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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended December 31, 2002
Commission File No 0-2892
THE DEWEY ELECTRONICS CORPORATION
A New York Corporation
I.R.S. Employer Identification
No. 13-1803974
27 Muller Road
Oakland, New Jersey 07436
(201) 337-4700
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 .
The number of shares outstanding of the registrant's common
stock, $.01 par value was 1,359,531 at January 31, 2003.
THE DEWEY ELECTRONICS CORPORATION
INDEX
Page No.
Part I Financial Information
Item 1 Consolidated Financial Statements 1
Consolidated balance sheets -
December 31, 2002 and June 30, 2002 2
Consolidated statements of operations -
three and six months ended December 31, 2002
and December 31, 2001 3
Consolidated statements of cash flows for the
six months ended December 31, 2002 and 2001 4
Notes to consolidated financial statements 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Item 4 Controls and Procedures 18
Part II Other Information
Item 4. Submission of Matters to a Vote of Security
Holders 19
Item 6. Exhibits and Reports on Form 8-K 22
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited, consolidated balance sheets, statements
of operations, and statements of cash flows are of The Dewey
Electronics Corporation. These consolidated financial statements
reflect all adjustments of a normal recurring nature, which are,
in the opinion of management, necessary for a fair presentation
of the financial position, results of operations and cash flows
for the interim periods reflected herein. The results reflected
in the unaudited statements of operations for the period ended
December 31, 2002 are not necessarily indicative of the results
to be expected for the entire year. The following unaudited
consolidated financial statements should be read in conjunction
with the notes thereto, and Management's Discussion and Analysis
of Financial Condition and Results of Operations set forth in
Item 2 of Part I of this report, as well as the audited
consolidated financial statements and related notes thereto
contained in the Form 10-K filed for the fiscal year ended
June 30, 2002.
1
THE DEWEY ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2002 2002
(UNAUDITED) (AUDITED)*
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $2,533,995 $3,503,087
ACCOUNTS RECEIVABLE 510,655 267,331
INVENTORIES 511,454 506,817
CONTRACT COSTS AND RELATED
ESTIMATED PROFITS IN EXCESS
OF APPLICABLE BILLINGS 1,185,700 1,272,569
DEFERRED TAX ASSET 30,563 30,563
PREPAID EXPENSES AND OTHER
CURRENT ASSETS 67,402 78,421
TOTAL CURRENT ASSETS 4,839,769 5,658,788
PLANT, PROPERTY AND EQUIPMENT
- (NET) 1,379,874 1,036,759
OTHER NON-CURRENT ASSETS 120,048 122,148
TOTAL ASSETS $6,339,691 $6,817,695
LIABILITIES AND STOCKHOLDERS'
EQUITY:
CURRENT LIABILITIES:
TRADE ACCOUNTS PAYABLE $426,683 $467,427
ACCRUED LIABILITIES 98,133 149,016
ACCRUED CORPORATE INCOME TAXES 111,808 100,166
ACCRUED PENSION COSTS 147,543 113,043
CURRENT PORTION OF LONG-TERM DEBT 60,938 60,938
TOTAL CURRENT LIABILITIES 845,105 890,590
LONG-TERM PORTION OF LONG-TERM DEBT 358,203 888,672
OTHER LONG-TERM LIABILITY 61,172 61,172
DEFERRED TAX LIABILITY 424,212 524,212
DUE TO RELATED PARTY 200,000 200,000
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, par value $1.00;
authorized 250,000 shares, issued
and outstanding, none -- --
COMMON STOCK, par value $.01;
authorized 3,000,000 shares;
issued and outstanding 1,693,397
shares 16,934 16,934
PAID IN CAPITAL 2,835,307 2,835,307
RETAINED EARNINGS 2,118,855 1,920,905
4,971,096 4,773,146
LESS TREASURY STOCK 353,866
SHARES AT COST (520,097) (520,097)
TOTAL STOCKHOLDERS' EQUITY 4,450,999 4,253,049
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $6,339,691 $6,817,695
*CONDENSED FROM AUDITED FINANCIAL STATEMENTS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
THE DEWEY ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
2002 2001 2002 2001
REVENUES $1,679,185 $2,148,712 $3,670,850 $4,814,765
COST OF REVENUES 1,194,348 1,302,543 2,747,927 3,283,444
GROSS PROFIT 484,837 846,169 922,923 1,531,321
SELLING & ADMIN
EXPENSES 332,207 422,774 580,692 652,922
OPERATING INCOME 152,630 423,395 342,231 878,399
INTEREST EXPENSE 16,172 26,042 35,237 58,639
OTHER (INCOME)-NET (10,317) (1,315) (22,923) (4,875)
INCOME BEFORE INCOME
TAXES 146,775 398,668 329,917 824,635
INCOME TAXES (58,710) (159,467) (131,967) (329,854)
NET INCOME $88,065 $239,201 $197,950 $494,781
NET INCOME PER SHARE:
BASIC $0.07 $0.18 $0.15 $0.37
DILUTED $0.06 $0.17 $0.14 $0.36
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING
BASIC 1,339,531 1,339,531 1,339,531 1,339,531
DILUTED 1,384,919 1,380,031 1,382,475 1,380,031
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
THE DEWEY ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
2002 2001
NET INCOME $ 197,950 $ 494,781
ADJUSTMENTS TO RECONCILE NET
INCOME TO NET CASH (USED
IN)/PROVIDED BY OPERATING
ACTIVITIES:
DEPRECIATION 51,150 54,450
AMORTIZATION 2,100 2,100
(INCREASE)/DECREASE IN
ACCOUNTS RECEIVABLE (243,324) 973,092
(INCREASE)/DECREASE IN
INVENTORIES (4,637) (129,940)
DECREASE/(INCREASE) IN
CONTRACT COSTS AND RELATED
ESTIMATED PROFITS IN EXCESS
OF APPLICABLE BILLINGS 86,869 785,345
DECREASE/(INCREASE) IN PREPAID
EXPENSES AND OTHER CURRENT
ASSETS 11,019 (2,049)
DEFERRED TAXES (100,000) 0
(DECREASE)/INCREASE IN
ACCOUNTS PAYABLE (40,744) (200,323)
(DECREASE)/INCREASE IN ACCRUED
LIABILITIES (50,883) 62,852
INCREASE IN ACCRUED CORPORATE
INCOME TAXES 11,642 144,854
INCREASE/(DECREASE) IN ACCRUED
PENSION COSTS 34,500 (28,000)
TOTAL ADJUSTMENTS (242,308) 1,662,381
NET CASH (USED IN)/PROVIDED
BY OPERATING ACTIVITIES (44,358) 2,157,162
CASH FLOWS FROM INVESTING
ACTIVITIES:
EXPENDITURES FOR PLANT,
PROPERTY AND EQUIPMENT (394,265) (111,945)
NET CASH (USED IN) INVESTING
ACTIVITIES (394,265) (111,945)
CASH FLOWS FROM FINANCING
ACTIVITIES:
PRINCIPAL PAYMENTS OF LONG-
TERM DEBT (530,469) (593,595)
NET CASH (USED IN) FINANCING
ACTIVITIES (530,469) (593,595)
NET (DECREASE)/INCREASE IN
CASH AND CASH EQUIVALENTS (969,092) 1,451,622
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 3,503,087 2,090,251
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $2,533,995 $3,541,873
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
INTEREST PAID $39,360 $60,853
INTEREST RECEIVED $6,450 $6,603
CORPORATE INCOME TAXES
PAID $220,325 $185,000
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002
NOTE 1: REVENUE RECOGNITION
Revenues and estimated earnings under defense contracts are
recorded using the percentage-of-completion method of
accounting, measured as the percentage of costs incurred
to estimated total costs for each contract. Provisions
for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
Changes in job performance, job conditions, and
estimated profitability may result in revisions to costs
and income and are recognized in the period in which the
revisions are determined.
Since substantially all of the Company's electronics business
comes from contracts with various agencies of the United
States Government or subcontracts with prime Government
contractors, the loss of Government business would have
a material adverse effect on this segment of business.
In the Leisure and Recreation segment, revenues and
earnings are recorded when deliveries are made.
NOTE 2: CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments
with a maturity of three months or less at the date of
purchase to be cash equivalents.
NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's long-term debt and line of
credit borrowings are estimated based upon interest rates
currently available for borrowings with similar terms
and maturities and approximate the carrying values.
Due to the short-term nature of cash, accounts receivable,
accounts payable, accrued expenses and other current
liabilities, their carrying value is a reasonable
estimate of fair value.
NOTE 4: INVENTORIES
Inventories are valued at lower of cost (first-in, first-out
method) or market. Components of cost include materials,
direct labor and plant overhead.
As there is no segregation of inventories as to raw materials,
work in progress and finished goods for interim reporting
periods (this information is available at year end when
physical inventories are taken and recorded), estimates
have been made for the interim period. These estimates
are consistent with those made in prior periods.
5
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002
December 31, 2002 June 30, 2002
Finished Goods $ 72,909 $ 68,258
Work In Process 130,474 137,268
Raw Materials 308,071 301,291
Total $511,454 $506,817
======= =======
NOTE 5: USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United
States of America requires management to make estimates
and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
NOTE 6: PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment are stated at cost. Allowance
for depreciation is provided on a straight-line basis over
estimated useful lives of three to ten years for machinery
and equipment, ten years for furniture and fixtures, and
twenty years for building and improvements.
NOTE 7: LOAN FEES
Loan fees are capitalized by the Company and amortized
utilizing the straight-line basis over the term of the loan.
NOTE 8: LONG-LIVED ASSETS
Whenever events or changes in circumstances indicate that
the carrying values of long-lived assets may not be
recoverable, the Company evaluates the carrying values
of such assets using future undiscounted cash flows.
Management believes that, as of December 31, 2002,
the carrying values of such assets are not impaired.
6
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002
NOTE 9: EARNINGS PER SHARE
Basic net income per share is computed by dividing reported
net income available to common shareholders by weighted
average shares outstanding for the period. Diluted net
income per share is computed by dividing reported net
income available to common shareholders by weighted average
shares outstanding for the period, adjusted for the
dilutive effect of common stock equivalents, which consist
of stock options, using the treasury stock method.
The table below sets forth the reconciliation of the numerators
and denominators of the basic and diluted net income per
common share computations.
Three Months Ended December 31,
2002 2001
Per Per
Income Shares Share Income Shares Share
Amount Amount
Basic
net
income
per
Common
Share $88,065 1,339,531 $.07 $239,201 1,339,531 $.18
Effect
Of
dilutive
Securities -- 45,388 ($.01) -- 40,500 ($.01)
Diluted
net
income
per
common
share $88,065 1,384,919 $.06 $239,201 1,380,031 $.17
Six Months Ended December 31,
2002 2001
Per Per
Income Shares Share Income Shares Share
Amount Amount
Basic
net
income
per
common
share $197,950 1,339,531 $.15 $494,781 1,339,531 $.37
Effect
of
dilutive
Securities -- 42,944 ($.01) -- 40,500 ($.01)
Diluted
net
income
per
common
share $197,950 1,382,475 $.14 $494,781 1,380,031 $.36
7
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002
NOTE 10: RECENT PRONOUNCEMENTS
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible
Assets" was approved by the FASB. SFAS No. 142 changes its
accounting for goodwill from an amortization method to
an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations,
will cease upon adoption of this statement. The Company
implemented SFAS No. 142 on July 1, 2002 and it has determined
that this statement had no material impact on its financial
position or results of operations.
On June 29, 2001, SFAS No. 143 "Accounting for Asset Retirement
Obligations" was approved by the FASB. SFAS No. 143 requires
that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. The Company
implemented SFAS No. 143 on July 1, 2002 and it has determined
that this statement had no material impact on its financial
position or results of operations.
In October 2001, the FASB issued SFAS No. 144 "Accounting for
theImpairment or Disposal of Long-Lived Assets". SFAS No. 144
Replaces SFAS No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of" and
establishes accounting and reporting standards for long-lived
assets to be disposed of by sale. This standard applies to
all long-lived assets, including discontinued operations.
SFAS No. 144 requires that those assets be measured at the
lower of carrying amount or fair value less cost to sell.
SFAS No. 144 also broadens the reporting of discontinued
operations to include all components of an entity with
operations that can be distinguished from the rest of the
entity that will be eliminated from the ongoing operations
of the entity in a disposal transaction. The Company
implemented SFAS No. 144 on July 1, 2002. The Company
has determined that this statement did not have a
material impact on its results of operations or financial
position.
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". In addition to amending
and rescinding other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, SFAS
No. 145 precludes companies from recording gains and losses
from the extinguishments of debt as an extraordinary item.
SFAS No. 145 is effective in fiscal 2003. The Company has
adopted this pronouncement and determined that this statement
did not have a material impact on the results of operations
or its financial position.
8
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities". The
standard 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. Examples of costs covered by the
standard include lease termination costs and certain
employee severance costs that are associated with a
restructuring, discontinued operation, plant closing,
or other exit or disposal activity. SFAS No. 146 is
to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company
does not expect the adoption of this pronouncement to
have a material effect on the results of operations or
financial position.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others- an Interpretation of FASB Statements No. 5, 57, and
107 and Rescission of FASB Interpretation No. 34" ("FIN 45").
FIN 45 elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its
obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee.
The initial recognition and initial measurement provisions
of FIN 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. However, the disclosure
requirements in FIN 45 are effective for financial statements
of interim or annual periods ending after December 15, 2002.
Management has determined that FIN 45 is not applicable as
the Company is not currently a guarantor of indebtedness.
In January 2003, the FASB issued FASB Interpretation No. 46,
" Consolidation of Variable Interest Entities- an Interpretation
of ARB No. 51" ("FIN 46"). FIN 46 addresses consolidation
by business enterprises of variable interest entities (formerly
special purpose entities or SPEs). In general, a variable
interest entity is a corporation, partnership, trust, or any
other legal structure used for business purposes that either
(a) does not have equity investors with voting rights or (b)
has equity investors that do not provide sufficient financial
resources for the entity to support its activities. The
objective of FIN 46 is not to restrict the use of variable
interest entities but to improve financial reporting by
companies involved with variable interest entities.
FIN 46 requires a variable interest entity to be consolidated
by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements of
FIN 46 apply to variable interest entities created after
January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period
beginning after June 15, 2003. However, certain of the
disclosure requirements apply to financial statements issued
after January 31, 2003, regardless of when the variable
interest entity was established. Management has determined
that FIN 46 is not applicable as the Company is not currently
associated with any variable interest entities.
9
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002
NOTE 11: SEGMENT INFORMATION
Information about the Company's operations in its two segments
for the second fiscal quarters ended December 31, 2002 and
2001 is as follows:
Three months ended Six months ended
December 31, December 31,
2002 2001 2002 2001
Electronics
Segment
Revenues $1,619,790 $1,856,599 $3,592,085 $4,506,510
Operating
Income $164,767 $404,160 $369,413 $878,693
HEDCO
Revenues $59,395 $292,113 $78,765 $308,255
Operating
Income (Loss) ($12,137) $19,235 ($27,182) ($294)
10
THE DEWEY ELECTRONICS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements, including the notes
thereto, appearing elsewhere in this Form 10-Q, and with the
audited consolidated financial statements, including the notes
thereto, appearing in the Company's Form 10-K for the fiscal
year ended June 30, 2002. Certain statements in this report
may be deemed "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934. All
statements, other than statements of historical fact, that
address activities, events or developments that the Company
or management intends, expects, projects, believes or
anticipates will or may occur in the future are forward-
looking statements. Such statements are based upon certain
assumptions and assessments made by management of the Company
in light of its experience and its perception of historical
trends, current conditions, expected future developments and
other factors it believes to be appropriate. The forward-
looking statements included in this report are also subject
to a number of material risks and uncertainties, including
but not limited to economic, governmental, competitive and
technological factors affecting the Company's operations,
markets, products, services and prices and, specifically,
the factors discussed below under "Government Defense
Business" and "Company Strategy". Such forward-looking
statements are not guarantees of future performance and
actual results, developments and business decisions may
differ from those envisaged by such forward-looking statements.
The Company's operating cycle is long-term and includes various
types of products and varying delivery schedules. Accordingly,
results of a particular period or period-to-period comparison
of recorded revenues and earnings, may not be indicative of
future operating results. The following comparative analysis
should be viewed in this context.
Operating Segments
The Company is organized into operating segments on the basis
of the type of products offered.
In the electronics segment, the Company is a producer of
sophisticated electronic and electromechanical systems for
the Armed Forces of the United States. Currently, the
principal products of this segment of business are manufactured
either as prime contractor or as subcontractor, for the
Department of Defense.
In the leisure and recreation segment, the Company, through
its HEDCO Division, designs, manufactures and markets advanced,
sophisticated snowmaking equipment.
There are no intersegment sales.
Some operating expenses, including general corporate expenses,
have been allocated by specific identification or based on
labor for items which are not specifically identifiable. In
computing operating profit, none of the following items have
been added or deducted: interest expense, income taxes,
and non-operating income and expenses.
11
Consolidated Results of Operations
For the second fiscal quarter ended December 31, 2002,
consolidated revenues were $1,679,185, compared to $2,148,712
for the same period last year. This year's revenues were
lower in both the electronics segment and the leisure and
recreation segment compared to the same period last year.
Results of operations by segment are discussed below in more
detail.
Consolidated revenues for the six-month period this year
were $3,670,850, compared to $4,814,765 for the same period
last year. Revenues for the six-month periods are discussed
below according to business segment.
Consolidated net income for the second fiscal quarter amounted
to $88,065 or $.07 per basic and $.06 per diluted share
compared to last year's second fiscal quarter consolidated net
income of $239,201 or $.18 per basic and $.17 per diluted share.
The electronics segment accounted for most of this difference.
For the six-month period this year, consolidated net income
amounted to $197,950 or $.15 per basic and $.14 per diluted
share. For the same six-month period last year, consolidated
net income amounted to $494,781 or $.37 per basic and $.36 per
diluted share.
Information about the Company's operations in its two segments
For the three and six month periods this year compared to last
year can be found in Note 11 of the Notes to Consolidated
Financial Statements.
Electronics Segment
The electronic segment is comprised mostly of the 2kW Generator
product line and the Pitometer Log Division's products.
Pitometer Log is a long-established manufacturer of ship
speed and distance measuring instrumentation. Its primary
customers are the U.S. Navy and other prime contractors such
as shipbuilders. Pitometer Log's business is derived from
various orders, limited in scope and duration. These are
generally for replacement parts and equipment for previous
Company contracts with the Department of Defense as well as
business from other projects performed as a subcontractor.
Under the 2kW diesel operated tactical generator set contract,
the Company has been the sole producer for the Department of
Defense since 1997. The original contract was awarded in
1996 and final deliveries were made under that award in March
2002. Deliveries were made to the various branches of the
Armed Forces of the United States.
In September 2001, the Company was awarded a new contract to
provide the U.S. Army and other Department of Defense Agencies
with this same 2kW diesel operated generator set. This new
contract is a ten-year indefinite delivery, indefinite quantity
contract which replaces the initial contract awarded in 1996.
As with the prior contract, this contract allows for the
Army to place annual production orders and to place additional
interim orders. The total amount of orders placed to date
amount to approximately $6 million. The Company received
most of these orders in March and April 2002 and has been
informed by the U.S. Government Program Office that an annual
production order is in process and that the Company would
receive this order in the amount of approximately $2.4
million in the near future. However, no assurances can
be made that the Army will place such orders or, if
additional orders are
12
placed, the timing and amount of such orders. Moreover,
periods of heightened national security and war have
often introduced new priorities and demands, external
delays, and increased uncertainty into the defense
contracting marketplace.
The Company has been producing under this new contract's
existing orders. Deliveries are scheduled to continue
through June 2003. Production would then continue with
the new production order referred to above, assuming that
the order is received. Generators are being manufactured
at a lower rate than this time last year due to declining
customer requirements. Deliveries are being made according
to the government provided delivery schedule.
In the electronics segment, revenues are recorded under
defense contracts using the percentage of completion
method of accounting. Revenues are recorded as work
is performed based on the percentage that incurred costs
bear to estimated total costs utilizing the most
recent estimates of costs and funding. Since contracts
typically extend over multiple reporting periods,
revisions in cost and estimates during the progress
of work have the effect of adjusting earnings applicable
to performance in prior periods in the current period.
When the estimated costs to complete a project indicate
a loss, provision is made for the anticipated loss
in the current period. For further information see
Note 1 and Note 5 of the Notes to Consolidated Financial
Statements.
For the three-month period ended December 31, 2002, revenues in
the electronics segment were $236,809 lower than the same
three-month period last year. During the three-month
period this year, the production of 2kW generator sets
provided 78% of electronics segment revenue. During the
same period last year, production of 2kW generator sets
provided 89% of electronics segment revenues. This decline
in contribution to revenues is the result of reduced
orders and the affected production levels and is discussed
further in the section "Government Defense Business" below.
The segment's remaining revenues, derived principally from
the Company's Pitometer Log Division, have remained
relatively level in past years. Pitometer Log revenues
are derived from various orders, more limited in scope and
duration, which are generally for replacement parts for
previously supplied Department of Defense equipment and
other projects performed as a sub-contractor. The Company
has also been developing a small customer base which
utilizes its specialized CNC machining centers.
For the six-month period ended December 31, 2002, revenues
in the electronics segment were $914,425 lower than the
same six-month period last year. The production of 2kW
generator sets provided 85% of electronics segment revenues
during the six-month period this year and 91% of electronics
segment revenues last year during the same six-month period.
As of December 31, 2002, the aggregate value of the Company's
backlog of electronics product not previously recorded as
revenues was approximately $1 million. It is estimated that
all of this backlog will be recognized as revenues during this
fiscal year ending June 30, 2003.
As of December 31, 2001, the aggregate value of the Company's
backlog of electronics product not previously recorded as
revenues was approximately $2 million.
Leisure and Recreation Segment
In the HEDCO Division, revenues were lower by $232,718 and
$229,490 for the three and six-month periods ended December
31, 2002, respectively, when compared to the same periods
of last year.
13
Last year, higher snowmaking machine revenues, which included
lease with purchase option agreements, increased revenues.
This year, no machine sales were made as the Company
reviewed its position in this market. Subsequently, the
Company has redirected its marketing efforts to concentrate
on a broader customer base, as well as optional enhancements
to its machines. The sale of replacement parts for its
machines not including warranty have remained level with prior
periods.
The Company is exploring possible strategic options with
respect to this division.
Liquidity and Capital Resources
The Company's working capital at December 31, 2002 was
$3,994,664 compared to $4,768,198 at June 30, 2002.
The ratio of current assets to current liabilities was 5.73 to
1 at December 31, 2002 and 6.35 to 1 at June 30, 2002.
For the six-month period ended December 31, 2002, operating
activities used net cash of $44,358. Expenditures for plant,
property and equipment used net cash of $394,265 and
financing activities used net cash of $530,469.
Net cash used by operating activities of $44,358 was primarily
the result of net income offset by an increase in accounts
receivable.
For the six-month period ended December 31, 2002, net cash
used for expenditures of plant, property and equipment of
$394,265 included an amount of $351,147, which was used by
the Company in its continued efforts to improve existing
technologies which would enhance its current product lines
and develop new revenue sources, both military and civilian.
Positive progress has been made in the areas of reduced sound
and weight for the generator product line. This is
anticipated to be reflected in working models to be used
for marketing purposes. The Company is currently working with
government representatives to ascertain requirements and
possible applications for the military. The Company expects
to continue investing in this and other technologies over
the next six-month period in connection with these initiatives.
Management believes that such initiatives, despite the
Inherent risks and uncertainties, are important to the
Company's business and future growth. As with all projects
of this nature, no assurances can be made that such efforts
will be successful or that the Company will achieve
its desired results.
During the six-month period ended December 31, 2002,
Financing activities used net cash of $530,469, which
includes a voluntary principal reduction payment of
$500,000 made towards the Company's long-term mortgage
debt with its primary lender. The outstanding balance of
the Company's mortgage note agreement at December 31,
2002 was $419,141.
For the six-month period ended December 31, 2001, operating
activities provided net cash of $2,157,162. Expenditures
for plant, property and equipment used net cash of $111,945
and financing activities used net cash of $593,595.
Net cash provided by operating activities resulted primarily
from increased collections of "accounts receivable" which
included increased billings of "contract costs and related
estimated profits in excess of applicable billings".
14
Net cash used in financing activities included additional
principal reduction payments of $528,485 made towards the
Company's long-term debt.
On December 27, 2001, the Company and its primary Bank agreed
to revised terms of its mortgage note agreement. The renewed
agreement, among other items, revised the interest rate from
a fixed rate of 8.25% to the Bank's prime rate plus .5% with
a floor of 6%. In addition, the maturity date was extended
from October 2002 to January 2005.
The Company also has a line of credit of $500,000 with its
Bank at the rate of the Bank's prime rate plus .25%, which
is renewable annually at October 31. There were no
borrowings against this line of credit facility and the
Bank has agreed to extend this line of credit for another
year.
In addition, the Company also has a note payable to a
co-founder (stockholder) in the amount of $200,000 at
an interest rate of 9% per annum. This note is unsecured
and subordinate to the mortgage note with the Company's
primary lender and has been classified on the Balance
Sheet as a long-term liability.
The Company owns approximately 90 acres of land and the
building which it occupies in Bergen County, New Jersey,
adjacent to an interchange of Interstate Route 287. The
Company is continuing to actively pursue ways of monetizing
this property by its sale and/or development.
The Company's borrowing capacity has remained above its use
of outside financing. Management believes that the Company's
anticipated cash flow from operations, combined with its line
of credit, will be sufficient to support working capital
requirements and capital expenditures at their current or
expected levels. The Company continues to meet its short-
term liquidity needs arising out of electronic product
operations through a combination of progress payments on
government contracts (based on costs incurred) and
billings at the time of delivery of products.
Government Defense Business
The electronics segment of business provides most of the
Company's revenues and is comprised of business with the
U.S. Department of Defense or with other government
contractors. It consists of long-term contracts and
short-term business such as replacement parts.
Long-term contracts have been dependent upon single projects
and until 1997, a single program, the ADCAP torpedo program
with the U.S. Navy was the primary source of the Company's
revenues. In 1996, the Company was awarded a contract with
the U.S. Army to provide diesel operated tactical generator
sets. This program has since become the Company's primary
source of revenues.
On September 7, 2001, the Company was awarded a ten-year
contract to provide the U.S. Army and other Department of
Defense Agencies with 2kW diesel operated generator sets.
This ten-year indefinite delivery, indefinite quantity
contract replaces the initial contract under which the
Company has been the sole producer of this generator for
the Army since 1997. These generators are currently
being fielded by both active and reserve components
of the U.S. Armed Forces.
15
As with the prior contract, this new contract to supply
2kW diesel operated generator sets allows for the U.S.
Army to place production orders annually and to place
additional interim orders. Orders under this new contract
were received as final deliveries were being made on
the prior contract and production of these orders has
begun. The Company is expecting the annual production
order for the second year of the contract to arrive in
the near future. However, no assurances can be made
that the Army will place additional orders under this
contract, or if additional orders are placed, the timing
and amount of such orders. Moreover, periods of heightened
national security and war, have often introduced new
priorities, changes in and demands, external delays,
and increased uncertainty into the defense contracting
marketplace. See the discussion above under "Electronics
Segment".
Total orders placed in the first year of the new contract
were down roughly by half from the peak of the original
contract. This is responsible for the reduction in revenues
the Company is currently experiencing. The value of the
anticipated order described above is expected to be
$2.4 million, which would be less than prior years'
annual production orders. It should be noted that, as
the contract allows, additional orders may be made by
the government through the year, although no assurances
can be made that they will do so. Management is
implementing cost saving measures and continues
its exploration of additional sources or revenue as
discussed in the section "Company Strategy" below.
It should be recognized that Department of Defense business
is subject to changes in military procurement policies
and objectives and to government budgetary constraints
and that the Company bids for Department of Defense business
in competition with many defense contractors, including
firms that are larger in size and have greater financial
resources.
All of the Company's contracts with the United States
Government (the "Government") are subject to the standard
provision for termination at the convenience of the
Government.
Since substantially all of the Company's electronics business
has been derived from contracts with various agencies of
the Government or subcontracts with prime Government
contractors, the loss of substantial Government business
(including a material reduction of orders under existing
contracts) would have a material adverse effect on the
business.
Company Strategy
The Company is continuing to invest in the further development
of existing technologies. These enhanced technologies would
be for use initially in the electronics segment with respect
to existing products. Management believes that such
initiatives, despite the inherent risks and
uncertainties, are important to the Company's business and
future growth, but as with all projects of this nature no
assurances can be made that such product development work
will be successful or that the Company will achieve its desired
results. See the discussion above under "Liquidity and Capital
Resources."
The Company has also increased its government sales and
marketing capacity. This is part of our existing strategy
to build stronger relations with our customers, while
working to develop new business.
The 2kW diesel operated tactical generator set, the Company's
principal revenue source, was recently approved by the U.S.
Army for use as an optional auxiliary power unit (APU) on the
their Family of Medium Tactical Vehicles (FMTV). Note, that
when generally dealing with the
16
extended time frame of the Department of Defense budgeting
process, as well as that of the Federal Government, any
potential sales of a material amount would not be recognized
by the Company for a minimum of 12 to 24 months. In
addition, this approval does not provide any guarantee of
sales.
The Company has many years of experience in contracting with
the Department of Defense receiving government contracts for
diverse product lines. The Company continues to explore
other areas of business, which will utilize its technical
expertise and production resources and are capable of
providing continued stability and growth. A small customer
base has been developing which utilizes the Company's CNC
specialized machining centers.
Other Developments
At its annual meeting held December 4, 2002, the Company's
Board of Directors unanimously elected John H.D. Dewey to
the office of President and Chief Executive Officer of the
Company.
At its meeting on June 14, 2002, the Board had appointed
John H.D. Dewey as Acting Chief Executive Officer of the
Company. John Dewey is the son of Gordon Dewey. Since 1999,
Mr. Dewey has been an active member of the Board, as well
as working on internal projects utilizing his experience
in management consulting and software engineering.
On December 2, 2002, the Company's Board of Directors
unanimously rejected an unsolicited proposal by Asset
Value Fund to purchase the Company at a cash price of
$5.00 per share. The Board of Directors had determined
that the Asset Value Fund proposal was not in the best
interests of the Company or its shareholders. Dewey
Electronics further stated that in the unanimous
position of the Board of Directors the Company is
not for sale.
Critical Accounting Policies and Estimates
Our financial statements and accompanying notes are prepared
in accordance with accounting principles generally accepted
in the United States of America. Preparing financial
statements requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities,
revenues and expenses. These estimates and assumptions
are affected by the application of our accounting policies.
Actual results could differ from these estimates. Our
significant accounting policies are described in the Notes
to the Consolidated Financial Statements herein and
contained within the Company's Form 10-K for the fiscal
year ended June 30, 2002. Critical accounting policies
are those that require application of management's
most difficult, subjective or complex judgments, often
as a result of matters that are inherently uncertain
and may change in subsequent periods. The Company's
critical accounting policies include revenue recognition
on contracts and contract estimates, long-lived assets,
and valuation of deferred tax assets and liabilities.
In the electronics segment, revenues and estimated earnings
are recorded under defense contracts using the percentage
of completion method of accounting, measured as the
percentage of costs incurred to estimated total costs
at completion of each contract. See Note 1 to the
Consolidated Financial Statements.
17
For interim reporting periods, the Company does not segregate
inventories as to raw materials, work in progress and finished
goods (this information is available at year end when physical
inventories are taken and recorded). Estimates are made for
interim reporting periods. See Note 4 to the Consolidated
Financial Statements.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, the
Company carried out, under the supervision and with the
participation of the Company's management, including its Chief
Executive Officer and Treasurer, an evaluation of the
effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934). Based upon and
as of the date of that evaluation, the Chief Executive Officer
and Treasurer concluded that the design and operation of
these disclosure controls and procedures are effective.
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect
these internal controls subsequent to the date of their
evaluation.
18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On December 4, 2002, at the Company's annual meeting of
shareholders, the following five directors were elected to
serve for the ensuing year. Set forth below are the numbers
of votes cast for, or withheld with respect to, each such
person (who were the Company's nominees for directors):
Name For Withheld
Alexander A.
Cameron 944,246 161,227
Frances D.
Dewey 947,746 157,727
John H.D.
Dewey 947,062 158,411
Nathaniel
Roberts 947,746 157,727
James M.
Link 946,546 158,927
Paul O. Koether, a shareholder, was nominated from the
floor and received 136,394 votes.
Item 6. Exhibits and Reports on Form 8-K
- ---------------------------------------
The exhibits listed on the accompanying Index to Exhibits
are filed as part of this quarterly report in Form 10-Q.
The following reports on Form 8-K were filed by the Company
during the period covered by this report:
On December 9, 2002, the Company filed a current report on
Form 8-K announcing, among other things, that the Company's
Board of Directors unanimously elected John H.D. Dewey to
the office of President and Chief Executive Officer of the
Company.
On December 3, 2002, the Company filed a current report on
Form 8-K announcing that the Company's Board of Directors
unanimously rejected an unsolicited proposal to purchase the
Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
l934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
THE DEWEY ELECTRONICS CORPORATION
/s/
Date: February 14, 2003 John H.D. Dewey
President and Chief
Executive Officer
/s/
Date: February 14, 2003 Thom A. Velto
Treasurer
19
CERTIFICATIONS
I, John H.D. Dewey, certify that:
1.I have reviewed this quarterly report on Form 10-Q of The
Dewey Electronics Corporation;
2.Based on my knowledge, this quarterly 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
quarterly report.
3.Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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
quarterly report.
4.The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures 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 quarterly report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):a)all significant deficiencies in the
design or operation of internal controls which could
adversely affect the registrant's ability to record,
process, summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; 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; and
6.The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies
and material weaknesses.
Date: February 14, 2003
____/s/_____
John H. D. Dewey
President and Chief Executive Officer
CERTIFICATIONS
I, Thom A. Velto, certify that:
1.I have reviewed this quarterly report on Form 10-Q of The
DeweyElectronics Corporation;
2.Based on my knowledge, this quarterly 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 quarterly report.
3.Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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
quarterly report.
4.The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and
we have:
a)designed such disclosure controls and procedures 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 quarterly report is
being prepared;
b)evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c)presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing
the equivalent function):
a)all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize
and report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; 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; and
6.The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal
controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: February 14, 2003
____/s/________
Thom A. Velto
Treasurer
THE DEWEY ELECTRONICS CORPORATION
INDEX TO EXHIBITS
The following exhibits are filed as part of this report.
For convenience of reference, exhibits are listed according
to the numbers assigned in the Exhibit table to
Regulation S-K.
Number
99.1 Certification of Chief Executive Officer pursuant to 18
U.S. C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
99.2 Certification of Treasurer pursuant to 18 U.S. C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 (filed herewith)
22
EXHIBIT 99.1
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 The Dewey Electronics
Corporation (the "Corporation") on Form 10-Q for the period
ended December 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"),
I, John H. D. Dewey, Chief Executive Officer of the
Corporation, certify, pursuant to 18 U.S.C. ss 1350, as
adopted pursuant to ss 906 of the Sarbanes-Oxley Act of 2002,
that to my knowledge:
(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 Corporation.
/s/
John H. D. Dewey, President and Chief Executive Officer
Dated: February 14, 2003
EXHIBIT 99.2
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 The Dewey Electronics
Corporation (the "Corporation") on Form 10-Q for the period
ended December 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"),
I, Thom A. Velto, Treasurer of the Corporation, certify,
pursuant to 18 U.S.C. ss 1350, as adopted pursuant to ss 906
of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(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 Corporation.
/s/
Thom A. Velto, Treasurer
Date: February 14, 2003