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 September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-4245
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CompuDyne Corporation
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(Exact name of registrant as specified in its charter)
Nevada 23-1408659
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
120 Union Street, Willimantic, Connecticut 06226
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(Address of principal executive offices)
(860) 456-4187
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(Registrant's telephone number, including area code)
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
-----
As of November 11, 1998 a total of 4,124,542 shares of Common Stock,
$.75 par value, were outstanding.
COMPUDYNE CORPORATION AND SUBSIDIARIES
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30, 1998
and 1997 (unaudited) 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997(unaudited) 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
- - - ------
Current Assets:
Cash $ - $ -
Accounts receivable, net 5,919 4,757
Inventories:
Finished Goods 89 72
Work in process 291 888
Raw materials and supplies 742 612
------- -------
Total inventories 1,122 1,572
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Prepaid expenses and other current
assets 97 95
------- -------
Total Current Assets $ 7,138 $ 6,424
------- -------
Non-current receivables, related parties 60 60
Property, plant and equipment, at cost
Land and improvements 26 26
Buildings and leasehold improvements 263 250
Machinery and equipment 957 1,055
Furniture and fixtures 297 287
Automobiles 69 84
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Total property, plant and equipment 1,612 1,702
------- -------
Less: accumulated depreciation and
amortization 781 990
------- -------
Net property, plant and equipment 831 712
------- -------
Deferred tax asset 144 124
Intangible assets, net of accumulated
amortization 62 66
Other assets, net 78 43
------- -------
Total other assets 284 233
------- -------
Total Assets $ 8,313 $ 7,429
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,170 $ 2,104
Bank notes payable 1,702 1,339
Other accrued expenses 923 1,015
Accrued income taxes 246 35
Current portion of deferred compensation - 26
Current portion of notes payable
related parties 20 20
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Total Current Liabilities $ 5,061 $ 4,539
Notes payable, related parties $ 20 $ 30
Long term pension liability 494 489
Other liabilities 191 209
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Total Liabilities $ 5,766 $ 5,267
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SHAREHOLDERS' EQUITY:
Common stock, par value $.75 per share
10,000,000 shares authorized; 4,124,542
shares issued 3,093 3,093
Other capital 8,203 8,203
Treasury shares, at cost; 78,636 shares
as of September 30, 1998; 16,666
shares as of December 31, 1997 (120) -
Receivable from management (90) (90)
Accumulated Deficit (8,539) (9,044)
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Total Shareholders' Equity 2,547 2,162
------- -------
Total Liabilities and Shareholders'
Equity $ 8,313 $ 7,429
======= =======
See Notes to Consolidated Financial Statements (unaudited).
- - - ------------------------------------------------------------------------
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September, 30, September 30
------------------ -----------------
1998 1997 1998 1997
Net sales $ 6,916 $ 4,690 $18,183 $ 14,585
Cost of sales 5,673 3,810 14,907 12,139
------- ------- ------ -------
Gross margin 1,243 880 3,276 2,446
Selling, general and administra-
tive expenses 801 631 2,298 1,784
Research and Development 113 10 181 100
------- ------ ------ -------
Operating income 329 239 797 562
------- ------ ------ -------
Other (income) expense
Interest expense 38 16 82 41
Other income (14) (16) (18) (48)
------- ------ ------ -------
Total other (income) expense,
net 24 - 64 (7)
Income before income tax provision 305 239 733 569
Income tax provision 93 48 228 97
------- ------- ------ ------
Net income $ 212 $ 191 $ 505 $ 472
======= ======= ====== ======
Basic EPS:
Net income $ .06 $ .07 $ .13 $ .18
====== ======= ====== ======
Weighted average number of
common shares outstanding 3,845 2,678 3,845 2,678
====== ======= ====== ======
Diluted EPS:
Net income $ .05 $ .04 $ .11 $ .11
====== ======= ====== ======
Weighted average number of
common shares and equivalents 4,447 4,446 4,447 4,446
====== ======= ====== ======
See Notes to Consolidated Financial Statements (unaudited).
- - - ------------------------------------------------------------------------
COMPUDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------
1998 1997
Cash flows provided by (used for) operating
activities:
Income from continuing operations $ 505 $ 472
Adjustments to reconcile net income to
net cash provided by (used in)
continuing operations:
Depreciation and amortization 137 70
Deferred income taxes 20 (119)
(Increase) decrease in accounts receivable (1,162) 1,718
Increase in accounts receivable, related parties - (12)
Increase in prepaid expenses (2) (48)
Decrease (increase) in inventories 450 (23)
Increase (decrease) in accounts payable 66 (1,780)
(Decrease) in accrued liabilities (118) (175)
Increase in accrued income taxes 211 98
Decrease in billings in excess of costs - (562)
Increase (decrease) in other assets 35 (14)
Decrease in other liabilities (13) -
------- -------
Cash flows provided by (used in) operations 19 (375)
------- -------
Cash flows used for investing activities:
Additions to property, plant and equipment (252) (99)
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Net cash flows used for investing activities (252) (99)
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Cash flows (used for) provided by financing
activities:
Purchase of treasury stock (120) -
Increase in short term debt 363 303
Proceeds from long term debt, related parties - 5
Repayment on long term debt, related parties (10) (20)
------- -------
Net cash provided by financing activities 233 288
Net decrease in cash - (186)
Cash and cash equivalents at beginning of period - 186
------- -------
Cash and cash equivalents at end of period $ - $ -
======= =======
Supplemental Schedule of Cash Flow Information:
Cash paid during the period for:
Interest $ 82 $ 17
Income taxes $ 29 $ 92
See Notes to Consolidated Financial Statements (unaudited).
COMPUDYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
- - - ------------------------
The accompanying unaudited consolidated financial statements of CompuDyne
Corporation and subsidiaries (the "Company"), have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in the annual
financial statements, prepared in accordance with generally accepted
accounting principles, 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 fair presentation for the periods presented. It is
suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's latest annual report to the Securities
and Exchange Commission on Form 10-K for the year ended December 31,
1997.
2. ACCOUNTS RECEIVABLE
- - - ----------------------
Accounts receivable consist of the following:
($ in thousands)
September 30, December 31,
1998 1997
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U.S. Government Contracts:
Billed $ 1,277 $ 1,712
Unbilled 837 1,054
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2,114 2,766
Commercial Contracts:
Billed 3,729 2,084
Unbilled 159 207
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3,888 2,291
Total Accounts Receivable $ 6,002 $ 5,057
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Less Allowance for Doubtful Accounts (83) (300)
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Net Accounts Receivable $ 5,919 $ 4,757
========= ===========
3. COMMON STOCK AND COMMON STOCK OPTIONS
- - - ----------------------------------------
On September 23, 1998, the Compensation and Stock Options Committee
("Committee") granted options to purchase 45,000 shares of CompuDyne
stock to key employees of Quanta SecurSystems at a price of $2.50 per
share (the fair market value of such shares at the date of grant).
4. SUBSEQUENT EVENTS
- - - --------------------
On November 10, 1998 CompuDyne signed a definitive agreement to acquire
all of the capital stock of Norment Industries, Inc. ("Norment") and
Norshield Corporation ("Norshield"), each of which is a wholly-owned
subsidiary of Apogee Enterprises, Inc. ("Apogee") a Minnesota based
corporation. CompuDyne will pay Apogee approximately twenty two million
five hundred thousand dollars ($22,500,000) with a combination of cash
and CompuDyne common stock subject to adjustments for working capital
levels at closing. CompuDyne expects to close on this purchase in late
November, 1998.
Norment Industries - The leading systems integrator and manufacturer of
physical and electronic security systems for the corrections market which
includes the following divisions:
SESCO - The largest detention system contractor in the United
States.
Trentech - One of the leading electronic security systems
manufacturer and integrator serving the corrections industry.
Airteq - Manufactures the most technologically advanced lock product
line in the corrections industry.
Engineered Maximum Security Systems ("EMSS") - A leading
detention system contractor located on the West Coast.
Norshield - The world's largest manufacturer and supplier of ballistic,
attack and blast resistant products.
Norment combined with Norshield had net sales in their fiscal year ended
February 28, 1998 of approximately $72 million.
CompuDyne is currently finalizing the following agreements to finance
this purchase:
1. $9 million in Senior subordinated notes with warrants for 297,924
shares of CompuDyne common stock with an exercise price of $3.25 per
share.
2. 1,075,507 shares of the corporation's common stock for a
purchase price of $3 million
3. A senior secured credit facility of $18 million, to include a
three year revolving credit facility of up to $6.5 million and
a five year term loan of $11.5 million.
5. RECLASSIFICATIONS
- - - --------------------
Quanta Systems has been involved in discussions with the Defense Contract
Audit Agency ("DCAA") during the past quarter regarding the indirect
pooling arrangements and the consequent indirect rate structure. Quanta
Systems revised the indirect rate structure to accommodate a single
general and administrative approach which is favored by DCAA. The
reclassification of certain costs from general and administrative to
costs of goods sold resulted in a reclassification in the 1997 income
statement for comparison purposes only, with no change in net profit.
The net effect on the 1998 income statement from this change is not
considered material.
COMPUDYNE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- - - ---------------------
Third Quarter 1998 and 1997 comparison
Net sales from continuing operations for the third quarter of 1998 were
$6.9 million. This was an increase of $2.2 million from $4.7 million in
the third quarter of 1997. SecurSystems net sales increased $1.4 million
to $3.1 million in the third quarter of 1998, up from $1.7 million in the
same quarter in 1997. This was due to the success of winning work and
significantly increasing the backlog throughout 1997. Quanta Systems
sales increased $878 thousand to $3.0 million in the third quarter of
1998 from $2.1 million during the same period in 1997 primarily due to
increased volume with SPAWAR. DCS had a slight decrease in net sales of
$28 thousand, down to $400 thousand in the third quarter of 1998 compared
with $428 thousand in the third quarter of 1997. Micro Assembly also had
a slight decrease in net sales of $33 thousand for the third quarter of
1998, down to $438 thousand from $471 thousand in net sales in the third
quarter of 1997. SYSCO had $39 thousand in net sales in the third
quarter of 1998. These were incremental sales since SYSCO had no sales
in the third quarter of 1997.
CompuDyne's gross margin increased $362 thousand from $880 thousand in
the third quarter of 1997 to $1.2 million in the third quarter of 1998.
SecurSystems gross margin increased $200 thousand in the third quarter of
1998 to $521 thousand, up from $321 thousand in the third quarter of
1997. This increase is directly related to increased sales. Gross
margin at Quanta Systems increased $124 thousand from $326 thousand in
the third quarter of 1997 to $460 thousand in the same period of 1998 due
to the increased sales volume as well as renegotiated higher fees on the
new SPAWAR work. Gross margin at DCS increased $75 thousand to $167
thousand in the third quarter of 1998, up from $92 thousand in the same
period of 1997 due to sales during the quarter at higher margins.
MicroAssembly's gross margin decreased $63 thousand to $79 thousand in
the third quarter of 1998, down from $142 thousand in the same period of
1997. SYSCO's gross margin of $16 thousand was incremental in the third
quarter of 1998. SYSCO had no sales in the third quarter of 1997.
CompuDyne's selling, general and administrative expenses increased $172
thousand from $632 thousand in the third quarter of 1997 to $804 thousand
in the third quarter of 1998. SecurSystems selling, general and
administrative expenses decreased $5 thousand to $228 thousand in the
third quarter of 1998, from $233 thousand in the third quarter of 1997.
Quanta Systems selling, general and administrative expenses increased $94
thousand from $139 thousand in the third quarter of 1997 to $233 thousand
in the third quarter of 1998. DCS's selling, general and administrative
decreased $27 thousand from $43 thousand in the third quarter of 1997 to
$16 thousand in the third quarter of 1998. Selling, general and
administrative expenses at MicroAssembly increased $23 thousand to $104
thousand in the third quarter of 1998 from $81 thousand in the same
period of 1997. SYSCO spent $125 thousand in the third quarter of 1998
compared to $39 thousand in the third quarter of 1997, an increase of $86
thousand. This was due to a change in management at SYSCO and increased
marketing efforts in the current year.
CompuDyne's net profit increased $65 thousand from $239 thousand in the
third quarter of 1997 to $304 thousand in the third quarter of 1998.
SecurSystems had a net profit of $259 thousand in the third quarter of
1998 compared to $64 thousand during the same period of 1997, an increase
of $195 thousand, again due to increased sales. Quanta Systems net
profit was $154 thousand in the third quarter of 1998 increasing $46
thousand from $108 thousand in the third quarter of 1997. DCS's net
profit of $33 thousand in the Third quarter of 1998 was down $2 thousand
from $35 thousand in the same quarter of 1997. MicroAssembly had a net
loss of $36 thousand in the third quarter of 1998, down $91 thousand from
a profit of $55 thousand in the third quarter of 1997. This loss was due
to a combination of a restructuring for improved quality control and a
slow down of orders due to the overall economic problems in the Asian
market. SYSCO had a loss of $116 thousand in the third quarter of 1998
compared with a loss of $39 thousand in the third quarter of 1997, down
$76 thousand.
RESULTS OF OPERATIONS - year-to-date comparison
- - - -----------------------------------------------
CompuDyne's net sales increased $3.6 million from $14.6 million in the
nine months ended September 30, 1997 to $18.2 million in the nine months
ended September 30, 1998. SecurSystems net sales were $7.3 million in
the nine months ended September 30, 1998, up $3.1 million from $4.2
million in the nine months ended September 30, 1997, a direct result of
the success in increasing backlog during 1997. Quanta Systems net sales
were $8.2 million for the nine months ended September 30, 1998,
increasing $87 thousand from $8.1 million during the same period in 1997.
DCS net sales increased $227 thousand from $953 thousand in the nine
months ended September 30, 1997 to $1.2 million in the same period of
1998. This increase was due to the sale of a replacement base band unit
by an existing customer. MicroAssembly had a modest increase from $1.3
million in the nine months ended September 30, 1997 to $1.4 million in
the same period of 1998. SYSCO had incremental sales of $94 thousand in
the third quarter of 1998 and had no sales in 1997.
Gross margins for CompuDyne increased $830 thousand from $2.5 million in
the nine months ended September 30, 1997 to $3.3 million in the same
period of 1998. SecurSystems gross margins were $1.3 million in the nine
months ended September 30, 1998, an increase of $412 thousand from $873
thousand for the same period of 1997 due to increased sales. Quanta
Systems had an increase of $290 thousand in gross margin due to the
increased sales volume as well as renegotiated higher fees on the new
SPAWAR contract. Gross margin went from $946 thousand in the nine months
ended September 30, 1997 to $1.2 million for the same period in 1998.
Gross margins at DCS increased $179 thousand from $197 thousand in the
nine months ended September 30, 1997 to $376 thousand in the nine months
ended September 30, 1998. MicroAssembly's gross margins decreased $77
thousand in the nine months ended september 30, 1998 to $352 thousand
from $429 thousand in the same period of 1997. This was primarily due to
a combination of a restructuring for improved quality and a slow down of
orders due to overall economic problems in the Asian market. SYSCO had
an incremental gross margin of $26 thousand in the nine months ended
September 30,1998. SYSCO had no sales or margin in 1997.
CompuDyne's selling, general and administrative expenses were $2.3
million in the nine months ended September 30, 1998, an increase of $508
thousand from $1.8 million in the nine months ended September 30, 1997.
SecurSystems selling, general and administrative expenses decreased $22
thousand to $698 thousand in the nine months ended September 30, 1998
from $720 thousand during the same period in 1997. Quanta Systems
selling, general and administrative expenses were $653 thousand in the
nine months ended September 30, 1998, an increase of $286 thousand from
$368 thousand in the same period of 1997. This increase is due to the
treatment of legal costs for the Fort Bragg claim ($158 thousand) and
increased marketing costs. These costs are offset by an $83 thousand
decrease at DCS due to a reduction in staff and consolidation of some
facilities. DCS had a decrease in selling, general and administrative
expenses of $83 thousand to $41 thousand in the nine months ended
September 30, 1998 from $124 thousand in the same period of 1997.
MicroAssembly's selling, general and administrative expenses increased
$61 thousand from $250 thousand in the nine months ended September 30,
1997 to $311 thousand in the same period of 1998. SYSCO increased it's
selling, general and administrative expenses $180 thousand from $85
thousand in the nine months ended September 30, 1997 to $265 thousand in
the nine months ended September 30, 1998. This was due to a change in
management at SYSCO and increased staff for additional marketing efforts.
CompuDyne corporate increased selling, general and administrative
expenses by $86 thousand to $323 thousand in the nine months ended
September 30, 1998 from $237 thousand in the same period of 1997.
CompuDyne's net profit increased $164 thousand in the nine months ended
September 30, 1998 to $733 thousand, from $569 thousand during the same
period in 1997. SecurSystems' net profit increased $386 thousand to $479
thousand in the nine months ended September 30, 1998 from $93 thousand in
the same period of 1997. Net profit at Quanta Systems was $376 thousand
in the nine months ended September 30, 1998, down $24 thousand from $400
thousand in the nine months ended September 30, 1997. This decrease is
primarily due to the increased interest costs which are unallowable
expense. Net profit at DCS increased $159 thousand in the nine months
ended September 30, 1998 to $119 thousand as a result of increased sales
volume as well as the decreased costs associated with the staff
reductions and facility consolidations. DCS had a loss of $40 thousand
during the same period in 1997. MicroAssembly's net profit decreased
$145 thousand to $13 thousand in the nine months ended September 30,
1998, from $158 thousand in the same period of 1997. This decrease was
primarily due to a combination of a restructuring for improved quality
control and a slow down of orders due to the overall economic problems
occurring in the Asian market. SYSCO had a loss of $255 thousand in the
nine months ended September 30, 1998 compared with a loss of $85 thousand
in the same period of 1997, an additional loss of $170 thousand. This
was due to a change in management at SYSCO and increased staff for
additional marketing efforts.
LIQUIDITY AND CAPITAL RESOURCES
- - - -------------------------------
The Company has a secured working capital line of credit agreement with
Chevy Chase Bank, Chevy Chase, Maryland which allows borrowings of an
average of 80% of eligible accounts receivable plus 40% of eligible
inventory. The new agreement was signed on June 25, 1998 and allows for
a maximum available loan of $2.5 million which is a $750 thousand
increase over the line of credit previously with Asian American Bank and
Trust Company of Boston, Massachusetts. The interest rate for the new
line of credit is at LIBOR plus 2.75%, compared with the old Asian
American line of credit which was at a rate of prime plus 0.5%. The new
line has a two year term and expires June 25, 2000.
This line of credit is expected to be replaced with the new revolving
line of credit of up to $6.5 million secured as part of the financing
arrangements for the acquisition of Norment.
MicroAssembly has an unsecured line of credit with Fleet Bank for $100
thousand with no expiration date. The line is guaranteed by Mr. Roenigk.
The rate is prime plus 2% and there was $57 thousand outstanding as of
September 30, 1998.
The Company's primary source of cash is from operations and bank
borrowings. The majority of Quanta Systems' receivables are due under
prime contracts with the U.S. Government or sub-contracts thereunder.
The majority of SecurSystems receivables are due under sub-contracts or
maintenance contracts with state and local governments. Net cash flows
provided by operations was $19 thousand in 1998, an increase of $394
thousand from cash flow used in operations of $375 in 1997. Net income
increased $33 thousand from $472 thousand in the nine months ended
September 30, 1997 to $505 thousand in the same period of 1998. During
the first nine months of 1998 CompuDyne purchased 62 thousand shares of
treasury stock at a cost of $120 thousand. Capital additions totalled
$252 thousand in the nine months ended September 30, 1998, an increase of
$153 thousand from $99 thousand in the same period of 1997. Accounts
receivable has increased $1.2 million as of September 31, 1998. This
increase is attributable to the increased revenues at SecurSystems.
YEAR 2000 COMPLIANCE
- - - --------------------
The Company has identified all significant software and hardware
applications that will require modification to ensure Year 2000
compliance. Internal and external resources are being used to make the
required modifications and test Year 2000 compliance. The modification
process of all significant applications and operational applications is
substantially complete. The Company plans on completing the process of
modifying all significant applications by December 31, 1998. The total
cost to the Company of these Year 2000 compliance activities has not been
and is not anticipated to be material to its financial position or
results of operations in any given year.
- - - ------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is party to certain legal actions and inquiries for
environmental and other matters resulting from the normal course of
business. Although the total amount of liability with respect to these
matters cannot be ascertained, management of the Company believes that
any resulting liability should not have a material effect on it's
financial position or results of future operations.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit (27) - Financial Data Schedule
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: November 11, 1998 /s/ William C. Rock
William C. Rock