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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
For the fiscal year ended June 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
For the transition period from ________________ to ______________
Commission File No. 1-4383
ESPEY MFG. & ELECTRONICS CORP.
(Exact name of registrant as specified in its charter)
New York 14-1387171
(State or other jurisdiction of (IRS EmployerIdentification No.)
incorporation or organization)
Congress and Ballston Avenues, Saratoga Springs, NY 12866
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 584-4100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock $.33-1/3 par value American Stock Exchange
Common Stock Purchase Rights American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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, and (2) has been subject to such filing requirements
for the past 90 days
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: $12,287,269 as of September 20, 1996 based upon the closing
sale price of $15.75 on the American Stock Exchange on September 20, 1996.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of the latest practicable date.
Class Outstanding at September 20,1996
Common Stock, $.33-1/3 par value 1,111,220
PART I
Item 1. Business.
General
Espey Mfg. & Electronics Corp. (the "Company") was incorporated in 1928.
The Company operates a one segment business. A significant portion of
the Company's business is the production of military and industrial
electronic equipment for use by the United States Government, its
agencies, and certain industrial customers.
In fiscal year ending June 30, 1996 (referred to herein as "1996"), the
Company's total sales were $16,800,200. Sales were made to the United
States Government and its agencies primarily on a subcontract basis.
Sales were made to domestic and foreign customers on a prime and
subcontract basis. Sales to two domestic customers and one foreign
customer accounted for 28.9%, 22.8% and 17.8%, respectively, of total
sales in 1996. In comparison, sales to two domestic customers and one
foreign customer accounted for 31.5%, 24.2% and 16.2%, respectively, of
total sales in 1995. Sales to one domestic customer accounted for 66.8%
of total sales in 1994.
Export sales in 1996 and 1995 aggregated approximately $3,073,000 and
$2,602,000, respectively. Export sales in 1994 were not significant.
Products
The Company has been and intends to continue to be engaged principally
in the development, design, production and sales of specialized
electronic power conditioning apparatus (electronic power supplies), a
wide variety of transformers and other types of iron-core components,
and electronic systems. In some cases, the Company manufactures such
products in accordance with pre-developed mechanical and electrical
requirements. In other cases the Company is responsible for both the
overall design and manufacture of the product. The Company does not
generally manufacture standardized components.
The electronic power supplies and components manufactured by the Company
find application principally in: (i) computers, (ii) aircraft, shipboard
and land based radar, (iii) missile guidance and control systems, (iv)
short, medium range and global communication systems, (v) navigation
systems for aircraft, (vi) nuclear submarine control systems, and (vii)
recently, in locomotives. The electronic systems manufactured by the
Company include antenna systems and high power radar transmitters.
These systems utilize the Company's own electronic power supplies,
transformers, and other iron-core components and mechanical assemblies.
The Company's iron-core components include: (i) transformers of the
audio, power and pulse types, (ii) magnetic amplifiers, and (iii) audio
filters.
I-1
The following tabulation shows the percentage of the Company's total
sales represented by sales of each class of similar products which
contributed at least 4% of total sales during one or more of the last
three fiscal years.
Fiscal Year Ended June 30
1996 1995 1994
Electronic Power Supplies 81% 84% 85%
Iron-Core Components 15% 11% 11%
Electronic Systems and Assemblies 4% 5% 4%
Raw Materials
The Company has never experienced any significant delay or shortage with
respect to the purchase of raw materials and components used in the
manufacture of its products, and has at least two potential sources of
supply for all raw materials used by it.
Sales Backlog
The total amount of backlog orders believed to be firm as of June 30,
1996 was approximately $16,297,000 as compared to approximately
$20,878,000 as of June 30, 1995. It is anticipated that a minimum of
$13,000,000 of orders comprising the June 30, 1996 backlog will be
filled during the fiscal year ending June 30, 1997. This is in addition
to any shipments which may be made against orders subsequently received
during the fiscal year ending June 30, 1997. From June 30, 1996 to
September 16, 1996, the Company did not book any significant new
business due principally to the timing restraints of funding by both the
United States Government and other major customers. The Company
currently anticipates that new business will be booked in the immediate
future based upon the ongoing negotiations revolving around the
Company's outstanding quotations.
Principal Customers
A significant portion of the Company's business is conducted with the
United States Government and its agencies, Lockheed Martin and General
Electric. The loss of any of these customers would have a material
adverse effect on the business of the Company.
I-2
Military Contracts
The Company, as well as other companies primarily engaged in supplying
equipment for military use, is subject to various risks, including,
without limitation, dependence on government appropriations and program
allocations, the competition for available military business, and
termination of orders for convenience.
Marketing and Competition
The Company is on the eligible list of contractors of many agencies of
the Department of Defense and generally is automatically solicited by
such agencies for procurement needs falling within the major classes of
products produced by the Company. In addition, the Company directly
solicits bids from both the Department of Defense and other United
States Government agencies for prime contracts. Subcontract work for
government end use is solicited from major electronic and aircraft
companies, primarily by the Company's own employees and sales
representatives.
There is competition in all classes of products manufactured by the
Company, from divisions of the largest electronic companies in the
country, as well as many small companies. The Company's sales do not
represent a significant portion of the industry's production of any
class of products made by the Company. The principal methods of
competition for electronic products of both a military and industrial
nature include, among other factors, price and product performance and
the experience of the particular company and history of its dealings in
such products.
The Company's business is not considered to be of a seasonal nature.
Research and Development
The Company has increased its expenditures for research and development
over the past three fiscal years. In 1996, approximately $205,000 was
expended for this type of effort. In 1995 and 1994, the Company spent
$141,000 and $119,000, respectively, on research and development. Some
of the Company's professional employees spend varying degrees of time
in either development of new products or improvement of existing
products.
Employees
The number of persons employed by the Company as of September 20, 1996
was 211.
I-3
Government Regulations
Compliance with federal, state and local provisions that have been
enacted or adopted to regulate the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
did not in 1996, and the Company believes will not in the current or
succeeding fiscal year, have a material effect upon the capital
expenditures, earnings or competitive position of the Company.
Item 2. Properties.
The Company's principal manufacturing and all of its engineering
facilities are at its plant in Saratoga Springs, New York, which the
Company owns. The Company initially occupied the plant in 1952, and in
1955 consolidated all of its manufacturing operations at the plant when
it terminated its manufacturing operations in New York, New York.
The Saratoga Springs plant was originally constructed about 1900 and
consists of various closely adjoining one-story buildings. The plant
has a sprinkler system throughout and contains approximately 138,000
square feet of floor space, of which 60,000 is used for manufacturing,
23,000 for engineering, 33,000 for shipping and climatically secured
storage, and 3,000 for offices. The offices and engineering are air
conditioned and approximately 1,000 square feet of "white rooms" are
completely climatically controlled. In addition to assembly and wiring
operations, the plant includes facilities for varnishing, potting,
impregnation, and spray painting operations, in addition to complete
machine shop and sheet metal fabrication facilities adequate for
substantially all of the Company's current operations. During fiscal
year 1995, the Company expended about $800,000 for the upgrading of its
plating department to more uniformly conform to the environmental
standards set by the Federal Government and established a new plating
division, called Saratoga Electro-Finishing. Besides normal test
equipment, the Company maintains a sophisticated on-site environmental
test facility. A fully staffed Automatic Data Processing Center is also
on-site.
The Company maintains additional manufacturing facilities in a three-
story, fully sprinklered building of approximately 4,000 square feet at
146 Fulton Street, Gloversville, New York. The facility is used
primarily for subcomponent wiring and assembly.
The Company maintains a sales office in a modern office building at 445
Northern Boulevard, Great Neck, New York. This space, comprising
approximately 750 square feet, is leased from a non-affiliated person
for a term expiring on September 9, 2001.
Item 3. Legal Proceedings.
Not applicable.
I-4
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
Price Range of Common Stock
The table below shows the range of high and low prices for the Company's
common stock on the American Stock Exchange, the principal market for
trading in the common stock, for each quarterly period for the last two
fiscal years ended June 30:
1996 High Low
First Quarter 16 1/4 14 1/4
Second Quarter 14 1/2 13 3/8
Third Quarter 14 1/4 12 7/8
Fourth Quarter 14 1/4 13 3/4
1995 High Low
First Quarter 14 7/8 13 3/8
Second Quarter 14 1/4 12 1/2
Third Quarter 13 1/4 11 5/8
Fourth Quarter 13 5/8 12 1/4
Holders
The approximate number of holders of the common stock was 240 on
September 20, 1996. Included in this number are shares held in "nominee" or
"street" name and, therefore, the number of beneficial owners of the common
stock are believed to be substantially in excess of the foregoing number.
Dividends
On September 11, 1996 the Board of Directors declared a cash dividend
of $.70 per share to be paid on November 22, 1996 to shareholders of
record on October 28, 1996. The Company paid a cash dividend on the
common stock of $.60 per share for its fiscal year ended June 30, 1995
and $.70 per share for its fiscal year ended June 30, 1996.
II-1
Item 6. Selected Financial Data.
ESPEY MFG. & ELECTRONICS CORP.
Five Years Ended June 30, 1996
Selected Income Statement Data
Year ended June 30,
1996 1995 1994 1993 1992
Net Sales $ 16,800,200 14,574,097 14,678,303 15,206,921 15,985,621
Operating income 209,226 24,064 1,502,470 2,234,782 2,068,330
Other income, net 575,006 726,073 435,238 396,891 866,096
Cumulative effect of change in
accounting principle -- -- 201,653 -- --
Net earnings 522,737 491,767 1,343,877 1,594,290 1,885,208
Earnings per common share:
Earnings before cumulative
effect of change in
accounting principle $ .41 .37 .85 1.18 1.35
Cumulative effect of change in
accounting principle -- -- .15 -- --
Net earnings $ .41 .37 1.00 1.18 1.35
Selected Balance Sheet Data
Year ended June 30,
1996 1995 1994 1993 1992
Current Assets $ 21,499,805 25,243,909 25,364,435 24,160,510 23,281,654
Current liabilities 623,908 983,401 722,170 681,101 814,143
Working capital 20,875,897 24,260,508 24,642,265 23,479,409 22,467,511
Total assets 24,950,043 28,839,718 28,474,536 27,608,660 26,985,274
Long-term liabilities (deferred
( income taxes) -- 30,697 124,619 446,934 457,761
Stockholders' equity 24,326,135 27,825,620 27,627,747 26,480,625 25,713,370
Cash dividends declared and
paid per common share $ .70 .60 .60 .60 .60
II-2
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operation
The Company operates a one segment business. It principally manufactures
power supplies and components for military and industrial use. Sales
volume is dependent to a large extent on product mix in any
given fiscal period. This mix is in turn subject to the dictates of
customer needs and delivery requirements. These factors principally
account for any variation in sales and operating income from year to
year.
Sales for fiscal years ended June 30, 1996, 1995, and 1994 were
$16,800,200, $14,574,097, and $14,678,303, respectively. The
corresponding cost of sales were 89%, 90%, and 80%, respectively.
Although sales in 1996 increased by approximately 15% over the previous
year the gross profit percentage increased only marginally. This was
due not only to the shipping of orders with relatively low profit
margins, but also due to the fact that a pre-tax write-off of $354,000
relating to inventory was taken in the fourth quarter. This write-off
also resulted in the net earnings per share during the current fourth
quarter being somewhat lower than the fourth quarter earnings per share
of the two preceding years.
As was the case last year, the Company has been accepting orders with
reduced profit margins because of the increasingly competitive nature
of the marketplace. The Company is making efforts to resolve this
situation by expanding its efforts to develop technologies and products
of a more proprietary nature for sale in the commercial and military
marketplace. The Company's efforts and investment in the advancement
and refinement of both military and industrial technologieshas resulted
in the Company being able to apply for various patents which are
currently pending. The Company has received a Notice of Allowance from
the United States Patent Office on one product, which indicates that the
issuance of the actual patent is imminent. Current demographics indicate
a need for the products for which the Company is currently seeking
patents, particularly in the military marketplace, as well as a
worldwide need for the Company's long range radar transmitters and
components for high power AC locomotives. The management currently
anticipates that the course of action the Company has taken will enhance
the Company's revenues and profitability in future periods based on
these indicated needs.
Selling, general and administrative expenses increased by approximately
$142,000 in 1996 as compared to 1995. This increase was due principally
to an increase in salaries of approximately $125,000 for sales
personnel. Earnings before income taxes increased in 1996 to $784,232
from $750,137 in 1995. Net earnings per share increased to $.41 from
$.37.
II-3
The Statements of Cash Flows indicates an increase in inventories of
$785,021. This is brought about by the liquidation of progress
payments in the amount of $2,121,800 which were netted against
inventories at the end of last year. The liquidation is a result of
shipments to the customers involved during fiscal 1996. Taking this
into consideration, the Company's inventories actually decreased by
approximately $1,337,000, which is in line with the increased sales
for 1996. All other changes, such as the decrease in both Accounts
Receivable and Accounts Payable are the result of transactions in the
normal course of business. The one exception to this is "proceeds
received from the sale of marketable securities," which proceeds were
used to purchase common stock of the Company. This transaction is more
fully explained in the Notes to the Financial Statements set forth in
Item 8 of this Annual Report and in "Liquidity and Capital Expenditures"
immediately below.
Liquidity and Capital Expenditures
The Company's working capital is an appropriate indicator of the
liquidity of its business, and during the past three fiscal years, the
Company, when possible, has funded all of its operations, including
financing activities, with cash flows resulting from operating
activities. The Company did not borrow any funds during the last three
fiscal years and does not currently anticipate that it will borrow any
funds during fiscal year 1997.
The Company's working capital for fiscal years ended June 30, 1996,
1995, and 1994 was $20,875,897, $24,260,508, and $24,642,265,
respectively. The principal reason for the decrease in working capital
between 1996 and 1995 was the repurchase by the Company of its common
stock during 1996 in the total amount of $3,696,340. On March 7, 1996,
the Company purchased a combined total of 219,400 shares of common stock
from the Entwistle Company and Global Securities at a total cost of
$3,620,100. In addition, the Company purchased 5,402 shares of common
stock from the Company's ESOP during 1996 for a total purchase price of
$76,240. Under existing authorizations, as of August 31, 1996, funds in
the amount of $1,884,000 were available for the continuing repurchase of
the Company's shares of common stock.
The Company's combined investment in both short-term investments and
marketable investment securities was (i) $11,754,564 as of June 30,
1992, (ii) $12,226,531 as of June 30, 1993, (iii) $13,290,888 as of June
30, 1994, (iv) $12,022,004 as of June 30, 1995, and (v) $7,505,507 as of
June 30, 1996. The short-term investments consisted of Certificates of
Deposit and United States Treasury Bills. During fiscal years 1992
through 1996, interest rates on short-term investments ranged from 6.00%
to 2.10%. This factor accounts for the fluctuation of interest income
during much of the five-year period. Interest income was $430,496 in
fiscal 1994, $718,785 in fiscal 1995, and $556,565 in fiscal 1996.
Interest income fiscal 1996, however was affected by the decrease in our
investment base arising from the capital expenditures of $1,080,000 in
1995 and purchase of the Company's common stock in the amount of
$3,696,340 during
II-4
fiscal 1996 as set forth above. A majority of the Company's investment
base is represented by United States Government Treasury securities and
Certificates of Deposit. Consequently, the Company does not feel that
there is any significant risk associated with its investment policy.
Management feels that the Company's reserve for bad debts of $3,000 is
adequate, since given the customers with whom the Company deals,
particularly the United States Government and its agencies, the amount
of bad debts over the years has been minimal.
The Company does not currently offer, nor does management currently
contemplate offering in the future, any post-retirement or employment
benefits. Consequently, no accruals or liabilities have been provided
for in the financial statements.
During fiscal year 1996, the Company expended approximately $349,000 for
plant improvements and new equipment. The Company plans to expend
approximately $425,000 for new equipment and plant improvements in
fiscal 1997. Management presently anticipates that the funds required
will be available from current operations.
Changes in Accounting Principles and Policies
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", as of July 1,
1993 on a prospective basis. The cumulative effect of the change in
accounting for income taxes as of July 1, 1993 was $201,653 and is
separately identified in the statement of earnings for the year ended
June 30, 1994. Prior years' financial statements have not been restated
to apply the provisions of SFAS No. 109. Further discussion of SFAS 109
can be found in the Notes to the Financial Statements set forth in Item
8 of this Annual Report.
The Company has adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities", as of July 1, 1994, the effects of which
are described in the Notes to the Financial Statements set forth in Item 8
of this Annual Report.
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", as of July 1, 1995.
The adoption of this accounting standard had no effect on the financial
position or results of operations of the Company.
II-5
Other Matters
An Employee Retirement Plan and Trust ("ESOP") was established for the
eligible non-union employees of the Company and was effective as of
July 1, 1988. The ESOP used the proceeds of a loan from the Company to
purchase 316,224 shares of the Company's common stock for approximately
$8.4 million, and the Company contributed approximately $400,000 to the
ESOP, which was used by the ESOP to purchase an additional 15,000
shares of the Company's common stock.
Each year the Company makes contributions to the ESOP which are used to
make loan interest and principal payments. With each loan and interest
payment, a portion of the common stock will be allocated to participating
employees. As of June 30, 1996, there were 139,997 shares allocated to
participants. Dividends attributable to allocated shares were likewise
allocated to the participants' accounts, whereas the dividends on
unallocated shares were used as part of the loan repayment, thus reducing
the Company's required contribution.
The loan from the Company to the ESOP is repayable in annual installments
of $1,039,605, including interest through June 30, 2004. Interest is
payable at a rate of 9% per annum. The Company's receivable from the ESOP
is recorded as common stock subscribed in the accompanying balance sheets.
In 1995 and 1996, 7,260 and 5,402 shares of the Company's common stock,
respectively, was purchased from the ESOP representing distributions
taken by participants.
II-6
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report II-8
Balance Sheets at June 30, 1996 and 1995 II-9
Statements of Earnings for the years ended June 30, 1996,
1995 and 1994 II-11
Statements of Changes in Stockholders' Equity for the years
ended June 30, 1996, 1995 and 1994 II-12
Statements of Cash Flows for the years ended June 30, 1996,
1995 and 1994 II-13
Notes to Financial Statements II-15
II-7
Independent Auditors' Report
The Board of Directors and Stockholders
Espey Mfg. & Electronics Corp.:
We have audited the financial statements of Espey Mfg. & Electronics Corp. as
listed in the accompanying index. In connection with our audits of the
financial statements, we also have audited the financial statement schedule as
listed in the accompanying index. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statementsare free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Espey Mfg. & Electronics Corp.
as of June 30, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended June 30, 1996, in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Albany, New York /s/ KPMG PeatMarwick LLP
August 30, 1996
II-8
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets
June 30, 1996 and 1995
Assets 1996 1995
Current assets:Cash $ 1,112,767 231,675
Short-term investments, at cost (market value -
$4,577,305 in 1996 and $1,497,681 in 1995) 4,484,312 1,467,540
Total cash and short-term investments 5,597,079 1,699,215
Marketable investment securities - current (note 2) 3,021,195 10,554,464
Trade accounts receivable, net of $3,000 allowance in
1996 and 1995 1,556,404 1,925,778
Other receivables 18,177 20,627
Net receivables 1,574,581 1,946,405
Inventories:
Raw materials and supplies 499,900 400,778
Work in process 1,561,742 1,078,169
Costs relating to contracts in process, net of
progress payments of $2,121,800 in 1995
(notes 3 and 4) 8,971,704 8,769,378
Net inventories 11,033,346 10,248,325
Income tax refund receivable -- 410,467
Deferred income taxes (note 8) 796 --
Prepaid expenses and other current assets 272,808 385,033
Total current assets 21,499,805 25,243,909
Deferred income taxes (note 8) 9,088 --
Property, plant and equipment, at cost (note 5) 11,813,137 11,464,636
Less accumulated depreciation (8,371,987) (7,868,827)
Net property, plant and equipment 3,441,150 3,595,809
$24,950,043 28,839,718
(Continued)
II-9
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets, Continued
June 30, 1996 and 1995
Liabilities and Stockholders' Equity 1996 1995
Current liabilities:
Accounts payable $ 158,631 596,832
Accrued expenses:
Salaries, wages and commissions 116,351 104,269
Employee insurance costs 54,739 50,293
Other 17,440 14,588
Payroll and other taxes withheld and accrued 156,890 141,513
Income taxes payable 119,857 --
Deferred income taxes - current (note 8) -- 75,915
Total current liabilities 623,908 983,401
Deferred income taxes (note 8) -- 30,697
Total liabilities 623,908 1,014,098
Stockholders' equity:
Common stock, par value $.33-1/3 per share (note 12)
Authorized 2,250,000 shares; issued
1,514,937 shares in 1996 and 1995 504,979 504,979
Capital in excess of par value 10,496,287 10,496,287
Retained earnings 24,316,400 24,678,208
35,317,666 35,679,474
Less:
Common stock subscribed (note 13) (4,469,299) (5,027,962)
Cost of 396,291 shares in 1996 and 171,489
shares in 1995 of common stock in treasury (6,522,232) (2,825,892)
Total stockholders' equity 24,326,135 27,825,620
$24,950,043 28,839,718
See accompanying notes to financial statements.
II-10
ESPEY MFG. & ELECTRONICS CORP.
Statements of Earnings
Years ended June 30, 1996, 1995 and 1994
1996 1995 1994
Net sales $ 16,800,200 14,574,097 14,678,303
Cost of sales 14,973,018 13,074,247 11,812,195
Gross profit 1,827,182 1,499,850 2,866,108
Selling, general and administrative expenses 1,617,956 1,475,786 1,363,638
Operating income 209,226 24,064 1,502,470
Other income:
Interest income 556,565 718,785 430,496
Sundry income 18,441 7,288 4,742
575,006 726,073 435,238
Earnings before income taxes and
cumulative effect of change in
accounting principle 784,232 750,137 1,937,708
Provision for income taxes (note 8) 261,495 258,370 795,484
Earnings before cumulative effect of change
in accounting principle 522,737 491,767 1,142,224
Cumulative effect of change in accounting principle
(note 1(e)) -- -- 201,653
Net earnings $ 522,737 491,767 1,343,877
Earnings per common share (note 9):
Earnings before cumulative effect of change
in accounting principle $ .41 .37 .85
Cumulative effect of change in accounting
principle -- -- .15
Net earnings per common share $ .41 .37 1.00
See accompanying notes to financial statements.
II-11
ESPEY MFG. & ELECTRONICS CORP.
Statements of Changes in Stockholders' Equity
Years ended June 30, 1996, 1995 and 1994
Capital Common Total
Common in excess Retained stock Treasury stockholders'
stock of par value earnings subscribed stock equity
Balance at June 30, 1993 $ 504,979 10,496,287 24,356,952 (6,145,286) (2,732,307) 26,480,625
Dividends paid on common
stock $.60 per share -- -- (810,424) -- -- (810,424)
Net earnings - 1994 -- -- 1,343,877 -- -- 1,343,877
Tax effect of dividends on
unallocated ESOP shares
(note 8) -- -- 55,007 -- -- 55,007
Reduction of common stock
subscribed -- -- -- 558,662 -- 558,662
Balance at June 30, 1994 504,979 10,496,287 24,945,412 (5,586,624) (2,732,307) 27,627,747
Dividends paid on common
stock $.60 per share -- -- (809,041) -- -- (809,041)
Net earnings - 1995 -- -- 491,767 -- -- 491,767
Tax effect of dividends on
unallocated ESOP shares
(note 8) -- -- 50,070 -- -- 50,070
Purchase of treasury stock
(7,260 shares) -- -- -- -- (93,585) (93,585)
Reduction of common
stock subscribed -- -- -- 558,662 -- 558,662
Balance at June 30, 1995 504,979 10,496,287 24,678,208 (5,027,962) (2,825,892) 27,825,620
Dividends paid on common
stock $.70 per share -- -- (937,119) -- -- (937,119)
Net earnings - 1996 -- -- 522,737 -- -- 522,737
Tax effect of dividends on
unallocated ESOP shares
(note 8) -- -- 52,574 -- -- 52,574
Purchase of treasury stock
(224,802 shares) -- -- -- -- (3,696,340) (3,696,340)
Reduction of common
stock subscribed -- -- -- 558,663 -- 558,663
Balance at June 30, 1996 $ 504,979 10,496,287 24,316,400 (4,469,299) (6,522,232) 24,326,135
See accompanying notes to financial statements.
II-12
ESPEY MFG. ELECTRONICS CORP.
Statements of Cash Flows
Year ended June 30, 1996, 1995 and 1994
1996 1995 1994
Cash flows from operating activities:
Net earnings $ 522,737 491,767 1,343,877
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Cumulative effect of change in accounting
principle -- -- (201,653)
Tax effect of dividends on unallocated ESOP
shares 52,574 50,070 55,007
Depreciation 503,160 493,735 490,987
Gain on sale of marketable investment securities (5,796) -- --
Deferred income tax benefit (116,496) (87,651) (72,364)
Change in assets and liabilities:
Decrease (increase) in receivables, net 371,824 (774,451) 905,972
Increase in inventories, net (785,021) (69,763) (583,697)
Decrease (increase) in income tax refund
receivable 410,467 (52,049) (358,418)
Decrease (increase) in prepaid expenses
and other current assets 112,225 (199,116) 39,335
Increase (decrease) in accounts payable (438,192) 259,941 101,093
Increase (decrease) in accrued salaries,
wages and commissions 12,082 4,717 (68,167)
Increase (decrease) in accrued employee
insurance costs 4,446 (7,979) (9,275)
Increase (decrease) in other accrued expenses 2,852 (2,430) (4,679)
Increase (decrease) in payroll and other taxes
withheld and accrued 15,377 711 (17,922)
Increase (decrease) in income taxes payable 119,857 -- (8,279)
Net cash provided by operating activities 782,096 107,502 1,611,817
Cash flows from investing activities:
Proceeds from maturity of marketable investment
securities 10,454,464 3,887,307 --
Additions to property, plant and equipment (348,501) (1,079,443) (152,938)
Reduction of common stock subscribed 558,663 558,662 558,662
Proceeds from sale of marketable investment securities 3,866,542 -- --
Purchases of marketable investment securities (6,781,941) (14,341,771) --
Net cash provided by (used in) investing
activities 7,749,227 (10,975,245) 405,724
(continued)
II-13
ESPEY MFG. ELECTRONICS CORP.
Statements of Cash Flows, Continued
Year ended June 30, 1996, 1995 and 1994
1996 1995 1994
Cash flows from financing activities:
Dividends on common stock $ (937,119) (809,041) (810,424)
Purchase of treasury stock (3,696,340) (93,585) --
Net cash used in financing activities (4,633,459) (902,626) (810,424)
Increase (decrease) in cash and short-term investments 3,897,864 (11,770,369) 1,207,117
Cash and short-term investments, beginning of year 1,699,215 13,469,584 12,262,467
Cash and short-term investments, end of year $ 5,597,079 1,699,215 13,469,584
Supplemental disclosures of cash flow information:
Income taxes paid (refund) $ (204,907) 348,000 1,179,538
See accompanying notes to financial statements.
II-14
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
Espey Mfg. & Electronics Corp. (the "Company") is a manufacturer
of electronic equipment used primarily in military applications.
The principal markets for the Company's products have been the
United States and Israel.
(b) Inventory Valuation and Income Recognition
Raw materials are valued at cost, principally on the first-in,
first-out method.
Inventoried work relating to contracts in process and work in
process is valued at actual production cost, including factory
overhead and initial set-up costs incurred to date, reduced by
amounts identified with revenue recognized on units shipped and
billed. Work in process represents spare parts and other
inventory items acquired or produced to service units previously
sold or anticipated to be sold in the future under contract.
Provision for losses on contracts is made when existence of such
losses becomes evident. The costs attributed to units delivered
under contracts are based on the estimated average cost of all
units expected to be produced.Certain contracts are expected to
extend beyond twelve months.
The cost elements of contracts in process consist of production
costs of goods and services currently in process and overhead
relative to those contracts where such costs are reimbursable
under the terms of the contracts. General and administrative
expenses are charged to operations in the period in which they
are incurred.
Revenue is recognized on contracts and orders in the period in
which the units are shipped and billed (unit-of-delivery
method).
(c) Progress Payments
The Company receives progress payments on certain sales
contracts. Such payments are recorded as a reduction of
inventory and are liquidated when customers are billed for
completed items shipped.
(d) Depreciation
Depreciation of plant and equipment is computed generally on a
straight-line basis over the estimated useful lives of the
assets for book purposes and on an accelerated method for tax
purposes.
(continued)
II-15
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements, Continued
(e) Income Taxes
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes", as of July 1, 1993 on a prospective basis. The
cumulative effect of the change in accounting for income taxes
as of July 1, 1993 was $201,653 and is separately identified in
the statement of earnings for the year ended June 30, 1994.
Under the provisions of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. In addition, SFAS No. 109
requires that the tax benefit of tax deductible dividends on
unallocated ESOP shares be recorded as a direct addition to
retained earnings rather than as a reduction of income tax
expense.
(f) Investment Tax Credits
Investment tax credits are accounted for as a reduction of
income tax expense in the year taxes payable are reduced. Such
credits reduced State income tax expense by approximately
$7,000 in 1994. No benefits for investment tax credits were
recognized in 1996 and 1995.
(g) Short-Term Investments and Cash Equivalents
All short-term investments, consisting of certificates of
deposit, money market accounts, and U.S. Teasury bills,
maturing within three months are considered cash equivalents
for purposes of the statements of cash flows.
(h) Marketable Investment Securities
Marketable investment securities at June 30, 1996 and 1995
consist of U.S. Treasury securities. The Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," at July 1, 1994. Upon adoption of SFAS No. 115, at
July 1, 1994, all amounts included in short-term investments
matured within three months of the adoption date. Therefore no
amounts were transferred to marketable investmentsecurities
upon adoption and there was no cumulative effect from this
change. Under SFAS No. 115, the Company classifies certain U.S.
Treasury securities as held-to-maturity. Held-to-maturity
securities are those securities that the Company has the ability
and intent to hold until their maturity. Held-to-maturity
securities are recorded at amortized cost.
(continued)
II-16
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements, Continued
A decline in the market value of any held-to-maturity security
below cost that is deemed other than temporary is charged to
earnings resulting in the establishment of a new cost basis for
the security.
Premiums and discounts are amortized or accredited over the life
of the related held-to-maturity security as an adjustment to
yield using the effective interest method. Interest income is
recognized when earned.
(i) Management Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(j) Reclassification
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
(2) Marketable Investment Securities
Marketable investment securities at June 30, 1996 and 1995, consist of
U.S. Treasury securities, which are classified as held-to-maturity
securities, and recorded at amortized cost. There were no gross
unrealized gains or losses on U.S. Treasury securities at June 30, 1996.
The difference between cost and fair market value for the U.S.Treasury
securities represents interest income, which has been recognized during
1996 and is included in accrued interest receivable at June 30, 1996.
Maturities of investment securities classified as held-to-maturity were
as follows:
Amortized Fair
Cost Value
At June 30, 1996:
Due after three months through 1 year $ 3,021,195 3,134,458
At June 30, 1995:
Due after three months through 1 year $ 10,554,464 10,731,469
(continued)
II-17
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements, Continued
On February 20, 1996, the Company realized a gain of $5,796 on the sale
of marketable securities with an aggregate amortized cost of $3,860,746.
These securities, which were classified as held to maturity, were sold
for the purpose of acquiring 219,400 shares of the Company's common
stock.
(3) Inventories and Cost of Sales
Included in costs relating to contracts in process at June 30, 1996,
1995 and 1994 are costs of $1,504,409, $1,023,945 and $835,056,
respectively, relative to contracts that may not be completed within the
ensuing year. Under the unit-of-delivery method, the related sale and
cost of sales will not be reflected in the statement of earnings until
the units under contract are shipped.
(4) Contracts in Process
Contracts in process at June 30, 1996 and 1995 are as follows:
1996 1995
Gross contract value $16,297,193 20,878,002
Carrying value of contracts in process 8,971,704 10,891,178
Less progress payments --
2,121,800
Included in current assets as contracts in
process, net of progress payments $ 8,971,704 8,769,378
(5) Property, Plant and Equipment
A summary of property, plant and equipment at June 30, 1996 and1995 is as
follows:
1996 1995
Land $ 50,000 50,000
Buildings and improvements 3,828,650 3,812,594
Machinery and equipment 7,614,027 7,288,397
Furniture, fixtures and office equipment 320,460 313,645
$11,813,137 11,464,636
(continued)
II-18
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements, Continued
The estimated useful lives of depreciable assets are as follows:
Buildings and improvements 20-25 years
Machinery and equipment 10 years
Furniture, fixtures and office equipment 10 years
Autos and trucks 5 years
The Company adopted the provisions of SFAS No. 121,"Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", as of July 1, 1995. This accounting standard requires that certain
long-lived assets be reviewed for impairment when events or circumstances
indicate that the carrying amount of the assets may not be recoverable.
If such review indicates that the carrying amount of an asset exceeds the
sum of its expected future cash flows, the asset's carrying value is
written down to fair value. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell.
The adoption of this accounting standard had no effect on the financial
position or results of operations of the Company.
(6) Research and Development Costs
Research and development costs charged to operations during the years
ended June 30, 1996, 1995 and 1994 were approximately $205,000, $141,000
and $119,000, respectively.
(7) Pension Expense
Under terms of a negotiated union contract, the Company is obligated to
make contributions to a union-sponsored defined benefit pension plan
covering eligible employees. Such contributions are based upon hours
worked at a specified rate and amounted to $79,282 in 1996, $65,500 in
1995 and $57,300 in 1994.
(8) Provision for Income Taxes
A summary of the components of the provision for income taxes for the
years ended June 30, 1996, 1995 and 1994 is as follows:
1996 1995 1994
Current tax expense - Federal $ 366,108 324,021 646,448
Current tax expense - State 11,883 22,000 221,400
Deferred tax benefit (116,496) (87,651) (72,364)
$ 261,495 258,370 795,484
(continued)
II-19
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements, Continued
Total income tax expense for the years ended June 30, 1996, 1995 and
1994 was allocated as follows:
1996 1995 1994
Earnings from operations $ 261,495 258,370 795,484
Stockholders' equity, for tax effect of
dividends on unallocated ESOP shares (52,574) (50,070) (55,007)
$ 208,921 208,300 740,477
Deferred income taxes reflect the impact of "temporary differences"
between the amount of assets and liabilities for financial reporting
purposes and such amounts measured by tax laws and regulations. These
"temporary differences" are determined in accordance with SFAS No.109
(see note 1(e)).
The combined U.S. Federal and state effective income tax rates of 33.3%,
34.4% and 41.1% for 1996, 1995 and 1994, respectively, differed from the
statutory U.S. Federal income tax rate for the following reasons:
1995 1994 1993
U.S. statutory tax rate 34.0% 34.0% 34.0%
Increase (reduction) in rate resulting from:
Dividends received deduction (.3) (.3) (.1)
State franchise tax, net of Federal income
tax benefit 1.0 1.9 7.6
Other (1.4) (1.2) (.4)
Effective tax rate 33.3% 34.4% 41.1%
For the year ended June 30, 1996 deferred income tax benefit of $116,496
results from the changes in temporary differences for the year. The
tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of June 30, 1996 and 1995 are
presented below:
(continued)
II-20
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements, Continued
1996 1995
Deferred tax liabilities:
Property, plant and equipment - principally
due to differences in depreciation methods $ 501,110 543,396
Inventory - effect of uniform capitalization 179,625 41,682
Total gross deferred tax liabilities 680,735 585,078
Deferred tax assets:
Inventory - differences in valuation methods 180,421 --
Common stock subscribed - due to difference
in interest recognition 510,198 478,466
Total gross deferred tax assets 690,619 478,466
Net deferred tax (asset) liability $ (9,884) 106,612
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based upon the level of historical taxable
income and projection for future taxable income over the period which the
deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these temporary
differences without consideration of a valuation allowance.
The Company's Federal income tax returns have been audited and accepted
without change through June 30, 1989.
(9) Common Stock and Earnings Per Share
Earnings per share information is based on the weighted average number
of common shares outstanding during the respective periods. The weighted
average number of shares used in the computation was 1,269,467 in 1996,
1,346,757 in 1995 and 1,350,708 in 1994.
(10) Segment Reporting
A significant portion of the Company's business is the production of
military and industrial electronic equipment for use by the U.S.
Government and its agencies and certain industrial customers. Sales
made to the U.S. Government and its agencies are primarily on a
subcontract basis. Sales to two domestic and one foreign customer
accounted for 28.9%, 22.8% and 17.8%, respectively, of total sales in
1996. Sales to two domestic customers and one foreign customer
accounted for 31.5%, 24.2%, and 16.2%, respectively, of total sales in
1995. Sales to one domestic customer accounted for 66.8% of total sales
in 1994.
II-21
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements, Continued
Export sales in 1996 and 1995 aggregated approximately $3,073,000 and
$2,602,000, respectively. Export sales in 1994 were not significant.
(11) Related Party Transactions
Barry Pinsley, son of the Company's retired president and current
chairman of the Board, Sol Pinsley, received from the Company
approximately $54,000 in 1994 for consulting services. On March 28, 1994,
the arrangement for consulting services was terminated and Barry Pinsley
is now employed as a vice-president of the Company.
(12) Stock Rights Plan
During 1989, the Company adopted a Shareholder Rights Plan in which
common stock purchase rights were distributed as a dividend at the rate
of one right for each share of common stock outstanding as of or issued
subsequent to April 14, 1989. Each right entitles the holder thereof to
buy one-half share of common stock of the Company at an exercise price
of $75 per share subject to adjustment. The rights are exercisable only
if a person or group acquires beneficial ownership of 25% or more of the
Company's common stock or commences a tender or exchange offer which, if
consummated, would result in the offeror, together with all affiliates
and associates thereof, being the beneficial owner of 30% or more of the
Company's common stock.
If a 25% or larger shareholder should engage in certain self-dealing
transactions or a merger with the Company in which the Company is the
surviving corporation and its shares of common stock are not changed or
converted into equity securities of any other person, or if any person
were to become the beneficial owner of 30% or more of the Company's
common stock, then each right not owned by such shareholder or related
parties of such shareholder (all of which will be void) will entitle its
holder to purchase, at the right's then current exercise price, shares
of the Company's common stock having a value of twice the right's
exercise price. In addition, if the Company is involved in any other
merger or consolidation with, or sells 50% or more of its assets or
earning power to, another person, each right will entitle its holder to
purchase, at the right's then current exercise price, shares of common
stock of such other person having a value of twice the right's exercise
price.
The Company generally is entitled to redeem the rights at one cent per
right at any time until the 15th day (or 25th day if extended by the
Company's Board of Directors) following public announcement that a 25%
position has been acquired or the commencement of a tender or exchange
offer which, if consummated, would result in the offer or, together with
all affiliates and associates thereof, being the beneficial owner of 30%
or more of the Company's common stock.
(continued)
II-22
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements, Continued
13) Employee Stock Ownership Plan
In 1989, the Company established an Employee Stock Ownership Plan (ESOP)
for eligible non-union employees. The ESOP used the proceeds of a loan
from the Company to purchase 316,224 shares of the Company's common
stock for approximately $8.4 million and the Company contributed
approximately $400,000 in 1989 to the ESOP which was used by the ESOP to
purchase an additional 15,000 shares of the Company's common stock.
Since inception of the Plan, the ESOP has sold or distributed 23,131
shares of the Company's common stock to pay benefits to participants.
At June 30, 1996, the ESOP held a total of 308,093 shares of the
Company's common stock, of which 139,997 shares were allocated to
participants in the Plan.
The loan from the Company to the ESOP is repayable in annual installments
of $1,039,605, including interest, through June 30, 2004. Interest is
payable at a rate of 9% per annum. The Company's receivable from the ESOP
is recorded as common stock subscribed in the accompanying balance sheets.
The company recognizes the principal payments of the ESOP debt, on a
straight-line basis over the term of the note, as compensation expense.
Each year, the Company makes contributions to the ESOP which are used to
make loan payments. With each loan payment, a portion of the common
stock is allocated to participating employees. In 1996, the Company's
required contribution of $1,039,605 was reduced by $132,376 which
represents the dividends paid to the unallocated ESOP shares. The
resulting payment of $907,229 includes $426,287 classified as compensation
expense. In 1995, the Company's required contribution of $1,039,605 was
reduced by $126,072 which represents the dividends paid to the unallocated
ESOP shares. The resulting payment of $913,533 includes $432,590
classified as compensation expense. In 1994, the Company's required
contribution of $1,039,605 was reduced by $138,679 which represents the
dividends paid to the unallocated ESOP shares. The resulting payment of
$900,926 includes $419,983 classified as compensation expense.
(14) Financial Instruments/Concentration of Credit Risk
The carrying amounts of financial instruments, including cash, short-term
investments, marketable investment securities, accounts receivable and
accounts payable, approximated fair value as of June 30, 1996 and 1995
because of the relatively short maturity of these instruments.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and short-term
investments and accounts receivable. The Company maintains cash and
short-term investments with various financial institutions. At times
such investments may be in excess of FDIC insurance limits. As
disclosed in note 10, a significant portion of the Company's sales are
made to the U.S. Government and its agencies and certain industrial
customers. The related accounts receivable balance represented 54% and
57% of the Company's total trade accounts receivable balance at June 30,
1996 and 1995, respectively.
(continued)
II-23
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements, Continued
Although the Company's exposure to credit risk associated with
nonpayment of these balances is affected by conditions or occurrences
within the U.S. Government, the Company believes that its trade accounts
receivable credit risk exposure is limited. The Company performs
ongoing credit evaluations of its customers' financial conditions and
requires collateral, such as progress payments, in certain circumstances.
The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical
trends and other information.
(15) Commitments and Contingencies
Subsequent to June 30, 1996, the Company renewed its operating lease
agreement for the rental of a sales office in Great Neck, New York.
This lease, which expires on September 9, 2001, requires future minimum
lease payments of $60,950 payable as follows:
Year ending June 30,
1997 $ 10,158
1998 12,190
1999 12,190
2000 12,190
2001 12,190
Thereafter 2,032
$ 60,950
Rent expense for the years ended June 30, 1996, 1995 and 1994 was
$22,624, $22,235 and $24,114, respectively.
(16) Quarterly Financial Information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
1996:
Net sales $ 4,000,805 4,434,896 4,352,275 4,012,224
Gross profit 404,675 486,916 533,557 402,034
Net earnings 98,440 125,906 169,479 128,912
Net earnings per share $ .07 .09 .13 .12
1995:
Net sales $ 4,161,569 2,814,595 3,496,584 4,101,349
Gross profit 614,354 293,631 267,462 324,403
Net earnings 174,765 33,407 74,149 209,446
Net earnings per share $ .13 .02 .06 .16
(continued)
II-24
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements, Continued
First Second Third Fourth
Quarter Quarter Quarter Quarter
1994:
Net sales $4,500,088 4,371,411 1,989,770 3,817,034
Gross profit 970,794 751,934 587,038 556,342
Cumulative effect of change
in accounting principle 201,653 -- -- --
Net earnings 645,254 257,737 223,401 217,485
Net earnings per share $ .48 .19 .17 .16
Financial information for the fourth quarter of 1996 reflects a pre-tax
write off of approximately $354,000 related to inventory for which the
Company expected to receive orders during the year. In the fourth
quarter of 1996, management's assessment of this inventory resulted in
the aforementioned write-off as previously anticipated orders did not
materialize.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Not Applicable.
II-25
PART III
Item 10. Directors and Executive Officers of the Registrant.
Identification of Directors
Date Present Term Other Positions
Expires and Period and Offices Held
Name Served as Director WithRegistrant Age
Joseph Canterino Annual Meeting in President and 71
December 1998 Chief Executive
Director since Officer
December 11, 1992
Paul J. Corr Annual Meeting in None 52
December 1996
Director since
April 3, 1992
William P. Greene Annual Meeting in None 66
December 1998
Director since
April 3, 1992
Barry Pinsley Annual Meeting in Vice President- 54
December 1996 Special Projects
Director since
March 25, 1994
Howard Pinsley Annual Meeting in Vice President-
December 1997 Special Power
Director since Supplies 56
December 11, 1992
Sol Pinsley Annual Meeting in Chairman of 83
December 1997 the Board
Director since 1950
(continued)
III-1
Date Present Term Other Positions
Expires and Period and Offices Held
Name Served as Director With Registrant Age
Seymour Saslow Annual Meeting in Vice President- 75
December 1998 Engineering
Director since
December 11, 1992
Michael W. Wool Annual Meeting in None 50
December 1996
Director since 1990
Identification of Executive Officers
Positions and
Offices Held Period Served As
Name With Company Executive Officer Age
Sol Pinsley Chairman of the President and Chief 83
Board and Executive Officer for
Director more than the past five
years prior to taking
present position on
August, 1996; Treasurer
from August 4, 1988 to
September 10, 1993
Seymour Saslow Vice President- Since April 3, 1992 75
Engineering and Director
Joseph Canterino President and Chief Since April 3, 1992; 71
Executive Officer and Vice-President-
Director Manufacturing prior
to present position
Howard Pinsley Vice President-Special Since April 3, 1992 56
Power Supplies and
Director
Barry Pinsley Vice President-Special Since March 25, 1994 54
Projects and Director
(continued)
III-2
Positions and
Offices Held Period Served As
Name With Company Executive Officer Age
Herbert Potoker Treasurer and Principal Since September10, 67
Financial Officer 1993
Garry M. Jones Assistant Treasurer Since August 4, 1988; 56
and Principal Accounting Principal Financial
Officer Officer from August 4,
1988 to September 10,
1993
Reita Wojtowecz Secretary Since June 27, 1994 67
Each officer's term is at the will of the Board of Directors, except for
Sol Pinsley. The term of Mr. Pinsley's employment is subject to the
provisions of an Employment Agreement, dated January 1, 1995. See
"Executive Compensation-Employment Contracts and Termination of
Employment and Change in Control Agreements."
Family Relationships
Sol Pinsley is the father of Barry Pinsley and uncle of Howard Pinsley.
Barry Pinsley and Howard Pinsley are cousins. Howard Pinsley and Herbert
Potoker are cousins.
Business Experience of Directors and Officers
Joseph Canterino has been President and Chief Executive Officer since
Sol Pinsley retired from these positions on August 1, 1996. Prior to his
election to his present position, Mr. Canterino served as Vice President
-Manufacturing since April 3, 1992 and Plant Manager for more than five
years prior to being elected Vice President-Manufacturing.
Paul J. Corr is a Certified Public Accountant and currently a senior
partner at the Latham, New York accounting firm of Richter & Company.
Mr. Corr was a partner of the accounting firm of Corr & Company from
1982 to 1993. Since 1981 to date, Mr. Corr has been professor of
Business at Skidmore College in Saratoga Springs, New York. Mr. Corr
currently holds the position of Associate Professor.
William P. Greene has been employed as Vice President of Operations for
Bulk Materials International Co., Newton, Connecticut from 1994 to
present. From 1991 to 1994 Mr. Greene was Associate Professor of Finance
and International Business at Pennsylvania State University, Kutztown,
Pennsylvania. From 1985 to 1990, he was Associate Dean at the School of
Business, United States International University in San Diego,
California. From 1982 to 1985, he was Chairman, Department of Business,
Skidmore College, Saratoga Springs, New York. Prior to that time, he had
been employed as an officer with several financial institutions.
III-3
Garry M. Jones for more than the past five years has been employed by
the Company on a full time basis as Senior Accountant prior to being
elected Assistant Treasurer and Principal Financial and Accounting
Officer on August 4, 1988.
Barry Pinsley is a Certified Public Accountant who for five years acted
as a consultant to the Company prior to his election as a Vice President-
Special Projects on March 25, 1994. Mr. Pinsley has been a practicing
Certified Public Accountant in Saratoga Springs, New York since 1975.
Howard Pinsley for more than the past five years has been employed by
the Company on a full time basis as Program Director prior to being
elected Vice President-Special Power Supplies on April 3, 1992.
Sol Pinsley has been for more than the past five years employed on a
full time basis as the President and Chief Executive Officer of the
Company. Mr. Pinsley retired from these positions effective August 1,
1996. He has remained with the Company as Chairman of the Board.
Herbert Potoker for more than the past five years has been employed by
the Company on a full time basis in a senior financial management
position prior to being elected Treasurer and Principal Financial
Officer on September 10, 1993. Mr. Potoker previously had been the
Treasurer and Principal Financial and Accounting Officer of the Company
until August 4, 1988.
Seymour Saslow has been Vice President-Engineering since April 3, 1992.
Mr. Saslow served as the Director of Engineering of the Company for more
than five years prior to his election to his present position.
Reita Wojtowecz has been Secretary of the Company since June 27, 1994.
She has been employed by the Company as Director of Human Resources for
more than the past five years.
Michael W. Wool has been an attorney in private practice and a partner
in the law firm of Langrock, Sperry & Wool in Burlington, Vermont for
more than the past five years.
Directorships
None of the directors holds a directorship in any other company with a
class of securities registered pursuant to Section 12 of the Exchange
Act or subject to the requirements of Section 15(d) of that Act or any
company registered as an Investment company under the Investment Company
Act of 1940.
Legal Proceedings
None of the directors or executive officers of the Company were involved
during the past five years in any of the legal proceedings specified
under Item 401(f) of Regulation S-K.
III-4
Item 11. Executive Compensation.
Executive Compensation Table
The following table summarizes the annual compensation of the Company's
Chief Executive Officer for fiscal years 1996, 1995 and 1994 and of the
other five highest paid executive officers of the Company whowere such
as of June 30, 1996 and for each of the two prior fiscal years that
they were executive officers for any part of such years:
SUMMARY COMPENSATION TABLE
Name and Fiscal Annual All Other
Principal Position Year Salary Bonus Compensation(1)
Sol Pinsley 1996 $193,900 $25,000 $14,129
President and Chief 1995 $189,000 $25,000 $9,968
Executive Officer 1994 $189,000 $25,000 $11,661
Seymour Saslow 1996 $112,900 $25,000 $15,063
Vice President- 1995 $108,000 $25,000 $10,393
Engineering 1994 $108,000 $25,000 $12,553
Joseph Canterino 1996 $103,180 $25,000 $15,819
Vice President - 1995 $ 98,280 $25,000 $11,320
Manufacturing 1994 $ 98,280 $25,000 $12,780
Howard Pinsley 1996 $ 93,350 $20,000 $15,567
Vice President - 1995 $ 90,450 $12,000 $11,042
Special Power 1994 $ 90,450 $12,000 $12,544
Supplies
Herbert Potoker 1996 $107,680 $25,000 $11,892
Treasurer and 1995 $101,280 $25,000 $9,320
Principal Financial Officer 1994 $101,280 $25,000 $10,280
Barry Pinsley 1996 $ 84,675 $10,000 $12,389
Vice President- 1995 $ 79,500 $10,000 $8,083
Special Projects
_______________
(1) Represents (a) the cash and market value of the shares allocated for
the respective fiscal years under the Company's Employee Retirement Plan and
Trust ("ESOP") to the extent to which each named executive officer is vested,
and (b) directors' fees except for Mr. Potoker.
III-5
Insurance
The executive officers of the Company are covered under group life and
medical and health plans which do not discriminate in favor of the
officers or directors of the Company and which are available generally
to all salaried employees.
The Company maintains insurance coverage, as authorized by Section 727
of the New York Business Corporation Law, providing for (a) reimbursement
of the Company for payments it makes to indemnify officers and directors
of the Company, and (b) payment on behalf of officers and directors of the
Company for losses, costs and expenses incurred by them in actions.
Employee Retirement Plan and Trust
Under the Company's Employee Retirement Plan and Trust ("ESOP"), approved
by the Board of Directors on June 2, 1989, effective July 1, 1988, all
non-union employees of the Company, including the Company's executive
officers, five of whom, Sol Pinsley, Seymour Saslow, Joseph Canterino,
Barry Pinsley and Howard Pinsley, are also directors of the Company, are
eligible to participate. The ESOP is a non-contributory plan which is
designed to invest primarily in shares of common stock of the Company.
Reference is made to, and there is incorporated by reference, the
description of the ESOP, its implementation and pertinent documents
attached as exhibits in the Company's Form 8-K dated June 16, 1989, filed
with the Commission on June 20, 1989, and to the amendments thereto filed
as an Exhibit to the 10-K Report for the fiscal year ended June 30, 1991.
Certain technical amendments not considered material were adopted during
the year effective as of June 30, 1994.
Of the 139,997 shares of common stock of the Company allocated to
participants of the ESOP as of June 30, 1996, 2,672.96 shares were
allocated to Sol Pinsley, 4,377.96 each were allocated to Joseph
Canterino and Herbert Potoker, 4,058.98 shares were allocated to Howard
Pinsley, 4,187.96 shares were allocated to Seymour Saslow and 972 shares
were allocated to Barry Pinsley.
Compensation of Directors
The Company's standard arrangement compensates each director of the
Company a fee in the amount of $500 for each meeting of the Board of
Directors attended by such director. No amount in excess of such fee
per meeting of the Board of Directors was paid to any director during
the last fiscal year for services as a director. Each member of the
Audit Committee is compensated in the amount of $500 for each Committee
meeting attended. Paul J. Corr and William P. Greene were paid $2,350
and $1,800, respectively, for consulting services to the Board of
Directors for the fiscal year ended June 30, 1996.
III-6
Employment Contracts and Termination of Employment and Change in
Control Agreements
There has been in effect since July 1, 1973 a full time employment
contract with Sol Pinsley, who was President, Chief Executive Officer
and a Director of the Company unti Aug. 1, 1996. The most recent
employment contract was entered into by the Company with Mr. Pinsley on
June 12, 1995 pursuant to prior authorization given by the Board of
Directors on March 24, 1995. This employment contract which was
approved and ratified by the Board of Directors on June 17, 1995 is
dated and effective as of January 1, 1995 for a term expiring December
31, 1998, and covers Mr. Pinsley's employment as President (or Chairman
of the Board) and Chief Executive Officer and also as a non-executive
officer employee should Mr. Pinsley elect to become a non-executive
officer employee. The agreement provided a minimum base annual
compensation of $182,000 for each calendar year commencing 1995 and the
Board of Directors in its discretion may increase such compensation for
any calendar year and/or award Mr. Pinsley a bonus for any calendar
year. The foregoing compensation is to be reduced by $40,000 per annum
in the event Mr. Pinsley elected to become a non-executive officer
employee. The employment agreement further provides that in the event of
his disability the foregoing compensation shall continue to be paid to
Mr. Pinsley until the expiration date of the agreement, and, in the
event of his death, such compensation shall be paid to his estate until
the expiration date of the agreement or 187 days after his death,
whichever is later. The agreement provides for (i) a restrictive
covenant of non-competition by Mr. Pinsley and (ii) his covenant not to
divulge or use other than for the registrant confidential information
concerning the registrant, during and for 18 months after the expiration
date of the agreement.
Effective August 1, 1996, Mr. Pinsley retired from the positions of
President and Chief Executive Officer. In accordance with the terms of
the above agreement, Mr. Pinsley has remained as Chairman of the Board
and as a non-executive officer of the Company at a reduced salary.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners
The following information is furnished as of September 20, 1996 (unless
otherwise indicated) with respect to any person (including any "group"
as that term is used in Section 13(d)(3) of the Act) who is known to the
Company to be the beneficial owner of more than five percent of any
class of the Company's voting securities:
Amount and
Nature of
Title of Name and Address Beneficial Percent of
Class of Beneficial Owner Ownership Class
Common Stock Sol Pinsley 80,261.00 -Direct (1) 7.4633%
$.33-1/3 p.v. P.O. Box 422 2 632.96 -Indirect (1)
Saratoga Springs,
NY 12866
(continued)
III-7
Amount and
Nature of
Title of Name and Address Beneficial Percent of
Class of Beneficial Owner Ownership Class
Common Stock Tweedy Browne 75,300.00 -Direct (2) 6.7853%
$.33-1/3 p.v. Company L.P. 100.00 -Indirect (2)
52 Vanderbilt Avenue
New York, NY 10017
" Dimensional Fund 75,100.00 -Direct (3) 6.7583%
Advisors Inc.
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
" The Adirondack Trust 300,667.00 -Direct (4) 27.0574%
Company, as Trustee of
the Company's Employee
Retirement Plan and Trust
473 Broadway
Saratoga Springs,
NY 12866
(1) Does not include 4,200 shares of common stock of the Company owned the
testamentary trust of the deceased spouse of Sol Pinsley, Ruth Pinsley,
beneficial ownership of which is disclaimed by Mr. Pinsley. The shares listed
as indirectly owned by Sol Pinsley are the shares allocated to him as of June
30, 1996 as a participant in the Company's ESOP. Mr. Pinsley has the right
under the ESOP to direct the manner in which such shares allocated to him are
to be voted by the ESOP Trustee.
(2) The information as to the number of shares of common stock of the
Company that may be deemed beneficially owned by Tweedy Browne Company, L.P.
("TBC") is from Amendment No. 2 dated January 17, 1996, to the Schedule 13D
dated March 14, 1995, both of which were filed with the Securities and
Commission. The 100 shares that are included as indirectly owned by TBC are
owned by TBK Partners L.P. ("TBK"), which may be deemed a member of a group
with TBC. TBC and TBK in said Amendment No. 2 disclaim beneficial ownership
of the common stock of the other and state that the filing of the Schedule 13D
should not be deemed an admission that TBK comprise a group within the meaning
of Section 13d-3 of the 1934 Act. TBC, a registered investment advisor, holds
shares in the Company in a fiduciary capacity. TBC reported sole voting power
with respect to 61,730 shares and sole dispositive power with respect to 75,300
shares.
III-8
(3) The information as to the number of shares of common stock of the
Company that may be deemed beneficially owned by Dimensional Fund Advisors Inc.
("Dimensional") is from the Schedule 13G dated January 30, 1995 filed with the
Securities and Exchange Commission. Dimensional has informed the Company by
letter dated February 9, 1995 that it disclaims beneficial ownership of all
such shares. Dimensional, a registered investment advisor, holds shares in the
Company in a fiduciary capacity. Dimensional reported sole voting power with
respect to 49,500 shares and sole dispositive power with respect to 75,100
shares.
(4) This information is from the Form 4 dated August 13, 1996, filed with
the Securities and Exchange Commission by the Trustee on behalf of the
Company's Employee Retirement Plan and Trust ("ESOP"). The ESOP Trustee has
sole voting power with respect to unallocated common shares owned by the Trust,
168,096 shares as of August 24, 1996, as directed by the Plan Administrator
appointed by the Company's Board of Directors. As to the common shares
allocated to participants, 132,571 shares as of August 24, 1996, the ESOP
Trustee has the power to vote such shares as directed by such Plan Administrator
to the extent the participants do not direct the manner in which such shares are
to be voted.
Security Ownership of Management
The following information is furnished as of September 20, 1996 (unless
otherwise indicated), as to each class of equity securities of the
Company beneficially owned by all the Directors and by Directors and
Officers of the Company as a Group:
Amount and
Nature of
Title of Name of Beneficial Percent of
Class Beneficial Owner Ownership Class
Common Stock
$.33-1/3 p.v. Paul J. Corr 500.00 -Direct .0450%
" William P. Greene 0.00 0.0%
" Michael W. Wool 100.00 .0090%
" Sol Pinsley 80,261.00 -Direct 7.4633%
2,672.96 -Indirect (1)(2)
" Seymour Saslow 4,187.96 -Indirect (2) .3769%
" Joseph Canterino 7,500.00 -Direct 1.0689%
4,377.96 -Indirect (2)
(continued)
III-9
Amount and
Nature of
Title of Name of Beneficial Percent of
Class Beneficial Owner Ownership Class
Common Stock Howard Pinsley 39,134.00 -Direct 3.8870%
$.33-1/3 4,058.98 -Indirect (2)
" Barry Pinsley 800.00 -Direct .5374%
5,172.00 -Indirect (2)(3)(4)
" Herbert Potoker 6,490.00 -Direct .9780%
4,377.96 -Indirect (2)(5)
" Garry M. Jones 0.00 -Direct .1790%
1,989.15 -Indirect (2)
" Reita Wojtowecz 0.00 -Direct .1222%
1,358.02 -Indirect (2)
" Officers and Directors 134,785.00 -Direct 14.6667%
as a Group 28,194.99 -Indirect (6)
_____________
(1) Excludes 4,200 shares owned by a testamentary trust of Ruth Pinsley, the
deceased spouse of Sol Pinsley. Beneficial ownership of the shares owned by the
trust is disclaimed by Mr. Pinsley.
(2) Shares allocated to named officer as of June 30, 1996 as a participant
in the Company's ESOP. Each such person has the right to direct the manner in
which such shares allocated to him or her are to be voted by the ESOP Trustee.
(3) Excludes 1,300 shares owned by Barry Pinsley's spouse, as to which
beneficial ownership is disclaimed by Mr. Pinsley.
(4) Includes 4,200 shares owned by a testamentary trust of Ruth Pinsley, the
deceased spouse of Sol Pinsley. As trustee of the trust, Barry Pinsley is
deemed the beneficial owner, as defined in Rule 13d-3, of the shares held by
the trust.
(5) Excludes 300 shares owned by Herbert Potoker's spouse, as to which
beneficial ownership is disclaimed by Mr. Potoker.
(6) Shares allocated to all officers as a group as of June 30, 1996 who
participate in the Company's ESOP, Each such person has the right to direct
the manner in which such shares allocated to him are to be voted by the ESOP
Trustee.
There are no arrangements known to the Company the operation of which
may at a subsequent date result in change of control of the Company.
III-10
Item 13. Certain Relationships and Related Transactions.
For the fiscal year ended June 30, 1996, Christopher Canterino, who is
a full time employee of the Company and the son of Joseph Canterino,
President and Chief Executive Officer of the Company, received
compensation as such employee of $79,950, as well as an ESOP allocation
of Company Stock and dividends thereon totaling $9,082.
As previously reported, the Company established and sold to the ESOP
Trust on June 5, 1989, 331,224 shares of the Company's treasury stock at
a price of $26.50 per share, which purchase price was funded by the
Company making a cash contribution and loan. Each year, the Company
makes contributions to the ESOP which are used to make loan interest and
principal payments to the Company. With each such payment, a portion of
the common stock held by the ESOP is allocated to participating
employees. As of June 30, 1996, there were 139,997 shares allocated to
participants. The loan from the Company to the ESOP is repayable in
annual installments of $1,039,605, including interest, through June 30,
2004. Officers of the Company, including five (Sol Pinsley, Seymour
Saslow, Joseph Canterino, Howard Pinsley and Barry Pinsley) who are also
directors, are eligible to participate in the ESOP and to have shares
and cash allocated to their accounts and distributed to them in
accordance with the terms of the ESOP.
The Company paid the law firm of Langrock, Sperry & Wool, of which
Michael W. Wool, a director of the Company, is a partner, a total of
$45,500 for legal services during the fiscal year ended June 30, 1996.
The Company believes the services provided to it by Langrock, Sperry &
Wool were provided to it at a cost comparable to that which the Company
would have been required to pay for comparable services from an
unaffiliated third party.
III-11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
Included in Part II of this report:
Independent Auditors' Report
Balance Sheets at June 30, 1996 and 1995
Statements of Earnings for the years ended June 30,
1996, 1995 and 1994
Statements of Changes in Stockholders' Equity forthe
years ended June 30, 1996, 1995 and 1994
Statements of Cash Flows for the years ended June 30,
1996, 1995 and 1994
Notes to Financial Statements
2. Financial Statement Schedules
Included in Part IV of this report: Page
Schedule II - Valuation and Qualifying Accounts IV-2
Other schedules are omitted because of the absence of
conditions under which they are required or because the
required information is given in the financial statements
or notes thereto.
3. Exhibits
Page
11.1 Statement re: computation of per share earnings IV-3
27 Financial Data Schedule (for electronic filing
purposes only)
(b) Reports on Form 8-K
The Company filed a report on Form 8-K during the third quarter of the
period covered by this report. The report was filed on March 11, 1996.
On March 7, 1996, pursuant to the authorization of the Board of
Directors, the Company purchased 219,400 shares of its common stock for
an aggregate cash purchase price of $3,620,100.
IV-1
SCHEDULE II
ESPEY MFG. & ELECTRONICS CORP.
Valuation and Qualifying Accounts
Years ended June 30, 1996, 1995 and 1994
Balance at Additions Deductions Balance at
beginning to from end of
Description of period reserve reserve period
Allowance for
doubtful accounts:
1996 $ 3,000 - - 3,000
1995 $ 3,000 - - 3,000
1994 $ 3,000 - - 3,000
IV-2
EXHIBIT 11.1
ESPEY MFG. & ELECTRONICS CORP.
Computation of per Share Earnings as
Disclosed in Item 14 of Form 10-K
Five years ended June 30, 1996
1996 1995 1994 1993 1992
Computation of earnings per
share:
Number of shares
issued at
beginning of year 1,514,937 1,514,937 1,514,937 1,514,937 1,514,937
Monthly weighted
average number of
treasury shares (245,470) (168,180) (164,229) (159,897) (119,786)
Weighted average
number of primary
shares outstanding 1,269,467 1,346,757 1,350,708 1,355,040 1,395,151
Net earnings $ 522,737 491,767 1,343,877 1,594,290 1,885,208
Per share $ .41 .37 1.00 1.18 1.35
IV-3
S I G N A T U R E S
Pursuant to the requirements of Section 13 and 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ESPEY MFG. & ELECTRONICS CORP.
/s/ Joseph Canterino
Joseph Canterino, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
President
(Principal Executive Officer)
/s/ Joseph Canterino September 20, 1996
Joseph Canterino
Treasurer (Principal Financial
Officer)
/s/ Herbert Potoker September 20, 1996
Herbert Potoker
Assistant Treasurer
(Principal Accounting Officer)
/s/ Garry M. Jones September 20, 1996
Garry M. Jones
/s/ Howard Pinsley Vice-President and Director
Howard Pinsley September 20, 1996
/s/ Barry Pinsley Vice-President and Director
Barry Pinsley September 20, 1996
/s/ Sol Pinsley Chairman of the Board and Director
Sol Pinsley September 20, 1996
(signatures continued)
Vice-President and Director
/s/ Seymour Saslow September 20, 1996
Seymour Saslow
/s/ Michael W. Wool Director
Michael W. Wool September 20, 1996
/s/ Paul J. Corr Director
Paul J. Corr September 20, 1996
/s/ William P. Greene Director
William P. Greene September 20, 1996