SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended September 30, 2004 Commission File No 0-2892 THE DEWEY ELECTRONICS CORPORATION A New York Corporation I.R.S. Employer Identification No. 13-1803974 27 Muller Road Oakland, New Jersey 07436 (201) 337-4700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X. The number of shares outstanding of the registrant's common stock, $.01 par value was 1,359,531 at November 5, 2004. THE DEWEY ELECTRONICS CORPORATION INDEX Page No. Part I Financial Information Item 1. Consolidated Financial Statements 3 Balance Sheets - September 30, 2004 and June 30, 2004 4 Statements of Operations - Three Months Ended September 30, 2004 and September 30, 2003 5 Statements of Cash Flows for the Three Months Ended September 30, 2004 and September 30, 2003 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 4. Controls and Procedures 20 Part II Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits 21 PART I: FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS The following unaudited, consolidated balance sheets, statements of operations, and statements of cash flows are of The Dewey Electronics Corporation. These consolidated financial statements reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods reflected herein. The results reflected in the unaudited statements of operations for the period ended September 30, 2004 are not necessarily indicative of the results to be expected for the entire year. The following unaudited consolidated financial statements should be read in conjunction with the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 of Part I of this report, as well as the audited consolidated financial statements and related notes thereto contained in the Form 10-K filed for the fiscal year ended June 30, 2004. THE DEWEY ELECTRONICS CORPORATION BALANCE SHEETS SEPTEMBER 30, JUNE 30, 2004 2004 (UNAUDITED) ASSETS: CURRENT ASSETS: CASH AND CASH EQUIVALENTS $1,410,426 $1,604,475 ACCOUNTS RECEIVABLE, NET 684,501 810,051 INVENTORIES 1,276,280 925,501 CONTRACT COSTS AND RELATED ESTIMATED PROFITS IN EXCESS OF BILLINGS 1,083,405 965,606 DEFERRED TAX ASSET 24,743 24,743 PREPAID EXPENSES AND OTHER CURRENT ASSETS 121,345 122,182 TOTAL CURRENT ASSETS 4,600,700 4,452,558 PLANT, PROPERTY AND EQUIPMENT - NET 556,475 575,455 CAPITALIZED DEVELOPMENT COSTS 912,795 904,566 DEFERRED LOAN FEES 24,694 43,215 LAND AND RELATED COSTS HELD FOR SALE 513,506 506,345 TOTAL OTHER ASSETS 1,450,995 1,454,126 TOTAL ASSETS 6,608,170 6,482,139 LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: TRADE ACCOUNTS PAYABLE $ 332,827 $255,029 ACCRUED EXPENSES AND OTHER LIABILITIES 242,200 251,921 ACCRUED CORPORATE INCOME TAXES 65,965 32,384 ACCRUED PENSION COSTS 8,818 8,818 MORTGAGE NOTE PAYABLE 312,500 327,735 DUE TO RELATED PARTY 200,000 200,000 TOTAL CURRENT LIABILITIES 1,162,310 1,075,887 LONG-TERM PENSION LIABILITY 232,363 247,363 STOCKHOLDERS' EQUITY: COMMON STOCK, par value $.01; authorized 3,000,000 shares; issued and outstanding 1,693,397 shares 16,934 16,934 PAID-IN CAPITAL 2,817,474 2,817,474 ACCUMULATED EARNINGS 3,034,804 2,980,196 ACCUMULATED OTHER COMPREHENSIVE LOSS (165,013) (165,013) 5,704,199 5,649,591 LESS: TREASURY STOCK 333,866 SHARES AT COST (490,702) (490,702) TOTAL STOCKHOLDERS' EQUITY 5,213,497 5,158,889 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,608,170 $6,482,139 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE DEWEY ELECTRONICS CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 2004 2003 REVENUES $1,285,075 $1,186,774 COST OF REVENUES 889,085 912,566 GROSS PROFIT 395,990 274,208 SELLING & ADMIN. EXPENSES 297,891 252,393 OPERATING INCOME 98,099 21,815 INTEREST EXPENSE 9,376 12,401 OTHER INCOME - NET (2,291) (3,136) INCOME BEFORE INCOME TAXES 91,014 12,550 INCOME TAX EXPENSE (36,406) (5,020) NET INCOME $54,608 $7,530 ========= ========= NET INCOME PER SHARE: BASIC $0.04 $0.01 DILUTED $0.04 $0.01 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC 1,359,531 1,359,531 DILUTED 1,402,031 1,402,031 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE DEWEY ELECTRONICS CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES NET INCOME $ 54,608 $ 7,530 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES: DEPRECIATION 26,850 18,570 AMORTIZATION OF LOAN FEES 18,521 2,475 DECREASE IN ACCOUNTS RECEIVABLE 125,550 555,733 INCREASE IN INVENTORIES (350,779) (543,627) (INCREASE)/DECREASE IN CONTRACT COSTS AND RELATED ESTIMATED PROFITS IN EXCESS OF APPLICABLE BILLINGS (117,799) 104,524 DECREASE/(INCREASE) IN PREPAID EXPENSES AND OTHER CURRENT ASSETS 837 (2,178) INCREASE/(DECREASE) IN ACCOUNTS PAYABLE 77,798 (137,512) DECREASE IN ACCRUED LIABILITIES (9,721) (40,392) INCREASE IN ACCRUED CORPORATE INCOME TAXES 33,581 4,696 DECREASE IN ACCRUED PENSION COSTS (15,000) 15,000 TOTAL ADJUSTMENTS (210,162) (22,711) NET CASH USED IN OPERATING ACTIVITIES (155,554) (15,181) CASH FLOWS FROM INVESTING ACTIVITIES: EXPENDITURES FOR PLANT, PROPERTY AND EQUIPMENT (7,870) (37,868) EXPENDITURES FOR CAPITALIZED DEVELOPMENT COSTS (8,229) (43,187) COSTS CAPITALIZED WITH LAND HELD FOR SALE (7,161) -- NET CASH USED IN INVESTING ACTIVITIES (23,260) (81,055) CASH FLOWS FROM FINANCING ACTIVITIES: PRINCIPAL PAYMENTS OF LONG TERM DEBT (15,235) (15,234) NET CASH USED IN FINANCING ACTIVITIES (15,235) (15,234) NET DECREASE IN CASH AND CASH EQUIVALENTS (194,049) (111,470) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,604,475 1,989,703 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,410,426 $1,878,233 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: INTEREST PAID $9,455 $12,478 INTEREST RECEIVED $1,885 $1,969 CORPORATE INCOME TAXES PAID $2,825 $325 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE DEWEY ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company applies Accounting Principles Board (APB) Opinion 25 and related interpretations in accounting for its Stock Option Plans. The compensation cost for the stock-based employee compensation plan is recognized using the intrinsic value method. The following table illustrates the effect on net income and net income per share if the Company had applied the fair value method to recognize stock-based employee compensation. 3 Months Ended September 30 2004 2003 Net income, as reported $54,608 $7,530 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax Effects 4,935 3,589 Pro forma net income $49,673 $3,941 Earnings per share: Basic - as reported $.04 $.01 Basic - pro forma $.04 $.00 Diluted - as reported $.04 $.01 Diluted - pro forma $.04 $.00 NOTE 2: REVENUE RECOGNITION Revenues and estimated earnings under defense contracts (including research and development contracts) are recorded using the percentage- of-completion method of accounting, measured as the percentage of costs incurred to estimated total costs for each contract. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Since substantially all of the Company's electronics business comes from contracts with various agencies of the United States Government or subcontracts with prime Government contractors, the loss of Government business would have a material adverse effect on this segment of business. In the Leisure and Recreation segment, revenues and earnings are recorded when deliveries are made and title and risk of loss have been transferred to the customer and collection is probable. THE DEWEY ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 NOTE 3: CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments with a maturity of three months or less at the date of purchase to be cash equivalents. NOTE 4: FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of the Company's long-term debt and line of credit borrowings are estimated based upon interest rates currently available for borrowings with similar terms and maturities and approximate the carrying values. Due to the short-term nature of cash, accounts receivable, accounts payable, accrued expenses and other current liabilities, their carrying value is a reasonable estimate of fair value. NOTE 5: INVENTORIES Inventories are valued at lower of cost (first-in, first-out method) or market. Components of cost include materials, direct labor and plant overhead. As there is no segregation of inventories as to raw materials, work in progress and finished goods for interim reporting periods (this information is available at year end when physical inventories are taken and recorded), estimates have been made for the interim period. These estimates are made following a physical review of existing materials at various stages including specific identification of major cost elements. This process of estimating inventory at various stages of production is consistent with prior periods. FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 September 30, 2004 June 30, 2004 Finished Goods $ 252,144 $223,969 Work In Progress 602,423 300,474 Raw Materials 421,713 401,058 Total $1,276,280 $925,501 ========== ========= NOTE 6: USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. THE DEWEY ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7: PLANT, PROPERTY AND EQUIPMENT Plant, property and equipment are stated at cost. Allowance for depreciation is provided on a straight-line basis over estimated useful lives of three to ten years for machinery and equipment, ten years for furniture and fixtures, and twenty years for building and improvements. NOTE 8: CAPITALIZED DEVELOPMENT COSTS Capitalized costs are for costs for efforts to improve and enhance the 2kW generator set product line and involve, primarily, the adaptation of existing technology, as well as, engineering and design to meet specific customer requests. The scope of these efforts includes the development of a product which is in accordance with current customer requests and future requirements. Company efforts are to address areas of sound reduction, reduced weight and environmental requirements. NOTE 9: LOAN FEES Loan fees are capitalized by the Company and amortized utilizing the straight-line method over the term of the loan. NOTE 10: INCOME TAXES The income tax expense for the three month period ended September 30, 2004 and 2003 was at an effective tax rate of 40%. NOTE 11: IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews the recoverability of all long-term assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset might not be recoverable. If required, the Company compares the estimated undiscounted future net cash flows to the related asset's carrying value to determine whether there has been an impairment. If an asset is considered impaired, the asset is written down to fair value, which is based either on discounted cash flows or appraised values in the period the impairment becomes known. Management believes that, as of September 30, 2004, the carrying value of such assets are not impaired. THE DEWEY ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 NOTE 12: INCOME PER SHARE Basic net income per share is computed by dividing reported net income available to common shareholders by the weighted average shares outstanding for the period. Diluted net income per share is computed by dividing reported net income available to common shareholders by the weighted average shares outstanding for the period, adjusted for the dilutive effect of common stock equivalents, which consist of stock options, using the treasury stock method. The table below sets forth the reconciliation of the numerators and denominators of the basic and diluted net income per common share computations. Three Months Ended September 30, 2004 2003 Per Per Income Shares Share Income Shares Share Amount Amount Basic Net income per common share $54,608 1,359,531 $.04 $7,530 1,359,531 $.01 Effect Of dilutive Securities - 42,500 -- -- 42,500 -- Diluted Net income per common share $54,608 1,402,031 $.04 $7,530 1,402,031 $.01 THE DEWEY ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 NOTE 13: SEGMENT INFORMATION Information about the Company's operations in its two segments for the three month period ended September 30, 2004 and 2003 are as follows: Three months ended September 30, 2004 2003 Electronics Segment Revenues $1,246,129 $1,176,826 Operating Income 112,539 50,634 LEISURE AND RECREATION SEGMENT Revenues 38,946 9,948 Operating (Loss) (14,440) (28,819) Total Revenues 1,285,075 1,186,774 Operating Income 98,099 21,815 Interest Expense (9,376) (12,401) Other Income 2,291 3,136 Income Tax Expense (36,406) (5,020) Net Income $ 54,608 $ 7,530 NOTE 14: PENSION PLAN Three months ended September 30 2004 2003 Service cost $7,067 $7,108 Interest cost 15,708 14,690 Expected return on plan assets (13,550) (11,956) Amortization of prior service cost -- -- Amortization of net (gain) loss 4,786 5,848 Net periodic benefit cost $14,011 $15,690 Employer Contributions The Company previously disclosed in its financial statements for the year ended June 30, 2004, that it expects to continue to contribute within the range of legally acceptable contributions as identified by the Plan's enrolled actuary. As of September 30, 2004, $30,000 of contributions have been made. The Company presently expects to continue to contribute within the range of legally acceptable contributions as identified by the Plan's enrolled actuary. THE DEWEY ELECTRONICS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q, and with the audited consolidated financial statements, including the notes thereto, appearing in the Company's Form 10-K for the fiscal year ended June 30, 2004. Certain statements in this report may be deemed "forward- looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, that address activities, events or developments that the Company or management intends, expects, projects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by management of the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. The forward-looking statements included in this report are also subject to a number of material risks and uncertainties, including but not limited to economic, governmental, competitive and technological factors affecting the Company's operations, markets, products, services and prices and, specifically, the factors discussed below under "Government Defense Business" and "Company Strategy". Such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ from those envisaged by such forward- looking statements. Operating Segments The Company is organized into two operating segments on the basis of the types of products offered. Each segment is comprised of separate and distinct businesses: the electronics segment - primarily business with the Department of Defense, and the leisure and recreation segment - primarily business with ski areas and resorts. In the electronics segment, the Company is a producer of electronic and electromechanical systems for the Armed Forces of the United States. The Company provides its products in this segment either as a prime contractor or as a subcontractor for the Department of Defense. The electronics segment is comprised primarily of the 2kW generator product line, two research and development contracts, and other various orders, more limited in scope and duration. The 2kW generator product line is provided to the various branches of the Armed Forces of the United States. Production is for a long-term contract as well as short-term orders for limited quantities. The Company also provides speed and measurement instrumentation primarily for the U.S. Navy and other prime contractors such as shipbuilders. Orders are also received for replacement parts and equipment for previous Company contracts with the Department of Defense as well as other projects performed as a sub-contractor. In past years, the Company had various long-term contracts to provide the U.S. Navy with equipment. Under the 2kW diesel operated tactical generator set contract, the Company has been the sole source producer for the Department of Defense since 1997. The original contract was awarded in 1996 and final deliveries were made under that award in March 2002. Deliveries were made to the various branches of the Armed Forces of the United States. A new contract was awarded in September 2001, to provide the U.S. Army and other Department of Defense Agencies with this same 2kW diesel operated generator set. This new contract is a ten-year indefinite delivery, indefinite quantity contract which replaces the initial contract awarded in 1996. The total amount of orders under the September 2001 contract placed through September 30, 2004 amount to approximately $12 million. As with the prior contract, this contract allows for the Army to place annual production orders and to place additional interim orders. However, no assurances can be made that further orders will be placed or, if they are placed, the timing and amount of such orders. In the leisure and recreation segment, the Company, through its HEDCO Division, designs, manufactures and markets advanced, sophisticated snowmaking equipment. It also supplies replacement parts for items no longer covered under warranty. There are no intersegment sales. Some operating expenses, including general corporate expenses, have been allocated to each segment by specific identification or based on labor for items which are not specifically identifiable. Results of Operations The Company's operating cycle is long-term and includes various types of products and varying delivery schedules. Accordingly, results of a particular period or period-to-period comparison of recorded revenues and earnings may not be indicative of future operating results. The following comparative analysis should be viewed in this context. Consolidated Summary For the three-month period ended September 30, 2004, consolidated revenues were $1,285,075 and operations resulted in a profit of $98,099. During the same period last year, consolidated revenues were $1,186,774 and operating income was $21,815. Revenues for the three-month period this year were higher compared to the same three-month period last year. This is attributable to both segments and is discussed further below in the results of operations by business segment. Also, information about the Company's operations in its two segments for the three month period this year and last year can be found in Note 14 of the Notes to Consolidated Financial Statements. Electronics Segment In the electronics segment, revenues are recorded under defense contracts using the percentage of completion method of accounting. Revenues are recorded as work is performed based on the percentage that actual incurred costs bear in comparison to estimated total costs utilizing the most recent estimates of costs and funding. Since contracts typically extend over multiple reporting periods, revisions in costs and estimates during the progress of work have the effect of adjusting earnings applicable to performance in prior periods in the current period. When the estimated costs to complete a project indicate a loss, provision is made for the anticipated loss in the current period. For further information see Note 2 and Note 6 of the Notes to Consolidated Financial Statements. For the three-month period ended September 30, 2004, revenues in the electronics segment were $69,303 higher than the same three-month period last year. This is partly the result of increased revenues from various orders which are generally for replacement parts. This increase in various orders includes increased orders received for 2kW generator sets not part of the Company's contract with the U.S. Army. They have been received mostly from other companies which are incorporating the 2kW generator sets into the product which they are supplying to the U.S. Government. The government sector has also begun to order small quantities of 2kW generator sets for a specific user, independent of the Company's contract. In addition, the Company's efforts towards the research and development contract awarded to the Company in September 2003 (the "2003 R&D Contract") have generated revenues not present during this time period last year. The production of 2kW generator sets under the Company's contract with the Army has contributed less revenues during this period when compared to last year. The 2003 R&D Contract is for work being performed towards the improvement to the current 2kW diesel operated generator set specifically at the request of the U.S. Army for lighter, quieter models. On September 28, 2004, the Company was awarded a second research and development contract by the U.S. Army for work to be performed towards similar objectives. Both of these research and development contracts are cost plus fixed fee contracts. For additional information, see "Company Strategy" below. The Company's contract to provide the Armed Forces with diesel operated generator sets provided lower revenues during this three month period when compared to the same three month period last year. This is the result of reduced orders and the affected production levels. See "Government Defense Business" below. As of September 30, 2004, the aggregate value of the Company's backlog of electronics product not previously recorded as revenues was approximately $4.4 million. It is estimated that approximately $3.6 million of this backlog will be recognized as revenues during this fiscal year ending June 30, 2005. As of September 30, 2003, the aggregate value of the Company's backlog of electronics product not previously recorded as revenues was approximately $4.5 million. Leisure and Recreation Segment In the HEDCO Division, revenues were higher by $28,998 for the three month period ended September 30, 2004 when compared to the same period last year as a result of increased sales of replacement parts. No snowmaking machine sales were made during this period of either year. The sale of snowmaking machines are recorded when machinery has been delivered which historically has been during the second fiscal quarter. Liquidity and Capital Resources The Company's principal capital requirements are to fund working capital needs and any debt servicing requirements and capital expenditures. The Company's borrowing capacity has remained above its use of outside financing. Management believes that the Company's future cash flow from operations, combined with its existing line of credit will be sufficient to support working capital requirements and capital expenditures at their current or expected levels. Management also believes that it can continue to meet the Company's short-term liquidity needs through a combination of progress payments on government contracts (based on costs incurred) and billings at the time of delivery of products. At September 30, 2004, the Company's working capital was $3,438,390 compared to $3,376,671 at June 30, 2004. The ratio of current assets to current liabilities was 3.96 to 1 at September 30, 2004 and 4.14 to 1 at June 30, 2004. The following table is a summary of the Statements of Cash Flows in the Company's Financial Statements: Three Months ended September 30, 2004 2003 Net Cash used in Operating activities $(155,554) $(15,181) Investing activities $(23,260) $(81,055) Financing activities $(15,235) $(15,234) Operating Activities Adjustments to reconcile net earnings to net cash used in operating activities are presented in the Statements to Cash Flows in the Company's Financial Statements. Net cash used in operating activities in the three month period ended September 30, 2004 was comprised primarily of net income before depreciation and amortization, an increase in accounts payable, and an increase in inventories. Inventories increased primarily as a result of the Company's efforts to increase capacity of 2kW generator sets for more rapid delivery of orders. During the three month period ended September 30, 2003, net cash used in operating activities was comprised primarily of net income before depreciation and amortization, a decrease in accounts receivable and an increase in inventories. Inventories increased primarily as a result of the Company's efforts to produce snowmaking and machines to be available for sales. The Company expenses its research and development costs as incurred. These costs consist primarily of material and labor costs. For the three month period ended September 30, 2004, the Company expensed $12,764 of these costs. For the same three month period last year, the Company expensed $61,777 of research and development costs. Investing Activities During the three-month period ended September 30, 2004, investing activities used $23,260. Of this amount, $7,870 was used for plant, property and equipment, and $7,161 was used for costs associated with undeveloped land owned by the Company and described below under "Financing Activities". The Company has also used $8,229 to continue to invest in its efforts to improve its products and existing technologies in its generator product line. See 'Company Strategy' below for further information on this effort. During the three month period ended September 30, 2003, net cash used in investing activities amounted to $81,055. Of this amount, $37,868 was used for plant, property and equipment, and $43,187 was used by the Company to continue to invest in its efforts to improve its technologies in its generator product line. Financing Activities Financing activities during the three month period ended September 30, 2004 used $15,235 and used $15,234 during the same period last year. These amounts represent principal reduction payments made toward the Company's Mortgage Note agreement. On December 27, 2001, the Company and its primary Bank had agreed to revised terms of its Mortgage Note agreement. The renewed agreement, among other items, revised the interest rate from a fixed rate of 8.25% to the Bank's prime rate plus .5% with a floor of 6%. In addition, the maturity date was extended from October 2002 to January 2005. Management believes that the Company's Mortgage Note agreement will again be renewed on terms to be determined. The Company also has a line of credit agreement with Sovereign Bank in the amount of $500,000 at the rate of .25% plus the Bank's prime rate, which may be renewed on October 31 of each year. The Bank had also agreed to extend the Company's line of credit of $500,000 through October 2004 at the rate of the Bank's prime rate plus .25%. As of September 30, 2004, there were no outstanding borrowings against this line of credit facility. On November 1, 2004, this term loan agreement was renewed through October 31, 2005 on the same terms and conditions. The Mortgage Note is secured by a first mortgage on all of the Company's land and its building. Borrowings under the line of credit arrangement are secured by a first lien on all of the Company's machinery, equipment and other personal property. The Company also has a note payable to a co-founder (shareholder) in the amount of $200,000, bearing the interest rate of 9% per annum. This note is unsecured and is subordinate to the Company's Mortgage Note with the Bank. It has been classified on the balance sheet as a short-term liability since the Mortgage Note has a maturity date of January 2005. If the Mortgage Note agreement is renewed, this note would again be classified as a long-term liability. The Company owns approximately 90 acres of land and the building, which it occupies in Bergen County, New Jersey, adjacent to an interchange of Interstate Route 287. The Company is continuing to actively pursue possible methods of monetizing the unused portion of this property by its sale and/or development. The Company has retained one of the largest commercial real estate brokerage houses serving the New York - New Jersey region to assist in these efforts and is currently in negotiations with a prospective buyer. Government Defense Business The electronics segment of business provides most of the Company's revenues and is comprised of business with the U.S. Department of Defense or with other government contractors. It consists of long- term contracts and short-term business such as replacement parts. Long-term contracts have been dependent upon single projects and until 1997, a single program, the ADCAP torpedo program with the U.S. Navy was the primary source of the Company's revenues. In 1996, the Company was awarded a contract with the U.S. Army to provide diesel operated tactical generator sets. This program has since become the Company's primary source of revenues. On September 7, 2001, the Company was awarded a ten-year contract to provide the U.S. Army and other Department of Defense Agencies with 2kW diesel operated generator sets. This ten-year indefinite delivery, indefinite quantity contract replaced the initial contract. The Company has been the sole source producer of this generator for the Army since 1997. These generators are currently being fielded by both active and reserve components of the U.S. Armed Forces. As with the prior contract, this new contract to supply 2kW diesel operated generator sets allows for the U.S. Army to place production orders annually and to place additional interim orders. Orders under this new contract were received as final deliveries were being made on the prior contract. The amount of orders received under this contract is approximately $12 million through September 30, 2004. Deliveries are scheduled to continue during the current fiscal year. The Army has been ordering 2kW generators at a reduced volume when compared to previous years. Thus, the Company is currently delivering at a reduced rate, which is partially responsible for the reduction in revenues. The reduction in orders results from many factors. It appears that our main customer, the Army, has satisfied the majority of its outstanding requirements. It has been placing orders as new requirements emerge, and this is a slower process. Moreover, we now believe there is competition in part of our market, from a larger 3kW generator that operates more quietly than our current model. However, it does not compete in the 'man-portable' segment of our market since this competing product is twice as heavy. The customer is interested in a product which is smaller, lighter and quieter and the Company is working towards developing the 2kW generators to address its customer's interest. See below under "Company Strategy." The Company's production contract for 2kW generators prohibits changes to the unit's design and performance characteristics. This allows the military procurement and logistics infrastructure to standardize on a single set of requirements, and avoid incremental change. Traditionally this has been advantageous to both customer and supplier. However, with evolving requirements and competition, this can be less advantageous. As the contract allows, additional orders may be made by the Army, although no assurances can be made that it will do so, or if there are additional orders, the amount and timing thereof. Moreover, periods of heightened national security and war have often introduced new priorities and demands, external delays, and increased uncertainty into the defense contracting marketplace. Management is continuing to explore additional sources of revenue as discussed below in the section "Company Strategy". It should be recognized that Department of Defense business is subject to changes in military procurement policies and objectives and to government budgetary constraints and that the Company bids for Department of Defense business in competition with many defense contractors, including firms that are larger in size and have greater financial resources. All of the Company's contracts with the United States Government (the "Government") are subject to the standard provision for termination at the convenience of the Government. Since substantially all of the Company's electronics business has been derived from contracts with various agencies of the Government or subcontracts with prime Government contractors, the loss of substantial Government business (including a material reduction of orders under existing contracts) would have a material adverse effect on the business. Company Strategy On September 9, 2003, the Company was awarded a "cost plus fixed fee" research and development contract. This contract with the U.S. Army Communications - Electronic Command, CECOM Acquisition Center, Washington is in the amount of approximately $1.8 million. The contract is for the research and development of improvements to the current 2kW diesel operated generator set specifically at the request of the Army for lighter, quieter models. The Company is in the development stage, and some components are being tested. Work on this contract is being performed at the Company's location in Oakland, New Jersey and is expected to continue through the current fiscal year ending June 2005. There are no assurances of future production orders as a result of this contract. However, the contract requires the Company to present improvements to the government. On September 28, 2004, the Company was awarded another 'cost plus fixed fee' research and development contract. This contract, also with the U.S. Army Communications - Electronic Command, CECOM Acquisition Center, Washington, DC, is in the amount of approximately $1.5 million. This contract is for the further development of improvements to the 2kW generator set provided to the U.S. Armed Forces. Efforts towards this contract are expected to continue through August 2006. The Company has continued to invest in its efforts to improve its products and existing technologies. This effort is focused on the enhancement of the existing generator set product line and involves, primarily, the adaptation of existing technology, as well as engineering and design to meet customer needs. The scope of these efforts includes the development of an improved product, which is in accordance with current customer requests and future requirements. The Company is engaging in efforts to address these requests in the areas of sound reduction, reduced weight, fuel and environmental requirements. Other companies have announced intentions of developing similar products. Some of these companies have greater financial and/or technical resources than we do. However, management believes that despite inherent risks and uncertainties in all of these type of projects, these efforts are important to the Company's business. As with all projects of this nature, no assurances can be made that such product development work will be successful or that the Company will achieve its desired results. The Department of Defense budgeting process is one of an extended time frame. The process of including expenditures in its budget could take a minimum of 12 to 24 months. In addition, approval of this budget does not guarantee the expenditure actually being made and particularly the receipt of an award by the Company. The Company has many years of experience in contracting with the Department of Defense and has received many contracts to provide various types of products and services. Utilizing some of this experience, the Company is continuing to explore other areas of business, which are capable of providing continued stability and growth. The Company's primary sources of revenue include products with long manufacturing lead times. These products, in particular, are its 2kW generator sets, and its HEDCO snowmaking machines. Recognizing this, the Company has committed some of its resources to making a quantity of these products readily available by producing them for inventory and sales. The government sector has begun to order small quantities of 2kW generator sets for specific uses pursuant to short term orders independent of the Company's 2kW contract. The market for snowmaking machines has changed in recent years. Rather than order machinery months ahead of time, customers are expecting product to be readily available for immediate use. In order to remain competitive in this market, the Company has produced some models of snowmaking machines for inventory purposes. It is also enhancing the technical capabilities as optional items for these machines. Despite the inherent risks and uncertainties of investing in inventory, management believes that the investments in inventory described above are important to the Company's business and future growth. Critical Accounting Policies and Estimates Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions affect the application of our accounting policies. Actual results could differ from these estimates. Our significant accounting policies are described in the Notes to the Consolidated Financial Statements herein and contained within the Company's Form 10-K for the fiscal year ended June 30, 2004. Critical accounting policies are those that require application of management's most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. The Company's critical accounting policies include revenue recognition on contracts and contract estimates, long-lived assets, pensions, impairment of long-lived assets, capitalized development costs and valuation of deferred tax assets and liabilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates", contained within the Company's Form 10-K for the fiscal year ended June 30, 2004. In the electronics segment, revenues and estimated earnings are recorded under defense contracts using the percentage of completion method of accounting, measured as the percentage of costs incurred to estimated total costs at completion of each contract. See Note 2 to the Consolidated Financial Statements. For interim reporting periods, the Company does not segregate inventories as to raw materials, work in progress and finished goods (this information is available at year end when physical inventories are taken and recorded). Estimates are made for interim reporting periods. See Note 5 to the Consolidated Financial Statements. The Company estimates its income taxes using an estimated annual effective tax rate for the annual period. See Note 10 of the Notes to the Consolidated Financial Statements. ITEM 4. Controls and Procedures The Company carried out, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Treasurer, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the fiscal quarter covered by this report. Based upon that evaluation, the Chief Executive Officer and Treasurer concluded that, as of September 30, 2004, the design and operation of these disclosure controls and procedures were effective. During the fiscal quarter covered by this report, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None Item 4. Submission of Matters to a Vote of Security Holders None Item 6. Exhibits ------------------------------------------------------------------ See the accompanying Index to Exhibits to this quarterly report on Form 10-Q. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE DEWEY ELECTRONICS CORPORATION /s/John H.D. Dewey Date: November 15, 2004 John H.D. Dewey President and Chief Executive Officer /s/Thom A. Velto Date: November 15, 2004 Thom A. Velto Treasurer THE DEWEY ELECTRONICS CORPORATION INDEX TO EXHIBITS The following exhibits are included with this report. For convenience of reference, exhibits are listed according to the numbers assigned in the Exhibit table to Regulation S-K. Number 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John H. D. Dewey, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Dewey Electronics Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 15, 2004 By: /s/ John H.D. Dewey John H.D. Dewey, President/CEO Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Thom A. Velto, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Dewey Electronics Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 15, 2004 By: /s/ Thom A. Velto Thom A. Velto, Treasurer EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of The Dewey Electronics Corporation (the "Corporation") on Form 10-Q for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John H. D. Dewey, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. SS 1350, as adopted pursuant to SS 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ John H.D. Dewey John H. D. Dewey, Chief Executive Officer Date: November 15, 2004 A signed original of this written statement required by Section 906 has been provided to The Dewey Electronics Corporation and will be retained by The Dewey Electronics Corporation and furnished to the Securities and exchange commission or its staff upon request. EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of The Dewey Electronics Corporation (the "Corporation") on Form 10-Q for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thom A. Velto, Treasurer of the Corporation, certify, pursuant to 18 U.S.C. SS 1350, as adopted pursuant to SS 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ Thom A. Velto Thom A. Velto, Treasurer Date: November 15, 2004 A signed original of this written statement required by Section 906 has been provided to The Dewey Electronics Corporation and will be retained by The Dewey Electronics Corporation and furnished to the Securities and exchange commission or its staff upon request.