UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - Q (Mark One) _X_ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2010 ___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 Indicate by check mark whether the registrant has(1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES_X_ NO___ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (SS232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES X No ___ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer__ ___ Accelerated filer _____ Non-accelerated filer _____ Smaller reporting company__X_ (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES___ NO_X_ 1 APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 1,362,031 at February 11, 2011. 2 THE DEWEY ELECTRONICS CORPORATION INDEX Page No. Part I Financial Information Item 1. Condensed Financial Statements Condensed Balance Sheets - December 31, 2010(unaudited) and June 30, 2010 4 Condensed Statements of Operations - Three and Six-months Ended December 31, 2010 and 2009 (unaudited) 5 Condensed Statements of Cash Flows for the Six-months Ended December 31, 2010 and 2009 (unaudited) 6 Notes to Condensed Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 4. Controls and Procedures 18 Part II Other Information Item 6. Exhibits 20 3 PART I: FINANCIAL INFORMATION ITEM 1.CONDENSED FINANCIAL STATEMENTS THE DEWEY ELECTRONICS CORPORATION CONDENSED BALANCE SHEETS DECEMBER 31, JUNE 30, 2010 2010 (unaudited) ASSETS: CURRENT ASSETS: Cash and cash equivalents $ 691,756 $ 777,511 Accounts receivable (net of allowance for doubtful accounts of $25,000 at December 31, 2010) 708,357 659,852 Inventories 685,122 553,472 Contract costs and related estimated profits in excess of billings 613,410 730,977 Prepaid expenses and other current Assets 47,059 47,829 ---------- ---------- TOTAL CURRENT ASSETS 2,745,704 2,769,641 ___________ __________ PLANT, PROPERTY AND EQUIPMENT: Land and improvements 651,015 651,015 Building and improvements 1,885,653 1,885,653 Machinery and equipment 3,192,823 3,189,648 Furniture and fixtures 259,096 257,777 ---------- ---------- 5,988,587 5,984,093 Less accumulated depreciation 5,120,926 5,080,666 ---------- ---------- 867,661 903,427 ---------- ---------- DEFERRED COSTS 65,095 65,095 ---------- ---------- TOTAL ASSETS $3,678,460 $3,738,163 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Trade accounts payable $ 354,410 $ 91,187 Accrued expenses and other Liabilities 254,250 242,127 Accrued compensation and benefits Payable 137,622 170,822 Accrued pension costs 13,361 50,022 --------- ---------- TOTAL CURRENT LIABILITIES 759,643 554,158 ----------- ---------- LONG-TERM PENSION LIABILITY 525,905 525,905 ----------- ---------- STOCKHOLDERS' EQUITY: Preferred stock, par value $1.00; authorized 250,000 shares, issued and outstanding-none, -- -- Common stock, par value $.01; authorized 3,000,000 shares; issued 1,693,397 at December 31, 2010 and June 30, 2010 16,934 16,934 Additional paid-in capital 2,841,697 2,827,457 Retained earnings 388,451 667,879 Accumulated other comprehensive loss (367,142) (367,142) ---------- ----------- 2,879,940 3,145,128 Less: Treasury stock 331,366 shares at cost (487,028) (487,028) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 2,392,912 2,658,100 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,678,460 $3,738,163 See accompanying notes to condensed financial statements 4 THE DEWEY ELECTRONICS CORPORATION CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) THREE-MONTHS ENDED SIX-MONTHS ENDED DECEMBER 31, DECEMBER 31, 2010 2009 2010 2009 REVENUES $1,953,281 $2,393,429 $3,568,764 $4,739,907 COST OF REVENUES 1,661,562 1,960,528 3,010,945 3,942,387 ---------- ---------- ---------- --------- GROSS PROFIT 291,719 432,901 557,819 797,520 SELLING,GENERAL & ADMINISTRATIVE 445,747 417,855 837,431 841,873 --------- -------- --------- -------- OPERATING INCOME/(LOSS) (154,028) 15,046 (279,612) (44,353) INTEREST EXPENSE/(INCOME) -- (177) -- 1,387 OTHER INCOME/(EXPENSE) - NET (1,135) 1,217 184 (4,803) -------- ------- ------- ------- INCOME/(LOSS) BEFORE INCOME TAXES (155,163) 16,440 (279,428) (50,543) PROVISION FOR INCOME TAX 0 0 0 0 ------- -------- -------- -------- NET INCOME/(LOSS) $(155,163) $ 16,440 $(279,428) $ (50,543) ========= ========= ========= ========= NET INCOME/(LOSS) PER COMMON SHARE-BASIC $ (0.11) $ 0.01 $ (0.21) $ (0.04) NET INCOME/(LOSS) PER COMMON SHARE-DILUTED $ (0.11) $ 0.01 $ (0.21) $ (0.04) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC 1,362,031 1,362,031 1,362,031 1,362,031 DILUTED 1,362,031 1,363,165 1,362,031 1,362,031 SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS 5 THE DEWEY ELECTRONICS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX-MONTHS ENDED DECEMBER 31, 2010 2009 CASH FLOWS FROM OPERATING ACTIVITIES NET INCOME/(LOSS) $(279,428) $(50,543) --------- -------- ADJUSTMENTS TO RECONCILE NET INCOME/(LOSS) TO NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION 40,260 52,652 STOCK OPTION COMPENSATION EXPENSE 14,240 2,361 GAIN ON SALE OF PLANT,PROPERTY AND EQUIPMENT -- (2,500) INCREASE IN ALLOWANCE FOR DOUBTFUL ACCOUNTS 25,000 -- (INCREASE)/DECREASE IN ACCOUNTS RECEIVABLE (73,505) 4,117 (INCREASE)/DECREASE IN INVENTORIES (131,650) 64,234 DECREASE IN CONTRACT COSTS AND RELATED ESTIMATED PROFITS IN EXCESS OF BILLINGS 117,567 876,156 DECREASE IN PREPAID EXPENSES AND OTHER CURRENT ASSETS 770 5,721 INCREASE IN CUSTOMER DEPOSITS -- 13,517 INCREASE/(DECREASE) IN ACCOUNTS PAYABLE 263,223 (394,294) DECREASE IN ACCRUED EXPENSES AND OTHER LIABILITIES (21,077) (140,157) DECREASE IN ACCRUED PENSION COSTS (36,661) (16,739) -------- -------- TOTAL ADJUSTMENTS 198,167 465,068 -------- -------- NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES (81,261) 414,525 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: EXPENDITURES FOR PROPERTY AND EQUIPMENT (4,494) (15,061) PROCEEDS FROM SALE OF ASSETS -- 10,500 ------- -------- NET CASH USED IN INVESTING ACTIVITIES (4,494) (4,561) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: SHORT TERM BORROWINGS -- 250,000 REPAYMENT OF SHORT TERM BORROWINGS -- (250,000) ------- --------- NET CASH USED IN FINANCING ACTIVITIES -- -- ------- --------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (85,755) 409,964 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 777,511 518,600 -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 691,756 $ 928,564 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION INTEREST RECEIVED $ 502 $ 401 INTEREST PAID $ -- $ 1,387 SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS 6 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, 2010 (the "2010 Form 10-K"). In the opinion of the Company's management, the accompanying unaudited condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, the Company's financial position as of December 31, 2010, and the results of operations for the three-months and six-months then ended and cash flows for the six-months then ended. The results of operations and cash flows for the period ended December 31, 2010 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, 2011. As of December 31, 2010, there have been no material changes to any of the significant accounting policies described in our 2010 Form 10-K. Revenue Recognition ------------------- Revenues and estimated earnings under long-term defense contracts (including research and development contracts, except as described below in this paragraph) 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 generator sets, 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 has one development sub- contract for which it recognizes revenues on a time and material basis. The Company uses the percentage-of-completion method to recognize revenues 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. Revenues and earnings for all other orders for replacement parts (including orders for replacement parts for snowmaking equipment) are recorded when deliveries of product are made and title and risk of loss have been transferred to the customer and collection is probable. 7 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. 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 ------------ Under the asset and liability method of accounting for taxes under ASC Topic 740, "Income Taxes", deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the results of operations in the period the new laws are enacted. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not, that such assets will be realized. 2. Accounting Standards Updates ------------------------------- In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition - Milestone Method. This ASU provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. Under the milestone method of revenue recognition, consideration that is contingent upon achievement of a milestone in its entirety can be recognized as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. This standard provides the criteria to be met for a milestone to be considered substantive which includes that performance consideration earned by achieving the milestone: a) be commensurate with either performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from performance to achieve the milestone; and b) relate to past performance and be reasonable relative to all deliverables and payment terms in the arrangement. This standard is effective on a prospective basis for milestones in fiscal years beginning on or after June 15, 2010. The Company currently has no milestone delineated contracts, therefore the adoption of this ASU in the first quarter of fiscal 2011 had no affect on the Company's financial position or results of operations. Accounting Standards Updates Not Yet Effective ---------------------------------------------- Other Accounting Standards Updates not effective until after December 31, 2010 are not expected to have a significant effect on the Company's financial position or results of operations. 8 3. Inventories --------------- Inventories consist of: December 31, 2010 June 30, 2010 Finished Goods $47,322 $54,912 Work In Progress 129,312 48,892 Raw Materials 508,488 449,668 -------- -------- Total $685,122 $553,472 ======== ======== 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 $1,050,000 and $210,000 of federal and state net deferred tax assets respectively, primarily arising from net operating loss carry-forwards, expiring beginning in 2012. In the six month period ended December 31, 2010 these federal and state net deferred tax assets increased by approximately $95,000 and $25,000, respectively, as a result of a net loss for the six month period. 5. Earnings/(Loss) Per Share ----------------------------- Net income (loss) per share has been presented pursuant to ASC Topic 260, "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 income (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 (loss) per common share computations. For the three-months ended December 31, 2010 and December 31, 2009, respectively, the number of shares excluded from the calculation were 52,700 and 16,000 respectively due to their anti-dilutive effect. For the six-month period ended December 31, 2010 and December 31, 2009, the number of shares excluded from the calculation were 52,700 and 24,700 respectively as a result of their anti-dilutive effect on the net loss for those periods. Three-months Ended December 31, 2010 2009 Per Per Income Shares Share Income Shares Share Amount Amount Basic net income per Common Share $(155,163) 1,362,031 $(.11) $16,440 1,362,031 $.01 Effect of dilutive Securities -- -- -- -- 1,634 -- -------- -------- ---- ------ --------- --- Diluted net income per common share $(155,163) 1,362,031 $(.11) $16,440 1,363,665 $.01 ========== ========= ==== ====== ========= ==== 9 Six-months Ended December 31, 2010 2009 Per Per Income Shares Share Income Shares Share Amount Amount Basic net income/(loss) per common share $(279,428) 1,362,031 $(.21) $(50,543) 1,362,031 $(.04) Effect of dilutive Securities -- -- -- -- -- -- --------- ------- ---- ------- -------- ---- Diluted net income/(loss) per common share $(279,428) 1,362,031 $(.21) $(50,543) 1,362,031 $(.04) ========= ========= ===== ======== ========= === 6. Stock Option Plan --------------------- On December 2, 1998, the Employee Stock Option Committee adopted a Stock Option Plan of 1998 which was amended and restated effective December 5, 2001, pursuant to which options to purchase a maximum of 85,000 shares of common stock may be granted to executives and key employees. Incentive stock options have been granted under the plan with an exercise price no less than fair market value of the stock on the date of grant. Outstanding options generally are exercisable for ten years from the date of grant, except for three grants totaling 8,800 options which are exercisable for a 5-year term. Outstanding options have expiration dates ranging from December 12, 2012 to December 12, 2020. The following disclosures are based on stock options granted to employees of the Company in the second quarter of fiscal 2011 (quarter ended December 31, 2010). For the three months ended December 31, 2010, the Company recorded a stock option compensation expense of $7,733 compared to stock option compensation expense of $929 for the three months ended December 31, 2009. For the six months ended December 31, 2010, the Company recorded stock option compensation expense of $14,240 compared to stock option compensation expense of $2,361 for the six month period ended December 31, 2009. For the full fiscal year ending June 30, 2011, the Company expects approximately $33,002 in stock option compensation expense based on stock options already granted and assuming no further option grants during the remainder of the fiscal year. However, our assessment of the estimated compensation expense will be affected by our stock price and actual stock option grants (if any) during the remainder of the year as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the volatility of our stock price and employee stock option exercise behaviors. The Company issues shares of common stock upon the exercise of stock options. The Company used its historical stock price volatility to compute the expected volatility for purposes of valuing stock options issued. The period used for the historical stock price corresponded to the expected term of the options and was between five and ten years. The expected dividend yield is based on the Company's practice of not paying dividends. The risk-free rate of return is based on the yield of U.S. Treasury Strips with terms equal to the expected life of the options as of the grant date. The expected life in years is based on historical actual stock option exercise experience. 10 The following weighted average assumptions were used in the valuation of stock options granted in the second quarter of fiscal 2011. December 31, 2010 Expected dividend yield -- Expected volatility 74.3% Risk-free interest rate 2.95% Expected life in years 7.1 Based on the assumptions in the table above, the grant date fair value of stock options granted in the second quarter of fiscal 2011 was $24,509. Stock option transactions for the Company's employee stock option plans for the three and six months ended December 31, 2010 are as follows: December 31, 2010 Three Months Six Months Weighted Weighted Average Average Shares Exercise Shares Exercise Price Price Beginning balance 36,700 2.92 40,700 2.80 Granted 16,000 2.05 16,000 2.05 Exercised -- -- -- -- Cancelled or expired -- -- 4,000 1.63 Ending balance 52,700 2.66 52,700 2.66 Options exercisable at end of period 20,700 3.41 20,700 3.41 11 THE DEWEY ELECTRONICS CORPORATION ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited condensed financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q, and with the audited financial statements, including the notes thereto, appearing in the Company's 2010 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 1 (Description of Business - Operational Risks) of the Company's 2010 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. 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, 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 2010 Form 10-K. Results of Operations - Revenues -------------------------------- Revenues and estimated earnings under long-term defense contracts (including research and development contracts, except as described below in this paragraph) 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 generator sets, 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 has one development sub- contract for which it recognizes revenues on a time and material basis. 12 The Company uses the percentage-of-completion method to recognize revenues 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. Revenues and earnings for all other orders for replacement parts (including orders for replacement parts for snowmaking equipment) 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. Revenues for the second quarter of fiscal year 2011, the three month period ended December 31, 2010, were $440,148 lower when compared to same period in 2009. Revenues were lower principally due to a decrease in production of generator sets under the Company's prime contract to provide 2kW generator sets to the U.S. Army as well as for delivery to other defense contractors outside the Company's prime contract and a small decrease in customer funded research and development. These decreases were partly offset by a small increase in sales of spare and replacement parts when compared to the same period in fiscal year 2010. For the three months ended December 31, 2010 production efforts to provide the Armed Forces with diesel operated generator sets provided approximately 81% of revenues compared to approximately 86% in the second quarter of fiscal year 2010 (quarter ended December 31, 2009). The Company's research and development contracts provided approximately 4% of revenues in the second quarter of fiscal 2011, and approximately 3% of revenues in the second quarter of fiscal 2010. Replacement parts and other short-term business provided approximately 15% of revenues in the second quarter of fiscal year 2011 and approximately 11% of revenues in the same period of fiscal 2010. Revenues for the six-month period ended December 31, 2010 were $1,171,143 lower when compared to the same period in 2009. This decrease in revenue is attributable to the same factors as for the three month period above when compared to the same six-month period last year. During the six-month period ended December 31, 2010, production efforts to provide the Armed Forces with diesel operated generator sets provided approximately 84% of revenues compared to approximately 89% in the same period in 2009. The Company's research and development contracts provided approximately 2% of revenues during the six-month period ended December 31, 2010, versus approximately 2% in the same period in 2009. Replacement parts and other short-term business provided approximately 14% of revenues in the six-month period ended December 31, 2010, and approximately 9% of revenues in the same period in 2009. The aggregate value of the Company's backlog of sales orders was $2.7 million on December 31, 2010 and $1.4 million on December 31, 2009. It is estimated that most of the present backlog will be billed during the next 6 months and be substantially recognized as fiscal year 2011 revenues. 13 Gross Profit ------------ The Company earned a gross profit of $291,719 (which was approximately 15% of revenues) for the three months ended December 31, 2010 compared to a gross profit of $432,901 (which was approximately 18% of revenues) for the same period in 2009. Gross profit is affected by a variety of factors including, among other items, production volume, product mix, product pricing, and product costs. The lower gross profit for the second quarter of fiscal year 2011 is the result of several factors. Principal among these is a change in production volume resulting from continued lower demand for the Company's 2kW diesel generator sets without a corresponding decrease in the Company's fixed operating costs. For the six-month period ended December 31, 2010 the Company's gross profit was $557,819 (which was approximately 16% of revenues) compared to a gross profit of $797,520 (which was approximately 17% of revenues) for the six- month period ended December 31, 2009. As with the three month period described above these lower results are due to continued lower demand and decreased production of 2kW diesel generator sets without a corresponding reduction in the Company's fixed operating expenses. Selling, General and Administrative Expenses -------------------------------------------- Selling, General and Administrative expenses for the three months ended December 31, 2010 were $445,747 or 23% of revenues compared to $417,855 or 17% of revenues for the three month period ended December 31, 2009. The most significant changes in expense and their approximate amounts were increases in Company sponsored research and development expense ($34,000) and compensation expense ($11,000) and reductions in expenditures for consulting services ($10,000) and legal and professional fees ($9,000). Selling, General and Administrative expenses for the six months ended December 31, 2010 were $837,431 or 23% of revenues compared to $841,873 or 18% of revenues for the six month period ended December 31, 2009. The most significant changes in expense and their approximate amounts were reductions in legal and professional fees ($35,000), salaries ($15,000 - as a result of temporary staff reductions), consulting fees ($10,000) and general corporate expense ($10,000), all of which were partly offset by an increase in allowance for doubtful accounts of $25,000 and an increase in Company sponsored research and development expense of $49,000. Interest Expense ---------------- The Company had no interest expense in the three month period ended December 31, 2010 compared to a negative interest expense of ($177) from the return of a previous overpayment, in the three month period ended December 31, 2009. For the six-month period ended December 31, 2010 the Company had no interest expense compared to interest expense of $1,387 in the six month period ended December 31, 2009. Other Expense/Income - Net -------------------------- Amounts reported as other income or expense represent the net effect of interest income and miscellaneous items such as the sale of scrap, bank transaction fees and other like items. Other expense of $1,135 for the three months ended December 31, 2010 was comprised of franchise tax of $1,040 and bank fees of $422 partly offset by miscellaneous income of $327. 14 Other income of $1,217 for the three months ended December 31, 2009 resulted from a gain on the sale of an asset of $2,500 and interest income of $30 partly offset by bank fees and other charges of $1,313. Other income of $184 for the six months ended December 31, 2010 was comprised of miscellaneous income of $2,529 partly offset by franchise taxes of $1,065 and bank fees of $1,280. Other expense of $4,803 for the six months ended December 31, 2009 was comprised of franchise taxes of $4,409 and bank fees of $3,295 partly offset by a gain on the sale of an asset of $2,500 and interest income of $401. Net Loss/Income before income taxes ----------------------------------- Net loss before income taxes for the three months ended December 31, 2010 was $155,163 and for the three months ended December 31, 2009 net income before income taxes was $16,440. Results for the second quarter of fiscal year 2011 decreased when compared to the same period in fiscal year 2010 primarily due to the lower gross profit resulting from lower revenues and less favorable product mix for the quarter which and an increase in Selling, General and Administrative expenses as discussed above. Net loss before income taxes for the six-month period ended December 31, 2010 was $279,428. For the same period in 2009 net loss before income taxes was $50,543. Results for the six-month period ended December 31, 2010 decreased when compared to the same period in fiscal year 2010 and as with the three month period above primarily due to lower revenues and less favorable product mix. Income Taxes ------------ Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts and for tax loss and credit carry-forwards. A valuation allowance is provided against deferred tax assets when it is determined to be more likely than not that these amounts will not be realized. 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 $1,050,000 and $210,000 of federal and state net deferred tax assets respectively, primarily arising from net operating loss carryforwards, expiring beginning in 2012. In the six month period ended December 31, 2010 these federal and state net deferred tax assets increased by approximately $95,000 and $25,000, respectively, as a result of a net loss for the period. 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, described under "Financing Activities" below. As of December 31, 2010, the Company had no material capital expenditure commitments. Management believes that the Company's current cash and its line of credit, combined with progress 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. 15 At December 31, 2010, the Company's working capital was $1,986,061 compared to $2,409,145 at December 31, 2009. The ratio of current assets to current liabilities was 3.61 to 1 at December 31, 2010 and 4.10 to 1 at December 31, 2009. The following table is a summary of the Statements of Cash Flows in the Company's Financial Statements: Six Months ended December 31, 2010 2009 Net cash provided by/(used in) Operating activities $ (81,261) $ 414,525 Investing activities (4,494) (4,561) Financing activities -- -- Operating Activities: -------------------- Adjustments to reconcile net income to net cash used in operations are presented in the Statements of Cash Flows in the Company's Financial Statements. Net cash used in operating activities in the six-month period ended December 31, 2010 was comprised primarily of net loss before depreciation and amortization and increases in accounts receivable, allowance for doubtful accounts, and inventories, and decreases in accrued expenses and other liabilities, and accrued pension costs. These were partly offset by a decrease in contract costs and estimated related profits in excess of applicable billings and an increase in trade accounts payable and prepaid expenses. Net cash provided by operating activities in the six-month period ended December 31, 2009 was comprised primarily of net loss before depreciation and amortization, decreases in contract costs and estimated related profits in excess of applicable billings, inventories, and prepaid expenses and an increase in customer deposits, which were partly offset by decreases in accounts payable, accrued expenses, and accrued pension expenses. The Company expenses its research and development costs as incurred. These costs consist primarily of salaries and material costs. For the six month period ended December 31, 2010 and December 31, 2009, the Company expensed $66,429 and $17,003 respectively, of research and development costs. Research and development projects performed under contract for customers are billed to the customer and are recorded as contract costs as they are incurred. Investing Activities: -------------------- During the first six months of fiscal 2011, net cash of $4,494 was used in investing activities all of which was used for capital expenditures, principally for replacement equipment. During the first six months of fiscal 2010, net cash of $4,561 was used in investing activities. This net amount reflects the use of $15,061 for capital expenditures, principally for demonstration and test equipment, and the receipt of $10,500 from the sale of assets. Financing Activities: -------------------- The Company did not use any cash in financing activities during the six month periods ended December 31, 2010 and 2009, respectively. 16 On April 27, 2009 the Company entered into a $500,000 line of credit with TD Bank, NA. (See Note 10 of the Notes to Financial Statements in the Company's 2010 Form 10-K). On May 11, 2010, the Company received a notice from the Bank informing the Company that the Bank had extended this line of credit to October 31, 2011 (See Item 5 (Other Information) in Part II of the Company's Quarterly Report for the quarter ended March 31, 2010). As of the date of this Quarterly Report the Company has no outstanding debt against this line of credit. The Company does not regard this credit facility as vital to its continued operations. 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". 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 continues to believe that there are strong reasons why its property should not be subject to the severe restrictions of the preservation area, and is attempting to affect a solution. Since the Act was passed in June of 2004, the State repeatedly delayed promulgation of final regulations and a master plan. Originally expected in 2005, final regulations and a master plan were approved by the Governor on September 5, 2008. At the same time the Governor issued executive order 114 further defining the framework by which the Highlands Council, other State agencies, and both county and municipal governments are to work together. The Company believes that a regulatory environment is now developing within which monetization of the land may be possible. In light of these recent events, the Company is actively assessing its options. However, no assurances can be given that the Company's efforts will be successful, that a satisfactory valuation will be achieved, or that resolution will be timely. In May 2008, the Company entered into a contract to sell a small parcel of land, approximately 7 acres, for $205,000. The land is physically separated from the main parcel of the Company's property by an interstate highway and is contained within the Highlands Preservation Area. Among other things, the sale of the land is subject to approval for development by the Highlands Commission and various state and local government agencies. Accordingly, the Company can make no assurance that the sale will be successfully consummated or, if consummated, the timing thereof. Accounting Standards Updates ---------------------------- Refer to Note 2, Significant Accounting Policies in the Notes to the Financial Statements section of this Quarterly Report. 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. 17 The Company is focusing its efforts within the market for military compact diesel power generation on select product categories which management believes represent the best chances of successfully growing the Company's 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 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 reinforce 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. The Company currently has a 10 year indefinite quantity, indefinite delivery contract with the U.S. Army to supply 2kW generator sets. This contract allows for the U.S. Army to place annual production orders and to place additional interim orders until the end of August 2011 when the contract expires. Production traditionally occurs six to twelve months after the receipt of an order. The Company anticipates that the Government will continue to require these generators and that a new contract will be put out to bid before August 2011. However, no assurances can be given that the Company will be awarded the new contract, or that further orders will be placed or, if placed, the timing and amount of such orders. In response to the U.S. Army's change in priorities away from long-term product improvements regarding the 2kW Generator Program in 2007, management re-evaluated its approach to the second and third strategic objectives described above. Rather than continuing to develop new longer term internal technologies, the Company is now attempting to capitalize on its previous investments in technology to obtain business in related military power markets and to expand into related military product categories. Two contracts in recent years with the U.S. Department of Defense to develop generators as auxiliary power units for vehicles are examples of the second strategic objective, expanding into related power markets. One contract for a Logistics Vehicle Power Supply "LVPS" (a diesel powered 3.5 kilowatt generator set providing power to equipment that protects against improvised explosive devices) utilized the Company's core expertise in compact and highly reliable diesel engine power generation. Another contract to develop a prototype 'idle reduction' system consisting of an environmental control unit and diesel generator built on the Company's accomplishments with vehicle mounted auxiliary power units, and management believes it will allow the Company to further expand into related power applications while increasing its technology base. 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 a customer funded research and development sub-contract where the Company is designing and prototyping electronic controls for diesel fuel cell systems. In the near term, a return to profitability and broadening the line of product offerings are the Company's primary objectives. The development contracts and subcontracts described above as well as internal Company sponsored development efforts contribute to this goal. The Company is continuing to pursue possible partnering and sub-contracting relationships with other companies and defense contractors that leverage the Company's current expertise and technology in generators and auxiliary power units. 18 ITEM 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures ------------------------------------------------ The Company carried out, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Treasurer, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the fiscal quarter covered by this Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Treasurer concluded that, as of December 31, 2010, the design and operation of the Company's 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. Changes in Internal Control over Financial Reporting ---------------------------------------------------- There were no changes in the Company's internal control over financial reporting during the fiscal quarter ended December 31, 2010 that materially affected, or are reasonably likely to affect, the Company's internal control over financial reporting. 19 PART II - OTHER INFORMATION Item 6. Exhibits ------------------------------------------------------------------ See the accompanying Index to Exhibits to this Quarterly Report on Form 10-Q. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE DEWEY ELECTRONICS CORPORATION /s/ John H.D. Dewey Date: February 11, 2011 John H.D. Dewey President and Chief Executive Officer /s/ Stephen P. Krill Date: February 11, 2011 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-K. Number 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 32.2 Certification of Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 21