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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 September 30, 2004
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 .
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X.
The number of shares outstanding of the registrant's common stock,
$.01 par value was 1,359,531 at November 5, 2004.
THE DEWEY ELECTRONICS CORPORATION
INDEX
Page No.
Part I Financial Information
Item 1. Consolidated Financial Statements 3
Balance Sheets -
September 30, 2004 and June 30, 2004 4
Statements of Operations -
Three Months Ended September 30, 2004
and September 30, 2003 5
Statements of Cash Flows for the
Three Months Ended September 30, 2004
and September 30, 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 4. Controls and Procedures 20
Part II Other Information
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 21
Item 4. Submission of Matters to a Vote of Security
Holders 21
Item 6. Exhibits 21
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 September 30, 2004 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, 2004.
THE DEWEY ELECTRONICS CORPORATION
BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2004 2004
(UNAUDITED)
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $1,410,426 $1,604,475
ACCOUNTS RECEIVABLE, NET 684,501 810,051
INVENTORIES 1,276,280 925,501
CONTRACT COSTS AND RELATED ESTIMATED
PROFITS IN EXCESS OF BILLINGS 1,083,405 965,606
DEFERRED TAX ASSET 24,743 24,743
PREPAID EXPENSES AND OTHER CURRENT
ASSETS 121,345 122,182
TOTAL CURRENT ASSETS 4,600,700 4,452,558
PLANT, PROPERTY AND EQUIPMENT - NET 556,475 575,455
CAPITALIZED DEVELOPMENT COSTS 912,795 904,566
DEFERRED LOAN FEES 24,694 43,215
LAND AND RELATED COSTS HELD FOR SALE 513,506 506,345
TOTAL OTHER ASSETS 1,450,995 1,454,126
TOTAL ASSETS 6,608,170 6,482,139
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
TRADE ACCOUNTS PAYABLE $ 332,827 $255,029
ACCRUED EXPENSES AND OTHER LIABILITIES 242,200 251,921
ACCRUED CORPORATE INCOME TAXES 65,965 32,384
ACCRUED PENSION COSTS 8,818 8,818
MORTGAGE NOTE PAYABLE 312,500 327,735
DUE TO RELATED PARTY 200,000 200,000
TOTAL CURRENT LIABILITIES 1,162,310 1,075,887
LONG-TERM PENSION LIABILITY 232,363 247,363
STOCKHOLDERS' EQUITY:
COMMON STOCK, par value $.01; authorized
3,000,000 shares; issued and outstanding
1,693,397 shares 16,934 16,934
PAID-IN CAPITAL 2,817,474 2,817,474
ACCUMULATED EARNINGS 3,034,804 2,980,196
ACCUMULATED OTHER COMPREHENSIVE LOSS (165,013) (165,013)
5,704,199 5,649,591
LESS: TREASURY STOCK 333,866 SHARES
AT COST (490,702) (490,702)
TOTAL STOCKHOLDERS' EQUITY 5,213,497 5,158,889
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $6,608,170 $6,482,139
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
2004 2003
REVENUES $1,285,075 $1,186,774
COST OF REVENUES 889,085 912,566
GROSS PROFIT 395,990 274,208
SELLING & ADMIN. EXPENSES 297,891 252,393
OPERATING INCOME 98,099 21,815
INTEREST EXPENSE 9,376 12,401
OTHER INCOME - NET (2,291) (3,136)
INCOME BEFORE INCOME TAXES 91,014 12,550
INCOME TAX EXPENSE (36,406) (5,020)
NET INCOME $54,608 $7,530
========= =========
NET INCOME PER SHARE:
BASIC $0.04 $0.01
DILUTED $0.04 $0.01
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
BASIC 1,359,531 1,359,531
DILUTED 1,402,031 1,402,031
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 54,608 $ 7,530
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH USED IN OPERATING
ACTIVITIES:
DEPRECIATION 26,850 18,570
AMORTIZATION OF LOAN FEES 18,521 2,475
DECREASE IN ACCOUNTS RECEIVABLE 125,550 555,733
INCREASE IN INVENTORIES (350,779) (543,627)
(INCREASE)/DECREASE IN CONTRACT COSTS
AND RELATED ESTIMATED PROFITS IN EXCESS
OF APPLICABLE BILLINGS (117,799) 104,524
DECREASE/(INCREASE) IN PREPAID EXPENSES
AND OTHER CURRENT ASSETS 837 (2,178)
INCREASE/(DECREASE) IN ACCOUNTS PAYABLE 77,798 (137,512)
DECREASE IN ACCRUED LIABILITIES (9,721) (40,392)
INCREASE IN ACCRUED CORPORATE
INCOME TAXES 33,581 4,696
DECREASE IN ACCRUED PENSION COSTS (15,000) 15,000
TOTAL ADJUSTMENTS (210,162) (22,711)
NET CASH USED IN OPERATING ACTIVITIES (155,554) (15,181)
CASH FLOWS FROM INVESTING ACTIVITIES:
EXPENDITURES FOR PLANT, PROPERTY AND
EQUIPMENT (7,870) (37,868)
EXPENDITURES FOR CAPITALIZED DEVELOPMENT
COSTS (8,229) (43,187)
COSTS CAPITALIZED WITH LAND HELD FOR
SALE (7,161) --
NET CASH USED IN INVESTING ACTIVITIES (23,260) (81,055)
CASH FLOWS FROM FINANCING ACTIVITIES:
PRINCIPAL PAYMENTS OF LONG TERM DEBT (15,235) (15,234)
NET CASH USED IN FINANCING ACTIVITIES (15,235) (15,234)
NET DECREASE IN CASH AND CASH
EQUIVALENTS (194,049) (111,470)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,604,475 1,989,703
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,410,426 $1,878,233
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
INTEREST PAID $9,455 $12,478
INTEREST RECEIVED $1,885 $1,969
CORPORATE INCOME TAXES PAID $2,825 $325
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company applies Accounting Principles Board (APB) Opinion 25 and
related interpretations in accounting for its Stock Option Plans. The
compensation cost for the stock-based employee compensation plan is
recognized using the intrinsic value method. The following table
illustrates the effect on net income and net income per share if the
Company had applied the fair value method to recognize stock-based
employee compensation.
3 Months Ended September 30
2004 2003
Net income, as reported $54,608 $7,530
Deduct: Total stock-based
employee compensation
expense determined
under fair value based
method for all awards,
net of related tax
Effects 4,935 3,589
Pro forma net income $49,673 $3,941
Earnings per share:
Basic - as reported $.04 $.01
Basic - pro forma $.04 $.00
Diluted - as reported $.04 $.01
Diluted - pro forma $.04 $.00
NOTE 2: REVENUE RECOGNITION
Revenues and estimated earnings under defense contracts (including
research and development 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 and title and risk of loss have been
transferred to the customer and collection is probable.
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
NOTE 3: 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 4: 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 5: 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 made following a physical review of existing
materials at various stages including specific identification of major
cost elements. This process of estimating inventory at various stages
of production is consistent with prior periods.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
September 30, 2004 June 30, 2004
Finished Goods $ 252,144 $223,969
Work In Progress 602,423 300,474
Raw Materials 421,713 401,058
Total $1,276,280 $925,501
========== =========
NOTE 6: 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.
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7: 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 8: CAPITALIZED DEVELOPMENT COSTS
Capitalized costs are for costs for efforts to improve and enhance the
2kW generator set product line and involve, primarily, the adaptation
of existing technology, as well as, engineering and design to meet
specific customer requests. The scope of these efforts includes the
development of a product which is in accordance with current customer
requests and future requirements. Company efforts are to address
areas of sound reduction, reduced weight and environmental
requirements.
NOTE 9: LOAN FEES
Loan fees are capitalized by the Company and amortized utilizing the
straight-line method over the term of the loan.
NOTE 10: INCOME TAXES
The income tax expense for the three month period ended September 30,
2004 and 2003 was at an effective tax rate of 40%.
NOTE 11: IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the recoverability of all long-term assets,
including the related useful lives, whenever events or changes in
circumstances indicate that the carrying amount of a long-lived asset
might not be recoverable. If required, the Company compares the
estimated undiscounted future net cash flows to the related asset's
carrying value to determine whether there has been an impairment. If
an asset is considered impaired, the asset is written down to fair
value, which is based either on discounted cash flows or appraised
values in the period the impairment becomes known. Management
believes that, as of September 30, 2004, the carrying value of such
assets are not impaired.
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
NOTE 12: INCOME PER SHARE
Basic net income per share is computed by dividing reported net income
available to common shareholders by the weighted average shares
outstanding for the period. Diluted net income per share is computed
by dividing reported net income available to common shareholders by
the 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 September 30,
2004 2003
Per Per
Income Shares Share Income Shares Share
Amount Amount
Basic
Net
income
per
common
share $54,608 1,359,531 $.04 $7,530 1,359,531 $.01
Effect
Of
dilutive
Securities - 42,500 -- -- 42,500 --
Diluted
Net
income
per
common
share $54,608 1,402,031 $.04 $7,530 1,402,031 $.01
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
NOTE 13: SEGMENT INFORMATION
Information about the Company's operations in its two segments for the
three month period ended September 30, 2004 and 2003 are as follows:
Three months ended
September 30,
2004 2003
Electronics Segment
Revenues $1,246,129 $1,176,826
Operating Income 112,539 50,634
LEISURE AND RECREATION SEGMENT
Revenues 38,946 9,948
Operating (Loss) (14,440) (28,819)
Total
Revenues 1,285,075 1,186,774
Operating Income 98,099 21,815
Interest Expense (9,376) (12,401)
Other Income 2,291 3,136
Income Tax Expense (36,406) (5,020)
Net Income $ 54,608 $ 7,530
NOTE 14: PENSION PLAN
Three months ended September 30
2004 2003
Service cost $7,067 $7,108
Interest cost 15,708 14,690
Expected return on plan assets (13,550) (11,956)
Amortization of prior service cost -- --
Amortization of net (gain) loss 4,786 5,848
Net periodic benefit cost $14,011 $15,690
Employer Contributions
The Company previously disclosed in its financial statements for the
year ended June 30, 2004, that it expects to continue to contribute
within the range of legally acceptable contributions as identified by
the Plan's enrolled actuary. As of September 30, 2004, $30,000 of
contributions have been made. The Company presently expects to
continue to contribute within the range of legally acceptable
contributions as identified by the Plan's enrolled actuary.
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, 2004. 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.
Operating Segments
The Company is organized into two operating segments on the basis of
the types of products offered. Each segment is comprised of separate
and distinct businesses: the electronics segment - primarily business
with the Department of Defense, and the leisure and recreation segment
- - primarily business with ski areas and resorts.
In the electronics segment, the Company is a producer of electronic
and electromechanical systems for the Armed Forces of the United
States. The Company provides its products in this segment either as a
prime contractor or as a subcontractor for the Department of Defense.
The electronics segment is comprised primarily of the 2kW generator
product line, two research and development contracts, and other
various orders, more limited in scope and duration. The 2kW generator
product line is provided to the various branches of the Armed Forces
of the United States. Production is for a long-term contract as well
as short-term orders for limited quantities. The Company also
provides speed and measurement instrumentation primarily for the U.S.
Navy and other prime contractors such as shipbuilders. Orders are
also received for replacement parts and equipment for previous Company
contracts with the Department of Defense as well as other projects
performed as a sub-contractor. In past years, the Company had various
long-term contracts to provide the U.S. Navy with equipment.
Under the 2kW diesel operated tactical generator set contract, the
Company has been the sole source 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.
A new contract was awarded in September 2001, 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. The total amount of orders under the
September 2001 contract placed through September 30, 2004 amount to
approximately $12 million. As with the prior contract, this contract
allows for the Army to place annual production orders and to place
additional interim orders. However, no assurances can be made that
further orders will be placed or, if they are placed, the timing and
amount of such orders.
In the leisure and recreation segment, the Company, through its HEDCO
Division, designs, manufactures and markets advanced, sophisticated
snowmaking equipment. It also supplies replacement parts for items no
longer covered under warranty.
There are no intersegment sales.
Some operating expenses, including general corporate expenses, have
been allocated to each segment by specific identification or based on
labor for items which are not specifically identifiable.
Results of Operations
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.
Consolidated Summary
For the three-month period ended September 30, 2004, consolidated
revenues were $1,285,075 and operations resulted in a profit of
$98,099. During the same period last year, consolidated revenues
were $1,186,774 and operating income was $21,815.
Revenues for the three-month period this year were higher compared to
the same three-month period last year. This is attributable to both
segments and is discussed further below in the results of operations
by business segment. Also, information about the Company's operations
in its two segments for the three month period this year and last year
can be found in Note 14 of the Notes to Consolidated Financial
Statements.
Electronics Segment
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 actual incurred costs bear in comparison to estimated total costs
utilizing the most recent estimates of costs and funding. Since
contracts typically extend over multiple reporting periods, revisions
in costs 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 2 and Note 6 of the
Notes to Consolidated Financial Statements.
For the three-month period ended September 30, 2004, revenues in the
electronics segment were $69,303 higher than the same three-month
period last year. This is partly the result of increased revenues
from various orders which are generally for replacement parts. This
increase in various orders includes increased orders received for 2kW
generator sets not part of the Company's contract with the U.S. Army.
They have been received mostly from other companies which are
incorporating the 2kW generator sets into the product which they are
supplying to the U.S. Government. The government sector has also
begun to order small quantities of 2kW generator sets for a specific
user, independent of the Company's contract. In addition, the
Company's efforts towards the research and development contract
awarded to the Company in September 2003 (the "2003 R&D Contract")
have generated revenues not present during this time period last year.
The production of 2kW generator sets under the Company's contract with
the Army has contributed less revenues during this period when
compared to last year.
The 2003 R&D Contract is for work being performed towards the
improvement to the current 2kW diesel operated generator set
specifically at the request of the U.S. Army for lighter, quieter
models. On September 28, 2004, the Company was awarded a second
research and development contract by the U.S. Army for work to be
performed towards similar objectives. Both of these research and
development contracts are cost plus fixed fee contracts. For
additional information, see "Company Strategy" below.
The Company's contract to provide the Armed Forces with diesel
operated generator sets provided lower revenues during this three
month period when compared to the same three month period last year.
This is the result of reduced orders and the affected production
levels. See "Government Defense Business" below.
As of September 30, 2004, the aggregate value of the Company's backlog
of electronics product not previously recorded as revenues was
approximately $4.4 million. It is estimated that approximately $3.6
million of this backlog will be recognized as revenues during this
fiscal year ending June 30, 2005.
As of September 30, 2003, the aggregate value of the Company's backlog
of electronics product not previously recorded as revenues was
approximately $4.5 million.
Leisure and Recreation Segment
In the HEDCO Division, revenues were higher by $28,998 for the three
month period ended September 30, 2004 when compared to the same period
last year as a result of increased sales of replacement parts. No
snowmaking machine sales were made during this period of either year.
The sale of snowmaking machines are recorded when machinery has been
delivered which historically has been during the second fiscal
quarter.
Liquidity and Capital Resources
The Company's principal capital requirements are to fund working
capital needs and any debt servicing requirements and capital
expenditures. The Company's borrowing capacity has remained above its
use of outside financing. Management believes that the Company's
future cash flow from operations, combined with its existing line of
credit will be sufficient to support working capital requirements and
capital expenditures at their current or expected levels.
Management also believes that it can continue to meet the Company's
short-term liquidity needs through a combination of progress payments
on government contracts (based on costs incurred) and billings at the
time of delivery of products.
At September 30, 2004, the Company's working capital was $3,438,390
compared to $3,376,671 at June 30, 2004.
The ratio of current assets to current liabilities was 3.96 to 1 at
September 30, 2004 and 4.14 to 1 at June 30, 2004.
The following table is a summary of the Statements of Cash Flows in
the Company's Financial Statements:
Three Months ended September 30,
2004 2003
Net Cash used in
Operating activities $(155,554) $(15,181)
Investing activities $(23,260) $(81,055)
Financing activities $(15,235) $(15,234)
Operating Activities
Adjustments to reconcile net earnings to net cash used in operating
activities are presented in the Statements to Cash Flows in the
Company's Financial Statements.
Net cash used in operating activities in the three month period ended
September 30, 2004 was comprised primarily of net income before
depreciation and amortization, an increase in accounts payable, and an
increase in inventories. Inventories increased primarily as a result
of the Company's efforts to increase capacity of 2kW generator sets
for more rapid delivery of orders.
During the three month period ended September 30, 2003, net cash used
in operating activities was comprised primarily of net income before
depreciation and amortization, a decrease in accounts receivable and
an increase in inventories. Inventories increased primarily as a
result of the Company's efforts to produce snowmaking and machines to
be available for sales.
The Company expenses its research and development costs as incurred.
These costs consist primarily of material and labor costs. For the
three month period ended September 30, 2004, the Company expensed
$12,764 of these costs. For the same three month period last year,
the Company expensed $61,777 of research and development costs.
Investing Activities
During the three-month period ended September 30, 2004, investing
activities used $23,260. Of this amount, $7,870 was used for plant,
property and equipment, and $7,161 was used for costs associated with
undeveloped land owned by the Company and described below under
"Financing Activities". The Company has also used $8,229 to continue
to invest in its efforts to improve its products and existing
technologies in its generator product line. See 'Company Strategy'
below for further information on this effort.
During the three month period ended September 30, 2003, net cash used
in investing activities amounted to $81,055. Of this amount, $37,868
was used for plant, property and equipment, and $43,187 was used by
the Company to continue to invest in its efforts to improve its
technologies in its generator product line.
Financing Activities
Financing activities during the three month period ended September 30,
2004 used $15,235 and used $15,234 during the same period last year.
These amounts represent principal reduction payments made toward the
Company's Mortgage Note agreement.
On December 27, 2001, the Company and its primary Bank had 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. Management believes that the Company's Mortgage Note agreement
will again be renewed on terms to be determined.
The Company also has a line of credit agreement with Sovereign Bank in
the amount of $500,000 at the rate of .25% plus the Bank's prime rate,
which may be renewed on October 31 of each year. The Bank had also
agreed to extend the Company's line of credit of $500,000 through
October 2004 at the rate of the Bank's prime rate plus .25%. As of
September 30, 2004, there were no outstanding borrowings against this
line of credit facility. On November 1, 2004, this term loan
agreement was renewed through October 31, 2005 on the same terms and
conditions.
The Mortgage Note is secured by a first mortgage on all of the
Company's land and its building. Borrowings under the line of credit
arrangement are secured by a first lien on all of the Company's
machinery, equipment and other personal property.
The Company also has a note payable to a co-founder (shareholder) in
the amount of $200,000, bearing the interest rate of 9% per annum.
This note is unsecured and is subordinate to the Company's Mortgage
Note with the Bank. It has been classified on the balance sheet as a
short-term liability since the Mortgage Note has a maturity date of
January 2005. If the Mortgage Note agreement is renewed, this note
would again be classified 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 possible methods of monetizing the unused portion of
this property by its sale and/or development. The Company has
retained one of the largest commercial real estate brokerage houses
serving the New York - New Jersey region to assist in these efforts
and is currently in negotiations with a prospective buyer.
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 replaced the initial contract.
The Company has been the sole source 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.
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. The amount of orders received under this contract
is approximately $12 million through September 30, 2004. Deliveries
are scheduled to continue during the current fiscal year.
The Army has been ordering 2kW generators at a reduced volume when
compared to previous years. Thus, the Company is currently delivering
at a reduced rate, which is partially responsible for the reduction in
revenues. The reduction in orders results from many factors. It
appears that our main customer, the Army, has satisfied the majority
of its outstanding requirements. It has been placing orders as new
requirements emerge, and this is a slower process. Moreover, we now
believe there is competition in part of our market, from a larger 3kW
generator that operates more quietly than our current model. However,
it does not compete in the 'man-portable' segment of our market since
this competing product is twice as heavy. The customer is interested
in a product which is smaller, lighter and quieter and the Company is
working towards developing the 2kW generators to address its
customer's interest. See below under "Company Strategy." The
Company's production contract for 2kW generators prohibits changes to
the unit's design and performance characteristics. This allows the
military procurement and logistics infrastructure to standardize on a
single set of requirements, and avoid incremental change.
Traditionally this has been advantageous to both customer and
supplier. However, with evolving requirements and competition, this
can be less advantageous.
As the contract allows, additional orders may be made by the Army,
although no assurances can be made that it will do so, or if there are
additional orders, the amount and timing thereof. 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. Management is continuing to
explore additional sources of revenue as discussed below in the
section "Company Strategy".
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
On September 9, 2003, the Company was awarded a "cost plus fixed fee"
research and development contract. This contract with the U.S. Army
Communications - Electronic Command, CECOM Acquisition Center,
Washington is in the amount of approximately $1.8 million. The
contract is for the research and development of improvements to the
current 2kW diesel operated generator set specifically at the request
of the Army for lighter, quieter models. The Company is in the
development stage, and some components are being tested. Work on this
contract is being performed at the Company's location in Oakland, New
Jersey and is expected to continue through the current fiscal year
ending June 2005. There are no assurances of future production orders
as a result of this contract. However, the contract requires the
Company to present improvements to the government.
On September 28, 2004, the Company was awarded another 'cost plus
fixed fee' research and development contract. This contract, also
with the U.S. Army Communications - Electronic Command, CECOM
Acquisition Center, Washington, DC, is in the amount of approximately
$1.5 million. This contract is for the further development of
improvements to the 2kW generator set provided to the U.S. Armed
Forces. Efforts towards this contract are expected to continue
through August 2006.
The Company has continued to invest in its efforts to improve its
products and existing technologies. This effort is focused on the
enhancement of the existing generator set product line and involves,
primarily, the adaptation of existing technology, as well as
engineering and design to meet customer needs. The scope of these
efforts includes the development of an improved product, which is in
accordance with current customer requests and future requirements.
The Company is engaging in efforts to address these requests in the
areas of sound reduction, reduced weight, fuel and environmental
requirements.
Other companies have announced intentions of developing similar
products. Some of these companies have greater financial and/or
technical resources than we do. However, management believes that
despite inherent risks and uncertainties in all of these type of
projects, these efforts are important to the Company's business. 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.
The Department of Defense budgeting process is one of an extended time
frame. The process of including expenditures in its budget could take
a minimum of 12 to 24 months. In addition, approval of this budget
does not guarantee the expenditure actually being made and
particularly the receipt of an award by the Company.
The Company has many years of experience in contracting with the
Department of Defense and has received many contracts to provide
various types of products and services. Utilizing some of this
experience, the Company is continuing to explore other areas of
business, which are capable of providing continued stability and
growth.
The Company's primary sources of revenue include products with long
manufacturing lead times. These products, in particular, are its 2kW
generator sets, and its HEDCO snowmaking machines. Recognizing this,
the Company has committed some of its resources to making a quantity
of these products readily available by producing them for inventory
and sales. The government sector has begun to order small quantities
of 2kW generator sets for specific uses pursuant to short term orders
independent of the Company's 2kW contract.
The market for snowmaking machines has changed in recent years. Rather
than order machinery months ahead of time, customers are expecting
product to be readily available for immediate use. In order to remain
competitive in this market, the Company has produced some models of
snowmaking machines for inventory purposes. It is also enhancing the
technical capabilities as optional items for these machines.
Despite the inherent risks and uncertainties of investing in
inventory, management believes that the investments in inventory
described above are important to the Company's business and future
growth.
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
affect 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, 2004. 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, pensions,
impairment of long-lived assets, capitalized development costs and
valuation of deferred tax assets and liabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies and Estimates", contained
within the Company's Form 10-K for the fiscal year ended June 30,
2004.
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 2 to
the Consolidated Financial Statements.
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 5 to the Consolidated Financial Statements.
The Company estimates its income taxes using an estimated annual
effective tax rate for the annual period. See Note 10 of the Notes to
the Consolidated Financial Statements.
ITEM 4. Controls and Procedures
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 Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the fiscal quarter
covered by this report. Based upon that evaluation, the Chief
Executive Officer and Treasurer concluded that, as of September 30,
2004, the design and operation of these disclosure controls and
procedures were effective. During the fiscal quarter covered by this
report, there have been no changes in the Company's internal control
over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits
- ------------------------------------------------------------------
See the accompanying Index to Exhibits to this quarterly report on
Form 10-Q.
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/John H.D. Dewey
Date: November 15, 2004 John H.D. Dewey
President and Chief Executive Officer
/s/Thom A. Velto
Date: November 15, 2004 Thom A. Velto
Treasurer
THE DEWEY ELECTRONICS CORPORATION
INDEX TO EXHIBITS
The following exhibits are included with this report. For convenience
of reference, exhibits are listed according to the numbers assigned in
the Exhibit table to Regulation S-K.
Number
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Treasurer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 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
32.2 Certification of Treasurer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 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 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 (the
registrant's fourth fiscal quarter in the case of an
annual report) 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 the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in
the design or operation of internal control 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 control over financial
reporting.
Date: November 15, 2004
By: /s/ John H.D. Dewey
John H.D. Dewey, President/CEO
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thom A. Velto, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Dewey
Electronics 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 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 (the
registrant's fourth fiscal quarter in the case of an
annual report) 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 the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in
the design or operation of internal control 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 control over financial
reporting.
Date: November 15, 2004
By: /s/ Thom A. Velto
Thom A. Velto, Treasurer
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 The Dewey Electronics
Corporation (the "Corporation") on Form 10-Q for the period ended
September 30, 2004 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
John H. D. Dewey, Chief Executive Officer
Date: November 15, 2004
A signed original of this written statement required by Section 906
has been provided to The Dewey Electronics Corporation and will be
retained by The Dewey Electronics Corporation and furnished to the
Securities and exchange commission or its staff upon request.
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 The Dewey Electronics
Corporation (the "Corporation") on Form 10-Q for the period ended
September 30, 2004 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
Thom A. Velto, Treasurer
Date: November 15, 2004
A signed original of this written statement required by Section 906
has been provided to The Dewey Electronics Corporation and will be
retained by The Dewey Electronics Corporation and furnished to the
Securities and exchange commission or its staff upon request.