UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
--
|X| ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
--- OF 1934
For the fiscal year ended June 30, 2007.
--
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the transition period from to .
Commission file number 0-2892
THE DEWEY ELECTRONICS CORPORATION
(Name of small business issuer in its charter)
NEW YORK 13-1803974
(State of Incorporation) (I.R.S. Employer Identification No.)
27 Muller Road, Oakland, New Jersey 07436
(Address of principal executive offices) Zip Code
201-337-4700
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
----
Securities registered under Section 12(g) of the Exchange Act:
Common stock, $.01 par value
----------------------------
(Title of class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. Yes [_] No [X]
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[_].
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form l0-KSB [X].
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): Yes [_] No [X].
State issuer's revenues for its most recent fiscal year: $5,426,655 for the
fiscal year ended June 30, 2007.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold or the average bid and asked price of such common equity, as of a
specified date within the past 60 days: $1,781,883 at September 18, 2007.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 1,362,031 shares of common stock, par
value $.01 per share, at September 19, 2007.
Documents Incorporated by Reference
Portions of the Company's definitive Proxy Statement for the 2007 Annual Meeting
of Shareholders are incorporated by reference in Part III.
Transitional Small Business Disclosure Format: Yes [_] No [X]
THE DEWEY ELECTRONICS CORPORATION
TABLE OF CONTENTS
Item Page
---- ----
PART I
1. Description of Business 3
2. Description of Property 7
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
PART II
5. Market for Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities 9
6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
7. Financial Statements 22
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 39
8A. Controls and Procedures 39
8B. Other Information 39
PART III
9. Directors, Executive Officers and Corporate Governance; Compliance
with Section 16(a) of the Exchange Act 40
10. Executive Compensation 40
11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 40
12. Certain Relationships and Related Transactions
and Director Independence 40
13. Exhibits 40
14. Principal Accountant Fees and Services 40
2
PART I
Item 1. DESCRIPTION OF BUSINESS
--------------------------------
The Dewey Electronics Corporation (the "Company") was incorporated in the State
of New York in 1955. It is a systems oriented military electronics development,
design and manufacturing organization based in Oakland, New Jersey. The Company
is organized into two operating segments on the basis of the type of products
offered. Each segment is comprised of separate and distinct businesses: the
Electronics segment, primarily business with the Department of Defense, and the
Leisure and Recreation segment, primarily business with ski areas and resorts.
In the Electronics segment, the Company is a producer of electronic and
electromechanical systems for the Armed Forces of the United States. The Company
provides its products in this segment either as a prime contractor or as a
subcontractor for the Department of Defense.
The Electronics segment is comprised mostly of the 2kW generator product line,
certain research and development sub-contracts, development contracts to design
and produce a 3.5kW generator and to design a 3kW armored generator, and other
various spare parts sales orders, more limited in scope and duration. The 2kW
generator product line is provided to the various branches of the Armed Forces
of the United States. Production is under a long-term contract as well as
short-term orders for limited quantities. The Company also provides speed and
measurement instrumentation primarily for the U.S. Navy and other prime
contractors such as shipbuilders. Orders are also received for replacement parts
and equipment for previous Company contracts with the Department of Defense as
well as other projects performed as a subcontractor. In past years, the Company
had various long-term contracts to provide the U.S. Navy with various equipment.
The Company has been the sole source producer of the 2kW diesel operated
tactical generator set for the Department of Defense since 1997. Its initial
contract was awarded by the U.S. Army in 1996 and final deliveries were made
under that award in March 2002. Deliveries were made to the various branches of
the Armed Forces of the United States.
A new contract was awarded in September 2001 to provide the U.S. Army and other
Department of Defense Agencies with this same 2kW diesel operated generator set.
This contract is a ten-year indefinite delivery, indefinite quantity contract
which replaces the initial contract awarded in 1996. The total amount of orders
under the September 2001 contract placed through August 31, 2007 amount to
approximately $24 million. Deliveries of orders currently in-house are scheduled
to continue through fiscal year 2008. As with the initial contract mentioned
above, this contract allows for the U.S. Army to place annual production orders
and to place additional interim orders. However, no assurances can be made that
further orders will be placed or, if they are placed, the timing and amount of
such orders.
On September 28, 2004, the Company was awarded a "cost plus fixed fee" research
and development contract by the U.S. Army, in the amount of approximately $1.5
million, for research and development of a lighter, quieter 2kW diesel
generator. Work on this project continued through September 2006 when funding
for the project was substantially exhausted. The contract expired on March 31,
2007. See Item 6 - Management's Discussion and Analysis of Financial Condition
and Results of Operations and Note 1-I, Capitalized Development Costs of the
Notes to the Financial Statements for additional information regarding this
contract and the Company's write-off of capitalized development costs to costs
of revenue in the fiscal quarter ended March 31, 2007.
In March 2007, the Company was awarded three related research and development
sub-contracts, in the amount of approximately $230,400 in the aggregate, to
research and develop electronic controls for diesel fuel cell reformers. Work on
these contracts is expected to extend until April 2008. No assurances can be
given that the Company will receive any future production orders as a result of
these sub-contracts or that the Company will be awarded any additional research
and development contracts or sub-contracts.
3
After the end of the 2007 fiscal year, in August 2007, the company received a
new contract to design and produce an auxiliary power system (a 3.5kW 28 Volt DC
generator) for the United States Marine Corps "Logistics Vehicle". This followed
the receipt in July 2007 of a development contract to design and develop an
armored 3kW 28 volt DC auxiliary power unit that can be mounted on the back of
the USMC main battle tank, the Abrams M1A1. See Item 6 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Recent Events
for additional information regarding these contracts. No assurances can be made
that the Company will receive any future production orders as a result of these
development contracts or that the United States Government (the "Government")
will award the Company any additional development contracts.
In the Leisure and Recreation segment, the Company, through its HEDCO Division,
designs, manufactures and markets advanced, sophisticated snowmaking equipment.
It also supplies replacement parts for items no longer covered under warranty.
The Company's primary sources of revenue include products with long
manufacturing lead times. These products, in particular, are its 2kW generator
sets, and its HEDCO snowmaking machines. Recognizing this, the Company has
committed some of its resources to making a quantity of these products readily
available by producing them for inventory and sales. The Government sector has
been ordering limited quantities of 2kW generator sets for specific uses
pursuant to short-term orders independent of the Company's 2kW contract.
There are no intersegment sales.
The sales and operating profit of each segment and the identifiable assets
attributed to each segment for the last two fiscal years ended June 30, 2007 and
2006 are set forth in Note 12 - Operating Segments of the Notes to the Financial
Statements.
The Company expenses its research and development costs as incurred. These costs
consist primarily of salaries and material costs. For the fiscal years ended
June 30, 2007 and June 30, 2006, the Company expensed $108,844 and $66,791,
respectively, of research and development costs. As discussed above, the Company
and the U.S. Army entered into a research and development contract in fiscal
year 2005. The costs incurred under this contract in fiscal years 2006 and 2007
were billed to the customer.
Compliance with Federal, state and local environmental provisions has had no
material effect upon capital expenditures, income or the competitive position of
the Company. In addition, there are no material capital expenditures anticipated
for environmental compliance.
As of August 31, 2007 the Company had a work force of 29 employees, all of whom
were fulltime employees of the Company. As of August 31, 2006 there were 34
employees, all of whom were fulltime employees of the Company. Fluctuations in
the work force during the year sometimes result from the uneven delivery
requirements of the Department of Defense as well as the seasonal nature of the
Leisure and Recreation segment of business.
ELECTRONICS SEGMENT
-------------------
In the Electronics segment, revenues and estimated earnings under long-term
defense contracts (including research and development contracts) are recorded
using the percentage-of-completion method of accounting, measured as the
percentage of costs incurred to estimated total costs of each contract. For the
Company's indefinite delivery, indefinite quantity contract to provide 2kW
generator sets to the military and for orders from other government
subcontractors for 2kW generators, percentage-of-completion calculations are
based on individual "Delivery Orders" which are periodically received for
specified quantities. For research and development contracts total costs
incurred are compared to total expected costs for each contract.
The Company uses the percentage-of-completion method to recognize revenue for
its replacement parts business when the dollar amount of the order to be
delivered in a
4
future period or periods is material, and the duration of the work will span
multiple reporting periods. Revenue and earnings for all other orders for
replacement parts are recorded when deliveries of product are made and title and
risk of loss have been transferred to the customer and collection is probable.
For those contracts where revenue has been recognized using the
percentage-of-completion method of accounting, provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.
Virtually all of the Electronics segment revenues are attributable to business
with the Department of Defense or with other Government contractors. Aside from
replacement part sales and other short-term business, the Company's Electronics
segment revenues have in recent years been dependent upon single programs. Thus,
until 1997, the ADCAP torpedo program with the U.S. Navy was responsible for all
of the Company's Electronics segment revenues from long-term projects. In 1997
this program was replaced by the tactical generator set program with the U.S.
Army.
Since substantially all of the Company's electronics business is derived from
contracts with various Government agencies or subcontracts with prime Government
contractors, the loss of substantial Government business would have a material
adverse effect on the business.
All of the Company's contracts with the Government are subject to the standard
provision for termination at the convenience of the Government.
Although raw materials are generally available from a number of suppliers, the
Company is at times dependent upon a specific supplier or a limited number of
suppliers of material for a particular contract. As of the filing of this Annual
Report, the Company's principal suppliers are: Martin Diesel, Baldor Electronics
and the Crompton Instruments Division of Tyco Electronics Corporation. The
Company has occasionally experienced some temporary delays in the receipt of raw
materials in the past. Such delays have not had a material adverse effect on
operations of this segment; however, the Company cannot provide any assurances
that future delays, if any, will not have a material adverse effect.
Reference is made to Item 6 - Management's Discussion and Analysis of Financial
Condition and Results of Operations for additional information regarding this
segment.
LEISURE AND RECREATION SEGMENT
------------------------------
Snowmaking equipment is sold to ski areas as original equipment or as
replacements for existing equipment. Most snowmaking equipment is paid for in
full at the time of delivery to the customer. In other cases, such equipment is
sold under a sales contract that provides for a substantial down payment and
retention of a security interest in the equipment until full payment is
received. The Company has not experienced any losses due to resale of the
equipment following default by customers. The Company services the equipment at
the purchaser's expense after a warranty period that typically expires at the
end of the snowmaking season in which the sale occurs.
The Company has sold snowmaking equipment to over three hundred different
locations in the United States and abroad. Marketing has been performed by the
Company's employees in the domestic market and by distributors and
representatives in foreign markets. In the past several years, the foreign
market represented a small amount of revenues, all from the sales of parts.
For the most part, shipments are made and revenues recorded during the second
fiscal quarter. Production usually takes place in the first and second quarters,
and it is during this period that inventory has been generated and working
capital demands have been the greatest. The sale of snowmaking machines are
recorded when machinery has been delivered and title and risk of loss have been
transferred to the customer and collection is probable.
5
The market for snowmaking machines has changed in recent years. Rather than
order machinery months ahead of time, customers are expecting product to be
readily available for immediate use. In order to remain competitive in this
market, the Company has produced some Snowcub models for inventory purposes. It
has also enhanced the technical capabilities as optional items for these
machines.
After the end of fiscal year 2006, management completed a strategic review of
the spare parts business. As a result, for the fourth quarter of fiscal year
2006, the Company recorded an adjustment of $299,596 against inventory related
to spares for old models of snowmakers. See Item 6 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Leisure and
Recreation for additional information.
While there may be some temporary delays, problems regarding source and
availability of raw materials have had no material adverse effect on operations
of this segment.
Reference is made to Item 6 - Management's Discussion and Analysis of Financial
Condition and Results of Operations for additional information regarding this
segment.
OPERATIONAL RISKS
-----------------
You should carefully consider the information described below, together with all
of the other information included in this Annual Report. The following
operational risks and uncertainties are not the only ones we face, however, they
are the ones our management believes are material. If any of the following risks
actually materialize, our business, financial condition or results of operations
could be harmed. This Annual Report contains statements that are
forward-looking. These statements are based on current expectations and
assumptions that are subject to risks and uncertainties such as those listed
below and elsewhere in this Annual Report, which, among others, should be
considered in evaluating our future performance.
The Company's Dependence on Government Defense Business and the 2kW Program
---------------------------------------------------------------------------
Most of our revenues are derived from Government defense business, which is
comprised of business with the U.S. Department of Defense or with other
Government contractors. Our Government defense business consists of long-term
contracts and short-term orders such as for replacement parts. The loss of
substantial Government business (including a material reduction of orders under
existing contracts) would have a material adverse effect on our business.
Historically, our revenues from our Government defense business have been
dependent upon single programs. Currently, our primary program is with the U.S.
Army to provide diesel operated generator sets. On September 7, 2001, we were
awarded a ten year indefinite delivery, indefinite quantity contract to provide
the U.S. Army and other Department of Defense agencies with 2kW diesel operated
generator sets. The amount of orders received under this contract is
approximately $24 million through August 31, 2007. Our generator set contract
with the U.S. Army allows the U.S. Army to place additional orders; however, we
cannot give any assurances that the U.S. Army will do so, or if there are
additional orders, the amount and timing of the orders. In addition, we
experienced inflationary pressures from some suppliers in each of fiscal year
2007 and fiscal year 2006 and cannot give any assurances that the Government
will agree to a price increase under the contract that would be equitable to the
Company.
We continue to explore additional sources of revenue to reduce our dependence on
the 2kW program, but cannot give any assurances that these efforts will be
successful or, if successful, when they will be achieved. See Item 6 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Company Strategy for additional information regarding Company
strategy.
Supplier Concentration Risks
----------------------------
The Company is primarily dependent on three vendors to supply qualified
components for its 2kW generator products. During fiscal year 2007, two of these
suppliers
6
accounted for 29.2% and 18.6% of material purchases, respectively. See
Note 1-B of the Notes to Financial Statements. We purchase these components
pursuant to purchase orders and do not have long-term contracts with any of
these vendors. While there may be some temporary delays, problems regarding
source and availability of raw materials have had no material adverse effect on
operations of the Electronics segment. However, we cannot give any assurances
that these three sources of supply will continue to be available to us or, if
any or all of these sources are not available to us when we need them to be
available, that the Company will be able to implement alternative sources of
supply without undue delay or expense.
Risks Associated with Government Defense Contracting; Competition
-----------------------------------------------------------------
The Government defense business is subject to changes in military procurement
policies and objectives and to Government budgetary constraints. Periods of
heightened national security and war have often introduced new priorities and
demands, external delays, and increased uncertainty into the defense contracting
marketplace. In addition, the Department of Defense budgeting process has an
extended timeframe. The process of including expenditures in this budget could
take a minimum of 12 to 24 months.
Approval of the Department of Defense budget does not guarantee that budgeted
expenditures will actually be made and, in particular, that we will receive an
award or order for a product. Among other things, we bid for this business in
competition with many defense contractors, including firms that are larger in
size and have greater financial resources than we have. Moreover, we now believe
that there has been competition in part of the market for generator sets, from a
larger 3kW generator that operates more quietly than our 2kW model. However,
this 3kW generator does not compete in the `man-portable' segment of the market
since it is twice as heavy.
All of our contracts with the Government are subject to the standard provision
for termination at the convenience of the Government.
Changes in the Market for Snowmaking Machines
---------------------------------------------
The market for snowmaking machines has changed in recent years. Rather than
order machinery many months in advance of delivery, customers are expecting
product to be readily available for immediate use. In order to remain
competitive in this market, we have produced some Snowcub snowmaking machines
for inventory purposes. We have also enhanced the technical capabilities as
optional items for these machines.
After the end of fiscal year 2006, management completed a strategic review of
the spare parts business. As a result, for the fourth quarter of fiscal year
2006, the Company recorded an adjustment against inventory related to spare
parts for old models of snow makers. Starting in January 2007, the Company has
focused on customers using the most recent model line, the Snowcub. The Company
will continue to actively market and support the Snowcub model line and has
ceased to support past models. Reference is made to Item 6 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Leisure and Recreation for additional information.
Despite the inherent risks and uncertainties of investing in inventory,
management believes that the existing investments in Snowcub related inventory
and the elimination of spare parts inventory for older models described above
are important to the Company's business and future growth.
Item 2. DESCRIPTION OF PROPERTY
--------------------------------
The Company's 49,200 square foot facility at 27 Muller Road, Oakland, New
Jersey, located on 90 acres of land owned by the Company, was constructed in
1981. This facility houses executive offices and manufacturing operations and is
used primarily for the Electronics segment of business. Approximately 90% of
this facility is being utilized for production (one shift), staging and storage.
There are no encumbrances on the building or property.
7
Item 3. LEGAL PROCEEDINGS
--------------------------
There are no material pending legal or environmental proceedings against or in
favor of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2007.
8
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
---------------------------------------------------------
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------------------
The Company's common stock is traded over-the-counter under the symbol
"DEWY.OB".
The table below sets forth the high and low market prices of the Company's
common stock for each quarter during the last two fiscal years.
Quarterly Common Stock Price Range
----------------------------------
Fiscal Year 2007 Fiscal Year 2006
---------------- ----------------
High Low High Low
---- --- ---- ---
1st Quarter 3.99 3.49 6.00 3.60
-----------
2nd Quarter 3.49 3.05 4.75 3.19
-----------
3rd Quarter 3.40 2.85 4.35 3.80
-----------
4th Quarter 3.15 2.75 4.50 3.75
-----------
Price information is based on over-the-counter market quotations, which reflect
inter-dealer prices, without retail mark-up, mark-down or commissions, and may
not necessarily represent actual transactions.
There were no dividends declared or paid during fiscal years 2007 and 2006. The
Company has no plans to pay dividends in the foreseeable future.
The number of holders of record of the Company's common stock as of September
19, 2007 was 422.
9
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
--------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
The following discussion should be read in conjunction with the Company's
Financial Statements, including the related notes thereto, appearing elsewhere
in this Annual Report. 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 "Company Strategy" and in Item 1 above (Description of
Business - 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.
The sales and operating profit of each segment and the identifiable assets
attributed to each segment for the last two fiscal years ended June 30, 2007,
are set forth in Note 12 - Operating Segments of the Notes to the Financial
Statements.
Results of Operations
---------------------
The Company's fiscal year ends on June 30. Accordingly, all references to years
in this Management's Discussion refer to the fiscal year ended June 30 of the
indicated year. Also, when referred to herein, operating profit means net sales
less operating expenses. Some operating expenses, including general corporate
expenses, have been allocated by specific identification or based on labor for
items which are not specifically identifiable.
Revenues
--------
Revenues in fiscal year 2007 were 26% lower than fiscal year 2006. Revenues in
2007 were lower in both the Electronics segment and in the Leisure and
Recreation segment than in fiscal year 2006. Information about the Company's
operations in the two segments is set forth in Note 12 - Operating Segments of
the Notes to the Financial Statements and is discussed in further detail below.
Electronics Segment
-------------------
In the Electronics segment, revenues and estimated earnings under long-term
defense contracts (including research and development contracts) are recorded
using the percentage-of-completion method of accounting, measured as the
percentage of costs incurred to estimated total costs of each contract. For the
Company's indefinite delivery, indefinite quantity contract to provide 2kW
generator sets to the military and for orders from other government
subcontractors for 2kW generators, percentage-of-completion calculations are
based on individual "Delivery Orders" which are periodically received for
specified quantities. For research and development contracts total costs
incurred are compared to total expected costs for each contract.
10
The Company uses the percentage-of-completion method to recognize revenue for
its replacement parts business when the dollar amount of the order to be
delivered in a future period or periods is material, and the duration of the
work will span multiple reporting periods. Revenue and earnings for all other
orders for replacement parts are recorded when deliveries of product are made
and title and risk of loss have been transferred to the customer and collection
is probable.
For those contracts where revenue has been recognized using the
percentage-of-completion method of accounting, provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and income and are recognized in
the period in which the revisions are determined. For further information see
Note 1-A of the Notes to Financial Statements.
Electronic product revenues of $ 5,391,265 and $7,164,083 accounted for more
than 99% of total revenues in fiscal year 2007 and 98% of total revenues in
fiscal year 2006, respectively.
Revenues in the Electronics segment in fiscal year 2007 were $1,772,818 lower
when compared to fiscal year 2006.
In fiscal year 2007, the Company experienced decreased revenues in this segment
compared to fiscal year 2006 due to decreased production efforts under the
Company's generator set production contract that were partly offset by an
increase in various orders for replacement parts and other short-term orders.
Revenues resulting from the Company's research and development contract
described below were lower this year compared to last year due to completion of
work during the first quarter of fiscal year 2007.
In fiscal year 2007, production efforts under the Company's contract to provide
the Armed Forces with 2kW diesel operated generator sets provided approximately
60% of the Electronic segment revenues compared to approximately 59% in fiscal
year 2006. The Company's research and development contracts provided
approximately 1% of Electronics segment revenues in 2007,and approximately 13%
of such revenues in fiscal year 2006. Replacement parts and other short-term
business provided approximately 39% of such revenues in fiscal year 2007 and
approximately 28% of such revenues in fiscal year 2006.
During September 2003, the Company was awarded a "cost plus fixed fee" research
and development contract in the amount of approximately $1.8 million. Work on
this contract ended in September 2005. This contract was for the research and
development of improvements to the current 2kW diesel operated generator set
specifically at the request of the U.S. Army for lighter, quieter models. The
Company recorded no revenue and no costs as a result of this contract during
fiscal 2007. The Company earned approximately $0.2 million from this contract
during fiscal year 2006. It incurred direct costs of approximately $0.1 million
under this contract during fiscal year 2006, which were billed to the customer.
During September 2004, the Company was awarded a second "cost plus fixed fee"
research and development contract by the U.S. Army, in the amount of
approximately $1.5 million, for work to be performed towards similar objectives.
Work on this contract continued through September 2006. As a result of efforts
towards this project, the Company earned approximately $0.1 million during
fiscal year 2007 and approximately $0.9 million during fiscal year 2006. It
incurred direct costs of approximately $0.1 million during fiscal year 2007 and
approximately $0.7 million during fiscal 2006, which were billed to the
customer. For additional information, see Item 1 - Description of Business
above.
The Company's 2004 research and development contract with the U.S. Army expired
on March 31, 2007. As disclosed in the Company's Form 10Q-SB filed with the
Securities and Exchange Commission on November 13, 2006, work on this contract
(for the research and development of improvements to the Company's current 2kW
diesel operated generator performed specifically at the request of the U.S.
Army) continued into September 2006 when funding was substantially exhausted. In
September 2006 the
11
Company was granted an extension of the contract to allow work toward a contract
modification incorporating additional funding and a limited amount of work was
performed through December 2006 using most of the remaining funding from the
contract. A second extension was granted in late December 2006 to allow the
Company to continue to work toward obtaining a contract modification
incorporating additional funding.
In late January 2007 the U.S. Army informed the Company that there had been a
significant change in Army staff and priorities related to the 2kW Generator
Program and there would be no further funding under the contract. A final
extension was granted through March 31, 2007 to allow the Company to prepare and
submit final reports and documents for the completion of the contract. As a
result of this development regarding funding, the Company has written-off all of
its capitalized development costs totaling $703,799 to costs of revenue in the
fiscal quarter ended March 31, 2007. See Note 1-I, Capitalized Development
Costs, of the Notes to Financial Statements.
In March 2007, the Company was awarded three related research and development
sub-contracts, in the amount of approximately $230,400 in the aggregate, to
research and develop electronic controls for diesel fuel cell reformers. Work on
these contracts is expected to extend until April 2008. No assurances can be
given that the Company will receive any future production orders as a result of
these sub-contracts or that the Company will be awarded any additional research
and development contracts or sub-contracts.
The Company experiences variable amounts of material receipts from time to time
during the normal course of business. Material receipts are dependent upon the
receipt of orders, project requirements and vendor delivery schedules. As the
Company uses the percentage-of-completion method of accounting to record
revenues on certain long-term contracts, material costs have an impact upon
recorded revenues (see Note 1-A, Revenue Recognition of the Notes to Financial
Statements).
The aggregate value of the Company's backlog of electronic products was $4.8
million on June 30, 2007 and $3.3 million on June 30, 2006. It is estimated that
most of the present backlog will be billed during the next 12 months and
recognized as fiscal year 2008 revenues.
Leisure and Recreation Segment
------------------------------
In the Leisure and Recreation segment, revenues of $35,390 in fiscal year 2007
decreased by approximately $135,415 when compared to fiscal year 2006. This is
the result of no snowmaking machine sales in 2007 and a decrease in the sale of
repair and replacement parts for machinery previously sold and no longer under
warranty. There were no export sales of snowmaking machines during the last two
fiscal years.
In fiscal years 2005 and 2004, the Company developed enhancements to its
snowmaking machines that simplify the operation of the HEDCO snowmaker and
provide remote control operations and monitoring capabilities. The costs of
developing these enhancements were expensed as incurred. In addition, the market
for snowmaking machines has changed in recent years. Rather than ordering
machinery many months in advance of delivery, customers are expecting product to
be readily available for immediate use. The last year in which the Company had a
backlog of orders for snowmaking machines was in 2001. In order to remain
competitive, the Company has produced some Snowcub snowmaking machines for
inventory purposes.
After the end of fiscal year 2006, management completed a review of the spare
parts business. Since introducing the H-2d snowmaker in 1971 the Company has
maintained the capacity to support all past models of snowmaking machines that
are still in use. However, starting in January 2007, the Company has focused on
customers using the most recent model line, the Snowcub. The Company will
continue to actively market and support the Snowcub model line and has ceased to
support past models.
Gross Profit/(Loss)
-------------------
As a result of writing off $703,799 of capitalized development costs to cost of
revenues the Company is reporting a gross loss of $107,324 for fiscal 2007
compared
12
to a gross profit of $838,302 for fiscal 2006.
Gross margin is the measure of gross profit as a percentage of revenues. It is
affected by a variety of factors including, among other items, product mix,
product pricing, and product costs. Primarily as a result of the write-off of
the Company's capitalized development costs, the Company had a negative gross
margin of (2%) for fiscal year 2007 compared to a gross margin of 11% for fiscal
2006.
Results for fiscal year 2007 were also impacted by several factors in addition
to the effect of the write-off of capitalized development costs. First is a
change in product mix as the Company engaged in significantly less customer
funded research and development for the U.S. Army (see "Electronics Segment"
above) than it had engaged in during fiscal year 2006. The reduction in customer
funded research and development had the effect of shifting a greater proportion
of overhead cost absorption to other product lines with contractually fixed
selling prices, thereby reducing the gross margin generated by these other
product line revenues when compared to the same period in fiscal year 2006.
The second factor was an increase in costs related to metals, transportation and
foreign sourced components for the 2kw generator set product line. The Company's
10-year indefinite delivery, indefinite quantity prime contract for generator
sets with the U.S. Army, awarded in 2001, allows for a small annual increase in
selling price. Gross profit has been reduced as a result of costs increasing
faster than the selling price. The Company is in communication with the
Government and is preparing for a formal request for pricing modification under
the contract. This formal request is a labor intensive process and no assurances
can be made that the Government will agree to a modification, or that such a
modification would be equitable to the Company.
In the last quarter of fiscal year 2006 the Company instituted price increases
for future delivery of generators sold separately from the prime contract.
Delivery on these orders began in the second quarter of fiscal year 2007,
however since the number of such generators is relatively small, the Company did
not realize a significant change in gross margin as a result of this price
increase.
The revenues and operating profit of each segment and the identifiable assets
attributed to each segment for the last two fiscal years ended June 30, 2007 and
2006 are set forth in Note 12 - Operating Segments of the Notes to the Financial
Statements.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, General and Administrative Expenses for fiscal 2007 were $1,574,587 or
29% of revenue compared to $1,345,757 or 18% of revenue in fiscal 2006.
Expenditures for fiscal 2007 were higher than fiscal 2006 primarily due to
higher legal and professional fees associated with the year-end audit and filing
of the Company's Form 10-K for fiscal 2006, costs related to personnel changes,
and increased Company sponsored new product development efforts.
Interest Expense
----------------
Interest expense was $4,969 for fiscal 2007 compared to $30,527 in fiscal 2006.
This reduction in interest expense is attributed to final payment of the
Company's term loan note in January of 2007 and the repayment of a demand note
at the end of fiscal 2006.
Other Income - Net
------------------
Amounts reported as other income represent the net effect of interest and
miscellaneous items such as the sale of scrap, bank transaction fees and other
like items.
Other income of $4,670 for fiscal year 2007 was comprised of interest income of
$6,302, and the net expense of miscellaneous items and fees of $1,632.
In fiscal year 2006, other income of $10,977 was comprised of interest income of
$18,047, and the net expense of miscellaneous items and fees of $3,856 and the
loss
13
on the sale on assets of $3,214.
Net Loss before income taxes
----------------------------
Net loss before income taxes for fiscal year 2007 was $1,682,209. For the year
ended June 30, 2006 net loss before income taxes was $527,005.
Fiscal year 2007 results decreased primarily due to the write-off capitalized
development costs of $703,799 and a change in product mix as the Company has
engaged in less customer funded research and development for the U.S. Army (see
"Electronics Segment" above) which had the effect of shifting a higher
proportion of overhead costs to other product lines thereby reducing their
profitability, and a reduction in demand for the Company's 2kW generator
product.
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 income tax liability for fiscal year 2007 was at an effective net tax rate
of 0.00%. The income tax liability was at an effective net tax rate of
approximately 6.92% for fiscal year 2006, the result of a valuation allowance
against deferred taxes from prior fiscal years.
Inflation
---------
Historically, inflation and price changes have not had a material effect on net
sales and revenues and on income from continuing operations. Management does not
believe that inflation and price changes in fiscal year 2007 had a material
effect on net sales and revenues. However, in fiscal year 2006, the 2kW
generator set business experienced increased costs related to metals,
transportation and foreign sourced components. The 10-year prime contract for
the generator sets with the Government, awarded in 2001, allows for a small
annual increase in selling price. Profits have been reduced as a result of costs
increasing faster than the selling price.
In the last quarter of fiscal year 2006 the Company instituted price increases
for future delivery of generators sold separately from the prime contract. The
first sales of generators at the new price were made in fiscal year 2007. The
Company is in communication with the Government and is preparing for a formal
request for pricing modification under the prime contract. This formal request
is a labor intensive process and no assurances can be made that the Government
will agree to a modification, or that such a modification would be equitable to
the Company.
Liquidity and Capital Resources
-------------------------------
Historically, the Company's capital expenditures, debt servicing requirements
and working capital needs have been financed by cash flow from operations,
progress payments on various Government contracts (based on cost incurred) and a
line of credit of $500,000. This line of credit expired on February 28, 2007.
(For further discussion, see below under "Financing Activities".) Starting in
fiscal year 2008 the Company has changed the way it progress bills on new
contracts. The Company now attempts to negotiate payment based on achievement of
milestones rather than relying on demonstration of incurred costs. This approach
is expected to result in the Company receiving payment at or before the time it
must pay its vendors. The two new contracts received early in fiscal year 2008
(see "Recent Events" below) have been structured this way and the Company
intends to continue this approach where practical.
As of June 30, 2007 the Company had no material capital expenditure commitments.
Management believes that the Company's current cash combined with progress
payments will be sufficient to support short-term liquidity requirements,
working capital needs and capital expenditures at their current or expected
levels.
14
At June 30, 2007, the Company's working capital was $2,074,454 compared to
$2,946,071 at June 30, 2006.
The ratio of current assets to current liabilities was 3.92 to 1 at June 30,
2007 and 4.38 to 1 at June 30, 2006.
The following table is a summary of the Statements of Cash Flows in the
Company's Financial Statements:
Years ended June 30,
2007 2006
Net Cash Provided by (used in)
Operating activities $(538,393) $ 232,547
Investing activities ( 18,723) (192,767)
Financing activities ( 86,047) (354,606)
Operating Activities:
---------------------
Adjustments to reconcile net loss to net cash provided by operations are
presented in the Statements of Cash Flows in the Company's Financial Statements.
Net cash used in operating activities in fiscal year 2007 was comprised
primarily of net loss before depreciation and amortization. Decreases in
inventories, prepaid expenses, contract costs and estimated related profits in
excess of applicable billings were partly offset by an increase in accounts
receivable. A decrease in accounts payable was partly offset by increases in
accrued expenses and accrued pension costs.
Net cash provided by operating activities in fiscal year 2006 was comprised
primarily of net loss before depreciation and amortization. Decreases in
accounts receivable, inventories, prepaid expenses and deferred tax benefits
were partly offset by an increase in contract costs and estimated related
profits in excess of applicable billings. Increases in accrued expenses and
accrued pension costs were partly offset by a decrease in accounts payable.
Company sponsored research and development costs are expensed as incurred. These
costs consist primarily of material and labor costs. The Company expensed
$108,844 of these costs during fiscal year 2007 and $66,791 of these costs
during fiscal year 2006.
Investing Activities:
---------------------
During fiscal year 2007, net cash of $18,723 was used in investing activities.
This amount consisted of $17,659 used for capital expenditures, principally for
the completion of a replacement testing device, and $1,064 that was expended for
costs related to efforts incurred to pursue methods of monetizing the
undeveloped and unused portion of land.
During fiscal year 2006, net cash of $192,767 was used in investing activities.
This amount consisted of $164,466 used for capital expenditures, principally for
the acquisition and implementation of a computerized business system, and
$28,651 that was expended for costs related to efforts incurred to pursue
methods of monetizing the undeveloped and unused portion of land. The Company
realized $350 from the sale of an asset.
Financing Activities:
---------------------
During fiscal year 2007, net cash used in financing activities amounted to
$86,047 which was used to pay off the Company's term loan described below. As of
June 30, 2007 the Company had no long-term debt.
During fiscal year 2006, net cash used in financing activities amounted to
$354,606. Of this amount, $86,046 was applied as repayment of the Company's
long-term debt,
15
consisting of the long-term portion of the Company's term loan described below,
and $68,560 was used toward payment of the current portion of the Company's term
loan. As of June 30, 2006 the Company had no long-term debt. The Company also
used $200,000 of net cash to repay a demand note payable to Frances Dewey as
discussed further in this section.
On February 24, 2005, the Company and Sovereign Bank (the "Bank") entered into a
Term Loan Agreement (the "Loan Agreement") that replaced, and restructured the
remaining balance due on, the Company's Mortgage Note agreement with the Bank,
which matured in January 2005. Pursuant to the Loan Agreement, the Company
borrowed $292,187 from the Bank for a term ending February 23, 2007, at a fixed
annual interest rate of 5.56 percent. This loan was secured by a first lien on
all of the Company's accounts receivable, machinery, equipment and other
personal property (the "Collateral") and was subject to customary
representations, covenants and default provisions in favor of the Bank. On
January 22, 2007, the Company made the final installment payment on this term
loan.
The Company also had a line of credit agreement with the Bank in the amount of
$500,000 at an annual interest rate equal to the Bank's prime rate (8.25% as of
December 31, 2006) plus 0.25 percent. In February 2007, the Bank advised the
Company that the Bank would not further renew the line of credit. This line of
credit is currently not vital for the Company; however the Company is
endeavoring to obtain a replacement credit facility from another lending
institution.
The Company owns approximately 90 acres of land and the building, which it
occupies in Bergen County, New Jersey, adjacent to an interchange of Interstate
Route 287. The Company is continuing to actively pursue possible methods of
monetizing 68 undeveloped and unused acres of this property, by its sale and/or
development. This endeavor has become more complex with the implications of New
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 believes that there are strong reasons why its property
should not be in the preservation area, and is attempting to affect a solution.
However, since the Act was passed in June of 2004, the State has repeatedly
delayed promulgation of final regulations. Originally expected in 2005, based on
information from the State, they have again been delayed by the State and are
not now expected until late 2007 at the earliest. Accordingly, no assurances can
be given that the Company's efforts will be successful or if successful, the
timing thereof.
Recent Pronouncements
---------------------
In February 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities." SFAS 159 permits
entities to choose, at specified election dates, to measure eligible financial
instruments at fair value and report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. SFAS 159 is effective for fiscal years beginning after November
15, 2007. The Company does not own any financial instruments and does not expect
this statement to have an effect on the Company's financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Benefits" ("SFAS 158"). SFAS
158 addresses the accounting for defined benefit pensions plans and other
postretirement benefit plans ("plans"). Specifically, SFAS 158 requires
companies to recognize an asset for a plan's over-funded status or a liability
for a plan's under-funded status and to measure a plan's assets and its
obligations that determine its funded status as of the end of the company's
fiscal year, the offset of which is recorded, net of tax, as a component of
other comprehensive income in shareholders' equity. The Company has adopted SFAS
158 and has recorded a liability on its balance sheet as of June 30, 2007 as a
result of under-funding of the Company's pension plan.
16
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, the Board having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this Statement does not require any new fair
value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company is currently
evaluating the impact of this Statement on its financial statements.
In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No.109 ("gFIN 48"h) which clarifies
the accounting for uncertainty in income taxes recognized in an enterprise"fs
financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 prescribes a recognition threshold and measurement criteria
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition and defines the criteria that must be met
for the benefits of a tax position to be recognized. The cumulative effect of
the change in accounting principle must be recorded as an adjustment to opening
retained earnings. The Company has completed its initial evaluation of the
impact of the July 1, 2007 adoption of FIN 48 and determined that such adoption
will not have a material impact on its financial statements.
Company Strategy
----------------
The Company has many years of experience in contracting with the Department of
Defense and has been successful in obtaining many contracts to provide a wide
array of products and services. Management believes that this experience is a
significant positive competitive factor. Management is continuing to explore
other areas of business with the Department of Defense, which are capable of
providing stability and growth.
The Company is focusing its efforts on select product categories where
management believes that the Company has the best chances of successfully
growing its business. Although no assurances can be made that such a strategy
will be successful, management believes that long-term growth can best be
achieved by: 1) growing the Company's market share in areas where the Company
already has a strong presence, 2) expanding into related markets with existing
products and capabilities, and 3) further taking advantage of the Company's
strengths by expanding into related product categories.
The Company's primary sources of revenue include products with long
manufacturing lead times. These products, in particular, are its 2kW generator
sets and its HEDCO snowmaking machines. The Government sector has been ordering
small quantities of 2kW generator sets for specific uses pursuant to short-term
orders independent of the Company's 2kW contract and the market for snowmaking
equipment now demands short delivery lead-times. Recognizing this, the Company
has committed some of its resources to making a quantity of these products
readily available by producing them for inventory and sales. The Company's
investments in 2kW generator and Snowcub-related inventory are an important
component of management's business strategy of growing the Company's market
share.
Despite the inherent risks and uncertainties of investing in inventory,
management believes that these investments in inventory are important because
they allow the Company to be more responsive to the needs of its customers.
The Company is also sharpening its market focus and concentrating its efforts
where it believes it has the best chances of success. As another important
component of
17
management's business strategy of growing the Company's market share, after the
end of fiscal year 2006, management completed a review of the Company's spare
parts business for its snowmaking machines. Since introducing the H-2d snowmaker
in 1971, the Company has maintained the capacity to support all past snowmaking
machines that are still in use. However, starting in January 2007, the Company
is focusing on customers using the most recent model line, the Snowcub. The
Company will continue to actively market and support the Snowcub line of
machines and will cease to support past models.
The Company faces competition in many areas and from companies of various sizes,
capabilities and resources. Competitive factors include product quality,
technology, product availability, price, and customer service. Management
believes that the reputation of the Company in these areas provides a
significant positive competitive factor. As part of its overall business
strategy management is continuing to re-enforce customer awareness of the
Company's current and past performance as a Department of Defense supplier, its
product quality and reliability, and its historically strong customer
relationships.
In response to the U.S. Army's change in priorities regarding the 2kW Generator
Program (see "Electronics Segment" above) management has re-evaluated its
approach to the second and third strategic objectives described above. Rather
than continuing to develop new internal technologies, the Company is now
attempting to capitalize on its previous investments in technology in its
efforts to obtain business in related military power markets and to expand into
related military product categories.
The two new auxiliary power unit contracts described under "Recent Events" below
are examples of the second strategic objective, expanding into related power
markets, utilizing the Company's core expertise in light weight air cooled
diesel engine power generation. In furtherance of the third strategic objective,
expanding into related military product categories, the Company is utilizing its
experience in military-grade portable power systems under three related customer
funded research and development sub-contracts where the Company will design and
prototype electronic controls for diesel fuel cell systems (See "Electronics
Segment" above).
In the near term, a return to profitability is the Company's primary objective.
The two new development contracts, and the customer-funded research and
development sub-contracts, described above contribute to this goal. At present
the Company is not actively pursuing opportunities for piece and component
manufacturing work and other short-term business that would utilize existing
factory capacities and capabilities as discussed in its Form 10-QSB for the
period ending March 31, 2007, due to the lack of excess capacity in the
Company's factory. However the Company may consider pursuing such opportunities
in the future. The Company is continuing to pursue possible sub-contracting
relationships with other companies and defense contractors that leverage the
Company's current expertise and technology.
Critical Accounting Policies and Estimates
------------------------------------------
The Company's financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States of
America. Preparing financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. These estimates and assumptions affect the application of our
accounting policies. Actual results could differ from these estimates. Our
significant accounting policies are described in the Notes to the Financial
Statements contained herein. 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, inventory valuation, and valuation of deferred tax assets and
liabilities.
Revenues and estimated earnings under defense contracts (including research and
development contracts) are recorded using the percentage-of-completion method of
accounting. Revenues are recorded as work is performed based on the percentage
that actual incurred costs bear in comparison to estimated total costs utilizing
the most
18
recent estimates of costs and funding. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.
In the Leisure and Recreation segment, revenues and earnings are recorded when
deliveries are made and title and risk of loss have been transferred to the
customer and collection is probable.
The Company has a defined benefit pension plan covering substantially all of its
employees. The Company accounts for its defined benefit pension plan in
accordance with SFAS No. 87 - "Employers' Accounting for Pensions," which
requires that amounts recognized in financial statements be determined on an
actuarial basis, rather than as contributions are made to the plan. A
significant element in determining the Company's pension income or expense in
accordance with SFAS No. 87 is the expected return on plan assets. The Company's
disclosures about its pension plan are made in accordance with SFAS 132R
(revised 2003), "Employers' Disclosures about Pensions and Other Postretirement
Benefits, an amendment of FASB Statements No. 87, 88, and 106, and a revision of
FASB Statement No. 132" and FASB Statement No. 158 "Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R) (FAS 158). SFAS No. 132R revises
employers' disclosures about pension plans and other postretirement benefit
plans. It does not change the measurement or recognition of those plans required
by SFAS No. 87, SFAS No. 88, "Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The rules require disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. FASB 158 requires companies to record a net
liability or asset to report the funded status of their defined benefit pension
and other postretirement benefits on their balance sheet at their fiscal
year-end and in the year of adoption, to show separately in the Notes to the
Financial Statements the effect of adopting the provisions of FAS 158.
Accordingly, the required information for the Company's pension plan is included
in the Notes to the Financial Statements.
The Company has assumed, based upon high quality corporate bond yields, AA rated
or higher, that its assumed discount rate will be 6.25% in 2007, the same as its
assumed discount rate in 2006. The Company's management conducts an analysis
which includes a review of plan asset investments and projected future
performance of those investments to determine the plan's assumed long-term rate
of return. The assumed long-term rate of return of 7.5% on assets is applied to
the market-related value of plan assets at the end of the previous year. This
produces the expected return on plan assets that is included in annual pension
income or expense for the current year. The cumulative difference between this
expected return and the actual return on plan assets is deferred and amortized
into pension income or expense over future periods. Since the value of the
Company's pension assets at fiscal year-end 2007 was less than the accumulated
pension benefit obligation, the Company recorded $18,448 as a non-cash
adjustment to other comprehensive loss in stockholders equity and increased its
long-term pension liability by $18,448. In fiscal year 2006, the Company
recorded $198,691 as a non-cash adjustment to other comprehensive loss in
stockholders' equity and decreased its long-term pension liability by $198,691.
These changes to equity did not affect net income and are recorded net of
deferred taxes. See Note 8 of the Notes to Financial Statements for additional
pension disclosures.
The Company had capitalized certain development costs for efforts to improve and
enhance the 2kW generator set product line. These efforts involved, primarily,
the adaptation of existing technology, as well as, engineering and design to
meet
19
specific customer requests. The scope of these efforts included the development
of a product, which was in accordance with then current customer requests and
future requirements. Company efforts were to address areas of sound reduction,
reduced weight, improved fuel consumption and environmental considerations. The
Company reviewed these capitalized costs on a regular basis, to assess future
recoverability through the existing contracts to which such costs relate, and
expenses such costs, if any, to the extent they are not deemed recoverable. As a
result of developments regarding funding, as discussed above in "Electronics
Segment", the Company has written-off all of its capitalized development costs
totaling $703,799 to cost of revenues in the fiscal quarter ending March 31,
2007. As of June 30, 2007 the Company has no capitalized development costs. On
June 30, 2006 the Company had $703,799 of capitalized development costs.
The Company reviews the recoverability of all long-term assets, including the
related useful lives, whenever events or changes in circumstances indicate that
the carrying amount of a long-lived asset might not be recoverable. If required,
the Company compares the estimated undiscounted future net cash flows to the
related asset's carrying value to determine whether there has been an
impairment. If an asset is considered impaired, the asset is written down to
fair value, which is based either on discounted cash flows or appraised values
in the period the impairment becomes known.
The Company reviews the carrying costs of its inventories and assess whether the
carrying costs of inventory items are likely to be recoverable. At the end of
the third quarter of fiscal year 2007 and again at the end of the fiscal year
the Company evaluated the market for its Snowcub snowmaking machines and
recorded a reduction in carrying value of its finished snowmaking machines
aggregating $28,713. At the end of fiscal 2007 in connection with its annual
physical inventory the Company identified specific items in its Electronics
segment inventory for which orders are uncertain and recorded a reduction in
carrying value of $15,548 for those items.
After the end of fiscal year 2006, management completed a strategic review of
the HEDCO spare parts business. As a result, for the fourth quarter of fiscal
year 2006, the Company recorded an adjustment against inventory of $299,596
based on specific identification and related to spare parts for old models of
snow makers. The parts were disposed of during fiscal 2007.
The Company applies Statement of Financial Accounting Standard ("SFAS") No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS No.
109, 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.
Recent Events
After the end of the 2007 fiscal year, on August 16, 2007 the Company announced
the receipt of a new contract to provide auxiliary power systems for the United
States Marine Corps (USMC) `Logistic Vehicle'. This contract, awarded by the
USMC Systems Command, Quantico, VA, consists of a base year and three option
years, exercisable at the Government's option. The initial delivery order for
the Logistic Vehicle Power System (LVPS), valued at approximately $2.3 million,
has been received with an accelerated delivery of 150 days. Work under current
delivery orders is expected to continue through December 2007. The LVPS is a
diesel-powered 3.5 kilowatt 28 volt DC generator providing power to equipment
that protects against improvised explosive devices. It is based on the Company's
existing 2 kilowatt military tactical generator.
20
The LVPS production award follows the recent receipt of another contract to
develop an armored 3 kilowatt 28 volt DC auxiliary power unit than can be
mounted on the back of the USMC main battle tank, the Abrams M1A1. This
development contract, for $646,400, was awarded by the USMC Tank Program Office,
also in Quantico, VA, through a sub-contract administered by CACI, Eatontown,
NJ, and has the possibility of a follow-on production contract. Work on this
contract is expected to continue into the quarter ending March 31, 2008. No
assurance can be made that the Company will receive any future production order
as a result of this contract or that the Government will award the Company any
additional development contracts.
21
Item 7. FINANCIAL STATEMENTS
-----------------------------
Index to Financial Statements
-----------------------------
Page
----
Report of Independent Registered Public Accounting Firm 23
Financial Statements:
Balance Sheets, June 30, 2007 and 2006 24
Statements of Operations, Years Ended June 30, 2007,
and 2006 25
Statements of Stockholders' Equity and Comprehensive
Income/Loss, Years Ended June 30, 2007 and 2006 26
Statements of Cash Flows, Years Ended June 30, 2007,
and 2006 27
Notes to the Financial Statements 28
All other schedules are omitted because they are not applicable or the required
information is shown in the Financial Statements or the Notes thereto.
22
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
The Dewey Electronics Corporation
Oakland, New Jersey
We have audited the accompanying balance sheets of The Dewey Electronics
Corporation (the "Company") as of June 30, 2007 and 2006, and the related
statements of operations, stockholders' equity and comprehensive income/loss and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 8 to the financial statements, the Company adopted the
provisions of FASB Statement No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Post-Retirement Plans".
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The Dewey Electronics Corporation at June
30, 2007 and 2006 and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
/s/ Amper, Politziner & Mattia, P.C.
September 26, 2007
New York, New York
23
The Dewey Electronics Corporation
Balance Sheets
June 30,
ASSETS: 2007 2006
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 432,337 $ 1,075,500
Accounts receivable, net of allowance for doubtful accounts of $3,981 and $6,181 922,627 526,730
Inventories 701,425 1,106,689
Contract costs and related estimated profits in excess of billings 581,619 932,411
Prepaid expenses and other current assets 147,686 176,057
----------- -----------
TOTAL CURRENT ASSETS 2,785,694 3,817,387
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 651,015 651,015
Building and improvements 1,885,653 1,885,653
Machinery and equipment 3,091,584 3,073,925
Furniture and fixtures 205,539 205,539
----------- -----------
5,833,791 5,816,132
Less accumulated depreciation (4,776,078) (4,650,562)
----------- -----------
1,057,713 1,165,570
CAPITALIZED DEVELOPMENT COSTS -- 703,799
DEFERRED COSTS 75,095 74,031
----------- -----------
TOTAL OTHER ASSETS 75,095 777,830
----------- -----------
TOTAL ASSETS $ 3,918,502 $ 5,760,787
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Note payable $ -- $ 86,047
Trade accounts payable 253,908 358,427
Accrued expenses and other liabilities 201,910 212,349
Accrued compensation and benefits payable 151,769 156,550
Accrued pension costs 103,653 57,943
----------- -----------
TOTAL CURRENT LIABILITIES 711,240 871,316
LONG-TERM PENSION LIABILITY 261,545 243,097
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00; authorized 250,000 shares, issued and -- --
outstanding-none
Common stock, par value $.01; authorized 3,000,000 shares; 1,693,397 shares
issued and 1,362,031 shares outstanding at June 30, 2007 and 2006 16,934 16,934
Additional paid-in capital 2,815,245 2,815,245
Retained earnings 703,348 2,385,557
Accumulated other comprehensive loss (102,782) (84,334)
----------- -----------
3,432,745 5,133,402
Less: Treasury stock, 331,366 shares at June 30, 2007 and 2006 at cost (487,028) (487,028)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,945,717 4,646,374
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,918,502 $ 5,760,787
=========== ===========
See notes to the financial statements.
24
The Dewey Electronics Corporation
Statements of Operations
Years Ended June 30,
2007 2006
---- ----
Revenues $ 5,426,655 $ 7,334,888
Cost of revenues 5,533,979 6,496,586
----------- -----------
Gross (loss)/ profit (107,324) 838,302
Selling, general and administrative expenses 1,574,587 1,345,757
----------- -----------
Operating loss (1,681,911) (507,455)
Interest expense (4,969) (30,527)
Other income - net 4,671 10,977
----------- -----------
Loss before income tax benefit (1,682,209) (527,005)
=========== ===========
Provision for Income Tax (0) (36,462)
----------- -----------
NET LOSS $(1,682,209) $ (563,467)
NET LOSS PER COMMON SHARE - BASIC $ (1.24) $ (0.41)
NET LOSS PER COMMON SHARE - DILUTED $ (1.24) $ (0.41)
Weighted Average Shares Outstanding
Basic 1,362,031 1,362,031
Diluted 1,362,031 1,362,031
See notes to the financial statements.
25
The Dewey Electronics Corporation
Statements of Stockholder's Equity and Comprehensive Income/Loss
Years ended June 30, 2007 and 2006.
Accumulated
Additional Other Treasury stock Total
Common Stock Paid-in Retained Comprehensive at cost Stockholders
Shares Amount Capital Earnings loss Shares Amount Equity
------ ------ ------- -------- ---- ------ ------ ------
Balance, June 30, 2005 1,693,397 $ 16,934 $ 2,815,245 $ 2,949,024 $ (283,025) 331,366 $ (487,028) $ 5,011,150
Net loss -- -- -- (563,467) -- -- -- (563,467)
Other comprehensive loss
net of tax:
Minimum pension liability
Adjustment -- -- -- -- 198,691 -- -- 198,691
-----------
Comprehensive Loss (364,776)
-----------
Balance, June 30, 2006 1,693,397 16,934 2,815,245 2,385,557 (84,334) 331,366 (487,028) 4,646,374
Net Loss -- -- -- (1,682,209) -- -- -- (1,682,209)
Other comprehensive loss
net of tax:
Minimum pension liability
Adjustment -- -- -- -- (18,448) -- -- (18,448)
-----------
Comprehensive Loss (1,700,657)
-----------
Balance, June 30, 2007 1,693,397 $ 16,934 $ 2,815,245 $ 703,348 $ (102,782) 331,366 $ (487,028) $ 2,945,717
========== ========== =========== =========== =========== =========== =========== ===========
See notes to financial statements
26
The Dewey Electronics Corporation
Statements of Cash Flows
Years ended June 30,
2007 2006
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,682,209) $ (563,467)
----------- -----------
Adjustments to reconcile net loss to net
cash (used in)/provided by operating activities:
Depreciation 125,516 116,212
Impairment of capitalized development costs 703,799 --
Loss on sale of assets -- 3,214
Deferred income tax provision -- 51,074
Provision for inventory reserve 44,260 299,596
(Decrease)/Increase in allowance for doubtful accounts (2,200) 6,181
(Increase)/Decrease in accounts receivable (393,697) 223,304
Decrease/(Increase) in inventories 361,004 (8,179)
Decrease/(Increase) in contract costs and related estimated
profits in excess of applicable billings 350,792 (159,904)
Decrease in prepaid expenses and other current assets 28,371 57,920
(Decrease) in accounts payable (104,519) (40,086)
(Decrease)/Increase in accrued expenses and other liabilities (15,220) 193,600
Increase in pension costs accrued 45,710 53,082
----------- -----------
Total adjustments 1,143,816 796,014
----------- -----------
Net cash (used in)/provided by operating activities (538,393) 232,547
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for plant, property and equipment (17,659) (164,466)
Deferred cost (1,064) (28,651)
Proceeds from sale of assets -- 350
----------- -----------
Net cash used in investing activities (18,723) (192,767)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment - note payable related party -- (200,000)
Payment - term loan (86,047) (154,606)
----------- -----------
Net cash used in financing activities (86,047) (354,606)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (643,163) (314,826)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,075,500 1,390,326
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 432,337 $ 1,075,500
----------- -----------
Interest paid $ 4,969 $ 30,527
Interest received 6,302 18,046
Corporate income taxes (refunded) -- (33,509)
See notes to the financial statements.
27
The Dewey Electronics Corporation
Notes to the Financial Statements
Years ended June 30, 2007 and, 2006
--------------------------------------------------------------------------------
1. Business and Summary of Significant Accounting Policies
-----------------------------------------------------------
The Dewey Electronics Corporation is a systems oriented military electronics
development, design and manufacturing organization based in Oakland, New Jersey.
The Company is organized into two operating segments on the basis of the type of
products offered. Each segment is comprised of separate and distinct businesses:
the Electronics segment, primarily business with the Department of Defense, and
the Leisure and Recreation segment, primarily business with ski areas and
resorts.
A. Revenue Recognition
Revenues and estimated earnings under long-term defense contracts (including
research and development contracts) are recorded using the
percentage-of-completion method of accounting, measured as the percentage of
costs incurred to estimated total costs of each contract. For the Company's
indefinite delivery, indefinite quantity contract to provide 2kW generator sets
to the military and for orders from other government subcontractors for 2kW
generators, percentage-of-completion calculations are based on individual
"Delivery Orders" which are periodically received for specified quantities. For
research and development contracts total costs incurred are compared to total
expected costs for each contract.
The Company uses the percentage-of-completion method to recognize revenue for
its replacement parts business when the dollar amount of the order to be
delivered in a future period or periods is material, and the duration of the
work will span multiple reporting periods. Revenue and earnings for all other
orders for replacement parts are recorded when deliveries of product are made
and title and risk of loss have been transferred to the customer and collection
is probable.
For those contracts where revenue has been recognized using the
percentage-of-completion method of accounting, provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.
In the Leisure and Recreation segment, revenues and earnings are recorded when
deliveries of product are made and title and risk of loss have been transferred
to the customer and collection is probable.
B. Concentration Risks
Concentration of Credit Risks
-----------------------------
The Company is subject to concentrations of credit risk primarily from cash and
accounts receivable. The Company maintains accounts with financial institutions
which exceed the federally insured maximum of $100,000. The Company minimizes
risks associated with cash by periodically reviewing the credit quality of its
primary financial institutions. The Company's accounts receivable are
principally with agencies of the United States Department of Defense. These
agencies accounted for 92.2% of the Company's accounts receivable as of June 30,
2007.
Product Concentration Risk
--------------------------
The Company derives a significant portion of its revenue from the sale of 2kw
portable electrical generators to various branches of the United States military
under a long term contract and to other Department of Defense contractors. The
contract to supply generators to the Department of Defense is for an indefinite
delivery, indefinite quantity and is subject to the Government's standard
provision for termination at the convenience of the Government.
28
Supplier Concentration Risks
----------------------------
The Company is primarily dependant on three vendors to supply qualified
components for its 2kw generator products. During fiscal year 2007 two of these
suppliers accounted for 29.2% and 18.6% of material purchases, respectively.
These same suppliers accounted for 32.4% and 23.4% of material purchases in
fiscal year 2006. No other supplier accounted for more than 10% of material
purchases in fiscal years 2007 or 2006.
Customer Concentration Risks
----------------------------
The Company derives most of its revenues through contracts with various agencies
of the Department of Defense including a long-term contract to supply portable
electric generators, research and development contracts, and various short-term
contracts and awards to supply spare parts and perform repairs on products
previously manufactured and sold by the Company. In fiscal year 2007, the
various agencies of the Department of Defense accounted for approximately 83.6%
of Company revenue. In fiscal year 2006 the percentage was 80.7%. No other
customer accounted for more than 10% of the Company's revenues in fiscal years
2007 or 2006.
C. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity of
three months or less at the date of purchase to be cash equivalents.
D. Fair Value of Financial Instruments
The fair values of the Company's long-term debt and line of credit borrowings
are estimated based upon interest rates currently available for borrowings with
similar terms and maturities and approximate the carrying values.
Due to the short-term nature of cash, accounts receivable, accounts payable,
accrued expenses and other current liabilities, their carrying value
approximates fair value.
E. Accounts Receivable
The Company regularly reviews its trade receivables for probability of
collection. An assessment of the probability of collection of delinquent
accounts is made and an allowance is recorded when collection becomes uncertain.
F. Inventories
Cost is determined by the first-in, first-out (FIFO) method. Inventories are
valued at the lower of cost or market. Components of cost include materials,
direct labor and factory overhead.
G. 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.
H. Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Allowance for depreciation is
provided on a straight-line basis over estimated useful lives of three to ten
years for machinery and equipment, five years for computer software, ten years
for furniture and fixtures, and twenty years for building and improvements.
29
I. Capitalized Development Costs
For several years, the Company had invested in research and development efforts
to improve its 2kW generator product at the request of its customer, the United
States Army. Initial efforts were at the Company's expense and certain of these
development costs arising from the Company's early efforts to develop new
technologies were capitalized and have appeared on the balance sheet as
"Capitalized Development Costs". These Company-sponsored efforts were
subsequently supplemented by two customer-funded research and development
contracts with the U.S. Army. The Company has not capitalized any costs
associated with the customer-funded contracts.
Work under the first of the Company's customer-funded research and development
contracts with the U.S. Army ended in September of 2005. Work under the second
contract continued into September of 2006 when funding was substantially
exhausted. In September 2006, the Company was granted an extension of the
contract to allow work toward a contract modification incorporating additional
funding. A limited amount of work was performed through December 2006 using most
of the remaining funding from the contract. A second extension was granted in
late December 2006 to allow the Company to continue to work toward obtaining a
contract modification incorporating additional funding.
In late January 2007 the U.S. Army informed the Company that there had been a
significant change in Army staff and priorities related to the 2kW Generator
Program, and that there would be no further funding under the contract. A final
extension was granted through March 31, 2007 to allow the Company to prepare and
submit final reports and documents for the completion of the contract. As a
result of this development regarding funding, the Company has written-off all of
its capitalized development costs totaling $703,799 to cost of revenues in the
quarter ended March 31, 2007. On June 30, 2006 the Company had $703,799 of
capitalized development costs.
The Company licenses certain technology rights under an agreement with a vendor
for which it has pre-paid licensing fees. The Company continues to pay and
expense licensing fees monthly. As of June 30, 2007 and 2006, $120,000 of these
fees are included in prepaid expenses and other current assets.
The Company expenses its research and development costs as incurred. These costs
consist primarily of salaries and material costs. For the fiscal year ended June
30, 2007, the Company expensed $108,844 of these costs. During the prior fiscal
year, the Company expensed $66,791 of research and development costs.
J. Impairment of Long-Lived Assets
The Company reviews the recoverability of all long-term assets, including the
related useful lives, whenever events or changes in circumstances indicate that
the carrying amount of a long-lived asset might not be recoverable. If required,
the Company compares the estimated undiscounted future net cash flows to the
related asset's carrying value to determine whether there has been an
impairment. If an asset is considered impaired, the asset is written down to
fair value, which is based either on discounted cash flows or appraised values
in the period the impairment becomes known. There were no impairments of
long-term assets in the year ended June 30, 2007 or in the year ended June 30,
2006.
K. Income Taxes
The Company applies Statement of Financial Accounting Standard ("SFAS") No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS No.
109, 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
30
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.
L. Deferred Costs
The Company is continuing to actively pursue possible methods of monetizing the
undeveloped and unused portion of its property, by its sale and/or development.
To that end the Company has deferred $65,095 of costs incurred related to these
efforts.
M. Liquidity
During the year ended June 30, 2007, the Company incurred a loss of $1.7 million
and cash outflows used in operations of approximately $540,000. Additionally,
the Company's $500,000 line of credit expired on February 28, 2007. The Company
believes that its current cash combined with progress payments expected
primarily in the second fiscal quarter under contracts entered into subsequent
to year-end will be sufficient to support its liquidity, working capital and
capital expenditure needs.
2. Recent Accounting Pronouncements
------------------------------------
In February 2007, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standard ("SFAS") No. 159 "The Fair Value
Option for Financial Assets and Financial Liabilities." SFAS 159 permits
entities to choose, at specified election dates, to measure eligible financial
instruments at fair value and report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. SFAS 159 is effective for fiscal years beginning after November
15, 2007. The Company does not own any financial instruments and does not expect
this statement to have an effect on the Company's financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Benefits" ("SFAS 158"). SFAS
158 addresses the accounting for defined benefit pensions plans and other
postretirement benefit plans ("plans"). Specifically, SFAS 158 requires
companies to recognize an asset for a plan's over-funded status or a liability
for a plan's under-funded status and to measure a plan's assets and its
obligations that determine its funded status as of the end of the company's
fiscal year, the offset of which is recorded, net of tax, as a component of
other comprehensive income in shareholders' equity. The Company has adopted SFAS
158 on June 30, 2007. See Note 8 related to the adoption of SFAS No. 158.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, the Board having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this Statement does not require any new fair
value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company is currently
evaluating the impact of this Statement on its financial statements.
In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109 ("gFIN 48"h) which
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise"fs financial statements in accordance with FASB Statement No.
109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement criteria for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition and defines the
criteria that must be met for the benefits of a tax position to be
31
recognized. The cumulative effect of the change in accounting principle must be
recorded as an adjustment to opening retained earnings. The Company has
completed its initial evaluation of the impact of the July 1, 2007 adoption of
FIN 48 and determined that such adoption will not have a material impact on its
financial statements.
3. Inventories
---------------
Inventories consist of:
June 30,
--------
2007 2006
---- ----
Finished goods $ 165,751 $ 194,885
Work in progress 137,678 93,485
Raw materials 397,996 818,319
---------- ----------
$ 701,425 $1,106,689
========== ==========
4. Costs and Estimated Earnings on Uncompleted Contracts
---------------------------------------------------------
June 30,
--------
2007 2006
---- ----
Costs incurred on contracts in progress $18,440,106 $14,953,793
Estimated contract profit 3,581,656 3,399,120
----------- -----------
22,021,762 18,352,913
Less: billings to date 21,440,144 17,420,502
----------- -----------
Contract costs and related estimated
profits in excess of billings $ 581,619 $ 932,411
=========== ===========
5. Stock Option Plan
---------------------
On December 2, 1998, the Employee Stock Option Committee adopted a Stock Option
Plan of 1998, which granted incentive stock options to various executives and
key employees to purchase shares of common stock. Options were granted at fair
market value of the stock on the date of grant and are exercisable over a
ten-year period beginning December 2, 1999 to September 12, 2010. At the Annual
Meeting of Stockholders on December 5, 2001, this stock option plan was amended
and restated among other things to increase the number of shares which may be
issued under the plan by 25,000 shares, from 60,000 to 85,000.
The changes in the number of shares under option are as follows:
Number of Shares Weighted Average
Exercise Price
Balance at June 30, 2005 40,000 $ 2.76
Granted during 2006 -- --
Exercised -- --
--------------- ---------------
Balance at June 30, 2006 40,000 $ 2.76
Granted during 2007 -- --
Forfeited (20,000) (2.05)
--------------- ---------------
Balance at June 30, 2007 20,000 $ 3.47
=============== ===============
Exercisable at June 30, 2007 20,000 $ 3.47
=============== ===============
32
Also, at the Annual Meeting of Stockholders on December 5, 2001, the Company
adopted a Stock Option Plan for Non-Employee Directors. The number of shares
issuable upon exercise of options, which may be granted under this Plan, shall
not exceed 50,000 shares of common stock. No options have been granted under
this plan.
Listed below is a summary of the stock options outstanding and exercisable at
June 30, 2007.
Outstanding and Exercisable
Weighted Average Weighted Average
Exercise Price Options Exercise Price Remaining Life-Years
-------------- ------- -------------- --------------------
1.63 4,000 1.63 3.2
3.93 16,000 3.93 6.5
------
20,000
For purposes of the disclosure required under SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement 123", the fair value of each option was estimated on the grant date
using the Black-Scholes option-pricing model. There were no stock options
granted in 2007 or 2006.
For the past two fiscal years, the number of options exercisable at fiscal year
end was as follows: 20,000 at June 30, 2007, and 40,000 at June 30, 2006.
6. Notes Payable
-----------------
As of June 30, 2007 the Company had no outstanding indebtedness.
7. Taxes on Income
-------------------
(Provision) for income taxes:
Years ended June 30,
2007 2006
Deferred
Federal $ -- $(32,106)
State -- (18,968)
-------- --------
-- (51,074)
Current
Federal -- 14,612
State -- --
-------- --------
-- 14,612
-------- --------
Total (Provision) $ -- $(36,462)
======== ========
Deferred tax assets and liabilities as of June 30, 2007 and June 30, 2006
consisted of the following:
33
Deferred Tax assets: 2007 2006
---------------------
Current
Vacation accrual $ 36,012 $ 41,748
Inventory reserve 17,704 119,838
Allowance for doubtful accounts (880) 2,480
Prepaids (8,275) (16,906)
--------- ---------
44,562 147,160
Less Valuation Allowance (44,562) (147,160)
--------- ---------
Total current deferred tax asset -- --
Non-current
Pension 146,079 79,287
Depreciation 806 9,519
Net Operating Loss 771,435 112,648
Other -- --
--------- ---------
918,320 201,454
Less Valuation Allowance (918,320) (201,454)
--------- ---------
Total non-current deferred tax assets 0 0
--------- ---------
Total deferred tax assets $ -- $ --
========= =========
The Company has provided a valuation allowance against its net deferred taxes as
it believes that it is more likely than not that it will not realize the tax
attributes. As of June 30, 2007, the Company has approximately $1,921,000 and
$1,972,000 of federal and state, respectively, net operating loss carry-forwards
expiring beginning in 2012 through 2022.
The reconciliation of the Federal statutory rate with the Company's effective
tax rate is summarized as follows: Years ended June 30,
2007 2006
---- ----
Federal statutory rate (34.00)% (34.00)%
State income taxes net of federal benefit -- 3.60
Increase in valuation allowance 36.52 36.02
Other (2.55) 1.30
--------- ---------
Effective Rate 0.00% 6.92%
========= =========
8. Pension Plan
----------------
The Company has a non-contributory defined benefit retirement plan covering all
its employees which is qualified under the Internal Revenue Code. The method of
determining the accrued benefit of an employee is the amount equal to 0.8% of an
employee's average monthly salary times the number of years employed by the
Company, to a maximum of 35 years. The Company's policy is to contribute the
amounts allowable under Internal Revenue Service regulations.
The investment policy of the Company for its pension plan is to maximize value
within the context of providing benefit security for plan participants. The plan
assets are invested in a fixed income investment account.
The Company expects to continue to contribute within the range of legally
acceptable contributions as identified by the Plan's enrolled actuary.
The following tables provide information about changes in the benefit obligation
and plan assets and the funded status of the Company's pension plan.
34
2007 2006
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,223,378 $ 1,309,981
Service cost
44,501 39,589
Interest cost
76,461 67,595
Actuarial gain (65,268)
(189,958)
Benefits paid plus administrative expenses (3,878) (3,829)
----------- -----------
Benefit obligation at end of year $ 1,275,194 $ 1,223,378
=========== ===========
Change in plan assets:
Fair value of plan assets at beginning of year $ 844,056 $ 781,649
Actual return on plan assets
39,818 36,236
Employer contributions
30,000 30,000
Benefits paid plus administrative expenses (3,878) (3,829)
----------- -----------
Fair value of plan assets at end of year $ 909,996 $ 844,056
----------- -----------
Funded status (365,198 (379,322)
Unrecognized Net Gain or Loss 261,545 321,379
----------- -----------
Accrued Pension Expense $ (103,653) $ (57,943)
----------- -----------
Measurement Date July 1, 2007 July 1, 2006
Weighted Average Assumptions
Discount Rate 6.25% 6.25%
Expected Long-term Rate of Return on Assets 7.50% 7.50%
Rate of increase in future compensation levels 3.00% 3.00%
Set forth below is a summary of the amounts reflected in the Company's statement
of financial position at the end of the last two fiscal years:
June 30, 2007 June 30, 2006
Accrued pension liability $(365,198) $(301,040)
Accumulated other comprehensive income, pre-tax 261,545 243,097
--------- ---------
Net amount recognized $(103,653) $ (57,943)
========= =========
The accumulated benefit obligation for the plan was $1,204,294 and $1,145,096 at
June 30, 2007, and 2006, respectively.
Components of periodic pension costs as of June 30, 2007 and 2006 are as
follows:
2007 2006
---- ----
Service cost-benefits earned during the period $ 44,501 $ 39,589
Interest cost on projected benefit obligation 76,461 67,595
Expected return on plan assets (64,823) (60,611)
Amortization of actuarial loss 19,571 36,509
-------- --------
Net periodic pension cost $ 75,710 $ 83,082
======== ========
35
Weighted Average Assumptions for Net Periodic Pension Expense
2007 2006
---- ----
Discount Rate 6.25% 5.16%
Expected Long-term Rate of Return on Assets 7.50% 7.50%
Rate of Increase in Future Compensation Levels 3.00% 3.00%
Retirement Plan for Employees of Dewey Electronics Corporation's weighted
average asset allocations at June 30, 2007, and 2006, by asset category are as
follows:
2007 2006
Asset Category
Fixed Funds with Guaranteed Interest Rates 100% 100%
---- ----
Total 100% 100%
==== ====
The expected future payments for the years ended June 30, are as follows:
2008 $ 8,000
2009 $ 19,000
2010 $ 30,000
2011 $ 42,000
2012 $ 59,000
Five years thereafter $ 409,000
During fiscal year 2007 the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 158 Employers' Accounting for Defined
Benefit Pension Plans and Other Post Retirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R) (FAS 158) which requires Companies to
recognize on their balance sheets either an asset for an over-funded pension
plan or a liability for an under-funded pension plan with a corresponding
adjustment to Accumulated Other Comprehensive Income. FAS 158 further requires
that in the year of adoption that companies first determine whether an
Additional Minimum Liability `AML' is required to be recorded on the balance
sheet under provisions of FASB Statement No. 87 Employers Accounting for
Pensions (FAS 87) and to disclose separately the incremental effect of adopting
the provisions of FAS 158 on individual line items of the balance sheet. The
table below summarizes the impact on balance sheet line items of adopting FAS
158.
Pre-FAS 158 Pre-FAS 158 FAS 158
Without AML AML With AML Adoption Post FAS
Adjustment Adjustment Adjustment Adjustment 158
Accrued Pension Liability $(243,097) $52,452 $(190,645) $(70,900) $(261,545)
Accumulated Other Comprehensive $( 84,334) $52,452 $( 31,882) $(70,900) $(102,782)
Income(Loss)
9. Earnings Per Share
----------------------
Net loss per share has been presented pursuant to SFAS No. 128, "Earnings per
Share". Basic net loss per share is computed by dividing reported net loss
available to common shareholders by weighted average shares outstanding for the
period. Diluted net loss per share is computed by dividing reported net loss
available to common shareholders by weighted average shares outstanding for the
period, adjusted for the dilutive effect of common stock equivalents, which
consist of stock options, using the treasury stock method.
The tables below set forth the reconciliation of the numerators and denominators
of the basic and diluted net loss per common share computations. Certain stock
options were excluded from the computation of earnings per share due to their
anti-dilutive effect. The weighted average number of such shares is 1,100 and
7,917 for the years ended June 30, 2007 and 2006.
36
Twelve Months Ended June 30, 2007
Loss Shares Per Share Amount
---- ------ ----------------
Basic net loss/per common share $(1,682,209) 1,362,031 $ (1.24)
Effect of dilutive securities -- -- --
----------- ----------- -----------
Diluted net loss per common share $(1,682,209) 1,362,031 $ (1.24)
=========== =========== ===========
Twelve Months Ended June 30, 2006
Loss Shares Per Share Amount
---- ------ ----------------
Basic net loss/per common share $ (563,467) 1,362,031 $ (0.41)
Effect of dilutive securities -- -- --
----------- ----------- -----------
Diluted net loss per common share $ (563,467) 1,362,031 $ (0.41)
=========== =========== ===========
10. Related Party Transaction
-----------------------------
During 1988, Gordon C. Dewey, the Company's co-founder, lent the Company a total
of $200,000, pursuant to an unsecured demand note bearing interest at the rate
of 9 percent per annum. As of June 30, 2006 this loan obligation had been fully
repaid. Interest expense paid under this note was $18,250 for fiscal year 2006.
11. Other Income
----------------
Other income/(expense) consists of the following for the years ended June 30:
2007 2006
---- ----
Sales of scrap and miscellaneous income/(expense) - net $ (1,632) $ (3,856)
Gain (Loss) on sale of assets $ -- $ (3,214)
Interest income $ 6,302 $ 18,047
-------- --------
$ 4,670 $ 10,977
======== ========
12. Operating Segments
-----------------------
The Company operates in two segments: Electronics, and Leisure and Recreation.
Operations in the Electronics segment are primarily related to supplying
electronics and electrical products and systems for the United States Government
as a prime contractor or subcontractor. Operations in the Leisure and Recreation
segment involve the production and sale of snowmaking machinery and servicing of
such machinery at the purchaser's expense beyond the warranty period. Total
revenue by segment represents sales to unaffiliated customers, as reported in
the Company's Statements of Operations. There are no inter-segment sales.
Some operating expenses, including general corporate expenses, have been
allocated by specific identification or based on direct labor for items which
are not specifically identifiable. In computing operating profit, none of the
following items have been added or deducted: interest expense, income taxes, and
non-operating income. All of the Company's operations are performed at its
facility in Oakland, New Jersey. The facility and resources are shared by both
segments and the direct use of such resources and space cannot be entirely
specified. Accordingly, the Company allocates usage of its facility and
equipment. Depreciation and amortization for the Electronics segment and the
Leisure and Recreation segment, respectively, was approximately $118,000 and
$7,000 in fiscal year 2007, and $108,000 and $8,000 in 2006. Capital
expenditures were approximately $17,700 in fiscal year 2007,and $164,000 in
2006.
Identifiable assets by industry segment are those assets that are used in the
Company's operations in each industry segment. Corporate assets are principally
cash, prepaid expenses, and other current assets.
The following tables present information about reported segment revenues,
operating profit or loss, and assets, and reconcile such segment information to
the Company's totals:
37
Year ended June 30, 2007
(Dollars in thousands)
Leisure and Total
Electronics Recreation Company
----------- ---------- -------
Revenue $ 5,392 $ 35 $ 5,427
============ ============ ============
Operating loss (1,531) (150) (1,682)
============ ============
Interest expense and other income-net --
------------
Loss before income taxes (1,682)
============
Identifiable assets at June 30, 2007 2,853 411 3,264
============ ============
Corporate assets 655
------------
Total assets at June 30, 2007 3,919
============
Year ended June 30, 2006
(Dollars in thousands)
Leisure and Total
Electronics Recreation Company
----------- ---------- -------
Revenue $ 7,164 $ 171 $ 7,335
============ ============ ============
Operating loss (110) (397) (507)
============ ============
Interest expense and other income-net (20)
------------
Loss before income taxes (527)
============
Identifiable assets at June 30, 2006 3,981 454 4,435
============ ============
Corporate assets 1,326
------------
Total assets at June 30, 2006 5,761
============
13. Unaudited Quarterly Financial Data
Gross Profit/ Net Earnings per share
2007 Revenue (Loss) (Loss) Basic Diluted
---- ------- ------ ------ ----- -------
Sept. 30 $ 1,645,771 $ 179,358 $ (157,469) $ (0.12) $ (0.12)
Dec. 31 $ 1,490,408 $ 123,210 $ (235,044) (0.17) (0.17)
Mar. 31 $ 1,170,845 $ (500,941) $ (914,157) (0.67) (0.67)
Jun. 30 $ 1,119,631 $ 91,049 $ (375,539) (0.28) (0.28)
----------- ----------- ----------- ----------- -----------
Year $ 5,426,655 $ (107,324) $(1,682,209) $ (1.24) $ (1.24)
=========== =========== =========== =========== ===========
Gross Profit/ Net Earnings per share
2007 Revenue (Loss) (Loss) Basic Diluted
---- ------- ------ ------ ----- -------
Sept. 30 $ 1,116,265 $ 200,486 $ (52,741) $ (0.04) $ (0.04)
Dec. 31 $ 1,974,374 $ 235,377 $ (233,489) (0.17) (0.17)
Mar. 31 $ 2,170,870 $ 241,118 $ (118,244) (0.09) (0.09)
Jun. 30 $ 2,073,379 $ 161,321 $ (158,993) (0.11) (0.11)
----------- ----------- ----------- ----------- -----------
Year $ 7,334,888 $ 838,302 $ (563,467) $ (0.41) $ (0.41)
=========== =========== =========== =========== ===========
38
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
------------------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------
None.
Item 8A. CONTROLS AND PROCEDURES
--------------------------------
The Company carried out, under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and Treasurer, an
evaluation of the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the fiscal year covered by
this Annual Report. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is accumulated and communicated to management, including
its Chief Executive Officer and Treasurer, as appropriate to allow timely
decisions regarding required disclosure. Based on this evaluation, the Chief
Executive Officer and Treasurer concluded that, as of June 30, 2007, 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.
During the fourth fiscal quarter covered by this Annual Report, the following
change in the Company's internal control over financial reporting occurred that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting. The Company has obtained
the services of an additional financial staff member to assist in financial
reporting and day to day financial activities. The Chief Executive Officer and
Treasurer took this change into account in reaching their conclusion regarding
the effectiveness of the Company's disclosure controls and procedures, as
described in the first paragraph of this Item 8A.
Item 8B. OTHER INFORMATION
--------------------------
None
39
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE;
----------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
Information in response to this Item is incorporated herein by reference from
the Company's definitive proxy statement for the 2007 Annual Meeting of
Stockholders.
The Company's Code of Ethics is available at our website at
www.deweyelectronics.com
Item 10. EXECUTIVE COMPENSATION
-------------------------------
Information in response to this Item is incorporated herein by reference from
the Company's definitive proxy statement for the 2007 Annual Meeting of
Stockholders.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
-------------------------------------------------------------
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
------------------------------------------
Item 403 of Regulation S-B
Information in response to this Item is incorporated herein by reference from
the Company's definitive proxy statement for the 2007 Annual Meeting of
Stockholders.
Item 201(d) of Regulation S-K
(a) (b)
Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding outstanding future issuance under
options, warrants options, warrants equity compensation
Plan Category and rights and rights plans (excluding
securities reflected
in column (a))
Equity compensation plans approved
by security holders 20,000 3.4690 92,500
Equity compensation plans not approved
by security holders -- -- --
------ ------ ------
Total 20,000 3.4690 92,500
====== ====== ======
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
AND DIRECTOR INDEPENDENCE
-------------------------
Information in response to this Item is incorporated herein by reference from
the Company's definitive proxy statement for the 2007 Annual Meeting of
Stockholders.
Item 13. EXHIBITS
-----------------
A list of the exhibits required to be filed as part of this report is set forth
in the Index to Exhibits, which immediately follows the signature page, and is
incorporated herein by this reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------
Information in response to this Item is incorporated herein by reference from
the Company's definitive proxy statement for the 2007 Annual Meeting of
Stockholders.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, The Dewey Electronics Corporation 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 /s/ Stephen P. Krill
----------------------------------------- ------------------------------------
BY: John H.D. Dewey BY: Stephen P. Krill Jr., Treasurer
President and Chief Executive Officer
DATE: September 26, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Frances D. Dewey Date: September 26, 2007
Frances D. Dewey, Director
/s/ John H.D. Dewey Date: September 26, 2007
John H.D. Dewey Director
/s/ James M. Link Date: September 26, 2007
James M. Link Director
/s/ Nathaniel Roberts Date: September 26, 2007
Nathaniel Roberts Director
/s/ John B. Rhodes Date: September 26, 2007
John B. Rhodes Director
/s/ Ron Tassello Date: September 26, 2007
Ron Tassello Director
41
THE DEWEY ELECTRONICS CORPORATION
INDEX TO EXHIBITS
The following exhibits are filed as part of this report. For convenience of
reference, exhibits are listed according to the numbers assigned in the Exhibit
table to Regulation S-K.
Number Page No.
------ --------
3 (a)- Certificate of Incorporation as amended. This item was filed as part
of the Registrant's Form 10-K for the year ended June 30, 1988 and is
herein incorporated by reference. --
3 (b)- By Laws as amended. This item was filed as part of the Registrant's
Form 10-K for the year ended June 30, 1988 and is herein incorporated
by reference. --
10 (a)- 2001 Stock Option Plan. This item was filed with the Registrant's
Definitive Proxy Statement for the 2001 annual meeting of stockholders
on December 5, 2001 and is herein incorporated by reference. --
10 (b)- Amendment and Restatement of the 1998 Stock Option Plan. This item
was filed with the Registrant's Definitive Proxy Statement for the
2001 annual meeting of stockholders on December 5, 2001 and is herein
incorporated by reference. --
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith) --
31.2 Certification of Treasurer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith) --
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 (filed herewith). --
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
(filed herewith) --
42