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, 2008.
|_| 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: $9,628,385 for the
fiscal year ended June 30, 2008.
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: $2,227,354 at September 22, 2008.
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 12, 2008.
Documents Incorporated by Reference
Portions of the Company's definitive Proxy Statement for the 2008 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 6
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security Holders 7
PART II
5. Market for Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities 8
6. Management's Discussion and Analysis or Plan
of Operations 9
7. Financial Statements 19
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 34
8A. Controls and Procedures 34
8B. Other Information 34
PART III
9. Directors, Executive Officers, Promoters and Control Persons,
Corporate Governance; Compliance with Section 16(a) of the
Exchange Act 35
10. Executive Compensation 35
11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 35
12. Certain Relationships and Related Transactions
and Director Independence 35
13. Exhibits 35
14. Principal Accountant Fees and Services 35
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's principal products are electronic and electromechanical systems
manufactured for the Armed Forces of the United States, which the Company
provides as a prime contractor or as a subcontractor for the Department of
Defense. In addition, the Company manufactures and sells commercial snowmaking
equipment and related spare parts to the leisure and recreation industry. In
recent years this commercial business has not provided a significant portion of
the Company's revenues.
The Company's Government defense business 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, 2008 amount to
approximately $29 million. Deliveries of orders currently in-house are scheduled
to continue through fiscal year 2009. 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-H, 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 aggregate amount of approximately $230,400, to research
and develop electronic controls for diesel fuel cell reformers. Work on these
contracts began in the first quarter of fiscal year 2008(ended September 30,
2007) and is expected to extend until the third quarter of fiscal 2009. No
assurances can be given that the Company will receive any future production
orders as a result of these sub-contracts or that the Company will be awarded
any additional research and development contracts or sub-contracts.
In July 2007, the Company received a subcontract to develop an armored 3
kilowatt 28 volt DC auxiliary power unit that can be mounted on the back of the
USMC main battle
3
tank, the Abrams M1A1. The development contract, for $646,400, was awarded by
the USMC Tank Program Office, in Quantico, VA, through a sub-contract
administered by CACI, Eatontown, NJ, and has the possibility of a follow-on
production contract. Work on this contract also began in the first quarter of
fiscal 2008 and is continuing into the quarter ending September 30, 2008. No
assurance can be made that the Company will receive any future production orders
as a result of this contract or that the Government will award the Company any
additional development contracts.
In August 2007, the Company received a new contract to provide auxiliary power
systems for the United States Marine Corps (USMC) 'Logistic Vehicle'. This
contract, awarded by the USMC Systems Command, Quantico, VA, consists of a base
year and three option years, exercisable at the Government's option. The
Logistics Vehicle Power System (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. A delivery order for the LVPS, valued at approximately $2.4
million was received in August 2007 and completed in December 2007. In July
2008, the Company received a second delivery order valued at approximately
$500,000 for additional units to be delivered in January 2009. While the Company
has been successful in obtaining these initial orders, no assurance can be made
that the Company will receive any future production orders as a result of this
contract.
In December 2007, the Company announced the award of a $985,976 subcontract from
Fibertek, Inc. of Herndon, VA, as part of the U.S. Government's 2kW Military
Tactical Generator (MTG) Product Improvements - Engine. This contract covers the
efforts to successfully qualify an EPA compliant diesel engine for use in the
2kW portable Military Tactical Generator product line. This engineering and test
effort is being conducted at the Company's Oakland, NJ, facility. Initial test
efforts began during the third quarter of fiscal year 2008(ended March 31, 2008)
and are expected to be completed by December 2008. Although no assurances can be
made, the Company expects that first article testing, if successful, should
result in the incorporation of the EPA compliant engine as a standard component
of the 120 volt AC and 28 volt DC 2kW generator sets currently manufactured by
the Company.
In May 2008, the Company received an award of $475,000 to develop a prototype
'idle reduction' system consisting of an environmental control unit and diesel
generator under a subcontract from MTC Technologies of Eatontown, NJ. The
Company is partnering with AMETEK Corporation of El Cajon, California to develop
this system to provide heating and cooling for US Army "long haul" trucks
independent of the vehicle's main engine. The generator being developed by the
Company under this subcontract will be used to power the environmental control
unit while also providing both AC and DC current for the vehicle. Delivery of
the prototype units to the customer is scheduled for November 2008. No assurance
can be made that the Company will receive any future production orders as a
result of this contract or that the Government will award the Company any
additional development contracts.
The Company's primary sources of revenue include products with long
manufacturing 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 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.
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, 2008 and June 30, 2007, the Company expensed $212,348 and $108,844
respectively, of research and development costs. Research and development
projects performed under contracts for customers are billed to the customer and
are recorded as contract costs as incurred.
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.
4
As of August 31, 2008 the Company had a work force of 39 employees, of which 37
were fulltime employees of the Company and 2 were temporary employees of
the Company. As of August 31, 2007 there were 29 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.
Revenues and estimated earnings under long-term defense contracts (including
research and development contracts, except as described in the final sentence of
this paragraph) are recorded using the percentage-of-completion method of
accounting, measured as the percentage of costs incurred to estimated total
costs of each contract. For the Company's indefinite delivery, indefinite
quantity contract to provide 2kW generator sets to the military and for orders
from other government subcontractors for 2kW 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 currently has one development sub-contract to
perform qualification tests for an EPA compliant engine for use with its 2kW
generator sets on which it does not recognize revenue based on the
percentage-of-completion method; rather, revenue is recorded with the successful
completion of each milestone in accordance with the contract terms.
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 (including orders for replacement parts for
snowmaking equipment, as well as for orders for new snowmaking machines), 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.
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 Electric
Company, Balmar Commercial Industries 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.
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.
5
The Company's Dependence on Government Defense Business and the 2kW Program
---------------------------------------------------------------------------
Virtually all 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 $29 million through August 31, 2008. 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
2008 and fiscal year 2007 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 four vendors to supply qualified
components for its 2kW generator products. During fiscal year 2008, two of these
suppliers accounted for 27.7% and 16.0% 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 four 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.
6
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 the Company's executive offices and manufacturing
operations. Approximately 90% of this facility is being utilized for production
(one shift), staging and storage. There are no encumbrances on the building or
property.
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 2008.
7
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 2008 Fiscal Year 2007
---------------- ----------------
High Low High Low
---- --- ---- ---
1st Quarter 3.00 2.05 3.99 3.49
2nd Quarter 2.90 2.12 3.49 3.05
3rd Quarter 3.35 2.19 3.40 2.85
4th Quarter 3.00 2.58 3.15 2.75
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 2008 and 2007. 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
12, 2008 was 404.
8
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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.
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.
Revenues
--------
Revenues and estimated earnings under long-term defense contracts (including
research and development contracts, except as described in the final sentence of
this paragraph) are recorded using the percentage-of-completion method of
accounting, measured as the percentage of costs incurred to estimated total
costs of each contract. For the Company's indefinite delivery, indefinite
quantity contract to provide 2kW generator sets to the military and for orders
from other government subcontractors for 2kW 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 currently has one development sub-contract to
perform qualification tests for an EPA compliant engine for use with its 2kW
generator sets on which it does not recognize revenue based on the
percentage-of-completion method; rather, revenue is recorded with the successful
completion of each milestone in accordance with the contract terms.
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 (including orders for replacement parts for
snowmaking equipment, as well as orders for new snowmaking machines) 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.
9
Revenues in fiscal year 2008 were $4,201,730 higher when compared to fiscal year
2007. The higher revenues were due to increased production of generator sets
principally due to the initial production and delivery of a new 3.5kW generator
and increased production of 2kW generator sets for delivery to other defense
contractors outside the Company's prime contract with the U.S. Army. Customer
funded research and development revenues also increased when compared to fiscal
2007 while revenues for replacement parts and short-term orders were lower in
fiscal 2008 then they were in fiscal 2007.
In fiscal year 2008, production efforts to provide the Armed Forces with 2kW and
3.5 kW diesel operated generator sets provided approximately 82% of revenues
compared to approximately 71% in fiscal year 2007. The Company's research and
development contracts provided approximately 8% of revenues in 2008,and
approximately 1% of revenues in fiscal year 2007. Replacement parts and other
short-term business including snowmaking equipment provided approximately 10% of
revenues in fiscal year 2008 and approximately 28% of revenues in fiscal year
2007.
During September 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 work to be performed towards developing a lighter, quieter 2kW
diesel generator set. Work on this contract continued through September 2006.
The Company did not earn any revenue as a result of this project in fiscal year
2008, in fiscal year 2007 the Company earned approximately $0.1 million from
efforts toward this project. It did not incur any direct costs related to this
contract during fiscal year 2008 and incurred approximately $0.1 million of
direct costs during fiscal 2007, 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 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-H, 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 aggregate amount of approximately $230,400 to research and
develop electronic controls for diesel fuel cell reformers. Work on these
contracts began in the first fiscal quarter of fiscal year 2008 (ended September
30, 2007) and is expected to extend until the third quarter of fiscal 2009. No
assurances can be given that the Company will receive any future production
orders as a result of these sub-contracts or that the Company will be awarded
any additional research and development contracts or sub-contracts.
In July 2007, the Company received a subcontract to develop an armored 3
kilowatt 28 volt DC auxiliary power unit that can be mounted on the back of the
USMC main battle tank, the Abrams M1A1. The development contract, for $646,400,
was awarded by the USMC Tank Program Office, in Quantico, VA, through a
sub-contract administered by
10
CACI, Eatontown, NJ, and has the possibility of a follow-on production contract.
Work on this contract also began in the first quarter of fiscal 2008 and is
continuing into the quarter ending September 30, 2008. No assurance can be made
that the Company will receive any future production orders as a result of this
contract or that the Government will award the Company any additional
development contracts.
In August 2007, the Company received a new contract to provide auxiliary power
systems for the United States Marine Corps (USMC) 'Logistic Vehicle'. This
contract, awarded by the USMC Systems Command, Quantico, VA, consists of a base
year and three option years, exercisable at the Government's option. The
Logistics Vehicle Power System (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. A delivery order for the LVPS, valued at approximately $2.4
million was received in August 2007 and completed in December 2007. In July
2008, the Company received a second delivery order valued at approximately
$500,000 for additional units to be delivered in January 2009. While the Company
was successful in obtaining these initial orders, no assurance can be made that
the Company will receive any future production orders as a result of this
contract.
In December 2007, the Company announced the award of a $985,976 subcontract from
Fibertek, Inc. of Herndon, VA, as part of the U.S. Government's 2kW Military
Tactical Generator (MTG) Product Improvements - Engine. This contract covers the
efforts to successfully qualify an EPA compliant diesel engine for use in the
2kW portable Military Tactical Generator product line. This engineering and test
effort is being conducted at the Company's Oakland, NJ, facility. Initial test
efforts began during the third quarter of fiscal year 2008 (ended March 31,
2008) and are expected to be completed by December 2008. Although no assurances
can be made, the Company expects that first article testing, if successful,
should result in the incorporation of the EPA compliant engine as a standard
component of the 120 volt AC and 28 volt DC 2kW generator sets currently
manufactured by the Company.
In May 2008, the Company received an award of $475,000 to develop a prototype
'idle reduction' system consisting of an environmental control unit and diesel
generator under a subcontract from MTC Technologies of Eatontown, NJ. The
Company is partnering with AMETEK Corporation of El Cajon, California to develop
this system to provide heating and cooling for US Army "long haul" trucks
independent of the vehicle's main engine. The generator being developed by the
Company under this subcontract will be used to power the environmental control
unit while also providing both AC and DC current for the vehicle. Delivery of
the prototype units to the customer is scheduled for November 2008. No assurance
can be made that the Company will receive any future production orders as a
result of this contract or that the Government will award the Company any
additional development contracts.
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 sales orders was $6.8 million on
June 30, 2008 and $4.8 million on June 30, 2007. It is estimated that most of
the present backlog will be billed during the next 12 months and recognized as
fiscal year 2009 revenues.
Gross Profit/(Loss)
-------------------
The Company earned a gross profit of $1,846,254 for fiscal 2008 compared to a
gross loss of $107,324 for fiscal 2007.
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. The Company had a gross margin of 19% for
fiscal year 2008 compared to a negative gross margin of (2%) for fiscal 2007.
11
The improved gross margin for fiscal year 2008 is the result of several factors.
Principal among these are the increase in volume and change in product mix
attributable to the initial production of the 3.5kW generator and the increase
in production of 2kW generators for delivery to other defense contractors
outside the Company's prime contract with the U.S. Army. The effects of these
changes are twofold. First the increase in production volume reduces the
proportion of fixed overhead expense absorbed by products with contractually
fixed selling prices thereby increasing the margins generated by these products.
Second, because the generators sold to other defense contractors are not being
sold under long term, fixed price contracts the selling price of these
generators takes into account current costs of production. Also affecting the
change in gross margin when compared to the prior fiscal year was the Company's
write off of $703,799 capitalized development costs in fiscal 2007.
Partly offsetting the gains in gross margin 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 continuing to pursue a pricing
modification under the contract. This 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.
The Company also recorded a charge to cost of sales of approximately $155,800
related to a reduction in the carrying costs of inventory held for sale in its
snowmaking equipment business.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, General and Administrative Expenses for fiscal 2007 were $1,750,546 or
18% of revenue compared to $1,574,587 or 29% of revenue in fiscal 2007. The most
significant increases in expense were for Company sponsored new product
development efforts, business development expense, and temporary help. These
increased expenses were partly offset by reduced legal and professional and
recruiting expense.
Interest Expense
----------------
The Company had no interest expense in fiscal 2008 compared to $4,969 in fiscal
2007.
Other Income - Net
------------------
Amounts reported as other income represent the net effect of interest income and
miscellaneous items such as the sale of scrap, bank transaction fees and other
like items.
Other income of $26,345 for fiscal year 2008 was comprised of interest income of
$2,163 and miscellaneous income, primarily from the sale of scrap, of $24,182.
Other income of $4,671 for fiscal year 2007 was comprised of interest income of
$6,302, and the net expense of miscellaneous items and fees of $1,632.
Net Income/Loss before income taxes
-----------------------------------
Net income before income taxes for fiscal year 2008 was $122,053. For the year
ended June 30, 2007 net loss before income taxes was $1,682,209.
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.
12
The income tax liability for fiscal year 2008 was 0.0% as a result of tax
credits recorded in prior periods. In fiscal 2007 the Company's income tax
liability was 0.0% as a result of a net operating loss, for which the Company
recorded a tax credit and full valuation allowance.
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 2008 had a material
effect on net sales and revenues. However, beginning in fiscal year 2006 and
continuing through fiscal 2008, 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 on generator sets produced under this contract have been reduced
as a result of costs increasing faster than the selling price.
The Company is in communication with the Government and is continuing to pursue
a pricing modification under the prime contract. This 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.
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 four new contracts described
under "Revenues" above that were received in fiscal year 2008 have been
structured this way and the Company intends to continue this approach where
possible.
As of June 30, 2008 the Company had no material capital expenditure commitments.
Management believes that the Company's current cash combined with progress and
milestone payments as well as billings at the time of delivery of products will
be sufficient to support short-term liquidity requirements, working capital
needs and capital expenditures at their current or expected levels.
At June 30, 2008, the Company's working capital was $2,203,421 compared to
$2,074,454 at June 30, 2007.
The ratio of current assets to current liabilities was 2.44 to 1 at June 30,
2008 and 3.92 to 1 at June 30, 2007.
The following table is a summary of the Statements of Cash Flows in the
Company's Financial Statements:
Years ended June 30,
2008 2007
Net Cash Provided by(used in)
Operating activities $(124,110) $(538,393)
Investing activities (103,105) (18,723)
Financing activities -- (86,047)
Operating Activities:
---------------------
Adjustments to reconcile net income/loss to net cash used in operations are
presented in the Statements of Cash Flows in the Company's Financial Statements.
13
Net cash used in operating activities in fiscal year 2008 was comprised
primarily of net income before depreciation and amortization adjusted by
increases in inventories, accounts receivable, contract costs and estimated
related profits in excess of applicable billings offset by increases in accounts
payable, accrued expenses, inventory reserve and allowance for doubtful accounts
and a decrease in prepaid expense.
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.
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, 2008 and June 30, 2007, the Company expensed $212,348 and $108,844
respectively, of research and development costs. Research and development
projects performed under contract for customers are billed to the customer and
are recorded as contract costs as incurred.
Investing Activities:
---------------------
During fiscal year 2008, net cash of $103,105 was used in investing activities.
This amount consisted of $113,105 used for capital expenditures, principally for
test equipment partly offset by a decrease of $10,000 in deferred costs related
to licensing rights.
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 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.
Financing Activities:
---------------------
The Company did not use any cash in financing activities during fiscal 2008.
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 debt.
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".
14
The Act identifies approximately 400,000 acres of New Jersey as The Highlands
Preservation Area. Pursuant to the statute, this area has the most onerous
restrictions on future development. The Company's property is in this area, and
further development would not be permitted without a waiver or other relief from
the State. The Company continues to believe that there are strong reasons why
its property should not be subject to the severe restrictions of the
preservation area, and is attempting to affect a solution.
However, since the Act was passed in June of 2004, the State has repeatedly
delayed promulgation of final regulations and a master plan. Originally expected
in 2005, final regulations and a master plan were recently approved by Governor
Corzine on September 5, 2008. At the same time the Governor issued executive
order 114 further defining the framework by which the Highlands Council, other
State agencies, and both county and municipal governments are to work together.
The Company believes that a regulatory environment is now developing within
which monetization of the land may be possible. In light of these recent events,
the Company is actively assessing its options. However, no assurances can be
given that the Company's efforts will be successful, that a satisfactory
valuation will be achieved, or that resolution will be timely.
In May 2008, the Company entered into a contract to sell a small parcel of land,
approximately 7 acres, for $205,000. The land is physically separated from the
main parcel of the Company's property by an interstate highway and is contained
within the Highlands Preservation Area. Among other things, the sale of the land
is subject to approval for development by the Highlands Commission and various
state and local government agencies. Accordingly the Company can make no
assurance that the sale will be successfully consummated or, if consummated, the
timing thereof.
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. 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.
Company Strategy
----------------
The Company has many years of experience in contracting with the Department of
Defense and has been successful in obtaining many contracts to provide a wide
array of products and services. Management believes that this experience is a
significant positive competitive factor. Management is continuing to explore
other areas of business with the Department of Defense, which are capable of
providing stability and growth.
The Company is focusing its efforts within the market for military compact
diesel power generation on select product categories which management believes
represent the best chances of successfully growing the Company's business.
Although no assurances
15
can be made that such a strategy will be successful, management believes that
long-term growth can best be achieved by: 1) growing the Company's market share
in areas where the Company already has a strong presence, 2) expanding into
related markets with existing products and capabilities, and 3) further taking
advantage of the Company's strengths by expanding into related product
categories.
The Company faces competition in many areas and from companies of various sizes,
capabilities and resources. Competitive factors include product quality,
technology, product availability, price, and customer service. Management
believes that the reputation of the Company in these areas provides a
significant positive competitive factor. As part of its overall business
strategy management is continuing to 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 in 2007 (see "Revenues" above), management re-evaluated its approach to
the second and third strategic objectives described above. Rather than
continuing to develop new longer term internal technologies, the Company is now
attempting to capitalize on its previous investments in technology to obtain
business in related military power markets and to expand into related military
product categories.
Two new contracts for the U.S. Marine Corps providing generators as auxiliary
power units for vehicles are examples of the second strategic objective,
expanding into related power markets. These contracts are for the Logistics
Vehicle Power Supply "LVPS" and the External Auxiliary Power Unit "EAPU" for the
USMC Abrams M1-A1 tank (described under "Revenues" above); both of them are
utilizing the Company's core expertise in compact and highly reliable diesel
engine power generation. The most recent contract to develop a prototype 'idle
reduction' system consisting of an environmental control unit and diesel
generator builds on the Company's recent accomplishments with vehicle mounted
auxiliary power units and management believes it will allow the Company to
further expand into related power applications while increasing its technology
base. In furtherance of the third strategic objective, expanding into related
military product categories, the Company is utilizing its experience in
military-grade portable power systems under three related customer funded
research and development sub-contracts where the Company will design and
prototype electronic controls for diesel fuel cell systems (See "Revenues"
above).
In the near term, continued growth in profitability and broadening the line of
product offerings are the Company's primary objectives. The 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 in generators and auxiliary power units.
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.
16
Revenues and estimated earnings under long-term defense contracts (including
research and development contracts, except as described in the final sentence of
this paragraph) 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 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. The Company currently has one
development sub-contract to perform qualification tests for an EPA compliant
engine for use with its 2kW generator sets on which it does not recognize
revenue based on the percentage-of-completion method; rather, revenue is
recorded with the successful completion of each milestone in accordance with the
contract terms.
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 2008, the same as its
assumed discount rate in 2007. 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 2008 was less than the accumulated
pension benefit obligation, the Company recorded $52,872 as a non-cash
adjustment to other comprehensive loss in stockholders equity and decreased its
long-term pension liability by $52,872. In fiscal year 2007, the Company
recorded $18,488 as a non-cash adjustment to other comprehensive loss in
stockholders' equity and increased its long-term pension liability by $18,488.
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.
17
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 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 "Revenues", 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, 2008 the Company has no 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 second quarter of fiscal 2008, ending December 31, 2007 the Company
evaluated the market for its Snowcub snowmaking machines and recorded a
reduction in carrying value of its finished snowmaking machines aggregating
$30,000. At the end of fiscal year 2008 the Company recorded a further reduction
in the carrying value of its snowmaking machine inventory of approximately
$125,800 which was charged to cost of sales.
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.
18
Item 7. FINANCIAL STATEMENTS
----------------------------
Index to Financial Statements
-----------------------------
Page
----
Report of Independent Registered Public Accounting Firm 20
Financial Statements:
Balance Sheets, June 30, 2008 and 2007 21
Statements of Operations, Years Ended June 30, 2008,
and 2007 22
Statements of Stockholders' Equity and Comprehensive
Income/Loss, Years Ended June 30, 2008 and 2007 23
Statements of Cash Flows, Years Ended June 30, 2008,
and 2007 24
Notes to the Financial Statements 25
All other schedules are omitted because they are not applicable or the required
information is shown in the Financial Statements or the Notes thereto.
19
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, 2008 and 2007, 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.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The Dewey Electronics Corporation at June
30, 2008 and 2007 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, LLP
September 26, 2008
New York, New York
20
The Dewey Electronics Corporation
Balance Sheets
June 30,
--------
ASSETS: 2008 2007
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 205,122 $ 432,337
Accounts receivable, net of allowance for doubtful accounts of $23,815 and $3,981 1,467,055 922,627
Inventories 854,390 701,425
Contract costs and related estimated profits in excess of billings 1,090,530 581,619
Prepaid expenses and other current assets 117,957 147,686
----------- -----------
TOTAL CURRENT ASSETS 3,735,054 2,785,694
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 651,015 651,015
Building and improvements 1,885,653 1,885,653
Machinery and equipment 3,202,423 3,091,584
Furniture and fixtures 207,805 205,539
----------- -----------
5,946,896 5,833,791
Less accumulated depreciation (4,886,097) (4,776,078)
----------- -----------
1,060,799 1,057,713
----------- -----------
DEFERRED COSTS 65,095 75,095
----------- -----------
TOTAL OTHER ASSETS 65,095 75,095
----------- -----------
TOTAL ASSETS $ 4,860,948 $ 3,918,502
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Trade Accounts Payable $ 871,100 $ 253,908
Accrued expenses and other liabilities 355,300 201,910
Accrued compensation and benefits payable 195,741 151,769
Accrued pension costs 109,492 103,653
----------- -----------
TOTAL CURRENT LIABILITIES 1,531,633 711,240
LONG-TERM PENSION LIABILITY 208,673 261,545
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00; authorized 250,000 shares, issued and outstanding-none -- --
Common stock, par value $.01; authorized 3,000,000 shares; 1,693,397 shares issued and
1,362,031 shares outstanding at June 30, 2008 and 2007 16,934 16,934
Additional paid-in capital 2,815,245 2,815,245
Retained earnings 725,401 703,348
Accumulated other comprehensive loss (49,910) (102,782)
----------- -----------
3,607,670 3,432,745
Less: Treasury stock, 331,366 shares at June 30, 2008 and 2007 at cost (487,028) (487,028)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,120,642 2,945,717
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,860,948 $ 3,918,502
=========== ===========
See notes to the financial statements.
21
The Dewey Electronics Corporation
Statements of Operations
Years Ended June 30,
--------------------
2008 2007
---- ----
Revenues $ 9,628,385 $ 5,426,655
Cost of revenues 7,782,131 5,533,979
----------- -----------
Gross (loss)/ profit 1,846,254 (107,324)
Selling, general and administrative expenses 1,750,546 1,574,587
----------- -----------
Operating income/(loss) 95,708 (1,681,911)
Interest expense -- (4,969)
Other income - net 26,345 4,671
----------- -----------
Income/(Loss) before income tax benefit 122,053 (1,682,209)
----------- -----------
Provision for Income Tax (0) (0)
----------- -----------
NET INCOME/(LOSS) $ 122,053 $(1,682,209)
=========== ===========
NET INCOME/(LOSS) PER COMMON SHARE - BASIC $ .09 $ (1.24)
NET INCOME/(LOSS) PER COMMON SHARE - DILUTED $ .09 $ (1.24)
Weighted Average Shares Outstanding
Basic 1,362,031 1,362,031
Diluted 1,362,949 1,362,031
See notes to the financial statements.
22
The Dewey Electronics Corporation
Statements of Stockholder's Equity and Comprehensive Income/Loss
Years ended June 30, 2008 and 2007.
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, 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)
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
---------- ------- ---------- ---------- --------- ------- ----------- -----------
Net Income -- -- -- 122,053 -- -- -- 122,053
Other comprehensive
income net of tax:
Minimum pension
liability Adjustment -- -- -- -- 52,872 -- -- 52,872
-----------
Comprehensive Income 174,925
-----------
Balance, June 30, 2008 1,693,397 $16,934 $2,815,245 $ 825,401 $ (49,910) 331,366 $ (487,028) $ 3,120,642
========== ======= ========== ========== ========= ======= =========== ===========
See notes to financial statements
23
The Dewey Electronics Corporation
Statements of Cash Flows
Years ended June 30,
2008 2007
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income/loss $ 122,053 $(1,682,209)
----------- -----------
Adjustments to reconcile net income/loss to net
cash (used in) operating activities:
Depreciation 110,019 125,516
Impairment of capitalized development costs -- 703,799
Provision for inventory reserve 148,800 44,260
Provisions/recoveries of allowance for doubtful accounts 19,834 (2,200)
(Increase) in accounts receivable (564,262) (393,697)
(Increase)/Decrease in inventories (301,765) 361,004
(Increase)/Decrease in contract costs and related estimated
profits in excess of billings (508,911) 350,792
Decrease in prepaid expenses and other current assets 29,729 28,371
Increase/(Decrease) in accounts payable 617,192 (104,519)
Increase/(Decrease) in accrued expenses and other liabilities 197,362 (15,220)
Increase in accrued pension costs 5,839 45,710
----------- -----------
Total adjustments (246,163) 1,143,816
----------- -----------
Net cash used in operating activities (124,110) (538,393)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (113,105) (17,659)
Deferred cost 10,000 (1,064)
----------- -----------
Net cash used in investing activities (103,105) (18,723)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment - term loan -- (86,047)
----------- -----------
Net cash used in financing activities -- (86,047)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (227,215) (643,163)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 432,337 1,075,500
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 205,122 $ 432,337
----------- -----------
Interest paid $ -- $ 4,969
Interest received 2,163 6,302
See notes to the financial statements.
24
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.
Its principal products are electronic and electro-mechanical systems
manufactured for the Armed Forces of the United States, which the Company
provides as a prime contractor or subcontractor for the Department of Defense.
A. Revenue Recognition
Revenues and estimated earnings under long-term defense contracts (including
research and development contracts, except as described in the final sentence of
this paragraph) are recorded using the percentage-of-completion method of
accounting, measured as the percentage of costs incurred to estimated total
costs of each contract. For the Company's indefinite delivery, indefinite
quantity contract to provide 2kW generator sets to the military and for orders
from other government subcontractors for 2kW 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 currently has one development sub-contract to
perform qualification tests for an EPA compliant engine for use with its 2kW
generator sets on which it does not recognize revenue based on the
percentage-of-completion method; rather, revenue is recorded with the successful
completion of each milestone in accordance with the contract terms.
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 (including orders for replacement parts for
snowmaking equipment, as well as orders for new snowmaking machines) 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.
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 69.9% of the Company's accounts receivable as of June 30,
2008.
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.
25
Supplier Concentration Risks
----------------------------
The Company is primarily dependent on four vendors to supply qualified
components for its generator products. During fiscal year 2008 two of these
suppliers accounted for 27.7% and 16.0% of material purchases, respectively.
These same suppliers accounted for 29.2% and 18.6% of material purchases in
fiscal year 2007. No other supplier accounted for more than 10% of material
purchases in fiscal years 2008 or 2007.
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. The Company also provides
portable electric generators as a sub-contractor to other prime contractors to
the Department of Defense. In fiscal year 2008 the various agencies of the
Department of Defense accounted for approximately 71.8% of Company revenue and
one prime contractor accounted for 16.2% of revenues. In fiscal year 2007 the
Department of Defense accounted for 83.6% of revenues. No other customer
accounted for more than 10% of the Company's revenues in fiscal years 2008 or
2007.
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. 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.
E. 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.
F. 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.
G. 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, ten years for furniture and fixtures, and
twenty years for building and improvements.
H. 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
26
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 wrote-off all of its
capitalized development costs totaling $703,799 to cost of revenues in the
quarter ended March 31, 2007.
The Company licenses certain technology rights under an agreement with a vendor
for which it has pre-paid licensing fees. As of June 30, 2008 and 2007, $100,000
and $120,000, respectively, 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 years ended
June 30, 2008 and June 30, 2007, the Company expensed $212,348 and $108,844
respectively, of research and development costs. Research and development
projects performed under contracts for customers are billed to the customer and
are recorded as contract costs as incurred.
I. 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, 2008 or in the year ended June 30,
2007.
J. 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 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.
On July 1, 2007 The Company adopted FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement 109" ("FIN 48").
There was no material effect on the Company's financial statements associated
with the adoption of FIN 48.
27
K. 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.
L. Liquidity
During the year ended June 30, 2008, the Company's net income was approximately
$122,000 and cash outflows used in operations were approximately $124,000.
Beginning in late fiscal 2007 the Company has changed the way it negotiates
payment terms on new contracts. The Company now attempts to negotiate payments
based on achievement of milestones rather than relying on demonstration of
incurred costs. This approach results in the Company receiving payment under
these contracts at or before the time it must pay its vendors. The four new
contracts received in fiscal 2008 have all been structured this way. The Company
believes that progress payments expected under existing and forecasted
contracts, along with its current cash combined 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 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 instrument 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. 157, "Fair Value Measurements". This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, the Board having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this Statement does not require any new fair
value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company is currently
evaluating the impact of this Statement on its financial statements.
3. Inventories
--------------
Inventories consist of:
June 30,
--------
2008 2007
---- ----
Finished goods $ 56,279 $ 165,751
Work in progress 217,674 137,678
Raw materials 580,437 397,996
----------- -----------
$ 854,390 $ 701,425
=========== ===========
4. Contract Costs and Estimated Profits in Excess of Billings
-------------------------------------------------------------
June 30,
--------
2008 2007
---- ----
Costs incurred on contracts in progress $22,511,777 $18,440,106
Estimated contract profit 4,024,728 3,581,656
26,536,505 22,021,762
Less: billings to date 25,445,975 21,440,144
----------- -----------
Contract costs and related estimated
profits in excess of billings $ 1,090,530 $ 581,619
=========== ===========
28
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, 2006 40,000 $ 2.76
Granted during 2007 -- --
Forefeited (20,000) (2.05)
------------- -------------
Balance at June 30, 2007 20,000 $ 3.47
Granted during 2008 -- --
Forfeited -- --
------------- -------------
Balance at June 30, 2008 20,000 $ 3.47
============= =============
Exercisable at June 30, 2008 20,000 $ 3.47
============= =============
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, 2008.
Outstanding and Exercisable
Weighted Average Weighted Average
Exercise Price Options Exercise Price Remaining Life-Years
-------------- ------- -------------- --------------------
1.63 4,000 1.63 2.2
3.93 16,000 3.93 5.5
------
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 2008 or 2007.
As of June 30, 2008, the intrinsic value of stock options outstanding and
exercisable was $5,480.
29
6. Taxes on Income
------------------
(Provision) for income taxes:
Years ended June 30,
2008 2007
Deferred
Federal $ -- $ --
State --
---------- ----------
Current
Federal -- --
State -- --
---------- ----------
Total (Provision) $ -- $ --
========== ==========
Deferred tax assets and liabilities as of June 30, 2008 and June 30, 2007
consisted of the following:
Deferred Tax assets: 2008 2007
--------------------
Current
Vacation accrual $ 53,038 $ 36,012
Inventory reserve 64,520 17,704
Allowance for doubtful accounts 8,600 (880)
Prepaids (2,489) (8,275)
---------- ----------
123,669 44,561
Less Valuation Allowance (123,669) (44,561)
---------- ----------
Total current deferred tax asset -- --
Non-current
Pension 137,956 146,079
Depreciation (15,787) 806
Net Operating Loss 785,819 771,435
Other -- --
---------- ----------
907,988 918,320
Less Valuation Allowance (907,988) (918,320)
---------- ----------
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. In fiscal 2008 the Company increased its deferred tax assets and the
valuation allowance against its net deferred tax assets by $170,464, the result
of differences between the Company's estimate of net operating losses in prior
years and the amount actually recognized for income tax purposes. In fiscal 2008
the Company removed the valuation allowance against $101,688 of its deferred tax
assets and used this amount to offset the Company's tax liability for fiscal
2008. The result of these two changes to the Company's deferred tax assets is an
increase of $68,776 against which the Company has provided a valuation allowance
in the same amount. As of June 30, 2008, the Company has approximately
$1,785,000 and $1,910,000 of federal and state, respectively, net operating loss
carry-forwards expiring beginning in 2012 through 2022.
30
The reconciliation of the Federal statutory rate with the Company's effective
tax rate is summarized as follows:
Years ended June 30,
2008 2007
---- ----
Federal statutory rate 34.00% (34.00)%
Tax Return to Provision true up (46.85) --
Decrease in valuation allowance 14.35 36.52
Other (1.50) (2.52)
-------- --------
Effective Rate 0.00% 0.00%
======== ========
7. 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.
2008 2007
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,275,194 $ 1,223,378
Service cost 34,758 44,501
Interest cost 79,450 76,461
Actuarial gain (63,639) (65,268)
Benefits paid plus administrative expenses (14,296) (3,878)
----------- -----------
Benefit obligation at end of year $ 1,311,467 $ 1,275,194
=========== ===========
Change in plan assets:
----------------------
Fair value of plan assets at beginning of year $ 909,996 $ 844,056
Actual return on plan assets 44,046 39,818
Employer contributions 53,556 30,000
Benefits paid plus administrative expenses (14,296) (3,878)
----------- -----------
Fair value of plan assets at end of year $ 993,302 $ 909,996
----------- -----------
Funded status (318,165) (365,198)
Unrecognized Net Gain or Loss 208,673 261,545
----------- -----------
Accrued Pension Expense $ (109,492) $ (103,653)
----------- -----------
Measurement Date July 1, 2008 July 1, 2007
Weighted Average Assumptions
Discount Rate 6.75% 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, 2008 June 30, 2007
------------- -------------
Accrued pension liability $(318,165) $(365,198)
Accumulated other comprehensive income, pre-tax 208.673 261,545
--------- ---------
Net amount recognized $(109,492) $(103,653)
========= =========
31
The accumulated benefit obligation for the plan was $1,311,467 and $1,204,294 at
June 30, 2008, and 2007, respectively.
Components of periodic pension costs as of June 30, 2008 and 2007 are as
follows:
2008 2007
---- ----
Service cost-benefits earned during the period $ 34,758 $ 44,501
Interest cost on projected benefit obligation 79,450 76,461
Expected return on plan assets (67,688) (64,823)
Amortization of actuarial loss 12,875 19,571
-------- --------
Net periodic pension cost $ 59,395 $ 75,710
======== ========
Weighted Average Assumptions for Net Periodic Pension Expense
2008 2007
---- ----
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%
Retirement Plan for Employees of Dewey Electronics Corporation's weighted
average asset allocations at June 30, 2008, and 2007, by asset category are as
follows:
2008 2007
---- ----
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:
2009 $ 26,000
2010 $ 37,000
2011 $ 51,000
2012 $ 66,000
2013 $ 74,000
Five years thereafter $ 441,000
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 fiscal year 2007 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)
32
8. Earnings Per Share
---------------------
Net income/loss per share has been presented pursuant to SFAS No. 128, "Earnings
per Share". Basic net income/loss per share is computed by dividing reported net
income/loss available to common shareholders by weighted average shares
outstanding for the period. Diluted net income/loss per share is computed by
dividing reported net income/loss available to common shareholders by weighted
average shares outstanding for the period, adjusted for the dilutive effect of
common stock equivalents, which consist of stock options, using the treasury
stock method.
The tables below set forth the reconciliation of the numerators and denominators
of the basic and diluted net income/loss per common share computations. 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 16,000
and 20,000 for the years ended June 30, 2008 and 2007.
Year Ended June 30, 2008
Income Shares Per Share Amount
------ ------ ----------------
Basic net loss/per common share $ 122,053 1,362,031 $ 0.09
Effect of dilutive securities -- 918 --
----------- ----------- -----------
Diluted net loss per common share $ 122,053 1,362,949 $ 0.09
=========== =========== ===========
Year 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)
=========== =========== ===========
9. Related Party Transaction
----------------------------
During fiscal 2008 and fiscal 2007 there were no related party transactions.
10. Other Income
----------------
Other income/(expense) consists of the following for the years ended June 30:
2008 2007
Sales of scrap and miscellaneous income/(expense) - net $24,182 $(1,632)
Interest income $ 2,163 $ 6,302
------- -------
$26,345 $ 4,671
==================
12.Unaudited Quarterly Financial Data
Net Income/ Earnings per share
2008 Revenue Gross Profit (Loss) Basic Diluted
---- ------- ------------ ------ ----- -------
Sept. 30 $ 2,232,096 $ 379,602 $ 45,305 $ 0.03 $ 0.03
Dec. 31 $ 2,833,378 $ 763,974 $ 318,634 0.23 0.23
Mar. 31 $ 2,414,946 $ 508,093 $ 37,380 0.03 0.03
Jun. 30 $ 2,147,965 $ 294,585 $ (279,266) (0.20) (0.20)
----------- ----------- ----------- ------- -------
Year $ 9,628,385 $ 1,946,254 $ 122,053 $ 0.09 $ 0.09
=========== =========== =========== ======= =======
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)
=========== =========== =========== ======= =======
33
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
Item 8A(T). CONTROLS AND PROCEDURES
-----------------------------------
Evaluation of Disclosure Controls and Procedures
The Company carried out, under the supervision and with the participation of the
Company's management, including 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, 2008, 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.
Management's Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting(as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934). The Company's internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.
Management conducted an evaluation of the effectiveness of the Company's
internal control over financial reporting as of June 30, 2008 based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this
evaluation, management concluded that the Company's internal control over
financial reporting was effective as of June 30, 2008 based on those criteria
issued by COSO.
Because of its inherent limitation, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
This Annual Report does not include an attestation report by the Company's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this Annual Report.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting
during the fiscal quarter ended June 30, 2008 that materially affected, or are
reasonably likely to affect, the Company's internal control over financial
reporting.
Item 8B. OTHER INFORMATION
--------------------------
None
34
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS 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 2008 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 2008 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 2008 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 2008 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 2008 Annual Meeting of
Stockholders.
35
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, 2008
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, 2008
Frances D. Dewey, Director
/s/ John H.D. Dewey Date: September 26, 2008
John H.D. Dewey Director
/s/ James M. Link Date: September 26, 2008
James M. Link Director
/s/ Nathaniel Roberts Date: September 26, 2008
Nathaniel Roberts Director
/s/ John B. Rhodes Date: September 26, 2008
John B. Rhodes Director
/s/ Ron Tassello Date: September 26, 2008
Ron Tassello Director
36
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) --
37