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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 March 31, 2005
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 1,362,031 at May 12, 2005.
THE DEWEY ELECTRONICS CORPORATION
INDEX
Page
No.
Part I Financial Information
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets -
March 31, 2005 and June 30, 2004 4
Consolidated Statements of Operations -
Three and Nine Months Ended March 31, 2005
and March 31, 2004 5
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2005
and March 31, 2004 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15
Item 4. Controls and Procedures 23
Part II Other Information
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 24
Item 4. Submission of Matters to a Vote of Security
Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
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 March 31, 2005 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
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, JUNE 30,
2005 2004
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $1,615,276 $1,604,475
ACCOUNTS RECEIVABLE, NET 930,240 810,051
INVENTORIES 934,333 925,501
CONTRACT COSTS AND RELATED ESTIMATED
PROFITS IN EXCESS OF BILLINGS 811,850 965,606
DEFERRED TAX ASSET 25,192 24,743
PREPAID EXPENSES AND OTHER CURRENT ASSETS 259,423 242,182
TOTAL CURRENT ASSETS 4,576,314 4,572,558
PLANT, PROPERTY AND EQUIPMENT - NET 561,330 575,455
CAPITALIZED DEVELOPMENT COSTS 735,704 684,566
DEFERRED FEES 10,000 143,215
LAND AND RELATED COSTS HELD FOR SALE 591,667 506,345
TOTAL OTHER ASSETS 1,337,371 1,334,126
TOTAL ASSETS 6,475,015 6,482,139
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
TRADE ACCOUNTS PAYABLE $ 289,148 $255,029
ACCRUED EXPENSES AND OTHER LIABILITIES 190,158 251,921
ACCRUED CORPORATE INCOME TAXES 33,332 32,384
ACCRUED PENSION COSTS 8,818 8,818
NOTE PAYABLE 167,489 327,735
DUE TO RELATED PARTY 200,000 200,000
TOTAL CURRENT LIABILITIES 888,946 1,075,887
LONG-TERM PENSION LIABILITY 262,363 247,363
DEFERRED INCOME TAXES 13,535 --
LONG-TERM PORTION OF NOTE PAYABLE 124,698 --
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 2,815,245 2,817,474
ACCUMULATED EARNINGS 3,005,335 2,980,196
ACCUMULATED OTHER COMPREHENSIVE
LOSS-PENSION (165,013) (165,013)
5,672,501 5,649,591
LESS: TREASURY STOCK 331,366 SHARES AT
COST AT MARCH 31, 2005 AND 333,866 SHARES
AT COST AT JUNE 30, 2004 (487,028) (490,702)
TOTAL STOCKHOLDERS' EQUITY 5,185,473 5,158,889
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,475,015 $6,482,139
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
2005 2004 2005 2004
REVENUES $1,267,727 $1,605,040 $4,406,184 $4,178,886
COST OF REVENUES 987,673 1,222,864 3,437,911 3,236,866
GROSS PROFIT 280,054 382,176 968,273 942,020
SELLING & ADMIN. EXPENSES 275,559 292,582 908,351 869,410
OPERATING INCOME 4,495 89,594 59,922 72,610
INTEREST EXPENSE 8,348 10,446 26,870 32,907
OTHER INCOME - NET (2,991) (457) (8,846) (848)
(LOSS)/INCOME BEFORE INCOME
TAXES (862) 79,605 41,898 40,551
INCOME TAX BENEFIT/(EXPENSE) 345 (31,842) (16,759) (16,220)
NET (LOSS)/INCOME ($517) $47,763 $25,139 $24,331
NET INCOME PER SHARE:
BASIC ($0.00) $0.04 $0.02 $0.02
DILUTED ($0.00) $0.03 $0.02 $0.02
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
BASIC 1,362,031 1,359,531 1,362,031 1,359,531
DILUTED 1,402,420 1,402,031 1,403,827 1,402,031
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $25,139 $24,331
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY/(USED BY)
OPERATING ACTIVITIES:
DEPRECIATION 80,550 55,710
AMORTIZATION OF FEES 133,215 7,425
DEFERRED INCOME TAXES 13,086 -
(INCREASE) IN ACCOUNTS RECEIVABLE (120,189) (404,081)
(INCREASE) IN INVENTORIES (8,832) (477,366)
DECREASE/(INCREASE) IN CONTRACT COSTS
AND RELATED ESTIMATED PROFITS IN
EXCESS OF APPLICABLE BILLINGS 153,756 (31,587)
(INCREASE)/DECREASE IN PREPAID EXPENSES
AND OTHER CURRENT ASSETS (17,241) 5,666
INCREASE IN ACCOUNTS PAYABLE 34,119 17,896
(DECREASE) IN ACCRUED LIABILITIES (61,763) (27,960)
INCREASE/(DECREASE) IN ACCRUED
CORPORATE INCOME TAXES 948 (6,524)
INCREASE IN ACCRUED PENSION COSTS 15,000 15,000
TOTAL ADJUSTMENTS 222,649 (845,821)
NET CASH PROVIDED BY(USED IN) OPERATING
ACTIVITIES 247,788 (821,490)
CASH FLOWS FROM INVESTING ACTIVITIES:
EXPENDITURES FOR PLANT, PROPERTY AND
EQUIPMENT (66,425) (241,360)
EXPENDITURES FOR CAPITALIZED
DEVELOPMENT COSTS (51,138) (184,854)
COSTS DEFERRED WITH LAND HELD FOR SALE (85,322) --
NET CASH USED IN INVESTING ACTIVITIES (202,885) (426,214)
CASH FLOWS FROM FINANCING ACTIVITIES:
PRINCIPAL PAYMENTS OF DEBT (35,547) (45,703)
TREASURY STOCK SOLD 1,445 --
NET CASH USED IN FINANCING ACTIVITIES (34,102) (45,703)
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 10,801 (1,293,407)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,604,475 1,989,703
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,615,276 $696,296
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
INTEREST PAID $27,204 $31,586
INTEREST RECEIVED 7,880 5,268
CORPORATE INCOME TAXES PAID 2,825 20,950
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2005
NOTE 1: STOCK BASED COMPENSATION
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 March 31
2005 2004
Net (loss)income, as reported ($517) $47,763
Deduct: Total stock-based
employee compensation
expense determined
under fair value based
method for all awards,
net of related tax
effects 14,161 4,935
Pro forma net (loss)/income ($14,678) $42,828
Earnings per share:
Basic - as reported ($.00) $.04
Basic - pro forma ($.01) $.03
Diluted - as reported ($.00) $.03
Diluted - pro forma ($.01) $.03
9 Months Ended March 31
2005 2004
Net income, as reported $25,139 $24,331
Deduct: Total stock-based
employee compensation
expense determined
under fair value based
method for all awards,
net of related tax
effects 24,031 14,847
Pro forma net income $1,108 $9,484
Earnings per share:
Basic - as reported $.02 $.02
Basic - pro forma $.00 $.01
Diluted - as reported $.02 $.02
Diluted - pro forma $.00 $.01
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2005
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.
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.
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2005
FOR THE NINE MONTHS ENDED MARCH 31, 2005
March 31, 2005 June 30, 2004
Finished Goods $367,644 $223,969
Work In Progress 165,077 300,474
Raw Materials 401,612 401,058
Total $934,333 $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.
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 development 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 related to the Company's mortgage note (which was replaced by
a term loan agreement on February 24, 2005) were capitalized by the
Company and amortized utilizing the straight-line method over the term
of the loan. As of March 31, 2005 the loan fees were fully amortized.
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2005
NOTE 10: INCOME TAXES
The income tax expense for the three and nine month periods ended March
31, 2005 and 2004 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 March 31, 2005, the carrying value of such assets are not
impaired.
NOTE 12: EARNINGS PER SHARE
Basic net(loss)/income per share is computed by dividing reported net
(loss)/income available to common shareholders by the weighted average
shares outstanding for the period. Diluted net (loss)/income per share
is computed by dividing reported net (loss)/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 (loss)/income per common
share computations.
Three Months Ended March 31,
2005 2004
Per Per
Loss Shares Share Income Shares Share
Amount Amount
Basic
Net
(loss)/
income
per
common
share ($517) 1,362,031 ($.00) $47,763 1,359,531 $.04
Effect of
dilutive
Securities - 40,389 -- -- 42,500 ($.01)
Diluted net
(loss)
per common
share ($517) 1,402,420 ($.00) $47,763 1,402,031 $.03
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2005
Nine Months Ended March 31,
2005 2004
Per Per
Income Shares Share Income Shares Share
Amount Amount
t
Basic net
income
per
common
share $25,139 1,362,031 $.02 $24,331 1,359,531 $.02
Effect of
dilutive
Securities - 41,796 -- -- 42,500 --
Diluted net
income
per common
share $25,139 1,403,827 $.02 $24,331 1,402,031 $.02
NOTE 13: RECENT ACCOUNTING PRONOUNCEMENTS
On December 15, 2004, the Financial Accounting Standards Board ("FASB")
released its final revised standard entitled FASB Statement No. 123R,
Share-Based Payment ("SFAS No. 123R"). SFAS No. 123R requires that a
public entity measure the cost of equity based service awards based on
the grant date fair value of the award (with limited exceptions). That
cost will be recognized over the period during which an employee is
required to provide service in exchange for the award or the requisite
service period. SFAS No. 123R is effective as of the beginning of the
Company's first fiscal year beginning after December 15, 2005. The
Company is currently assessing the impact SFAS No. 123R will have on
our financial position and results of operations and does not
anticipate that the adoption of this statement will have a material
impact on the Company's results of operations or financial condition.
On November 24, 2004, the FASB issued Statement No. 151, Inventory
Costs, an Amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"). The
standard requires that abnormal amounts of idle capacity and spoilage
costs within inventory should be excluded from the cost of inventory
and expensed when incurred. The provisions of SFAS No. 151 are
applicable to inventory costs incurred during fiscal years beginning
after June 15, 2005. The Company expects the adoption of SFAS No. 151
will not have a material impact on our financial position or results of
operations.
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2005
On October 22, 2004, the President signed the American Jobs Creation
Act of 2004 (the "Act"). The Act raises a number of issues with
respect to accounting for income taxes. For companies that pay U.S.
income taxes on manufacturing activities in the U.S., the Act provides
a deduction from taxable income equal to a stipulated percentage of
qualified income. The Act also provides for other changes in tax law
that will affect a variety of taxpayers. On December 21, 2004, the
Financial Accounting Standards Board ("FASB") issued two FASB Staff
Positions ("FSP") regarding the accounting implications of the Act
related to (1) the deduction for qualified domestic production
activities and (2) the one-time tax benefit for the repatriation of
foreign earnings. The FASB decided that the deduction for qualified
domestic production activities should be accounted for as a special
deduction under FASB Statement No. 109, Accounting for Income Taxes.
The FASB also confirmed, that upon deciding that some amount of
earnings will be repatriated, a company must record in that period the
associated tax liability. The guidance in the FSPs applies to
financial statements for periods ending after the date the Act was
enacted. The Company adopted these positions and determined that they
do not have a material impact on the Company's results of operations or
financial condition.
NOTE 14: SEGMENT INFORMATION
Information about the Company's operations in its two segments for the
three and nine month periods ended March 31, 2005 and 2004 are as
follows:
Three months ended Nine months ended
March 31, March 31
2005 2004 2005 2004
Electronics
Segment
Revenues $1,257,704 $1,597,660 $4,206,272 $3,806,325
Operating
Income 29,587 117,230 160,539 132,146
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2005
Leisure and Recreation
Revenues 10,023 7,380 199,912 372,561
Operating (Loss) (25,092) (27,636) (100,617) (59,536)
Total
Revenues 1,267,727 1,605,040 4,406,184 4,178,886
Operating Income 4,495 89,594 59,922 72,610
Interest Expense 8,348 10,446 26,870 32,907
Other Income 2,991 457 8,846 848
Income Tax
Benefit(Expense) 345 (31,842) (16,759) (16,220)
Net (Loss)/Income ($517) $47,763 $25,139 $24,331
NOTE 15: PENSION PLAN
Three months ended Nine months ended
March 31, March 31,
2005 2004 2005 2004
Service cost $7,067 $7,108 $21,200 $21,325
Interest cost 15,708 14,690 47,125 44,070
Expected return on
plan assets (13,551) (11,956) (40,651) (35,868)
Amortization of prior
service cost -- -- -- --
Amortization of net
(gain) loss 4,786 5,848 14,358 17,544
Net periodic benefit
Cost $14,010 $15,690 $42,032 $47,071
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 March 31, 2005, $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.
NOTE 16: LAND AND RELATED COSTS HELD FOR SALE
On December 29, 2004, the Company agreed to sell approximately 68 acres
of land. Completion of the land sale depends, among other things, on a
number of conditions being satisfied, including extensive regulatory
and rezoning approvals from New Jersey state and local entities. The
Company's stockholders approved the sale of this land at the Annual
Stockholders meeting which was held on March 8, 2005. Accordingly,
there can be no assurance that the sale will be completed or, if
completed, the timing thereof. This land and related costs held for
sale are recorded on the Company's Balance sheet at $591,667.
NOTE 17: RECLASSIFICATIONS
Certain prior period information has been reclassified to conform to
the current period's presentation.
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 March 31, 2005 amount to
approximately $12.8 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 March 31, 2005, consolidated revenues
were $1,267,727 and operations resulted in a profit of $4,495. During
the same period last year, consolidated revenues were $1,605,040 and
the operating profit was $89,594.
For the nine-month period ended March 31, 2005, consolidated revenues
were $4,406,184 and operations resulted in a profit of $59,922. During
the same nine-month period last year, consolidated revenues were
$4,178,886 and operations resulted in a profit of $72,610.
Compared to the same three-month period last year, this year's revenues
were lower in the electronics segment and higher in the leisure and
recreation segment. When compared to the same nine-month period last
year, this year's revenues were higher in the electronics segment and
lower in the leisure and recreation segment. Results of operations by
business segment are discussed below in more detail. Also, information
about the Company's operations in its two segments for the three and
nine-month periods 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 March 31, 2005, revenues in the
electronics segment were $339,956 lower than the same three-month
period last year. During the three month period this year, the
production of 2kW generator sets provided 23% of electronics segment
revenues, the Company's research and development contracts provided 37%
of electronics segment revenues and various orders which are generally
for replacement parts provided 40% of such revenues. During the same
three month period last year, the production of 2kW generator sets
provided 68% of electronics segment revenues, the Company's research
and development contract provided 3% of electronics segment revenues
and various orders generally for replacement parts provided 29% of such
revenues.
The decrease in revenues during the three-month period ended March 31,
2005 compared to March 31, 2004 is the result of lower production
efforts particularly in the generator set contract. A portion of these
efforts had been redirected towards the Company's research and
development contracts and various orders for replacement parts.
Efforts in these areas have resulted in increased revenues compared to
the same three-month period last year.
For the nine-month period ended March 31, 2005, revenues in the
electronics segment were $399,947 higher than the same nine-month
period last year. During the nine-month period this year, the
production of 2kW generator sets provided 34% of electronics segment
revenues, the Company's research and development contracts provided 27%
of electronics segment revenues and various orders which are generally
for replacement parts provided 39% of such revenues. During the same
nine-month period last year, the production of 2kW generator sets
provided 66% of electronics segment revenues, the Company's research
and development contract provided 3% of electronics segment revenues
and various orders generally for replacement parts provided 31% of such
revenues.
The increase in revenues during the nine-month period ended March 31,
2005, resulted from increased efforts in the Company's research and
development contracts and its various orders which are generally for
replacement parts. Revenues resulting from the Company's generator set
contract were lower than the same nine-month period last year.
The 2003 R&D Contract is for work to be performed towards the further
development of the current 2kW diesel operated generator set. This
contract includes efforts which are similar to those that the Company
had previously invested in specifically at the request of the U.S.
Army. 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.
As of March 31, 2005, the aggregate value of the Company's backlog of
electronics segment not previously recorded as revenues was
approximately $3.6 million. It is estimated that approximately $2.8
million of this backlog will be recognized as revenues during this
fiscal year ending June 30, 2005.
As of March 31, 2004, the aggregate value of the Company's backlog of
electronics product not previously recorded as revenues was
approximately $4.1 million.
Leisure and Recreation Segment
In the HEDCO Division, revenues were $2,643 higher for the three-month
period ended March 31, 2005 when compared to the same period last year.
This reflects a stable market for replacement parts for the previously
sold snowmaking machinery. Revenues for the nine-month period ended
March 31, 2005 were $172,649 lower than the same nine-month period last
year as a result of fewer sales of snowmaking machines. The HEDCO
Division has been operating at a loss as a result of revenues not
exceeding its basic operating costs The Company has been enhancing the
technical capabilities as optional items for these machines. The cost
of developing these enhancements is being expensed as incurred. 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 March 31, 2005, the Company's working capital was $3,687,368
compared to $3,496,671 at June 30, 2004.
The ratio of current assets to current liabilities was 5.15 to 1 at
March 31, 2005 and 4.25 to 1 at June 30, 2004.
The following table is a summary of the Statements of Cash Flows in the
Company's Financial Statements:
Nine Months ended March 31,
2005 2004
Net Cash provided by/(used in)
Operating activities $247,788 ($821,490)
Investing activities ($202,885) ($426,214)
Financing activities ($34,102) ($45,703)
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 provided by operating activities in the nine-month period
ended March 31, 2005 was comprised primarily of net income before
depreciation and amortization.
The Company has been amortizing its prepaid licensing fees. They are
being expensed as the corresponding licensing period expires. For the
nine-month period ended March 31, 2005, the Company has expensed
$90,000 of these fees and $120,000 has been classified as a current
asset.
For the nine-month period ended March 31, 2004, operating activities
used net cash of $821,490. This was the result primarily of two
factors. Accounts receivable increased by $404,081 and inventories
increased using cash of $477,366. Of the increase in inventories,
$403,548 is the result of the Company's efforts to produce snowmaking
machines to be available for sales. The Company has also begun to
produce a small quantity of 2kW generator sets for inventory purposes.
The government sector has begun to order limited quantities of 2kW
generator sets for specific uses pursuant to short term orders
independent of the Company's 2kW contract.
Company sponsored research and development costs are expensed as
incurred. These costs consist primarily of material and labor costs.
For the nine-month period ended March 31, 2005, the Company expensed
$50,943 of these costs. For the same nine-month period last year, the
Company expensed $122,909 of research and development costs.
Investing Activities
During the nine-month period ended March 31, 2005, investing activities
used $202,885. Of this amount, $66,425 was used for plant, property
and equipment, and $85,322 was used for costs associated with
undeveloped land owned by the Company and described below under
"Financing Activities". The Company has also used $51,138 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 nine-month period ended March 31, 2004, net cash used in
investing activities amounted to $426,214. Of this amount, $241,360
was used for plant, property and equipment, and $184,854 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 nine-month period ended March 31, 2005
includes $35,547 used for principal reduction payments made toward the
Company's Mortgage Note agreement. For the nine-month period ended
March 31, 2004, financing activities used $45,703 in principal
reduction payments.
On February 24, 2005, the Company and Sovereign Bank (the "Bank")
entered into a Term Loan Agreement (the "Loan Agreement") that
replaced, and restructured the remaining balance due on, the Company's
Mortgage Note agreement with the Bank, which matured in January 2005.
Pursuant to the Loan Agreement, the Company has borrowed $(292,187)
from the Bank for a term ending February 23, 2007, at a fixed annual
interest rate of 5.56 percent. This loan is secured by a first lien on
all of the Company's accounts receivable, machinery, equipment and
other personal property (the "Collateral") and is subject to customary
representations, covenants, and default provisions in favor of the
Bank. A copy of the Term Loan Agreement is attached as Exhibit 10(b)
hereto and is incorporated by reference.
The Company also has a line of credit agreement with the Bank in the
amount of $500,000 at an annual interest rate equal to the Bank's prime
rate plus .25 percent. Effective November 1, 2004, this line of credit
agreement was renewed through October 31, 2005. As of March 31, 2005,
there were no outstanding borrowings against this line of credit
facility. In the event that the Company borrows funds under this line
of credit facility, the loan would be co-collateralized by the
Collateral.
During 1998, Gordon C. Dewey, the Company's co-founder, lent the
Company a total of $200,000. The Company's note payable is unsecured
and bears interest at the rate of 9 percent per annum. This note was
subordinate to the Company's Mortgage Note with the Bank, but is not
subordinate to the new Loan Agreement with the Bank described above.
It is repayable upon demand by Frances D. Dewey, Mr. Dewey's widow.
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. On December 29, 2004, Company agreed to sell
approximately 68 acres of this land to K. Hovnanian North Jersey
Acquisitions, L.L.C. K. Hovnanian is a wholly-owned subsidiary of
Hovnanian Enterprises, Inc., a large residential real estate developer
and homebuilder with projects in New Jersey and other parts of the
United States. The Company's stockholders approved the sale of this
land at the Annual Stockholders meeting which was held on March 8,
2005. Completion of the proposed land sale depends, among other
things, on a number of conditions being satisfied, including extensive
regulatory and rezoning approvals from New Jersey state and local
entities. Accordingly, there can be no assurance that the sale will be
completed or, if completed, the timing thereof.
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. The amount of
orders received under this contract is approximately $12.8 million
through March 31, 2005. Deliveries for existing orders are scheduled
to continue through November 2005.
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. 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,
this 3kW generator 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 request. 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 final
stage of development and entering a testing stage, with some components
being tested. Work on this contract is being performed at the Company's
location in Oakland, New Jersey and is expected to continue through
September 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 limited 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 March 31, 2005,
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
On January 14, 2005, the Company sold 2,500 shares of its common stock,
par value $.01 per share ("Common Stock"), for a total price of
$1,445.31, to an employee upon exercise of stock options granted to
such employee under the Company's stockholder-approved 1998 Stock
Option Plan. The proceeds of such sale will be used for general
corporate purposes. As the basis for exemption from registration under
the Securities Act of 1933, as amended (the "Act"), the Company is
relying on Section 4(2) of the Act such that the aforementioned
transaction does not involve any public offering.
Item 4. Submission of Matters to a Vote of Security Holders
On March 8, 2005, 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 1,190,852 1,447
Frances D. Dewey 1,190,788 1,511
John H.D. Dewey 1,190,888 1,411
James M. Link 1,191,069 1,230
Nathaniel Roberts 1,191,069 1,230
Also at this meeting, stockholders approved a proposal to sell
approximately 68 acres of undeveloped and unused land owned by the
Company. Set forth below are the numbers of votes cast for, against
and abstained with respect to this sale:
For Against Abstain
1,016,944 1,099 2,504
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: May 13, 2005 John H.D. Dewey
President and Chief Executive Officer
/s/ Thom A. Velto
Date: May 13, 2005 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
10(b) Term Loan Agreement, dated February 24, 2005, between The
Dewey Electronics Corporation and Sovereign Bank.
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