-----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, BGJjIVh21jRq4d2qBzMFD5yy77/dVHYWCQlVlWYj8065ErzePLiskUPcT3CWIgaN YBs/9WvBrqxHz+La/bJ0Xw== 0000915656-03-000036.txt : 20030813 0000915656-03-000036.hdr.sgml : 20030813 20030813165244 ACCESSION NUMBER: 0000915656-03-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29798 FILM NUMBER: 03842086 BUSINESS ADDRESS: STREET 1: 7249 NATIONAL DRIVE CITY: HANOVER STATE: MD ZIP: 21076 BUSINESS PHONE: 4107120275 MAIL ADDRESS: STREET 1: 7249 NATIONAL DRIVE CITY: HANOVER STATE: MD ZIP: 21076 FORMER COMPANY: FORMER CONFORMED NAME: CDC CONTROL SERVICES INC DATE OF NAME CHANGE: 19680510 10-Q 1 cdc10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ------------- to -------------- Commission File Number 0-29798 CompuDyne Corporation (Exact name of registrant as specified in its charter) Nevada 23-1408659 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7249 National Drive, Hanover, Maryland 21076 (Address of principal executive offices) Registrant's telephone number, including area code: (410) 712-0275 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 checkmark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act) Yes X No As of August 13, 2003, a total of 7,924,012 shares of Common Stock, $.75 par value, were outstanding. COMPUDYNE CORPORATION AND SUBSIDIARIES INDEX Part I. Financial Information Item 1. Financial Statements - Unaudited Consolidated Balance Sheets - June 30, 2003 and December 31, 2002 Consolidated Statements of Operations - Three Months and Six Months Ended June 30, 2003 and 2002 Consolidated Statement of Changes in Shareholders' Equity - Six Months Ended June 30, 2003 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2003 and 2002 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Signature and Certifications ITEM 1. FINANCIAL STATEMENTS COMPUDYNE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) June 30, December 31, ASSETS 2003 2002 ---- ---- (in thousands) Current Assets Cash and cash equivalents $ 4,079 $ 1,274 Accounts receivable, net 43,124 45,168 Contract costs in excess of billings 15,159 18,297 Inventories 5,637 6,401 Deferred tax assets 1,220 1,220 Prepaid expenses and other 3,168 2,510 -------- -------- Total Current Assets 72,387 74,870 Property, plant and equipment, net 10,836 12,171 Goodwill and intangible assets, net 27,766 32,109 Deferred tax assets 965 987 Other 746 667 -------- -------- Total Assets $112,700 $120,804 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable and accrued liabilities $ 24,177 $ 22,235 Billings in excess of contract costs incurred 13,654 13,602 Deferred revenue 3,793 5,812 Current portion of notes payable 2,107 2,402 -------- -------- Total Current Liabilities 43,731 44,051 Notes payable 18,975 25,108 Deferred tax liabilities 2,114 2,114 Other 270 327 -------- -------- Total Liabilities 65,090 71,600 -------- -------- Commitments and contingencies Shareholders' Equity Preferred stock, 2,000,000 shares authorized and unissued - - Common stock, par value $.75 per share: 15,000,000 shares authorized; 8,513,980 and 8,391,522 shares issued at June 30, 2003 and December 31, 2002, respectively 6,385 6,294 Additional paid-in-capital 38,976 42,508 Retained earnings 6,497 4,518 Accumulated other comprehensive loss (162) (196) Treasury stock, at cost; 594,768 shares at June 30, 2003 and 573,930 shares at December 31, 2002 (4,086) (3,920) -------- -------- Total Shareholders' Equity 47,610 49,204 -------- -------- Total Liabilities and Shareholders' Equity $112,700 $120,804 ======== ========
The accompanying notes are an integral part of these financial statements. COMPUDYNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended June 30 2003 2002 ---- ---- (in thousands, except per share data) Net sales $47,538 $39,416 Cost of goods sold 35,751 29,978 ------- ------- Gross profit 11,787 9,438 Operating expenses 7,696 6,692 Research and development 2,032 1,289 ------- ------- Operating income 2,059 1,457 ------- ------- Other expense (income) Interest expense 334 346 Other (income) expense (2) (77) ------- ------- Total other expense 332 269 ------- ------- Income before income taxes 1,727 1,188 Income taxes 690 475 ------- ------- Net income $ 1,037 $ 713 ======= ======= Earnings per share: Basic earnings per share $ .13 $ .10 ======= ======= Weighted average number of common shares outstanding 7,898 7,427 ======= ======= Diluted earnings per share $ .13 $ .09 ======= ======= Weighted average number of common shares and equivalents 8,139 8,065 ======= =======
The accompanying notes are an integral part of these financial statements. TABLE CONTINUED Six Months Ended June 30 2003 2002 ---- ---- (in thousands, except per share data) Net sales $94,305 $69,906 Cost of goods sold 70,735 54,473 ------- ------- Gross profit 23,570 15,433 Operating expenses 15,654 11,184 Research and development 3,913 1,323 ------- ------- Operating income 4,003 2,926 ------- ------- Other expense (income) Interest expense 713 659 Other (income) expense (9) (139) ------- ------- Total other expense 704 520 ------- ------- Income before income taxes 3,299 2,406 Income taxes 1,320 912 ------- ------- Net income $ 1,979 $ 1,494 ======= ======= Earnings per share: Basic earnings per share $ .25 $ .21 ======= ======= Weighted average number of common shares outstanding 7,860 7,050 ======= ======= Diluted earnings per share $ .24 $ .20 ======= ======= Weighted average number of common shares and equivalents 8,106 7,656 ======= =======
The accompanying notes are an integral part of these financial statements. COMPUDYNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands) Additional Common Stock Paid-in Retained Shares Amount Capital Earnings ------ ------ ------- -------- December 31, 2002 8,392 $6,294 $42,508 $4,518 Acquisition of Tiburon Purchase price Adjustment (3,800) Stock options exercised 74 55 138 Warrants exercised in cashless exercise 48 36 130 Net income 1,979 Other comprehensive income, net of tax: Loss on interest rate swap agreement Translation adjustment ----- ------ ------- ------ Balance at June 30, 2003 8,514 $6,385 $38,976 $6,497 ===== ====== ======= ======
The accompanying notes are an integral part of these consolidated financial statements. Accumulated Other Comprehensive Treasury Stock Loss Shares Amount Total ---- ------ ------ ----- December 31, 2002 $ (196) 574 $ (3,920) $49,204 Acquisition of Tiburon Purchase price Adjustment (3,800) Stock options exercised 193 Warrants exercised in cashless exercise 21 (166) - Net income 1,979 Other comprehensive income, net of tax: Loss on interest rate swap agreement 41 41 Translation adjustment (7) (7) ------- ---- -------- ------- Balance at June 30, 2003 $ (162) 595 $ (4,086) $47,610 ======= ==== ======== =======
The accompanying notes are an integral part of these consolidated financial statements. COMPUDYNE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six Months Ended June 30, 2003 2002 ---- ---- (in thousands) Cash flows from operating activities: Net income $1,979 $1,494 Adjustments to reconcile net income to net cash used in operations: Depreciation and amortization 1,376 1,073 Equity earnings in affiliated company - (23) (Loss/Gain) from disposition of property, plant and equipment 1 (5) Changes in assets and liabilities: Accounts receivable 2,044 (6,560) Contract costs in excess of billings 3,714 2,335 Inventories 764 71 Prepaid expenses and other current assets (658) 786 Other assets (79) (49) Accounts payable and accrued liabilities 2,268 (1,493) Billings in excess of contract costs incurred 52 2,324 Deferred revenue (2,019) - Other liabilities (1) (4) ------ ------ Net cash flows provided by (used in) operating activities 9,441 (51) ------ ------ Cash flows from investing activities: Additions to property, plant and equipment (339) (2,464) Proceeds from sale of property, plant and equipment 9 25 Net payment for acquisition (71) (10,374) ------ ------ Net cash flows used in investing activities (401) (12,813) ------ ------ Cash flows from financing activities: Issuance of common stock 193 527 Warrants exercised 166 64 Purchase of treasury stock (166) (64) Repayment of subordinated notes payable (587) Borrowings of bank notes - 14,500 Repayment of bank notes (6,428) (416) ------ ------ Net cash (used in) provided by financing activities (6,235) 14,024 ------ ------ Net change in cash and cash equivalents 2,805 1,160 Cash and cash equivalents at beginning of period 1,274 296 ------ ------ Cash and cash equivalents at end of period $4,079 $1,456 ====== ====== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 587 $ 604 Income taxes $1,220 $ 696
The accompanying notes are an integral part of these financial statements. COMPUDYNE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of CompuDyne Corporation and its subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The consolidated balance sheet as of December 31, 2002 has been derived from the Company's December 31, 2002 audited financial statements. Certain information and note disclosures included in the annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all necessary adjustments and reclassifications (all of which are of a normal, recurring nature) that are necessary for the fair presentation of the periods presented. It is suggested that these consolidated unaudited financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report filed with the Securities and Exchange Commission on Form 10-K for the year ended December 31, 2002. Operating results for the three and six month periods ended June 30, 2003 and 2002 are not necessarily indicative of operating results for the entire fiscal year. New Accounting Pronouncements: In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Many of such instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The Statement is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance of the date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. Management believes that the adoption of this statement will not have a significant impact on the financial position, results of operations or cash flows of the Company. In April 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities". The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. The amendments set forth in SFAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in Statement 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. Statement 149 amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not expect that adoption of this pronouncement will have a material effect on its financial position, results of operations or cash flows. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation --Transition and Disclosure, an amendment of FASB Statement No. 123" which amends SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation" and the reporting provisions of APB No. 30, "Interim Financial Reporting." SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Adoption of this statement was required at the beginning of fiscal year 2003. The adoption of this pronouncement did not have a material effect on the financial position, results of operations or cash flows of CompuDyne. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The Statement is effective for fiscal years beginning after December 31, 2002. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred, rather than at the date of a commitment to an exit or disposal plan. The adoption of this standard did not have a material effect on the financial position, results of operations or cash flows of CompuDyne. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement is effective for fiscal years beginning after May 15, 2002. SFAS 145 requires, among other things, eliminating reporting debt extinguishments as an extraordinary item in the income statement. The adoption of this standard did not have a material effect on the financial position, results of operations or cash flows of CompuDyne. In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." The Interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Interpretation applies immediately to variable interest entities created after January 31, 2003, or in which the Company obtains an interest after that date. The Interpretation is effective July 1, 2003 to variable interest entities in which the Company holds a variable interest acquired before February 1, 2003. The Company has assessed the impact of adopting this Interpretation. The adoption of this standard did not have a material effect on the financial position, results of operations or cash flows of CompuDyne. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the recognition of liabilities for guarantees that are issued or modified subsequent to December 31, 2002. The liabilities should reflect the fair value, at inception, of the guarantors' obligations to stand ready to perform, in the event that the specified triggering events or conditions occur. The adoption of this standard did not have a material effect on the financial position, results of operations or cash flows of CompuDyne. Reclassifications: Certain prior period amounts have been reclassified to conform to the current period's presentation. 2. OPERATING SEGMENT INFORMATION The following is the operating segment information for the three months ended June 30, 2002 and 2003. Revenues Gross Profit -------- ------------ (Three Months ended June 30) (in thousands) 2003 2002 2003 2002 ---- ---- ---- ---- Institutional Security Systems $25,692 $21,981 $3,240 $3,539 Attack Protection 6,533 5,598 1,380 795 Federal Security Systems 4,261 3,893 603 689 Public Safety and Justice 11,052 7,944 6,564 4,415 CompuDyne Corporate - - - - ------- ------- ------- ------ $47,538 $39,416 $11,787 $9,438 ======= ======= ======= ======
TABLE CONTINUED Pre-tax Income/(Loss) --------------------- (in thousands) 2003 2002 ---- ---- Institutional Security Systems $ 835 $1,040 Attack Protection (52) (696) Federal Security Systems 296 252 Public Safety and Justice 482 491 CompuDyne Corporate 166 101 ------ ------ $1,727 $1,188 ====== ======
The following is the operating segment information for the six months ended June 30, 2002 and 2003. Revenues Gross Profit -------- ------------ (Three Months ended June 30) (in thousands) 2003 2002 2003 2002 ---- ---- ---- ---- Institutional Security Systems $49,140 $42,201 $ 6,517 $ 7,230 Attack Protection 14,876 11,772 3,355 2,122 Federal Security Systems 7,750 6,861 1,125 1,140 Public Safety and Justice 22,539 9,072 12,573 4,941 CompuDyne Corporate - - - - ------- ------- ------- ------- $94,305 $69,906 $23,570 $15,433 ======= ======= ======= =======
TABLE CONTINUED Pre-tax Income/(Loss) --------------------- (in thousands) 2003 2002 ---- ---- Institutional Security Systems $1,572 $2,178 Attack Protection 510 (689) Federal Security Systems 503 301 Public Safety and Justice 550 493 CompuDyne Corporate 164 123 ------ ------ $3,299 $2,406 ====== ======
3. EARNINGS PER SHARE Earnings per share are presented in accordance with SFAS No. 128, "Earnings Per Share." This Statement requires dual presentation of basic and diluted earnings per share on the face of the statement of operations. Basic earnings per share excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share also reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Stock options and warrants to purchase 814,520 shares and 25,500 shares for the three month periods ended June 30, 2003 and 2002 respectively, were not dilutive and, therefore, were not included in the computation of diluted earnings per common share. Stock options and warrants to purchase 1,044,020 shares and 45,500 shares for the six month periods ended June 30, 2003 and 2002 respectively, were not dilutive and, therefore, were not included in the computation of diluted earnings per common share. The computations of the Company's basic and diluted earnings per share amounts for the Company's operations were as follows: Three Months Ended June 30, 2003 2002 ---- ---- (in thousands, except per share data) Net income $1,037 $ 713 ====== ====== Weighted average common shares outstanding 7,898 7,427 Effect of dilutive stock options and warrants 241 638 ----- ----- Diluted weighted average common shares outstanding 8,139 8,065 ===== ===== Net income per common share Basic $ .13 $ .10 Diluted $ .13 $ .09
TABLE CONTINUED Six Months Ended June 30, 2003 2002 (in thousands, except per share data) Net income $1,979 $1,494 ====== ====== Weighted average common shares outstanding 7,860 7,050 Effect of dilutive stock options and warrants 246 606 ----- ----- Diluted weighted average common shares outstanding 8,106 7,656 ===== ===== Net income per common share Basic $ .25 $ .21 Diluted $ .24 $ .20
4. INVENTORIES Inventories consist of the following: June 30, December 31, 2003 2002 ---- ---- (in thousands) Raw materials $3,702 $3,937 Work in progress 1,541 2,197 Finished goods 394 267 ------ ------ $5,637 $6,401 ====== ======
5. GOODWILL AND INTANGIBLE ASSETS Intangible assets include the trade name, customer relationships and backlog from the acquisition of Tiburon, Inc. Other intangibles include Department of State Certifications, Underwriters Laboratories, Inc. listings, and patents related to the acquisition of Norment and Norshield. Except for goodwill and trade names, which have indefinite lives, intangibles are being amortized using the straight-line method. Goodwill and intangible assets consist of the following: June 30, December 31, Amortizable 2003 2002 Lives ---- ---- ----- (in thousands) (in years) Goodwill $17,956 $22,043 Indefinite Trade name 6,913 6,913 Indefinite Customer relationships 2,500 2,500 14 Backlog 300 300 2 Other 1,220 1,220 2 - 20 ------- ------- 28,889 32,976 Less: accumulated amortization (1,123) (867) ------- ------- $27,766 $32,109 ======= =======
6. ACQUISITION OF TIBURON, INC. On January 25, 2002, the Company and Tiburon, Inc. ("Tiburon") entered into a First Amendment Agreement whereby upon the satisfaction of certain conditions, the Company agreed to purchase all of the issued and outstanding common shares and other common stock equivalents it did not already own for a combination of cash and stock. All requisite conditions were met and the Company completed the purchase of Tiburon, Inc. ("Tiburon") on May 2, 2002. Total consideration paid for the purchase of the portion of Tiburon that the Company did not previously own amounted to approximately $10.4 million, net in cash and approximately 1.1 million shares of CompuDyne common stock for a total acquisition cost of $30.0 million. To fund the cash portion of the Tiburon acquisition, the Company negotiated a $10 million increase in its borrowing facility from its banks. The remainder of the cash consideration paid was funded from the Company's working capital. Tiburon provides a fully integrated suite of products including computer-assisted dispatch, records management and court and probation software systems for the law enforcement, fire and rescue, corrections and justice environments. Tiburon is a worldwide market leader in the development, implementation and support of public safety and justice automation systems. The Company has determined that the consideration received is the best representation of the fair value of the purchase price of Tiburon. As such, the Company engaged an independent third party to complete a valuation of the business as of the acquisition date (May 2, 2002). During the first quarter of 2003, the valuation was completed and resulted in a $3.8 million reduction of the goodwill originally recorded. The Company completed the valuation of fair value of the plant and equipment acquired in the second quarter of 2003. This valuation resulted in a $545 thousand increase in goodwill. In addition, other final adjustments to the purchase price of Tiburon amounted to $887 thousand and were recorded as a decrease in goodwill in April 2003. The purchase price was recorded as follows (in thousands): Purchase Price $30,000 Net assets acquired (13,617) ------- Goodwill $16,383 =======
The following are the Company's unaudited pro forma results assuming the acquisition of Tiburon had occurred on January 1, 2002: Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ---- ---- ---- ---- (in thousands, except per share data) Revenue $47,538 $42,739 $94,305 $83,654 Net income $ 1,037 $ 824 $ 1,979 $ 1,757 Earnings per share: Basic $ .13 $ .10 $ .25 $ .22 Diluted $ .13 $ .10 $ .24 $ .21
These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the combination been effective on January 1, 2002, or of future results of operations. 7. STOCK-BASED COMPENSATION As of June 30, 2003, the Company continues to account for its stock-based compensation plans, which are described more fully in the Company's 2002 Annual Report, using the intrinsic value method and in accordance with the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted had an exercise price equal to fair market value of the underlying common stock on the date of grant. The following table illustrates, in accordance with the provisions of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation. For the Three Months Ended June 30, 2003 2002 ---- ---- (in thousands, except per share data) Net income, as reported $1,037 $713 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax effects (469) (392) ------ ---- Pro forma net income $ 568 $321 ====== ==== Earnings per share: Basic - as reported $ .13 $ .10 Basic - pro forma $ .07 $ .04 Diluted - as reported $ .13 $ .09 Diluted - pro forma $ .07 $ .04
For the Six Months Ended June 30, 2003 2002 ---- ---- (in thousands, except per share data) Net income, as reported $1,979 $1,494 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax effects (964) (702) ------ ----- Pro forma net income $1,015 $ 792 ====== ===== Earnings per share: Basic - as reported $ .25 $ .21 Basic - pro forma $ .13 $ .11 Diluted - as reported $ .24 $ .20 Diluted - pro forma $ .12 $ .10
The fair value of the Company's stock-based option awards to employees was estimated using the Black-Scholes model assuming no expected dividends and the following weighted-average assumptions: For The Three For The Six Months Ended Months Ended June 30 June 30 2003 2002 2003 2002 ---- ---- ---- ---- Expected volatility 79.6% 74.0% 80.0% 74.0% Risk-free interest rate 2.6% 5.0% 2.8% 5.0% Expected life in years 6.7 7.5 6.9 7.5
8. PRODUCT WARRANTIES Accruals for estimated expenses related to warranties are made at the time products are sold or services are rendered. These accruals are established using historical information on the nature, frequency, and average cost of warranty claims. The Company warrants numerous products, the terms of which vary widely. In general, the Company warrants its products against defect and specific non- performance. As of June 30, 2003, the Company had a product warranty accrual in the amount of $475 thousand. Product Warranty Liabilities ---------------------------- (in thousands) Beginning balance at January 1, 2003 $ 482 Minus accruals for product (7) ----- Ending balance at June 30, 2003 $ 475 =====
ITEM 2 COMPUDYNE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview CompuDyne Corporation ("CompuDyne" or the "Company") was reincorporated in Nevada in 1996, and is a leading provider of products and services to the public security market. The Company operates in four (4) distinct segments in this marketplace: Institutional Security Systems (formerly known as Corrections), Attack Protection, Federal Security Systems, and Public Safety and Justice. The Institutional Security Systems segment is headquartered in Montgomery, Alabama and is known to the trade as Norment Security Group ("Norment"). This segment provides physical and electronic security products and services to the corrections industry (prisons and jails) and to the courthouse, municipal and commercial markets. Norment serves as a contractor, responsible for most installation work on larger projects. Installations involve hard-line (steel security doors, frames, locking devices, etc.) and sophisticated electronic security systems, including software, electronics, touch-screens, closed circuit TV, perimeter alarm devices and other security monitoring controls. Norment also developed a product called MaxWall. MaxWall is a modular steel, concrete filled prefabricated jail cell. It allows for construction projects to use considerably less space and can save the project owner significant amounts of money. Norment, through a network of regional offices provides field level design, installation and maintenance of both physical and electronic security products. Included in the Institutional Security Systems segment is the TrenTech line which designs, manufactures and integrates electronic security systems. TrenTech integrates generally available products and software as well as designing its own proprietary systems. TrenTech has developed a sophisticated proprietary video badging system, which has become the virtual standard for the United States Air Force and has been installed at over 200 United States Air Force facilities throughout the world. The Institutional Security Systems segment also manufactures a complete line of locks and locking devices under the brand name Airteq. Airteq is an industry leader in pneumatic and electro-mechanical sliding devices used in the corrections industry. The Attack Protection segment is the country's largest original equipment manufacturer (OEM) of bullet, blast and attack resistant windows and doors designed for high security applications such as embassies, courthouses, Federal buildings, banks, corporate headquarters and other facilities that insist on having the highest level of protection currently available. CompuDyne is a premier provider of Level 8 security products, the highest rating level of commercial security products. The product manufactured is an integrated and structurally secure product where the rated protection comes not only from the glass but also from the frame and encasement, which are specifically designed to become integral parts of the structure into which they are to be installed. Existing product installations number in the thousands and range from the Middle East to the White House. Working under contracts from the United States Department of State, the segment's largest customer, Attack Protection is the largest supplier of bullet and blast resistant windows and doors to United States embassies throughout the world. Products are also sold to drug stores, convenience stores, and banks to secure drive through facilities. Other commercial applications include guard booths, tollbooths, cash drawers and other similar items. Additionally, this segment designs and installs both fixed and pop-up bollards and barrier security systems. The Attack Protection segment also manufactures a highly sophisticated fiber optic sensor system, known as Fiber SenSys, used to detect physical intrusion. This application is designed to protect large perimeters including such applications as Federal facilities, oil fields, airport tarmacs, public utilities, nuclear reactors and water systems. In addition, it has been installed to protect the perimeters of numerous private estates and other similar properties. A related product is SecurLan, which protects data lines from physical intrusion using a fiber optic technology similar to the Fiber SenSys technology. The Federal Security Systems segment is known as Quanta Systems Corporation. This segment has been serving the Federal government's security needs since 1952. Its customer base includes military, governmental agencies, and state and local governmental units. Federal Security Systems provides turnkey systems integration of public security and safety systems. This segment is a classic security integrator and specializes in a wide range of customized access control and badging, intrusion detection, surveillance and assessment, communications, command and control, fire and life safety, and asset tracking systems. Federal Security Systems provides central station oversight and control of multiple and separate facilities as well as security and public life safety systems and equipment. The Public Safety and Justice segment consists of two subsidiaries known to the industry as CorrLogic, Inc., ("CorrLogic") and Tiburon, Inc. ("Tiburon"). CorrLogic is a leading developer of inmate management and institutional medical software systems. CorrLogic specializes in the development, implementation and support of complex, integrated inmate management software systems, including inmate medical management that improves the efficiency and accuracy of correctional facility operations. CorrLogic's focus is entirely on information solutions for the corrections industry. CompuDyne expanded its offerings in the Public Safety and Justice sector through the completion of its acquisition of Tiburon, on May 2, 2002. Tiburon provides a fully integrated suite of products including computer-assisted dispatch, records management, court and probation software systems for the law enforcement, fire and rescue, corrections and justice environments. Tiburon is a worldwide market leader in the development, implementation and support of public safety and justice automation systems. In business since 1980, with more than 450 systems supporting over 700 agencies, Tiburon is a leader in public safety and justice solutions. RESULTS OF OPERATIONS Three months ended June 30, 2003 and 2002 Revenues. The Company had revenues of $47.5 million and $39.4 million for the three months ended June 30, 2003 and June 30, 2002, respectively. The revenues for the three months ended June 30, 2003 increased by $8.1 million or 20.6% over the comparable period for 2002. Revenues from the Institutional Security Systems segment increased from $22.0 million in the second quarter of 2002 to $25.7 million in the second quarter of 2003. This was an increase of 16.9%. The Institutional Security Systems segment is largely a construction driven business. Much of its revenue is obtained by working on new and retrofit construction projects in the corrections industry, as opposed to from sources of recurring revenue. As such, the increase in revenue experienced by this segment is largely attributable to its ability to win and work on more projects than it did in the comparable quarter of the previous year. One of the reasons it was able to do this was because its backlog had grown from $92.3 million at December 31, 2001 to $99.5 million at December 31, 2002, thus providing it with the ability to engage in more work in the second quarter of 2003 than it did in the second quarter of 2002. At June 30, 2003, the backlog for the Institutional Security System's segment had declined to $81.9 million. The first half of 2003 was a slow bidding period, which the Company attributes to the seasonal nature of the bidding process and due in general to the state and local government budget deficits which are causing these governmental units to rethink and delay many of their pending corrections projects. Revenues from the Attack Protection segment increased from $5.6 million during the quarter ended June 30, 2002 to $6.5 million in the quarter ended June 30, 2003. This was an increase of 16.7%. The Attack Protection segment was largely capacity constrained during 2001. As a result, the Company purchased an existing 75,000 square foot factory on 20 acres of land in close proximity to its existing factory in Montgomery, Alabama. This expansion provides the segment with the necessary capacity to generate incremental revenue of approximately $10 million per year. Of the $0.9 million of increased revenue generated by the Attack Protection segment, $1.2 million of the increase resulted from the Norshield product line while its Fiber SenSys product line saw a decrease in revenue of $0.3 million. The Norshield product line encompasses the segment's bullet and blast resistant windows and doors, guard booths, bollards, barriers and other related products. During the second quarter of 2003, the Attack Protection segment experienced an increased demand for its products, as the slow down in the government building process experienced during 2002 appeared to end. Now it appears that projects are being released for construction, and thus the Attack Protection segment is experiencing an increased demand for its products. The segment's Fiber SenSys product line consists primarily of fiber optic perimeter protection products. These products experienced significant growth in 2002 as revenues from this product line grew from $1.5 million in 2001 to $4.9 million in 2002, of which $1.4 million occurred in the second quarter of 2002. Orders received for the Fiber SenSys line tend to be large dollar orders. Although fewer orders were received and shipped for these products during the second quarter of 2003 as compared to the second quarter of 2002, the Company continues to see heightened interest for these products and expects sales for these items to continue to experience significant growth in 2003. Revenues from the Federal Security Systems segment increased from $3.9 million during the second quarter of 2002 to $4.3 million during the second quarter of 2003. This was an increase of 9.5%. At December 31, 2001 the Federal Security Systems segment backlog was a relatively small $380 thousand. Substantially all of this segment's revenue is backlog driven. Its backlog is therefore a precursor to future revenues. The Federal Security Systems segment's failure to have any meaningful backlog at December 31, 2001 resulted in substantially all of its 2002 revenue being driven by contract awards it received during 2002. This inherently caused the segment's revenue to be low during that period. The Federal Security Segment ended 2002 with a significantly improved backlog level of $11.4 million. As such it entered the first quarter of 2003 with a much greater book of business from which to generate its increased revenue in the first and second quarter of 2003. Revenues from the Public Safety and Justice segment increased $3.1 million from $7.9 million during the second quarter of 2002 to $11.0 million during the second quarter of 2003, an increase of 39.2%. On May 2, 2002 the Company completed its acquisition of Tiburon, Inc. Prior thereto, the Company controlled approximately 20% of Tiburon and recorded its investment in Tiburon under the equity method of accounting. Subsequent to May 2, 2002, Tiburon became a wholly owned subsidiary of the Company and thus its operating results are now consolidated with those of the Company. Tiburon's revenues for the three months ended June 30, 2003 amounted to $10.0 million, whereas only two (2) months of Tiburon's revenues were included in the Company's June 30, 2002 results. This inclusion of an additional one (1) month's revenue accounts for substantially all of the increase in revenue experienced by this segment during the second quarter of 2003 compared to the second quarter of 2002. Expenses. Cost of goods sold increased from $30.0 million during the second quarter of 2002 to $35.8 million during the second quarter of 2003. This increase was largely a result of increased costs of goods sold of $4.0 million in the Institutional Security Systems segment, $0.3 million at the Attack Protection segment and $0.5 million at the Federal Security Systems segment, all largely attributable to the increased sales levels attained by these segments. In addition the acquisition of Tiburon on May 2, 2002, added $1.0 million of cost of goods sold. The smaller percentage increase in cost of goods sold as compared to the percentage increase in sales resulted in an increased gross profit percentage of 24.8% in the second quarter of 2003 as compared to 23.9% during the second quarter of 2002. Cost of goods sold in the Institutional Security Systems segment increased from $18.4 million in the second quarter of 2002 to $22.5 million in the second quarter of 2003. This was an increase of $4.0 million or 21.7%. This increase was larger than the related sales increase of this segment of 16.9% resulting in a decline in the gross profit percentage from 16.0% in the second quarter of 2002 to 12.6% in the second quarter of 2003. During 2002, the West Coast operations of the Institutional Security Systems segment experienced significant cost overruns on many of its projects. These cost overruns were incurred and recorded during the third and fourth quarters of 2002 and amounted to approximately $1.8 million. As a result, as these projects are brought to completion, many in the first and second quarter of 2003, the revenues generated by them resulted in little margin or in some cases losses. In addition, the Company recorded approximately $1.0 million of additional write-downs on several additional projects that were nearing completion in the second quarter of 2003. This was the primary reason for the decrease in the gross profit percentage by the Institutional Security Systems segment. To address this situation, the Company implemented more centralized controls and replaced certain personnel at its West Coast operations. Cost of goods sold in the Attack Protection segment increased from $4.8 million in the second quarter of 2002 to $5.2 million in the second quarter of 2003. This was an increase of $350 thousand or 7.3%. This increase was smaller than the related sales increase of this segment of 16.7%, resulting in an increase in the gross profit percentage from 14.2% in the second quarter of 2002 to 21.1% in the second quarter of 2003. During 2002 the Attack Protection segment experienced lower-than-expected volume in its bullet and blast resistant windows and doors product line which was exacerbated by excess plant capacity which resulted from the addition of its new 75,000 square foot factory that was placed in service during the spring of 2002. As a result of the terrorist attacks of September 11, 2001, the Company had geared up in anticipation of increased demand for this segment's products, which is only now beginning to materialize. This new factory was provisioned and staffed, using new equipment and hires as well as by the movement of equipment and staff from the Company's existing factory. This resulted in the Company running both of its factories at levels significantly below optimum capacity in 2002, resulting in operational inefficiencies. As a result, the Company experienced incremental expenses in excess of the commensurate sales volume increase resulting in the lower gross profit percentage during 2002. Cost of goods sold in the Federal Security Systems segment increased from $3.2 million in the second quarter of 2002 to $3.7 million in the second quarter of 2003. This was an increase of $454 thousand or 14.2%. This increase was greater than the related sales increase of this segment of 9.5%, resulting in a decrease in the gross profit percentage from 17.7% in the second quarter of 2002 to 14.2% in the second quarter of 2003. Substantially all of the projects awarded in this segment are discrete projects. Cost of goods sold in the Public Safety and Justice segment increased from $3.5 million in the second quarter of 2002 to $4.5 million in the second quarter of 2003. This was an increase of $1.0 million or 28.6%. Substantially all of this increase was a result of the Company's May 2, 2002 acquisition of Tiburon and by lower margins experienced by CorrLogic on a major new project. Operating expenses increased from $6.7 million in the second quarter of 2002 to $7.7 million in the second quarter of 2003. This was an increase of $1.0 million. Substantially all of the change in operating expenses was a result of the Company's May 2, 2002 acquisition of Tiburon. Amortization of Intangible Assets and Capitalized Software Acquired in the Tiburon Acquisition In conjunction with the acquisition on May 2, 2002, of Tiburon, Inc. and in compliance with Statement of Financial Accounting Standards No. 141 (SFAS 141) Business Combinations, the Company determined the fair value of the following identifiable assets and assigned the indicated lives thereto for purposes of amortization and depreciation. Amount Life ------ ---- (in thousands) (in years) Trade name $ 5,340 Indefinite Customer relationships $ 2,500 14 Software $ 3,000 5 Backlog $ 300 2 Other $ 135 3
The amortization of the above intangibles for the three months ended June 30, 2003 resulted in the Company recording expense of $243 thousand, which is included in operating expenses. Research and Development expenses increased from $1.3 million in the second quarter of 2002 to $2.0 million in the second quarter of 2003. Historically, the Company did not expend significant monies on research and development. With the acquisition of Tiburon, the Company's Public Safety and Justice segment expends significantly more dollars on software development. Being a technology driven enterprise, the Company's Public Safety and Justice segment is required to continually update and enhance its software offerings thus causing it to incur significant research and development costs. Interest expense decreased from $346 thousand in the second quarter of 2002 to $334 thousand in the second quarter of 2003. The decrease in the Company's interest expense during the second quarter of 2003 is a result of the Company having a lower average interest rate and a smaller average level of borrowings in the second quarter of 2003 as compared to the second quarter of 2002. The following table compares the weighted average of the Company's second quarter of 2003 and the second quarter of 2002 interest bearing borrowings and the related interest rates charged thereon. Average second Average second quarter of 2003 quarter of 2002 Amount Rate Amount Rate ------ ---- ------ ---- (in thousands) Bank borrowings $21,081 5.6% $22,162 6.7% Subordinated borrowings $ - - $ 1,232 6.6% Amortization and write-off of financing charges $ 51 $ 37
Taxes on Income. The effective tax rate in the second quarter of 2003 and 2002 was 40.0%. Net Income. The Company reported net income of $1.0 million and $713 thousand in the second quarters of 2003 and 2002, respectively. Fully diluted earnings per share increased to $.13 in the second quarter of 2003 from $.09 in the second quarter of 2002. The weighted average number of common shares and equivalents outstanding was 8.1 million in the second quarter of 2002 and in the second quarter of 2003. RESULTS OF OPERATIONS Six months ended June 30, 2003 and 2002 Revenues. The Company had revenues of $94.3 million and $69.9 million for the six month period ended June 30, 2003 and June 30, 2002, respectively. This was an increase of $24.4 million or 34.9%. Revenues from the Institutional Security Systems segment increased from $42.2 million in the first six months of 2002 to $49.1 million in the first six months of 2003. This was an increase of 16.4%. The Institutional Security Systems segment is largely a construction driven business. Much of its revenue is obtained by working on new and retrofit construction projects in the corrections industry, as opposed to from sources of recurring revenue. As such, the increase in revenue experienced by this segment is largely attributable to its ability to win and work on more projects than it did in the comparable period of the previous year. One of the reasons it was able to do this was because its backlog had grown from $92.3 million at December 31, 2001 to $99.5 million at December 31, 2002 thus providing it with the ability to engage in more work in the first six months of 2003 than it did in the first six months of 2002. At June 30, 2003, the backlog for the Institutional Security System's segment had declined to $81.9 million. The first half of 2003 was a slow bidding period, which the Company attributes to the seasonal nature of the bidding process and due to the general state and local governmental budget deficits which is causing theses governmental units to rethink and delay many of the pending corrections projects. Revenues from the Attack Protection segment increased from $11.8 million during the six months ended June 30, 2002 to $14.9 million during the six months ended June 30, 2003. This was an increase of 26.4%. The Attack Protection segment was largely capacity constrained during 2001. As a result, the Company purchased an existing 75,000 square foot factory on 20 acres of land in close proximity to its existing factory in Montgomery, Alabama. This expansion provides the segment with the necessary capacity to generate incremental revenue of approximately $10 million per year. Of the $3.1 million of increased revenue generated by the Attack Protection segment, $3.8 million of the increase came from its Norshield product line while its Fiber SenSys product line saw a decrease in revenue of $0.7 million. The Norshield product line encompasses the segment's bullet and blast resistant windows and doors, guard booths, bollards, barriers and other related products. During the first six months of 2003, the Attack Protection segment experienced an increased demand for its products, as the slow down in the government building process experienced during 2002 appeared to end. Now it appears that projects are being released for construction, and thus the Attack Protection segment is experiencing an increased demand for its products. The Segment's Fiber SenSys product line consists primarily of fiber optic perimeter protection products. These products experienced significant growth in 2002 as revenues from this product line grew from $1.5 million in 2001 to $4.9 million in 2002, of which $3.1 million occurred in the first six months of 2002. Orders received for the Fiber SenSys line tend to be large dollar orders. Although fewer orders were received and shipped for these products during the first six months of 2003 as compared to the first six months of 2002, the Company continues to see heightened interest for these products and expects sales for these items to continue to experience significant growth in 2003. Revenues from the Federal Security Systems segment increased from $6.9 million during the first six months of 2002 to $7.8 million during the first six months of 2003. This was an increase of 13.0%. At December 31, 2001 the Federal Security Systems segment backlog was a relatively small $380 thousand. Substantially all of this segment's revenue is backlog driven. Its backlog is therefore a precursor to future revenues. The Federal Security Systems segment's failure to have any meaningful backlog at December 31, 2001 resulted in substantially all of its 2002 revenue being driven by contract awards it received during 2002. This inherently caused the segment's revenue to be low during that period. The Federal Security Systems Segment ended 2002 with a significantly improved backlog level of $11.4 million. As such it entered 2003 with a much greater book of business from which to generate its increased revenue during the first six months of 2003. Revenues from the Public Safety and Justice segment increased $13.5 million from $9.1 million during the first six months of 2002 to $22.5 million during the first six months of 2003. On May 2, 2002 the Company completed its acquisition of Tiburon, Inc. Prior thereto, the Company controlled approximately 20% of Tiburon and recorded its investment in Tiburon under the equity method of accounting. Subsequent to May 2, 2002, Tiburon became a wholly owned subsidiary of the Company and thus its operating results are now consolidated with those of the Company. Tiburon's revenues for the six months ended June 30, 2003 amounted to $20.4 million as compared to $7.0 million for the two month period Tiburon was owned by CompuDyne during the first six months of 2002. This accounts for substantially all of the increase in revenue experienced by this segment during the first six months of 2003 compared to the first six months of 2002. Expenses. Cost of goods sold increased from $54.5 million during the first six months of 2002 to $70.7 million during the first six months of 2003. This increase was largely a result of the acquisition of Tiburon on May 2, 2002, which added $5.1 million of cost of goods sold to the results of the Company, as well as increased costs of goods sold of $7.6 million at the Institutional Security Systems segment, $1.9 million at the Attack Protection segment and $0.9 million at Federal Security Systems, all largely attributable to the increased sales levels attained by these segments. The smaller percentage increase in cost of goods sold as compared to the percentage increase in sales resulted in an increased gross profit percentage of 25.0% in 2003 as compared to 22.1% during the first six months of 2002. Cost of goods sold in the Institutional Security Systems segment increased from $35.0 million in the first six months of 2002 to $42.6 million in the first six months of 2003. This was an increase of $7.7 million or 21.9%. This increase was larger than the related sales increase of this segment of 16.4% resulting in a decline in the gross profit percentage from 17.1% in the first six months of 2002 to 13.3% in the first six months of 2003. During 2002, the West Coast operations of the Institutional Security Systems segment experienced significant cost overruns on many of its projects. These cost overruns were incurred and recorded during the third and fourth quarters of 2002 and amounted to approximately $1.8 million. As a result, as these projects are brought to completion, many in the first and second quarters of 2003, the revenues generated by them resulted in little margin or in some cases losses. In addition, the Company recorded approximately $1.0 million of additional write-downs on several additional projects that were nearing completion in the second quarter of 2003. This was the primary reason for the decrease in the gross profit percentage by Institutional Security Systems. To address this situation, the Company implemented more centralized controls and replaced certain personnel at its West Coast operations. Cost of goods sold in the Attack Protection segment increased from $9.7 million in the first six months of 2002 to $11.5 million in the first six months of 2003. This was an increase of $1.9 million or 19.4%. This increase was smaller than the related sales increase of this segment of 26.4%, resulting in an increase in the gross profit percentage from 18.0% in the first six months of 2002 to 22.6% in the first six months of 2003. During the first half of 2002 the Attack Protection segment experienced lower-than-expected volume in its bullet and blast resistant windows and doors product line which was exacerbated by excess plant capacity which resulted from the addition of its new 75,000 square foot factory that was placed in service during the spring of 2002. As a result of the terrorist attacks of September 11, 2001, the Company had geared up in anticipation of increased demand for this segment's products, which is only now beginning to materialize. This new factory was provisioned and staffed, via new equipment and hires as well as by the movement of equipment and staff from its existing factory. This resulted in the Company running both of its factories at levels significantly below optimum capacity in 2002, resulting in operational inefficiencies. As a result, the Company experienced incremental expenses in excess of the commensurate sales volume increase resulting in the lower gross profit percentage during 2002. Cost of goods sold in the Federal Security Systems segment increased from $5.7 million in the first six months of 2002 to $6.6 million in the first six months of 2003. This was an increase of $0.9 million or 15.8%. This increase was consistent with the related sales increase of this segment of 13.0%. The Federal Security Systems segment gross profit percentage was 14.5% and 16.6% during the first six months of 2002 and 2003 respectively. Substantially all of the projects awarded in this segment are discrete projects. Cost of goods sold in the Public Safety and Justice segment increased from $4.1 million in the first six months of 2002 to $10.0 million in the first six months of 2003. This was an increase of $5.9 million. Substantially all of this increase was a result of the Company's May 2, 2002 acquisition of Tiburon. Operating expenses increased from $11.1 million in the first six months of 2002 to $15.7 million in the first six months of 2003. This was an increase of $4.6 million. Substantially all of the change in operating expenses was a result of the Company's May 2, 2002 acquisition of Tiburon. Amortization of Intangible Assets and Capitalized Software Acquired in the Tiburon Acquisition. In conjunction with the acquisition on May 2, 2002, of Tiburon, Inc. and in compliance with Statement of Financial Accounting Standards No. 141 (SFAS 141) Business Combinations, the Company determined the fair value of the following identifiable assets and assigned the indicated lives thereto for purposes of amortization and depreciation. Amount Life ------ ---- (in thousands) (in years) Trade name $5,340 Indefinite Customer relationships $2,500 14 Software $3,000 5 Backlog $ 300 2 Other $ 135 3
The amortization of the above intangibles for the six months ended June 30, 2003 resulted in the Company recording amortization expense related to these intangibles of $486 thousand, which is included in operating expenses. Research and Development expenses increased from $1.3 million in the first six months of 2002 to $3.9 million in the first six months of 2003. Historically, the Company did not expend significant monies on research and development. With the acquisition of Tiburon, the Company's Public Safety and Justice segment expends significantly more dollars on software development. Being a technology driven enterprise, the Company's Public Safety and Justice segment is required to continually update and enhance its software offerings thus causing it to incur significant research and development costs. Interest expense increased from $659 thousand in the first six months of 2002 to $713 thousand in the first six months of 2003. The increase in the Company's interest expense during the first six months of 2003 is a result of the Company having a greater average level of borrowings in the first six months of 2003 as compared to the first six months of 2002 offset by a lower average borrowing rate. The increased borrowings in 2003 reflect borrowings made in the second quarter of 2002 to fund the cash portion of the Tiburon purchase price. The following table compares the weighted average of the Company's interest bearing borrowings and the related interest rates charged thereon for the first six months of 2003 and the first six months of 2002. Average first six Average first six months of 2003 months of 2002 Amount Rate Amount Rate ------ ---- ------ ---- (in thousands) Bank borrowings $23,085 5.1% $19,399 5.8% Subordinated borrowings $ - - $ 1,497 6.0% Amortization and write-off of financing charges $ 101 $ 75
Taxes on Income The effective tax rate in the first six months of 2003 was 40.0% as compared to 37.9% in the first six months of 2002. The primary reason for this change in effective tax rates is due to a change in the mix in the states in which the Company's earnings occur. Net Income. The Company reported net income of $2.0 million and $1.5 million in the first six months of 2003 and 2002, respectively. Fully diluted earnings per share increased to $.24 in the first six months of 2003 from $.20 in the first six months of 2002. The weighted average number of common shares outstanding and equivalents increased from 7.7 million in the first six months of 2002 to 8.1 million in the first six months of 2003. Liquidity and Capital Resources The Company funds its operations through cash flows generated from its operations, bank financing, and the sale of its common stock. The Company's liquidity requirements arise from cash necessary to carry its inventories and billed and unbilled receivables, for capital expenditures, to repurchase shares of its common stock under its share repurchase program, for payments of principal and interest on outstanding indebtedness and for acquisitions. The ultimate customers of the Company are primarily Federal, State and local governmental units. In the event the funding of these governmental units is reduced for any reason, including budgetary reductions due to economic conditions, there is a risk that the demand for the Company's goods and services would decrease which would reduce the availability of funds to the Company. As of June 30, 2003, the Company had working capital of $29 million compared with $31 million as of December 31, 2002. The most significant changes in working capital were decreases in accounts receivable, contract costs in excess of billings and deferred revenue and an increase in accounts payable and accrued expenses. Net cash provided by operating activities was $9.4 million in the first six months of 2003 versus $51 thousand used in operating activities in the first six months of 2002. Net cash used for investing activities was $401 thousand in the first six months of 2003 compared to $12.8 million in the first six months of 2002. Capital expenditures of $2.5 million were made in 2002 for the acquisition and provisioning of the Attack Protection segment's new 75,000 square foot factory in Montgomery, Alabama to increase capacity of the Attack Protection segment. Net payments for the acquisition of Tiburon, Inc. during the first six months of 2002 were $10.4 million. Net cash used in financing activities amounted to $6.2 million in the first six months of 2003 compared with $14.0 million provided by financing in 2002. The $10.0 million borrowing from banks in 2002 were used to finance the acquisition of Tiburon on May 2, 2002. The decrease in cash provided by financing activities is primarily a result of repayments under the Company's bank credit facilities. The following table summarizes the contractual obligations of the Company as of June 30, 2003 and the payments due by period. Payments Due by Period ---------------------- (in thousands) Long-Term Debt Operating Leases -------------- ---------------- December 31: 2003 $ 974 $ 1,426 2004 16,103 2,620 2005 440 1,840 2006 440 777 2007 440 556 Thereafter 2,685 380 ------- ------- Totals $21,082 $ 7,599 ======= =======
The Company's total outstanding borrowings at June 30, 2003 amounted to $21.1 million. These borrowings were at variable rates. The Company had two borrowings from banks, both made under a Credit Agreement that provides for both term borrowings and a line of credit. The first borrowing is a 3-year term loan due in quarterly installments through November 2004. This borrowing of $5.0 million was entered into on November 16, 2001. The amount outstanding as of June 30, 2003 was $2.5 million. The interest rate is variable and can range from LIBOR +1.75% to 3.5% or prime +0.5% to 2.25%. The rate charged the Company is based on the Company's leverage ratio at the end of each quarter. The leverage ratio is defined as the ratio of consolidated indebtedness for borrowed money, capital leases, guaranties of borrowed money and reimbursement obligations in respect of letters of credit divided by the Company's earnings before interest, taxes, depreciation, and amortization (EBITDA). The rate was 3.54% as of June 30, 2003. The second borrowing available from banks under the Credit Agreement is a $25.0 million line of credit, due November 16, 2004. Borrowings outstanding under this line of credit as of June 30, 2003 were $14.0 million. Its interest rate is variable and can range from LIBOR plus 1.50% to 3.25% or the prime rate plus 0.25% to 2.0%. The rate charged the Company is based on the Company's leverage ratio at the end of each quarter as defined above. The rate ranged from 3.54% to 5.00% as of June 30, 2003. The Company also had two industrial revenue bonds outstanding as of June 30, 2003 in the amounts of $1.7 million and $2.9 million. These borrowings bear interest at variable rates between 1.1% and 1.9% for the first six months of 2003 based on weekly market conditions. These bonds are fully collateralized by bank letters of credit issued under the Credit Agreement. The Company's banks consider letters of credit as outstanding borrowings when considering the amount of availability the Company has remaining under its line of credit. Other than the Company's $5.0 million of letters of credit, $4.0 million of which was entered into in April, 2002, primarily to secure an Industrial Revenue Bond borrowing on the Company's new Attack Protection facility, the Company has no other material off balance sheet liabilities. The Company had $7.7 million of unused availability under its line of credit at June 30, 2003. As a result of the variable nature of the interest rate on the Company's bank borrowings, any increase in the amount of outstanding borrowings and/or decreases in the Company's EBITDA (an increase in the "leverage ratio") will result in the Company's interest rate increasing and thus the amount of interest expense incurred also increasing. The Company anticipates that cash generated from operations and borrowings under the working capital line of credit will enable the Company to meet its liquidity, working capital and capital expenditure requirements during the next 12 months. The Company, however, may require additional financing to pursue its strategy of growth through acquisitions. If such financing is required, there are no assurances that it will be available, or if available, that it can be obtained on terms favorable to the Company. The Company presently has no binding commitment or binding agreement with respect to any acquisition or strategic investment. However, from time to time, the Company may be party to one or more non-binding letters of intent regarding material acquisitions, which, if consummated, may be paid for with cash or through the issuance of a significant number of shares of the Company's common stock. On May 2, 2002, the Company completed the acquisition of Tiburon, Inc. Total consideration paid for the purchase of the portion of Tiburon that the Company did not previously own amounted to approximately $10.4 million, net in cash and approximately 1.1 million shares of CompuDyne common stock for a total acquisition cost of $30.0 million. To fund the cash portion of the Tiburon acquisition, the Company negotiated an increase in its bank line of credit of $10.0 million effective May 2, 2002. Borrowings made by the Company under this increased facility may result in increased interest rates charged to the Company, to the extent its leverage ratio changes resulting in increased interest charges. As a result of the approval of this borrowing, the Company had adequate cash available to complete this transaction. On March 21, 2003, the Company and its banks amended the Company's loan agreements, which included a waiver of compliance with a variety of its loan covenants as of December 31, 2002. In conjunction with the amendment, the Company agreed to raise $7.0 million of new equity or borrowings, or a combination thereof, subordinate to its existing bank borrowings, by June 30, 2003. On June 30, 2003, the Company replaced one of the banks in its bank syndicate. As a result of this replacement, the requirement that the Company raise $7 million of capital, subordinate to its senior banking facility, which was required by the replaced syndicated member, was eliminated. Additional Considerations Cost Containment Due to current economic conditions, and in light of a very strong competitive environment, the Company recognizes that its ability to increase the prices it charges its customers is limited. As a result, in order to enhance its profitability, the Company recognizes the need to continue to seek ways to reduce its costs. Office Closures and Consolidations In January 2003, the Company closed its Midwest Regional Office, located in Wauwatusa, Wisconsin, and consolidated its operations into its Montgomery, Alabama office. The Company does not believe this office closure will have a negative impact on its ability to generate sales in the Midwest region. The costs to close this office were minimal. The Company anticipates that closure of this office will result in annual overhead savings of approximately $100 thousand. In June 2003, the Company moved its Airteq Systems manufacturing facility from leased space in Tualatin, Oregon to its new plant in Montgomery, Alabama, which was purchased in 2002 for its Attack Protection business. The move is expected to result in manufacturing efficiencies, labor reductions, better sharing of engineering and other overhead resources, and will absorb excess capacity in the Montgomery plant. In conjunction with the Airteq move the Company's Fiber SenSys business, which manufactures fiber optic based perimeter sensors for intrusion detection, will move from its current leased space in Beaverton, Oregon to the larger Airteq facility, which will result in a 10,000 square foot expansion for Fiber SenSys. These moves will result in charges totaling about $400 thousand during the second and third quarters of 2003 and should result in annual savings of $250 thousand in addition to providing the added capacity for Fiber SenSys. As of June 30, 2003, charges totaling $6 thousand were incurred by the Company in conjunction with this move. Pension Plan Prior to this year the Company maintained a money purchase pension plan, which covers employees at one of its divisions. Salaried employees at this division were eligible to participate in this plan after one year of service. Annual contributions of between 3% and 5% of annual compensation were made by the Company depending on the employees' years of service. The expense related to funding the plan was $253 thousand during the first six months of 2002. Effective December 31, 2002, the Company ceased contributions to this plan. The balances in this plan will be 100% vested and rolled into the CompuDyne 401K plan in 2003. CompuDyne's Total Backlog CompuDyne's total backlog amounted to $182 million at June 30, 2003. The break down of the Company's backlog by business segment is as follows: June 30, December, 31, 2003 2002 -------- ------------ (in thousands) (in thousands) Institutional Security Systems $ 81,916 $ 99,527 Attack Protection 16,552 18,478 Federal Security Systems 10,643 11,440 Public Safety and Justice 72,621 74,867 -------- -------- Totals $181,732 $204,312 ======== ========
Included in the backlog of the Public Safety and Justice segment at June 30, 2003 is $17.2 million representing awards received by the segment, for which the customers have not yet entered into signed contracts. These awards are expected to result in signed contracts over the next twelve (12) months. Critical Accounting Policies A complete description of the Company's significant accounting policies appears in the Company's Annual Report to its stockholders and is incorporated by reference in its Annual Report on Form 10-K for the year ended December 31, 2002. Percentage of Completion Accounting Approximately 85% of the Company's revenues are derived from long term contracts where revenue is recognized under the percentage of completion method of accounting. The Company's software related contracts utilize labor hours incurred to date on a project, divided by the total expected project hours to determine the completion percentage. The Company's manufacturing and construction contracts utilize costs incurred to date on a project, divided by the total expected project costs to determine the completion percentage. Both of these methods require considerable judgment and as such, the estimates derived at any point in time could differ significantly from actual results. These estimates effect many of the balance sheet and statement of operations accounts including net sales, cost of goods sold, accounts receivable, contract costs in excess of billings and billings in excess of contract costs incurred. Provisions for estimated losses on uncompleted contracts are recognized in the period such losses are determined. Goodwill and Intangible Assets The Company reviews the carrying value of goodwill and intangible assets annually as of September 30 or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, utilizing a discounted cash flow model. Changes in estimates of future cash flows caused by items such as unforeseen events or changes in market conditions could negatively affect the reporting unit's fair value and result in an impairment charge. The Company cannot predict the occurrence of events that might adversely affect the reported value of goodwill and intangible assets that totaled $17.9 million and $9.9 million, respectively as of June 30, 2003. Economic Conditions and the After Effect of the September 11, 2001 Terrorist Attacks Much of the work CompuDyne performs is for state and local governmental units. These entities have been particularly hard hit by recent economic conditions and the resultant contraction of the tax bases of these governmental units. This has caused these governmental units to carefully evaluate their budgets and defer expenses and projects where possible. Much of the work of the Company's Public Safety and Justice and Institutional Security Systems segments is contracted with these state and local governmental units. As a result, these segments, although building a strong backlog, have seen delays in new work available to be bid and worked on. In addition, even work that has been contracted for, where possible is being deferred by the customer into the future, presumably when the economy will experience more robust times. After the occurrence of the tragic events of the September 11, 2001 terrorist attacks, there was a general perception that CompuDyne's Federal Security Systems and Attack Protection segments would see a significant increase in order flow. To the contrary, in the months subsequent to the terrorist attacks these segments actually saw a slowing in new work opportunities as the various Federal agencies and other customers that are the usual source of business for the Company slowed their procurement processes waiting for definitive direction as to how to proceed in the post September 11 world. Now further complicated by the military action in Iraq, the Company's customers are reevaluating priorities and budgets and are funding only their most pressing demands while also making key decisions as to which projects can be deferred. Over time the Company believes these units will start to see a significant increase in business which has only recently begun. As a result of the above factors, the Company is experiencing a more challenging marketplace than it has experienced in several years. Impact of Inflation Inflation did not have a significant effect on CompuDyne's operations during the six months ended June 30, 2003. Market Risk The Company is exposed to market risk related to changes in interest rates. At June 30, 2003, the Company had a total of $21.1 million of notes payable outstanding. These borrowings were all at variable rates. The Company entered into an interest rate swap agreement on June 26, 2001 in the initial amount of $11.5 million. The amount of this swap agreement declines by $676 thousand on a quarterly basis until it becomes $0 on October 1, 2005. At June 30, 2003 the amount of the swap agreement had declined to $6.8 million at a fixed rate of 4.9%. As such, approximately $14.3 million of the Company's variable rate borrowings were not hedged with an interest rate swap agreement. In the event interest rates increase dramatically, the increase in interest rate expense to the Company could be material to the results of operations of the Company. Recent Accounting Pronouncements In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Many of such instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The Statement is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance of the date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. Management believes that the adoption of this statement will not have a significant impact on the financial position, results of operations or cash flows of the Company. In April 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities". The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. The amendments set forth in SFAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in Statement 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. Statement 149 amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Management does not expect that adoption of this pronouncement will have a material effect on the financial position, results of operations or cash flows of CompuDyne. In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation --Transition and Disclosure, an amendment of FASB Statement No. 123" which amends SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation" and the reporting provisions of APB No. 30, "Interim Financial Reporting." SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Adoption of this statement was required at the beginning of fiscal year 2003. The adoption of this pronouncement did not have a material effect on the financial position, results of operations or cash flows of CompuDyne. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The statement is effective for fiscal years beginning after December 31, 2002. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The adoption of this standard did not have a material effect on the financial position, results of operations or cash flows of CompuDyne. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement is effective for fiscal years beginning after May 15, 2002. SFAS 145 requires, among other things, eliminating reporting debt extinguishments as an extraordinary item in the income statement. The adoption of this standard did not have a material effect on the financial position, results of operations or cash flows of CompuDyne. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." The Interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Interpretation applies immediately to variable interest entities created after January 31, 2003, or in which the Company obtains an interest after that date. The Interpretation is effective July 1, 2003 to variable interest entities in which the Company holds a variable interest acquired before February 1, 2003. The Company has assessed the impact of adopting this Interpretation. The adoption of this standard did not have a material effect on the financial position, results of operations or cash flows of CompuDyne. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the recognition of liabilities for guarantees that are issued or modified subsequent to December 31, 2002. The liabilities should reflect the fair value, at inception, of the guarantors' obligations to stand ready to perform, in the event that the specified triggering events or conditions occur. The adoption of this standard did not have a material effect on the financial condition, results of operations or cash flows of CompuDyne. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 Certain statements made in this Form 10-Q with regard to the Company's expectations as to future revenues, expenses, financial position and industry conditions, the Company's ability to secure new contracts, its goals for future operations, implementation of business strategy and other future events constitute "forward-looking statements" within the meaning of the federal securities laws. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to management, identify forward-looking statements. Although the Company makes such statements based on current information and assumptions it believes to be reasonable, there can be no assurance that actual results will not differ materially from those expressed or implied by such forward-looking statements. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain important factors, including but not limited to, demand for the Company's products, competitive factors and pricing pressures, changes in legal and regulatory requirements, government budget problems, the ability to remain in compliance with its bank covenants and its amended bank covenants, delays in government procurement processes, ability to obtain bid, payment and performance bonds on various of the Company's projects, technological change or difficulties, the ability to refinance debt when it becomes due, product development risks, commercialization difficulties, adverse results in litigation and general economic conditions. Risks inherent in the Company's business and with respect to future uncertainties are further described in our other filings with the Securities and Exchange Commission. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk CompuDyne has variable rate notes payable. These on-balance sheet financial instruments expose the Company to interest rate risk, with the primary interest rate exposure resulting from changes in the LIBOR rate used to determine the interest rate applicable to the borrowing under the Company's bank borrowings. The information below summarizes CompuDyne's sensitivity to market risks associated with fluctuations in interest rates as of June 30, 2003. To the extent that the Company's financial instruments expose the Company to interest rate risk, they are presented in the table below. The table presents principal cash flows and related interest rates by year of maturity of the Company's notes payable with variable rates of interest in effect at June 30, 2003. Financial Instruments by Expected Maturity Date Year Ending December 31 2003 2004 2005 ---- ---- ---- Notes Payable: Variable rate $974,000 $16,103,000 $440,000 Average interest rate 4.5% 5.0% 6.0% Fixed rate $ - $ - $ - Average interest rate - - - Year Ending December 31 Thereafter Total Fair Value ---------- ----- ---------- Notes Payable: Variable rate $2,685,000 $21,082,000 $21,082,000 Average Interest Rate 7.0% 5.5% 5.5% Fixed rate $ - $ - $ - Average Interest Rate - - - Year Ending December 31 2003 2004 2005 ---- ---- ---- Interest Rate Swaps: Variable to Fixed $1,352,940 $2,705,880 $ 2,705,890 Average pay rate 4.90% 4.90% 4.90% Average receive rate 2.00% 3.00% 4.00% Year Ending December 31 Thereafter Total Fair Value ---------- ----- ---------- Interest Rate Swaps: Variable to Fixed $ - $6,764,710 ($ 270,768) Average pay rate - - - Average receive rate - - -
TABLE CONTINUED Financial Instruments by Expected Maturity Date Year Ending December 31 2006 2007 Notes Payable: Variable rate $440,000 $440,000 Average interest rate 6.5% 7.5% Fixed rate $ - $ - Average interest rate Year Ending December 31 Notes Payable: Variable rate Average Interest Rate Fixed rate Average Interest Rate Year Ending December 31 2006 2007 Interest Rate Swaps: Variable to Fixed $ - $ - Average pay rate - - Average receive rate - - Year Ending December 31 Interest Rate Swaps: Variable to Fixed Average pay rate Average receive rate
ITEM 4 CONTROLS AND PROCEDURES CompuDyne's management conducted an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of July 31, 2003. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that (i) the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed in reports filed or submitted to the SEC is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and (ii) such information is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. In addition, CompuDyne's management, including the Chief Executive Officer and Chief Financial Officer, reviewed the internal controls over financial reporting, and there have been no significant changes or deficiencies or material weaknesses in the Company's internal controls over financial reporting or in other factors that could significantly affect those controls subsequent to July 31, 2003. The Company continually strives to improve its disclosure controls and procedures to enhance the quality of its financial reporting. PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders Proposal #2 - Amendment of the 1996 Stock Option Plan for Non-Employee Directors At the Annual Meeting of Shareholders on May 16, 2003, the shareholders approved an amendment of the 1996 stock Option Plan for Non-Employee Directors that upon initial election or re-election to the Board the Non-Employee Director receive an option to purchase 10,000 shares of Common Stock as specified by the terms and conditions of the Directors Plan. In addition, each Non-Employee Director will receive an option to purchase 10,000 shares of Common Stock as specified by the terms of the Plan, at each Annual Meeting. This amendment to the Plan increases the number of shares of Common Stock that may be issued or transferred under the Directors Plan upon exercise of options or other rights to 400,000 shares. No options will be granted for attendance or participation in meetings of the Board of Directors or its committees. The votes were cast as follows: For - 6,619,689 Against - 149,076 Abstain - 89,745 Item 6: Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Fifth Amendment to the Credit Agreement dated as of June 22, 2003 by and among CompuDyne Corporation and its subsidiaries, certain participating lenders and PNC Bank, National Association, in its capacity as agent for the lenders, filed herewith. 10.2 Sixth Amendment to Credit Agreement dated as of July 15, 2003 by and among CompuDyne Corporation and its subsidiaries, certain participating lenders and PNC Bank, National Association, in its capacity as agent for the lenders, filed herewith. 31.1 Certification by Mr. Martin Roenigk, Chief Executive Officer pursuant to Rule 13a-14(a), filed herewith. 31.2 Certification by Mr. Geoffrey F. Feidelberg, Chief Financial Officer pursuant to Rule 13a-14(a), filed herewith. 32.1 Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, for Mr. Martin Roenigk, Chief Executive Officer, filed herewith. 32.2 Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, for Mr. Geoffrey F. Feidelberg, Chief Financial Officer, filed herewith. (b) Reports on Form 8-K Current Report on Form 8-K filed May 5, 2003 attaching CompuDyne Corporation's press release concerning earnings during the period ending March 31, 2003. SIGNATURE Pursuant to the requirements 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 Date: August 13, 2003 By: /s/ Geoffrey F. Feidelberg ------------------------------- Geoffrey F. Feidelberg Chief Financial Officer EX-10 3 fifthamend.txt Fifth Amendment to Credit Agreement THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made and effective as of June 27, 2003, by and among COMPUDYNE CORPORATION (the "Borrower"), the GUARANTORS party to this Fifth Amendment and the Credit Agreement referred to below (collectively, the "Guarantors"), the BANKS party to this Fifth Amendment and the Credit Agreement referred to below (collectively and together with the Agent, the "Banks") and PNC BANK, NATIONAL ASSOCIATION, individually and in its capacity as agent for the Banks under the Credit Agreement referred to below (hereinafter referred to in such capacity as the "Agent"). WITNESSETH: WHEREAS, reference is made to (i) that certain Credit Agreement dated November 16, 2001, as amended by that First Amendment to Credit Agreement dated as of December 19, 2001, that Second Amendment to Credit Agreement dated as of April 22, 2002, that Third Amendment to Credit Agreement dated and effective as of September 30, 2002 and that Fourth Amendment to Credit Agreement dated as of March 21, 2003 (the "Fourth Amendment"), by and among the Borrower, the Guarantors party thereto, the Banks party thereto and the Agent (as the same may be further amended, restated, supplemented or modified from time to time, the "Credit Agreement") pursuant to which the Banks made available to the Borrower a $30,000,000 revolving credit facility (including a $6,000,000 letter of credit subfacility and a $2,000,000 swing line of credit) and a $5,000,000 term loan, and (ii) those Notes of the Borrower evidencing its obligations under the Credit Agreement and the Loan Documents, comprised of a $3,000,000 Amended and Restated Term Note dated December 19, 2001, an $18,000,000 Second Amended and Restated Revolving Credit Note dated April 22, 2002, a $2,000,000 Term Note dated December 19, 2001, a $12,000,000 Amended and Restated Revolving Credit Note dated April 22, 2002 and a $2,000,000 Swing Line Note dated November 16, 2001 (collectively, the "Notes"); WHEREAS, contemporaneously with the execution of this Fifth Amendment and as permitted by the terms of the Credit Agreement, SunTrust Bank ("SunTrust") has assigned: (i) to SunBank ("SunBank"), 49.1875% of its rights and interests in, and SunBank has assumed such percentage interest in, the Commitments of SunTrust under the Credit Agreement and the Loan Documents, by virtue of execution of an Assignment and Assumption Agreement between SunTrust and SunBank even date herewith (the "SunBank Assignment and Assumption Agreement"); and (ii) to PNC Bank, National Association ("PNC"), 50.8143% of its rights and interests in, and PNC has assumed such percentage interest in, the Commitments of SunTrust under the Credit Agreement and the Loan Documents, by virtue of execution of an Assignment and Assumption Agreement between SunTrust and PNC even date herewith (the "PNC Assignment and Assumption Agreement"); and WHEREAS, pursuant to the terms of the SunBank Assignment and Assumption Agreement and the Credit Agreement, the Borrower has executed and delivered to SunBank the following Notes (the "SunBank Notes"): (i) a Revolving Credit Note dated June 27, 2003 in the stated principal amount of $5,455,000; and (ii) a Term Note dated June 27, 2003 in the stated principal amount of $545,000. All references to the "Notes" in the Credit Agreement and each of the Loan Documents shall hereinafter refer to and include the SunBank Notes; and WHEREAS, pursuant to the terms of the PNC Assignment and Assumption Agreement and the Credit Agreement, the Borrower has executed and delivered to PNC Bank the following Notes (the "Amended PNC Notes"): (i) a Third Amended and Restated Revolving Credit Note dated June 27, 2003 in the stated principal amount of $19,545,000; and (ii) a Second Amended and Restated Term Note dated June 27, 2003 in the stated principal amount of $1,951,666.65. All references to the "Notes" in the Credit Agreement and each of the Loan Documents shall hereinafter refer to and include the Amended PNC Notes; and WHEREAS, the Borrower, the Guarantors, the Agent and the Banks desire to further amend the Credit Agreement as provided for below. NOW, THEREFORE, in consideration of the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows: 1. Amendments to Credit Agreement. The Credit Agreement is amended as set forth in Exhibit A. Any and all references to the Credit Agreement in any of the Loan Documents shall be deemed to refer to the Credit Agreement as amended hereby. Any initially capitalized terms used in this Fifth Amendment without definition shall have the meanings assigned to those terms in the Credit Agreement. 2. Incorporation into Credit Agreement. This Fifth Amendment is deemed incorporated into each of the Loan Documents. To the extent that any term or provision of this Fifth Amendment is or may be deemed expressly inconsistent with any term or provision in any Loan Document, the terms and provisions hereof shall control. 3. Representations. In order to induce the Banks and the Agent to enter into this Fifth Amendment and agree to the transactions herein specified, Borrower and Guarantors represent and warrant as follows: (a) Borrower and each of the Guarantors is a corporation duly organized and in good standing under the laws of their respective states of incorporation. Borrower and each of the Guarantors has the power to own its property and to carry on its business as now being conducted. Borrower and each of the Guarantors is duly qualified to do business in every other jurisdiction in which the character of the property owned or the nature of the business conducted makes qualification necessary; (b) None of Borrower or any of the Guarantors is in violation of its articles of incorporation or bylaws, or in default in the performance of any material obligation, agreement, permit or license agreement to which it is a party or by which it is bound. The execution and delivery of this Fifth Amendment, the SunBank Notes and the Amended PNC Notes, and all other documents as specified herein, the performance and fulfillment of the terms herein and therein set forth and the consummation of the transactions herein or therein contemplated do not and will not constitute a breach of, or default under, any of Borrower's or Guarantors' articles of incorporation or bylaws, or any other agreement, indenture or other instrument by which it is bound, or any applicable law, administration regulation or court decree. All corporate and other actions, consents or authorizations which may be necessary or appropriate for the execution, delivery of and compliance with this Fifth Amendment, the SunBank Notes, the Amended PNC Notes and all documents and instruments herein set forth have been taken or obtained. Upon their execution and delivery, this Fifth Amendment, the SunBank Notes, the Amended PNC Notes and such other documents and instruments will constitute the valid and legally binding obligations of Borrower and Guarantors, enforceable against Borrower and Guarantors in accordance with their respective terms. (c) As of the date hereof, no Event of Default (as defined in the Credit Agreement) or any event, fact or circumstance which, with the passage of time or the giving of notice, or both, would constitute an Event of Default, has occurred and is continuing. (d) All representations and warranties of Borrower and Guarantors to the Banks as set forth in the Credit Agreement and each of the Loan Documents (as defined in the Credit Agreement) are true and correct as of the date hereof as if fully set forth herein at length. (e) None of Borrower or any of the Guarantors has any defense, set-off, claim or counterclaim to or against, or with respect to, full and prompt payment and performance by Borrower of all of Borrower's debts, liabilities or obligations to Agent or any of the Banks under the Credit Agreement and under the Loan Documents. 4. Collateral Confirmation. The Borrower and the Guarantors hereby confirm that any collateral for the Obligations, including but not limited to liens, security interests, mortgages, and pledges granted by the Borrower, the Guarantors or third parties (if applicable), shall continue unimpaired and in full force and effect. 5. Guarantor Reaffirmation. The Guarantors hereby affirm, acknowledge and agree that their respective guaranty agreements continue in full force and effect with respect to the Obligations, as modified and amended by this Fifth Amendment, and shall specifically extend to and include the SunBank Notes and the Amended PNC Notes. None of the Guarantors has any defense, offset or counterclaim to full performance and observance of their respective liabilities under the guaranty agreements as reaffirmed hereby. Each Guarantor hereby acknowledges and affirms that it has and will continue to realize tangible and significant direct economic benefit from the transactions described in the Credit Agreement, as amended hereby, the Notes and the other Loan Documents and hereby irrevocably and unconditionally acknowledge the receipt of good and valuable consideration for the execution and delivery of their respective guaranty agreements. 6. Release of Agent and Banks. As additional consideration for the Agent's and the Banks' entering into this Fifth Amendment, the Borrower and each Guarantor hereby fully and unconditionally releases and forever discharges the Agent and the Banks, their respective agents, employees, directors, officers, attorneys, branches, affiliates, subsidiaries, successors and assigns and all persons, firms, corporations and organizations acting on any of their respective behalves (the "Released Parties") of and from any and all claims, liabilities, demands, obligations, damages, losses, actions and causes of action whatsoever which the Borrower or any Guarantor may now have or claim to have against the Agent or any Bank or any other Released Parties as of the date hereof, whether presently known or unknown and of any nature and extent whatsoever, including, without limitation, on account of or in any way affecting, concerning or arising out of or founded upon the Credit Agreement, this Fifth Amendment or any of the Loan Documents, including but not limited to all such loss or damage of any kind heretofore sustained or that may arise as a consequence of the dealings between the parties up to and including the date hereof, including but not limited to, the administration or enforcement of the Loans, the Notes, the Obligations or any of the Loan Documents. The obligations of the Borrower and the Guarantors under the Loan Documents and this Fifth Amendment shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, discharged or in any way affected by: (i) any exercise or nonexercise of any right, remedy, power or privilege under or in respect of this Fifth Amendment, any Loan Document, any document relating to or evidencing any of the Agent's or any Bank's liens or applicable law, including, without limitation, any waiver, consent, extension, indulgence or other action or inaction in respect thereof; or (ii) any other act or thing or omission or delay to do any other act or thing which could operate to or as a discharge of the Borrower or any Guarantor as a matter of law, other than payment in full of all Obligations, including but not limited to all obligations under the Loan Documents and this Fifth Amendment. The Borrower and each of the Guarantors further agrees to indemnify and hold the Agent and the Banks and their respective officers, directors, attorneys, agents and employees harmless from any loss, damage, judgment, liability or expense (including attorneys' fees) suffered by or rendered against the Agent or the Banks, or any of them, on account of any claims arising out of or relating to the Obligations. The Borrower and each of the Guarantors further states that it has carefully read the foregoing release and indemnity, knows the contents thereof and grants the same as its own free act and deed. 7. Counterparts. This Fifth Amendment may be signed in any number of counterpart copies and by the parties hereto on separate counterparts, but all such copies shall constitute one and the same instrument. 8. Binding Effect. This Fifth Amendment will be binding upon and inure to the benefit of the Borrower, the Guarantors, the Banks and the Agent and their respective heirs, executors, administrators, successors and assigns. 9. Additional Conditions and Covenants. The following agreements and covenants constitute additional and substantial consideration for the Banks' agreement to effect the amendments to the Credit Agreement set forth herein: (a) The Borrower shall reimburse the Agent for its out of pocket fees and expenses incurred in connection with this Fifth Amendment, including, without limitation, its attorney fees and expenses. (b) SunTrust and SunBank shall have duly executed the SunBank Assignment and Assumption Agreement in substantially the form attached hereto as Appendix 1, and a true and correct copy thereof shall have been provided to the Agent. (c) SunTrust and PNC shall have duly executed the PNC Assignment and Assumption Agreement in substantially the form attached hereto as Appendix 2, and a true and correct copy thereof shall have been provided to the Agent. (d) The Borrower shall have duly executed and delivered the SunBank Notes in substantially the form attached hereto as Appendix 3, and a true and correct copy thereof shall have been provided to the Agent. (e) The Borrower shall have duly executed and delivered the Amended PNC Notes in substantially the form attached hereto as Appendix 4, and a true and correct copy thereof shall have been provided to the Agent. (f) The Borrower and the Guarantors shall execute such reaffirmation documents and other documents, instruments and agreements that the Agent may request from time to time in order to evidence, ratify and affirm its obligations under the Credit Agreement and the other Loan Documents and the security interests, liens and pledges effected thereby. (g) The Borrower shall pay a commitment fee to the Agent on behalf of SunBank in the amount of $10,000. 10. Representation by Counsel. The Borrower and each Guarantor represents and warrants that it is represented by legal counsel of its choice and that its counsel has had the opportunity to review this Fifth Amendment, that it is fully aware of the terms contained herein and that it has voluntarily and without coercion or duress of any kind or nature whatsoever entered into this Fifth Amendment. The provisions of this Fifth Amendment shall survive the execution and delivery of this Fifth Amendment. 11. LIMITATION ON DAMAGES. NEITHER THE AGENT, ANY BANK NOR ANY AGENT OR ATTORNEY FOR OR OF THE AGENT OR ANY BANK SHALL BE LIABLE TO THE BORROWER OR ANY GUARANTOR FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES ARISING FROM ANY BREACH OF CONTRACT, TORT OR OTHER WRONG RELATING TO THE ESTABLISHMENT, ADMINISTRATION OR COLLECTION OF THE OBLIGATIONS, AS DEFINED IN ANY LOAN DOCUMENT OR THE ACTION OR INACTION OF THE AGENT OR ANY BANK OR THE BORROWER OR ANY GUARANTOR UNDER THIS FOURTH AMENDMENT OR ANY LOAN DOCUMENT OR OTHERWISE. 12. Elimination of Fourth Amendment Condition. The requirement regarding the Subordinated Cash Event set forth in Section 9(e) of the Fourth Amendment is hereby eliminated. 13. Ratification of Loan Documents. Except as amended hereby, the terms and provisions of the Loan Documents remain unchanged and in full force and effect, and are hereby ratified and affirmed. Except as expressly provided herein, this Fifth Amendment shall not constitute an amendment, waiver, consent or release with respect to any provision of any Loan Document, a waiver of any default or Event of Default thereunder, or a waiver or release of any of the Banks' rights and remedies (all of which are hereby reserved). The Borrower and each of the Guarantors expressly ratifies and confirms the confession of judgment (if applicable) and waiver of jury trial provisions contained in the Loan Documents as if set forth herein in their entirety as of the date hereof. [SIGNATURE PAGE FOLLOWS IMMEDIATELY] WITNESS the due execution hereof as of the day and year first above written. COMPUDYNE CORPORATION, a Nevada corporation By: Title: CFO-Treasurer CORRLOGIC, INC., a Nevada corporation By: Title: Vice President FIBER SENSYS, INC., an Oregon corporation By: Title: Vice President NEW TIBURON, INC., a Virginia corporation By: Title: Vice President NORMENT SECURITY GROUP, INC., a Delaware corporation By: Title: Vice President NORSHIELD CORPORATION, an Alabama corporation By: Title: Vice President QUANTA SYSTEMS CORPORATION, a Connecticut corporation By: Title: SYSCO SECURITY SYSTEMS, INC., now by name change SECURETRAVEL, INC. a Nevada corporation By: Title: Vice President PNC BANK, NATIONAL ASSOCIATION, as a Bank and as Agent By: Title: Vice President SUNBANK By: Title: Regional President AMENDMENTS TO CREDIT AGREEMENT EXHIBIT A The Credit Agreement is hereby amended as follows: I. Background to Amendment The Borrower, the Guarantors, the Banks and the Agent desire to amend the Credit Agreement to reallocate the amount of the Banks' Commitments, to reduce the total amounts of the Commitments and to modify the definition of "Fixed Charges". II. Credit Agreement Amendments a) The definition of "Fixed Charges" set forth in Section 1.1 is deleted and restated in its entirety as follows: "Fixed Charges" shall mean for any period of determination the sum of interest expense and scheduled principal installments on Indebtedness (as adjusted for prepayments) for the prior four (4) fiscal quarters in each case of the Borrower and its Subsidiaries for such period determined and consolidated in accordance with GAAP." b) Part 1 of Schedule 1.1(B) is deleted in its entirety and restated as follows: Part 1 - Commitments of Banks and Addresses for Notices to Banks Bank Name: PNC Bank, National Association Address: 4242 Carlisle Pike Camp Hill, PA 17011 Attention: Thomas J. Fowlston Telephone (717) 730-2404 Telecopy: (717) 730-2387 Amount of Amount of Amount of Commitment Commitment Commitment for Revolving for Term for Swing Total Credit Loans Loans Loans* Commitment Ratable Shares - ------------ ----- ------ ---------- -------------- $19,545,000 $1,951,666.65 $2,000,000 $21,496,666.65 78.17917% Name: SunBank Address: SunBank 1100 Spring Garden Drive Suite A Middletown, PA 17057 Attention: David Diffenderffer Telephone: (717) 831-0008 Telefax: (717) 831-0072 Amount of Amount of Amount of Commitment Commitment Commitment for Revolving for Term for Swing Total Credit Loans Loans Loans* Commitment Ratable Shares - ------------ ----- ------ ---------- -------------- $5,455,000 $545,000 $6,000,000 21.82083% TOTAL $25,000,000 $2,496,666.65 $N/A $27,496,666.65 100% =========== ============= ==== ============== ====
_______________________ * The Swing Line is shown as a part of the Revolving Credit Commitment of PNC Bank and is not separately combined in calculating total Commitments in the table. STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of June, 2003, before me, a Notary Public, the undersigned officer, personally appeared ____________________________, who acknowledged himself/herself to be the ____________________________ of COMPUDYNE CORPORATION and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. __________________________________ Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of June, 2003, before me, a Notary Public, the undersigned officer, personally appeared ____________________________, who acknowledged himself/herself to be the ____________________________ of CORRLOGIC, INC. and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. __________________________________ Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of June, 2003, before me, a Notary Public, the undersigned officer, personally appeared ____________________________, who acknowledged himself/herself to be the ____________________________ of FIBER SENSYS, INC. and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. __________________________________ Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of June, 2003, before me, a Notary Public, the undersigned officer, personally appeared ____________________________, who acknowledged himself/herself to be the ____________________________ of NEW TIBURON, INC. and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. __________________________________ Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of June, 2003, before me, a Notary Public, the undersigned officer, personally appeared ____________________________, who acknowledged himself/herself to be the ____________________________ of NORMENT SECURITY GROUP, INC. and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. __________________________________ Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of June, 2003, before me, a Notary Public, the undersigned officer, personally appeared ____________________________, who acknowledged himself/herself to be the ____________________________ of NORSHIELD CORPORATION and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. __________________________________ Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of June, 2003, before me, a Notary Public, the undersigned officer, personally appeared ____________________________, who acknowledged himself/herself to be the ____________________________ of QUANTA SYSTEMS CORPORATION and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. __________________________________ Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of June, 2003, before me, a Notary Public, the undersigned officer, personally appeared ____________________________, who acknowledged himself/herself to be the ____________________________ of SECURETRAVEL, INC., formerly SYSCO SECURITY SYSTEMS, INC. and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. __________________________________ Notary Public My commission expires: COMMONWEALTH OF PENNSYLVANIA ) ) SS: COUNTY OF ) On this, the _____ day of June, 2003, before me, a Notary Public, the undersigned officer, personally appeared Thomas J. Fowlston, who acknowledged himself to be the Vice President of PNC BANK, NATIONAL ASSOCIATION and that he, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of said bank as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. __________________________________ Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of June, 2003, before me, a Notary Public, the undersigned officer, personally appeared ___________________, who acknowledged himself to be the Regional President of SUNBANK, and that he, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of said bank as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. __________________________________ Notary Public My commission expires: APPENDIX 1 FORM OF SUNBANK ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT Reference is made to the Credit Agreement dated as of November 16, 2001, as the same may be modified, supplemented or amended from time to time, including, without limitation, as amended by that First Amendment to Credit Agreement dated as of December 19, 2001, that Second Amendment to Credit Agreement dated as of April 22, 2002, that Third Amendment to Credit Agreement dated as of September 30, 2002 and that Fourth Amendment to Credit Agreement dated as of March 21, 2003 (the "Credit Agreement") by and among COMPUDYNE CORPORATION, a Nevada corporation (the "Borrower"), the Guarantor subsidiaries and affiliates of the Borrower parties thereto, the Banks as defined therein, and PNC Bank, National Association, individually and in its capacity as agent ("Agent"). Unless otherwise defined herein, terms defined in the Credit Agreement are used herein with the same meanings. SUNTRUST BANK (the "Assignor") and SUNBANK (the "Assignee"), intending to be legally bound hereby, make this Assignment and Assumption Agreement as of this 27th day of June, 2003 and hereby agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, WITHOUT RECOURSE to the Assignor, 49.1857% interest in and to all of the Assignor's rights, obligations and Commitment under the Credit Agreement as of the Effective Date (as defined below), including without limitation, such percentage interest in the Assignor's Commitment as in effect on the Effective Date, the Loans owing to the Assignor on the Effective Date and the Notes evidencing the outstanding Loans held by the Assignor. 2. The Assignor (i) represents and warrants that, as of the date hereof, its Commitment (a) under the Revolving Credit Facility, is $11,200,000 with an unpaid principal amount of $4,800,000 and (b) under the Term Loan Facility, is $2,000,000 in original principal amount with a current unpaid principal balance of $998,666.65; (ii) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (iii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or any of the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any of the Loan Documents or any other instrument or document furnished pursuant thereto; (iv) makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance or observance by Borrower of any of its obligations under the Credit Agreement or any of the Loan Documents or any other instrument or document furnished pursuant thereto; and (v) attaches the Notes referred to in paragraph 1 above and requests that the Agent exchange such Notes for new Notes as follows: a) Partially exchange existing Amended and Restated Revolving Credit Note dated April 22, 2002 in the stated principal amount of $12,000,000 payable to SunTrust Bank (the "SunTrust Revolving Note") for a Revolving Credit Note of Borrower in favor of Assignee. Upon closing under that Assignment and Assumption Agreement dated even date herewith between SunTrust Bank and PNC Bank, National Association regarding the remaining portion of the SunTrust Revolving Credit Facility Commitment, the SunTrust Revolving Note shall be deemed satisfied and cancelled; and b) Partially exchange existing Term Note dated December 19, 2001 in the stated principal amount of $2,000,000 payable to SunTrust Bank (the "SunTrust Term Note") for a Term Note of Borrower in favor of Assignee. Upon closing under that Assignment and Assumption Agreement dated even date herewith between SunTrust Bank and PNC Bank, National Association regarding the remaining portion of the SunTrust Term Loan Commitment, the SunTrust Term Note shall be deemed satisfied and cancelled. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements (if any) referred to in Sections 6.1.9 [Financial Statements] and 8.3 [Reporting Requirements] of the Credit Agreement and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption; (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoints and authorizes the Agent to take such actions on its behalf and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof; (iv) agrees that it will become a party to and be bound by the Credit Agreement from and after the Effective Date as if it were an original Bank thereunder and will have the rights and obligations of a Bank thereunder and will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank; (v) specifies as its address for notices the office set forth beneath its name on the signature pages hereof. 4. The effective date of this Assignment and Assumption shall be June 27, 2003 (the "Effective Date"). Following the execution of this Assignment and Assumption, it will be delivered to the Agent for acceptance and recording by the Agent. 5. Upon such acceptance and recording, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Assumption, have the rights and obligations of a Bank thereunder and under the Loan Documents and (ii) the Assignor shall, to the extent provided in this Assignment and Assumption, relinquish its rights and be released from its obligations under the Credit Agreement, and the Commitments of the Assignor and the Assignee shall be as set forth in Schedule I hereto. 6. Upon such acceptance and recording, from and after the Effective Date, the Agent shall make all payments under the Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal and interest fees with respect thereto, less the Agent's Fee) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. The Assignor makes this assignment to the Assignee in consideration of the payment by the Assignee to the Agent of $3,163,400 receipt of which is hereby acknowledged by the Assignor. 8. This Assignment and Assumption shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania excluding its rules relating to conflicts of laws. SUNTRUST BANK By: Name: Title: SUNBANK By: Name: Title: Notice Address: 1100 Spring Garden Drive Suite A Middletown, PA 17057 Telephone No.: (717) 831-0008 Telecopier No.: (717) 831-0072 Attn: David Diffenderffer CONSENTED TO this ____day of June, 2003 PNC BANK, NATIONAL ASSOCIATION, as Agent By: Name: Title: COMPUDYNE CORPORATION By: Name: Title: SCHEDULE I Amount of Commitment Amount of Loans as of the Effective Date as of the Effective Date SunTrust Bank 1 $ -0- $ -0- SunBank 2 $ 6,000,000 $ 3,163,400
- --------------------- 1 After giving effect to the Assignment and Assumption Agreement dated even date herewith between Assignor and PNC Bank, National Association 2 After giving effect to the modifications in the Commitment amounts set forth in that Fifth Amendment to Credit Agreement dated even date herewith among Assignee, PNC Bank, National Association, as agent, the Banks parties thereto and the Guarantors parties thereto. APPENDIX 2 FORM OF PNC ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT Reference is made to the Credit Agreement dated as of November 16, 2001, as the same may be modified, supplemented or amended from time to time, including, without limitation, as amended by that First Amendment to Credit Agreement dated as of December 19, 2001, that Second Amendment to Credit Agreement dated as of April 22, 2002, that Third Amendment to Credit Agreement dated as of September 30, 2002 and that Fourth Amendment to Credit Agreement dated as of March 21, 2003 (the "Credit Agreement") by and among COMPUDYNE CORPORATION, a Nevada corporation (the "Borrower"), the Guarantor subsidiaries and affiliates of the Borrower parties thereto, the Banks as defined therein, and PNC Bank, National Association, individually and in its capacity as agent ("Agent"). Unless otherwise defined herein, terms defined in the Credit Agreement are used herein with the same meanings. SUNTRUST BANK (the "Assignor") and PNC BANK, NATIONAL ASSOCIATION (the "Assignee"), intending to be legally bound hereby, make this Assignment and Assumption Agreement as of this 27th day of June, 2003 and hereby agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, WITHOUT RECOURSE to the Assignor, 50.8143% interest in and to all of the Assignor's rights, obligations and Commitment under the Credit Agreement as of the Effective Date (as defined below), including without limitation, such percentage interest in the Assignor's Commitment as in effect on the Effective Date, the Loans owing to the Assignor on the Effective Date and the Notes evidencing the outstanding Loans held by the Assignor. 2. The Assignor (i) represents and warrants that, as of the date hereof, its Commitment (a) under the Revolving Credit Facility, is $11,200,000 with an unpaid principal amount of $4,800,000 and (b) under the Term Loan Facility, is $2,000,000 in original principal amount with a current unpaid principal amount of $998,666.65; (ii) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (iii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or any of the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any of the Loan Documents or any other instrument or document furnished pursuant thereto; (iv) makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance or observance by Borrower of any of its obligations under the Credit Agreement or any of the Loan Documents or any other instrument or document furnished pursuant thereto; and (v) attaches the Notes referred to in paragraph 1 above and requests that the Agent exchange such Notes for new Notes as follows: a) Partially exchange existing Amended and Restated Revolving Credit Note dated April 22, 2002 in the stated principal amount of $12,000,000 payable to SunTrust Bank (the "SunTrust Revolving Note") for a Third Amended and Restated Revolving Credit Note of Borrower in favor of Assignee. Upon closing under that Assignment and Assumption Agreement dated even date herewith between SunTrust Bank and SunBank regarding the remaining portion of the SunTrust Revolving Credit Facility Commitment, the SunTrust Revolving Note shall be deemed satisfied and cancelled; and b) Partially exchange existing Term Note dated December 19, 2001 in the stated principal amount of $2,000,000 payable to SunTrust Bank (the "SunTrust Term Note") for a Second Amended and Restated Term Note of Borrower in favor of Assignee. Upon closing under the that Assignment and Assumption Agreement dated even date herewith between SunTrust Bank and SunBank regarding the remaining portion of the SunTrust Term Loan Commitment, the SunTrust Term Note shall be deemed satisfied and cancelled. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements (if any) referred to in Sections 6.1.9 [Financial Statements] and 8.3 [Reporting Requirements] of the Credit Agreement and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption; and (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement. 4. The effective date of this Assignment and Assumption shall be June 27, 2003 (the "Effective Date"). Following the execution of this Assignment and Assumption, it will be delivered to the Agent for acceptance and recording by the Agent. 5. Upon such acceptance and recording, as of the Effective Date, the Assignor shall, to the extent provided in this Assignment and Assumption, relinquish its rights and be released from its obligations under the Credit Agreement, and the Commitments of the Assignor and the Assignee shall be as set forth in Schedule I hereto. 6. Upon such acceptance and recording, from and after the Effective Date, the Agent shall make all payments under the Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal and interest fees with respect thereto, less the Agent's Fee) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. The Assignor makes this assignment to the Assignee in consideration of the payment to the Agent of $2,635,266.65 receipt of which is hereby acknowledged by the Assignor. In addition to the foregoing payment, Assignor retains its rights to payment from the Agent of accrued interest and unused commitment fees in the amount of $32,020.08. 8. This Assignment and Assumption shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania excluding its rules relating to conflicts of laws. SUNTRUST BANK By: Name: Title: PNC BANK, NATIONAL ASSOCIATION By: Name: Title: Notice Address: 4242 Carlisle Pike Camp Hill, PA 17011 Telephone No.: (717) 730-2404 Telecopier No.: (717) 730-2387 Attn: Thomas J. Fowlston CONSENTED TO this ____ day of June, 2003 PNC BANK, NATIONAL ASSOCIATION, as Agent By: Name: Thomas J. Fowlston Title: Vice President COMPUDYNE CORPORATION By: Name: Title: SCHEDULE I Amount of Commitment as of the Effective Date Amount of Loans as of the Effective Date SunTrust Bank 1 $ -0- $ -0- PNC Bank 2 $21,496,666.65 $12,386,081.44
- --------------------- 1 After giving effect to the Assignment and Assumption Agreement dated even date herewith between Assignor and SunBank. 2 After giving effect to the existing Commitment of PNC and the modifications in the Commitment amounts set forth in that Fifth Amendment to Credit Agreement dated even date herewith among Assignee PNC Bank, National Association, as agent, the Banks parties thereto and the Guarantors parties thereto. APPENDIX 3 FORM OF SUNBANK NOTES REVOLVING CREDIT NOTE $5,455,000.00 June 27, 2003 FOR VALUE RECEIVED, the undersigned, COMPUDYNE CORPORATION, a Nevada corporation (the "Borrower"), hereby promises to pay to the order of SUNBANK (the "Bank"), at the Principal Office (as such term is defined in Section 1.1 [Certain Definitions] of the Credit Agreement) of PNC Bank, National Association (the "Agent"), the lesser of (i) the rincipal sum of Five Million Four Hundred Fifty-Five Thousand Dollars (U.S. $5,455,000.00), and (ii) the aggregate unpaid principal balance of all Revolving Credit Loans made by the Bank to the Borrower pursuant to Section 2.1 [Revolving Credit Commitments] of the Credit Agreement dated November 16, 2001 among the Borrower, each of the Guarantors, the Banks party thereto, the Agent and the Bank (as amended by that First Amendment to Credit Agreement dated as of December 19, 2001, that Second Amendment to Credit Agreement dated as of April 22, 2002, that Third Amendment to Credit Agreement dated as of September 30, 2002, that Fourth Amendment to Credit Agreement dated as of March 21, 2003 and that Fifth Amendment to Credit Agreement dated even date herewith, and as the same may be further amended or renewed from time to time, the "Credit Agreement"). Such principal sum shall be payable on the time or times provided in Section 5.1 [Payments] of the Credit Agreement, provided that all amounts due under the Credit Agreement shall, unless previously paid, be paid in full on the Expiration Date. The Borrower shall pay interest on the unpaid principal balance hereof from time to time outstanding from the date hereof at the rate or rates per annum specified by the Borrower pursuant to Section 4.1 [Interest Rate Options] of, or as otherwise provided in, the Credit Agreement. If any payment or action to be made or taken hereunder shall be stated to be or become due on a day which is not a Business Day, such payment or action shall be made or taken on the next following Business Day (or the prior Business Day (as such term is defined in Section 1.1 [Certain Definitions] of the Credit Agreement) in respect of certain Revolving Credit Loans to which the Euro-Rate Option (as such term is defined in Section 1.1 [Certain Definitions] of the Credit Agreement) applies) and such extension of time shall be included in computing interest or fees, if any, in connection with such payment or action. Subject to the provisions of the Credit Agreement, payments of both principal and interest shall be made without setoff, counterclaim or other deduction of any nature at the Principal Office (as such term is defined in Section 1.1 [Certain Definitions] of the Credit Agreement) of the Agent, in lawful money of the United States of America in immediately available funds. This Note is one of the Revolving Credit Notes referred to in, evidences indebtedness incurred under, and is entitled to the benefits of, the Credit Agreement and the other Loan Documents, including, without limitation, the representations, warranties, covenants, conditions, security interests or liens contained or granted therein. The Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayment, in certain circumstances, on account of principal hereof prior to maturity upon the terms and conditions therein specified. All capitalized terms used herein shall, unless otherwise defined herein, have the same meanings given to such terms in the Credit Agreement. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the Credit Agreement. No failure to exercise and no delay in exercising any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. This Note shall bind the Borrower and Borrower's successors and assigns, and the benefits hereof shall inure to the benefit of the Bank, the Agent and their respective successors and assigns. All references herein to the "Borrower", the "Bank" and the "Agent" shall be deemed to apply to the Borrower, the Bank and the Agent, respectively, and their respective successors and assigns. This Note and any other documents delivered in connection herewith and the rights and obligations of the parties hereto and thereto shall for all purposes be governed by and construed and enforced in accordance with the internal laws of the Commonwealth of Pennsylvania without giving effect to its conflicts of law principles. IN WITNESS WHEREOF, the undersigned has executed this Note by its duly authorized officers. COMPUDYNE CORPORATION, a Nevada corporation By: _____________________________ Name: _____________________________ Title: _____________________________ TERM NOTE $545,000.00 June 27, 2003 FOR VALUE RECEIVED, the undersigned, COMPUDYNE CORPORATION, a Nevada corporation (the "Borrower"), hereby unconditionally promises to pay to the order of SUNBANK (the "Bank"), at the Principal Office (as such term is defined in Section 1.1 [Certain Definitions] of the Credit Agreement) of PNC Bank, National Association (the "Agent"), in the installments referred to below, in lawful money of the United States of America and in immediately available funds, the principal amount of (a) Five Hundred Forty-Five Thousand U.S. Dollars (U.S. $545,000.00), or if less (b) the aggregate principal amount of all Term Loans made by the Bank to the Borrower pursuant to Section 3.1 [Term Loan Commitments] of the Credit Agreement referred to below. The Borrower further agrees to pay interest accrued on the unpaid principal amount outstanding hereunder from time to time from the date hereof in like money at such Principal Office (as such term is defined in Section 1.1 [Certain Definitions] of the Credit Agreement referred to below) at the rates and on the dates specified in Section 3.3 [Term Loan Notes] of the Credit Agreement, together with all other costs, fees and expenses as provided in the Credit Agreement. The Borrower shall make principal payments on this Note in installments due on the dates specified in the Credit Agreement and in the amounts determined in accordance with the provisions thereof; provided that, the last such installment shall be in an amount sufficient to repay the entire unpaid principal balance of this Note, together with all accrued and unpaid interest thereon. All outstanding principal and accrued and unpaid interest shall be due and payable on such date as is set forth in Section 3.3 [Term Loan Notes] of the Credit Agreement. This Note is one of the Term Notes referred to in, evidences indebtedness incurred under, and is entitled to the benefits of, the Credit Agreement, dated as of the date hereof (said Agreement, as amended by that First Amendment to Credit Agreement dated as of December 19, 2001, that Second Amendment to Credit Agreement dated as of April 22, 2002, that Third Amendment to Credit Agreement dated as of September 30, 2002, that Fourth Amendment to Credit Agreement dated as of March 21, 2003 and that Fifth Amendment to Credit Agreement dated even date herewith, and as it may be amended, supplemented or otherwise modified from time to time, being referred to as the "Credit Agreement"), among the Borrower, the Guarantors, the Bank, the other banks and financial institutions parties thereto, and Agent. The Credit Agreement, among other things, contains provisions for the acceleration of the maturity hereof upon the happening of certain events, for voluntary or mandatory prepayments of the principal hereof prior to the maturity thereof, for a higher rate of interest hereunder on amounts past due and, in certain circumstances, in the case of an Event of Default, for the amendment or waiver of certain provisions of the Credit Agreement and for certain security interests granted by the Borrower and certain related entities. Reference is made to the Credit Agreement and the other Loan Documents for a statement of the terms and conditions under which the Term Loan evidenced hereby has been secured. Upon the occurrence of any one or more of the Events of Default specified in the Credit Agreement, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided therein. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. This Note shall bind the Borrower and Borrower's successors and assigns, and the benefits hereof shall inure to the benefit of the Bank, the Agent and their respective successors and assigns. All references herein to the "Borrower", the "Bank" and the "Agent" shall be deemed to apply to the Borrower, the Bank and the Agent, respectively, and their respective successors and assigns. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement. This Note shall be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania without giving effect to its conflicts of law principles. COMPUDYNE CORPORATION, a Nevada corporation By: ________________________________ Name: ________________________________ Title: ________________________________ APPENDIX 4 FORM OF AMENDED PNC NOTES THIRD AMENDED AND RESTATED REVOLVING CREDIT NOTE $19,545,000.00 June 30, 2003 FOR VALUE RECEIVED, the undersigned, COMPUDYNE CORPORATION, a Nevada corporation (the "Borrower"), hereby promises to pay to the order of PNC BANK, NATIONAL ASSOCIATION (the "Bank"), at the Principal Office (as such term is defined in Section 1.1 [Certain Definitions] of the Credit Agreement) of PNC Bank, National Association (the "Agent"), the lesser of (i) the principal sum of Nineteen Million Five Hundred Forty-Five Thousand Dollars (U.S. $19,545,000.00), and (ii) the aggregate unpaid principal balance of all Revolving Credit Loans made by the Bank to the Borrower pursuant to Section 2.1 [Revolving Credit Commitments] of the Credit Agreement dated November 16, 2001 among the Borrower, each of the Guarantors, the Banks party thereto, the Agent and the Bank (as amended by that First Amendment to Credit Agreement dated as of December 19, 2001, that Second Amendment to Credit Agreement dated as of April 22, 2002, that Third Amendment to Credit Agreement dated as of September 30, 2002, that Fourth Amendment to Credit Agreement dated as of March 21, 2003 and that Fifth Amendment to Credit Agreement dated even date herewith, and as the same may be further amended or renewed from time to time, the "Credit Agreement"). Such principal sum shall be payable on the time or times provided in Section 5.1 [Payments] of the Credit Agreement, provided that all amounts due under the Credit Agreement shall, unless previously paid, be paid in full on the Expiration Date. The Borrower shall pay interest on the unpaid principal balance hereof from time to time outstanding from the date hereof at the rate or rates per annum specified by the Borrower pursuant to Section 4.1 [Interest Rate Options] of, or as otherwise provided in, the Credit Agreement. If any payment or action to be made or taken hereunder shall be stated to be or become due on a day which is not a Business Day, such payment or action shall be made or taken on the next following Business Day (or the prior Business Day (as such term is defined in Section 1.1 [Certain Definitions] of the Credit Agreement) in respect of certain Revolving Credit Loans to which the Euro-Rate Option (as such term is defined in Section 1.1 [Certain Definitions] of the Credit Agreement) applies) and such extension of time shall be included in computing interest or fees, if any, in connection with such payment or action. Subject to the provisions of the Credit Agreement, payments of both principal and interest shall be made without setoff, counterclaim or other deduction of any nature at the Principal Office (as such term is defined in Section 1.1 [Certain Definitions] of the Credit Agreement) of the Agent, in lawful money of the United States of America in immediately available funds. This Note is one of the Revolving Credit Notes referred to in, evidences indebtedness incurred under, and is entitled to the benefits of, the Credit Agreement and the other Loan Documents, including, without limitation, the representations, warranties, covenants, conditions, security interests or liens contained or granted therein. The Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayment, in certain circumstances, on account of principal hereof prior to maturity upon the terms and conditions therein specified. All capitalized terms used herein shall, unless otherwise defined herein, have the same meanings given to such terms in the Credit Agreement. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the Credit Agreement. No failure to exercise and no delay in exercising any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. This Note shall bind the Borrower and Borrower's successors and assigns, and the benefits hereof shall inure to the benefit of the Bank, the Agent and their respective successors and assigns. All references herein to the "Borrower", the "Bank" and the "Agent" shall be deemed to apply to the Borrower, the Bank and the Agent, respectively, and their respective successors and assigns. This Note and any other documents delivered in connection herewith and the rights and obligations of the parties hereto and thereto shall for all purposes be governed by and construed and enforced in accordance with the internal laws of the Commonwealth of Pennsylvania without giving effect to its conflicts of law principles. This Note amends, restates and replaces in its entirety that Second Amended and Restated Revolving Credit Note dated April 22, 2002 of the Borrower to the Bank in the stated principal amount of $18,000,000 (the "Prior Note"). By execution and delivery of this Restated Note, the Borrower hereby represents, covenants and agrees that (i) the indebtedness and obligations evidenced by the Prior Note, as amended and restated hereby, and the Loan Documents continue in full force and effect as valid and binding obligations of the Borrower, fully enforceable in accordance with their respective terms and (ii) as of the date hereof, the Borrower has no defense, set-off, claim or counter-claim against or with respect to full and prompt payment and performance by Borrower of all of Borrower's debts, liabilities and obligations to Bank hereunder and under the other Loan Documents. IN WITNESS WHEREOF, the undersigned has executed this Note by its duly authorized officers. COMPUDYNE CORPORATION, a Nevada corporation By: _____________________________ Name: _____________________________ Title: _____________________________ SECOND AMENDED AND RESTATED TERM NOTE $1,951,666.65 June 30, 2003 FOR VALUE RECEIVED, the undersigned, COMPUDYNE CORPORATION, a Nevada corporation (the "Borrower"), hereby unconditionally promises to pay to the order of PNC BANK, NATIONAL ASSOCIATION (the "Bank"), at the Principal Office (as such term is defined in Section 1.1 [Certain Definitions] of the Credit Agreement) of PNC Bank, National Association (the "Agent"), in the installments referred to below, in lawful money of the United States of America and in immediately available funds, the principal amount of (a) One Million Nine Hundred Fifty-One Thousand Six Hundred Sixty-Six and 65/100 U.S. Dollars (U.S. $1,951,666.65), or if less (b) the aggregate principal amount of all Term Loans made by the Bank to the Borrower pursuant to Section 3.1 [Term Loan Commitments] of the Credit Agreement referred to below. The Borrower further agrees to pay interest accrued on the unpaid principal amount outstanding hereunder from time to time from the date hereof in like money at such Principal Office (as such term is defined in Section 1.1 [Certain Definitions] of the Credit Agreement referred to below) at the rates and on the dates specified in Section 3.3 [Term Loan Notes] of the Credit Agreement, together with all other costs, fees and expenses as provided in the Credit Agreement. The Borrower shall make principal payments on this Note in installments due on the dates specified in the Credit Agreement and in the amounts determined in accordance with the provisions thereof; provided that, the last such installment shall be in an amount sufficient to repay the entire unpaid principal balance of this Note, together with all accrued and unpaid interest thereon. All outstanding principal and accrued and unpaid interest shall be due and payable on such date as is set forth in Section 3.3 [Term Loan Notes] of the Credit Agreement. This Note is one of the Term Notes referred to in, evidences indebtedness incurred under, and is entitled to the benefits of, the Credit Agreement, dated as of the date hereof (said Agreement, as amended by that First Amendment to Credit Agreement dated as of December 19, 2001, that Second Amendment to Credit Agreement dated as of April 22, 2002, that Third Amendment to Credit Agreement dated as of September 30, 2002, that Fourth Amendment to Credit Agreement dated as of March 21, 2003 and that Fifth Amendment to Credit Agreement dated even date herewith, and as it may be amended, supplemented or otherwise modified from time to time, being referred to as the "Credit Agreement"), among the Borrower, the Guarantors, the Bank, the other banks and financial institutions parties thereto, and Agent. The Credit Agreement, among other things, contains provisions for the acceleration of the maturity hereof upon the happening of certain events, for voluntary or mandatory prepayments of the principal hereof prior to the maturity thereof, for a higher rate of interest hereunder on amounts past due and, in certain circumstances, in the case of an Event of Default, for the amendment or waiver of certain provisions of the Credit Agreement and for certain security interests granted by the Borrower and certain related entities. Reference is made to the Credit Agreement and the other Loan Documents for a statement of the terms and conditions under which the Term Loan evidenced hereby has been secured. Upon the occurrence of any one or more of the Events of Default specified in the Credit Agreement, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided therein. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. This Note shall bind the Borrower and Borrower's successors and assigns, and the benefits hereof shall inure to the benefit of the Bank, the Agent and their respective successors and assigns. All references herein to the "Borrower", the "Bank" and the "Agent" shall be deemed to apply to the Borrower, the Bank and the Agent, respectively, and their respective successors and assigns. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement. This Note shall be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania without giving effect to its conflicts of law principles. This Note amends, restates and replaces in its entirety that Term Note (Amended and Restated) dated December 19, 2001 of the Borrower to the Bank in the stated principal amount of $3,000,000 (the "Prior Note"). By execution and delivery of this Restated Note, the Borrower hereby represents, covenants and agrees that (i) the indebtedness and obligations evidenced by the Prior Note, as amended and restated hereby, and the Loan Documents continue in full force and effect as valid and binding obligations of the Borrower, fully enforceable in accordance with their respective terms and (ii) as of the date hereof, the Borrower has no defense, set-off, claim or counter-claim against or with respect to full and prompt payment and performance by Borrower of all of Borrower's debts, liabilities and obligations to Bank hereunder and under the other Loan Documents. COMPUDYNE CORPORATION, a Nevada corporation By:________________________________ Name:______________________________ Title:_____________________________ EX-10 4 sixthamend.txt Sixth Amendment to Credit Agreement THIS SIXTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made and effective as of July ___, 2003, by and among COMPUDYNE CORPORATION (the "Borrower"), the GUARANTORS party to this Sixth Amendment and the Credit Agreement referred to below (collectively, the "Guarantors"), the BANKS party to this Sixth Amendment and the Credit Agreement referred to below (collectively and together with the Agent, the "Banks") and PNC BANK, NATIONAL ASSOCIATION, individually and in its capacity as agent for the Banks under the Credit Agreement referred to below (hereinafter referred to in such capacity as the "Agent"). WITNESSETH: WHEREAS, reference is made to (i) that certain Credit Agreement dated November 16, 2001, as amended by that First Amendment to Credit Agreement dated as of December 19, 2001, that Second Amendment to Credit Agreement dated as of April 22, 2002, that Third Amendment to Credit Agreement dated and effective as of September 30, 2002, that Fourth Amendment to Credit Agreement dated as of March 21, 2003 and that Fifth Amendment to Credit Agreement dated as of June 27, 2003 by and among the Borrower, the Guarantors party thereto, the Banks party thereto and the Agent (as the same may be further amended, restated, supplemented or modified from time to time, the "Credit Agreement") pursuant to which the Banks made available to the Borrower a $30,000,000 original principal amount revolving credit facility, now reduced by amendment to $25,000,000 (including a $7,000,000 letter of credit subfacility and a $2,000,000 swing line of credit) and a $5,000,000 original principal amount term loan, now reduced through amortization to $2,496,666.65, and (ii) those Notes of the Borrower evidencing its obligations under the Credit Agreement and the Loan Documents, comprised of (A) a Second Amended and Restated Term Note in the stated principal amount of $1,951,666.65 in favor of PNC Bank, National Association dated June 27, 2003, (B) a Third Amended and Restated Revolving Credit Note in the stated principal amount of $19,545,000 in favor of PNC Bank, National Association dated June 27, 2003, (C) a Term Note in the stated principal amount of $545,000 in favor of SunBank dated June 27, 2003 and (D) a Revolving Credit Note in the stated principal amount of $5,455,000 in favor of SunBank dated June 27, 2003 (as the same may be amended, restated, supplemented, restated or substituted from time to time, collectively, the "Notes"); WHEREAS, the Borrower, the Guarantors, the Agent and the Banks desire to amend the Credit Agreement to increase the amount of the letter of credit subfacility on the terms and conditions set forth herein as provided for below. NOW, THEREFORE, in consideration of the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows: 1. Amendments to Credit Agreement. The Credit Agreement is amended as set forth in Exhibit A. Any and all references to the Credit Agreement in any of the Loan Documents shall be deemed to refer to the Credit Agreement as amended hereby. Any initially capitalized terms used in this Sixth Amendment without definition shall have the meanings assigned to those terms in the Credit Agreement. 2. Incorporation into Credit Agreement. This Sixth Amendment is deemed incorporated into each of the Loan Documents. To the extent that any term or provision of this Sixth Amendment is or may be deemed expressly inconsistent with any term or provision in any Loan Document, the terms and provisions hereof shall control. 3. Representations. In order to induce the Banks and the Agent to enter into this Sixth Amendment and agree to the transactions herein specified, Borrower and Guarantors represent and warrant as follows: (a) Borrower and each of the Guarantors is a corporation duly organized and in good standing under the laws of their respective states of incorporation. Borrower and each of the Guarantors has the power to own its property and to carry on its business as now being conducted. Borrower and each of the Guarantors is duly qualified to do business in every other jurisdiction in which the character of the property owned or the nature of the business conducted makes qualification necessary; (b) None of Borrower or any of the Guarantors is in violation of its articles of incorporation or bylaws, or in default in the performance of any material obligation, agreement, permit or license agreement to which it is a party or by which it is bound. The execution and delivery of this Sixth Amendment, and all other documents as specified herein, the performance and fulfillment of the terms herein and therein set forth and the consummation of the transactions herein or therein contemplated do not and will not constitute a breach of, or default under, any of Borrower's or Guarantors' articles of incorporation or bylaws, or any other agreement, indenture or other instrument by which it is bound, or any applicable law, administration regulation or court decree. All corporate and other actions, consents or authorizations which may be necessary or appropriate for the execution, delivery of and compliance with this Sixth Amendment and all documents and instruments herein set forth have been taken or obtained. Upon their execution and delivery, this Sixth Amendment and such other documents and instruments will constitute the valid and legally binding obligations of Borrower and Guarantors, enforceable against Borrower and Guarantors in accordance with their respective terms. (c) As of the date hereof, no Event of Default (as defined in the Credit Agreement) or any event, fact or circumstance which, with the passage of time or the giving of notice, or both, would constitute an Event of Default, has occurred and is continuing. (d) All representations and warranties of Borrower and Guarantors to the Banks as set forth in the Credit Agreement and each of the Loan Documents (as defined in the Credit Agreement) are true and correct as of the date hereof as if fully set forth herein at length. (e) None of Borrower or any of the Guarantors has any defense, set-off, claim or counterclaim to or against, or with respect to, full and prompt payment and performance by Borrower of all of Borrower's debts, liabilities or obligations to Agent or any of the Banks under the Credit Agreement and under the Loan Documents. 4. Collateral Confirmation. The Borrower and the Guarantors hereby confirm that any collateral for the Obligations, including but not limited to liens, security interests, mortgages, and pledges granted by the Borrower, the Guarantors or third parties (if applicable), shall continue unimpaired and in full force and effect. 5. Guarantor Reaffirmation. The Guarantors hereby affirm, acknowledge and agree that their respective guaranty agreements continue in full force and effect with respect to the Obligations, as modified and amended by this Sixth Amendment. None of the Guarantors has any defense, offset or counterclaim to full performance and observance of their respective liabilities under the guaranty agreements as reaffirmed hereby. Each Guarantor hereby acknowledges and affirms that it has and will continue to realize tangible and significant direct economic benefit from the transactions described in the Credit Agreement, as amended hereby, the Notes and the other Loan Documents and hereby irrevocably and unconditionally acknowledge the receipt of good and valuable consideration for the execution and delivery of their respective guaranty agreements. 6. Release of Agent and Banks. As additional consideration for the Agent's and the Banks' entering into this Sixth Amendment, the Borrower and each Guarantor hereby fully and unconditionally releases and forever discharges the Agent and the Banks, their respective agents, employees, directors, officers, attorneys, branches, affiliates, subsidiaries, successors and assigns and all persons, firms, corporations and organizations acting on any of their respective behalves (the "Released Parties") of and from any and all claims, liabilities, demands, obligations, damages, losses, actions and causes of action whatsoever which the Borrower or any Guarantor may now have or claim to have against the Agent or any Bank or any other Released Parties as of the date hereof, whether presently known or unknown and of any nature and extent whatsoever, including, without limitation, on account of or in any way affecting, concerning or arising out of or founded upon the Credit Agreement, this Sixth Amendment or any of the Loan Documents, including but not limited to all such loss or damage of any kind heretofore sustained or that may arise as a consequence of the dealings between the parties up to and including the date hereof, including but not limited to, the administration or enforcement of the Loans, the Notes, the Obligations or any of the Loan Documents. The obligations of the Borrower and the Guarantors under the Loan Documents and this Sixth Amendment shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, discharged or in any way affected by: (i) any exercise or nonexercise of any right, remedy, power or privilege under or in respect of this Sixth Amendment, any Loan Document, any document relating to or evidencing any of the Agent's or any Bank's liens or applicable law, including, without limitation, any waiver, consent, extension, indulgence or other action or inaction in respect thereof; or (ii) any other act or thing or omission or delay to do any other act or thing which could operate to or as a discharge of the Borrower or any Guarantor as a matter of law, other than payment in full of all Obligations, including but not limited to all obligations under the Loan Documents and this Sixth Amendment. The Borrower and each of the Guarantors further agrees to indemnify and hold the Agent and the Banks and their respective officers, directors, attorneys, agents and employees harmless from any loss, damage, judgment, liability or expense (including attorneys' fees) suffered by or rendered against the Agent or the Banks, or any of them, on account of any claims arising out of or relating to the Obligations. The Borrower and each of the Guarantors further states that it has carefully read the foregoing release and indemnity, knows the contents thereof and grants the same as its own free act and deed. 7. Counterparts. This Sixth Amendment may be signed in any number of counterpart copies and by the parties hereto on separate counterparts, but all such copies shall constitute one and the same instrument. 8. Binding Effect. This Sixth Amendment will be binding upon and inure to the benefit of the Borrower, the Guarantors, the Banks and the Agent and their respective heirs, executors, administrators, successors and assigns. 9. Additional Conditions and Covenants. The following agreements and covenants constitute additional and substantial consideration for the Banks' agreement to effect the amendments to the Credit Agreement set forth herein: (a) The Borrower shall reimburse the Agent for its out of pocket fees and expenses incurred in connection with this Sixth Amendment, including, without limitation, its attorney fees and expenses. (b) The Borrower and the Guarantors shall execute such reaffirmation documents and other documents, instruments and agreements that the Agent may request from time to time in order to evidence, ratify and affirm its obligations under the Credit Agreement and the other Loan Documents and the security interests, liens and pledges effected thereby. 10. Representation by Counsel. The Borrower and each Guarantor represents and warrants that it is represented by legal counsel of its choice and that its counsel has had the opportunity to review this Sixth Amendment, that it is fully aware of the terms contained herein and that it has voluntarily and without coercion or duress of any kind or nature whatsoever entered into this Sixth Amendment. The provisions of this Sixth Amendment shall survive the execution and delivery of this Sixth Amendment. 11. LIMITATION ON DAMAGES. NEITHER THE AGENT, ANY BANK NOR ANY AGENT OR ATTORNEY FOR OR OF THE AGENT OR ANY BANK SHALL BE LIABLE TO THE BORROWER OR ANY GUARANTOR FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES ARISING FROM ANY BREACH OF CONTRACT, TORT OR OTHER WRONG RELATING TO THE ESTABLISHMENT, ADMINISTRATION OR COLLECTION OF THE OBLIGATIONS, AS DEFINED IN ANY LOAN DOCUMENT OR THE ACTION OR INACTION OF THE AGENT OR ANY BANK OR THE BORROWER OR ANY GUARANTOR UNDER THIS SIXTH AMENDMENT OR ANY LOAN DOCUMENT OR OTHERWISE. 12. Ratification of Loan Documents. Except as amended hereby, the terms and provisions of the Loan Documents remain unchanged and in full force and effect, and are hereby ratified and affirmed. Except as expressly provided herein, this Sixth Amendment shall not constitute an amendment, waiver, consent or release with respect to any provision of any Loan Document, a waiver of any default or Event of Default thereunder, or a waiver or release of any of the Banks' rights and remedies (all of which are hereby reserved). The Borrower and each of the Guarantors expressly ratifies and confirms the confession of judgment (if applicable) and waiver of jury trial provisions contained in the Loan Documents as if set forth herein in their entirety as of the date hereof. [SIGNATURE PAGE FOLLOWS IMMEDIATELY] WITNESS the due execution hereof as of the day and year first above written. COMPUDYNE CORPORATION, a Nevada corporation By: Title: CFO-Treasurer CORRLOGIC, INC., a Nevada corporation By: Title: Vice President FIBER SENSYS, INC., an Oregon corporation By: Title: Vice President NEW TIBURON, INC., a Virginia corporation By: Title: Vice President NORMENT SECURITY GROUP, INC., a Delaware corporation By: Title: Vice President NORSHIELD CORPORATION, an Alabama corporation By: Title: Vice President QUANTA SYSTEMS CORPORATION, a Connecticut corporation By: Title: SYSCO SECURITY SYSTEMS, INC., now by name change SECURETRAVEL, INC. a Nevada corporation By: Title: Vice President PNC BANK, NATIONAL ASSOCIATION, as a Bank and as Agent By: Title: Vice President SUNBANK By: Title: Regional President AMENDMENTS TO CREDIT AGREEMENT EXHIBIT A The Credit Agreement is hereby amended as follows: I. Background to Amendment The Borrower, the Guarantors, the Banks and the Agent desire to amend the Credit Agreement to increase the amount of the letter of credit subfacility. II. Credit Agreement Amendments (A) Section 2.8.1 is deleted and restated in its entirety as follows: "2.8.1 Issuance of Letters of Credit. Borrower may request the issuance of letters of credit (each a "Letter of Credit") on behalf of itself or another Loan Party by delivering to the Agent a completed application and agreement for letters of credit in such form as the Agent may specify from time to time by no later than 10:00 a.m., Pittsburgh time, at least three (3) Business Days, or such shorter period as may be agreed to by the Agent, in advance of the proposed date of issuance. Except for the Second Norment Letter of Credit (as defined in Subsection 2.8.10, below), each Letter of Credit shall be either a Standby Letter of Credit or a Commercial Letter of Credit. Subject to the terms and conditions hereof and in reliance on the agreements of the other Banks set forth in this Section 2.8, the Agent will issue a Letter of Credit provided that each Letter of Credit shall (A) have a maximum maturity of thirty-six (36) months from the date of issuance, and (B) in no event expire later than ten (10) Business Days prior to the Expiration Date and further provided that in no event shall (i) the Letter of Credit Outstanding exceed, at any one time, $8,000,000 or (ii) the Revolving Facility Usage exceed, at any one time, the Revolving Credit Commitments. The Existing Letters of Credit will be cancelled on the Closing Date or replaced by Letters of Credit. The Existing Letters of Credit are not "Letters of Credit" hereunder, but the Second Norment Letter of Credit constitutes a "Letter of Credit" hereunder (subject to the provisions of Subsection 2.8.10)." STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of July, 2003, before me, a Notary Public, the undersigned officer, personally appeared ___________________________, who acknowledged himself/herself to be the ____________________________ of COMPUDYNE CORPORATION and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of July, 2003, before me, a Notary Public, the undersigned officer, personally appeared ___________________________, who acknowledged himself/herself to be the ____________________________ of CORRLOGIC, INC. and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of July, 2003, before me, a Notary Public, the undersigned officer, personally appeared ___________________________, who acknowledged himself/herself to be the ____________________________ of FIBER SENSYS, INC. and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of July, 2003, before me, a Notary Public, the undersigned officer, personally appeared ___________________________, who acknowledged himself/herself to be the ____________________________ of NEW TIBURON, INC. and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of July, 2003, before me, a Notary Public, the undersigned officer, personally appeared ___________________________, who acknowledged himself/herself to be the ____________________________ of NORMENT SECURITY GROUP, INC. and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of July, 2003, before me, a Notary Public, the undersigned officer, personally appeared ___________________________, who acknowledged himself/herself to be the ____________________________ of NORSHIELD CORPORATION and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of July, 2003, before me, a Notary Public, the undersigned officer, personally appeared ___________________________, who acknowledged himself/herself to be the ____________________________ of QUANTA SYSTEMS CORPORATION and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of July, 2003, before me, a Notary Public, the undersigned officer, personally appeared ___________________________, who acknowledged himself/herself to be the ____________________________ of SECURETRAVEL, INC., formerly SYSCO SECURITY SYSTEMS, INC. and that he/she, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporation as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My commission expires: COMMONWEALTH OF PENNSYLVANIA ) ) SS: COUNTY OF ) On this, the _____ day of July, 2003, before me, a Notary Public, the undersigned officer, personally appeared Thomas J. Fowlston, who acknowledged himself to be the Vice President of PNC BANK, NATIONAL ASSOCIATION and that he, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of said bank as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My commission expires: STATE OF ____________________ ) ) SS: COUNTY OF ) On this, the _____ day of July, 2003, before me, a Notary Public, the undersigned officer, personally appeared ___________________________, who acknowledged himself to be the Regional President of SUNBANK, and that he, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of said bank as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My commission expires: EX-31 5 cdcex311.txt Exhibit 31.1 CERTIFICATION I, Martin A. Roenigk, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CompuDyne Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors; (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 13, 2003 /s/ Martin Roenigk --------------------- Martin Roenigk Chief Executive Officer EX-31 6 cdcex312.txt Exhibit 31.2 CERTIFICATION I, Geoffrey F. Feidelberg, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CompuDyne Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors; (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 13, 2003 /s/ Geoffrey F. Feidelberg ----------------------------- Geoffrey F. Feidelberg Chief Financial Officer EX-32 7 cdcex321.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CompuDyne Corporation (the "Company") on Form 10-Q for the period ending June 30, 2003 accompanying this certification and filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Martin Roenigk, Chief Executive Officer of the Company, certify, to the best of my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 13, 2003 /s/ Martin Roenigk ---------------------- Martin Roenigk Chief Executive Officer EX-32 8 cdcex322.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CompuDyne Corporation (the "Company") on Form 10-Q for the period ending June 30, 2003 accompanying this certification and filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Geoffrey F. Feidelberg, Chief Financial Officer of the Company, certify, to the best of my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 13, 2003 /s/ Geoffrey F. Feidelberg ---------------------------- Geoffrey F. Feidelberg Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----