UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - QSB
(Mark One)
_X_ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 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 issuers classes of
common equity, as of the latest practicable date: 1,362,031 at November
12, 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 -
September 30, 2007 (unaudited)
and June 30, 2007 3
Condensed Statements of Operations -
Three-months Ended September 30, 2007
and September 30, 2006 (unaudited) 4
Condensed Statements of Cash Flows -
Three-months Ended September 30, 2007
and September 30, 2006 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Managements Discussion and Analysis or
Plan of Operations 10
Item 3. Controls and Procedures 19
Part II Other Information
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 20
Item 4. Submission of Matters to a Vote of Security
Holders 20
Item 6. Exhibits 20
2
PART I: FINANCIAL INFORMATION
ITEM 1.CONDENSED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
CONDENSED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2007 2007
ASSETS: (unaudited)
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $344,488 $432,337
ACCOUNTS RECEIVABLE, net of
allowance for doubtful
accounts of $3,981 1,065,745 922,627
INVENTORIES 924,604 701,425
CONTRACT COSTS AND RELATED
ESTIMATED PROFITS IN EXCESS
OF BILLINGS 1,473,463 581,619
PREPAID EXPENSES AND OTHER
CURRENT ASSETS 150,454 147,686
_________ ________
TOTAL CURRENT ASSETS 3,958,754 2,785,694
_________ _________
PLANT, PROPERTY AND EQUIPMENT
LAND AND IMPROVEMENTS 651,015 651,015
BUILDING AND IMPROVEMENTS 1,885,653 1,885,653
MACHINERY AND EQUIPMENT 3,092,505 3,091,584
FURNITURE AND FIXTURES 205,539 205,539
_________ _________
5,834,712 5,833,791
Less accumulated depreciation 4,803,780 4,776,078
_________ _________
1,030,932 1,057,713
_________ _________
DEFERRED COSTS 75,095 75,095
_________ _________
TOTAL ASSETS $5,064,781 $3,918,502
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY:
CURRENT LIABILITIES:
TRADE ACCOUNTS PAYABLE 857,463 253,908
DEFERRED REVENUE 406,800 --
ACCRUED EXPENSES AND OTHER
LIABILITIES 314,870 201,910
ACCRUED COMPENSATION AND BENEFITS
PAYABLE 144,428 151,769
ACCRUED PENSION LIABILITY 88,653 103,653
_______ _______
TOTAL CURRENT LIABILITIES 1,812,214 711,240
_________ _______
LONG-TERM PENSION LIABILITY 261,545 261,545
STOCKHOLDERS EQUITY:
Preferred stock, par value $1.00;
authorized 250,000 shares,
issued and outstanding-none, -- --
Common stock, par value $.01;
authorized 3,000,000 shares;
issued 1,693,397 at September 30,
2007 and June 30, 2007 16,934 16,934
Additional paid-in capital 2,815,245 2,815,245
RETAINED EARNINGS 748,653 703,348
ACCUMULATED OTHER COMPREHENSIVE LOSS (102,782) (102,782)
_________ _________
3,478,050 3,432,745
LESS: TREASURY STOCK 331,366
SHARES at cost (487,028) (487,028)
_________ _________
TOTAL STOCKHOLDERS EQUITY 2,991,022 2,945,717
_________ _________
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY $5,064,781 $3,918,502
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
3
THE DEWEY ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE-MONTHS ENDED SEPTEMBER 30,
2007 2006
REVENUES $2,232,096 $1,645,771
COST OF REVENUES 1,852,494 1,466,413
__________ __________
GROSS PROFIT 379,602 179,358
SELLING,GENERAL & ADMINISTRATIVE 334,576 339,074
__________ __________
OPERATING INCOME/(LOSS) 45,026 (159,716)
INTEREST EXPENSE -- (2,151)
OTHER INCOME NET 279 4,398
__________ __________
INCOME/(LOSS) BEFORE INCOME TAXES 45,305 (157,469)
INCOME TAX BENEFIT -- --
__________ __________
NET INCOME/(LOSS) $45,305 $(157,469)
========== ==========
NET INCOME/(LOSS) PER COMMON
SHARE-BASIC $0.03 $(0.12)
NET INCOME/(LOSS) PER COMMON
SHARE-DILUTED $0.03 $(0.12)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
BASIC 1,362,031 1,362,031
DILUTED 1,362,883 1,362,031
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
4
THE DEWEY ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE-MONTHS ENDED
SEPTEMBER 30,
2007 2006
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME/(LOSS) $45,305 $(157,469)
_______ _________
ADJUSTMENTS TO RECONCILE NET INCOME/(LOSS)
TO NET CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION 27,702 30,077
(INCREASE)/DECREASE IN ACCOUNTS RECEIVABLE (143,118) 393,615
INCREASE IN INVENTORIES (223,179) (286,893)
(INCREASE) IN CONTRACT COSTS AND
ESTIMATED PROFITS IN EXCESS OF APPLICABLE
BILLINGS (891,844) (360,206)
(INCREASE)/DECREASE IN PREPAID EXPENSES AND
OTHER CURRENT ASSETS (2,768) 14,634
INCREASE/(DECREASE) IN ACCOUNTS PAYABLE 603,555 (15,568)
INCREASE IN DEFERRED REVENUE 406,800 --
INCREASE IN ACCRUED EXPENSES AND
OTHER LIABILITIES 105,619 5,893
DECREASE IN ACCRUED PENSION LIABILITY (15,000) (11,250)
_________ ________
TOTAL ADJUSTMENTS (132,233) (229,167)
_________ ________
NET CASH USED IN OPERATING ACTIVITIES (86,928) (387,167)
_________ ________
CASH FLOWS FROM INVESTING ACTIVITIES:
EXPENDITURES FOR PLANT, PROPERTY AND
EQUIPMENT (921) (14,021)
DEFERRED COSTS -- (86)
_________ ________
NET CASH USED IN INVESTING ACTIVITIES (921) (14,107)
_________ ________
CASH FLOWS FROM FINANCING ACTIVITIES:
PRINCIPAL PAYMENTS OF NOTE PAYABLE -- (38,652)
_________ ________
NET CASH USED IN FINANCING ACTIVITIES -- (38,652)
_________ ________
NET DECREASE IN CASH AND CASH EQUIVALENTS (87,849) (439,926)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 432,337 1,075,500
_________ _________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $344,488 $635,574
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
INTEREST PAID $ -- $2,151
INTEREST RECEIVED 220 2,624
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
5
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 Companys Annual Report on Form 10-
KSB for the fiscal year ended June 30, 2007 (the 2007 Form 10-KSB).
In the opinion of the Companys management, the accompanying unaudited
condensed financial statements contain all adjustments (consisting of
normal recurring adjustments) necessary to present fairly, in all material
respects, the Companys financial position as of September 30, 2007, and
the results of operations and cash flows for the three-months then ended.
The results of operations and cash flows for the period ended September 30,
2007 are not necessarily indicative of the results of operations or cash
flows to be expected for any subsequent quarter or the full fiscal year
ending June 30, 2008.
As of September 30, 2007, there have been no material changes to any of the
significant accounting policies, described in our Annual Report on Form 10-
KSB for the fiscal year ended June 30, 2007, except for the adoption of
Financial Interpretation No. 48, Accounting for Uncertainty in Income
Taxes.
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
Companys 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.
Income Taxes
____________
In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48) which
clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB Statement No.
109, Accounting for Income Taxes. FIN 48 prescribes a recognition
threshold and measurement criteria 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, disclosure, and
transition and defines the criteria that must be met for the benefits of a
tax position to be recognized. The cumulative effect of the change in
accounting principle must be recorded as an adjustment to beginning
retained earnings. The Company has completed its evaluation of the impact
of the Companys July 1, 2007 adoption of FIN 48 and determined that such
adoption did not have a material impact on its financial statements.
The tax years 1999 to 2006 remain open to examination by the major taxing
jurisdictions to which we are subject.
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
Companys 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.
3. Inventories
_______________
Inventories consist of:
September 30, 2007 June 30, 2007
Finished Goods $165,751 $165,751
Work In Progress 161,181 137,678
Raw Materials 597,672 397,996
________ ________
Total $924,604 $701,425
======== ========
4. Taxes on Income
___________________
The Company has provided a valuation allowance against its net deferred tax
assets as it believes that it is more likely than not that it will not
realize these tax attributes. The Company has approximately $1,100,000 and
$202,000 of federal and state net deferred tax assets, respectively,
expiring beginning in 2012. Of these amounts, reductions of approximately
$7,000 and $3,000 of federal and state net deferred tax assets,
respectively, are the result of net income for the three-month period
ending September 30, 2007.
5. Earnings Per Share
______________________
Net income/(loss) per share has been presented pursuant to SFAS No. 128,
Earnings per Share. Basic net income/(loss) per share is computed by
dividing reported net income/(loss) available to common shareholders by
weighted average shares outstanding for the period. Diluted net
income/(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 income or loss per common share
computations. Certain stock options were excluded from the computation of
earnings per share due to their anti-dilutive effect. For the three-months
ended September 30, 2007 the number of shares excluded from the calculation
was 16,000 due to the exercise price of the options exceeding the average
share price for the quarter and for the three-months ended September 30,
2006 the number of shares excluded from the calculation was 35,000 due to
the anti-dilutive effect they would have on the basic net loss.
Three-months Ended September 30,
2007 2006
Per Per
Income Shares Share Loss Shares Share
Amount Amount
Basic net
income/
(loss
Per
Common
Share $45,305 1,362,031 $.03 ($157,469) 1,362,031 ($.12)
Effect of
dilutive
Securities -- 852 -- -- -- --
Diluted
net income/
(loss) per
common
share $45,305 1,362,883 $.03 ($157,469) 1,362,031 ($.12)
======= ========= ==== ======== ========= ====
8
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 purchasers
expense beyond the warranty period. Total revenue by segment represents
sales to unaffiliated customers, as reported in the Companys 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 Companys 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
Companys totals:
Three-months ended
September 30,
2007 2006
Electronics Segment
Revenues $2,227,763 $1,635,626
Operating Income/(Loss) 79,054 (131,885)
Leisure and Recreation Segment
Revenues 4,333 10,145
Operating (Loss) (34,028) (27,831)
Total
Revenues 2,232,096 1,645,771
Operating Income/(Loss) 45,026 (159,716)
Interest Expense -- (2,151)
Other Income 279 4,398
________ ________
Net Income/(Loss) $45,305 $(157,469)
======== =========
9
THE DEWEY ELECTRONICS CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN 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 Companys 2007 Form 10-KSB.
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 Companys operations, markets, products, services and
prices and, specifically, the factors discussed below under Financing
Activities, and Company Strategy and in Item 1 (Description of Business
Operational Risks) of the Companys 2007 Form 10-KSB. 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 Companys operating cycle is long-term and includes various types of
products and varying delivery schedules. Accordingly, results of a
particular period or period-to-period comparison of recorded revenues and
earnings may not be indicative of future operating results. The following
comparative analysis should be viewed in this context.
Operating Segments
___________________
The Company is organized into two operating segments on the basis of the
types of products offered. Each segment is comprised of separate and
distinct businesses: the Electronics Segment - primarily business with the
Department of Defense, and the Leisure and Recreation segment - primarily
business with ski areas and resorts.
In the Electronics Segment, the Company is a producer of electronic and
electromechanical systems for the Armed Forces of the United States. The
Company provides its products in this segment either as a prime contractor
or as a subcontractor for the Department of Defense.
In the Leisure and Recreation segment, the Company, through its HEDCO
Division, designs, manufactures and markets advanced, sophisticated
snowmaking equipment. It also supplies replacement parts for items no
longer covered under warranty.
Some operating expenses, including general corporate expenses, have been
allocated to each segment by specific identification or based on labor for
items which are not specifically identifiable.
There are no intersegment sales.
10
Results of Operations
______________________
The Companys operating cycle is long-term and includes various types of
products and varying delivery schedules. Accordingly, results of a
particular period or period-to-period comparisons of recorded revenues and
earnings may not be indicative of future operating results. The following
comparative analysis should be viewed in this context.
The sales and operating profit of each segment for the first quarter of
fiscal year 2008 (the three-month period ended September 30, 2007) and the
first quarter of fiscal year 2007 (the three month period ended September
30, 2006) are set forth in Note 6 Operating Segments of the Notes to the
Condensed Financial Statements.
Revenues
________
Revenues of $2,232,096 for the three-month period ended September 30, 2007
were 36% higher than in the same period in 2006 when revenues were
$1,645,771. Revenues for the three-month period ended September 30, 2007
were higher in the Electronics Segment and lower in the Leisure and
Recreation segment when compared to the same period in 2006. Information
about the Companys 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 Companys 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.
Electronic product revenues accounted for 99% of total revenues for the
first quarter of fiscal year 2008, compared with 99% of total revenues for
the first quarter of fiscal year 2007.
Revenues in the Electronics Segment for the three-month period ended
September 30, 2007 were $592,137 higher when compared to the same period in
2006. This increase in revenue is attributable to initial production
efforts under a short-term contract to provide the United States Marine
Corps with a 3.5kW generator set as described further below and from
various orders for replacement parts and other short-term orders. Revenues
resulting from the Companys research and development contracts were also
higher in this three-month period compared to the same period last year as
initial work was begun on two customer sponsored research and development
subcontracts as described further below.
11
During the three-month period ended September 30, 2007, production efforts
under the Companys contracts to provide the Armed Forces with 2kW and
3.5kW diesel operated generator sets provided approximately 75% of the
Electronic segment revenues compared to approximately 75% of such revenues
in the same period last year. The Companys research and development
contracts provided approximately 6% of Electronics Segment revenues during
the three-month period ended September 30, 2007, versus approximately 1% of
such revenues in the same period last year. Replacement parts and other
short-term business provided approximately 19% of such revenues in the
three-month period ended September 30, 2007, and approximately 24% of such
revenues in the same period in 2006.
In March 2007, the Company was awarded three related research and
development sub-contracts, in the amount of approximately $230,400 in the
aggregate, to research and develop electronic controls for diesel fuel cell
reformers. Work on these contracts began in the first fiscal quarter
(ended September 30, 2007) and is expected to extend until April 2008. No
assurances can be given that the Company will receive any future production
orders as a result of these sub-contracts or that the Company will be
awarded any additional research and development contracts or sub-contracts.
In July 2007 the Company received a subcontract to develop an armored 3
kilowatt 28 volt DC auxiliary power unit than can be mounted on the back of
the USMC main battle tank, the Abrams M1A1. The development contract, for
$646,400, was awarded by the USMC Tank Program Office, in Quantico, VA,
through a sub-contract administered by CACI, Eatontown, NJ, and has the
possibility of a follow-on production contract. Work on this contract also
began in the first quarter of fiscal 2008 and is expected to continue into
the quarter ending March 31, 2008. No assurance can be made that the
Company will receive any future production orders as a result of this
contract or that the Government will award the Company any additional
development contracts.
In August 2007, the Company received a new contract to provide auxiliary
power systems for the United States Marine Corps (USMC) Logistic
Vehicle. This contract, awarded by the USMC Systems Command, Quantico,
VA, consists of a base year and three option years, exercisable at the
Governments option. The initial delivery order for the Logistic Vehicle
Power System (LVPS), valued at approximately $2.3 million, has been
received with an accelerated delivery of 150 days. Work under current
delivery orders is expected to continue through December 2007. The LVPS is
a diesel-powered 3.5 kilowatt 28 volt DC generator providing power to
equipment that protects against improvised explosive devices. It is based
on the Companys existing 2 kilowatt military tactical generator.
Previously, on September 28, 2004, the Company was awarded a cost plus
fixed fee research and development contract by the U.S. Army, in the
amount of approximately $1.5 million, for research and development of a
lighter, quieter 2kW diesel generator. Work on this project continued
through September 2006 when funding for the project was substantially
exhausted and the contract expired on March 31, 2007. As a result the
Company did not realize any revenue from this contract during the first
three months of fiscal 2008 and the Company realized approximately $22,000
during the first three-months of fiscal year 2007.
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 Companys 2007 Form 10-KSB).
12
The aggregate value of the Companys backlog of electronic products not
previously recorded as revenues was $8.1 million as of September 30, 2007.
It is estimated that most of the present backlog will be billed during the
next 12 months and be substantially recognized as fiscal year 2008
revenues.
As of September 30, 2006 the aggregate value of the Companys backlog of
electronic products not previously recognized as revenue was approximately
$2.9 million.
Leisure and Recreation Segment
______________________________
In the Leisure and Recreation segment, revenues in the first three-months
of fiscal year 2008 decreased by approximately $5,812 when compared to the
same three-months of fiscal year 2007. This is the result of a decrease in
the sale of repair and replacement parts for machinery previously sold and
no longer under warranty. There were no sales of finished snowmaking
machines in either period.
The market for snowmaking machines has changed in recent years. Rather
than ordering machinery many months in advance of delivery, customers are
expecting product to be readily available for immediate use. The last year
in which the Company had a backlog of orders for snowmaking machines was in
2001. In order to remain competitive, the Company has produced some
Snowcub snowmaking machines for inventory purposes.
Gross Profit
____________
The Companys gross profit was $379,602 in the first quarter of fiscal year
2008, compared with a gross profit of $179,358 for the same period in
fiscal year 2007.
Gross margin is the measure of gross profit as a percentage of revenues.
Gross margin was 17% for the three-month period ended September 30, 2007
and 11% for the three-month period ended September 30, 2006. The Companys
gross margin is affected by a variety of factors including, among other
items, product mix, product pricing and product costs. Results for the
first quarter of fiscal year 2008 are due primarily to two factors. The
first factor is the addition of production efforts under the Companys
short-term contract to provide the United States Marines with 3.5kW
generator sets and the second factor is an increase in customer sponsored
research and development activities. The increased efforts in these two
areas provides a greater basis for allocating the Companys fixed
production costs thereby improving the margins on all of the Companys
product lines. Additionally the selling price of the 3.5kW generators is
reflective of current material costs unlike the 2kW generator contract, the
gross margin on which has diminished over time due to material costs rising
faster than price increases allowed in the contract.
In the last quarter of fiscal year 2006 the Company instituted price
increases for delivery of generators sold separately from the prime
contract. Delivery on these orders during the first quarter of fiscal 2008
reflect this price increase, however, since the number of such generators
is relatively small, the contribution to gross margin from these sales was
not significant.
Selling, General and Administrative Expenses
____________________________________________
Selling, General and Administrative expense for the three-months ended
September 30, 2007 were $334,576 or 15% of revenue. For the three-months
ended September 30, 2006, Selling, General and Administrative expenses
totaled $339,074 or 21% of revenue. Expenditures for the three-month
period ended September 30, 2007 were slightly lower when compared with the
same period last year primarily due to lower legal and professional fees
associated with the year end audit and filing of the Companys 2007 Form
10-KSB, partly offset by increased product development efforts.
13
Interest Expense
________________
The Company had no interest expense for the three-months ended September
30, 2007 compared to $2,151 for the same period last year. This reduction
in interest expense is a result of the Company paying off its mortgage note
during fiscal 2007.
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 $279 for the three-months ended September 30, 2007 was
comprised of interest income of $220, and miscellaneous income of $59.
For the three-months ended September 30, 2006 other income of $4,398 was
comprised of interest income of $2,623 and miscellaneous income of $1,775.
Net Income/Loss before income taxes
___________________________________
Net Income before income taxes for the three-month period ended September
30, 2007 was $45,305. For the same period in 2006 net loss before income
taxes was $157,469.
Results for the first quarter of fiscal year 2008 increased when compared
to the same period in fiscal year 2007 primarily due to higher gross profit
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 $1,100,000 and
$202,000 of federal and state net deferred tax assets, respectively,
expiring beginning in 2012. Of these amounts, reductions of approximately
$7,000 and $3,000 of federal and state net deferred tax assets,
respectively, are the result of net income for the three-month period
ending September 30, 2007.
Liquidity and Capital Resources
_______________________________
Historically, the Companys 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. Starting in fiscal year 2008, the Company
has changed the way it progress bills on new contracts. The Company now
attempts to negotiate payment based on achievement of milestones rather
than relying on demonstration of incurred costs. This approach is expected
to result in the Company receiving payment at or before the time it must
pay its vendors. The two new contracts described under Electronics
Segment above that were received early in fiscal year 2008 have been
structured this way and the Company intends to continue this approach where
possible.
As of June 30, 2007 the Company had no material capital expenditure
commitments. Management believes that the Companys current cash combined
with progress and milestone payments as well as billings at the time of
delivery of products will be sufficient to support short-term liquidity
requirements, working capital needs and capital expenditures at their
current or expected levels.
At September 30, 2007, the Companys working capital was $2,146,540
compared to $2,793,322 at September 30, 2006.
14
The ratio of current assets to current liabilities was 2.18 to 1 at
September 30, 2007 and 4.39 to 1 at September 30, 2006.
The following table is a summary of the Statements of Cash Flows in the
Companys Condensed Financial Statements:
Years ended September 30,
2007 2006
Net Cash used in
Operating activities ($86,928) ($387,167)
Investing activities ($921) ($14,107)
Financing activities -- ($38,652)
Operating Activities:
____________________
Adjustments to reconcile net loss to net cash provided by operations are
presented in the Statements of Cash Flows in the Companys Condensed
Financial Statements.
Net cash used in operating activities for the three-month period ended
September 30, 2007 was comprised primarily of net income before
depreciation and amortization, increases in accounts receivable,
inventories, contract costs and related profits in excess of applicable
billings and decreases in accrued pension expenses which were partly
offset by increases in accounts payable, deferred revenue and accrued
expenses.
Net cash used in operating activities for the three-months ended September
30, 2006 was comprised primarily of a net loss before depreciation and
amortization increases in inventories and contract costs and related
profits in excess of applicable billings and a decrease in accounts payable
which was partly offset by decreases in accounts receivable and prepaid
expenses and an increase in accrued expenses.
Company sponsored research and development costs are expensed as incurred.
These costs consist primarily of material and labor costs. The Company
expensed $39,499 of these costs during the three-month period ended
September 30, 2007. For the same three-month period last year the Company
expensed $12,809 of research and development costs.
Investing Activities:
____________________
During the three-month period ending September 30, 2007 net cash of $921
was used in investing activities all of which was used for capital
expenditures.
During the three-month period ended September 30, 2006 investing activities
used net cash of $14,107. Of this amount, $14,021 was used for capital
expenditures and $86 was used by the Company for deferred costs.
Financing Activities:
____________________
During the three-month period ended September 30, 2007, the Company
expended no cash on financing activities.
Net cash used in financing activities in the same period in fiscal year
2007 amounted to $38,652 representing principal payments toward the long-
term portion of the Companys 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 Companys 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 Companys 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.
15
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 Banks prime rate
(8.25% as of December 31, 2006) plus 0.25 percent. In February 2007, the
Bank advised the Company that the Bank would not further renew the line of
credit. This line of credit is currently not vital for the Company;
however 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 Jerseys Highlands Water Protection
and Planning Act.
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 Companys 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.
However, since the Act was passed in June of 2004, the State has repeatedly
delayed promulgation of final regulations. Originally expected in 2005,
based on information from the State, they have again been delayed by the
State and are not now expected until late 2007 at the earliest.
Accordingly, no assurances can be given that the Companys 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 Companys 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.
16
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 Companys 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 Companys strengths by expanding into related product
categories.
The Companys 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 Companys 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 Companys investments in 2kW generator and
Snowcub-related inventory are an important component of managements
business strategy of growing the Companys 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 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 Companys current and past performance as a Department of Defense
supplier, its product quality and reliability, and its historically strong
customer relationships.
The U.S. Army has changed its priorities regarding product improvements to
the 2kW Generator Program (see Electronics Segment above). These
priorities have shifted away from long range product improvement toward
less extensive, more immediate product improvement. As a result 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 in related
military power markets and to expand into related military product
categories. For additional discussion of the Companys prior efforts at
long range product improvements to the 2kW Generator Program, see
Managements Discussion and Analysis of Financial Condition and Results of
Operations Electronics Segment included in the Companys 2007 Form 10-
KSB.
The contract to develop and provide a 3.5kW auxiliary power unit for use on
a United States Marine Corps logistics vehicle and the subcontract to
develop a 3kW enclosed generator for mounting on a United States Marine
Corps battle tank are examples of the second strategic objective, expanding
into related power markets, utilizing the Companys core expertise in light
weight air cooled diesel engine power generation. In furtherance of the
third strategic objective, expanding into related military product
categories, the Company is utilizing its experience in military-grade
portable power systems under three related customer funded research and
development sub-contracts where the Company will design and prototype
electronic controls for diesel fuel cell systems (See Electronics Segment
above).
17
In the near term, a continued return to profitability is the Companys
primary objective. The two new development contracts, and the customer-
funded research and development sub-contracts, described above contribute
to this goal. At present, the Company is not actively pursuing
opportunities for piece and component manufacturing work and other short-
term business that would utilize existing factory capacities and
capabilities as discussed in its Form 10-QSB for the period ending March
31, 2007, due to the lack of excess capacity in the Companys factory.
However, the Company may consider pursuing such opportunities in the
future. The Company is continuing to pursue possible sub-contracting
relationships with other companies and defense contractors that leverage
the Companys current expertise and technology.
Critical Accounting Policies and Estimates
___________________________________________
The Companys 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 managements most difficult, subjective or complex
judgments, often as a result of matters that are inherently uncertain and
may change in subsequent periods. The Companys critical accounting
policies include revenue recognition on contracts and contract estimates,
pensions, impairment of long-lived assets, and valuation of deferred tax
assets and liabilities. For additional discussion of the application of
these and other accounting policies, see Managements 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 Companys 2007 Form 10-KSB.
18
ITEM 3. Controls and Procedures
The Company carried out, under the supervision and with the participation
of the Companys management, including the Chief Executive Officer and
Treasurer, an evaluation of the effectiveness of the design and operation
of its disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of
the fiscal quarter covered by this report. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act is
accumulated and communicated to management, including its Chief Executive
Officer and Treasurer, as appropriate to allow timely decisions regarding
required disclosure. Based on this evaluation, the Chief Executive Officer
and Treasurer concluded that, as of September 30, 2007, the design and
operation of the Companys disclosure controls and procedures were
effective.
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 Companys internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.
19
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits
------------------------------------------------------------------
See the accompanying Index to Exhibits to this quarterly report on Form 10-
QSB.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE DEWEY ELECTRONICS CORPORATION
/s/ John H.D. Dewey
Date: November 12, 2007 John H.D. Dewey
President and Chief Executive Officer
/s/ Stephen P. Krill
Date: November 12, 2007 Stephen P. Krill
Treasurer
20
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