UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - QSB
(Mark One)
_X_ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from__________to____________
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
Check whether the issuer (1) filed reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 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 a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES___ NO_X_
APPLICABLE ONLY TOISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECENDING FIVE YEARS.
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. YES___ NO___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 1,362,031 at November 4,
2006.
_______________________________________
Transitional Small Business Disclosure Format (Check one): YES___ NO_X_
THE DEWEY ELECTRONICS CORPORATION
INDEX
Page No.
Part I Financial Information
Item 1. Condensed Financial Statements
Condensed Balance Sheets -
September 30, 2006 (unaudited)
and June 30, 2006 3
Condensed Statements of Operations -
Three-months Ended September 30, 2006
and September 30, 2005 (unaudited) 4
Condensed Statements of Cash Flows for
the Three-months Ended September 30, 2006
and September 30, 2005 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Item 3. Controls and Procedures 20
Part II Other Information
Item 1A. Risk Factors
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.CONDENSED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
CONDENSED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2006 2006
ASSETS: (unaudited)
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $635,574 $1,075,500
ACCOUNTS RECEIVABLE, net of
allowance for doubtful
accounts of $6,182 133,115 526,730
INVENTORIES 1,393,582 1,106,689
CONTRACT COSTS AND RELATED
ESTIMATED PROFITS IN EXCESS
OF BILLINGS 1,292,617 932,411
PREPAID EXPENSES AND OTHER
CURRENT ASSETS 161,423 176,057
_________ ________
TOTAL CURRENT ASSETS 3,616,311 3,817,387
_________ _________
PLANT, PROPERTY AND EQUIPMENT
LAND AND IMPROVEMENTS 651,015 651,015
BUILDING AND IMPROVEMENTS 1,885,653 1,885,653
MACHINERY AND EQUIPMENT 3,087,946 3,073,925
FURNITURE AND FIXTURES 205,539 205,539
_________ _________
5,830,153 5,816,132
Less accumulated depreciation 4,680,639 4,650,562
_________ _________
1,149,514 1,165,570
CAPITALIZED DEVELOPMENT COSTS 703,799 703,799
DEFERRED COSTS 74,117 74,031
TOTAL OTHER ASSETS 777,916 777,830
________ _________
TOTAL ASSETS $5,543,741 $5,760,787
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
NOTE PAYABLE $47,395 $86,047
TRADE ACCOUNTS PAYABLE 342,859 358,427
ACCRUED EXPENSES AND OTHER
LIABILITIES 228,639 212,349
ACCRUED COMPENSATION AND
BENEFITS PAYABLE 146,153 156,550
ACCRUED PENSION COSTS 57,943 57,943
_______ _______
TOTAL CURRENT LIABILITIES 822,989 871,316
_______ _______
LONG-TERM PENSION LIABILITY 231,847 243,097
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00;
authorized 250,000 shares, issued
and outstanding-none, -- --
Common stock, par value $.01;
authorized 3,000,000 shares;
issued 1,693,397 at September 30,
2006 and 2005 16,934 16,934
Additional paid-in capital 2,815,245 2,815,245
RETAINED EARNINGS 2,228,088 2,385,557
ACCUMULATED OTHER COMPREHENSIVE
LOSS (84,334) (84,334)
_________ _________
4,975,933 5,133,402
LESS: TREASURY STOCK 331,366
SHARES at cost (487,028) (487,028)
_________ _________
TOTAL STOCKHOLDERS' EQUITY 4,488,905 4,646,374
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $5,543,741 $5,760,787
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE-MONTHS ENDED SEPTEMBER 30,
2006 2005
REVENUES $1,645,771 $1,116,265
COST OF REVENUES 1,466,413 915,779
__________ __________
GROSS PROFIT 179,358 200,486
SELLING,GENERAL & ADMINISTRATIVE 339,074 284,549
__________ __________
OPERATING LOSS (159,716) (84,063)
INTEREST EXPENSE (2,151) (7,793)
OTHER INCOME - NET 4,398 3,954
__________ _________
LOSS BEFORE INCOME TAXES (157,469) (87,902)
INCOME TAX BENEFIT -- 35,161
__________ _________
NET LOSS $(157,469) $(52,741)
========= =========
NET LOSS PER COMMON SHARE-BASIC $(0.12) $(0.04)
NET LOSS PER COMMON SHARE-DILUTED $(0.12) $(0.04)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
BASIC 1,362,031 1,362,031
DILUTED 1,362,031 1,362,031
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE-MONTHS ENDED
SEPTEMBER 30,
2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $(157,469) $(52,741)
_________ ________
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION 30,077 28,499
DECREASE IN ACCOUNTS RECEIVABLE 393,615 6,883
INCREASE IN INVENTORIES (286,893) (19,538)
(INCREASE)/DECREASE IN CONTRACT COSTS
AND ESTIMATED PROFITS IN EXCESS OF
APPLICABLE BILLINGS (360,206) 9,038
(INCREASE)/DECREASE IN PREPAID EXPENSES
AND OTHER CURRENT ASSETS 14,634 (772)
DECREASE IN ACCOUNTS PAYABLE (15,568) (212,921)
INCREASE IN ACCRUED EXPENSES AND
OTHER LIABILITIES 5,893 120,183
DECREASE IN ACCRUED PENSION LIABILITY (11,250) (15,000)
________ ________
TOTAL ADJUSTMENTS (229,698) (83,628)
________ ________
NET CASH USED IN OPERATING ACTIVITIES (387,167) (136,369)
_________ ________
CASH FLOWS FROM INVESTING ACTIVITIES:
EXPENDITURES FOR PLANT, PROPERTY AND
EQUIPMENT (14,021) (60,920)
DEFERRED COSTS (86) (13,302)
_________ _______
NET CASH USED IN INVESTING ACTIVITIES (14,107) (74,222)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
PRINCIPAL PAYMENTS OF NOTE PAYABLE (38,652) (38,651)
_______ _______
NET CASH USED IN FINANCING ACTIVITIES (38,652) (38,651)
_______ _______
NET DECREASE IN CASH (439,926) (249,242)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,075,500 1,390,326
_________ _________
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $635,574 $1,141,084
======== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
INTEREST PAID $2,151 $7,828
INTEREST RECEIVED 2,624 4,711
CORPORATE INCOME TAXES PAID -- --
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Significant Accounting Policies
Basis of Presentation
_____________________
The accompanying unaudited condensed financial statements have been prepared
by The Dewey Electronics Corporation (the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC")for
interim reporting. Certain information and disclosures normally included in
notes to financial statements have been condensed or omitted pursuant to such
rules and regulations, but resultant disclosures are in accordance with
accounting principles generally accepted in the United States of America as
they apply to interim reporting. The condensed financial statements should
be read in conjunction with the financial statements and the notes thereto in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2006 (the "2006 Form 10-K").
In the opinion of the Company's management, the accompanying unaudited
condensed financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly, in all material respects,
the Company's financial position as of September 30, 2006, and the results
of operations and cash flows for the three-months then ended. The results of
operations and cash flows for the period ended September 30, 2006 are not
necessarily indicative of the results of operations or cash flows to be
expected for any subsequent quarter or the full fiscal year ending June 30,
2007.
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 of 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 of product are made and title and risk of loss have been
transferred to the customer and collection is probable.
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. These estimates include, among others,
lower of cost or market estimates for inventories, realization of deferred
tax assets, revenue recognition and certain accrued expenses. Actual results
could differ from those estimates.
2. Recent Accounting Pronouncements
___________________________________
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
"Considering the Effects of Prior Year Misstatements when quantifying
Misstatements in current Year Financial Statements" ("SAB 108"). SAB 108
requires that registrants quantify errors using both a balance sheet and
income statement approach and evaluate whether either approach results in a
misstated amount that, when all relevant quantitative and qualitative factors
are considered, is material. SAB 108 is effective for fiscal years ending
after November 15, 2006. The Company is currently evaluating the impact of
this Bulletin on its financial statements.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Benefits"
("SFAS 158"). SFAS 158 addresses the accounting for defined benefit pensions
plans and other postretirement benefit plans ("plans"). Specifically, SFAS
158 requires companies to recognize an asset for a plan's overfunded status
or a liability for a plan's underfunded status and to measure a plan's assets
and its obligations that determine its funded status as of the end of the
company's fiscal year, the offset of which is recorded, net of tax, as a
component of other comprehensive income in shareholders' equity. SFAS 158 is
effective for fiscal years ending after December 15, 2006. The Company is
currently evaluating the impact of this Statement on its financial
statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
This Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board
having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement
does not require any new fair value measurements. However, for some
entities, the application of this Statement will change current practice.
This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently evaluating the impact of this Statement on
its financial statements.
In July 2006, the FASB issued Financial Interpretation No. 48 (FIN 48)
"Accounting for Uncertainty in Income Taxes, as Interpretation of FASB
Statement No. 109". This Interpretation clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, "Accounting for Income
Taxes". FIN 48 prescribes a recognition and measurement threshold
attributable for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosures and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact of this Interpretation on its financial statements.
3. Inventories
Inventories consist of:
September 30, 2006 June 30, 2006
Finished Goods $194,885 $194,885
Work In Progress 239,838 93,485
Raw Materials 958,859 818,319
________ ________
Total $1,393,582 $1,106,689
========== ==========
4. Taxes on Income
___________________
The Company has provided a valuation allowance against its net deferred tax
assets as it believes that it is more likely than not that it will not
realize these tax attributes. The Company has approximately $316,000 and
$333,000 of federal and state net operating loss carry forwards,
respectively, expiring beginning in 2012.
5. Earnings Per Share
______________________
Net loss per share has been presented pursuant to SFAS No. 128, "Earnings per
Share". Basic net loss per share is computed by dividing reported net loss
available to common shareholders by weighted average shares outstanding for
the period. Diluted net loss per share is computed by dividing reported net
loss available to common shareholders by 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 tables below set forth the reconciliation of the numerators and
denominators of the basic and diluted net loss per common share computations.
Certain stock options were excluded from the computation of earnings per
share due to their anti-dilutive effect. The weighted average number of such
excluded shares is 6,752 and 9,419 for the three-months ended September 30,
2006 and September 30, 2005, respectively.
Three-months Ended September 30,
2006 2005
Loss Shares Per Loss Shares Per
Share Share
Amount Amount
Basic net
Loss per
common share ($157,469) 1,362,031 ($.12) ($52,741) 1,362,031 ($.04)
Effect of
dilutive
Securities -- -- -- -- -- --
________ _________ ____ _______ _________ ___
Diluted net
loss per
common share ($157,469) 1,362,031 ($.12) ($52,741) 1,362,031 ($.04)
========= ========= ==== ======= ========= ====
6. Operating Segments
______________________
The Company operates in two segments: Electronics, and Leisure and
Recreation. Operations in the Electronics segment are primarily related to
supplying electronics and electrical products and systems for the United
States Government as a prime contractor or subcontractor. Operations in the
Leisure and Recreation segment involve the production and sale of snowmaking
machinery and servicing of such machinery at the purchaser's expense beyond
the warranty period. Total revenue by segment represents sales to
unaffiliated customers, as reported in the Company's Statements of
Operations. There are no inter-segment sales.
Some operating expenses, including general corporate expenses, have been
allocated by specific identification or based on direct labor for items which
are not specifically identifiable. In computing operating profit, none of
the following items have been added or deducted: interest expense, income
taxes, and non-operating income. All of the Company's operations are
performed at its facility in Oakland, New Jersey. The facility and resources
are shared by both segments and the direct use of such resources and space
cannot be entirely specified. Accordingly, the Company allocates usage of
its facility and equipment.
The following tables present information about reported segment revenues,
operating profit or loss, and reconciles such segment information to the
Company's totals:
Three-months ended
September 30,
2006 2005
Electronics Segment
Revenues $1,635,626 $1,094,205
Operating Loss (131,885) (71,644)
Leisure and Recreation Segment
Revenues 10,145 22,060
Operating Loss (27,832) (12,419)
Total
Revenues 1,645,771 1,116,265
Operating Loss (159,716) (84,063)
Interest Expense (2,151) (7,793)
Other Income 4,398 3,954
Income Tax Benefit -- 35,161
__________ ________
Net Loss (157,469) (52,741)
========== ========
7. Stock-Based Compensation Plans
___________________________________
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No.123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R"). This new
pronouncement requires that compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost is 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." The Company adopted the provisions of SFAS
No. 123R in fiscal year 2006 using a modified version of prospective
application. The Company did not grant, modify, repurchase, or cancel any
share based payment awards after the date of adoption of SFAS No. 123R. All
awards granted prior to July 1, 2005 had fully vested prior to July 1, 2005.
Therefore, there was no effect of adopting SFAS 123R in the Company's
financial statements for the first quarter of fiscal 2007 (the three month
period ended September 30, 2006) or in fiscal year 2006.
Prior to the adoption of SFAS 123R, the Company provided the disclosures
required by SFAS No. 123, whereby the Company did not recognize compensation
expense on non-qualified stock options granted to employees when the exercise
price of the options is equal to the market price of the underlying stock on
the date of the grant. Options granted vest after a one year period and
expire ten years from the grant date.
There were no options granted in fiscal 2006 or during the quarter ended
September 30, 2006. However, pro forma information regarding net income and
earnings per share is required for fiscal year 2006 by SFAS No. 123 and has
been determined as if the Company had accounted for its employee stock option
grants under the fair value method prescribed by that Statement.
The estimated fair value of the option grants are amortized to expense over
the options' vesting period beginning January 1 of the following year, due to
the timing of the grants. The Company's pro forma information for the three
months ended September 30, 2005 is as follows:
Three Months Ended
September 30, 2005
Net loss, as reported ($52,741)
Deduct: Total stock-based employee
Compensation expense determined under
fair value based method forall awards,
net of related tax effects 2,233
________
Pro forma net loss ($54,974)
=========
Earnings per share:
Basic - as reported ($.04)
======
Basic - pro forma ($.04)
======
Diluted - as reported ($.04)
======
Diluted - pro forma ($.04)
======
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
condensed financial statements, including the notes thereto, appearing
elsewhere in this Form 10-Q, and with the audited financial statements,
including the notes thereto, appearing in the Company's 2006 Form 10-K.
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 "Financing Activities", and
"Company Strategy" and in Item 1A (Risk Factors) of the Company's 2006 Form
10-K. 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.
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.
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.
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.
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.
There are no intersegment sales.
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 comparisons of recorded revenues and earnings may
not be indicative of future operating results. The following comparative
analysis should be viewed in this context.
The sales and operating profit of each segment for the first quarter of
fiscal year 2007 (the three-month period ended September 30, 2006) and the
first quarter of fiscal year 2006 (the three month period ended September 30,
2005) are set forth in Note 6 - Operating Segments of the Notes to the
Condensed Financial Statements.
Revenues
________
Revenues of $1,645,771 for the three-month period ended September 30, 2006
were 47% higher than in the same period in 2005 when revenues were
$1,116,265. Revenues for the three-month period ended September 30, 2006 were
higher in the Electronics segment and lower in the Leisure and Recreation
segment when compared to the same period in 2005. Information about the
Company's operations in the two segments is set forth in Note 6 - Operating
Segments of the Notes to the Condensed Financial Statements and is discussed
in further detail below.
Electronics Segment
___________________
In the Electronics segment, revenues under defense contracts are recorded
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 cost 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 1-A of the
Notes to Financial Statements in the Company's 2006 Form 10-K.
Electronic product revenues accounted for 99% of total revenues for the first
quarter of fiscal year 2007, compared with 98% of total revenues for the
first quarter of fiscal year 2006.
Revenues in the Electronics segment for the three-month period ended
September 30, 2006 were $541,421 higher when compared to the same period in
2005. This increase in revenue is attributable to increased production
efforts under the Company's generator set production contract with the U.S.
Army and from various orders for replacement parts and other short-term
orders. Revenues resulting from the Company's research and development
contracts described below were lower in this three-month period compared to
the same period last year due to two factors. The first was completion of
work on the first of the Company's two research and development contracts
during the first quarter of fiscal year 2006. The second was the completion
of only a limited amount of work on the remaining contract during the first
quarter of fiscal year 2007 due to funding constraints, as described further
below.
During the three-month period ended September 30, 2006, production efforts
under the Company's contract to provide the Armed Forces with 2kW diesel
operated generator sets provided approximately 75% of the Electronic segment
revenues compared to approximately 30% of such revenues in the same period
last year. The Company's research and development contracts provided
approximately 1% of Electronics segment revenues during the three-month
period ended September 30, 2006, versus approximately 47% of such revenues in
the same period last year. Replacement parts and other short-term business
provided approximately 24% of such revenues in the three-month period ended
September 30, 2006, and approximately 23% of such revenues in the same period
in 2005.
During September 2003, the Company was awarded a "cost plus fixed fee"
research and development contract in the amount of approximately $1,800,000.
Work on this contract ended in September 2005. This contract was for the
research and development of improvements to the current 2kW diesel operated
generator set specifically at the request of the U.S. Army for smaller,
lighter, quieter models. It included efforts similar to those that the
Company had previously invested in specifically at the request of the U.S.
Army. There was no revenue from this contract in the first quarter of fiscal
year 2007. The Company earned approximately $146,000 from this contract
during the first quarter of fiscal year 2006, when work was completed on this
contract.
During September 2004, the Company was awarded a second "cost plus fixed fee"
research and development contract by the U.S. Army, in the amount of
approximately $1,500,000 for work to be performed towards similar objectives.
Work on this contract continued into September 2006 when funding was
substantially exhausted. An initial extension of the contract has been
granted by the U.S. Army and the Company is working toward a modification
incorporating additional funding. As a result of efforts towards this
project, the Company realized revenue of approximately $22,000 during the
first three-months of fiscal year 2007 compared with approximately $364,000
during the same period in fiscal year 2006.
The Company experiences variable amounts of material receipts from time to
time during the normal course of business. Material receipts are dependent
upon the receipt of orders, project requirements and vendor delivery
schedules. As the Company uses the percentage-of-completion method of
accounting to record revenues, material costs have an impact upon recorded
revenues (see Note 1-A, Revenue Recognition of the Notes to Financial
Statements in the Company's 2006 Form 10-K.
The aggregate value of the Company's backlog of electronic products not
previously recorded as revenues was $2.9 million as of September 30, 2006. It
is estimated that most of the present backlog will be billed during the next
12 months and be substantially recognized as fiscal year 2007 revenues.
As of September 30, 2005 the aggregate value of the Company's backlog of
electronic products not previously recognized as revenue was approximately
$3.2 million.
Leisure and Recreation Segment
______________________________
In the Leisure and Recreation segment, revenues in the first three-months of
fiscal year 2007 decreased by approximately $11,915 when compared to the same
three-months of fiscal year 2006. This is the result of a decrease in the
sale of repair and replacement parts for machinery previously sold and no
longer under warranty. There were no sales of finished snowmaking machines in
either period.
The market for snowmaking machines has changed in recent years. Rather than
ordering machinery many months in advance of delivery, 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 has produced some Snowcub
snowmaking machines for inventory purposes.
After the end of fiscal year 2006, management completed a review of the spare
parts business. Since introducing the H-2d snowmaker in 1971 the Company has
maintained the capacity to support all past models of snowmaking machines
that are still in use. However, starting in January 2007, the Company will
focus on customers using the most recent model line, the Snowcub. The
Company will continue to actively market and support the Snowcub model line
and will cease to support past models. As a result, for the fourth quarter
of fiscal year 2006, the Company recorded an adjustment of $299,596 against
inventory related to spares for old models of snow makers. The remaining
segment inventory at the end of fiscal 2006 was either new Snowcub machines
or spare parts for Snowcub models.
Gross Profit
____________
The Company's gross profit was $179,358 in the first quarter of fiscal year
2007, compared with a gross profit of $200,486 for the same period in fiscal
year 2006.
Gross margin is the measure of gross profit as a percentage of revenues.
Gross margin was 11% for the three-month period ended September 30, 2006 and
18% for the three-month period ended September 30, 2005. The Company's gross
margin is affected by a variety of factors including, among other items,
product mix, product pricing and product costs. Results for the first quarter
of fiscal year 2007 are due primarily to two factors. First is a change in
product mix as the Company has engaged in significantly less customer funded
research and development for the U.S. Army (see "Electronics Segment" above)
than it had engaged in during the same quarter in fiscal year 2006, while
realizing substantially greater revenue from the generator product line in
the first quarter of fiscal year 2007 compared to the same quarter in fiscal
year 2006. The reduction in customer funded research and development had the
effect of shifting a greater proportion of overhead cost absorption to other
product lines thereby reducing the gross margin generated by these other
product line revenues when compared to the same period in fiscal year 2006.
The second factor was an increase in costs related to metals, transportation
and foreign sourced components for the 2kw generator set product line. The
10-year indefinite delivery, indefinite quantity prime contract for generator
sets with the U.S. Army, awarded in 2001, allows for a small annual increase
in selling price. Gross profit has been reduced as a result of costs
increasing faster than the selling price. The Company is investigating an
appropriate pricing modification under the prime contract, however no
assurances can be made that the Government will agree to a modification, or
that such a modification would be equitable to the Company.
In the last quarter of fiscal year 2006 the Company instituted price
increases for future delivery of generators sold separately from the prime
contract. Delivery on these orders are just beginning in the second quarter
of fiscal 2007, however since the number of such generators is relatively
small, the Company does not anticipate a significant change in gross margin
as a result of this price increase.
Selling, General and Administrative Expenses
____________________________________________
Selling, General and Administrative expense for the three-months ended
September 30, 2006 were $339,074 or 21% of revenue. For the three-months
ended September 30, 2005, Selling, General and Administrative expenses
totaled $284,549 or 25% of revenue. Expenditures for the three-month period
ended September 30, 2006 were higher when compared with the same period last
year primarily due to higher legal and professional fees associated with the
year end audit and filing of the Company's 2006 Form 10-K.
Interest Expense
________________
Interest expense for the three-months ended September 30, 2006 was $2,151
compared to $7,793 for the same period last year. This reduction in interest
expense is attributed to principal reduction payments made towards the
Company's mortgage note as well as repayment of a $200,000 note payable to a
related party prior to the end of fiscal 2006.
Other Income - Net
__________________
Amounts reported as other income represent the net effect of interest and
miscellaneous items such as the sale of scrap, bank transaction fees and
other like items.
Other income of $4,399 for the three-months ended September 30, 2006 was
comprised of interest income of $2,623, and miscellaneous income of $1,776.
For the three-months ended September 30, 2005 other income of $3,954 was
comprised of interest income of $4,711 and miscellaneous expense of $757.
Net Loss before income taxes
_____________________________
Net loss before income taxes for the three-month period ended September 30,
2006 was $157,469. For the same period in 2005 net loss before income taxes
was $87,902.
Results for the first quarter of fiscal year 2007 decreased when compared to
the same period in fiscal year 2006 primarily due to lower gross profit and
higher Selling, General and Administrative costs as discussed above.
Taxes on Income
_______________
The Company has provided a valuation allowance against its net deferred tax
assets as it believes that it is more likely than not that it will not
realize these tax attributes. The Company has approximately $316,000 and
$333,000 of federal and state net operating loss carry forwards,
respectively, expiring beginning in 2012. Of these amounts, approximately
$43,000 and $9,000 of federal and state loss carry forwards, respectively,
are the result of net loss for the three-month period ending September 30,
2006.
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 of $500,000 (which is further
described below under Financing Activities) 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, 2006, the Company's working capital was $2,793,322 compared
to $3,475,207 at September 30, 2005.
The ratio of current assets to current liabilities was 4.39 to 1 at September
30, 2006 and 5.13 to 1 at September 30, 2005.
The following table is a summary of the Statements of Cash Flows in the
Company's Condensed Financial Statements:
Years ended September 30,
2006 2005
Net Cash used in
Operating activities ($387,167) ($136,369)
Investing activities ($14,107) ($74,222)
Financing activities ($38,652) ($38,651)
Operating Activities:
____________________
Adjustments to reconcile net loss to net cash provided by operations are
presented in the Statements of Cash Flows in the Company's Condensed
Financial Statements.
Net cash used in operating activities for the three-month period ended
September 30, 2006 was comprised primarily of net loss before depreciation
and amortization, increases in inventories and contract costs and related
profits in excess of applicable billings and decreases in accounts payable
and accrued pension expenses which were partly offset by decreases in
accounts receivable and prepaid expenses and an increase in accrued expenses.
Net cash used in operating activities for the three-months ended September
30, 2005 was comprised primarily of a net loss before depreciation and
amortization and a decrease in accounts payable which was partly offset by an
increase in accrued liabilities.
Company sponsored research and development costs are expensed as incurred.
These costs consist primarily of material and labor costs. The Company
expensed $12,809 of these costs during the three-month period ended September
30, 2006. For the same three-month period last year the Company expensed
$22,700 of research and development costs.
Investing Activities:
____________________
During the three-month period ending September 30, 2006 net cash of $14,107
was used in investing activities. This amount consisted of $14,201 used for
capital expenditures, and $86 of deferred costs.
During the three-month period ended September 30, 2005 investing activities
used net cash of $74,222. Of this amount, $60,920 was used for capital
expenditures and $13,303 was used by the Company for deferred costs.
Financing Activities:
____________________
During the three-month period ended September 30, 2006, net cash used in
financing activities amounted to $38,652. This amount was used toward the
repayment of the current portion of the Company's term loan as described
further below. As of September 30, 2006 the Company had no long-term debt.
Net cash used in financing activities in the same period in fiscal year 2006
amounted to $38,651 representing principal payments toward the long-term
portion of the Company's term loan as described below.
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 $47,395 was outstanding as of September 30, 2006, 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 (8.25%
as of September 30, 2006) plus 0.25 percent. Effective November 9, 2005,
this line of credit agreement was renewed through December 1, 2006. As of
September 30, 2006, 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. Management believes that the Company's line of
credit agreement will again be renewed with substantially the same terms and
conditions.
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 68 undeveloped and unused acres of this property, by
its sale and/or development. This endeavor has become more complex with the
implications of New Jersey's "Highlands Water Protection and Planning Act".
Although the Act was passed in June of 2004, the specifics are still
emerging. The Act identifies approximately 400,000 acres of New Jersey as
The Highlands Preservation Area. Pursuant to the statute, this area has the
most onerous restrictions on future development. The Company's property is
in this area, and further development would not be permitted without a waiver
or other relief from the State. The Company believes that there are strong
reasons why its property should not be in the preservation area, and is
attempting to affect a solution. The Company is currently awaiting the
promulgation of final regulations to assess its course of action. These final
regulations are not expected before February 2007. Accordingly, no assurances
can be given that these efforts will be successful or, if successful, the
timing thereof.
Recent Pronouncements
_____________________
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
"Considering the Effects of Prior Year Misstatements when quantifying
Misstatements in current Year Financial Statements" ("SAB 108"). SAB 108
requires that registrants quantify errors using both a balance sheet and
income statement approach and evaluate whether either approach results in a
misstated amount that, when all relevant quantitative and qualitative factors
are considered, is material. SAB 108 is effective for fiscal years ending
after November 15, 2006. The Company is currently evaluating the impact of
this Bulletin on its financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 158, "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Benefits" ("SFAS 158"). SFAS 158 addresses the
accounting for defined benefit pensions plans and other postretirement
benefit plans ("plans"). Specifically, SFAS 158 requires companies to
recognize an asset for a plan's overfunded status or a liability for a plan's
underfunded status and to measure a plan's assets and its obligations that
determine its funded status as of the end of the company's fiscal year, the
offset of which is recorded, net of tax, as a component of other
comprehensive income in shareholders' equity. SFAS 158 is effective for
fiscal years ending after December 15, 2006. The Company is currently
evaluating the impact of this Statement on its financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
This Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board
having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement
does not require any new fair value measurements. However, for some
entities, the application of this Statement will change current practice.
This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently evaluating the impact of this Statement on
its financial statements.
In July 2006, the FASB issued Financial Interpretation No. 48 (FIN 48)
Accounting for Uncertainty in Income Taxes, as Interpretation of FASB
Statement No. 109. This Interpretation clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, "Accounting for Income
Taxes". FIN 48 prescribes a recognition and measurement threshold
attributable for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosures and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact of this Interpretation on its financial statements.
Company Strategy
_________________
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 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 new 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 Snowcub models for inventory
purposes. Also in fiscal years 2004 and 2005, it enhanced the technical
capabilities as optional items for these machines.
After the end of fiscal year 2006, management completed a review of the
Company's spare parts business for its snowmaking machines. Since
introducing the H-2d snowmaker in 1971, the Company has maintained the
capacity to support all past snowmaking machines that are still in use.
However, starting in January 2007, the Company will focus on customers using
the most recent model line, the Snowcub. The Company will continue to
actively market and support the Snowcub line of machines and will cease to
support past models.
Despite the inherent risks and uncertainties of investing in inventory,
management believes that the investments in 2kW generator and Snowcub related
inventory and the ceasing of support for older Snowcub models 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 the U.S. Army's future requirements. The U.S. Army is
interested in a product that is smaller, lighter and quieter and the Company
is working towards developing the 2kW generators to address its customer's
request. 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 to the Company.
The Company has continued to invest in 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, the Company's management believes that despite
inherent risks and uncertainties in all of these types of projects, these
efforts are important to the Company's business. Management believes that
our current development projects will result in enhanced salable products.
As with all projects of this nature, the Company cannot give any assurances
that its product development work will be successful or that it will achieve
the desired results.
Management is also continuing to engage in efforts 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.
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. For additional discussion of the application of
these and other accounting policies, See Management's Discussion and Analysis
of Financial Condition and Results of Operations - Critical Accounting
Policies and Note 1 of the Notes to the Financial Statements included in the
Company's 2006 Form 10-K.
ITEM 3.Controls and Procedures
_______________________________
The Company carried out, under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and
Treasurer, an evaluation of the effectiveness of the design and operation of
its 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. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act is accumulated and
communicated to management, including its Chief Executive Officer and
Treasurer, as appropriate to allow timely decisions regarding required
disclosure. Based on this evaluation, the Chief Executive Officer and
Treasurer concluded that, as of September 30, 2006, the design and operation
of the Company's disclosure controls and procedures were not effective
because of the material weakness in the Company's internal control over
financial reporting described in the following paragraph.
In connection with its audit of the Company's financial statements for the
fiscal year ended June 30, 2006, the Company's independent registered public
accounting firm, Amper, Politziner & Mattia, P.C. ("AP&M"), informed
management and the Board of Directors that it had noted the following
conditions which it had concluded, in the aggregate, represent a material
weakness in the Company's internal control over financial reporting. Before
the audited financial statements for fiscal year 2006 were finalized, certain
audit adjustments related to significant non-routine matters were made to
such financial statements after being identified by AP&M and certain
disclosures required by GAAP were incorporated in such financial statements
and the notes thereto after being identified by AP&M. In addition, AP&M
advised management and the Board of Directors that the limited size of the
Company's accounting department makes it impractical in AP&M's view to
achieve an optimum separation of duties, and such limited size may restrict
the Company's ability to gather, analyze and report information relative to
the financial statements in a timely manner.
The Company intends to hire an additional staff member with the requisite
knowledge to ensure that the weakness identified by AP&M is properly
addressed and remedied as promptly as practicable. Nonetheless, a control
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the control system are met, and no
evaluation of controls can provide absolute assurance that all control issues
have been detected.
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 1A. Risk Factors
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors"
in our 2006 Form 10-K, which could materially affect our business, financial
condition or future results. The risks described in our 2006 Form 10-K are
not the only risks facing our Company. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or
operating results.
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 13, 2006 John H.D. Dewey
President and Chief Executive Officer
/s/ Stephen P. Krill
Date: November 13, 2006 Stephen P. Krill
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-B.
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