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, 2005 Commission File No 0-2892
THE DEWEY ELECTRONICS CORPORATION
A New York Corporation
I.R.S. Employer Identification No. 13-1803974
27 Muller Road
Oakland, New Jersey 07436
(201) 337-4700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X.
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X.
The number of shares outstanding of the registrant's common stock, $.01
par value was 1,362,031 at November 10, 2005.
THE DEWEY ELECTRONICS CORPORATION
INDEX
Page
No.
Part I Financial Information
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets -
September 30, 2005 and June 30, 2005 4
Consolidated Statements of Operations -
Three Months Ended September 30, 2005
and September 30, 2004 5
Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2005
and September 30, 2004 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 4. Controls and Procedures 23
Part II Other Information
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits 24
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited, consolidated balance sheets, statements of
operations, and statements of cash flows are of The Dewey Electronics
Corporation. These consolidated financial statements reflect all
adjustments of a normal recurring nature, which are, in the opinion of
management, necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods reflected
herein. The results reflected in the unaudited statements of operations
for the period ended September 30, 2005 are not necessarily indicative of
the results to be expected for the entire year. The following unaudited
consolidated financial statements should be read in conjunction with the
notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations set forth in Item 2 of Part I of this
report, as well as the audited consolidated financial statements and
related notes thereto contained in the Form 10-K filed for the fiscal
year ended June 30, 2005.
THE DEWEY ELECTRONICS CORPORATION
BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2005 2005
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $1,141,084 $1,390,326
ACCOUNTS RECEIVABLE, NET 749,332 756,215
INVENTORIES 1,417,643 1,398,105
CONTRACT COSTS AND RELATED ESTIMATED
PROFITS IN EXCESS OF BILLINGS 763,469 772,507
DEFERRED TAX ASSET 9,471 9,471
PREPAID EXPENSES AND OTHER CURRENT
ASSETS 234,749 233,977
TOTAL CURRENT ASSETS 4,315,748 4,560,601
PLANT, PROPERTY AND EQUIPMENT - NET 646,956 614,535
CAPITALIZED DEVELOPMENT COSTS 703,799 703,799
DEFERRED TAXES 41,603 41,603
DEFERRED COSTS 10,000 10,000
LAND AND RELATED COSTS HELD FOR SALE 555,027 541,725
TOTAL OTHER ASSETS 1,310,429 1,297,127
TOTAL ASSETS $6,273,133 $6,472,263
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
TRADE ACCOUNTS PAYABLE $185,592 $398,513
ACCRUED EXPENSES AND OTHER LIABILITIES 152,666 30,498
ACCRUED COMPENSATION AND BENEFITS
PAYABLE 142,816 144,801
ACCRUED PENSION COSTS 4,861 4,861
NOTE PAYABLE 154,606 154,606
DUE TO RELATED PARTY 200,000 200,000
TOTAL CURRENT LIABILITIES 840,541 933,279
LONG-TERM PENSION LIABILITY 426,788 441,788
LONG-TERM PORTION OF NOTE PAYABLE 47,395 86,046
STOCKHOLDERS' EQUITY:
COMMON STOCK, par value $.01;
authorized 3,000,000 shares; issued
and outstanding 1,693,397 shares 16,934 16,934
PAID-IN CAPITAL 2,815,245 2,815,245
ACCUMULATED EARNINGS 2,896,283 2,949,024
ACCUMULATED OTHER COMPREHENSIVE LOSS (283,025) (283,025)
5,445,437 5,498,178
LESS: TREASURY STOCK 333,866 SHARES
AT COST (487,028) (487,028)
TOTAL STOCKHOLDERS' EQUITY 4,958,409 5,011,150
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $6,273,133 $6,472,263
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
2005 2004
REVENUES $1,116,265 $1,285,075
COST OF REVENUES 915,779 889,085
GROSS PROFIT 200,486 395,990
SELLING & ADMIN. EXPENSES 284,549 297,891
OPERATING (LOSS)/INCOME (84,063) 98,099
INTEREST EXPENSE 7,793 9,376
OTHER INCOME - NET (3,954) (2,291)
(LOSS)/INCOME BEFORE INCOME TAXES (87,902) 91,014
INCOME TAX BENEFIT/(EXPENSE) 35,161 (36,406)
NET (LOSS)/INCOME ($52,741) $54,608
========= =========
NET (LOSS)/INCOME PER SHARE:
BASIC ($0.04) $0.04
DILUTED ($0.04) $0.04
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
BASIC 1,362,031 1,359,531
DILUTED 1,362,031 1,402,031
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME ($52,741) $54,608
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING
ACTIVITIES:
DEPRECIATION 28,499 26,850
AMORTIZATION OF LOAN FEES 0 18,521
DEFERRED INCOME TAXES 0 0
DECREASE IN ACCOUNTS RECEIVABLE 6,883 125,550
(INCREASE) IN INVENTORIES (19,538) (350,779)
DECREASE/(INCREASE) IN CONTRACT COSTS
AND RELATED ESTIMATED PROFITS IN EXCESS
OF APPLICABLE BILLINGS 9,038 (117,799)
(INCREASE)DECREASE IN PREPAID EXPENSES
AND OTHER CURRENT ASSETS (772) 837
(DECREASE)/INCREASE IN ACCOUNTS PAYABLE (212,921) 77,798
INCREASE/(DECREASE) IN ACCRUED
LIABILITIES 120,183 (9,721)
INCREASE IN ACCRUED CORPORATE
INCOME TAXES 0 33,581
INCREASE/(DECREASE) IN ACCRUED PENSION
COSTS (15,000) 15,000
TOTAL ADJUSTMENTS (83,628) (210,162)
NET CASH (USED IN)PROVIDED BY OPERATIONS (136,369) (155,554)
CASH FLOWS FROM INVESTING ACTIVITIES:
EXPENDITURES FOR PLANT, PROPERTY AND
EQUIPMENT (60,920) (7,870)
EXPENDITURES FOR CAPITALIZED DEVELOPMENT
COSTS 0 (8,229)
COSTS CAPITALIZED WITH LAND HELD FOR SALE (13,302) (7,161)
NET CASH USED IN INVESTING ACTIVITIES (74,222) (23,260)
CASH FLOWS FROM FINANCING ACTIVITIES:
PRINCIPAL PAYMENTS OF LONG TERM DEBT (38,651) (15,235)
NET CASH USED IN FINANCING ACTIVITIES (38,651) (15,235)
NET (DECREASE) IN CASH (249,242) (194,049)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 1,390,326 1,604,475
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,141,084 $1,410,426
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
INTEREST PAID $7,828 $9,455
INTEREST RECEIVED $4,711 $1,885
CORPORATE INCOME TAXES PAID $325 $2,825
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
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
2005 2004
Net (loss)/income, as reported ($52,741) $54,608
Deduct: Total stock-based
employee compensation
Expense determined
under fair value based
method for all awards,
net of related tax
Effects 2,233 4,935
Pro forma net income ($54,974) $49,673
Earnings per share:
Basic - as reported ($.04) $.04
Basic - pro forma ($.04) $.04
Diluted - as reported ($.04) $.04
Diluted - pro forma ($.04) $.04
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, 2005
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, 2005
September 30, 2005 June 30, 2005
Finished Goods $356,386 $367,660
Work In Progress 303,445 298,771
Raw Materials 757,782 731,674
Total $1,417,613 $1,398,105
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6: USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
NOTE 7: PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment are stated at cost. Allowance for
depreciation is provided on a straight-line basis over estimated useful
lives of three to ten years for machinery and equipment, ten years for
furniture and fixtures, and twenty years for building and improvements.
NOTE 8: CAPITALIZED DEVELOPMENT COSTS
Capitalized 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, improved fuel consumption and environmental
considerations. The Company reviews these capitalized costs on a regular
basis to assess future recoverability through the existing contracts to
which such costs relate and expense such costs, if any, to the extent
that they are not deemed recoverable.
NOTE 9: INCOME TAXES
The income tax expense for the three-month period ended September 30,
2005 and 2004 was at an effective tax rate of 40%.
NOTE 10: 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, 2005, 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, 2005
NOTE 11: 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,
2005 2004
Per Per
Income Shares Share Income Shares Share
Amount Amount
Basic net
(loss)/income
per common share ($52,742) 1,362,031 ($.04) $54,608 1,359,531 $.04
Effect of dilutive
Securities -- 0 -- -- 42,500 --
Diluted net (loss)
income per common
Share ($52,742) 1,362,031 ($.04) $54,608 1,402,031 $.04
Stock options to purchase 40,000 shares of common stock were outstanding
at September 30, 2005, but were not included in the dilutive loss per
share computation because the effect would be antidilutive.
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
NOTE 12: SEGMENT INFORMATION
Information about the Company's operations in its two segments for the
three-month period ended September 30, 2005 and 2004 are as follows:
Three months ended
September 30,
2005 2004
Electronics Segment
Revenues $1,094,205 $1,246,129
Operating (Loss)/Income (71,644) 112,539
LEISURE AND RECREATION SEGMENT
Revenues 22,060 38,946
Operating (Loss) (12,419) (14,440)
Total
Revenues 1,116,265 1,285,075
Operating (Loss)/Income (84,063) 98,099
Interest Expense (7,793) (9,376)
Other Income 3,954 2,291
Income Tax Benefit/(Expense) 35,161 (36,406)
Net Income ($52,741) $54,608
NOTE 13: PENSION PLAN
Three months ended September 30
2005 2004
Service cost $ 9,897 $ 7,067
Interest cost 16,899 15,708
Expected return on plan assets (15,153) (13,550)
Amortization of prior service cost -- --
Amortization of net (gain) loss 9,127 4,786
Net periodic benefit cost $20,770 $14,011
Employer Contributions
The Company previously disclosed in its financial statements for the year
ended June 30, 2005, 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, 2005, $30,000 of contributions
have been made. The Company presently expects to continue to contribute
within the range of legally acceptable contributions as identified by the
Plan's enrolled actuary.
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
NOTE 14: Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43,
Chapter 4." SFAS No. 151 amends the guidance in Accounting Research
Bulletins ("ARB") No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Paragraph 5 of ARB No.
43, Chapter 4, previously stated that "... under some circumstances, items
such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current
period charges... ." SFAS No. 151 requires that those items be recognized
as current period charges regardless of whether they meet the criterion
of "so abnormal." In addition, SFAS No. 151 requires that allocation of
fixed production overheads to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of SFAS No.
151 will apply to inventory costs beginning in fiscal year 2007. The
adoption of SFAS No. 151 is not expected to have a material effect on the
consolidated financial statements of the Company.
In December 2004, the FASB issued SFAS No.123 (Revised 2004), "Share-
Based Payment" ("SFAS No. 123R"). This new pronouncement requires
compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on
the fair value of the equity or liability instruments issued. SFAS No.
123R covers a wide range of share-based compensation arrangements
including stock options, restricted stock plans, performance-based
awards, stock appreciation rights, and employee stock purchase plans.
SFAS No. 123R replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123, as
originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, SFAS No. 123 permitted entities the option of continuing to
apply the guidance in APB No. 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. The Company will be required to adopt
the provisions of SFAS No. 123R in the first quarter of fiscal year 2007.
Management is currently evaluating the requirements of SFAS No. 123R. The
adoption of SFAS No. 123R is not expected to have a material effect on
the financial statements of the Company.
In April 2005, the FASB issued FASB Interpretation (FIN) 47, "Accounting
for Conditional Asset Retirement Obligations." This interpretation
clarifies that the entity is required to record a liability in financial
statements for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably
estimated. The "conditional asset retirement obligation" terminology
used in SFAS No. 143, "Accounting for Asset Retirement Obligations,"
refers to a legal obligation to perform an asset retirement activity in
which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity.
This interpretation is required to be adopted no later than the end of
fiscal year 2006. Management does not expect that this interpretation
will have a material impact on the Company's financial statements.
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
NOTE 14: Recent Accounting Pronouncements Cont'd
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB No. 20 and FASB Statement No. 3."
This SFAS No. 154 supersedes APB No. 20, "Accounting Changes," and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements."
This statement applies to all voluntary changes in accounting principle
and changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition
provisions. SFAS No. 154 requires retrospective application to prior
periods' financial statements of changes in accounting principle, unless
this would be impracticable. When it is impracticable to determine the
period-specific effects of an accounting change on one or more individual
prior periods presented, this statement requires that the new accounting
principle be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is
practicable. This statement also requires that if an entity changes its
method of depreciation, amortization, or depletion for long-lived,
nonfinancial assets, the change must be accounted for as a change in
accounting estimate. This statement will be effective in fiscal year
2007. Management does not expect this statement to have a material
effect on the financial statements.
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, 2005. 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 provides most of the Company's revenues and is
comprised mostly of the 2kW generator product line, two research and
development contracts, and other various spare parts sales 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 under 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
subcontractor. In past years, the Company had various long-term
contracts to provide the U.S. Navy with various equipment.
The Company has been the sole source producer of the 2kW diesel operated
tactical generator set for the Department of Defense since 1997. Its
initial contract was awarded by the U.S. Army 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 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, 2005 amount to approximately $15 million.
As with the initial contract mentioned above, this contract allows for
the U.S. 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.
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 been ordering limited quantities of 2kW
generator sets for specific uses pursuant to short-term orders
independent of the Company's 2kW contract.
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, 2005, consolidated
revenues were $1,116,265 and operations resulted in a loss of $84,063.
During the same period last year, consolidated revenues were $1,285,075
and operating income was $98,099.
Revenues for the three-month period ended September 30, 2005 were lower
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 12 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, 2005, revenues in the
electronics segment were $151,924 lower than the same three-month period
last year. During the three-month period this year, the production of
2kW generator sets provided 30% of Electronics segment revenues, the
Company's research and development contracts provided 46% of Electronics
segment revenues and various orders which are generally for replacement
parts provided 24% of Electronics segment revenues. During the same
three-month period last year, the production of 2kW generator sets
provided 38% of Electronics segment revenues, the Company's research and
development contract provided 24% of Electronics segment revenues and
various orders generally for replacement parts provided 38% of
Electronics segment revenues.
The decrease in revenues during the three-month period ended September
30, 2005 compared to September 30, 2004 is the result of lower production
efforts towards various orders for replacement parts as well as the
generator set contract. Most of these efforts had been redirected
towards the Company's research and development contracts (see "Government
Defense Business" below), which increased in revenues compared to the
same three-month period last year.
This change in product mix and reduction in revenues also resulted in a
decline in profitability. Higher margin production of replacement parts
and generator sets had been replaced by lower margin efforts towards
research and development.
As of September 30, 2005, the aggregate value of the Company's backlog of
electronics product not previously recorded as revenues was approximately
$3.2 million. It is estimated that most of this backlog will be
recognized as revenues during this fiscal year ending June 30, 2006.
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.
Leisure and Recreation Segment
In the HEDCO Division, revenues were lower by $16,886 for the three-month
period ended September 30, 2005 when compared to the same period last
year as a result of fewer sales of replacement parts. No snowmaking
machine sales were made during this period of either year. Revenues in
the three-month period for both year's were derived entirely from the
sale of replacement parts. The sale of snowmaking machines are recorded
when machinery has been delivered which historically has been during the
second fiscal quarter.
As a result of a review of this segment completed by management during
2003, enhancements to the machines were designed. These enhancements
were and are currently designed to simplify the operation of the HEDCO
snowmaker and are made available to provide remote control operations and
monitoring as optional features. The cost of developing these
enhancements is expensed as incurred. In addition, the market for
snowmaking machines has changed in recent years. Rather than ordering
machinery months ahead of delivery times, customers are expecting product
to be readily available for immediate use. The last year in which the
Company had a backlog of orders for snowmaking machines was in 2001. In
order to remain competitive, the Company had produced some models for
inventory purposes. During October 2005, the Company received orders for
snowmaking machines for November delivery in the amount of approximately
$98,000.
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, 2005, the Company's working capital was $3,475,207
compared to $3,627,322 at June 30, 2005.
The ratio of current assets to current liabilities was 5.13 to 1 at
September 30, 2005 and 4.89 to 1 at June 30, 2005.
The following table is a summary of the Statements of Cash Flows in the
Company's Financial Statements:
Three Months ended September 30,
2005 2004
Net Cash used in
Operating activities ($136,369) ($155,554)
Investing activities ($74,222) ($23,260)
Financing activities ($38,651) ($15,235)
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.
During the three-month period ended September 30, 2005, net cash used in
operating activities was comprised primarily of net income before
depreciation and amortization, a decrease in accounts payable and an
increase in accrued liabilities.
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.
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, 2005, the Company expensed $22,700
of these costs. For the same three-month period last year, the Company
expensed $12,764 of research and development costs.
Investing Activities
During the three-month period ended September 30, 2005, net cash used in
investing activities amounted to $74,222. Of this amount, $60,920 was
used for plant, property and equipment, and $13,302 was used by the
Company for "land and land costs held for sale".
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
"land and land costs held for sale". The Company had also used $8,229 to
continue to invest in its capitalized development costs.
Financing Activities
Financing activities during the three-month period ended September 30,
2005 used $38,651 compared to $15,234 during the same period last year.
These amounts represent principal reduction payments made toward the
Company's term loan agreement.
On February 24, 2005, the Company and Sovereign Bank (the "Bank") entered
into a Term Loan Agreement (the "Loan Agreement") that replaced, and
restructured the remaining balance due on, the Company's Mortgage Note
agreement with the Bank, which matured in January 2005. Pursuant to the
Loan Agreement, the Company borrowed $292,187 from the Bank for a term
ending February 23, 2007, at a fixed annual interest rate of 5.56
percent. This loan, of which $202,001 was outstanding as of September
30, 2005, is secured by a first lien on all of the Company's accounts
receivable, machinery, equipment and other personal property (the
"Collateral") and is subject to customary representations, covenants and
default provisions in favor of the Bank.
The Company also has a line of credit agreement with the Bank in the
amount of $500,000 at an annual interest rate equal to the Bank's prime
rate plus .25 percent. Effective November 1, 2004, this line of credit
agreement was renewed through October 31, 2005. As of September 30,
2005, there were no outstanding borrowings against this line of credit
facility. In the event that the Company borrows funds under this line of
credit facility, the loan would be co-collateralized by the Collateral
under the Loan Agreement. On November 9, 2005, this line of credit
agreement was renewed on the same terms and conditions with a maturity
date of December 1, 2006.
During 1998, Gordon C. Dewey, the Company's co-founder, lent the Company
a total of $200,000. The Company's note payable is unsecured and bears
interest at the rate of 9 percent per annum. This note was subordinate
to the Company's Mortgage Note with the Bank, but is not subordinate to
the new Loan Agreement with the Bank described above. It is repayable
upon demand by Frances D. Dewey, Mr. Dewey's widow.
The Company owns approximately 90 acres of land and the building, which
it occupies in Bergen County, New Jersey, adjacent to an interchange of
Interstate Route 287.
Previously, on December 29, 2004, the Company had agreed to sell
approximately 68 undeveloped and unused acres of this land to K.
Hovnanian North Jersey Acquisitions, L.L.C. ("K. Hovnanian"), a wholly-
owned subsidiary of Hovnanian Enterprises, Inc., a residential real
estate developer and homebuilder. The Company's stockholders approved
the sale of this land at the Annual Stockholders meeting, which was held
on March 8, 2005. Completion of the proposed land sale depended on,
among other things, a number of conditions being satisfied, including
extensive regulatory and rezoning approvals from New Jersey State and
local entities. On June 2, 2005, the Company agreed to extend, from June
7, 2005 until September 7, 2005, the period (the "Investigation Period")
during which K. Hovnanian was permitted to conduct its investigation
relating to the proposed purchase. The Agreement of Sale provided that,
during the Investigation Period, if K. Hovnanian was not satisfied with
the results of its investigation, it could terminate the Agreement of
Sale without explanation.
On July 25, 2005, the Company announced that it had received from K.
Hovnanian a notice terminating the Agreement of Sale. As a result of
such termination, the $200,000 deposit previously paid into escrow by K.
Hovnanian was returned to K. Hovnanian. As a result of this termination
of the Agreement of Sale, the Company had expensed $63,946 of related
costs, which had been capitalized as "Land and related costs held for
sale". This amount was expensed during the fourth quarter ended June 30,
2005.
The Company is continuing to actively pursue possible methods of
monetizing the undeveloped and unused portion of its property, by its
sale and/or development, but there can be no assurance that such
transaction will be achieved, or, if achieved, what the price, other
terms or timing would be. These efforts may be complicated by the
current regulatory environment in New Jersey regarding land development.
Government Defense Business
Most of the Company's revenues are derived from government defense
business, which is comprised of business with the U.S. Department of
Defense or with other government contractors. The Company's government
defense business consists of long-term contracts and short-term orders
such as for replacement parts.
Historically, the Company's revenues from its government defense business
have been dependent upon single programs. Currently, the Company's
primary program is with the U.S. Army to provide diesel operated
generator sets. 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, which was awarded in 1996. The Company has been the sole
source producer of this generator set for the Armed Forces since 1997.
These generators continue to be provided for both active and reserve
components of various departments of the U.S. Armed Forces.
As with the initial contract, the current contract to supply 2kW diesel
operated generator sets allows for the U.S. Army to place annual
production orders and also place additional interim orders. The amount
of orders received under this contract is approximately $15 million
through September 30, 2005. Deliveries of these orders are scheduled to
continue through May 2006.
The composition of the Company's government defense business has been
evolving in recent years. Production efforts towards the 2kW generator
set contract have been reduced as a result of reduced orders. During the
three-months ended September 30, 2005, these production efforts provided
approximately 30% of Electronics segment revenue compared to
approximately 35% during the same period in fiscal year 2005 and
approximately 57% during the same period in fiscal year 2004. This
reduction in contribution to Electronic segment revenue was offset by
other Electronics segment businesses. Replacement parts and other short-
term business provided approximately 24% of Electronics segment revenue
during the three-months ended September 30, 2005, approximately 35%
during the same period in fiscal year 2005, and approximately 36% during
the same period in fiscal year 2004. In addition the Company was awarded
a research and development contract on September 9, 2003 and another
research and development contract on September 28, 2004. Efforts toward
these research and development contracts provided approximately 46% of
Electronics segment revenues during the three-months ended September 30,
2005, approximately 30% during the same period in fiscal year 2005 and
approximately 7% during the same period in fiscal year 2004 when the
initial research and development contract was awarded.
The reduction in generator set orders results from many factors. It
appears that the main customer, the U.S. 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, the Company
now believes that there is competition in part of the market, from a
larger 3kW generator that operates more quietly than the Company's 2kW
model. However, it does not compete in the 'man-portable' segment of the
market since the competing product is twice as heavy. The customer is
interested in a product which is smaller, lighter and quieter and the
Company is working towards developing the 2kW generators to address its
customer's request. See below under "Company Strategy." The Company's
production contract for 2kW generators prohibits changes to the unit's
design and performance characteristics. This allows the military
procurement and logistics infrastructure to standardize on a single set
of requirements, and avoid incremental change. Traditionally this has
been advantageous to both customer and supplier. However, with evolving
requirements and competition, this can be less advantageous.
As the contract allows, additional orders may be made by the U.S. 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".
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
was in the amount of approximately $1.8 million. The contract was 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. Work on this contract was performed at the
Company's location in Oakland, New Jersey and was completed in September
2005. On September 28, 2004, the Company was awarded a second "cost plus
fixed fee" research and development contract by the U.S. Army, in the
amount of $1.5 million, for work to be performed towards similar
objectives. Work on this project is expected to continue through
September 2006. There are no assurances of future production orders as a
result of these contracts. However, both contracts require the Company
to present improvements to the government.
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 specific customer requests. 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, improved fuel consumption and
environmental considerations.
Other companies have announced intentions of developing similar products.
Some of these companies have greater financial and/or technical resources
than the Company. 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.
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
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 been ordering 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.
The Company is focusing its efforts on select product categories where
management believes that the Company can grow its business. Although no
assurances can be made that such strategy will be successful, management
believes that long term growth can be achieved from three perspectives:
1) growing the Company's market share in areas where it already has a
strong presence, 2) expanding into related markets, and 3) expanding its
strengths into related product categories.
As part of this strategy, the Company has been investing in existing
technologies to meet its customer's future requirements. Management is
also continuing to re-enforce the customer recognition of the Company's
product quality and customer relationships. The Company faces
competition in many areas and from companies of various sizes.
Competitive factors include product quality, technology, product
availability, price and customer service. Management believes that the
reputation of the Company in these areas provides a significant positive
competitive factor.
Critical Accounting Policies and Estimates
The Company's 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 Financial Statements contained herein.
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, pensions,
impairment of long-lived assets, capitalized development costs, and
valuation of deferred tax assets and liabilities.
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.
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 Company has capitalized certain development costs for efforts to
improve and enhance the 2kW generator set product line. These efforts
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,
improved fuel consumption and environmental considerations. The Company
reviews these capitalized costs on a regular basis, to assess future
recoverability through the existing contracts to which such costs relate,
and expenses such costs, if any, to the extent they are not deemed
recoverable. The Company had $703,799 of capitalized development costs
as of September 30, 2005 and as of June 30, 2005. See "Government
Defense Business" above.
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, 2005, the design and operation of these disclosure
controls and procedures were effective. During the fiscal quarter
covered by this report, there have been no changes in the Company's
internal control over financial reporting that have materially affected,
or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 11, 2005 John H.D. Dewey
President and Chief Executive Officer
/s/ Thom A. Velto
Date: November 11, 2005 Thom A. Velto
Treasurer
THE DEWEY ELECTRONICS CORPORATION
INDEX TO EXHIBITS
The following exhibits are included with this report. For convenience of
reference, exhibits are listed according to the numbers assigned in the
Exhibit table to Regulation S-K.
Number
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