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 March 31, 2007
___ 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 PRECEDING 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 May 10, 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 -
March 31, 2007(unaudited) and June 30, 2006 3
Condensed Statements of Operations -
Three and Nine-months Ended March 31, 2007
and 2006 (unaudited) 4
Condensed Statements of Cash Flows for
the Nine-months Ended March 31, 2007
and 2006 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 3. Controls and Procedures 23
Part II Other Information
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 25
Item 4. Submission of Matters to a Vote of Security
Holders 25
Item 6. Exhibits 25
PART I: FINANCIAL INFORMATION
ITEM 1.CONDENSED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
CONDENSED BALANCE SHEETS
March 31, JUNE 30,
2007 2006
ASSETS: (unaudited)
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 370,450 $1,075,500
ACCOUNTS RECEIVABLE(net of $0 and
$6,181, respectively) 448,187 526,730
INVENTORIES 932,900 1,106,689
CONTRACT COSTS AND RELATED ESTIMATED
PROFITS IN EXCESS OF BILLINGS 1,053,689 932,411
PREPAID EXPENSES AND OTHER CURRENT ASSETS 174,330 176,057
_________ _________
TOTAL CURRENT ASSETS 2,979,556 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 3,091,387 3,073,925
FURNITURE AND FIXTURES 205,539 205,539
_________ _________
5,833,594 5,816,132
Less accumulated depreciation 4,740,794 4,650,562
_________ _________
1,092,800 1,165,570
CAPITALIZED DEVELOPMENT COSTS -- 703,799
DEFERRED COSTS 75,095 74,031
_________ _________
TOTAL OTHER ASSETS 75,095 777,830
TOTAL ASSETS $4,147,451 $5,760,787
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
NOTE PAYABLE -- $ 86,047
ACCOUNTS PAYABLE 192,771 358,427
ACCRUED EXPENSES AND OTHER LIABILITIES 144,748 212,349
ACCRUED COMPENSATION AND BENEFITS PAYABLE 142,938 156,550
ACCRUED PENSION COSTS 57,943 57,943
________ _________
TOTAL CURRENT LIABILITIES 538,400 871,316
________ _________
LONG-TERM PENSION LIABILITY 269,347 243,097
________ _________
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
March 31, 2007 and June 30, 2006 16,934 16,934
Additional paid-in capital 2,815,245 2,815,245
RETAINED EARNINGS 1,078,887 2,385,557
ACCUMULATED OTHER COMPREHENSIVE LOSS (84,334) (84,334)
_________ _________
3,826,732 5,133,402
LESS: TREASURY STOCK 331,366 SHARES, at cost (487,028) (487,028)
_________ _________
TOTAL STOCKHOLDERS' EQUITY 3,339,704 4,646,374
_________ _________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,147,451 $5,760,787
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE-MONTHS ENDED NINE-MONTHS ENDED
MARCH 31, MARCH 31
2007 2006 2007 2006
REVENUES $1,170,845 $2,170,870 $4,307,024 $5,261,509
COST OF REVENUES 1,671,786 1,929,752 4,505,397 4,584,528
_________ _________ _________ _________
GROSS PROFIT/(LOSS) (500,941) 241,118 (198,373) 676,981
SELLING,GENERAL &
ADMINISTRATIVE 414,267 371,220 1,108,912 1,033,917
_________ ________ _________ _________
OPERATING LOSS (915,208) (130,102) (1,307,285) (356,936)
INTEREST EXPENSE (36) (6,563) (5,181) (21,620)
OTHER INCOME - NET 1,087 3,809 5,796 10,544
________ ________ _________ ________
LOSS BEFORE INCOME TAXES (914,157) (132,856) (1,306,670) (368,012)
(PROVISION)/BENEFIT FOR
INCOME TAX -- 14,612 -- (36,462)
________ _______ _________ _______
NET LOSS $(914,157) $(118,244) $(1,306,670) $(404,474)
========= ========= =========== =========
NET LOSS PER COMMON
SHARE-BASIC $(0.67) $(0.09) $(0.96) $(0.30)
NET LOSS PER COMMON
SHARE-DILUTED $(0.67) $(0.09) $(0.96) $(0.30)
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)
NINE-MONTHS ENDED
MARCH 31,
2007 2006
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $(1,306,670) $(404,474)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION 90,232 85,500
DECREASE IN DEFERRED TAXES -- 51,074
WRITE OFF OF CAPITALIZED DEVELOPMENT
COSTS 703,799 --
DECREASE/(INCREASE) IN ACCOUNTS
RECEIVABLE 78,543 (23,198)
DECREASE/(INCREASE) IN INVENTORIES 173,788 (21,291)
INCREASE IN CONTRACT COSTS AND RELATED
ESTIMATED PROFITS IN EXCESS OF BILLINGS (121,278) (465,784)
DECREASE IN PREPAID EXPENSES AND
OTHER CURRENT ASSETS 1,727 5,684
INCREASE/(DECREASE) IN ACCOUNTS PAYABLE (165,656) 411,264
INCREASE/(DECREASE) IN ACCRUED EXPENSES AND
OTHER LIABILITIES (81,213) 135,291
INCREASE/(DECREASE) IN PENSION COSTS
ACCRUED 26,250 15,000
________ _______
TOTAL ADJUSTMENTS 706,192 193,540
________ _______
NET CASH USED IN OPERATING ACTIVITIES (600,478) (210,934)
________ _______
CASH FLOWS FROM INVESTING ACTIVITIES:
EXPENDITURES FOR PLANT, PROPERTY AND
EQUIPMENT (17,462) (101,061)
DEFERRED COST (1,063) (25,769)
________ _______
NET CASH USED IN INVESTING ACTIVITIES (18,525) (126,830)
________ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
PRINCIPAL PAYMENTS OF DEBT (86,047) (115,955)
________ ________
NET CASH USED IN FINANCING ACTIVITIES (86,047) (115,955)
________ ________
NET DECREASE IN CASH AND CASH EQUIVALENTS (705,050) (453,719)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,075,500 1,390,326
_________ _________
CASH AND CASH EQUIVALENTS AT END OF
PERIOD 370,450 $936,607
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
INTEREST PAID $5,181 $21,620
INTEREST RECEIVED 5,392 10,544
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 March 31, 2007, and the results of
operations and cash flows for the three months and nine-months then ended.
The results of operations and cash flows for the periods ended March 31, 2007
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 February 2007, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standard ("SFAS") No. 159 "The Fair Value
Option for Financial Assets and Financial Liabilities." SFAS 159 permits
entities to choose, at specified election dates, to measure eligible
financial instruments at fair value and report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each
subsequent reporting date. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company does not own any financial instruments
and does not expect this statement to have an effect on the Company's
financial statements.
In September 2006, the FASB issued 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:
March 31, 2007 June 30, 2006
Finished Goods $180,672 $194,885
Work In Progress 301,753 93,485
Raw Materials 450,475 818,319
________ _______
Total $932,900 $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 March 31, 2007 the Company has
approximately $712,000 and $402,000 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 7,435 and 9,041 as of March 31, 2007 and March 31, 2006,
respectively.
Three-months Ended March 31,
2007 2006
Per Per
Loss Shares Share Loss Shares Share
Amount Amount
Basic
Net
loss
per
common
share ($914,157) 1,362,031 ($.67) ($118,244) 1,362,031 ($.09)
Effect
Of
dilutive
Securities -- -- -- -- -- --
________ ________ _____ ________ _________ _____
Diluted
Net
Loss
per
common
share ($914,157) 1,362,031 ($.67) ($118,244) 1,362,031 ($.09)
========= ========= ==== ======== ========= ====
Nine-months Ended March 31,
2007 2006
Per Per
Loss Shares Share Loss Shares Share
Amount Amount
Basic
Net
loss
per
common
share ($1,306,670) 1,362,031 ($.96) ($404,474) 1,362,031 ($..30)
Effect
Of
dilutive
Securities -- -- -- -- -- --
__________ _________ ____ ________ _________ ______
Diluted
Net
Loss
per
common
share ($1,306,670) 1,362,031 ($.96) ($404,474) 1,362,031 ($.30)
============ ========= ===== ======== ========= ====
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 Nine-months ended
March 31, March 31,
2007 2006 2007 2006
Electronics Segment
Revenues $1,164,869 $2,157,634 $4,275,359 $5,091,912
Operating Loss (871,033) (96,641) (1,188,067) (278,064)
Leisure and Recreation
Segment
Revenues 5,976 13,236 31,665 169,597
Operating Loss (44,175) (33,641) (119,218) (78,872)
Total
Revenues 1,170,845 2,170,870 4,307,024 5,261,509
Operating Loss (915,208) (130,102) (1,307,285) (356,936)
Interest Expense (36) (6,563) (5,181) (21,620)
Other Income 1087 3,809 5,796 10,544
Income Tax Benefit/
(Provision) 0 14,612 0 (36,462)
________ _________ ________ ________
Net Loss $(914,157) $(118,244) $(1,306,670) $(404,474)
========= ========= =========== =========
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 nine month period
ended March 31, 2007 or in or in the nine month period ended March 31,
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 nine-months ended
March, 2007. 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 and nine-months ended March 31, 2006 is as follows:
Three-Months
Ended
March 31, 2006
Net loss, as reported ($118,244)
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 ($120,476)
=========
Earnings per share:
Basic - as reported ($.09)
=====
Basic - pro forma ($.09)
=====
Diluted - as reported ($.09)
=====
Diluted - pro forma ($.09)
=====
Nine-Months
Ended
March 31, 2006
Net loss, as reported ($404,474)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects 6,696
_________
Pro forma net loss ($411,170)
=========
Earnings per share:
Basic - as reported ($.30)
=====
Basic - pro forma ($.30)
=====
Diluted - as reported ($.30)
=====
Diluted - pro forma ($.30)
=====
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 were capitalized and have appeared 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 has
written-off all of its capitalized development costs totaling $703,799 to
cost of revenues in the quarter ended 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 2004 research and development contract with the U.S. Army,
discussed below under "Electronics Segment", expired 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 has written-
off all of its capitalized development costs totaling $703,799 to cost of
revenues in 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 loss of each segment for the three- and nine-month
periods ended March 31, 2007 and March 31, 2006 are set forth in Note 6 -
Operating Segments of the Notes to the Condensed Financial Statements.
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.
Revenues
--------
Revenues of $1,170,845 for the third quarter of fiscal year 2007(the three-
month period ended March 31, 2007) were 46% lower than in the third quarter
of fiscal year 2006 (the three-month period ended March 31, 2006) when
revenues were $2,170,870. Revenues for the third 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 nine-month period ended March 31, 2007, revenues totaled $4,307,024
which is 18% lower than total revenues of $5,261,509 for the nine-month
period ended March 31, 2006. Revenues were lower in both the Electronics and
Leisure and Recreation segments when compared to the same nine-month period
ending March 31, 2006.
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 third
quarter of fiscal year 2007 and 2006, respectively.
Revenues in the Electronics segment for the three-month period ended March
31, 2007 were $992,765 lower when compared to the same period in 2006. This
decrease in revenue is attributable to completion of the Company's research
and development contract with the U.S. Army in the previous fiscal quarter,
decreased production efforts under the Company's generator set production
contract with the U.S. Army and a decrease in revenue from various orders for
replacement parts and other short-term orders.
During the three-month period ended March 31, 2007, production efforts under
the Company's contract to provide the Armed Forces with 2kW diesel operated
generator sets provided approximately 62% of the Electronic segment revenues
compared to approximately 64% of such revenues in the same period in 2006.
The Company's research and development contracts did not provide any
Electronics segment revenues during the three-month period ended March 31,
2007, versus approximately 8% of such revenues in the same period in 2006.
Replacement parts and other short-term business provided approximately 38% of
such revenues in the three-month period ended March 31, 2007, and
approximately 28% of such revenues in the same period in 2006.
Revenues in the Electronics segment for the nine-month period ended March 31,
2007 were $816,553 lower when compared to the same period in 2006. This
decrease in revenue is the result of decreased production efforts under the
Company's generator set production contract with the U.S. Army and from a
slight 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 nine-
month period compared to the same period in 2006.
During the nine-month period ended March 31, 2007, production efforts under
the Company's contract to provide the Armed Forces with 2kW diesel operated
generator sets provided approximately 66% of the Electronic segment revenues
compared to approximately 53% of such revenues in the same period in 2006.
The Company's research and development contracts provided approximately 2% of
Electronics segment revenues during the nine-month period ended March 31,
2007, versus approximately 19% of such revenues in the same period in 2006.
Replacement parts and other short-term business provided approximately 32% of
such revenues in the nine-month period ended March 31, 2007, and
approximately 28% of such revenues in the same period in 2006.
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 or third fiscal quarters.
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 did not realize any revenue from this contract during the three-
month period ended March 31, 2007, compared with approximately $163,000
during the same period in 2006. During the nine-month period ended March 31,
2007 the Company recognized revenue of approximately $75,000 from this
contract, compared with approximately $975,000 during the same period in
2006. This contract expired on March 31, 2007 and, in connection therewith,
the Company has written-off 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 $3.1 million as of March 31, 2007. 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 March 31, 2006 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 March 31, 2007 decreased by approximately $7,260 when compared to the
same period in 2006. This is attributable to a decrease in the sale of
repair and replacement parts for machinery previously sold and no longer
under warranty.
During the nine-month period ended March 31, 2007, revenues decreased
approximately $137,932 when compared to the same period in 2006. This
decrease is attributable to both 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 Loss
----------
As a result of writing off $703,799 of capitalized development costs to cost
of revenues during the three-month period ended March 31, 2007 (see "Recent
Events above),the Company is reporting a gross loss of $500,941 compared to a
gross profit of $241,118 in the same three-month period last year.
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. Primarily as a result of the write
off of the Company's capitalized development costs, the Company had a
negative gross margin of (43%) for the three-month period ended March 31,
2007 compared to a gross margin of 11% for the three-month period ended March
31, 2006.
The reduction in gross margin compared to the same period last year is
primarily the result of the write-off of capitalized development costs, which
was partially offset by a higher proportion of spare and replacement part
sales as a percentage of total sales and lower fixed price revenue from
generators and research and development activities.
For the nine-month period ended March 31, 2007, the Company had a gross loss
of $198,373 compared to a gross profit of $676,981 for the nine-month period
ended March 31, 2006.
For the nine-month period ended March 31, 2007, the Company had a negative
gross margin of approximately (5%). For the nine-month period ended March
31, 2006, gross margin was approximately 13%.
Results for the first nine-months of fiscal year 2007 are due to several
factors in addition to the effect of the write-off of capitalized development
costs. 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 slightly greater revenue from the
generator product line in the first nine-months of fiscal year 2007 compared
to the same nine-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 March
31, 2007 were $414,267 or 35% of revenue. For the three-months ended March
31, 2006, Selling, General and Administrative expenses totaled $371,220 or
17% of revenue.
Selling, General and Administrative expense for the nine-months ended March
31, 2007 were $1,108,912 or 26% of revenue. For the nine-months ended March
31, 2006, Selling, General and Administrative expenses totaled $1,033,917 or
20% of revenue. Expenditures for the nine-month period ended March 31, 2007
were higher when compared with the same period in 2006 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
and costs related to personnel changes.
Interest Expense
----------------
Interest expense for the three-months ended March 31, 2007 was $36 compared
to $6,563 for the same period in 2006. This reduction in interest expense is
due to the final payment of the Company's mortgage note in January 2007 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 nine-months ended March 31, 2007 was $5,181 compared
to $21,620 for the same period last year. This reduction in interest expense
is attributed to principal reduction payments and final payment of 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 $1,087 for the three-months ended March 31, 2007 was
comprised of interest income of $1,112, and miscellaneous expense of $25.
For the three-months ended March 31, 2006, other income of $3,809 was
comprised of interest income of $4,412 and miscellaneous expense of $603.
Other income of $5,796 for the nine-months ended March 31, 2007 was comprised
of interest income of $5,391, and miscellaneous income of $405.
For the nine-months ended March 31, 2006, other income of $10,544 was
comprised of interest income of $12,670 and miscellaneous expense of $2,126.
Net Loss before income taxes
---------------------------
Net loss before income taxes for the three-month period ended March 31, 2007
was $914,157. For the same period in 2006 net loss before income taxes was
$132,856.
Results for the third quarter of fiscal year 2007 decreased when compared to
the same period in fiscal year 2006 primarily due to the write-off of
capitalized development costs totaling $703,799 to cost of revenues (see
"Recent Events" above). In addition to the effect of the write-off of
capitalized development costs, the greater loss from operating activities in
the third quarter of fiscal year 2007 compared to the same period in 2006 is
primarily the result of substantially lower revenues during the quarter when
compared to the same period last year.
Net loss before income taxes for the nine-month period ended March 31, 2007
was $1,306,670. For the same period in 2006 net loss before income taxes was
$368,012.
As noted above results for the nine-month period ended March 31, 2007
decreased when compared to the same period in 2006 primarily due to the
write-off of capitalized development costs and substantially lower revenues
when compared to the same nine-month period last year.
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 $712,000 and
$402,000 of federal and state net operating loss carry forwards,
respectively, expiring beginning in 2012. Of these amounts, approximately
$439,000 and $78,000 of federal and state loss carry forwards, respectively,
are the result of the net loss for the nine-month period ending March 31,
2007.
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. This line of credit expired on February
28, 2007. (For further discussion, see below under "Financing Activities".)
As of March 31, 2007 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 March 31, 2007, the Company's working capital was $2,441,156 compared to
$2,946,071 at June 30, 2006.
The ratio of current assets to current liabilities was 5.53 to 1 at March 31,
2007 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:
Nine-months ended March 31,
2007 2006
Net Cash provided by(used in)
Operating activities ($600,478) ($210,934)
Investing activities $(18,525) ($126,830)
Financing activities ($86,047) ($115,955)
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 nine-month period ended March
31, 2007 was comprised primarily of net loss before depreciation, 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 and the write-off of
capitalized development costs.
During the nine month period ended March 31, 2006, net cash used in operating
activities was comprised primarily of net loss before depreciation and
increases in accounts receivable, inventory and contract costs and related
profits in excess of billings. These were partly offset by a decrease in
deferred taxes and increases in accounts payable and accrued liabilities.
Company sponsored research and development costs are expensed as incurred.
These costs consist primarily of material and labor costs. The Company
expensed $68,652 of these costs during the nine-month period ended March 31,
2007. For the nine-month period ended March 31, 2006, the Company expensed
$45,886 of research and development costs.
Investing Activities:
--------------------
During the nine-month period ended March 31, 2007, net cash of $18,525 was
used in investing activities. This amount consisted of $17,462 used for
capital expenditures, and $1,063 of deferred costs.
During the nine-month period ended March 31, 2006, investing activities used
net cash of $126,830. Of this amount, $101,061 was used for capital
expenditures and $25,769 was used by the Company for deferred costs.
Financing Activities:
--------------------
During the nine-month period ended March 31, 2007, net cash used in financing
activities amounted to $86,047. This amount was used toward the repayment of
the current portion of the Company's term loan as described further below.
As of March 31, 2007, the Company had no long-term debt and had repaid the
term loan.
Net cash used in financing activities during the nine-month period ended
March 31, 2006 amounted to $115,955. 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 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 had 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. In February
2007, the Bank advised the Company that the Bank would not further renew the
line of credit. The Company is endeavoring to obtain a replacement credit
facility from another lending institution.
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. Although
final regulations were expected in February 2007, based on information from
the State, they have been again delayed by the State and are now not expected
until August 2007 at the earliest. Accordingly, no assurances can be given
that these efforts will be successful or, if successful, the timing thereof.
Recent Pronouncements
---------------------
In February 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities." SFAS 159 permits
entities to choose, at specified election dates, to measure eligible
financial instruments at fair value and report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each
subsequent reporting date. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company does not own any financial instruments
and does not expect this statement to have an effect on the Company's
financial statements.
In September 2006, the FASB issued 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 is focusing 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 near 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 March 31, 2007, 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
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None
Item 4. Submission of Matters to a Vote of Security Holders
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None
Item 6. Exhibits
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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: May 15, 2007 John H.D. Dewey
President and Chief Executive Officer
/s/ Stephen P. Krill
Date: May 15, 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