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 September 30, 2011 ___ 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 November 4, 2011. 2 THE DEWEY ELECTRONICS CORPORATION INDEX Page No. Part I Financial Information Item 1. Condensed Financial Statements Condensed Balance Sheets - September 30, 2011(unaudited) and June 30, 2011 4 Condensed Statements of Operations - Three-months Ended September 30, 2011 and 2010 (unaudited) 5 Condensed Statements of Cash Flows for the Three-months Ended September 30, 2011 and 2010 (unaudited) 6 Notes to Condensed Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 4. Controls and Procedures 19 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 SEPTEMBER 30, JUNE 30, 2011 2011 ASSETS: (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 425,065 $ 474,381 Note receivable-net of provision for loss of $25,000 at September 30, 2011 and June 30, 2011 3,138 13,048 Accounts receivable 625,964 695,911 Inventories 670,392 721,565 Contract costs and related estimated profits in excess of billings 524,233 623,521 Prepaid expenses and other current assets 35,696 53,912 __________ ________ TOTAL CURRENT ASSETS 2,284,488 2,582,338 __________ _________ PLANT, PROPERTY AND EQUIPMENT: Land and improvements 651,015 651,015 Building and improvements 1,930,119 1,885,653 Machinery and equipment 3,271,583 3,247,924 Furniture and fixtures 263,030 259,096 __________ _________ 6,115,747 6,043,688 Less accumulated depreciation 5,170,670 5,155,939 __________ _________ 945,077 887,749 __________ _________ DEFERRED COSTS 65,095 65,095 __________ _________ TOTAL ASSETS $3,294,660 $3,535,182 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Note payable - current portion $ 14,822 $ -- Trade accounts payable 190,720 230,018 Accrued expenses and other liabilities 210,760 306,650 Accrued compensation and benefits Payable 139,694 154,724 Accrued pension costs 51,969 45,325 __________ ___________ TOTAL CURRENT LIABILITIES 607,965 736,717 __________ ___________ LONG-TERM PORTION OF NOTE PAYABLE 28,409 -- __________ ___________ LONG-TERM PENSION LIABILITY 533,621 533,621 __________ ___________ 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; 1,693,397 shares issued and 1,362,031 shares outstanding at September 30, 2011 and June 30, 2011 16,934 16,934 Additional paid-in capital 2,867,154 2,860,459 Retained earnings 102,463 249,337 Accumulated other comprehensive loss (374,858) (374,858) __________ ___________ 2,611,693 2,751,872 Less: Treasury stock 331,366 shares at cost (487,028) (487,028) __________ ___________ TOTAL STOCKHOLDERS' EQUITY 2,124,665 2,264,844 __________ ___________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,294,660 $3,535,182 ========== ========== See accompanying notes to condensed financial statements 4 THE DEWEY ELECTRONICS CORPORATION CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) THREE-MONTHS ENDED SEPTEMBER 30, 2011 2010 Revenues $1,739,335 $1,615,483 Cost of revenues 1,535,750 1,349,383 __________ __________ Gross profit 203,585 266,100 Selling, general & administrative 350,058 391,684 __________ __________ Operating Loss (146,473) (125,584) Interest expense -- -- Other income/(expense) net (401) 1,319 __________ _________ Loss before income taxes (146,874) (124,265) Provision for income tax -- -- ___________ _________ NET LOSS $(146,874) $(124,265) =========== ========= NET LOSS PER COMMON SHARE-BASIC $(0.11) $(0.09) NET LOSS PER COMMON SHARE-DILUTED $(0.11) $(0.09) Weighted average number of shares outstanding: Basic 1,362,031 1,362,031 Diluted 1,362,031 1,362,031 See accompanying notes to condensed financial statements 5 THE DEWEY ELECTRONICS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE-MONTHS ENDED SEPTEMBER 30, 2011 2010 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(146,874) $(124,265) _________ _________ Adjustments to reconcile net loss to Net cash (used in)/provided by operating activities: Depreciation 14,731 20,130 Stock based compensation expense 6,695 6,507 Decrease/(increase) in accounts receivable and notes receivable 79,857 (122,930) Increase in allowance for doubtful Accounts -- $25,000 Decrease/(increase) in inventories 51,173 (245,520) Decrease in contract costs and related estimated profits in excess of billings 99,288 46,649 Decrease/(increase) in prepaid expenses and other current assets 18,216 (5,965) (Decrease)/increase in trade accounts payable (39,298) 375,949 (Decrease) in accrued expenses and other liabilities (110,920) (88,712) Increase/(decrease) in accrued pension costs 6,644 (33,783) ________ _______ Total adjustments 126,386 (22,675) ________ _______ NET CASH USED IN OPERATING ACTIVITIES (20,488) (146,940) ________ ________ CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for plant, property and Equipment (72,059) (4,494) ________ ________ NET CASH USED IN INVESTING ACTIVITIES (72,059) (4,494) ________ ________ CASH FLOWS FROM FINANCING ACTIVITIES: Short term borrowings -- -- Repayment of short term borrowings -- -- Proceeds from long term debt 44,466 -- Repayment of long term debt (1,235) -- ________ ________ NET CASH FROM FINANCING ACTIVITIES 43,231 -- ________ ________ NET DECREASE IN CASH AND CASH EQUIVALENTS (49,316) (151,434) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 474,381 777,511 ________ _________ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 425,065 $ 626,077 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ -- $ -- ========== ========== 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, 2011 (the "2011 Form 10-K"). In the opinion of the Company's management, the accompanying unaudited condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, the Company's financial position as of September 30, 2011, 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, 2011 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, 2012. As of September 30, 2011, there have been no material changes to any of the significant accounting policies described in our 2011 Form 10-K. Liquidity --------- The Company has experienced recurring losses from operations and net cash outflows from operations in recent quarters. In addition, as previously reported, the Company's 10 year indefinite delivery, indefinite quantity contract with the U.S. Army to supply 2kW generator sets expired at the end of September 2011. Prior to the expiration of the contract the Company received a final delivery order in the amount of $7.9 million with deliveries scheduled through September 2013. The U.S Army has announced that it no longer plans to issue a new multiple year indefinite delivery, indefinite quantity fixed price contract and will transfer the 2kW program to a 'sustainment' command. The Company anticipates that the Government will continue to require these generators, which can be ordered under individual "Purchase Orders" or via the General Services Administration's GSA.gov Web site. We are unable to predict whether, when or to what extent the Government will continue to place orders for these generators. 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, described under "Financing Activities" in the Management's Discussion and Analysis section of this Form 10-Q. 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. 7 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, which expired on September 30, 2011, 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. These calculations require management to estimate the cost to complete open orders. Changes between those estimates and the actual cost of completion of delivery orders impact the revenue recognition in each reporting period. Estimates are adjusted as necessary on a quarterly basis. 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 and other short term 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 and other short term business (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. 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. 8 The Company accounts for uncertain tax positions in accordance with Generally Accepted Accounting Principles in the U.S. Income tax positions must meet a more-likely-than-not recognition in order to be recognized in the financial statements. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within operations as income tax expense. As new information becomes available, the assessment of the recognition threshold and the measurement of the associated tax benefit of uncertain tax positions may result in financial statement recognition or derecognition. 2. Accounting Standards Updates ------------------------------- Accounting Standards Updates Not Yet Effective ---------------------------------------------- In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04 (ASU No. 2011-4), Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs to provide a uniform framework for fair value measurements and related disclosures between U.S. GAAP and International Financial Reporting Standards (IFRS). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity's use of a nonfinancial asset that is different from the asset's highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU No. 2011-04 requires prospective application for interim and annual periods beginning on or after December 15, 2011. The Company is currently evaluating the impact that ASU No. 2011-04 will have on its financial position and results of operations. In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220):Presentation of Comprehensive Income which improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income ("OCI") by eliminating the option to present components of OCI as part of the statement of changes in stockholders' equity. The amendments in this standard require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, an entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. The amendments in this standard do not change the items that must be reported in OCI, when an item of OCI must be reclassified to net income, or change the option for an entity to present components of OCI gross or net of the effect of income taxes. The amendments in ASU No. 2011-05 are effective for interim and annual periods beginning after December 15, 2011 and are to be applied retrospectively. The adoption of the provisions of ASU No. 2011-05 will not have a material impact on the Company's financial position or results of operations. Other Accounting Standards Updates not effective until after September 30, 2011 are not expected to have a significant effect on the Company's financial position or results of operations. 9 3. Inventories --------------- Inventories consist of: September 30, 2011 June 30, 2011 Finished Goods $23,123 $34,240 Work In Progress 184,651 140,344 Raw Materials 462,618 546,981 ________ ________ Total $670,392 $721,565 ======== ======== 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 $1,125,000 and $214,000 of federal and state net deferred tax assets respectively, primarily arising from net operating loss carryforwards, expiring beginning in 2013. In the three month period ended September 30, 2011 these federal and state net deferred tax assets increased by approximately $50,000 and $9,000, respectively, as a result of a net loss for the 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. All outstanding stock options were excluded from the computation of earnings per share due to their anti-dilutive effect, the result of a net loss in the three month periods ended September 30, 2011 and September 30, 2010. For the three-months ended September 30, 2011 and September 30, 2010, respectively, the number of shares excluded from the calculation were 62,500 and 36,700 respectively. Three-months Ended September 30, 2011 2010 Per Per Net Loss Shares Share Net Loss Shares Share Amount Amount Basic Net (loss) Per Common Share $(146,874) 1,362,031 $(.11) $(124,265) 1,362,031 $(.09) Effect Of dilutive Securities -- -- -- -- -- -- ________ ________ ____ ________ _________ _____ Diluted Net (loss) Per Common Share $(146,874) 1,362,031 $(.11) $(124,265) 1,362,031 $(.09) ========= ========= ===== ========= ========= ===== 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 four grants totaling 13,500 options which are exercisable for a 5-year term. Outstanding options have expiration dates ranging from December 12, 2012 to September 21, 2021. 10 The following disclosures are based on stock options granted to employees of the Company in the first quarter of fiscal 2012 (quarter ended September 30, 2011). For the three months ended September 30, 2011, the Company recorded stock option compensation expense of $6,695. For the three months ended September 30, 2010, the Company recorded stock option compensation expense of $6,507. For the full fiscal year ending June 30, 2012, the Company expects approximately $20,113 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. The following weighted average assumptions were used in the valuation of stock options granted in the first quarter of fiscal 2012. September 30, 2011 Expected dividend yield -- Expected volatility 76.8% Risk-free interest rate 1.27% Expected life in years 6.0 Based on the assumptions in the table above, the grant date fair value of stock options granted in the first quarter of fiscal 2012 was $11,354. Stock option transactions for the Company's employee stock options plans for the quarter ended September 30, 2011 are as follows: Weighted Average Shares Exercise Price Beginning balance 52,700 $2.66 Granted 9,800 1.63 Exercised -- -- Cancelled or expired -- -- ______ _____ Ending balance 62,500 2.50 ====== ===== Options exercisable at end of period 36,700 2.92 ====== ===== 11 7. Long Term Debt ---------------- In August 2011 the Company entered into a 36 month, interest free, financing agreement with Wells Fargo Financial Leasing in the amount of $44,466 to upgrade facility lighting. The loan is secured by the physical assets financed under this loan. As of the date of this Quarterly Report the Company has an outstanding balance of $43,231 on this note. 8. Line of Credit ----------------- 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 Form 10-K for the fiscal year ended June 30, 2011). On November 2, 2011, the Company and TD Bank entered into a modification of this line of credit, effective as of October 31, 2011, which reduced the maximum borrowing amount to $375,000 and extended this line of credit to November 30, 2012. No other terms of the Company's April 27, 2009 revolving term note to TD Bank were changed. (See Item 5 (Other Information) in Part II of this Quarterly Report.) 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. 12 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 2011 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) of the Company's 2011 Form 10-K under the subheading "Operational Risks". 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 comparisons 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 2011 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, which expired on September 30, 2011, 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. These calculations require management to estimate the cost to complete open orders. Changes between those estimates and the actual cost of completion of delivery orders impact the revenue recognition in each reporting period. Estimates are adjusted as necessary on a quarterly basis. 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. 13 The Company uses the percentage-of-completion method to recognize revenues for its replacement parts and other short term 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 and other short term business (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 first quarter of fiscal year 2012, the three month period ended September 30, 2011, were $123,852 higher when compared to the same period in 2010. The increase in revenues was due to increased production of generator sets for delivery under the Company's 10 year indefinite delivery/indefinite quantity contract with the U.S. Army and an increase in customer funded research and development. These increases were partly offset by a reduction in revenues from production of generator sets for delivery to other government contractors and sales of replacement parts and other short- term business when compared to the same period in fiscal year 2011. For the three months ended September 30, 2011 production efforts to provide the Armed Forces with diesel operated generator sets provided approximately 84% of revenues compared to approximately 87% in the first quarter of fiscal year 2011 (quarter ended September 30, 2010). Replacement parts and other short-term business provided approximately 10% of revenues in the first quarter of fiscal year 2012 and approximately 13% of revenues in the same period of fiscal 2011. Revenues from research and development contracts provided approximately 6% of revenues in the first quarter of fiscal 2012. The Company realized no revenues from research and development contracts in the first quarter of fiscal 2011. The aggregate value of the Company's backlog of sales orders was $10.0 million on September 30, 2011, primarily the result of the receipt in September of a final delivery order in the amount of $7.9 million under the Company's contract to supply the U.S. Army with 2kW generator sets. The Company's backlog of sales orders was $4.2 million on September 30, 2010. It is estimated that substantially all of the present backlog will be billed during the next 24 months and be recognized as fiscal year 2012 and 2013 revenues. Gross Profit ------------ Gross profit is affected by a variety of factors including, among other items, sales volume, product mix, product pricing, and product costs. The Company earned a gross profit of $203,585 for the three months ended September 30, 2011 compared to a gross profit of $266,100 for the same period in 2010. The reduction in gross profit was a result of a higher proportion of revenues from production of generators for delivery under the Company's prime contract with the U.S. Army, which generate a lower gross profit than other lines of business, as well as increases in material costs, and higher initial production costs for a new accessory for 2kW generators which resulted in lower margins in the Company's replacement parts and other short term business. Partly offsetting these lower margins were increased gross profits from an increase in revenues from customer funded research and development work. As a result, gross profit as a percentage of revenues in the first three months of fiscal year 2012 decreased when compared to the same period last year. 14 The Company experienced decreased demand for its 2kW generator sets during the first quarter of fiscal 2012 and temporarily reduced operating hours by 10% at the beginning of the fourth quarter of its fiscal year ended June 30, 2011 and continued to operate with reduced operating hours through August 2011. The Company returned to normal operating hours at the end of August 2011, during the first fiscal quarter of 2012. Selling, General and Administrative Expenses ------------------------------------------- Selling, General and Administrative Expenses for the first three months of fiscal 2012 were $350,058 or 20% of revenues compared to $391,684 or 24% of revenues in the first three months of fiscal 2011. The most significant reductions in expense and their approximate amounts were in company sponsored research and development ($20,000), bad debt expense ($20,000), and marketing expense ($20,000), all of which were partly offset by an increase in legal and professional fees of $14,000. Interest Expense ---------------- The Company had no interest expense in the three month periods ended September 30, 2011 and September 30, 2010 respectively. 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 $401 for the three months ended September 30, 2011 was comprised primarily of franchise taxes and miscellaneous bank fees, partly offset by interest income and scrap sales. Other income of $1,319 for the three months ended September 30, 2010 was comprised primarily of sales of scrap material and interest income, partially offset by miscellaneous bank fees. Loss before income taxes ------------------------ Loss before income taxes for the three months ended September 30, 2011 was $146,874 and $124,265 for the three months ended September 30, 2010. 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. 15 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 $1,125,000 and $214,000 of federal and state net deferred tax assets respectively, primarily arising from net operating loss carryforwards, expiring beginning in 2013. In the three month period ended September 30, 2011 these federal and state net deferred tax assets increased by approximately $50,000 and $9,000, 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, described under "Financing Activities" below. As of September 30, 2011, 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. At September 30, 2011, the Company's working capital was $1,676,523 compared to $2,113,361 at September 30, 2010. The ratio of current assets to current liabilities was 3.76 to 1 at September 30, 2011 and 3.62 to 1 at September 30, 2010. The following table is a summary of the Statements of Cash Flows in the Company's Financial Statements: Three Months ended September 30, 2011 2010 Net cash provided by(used in) Operating activities $ (20,488) $ (146,940) Investing activities (72,059) (4,494) Financing activities 43,231 -- Operating Activities: -------------------- Adjustments to reconcile net income to net cash used in operations are presented in the Condensed Statements of Cash Flows in the Company's Financial Statements. Net cash used in operating activities in the three-month period ended September 30, 2011 was comprised primarily of net loss before depreciation and amortization and non-cash compensation expense, and decreases in accounts payable and accrued expenses partly offset by decreases in accounts receivable, inventories, contract costs and estimated related profits in excess of applicable billings, and prepaid expenses, and an increase in accrued pension costs. Net cash used in operating activities in the three-month period ended September 30, 2010 was comprised primarily of net loss before depreciation and amortization and non-cash compensation expense, and increases in accounts receivable, allowance for doubtful accounts, inventories, and prepaid expenses 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 other accrued expenses. 16 The Company expenses its research and development costs as incurred. These costs consist primarily of salaries and material costs. For the three month period ended September 30, 2011 and September 30, 2010, the Company expensed $11,515 and $31,061 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 three months of fiscal 2012, net cash of $72,059 was used in investing activities. The entire amount was used for capital expenditures, principally for the replacement and upgrade of facility lighting and the acquisition of additional demonstration and test equipment. During the first three months of fiscal 2011, net cash of $4,494 was used in investing activities. The entire amount was used for capital expenditures, principally for demonstration and test equipment. Financing Activities: -------------------- In August 2011, the Company entered into a 36 month, interest free, financing agreement with Wells Fargo Financial Leasing in the amount of $44,466 to upgrade facility lighting. The loan is secured by the physical assets financed under this loan. As of the date of this Quarterly Report the Company has an outstanding balance of $43,231 on this note. The Company did not use any cash in financing activities during the three month period 2010. 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 Form 10-K for the fiscal year ended June 30, 2011). On November 2, 2011, the Company and TD Bank entered into a modification of this line of credit, effective as of October 31, 2011, which reduced the maximum borrowing amount to $375,000 and extended this line of credit to November 30, 2012. No other terms of the Company's April 27, 2009 revolving term note to TD Bank were changed. (See Item 5 (Other Information) in Part II of this Quarterly Report.) 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 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. 17 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. Accounting Standards Updates in the Notes to the Condensed 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. 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 profitability 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's 10 year indefinite delivery, indefinite quantity contract with the U.S. Army to supply 2kW generator sets expired at the end of September 2011. Deliveries of orders received prior to the expiration of the contract are scheduled to continue through September 2013. As previously reported the U.S. Army has announced that it is not issuing a new multiple year fixed price contract and will transfer the 2kW Generator Program to a 'sustainment' command. The Company anticipates that the Government will continue to require these generators, which can be ordered under individual "Purchase Orders" or via the General Services Administration's GSA.gov Web site. Most importantly, with the expiration of the contract the Company will be able to set new pricing on future orders which could be adjusted on an annual basis. New pricing would be restricted by defense acquisition regulations and comprehensive government auditing. However, we are unable to predict whether, when or to what extent the Government will continue to place orders for these generators. In approaching the second and third strategic objectives described above, the Company is 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. 18 In recent months the Company has continued to act on the second strategic objective, expanding into related power markets. Using our expertise in Direct Current power generation we have designed and delivered diesel power generation systems for use on other companies' trailer mounted military systems. These power systems have integrated energy storage batteries and digital controls combined with traditional diesel generators. That integration delivers fuel savings as compared to traditional diesel generators while also enabling the optional integration of opportunistic power sources such as solar and wind. These accomplishments build on the Company's previous 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 subcontract 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. 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 September 30, 2011, 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 September 30, 2011 that materially affected, or are reasonably likely to affect, the Company's internal control over financial reporting. 19 PART II - OTHER INFORMATION Item 5. Other Information (a) On November 2, 2011, the Company and TD Bank entered into a modification of the Company's line of credit, effective as of October 31, 2011, which reduced the maximum borrowing amount to $375,000 and extended this line of credit to November 30, 2012. See Note 8. Line of Credit in the Notes to the Condensed Financial Statements section of this Quarterly Report. As of the date of this Quarterly Report, the Company has no outstanding debt against this line of credit. The terms of the line of credit are otherwise unchanged and provide among other things for an annual interest rate on borrowings equal to TD Bank's prime rate plus one (1.00) percent with a minimum interest rate of 4.25% and are subject to customary representations, covenants, and default provisions in favor of TD Bank. Any loans drawn under the line of credit are secured by a first lien on all of the Company's accounts receivable, machinery, equipment, other personal property and a Commercial Mortgage Security Agreement on the Company's real property. Item 6. Exhibits ------------------------------------------------------------------ See the accompanying Index to Exhibits to this Quarterly Report on Form 10-Q. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE DEWEY ELECTRONICS CORPORATION /s/ John H.D. Dewey Date: November 10, 2011 John H.D. Dewey President and Chief Executive Officer /s/ Stephen P. Krill Date: November 10, 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 10.1 Modification Agreement dated as of October 31, 2011 between The Dewey Electronics Corporation and TD Bank, N.A. 10.2 Amended and Restated Revolving Term Note made by The Dewey Electronics Corporation in favor of TD Bank, NA dated October 31, 2011 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