems integration of highly technical security systems. Although the majority of SecurSystems work is related to detention facilities, SecurSystems also performs work in areas such as colleges, court houses, private residences, public buildings and in the transportation market. SecurSystems has offices strategically located within the United States. The home office and the Northeast regional office is located in Hanover, Maryland. Other offices are located in Riverside, California, Tucson and Chandler, Arizona and Garner North Carolina. These offices act as regional hubs to perform maintenance and installation contracts on security systems throughout the United States. SecurSystems currently has approximately $1.9 million in annual recurring maintenance work and the balance of the Company's revenue is made up of new installation and refit work. SecurSystems' customers include the Federal Bureau of Prisons, the State of Arizona, Prince Georges County (Maryland), Suffolk County (Massachusetts), The Department of the Army (Pennsylvania), Wake County (North Carolina) and North Carolina State University. CompuDyne acquired all of the capital stock of SES, now SecurSystems, on July 11, 1996. MicroAssembly, located in Willimantic, Connecticut, is a manufacturer of a proprietary automated process called the "Stick-Screw (TM) System". The Stick-Screw System uses custom designed screws in a stick format for the insertion of fasteners in electronic and other assembly environments. The Stick-Screw System provides insertion of the fasteners at a faster speed than can be accomplished by comparably priced competing systems or processes. MicroAssembly operates out of owned facilities, utilizing automatic screw machines to manufacture the Stick-Screw (TM). MicroAssembly also assembles the specially designed pneumatic drivers for inserting the screws. MicroAssembly has recently developed drill press and drill stand based models of the driver, one of which is electric and will permit sales in "clean room" environments. MicroAssembly introduced an electric Stick- Screw(TM) driver which is expected to expand its market significantly. Sales are primarily in the United States via a network of independent sales representatives, with modest sales in Europe and South America. In August 1996, MicroAssembly acquired the power screwdriver product line from Blackstone Industries for $50,000. This is a complementary line of automatic screwdrivers with vacuum pick-up. CompuDyne acquired all of the capital stock of MicroAssembly on August 21, 1995. SYSCO is a distributor based product sales company. It was formed by CompuDyne in October, 1997 to contract with distributors for sales of physical security products. These products already include Shorrock Integrated Systems' physical security product line and SYSCO has signed a letter of intent with SYSCO UK to include their physical security product line. SYSCO has distributors in 80% of the continental United States, Canada and Mexico. See Note 15 Industry Segment Information to the Consolidated Financial Statements of CompuDyne for more information about the results of operations from the five industry segments. General Information The Company purchases most of the parts and raw materials used in its products from various suppliers. The primary raw materials used in the manufacturing of Quanta Systems and SecurSystems' products are electronic components. MicroAssembly's products are purchased from either distributors or manufacturers of metal products. While the bulk of such raw material is purchased from relatively few sources of supply, the Company believes that alternative sources are readily available. There is no significant seasonality in CompuDyne's business. The Company s backlog of orders as of December 31, 1997 was $19.7 million compared to $5.7 million as of December 31, 1996. Quanta Systems backlog of $4.7 million, SecurSystems' backlog of $13.8 million (includes $5.0 million of multi year maintenance contracts), DCS backlog of $625 thousand, and MicroAssembly s backlog of $551 thousand as of December 31, 1997 compared to $3.1 million, $1.7 million, $344 thousand and $523 thousand respectively as of December 31, 1996. It is expected that approximately $14.9 million of all orders included in the current backlog will be filled by December 31, 1998. For the year ended December 31, 1997, direct sales to the U.S. Federal Government amounted to $9.3 million or 47% of the Company's total net sales from continuing operations, compared with $15.5 million and $8.9 million in fiscal years 1996 and 1995, respectively, or 70% and 86% of the Company's total net sales. No other single customer accounted for greater than 10% of the Company's net sales. Substantially all of Quanta Systems' Government related business is with the United States Department of Defense. Within the Department of Defense there are various agencies that are customers of the Company, with the largest being the United States Navy. At December 31, 1997, Quanta Systems had five major multi-year contracts (SPAWAR, J, K2, K3 and TETON) with the United States Government, which accounted for revenues of $9.3 million in 1997. On March 31, 1992, Quanta Systems was awarded the NISE East contract, now SPAWAR, a one-year contract with four one-year renewal options. SPAWAR provided a bridge contract to continue this effort through February 28, 1998. Quanta Systems is in negotiations for a follow-on contract to begin in March of 1998. This contract will be one year with four one year option periods. The TETON contract was awarded in September, 1995 and has increased in value from $9.5 million to $13.5 million. This is a one year contract with options to renew yearly for four years. Quanta Systems is operating in the second option year of the contract. The J contract is a one year contract with options to renew yearly for four years. Quanta Systems is operating in the fourth renewal year of the contract. This contract is currently valued at $6.4 million. The K2 contract is a one year contract with options to renew yearly. Quanta Systems is currently performing in the initial base year. The K3 contract is a one year contract with options to renew yearly. Quanta Systems is performing in the first option year of the contract. The value of the contract to date is $1.3 million. If renewals under these contracts do not continue, or if terms and conditions under the contracts are substantially modified Quanta Systems will be required to modify its operations accordingly. Although most of Quanta Systems' contracts are subject to Government audit, management of the Company does not believe such audits will result in any material adjustments to the financial statements. Most of the Federal Government contracts with the Company include a termination for convenience clause, which allows the Federal Government to unilaterally terminate a contract if it is considered to be in the best interests of the Government to do so. If the Government were to terminate a contract, the clause provisions allow the Company to submit a Termination Settlement Proposal for recovery of costs. This proposal would reflect all direct costs to the contract; all allowable indirect costs; and as applicable, other costs such as idle facility costs, abnormal severance costs and unabsorbed indirect costs resulting from the termination. Because of cost recovery from the aforementioned process, the Company believes that the immediate financial impact of a termination would be negligible. It would, however, mean that additional contracts would need to be entered into to offset the longer-term, negative effects of the termination on revenues and profits. The Company, trying to mitigate this minimal threat, has made considerable progress in diversifying its contracts and customer base over the past three years. The Company is subject to intense competition from numerous companies that sell in regional, national and international markets. Many of these competitors are substantially larger than the Company. There have been significant international political changes that could have a major impact on the market for CompuDyne's products and services. During the last several years, dramatic changes have taken place throughout the world that have had, and will continue to have, an impact on future U.S. Defense spending. In addition, current budget constraints which have affected the overall U.S. economy have impacted CompuDyne's operations. The Company has significant sales to various organizations involved in the Country's security and intelligence efforts. The Company has intensified its efforts to market to other agencies of the government to counteract the projected decline in defense spending. The Company believes that overall U.S. expenditures for physical security installations and intelligence gathering will continue to out pace the general economy. The Company is currently undertaking research and development activities at DCS to expand and improve its product lines. Research and development expenditures were $172 thousand during the fiscal year ended December 31, 1997 compared with $234 thousand and $359 thousand during 1996 and 1995, respectively. In 1997 expenditures were made by DCS to expand the demodulation/demultiplexor product lines. At December 31, 1997, the Company had 172 employees. None of the employees is subject to collective bargaining agreements. Year 2000 Compliance - -------------------- The Company has identified all significant software and hardware applications that will require modification to ensure Year 2000 compliance. Internal and external resources are being used to make the required modifications and test Year 2000 compliance. The modification process of all significant applications and operational systems is substantially complete. The Company plans on completing the process of modifying all significant applications by December 31, 1998. The total cost to the Company of these Year 2000 compliance activities has not been and is not anticipated to be material to its financial position or results of operations in any given year. Financial Information About Foreign and Domestic Operations - ----------------------------------------------------------- Export sales for the Company were $257 thousand, $576 thousand and $125 thousand, for the years ended December 31, 1997, 1996 and 1995, respectively. Cautionary Statement Regarding Forward-Looking Information - ---------------------------------------------------------- Any statements in this Annual Report that are not statements of historical fact are forward-looking statements that are subject to a number of important risks and uncertainties that could cause actual results to differ materially. Specifically, any forward-looking statements in this Annual Report related to the Company s objectives of future growth, profitability and financial returns are subject to a number of risks and uncertainties, including, but not limited to, risks related to a growing market demand for the Company s existing and new products, continued growth in sales and market share of the Company s products, pricing, market acceptance of existing and new products, general economic conditions, competitive products, and product and technology development. There can be no assurance that such objectives will be achieved. In addition, the Company s objectives of future growth, profitability and financial returns are also subject to the uncertainty of the continuation and renewal of the SPAWAR Contract and the Teton Contract. ITEM 2. PROPERTIES - ------------------- The following table sets forth the main facilities of the Company's operations: Approximate Primary Owned or Square Feet Location Purpose Leased (1) of Space - --------- -------------- ---------- ----------- Corporate Office - ---------------- Willimantic, Connecticut Administrative Owned 2,900 Quanta Systems - -------------- Gaithersburg, Maryland/Admin. Engineering Leased 14,690 Gaithersburg, Maryland Manufacturing Leased 8,400 Gaithersburg, Maryland Sub-Leased Leased 7,300 MicroAssembly - ------------- Willimantic, Connecticut Manufacturing Owned 7,000 SecurSystems - ------------ Hanover, Maryland Admin/Whse Leased 9,500 Garner, North Carolina Engineering Leased 2,000 Tucson, Arizona Engineering Leased 1,500 Riverside, California Engineering Leased 1,300 Chandler, Arizona Engineering Leased 2,500 (1) See Note 12 to the Consolidated Financial Statements for additional information relating to lease expense and commitments. Quanta Systems leases three buildings in Gaithersburg, Maryland. One building is used by the DCS products group which manufactures telemetry, satellite and telecommunications equipment. The second building is used by its services group, which provides engineering services and administrative staff. Quanta Systems leases a third building in Gaithersburg which it subleases to Orion Network Systems Corporation. SecurSystems leases five buildings within the United States. The Northeast region and Home office located in Hanover, Maryland provides office space, engineering and storage space for the Northeastern United States as well as the administrative functions of the Home office. The Southeast office located in Garner, North Carolina provides office space, engineering and storage space to service the Southeastern United States. The two Arizona offices, one in Tucson and the other outside of Phoenix in Chandler, Arizona, provide bases to service the Arizona maintenance operations and also to service any projects in the Midwestern and Western United States. The California office in Riverside, is currently being used to service a contract in Western Arizona. It is anticipated that after the completion of this contract the Riverside office will be closed in mid 1998. The Company is currently looking at establishing offices in other areas of the United States in order to take advantage of contract security maintenance work available in other areas. The Company leases only those properties necessary to conduct its' business and does not invest in real estate or interests in real estate on a speculative basis. The Company believes that its' current properties are suitable and adequate for its current operations, however, as its operations grow, additional space may be needed to service contracts in other areas. ITEM 3. LEGAL PROCEEDINGS - -------------------------- The Company is party to certain legal actions and inquiries for environmental and other matters resulting from the normal course of business. Although the total amount of liability with respect to these matters cannot be ascertained, management of the Company believes that any resulting liability should not have a material effect on its financial position or results of future operations. On June 18, 1997, after being denied equitable adjustment consideration for a series of change order costs, Quanta Systems filed a claim for $ 853 thousand with the Aberdeen Proving Grounds (the contracts office) for work being performed at Fort Bragg. After failing to receive a response from the Government within the allotted time frame, Quanta filed a deemed denied appeal on November 10, 1997 with the Armed Services Board of Contract Appeals ("ASBCA"). Subsequent to Quanta s appeal filing, the Government formally denied all claim elements. On July 31, 1997, the Government unilaterally established a September 19, 1997 completion date for the contract. Quanta forwarded two written responses to this unilateral action, apprising the Government that overall contract completion was contingent upon the Vicon Corporation s completion of a Protech software package (specified in the contract), which was still being debugged by Vicon. On September 22, 1997, without further discussion, the Government terminated the contract for default. During the week preceding the termination, Quanta s representatives had walked the Contracting Officer s Representative ("COR") through the job to demonstrate that the job was effectively 99% complete. Quanta Systems filed an official Notice of Appeal from the termination with the ASBCA on September 23, 1997. Quanta Systems and U.S. Army counsel are currently engaged in discovery in both appeals, (Claim and Termination). Legal costs for the fiscal year ended December 31, 1997, which have been fully absorbed, were $76 thousand. On February 20, 1998, SecurSystems settled its claims against and from the County of Sonoma, California. The net effect of the settlement was a one time charge of $270 thousand ($158 thousand after taxes) in fiscal 1997 for costs accumulated through the claim settlement date. With this settlement there will be no additional liabilities to the Company resulting from these issues in the future. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ---------------------------------------------------------- Proposal to amend the CompuDyne 1996 Stock option plan for non-employee directors. PART II ITEM 5.MARKET FOR COMPUDYNE COMMON STOCK AND RELATED SHAREHOLDER MATTERS - ---------------------------------------- CompuDyne Common Stock is traded in the over-the-counter market, and in January 1993 began being quoted on the OTC Bulletin Board, an inter- dealer quotation medium maintained by the National Association of Securities Dealers, Inc., under the symbol "CDCY". There were 1,940 common shareholders of record as of March 23, 1998. The following table sets forth the high and low bids for CompuDyne Common Stock from January 1, 1996 to December 31, 1997 on the over-the-counter market, as quoted on the OTC Bulletin Board. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily reflect actual transactions. Quarter Ended High Low - ------------------------------------------------------------------------- March 31, 1996 $ 1 3/8 $ 1 1/4 June 30, 1996 1 3/8 7/8 September 30, 1996 1 1/4 1 1/4 December 31, 1996 1 1/4 3/4 Quarter Ended High Low - ------------------------------------------------------------------------- March 31, 1997 $ 1 3/4 $ 7/8 June 30, 1997 3 1/2 1 September 30, 1997 3 1 3/4 December 31, 1997 3 1 The Company has not paid any dividends on its Common Stock during the past three fiscal years, and its Board of Directors has no intention of declaring a dividend in the foreseeable future. Recent Sales of Unregistered Securities - --------------------------------------- None ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- The following is a consolidated summary of operations of CompuDyne and its subsidiaries for the years ended December 31, 1997, 1996, 1995, 1994 and 1993. The information in the table below is based upon the audited consolidated financial statements of CompuDyne and its subsidiaries for the years indicated appearing elsewhere in this annual report and in prior annual reports on Form 10-K filed by the Company with the SEC, and should be read in conjunction therewith and the notes thereto. (In thousands except per share data): For the years ended December 31, -------------------------------- 1997 1996 1995 1994 1993 Net sales $ 20,016 $ 22,142 $ 10,308 $ 9,699 $ 9,571 Gross profit $ 3,478 $ 2,803 $ 1,516 $ 1,586 $ 1,884 Selling, general and administrative 2,456 2,102 1,214 1,095 1,492 Research and development 172 234 359 66 113 Interest expense, net of interest income $ 62 $ 39 $ 22 $ (7)$ 111 Income (loss) from continuing operations before extra- ordinary items $ 696 $ 391 $ (210)$ 2,065 $ 253 Loss from discontinued operations - (60) (453) (860) (211) Extraordinary items (Note a) - - - 523 161 -------- ------ ------- ------ ------ Net income (loss) $ 696 $ 331 $ (663) $1,728 $ 203 ======== ====== ======= ===== ====== Basic EPS: Continuing operations $ .23 $ .17 $ (.13) $ 1.18 $ .15 Discontinued operations - (.03) (.27) (.49) (.13) Extraordinary items - - - .30 .10 -------- ------ ------- ----- ------ Net income (loss) $ .23 $ .14 $ (.40) $ .99 $ .12 ======= ====== ======= ===== ====== Weighted average number of common shares outstanding 3,005 2,294 1,657 1,748 1,686 ======= ====== ====== ===== ====== Diluted EPS: Continuing operations $ .16 $ .10 $ (.13) $ 1.18 $ .15 Discontinued operations - (.02) (.27) (.49) (.13) Extraordinary items - - - .30 .10 ------- ------ ------ ----- ------ Net income (loss) $ .16 $ .08 $ (.40) $ .99 $ .12 ======= ====== ====== ===== ====== Weighted average number of common shares and equivalents 4,364 3,762 1,657 1,748 1,686 ======= ====== ====== ===== ====== Total assets $ 7,429 $ 7,575 $ 3,947 $ 2,114 $ 1,993 ======= ======= ======= ====== ======= Long-term debt, net $ 30 $ 50 $ 470 $ - $ 1,050 ======= ======= ======= ====== ======= Total shareholders equity/ (deficit) $ 2,162 $ 1,776 $ 421 $ - $ (1,736) ======= ======= ======= ====== ======= Notes: (a) The extraordinary items are a rent settlement in 1993 and debt forgiveness in 1994. (b) For the year ended December 31, 1995, the conversions of Common Stock equivalents into common shares would result in an increased net (loss) per share amounts which are anti-dilutive and are therefore not included as common equivalent shares. Income per common share was determined by dividing net income (loss), after deduction of dividend requirements on the CompuDyne Convertible Preference Stock, ( Preferred Stock ), which was issued in August 1995, by the weighted average number of shares of Common Stock. Accordingly, net income is not reduced for the related preferred dividend requirement. In November, 1997 the Series D Preference Stock was converted into Common Stock. There was no dividend requirement on the preferred stock for 1996 or 1995 due to the effect of purchase accounting on MicroAssembly's results. ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------- Financial Condition - ------------------- During 1997, CompuDyne's net worth increased by $386 thousand to $2.2 million at December 31, 1997. Debt outstanding was $1.4 million at December 31, 1997 compared to $232 thousand at December 31, 1996. Working capital was $1.9 million at December 31, 1997 compared to $1.8 million at December 31, 1996. During 1997, CompuDyne had net income of $696 thousand compared to $331 thousand in 1996, or a 110% increase over last year. This was realized even though the Company recognized an additional loss of approximately $197 thousand on the fixed-price Ft. Bragg contract at Quanta Systems. A claim is being pursued to recover a substantial portion of the loss (see "Legal Proceedings"). In addition, SecurSystems settled a dispute with the County of Sonoma resulting in a net cost to SecurSystems of $158 thousand after tax in fiscal 1997. SYSCO spent $147 thousand in start-up costs fiscal 1997. Net income includes twelve months of operations for SecurSystems in 1997 compared to six months of operations in 1996. Results of Operations - 1997 compared with 1996 - ----------------------------------------------- CompuDyne's net sales decreased $2.1 million in 1997 to $20 million, down from $22.1 million in 1996. Sales at Quanta Systems decreased to $10.7 million in 1997, down $4.9 million from $15.6 million in 1996. This decrease was primarily due to the nonrecurring low margin orders completed during the first nine months of 1996. The balance is due to slower then normal bookings for the first two quarters of 1997 resulting in lower output for the year ended December 31, 1997. DCS' sales decreased $163 thousand to $1.3 million in 1997 from $1.5 million in 1996. MicroAssembly increased sales $281 thousand to $1.8 million in 1997, up from $1.5 million in 1996. This is due to increased sales to current customers and new customers gained through increased sales efforts. SecurSystems' sales were $6.2 million for twelve months in 1997 compared to $3.5 million for six months of 1996. SecurSystems was acquired in July 1996. SecurSystems' sales reflect lower billings due to low order intake in the fourth quarter of 1996 and the first half of 1997; however, the backlog is currently $13.8 million (including a $5 million multi-year maintenance contract). CompuDyne's gross margins increased $675 thousand to $3.5 million, up from $2.8 million in 1996 even though net sales for 1997 decreased. Quanta Systems contributed $241 thousand to this increase. Although Quanta Systems' sales decreased in 1997, Quanta Systems' sales were at higher profit margins in 1997 than in 1996. This was primarily due to nonrecurring low margin orders completed in 1996 and $117 thousand additional profit booked due to contract closeouts during the year. Quanta Systems absorbed a $197 thousand loss on the Fort Bragg contract in 1997. DCS' profit margin went down $98 thousand in 1997 generating a gross margin of $364 thousand compared to $462 thousand in 1996. This decrease in gross margin was due to a decrease in sales and a related decrease in cost of goods sold. Quanta SecurSystems contributed $1.1 million to 1997 gross margins. This was up from $677 thousand in 1996. Quanta SecurSystems was acquired in July, 1996 and the margin was 17.4% in 1997 compared to 19.2% in 1996. This was due to lower margin installation contracts performed in 1997. MicroAssembly contributed $125 thousand to the increase in gross margin. This was due to increasing sales by 18.9% and only increasing cost of goods sold by 12.1%. Selling, general and administrative expenses increased $354 thousand in 1997 to $2.5 million from $2.1 million in 1996. Quanta Systems remained fairly constant with only a modest increase of $15 thousand, spending $930 thousand in 1997 compared to $915 thousand in 1996. DCS spent $174 thousand in 1997, $41 thousand less than the $215 thousand spent in 1996. This savings was due to the consolidation of some facilities and operations with Quanta Systems. SecurSystems spent $1.0 million in 1997, up by $569 thousand from the $432 thousand spent in 1996. The 1997 spending, by SecurSystems included twelve months of operations while the 1996 spending only covered six months since SecurSystems was acquired in July 1996. Included in the 1997 spending was $270 thousand for Sonoma settlement costs. SYSCO spent $147 thousand in start-up costs in 1997. Research and development costs, which are related only to Quanta Systems' DCS product division totalled $172 thousand for 1997. This was a decrease of $62 thousand compared to the $234 thousand spent in 1996. The 1997 expenses were spent on expanding the Company's demodulator/demultiplexor product line. CompuDyne's 1997 income from continuing operations before extraordinary items of $696 thousand compares with a profit of $391 thousand in 1996. This $305 thousand increase is due to the tax effect of net operating loss carryforwards ("NOLs") and the establishment of a deferred tax asset. In addition Quanta Systems' increased margins on contracts which included a more favorable labor mix contributed to the increase and $117 thousand additional profit was realized from contract closeouts. MicroAssembly's increased sales also contributed to this increase. Quanta Systems income increased $234 thousand to $517 thousand in 1997 from $283 thousand in 1996. This increase was primarily due to increased margins of 15.8% in 1997 compared to 9.3 % in 1996. SecurSystems showed a loss of $97 thousand in 1997 compared to a profit of $113 thousand in 1996. This was a decrease of $210 thousand. SecurSystems absorbed $270 thousand in settlement and legal costs to finalize the Sonoma claim in fiscal 1997. SYSCO reported a $147 thousand loss in 1997 for start-up costs with no offsetting revenues. Corporate activities realized a profit of $169 thousand due to tax issues, including the use of NOLs and the establishment of a deferred tax asset. Interest paid in 1997 totalled $62 thousand, an increase of $7 thousand over the 1996 total of $55 thousand. This increase was due to the expanded use of credit to finance operations and expansion during 1997. See "Liquidity". There were no losses from discontinued operations in 1997. In 1996, Quanta Systems spent $60 thousand related to a discontinued subsidiary. Results of Operations - 1996 compared with 1995 - ----------------------------------------------- CompuDyne's net sales, which increased significantly from $10.3 million in 1995 to $22.1 million in 1996, a 114% increase, were comprised of services revenue, telemetry and data acquisition product sales at Quanta Systems, Stick-Screw (TM) products at MicroAssembly, and services revenue at newly acquired SecurSystems. Quanta Systems's services revenue in 1996 was $15.6 million, $6.8 million more than 1995. This increase in services revenue was attributable to increases in task spending on Government contracts, particularly on materials intensive facilities improvement tasks at naval facilities. Quanta Systems services revenue represented 70% of 1996 total CompuDyne revenues compared to 86% of 1995 revenues. MicroAssembly's product sales increased from $567 thousand in 1995 to $1.5 million in 1996, an increase of 164%, but not totally comparable since 1995 data for MicroAssembly reflected results only from August 21 (acquisition date) through December, 1995. SecurSystems contributed sales of $3.5 million for the six-month period following its acquisition in July, 1996. Quanta Systems's product sales at it's DCS division increased from $863 thousand in 1995 to $1.5 million in 1996, an increase of 74%. The improvement in sales is primarily attributable to increased deliveries of the new QPSK Model 7500 high-speed satellite test modem and of the APC- 2000 automatic power controller. Net sales for MicroAssembly for 1995 reflected data from the acquisition date of August 21, 1995 through December, 1995. Annualizing the 1995 sales shows that sales for MicroAssembly remained at about the same level in 1996. Gross margins increased $1.3 million from $1.5 million, 15% of sales in 1995, to $2.8 million, 13% of sales in 1996. The gross margin at Quanta Systems increased $474 thousand to $1.9 million, with the gross margin rate decreasing from 15% of sales to 11% of sales. The increase in amounts is attributable to the significant increase in overall sales and the decline in rate was due to the fact that most of the sales increase was in lower-margin material and subcontract Government task orders. Even though the increased sales showed a lower margin rate, the increased base was important in absorbing indirect costs, thus affording higher profitability on some fixed-rate contracts. DCS margins increased by $193 thousand from $269 thousand in 1995 to $462 thousand in 1996; the increase in gross margin can be attributable entirely to the $617 thousand increase in sales since the gross margin rate remained stable at 31%. MicroAssembly's gross margin increased by $133 thousand to $210 thousand, most of which is attributable to the increased sales (1995 was only for 4 1/3 months) but some of which is attributable to an increased rate from 13.7% to 14.1%. SecurSystems contributed $677 thousand in gross margin and is incremental since it was the first year of inclusion in CompuDyne's financial statements. Total 1996 selling and general and administrative expenses increased $889 thousand from 1995 levels, $423 thousand of which is attributable to the incremental increase caused by the acquisition of SecurSystems. A full year's operating results for MicroAssembly resulted in an increase of $86 thousand in selling and general and administrative expenses. Corporate expenses increased $61 thousand, with the remainder attributable to increased general and administrative expenses at Quanta Systems. The increase at Quanta Systems is primarily attributable to costs associated with the default of a lease agreement between Quanta Systems and an insolvent tenant. Idle facility costs include rent payments ($43 thousand), build-out costs for a new tenant ($42 thousand). and real estate agent commissions of $22 thousand. Other expenses were additional personnel costs caused by the significant increase in sales volume and increased repair and renovation costs for other Quanta Systems facilities. Research and development activities, which are related only to Quanta Systems' DCS product division, decreased by $125 thousand from the 1995 level of $359 thousand to $234 thousand in 1996. The 1995 expenses were devoted primarily to the development of DCS' QPSK model 7500 and APC- 2000. Those activities continued into 1996, but at a reduced level aimed at refining and upgrading the operating capabilities of the QPSK,APC and the bit synchronizer product lines. The 1996 income from continuing operations before extraordinary items of $391 thousand compares with a loss in 1995 of $210 thousand. The increase in such income is attributable to the increased sales and profitability of Quanta Systems and the purchase of SecurSystems. SecurSystems contributed $192 thousand before taxes to profits since it was purchased by CompuDyne in July 1996. Although a loss of $550 thousand was recorded on a Ft. Bragg fixed-price contract at Quanta Systems in 1996, increased sales of $7.4 million at Quanta Systems (from $9.7 million to $15.6 million) combined with an expense-reducing corporate reorganization resulted in an increase in profits at Quanta Systems of $416 thousand compared with 1995. Contributing to the improved performance at Quanta Systems was an increase in sales and elimination of losses at its DCS division. Total interest expense for 1996 was $55 thousand compared with $31 thousand for 1995. The increase was due to the expanded use of credit to provide working capital. Loss from discontinued operations in 1996 was $60 thousand compared with 1995's loss of $453 thousand. The loss for 1996 reflects settlements of Suntec-incurred, Quanta Systems-liable obligations and reserves for potential future Suntec-related obligations. Liquidity - --------- The Company's principle source of cash is from operating activities and bank borrowings. The Company's primary requirement for working capital is to carry billed and unbilled receivables, the majority of which are due under prime contracts with the United States Government, or subcontracts thereunder. The Company has a secured working capital line of credit agreement with the Asian American Bank and Trust Company of Boston, Massachusetts which allows borrowings of up to 75% of eligible accounts receivable. At December 31, 1996, the maximum available under the line was $850 thousand which has been increased to $1.75 million at December 31, 1997. The credit agreement requires the Company to maintain a working capital ratio of 1.1 to 1, and a debt service ratio of at least 1.0 to 1 with which the Company was in compliance. During 1996, the interest rate was 2% above the prime; the rate was reduced to .5% above prime in August, 1997 (10% at December 31, 1997.) At December 31, 1997 and 1996, the Company had outstanding borrowings of $1.3 million and $121 thousand respectively. The current line is due to expire on July 1, 1998. MicroAssembly has an unsecured line of credit with Fleet Bank for $100 thousand with no expiration date. The line of credit is guaranteed by Mr. Roenigk. The rate is prime plus 2% (11.5% at December 31, 1997) and there was $27 and $41 thousand outstanding as of December 31, 1997 and 1996, respectively. Net cash flows used in operations was $838 thousand in 1997, a decrease of $1.1 million from the 1996 cash flow provided by operations of $301 thousand. Cash from net income increased from $391 thousand in 1996 to $696 thousand in 1997. A total of $1.4 million was used to pay down accounts payable and accrued expenses. An additional $195 thousand was used to purchase capital equipment. When MicroAssembly was acquired in August, 1995, $400 thousand in cash was received for convertible long-term notes issued to the sellers, the Company's chairman, Martin Roenigk and Alan Markowitz. In July, 1996 the notes were converted to Common Stock and $600 thousand was received from the same persons in exchange for 600,000 shares of CompuDyne Common Stock. Net cash of $566 thousand was used to purchase SES, now SecurSystems. Capital Resources - ----------------- Capital expenditures totalled $195 thousand in 1997 compared with $33 thousand in 1996. The Company has projected spending up to $250 thousand for capital expenditures in fiscal 1998. Recently Issued Accounting Standards - ------------------------------------ In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The new standard defines a fair value method of accounting for stock-based employee compensation plans. Under this method, compensation cost is measured based on the fair value of the stock award when granted and is recognized as an expense over the service period, which is usually the vesting period. The new standard permits companies to continue to account for equity transactions with employees under existing accounting rules, but requires disclosure in a note to the financial statements of the pro forma net income and earnings per share as if the company had applied the new method of accounting. The Company has disclosed the pro forma impact that the adoption of this standard has on net income and earnings/(loss) per share for fiscal years 1995, 1996 and 1997. In February, 1997, the financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share". The statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This standard replaces the primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. The Company has restated EPS for fiscal years 1995, 1996 and 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- See Item 14 below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - --------------------------------------------------------------------- None. PART III -------- Information required by Items 10, 11, 12 and 13 about CompuDyne is incorporated herein by reference from the definitive proxy statement of CompuDyne to be filed with the SEC within 120 days following the end of its fiscal year ended December 31, 1996, or April 30, 1997, relating to its 1997 Annual Meeting of Stockholders. PART IV ------- ITEM 10. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K - --------------------------------------- (a) Financial Statements The financial statements listed in the accompanying index to financial statements are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K None (c) Exhibits The Exhibits listed on the index below are filed as a part of this Annual Report. COMPUDYNE CORPORATION INDEX TO EXHIBITS (Item 10(c)) 3(A) Articles of Incorporation of CompuDyne Corporation filed with the Secretary of State of the State of Nevada on May 8, 1996 herein incorporated by reference to Registrant's Proxy Statement dated May 15, 1996 for its 1996 Annual Meeting of Shareholders. 3(B) Agreement and Plan of Merger dated May 8, 1996 is incorporated by reference as Exhibit 3(B) to registrant's 10-K filed March 31, 1997. 3(C). By-Laws, as amended through January 28, 1997 and as presently in effect, is incorporated by reference as Exhibit 3(C) to registrant's 10-K filed March 31, 1997. 10 (A). 1996 Stock Incentive Compensation Plan incorporated herein by reference to Registrant's Proxy Statement dated April 18, 1997 for its 1996 Annual Meeting of Shareholders. 10 (D) The credit Agreement dated December 20, 1996 between Asian American Bank and Trust, CompuDyne, Quanta Systems, MicroAssembly and SecurSystems is filed herewith. 10 (E) Form of Management Stock Purchase Agreement dated August 1, 1993 between CompuDyne Corporation and each of Messrs. Blackmon, and Mrs. Burns is incorporated by reference as Exhibit 10.1 of Registrant's Form 10-Q filed September 30, 1993. 10 (F) CompuDyne Corporation Certificate of Designations of the Convertible Preference Stock, Series D is incorporated herein by reference to Exhibit (4.1) to Registrant's Form 8-K filed September 5, 1995. 10 (G) CompuDyne Corporation Senior Convertible Promissory Notes is incorporated by reference to Exhibit (4.2) to Registrant's Form 8-K filed September 5, 1995. 10 (H) Stock Purchase Agreement dated August 21, 1995 between CompuDyne Corporation, MicroAssembly Systems, Inc., Martin A. Roenigk and Alan Markowitz is incorporated by reference to Exhibit (4.3) to Registrant's Form 8-K filed September 5, 1995. 10(I) 1996 Stock Non-Employee Director Plan incorporated herein by reference to Registrant's Proxy Statement dated April 18, 1997 for its 1996 Annual Meeting of Shareholders. 10 (J) Stock Option Agreement dated August 21, 1995 by and between Martin A. Roenigk and CompuDyne Corporation is incorporated by reference to Exhibit (4.5) to Registrant's Form 8-K filed September 5, 1995. 10(K) Stock Purchase Agreement dated July 11, 1996 between CompuDyne Corporation and SES Corp. USA is incorporated by reference to Exhibit (99.1) to Registrant's Form 8-K filed July 25, 1996. 10(L) Notice and Agreement of Conversion with respect to Senior convertible Promissory Note by and between CompuDyne Corporation and Martin A. Roenigk is incorporated by reference to Exhibit (99.2) to Registrant's Form 8-K filed July 25, 1996. 10(M) Notice and Agreement of Conversion with respect to Senior Convertible Promissory Note by and between CompuDyne Corporation and Alan Markowitz is incorporated by reference to Exhibit (99.3) to Registrant's Form 8-K filed July 25, 1996. 10(N) Stock Purchase Agreement dated July 11, 1996 by and among CompuDyne Corporation, Martin Roenigk and Alan Markowitz is incorporated by reference to Exhibit (99.4) to Registrant's Form 8-K filed July 25, 1996. 10(O) Stock Purchase Agreement dated July 11, 1996 between CompuDyne Corporation and SES Corp. USA is incorporated by reference to Exhibit (99.1) to Registrant's Form 8-K filed July 25, 1996. 10(P) Notice and Agreement of Conversion with respect to Senior Convertible Promissory Note by and between CompuDyne Corporation and Martin A. Roenigk is incorporated by reference to Exhibit (99.2) to Registrant's Form 8-K filed July 25, 1996. 10(Q) Notice and Agreement of Conversion with respect to Senior Convertible Promissory Note by and between CompuDyne Corporation and Alan Markowitz is incorporated by reference to Exhibit (99.3) to Registrant's Form 8-K filed July 25, 1996. 10(R) Stock Purchase Agreement dated of July 11, 1996 by and among CompuDyne Corporation, Martin Roenigk and Alan Markowitz is incorporated by reference to Exhibit (99.4) to Registrant's Form 8-K filed July 25, 1996. 10(S) Amendment number two dated August 29, 1997 to the Asian American Bank and Trust Credit Agreement dated November 18, 1994 is filed herewith. 21. Subsidiaries of the Registrant is filed herewith. 27.Financial Data Schedule COMPUDYNE CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS (Item 14(a)(1)) Page(s) Independent Auditors' Report 16 Consolidated Balance Sheets at December 31, 1997 and 1996 17 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 18 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 19 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 20 Notes to Consolidated Financial Statements 21-34 (Item 14(a)(2)) Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1997, 1996 and 1995 35 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders of CompuDyne Corporation: We have audited the accompanying consolidated balance sheets of CompuDyne Corporation and subsidiaries as of December 31, 1997, 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audit also included the financial statement schedule listed in the accompanying index at Item 14(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CompuDyne Corporation and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule as of and for the years ended December 31, 1997, 1996 and 1995, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/Deloitte & Touche LLP Washington D.C. March 23, 1998 - ------------------------------------------------------------------- COMPUDYNE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS December 31, 1997 1996 ------------- (In Thousands) Current Assets Cash and cash equivalents $ - $ 186 Accounts receivable 4,757 5,273 Inventories Finished goods 72 93 Work in progress 888 778 Raw materials and supplies 612 471 ------ ----- Total Inventories 1,572 1,342 ------ ----- Prepaid expenses and other current assets 95 57 Total Current Assets 6,424 6,858 ------ ----- Non-current receivable related parties 60 60 Property, plant and equipment, at cost Land and improvements 26 26 Buildings and leasehold improvements 250 190 Machinery and equipment 1,055 948 Furniture and fixtures 287 210 Automobiles 84 78 ------ ----- 1,702 1,452 Less accumulated depreciation and amortization 990 863 ------ ----- Net property, plant and equipment 712 589 ------ ----- Deferred tax asset 124 - Intangible assets, net of accumulated amortization 66 53 Other assets 43 15 ------ ----- Total other assets 233 68 ------ ----- Total Assets $7,429 $7,575 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 2,104 $3,017 Bank notes payable 1,339 162 Accrued pension costs - 32 Other accrued expenses 1,015 1,249 Billings in excess of contract costs incurred - 562 Accrued income taxes 35 - Current portion of deferred compensation 26 38 Current portion of notes payable-related parties 20 20 ------ ----- Total Current Liabilities 4,539 5,080 Notes payable-related parties 30 50 Long term pension liability 489 393 Deferred compensation, net of current portion - 25 Other liabilities 209 185 Deferred income taxes - 66 ------ ----- Total Liabilities 5,267 5,799 ------ ----- Shareholders' Equity Convertible preference stock, Series D, Redemption value of $1.50 per share, 1,260,460 Shares authorized, issued and outstanding at December 31, 1996 - 945 Common stock, par value $.75 per share: 10,000,000 shares authorized; 4,124,542 and 2,864,082 shares issued at December 31, 1997 and 1996, respectively 3,093 2,148 Other capital 8,203 8,203 Treasury shares, at cost; 16,666 shares - - Receivable from management (90) (90) Accumulated Deficit (9,044) (9,430) ----- ----- Total Shareholders' Equity 2,162 1,776 ----- ----- Total Liabilities and Shareholders' Equity $7,429 $7,575 ====== ====== See notes to consolidated financial statements COMPUDYNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1997 1996 1995 ------------------------ (In thousands, except per share amounts) Net sales $ 20,016 $ 22,142 $ 10,308 Cost of goods sold 16,538 19,339 8,792 ------- ------- ------- Gross margin 3,478 2,803 1,516 Sonoma settlement costs 270 - - Selling, general and administrative expenses 2,456 2,102 1,214 Research and development 172 234 359 ------ ------ ------ Operating income (loss) 580 467 (57) ------ ------ ------ Other (income) expense Interest expense 62 55 31 Interest income - (16) (9) Other (income)expenses (20) (33) 186 ------ ------ ------ Total other (income) expense 42 6 208 ------ ------ ------ Income (loss) from continuing operations before income taxes 538 461 (265) Income tax provision (benefit) (158) 70 (55) ------ ------ ------ Income (loss) from continuing operations 696 391 (210) Discontinued Operations: Loss from discontinued operations - (60) (352) Loss on disposal of discontinued operations - - (101) ------ ------ ------ Loss from discontinued operations - (60) (453) ------ ------ ------ Net income (loss) $ 696 $ 331 $ (663) ======= ======= ======= Basic EPS: Continuing operations $ .23 $ .17 $ (.13) Discontinued operations - (.03) (.27) Extraordinary items - - - ------- ------- ------- Net income (loss) $ .23 $ .14 $ (.40) ======= ======= ======= Weighted average number of common shares outstanding 3,005 2,294 1,657 ======= ======= ======= Diluted EPS: Continuing operations $ .16 $ .10 $ (.13) Discontinued operations - (.02) (.27) Extraordinary items - - - ------- ------- ------- Net income (loss) $ .16 $ .08 $ (.40) ======= ======= ======= Weighted average number of common shares and equivalents 4,364 3,762 1,657 ======= ======= ======= See notes to consolidated financial statements COMPUDYNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, -------------------------- 1997 1996 1995 -------------------------- (In Thousands) Cash flows from operating activities: Net income (loss) from continuing operations $ 696 $ 391 $ (210) Adjustments to reconcile net income to net cash from operations: Depreciation and amortization 114 104 45 Deferred income tax (benefit) (189) (25) (20) Changes in assets and liabilities: Accounts receivable 516 (2,123) (393) Accounts receivable-related party - - 5 Inventory (285) (423) (138) Prepaid expenses (38) 52 15 Other assets (28) - - Accounts payable (913) 1,240 338 Accrued expenses (104) 553 (131) Accrued income taxes (35) - - Billings in excess of costs incurred (562) 562 - Other liabilities (10) 27 11 ----- ----- ----- Net cash flows (used in) provided by continuing operations (838) 358 (478) ----- ----- ----- Loss on discontinued operations - (60) (453) (Increase) decrease in net assets of discontinued operations - 3 132 ----- ----- ----- Cash flows used in discontinued operations - (57) (321) ----- ----- ----- Net cash flows (used in) provided by operations (838) 301 (799) ----- ----- ----- Cash flows from investing activities: Net cash (used for) received from acquisitions - (566) 52 Additions to property, plant and equipment (195) (33) (78) ----- ----- ----- Net cash flows used in investing activities (195) (599) (26) ----- ----- ----- Cash flows from financing activities: Conversion of series D preference stock (310) - - Issuance of common stock - 600 - Payment of receivable from management - 1 1 Increase/(decrease) in short term debt 1,177 (97) 258 Proceeds from note payable, related parties - - 400 Repayment of note payable related parties (20) (20) (10) ----- ----- ----- Net cash flows provided by financing activities 847 484 649 ----- ----- ----- Net (decrease) increase in cash and cash equivalents (186) 186 (176) Cash and cash equivalents at the beginning of the year 186 - 176 ----- ----- ----- Cash and cash equivalents at the end of the year $ - $ 186 $ - ======= ======== ======= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 62 $ 55 $ 15 Income taxes, net of refunds $ 70 $ - $ (30) See notes to consolidated financial statements. COMPUDYNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ($ In Thousands) Rec. Accumu- Preference Common Other From lated Treas. Stock Stock Capital Mgmt. Deficit Shares Total ------ ------- ------- ----- ------- ------ ----- Bal. January 1, 1995 $ - $ 1,202 $ 7,988 $ (92) $(9,098) $ - $ - Net loss - - - - (663) - (663) Shares issued- common stock - 153 (15) 1 - - 139 Shares issued- preference stock $ 945 $ - $ - $ - $ - $ - $ 945 ---- ------ ------ ---- ------ --- --- Bal. Dec. 31, 1995, as restated 945 1,355 7,973 (91) (9,761) - 421 Net Income - - - - 331 - 331 Shares issued- Common shares - 793 230 - - - 1,023 Purchase of treasury stock - - - - - - - Payments from management - - - 1 - - 1 ----- ----- ----- ---- ----- --- ----- Bal. at December 31, 1996 $ 945 $ 2,148 $ 8,203 $(90) $(9,430) $ - $1,776 Net Income - - - - 696 - 696 Preferred shares converted to Common shares (945) 945 - - (310) - (310) ------ ------ ------ ---- ------ --- ---- Bal. at December 31, 1997 $ - $ 3,093 $ 8,203 $ (90)$(9,044) $ - $2,162 ====== ====== ====== ==== ====== ==== ===== See notes to consolidated financial statements. COMPUDYNE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS - ----------------------------- Description of Business - CompuDyne Corporation ("CompuDyne" or the "Company") a Nevada corporation, was incorporated in Pennsylvania on December 8, 1952. On May 8, 1996, CompuDyne changed its state of incorporation to Nevada after receiving shareholder approval at the 1996 Annual Meeting of Shareholders. CompuDyne operates in five business segments through its wholly owned subsidiaries Quanta Systems Corporation ("Quanta Systems"), Quanta SecurSystems, Inc., ("SecurSystems"), MicroAssembly Systems, Inc. ("MicroAssembly") and SYSCO Security Systems, Inc. ("SYSCO"). Quanta Systems is an engineering services firm providing turn-key design, fabrication, installation, training, maintenance, documentation, and systems integration of closed circuit television, access control and intrusion detection. Quanta Systems also provides original equipment manufacturing and worldwide quick reaction capability to respond to the urgent and unique requirements of customers' with critical missions. Quanta Systems is currently providing these services primarily to the Federal Government. Data Control Systems ( DCS ) a division of Quanta Systems, manufactures a proprietary line of telemetry, satellite command and control systems, radio frequency and telecommunications products. These products and systems are used for data acquisition, control, test programs and laboratory environments having a variety of telecommunications, military, intelligence and commercial applications. The market for DCS' current products is mainly with U.S. and foreign governments as well as aerospace and telecommunications companies. SecurSystems primarily focuses on the installation, maintenance and system integration of highly technical security systems. Although the majority of SecurSystems work is related to detention facilities, SecurSystems has also performed work in areas such as colleges, court houses and in the transportation market. MicroAssembly, located in Willimantic, Connecticut, is a manufacturer of a proprietary automated process called the Stick-Screw System . The Stick-Screw (TM( System uses custom designed screws in a stick format for the insertion of fasteners in electronic and other assembly environments. The Stick-Screw (TM) System provides insertion of the fasteners at a faster speed than can be accomplished by comparably priced competing systems or processes. Sales are primarily in the United States via a network of independent sales representatives, with modest sales in Europe and South America. In 1996 MicroAssembly acquired the power screwdriver product line from Blackstone Industries for $50,000. This is a complimentary line of automatic screwdrivers with vacuum pick-up. SYSCO, located in Hanover, Maryland is a distributor based product sales company. It was formed by CompuDyne to set up a national network of sales representatives and dealers. These products include Shorrock Integrated Systems' physical security product line and will include SYSCO United Kingdom's physical security product line if negotiations are completed. 2. SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------- Principles of Consolidation - The consolidated financial statements include the accounts of CompuDyne Corporation and its subsidiaries, all of which are wholly-owned. All material intercompany transactions have been eliminated. Inventories - Raw material inventories are valued at the lower of cost (first-in, first-out) or market. Work-in-process represents direct labor, materials and overhead incurred on products not yet delivered. Finished goods are valued at the lower of cost or market. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Certain estimates used by management are susceptible to significant changes in the economic environment. These include estimates of percentage-completion on long term contracts and valuation allowances for contracts accounts receivable. Actual results could differ from those estimates. Revenue Recognition - Revenue under cost reimbursement contracts is recognized to the extent of costs incurred to date plus a proportionate amount of the fee earned. Revenue under time and materials contracts are recognized to the extent of billable rates times hours delivered plus materials expenses incurred. Revenue from fixed price contracts is recognized under the percentage of completion method. Revenue from the sale of manufactured products is recognized based on shipment date. Provisions for estimated losses on uncompleted contracts are recognized in the period such losses are determined. Property, Plant and Equipment - Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is computed using principally the straight-line method based on the estimated useful lives of the related assets. The estimated useful lives are as follows: Buildings and improvements 7-39 years Machinery and equipment 3-10 years Furniture and fixtures 3-10 years Leasehold improvements are amortized over their estimated useful lives or the term of the underlying lease, whichever is shorter. Maintenance and repair costs are charged to operations as incurred; major renewals and betterments are capitalized. Other Intangible Assets - Intangible assets consist of a trademark amortized on a straight-line basis over 15 years and a deferred credit for negative goodwill recorded due to the acquisition of SecurSystems amortized on a straight-line basis over 5 years. Accumulated amortization was $12 thousand and ($29) thousand respectively at December 31, 1997. Cash and Cash Equivalents - For purposes of the statements of cash flows, the company considers temporary investments with original maturities of three months or less to be cash equivalents. Income Taxes - The Company follows Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes". Under SFAS 109, deferred income taxes are recognized for the future tax consequences of differences between tax bases of assets and liabilities and financial reporting amounts, based upon enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Stock Based Compensation - In 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation. As permitted under this Statement, the Company continues to follow the Accounting Principles Board ( APB ) Opinion No. 25 for the recognition and measurement of employees stock-based compensation and therefore provides only the disclosures required under SFAS No. 123. New Accounting Pronouncements - In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure." The Company is required to adopt the provisions of this statement for the year ending December 31, 1998. This statement extends the previous requirements to disclose certain information about an entity's capital structure found in APB Opinion No. 10, "Omnibus Opinion-1996, No. 15, "Earnings per Share, and FASB Statement No. 47, "Disclosure of Long-Term Obligations, for entities that were subject to the requirements of those standards. As the Company has been subject to the requirements of each of those standards, adoption of SFAS No. 129 will have no impact on the Company's financial statements. In June, 1997 the FASB issued SFAS No. 130, Reporting Comprehensive Income, which establishes standards for the reporting and display of comprehensive income and its components in the financial statements. The Company is required to adopt the provisions of the statement for fiscal periods beginning after December 15, 1997. This statement may require the company to make additional disclosures. In June 1997, the FASB issued No. 131, "Disclosures about Segments of an Enterprise and Related Information, which requires the Company to present certain information about operating segments and in condensed financial statements for interim periods. The Company is required to adopt the provisions of the statement for the year ending December 31, 1998. The statement may require the Company to make additional disclosures. 3. NET INCOME (LOSS) PER SHARE - ------------------------------- In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This statement requires dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. SFAS No. 128 is effective for fiscal years ending after December 15, 1997, and accordingly, has been adopted by the Company as of December 31, 1997. The Company has restated earnings per share for fiscal years 1995 and 1996. Options to purchase 53,050 shares of common stock at $2.81 were outstanding during 1997 but were not included in the computation of diluted net income per common share because the options' exercise price was greater than the average market price of the common shares. The options were still outstanding at December 31, 1997. Options to purchase 200,000, 56,290 and 25,000 shares of common stock at $1.50, $1.81 and $2.00, respectively were outstanding during 1996 but were not included in the computation of diluted net income per common share because the options' exercise prices were greater than the average market price of the common shares. Preferred stock convertible to 1,260,460 shares of common stock was not included in the computation of diluted net income per share in 1995 because such shares would have been anti-dilutive. The following is a reconciliation of the amounts used in calculating basic and diluted net income per common share: Per Share Income Shares Amount ------ ------ ------- ($ in thousands) Basic net income per common share for the year ended December 31, 1997: Income available to common stockholders $ 696 3,004,974 $ .23 ----- Effect of dilutive preferred stock 1,102,902 Effect of dilutive stock options - 256,325 ------ --------- Diluted net income per common share for the year ended December 31, 1997 $ 696 4,364,201 $ .16 ------ --------- ----- Basic net income per common share for the year ended December 31, 1996: Income available to common stockholders $ 331 2,293,602 $ .14 ----- Effect of dilutive preferred stock 1,260,460 Effect of dilutive stock options - 207,980 ------ --------- Diluted net income per common share for the year ended December 31, 1996 $ 331 3,762,042 $ .08 ------ --------- ----- Basic net income per common share for the year ended December 31, 1995: Income available to common stockholders $ 663 1,657,000 $ (.40) ----- Effect of dilutive stock options - - ------ --------- Diluted net income per common share for the year ended December 31, 1995 $ 663 1,657,000 $ (.40) ------ --------- ----- 4. ACQUISITIONS AND DISPOSAL OF BUSINESSES - ------------------------------------------- Acquisition of Shorrock Electronic Systems, Inc. - On July 11, 1996, CompuDyne Corporation entered into and consummated a Stock Purchase Agreement by and between SES Corporation USA ( the seller ) and CompuDyne to purchase all of the capital stock of Shorrock Electronic Systems, Incorporated ("SES ) from the seller. The seller is an indirect subsidiary of BET Public Limited Company. SES, located in Hanover, Maryland, is engaged in the sale, installation and maintenance of physical security systems for correctional and other facilities. The consideration paid to the seller for the stock of SES was approximately $613 thousand. CompuDyne has accounted for the acquisition of SES using the purchase method of accounting. The purchase price was allocated to the net assets acquired based upon their estimated fair value at the date of acquisition which resulted in an excess of net assets acquired over cost (negative goodwill) of approximately $336 thousand. As a result, the assigned values of the non-current assets of $231 thousand were written down to zero and negative goodwill of $105 thousand was recorded. The resulting purchase price allocation was based on the fair values as follows: Cash $ 47 Accounts receivable 1,028 Inventory 109 Prepaid expenses 12 Contract billings in excess of costs (150) Accounts payable and accrued expenses (328) Negative goodwill (105) ------- $ 613 ======== The accompanying financial statements include the operations for SES for the period from July 11, 1996, the date of acquisition. Acquisition of MicroAssembly Systems, Inc. - On August 21, 1995, CompuDyne entered into and consummated a Stock Purchase Agreement by and among the Company, Martin A. Roenigk and Alan Markowitz (Messrs. Roenigk and Markowitz are, collectively, the "Sellers ) and MicroAssembly, pursuant to which CompuDyne issued to the Sellers 1,260,460 shares of its Convertible Preference Stock, Series D ("Series D Preference Stock ) in exchange for all of the outstanding shares of capital stock of MicroAssembly. This transaction represented a non-cash investing activity and, therefore, was not been included in the Statement of Cash Flows. The issuance by CompuDyne of the Series D Preference Stock, together with the issuance of certain Notes, as defined below, and certain options to purchase Common Stock, all as described below and in accordance with the terms of the Stock Purchase Agreement, are referred to as the "Transaction in which MicroAssembly became a wholly-owned subsidiary of CompuDyne. Of the 1,260,460 Shares of Series D Preference Stock issued to the Sellers, 945,345 shares were issued to Mr. Roenigk, and 315,115 shares were issued to Mr. Markowitz. In November 1997 the Series D Preference Stock was converted on a share for share basis to Common Stock with full voting rights. No dividends had been paid on the Series D Preference Stock. When converted a $0.246 per share Early Conversion Adjustment was paid to Mr. Roenigk and Mr. Markowitz. The adjustment totalled approximately $310 thousand and was recorded as a reduction to accumulated deficit.The Series D Preference Stock had rights to vote on a share for share basis with the Company's Common Stock. Each share of Series D Preference Stock carried an annual aggregate dividend equal to the lower of: (a) sixty percent (60%) of MicroAssembly's after-tax net income in the previous calendar year, divided by 1,260,460, or (b) eight percent (8%) of the Redemption Value of $1.50 per share of the Series D Preference Stock. Dividends could have been paid on the Series D Preference Stock, at the Company's option, in cash, CompuDyne Common Stock, or a combination thereof, based upon the average closing price of CompuDyne's Common Stock for the prior thirty (30) trading days. There were no dividends accrued or paid in 1997, 1996 or 1995. Beginning on August 21 in the year 2000, the Company could have, at its option, redeem all or any part of the Series D Preference Stock for a price of $1.80 per share, that being one hundred twenty percent (120%) of the redemption value, plus accrued and unpaid dividends. CompuDyne has accounted for the acquisition of MicroAssembly using the purchase method of accounting. The purchase price, as restated, was allocated to the net assets acquired based on their estimated fair values at the date of acquisition. The fair values of these assets and liabilities are summarized as follows (in thousands): Cash, net $ 52 Accounts Receivable 261 Inventories 436 Other Assets 76 Property, Plant and Equipment 531 Intangible Assets 58 Accounts Payable and Accrued Expenses ( 358) Deferred Tax Liabilities ( 111) ------ Total - value assigned to Series D preferred stock $ 945 ====== The accompanying financial statements include the operations of MicroAssembly for the period from August 21, 1995, the date of acquisition. As part of the Transaction, in return for $400 thousand paid to CompuDyne at the closing, CompuDyne issued to the Sellers Senior Convertible Promissory Notes (the "Notes") in the aggregate principal amount of $400 thousand, which Notes were convertible, prior to redemption by CompuDyne, into CompuDyne Common Stock at a conversion rate of $1.50 per share of common stock, or 266,667 shares of common stock if the entire principal amount of the Notes was converted. Of the $400 thousand principal amount of Notes issued, $300 thousand principal amount of the Notes were issued to Mr. Roenigk, and $100 thousand principal amount of the Notes were issued to Mr. Markowitz. As described in a report filed by the Sellers with the Securities and Exchange Commission and with the Company pursuant to Section 13(d) of the Securities Exchange Act of 1934, the source of the Sellers' $400 thousand investment in the Company was personal funds. All of the notes were converted into common stock the third quarter of 1996. As a further part of the Transaction, Norman Silberdick, the Company's then Chairman, President, Chief Executive Officer and Director, resigned as such. The Company's Board of Directors elected Mr. Roenigk to fill Mr. Silberdick's seat on the Board of Directors, and to become its Chairman, President and Chief Executive Officer. Mr. Markowitz was also elected to the Company's six member Board of Directors. In recognition of Mr. Roenigk's position as Chairman, President and CEO, the Company has issued to him options to purchase up to 200,000 shares of the Company's Common Stock for $1.50 per share. The options were to expire in ten (10) years. Mr. Silberdick, as part of a related transaction described below, turned in to the Company 60,000 shares of the Company's Common Stock issued pursuant to a Stock Purchase Agreement, dated August 1, 1993, between the Company and Mr. Silberdick, and he relinquished his rights to purchase an additional 50,000 shares pursuant to such Agreement. Divestiture of Suntec Division - On August 21, 1995, Quanta Systems transferred all of the assets and liabilities of Quanta Systems's Suntec division to Suntec Service Corporation, a newly-formed corporation ("Suntec"), in return for (i) all of Suntec's issued and outstanding common stock and (ii) Suntec's agreement to pay to Quanta Systems a royalty of 2% of Suntec's net sales and other revenues for thirty (30) years from the date of the closing. Quanta Systems then sold all of Suntec's Common Stock to Norman Silberdick, who resigned on that date as CompuDyne's Chairman, President, CEO and Director. As a condition precedent to the sale of the Suntec shares to Mr. Silberdick, he relinquished to CompuDyne 60,000 shares of CompuDyne Common Stock and purchase rights held by him to acquire an additional 50,000 shares of CompuDyne Common Stock. As consideration for the shares of Suntec, Mr. Silberdick executed a nonrecourse promissory note in the initial principal amount of $79 thousand (the "Silberdick Note"), payment of which was secured by a pledge of all Suntec shares held by Mr. Silberdick, which shares must at all times equal or exceed 33% of all outstanding shares of Suntec capital stock. The Silberdick Note bears interest at an annual rate equal to the Wall Street Journal prime rate, plus 2%. Through August 31, 2000, the principal payments on the Silberdick Note are payable annually in amounts equal to 25% of Suntec's net, after-tax income for the year in question. Thereafter, the unpaid principal balance, as of that date, shall be paid in five equal annual installments. Suntec has now ceased all operations. As part of the transaction, Quanta Systems loaned $50 thousand to Suntec payable at the end of three years at prime plus 2% with interest due at the anniversary date of the loan. The loan is a senior obligation of Suntec with rights to security. As of December 31, 1996, the Company has written off the full amount of this loan because Suntec ceased operations. The effective interest rate was 10.5% at December 31, 1995. Loss from Discontinued Operations includes a provision of $85 thousand in 1995 for the loss on disposal. Revenues included in loss from discontinued operations were $656 thousand in 1995. Pro-Forma Financial Information - The following unaudited pro-forma financial information of CompuDyne Corporation reflects the acquisition of MicroAssembly and the disposition of Suntec Service Corporation as if these transactions had occurred on January 1, 1995, and the acquisition of Shorrock (now SecurSystems, Inc.) as if this transaction had occurred on January 1, 1996 and January 1, 1995: (In Thousands) 1996 1995 -------- -------- Revenues $ 23,818 $ 15,833 Income (loss) before Extraordinary Items (1,226) (7,151) Net Income (Loss) (145) (3,667) Earnings (Loss) Per Share (.04) (2.21) 5. ACCOUNTS RECEIVABLE - ----------------------- Accounts Receivable consist of the following: (In thousands) December 31, December 31, 1997 1996 U.S. Government Contracts: ----------- ----------- Billed $ 1,712 $ 2,420 Unbilled 1,054 1,031 --------- ------- 2,766 3,451 Commercial Billed $ 2,084 $ 2,360 Unbilled 207 - --------- ------- 2,291 2,360 Total Accounts Receivable 5,057 5,811 Less Allowance for Doubtful Accounts (300) (538) --------- ------- Net Accounts Receivable $ 4,757 $ 5,273 ========= ======= Substantially all of the U.S. Government billed and unbilled receivables are derived from cost reimbursable or time-and-material contracts. Unbilled receivables include retainages of approximately $185 thousand and $301 thousand at December 31, 1997 and 1996, respectively. Direct sales to the U.S. Government for the years ended December 31, 1997, 1996 and 1995 were approximately $9.3 million, $15.5 million and $8.9 million, respectively, or 47%, 70% and 86% of the Company's total net sales for the same years. No other single customer accounted for greater than 10% of the Company's net sales. Contract costs for services provided to the U.S. Government, including indirect expenses, are subject to audit by the Defense Contract Audit Agency, ("DCAA"). All contract revenues are recorded in amounts expected to be realized upon final settlement. In the opinion of management, adequate provisions have been made for adjustments, if any, that may result from the government audits. Quanta Systems received final approval on their indirect rates for 1989 through 1994 from DCAA which resulted in billings and collections of $350 thousand in 1997. Included in unbilled receivables at December 31, 1997 is approximately $457 thousand of costs relating to a certified claim on the Fort Bragg contract performed by Quanta Systems. The contract was terminated by the U. S. Government in September, 1997 after Quanta Systems submitted a claim in May, 1997. Quanta Systems was unable to bill approximately $181 thousand of costs from the available funding of the contract. Of the remaining $276 thousand of costs included in the unbilled receivables, management believes that there are sufficient reserves established for any amounts not recovered, and the outcome of the claim will not have a material effect on the financial statements. 6. NOTES PAYABLE RELATED PARTIES - --------------------------------- In July, 1996, the holders of CompuDyne's $400 thousand Senior Convertible Notes (which includes the Chairman and a Director) agreed to convert the notes into 400,000 common shares. The same investors also agreed to purchase 600,000 additional common shares for $600 thousand. This financing, which was completed on July 12, 1996, added $1.0 million to the Company's equity, reduced interest charges, and provided the cash required to acquire SES and also provided working capital for SES operations. At the time the Senior Convertible Notes were issued in August 1995, they had a conversion price of $1.50 per share. On May 23, 1996, the CompuDyne Board approved an amendment to the Senior Convertible Notes that reduced the conversion price to $1.00 per share based upon the price of CompuDyne common stock at the time, the restricted nature of the stock issued upon conversion, the limited liquidity for CompuDyne common stock existing at the time, an evaluation of CompuDyne's balance sheet and the need to strengthen CompuDyne's balance sheet in view of the proposed acquisition of SES. The notes were converted into common shares in July, 1996. CompuDyne entered into a subordinated note agreement on April 29, 1995 with Alan Markowitz, a Director, for $100 thousand. The agreement calls for CompuDyne to pay $5,000 quarterly plus accrued interest for the quarter at a rate of Prime plus 1%. Amounts outstanding at December 31, 1997 and December 31, 1996 were $50 and $70 thousand respectively. Interest expense pertaining to the notes for 1997 and 1996 were $6 and $8 thousand respectively. 7. BANK NOTES PAYABLE - ---------------------- The Company has a secured working capital line of credit agreement with the Asian American Bank and Trust Company of Boston, Massachusetts which allows borrowings of up to 75% of eligible accounts receivable. At December 31, 1996, the maximum available under the line was $850 thousand which has been increased to $1.75 million at December 31, 1997. The credit agreement requires the Company to maintain a working capital ratio of 1.1 to 1, and a debt service ratio of at least 1.0 to 1 with which the Company was in compliance. During 1996, the interest rate was 2% above the prime; the rate was reduced to .5% above prime in June, 1997 (10% at December 31, 1997.) At December 31, 1997 and 1996, the Company had outstanding borrowings of $1.3 million and $121 thousand respectively. The current line is due to expire on July 1, 1998. MicroAssembly has an unsecured line of credit with Fleet Bank for $100 thousand with no expiration date. The line of credit is guaranteed by Mr. Roenigk. The rate is prime plus 2% (11.5% at December 31, 1997) and there was $27 and $41 thousand outstanding as of December 31, 1997 and 1996, respectively. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS - --------------------------------------- The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents - The carrying amounts reported in the balance sheets for cash and cash equivalents approximates fair value. Notes Payable - The carrying amounts reported in the balance sheet approximate fair value as the bank lines of credit are renewed annually at current interest rates. 9. INCOME TAXES - --------------- The components of the income tax provision (benefit) from continuing operations for the years ended December 31, 1997, 1996, and 1995 are as follows: $ thousands 1997 1996 1995 ---------------------- Current $ 31 $ 84 $ (29) Deferred (189) (14) (26) ------ ----- ----- $ (158) $ 70 $ (55) ====== ===== ===== The tax effects of the primary temporary differences giving rise to the Company's net deferred tax assets and liabilities at December 31, 1997 and 1996 are summarized as follows: December 31, 1997 1996 ------------------ Assets: Accrued expenses and deferred compensation $ 142 $ 25 Tax operating loss carryforward 10,341 9,416 Tax credit carryforward 459 408 Book reserves in excess of tax 315 122 Book depreciation in excess of tax - 28 Accrued pension liability 184 164 -------- -------- Total deferred assets 11,441 10,163 Valuation allowance (11,254) (10,163) ------ ------ Net deferred assets 187 - Liabilities: Tax depreciation in excess of book depreciation (64) - Investment in subsidiary - (66) ------ ------ Total deferred liabilities (64) (66) ------ ------ Net deferred liabilities $ (64) $ (66) ======= ======= A valuation allowance is provided to offset fully the recorded current deferred tax assets as management cannot conclude that such deferred tax assets are more likely of realization than not. The non-current deferred tax assets are more likely of realization than not and accordingly, no valuation allowance is provided. The difference between the statutory tax rate and CompuDyne's effective tax rate from continuing operations are summarized as follows: 1997 1996 1995 ------ ------ ------ Statutory federal income tax rates 35.0% 34.0% 34.0% State income taxes, net of Federal benefit 2.9 4.6 - Change in valuation allowance (51.2) - (34.0) Tax effect of NOL utilization (18.6) (27.0) - Reversal of prior year taxes - - (10.9) Tax effect of non-deductible items 2.5 3.6 (9.9) ----- ----- ----- Tax (29.4)% (15.2)% (20.8)% At December 31, 1997, the Company and its subsidiaries have net operating loss carryforwards available to offset future taxable income of approximately $29 million, subject to certain severe limitations. These carryforwards expire between 2000 and 2009. The utilization of substantially all of these tax loss carryforwards is limited to approximately $200 thousand each year as a result of the ownership change which occurred in 1995. The Company also has carryforwards available for alternative minimum tax purposes which do not differ significantly from regular net operating loss carryforwards. The Company also has research and development tax credits of approximately $459 thousand expiring between 1999 and 2003. 10. COMMON STOCK AND COMMON STOCK OPTIONS - ------------------------------------------ On November 12, 1992, the CompuDyne Board authorized the issuance of 300,000 shares of Common Stock to key employees of CompuDyne and Quanta Systems at a price of $.40 per share, the fair market value at such time. In January 1993, the Board subsequently authorized the issuance of an additional 200,000 shares of Common Stock to a key employee at the same price and on the same terms as those authorized on November 12, 1992. These authorizations were formalized in Stock Purchase Agreements, dated August 1, 1993, under which the employees may purchase an aggregate of 125,000 shares on August 1, of each of the years 1993 through 1996 provided certain conditions are met including continued employment by CompuDyne, by paying cash for such shares or by giving the Company a five-year non-recourse promissory note, collateralized by the stock and bearing interest at 2% per annum over the rate designated by the First National Bank of Maryland as its prime commercial rate. As of December 31, 1996, 302,500 shares of CompuDyne Common Stock had been issued to five members of senior management, (the "Management Shares") in exchange for promissory notes pursuant to the Stock Purchase Agreements. Due to the resignation of two of the employees who were parties to the Stock Purchase Agreements, 225,000 shares of CompuDyne Common Stock have been issued under the Stock Purchase Agreements with no further shares remaining. In August 1995, the Company issued Martin A. Roenigk options, vested immediately, to purchase up to 200,000 shares of the Company's Common Stock for $1.50 per share, 100% of the fair market value of such shares at the date of grant. The options expire in ten (10) years. On February 2, 1996 the Compensation and Stock Option Committee granted options to purchase 16,290 shares of CompuDyne Common Stock to key employees of CompuDyne's subsidiary, MicroAssembly, at a price of $1.81 per share (100% of the fair market value of such shares at the date of grant) and in accordance with the terms and conditions of the 1986 Stock Incentive Compensation Plan. In May, 1996 the number of shares granted was reduced to 12,040 shares when an optionee resigned and did not exercise his options within 30 days following the date on which he ceased to be an employee, as defined under the terms of the plan. In addition, on February 2, 1996 the Compensation and Stock Option Committee granted options to purchase 21,710 shares of CompuDyne Common Stock to key employees of CompuDyne's subsidiary, MicroAssembly, at a price of $1.81 per share (100% of the fair market value of such shares at the date of grant) and in accordance with the terms and conditions of the 1996 Stock Incentive Plan for Employees (the "Plan"). These options vest over a five (5) year term. The Plan was subsequently approved by the Shareholders at its Annual Meeting on June 5, 1996. In May, 1996 the number of shares granted was reduced to 15,960 shares when an optionee resigned and did not exercise his options within 30 days following the date on which he ceased to be an employee, as defined under the terms of the Plan. On July 11, 1996 the Committee granted options, which vest over five years, to purchase 121,000 shares, of CompuDyne Common Stock to key employees of the newly acquired company, SecurSystems, and a key employee of Data Control Systems, in accordance with the terms and conditions of the 1996 Stock Incentive Compensation Plan for Employees at a price of $1.625 per share (the fair market value of such shares at the date of grant). On September 18, 1996 the Company issued options to purchase 1,050 shares of common stock for $1.625 per share to directors of the Company. On May 21, 1997 the Company issued options to purchase 1,050 shares of common stock for $2.81 per share to directors of the Company. On November 17, 1997 the Company issued options to purchase 1,050 shares of common stock for $1.69 per share to directors of the Company. Of the above shares to the directors, 50% become vested after the second year and the remaining 50% after the third year. On November 17, 1997 the Company also issued options, which vest over five years, to purchase 52,000 shares of common stock at $2.81 per share to selected employees of Quanta Systems and SecurSystems. The transactions for shares under options were: Year Weighted Year Year ended Average ended ended December 31, Excercise December 31, December 31, 1997 Price 1996 1995 ------------- --------- ------------ ----------- Outstanding, Beginning of Period Shares 375,050 $1.60 225,500 92,167 Prices $1.50-2.00 $1.50-14.125 $.75-14.125 Granted Shares 54,100 $2.79 160,050 283,210 Prices $1.69-2.81 $1.81 $1.375-2.00 Exercised Shares - - - 58,210 Prices - - - $1.375 Expired or Canceled 25,000 $2.00 10,500 91,667 Outstanding, End of Period Shares 404,150 $1.73 375,050 225,500 Prices $1.50-$2.81 $1.50-2.00 $1.50-14.125 Options Exercisable 253,775 375,050 225,500 Information with respect to stock options outstanding and stock options excercisable at December 31, 1997 is as follows: OPTIONS OUTSTANDING ------------------- Range of Weighted Weighted Exercise Number Outstanding Average Aver. Remaining Price at December 31, 1997 Exer. Price Contractual Life ------------- -------------------- ----------- ---------------- $1.50 - $2.00 351,100 $1.57 1.21 $2.81 53,050 $2.81 4.88 ------- 404,150 ======= OPTIONS EXCERCISABLE Range of Weighted Weighted Exercise Number Outstanding Average Aver. Remaining Price at December 31, 1997 Exer. Price Contractual Life ------------- -------------------- ----------- ---------------- $1.50 - $2.00 253,512 $1.94 1.24 $2.81 263 $2.81 4.92 ------- 253,775 ======= As permitted under SFAS No. 123, the Company continues to account for its employee stock-based compensation plans and options granted under APB No. 25. No compensation expense has been recognized in connection with options, as all options have been granted with an exercise price equal to fair value of the Company s common stock on the date of grant. Accordingly, the Company has provided below the additional disclosures specified in SFAS No. 123 for 1996 and 1995. For SFAS No. 123 purposes, the fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.00%, expected life of 7 years, dividend rate of zero percent and expected volatility of 60%. Using these assumptions, the fair value of the stock options granted in 1997, 1996 and 1995 is $0, $165,000 and $231,000, respectively, which would be amortized as compensation expense over the vesting period of the options. Had compensation expense been determined consistent with SFAS No. 123, utilizing the assumptions detailed above, the Company s net income (loss) and earnings (loss) per share for the years ended December 31, 1997, 1996 and 1995 would have been reduced to the following pro forma amounts: (In thousands) 1997 1996 1995 ------ ------ ------ Net Income (loss): As Reported $ 696 $ 331 $(663) Pro Forma $ 696 $ 294 $(836) Net Income (Loss) per share: As Reported $ 0.23 $ 0.09 $(.40) Pro Forma $ 0.23 $ 0.08 $(.50) The resulting pro forma compensation cost may not be representative of that expected in future years. 11. EMPLOYEE BENEFIT PLANS - --------------------------- The Company has a 401(k) retirement savings plan covering substantially all employees. All employees are eligible to participate in the plan after completing one year of service. Participants may make before tax contributions of up to 15% of their annual compensation subject to Internal Revenue Service limitations. CompuDyne currently matches employee contributions up to the first 2.5% contributed. Expense for matching contributions to the Plan was $114 thousand, $76 thousand and $46 thousand for 1997, 1996, and 1995, respectively. 12. COMMITMENTS AND CONTINGENT LIABILITIES - ------------------------------------------- The Company and certain of its subsidiaries are obligated as lessees under various operating leases for office, distribution, manufacturing and storage facilities. The minimum rent payments include space which is sub-leased to Orion Corporation. As of December 31, 1997, future minimum rental payments required under operating leases that have initial or remaining noncancellable terms in excess of one year are as follows (in thousands): Year Ended December 31, Sub-Lease Net --------- ------ 1998 $ 462 $ (85) $ 377 1999 476 (87) 389 2000 164 (15) 149 2001 45 - 45 2002 5 - 5 ----- ------ ------ $1,152 $ (187) $ 965 Rental expense was $452 thousand, $468 thousand and $399 thousand in 1997, 1996, and 1995, respectively. The Company is party to certain legal actions and inquiries for environmental and other matters resulting from the normal course of business. Although the total amount of liability with respect to these matters cannot be ascertained, management of the Company believes that any resulting liability will not have a material effect on its financial position or results of future operations. 13.RELATED PARTIES Corcap, Inc. ("Corcap"), entered into a Settlement Agreement, dated March 25, 1996 (the "Settlement Agreement"), with Lydall, Inc. ("Lydall") pursuant to which Corcap transferred 120,000 shares (the "Transferred Shares ) of CompuDyne Common Stock to Lydall in settlement of certain claims. As part of the Settlement Agreement, Lydall required as a condition to signing, that CompuDyne enter into a registration rights agreement with Lydall obligating CompuDyne to register the Transferred Shares upon demand of Lydall two years following the date of the Agreement or in a "piggyback registration at any time upon the proposed registration by CompuDyne of its stock. In order to induce CompuDyne to enter into such agreement, Corcap agreed to issue an option (the "Corcap Option") to CompuDyne to purchase 16,666 shares of CompuDyne Common Stock at a price of $.01 per share exercisable immediately for a period of five years under a Stock Option Agreement, dated March 25, 1996, between Corcap and CompuDyne. In addition, Corcap agreed to limit CompuDyne's support of its legal services to $1 thousand per month for 24 months. On December 31, 1996 CompuDyne exercised its option to purchase 16,666 shares of CompuDyne Stock pursuant to the Option Agreement, which has been recorded as treasury stock. 14. KOLUX PENSION PLAN - ---------------------- In March 1987, the Company ceased its Kolux plant operations resulting in a curtailment of the defined benefit pension plan covering certain plant employees. As of December 31, 1997, the actuarial present value of accumulated plan benefits was estimated to be $801 thousand, based upon an 7.0% interest rate assumption; the 1984 Unisex Mortality table with a five year age setback for females; and the March 1, 1997 (latest actuarial valuation) employee database projected forward to December 31, 1997. All benefits under the plan are fully vested. The market value of plan assets as of December 31, 1997 was $314 thousand. Accordingly, the plan's unfunded accrued liability as of December 31, 1997 of $489 thousand has been reflected in the balance sheet as accrued pension costs. 15. INDUSTRY SEGMENT INFORMATION - ----------------------------------- The Company currently operates in five business segments: government engineering services, physical security services, the manufacture of telemetry and telecommunications equipment, the manufacturing and marketing of the Stick-Screw (TM) System and distribution of physical security products. During the years ended December 31, 1997, 1996, and 1995 sales to the United States Federal Government amounted to 47%, 70% and 86%, respectively, of the Company's total net sales. No other single customer accounted for greater than 10% of the Company's net sales. The following segment information includes revenues and related costs for Quanta Systems, government engineering services, DCS's telemetry and telecommunications products and Corporate activities for the three years ended December 31, 1997, 1996 and 1995. Also included are revenues and related costs from SecurSystems physical security services for the year ended December 31, 1997 and from its July 11, 1996 acquisition through December 31, 1996, SYSCO's product sales operations from it's inception, October 11, 1997 through December 31, 1997 and MicroAssembly's Stick- Screw product sales during the year ended December 31, 1997, December, 1996 and from its August 21, 1995 acquisition through December 31, 1995. Revenues Gross Profit --------------------- ---------------------- 1997 1996 1995 1997 1996 1995 -------------------------- ------------------------- Quanta Systems $ 10,714 $ 15,644 $ 8,878 $ 1,694 $ 1,453 $ 1,169 Data Control Systems 1,317 1,480 863 364 462 269 SecurSystems 6,217 3,530 - 1,084 677 - SYSCO - - - - - - MicroAssembly 1,768 1,488 567 336 211 78 CompuDyne Corporate - - - - - - ------- ------ ------- ------ ------ ------- $ 20,016 $ 22,142 $ 10,308 $ 3,478 $ 2,803 $ 1,516 Total Assets, at Year End Operating Income/(Loss) ------------------------- ------------------------- 1997 1996 1995 1997 1996 1995 ------------------------- ------------------------- Quanta Systems $ 2,234 $ 3,157 $ 1,251 $ 764 $ 538 $ 546 Data Control Systems 1,375 812 758 18 13 (311) SecurSystems 2,060 1,961 - 82 245 - SYSCO - - - (147) - - MicroAssembly 1,286 2,300 2,392 208 3 (46) CompuDyne Corporate 474 (655) (454) (385) (332) (246) ------- ------- ------- ------ ------- ------- $ 7,429 $ 7,575 $ 3,947 $ 540 $ 467 $ (57) Capital Expenditures Depreciation -------------------- ------------ 1997 1996 1995 1997 1996 1995 ----------------------- ------------------------- Quanta Systems $ 78 $ 9 $ 4 $ 13 $ 3 $ - Data Control Systems 55 4 - 26 13 - SecurSystems 55 8 - 11 30 - SYSCO - - - - - - MicroAssembly 63 12 74 80 79 28 CompuDyne Corporate - - - - - - ------ ------ ------- ----- ------ ------ $ 51 $ 33 $ 78 $ 130 $ 125 $ 28 16. SONOMA SETTLEMENT COSTS - ---------------------------- On February 20, 1998, SecurSystems settled its claim against and from the County of Sonoma, California. The Company has accrued $270 thousand of settlement costs and legal fees related to this claim at December 31, 1997. With the settlement management believes there will be no additional liabilities to the Company from this matter. SCHEDULE II COMPUDYNE CORPORATION AND SUBSIDIARIES SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996, and 1995 ($ Thousands) Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deduction of Period - ------------- --------- -------- --------- --------- Year Ended December 31, 1997 Reserve and allowances deducted from asset accounts: Obsolescence reserve for inventory $ 299 $ 14 $ - $ 313 Reserve for accounts receivable 538 60 (298) 300 Year Ended December 31, 1996 Reserve and allowances deducted from asset accounts: Obsolescence reserve for inventory $ 216 $ 83 $ - $ 299 Reserve for accounts receivable 205 333 - 538 Year Ended December 31, 1995 Reserve and allowances deducted from asset accounts: Obsolescence reserve for inventory $ 201 $ 15 $ - $ 216 Reserve for accounts receivable 207 3 (5) 205 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPUDYNE CORPORATION --------------------- (Registrant) By:/s/ William C. Rock ----------------------- William C. Rock Dated: March 30, 1998 Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March ??, 1998. /s/ Martin A. Roenigk Director, Chairman, President - --------------------- and Chief Executive Officer Martin A. Roenigk /s/ David W. Clark, Jr. Director - ---------------------- David W. Clark, Jr. /s/ Millard H. Pryor, Jr. Director /s/ Alan Markowitz Director - ------------------------ ------------------ Millard H. Pryor, Jr. Alan Markowitz /s/ Miles P. Jennings Director /s/ Philip M. Blackmon Director and - --------------------- ---------------------- Executive Vice- Miles P. Jennings Philip M. Blackmon President /s/ William C. Rock Chief Financial Officer - ------------------ and Principle Accounting William C. Rock Officer EX-27 2
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. 12-MOS DEC-31-1997 DEC-31-1997 0 0 5,057 300 1,572 6,424 1,703 990 7,429 4,529 0 0 0 3,093 (931) 7,575 828 5,431 608 4,926 768 0 11 (250) (256) 6 0 0 0 6 .00 .00
EX-10 3 Credit Agreement CREDIT AGREEMENT is made as of the 20th day of December, 1996, by and among (i) CompuDyne Corporation, a Nevada corporation ("CompuDyne"), (ii) MicroAssembly Systems, Inc., a Connecticut corporation ("MicroAssembly"), (iii) Quanta Systems Corporation, a Connecticut corporation ("Quanta"), (iv) Quanta SecurSystems, Inc., a Maryland corporation ("SecurSystems" and, collectively with CompuDyne, Quanta and MicroAssembly, the Borrowers ), and (v) Asian American Bank & Trust Company, a Massachusetts trust company with a head office at 68 Harrison Avenue, Boston, Massachusetts (the Bank ). 1. DEFINITIONS AND RULES OF INTERPRETATION. 1.01 Definitions. The following terms shall have the meanings set forth in this REF 1 or elsewhere in the provisions of this Credit Agreement referred to below: Accounts Receivable. - -------------------- All rights of the Borrowers to payment for goods sold, leased or otherwise marketed in the ordinary course of business and all rights of the Borrowers to payment for services rendered in the ordinary course of business and all sums of money or other proceeds due thereon pursuant to transactions with account debtors, except for that portion of the sum of money or other proceeds due thereon that relates to sales, use or property taxes in conjunction with such transactions, recorded on books of account in accordance with generally accepted accounting principles. Affiliate. - --------- Any Person that would be considered to be an affiliate of a Borrower under Rule 144(a) of the Rules and Regulations of the Securities and Exchange Commission, as in effect on the date hereof, if such Borrower were issuing securities. Assignment of Monies. - -------------------- An Assignment of Monies Due or to Become Due, to be executed and delivered by the Borrowers in accordance with REF. 8.12, substantially in the form of Exhibit A attached hereto. Balance Sheet Date. [September 30, 1996]. - ------------------ Bank. As defined in the preamble hereto. - ---- Bank s Head Office. - ------------------ The Bank s head office located at 68 Harrison Avenue, Boston, Massachusetts 02111, or at such other location as the Bank may designate from time to time. Bank s Special Counsel. - ---------------------- Lyne, Woodworth & Evarts LLP or such other counsel as may be approved by the Bank. Borrower(s). As defined in the preamble hereto. - ----------- Borrowing Base. - -------------- At the relevant time of reference thereto, an amount determined by the Bank by reference to the most recent Borrowing Base Report that is equal to 75% of Eligible Accounts Receivable for which invoices have been issued and are payable. Borrowing Base Report. - --------------------- A Borrowing Base Report signed by the chief financial officer of the Borrowers and in substantially the form of Exhibit B hereto. Business Day. - ------------ Any day other than a Saturday, a Sunday, or any other day on which banking institutions in Boston, Massachusetts, are not required or permitted to be open for the transaction of banking business. Capital Assets. - -------------- Fixed assets, both tangible (such as land, buildings, fixtures, machinery and equipment) and intangible (such as patents, copyrights, trademarks, franchises and good will); provided, that Capital Assets shall not include any item customarily charged directly to expense or depreciated over a useful life of 12 months or less in accordance with generally accepted accounting principles. Capital Expenditures. - -------------------- Amounts paid or indebtedness incurred by the Borrowers in connection with the purchase or lease by the Borrowers of Capital Assets that would be required to be capitalized and shown on the consolidated balance sheet of CompuDyne and its Subsidiaries in accordance with generally accepted accounting principles. Capitalized Leases. - ------------------ Leases under which any Borrower is the lessee or obligor, the discounted future rental payment obligations under which are required to be capitalized on the balance sheet of the lessee or obligor in accordance with generally accepted accounting principles. CERCLA. See REF 7.18. - ------ Closing Date. - ------------ The first date on which the conditions set forth in REF 11 have been satisfied. Code. - ----- The Internal Revenue Code of 1986. Collateral. - ----------- All of the property, rights and interests of the Borrowers that are or are intended to be subject to the security interests created by the Security Documents. Concentration Account. See REF 8.13. Consolidated or consolidated. - ---------------------------- With reference to any term defined herein, shall mean that term as applied to the accounts of CompuDyne and its Subsidiaries, consolidated in accordance with generally accepted accounting principles. Consolidated Cash Flow. - ---------------------- With respect to any fiscal period, an amount equal to the sum of Consolidated Net Income for such fiscal period plus depreciation and all other noncash charges made in calculating Consolidated Net Income, all as determined on a consolidated basis in accordance with generally accepted accounting principles. Consolidated Financial Obligations. - ---------------------------------- With respect to any fiscal period, an amount equal to the sum of all payments on Indebtedness that become due and payable or that are to become due and payable during such fiscal period pursuant to any agreement or instrument to which CompuDyne or any of its Subsidiaries is a party relating to the borrowing of money or the obtaining of credit or in respect of Capitalized Leases. Demand obligations shall be deemed to be due and payable during any fiscal period during which such obligations are outstanding. Consolidated Net Income (or Deficit). - ----------------------------------- The consolidated net income (or deficit) of CompuDyne and its Subsidiaries, after deduction of all expenses, taxes, and other proper charges, determined in accordance with generally accepted accounting principles, after eliminating therefrom all extraordinary nonrecurring items of income. Credit Agreement. - ---------------- This Credit Agreement, including the Schedules and Exhibits hereto. Current Assets. - -------------- All assets of CompuDyne and its Subsidiaries on a consolidated basis that, in accordance with generally accepted accounting principles, are properly classified as current assets, provided that (a) notes and accounts receivable shall be included only if good and collectible as determined by the Borrowers in accordance with established practice consistently applied and, with respect to such notes, only if payable on demand or within one year from the date as of which Current Assets are to be determined and if not directly or indirectly renewable or extendible at the option of the debtors, by their terms, or by the terms of any instrument or agreement relating thereto, beyond such year, and, with respect to such accounts receivable, only if payable and outstanding not more than 90 days after the date of the shipment of goods or other transaction out of which any such account receivable arose; and such notes and accounts receivable shall be taken at their face value less reserves determined to be sufficient in accordance with generally accepted accounting principles; and (b) inventory shall be included only if and to the extent that the same shall consist of saleable finished goods ready and available for shipment to purchasers thereof. Current Liabilities. - ------------------- All consolidated liabilities of CompuDyne and its Subsidiaries maturing on demand or within one year from the date as of which Current Liabilities are to be determined, and such other liabilities as may properly be classified as current liabilities in accordance with generally accepted accounting principles. Default. See REF 13. - --------- Distribution. - ------------ The declaration or payment of any dividend on or in respect of any shares of any class of capital stock of any Borrower, other than dividends payable solely in shares of common stock of such Borrower; the purchase, redemption, or other retirement of any shares of any class of capital stock of such Borrower; the return of capital by such Borrower to its shareholders as such; or any other distribution on or in respect of any shares of any class of capital stock of such Borrower. Dollars or $. - ------------ Dollars in lawful currency of the United States of America. Drawdown Date. - ------------- The date on which any Loan is made or is to be made. Eligible Accounts Receivable. - ---------------------------- The aggregate of the unpaid portions of Accounts Receivable (net of any credits, rebates, offsets, holdbacks or other adjustments or commissions payable to third parties that are adjustments to such Accounts Receivable) (a) that the Borrowers reasonably and in good faith determine to be collectible; (b) that are with account debtors that (i) are not Affiliates of any Borrower, (ii) purchased the goods or services giving rise to the relevant Account Receivable in an arm s length transaction, (iii) are not insolvent or involved in any case or proceeding, whether voluntary or involuntary, under any bankruptcy, reorganization, arrangement, insolvency, adjustment of debt, dissolution, liquidation or similar law of any jurisdiction and (iv) are, in the Bank s reasonable judgment, creditworthy; (c) that are in payment of obligations that have been fully performed and are not subject to dispute or any other similar claims that would reduce the cash amount payable therefor; (d) that are not subject to any pledge, restriction, security interest or other lien or encumbrance other than those created by the Loan Documents; (e) in which the Bank has a valid and perfected first-priority security interest; (f) that are not outstanding for more than 60 days past the earlier to occur of (i) the date of the respective invoices therefor and (ii) the date of shipment thereof in the case of goods or the end of the calendar month following the provision thereof in the case of services; (g) that are not due from any single account debtor if more than 15% of the aggregate amount of all Accounts Receivable owing from such account debtor would otherwise not be Eligible Accounts Receivable; (h) that are payable in Dollars; (i) that are not payable from an office outside of the United States; and (j) in the case of any Account Receivable arising under any U.S. Government Contract, with respect to which the Borrowers shall have executed and delivered a duly-completed Assignment of Monies. Environmental Laws. See REF 7.18. - ------------------ ERISA. - ------ The Employee Retirement Income Security Act of 1974. Event of Default. See REF 13. - ---------------- generally accepted accounting principles. - ---------------------------------------- (a) When used in REF 10, whether directly or indirectly through reference to a capitalized term used therein, means (i) principles that are consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, in effect for the fiscal year ended on the Balance Sheet Date, and (ii) to the extent consistent with such principles, the accounting practice of the Borrowers reflected in its financial statements for the year ended on the Balance Sheet Date, and (b) when used in general, other than as provided above, means principles that are (i) consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, as in effect from time to time, and (ii) consistently applied with past financial statements of the Borrowers adopting the same principles, provided, that in each case referred to in this definition of generally accepted accounting principles , a certified public accountant would, insofar as the use of such accounting principles is pertinent, be in a position to deliver an unqualified opinion (other than a qualification regarding changes in generally accepted accounting principles) as to financial statements in which such principles have been properly applied. Guaranteed Pension Plan. - ----------------------- Any pension plan maintained by any Borrower, or to which any Borrower contributes, that is required to pay plan termination insurance premiums to the Pension Benefit Guaranty Corporation. Hazardous Substances. See REF 7.18. - -------------------- Indebtedness. - ------------ All obligations, contingent and otherwise, that in accordance with generally accepted accounting principles should be classified upon the obligor s balance sheet as liabilities, or to which reference should be made by footnotes thereto, including in any event and whether or not so classified: (a) all debt and similar monetary obligations, whether direct or indirect; (b) all liabilities secured by any mortgage, pledge, security interest, lien, charge or other encumbrance existing on property owned or acquired subject thereto, whether or not the liability secured thereby shall have been assumed; and (c) all guaranties, endorsements and other contingent obligations, whether direct or indirect, in respect of indebtedness of others, including any obligation to supply funds to or in any manner to invest in, directly or indirectly, the debtor, to purchase indebtedness, or to assure the owner of indebtedness against loss, through an agreement to purchase goods, supplies, or services for the purpose of enabling the debtor to make payment of the indebtedness held by such owner or otherwise, and the obligations to reimburse the issuer in respect of any letters of credit. Investments. - ----------- All expenditures made and all liabilities incurred (contingently or otherwise) for the acquisition of stock or Indebtedness of, or for loans, advances, capital contributions or transfers of property to, or in respect of any guaranties (or other commitments as described under Indebtedness), or obligations of, any Person. Letter of Credit. See REF 4.01(a). - ----------------- Letter of Credit Application. See REF 4.01(a). - ---------------------------- Line Cap. $850,000. - -------- Line Termination Date. June 30, 1997. - --------------------- Loan Documents. - -------------- This Credit Agreement, the Note, the Letter of Credit Applications, the Letters of Credit, the Subordination Agreement and the Security Documents. Loan Request. See REF. 2.04. Loans. - ----- Revolving credit loans made or to be made by the Bank to the Borrowers pursuant to REF 2. Maximum Drawing Amount. - ---------------------- The maximum aggregate amount from time to time that the beneficiaries may draw under outstanding Letters of Credit, as such aggregate amount may be reduced from time to time pursuant to the terms of the Letters of Credit. Note. See REF 2.02. - ----- Obligations. - ----------- All indebtedness, obligations and liabilities of any Borrower to the Bank, individually or collectively, existing on the date of this Credit Agreement or arising thereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, including those arising or incurred under this Credit Agreement or any of the other Loan Documents or in respect of any of the Loans made or the Note or other instruments at any time evidencing any thereof. outstanding. - ----------- With respect to the Loans, the aggregate unpaid principal thereof as of any date of determination. Perfection Certificates. - ----------------------- The Perfection Certificates as defined in the Security Agreement. Permitted Liens. - --------------- Liens, security interests and other encumbrances permitted by REF 9.02. Person. - ------ Any individual, corporation, partnership, trust, unincorporated association, business or other legal entity, and any government or any governmental agency or political subdivision thereof. Pledge Agreement. - ---------------- The Pledge Agreement, dated or to be dated on or prior to the Closing Date, between CompuDyne and the Bank, substantially in the form of Exhibit H attached hereto. Prime Rate. - ---------- The highest rate of interest published from time to time in the Wall Street Journal as the "prime rate" in its "Money Rates" section. Record. - ------ The grid attached to the Note, or the continuation of such grid, or any other similar record maintained by the Bank with respect to any Loan referred to in the Note. Reimbursement Obligation. - ------------------------ The Borrowers obligation to reimburse the Bank on account of any drawing under any Letter of Credit as provided in REF 4.02. Security Agreement. - ------------------ The Security Agreement, dated or to be dated on or prior to the Closing Date, between the Borrowers and the Bank, substantially in the form of Exhibit C attached hereto. Security Documents. - ------------------ The Assignments of Monies, the Pledge Agreement and the Security Agreement. Subordinated Debt. - ----------------- Unsecured Indebtedness of any Borrower that is expressly subordinated and made junior to the payment and performance in full of the Obligations, and evidenced as such by the Subordination Agreement or by another written instrument containing subordination provisions in form and substance approved by the Bank in writing. Subordination Agreement. - ----------------------- The Subordination Agreement, dated or to be dated on or prior to the Closing Date, between the Bank, the Borrowers and Alan Markowitz, substantially in the form of Exhibit G attached hereto. Subsidiary. - ---------- Any corporation, association, trust, or other business entity of which the designated parent shall at any time own, directly or indirectly, through a Subsidiary or Subsidiaries, at least a majority (by number of votes) of the outstanding Voting Stock. Surety Agreement. - ---------------- Any agreement between any insurance, surety, bonding or similar entity (a "surety") and any Borrower, pursuant to which, among other things, such Borrower agrees to indemnify and reimburse the surety for any and all costs and expenses incurred by such surety in connection with its performance of any bonding or similar arrangement on behalf of such Borrower. UCC. - ---- The Uniform Commercial Code as adopted and in effect in the Commonwealth of Massachusetts. Uniform Customs. - --------------- With respect to any Letter of Credit, the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, or any successor version thereto adopted by the Bank in the ordinary course of its business as a letter of credit issuer and in effect at the time of issuance of such Letter of Credit. Unpaid Reimbursement Obligation. - ------------------------------- Any Reimbursement Obligation for which the Borrowers do not reimburse the Bank on the date specified in, and in accordance with, REF 4.02. U.S. Government Contract. - ------------------------ Any contract between any Borrower and the United States government or any of its departments, agencies, bureaus or instrumentalities. Voting Stock. - ------------ Stock or similar interests, of any class or classes (however designated), the holders of which are at the time entitled, as such holders, to vote for the election of a majority of the directors (or persons performing similar functions) of the corporation, association, trust or other business entity involved, whether or not the right so to vote exists by reason of the happening of a contingency. 1.02 Rules of Interpretation. - ----------------------------- a. A reference to any document or agreement shall include such document or agreement as amended, modified or supplemented from time to time in accordance with its terms and the terms of this Credit Agreement. b. The singular includes the plural and the plural includes the singular. c. A reference to any law includes any amendment or modification to such law. d. A reference to any Person includes its permitted successors and permitted assigns. e. Accounting terms not otherwise defined herein have the meanings assigned to them by generally accepted accounting principles applied on a consistent basis by the accounting entity to which they refer. f. The words "include", "includes" and "including" are not limiting. g. All terms not specifically defined herein or by generally accepted accounting principles, which terms are defined in the UCC have the meanings assigned to them therein. h. Reference to a particular "REF" refers to that section of this Credit Agreement unless otherwise indicated. i. The words "herein", "hereof", "hereunder" and words of like import shall refer to this Credit Agreement as a whole and not to any particular section or subdivision of this Credit Agreement. 2. THE REVOLVING CREDIT FACILITY. - -------------------------------- 2.01 Commitment to Lend. - --------------------------- Subject to the terms and conditions set forth in this Credit Agreement, the Bank agrees to lend to the Borrowers, and the Borrowers may borrow, repay, and reborrow from time to time between the Closing Date and the Line Termination Date upon notice by the Borrowers to the Bank given in accordance with REF 2.04, such sums as are requested by the Borrowers up to a maximum aggregate amount outstanding (after giving effect to all amounts requested) at any one time equal to the lesser of (a) the Line Cap less the sum of the Maximum Drawing Amount and all Unpaid Reimbursement Obligations and (b) the Borrowing Base less the sum of the Maximum Drawing Amount and all Unpaid Reimbursement Obligations. Each request for a Loan hereunder shall constitute a representation and warranty by the Borrowers that the conditions set forth in REFS 11 and 12, in the case of the initial Loan to be made on the Closing Date, and REF 12, in the case of all other Loans, have been satisfied on the date of such request. 2.02 The Note. - ----------------- The Loans shall be evidenced by a promissory note of the Borrowers in substantially the form of Exhibit D hereto (the "Note"), dated as of the Closing Date and completed with appropriate insertions. The Note shall be payable to the order of the Bank in a principal amount equal to the Line Cap or, if less, the outstanding amount of all Loans, plus interest accrued thereon, as set forth below. The Borrowers irrevocably authorize the Bank to make or cause to be made, at or about the time of the Drawdown Date of any Loan or at the time of receipt of any payment of principal on the Note, an appropriate notation on the Record reflecting the making of such Loan or (as the case may be) the receipt of such payment. The outstanding amount of the Loans set forth on the Record shall be prima facie evidence of the principal amount thereof owing and unpaid to the Bank, but the failure to record, or any error in so recording, any such amount on the Record shall not limit or otherwise affect the obligations of the Borrowers hereunder or under the Note to make payments of principal of or interest on the Note when due. 2.03 Interest on Loans. - -------------------------- a. Except as otherwise provided in REF 5.03, each Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the date of repayment thereof at the rate of 2% per annum above the Prime Rate. Any change in the interest rate resulting from a change in the Prime Rate is to be effective at the beginning of the day of such change. b. The Borrowers jointly and severally promise to pay interest on each Loan in arrears on the 15th day of each calendar month, commencing on January 15, 1997. 2.04 Requests for Loans. - --------------------------- The Borrowers shall give to the Bank written notice (which written notice may be delivered by telecopy) in the form of Exhibit E hereto (or telephonic notice confirmed in a writing in the form of Exhibit E hereto) of each Loan requested hereunder (a "Loan Request") not later than (a) 10:00 a.m. (Boston time) on the proposed Drawdown Date thereof. Each Loan Request shall be irrevocable and binding on the Borrowers and shall obligate the Borrowers to accept the Loan requested from the Bank on the proposed Drawdown Date. Each Loan Request shall be in a minimum aggregate amount of $10,000 or an integral multiple thereof. 2.05 Change in Borrowing Base. - ---------------------------------- The Borrowing Base shall be determined weekly (or at such other interval as may be specified pursuant to REF 8.03(e)) by the Bank by reference to the Borrowing Base Report. 2.06 Unused Availability Fee. - --------------------------------- The Borrowers jointly and severally agree to pay to the Bank an unused availability fee calculated at the rate of 1/2% per annum on the average daily amount during each calendar month or portion thereof from the Closing Date to the Line Termination Date by which the Line Cap exceeds the outstanding amount of Loans during such calendar month. The unused availability fee shall be payable monthly in arrears on the first day of each calendar month for the immediately preceding calendar month commencing on February 1, 1996, with a final payment on the Line Termination Date or any earlier date on which the Loans shall become due and payable in full. 2.07 Origination Fee. - ------------------------ The Borrowers shall pay to the Bank, on or prior to the Closing Date, an origination fee in the amount of $1,000. 3. REPAYMENT OF THE LOANS. - ------------------------- 3.01 Line Termination. - --------------------- The Borrowers jointly and severally promise to pay on the Line Termination Date, and there shall become absolutely due and payable on the Line Termination Date, all of the Loans outstanding on such date, together with any and all accrued and unpaid interest thereon. 3.02 Mandatory Repayments of Loans. - ---------------------------------- If at any time while the Loans are outstanding, the outstanding amount of the Loans, the Maximum Drawing Amount and all Unpaid Reimbursement Obligations exceeds the lesser of (a) the Line Cap and (b) the Borrowing Base, then the Borrowers shall immediately pay the amount of such excess to the Bank for application first, to any Unpaid Reimbursement Obligations; second, to the Loans; and third, to provide the Bank with cash collateral for Reimbursement Obligations as contemplated by REF 4.02(b) and (c). 3.03 Automatic Repayment of Loans. - --------------------------------- At such times as the Bank may determine, the Bank, by charging the Concentration Account, shall apply the unrestricted collateral balances in the Concentration Account (subject to final payment in cash of all items theretofore credited to the Concentration Account) to the outstanding Loans. The Bank shall provide the Borrowers with prompt notice of each such charge and application. To the extent that, after such application, there are no Loans outstanding, the Bank shall, at the Borrowers request, transfer the unrestricted collected balances in the Concentration Account to the Borrowers operating accounts with the Bank. 3.04 Optional Repayments of Loans. - --------------------------------- The Borrowers shall have the right, at their election, to repay the outstanding amount of the Loans, as a whole or in part, at any time without penalty or premium. Each such partial prepayment of the Loans shall be in an integral multiple of $10,000 and shall be accompanied by the payment of accrued interest on the principal prepaid to the date of prepayment. 4. LETTERS OF CREDIT. - -------------------- 4.01 Letter of Credit Commitments. - --------------------------------- a. Subject to the terms and conditions hereof and the execution and delivery by the Borrowers of a letter of credit application on the Bank s customary form (a "Letter of Credit Application"), the Bank, in reliance upon the representations and warranties of the Borrowers contained herein, agrees to issue, extend and renew for the account of the Borrowers one or more standby or documentary letters of credit (individually, a "Letter of Credit"), in such form as may be requested from time to time by the Borrowers and agreed to by the Bank; provided, however, that, after giving effect to such request, (i) the sum of the aggregate Maximum Drawing Amount and all Unpaid Reimbursement Obligations shall not exceed $100,000 at any one time and (ii) the sum of (A) the Maximum Drawing Amount on all Letters of Credit, (B) all Unpaid Reimbursement Obligations, and (C) the amount of all Loans outstanding shall not exceed the lesser of (1) the Line Cap and (2) the Borrowing Base. b. Each Letter of Credit Application shall be completed to the satisfaction of the Bank. In the event that any provision of any Letter of Credit Application shall be inconsistent with any provision of this Credit Agreement, then the provisions of this Credit Agreement shall, to the extent of any such inconsistency, govern. c. Each Letter of Credit issued, extended or renewed hereunder shall, among other things, (i) provide for the payment of sight drafts for honor thereunder when presented in accordance with the terms thereof and when accompanied by the documents described therein, and (ii) have an expiry date no later than the date that is 14 days (or, if the beneficiary is located outside of the United States of America, 45 days) prior to the Line Termination Date. Each Letter of Credit so issued, extended or renewed shall be subject to the Uniform Customs. 4.02 Reimbursement Obligation of the Borrowers. - ---------------------------------------------- In order to induce the Bank to issue, extend and renew each Letter of Credit, the Borrowers hereby agree, jointly and severally, to reimburse or pay to the Bank, with respect to each Letter of Credit issued, extended or renewed by the Bank hereunder, except as otherwise expressly provided in REF 4.02(b) and (c), on each date that any draft presented under such Letter of Credit is honored by the Bank, or the Bank otherwise makes a payment with respect thereto, (i) the amount paid by the Bank under or with respect to such Letter of Credit, and (ii) the amount of any taxes, fees, charges or other costs and expenses whatsoever incurred by the Bank in connection with any payment made by the Bank under, or with respect to, such Letter of Credit, b. upon the reduction (but not termination) of the Line Cap to an amount less than the Maximum Drawing Amount, an amount equal to such difference, which amount shall be held by the Bank as cash collateral for all Reimbursement Obligations, and c. upon the termination of the Line Cap, or the acceleration of the Reimbursement Obligations with respect to all Letters of Credit in accordance with REF 13, an amount equal to the then Maximum Drawing Amount on all Letters of Credit, which amount shall be held by the Bank as cash collateral for all Reimbursement Obligations. Each such payment shall be made to the Bank at the Bank s Head Office in immediately available funds. Interest on any and all amounts remaining unpaid by the Borrower under this REF 4.02 at any time from the date such amounts become due and payable (whether as stated in this REF 4.02, by acceleration or otherwise) until payment in full (whether before or after judgment) shall be payable to the Bank on demand at the rate specified in REF 5.03 for overdue principal on the Loans. 4.03 Letter of Credit Payments. - ------------------------------ If any draft shall be presented or other demand for payment shall be made under any Letter of Credit, the Bank shall notify the Borrowers of the date and amount of the draft presented or demand for payment and of the date and time when it expects to pay such draft or honor such demand for payment. The responsibility of the Bank to the Borrowers shall be only to determine that the documents (including each draft) delivered under each Letter of Credit in connection with such presentment shall be in conformity in all material respects with such Letter of Credit. 4.04 Obligations Absolute. - ------------------------- The Borrowers obligations under this REF 4 shall be absolute and unconditional under any and all circumstances and irrespective of the occurrence of any Default or Event of Default or any condition precedent whatsoever or any setoff, counterclaim or defense to payment that the Borrowers may have or have had against the Bank or any beneficiary of a Letter of Credit. The Borrowers further agree with the Bank that the Bank shall not be responsible for, and the Borrowers Reimbursement Obligations under REF 4.02 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among the Borrowers, the beneficiary of any Letter of Credit or any financing institution or other party to which any Letter of Credit may be transferred or any claims or defenses whatsoever of the Borrowers against the beneficiary of any Letter of Credit or any such transferee. The Bank shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit. The Borrowers agree that any action taken or omitted by the Bank under or in connection with each Letter of Credit and the related drafts and documents, if done in good faith, shall be binding upon the Borrowers and shall not result in any liability on the part of the Bank to the Borrowers. 4.05 Reliance by Issuer. - ----------------------- To the extent not inconsistent with REF 4.04, the Bank shall be entitled to rely, and shall be fully protected in relying upon, any Letter of Credit, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel, independent accountants and other experts selected by the Bank. 4.06 Letter of Credit Fee. - ------------------------- The Borrowers shall, on the date of issuance or any extension or renewal of any Letter of Credit and at such other time or times as such charges are customarily made by the Bank, pay a fee (in each case, a "Letter of Credit Fee") to the Bank in respect of each Letter of Credit at the rate set forth in the Bank s standard rate sheet as in effect at the time or such issuance, extension or renewal. 5. CERTAIN GENERAL PROVISIONS. 5.01 Funds for Payments. - ----------------------- a. All payments of principal, interest, Reimbursement Obligations and any other amounts due hereunder or under any of the other Loan Documents shall be made to the Bank at the Bank s Head Office or at such other location that the Bank may from time to time designate, in each case in immediately available funds. The Borrowers shall enter into such arrangements as are necessary to permit the Bank to deduct such payments automatically from the Borrowers deposit accounts with the Bank. b. All payments by the Borrowers hereunder and under any of the other Loan Documents shall be made without setoff or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory loans, restrictions or conditions of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless the Borrowers are compelled by law to make such deduction or withholding. If any such obligation is imposed upon the Borrowers with respect to any amount payable by it hereunder or under any of the other Loan Documents, the Borrowers will pay to the Bank, on the date on which such amount is due and payable hereunder or under such other Loan Document, such additional amount in Dollars as shall be necessary to enable the Bank to receive the same net amount that the Bank would have received on such due date had no such obligation been imposed upon the Borrowers. The Borrowers will deliver promptly to the Bank certificates or other valid vouchers for all taxes or other charges deducted from or paid with respect to payments made by the Borrowers hereunder or under such other Loan Document. 5.02 Computations. - ----------------- All computations of interest on the Loans shall be based on a 360-day year and paid for the actual number of days elapsed. Whenever a payment hereunder or under any of the other Loan Documents becomes due on a day that is not a Business Day, the due date for such payment shall be the immediately preceding Business Day. The outstanding amount of the Loans as reflected on the Record from time to time shall be considered correct and binding on the Borrowers unless within five Business Days after receipt of any notice by the Bank of such outstanding amount, the Bank shall notify the Borrowers to the contrary. 5.03 Late Fee; Interest after Default. - ------------------------------------- If any payment hereunder or under any of the other Loan Documents shall not be paid within 15 days of the due date thereof, there shall immediately become due and payable a late payment fee in the amount of 5% of the amount so overdue. During the continuance of any Default or Event of Default, the Loans shall bear interest at a rate equal to 2% above the rate that would otherwise be applicable pursuant to REF 2.03. 6. COLLATERAL SECURITY. - ---------------------- a. The Obligations shall be secured by a perfected first-priority security interest (subject only to Permitted Liens entitled to priority under applicable law) in all of the assets of the Borrowers, whether now owned or hereafter acquired, pursuant to the terms of the Security Agreement. b. On or prior to the Closing Date, the Borrowers shall execute and deliver a duly completed Assignment of Monies with respect to each U.S. Government Contract, except for any such contract containing specific provisions that prohibit contract award disclosure. 7. REPRESENTATIONS AND WARRANTIES. - --------------------------------- The Borrowers represent and warrant to the Bank as follows: 7.01 Corporate Authority. - ------------------------ a. Incorporation; Good Standing. CompuDyne (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada, (ii) has all requisite corporate power to own its property and conduct its business as now conducted and as currently contemplated, and (iii) is in good standing as a foreign corporation and is duly authorized to do business in the State of Connecticut and in each other jurisdiction where such qualification is necessary, except where a failure to be so qualified would not have a materially adverse effect on the business, assets or financial condition of CompuDyne. Quanta (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Connecticut, (ii) has all requisite corporate power to own its property and conduct its business as now conducted and as currently contemplated, and (iii) is in good standing as a foreign corporation and is duly authorized to do business in the State of Maryland and in each other jurisdiction where such qualification is necessary, except where a failure to be so qualified would not have a materially adverse effect on the business, assets or financial condition of Quanta. MicroAssembly (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Connecticut, (ii) has all requisite corporate power to own its property and conduct its business as now conducted and as currently contemplated, and (iii) is in good standing as a foreign corporation and is duly authorized to do business in each jurisdiction where such qualification is necessary, except where a failure to be so qualified would not have a materially adverse effect on the business, assets or financial condition of MicroAssembly. SecurSystems (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland, (ii) has all requisite corporate power to own its property and conduct its business as now conducted and as currently contemplated, and (iii) is in good standing as a foreign corporation and is duly authorized to do business in each jurisdiction where such qualification is necessary, except where a failure to be so qualified would not have a materially adverse effect on the business, assets or financial condition of SecurSystems. b. Authorization. The execution, delivery and performance of this Credit Agreement and the other Loan Documents to which any Borrower is or is to become a party and the transactions contemplated hereby and thereby (i) are within the corporate authority of such Borrower, (ii) have been duly authorized by all necessary corporate proceedings, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which such Borrower is subject or any judgment, order, writ, injunction, license or permit applicable to such Borrower and (iv) do not conflict with any provision of the corporate charter or bylaws of, or any agreement or other instrument binding upon, such Borrower. c. Enforceability. The execution and delivery of this Credit Agreement and the other Loan Documents to which any Borrower is or is to become a party will result in valid and legally binding obligations of such Borrower enforceable against it in accordance with the respective terms and provisions hereof and thereof, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. 7.02 Governmental Approvals. - --------------------------- The execution, delivery and performance by the Borrowers of this Credit Agreement and the other Loan Documents to which any Borrower is or is to become a party and the transactions contemplated hereby and thereby do not require the approval or consent of, or filing with, any governmental agency or authority other than those already obtained. 7.03 Title to Properties; Leases. - -------------------------------- Except as indicated on Schedule 7.03 hereto, the Borrowers own all of the assets reflected in the balance sheet of the Borrowers as at the Balance Sheet Date or acquired since that date (except property and assets sold or otherwise disposed of in the ordinary course of business since that date), subject to no rights of others, including any mortgages, leases, conditional sales agreements, title retention agreements, liens or other encumbrances except Permitted Liens. 7.04 Financial Statements. - ------------------------- There has been furnished to the Bank a balance sheet of the Borrowers as at the Balance Sheet Date, and a statement of income of the Borrowers for the fiscal period then ended. Such balance sheet and statement of income have been prepared in accordance with generally accepted accounting principles and fairly present the financial condition of the Borrowers as at the close of business on the date thereof and the results of operations for the fiscal period then ended. There are no contingent liabilities of the Borrowers as of such date involving material amounts, known to the officers of the Borrowers, that were not disclosed in such balance sheet and the notes related thereto. 7.05 No Material Changes, Etc. - ----------------------------- Since the Balance Sheet Date there has occurred no materially adverse change in the financial condition or business of any Borrower as shown on or reflected in the balance sheet of the Borrowers as at the Balance Sheet Date, or the statement of income for the fiscal year then ended, other than changes in the ordinary course of business that have not had any materially adverse effect either individually or in the aggregate on the business or financial condition of any Borrower. Since the Balance Sheet Date, no Borrower has made any Distribution. 7.06 Franchises, Patents, Copyrights, Etc. - ----------------------------------------- Each Borrower possesses all franchises, patents, copyrights, trademarks, trade names, licenses and permits, and rights in respect of the foregoing, adequate for the conduct of its business substantially as now conducted without known conflict with any rights of others. 7.07 Litigation. - --------------- Except as set forth in Schedule REF 7.07 hereto, there are no actions, suits, proceedings or investigations of any kind pending or threatened against any Borrower before any court, tribunal or administrative agency or board that, if adversely determined, might, either in any case or in the aggregate, materially adversely affect the properties, assets, financial condition or business of any Borrower or materially impair the right of such Borrower, considered as a whole, to carry on business substantially as now conducted by, or result in any substantial liability not adequately covered by insurance, or for which adequate reserves are not maintained on the balance sheet of the Borrowers, or that question the validity of this Credit Agreement or any of the other Loan Documents, or any action taken or to be taken pursuant hereto or thereto. 7.08 No Materially Adverse Contracts, Etc. - ----------------------------------------- No Borrower is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation that has or is expected in the future to have a materially adverse effect on the business, assets or financial condition of such Borrower. No Borrower is a party to any contract or agreement that has or is expected, in the judgment of such Borrower s officers, to have any materially adverse effect on the business of such Borrower. 7.09 Compliance With Other Instruments, Laws, Etc. - ------------------------------------------------- No Borrower is in violation of any provision of its charter documents, bylaws, or any agreement or instrument to which it may be subject or by which it or any of its properties may be bound or any decree, order, judgment, statute, license, rule or regulation, in any of the foregoing cases in a manner that could result in the imposition of substantial penalties or materially and adversely affect the financial condition, properties or business of such Borrower. 7.10 Tax Status. - --------------- Each Borrower has (a) made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject, (b) paid all taxes and other governmental assessments and charges shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and by appropriate proceedings and (c) set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Borrowers know of no basis for any such claim. 7.11 No Event of Default. - ------------------------ No Default or Event of Default has occurred and is continuing. 7.12 Holding Company and Investment Company Acts. - ------------------------------------------------ No Borrower is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935; nor is any Borrower an "investment company", or an "affiliated company" or a "principal underwriter" of an "investment company", as such terms are defined in the Investment Company Act of 1940. 7.13 Absence of Financing Statements, Etc. - ----------------------------------------- Except with respect to Permitted Liens, there is no financing statement, security agreement, chattel mortgage, real estate mortgage or other document filed or recorded with any filing records, registry or other public office, that purports to cover, affect or give notice of any present or possible future lien on, or security interest in, any assets or property of any Borrower or any rights relating thereto. 7.14 Perfection of Security Interest. - ------------------------------------ All filings, assignments, pledges and deposits of documents or instruments have been made and all other actions have been taken that are necessary or advisable, under applicable law, to establish and perfect the Bank s security interest in the Collateral. The Collateral and the Bank s rights with respect to the Collateral are not subject to any setoff, claims, withholdings or other defenses. The Borrowers are the owners of the Collateral free from any lien, security interest, encumbrance and any other claim or demand, except for Permitted Liens. 7.15 Certain Transactions. - ------------------------- None of the officers, directors, or employees of any Borrower is currently a party to any transaction with any Borrower (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of any Borrower, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. 7.16 ERISA Compliance. - --------------------- Each Borrower has complied in all material respects with ERISA, including the provisions thereof respecting funding requirements for, and the termination of, plans and respecting prohibited transactions thereunder, and the funding of any Guaranteed Pension Plan complies with the minimum funding standards of Section 412 of the Internal Revenue Code. Except as set forth on Schedule 7.16 hereto, the current value of all accrued benefits under each of such plans did not, as of the latest valuation date, exceed the then current value of the assets of such plans allocable to such accrued benefits based upon the actuarial methods and assumptions used for such plans. 7.17 Regulations U and X. - ------------------------ The proceeds of the Loans shall be used for working capital and general corporate purposes. No portion of any Loan is to be used for the purpose of purchasing or carrying any "margin security" or "margin stock" as such terms are used in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224. 7.18 Environmental Compliance. - ----------------------------- a. No Borrower is in violation of any judgment, decree, order, law, license, rule or regulation pertaining to environmental matters, including those arising under the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Toxic Substances Control Act or any state or local statute, regulation, ordinance, order or decree relating to health, safety or the environment (collectively, "Environmental Laws"), which violation would have a materially adverse effect on the business, assets or financial condition of any Borrower, except as disclosed on Schedule 7.18 hereto. b. No Borrower has received notice that it has been identified by the United States Environmental Protection Agency as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B (1986), nor has any Borrower received any notification that any hazardous waste, as defined by 42 U.S.C. REF 6903(5), any hazardous substances, as defined by 42 U.S.C. REF 9601(14), any "pollutant or contaminant", as defined by 42 U.S.C. REF 9601(33), or any toxic substance, hazardous materials, oil or other chemicals or substances regulated by any Environmental Laws (collectively, Hazardous Substances ) that it has disposed of has been found at any site at which a federal or state agency has conducted or is conducting a remedial investigation or other action pursuant to any Environmental Law except as disclosed on Schedule 7.18 hereto. 7.19 Subsidiaries. - ----------------- Attached hereto as Schedule 7.19 is a complete and accurate list of all Subsidiaries of any of the Borrowers. 7.20 Government Contracts. - ------------------------- Attached hereto as Schedule 7.20 is a true, correct and complete list of all U.S. Government Contracts. 8. AFFIRMATIVE COVENANTS OF THE BORROWERS. The Borrowers covenant and agree that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit or Note is outstanding or the Bank has any obligation to make any Loans or to issue, extend or renew Letters of Credit: 8.01 Maintenance of Office. - -------------------------- Each of CompuDyne and MicroAssembly will maintain its chief executive office in Willimantic, Connecticut, or at such other place in the United States of America as such Borrower shall designate upon written notice to the Bank, where notices, presentations and demands to or upon such Borrower in respect of the Loan Documents to which such Borrower is a party may be given or made. Quanta will maintain its chief executive office in Gaithersburg, Maryland, or at such other place in the United States of America as Quanta shall designate upon written notice to the Bank, where notices, presentations and demands to or upon Quanta in respect of the Loan Documents to which Quanta is a party may be given or made. SecurSystems will maintain its chief executive office in Hanover, Maryland, or at such other place in the United States of America as SecurSystems shall designate upon written notice to the Bank, where notices, presentations and demands to or upon SecurSystems in respect of the Loan Documents to which SecurSystems is a party may be given or made. 8.02 Records and Accounts. Each Borrower will (a) keep true and accurate records and books of account in which full, true and correct entries will be made in accordance with generally accepted accounting principles and (b) maintain adequate accounts and reserves for all taxes (including income taxes), depreciation, depletion, obsolescence and amortization of its properties, contingencies and other reserves. 8.03 Financial Statements, Certificates and Information. The Borrowers will deliver to the Bank: a. as soon as practicable, but in any event not later than 90 days after the end of each fiscal year of CompuDyne, the consolidated and consolidating balance sheets of CompuDyne and its Subsidiaries as at the end of such year, and the related consolidated and consolidating statements of income and statements of cash flow for such year, each setting forth in comparative form the figures for the previous fiscal year and all such statements to be in reasonable detail, prepared in accordance with generally accepted accounting principles, and certified without qualification by Deloitte & Touche or by other independent certified public accountants satisfactory to the Bank, together with a written statement from such accountants to the effect that they have read a copy of this Credit Agreement, and that, in making the examination necessary to such certification, they have obtained no knowledge of any Default or Event of Default or, if such accountants shall have obtained knowledge of any then existing Default or Event of Default, they shall disclose in such statement any such Default or Event of Default; provided that such accountants shall not be liable to the Bank for failure to obtain knowledge of any Default or Event of Default; b. as soon as practicable, but in any event not later than 45 days after the end of each of the fiscal quarters of CompuDyne, copies of the unaudited consolidated and consolidating balance sheets of CompuDyne and its Subsidiaries as at the end of such quarter, and the related consolidated and consolidating statements of income and statements of cash flow for the portion of CompuDyne s fiscal year then elapsed, all in reasonable detail and prepared in accordance with generally accepted accounting principles, together with a certification by the principal financial or accounting officer of CompuDyne that the information contained in such financial statements fairly presents the financial position of CompuDyne on the date thereof (subject to year-end adjustments); c. simultaneously with the delivery of the financial statements referred to in subsections (a) and (b) above, CompuDyne s 10-K or 10-Q report, as the case may be, together with a statement certified by the principal financial or accounting officer of CompuDyne in substantially the form of Exhibit F hereto and setting forth in reasonable detail computations evidencing compliance with the covenants contained in REF 10 and (if applicable) reconciliations to reflect changes in generally accepted accounting principles since the Balance Sheet Date; d. contemporaneously with the mailing thereof, copies of all material of a financial nature sent to the stockholders of any Borrower; e. on Tuesday of each week or at such earlier time as the Bank may reasonably request, a Borrowing Base Report setting forth the Borrowing Base as at the end of the immediately preceding week or other date so requested by the Bank, signed by the Chief Financial Officer of each of the Borrowers; f. within 15 days after the end of each calendar month, an Accounts Receivable and accounts payable aging report; g. contemporaneously with the filing thereof, true, correct and complete copies of each Borrower s federal and state income tax returns h. from time to time such other financial data and information (including accountants management letters) as the Bank may reasonably request. 8.04 Notices. - ------------ a. Defaults. The Borrowers will promptly notify the Bank in writing of the occurrence of any Default or Event of Default. If any Person shall give any notice or take any other action in respect of a claimed default (whether or not constituting an Event of Default) under this Credit Agreement or any other note, evidence of indebtedness, indenture or other obligation to which or with respect to which any Borrower is a party or obligor, whether as principal, guarantor, surety or otherwise, the Borrowers shall forthwith give written notice thereof to the Bank describing the notice or action and the nature of the claimed default. b. Environmental Events. The Borrowers will promptly give notice to the Bank (i) of any violation of any Environmental Law that any Borrower reports in writing or is reportable by such Person in writing (or for which any written report supplemental to any oral report is made) to any federal, state or local environmental agency and (ii) upon becoming aware thereof, of any inquiry, proceeding, investigation, or other action, including a notice from any agency of potential environmental liability, or any federal, state or local environmental agency or board, that has the potential materially to affect the assets, liabilities, financial condition or operations of any Borrower, or the Bank s security interests pursuant to the Security Documents. c. Notification of Claims against Collateral. The Borrowers will, immediately upon becoming aware thereof, notify the Bank in writing of any setoff, claims, withholdings or other defenses to which any of the Collateral, or the Bank s rights with respect to the Collateral, are subject. d. Notice of Litigation and Judgments. The Borrowers will give notice to the Bank in writing within 15 days of becoming aware of any litigation or proceedings threatened in writing or any pending litigation and proceedings affecting any Borrower or to which any Borrower is or becomes a party involving an uninsured claim against such Borrower that could reasonably be expected to have a materially adverse effect on such Borrower and stating the nature and status of such litigation or proceedings. The Borrowers will give notice to the Bank in writing, in form and detail satisfactory to the Bank, within ten days of any judgment not covered by insurance, final or otherwise, against any Borrower in an amount in excess of $10,000. 8.05 Corporate Existence; Maintenance of Properties. Each Borrower will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights and franchises. Each Borrower will (a) cause all of its properties used or useful in the conduct of its business to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment, (b) cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in such Borrower s judgment may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times, and (c) continue to engage primarily in the businesses now conducted by it and in related businesses; provided that nothing in this REF 8.05 shall prevent any Borrower from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the judgment of such Borrower, desirable in the conduct of its business and that do not in the aggregate materially adversely affect the business of such Borrower. 8.06 Insurance. Each Borrower will maintain with financially sound and reputable insurers insurance with respect to its properties and business against such casualties and contingencies as shall be in accordance with the general practices of businesses engaged in similar activities in similar geographic areas and in amounts, containing such terms, in such forms and for such periods as may be reasonable and prudent and in accordance with the terms of the Security Agreement. 8.07 Taxes. Each Borrower will duly pay and discharge, or cause to be paid and discharged, before the same shall become overdue, all taxes, assessments and other governmental charges imposed upon it and its real properties, sales and activities, or any part thereof, or upon the income or profits therefrom, as well as all claims for labor, materials, or supplies that if unpaid might by law become a lien or charge upon any of its property; provided that any such tax, assessment, charge, levy or claim need not be paid if the validity or amount thereof shall currently be contested in good faith by appropriate proceedings and if such Borrower shall have set aside on its books adequate reserves with respect thereto; and provided further that the Borrowers will pay all such taxes, assessments, charges, levies or claims forthwith upon the commencement of proceedings to foreclose any lien that may have attached as security therefor. 8.08 Inspection of Properties and Books. Each Borrower, at its own expense, shall permit the Bank, through its designated representatives, to visit and inspect any of the properties of such Borrower, to examine the books of account of such Borrower (and to make copies thereof and extracts therefrom), and to discuss the affairs, finances and accounts of such Borrower with, and to be advised as to the same by, its officers, all at such reasonable times and intervals as the Bank may reasonably request. 8.09 Compliance with Laws, Contracts, Licenses and Permits. Each Borrower will comply with (a) all applicable laws and regulations wherever its business is conducted, including all Environmental Laws, (b) the provisions of its charter documents and bylaws, (c) all agreements and instruments by which it or any of its properties may be bound and (d) all applicable decrees, orders and judgments. If any authorization, consent, approval, permit or license from any officer, agency or instrumentality of any government shall become necessary or required in order that any Borrower may fulfill any of its obligations hereunder or any of the other Loan Documents to which such Borrower is a party, such Borrower will immediately take or cause to be taken all reasonable steps within the power of such Borrower to obtain such authorization, consent, approval, permit or license and furnish the Bank with evidence thereof. 8.10 Pension Plans. Each Borrower shall: a. fund each pension plan as required by Section 412 of the Code; b. furnish to the Bank a copy of any actuarial statement related to any pension plan required to be submitted under REF 103(d) of ERISA, no later than the date on which such statement is submitted to the Department of Labor or the Internal Revenue Service; c. furnish to the Bank forthwith a copy of (i) any notice of a pension plan termination sent to the Pension Benefit Guaranty Corporation under REF 4041(a) of ERISA and (ii) any notice, report or demand sent or received by a pension plan under REFS 4041, 4042, 4043, 4063, 4065, 4066 or 4068 of ERISA; and d. furnish to the Bank a copy of any request for waiver from the funding standards or extension of the amortization periods required by Section 412 of the Code no later than the date on which the request is submitted to the Department of Labor or the Internal Revenue Service, as the case may be. 8.11 Use of Proceeds. The Borrowers will use the proceeds of the Loans solely for working capital purposes. 8.12 Assignment of U.S. Government Contracts. The Borrowers shall execute and deliver to the Bank a duly completed Assignment of Monies with respect to each U.S. Government Contract. With respect to U.S. Government Contracts entered into subsequent to the Closing Date, such Assignment of Monies shall be furnished contemporaneously with the execution thereof. Notwithstanding the foregoing, the Borrowers shall not be required to deliver an Assignment of Monies with respect to any U.S. Government Contract containing specific provisions that prohibit contract award disclosure. The Bank shall not deliver any Assignment of Monies to the relevant governmental agency except during the continuance of an Event of Default. 8.13 Depository Accounts. Each Borrower shall maintain its primary depository accounts with the Bank. In addition, the Borrowers shall open an account or accounts (the "Concentration Account") with the Bank for deposits of proceeds of Accounts Receivable. The Borrowers shall make such arrangements as are satisfactory to the Bank to provide that the proceeds of all Accounts Receivable are deposited directly into the Concentration Account. Such deposits shall be made by ACH or direct wire transfer to the Concentration Account whenever reasonably practicable. The Borrowers shall have no right to withdraw any funds from the Concentration Account except as provided in REF 3.03. 8.14 Further Assurances. Each Borrower will cooperate with the Bank and execute such further instruments and documents as the Bank shall reasonably request to carry out to its satisfaction the transactions contemplated by this Credit Agreement and the other Loan Documents. 9 CERTAIN NEGATIVE COVENANTS OF THE BORROWERS. - --------------------------------------------- The Borrowers covenant and agree that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit or Note is outstanding or the Bank has any obligation to make any Loans or to issue, extend or renew Letters of Credit: 9.01 Restrictions on Indebtedness. No Borrower will create, incur, assume, guarantee or be or remain liable, contingently or otherwise, with respect to any Indebtedness other than: a. Indebtedness to the Bank arising under any of the Loan Documents; b. current liabilities of such Borrower incurred in the ordinary course of business and not incurred through (i) the borrowing of money or (ii) the obtaining of credit except for credit on an open account basis customarily extended and in fact extended in connection with normal purchases of goods and services; c. Indebtedness in respect of taxes, assessments, governmental charges or levies and claims for labor, materials and supplies to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of REF 8.07; d. Indebtedness in respect of judgments or awards that have been in force for less than the applicable period for taking an appeal so long as execution is not levied thereunder or in respect of which such Borrower shall at the time in good faith be prosecuting an appeal or proceedings for review and in respect of which a stay of execution shall have been obtained and be in effect pending such appeal or review; e. endorsements for collection, deposit or negotiation and warranties of products or services, in each case incurred in the ordinary course of business; f. loans from shareholders of CompuDyne, to the extent the same are subordinated to the Obligations pursuant to the Subordination Agreement, and other Subordinated Debt; g. Indebtedness incurred in connection with the acquisition after the date hereof of any real or personal property by such Borrower, provided that the aggregate principal amount of such Indebtedness of the Borrowers shall not exceed the aggregate amount of $100,000 at any one time; h. Indebtedness existing on the date hereof and listed and described on Schedule 9.01 hereto; and i. contingent Indebtedness incurred by any Borrower in connection with the execution of any one or more Surety Agreements. 9.02 Restrictions on Liens. No Borrower will (a) create or incur or suffer to be created or incurred or to exist any lien, encumbrance, mortgage, pledge, charge, restriction or other security interest of any kind upon any of its property or assets of any character, whether now owned or hereafter acquired, or upon the income or profits therefrom; (b) transfer any of such property or assets or the income or profits therefrom for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to payment of its general creditors; (c) acquire, or agree or have an option to acquire, any property or assets upon conditional sale or other title retention or purchase money security agreement, device or arrangement; (d) suffer to exist for a period of more than 30 days after the same shall have been incurred any Indebtedness or claim or demand against it that if unpaid might by law or upon bankruptcy or insolvency, or otherwise, be given any priority whatsoever over its general creditors; or (e) sell, assign, pledge or otherwise transfer any accounts, contract rights, general intangibles, chattel paper or instruments, with or without recourse; provided that any Borrower may create or incur or suffer to be created or incurred or to exist: i. liens to secure taxes, assessments and other government charges or claims for labor, material or supplies in respect of obligations not overdue; ii. deposits or pledges made in connection with, or to secure payment of, workmen s compensation, unemployment insurance, old age pensions or other social security obligations; iii. liens in respect of judgments or awards, the Indebtedness with respect to which is permitted by REF 9.01(d); iv. liens of carriers, warehousemen, mechanics and materialmen, and other like liens, in existence less than 120 days from the date of creation thereof in respect of obligations not overdue; v. encumbrances consisting of easements, rights of way, zoning restrictions, restrictions on the use of real property and defects and irregularities in the title thereto, landlord s or lessor s liens under leases to which such Borrower is a party, and other minor liens or encumbrances none of which in the opinion of such Borrower interferes materially with the use of the property affected in the ordinary conduct of the business of such Borrower, which defects do not individually or in the aggregate have a materially adverse effect on the business of such Borrower; vi. liens existing on the date hereof and listed on Schedule 9.02 hereto; vii. purchase money security interests in or purchase money mortgages on real or personal property acquired after the date hereof to secure purchase money Indebtedness of the type and amount permitted by REF 9.01(g), incurred in connection with the acquisition of such property, which security interests or mortgages cover only the real or personal property so acquired; viii. liens in favor of the Bank under the Loan Documents; ix. liens securing Subordinated Debt; and x. unperfected security interests in favor of one or more sureties and created in connection with the execution of Surety Agreements by any one or more Borrowers. 9.03 Restrictions on Investments. No Borrower will make or permit to exist or to remain outstanding any Investment except Investments in: a. marketable direct or guaranteed obligations of the United States of America that mature within one year from the date of purchase by such Borrower; b. demand deposits, certificates of deposit, bankers acceptances and time deposits of the Bank or, to the extent the same are fully insured by the Federal Deposit Insurance Corporation, of other United States banks; c. securities commonly known as "commercial paper" issued by a corporation organized and existing under the laws of the United States of America or any state thereof that at the time of purchase have been rated and the ratings for which are not less than "P 1" if rated by Moody s Investors Services, Inc., and not less than "A 1" if rated by Standard and Poor s; and d. common stock issued by a corporation organized and existing under the laws of the United States of America or any state thereof, provided, no such common stock shall constitute margin stock as such term is used in Regulation U of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 221, and provided further that the aggregate outstanding dollar amount of all such common stock shall not exceed $50,000 at any time. 9.04 Distributions. CompuDyne will not make any Distributions; provided, however, that so long as no Default or Event of Default shall have occurred and be continuing, or shall occur as a result thereof, CompuDyne may pay dividends on the preferred stock described on Schedule 9.04 hereto at a rate not in excess of the rate set forth on Schedule 9.04. 9.05 Merger and Consolidation. No Borrower will become a party to any merger or consolidation, or agree to or effect any asset acquisition, stock acquisition or disposition of assets (other than the acquisition and disposition of assets in the ordinary course of business consistent with past practices). 9.06 Sale and Leaseback. No Borrower will enter into any arrangement, directly or indirectly, whereby such Borrower shall sell or transfer any property owned by it in order then or thereafter to lease such property or lease other property that such Borrower intends to use for substantially the same purpose as the property being sold or transferred. 9.07 Subordinated Debt. No Borrower will amend, supplement or otherwise modify the terms of any of the Subordinated Debt or prepay, redeem or repurchase any of the Subordinated Debt. 10 FINANCIAL COVENANTS OF THE BORROWERS. - ---------------------------------------- The Borrowers covenant and agree that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit or Note is outstanding or the Bank has any obligation to make any Loans or to issue, extend or renew Letters of Credit: 10.01 Debt Service. The Borrowers will not permit the ratio of Consolidated Cash Flow for any fiscal quarter of CompuDyne ending on or after December 31, 1996, to Consolidated Financial Obligations as determined for such fiscal quarter, to be less than 1.1:1.0. 10.02 Current Ratio. The Borrowers will not permit the ratio of Current Assets to Current Liabilities to be less than 1.0:1.0 at any time. 11 CLOSING CONDITIONS. - --------------------- The obligation of the Bank to make the initial Loan and to issue any initial Letters of Credit shall be subject to the satisfaction of the following conditions precedent on or prior to December ___, 1996: 11.01 Loan Documents. Each of the Loan Documents shall have been duly executed and delivered by the respective parties thereto, shall be in full force and effect and shall be in form and substance satisfactory to the Bank. The Bank shall have received a fully executed copy of each such document. 11.02 Certified Copies of Charter Documents. The Bank shall have received from each Borrower a copy, certified by a duly authorized officer of such Borrower to be true and complete on the Closing Date, of each of (a) its charter or other incorporation documents as in effect on such date of certification, and (b) its by-laws as in effect on such date. 11.03 Corporate Action. All corporate action necessary for the valid execution, delivery and performance by each Borrower of this Credit Agreement and the other Loan Documents to which such Borrower is or is to become a party shall have been duly and effectively taken, and evidence thereof satisfactory to the Bank shall have been provided to the Bank. 11.04 Incumbency Certificate. The Bank shall have received from each Borrower an incumbency certificate, dated as of the Closing Date, signed by a duly authorized officer of such Borrower, and giving the name and bearing a specimen signature of each individual who shall be authorized: (a) to sign, in the name and on behalf of such Borrower, each of the Loan Documents to which such Borrower is or is to become a party; (b) to make Loan Requests; and (c) to give notices and to take other action on its behalf under the Loan Documents. 11.05 Validity of Liens. The Security Agreement shall be effective to create in favor of the Bank a legal, valid and enforceable first (except for Permitted Liens entitled to priority under applicable law) security interest in and lien upon the Collateral. All filings, recordings, deliveries of instruments and other actions necessary or desirable in the opinion of the Bank to protect and preserve such security interests shall have been duly effected. The Bank shall have received evidence thereof in form and substance satisfactory to the Bank. 11.06 Perfection Certificates and UCC Search Results. The Bank shall have received from each Borrower a completed and fully executed Perfection Certificate and the results of Uniform Commercial Code searches with respect to the Collateral, indicating no liens other than Permitted Liens and otherwise in form and substance satisfactory to the Bank. 11.07 Certificates of Insurance. The Bank shall have received a certificate of insurance from an independent insurance broker as of dated the Closing Date, identifying insurers, types of insurance, insurance limits, and policy terms, and otherwise describing all liability insurance, as well as the insurance obtained in accordance with the provisions of the Security Agreement. 11.08 Borrowing Base Report. The Bank shall have received from the Borrowers the initial Borrowing Base Report dated as of the Closing Date. 11.09 Accounts Receivable Aging Report. The Bank shall have received from the Borrowers the most recent Accounts Receivable aging report of the Borrowers dated as of a date no more than 15 days prior to the Closing Date and the Borrowers shall have notified the Bank in writing on the Closing Date of any material deviation from the Accounts Receivable values reflected in such Accounts Receivable aging report and shall have provided the Bank with such supplementary documentation as the Bank may reasonably request. 11.10 Opinions of Counsel. The Bank shall have received a favorable legal opinion addressed to the Bank, dated as of the Closing Date, in form and substance satisfactory to the Bank, from Tyler Cooper & Alcorn, counsel to the Borrowers, and from ________________, local Nevada counsel to CompuDyne. 11.11 Origination Fee. The Borrowers shall have paid to the Bank the fee described in REF 2.07 12 CONDITIONS TO ALL BORROWINGS. - ------------------------------- The obligations of the Bank to make any Loan and to issue, extend or renew any Letter of Credit, including the initial Loan and any initial Letters of Credit, in each case whether on or after the Closing Date, shall also be subject to the satisfaction of the following conditions precedent: 12.01 Representations True; No Event of Default. Each of the representations and warranties of any of the Borrowers contained in this Credit Agreement, the other Loan Documents or in any document or instrument delivered pursuant to or in connection with this Credit Agreement shall be true as of the date as of which they were made and shall also be true at and as of the time of the making of such Loan or the issuance, extension or renewal of such Letter of Credit, with the same effect as if made at and as of that time (except to the extent of changes resulting from transactions contemplated or permitted by this Credit Agreement and the other Loan Documents and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, and to the extent that such representations and warranties relate expressly to an earlier date) and no Default or Event of Default shall have occurred and be continuing. 12.02 No Legal Impediment. No change shall have occurred in any law or regulations thereunder or interpretations thereof that in the reasonable opinion of the Bank would make it illegal for it to make such Loan. 12.03 Governmental Regulations. The Bank shall have received such statements in substance and form reasonably satisfactory to the Bank as it shall require for the purpose of compliance with any applicable regulations of the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation or the Board of Governors of the Federal Reserve System. 12.04 Proceedings and Documents. All proceedings in connection with the transactions contemplated by this Credit Agreement, the other Loan Documents and all other documents incident thereto shall be satisfactory in substance and in form to the Bank and to the Bank s Special Counsel, and the Bank and such counsel shall have received all information and such counterpart originals or certified or other copies of such documents as the Bank may reasonably request. 12.05 Borrowing Base. The Bank shall have received the most recent Borrowing Base Report required to be delivered to the Bank in accordance with REF 8.03(e) and, if requested by the Bank, a Borrowing Base Report dated within five days of the Drawdown Date of such Loan or the date of the issuance, extension or renewal of such Letter of Credit. 13 EVENTS OF DEFAULT; ACCELERATION; ETC. - --------------------------------------- 13.01 Events of Default and Acceleration. If any of the following events ("Events of Default" or, if the giving of notice or the lapse of time or both is required, then, prior to such notice or lapse of time, "Defaults") shall occur: a. the Borrowers shall fail to pay any principal of the Loans or any Reimbursement Obligation when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment; b. the Borrowers shall fail to pay any interest on the Loans or other sums due hereunder or under any of the other Loan Documents within 15 days of the date when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment; c. any Borrower shall fail to comply with any of its covenants contained in REFS. 8.08, 9 or 10; d. any Borrower shall fail to perform any term, covenant or agreement contained herein or in any of the other Loan Documents (other than those specified elsewhere in this REF 13.01) for 30 days after written notice of such failure has been given to the Borrowers by the Bank; e. any representation or warranty of any Borrower in this Credit Agreement or any of the other Loan Documents or in any other document or instrument delivered pursuant to or in connection with this Credit Agreement shall prove to have been false in any material respect upon the date when made or deemed to have been made or repeated; f. any Borrower shall fail to pay at maturity, or within any applicable period of grace, any obligation for borrowed money or credit received or in respect of any Capitalized Leases, or fail to observe or perform any material term, covenant or agreement contained in any agreement by which it is bound, evidencing or securing borrowed money or credit received or in respect of any Capitalized Leases for such period of time as would permit (assuming the giving of appropriate notice if required) the holder or holders thereof or of any obligations issued thereunder to accelerate the maturity thereof; g. any Borrower shall make an assignment for the benefit of creditors, or admit in writing its inability to pay or generally fail to pay its debts as they mature or become due, or shall petition or apply for the appointment of a trustee or other custodian, liquidator or receiver of such Borrower or of any substantial part of the assets of such Borrower or shall commence any case or other proceeding relating to such Borrower under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or shall take any action to authorize or in furtherance of any of the foregoing, or if any such petition or application shall be filed or any such case or other proceeding shall be commenced against any Borrower and such Borrower shall indicate its approval thereof, consent thereto or acquiescence therein; h. a decree or order is entered appointing any such trustee, custodian, liquidator or receiver or adjudicating any Borrower bankrupt or insolvent, or approving a petition in any such case or other proceeding, or a decree or order for relief is entered in respect of any Borrower in an involuntary case under federal bankruptcy laws as now or hereafter constituted; i. there shall remain in force, undischarged, unsatisfied and unstayed, for more than 30 days, whether or not consecutive, any final judgment against any Borrower that, with other outstanding final judgments, undischarged, against the Borrowers exceeds in the aggregate $25,000; j. any Subordinated Debt shall be prepaid, redeemed or repurchased in whole or in part; k. if any of the Loan Documents shall be canceled, terminated, revoked or rescinded otherwise than in accordance with the terms thereof or with the express prior written agreement, consent or approval of the Bank, or any action at law, suit in equity or other legal proceeding to cancel, revoke or rescind any of the Loan Documents shall be commenced by or on behalf of any Borrower or any of its stockholders, or any court or any other governmental or regulatory authority or agency of competent jurisdiction shall make a determination that, or issue a judgment, order, decree or ruling to the effect that, any one or more of the Loan Documents is illegal, invalid or unenforceable in accordance with the terms thereof; or l. any Borrower shall be indicted for a federal crime, a punishment for which could include the forfeiture of any assets of such Borrower included in the Borrowing Base or any assets of such Borrower not included in the Borrowing Base but having a fair market value in excess of $10,000; then, and in any such event, so long as the same may be continuing, the Bank may, by notice in writing to the Borrowers, declare all amounts owing with respect to this Credit Agreement, the Note and the other Loan Documents to be, and they shall thereupon forthwith become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrowers; provided that in the event of any Event of Default specified in REFS. 13.01(g), REF 13.01(h) or REF 13.01(j), all such amounts shall become immediately due and payable automatically and without any requirement of notice from the Bank. 13.02 Termination of Line Cap. If any one or more of the Events of Default specified in REFS. 13.01(g), 13.01(h) or 13.01(j) shall occur, any unused portion of the credit hereunder shall forthwith terminate and the Bank shall be relieved of all further obligations to make Loans to the Borrowers or to issue, extend or renew Letters of Credit. If any other Event of Default shall have occurred and be continuing the Bank may, by notice to the Borrowers, terminate the unused portion of the credit hereunder, and upon such notice being given such unused portion of the credit hereunder shall terminate immediately and the Bank shall be relieved of all further obligations to make Loans or to issue, extend or renew Letters of Credit. No termination of the credit hereunder shall relieve the Borrowers of any of the Obligations. 13.03 Remedies. In case any one or more of the Events of Default shall have occurred and be continuing, and whether or not the Bank shall have accelerated the maturity of the Loans pursuant to REF 13.01, the Bank may proceed to protect and enforce its rights by suit in equity, action at law or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Credit Agreement and the other Loan Documents or any instrument pursuant to which the Obligations to the Bank are evidenced, including as permitted by applicable law the obtaining of the ex parte appointment of a receiver, and, if any amount owing to the Bank hereunder or under any of the other Loan Documents shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of the Bank. No remedy herein conferred upon the Bank or the holder of the Note is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or any other provision of law. 13.04 Distribution of Collateral Proceeds. In the event that, following the occurrence or during the continuance of any Default or Event of Default, the Bank receives any monies in connection with the enforcement of any of the Security Documents, or otherwise with respect to the realization upon any of the Collateral, such monies shall be distributed for application as follows: a. First, to the Obligations in such order or preference as the Bank may determine; b. Second, upon payment and satisfaction in full or other provisions for payment in full satisfactory to the Bank of all of the Obligations, to the payment of any obligations required to be paid pursuant to REF 9- 504(l)(c) of the UCC; and c. Third, the excess, if any, shall be returned to the Borrowers or to such other Persons as are entitled thereto. 14 SETOFF. - ---------- Regardless of the adequacy of any collateral, any securities, deposits or other sums credited by or due from the Bank to any Borrower are and shall be subject to a security interest hereby granted by such Borrower in favor of the Bank to secure payment of Obligations and any and all other liabilities, direct, or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, of such Borrower to the Bank. Upon the occurrence of any Event of Default, and at any time or times thereafter, without any demand or notice, except to the extent that notice may be required by applicable law, the Bank may sell or dispose of any or all such securities, deposits or other sums, and may exercise any and all rights accorded the Bank pursuant to the UCC. The Bank may at any time following the occurrence and during the continuance of any Event of Default apply or set off such deposits or other sums against the payment of the Obligations or any other liabilities, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, of such Borrower to the Bank, or may apply an administrative hold or "freeze" to such sums or deposits and hold the same as collateral security for such liabilities. No single or partial exercise by the Bank of any right, power or remedy hereunder or under any of the other Loan Documents shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. Each right, power and remedy specifically granted to the Bank herein or in any of the other Loan Documents or otherwise available to it, shall be cumulative, and shall be in addition to every other right, power and remedy specifically given herein or in any of the other Loan Documents or now or hereafter existing at law, in equity or otherwise. Each such right, power and remedy, whether specifically granted herein or otherwise existing, may be exercised at any time and from time to time and as often and in such order as may be deemed expedient by the Bank in its sole and absolute discretion. 15. EXPENSES. - ------------- The Borrowers agree, jointly and severally, to pay (a) the reasonable costs of producing and reproducing this Credit Agreement, the other Loan Documents and the other agreements and instruments mentioned herein, (b) any taxes (including any interest and penalties in respect thereof) payable by the Bank (other than taxes based upon the Bank s net income) on or with respect to the transactions contemplated by this Credit Agreement (the Borrowers hereby jointly and severally agreeing to indemnify the Bank with respect thereto), (c) the reasonable fees, expenses and disbursements of the Bank s Special Counsel or any local counsel to the Bank incurred in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, each closing hereunder, and amendments, modifications, approvals, consents or waivers hereto or hereunder, (d) the fees, expenses and disbursements of the Bank incurred by the Bank in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, (e) all reasonable out-of-pocket expenses (including reasonable attorneys fees and costs, which attorneys may be employees of the Bank) incurred by the Bank in connection with (i) the enforcement of or preservation of rights under any of the Loan Documents against any Borrower or the administration thereof after the occurrence of a Default or Event of Default and (ii) any litigation, proceeding or dispute, whether arising hereunder or otherwise, in any way related to the Bank s relationship with any Borrower and (f) all reasonable fees, expenses and disbursements of the Bank incurred in connection with title and UCC searches, UCC filings or mortgage recordings. The covenants of this REF 15 shall survive payment or satisfaction of payment of amounts owing with respect to the Note. 16 INDEMNIFICATION. - ------------------ The Borrowers agree, jointly and severally, to indemnify and hold harmless the Bank from and against any and all claims, actions and suits, whether groundless or otherwise, and from and against any and all liabilities, losses, damages and expenses of every nature and character arising out of this Credit Agreement or any of the other Loan Documents or the transactions contemplated hereby including, without limitation, (a) any actual or proposed use by the Borrowers of the proceeds of any of the Loans, (b) any actual or alleged infringement of any patent, copyright, trademark, service mark or similar right of any Borrower, (c) any Borrower s entering into or performing this Credit Agreement or any of the other Loan Documents or (d) with respect to the Borrowers and their respective properties and assets, the violation of any Environmental Law, the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release or threatened release of any Hazardous Substances or any action, suit, proceeding or investigation brought or threatened with respect to any Hazardous Substances (including, but not limited to, claims with respect to wrongful death, personal injury or damage to property), in each case including, without limitation, the reasonable fees and disbursements of counsel and allocated costs of internal counsel incurred in connection with any such investigation, litigation or other proceeding. In litigation, or the preparation therefor, the Bank shall be entitled to select its own counsel and, in addition to the foregoing indemnity, the Borrowers agree to pay promptly the reasonable fees and expenses of such counsel. If and to the extent that the obligations of any Borrower under this REF 16 are unenforceable for any reason, the Borrowers hereby agree to make the maximum contribution to the payment in satisfaction of such obligations that is permissible under applicable law. 17 SURVIVAL OF COVENANTS, ETC. All covenants, agreements, representations and warranties made herein, in the Note, in any of the other Loan Documents or in any documents or other papers delivered by or on behalf of any Borrower pursuant hereto shall be deemed to have been relied upon by the Bank, notwithstanding any investigation heretofore or hereafter made by it, and shall survive the making by the Bank of any of the Loans as herein contemplated, and shall continue in full force and effect so long as any amount due under this Credit Agreement or the Note or any of the other Loan Documents remains outstanding or the Bank has any obligation to make any Loans. All statements contained in any certificate or other paper delivered to the Bank at any time by or on behalf of any Borrower pursuant hereto or in connection with the transactions contemplated hereby shall constitute representations and warranties by such Borrower hereunder. 18 ASSIGNMENT AND PARTICIPATION. - --------------------------------- 18.01 Participations. The Bank may sell participations to one or more banks or other entities in all or a portion of the Bank s rights and obligations under this Credit Agreement and the other Loan Documents. 18.02 Disclosure. The Borrowers agree that the Bank may disclose information obtained by the Bank pursuant to this Credit Agreement to participants and potential participants hereunder; provided that such participants or potential participants shall agree (a) to treat in confidence such information, (b) not to disclose such information to a third party and (c) not to make use of such information for purposes of transactions unrelated to such contemplated participation. 18.03 Successors and Assigns. This Agreement and all rights and obligations hereunder shall be binding upon the Borrowers and their respective successors and assigns, and shall inure to the benefit of the Bank and its successors and assigns. 18.04 Assignment by Borrowers. No Borrower shall assign or transfer any of its rights or obligations under any of the Loan Documents without the prior written consent of the Bank. 19 CONCERNING JOINT AND SEVERAL LIABILITY. 19.01 Mutual Benefit, Etc. Each of the Borrowers is accepting joint and several liability hereunder in consideration of the financial accommodations to be provided by the Bank under this Credit Agreement, for the mutual benefit, directly and indirectly, of each of the Borrowers and in consideration of the undertakings of each other Borrower to accept joint and several liability for the Obligations. 19.02 Acceptance of Joint and Several Liability. Each of the Borrowers, jointly and severally, hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Borrowers, with respect to the payment and performance of all of the Obligations (including, without limitation, any Obligations arising under this REF 19), it being the intention of the parties hereto that all the Obligations shall be the joint and several Obligations of each of the Borrowers without preferences or distinction among them. 19.03 Failure to Pay or Perform. If and to the extent that any of the Borrowers shall fail to make any payment with respect to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event the other Borrowers will make such payment with respect to, or perform, such Obligations. 19.04 Full Recourse Obligations. The Obligations of each of the Borrowers under the provisions of this REF 19 constitute full recourse Obligations of each of the Borrowers enforceable against each such Person to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Agreement or any other circumstance whatsoever. 19.05 Certain Waivers. Except as otherwise expressly provided in this Agreement, each of the Borrowers hereby waives notice of acceptance of its joint and several liability, notice of the Loans, notice of the occurrence of any Default or Event of Default, or of any demand for any payment under this Agreement, notice of any action at any time taken or omitted by the Bank under or in respect of any of the Obligations, any requirement of diligence or to mitigate damages and, generally, to the extent permitted by applicable law, all demands, notices and other formalities of every kind in connection with this Agreement. Each of the Borrowers hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by the Bank at any time or times in respect of any default by any of the Borrowers in the performance or satisfaction of any term, covenant, condition or provision of this Agreement, any and all other indulgences whatsoever by the Bank in respect of any of the Obligations, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Obligations or the addition, substitution or release, in whole or in part, of any of the Borrowers. Without limiting the generality of the foregoing, each of the Borrowers assents to any other action or delay in acting or failure to act on the part of the Bank with respect to the failure by any of the Borrowers to comply with any of its respective Obligations, including, without limitation, any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations thereunder, that might, but for the provisions of this REF 19, afford grounds for terminating, discharging or relieving any of the Borrowers, in whole or in part, from any of its Obligations under this REF 19, it being the intention of each of the Borrowers that, so long as any of the Obligations hereunder remain unsatisfied, the Obligations of such Borrowers under this REF 19 shall not be discharged except by performance and then only to the extent of such performance. The Obligations of each of the Borrowers under this REF 19 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any of the Borrowers or of the Bank. The joint and several liability of the Borrowers hereunder shall continue in full force and effect notwithstanding any absorption, merger, amalgamation or any other change whatsoever in the name, membership, constitution or place of formation of any of the Borrowers or the Bank. 19.06 Successors and Assigns; Provisions Remain in Effect; Etc. The provisions of this REF 19 are made for the benefit of the Bank and its successors and assigns, and may be enforced by it from time to time against any or all of the Borrowers as often as occasion therefor may arise and without requirement on the part of the Bank first to marshall any of its claims or to exercise any of its rights against any other Borrower or to exhaust any remedies available to it against any other Borrower or to resort to any other source or means of obtaining payment of any of the Obligations hereunder or to elect any other remedy. The provisions of this REF 19 shall remain in effect until all of the Obligations shall have been paid in full or otherwise fully satisfied. If at any time any payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be restored or returned by the Bank upon the insolvency, bankruptcy or reorganization of any of the Borrowers, or otherwise, the provisions of this REF 19 will forthwith be reinstated in effect, as though such payment had not been made. 19.07 Subrogation Waiver. Except to the extent provided in REF 19.08, until the payment and performance in full of all Obligations and any and all other obligations of each Borrower to the Bank, whether existing on the date hereof or arising at any time hereafter, each Borrower hereby agrees that it shall not exercise any rights against any other Borrower hereunder, by way of contribution, subrogation or otherwise, and will not prove any claim in competition with the Bank, its affiliates or such other creditor in respect of any payment hereunder in bankruptcy or insolvency proceedings of any nature; such Borrower will not claim any setoff or counterclaim against any other Borrower in respect of any liability of such Borrower to such other Borrower; and such Borrower waives any benefit of and any right to participate in any collateral that may be held by the Bank or any such affiliate. Each Borrower hereby acknowledges that the waiver contained in the preceding sentence (the Subrogation Waiver ) is given as an inducement to the Bank to consummate the transactions contemplated hereby and any other agreement referred to herein and, in consideration of the willingness of the Bank to consummate such transactions, such Borrower agrees that it shall not in any way amend or modify the Subrogation Waiver without the prior written consent of the Bank. If any payment shall be made to a Borrower on account of its rights under this REF 19 at any time when the Obligations shall not have been paid in full, each and every amount so paid will forthwith be paid over to the Bank to be credited and applied to the Obligations. 19.08 Indemnities. Each of the Borrowers agrees to indemnify each other Borrower for any losses, costs or expenses that any such other Borrower may sustain or incur as a result of paying or repaying any of the obligations of such indemnifying Borrower hereunder or under the Note or any of the other Loan Documents. All obligations of the Borrowers in respect of the indemnities set forth in this paragraph (h) shall be fully subordinated in right of payment to the final payment in full of all of the Obligations. Each Borrower agrees not to enforce any such indemnification claim unless and until all of the Obligations have been fully and finally paid and satisfied in full; provided, however, that such Borrower shall be entitled, if it so elects, to take from time to time such procedural actions, such as providing notices of claims and filing proofs of claim, as such Borrower may reasonably determine to preserve any such indemnification claim. 19.09 Transfer of Indemnification Rights. Each of the Borrowers is free to sell, assign or transfer its indemnification rights under REF 19.08 in connection with any sale, transfer or other disposition of all or substantially all of the assets of such Borrower to the extent that such sale, assignment, transfer or other disposition is otherwise expressly permitted hereunder. 20 NOTICES, ETC. - ----------------- Except as otherwise expressly provided in this Credit Agreement, all notices and other communications made or required to be given pursuant to this Credit Agreement or the Note shall be in writing and shall be delivered in hand, mailed by United States first class mail, postage prepaid, sent by overnight courier (e.g., Federal Express or similar courier), or sent by telegraph, telecopy, facsimile or telex and confirmed by delivery via hand, courier or postal service, addressed as follows: a. if to any Borrower, at c/o CompuDyne Corporation, 120 Union Street, Willimantic, Connecticut, Attention: Martin A. Roenigk, or at such other address for notice as such Borrower shall last have furnished in writing to the Person giving the notice; and b. if to the Bank, at 68 Harrison Avenue, Boston, Massachusetts 02111, Attention: Jeffrey S. Hollis, Vice President/Lending, or at such other address for notice as the Bank shall last have furnished in writing to the Person giving the notice. Any such notice or demand shall be deemed to have been duly given or made and to have become effective (i) if delivered by hand, overnight courier or facsimile to a responsible officer of the party to which it is directed, at the time of the receipt thereof by such officer or the sending of such facsimile and (ii) if sent by first-class mail, postage prepaid, on the third Business Day following the mailing thereof. 21 GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE; ETC. - ---------------------------------------------------------- THIS CREDIT AGREEMENT AND, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED THEREIN, EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SUCH COMMONWEALTH (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). EACH BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS SPECIFIED IN REF 20. EACH BORROWER HEREBY WAIVES ANY OBJECTION THAT SUCH BORROWER MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT. 22 HEADINGS. The captions in this Credit Agreement are for convenience of reference only and shall not define or limit the provisions hereof. 23 COUNTERPARTS. This Credit Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, and all of which together shall constitute one instrument. In proving this Credit Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. 24 ENTIRE AGREEMENT, ETC. The Loan Documents and any other documents executed in connection herewith or therewith express the entire understanding of the parties with respect to the transactions contemplated hereby. Neither this Credit Agreement nor any term hereof may be changed, waived, discharged or terminated, except as provided in REF 26. 25 WAIVER OF JURY TRIAL, CERTAIN DAMAGES, ETC. EACH OF THE BORROWERS AND THE BANK HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS CREDIT AGREEMENT, THE NOTE OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. EXCEPT AS PROHIBITED BY LAW, EACH BORROWER HEREBY WAIVES ANY RIGHT SUCH BORROWER MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. Each Borrower (a) certifies that no representative, agent or attorney of the Bank has represented, expressly or otherwise, that the Bank would not, in the event of litigation, seek to enforce the foregoing waivers and (b) acknowledges that the Bank has been induced to enter into this Credit Agreement by, among other things, the waivers and certifications contained in this REF 25. 26 CONSENTS, AMENDMENTS, WAIVERS, ETC. Any consent or approval required or permitted by this Credit Agreement to be given by the Bank may be given, and any term of this Credit Agreement, the other Loan Documents or any other instrument related hereto or mentioned herein may be amended, and the performance or observance by any Borrower of any terms of this Credit Agreement, the other Loan Documents or such other instrument or the continuance of any Default or Event of Default may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Borrowers and the written consent of the Bank. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of the Bank in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon the Borrowers shall entitle any Borrower to other or further notice or demand in similar or other circumstances. 27 SEVERABILITY. The provisions of this Credit Agreement are severable and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Credit Agreement in any jurisdiction. 28 TRANSITIONAL ARRANGEMENTS. - ---------------------------- 28.01 Original Credit Agreement Superseded. This Credit Agreement shall supersede the Credit Agreement, dated February 9, 1996 (the Original Credit Agreement ), among CompuDyne, Quanta, MicroAssembly and the Bank in its entirety, except as provided in this REF 28. On the Closing Date, the rights and obligations of the parties under the Original Credit Agreement and the Note as defined therein shall be subsumed within and be governed by this Credit Agreement and the Note. 28.02 Fees under Superseded Agreement. All unused availability and other fees and expenses owing or accruing under or in respect of the Original Credit Agreement shall be calculated as of the Closing Date (prorated in the case of any fractional periods), and shall be paid in accordance with the method, and on the dates, specified in the Original Credit Agreement, as if the Original Credit Agreement were still in effect. IN WITNESS WHEREOF, the undersigned have duly executed this Credit Agreement as a sealed instrument as of the date first set forth above. COMPUDYNE CORPORATION QUANTA SYSTEMS CORPORATION By:/s/ Martin Roenigk By:/s/ Martin Roenigk Title: Chairman, Pres. & CEO Title: Chairman MICROASSEMBLY SYSTEMS, INC. QUANTA SECURSYSTEMS, INC. By: /s/ Martin Roenigk By:/s/ Martin Roenigk Title: President Title: Chairman ASIAN AMERICAN BANK & TRUST COMPANY By: Title: - ------------------------------------------------------------------------ Schedule 7.03 Exceptions to Title None - ------------------------------------------------------------------------- Schedule 7.07 Litigation - ------------------------------------------------------------------------- Schedule 7.16 ERISA Compliance CompuDyne Corporaton currently has a pension plan which is not fully funded. The liability for such shortfall is disclosed in CompuDyne's financial statements. - ------------------------------------------------------------------- Schedule 7.18 Environmental Matters 1. See Schedule 7.7 to the Agreement - ------------------------------------------------------------------------- Schedule 7.19 Subsidiaries Percentage of voting securities Incorporated owned by under the immediate Name laws of Parent parent - ------- -------- --------------- ------ CompuDyne Corp. of Maryland Maryland CompuDyne Corp. 100% Quanta Systems Corporation Connecticut CompuDyne Corp. 100% CompuDyne, Inc. Delaware CompuDyne Corp. 100% MicroAssembly Systems, Inc. Connecticut CompuDyne Corp. 100% Quanta SecurSystems, Inc. Maryland CompuDyne Corp. 100% Schedule 7.20 Government Contracts - ------------------------------------------------------------------------- Schedule 9.01 Existing Indebtedness - ------------------------------------------------------------------------- Schedule 9.02 Existing Liens - ------------------------------------------------------------------------- Schedule 9.04 Preferred Stock Table of Contents 1. 1. DEFINITIONS AND RULES OF INTERPRETATION.....................1 1.01. Definitions...............................................1 1.02. Rules of Interpretation...................................7 2. THE REVOLVING CREDIT FACILITY....................................8 2.01. Commitment to Lend........................................8 2.02. The Note......................................................8 2.03. Interest on Loans.............................................8 2.04. Requests for Loans............................................8 2.05. Change in Borrowing Base......................................9 2.06. Unused Availability Fee......................................9 2.07. Origination Fee...............................................9 3. REPAYMENT OF THE LOANS...........................................9 3.01. Line Termination..............................................9 3.02. Mandatory Repayments of Loans.................................9 3.03. Automatic Repayment of Loans..................................9 3.04. Optional Repayments of Loans..................................9 4. LETTERS OF CREDIT...............................................10 4.01. Letter of Credit Commitments.................................10 4.02. Reimbursement Obligation of the Borrowers....................10 4.03. Letter of Credit Payments....................................11 4.04. Obligations Absolute.........................................11 4.05. Reliance by Issuer...........................................11 4.06. Letter of Credit Fee.........................................12 5. CERTAIN GENERAL PROVISIONS......................................12 5.01. Funds for Payments...........................................12 5.02. Computations.................................................12 5.03. Late Fee; Interest after Default.............................12 6. COLLATERAL SECURITY.............................................13 7. REPRESENTATIONS AND WARRANTIES..................................13 7.01. Corporate Authority..........................................13 (a) Incorporation; Good Standing...................................13 (b) Authorization..................................................14 (c) Enforceability.................................................14 7.02. Governmental Approvals.......................................14 7.03. Title to Properties; Leases..................................14 7.04. Financial Statements.........................................14 7.05. No Material Changes, Etc.....................................14 7.06. Franchises, Patents, Copyrights, Etc.........................15 7.07. Litigation...................................................15 7.08. No Materially Adverse Contracts, Etc.........................15 7.09. Compliance With Other Instruments, Laws, Etc.................15 7.10. Tax Status...................................................15 7.11. No Event of Default..........................................15 7.12. Holding Company and Investment Company Acts..................15 7.13. Absence of Financing Statements, Etc.........................16 7.14. Perfection of Security Interest..............................16 7.15. Certain Transactions.........................................16 7.16. ERISA Compliance.............................................16 7.17. Regulations U and X..........................................16 7.18. Environmental Compliance.....................................16 7.19. Subsidiaries.................................................17 7.20. Government Contracts.........................................17 8. AFFIRMATIVE COVENANTS OF THE BORROWERS..........................17 8.01. Maintenance of Office........................................17 8.02. Records and Accounts.........................................17 8.03. Financial Statements, Certificates and Information...........18 8.04. Notices......................................................19 (a) Defaults.......................................................19 (b) Environmental Events...........................................19 (c) Notification of Claims against Collateral......................19 (d) Notice of Litigation and Judgments.............................19 8.05. Corporate Existence; Maintenance of Properties...............19 8.06. Insurance....................................................20 8.07. Taxes........................................................20 8.08. Inspection of Properties and Books...........................20 8.09. Compliance with Laws, Contracts, Licenses and Permits........20 8.10. Pension Plans................................................21 8.11. Use of Proceeds..............................................21 8.12. Assignment of U.S. Government Contracts......................21 8.13. Depository Accounts..........................................21 8.14. Further Assurances...........................................21 9. CERTAIN NEGATIVE COVENANTS OF THE BORROWERS.....................21 9.01. Restrictions on Indebtedness.................................22 9.02. Restrictions on Liens........................................22 9.03. Restrictions on Investments..................................24 9.04. Distributions................................................24 9.05. Merger and Consolidation.....................................24 9.06. Sale and Leaseback...........................................24 9.07. Subordinated Debt............................................24 10. FINANCIAL COVENANTS OF THE BORROWERS...........................24 10.01. Debt Service................................................25 10.02. Current Ratio...............................................25 11. CLOSING CONDITIONS.............................................25 11.01. Loan Documents..............................................25 11.02. Certified Copies of Charter Documents.......................25 11.03. Corporate Action............................................25 11.04. Incumbency Certificate......................................25 11.05. Validity of Liens...........................................25 11.06. Perfection Certificates and UCC Search Results..............25 11.07. Certificates of Insurance...................................26 11.08. Borrowing Base Report.......................................26 11.09. Accounts Receivable Aging Report............................26 11.10. Opinions of Counsel.........................................26 11.11. Origination Fee.............................................26 12. CONDITIONS TO ALL BORROWINGS...................................26 12.01. Representations True; No Event of Default...................26 12.02. No Legal Impediment.........................................26 12.03. Governmental Regulations....................................26 12.04. Proceedings and Documents...................................27 12.05. Borrowing Base..............................................27 13. EVENTS OF DEFAULT; ACCELERATION; ETC...........................27 13.01. Events of Default and Acceleration..........................27 13.02. Termination of Line Cap.....................................29 13.03. Remedies....................................................29 13.04. Distribution of Collateral Proceeds.........................29 14. SETOFF...............................................29 15. EXPENSES.......................................................30 16. INDEMNIFICATION................................................30 17. SURVIVAL OF COVENANTS, ETC......................................31 18. ASSIGNMENT AND PARTICIPATION...................................31 18.01. Participations..............................................31 18.02. Disclosure..................................................31 18.03. Successors and Assigns......................................31 18.04. Assignment by Borrowers.....................................31 19. CONCERNING JOINT AND SEVERAL LIABILITY.........................32 19.01. Mutual Benefit, Etc.........................................32 19.02. Acceptance of Joint and Several Liability...................32 19.03. Failure to Pay or Perform...................................32 19.04. Full Recourse Obligations...................................32 19.05. Certain Waivers.............................................32 19.06. Successors and Assigns; Provisions Remain in Effect; Etc....33 19.07. Subrogation Waiver..........................................33 19.08. Indemnities.................................................33 19.09. Transfer of Indemnification Rights..........................34 20. NOTICES, ETC...................................................34 21. GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE; ETC........34 22. HEADINGS.......................................................35 23. COUNTERPARTS...................................................35 24. ENTIRE AGREEMENT, ETC..........................................35 25. WAIVER OF JURY TRIAL, CERTAIN DAMAGES, ETC.....................35 26. CONSENTS, AMENDMENTS, WAIVERS, ETC.............................35 27. SEVERABILITY...................................................36 28. TRANSITIONAL ARRANGEMENTS......................................36 28.01. Original Credit Agreement Superseded........................36 28.02. Fees under Superseded Agreement.............................36 - ------------------------------------------------------------------------ List of Schedules and Exhibits Schedule 7.03 --- Exceptions to Title Schedule 7.07 --- Litigation Schedule 7.16 --- ERISA Compliance Schedule 7.18 --- Environmental Matters Schedule 7.19 --- Subsidiaries Schedule 7.20 --- Government Contracts Schedule 9.01 --- Existing Indebtedness Schedule 9.02 --- Existing Liens Schedule 9.04 --- Preferred Stock Exhibit A --- Assignment of Monies Exhibit B --- Form of Borrowing Base Report Exhibit C --- Security Agreement Exhibit D --- Note Exhibit E --- Form of Loan Request Exhibit F --- Form of Compliance Report Exhibit G --- Form of Subordination Agreement Exhibit H --- Pledge Agreement - ----------------------------------------------------------------------- Credit Agreement Dated as of December ___, 1996 Among CompuDyne Corporation Quanta Systems Corporation MicroAssembly Systems, Inc. Quanta SecurSystems, Inc. And Asian American Bank & Trust Company EX-21 4 EXHIBIT 22 SUBSIDIARIES OF THE REGISTRANT Percentage of voting securities Incorporated owned by under the immediate Name laws of Parent parent - ---------------------------- ------------ ------------- --------- CompuDyne Corporation * Nevada Registrant SYSCO Security Systems, Inc. * Nevada CompuDyne Corp. 100% CompuDyne Corp. of Maryland * Maryland CompuDyne Corp. 100% Quanta Systems Corporation * Connecticut CompuDyne Corp. 100% CompuDyne, Inc.** Delaware CompuDyne Corp. 100% MicroAssembly Systems, Inc. Connecticut CompuDyne Corp. 100% Quanta SecurSystems, Inc. Maryland CompuDyne Corp. 100% Note: * All subsidiaries of the Registrant as of December 31, 1997, are included in the consolidated financial statements of the Registrant. ** CompuDyne, Inc. filed for petition in bankruptcy on December 31, 1991. EX-10 5 QUANTA SYSTEMS CORPORATION COMPUDYNE CORPORATION MICROASSEMBLY SYSTEMS CORPORATION QUANTA SECURSYSTEMS, INC. 120 Union Street Willimantic, CT 06226-0397 As of August 29, 1997 Asian American Bank & Trust Company 17 Kneeland Street Boston, Massachusetts 02111 Attention: Jeffrey S. Hollis, Vice President/Lending Re: Credit Agreement -- Amendment No. 2 ------------------------------------- Ladies and Gentlemen: We refer to the Credit Agreement, dated as of December 20, 1996 (as amended and in effect from time to time, the "Agreement ), among Quanta Systems Corporation, a Connecticut corporation, CompuDyne Corporation, a Nevada corporation, MicroAssembly Systems, Inc., a Connecticut corporation, Quanta SecurSystems, Inc., a Maryland corporation, and Asian American Bank & Trust Company (the Bank ). Capitalized terms used herein and not otherwise defined that are defined in the Agreement shall have the same respective meanings herein as therein. 1. Amendment to Section 1.01 of the Agreement. - ------------------------------------------- The undersigned hereby agree, and hereby request your agreement, that REF 101 of the Agreement be, and hereby is, amended by deleting the figure $1,250,000" contained in the definition of the term "Line Cap and substituting therefor the figure $1,750,000. . 2. Conditions to Effectiveness. - ------------------------------ The foregoing provisions of this Amendment No. 1 shall become effective as of the date hereof subject to the satisfaction of the following conditions on or prior to August ___, 1997 (the "Closing Date"): a.Note. - ------ The Borrowers shall have executed and delivered to the Bank a new Promissory Note, substantially in the form of Exhibit A attached hereto. b. Representations and Warranties. - --------------------------------- Except as otherwise set forth on Exhibit B attached hereto, the representations and warranties contained in the Agreement and the other Loan Documents (in each case, after giving effect to this Amendment No. 2) shall be true and correct at and as of the date hereof as if made at and as of the date hereof (except as the same may expressly relate to an earlier date), and the Bank shall have received from each of the Borrowers a certificate to such effect. c. Proof of Corporate Action. - ---------------------------- The Bank shall have received certified copies of the records of all actions taken by the Borrowers to authorize the execution and delivery of this Amendment No. 2 and the performance by the Borrowers of their respective obligations contained herein. d. Authorized Signatures. - ------------------------ Each of the Borrowers shall have delivered to the Bank a certificate giving the names and specimen signatures of each officer of such Person, authorized to execute, on behalf of such Person, this Amendment No. 2. e. Validity of Liens. - -------------------- The Security Documents shall be effective to create in favor of the Bank a legal, valid and enforceable first priority security interest in and lien upon the Collateral (as such term is defined in the Security Agreement). All filings, recordings, deliveries of instruments and other actions necessary or desirable in the opinion of the Bank to protect and preserve such security interests shall have been duly effected. The Bank shall have received evidence thereof in form and substance satisfactory to the Bank. f. Perfection Certificates and UCC Search Results. - -------------------------------------------------- The Bank shall have received from each Borrower a completed and fully executed Perfection Certificate and the results of Uniform Commercial Code searches with respect to the Collateral, indicating no liens and otherwise in form and substance satisfactory to the Bank. g. Opinion of Borrower s Counsel. - -------------------------------- The Bank shall have received favorable legal opinions addressed to the Bank, dated as of the Closing Date, from each of Tyler, Cooper & Alcorn; Ober, Kaler, Grimes & Shriver; and Hale, Lane, Peek, Dennison, Howard, Anderson & Pearl. If the terms of this letter are acceptable to you, and you agree to honor our requests made herein, kindly so indicate by executing and returning a counterpart hereof to the undersigned. Upon your execution and delivery of a counterpart hereof executed by the undersigned, the agreements made and waivers granted hereby shall become effective as of the date hereof. Except as specifically amended hereby, the Agreement shall remain in full force and effect, and is hereby ratified and confirmed. The execution, delivery and effectiveness of this Amendment No. 2 shall not, except as expressly provided herein, operate as a waiver of any of your rights, powers or remedies under the Agreement. Very truly yours, COMPUDYNE CORPORATION QUANTA SYSTEMS CORPORATION By: By: ----------------------- ---------------------- Title: Title: MICROASSEMBLY SYSTEMS, INC. QUANTA SECURSYSTEMS, INC. By: By: ----------------------- ---------------------- Title: Title: ACCEPTED and AGREED as of the date of the above letter: ASIAN AMERICAN BANK & TRUST COMPANY By: ----------------------- Title: - ------------------------------------------------------------------------- Promissory Note - --------------- $1,750,000 As of August __, 1997 FOR VALUE RECEIVED, the undersigned (collectively, the Borrowers ), JOINTLY AND SEVERALLY, promise to pay to the order of ASIAN AMERICAN BANK & TRUST COMPANY (hereinafter, together with its successors in title and assigns, called the "Bank ) at its head office at 17 Kneeland Street, Boston, Massachusetts 02111, on or prior to June 30, 1998, the principal sum of ONE MILLION SEVEN HUNDRED FIFTY THOUSAND DOLLARS ($1,750,000) or, if less, the aggregate unpaid principal amount of all Loans made by the Bank to the Borrowers pursuant to the Agreement to which reference is hereinafter made. This Promissory Note ("this Note ) evidences borrowings under and is entitled to the benefits and subject to the provisions of a certain Credit Agreement, dated as of December 20, 1996 (as amended and in effect from time to time, the "Agreement ), by and between the Borrowers and the Bank. All capitalized terms used herein and not otherwise defined that are defined in the Agreement shall have the same meanings herein as therein. The Borrowers also jointly and severally promise to pay interest on the unpaid principal amount of the Loans outstanding until paid in full at the rates per annum set forth in or established pursuant to the Agreement. Such interest shall be payable on such dates as are determined from time to time pursuant to the Agreement and shall be calculated as therein provided. As contemplated by the Agreement, the Bank may enter on the grid attached to this Note appropriate notations evidencing advances and payments of principal hereunder. The Borrowers have the right in certain circumstances and the obligation in certain circumstances to prepay the principal of this Note on the terms and conditions specified in the Agreement. Payment of this Note is secured, inter alia, pursuant to the Security Documents. The Borrowers and all guarantors and endorsers hereby waive presentment, demand, protest and notice of any kind in connection with the delivery, acceptance, performance and enforcement of this Note, and also hereby assent to extensions of time of payment or forbearance or other indulgences without notice. In case an Event of Default shall occur and be continuing, the entire unpaid principal amount of this Note and all of the unpaid interest accrued thereon may become or be declared due and payable in the matter and with the effect provided for in the Agreement. THIS NOTE AND THE OBLIGATIONS OF THE BORROWERS HEREUNDER SHALL BE GOVERNED BY, AND INTERPRETED AND DETERMINED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. EXHIBIT A - --------- IN WITNESS WHEREOF, the Borrowers have caused this Promissory Note to be executed as an instrument under seal by their duly authorized officers on the day and in the year first above written. COMPUDYNE CORPORATION QUANTA SYSTEMS CORPORATION By: By: ------------------------ ------------------------ Title: Title: MICROASSEMBLY SYSTEMS, INC. QUANTA SECURSYSTEMS, INC. By: By: ------------------------- ------------------------ Title: Title: EXHIBIT A - --------- ADVANCES AND - ------------ REPAYMENTS OF PRINCIPAL - ----------------------- Advances and payments of principal of this Note were made on the dates in the amounts specified below: Date Amount of Loan Amount of Principal Prepaid or Repaid Balance of Principal Unpaid Notation Made By: EXHIBIT B - --------- Exceptions to Representations and Warranties -----END PRIVACY-ENHANCED MESSAGE-----