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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 for the fiscal year ended June 30, 2004
|_| Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
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 Employer
incorporation or organization) Identification No.)
233 Ballston Avenue, Saratoga Springs, NY 12866
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(Address of principal executive offices including Zip Code)
(Registrant's telephone number including area code) (518)245-4400
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 the 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| Yes |_| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
|_| Yes |X| No
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $23,184,021 based upon the closing sale price of $22.85 on the
American Stock Exchange on June 30, 2004.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 14, 2001
----- ---------------------------------
Common stock, $.33-1/3 par value 1,010,804 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement relating to the 2004
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission, are incorporated by reference in Part III, Items 10 and 14 on Form
10-K as indicated herein.
1
PART I
Item 1. Business.
General
Espey Mfg. & Electronics Corp. (the "Company") located in Saratoga Springs, New
York, is engaged principally in the development, design, production and sale of
specialized electronic power supplies, a wide variety of transformers and other
types of iron-core components, and electronic system components. In some cases,
the Company manufactures such products in accordance with pre-developed
mechanical and electrical requirements ("build to print"). 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
Company operates a one-segment business and was incorporated in 1928.
The electronic power supplies and components manufactured by the Company find
application principally in (i) shipboard and land based radar, (ii) locomotives,
(iii) aircraft, (iv) short and medium range communication systems, (v)
navigation systems and (vi) land based military vehicles.
The Company's iron-core components include (i) transformers of the audio, power
and pulse types, (ii) magnetic amplifiers and (iii) audio filters. The
electronic system components manufactured by the Company include antenna systems
and high power radar transmitters. These system components utilize the Company's
own electronic power supplies, transformers and other iron-core components and
mechanical assemblies.
In the fiscal year ended June 30, 2004 and 2003, the Company's total sales were
$22,507,199 and $19,773,411, respectively. Sales to two domestic customers and
one foreign customer accounted for 22%, 16% and 18% and 25%, 19% and 12%, of
total sales in 2004 and 2003, respectively. Sales to two domestic customers and
one foreign customer accounted for 26%, 21% and 14% respectively, of total sales
in 2002.
Export sales in 2004, 2003 and 2002 were approximately $9,800,000, $7,100,000,
and $6,600,000, respectively.
Sources of 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 a majority of its
raw materials. However, certain components used in our products are available
from only a limited number of sources, and other components are only available
from a single source. Despite the risk associated with limited or single source
suppliers, the benefits of higher quality goods and timely delivery minimize and
often limit any potential risk and can eliminate problems with part failures
during production.
Sales Backlog
At September 14, 2004, the Company's backlog was approximately $14.0 million.
The total backlog at June 30, 2004 was approximately $15.4 million as compared
to approximately $21.4 million at June 30, 2003. The Company's backlog is
discussed in greater detail in Management's Discussion and Analysis of Financial
Condition and Results of Operations, contained in Item 7 below.
It is presently anticipated that a minimum of $15.2 million of orders comprising
the June 30, 2004 backlog will be filled during the fiscal year ending June 30,
2005. The minimum of $15.2 million does not include any shipments, which may be
made against orders subsequently received during the fiscal year ending June 30,
2005. The estimate of the June 30, 2004 backlog to be shipped in fiscal 2005 is
subject to future events, which may cause the amount of the backlog actually
shipped to differ from such estimate.
Marketing and Competition
The Company markets its products primarily through its own direct sales
organization. Business is solicited from large industrial manufacturers and
defense companies, the government of the United States and foreign governments
and major foreign electronic equipment companies. In certain countries the
Company has external sales representatives to help solicit and coordinate
foreign contracts. The Company is also on the eligible list of contractors of
many agencies of the United States 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.
2
There is competition in all classes of products manufactured by the Company,
from divisions of the largest electronic companies, as well as many small
companies. The Company's sales do not represent a significant share of the
industry's market for any class of its products. The principal methods of
competition for electronic products of both a military and industrial nature
include, among other factors, price, product performance, the experience of the
particular company and history of its dealings in such products. The Company, as
well as other companies engaged in supplying equipment for military use, is
subject to various risks, including, without limitation, dependence on U.S. and
foreign government appropriations and program allocations, the competition for
available military business, and government termination of orders for
convenience.
The Company's business is not considered to be of seasonal nature.
Research and Development
The Company's expenditures for research and development were approximately
$150,000, $100,000, and $335,000, in 2004, 2003 and 2002, respectively. Some of
the Company's engineers and technicians spend varying degrees of time on either
development of new products or improvement of existing products.
Employees
The Company had 181 employees as of September 14, 2004. Some of these employees
are represented by the International Brotherhood of Electrical Workers Local
#1799. The current collective bargaining agreement expires on June 30, 2008. The
contract includes a 3.75% annual pay increase in the fiscal period 2004 through
2007, and no increase for 2008. Relations with the Union are considered good.
Union membership at September 14, 2004 was 78 people.
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 fiscal 2004,
and the Company believes will not in fiscal year 2005 have a material effect
upon the capital expenditures, net income, or competitive position of the
Company.
Item 2. Properties
The Company's manufacturing and engineering facilities are at its plant in
Saratoga Springs, New York.
The Saratoga Springs plant, which the Company owns, consists of various
adjoining one-story buildings. The plant has a sprinkler system throughout and
contains approximately 151,000 square feet of floor space, of which 90,000 is
used for manufacturing, 24,000 for engineering, 33,000 for shipping and
climatically secured storage, and 4,000 for offices. The offices, engineering
and some manufacturing areas are air-conditioned. In addition to assembly and
wiring operations, the plant includes facilities for varnishing, potting,
plating, impregnation and spray-painting operations. The manufacturing operation
also includes a complete machine shop, with welding and sheet metal fabrication
facilities adequate for substantially all of the Company's current operations.
Besides normal test equipment, the Company maintains a sophisticated on-site
environmental test facility. In addition to meeting all of the Company's
in-house needs, the plating, machine shop and environmental facilities are
available to other companies on a contract basis.
Item 3. Legal Proceedings.
On June 3, 2004, the Company was informed by the American Stock Exchange, Inc.
("AMEX") that its review of events that had occurred at the Company's annual
meeting on November 13, 2003 had been completed and that no further action was
warranted.
At the annual meeting, a vote was taken on a shareholder proposal, to remove
certain incumbent directors, that had not been included in the Company's proxy
material sent to shareholders in advance of the meeting. AMEX informed the
Company in January 2004 that it would be conducting a review of such incident.
The Board of Directors engaged special counsel to investigate whether any
directors or officers of the Company had engaged in misconduct in connection
with the shareholder proposal presented at the meeting. Special counsel
subsequently reported to the Board of Directors that no such finding had been
made, and that action taken on the shareholder proposal presented at the annual
meeting was inappropriate.
3
In April 2004, the Board of Directors adopted various corporate governance
modifications, including the creation of a nominating committee comprised of
independent directors and various other corporate by-law amendments. The results
of special counsel's reports and the corporate governance modifications were
supplied to AMEX incidental to its review.
Item 4. Submission of Matters to a Vote of Security Holders.
None
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:
2004 High Low
First Quarter 23.00 17.60
Second Quarter 27.35 22.99
Third Quarter 26.00 24.60
Fourth Quarter 27.14 21.00
2003 High Low
First Quarter 20.50 18.48
Second Quarter 19.75 18.65
Third Quarter 20.75 17.55
Fourth Quarter 18.49 17.70
Holders
The approximate number of holders of record of the common stock was 141 on
September 14, 2004 according to records of the Company's transfer agent.
Included in this number are shares held in "nominee" or "street" name and,
therefore, the number of beneficial owners of the common stock is believed to be
substantially in excess of the foregoing number.
Dividends
The Company paid cash dividends on the common stock of $1.50, $.35, and $.30 per
share for the fiscal years ended June 30, 2004, 2003 and 2002, respectively. The
Board of Directors has authorized the payment of a fiscal 2005 first quarter
dividend of $.15 payable September 30, 2004.
See also Item 12 for a discussion of Securities Authorized for Issuance under
Equity Compensation plans.
During fiscal 2004 the Company sold common stock to certain employees as they
exercised existing stock options granted under a shareholder approved plan.
8,500 shares were sold at various times during the year at prices that ranged
from $13.25 a share to $19.85 a share. The securities were sold for cash and
were made without registration under the Securities Act in reliance upon the
exemption from registration afforded under Section 4(2) of the Securities Act of
1933. Proceeds were used for general working capital purposes.
There were no purchases of equity securities in the fiscal 2004 fourth quarter.
4
Item 6. Selected Financial Data.
ESPEY MFG. & ELECTRONICS CORP.
Five Years Ended June 30, 2004
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Selected Income Statement Data 2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Net Sales ........................... $22,507,199 $19,773,411 $18,405,213 $17,251,640 $14,719,818
Operating Income .................... 1,178,723 1,146,386 549,139 1,169,271 733,617
Other income ........................ 121,894 139,880 179,615 305,833 459,326
----------- ----------- ----------- ----------- -----------
Net income ................. 960,826 964,700 545,754 1,033,069 782,943
Income per common share:
Basic ............................. $ .95 $ .94 $ .53 $ 1.00 $ .75
Diluted .......................... $ .94 $ .94 $ .53 $ 1.00 $ .75
=========== =========== =========== =========== ===========
Selected Balance Sheet Data
Current Assets ...................... 26,030,744 26,528,434 25,008,710 23,736,991 22,540,316
Current Liabilities ................. 965,038 1,639,755 1,158,439 1,063,497 1,329,171
Working Capital ..................... 25,065,706 24,888,679 23,850,271 22,673,494 21,211,145
Total Assets ........................ 29,131,260 29,795,497 28,332,962 27,228,881 26,118,037
Stockholders' equity ................ 27,841,906 27,953,508 27,054,442 26,165,384 24,788,866
Cash dividends declared and
paid per common share ............. $ 1.50 $ .35 $ .30 $ .20 $ .20
=========== =========== =========== =========== ===========
5
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business Outlook
During fiscal year 2004, while net sales increased, new orders received by the
Company did not keep pace with backlog relieved. Thus, while the sales backlog
of approximately $15.4 million at June 30, 2004 gives the Company a solid base
of future sales, the Company anticipates that the reduction of backlog may
result in a reduction of sales during fiscal 2005. Management also anticipates a
concurrent reduction in costs. Management believes that existing customers have
been delayed in placing orders for additional products, but anticipates that new
orders will be received in the current calendar year which should result in a
significant increase in backlog. Many potential orders are currently being
discussed and negotiated with our customers. In addition to the backlog, the
Company currently has outstanding quotations representing in excess of $40
million in the aggregate for both repeat and new programs. Based on management's
communications with customers, the Company expects to receive substantial orders
for spare parts on the various types of transmitters which are already in
service, a number of contracts for further development and manufacture of power
supplies, transformers and additional contracts for pre-engineered hardware. We
expect these contracts to substantially increase sales in years beyond 2005.
The outstanding quotations encompass various new and previously manufactured
power supplies, transformers, and subassemblies. However, there can be no
assurance that the Company will acquire any or all of the anticipated orders
described above, many of which are subject to allocations of the United States
defense spending and factors affecting the defense industry and military
procurement generally.
Results of Operations
Net Sales for fiscal years ended June 30, 2004, 2003 and 2002, were $22,507,199,
$19,773,411, and $18,405,213, respectively. The 13.8% increase in net sales in
2004 as compared to 2003, is the result of increased transmitter component
shipments on two of the Company's products. In fiscal 2004, the Company
continued to realize the benefits of increased business with existing customers
and continued to establish new customer relationships. Enhanced customer
relationships and the quality of our products have provided for the continued
increase in sales that has occurred over the last five years. The sales backlog
at June 30, 2004, as discussed above includes significant orders for land and
shipboard high voltage radar power supply/transmitters, industrial power
supplies, and contracts to manufacture certain customer products in accordance
with pre-engineered requirements. The increase in net sales in 2003 as compared
to 2002 was the result of increased shipments of small transformers, certain
power supplies, and shipments made on build to print orders.
The primary factor in determining gross profit and net income is product mix.
The gross profits on mature products and build to print contracts are higher
than with respect to the products which are still in the engineering development
stage or in the early stages of production. In any given accounting period the
mix of product shipments between higher margin mature programs and less mature
programs including loss contracts, has a significant impact on gross profit and
net income. For fiscal years ended June 30, 2004, 2003 and 2002 gross profits
were $3,714,865, $3,097,861, and $2,300,994, respectively. The increase in gross
profit between 2004, 2003 and 2002 was predominately due to an increase in net
sales and favorable product mix. Gross profit as a percentage of sales was
16.5%, 15.7%, and 12.5% for fiscal 2004, 2003, and 2002, respectively.
Management continues to evaluate the Company's workforce to ensure that
production and overall execution of the backlog orders and additional
anticipated orders are successfully performed. Employment at June 30, 2004 was
181 people compared to 192 people at June 30,2003.
Net income for fiscal 2004, was $960,826 or $.95 and $.94 per share, basic and
diluted, respectively, compared to $964,700 or $.94 per share, both basic and
diluted, for fiscal 2003. The change in net income per share was due to
increased sales and improved gross profit offset primarily by one loss contract
and higher selling, general and administrative expenses. Net income for fiscal
2003, was $964,700 or $.94 per share compared to net income of $545,754 or $.53
per share for fiscal 2002. The increase in net income per share was due to
decreased expenditures made on engineering development contracts, higher sales
and favorable product mix. The decrease in engineering development expenditures
occurred naturally as the related programs moved from the engineering design
phase into the production phase of the associated contracts. The increase in net
income was partially offset by an increase in selling, general and
administrative expenses.
Selling, general and administrative expenses were $2,536,142, for the fiscal
year ended June 30, 2004, an increase of $584,667, or 30.0% as compared to the
prior year. This
6
increase is primarily due to an increase in professional fees, insurance costs
and administrative salaries. The increase in professional fees was attributable,
in part, to legal fees incurred relating to the review conducted by the American
Stock Exchange following the Company's Annual Meeting in November 2003 and the
implementation of corporate governance modifications, including the amendment of
the corporate by-laws. Selling, general and administrative expenses were $
1,951,475 for the year ended June 30, 2003, an increase of $199,620, or 11.4% as
compared to the prior year. This increase is mainly attributable to an increase
in insurance premiums and increased selling expenses.
Other income for fiscal 2004 decreased as compared to fiscal 2003 due to lower
dividend and interest income. The Company does not believe that there is
significant risk associated with its investment policy, since at June 30, 2004
all of the investments are primarily represented by short-term liquid
investments including certificates of deposit and money market accounts. Total
other income in fiscal 2003, as compared to 2002 declined as expected, as the
Company sold its higher interest bearing preferred securities, and interest
rates continued to decline.
The effective income tax rate was 26.1% in 2004, 25.0% in 2003, and 25.1% in
2002. The effective tax rate is less than the statutory tax rate mainly due to
the foreign exportation benefit the Company receives on its foreign sales.
Liquidity and Capital Resources
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 with cash flows resulting from
operating activities and when necessary from its existing cash and investments.
The Company did not borrow any funds during the last three fiscal years.
Management has available a $3,000,000 line of credit to help fund further growth
or working capital needs, if necessary, but does not anticipate the need for any
borrowed funds in the foreseeable future.
The Company's working capital as of June 30, 2004, 2003 and 2002 was
$25,065,706, $24,888,679, and $23,850,271, respectively. During 2004, 2003 and
2002 the Company repurchased 13,625, 15,918, and 0 shares, respectively, of its
common stock from the Company's Employee Retirement Plan and Trust ("ESOP") and
in other open market transactions, for a total purchase price of $272,329,
$311,468, and $0, respectively. Under existing authorizations from the Company's
Board of Directors, as of June 30, 2004, management is authorized to purchase an
additional $542,566 of Company stock.
The table below presents the summary of cash flow information for the fiscal
year indicated:
2004 2003
----------- -----------
Net cash provided by operating activities ........................ $ 3,874,800 $ 1,936,468
Net cash (used) provided by investing activities ................. (910,855) 523,370
Net cash used in financing activities ............................ 1,649,456 656,317
Net cash provided by operating activities fluctuates between periods primarily
as a result of differences in net income, the timing of the collection of
accounts receivable, purchases of inventory, receipt of progress payments, level
of sales and payments of accounts payable. Net cash (used) provided by investing
activities changed in fiscal 2004 due to slightly lower additions of plant and
equipment and the purchase of short-term investments. The increase in cash used
in financing activities is due primarily to the increase in the amount of
dividends paid during 2004 as compared to 2003.
The Company believes that the cash generated from operations and when necessary,
from existing cash and cash equivalents, will be sufficient to meet its
long-term funding requirements for the foreseeable future.
Management believes that the Company's reserve for bad debts of $3,000 is
adequate given the customers with whom the Company does business. Historically,
bad debt expense has been minimal.
During fiscal year 2004 and 2003, the Company expended $413,517 and $438,481,
respectively, for plant improvements and new equipment. The Company has budgeted
approximately $450,000 for new equipment and plant improvements in fiscal 2005.
Management presently anticipates that the funds required will be available from
current operations.
The Company has entered into standby letters of credit agreements with financial
institutions primarily relating to the guarantee of future performance on
certain contracts. Contingent liabilities on outstanding standby letters of
credit agreements aggregated approximately $190,000 at June 30, 2004. The
Company does not expect to fund any of the amounts under the standby letters of
credit.
7
The Company has an operating lease for $500 a month which expires June 1, 2008.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 to the financial
statements. We believe our most critical accounting policies include revenue
recognition and cost estimation on our contracts.
Revenue Recognition and Estimates
A significant portion of our business is comprised of development and production
contracts. Generally revenues on long-term fixed-price contracts are recorded on
a percentage of completion basis using units of delivery as the measurement
basis for progress toward completion.
Percentage of completion accounting requires judgment relative to expected
sales, estimating costs and making assumptions related to technical issues and
delivery schedule. Contract costs include material, subcontract costs, labor and
an allocation of overhead costs. The estimation of cost at completion of a
contract is subject to numerous variables involving contract costs and estimates
as to the length of time to complete the contract. Given the significance of the
estimation processes and judgments described above, it is possible that
materially different amounts of contract costs could be recorded if different
assumptions were used, based on changes in circumstances, in the estimation of
cost at completion. When a change in expected sales value or estimated cost is
determined, changes are reflected in current period earnings.
Other Matters
An Employee Retirement Plan and Trust ("ESOP") was established for the eligible
non-union employees of the Company, effective as of July 1, 1988. The ESOP used
the proceeds of a loan from the Company made on June 5, 1989 to purchase 316,224
shares of the Company's common stock for approximately $8,400,000 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.
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 is allocated to participating employees. As of June
30, 2004, there were 240,749 shares allocated to participants. Dividends
attributable to allocated shares were likewise allocated to the participants'
accounts, whereas the dividends on unallocated shares were used toward the loan
repayment, thus reducing the Company's required contribution.
The loan from the Company to the ESOP was repayable in annual installments of
$1,039,605, including interest through June 30, 2004. Interest was 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 sheet as of June 30, 2003.
Effective June 30, 2004 the loan from the Company to the ESOP was paid in full
and all shares have been allocated to participant's accounts.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
It should be noted that in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms "believe," "anticipate," "intend," "goal,"
"expect," and similar expressions may identify forward-looking statements. These
forward-looking statements represent the Company's current expectations or
beliefs concerning future events. The matters covered by these statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those set forth in the forward-looking statements,
including the Company's dependence on timely development, introduction and
customer acceptance of new products, the impact of competition and price
erosion, as well as supply and manufacturing constraints and other risks and
uncertainties. The foregoing list should not be construed as exhaustive, and the
Company disclaims any obligation subsequently to revise any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made.
8
Item 8. Financial Statements
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Espey Mfg. & Electronics Corp.:
We have audited the accompanying balance sheet of Espey Mfg. & Electronics Corp.
as of June 30, 2004, and the related statements of income, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. 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 audit provides 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, 2004, and the results of its operations and its cash flows for
the year then ended, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
- -----------------
KPMG LLP
Albany, New York
August 6, 2004
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Espey Mfg. & Electronics Corp. :
In our opinion, the 2003 and 2002 financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Espey Mfg. & Electronics Corp. (the Company) at June 30,
2003, and the results of its operations and its cash flows for each of the two
years in the period ended June 30, 2003 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Albany, New York
August 1, 2003
9
Espey Mfg. & Electronics Corp.
Balance Sheets
June 30, 2004 and 2003
- -------------------------------------------------------------------------------------------------------------------------
2004 2003
------------ ------------
ASSETS
Cash and cash equivalents ................................................. $ 12,310,972 $ 10,996,483
Short term investments .................................................... 1,056,000 --
Trade accounts receivable, net ............................................ 2,140,397 3,470,895
Other receivables ......................................................... 1,809 11,638
Inventories:
Raw materials and supplies ....................................... 1,543,930 1,570,028
Work in Process .................................................. 3,390,133 3,020,081
Costs related to contracts in process,
net of progress payments of $905,646
in 2004 and $3,314,816 in 2003 ................................... 5,151,234 7,246,158
------------ ------------
Total inventories ................................................ 10,085,297 11,836,267
------------ ------------
Deferred income taxes ..................................................... 76,876 88,643
Prepaid expenses and other current assets ................................. 359,393 124,508
------------ ------------
Total current assets ............................................. 26,030,744 26,528,434
------------ ------------
Property, plant and equipment, net ........................................ 3,100,516 3,267,063
------------ ------------
Total Assets ................................................. $ 29,131,260 $ 29,795,497
============ ============
LIABILITIES AND STOCKHOLDERS'EQUITY
Accounts payable .......................................................... $ 250,675 $ 647,597
Accrued expenses:
Salaries, wages and commissions .................................. 44,519 88,287
Employee insurance costs ......................................... 7,487 7,038
Vacation ......................................................... 451,516 465,815
Other ............................................................ 50,370 42,361
Payroll and other taxes withheld and accrued .............................. 26,000 38,425
Income taxes payable ...................................................... 134,471 350,232
------------ ------------
Total current liabilities .................................... 965,038 1,639,755
------------ ------------
Deferred income taxes ..................................................... 324,316 202,234
------------ ------------
Total liabilities ............................................ 1,289,354 1,841,989
------------ ------------
Common stock, par value $.33-1/3 per share
Authorized 10,000,000 shares; Issued 1,514,937
shares in 2004 and 2003, outstanding 1,014,618
and 1,019,643 shares in 2004 and 2003 ............................ 504,979 504,979
Capital in excess of par value ............................................ 10,411,915 10,459,278
Retained Earnings ......................................................... 24,911,920 25,458,400
------------ ------------
35,828,814 36,422,657
Less common stock subscribed .............................................. -- (558,662)
Cost of 500,319 and 495,294 shares of
common stock in treasury in 2004
and 2003, respectively ........................................... (7,986,908) (7,910,487)
------------ ------------
Total stockholders' equity ................................... 27,841,906 27,953,508
------------ ------------
Total liabilities and
stockholders' equity ......................................... $ 29,131,260 $ 29,795,497
============ ============
The accompanying notes are an integral part of the financial statements.
10
Espey Mfg. & Electronics Corp.
Statements of Income
Years Ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net sales ................................................... $ 22,507,199 $ 19,773,411 $ 18,405,213
Cost of sales ............................................... 18,792,334 16,675,550 16,104,219
------------ ------------ ------------
Gross profit ................................ 3,714,865 3,097,861 2,300,994
Selling, general and
administrative expenses ................................ 2,536,142 1,951,475 1,751,855
------------ ------------ ------------
Operating income ............................ 1,178,723 1,146,386 549,139
Other income (expense)
Interest and dividend income ................ 94,655 140,000 199,050
Other income (loss) ......................... 27,239 (120) (19,435)
------------ ------------ ------------
Total other income .......................... 121,894 139,880 179,615
------------ ------------ ------------
Income before income taxes .................................. 1,300,617 1,286,266 728,754
Provision for income taxes .................................. 339,791 321,566 183,000
------------ ------------ ------------
Net income .................................. $ 960,826 $ 964,700 $ 545,754
============ ============ ============
Net Income per share:
Basic .................................................. $ .95 $ .94 $ .53
Diluted ................................................ $ .94 $ .94 $ .53
------------ ------------ ------------
Weighted average number
of shares outstanding
Basic ....................................... 1,013,663 1,025,200 1,030,556
Diluted ..................................... 1,022,344 1,027,686 1,034,904
============ ============ ============
The accompanying notes are an integral part of the financial statements.
11
Espey Mfg. & Electronics Corp.
Statements of Changes in Stockholders' Equity
Years Ended June 30, 2004, 2003 and 2002
- -------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Capital in Comprehen-
Common Excess of sive income Retained
Shares Amount par Value (Loss) Earnings
----------- ----------- ----------- ----------- -----------
Balance as of June 30, 2001 1,029,461 $ 504,979 $10,496,287 $ (50,281) $24,607,239
----------- ----------- ----------- ----------- -----------
Comprehensive income:
Net income, 2002 545,754
Other comprehensive income,
net of tax benefit of $9,940 21,202
Comprehensive income
Stock option exercises 5,100 (30,409)
Dividends paid on common stock
$.30 per share (309,176)
Tax effect of dividends on
unallocated ESOP shares 5,041
Purchase of treasury stock
Reduction of common stock subscribed
----------- ----------- ----------- ----------- -----------
Balance as of June 30, 2002 1,034,561 504,979 10,465,878 (29,079) 24,848,858
----------- ----------- ----------- ----------- -----------
Comprehensive income:
Net income, 2003 964,700
Other comprehensive income,
net of tax benefit of $15,599 19,589
Reclassification adjustment 9,490
Comprehensive income
Stock option exercises 1,000 (6,600)
Dividends paid on common stock
$.35 per share (358,099)
Tax effect of dividends on
unallocated ESOP shares 2,941
Purchase of treasury stock (15,918)
Reduction of common stock subscribed
----------- ----------- ----------- ----------- -----------
Balance as of June 30, 2003 1,019,643 504,979 10,459,278 -- 25,458,400
----------- ----------- ----------- ----------- -----------
Net income, 2004 960,826
Stock option exercises 8,600 (53,122)
Dividends paid on common stock
$1.50 per share (1,519,913)
Tax effect of stock options exercised 5,759
Tax effect of dividends on
unallocated ESOP shares 12,607
Purchase of treasury stock (13,625)
Reduction of common stock subscribed
----------- ----------- ----------- ----------- -----------
Balance as of June 30, 2004 1,014,618 $ 504,979 $10,411,915 $ -- $24,911,920
=========== =========== =========== =========== ===========
12
Common Treasury Stock Total
Stock --------------------------- Stockholders'
Subscribed Shares Amount Equity
----------- ----------- ----------- -----------
Balance as of June 30, 2001 (1,675,987) 485,476 $(7,716,853) $26,165,384
----------- ----------- ----------- -----------
Comprehensive income:
Net income, 2002 545,754
Other comprehensive income,
net of tax benefit of $9,940 21,202
-----------
Comprehensive income 566,956
Stock option exercises (5,100) 97,984 67,575
Dividends paid on common stock
$.30 per share (309,176)
Tax effect of dividends on
unallocated ESOP shares 5,041
Reduction of common stock subscribed 558,662 558,662
----------- ----------- ----------- -----------
Balance as of June 30, 2002 (1,117,325) 480,376 (7,618,869) 27,054,442
----------- ----------- ----------- -----------
Comprehensive income:
Net income, 2003 964,700
Other comprehensive gain,
net of tax benefit of $15,599 19,589
Reclassification adjustment 9,490
-----------
Comprehensive income 993,779
Stock option exercises (1,000) 19,850 13,250
Dividends paid on common stock
$.35 per share (358,099)
Tax effect of dividends on
unallocated ESOP shares 2,941
Purchase of treasury stock 15,918 (311,468) (311,468)
Reduction of common stock subscribed 558,663 558,663
----------- ----------- ----------- -----------
Balance as of June 30, 2003 (558,662) 495,294 (7,910,487) 27,953,508
----------- ----------- ----------- -----------
Net income, 2004 960,826
Stock option exercises (8,600) 195,908 142,786
Dividends paid on common stock
$1.50 per share (1,519,913)
Tax effect on stock options exercised 5,759
Tax effect of dividends on
unallocated ESOP shares 12,607
Purchase of treasury stock 13,625 (272,329) (272,329)
Reduction of common stock subscribed 558,662 558,662
----------- ----------- ----------- -----------
Balance as of June 30, 2004 -- 500,319 $(7,986,908) $27,841,906
=========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
13
Espey Mfg. & Electronics Corp.
Statements of Cash Flows
Years Ended June 30, 2004, 2003 and 2002
- -------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
----------- ----------- -----------
Cash Flows From Operating Activities:
Net income .................................................. $ 960,826 $ 964,700 $ 545,754
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Tax effect of dividends on
unallocated ESOP shares ..................................... 12,607 2,941 5,043
Tax effect on stock options exercised ....................... 5,759 -- --
Depreciation ................................................ 557,943 495,670 513,470
Loss on disposal of plant and equipment ..................... 22,121 -- 35,782
Loss on sale of investment securities ....................... -- 15,817 --
Deferred income tax ......................................... 133,849 57,359 112,097
Changes in assets and liabilities:
Decrease (increase) in receivables ..................... 1,340,327 (1,059,414) 145,370
Decrease in inventories, net ........................... 1,750,970 904,528 2,191,882
(Increase) decrease in prepaid
expenses and other current assets ................... (234,885) 73,553 (46,181)
(Decrease) increase in accounts payable ................ (396,922) 150,143 162,682
(Decrease) increase in accrued
salaries, wages and commissions ..................... (43,768) 1,406 (37,200)
Increase (decrease) in accrued
employee insurance costs ............................ 449 150 (54,911)
(Decrease) increase in vacation accrual ................ (14,299) 66,916 53,352
Increase in other accrued expenses ..................... 8,009 951 3,699
(Decrease) increase in payroll and
other taxes withheld and accrued .................... (12,425) 482 (1,454)
(Decrease) increase in income
taxes payable ....................................... (215,761) 261,266 27,526
----------- ----------- -----------
Net cash provided by
operating activities .................... $ 3,874,800 $ 1,936,468 $ 3,656,911
----------- ----------- -----------
The accompanying notes are an integral part of the financial statements.
(Continued)
14
Cash Flows From Investing Activities:
Proceeds from maturity of investment
securities ............................................. -- 403,188 399,869
Additions to property, plant and equipment ............... (413,517) (438,481) (393,865)
Purchase of short term investments ....................... (1,056,000) -- --
Proceeds on sale of plant and equipment .................. -- -- 12,250
Reduction of common stock subscribed ..................... 558,662 558,663 558,662
------------ ------------ ------------
Net cash (used) provided by
investing activities ................. (910,855) 523,370 576,916
------------ ------------ ------------
Cash Flows From Financing Activities:
Dividends on common stock ................................ (1,519,913) (358,099) (309,176)
Purchase of treasury stock ............................... (272,329) (311,468) --
Proceeds from exercise of stock options .................. 142,786 13,250 67,575
------------ ------------ ------------
Net cash used in
financing activities ................. (1,649,456) (656,317) (241,601)
------------ ------------ ------------
Increase in cash and cash equivalents ......................... 1,314,489 1,803,521 3,992,226
Cash and cash equivalents, beginning of the year .............. 10,996,483 9,192,962 5,200,736
------------ ------------ ------------
Cash and cash equivalents, end of the year .................... $ 12,310,972 $ 10,996,483 $ 9,192,962
============ ============ ============
Net Income Taxes Paid ......................................... $ 403,337 $ -- $ 62,238
============ ============ ============
The accompanying notes are an integral part of the financial statements.
15
Espey Mfg. & Electronics Corp.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 1. Nature of operations
Espey Mfg. & Electronics Corp. (the Company) is a manufacturer of electronic
equipment used primarily in military and industrial applications. The principal
markets for the Company's products are companies that provide electronic support
to both military and industrial applications. During the year the Company
dissolved Espey International, Inc, a wholly owned subsidiary. The subsidiary
was an inactive foreign sales corporation.
Note 2. Summary of Significant Accounting Policies
Inventory Valuation, Cost Estimation and Revenue Recognition Raw materials are
valued at weighted average cost.
Inventoried work relating to contracts in process and work in process is valued
at actual production cost, including factory overhead incurred to date. Work in
process represents spare units, parts and other inventory items acquired or
produced to service units previously sold or to meet anticipated future orders.
The cost elements of contracts in process and work in process consist of
production costs of goods and services currently in process and overhead.
Provision for losses on contracts is made when the 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.
Revenue is recognized on contracts in the period in which the units are
delivered and billed (unit-of-delivery method). A significant portion of our
business is comprised of development and production contracts. Generally,
revenues on long-term fixed-price contracts are recorded on a percentage of
completion basis using units of delivery as the measurement basis for progress
toward completion.
Percentage of completion accounting requires judgment relative to expected
sales, estimating costs and making assumptions related to technical issues and
delivery schedule. Contract costs include material, subcontract costs, labor and
an allocation of overhead costs. The estimation of cost at completion of a
contract is subject to numerous variables involving contract costs and estimates
as to the length of time to complete the contract. Given the significance of the
estimation processes and judgments described above, it is possible that
materially different amounts of contract costs could be recorded if different
assumptions were used, based on changes in circumstances, in the estimation of
cost at completion. When a change in expected sales value or estimated cost is
determined, changes are reflected in current period earnings.
Depreciation
Depreciation of plant and equipment is computed on a straight-line basis over
the estimated useful lives of the assets.
Estimated useful lives of depreciable assets are as follows:
Buildings and improvements 10 - 25 years
Machinery and equipment 3 - 10 years
Furniture, fixtures and office equipment 10 years
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes."
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. The
effect on deferred taxes and liabilities of a change in tax rates is recognized
in earnings in the period that includes the enactment date. 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.
16
Espey Mfg. & Electronics Corp.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 2. Summary of Significant Accounting Policies, Continued
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks, certificates of deposit, and
money market accounts. The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents.
Short-term investments include certificates of deposit with maturities greater
than three months to a year.
Stock-Based Compensation
The intrinsic value method of accounting is used for stock-based compensation
plans. Under the intrinsic value method, compensation cost is measured as the
excess, if any, of the quoted market price of the stock at the grant date over
the amount an employee must pay to acquire the stock.
The Company has elected to account for its stock-based compensation plans under
the intrinsic value-based method of accounting as permitted by SFAS No. 123 and
as prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB No. 25, in accounting for its fixed
stock option plans. Under this method, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. In December 2002, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 148, Accounting for Stock Based Compensation. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends the
disclosure requirements of SFAS No. 123, Accounting for Stock Based
Compensation, to require more prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148, as
required.
The following table illustrates the effect on net income and net income per
share if the Company had applied the fair value recognition provisions of SFAS
no. 123, to stock-based employee compensation.
Year Ended June 30,
2004 2003 2002
-----------------------------------------
Net income
as reported $ 960,826 $ 964,700 $ 545,754
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (31,460) (36,912) (36,080)
---------- --------- ---------
Pro forma net income $ 929,366 $ 927,788 $ 509,674
========== ========= =========
Net income per share:
Basic-as reported $ .95 $ .94 $ .53
========== ========= =========
Basic-pro forma $ .92 $ .91 $ .49
========== ========= =========
Diluted-as reported $ .94 $ .94 $ .53
========== ========= =========
Diluted-pro forma $ .91 $ .91 $ .49
========== ========= =========
17
Espey Mfg. & Electronics Corp.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 2. Summary of Significant Accounting Policies, Continued
Per Share Amounts
Basic net income per share excludes dilution and is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
Common Stock were exercised or converted into Common Stock or resulted in the
issuance of Common Stock that then shared in the net income of the Company.
Comprehensive Income
Comprehensive income in 2003 and 2002 consists of net income and unrealized
gains (losses) on securities available-for-sale and is presented in the
Statement of Changes in Stockholders' Equity. In 2004, comprehensive income is
equal to net income.
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 effect 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.
Investment Tax Credits
Investment tax credits are accounted for as a reduction of income tax expense in
the year taxes payable are reduced.
Reclassifications
Certain reclassifications may have been made to the prior year financial
statements to conform to the current year presentation.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant, and equipment, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.
Concentrations of Risk
The market for our defense electronics products is largely dependent on the
availability of new contracts from the United States and foreign governments to
prime contractors to which we provide components. Any decline in expenditures by
the United States or foreign governments may have an adverse effect on our
financial performance.
Also, our international sales are denominated in United States currency.
Consequently, changes in exchange rates that strengthen the United States dollar
could increase the price in local currencies of our products in foreign markets
and make our products relatively more expensive than competitor's products.
Note 3. Contracts in Process
Contracts in process at June 30, 2004 and 2003 are as follows:
2004 2003
----------- -----------
Gross contract value $15,425,540 $21,370,490
Costs related to contracts in process,
net of progress payments of $905,646
in 2004 and $3,314,816 in 2003 $ 5,151,234 $ 7,246,158
18
Espey Mfg. & Electronics Corp.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 3. Contracts in Process, Continued
Included in costs relating to contracts in process at June 30, 2004 and 2003 are
costs of $1,237,135 and $1,460,338, 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 income
until the units under contract are shipped.
Note 4. Property, Plant and Equipment
A summary of the original cost of property, plant and equipment at June 30, 2004
and 2003 is as follows:
2004 2003
------------ ------------
Land $ 45,000 $ 45,000
Building and improvements 4,040,155 3,981,689
Machinery and equipment 7,506,843 7,273,596
Furniture, fixtures and office equipment 309,407 308,394
------------ ------------
11,901,405 11,608,679
Accumulated depreciation (8,800,880) (8,341,616)
------------ ------------
$ 3,100,516 $ 3,267,063
============ ============
Depreciation expense was $557,943, $495,670, and $513,470 during the years ended
June 30, 2004, 2003, and 2002, respectively.
Note 5. Line of credit
At June 30, 2004, the Company has an uncommitted and unused Line of Credit with
a financial institution. The agreement provides that the Company may borrow up
to $3,000,000. The line provides for interest at the borrower's choice of (I)
prime minus .75% or (II) LIBOR plus 1.80% for periods of 1, 2, or 3 months. Any
borrowing under the line of credit will be collateralized by accounts
receivable.
Note 6. Research and Development Costs
Research and development costs charged to cost of sales during the years ended
June 30, 2004, 2003 and 2002 were approximately $150,000, $100,000, and
$335,000, respectively.
Note 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 $91,265 in 2004, $93,066 in 2003, and $83,778 in
2002.
The Company sponsors a 401(k) plan with employee and employer matching
contributions. The employer match is 10% of the employee contribution and was
$31,721, $29,030, and $25,744 for fiscal years 2004, 2003 and 2002 respectively.
Note 8. Provision for Income Taxes
A summary of the components of the provision for income taxes for the years
ended June 30, 2004, 2003 and 2002 is as follows:
2004 2003 2002
-------- -------- --------
Current tax expense - federal $190,387 $252,961 $ 49,653
Current tax expense - state 15,555 11,246 1,383
Deferred tax expense 133,849 57,359 131,964
-------- -------- --------
$339,791 $321,566 $183,000
======== ======== ========
19
Mfg. & Electronics Corp.
Notes to Financial Statements
- -------------------------------------------------------------------------------------------------------
Note 8. Provision for Income Taxes, Continued
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.
The combined U.S. federal and state effective income tax rates of 26.1%, 25.0%,
and 25.1%, for 2004, 2003 and 2002 respectively, differed from the statutory
U.S. federal income tax rate for the following reasons:
2004 2003 2002
------ ------ ------
U.S. federal statutory income tax rate 34.0% 34.0% 34.0%
Increase (reduction) in rate
resulting from:
Dividends received deduction -- (1.0) (1.0)
State franchise tax, net of federal
income tax benefit 1.0 1.0 1.1
Foreign exportation benefit (7.7) (5.0) (7.3)
Other (1.2) (4.0) (1.7)
------ ------ ------
Effective tax rate 26.1% 25.0% 25.1%
====== ====== ======
For the years ended June 30, 2004 and 2003 deferred income tax expense of
$133,849 and $57,359, respectively, result from the changes in temporary
differences for each year. The tax effects of temporary differences that give
rise to deferred tax assets and deferred tax liabilities as of June 30, 2004 and
2003 are presented as follows:
2004 2003
--------- ---------
Deferred tax assets:
Common stock subscribed - due to difference
in interest recognition .......................... $ -- $ 142,159
Non-deductible accruals ............................... 108,485 105,443
Other ................................................. 15,428 16,875
--------- ---------
Total deferred tax assets ............... 123,913 264,477
--------- ---------
Deferred tax liabilities:
Property, plant and equipment - principally due
to differences in depreciation methods ........... 324,316 344,393
Inventory - effect on uniform capitalization .......... 47,037 33,675
--------- ---------
Total deferred tax liabilities .......... 371,353 378,068
--------- ---------
Net deferred tax liability ................................ $(247,440) $(113,591)
========= =========
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 in which the deferred tax assets are deductible, management believes it
is more likely than not that the Company will realize the benefits of these
temporary differences without consideration of a valuation allowance.
20
Espey Mfg. & Electronics Corp.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 9. Significant Customers
A significant portion of the Company's business is the production of military
and industrial electronic equipment for use by the U.S. and foreign governments
and certain industrial customers. Sales to two domestic customers and one
foreign customer accounted for 22%, 16%, and 18%, respectively, of total sales
in 2004. Sales to two domestic customers and one foreign customer accounted for
25%, 19%, and 12%, respectively, of total sales in 2003. Sales to two domestic
customers and one foreign customer accounted for 26%, 21%, and 14% respectively,
of total sales in 2002.
Export sales aggregated approximately $9,800,000, $7,100,000, and $6,600,000,
for the years ended June 30, 2004, 2003 and 2002, respectively.
Note 10. Stock Rights Plan
The Company has a Shareholder Rights Plan which expires on December 31, 2009.
Under this plan, 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 $50 per
share subject to adjustment. The rights are exercisable only if a person or
group acquires beneficial ownership of 15% or more of the Company's common stock
or commences 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 15% or more of the Company's common stock.
If a 15% 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 15% 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 15% 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 15% or more of the Company's common stock.
Note 11. Employee Stock Ownership Plan
In 1989, the Company established an Employee Stock Ownership Plan (ESOP) with an
effective date of July 1, 1988, for eligible non-union employees. The ESOP used
the proceeds of a loan from the Company made in June 1989 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 135,235 shares of
the Company's common stock to pay benefits to participants. At June 30, 2004 and
2003, the ESOP held a total of 240,749 and 251,574 shares, respectively, of the
Company's common stock, of which 240,749 and 230,562 shares, respectively, were
allocated to participants in the Plan.
The loan from the Company to the ESOP was repayable in annual installments of
$1,039,605 including interest, through June 30, 2004. Interest was payable at a
rate of 9% per annum. The Company's receivable from the ESOP at June 30, 2003 is
recorded as common stock subscribed in the accompanying balance sheet. The
Company Espey recognizes the principal payments of the ESOP debt, on a
straight-line basis over the term of the note, as compensation expense.
21
Espey Mfg. & Electronics Corp.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 11. Employee Stock Ownership Plan, Continued
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. For the periods ended June 30, 2004 and
2003, 21,012 shares were allocated to participants. In 2004, the Company's
required contribution of $1,039,605 was reduced by $31,518, which represents the
dividends paid on unallocated ESOP shares. The resulting payment of $1,008,087
includes $527,144 classified as compensation expense. In 2003, the Company's
required contribution of $1,039,605 was reduced by $14,708, which represents the
dividends paid on unallocated ESOP shares. The resulting payment of $1,024,897
includes $543,954 classified as compensation expense. In 2002, the Company's
required contribution of $1,039,605 was reduced by $18,911, which represents the
dividends paid on the unallocated ESOP shares. The resulting payment of
$1,020,694 includes $539,752 classified as compensation expense. All shares
purchased by the ESOP are considered to be outstanding for the income per share
computations.
Effective June 30, 2004 the loan from the Company to the ESOP was paid in full
and all shares have been allocated to participants' accounts.
Note 12. Stock Based Compensation
During fiscal 2000, the Board of Directors and shareholders approved the 2000
Stock Option Plan (the Plan). Under the Plan, incentive and non-qualified stock
options will be granted to purchase shares of common stock of the Company.
Options authorized for issuance under the Plan totaled 150,000. As of June 30,
2004, the Plan was authorized to grant options to purchase 98,400 shares of the
Company's common stock.
Options granted under the Plan have been granted with exercise prices at fair
market value at the grant date and vest over a period of two years. All options
must be exercised within 10 years from the date of grant and are exercisable
anytime after the two year vesting period.
Information concerning the plans incentive and non-qualified stock options is as
follows:
Option Option Price
Shares Per Share
------------------------------------------------------------------
June 30, 2001 24,000 $13.25 - 17.95
------------------------------------------------------------------
Options granted 13,000 19.85
Options canceled (500) $13.25 - 17.95
Options exercised (5,100) 13.25
------------------------------------------------------------------
June 30, 2002 31,400 $13.25 - 19.85
------------------------------------------------------------------
Options granted 15,100 18.50
Options canceled -- --
Options exercised (1,000) 13.25
------------------------------------------------------------------
June 30, 2003 45,500 $13.25 - 19.85
------------------------------------------------------------------
Options granted -- --
Options canceled -- --
Options exercised (8,500) $13.25 - 19.85
------------------------------------------------------------------
June 30, 2004 37,000 $13.25 - 19.85
==================================================================
22
Espey Mfg. & Electronics Corp.
Notes to Financial Statements
- -----------------------------------------------------------------------------------------------------------------
Note 12. Stock Based Compensation, Continued
The table below summarizes information with respect to stock options outstanding
as of June 30, 2004:
Remaining Exercise Price of
Exercise Options Contractual Options Exercisable
Prices Outstanding Life Exercisable Options
---------------------------------------------------------------------------------------------------
$ 13.25 1,600 6 1,600 $ 13.25
$ 17.95 8,500 7 8,500 $ 17.95
$ 19.85 11,800 8 11,800 $ 19.85
$ 18.50 15,100 9 -- --
---------------------------------------------------------------------------
Total 37,000 21,900
===========================================================================
During 2004, no stock options were granted under the plan. The weighted average
fair value of options granted under the plans during fiscal years 2003 and 2002
was $4.31, and $3.93, respectively. The assumptions used for the Black-Scholes
model are as follows:
2003 2002
------ ------
Risk-free interest rate................................. 3.5% 4.5%
Expected term........................................... 5 years 5 years
Company's expected volatility........................... 20.0% 20.0%
Dividend yield.......................................... 2.5% 2.5%
Note 13. Financial Instruments/Concentration of Credit Risk
The carrying amounts of financial instruments, including cash and cash
equivalents, short term investments, accounts receivable, accounts payable and
accrued expenses, approximated fair value as of June 30, 2004 and 2003 because
of the relatively short maturities of these instruments.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents, short term
investments and accounts receivable. The Company maintains cash and cash
equivalents with various financial institutions. At times such investments may
be in excess of FDIC insurance limits. As disclosed in Note 9, a significant
portion of the Company's business is the production of military and industrial
electronic equipment for use by the U.S. and foreign governments and certain
industrial customers. The related accounts receivable balance represented by
three customers was 29% and 57% of the Company's total trade accounts receivable
balance at June 30, 2004 and 2003, respectively.
Although the Company's exposure to credit risk associated with nonpayment of
these balances is affected by the conditions or occurrences within the U.S. and
foreign governments, the Company believes that its trade accounts receivable
credit risk exposure is limited. The Company performs ongoing credit evaluations
of its customer's 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.
Note 14. Related Parties
The Company paid a law firm in which a director of the Company is a partner, a
total of $11,524, $22,000, and $24,000 for legal services during fiscal years
ended June 30, 2004, 2003, and 2002, respectively.
23
Espey Mfg. & Electronics Corp.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 15. Commitments and Contingencies
The Company has entered into standby letters of credit agreements with financial
institutions primarily relating to the guarantee of future performance on
certain contracts. Contingent liabilities on outstanding standby letters of
credit agreements aggregated approximately $190,000 at June 30, 2004. The
Company does not expect to fund any of the amounts under the standby letters of
credit.
The Company also has an operating lease commitment for a copier machine for $500
per month which expires on June 1, 2008.
Note 16. Quarterly Financial Information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
2004
Net Sales .................... $5,095,317 $5,871,675 $6,116,221 $5,423,986
Gross profit .............. 900,172 727,876 717,562 1,369,255
Net income ................ 280,965 61,430 54,008 564,423
Net income per share -
Basic ........................ 0.28 0.06 0.05 0.56
Diluted ...................... 0.28 0.06 0.05 0.55
2003
Net Sales ..................... $4,491,359 $5,374,456 $5,707,503 $4,200,093
Gross profit (loss) ....... 789,221 (75,254) 1,223,106 1,160,788
Net income (loss) ......... 306,545 (417,334) 575,586 499,903
Net income (loss)
(per share - basic and
diluted) ..................... 0.30 (0.41) 0.56 0.49
2002
Net Sales ..................... $4,585,515 $5,199,517 $4,616,587 $4,003,594
Gross profit .............. 607,585 593,569 700,016 399,824
Net income ................ 203,691 81,999 212,644 47,420
Net income
(per share - basic and
diluted) ..................... 0.20 0.08 0.20 0.05
24
Item 9. Changes in and disagreements with accountants on accounting and
financial disclosure
None
Item 9A. Controls and Procedures
(a) The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this Annual Report on Form 10-K. Based on such
evaluation, our chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report.
(b) There have been no changes in our internal controls over financial reporting
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
Item 9B. Other information
None.
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 With Registrant Age
----- ------------------ ---------------- ---
Paul J. Corr Annual Meeting in None 60
December 2005
Director since 1992
William P. Greene Annual Meeting in None 74
December 2004
Director since 1992
Carl Helmetag Annual Meeting in None 56
December 2006
Director since 1999
Barry Pinsley Annual Meeting in Non-Executive 62
December 2005 officer
Director since 1994
Howard Pinsley Annual Meeting in President and Chief 64
December 2006 Executive Officer
Director since 1992
Alvin O. Sabo Annual Meeting in None 61
December 2006
Director since 1999
Seymour Saslow Annual Meeting in None 83
December 2004
Director since 1992
Michael W. Wool Annual Meeting in None 58
December 2005
Director since 1990
25
Identification of Executive Officers
Positions and
Offices Held Period Served As
Name With Company Executive Officer Age
---- ----------------- ----------------- ---
Howard Pinsley President and Served as Vice President- 64
Chief Executive Special Power Supplies
Officer from April 3, 1992 until
being elected as Executive
Vice President on December
6, 1997. Elected to present
office on December 10, 1998
John J. Pompay, Jr. Vice President- Since December 6, 1996 69
Marketing and Sales Retired April 5, 2004
David A. O'Neil Treasurer & Principal Since January 4, 2000. 39
Financial Officer Controller and Assistant
Treasurer from December 11,
1998 to January 3, 2000
Peggy A. Murphy Secretary Since December 11, 1998 46
Garry M. Jones Assistant Treasurer Since August 4, 1988. 64
& Principal Accounting Principal Financial
Officer Officer from August 4, 1988
to September 10, 1993
Timothy A. Polidore Assistant Treasurer Since December 8, 2000 44
The terms of office of Mrs. Peggy A. Murphy, Mr. David A. O'Neil, Mr. Timothy A.
Polidore, and Mr. Garry M. Jones are until the next annual meeting of the Board
of Directors unless successors are sooner appointed by the Board of Directors.
The terms of office of Mr. Howard Pinsley and Mr. John Pompay are subject to the
agreements between them and the Company. See "Employment Contracts and
Termination of Employment."
Family Relationships
Barry Pinsley and Howard Pinsley are cousins.
Business Experience of Directors and Officers
Paul J. Corr is a Certified Public Accountant licensed by the State of [New
York], and has been a Professor of Business at Skidmore College in Saratoga
Springs, NY since 1981. Mr. Corr currently holds the position of Associate
Professor. Mr. Corr is also a shareholder in the Latham, New York accounting
firm of Rutnik, Matt & Corr, P.C.
William P. Greene, D.B.A. was vice president of operations for the Company until
December 31, 2000 when he retired. Prior to joining the Company's management
team he was Vice President of Finance for ComCierge, LLC, San Diego, CA since
August 1997. Prior to that position, Dr. Greene held the position of Vice
President Operations for Bulk Materials International, Newtown, CT from 1993 to
July 1997. From 1991 to 1993, Dr. Greene was Associate Professor of Finance and
International Business at Pennsylvania State University Kutztown, PA. From 1985
to 1990, he was Associate Dean of the School of Business, United States
International University, San Diego, CA. From 1992 to 1995, he was Chairman of
the Department of Business, Skidmore College, Saratoga Springs, NY.
Barry Pinsley is a Certified Public Accountant who for more than five years
acted as a consultant to the Company prior to his election as Vice
President-Special Projects on March 25, 1994. On December 6, 1997, Mr. Pinsley
was elected to the position of Vice President-Investor Relations and Human
Resources, from which he resigned on June 9, 1998. 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 first as a Program Director prior to being elected
Vice President-Special Power Supplies on April 3, 1992. On December 6, 1996, Mr.
Pinsley was elected to the position of Executive Vice President. On June 9, 1998
he was elected to the positions of President and Chief Operating Officer. On
December 10, 1998 he became the President and Chief Executive Officer.
26
Seymour Saslow had been Senior Vice President of the Company since December 6,
1996. Prior to being elected to Senior Vice President, Mr. Saslow served as Vice
President-Engineering since April 3, 1992. Mr. Saslow resigned as an executive
officer effective December 31, 1999.
Michael W. Wool is an attorney engaged in the private practice of law and as a
senior partner since 1982 in the law firm of Langrock, Sperry & Wool with
offices in Burlington and Middlebury, Vermont.
Alvin O. Sabo is an attorney engaged in private practice of law and Senior
Partner of the law firm of Donohue, Sabo, Varley & Armstrong, P.C. in Albany, NY
since 1980. Prior to that position, he was Assistant Attorney General, State of
New York, Department of Law for eleven years.
Carl Helmetag is currently President and CEO of UVEX Inc. in Providence, RI.
From 1996 to 1999, he was President and CEO of Head USA Inc. Prior to that
position, Mr. Helmetag was Executive Vice President, and then President at
Dynastar Inc. from 1978 to 1996. He is an MBA graduate from the Wharton School
of Business, University of Pennsylvania.
Peggy Murphy is Secretary of the Company since December 11, 1998. She has been
employed by the Company since 1978 and has served as Director of Human Resources
since October 1998.
David A. O'Neil is currently the Treasurer and Principal Financial Officer of
the Company. Mr. O'Neil is a Certified Public Accountant who joined the Company
as Controller and Assistant Treasurer on November 6, 1998. Prior to joining the
Company, Mr. O'Neil was a Senior Manager at the accounting firm of KPMG LLP.
John J. Pompay, Jr. for more than the past five years has been employed by the
Company on a full-time basis as Vice President-Marketing and Sales since
December 6, 1996. Effective April 5, 2004, Mr. Pompay retired as an executive
officer.
Timothy A. Polidore was the Assistant Treasurer of the Company. Mr. Polidore
joined the Company on May 17, 1999. Prior to joining the Company he was
Accounting Manager for Brinks, Inc. Effective August 6, 2004 Mr. Polidore
resigned.
Garry M. Jones for more than the past five years has been employed by the
Company on a full-time basis since 1970, and has served as Assistant Treasurer
and Principal Accounting Officer since August 4, 1988.
Directorships
Howard Pinsley serves as a director of All American Semiconductor Inc.
None of the other 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 legal proceedings specified under Item 401(f) of
Regulation S-K.
Procedures For Shareholders to Nominate Directors
The information regarding this item is included under "Procedures For
Shareholders to Nominate Directors" in our Proxy Statement for our 2004 annual
meeting of shareholders.
Compliance with Section 16(a) of the Securities Exchange Act
The information regarding this item is included under "Compliance with Section
16(a) of the Securities Exchange Act" in our Proxy Statement for our 2004 annual
meeting of shareholders.
Code of Ethics
The Company has adopted a Code of Ethics which is available on our website at
www.espey.com.
- -------------
27
Item 11. Executive Compensation
The following table summarizes the annual compensation for each of the fiscal
years ended June 30, 2004, 2003, and 2002 received by the Company's Chief
Executive Officer and the other highest paid executive officers of the Company
that received over $100,000 in total compensation as of June 30, 2004.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
------------
Securities
Name and Fiscal Annual Underlying All Other
Principal Position Year Salary Bonus Options(#) Compensation(1)
- ------------------ ------ ------ ------ ------------ ---------------
Howard Pinsley 2004 $190,120 $20,000 0 $ 34,826
President and 2003 $180,404 $12,500 2,000 $ 19,109
Chief Executive Officer 2002 $173,120 $25,000 2,000 $ 11,841
John J. Pompay, Jr.(2) 2004 $165,622 $25,000 0 $ 34,733
Vice President-Sales 2003 $160,554 $25,000 800 $ 19,244
2002 $154,340 $25,000 800 $ 12,134
David A. O'Neil 2004 $112,250 $12,500 0 $ 13,101
Treasurer and Principal 2003 $105,490 $10,000 800 $ 10,738
Financial Officer 2002 $ 99,950 $12,500 800 $ 9,899
(1) Represents (a) the cash and market value of the shares allocated for the
respective fiscal years under the Company's ESOP to the extent to which
each named executive officer is vested, and the Company's matching
contribution under the 401K plan.
(2) Mr. Pompay retired, effective April 5, 2004, as an executive officer.
OPTION GRANTS IN LAST FISCAL YEAR
There were no options granted during the year ended June 30, 2004.
The following table sets forth information concerning unexercised options held
on June 30, 2004 by the named executive officers:
AGGREGATED OPTIONS AT FISCAL YEAR-END AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired Options at Options at
On Value Fiscal Year-End (#) Fiscal Year-End ($)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ------------- --------- --------- ------------------------- --------------------------
Howard Pinsley 0 0 4,000/2,000 15,800/8,700
John J. Pompay Jr.* 0 0 800/800 2,400/3,480
David A. O'Neil 0 0 800/800 2,400/3,480
In accordance with the 2000 Stock Option Plan the above options have exercise
dates that range from March 1, 2002 through and expiring on March 1, 2013.
*Mr. Pompay retired, effective April 5, 2004, as an executive officer.
Insurance
The executive officers and directors of the Company can elect to be covered
under the Company sponsored health plans which do not discriminate in favor of
the officers or directors of the Company and which are available generally to
all employees. In addition, the executive officers are covered under a group
life plan, which does not discriminate, and is available to all 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
28
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 any actions.
Employee Retirement Plan and Trust
Under the Company's 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 and non-executive officers 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. Certain technical amendments not considered
material were adopted effective as of June 30, 1994 and July 1, 2002.
Of the 240,749 shares of common stock of the Company allocated to participants
of the ESOP as of June 30, 2004, 11,161 shares were allocated to John J. Pompay
Jr., 10,712 shares were allocated to Howard Pinsley, 2,382 shares were allocated
to David A. O'Neil and 3,369 shares were allocated to Barry Pinsley.
Compensation of Directors
The Company's standard arrangement compensates each director of the Company an
annual fee in the amount of $15,000 for being a member of the Board of
Directors. Each Director that also serves as a member of the Audit Committee is
compensated an additional annual fee of $5,000. Each director that serves as a
member of the Succession Committee or the Mergers and Acquisition Committee is
compensated an additional $2,500 for each committee. These fees are paid monthly
to the Directors. Executive officers that also serve on the Company's Board of
Directors do not receive director's fees.
Directors are also eligible to receive stock options under the 2000 Stock Option
Plan at the discretion of the stock option committee. The stock option committee
consists of three appointed board members. For the year ended June 30, 2004 the
following options remain granted and unexercised by the Board of Directors in
accordance with this Plan.
Name Number of Options Exercise Price Range
- ---- ----------------- --------------------
Seymour Saslow 1,500 $17.95 - 19.85
Barry Pinsley 1,500 13.25 - 19.85
Michael W. Wool 1,500 17.95 - 19.85
William P. Greene 900 17.95 - 19.85
Paul J. Corr 1,600 13.25 - 19.85
Alvin O. Sabo 1,400 13.25 - 19.85
Carl Helmetag 800 13.25 - 19.85
Howard Pinsley 6,000 17.95 - 19.85
The above options have exercise dates ranging from March 1, 2002 and expiring on
March 1, 2013.
Employment Contracts and Termination of Employment
The Company has an employment contract with John J. Pompay Jr. in connection
with his duties as Vice President-Marketing and Sales. The contract was
effective as of January 1, 2003, and allowed, on April 5, 2004, Mr. Pompay to
voluntarily resign as Vice President of Marketing and Sales and accept an option
under the contract as a non-executive officer in which he will receive full
benefits plus full compensation for 13 weeks and then for the next 143 weeks
receive $1,000 per week for services to be rendered. This contract expires on
April 5, 2007.
The Company entered into an agreement with Howard Pinsley, President and CEO
effective July 1, 2002. The contract allows Mr. Pinsley upon his resignation or
termination to become a non-executive officer of the Company for a period of
thirty-six months. In consideration for services to be provided by Mr. Pinsley
for the equivalent of two days a month after his resignation or termination, and
to perform duties as reasonably requested by the Company, he will receive full
benefits plus, $15,000 per month for the first three months, and $4,333 per
month for the next thirty-three consecutive months. This agreement expires on
December 31, 2005.
29
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
The following information is furnished as of September 14, 2004 (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 Name and Address Beneficial Percent of
Class of Beneficial Owner Ownership Class
- ----- ------------------- --------- -----
Common Stock Franklin Advisory 78,000 - Direct (1) 7.70%
Services, LLC
777 Mariners Island Blvd
P.O. Box 7777
San Mateo, CA 94403-7777
" The Adirondack Trust 236,735 - Direct (2) 23.42%
Company, as Trustee of
the Company's Employee
Retirement Plan and Trust
473 Broadway
Saratoga Springs, NY 12866
" Advisory Research, Inc. 70,700 - Direct (3) 7.00%
180 North Stetson St.
Suite 5780
Chicago, IL 60601
" Howard Pinsley 46,634 - Direct (4) 5.65%
233 Ballston Avenue 10,712 - Indirect (4)
Saratoga Springs, NY 12866
(1) The information as to the number of shares of common stock and the percent
of class ownership of the Company that may be deemed beneficially owned by
Franklin Advisory Services, LLC ("Franklin") is from the Schedule 13G,
dated February 4, 2004 filed with the SEC. The Franklin statement indicated
that Franklin's investment "advisory subsidiaries," have sole voting and
dispositive power with respect to all of the shares of common stock shown
in the table above for Franklin. The Franklin statement indicates that the
common stock set forth in the table is beneficially owned by one or more
open or closed-end investment companies or other managed accounts which are
advised by direct and indirect Franklin investment advisory subsidiaries.
The statement also indicated that it filed the Schedule 13G on behalf of
itself and Franklin's principal shareholders, Charles B. Johnson and Rupert
H. Johnson, Jr. (the "Principal Shareholders"), all of which are deemed
beneficial owners of the shares of common stock shown in the above table
for Franklin. Franklin and the Principal Shareholders disclaim any economic
interest or beneficial ownership in any of the common stock shown in the
table for Franklin.
(2) The information as to the number of shares of common stock of the Company
that may be deemed beneficially owned by The Adirondack Trust is from the
Form 4 dated August 26, 2004 filed with the SEC by the Trustee on behalf of
the Company's ESOP. The ESOP Trustee has sole voting power with respect to
unallocated common shares owned by the Trust, as directed by the ESOP
Committee appointed by the Company's Board of Directors. As to the common
shares allocated to participants, 236,735 shares as of August 26, 2004, the
ESOP Trustee has the power to vote such shares as directed by such ESOP
Committee to the extent the participants do not direct the manner in which
such shares are to be voted.
(3) The information as to the number of shares of common stock and the percent
of class ownership of the Company that may be deemed beneficially owned by
advisory clients of Advisory Research, Inc. ("Advisory") is from the
Schedule 13G dated February 12, 2004 filed with the Securities and Exchange
Commission (the "SEC"). Advisory, a registered investment advisor, is
deemed to have beneficial ownership of 70,700 shares of Espey Mfg. &
Electronics Corp. stock as of February 12, 2004, all of which shares are
held in Advisory investment companies, trusts and accounts. Advisory, in
its role as investment advisor and/or manager, reported sole voting power
with respect to 70,700 shares.
30
(4) This information is from Form 4 dated July 29, 2004. Indirect shares
represent stock being held in the Company ESOP. Direct shares include
options to acquire shares which are exercisable within 60 days.
Security Ownership
The following information is furnished as of September 14, 2004 (unless
otherwise indicated), as to each class of equity securities of the Company
beneficially owned by all Directors and Executive Officers and by Directors and
Executive Officers of the Company as a Group:
Amount and
Nature of
Title Name of Beneficial Percent of
Class Beneficial Owner Ownership Class
- ----- ------------------- ------------- ----------
Common Stock
Paul J. Corr 2,000 - Direct (1) *
" William P. Greene 700 - Direct (1) *
" Carl Helmetag 3,400 - Direct (1) *
500 - Indirect (2)
" Garry M. Jones 400 - Direct (1)
4,923 - Indirect (3) *
" Peggy Murphy 600 - Direct (1)
3,644 - Indirect (3) *
" David A. O'Neil 3,200 - Direct (1) *
2,382 - Indirect (3)
" Barry Pinsley 34,830 - Direct (1) 3.78%
3,370 - Indirect (3,4)
" Howard Pinsley 46,634 - Direct (1) 5.65%
10,712 - Indirect (3)
" Alvin O. Sabo 1,100 - Direct (1) *
" Seymour Saslow 8,559 - Direct (1) *
" Michael W. Wool 1,100 - Direct (1) *
" Officers and Directors 102,523 - Direct (1) 10.14%
as a Group (13 persons) 26,614 - Indirect (2,3,4)
* Less than one percent
(1) Direct shares include options to acquire shares which are exercisable
within 60 days as follows:
Name of Exercisable Name of Exercisable
Beneficial Owner Options Beneficial Owner Options
----------------- ------------ ----------------- ------------
Paul J. Corr 1,000 William P. Greene 600
Carl Helmetag 400 Garry M. Jones 400
Peggy Murphy 600 David A. O'Neil 800
Barry Pinsley 1,000 Howard Pinsley 4,000
Alvin O. Sabo 900 Seymour Saslow 1,000
Michael W. Wool 1,000
(2) Includes 500 shares owned by the trust of Molly K. Helmetag. As trustee of
the trust, Mr. Helmetag is deemed beneficial owner, as defined in rule
13d-3, of the shares held by the trust. Excludes 806 shares owned by the
spouse of Mr. Helmetag. Beneficial ownership is disclaimed by Mr. Helmetag.
(3) Includes shares allocated to named director or officer as of June 30, 2004
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.
31
(4) Excludes 2,000 shares owned by the spouse of Barry Pinsley. Beneficial
ownership of the shares is disclaimed by Mr. Pinsley.
There are no arrangements known to the Company, the execution of which may at a
subsequent date, result in change of control of the Company.
During fiscal 2000, the Board of Directors and shareholders approved the 2000
Stock Option Plan (the Plan). Under the Plan, incentive and non-qualified stock
options will be granted to purchase shares of common stock of the Company. As of
June 30, 2004, the Plan was authorized to grant options to purchase 98,700
shares of the Company's common stock with a maximum grant of 15,000 options in
any one year.
The Stock Option Committee of the Board of Directors administers the 2000 Plan.
The Committee may designate, from time to time, the individuals to whom awards
are made under the 2000 Plan, the amount of any such award and the price and
other terms and conditions of any such award. The Committee has the full and
exclusive power to interpret the 2000 Plan and may, subject to the provisions of
the 2000 Plan, establish the rules for its operation.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of Securities
remaining available
Number of securities for future issuance
to be issued upon Weighted-average under equity
exercise of exercise price of compensation plan
outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
- ----------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 37,000 18.58 98,400
Equity compensation
plans not approved
by security holders -- -- --
------ ------
Total 37,000 98,400
- ----------------------------------------------------------------------------------------------------------------
Item 13 Certain Relationships and Related Transactions
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, 2004, there were 240,749 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.
Effective June 30, 2004 the loan was paid in full and all shares were allocated
to participants. Officers of the Company, (including Howard Pinsley) who is also
a director, 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 $11,524 for legal
services during the fiscal year ended June 30, 2004.
Item 14 Principal Accountant Fees and Services
The information required by this item is included in "Audit Fees" in our Proxy
Statement for our 2004 annual meeting of shareholders.
32
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
Included in Part II, Item 8, of this report:
Report of Independent Registered Public Accounting Firm
2004
Report of Independent Registered Public Accounting Firm
2003
Balance Sheets at June 30, 2004 and 2003
Statements of Income for the years ended June 30, 2004, 2003
and 2002
Statements of Changes in Stockholders' Equity for the years
ended June 30, 2004, 2003 and 2002
Statements of Cash Flows for the years ended June 30, 2004,
2003 and 2002
Notes to Financial Statements
2. Financial Statement Schedules
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
3.1 Certificate of incorporation and all amendments
thereto(filed herewith)
3.2 By-laws incorporated by reference to Exhibit 3.2 to
Espey's March 31, 2004 Form 10-Q
4.1 Amended and Restated Rights Agreement, dated March 31,
1989, as amended February 12, 1999 and December 31,
1999, between Espey Mfg. & Electronics Corp. and
Registrar and Transfer Company incorporated by
reference to Espey's Form 8-K dated December 20, 1999
10.1 2000 Stock Option Plan incorporated by reference to
Espey's Definitive Proxy Statement dated December 6,
1999 for the January 4, 2000 annual meeting
11.1 Statement re: Computation of Per Share Net income
(filed herewith)
14.1 Code of ethics incorporated by reference to Espey's
website www.espey.com
-------------
31.1 Certification of the Chief Executive Officer pursuant
to Rules 13a-14(a) and 15d-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certification of the Principal Financial Officer
pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
32.1 Certification of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
32.2 Certification of the Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
33
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/ Howard Pinsley
----------------------------------
Howard Pinsley
President and
Chief Executive Officer
/s/ Howard Pinsley President
- --------------------------- (Chief Executive Officer)
Howard Pinsley September 14, 2004
/s/ David A. O'Neil Treasurer
- --------------------------- (Principal Financial Officer)
David A. O'Neil September 14, 2004
/s/ Garry M. Jones Assistant Treasurer
- --------------------------- (Principal Accounting Officer)
Garry M. Jones September 14, 2004
/s/ Barry Pinsley Director
- --------------------------- September 14, 2004
Barry Pinsley
/s/ Seymour Saslow Director
- --------------------------- September 14, 2004
Seymour Saslow
/s/ William P. Greene Director
- --------------------------- September 14, 2004
William P. Greene
/s/ Michael W. Wool Director
- --------------------------- September 14, 2004
Michael W. Wool
/s/ Paul J. Corr Director
- --------------------------- September 14, 2004
Paul J. Corr
/s/ Alvin O. Sabo Director
- --------------------------- September 14, 2004
Alvin O. Sabo
/s/ Carl Helmetag Director
- --------------------------- September 14, 2004
Carl Helmetag
34