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 December 31, 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 TO ISSUERS 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 February 8,
2007.
_______________________________________
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 -
December 31, 2006(unaudited) and June 30, 2006 3
Condensed Statements of Operations -
Three and Six-months Ended December 31, 2006
and 2005 (unaudited) 4
Condensed Statements of Cash Flows for
the Six-months Ended December 31, 2006
and 2005 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Item 3. Controls and Procedures 22
Part II Other Information
Item 1A. Risk Factors
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.CONDENSED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
CONDENSED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2006 2006
ASSETS: (unaudited)
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $585,253 $1,075,500
ACCOUNTS RECEIVABLE(net of $6,181
reserve on June 30, 2006) 399,788 526,730
INVENTORIES 918,092 1,106,689
CONTRACT COSTS AND RELATED ESTIMATED
PROFITS IN EXCESS OF BILLINGS 1,088,850 932,411
PREPAID EXPENSES AND OTHER CURRENT
ASSETS 142,655 176,057
TOTAL CURRENT ASSETS 3,134,638 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 3,088,895 3,073,925
FURNITURE AND FIXTURES 205,539 205,539
5,831,102 5,816,132
Less accumulated depreciation 4,710,717 4,650,562
1,120,385 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 $5,032,939 $5,760,787
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
NOTE PAYABLE $ 8,744 $ 86,047
ACCOUNTS PAYABLE 235,284 358,427
ACCRUED EXPENSES AND OTHER
LIABILITIES 100,927 212,349
ACCRUED COMPENSATION AND BENEFITS
PAYABLE 125,583 156,550
ACCRUED PENSION COSTS 57,943 57,943
TOTAL CURRENT LIABILITIES 528,481 871,316
LONG-TERM PENSION LIABILITY 250,597 243,097
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 December 31,
2006 and June 30, 2006 16,934 16,934
Additional paid-in capital 2,815,245 2,815,245
RETAINED EARNINGS 1,993,044 2,385,557
ACCUMULATED OTHER COMPREHENSIVE
LOSS (84,334) (84,334)
4,740,889 5,133,402
LESS: TREASURY STOCK 331,366 SHARES
at cost (487,028) (487,028)
TOTAL STOCKHOLDERS' EQUITY 4,253,861 4,646,374
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $5,032,939 $5,760,787
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE-MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2006 2005 2006 2005
REVENUES $1,490,408 $1,974,374 $3,136,179 $3,090,639
COST OF REVENUES 1,367,198 1,738,997 2,833,611 2,654,776
GROSS PROFIT 123,210 235,377 302,568 435,863
SELLING,GENERAL &
ADMINISTRATIVE 355,571 378,148 694,645 662,697
OPERATING LOSS (232,361) (142,771) (392,077) (226,834)
INTEREST EXPENSE (2,994) (7,264) (5,145) (15,057)
OTHER INCOME - NET 311 2,781 4,709 6,735
LOSS BEFORE INCOME TAXES (235,044) (147,254) (392,513) (235,156)
PROVISION FOR INCOME TAX -- (86,235) -- (51,074)
NET LOSS $(235,044) $(233,489) $(392,513) $(286,230)
========== ========== ========== ==========
NET LOSS PER COMMON
SHARE-BASIC $(0.17) $(0.17) $(0.29) $(0.21)
NET LOSS PER COMMON
SHARE-DILUTED $(0.17) $(0.17) $(0.29) $(0.21)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
BASIC 1,362,031 1,362,031 1,362,031 1,362,031
DILUTED 1,362,031 1,362,031 1,362,031 1,362,031
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX-MONTHS ENDED
DECEMBER 31,
2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $(392,513) $(286,230)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION 60,155 57,000
DECREASE IN ACCOUNTS RECEIVABLE 126,942 112,895
DECREASE IN INVENTORIES 188,597 190,448
INCREASE IN CONTRACT COSTS AND
RELATED ESTIMATED PROFITS IN
EXCESS OF BILLINGS (156,439) (236,023)
DECREASE IN PREPAID EXPENSES AND
OTHER CURRENT ASSETS 33,402 53,922
DECREASE IN ACCOUNTS PAYABLE (123,143) (230,695)
INCREASE/(DECREASE) IN ACCRUED
EXPENSES AND OTHER LIABILITIES (142,389) 118,684
INCREASE IN LONG-TERM PENSION LIABILITY 7,500 --
INCREASE IN ACCRUED CORPORATE INCOME
TAXES -- 51,074
TOTAL ADJUSTMENTS (5,375) 117,305
NET CASH USED IN OPERATING ACTIVITIES (397,888) (168,925)
CASH FLOWS FROM INVESTING ACTIVITIES:
EXPENDITURES FOR PLANT, PROPERTY AND
EQUIPMENT (14,970) (88,687)
DEFERRED COSTS (86) (23,339)
NET CASH USED IN INVESTING ACTIVITIES (15,056) (112,026)
CASH FLOWS FROM FINANCING ACTIVITIES:
PRINCIPAL PAYMENTS OF DEBT (77,303) (77,303)
NET CASH USED IN FINANCING ACTIVITIES (77,303) (77,303)
NET DECREASE IN CASH AND CASH
EQUIVALENTS (490,247) (358,254)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,075,500 1,390,326
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 585,253 $1,032,072
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
INTEREST PAID $5,145 $15,057
INTEREST RECEIVED 4,279 8,258
CORPORATE INCOME TAXES PAID -- 7,825
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 December 31, 2006, and the
results of operations and cash flows for the three months and six months
then ended. The results of operations and cash flows for the periods ended
December 31, 2006 are not necessarily indicative of the results of
operations or cash flows to be expected for any subsequent quarters or the
full fiscal year ending June 30, 2007.
Revenue Recognition
-----------------
Revenues and estimated earnings under long-term 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. For the
Company's indefinite delivery, indefinite quantity contract to provide 2kW
generator sets to the military and for orders from other government
subcontractors for 2kW generators, percentage-of-completion calculations
are based on individual "Delivery Orders" which are periodically received
for specified quantities. For research and development contracts total
costs incurred are compared to total expected costs for each contract.
The Company uses the percentage-of-completion method to recognize revenue
for its replacement parts business when the dollar amount of the order to
be delivered in a future period or periods is material, and the duration of
the work will span multiple reporting periods. Revenue and earnings for
all other orders for replacement parts are recorded when deliveries of
product are made and title and risk of loss have been transferred to the
customer and collection is probable.
For those contracts where revenue has been recognized using the percentage-
of-completion method of accounting, 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:
December 31, 2006 June 30, 2006
Finished Goods $194,885 $194,885
Work In Progress 246,951 93,485
Raw Materials 476,256 818,319
Total $918,092 $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. As of December 31, 2006 the Company has
approximately $406,000 and $348,000 of federal and state net operating loss
carry forwards, respectively, expiring beginning in 2012 through 2014.
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
net loss per share due to their anti-dilutive effect. The weighted average
number of such excluded shares is 6,311 and 6,879 as of December 31, 2006
and December 31, 2005, respectively.
Three-months Ended December 31,
2006 2005
Per Per
Loss Shares Share Loss Shares Share
Amount Amount
Basic Net
Loss per
common
share ($235,044) 1,362,031 ($.17) ($233,489) 1,362,031 ($.17)
Effect of
dilutive
Securities -- -- -- -- -- --
Diluted
Net Loss
per common
share ($235,044) 1,362,031 ($.17) ($233,489) 1,362,031 ($.17)
========= ========= ==== ========= ========= ====
Six-months Ended December 31,
2006 2005
Per Per
Loss Shares Share Loss Shares Share
Amount Amount
Basic Net
Loss per
common
share ($392,513) 1,362,031 ($.29) ($286,230) 1,362,031 ($.21)
Effect of
dilutive
Securities -- -- -- -- -- --
Diluted
Net Loss
per common
Share ($392,513) 1,362,031 ($.29) ($286,230) 1,362,031 ($.21)
========= ========= ===== ========= ========= =====
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 Six-months ended
December 31, December 31,
2006 2005 2006 2005
Electronics Segment
Revenues $1,474,864 $1,840,073 $3,110,490 $2,934,278
Operating Loss (185,150) (109,959) (317,034) (181,603)
Leisure and Recreation
Segment
Revenues 15,544 134,301 25,689 156,361
Operating Loss (47,211) (32,812) (75,043) (45,231)
Total
Revenues 1,490,408 1,974,374 3,136,179 3,090,639
Operating Loss (232,361) (142,771) (392,077) (226,834)
Interest Expense (2,994) (7,264) (5,145) (15,057)
Other Income 311 2,781 4,709 6,735
Income Tax Benefit/Expense 0 (86,235) 0 (51,074)
Net Loss $(235,044) $(233,489) $(392,513) $(286,230)
========= ========= ========= =========
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 (January 1, 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 January 1, 2006
were fully vested prior to implementation of SFAS No. 123R. 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 six-months ended
December 31, 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
six-months ended December 31, 2005 is as follows:
Three-Months
Ended
December 31, 2005
Net (loss), as reported ($233,489)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 2,232
Pro forma net loss ($235,721)
=========
Earnings per share:
Basic - as reported ($.17)
=====
Basic - pro forma ($.17)
=====
Diluted - as reported ($.17)
=====
Diluted - pro forma ($.17)
=====
Six-Months
Ended
December 31, 2005
Net (loss), as reported ($286,230)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 4,465
Pro forma net loss ($290,695)
=========
Earnings per share:
Basic - as reported ($.21)
=====
Basic - pro forma ($.21)
=====
Diluted - as reported ($.21)
=====
Diluted - pro forma ($.21)
=====
Note 8. Capitalized Development Costs
----------------------------------------
For several years, the Company has invested in research and development
efforts to improve its 2kW generator product at the request of its
customer, the United States Army. Initial efforts were at the Company's
expense and certain of these development costs arising from the Company's
early efforts to develop new technologies have been capitalized and appear
on the balance sheet as "Capitalized Development Costs". These Company-
sponsored efforts were subsequently supplemented by two customer-funded
research and development contracts with the U.S. Army. The Company has not
capitalized any costs associated with the customer-funded contracts.
Work under the first of the Company's customer-funded research and
development contracts with the U.S. Army ended in September of 2005. Work
under the second contract continued into September of 2006 when funding was
substantially exhausted. In September 2006 the Company was granted an
extension of the contract to allow work toward a contract modification
incorporating additional funding and a limited amount of work was performed
through December 2006 using most of the remaining funding from the
contract. A second extension was granted in late December 2006 to allow
the Company to continue to work toward obtaining a contract modification
incorporating additional funding.
In late January 2007 the U.S. Army informed the Company that there had been
a significant change in Army staff and priorities related to the 2kW
Generator Program, and that there would be no further funding under the
contract. A final extension was granted through March 31, 2007 to allow
the Company to prepare and submit final reports and documents for the
completion of the contract. As a result of this development regarding
funding, the Company expects to write-off to operating expense an
impairment of all of its capitalized development costs. As of June 30, 2006
and December 31, 2006, the aggregate value of these costs was $703,799.
This impairment charge will be reflected in the Company's financial
statements for the fiscal quarter ending March 31, 2007.
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-QSB, 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.
Recent Events
------------
The Company's current research and development contract with the U.S. Army,
discussed below under "Electronics Segment", will expire on March 31, 2007.
As disclosed in the Company's Form 10Q-SB filed with the Securities and
Exchange Commission on November 13, 2006, work on this contract (for the
research and development of improvements to the Company's current 2kW
diesel operated generator performed specifically at the request of the U.S.
Army) continued into September 2006 when funding was substantially
exhausted. In September 2006 the Company was granted an extension of the
contract to allow work toward a contract modification incorporating
additional funding and a limited amount of work was performed through
December 2006 using most of the remaining funding from the contract. A
second extension was granted in late December 2006 to allow the Company to
continue to work toward obtaining a contract modification incorporating
additional funding.
In late January 2007 the U.S. Army informed the Company that there had been
a significant change in Army staff and priorities related to the 2kW
Generator Program and there would be no further funding under the contract.
A final extension was granted through March 31, 2007 to allow the Company
to prepare and submit final reports and documents for the completion of the
contract. As a result of this development regarding funding, the Company
expects to write-off to operating expense an impairment of all of its
capitalized development costs. As of June 30, 2006 and December 31, 2006,
the aggregate value of these costs was $703,799. This impairment charge
will be reflected in the Company's financial statements for the fiscal
quarter ending March 31, 2007. See Note 8, Capitalized Development Costs
of the Notes to the Condensed Financial 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.
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 three- and six-month
periods ended December 31, 2006 and December 31, 2005 are set forth in Note
6 - Operating Segments of the Notes to the Condensed Financial Statements.
Revenues
--------
Revenues of $1,490,408 for the second quarter of fiscal year 2007(the
three-month period ended December 31, 2006) were 25% lower than in the
second quarter of fiscal year 2006 (the three-month period ended December
31, 2005) when revenues were $1,974,374. Revenues for the second quarter of
fiscal year 2007 were lower in both the Electronics segment and the Leisure
and Recreation segment when compared to the same period in fiscal year
2006.
For the six-month period ended December 31, 2006, revenues totaled
$3,136,179 which is 1% higher than total revenues of $3,090,639 for the
six-month period ended December 31, 2005. Revenues in the Electronics
segment were higher and Leisure and Recreation segment revenues were lower
when compared to the same six-month period ending December 31, 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 and estimated earnings under long-term
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. For the Company's indefinite delivery, indefinite quantity
contract to provide 2kW generator sets to the military and for orders from
other government subcontractors for 2kW generators, percentage-of-
completion calculations are based on individual "Delivery Orders" which are
periodically received for specified quantities. For research and
development contracts total costs incurred are compared to total expected
costs for each contract.
The Company uses the percentage-of-completion method to recognize revenue
for its replacement parts business where the dollar amount of the order
to be delivered in a future period or periods is material, and the duration
of the work will span multiple reporting periods. Revenue and earnings
for all other orders for replacement parts is recorded when delivery of the
product is made and title and risk of loss has transferred to the customer
and collection is probable.
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. For those contracts where revenue has been recognized
using percentage-of-completion method of accounting, 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, Revenue Recognition of the Notes to the Condensed Financial Statements.
Electronic product revenues accounted for 99% of total revenues for the
second quarter of fiscal year 2007, compared with 93% of total revenues for
the second quarter of fiscal year 2006.
Revenues in the Electronics segment for the three-month period ended
December 31, 2006 were $365,209 lower when compared to the same period in
2005. This decrease in revenue is attributable to decreased revenue
realized under the Company's research and development contract with the
U.S. Army, decreased production efforts under the Company's generator set
production contract with the U.S. Army and a small decrease in revenue from
various orders for replacement parts and other short-term orders. Revenues
resulting from the Company's research and development contracts described
below were significantly lower in this three-month period compared to the
same period in 2005 as a result of the completion of only a limited amount
of work due to funding constraints, as described further in "Recent Events"
above.
During the three-month period ended December 31, 2006, production efforts
under the Company's contract to provide the Armed Forces with 2kW diesel
operated generator sets provided approximately 60% of the Electronic
segment revenues compared to approximately 54% of such revenues in the same
period in 2005. The Company's research and development contracts provided
approximately 4% of Electronics segment revenues during the three-month
period ended December 31, 2006, versus approximately 16% of such revenues
in the same period in 2005. Replacement parts and other short-term business
provided approximately 36% of such revenues in the three-month period ended
December 31, 2006, and approximately 30% of such revenues in the same
period in 2005.
Revenues in the Electronics segment for the six-month period ended December
31, 2006 were $176,212 higher when compared to the same period in 2005.
This increase in revenue is the result of increased production efforts
under the Company's generator set production contract with the U.S. Army
and from an increase in revenue from various orders for replacement parts
and other short-term orders. Revenues resulting from the Company's research
and development contracts described below were significantly lower in this
six- month period compared to the same period in 2005.
During the six-month period ended December 31, 2006, production efforts
under the Company's contract to provide the Armed Forces with 2kW diesel
operated generator sets provided approximately 68% of the Electronic
segment revenues compared to approximately 45% of such revenues in the same
period in 2005. The Company's research and development contracts provided
approximately 2% of Electronics segment revenues during the six-month
period ended December 31, 2006, versus approximately 28% of such revenues
in the same period in 2005. Replacement parts and other short-term
business provided approximately 30% of such revenues in the six-month
period ended December 31, 2006, and approximately 27% 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 either the first
or second quarters of fiscal year 2007. The Company realized revenue of
approximately $146,000 from this contract during the first quarter of
fiscal year 2006, when work was completed on this contract and there was no
additional revenue in the second fiscal quarter.
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. The Company realized revenue of approximately $53,000 from
this contract during the three-month period ended December 31, 2006,
compared with approximately $364,000 during the same period in 2005.
During the six-month period ended December 31, 2006 the Company recognized
revenue of approximately $75,000 from this contract, compared with
approximately $665,000 during the same period in 2005. This contract will
expire on March 31, 2007 and, in connection therewith, the Company expects
to write-off to operating expense an impairment of all of its capitalized
development costs. See "Recent Events" above.
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 $2.5 million as of December 31, 2006.
It is estimated that most of the present backlog will be billed during the
next 12 months and be substantially recognized as fiscal years 2007 and
2008 revenues.
As of December 31, 2005 the aggregate value of the Company's backlog of
electronic products not previously recognized as revenue was approximately
$4.0 million.
Leisure and Recreation Segment
------------------------------
In the Leisure and Recreation segment, revenues for the three-month period
ended December 31, 2006 decreased by approximately $118,757 when compared
to the same period in 2005. This is attributable to a lack of sales of
finished machines during the three-month period ended December 31, 2006 and
a decrease in the sale of repair and replacement parts for machinery
previously sold and no longer under warranty.
During the six-month period ended December 31, 2006, revenues decreased
approximately $130,672 when compared to the same period in 2005. As with
the three-month period above this decrease is attributable to a lack of
sales of finished snowmaking machines and a decrease in sales of repair and
replacement parts for previously sold snowmaking machines.
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 is focusing 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 $123,210 for the second quarter of fiscal
year 2007, compared with gross profit of $235,377 for the second quarter of
fiscal year 2006.
Gross margin is the measure of gross profit as a percentage of revenues.
It is affected by a variety of factors including, among other items,
product mix, product pricing, and product costs. The Company's gross
margin was 8% for the three-month period ended December 31, 2006 and 12%
for the three-month period ended December 31, 2005. The decrease in gross
margin is attributable to a decrease in revenues when the three-month
period ended December 31, 2006 is compared to the same period in 2005
(principally in customer sponsored research and development), while certain
of the Company's fixed manufacturing costs during this three month period
remained at substantially the same levels as in 2005.
For the six-month period ended December 31, 2006, the Company's gross
profit was $302,568 compared to $435,863 for the six-month period ended
December 31, 2005.
For the six-month period ended December 31, 2006, the Company's gross
margin was approximately 10%. During the six-month period ended December
31, 2005, gross margin was approximately 14%. Results for the first six
months of fiscal year 2007 are due to several factors. First is a change in
product mix as the Company 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 period in fiscal year 2006,
while realizing substantially greater revenue from the generator product
line in the first six months of fiscal year 2007 compared to the same six-
months 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 with contractually fixed selling
prices, 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 Company's 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 began in the second quarter of fiscal
year 2007, however since the number of such generators is relatively small,
the Company did not realize 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
December 31, 2006 were $355,571 or 24% of revenue. For the three-months
ended December 31, 2005, Selling, General and Administrative expenses
totaled $378,148 or 19% of revenue.
Selling, General and Administrative expense for the six-months ended
December 31, 2006 were $694,645 or 22% of revenue. For the six-months
ended December 31, 2005, Selling, General and Administrative expenses
totaled $662,697 or 21% of revenue. Expenditures for the six-month period
ended December 31, 2006 were higher when compared with the same period in
2005 primarily due to higher legal and professional fees associated with
the year end audit and filing of the Company's 2006 Form 10-K in the first
fiscal quarter of 2007.
Interest Expense
----------------
Interest expense for the three-months ended December 31, 2006 was $2,994
compared to $7,264 for the same period in 2005. This reduction in interest
expense is attributable 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 year 2006.
Interest expense for the six-months ended December 31, 2006 was $5,145
compared to $15,057 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 $311 for the three-months ended December 31, 2006 was
comprised of interest income of $1,656, and miscellaneous expense of
$1,345.
For the three-months ended December 31, 2005, other income of $2,781 was
comprised of interest income of $3,547 and miscellaneous expense of $764.
Other income of $4,709 for the six-months ended December 31, 2006 was
comprised of interest income of $4,279, and miscellaneous income of $430.
For the six-months ended December 31, 2005, other income of $6,735 was
comprised of interest income of $8,258 and miscellaneous expense of $1523.
Net Loss before income taxes
---------------------------
Net loss before income taxes for the three-month period ended December 31,
2006 was $235,044. For the same period in 2005 net loss before income taxes
was $147,254.
Results for the second quarter of fiscal year 2007 decreased when compared
to the same period in fiscal year 2006 primarily due to lower gross profit
which was partly offset by lower Selling, General and Administrative costs
as discussed above.
Net loss before income taxes for the six-month period ended December 31,
2006 was $392,513. For the same period in 2005 net loss before income taxes
was $235,156.
Results for the six-month period ended December 31, 2006 decreased when
compared to the same period in 2005 primarily due to lower gross profit and
slightly greater 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 $406,000 and
$348,000 of federal and state net operating loss carry forwards,
respectively, expiring beginning in 2012. Of these amounts, approximately
$133,000 and $24,000 of federal and state loss carry forwards,
respectively, are the result of the net loss for the six-month period ending
December 31, 2006.
Liquidity and Capital Resources
------------------------------
Historically, the Company's capital expenditures, debt servicing
requirements and working capital needs have been financed by cash flow from
operations, progress payments on various government contracts (based on
cost incurred.) and a line of credit of $500,000. As of December 31, 2006
no amounts were drawn on this line of credit, and the line will expire on
February 28, 2007. (For further discussion, see below under "Financing
Activities".)
As of December 31, 2006 the Company had no material capital expenditure
commitments. Management believes that the Company's current cash combined
with progress payments will be sufficient to support short-term liquidity
requirements, working capital needs and capital expenditures at their
current or expected levels.
At December 31, 2006, the Company's working capital was $2,606,158 compared
to $2,946,071 at June 30, 2006.
The ratio of current assets to current liabilities was 5.93 to 1 at
December 31, 2006 and 4.38 to 1 at June 30, 2006.
The following table is a summary of the Statements of Cash Flows in the
Company's Condensed Financial Statements:
Six months ended December 31,
2006 2005
Net Cash used in
Operating activities ($397,888) ($168,925)
Investing activities ($15,056) ($112,026)
Financing activities ($77,303) ($77,303)
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 six-month period ended
December 31, 2006 was comprised primarily of net loss before depreciation
and amortization, an increase in contract costs and related estimated
profits in excess of billings and decreases in accounts payable and accrued
liabilities which were partly offset by decreases in inventories, accounts
receivable, prepaid expenses, and other current assets.
Net cash used in operating activities for the six-months ended December 31,
2005 was comprised primarily of a net loss before depreciation and
amortization and a decrease in accounts payable, a decrease in deferred
taxes, and an increase in contract costs and related estimated profits in
excess of billings. These were partly offset by decreases in inventories,
accounts receivable, prepaid expenses and other current assets and 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 $30,819 of these costs during the six-month period ended December
31, 2006. For the six-month period ended December 31, 2005, the Company
expensed $41,313 of research and development costs.
Investing Activities:
--------------------
During the six-month period ended December 31, 2006, net cash of $15,056
was used in investing activities. This amount consisted of $14,970 used for
capital expenditures, and $86 of deferred costs.
During the six-month period ended December 31, 2005, investing activities
used net cash of $112,026. Of this amount, $88,687 was used for capital
expenditures and $23,339 was used by the Company for deferred costs.
Financing Activities:
---------------------
During the six-month period ended December 31, 2006, net cash used in
financing activities amounted to $77,303. This amount was used toward the
repayment of the current portion of the Company's term loan as described
further below. As of December 31, 2006, the Company had no long-term debt.
Net cash used in financing activities during the six-month period ended
December 31, 2005 amounted to $77,303. This amount was used toward the
repayment of 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 $8,744 was outstanding as of December 31, 2006, was
secured by a first lien on all of the Company's accounts receivable,
machinery, equipment and other personal property (the "Collateral") and was
subject to customary representations, covenants and default provisions in
favor of the Bank. On January 22, 2007, the Company made the final
installment payment on this term loan.
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 December 31, 2006) plus 0.25 percent. Effective December 1,
2006, this line of credit agreement was renewed through February 28, 2007.
As of December 31, 2006, there were no outstanding borrowings against this
line of credit facility. In February 2007, the Bank advised the Company
that, except for a possible short-term extension while the Company seeks to
replace the line of credit, the Bank would not further renew the line of
credit.
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 been successful in obtaining many contracts to provide a
wide array of products and services. Management believes that this
experience is a significant positive competitive factor. Management is
continuing to explore other areas of business with the Department of
Defense, which are capable of providing stability and growth.
The Company is focusing its efforts on select product categories where
management believes that the Company has the best chances of successfully
growing its business. Although no assurances can be made that such a
strategy will be successful, management believes that long-term growth can
best be achieved by: 1) growing the Company's market share in areas where
the Company already has a strong presence, 2) expanding into related
markets with existing products and capabilities, and 3) further taking
advantage of the Company's strengths by expanding into related product
categories.
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. 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 and
the market for snowmaking equipment now demands short delivery lead-times.
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 Company's investments in 2kW generator and
Snowcub-related inventory are an important component of management's
business strategy of growing the Company's market share.
Despite the inherent risks and uncertainties of investing in inventory,
management believes that these investments in inventory are important
because they allow the Company to be more responsive to the needs of its
customers.
The Company is also sharpening its market focus and concentrating its
efforts where it believes it has the best chances of success. As another
important component of management's business strategy of growing the
Company's market share, 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.
The Company faces competition in many areas and from companies of various
sizes, capabilities and resources. 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. As part of its overall
business strategy management is continuing to re-enforce customer awareness
of the Company's current and past performance as a Department of Defense
supplier, its product quality and reliability, and its historically strong
customer relationships.
In response to the U.S. Army's change in priorities regarding the 2kW
Generator Program (see "Recent Events" above) management has re-evaluated
its approach to the second and third strategic objectives described above.
Rather than continuing to develop new internal technologies, the Company is
now attempting to capitalize on its previous investments in technology
in its efforts to obtain business from the U.S. Army in related
power markets and to expand into related military product categories.
In the nearer term, a return to profitability is the Company's primary
objective. The Company's efforts to achieve this include exploring
opportunities for piece and component manufacturing work and other short-
term business that would utilize existing factory capacities and
capabilities. Additionally, the Company is pursuing possible subcontracting
relationships with other defense contractors that leverage the Company's
current expertise and technology.
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 December 31, 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
--------------------------------------------------------------
On December 6, 2006, at the Company's annual meeting of shareholders, the
following six directors were elected to serve for the ensuing year. Set
forth below are the number of votes cast for, or withheld with respect to,
each such person (who were the Company's nominees for directors):
Name For Withheld
Frances D. Dewey 1,142,497 53,110
John H.D. Dewey 1,186,617 8,990
James M. Link 1,186,117 9,490
John B. Rhodes 1,185,945 9,662
Nathaniel Roberts 1,185,967 9,640
Ronald Tassello 1,186,117 9,490
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: February 14, 2007 John H.D. Dewey
President and Chief Executive Officer
/s/ Stephen P. Krill
Date: February 14, 2007 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