UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2004
Commission File Number I-4383
ESPEY MFG. & ELECTRONICS CORP.
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(Exact name of registrant as specified in charter)
NEW YORK 14-1387171
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(State of Incorporation) (I.R.S. Employer's Identification No.)
233 Ballston Avenue, Saratoga Springs, New York 12866
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 518-584-4100
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 12, 2004
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Common stock, $.33-1/3 par value 1,011,404 shares
ESPEY MFG. & ELECTRONICS CORP.
Quarterly Report on Form 10-Q
I N D E X
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements:
Balance Sheets (Unaudited) -
September 30, 2004 and June 30, 2004 1
Statements of Income (Unaudited) -
Three Months Ended September 30, 2004 and 2003 3
Statements of Cash Flows (Unaudited)-
Three Months Ended September 30, 2004 and 2003 4
Notes to Financial Statements (Unaudited) 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations. 7
Item 4 Controls and Procedures 10
PART II OTHER INFORMATION AND SIGNATURES
Item 1 Legal Proceedings 11
Item 2 Unregistered Sales of Equity Securities 11
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 5 Other Information 11
Item 6 Exhibits 11
SIGNATURES 12
PART I: Financial Information
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets (Unaudited)
September 30, 2004 and June 30, 2004
------------------------------------
A S S E T S
2004 2004
September 30, June 30,
------------- -----------
ASSETS:
Cash and cash equivalents $11,873,233 $12,310,972
Short term investments 1,440,000 1,056,000
Trade accounts receivable, net 2,869,707 2,140,397
Other receivables 7,199 1,809
Inventories:
Raw materials and supplies 1,546,909 1,543,930
Work-in-process 3,932,555 3,390,133
Costs relating to contracts in
process, net of advance payments of
$556,150 at September 30, 2004 and
$905,646 at June 30, 2004 4,272,160 5,151,234
----------- -----------
Total inventories 9,751,624 10,085,297
----------- -----------
Deferred income taxes 76,876 76,876
Prepaid expenses and other current assets 271,812 359,393
----------- -----------
Total current assets 26,290,451 26,030,744
----------- -----------
Property, plant and equipment, net 3,086,555 3,100,516
----------- -----------
Total assets $29,377,006 $29,131,260
=========== ===========
See accompanying notes to the financial statements.
(Continued)
1
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets (Unaudited), Continued
September 30, 2004 and June 30, 2004
------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2004
September 30, June 30,
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 746,732 $ 250,675
Accrued expenses:
Salaries, wages and commissions 61,652 44,519
Employees' insurance costs 8,791 7,487
Vacation 386,997 451,516
Other 54,311 50,370
Payroll and other taxes withheld and accrued 34,529 26,000
Income taxes payable 84,802 134,471
----------- -----------
Total current liabilities 1,377,814 965,038
----------- -----------
Deferred income taxes 335,047 324,316
----------- -----------
Total liabilities 1,712,861 1,289,354
----------- -----------
Common stock, par value .33-1/3 per share
Authorized 10,000,000 shares; issued 1,514,937
shares on September 30, 2004 and June 30, 2004
Outstanding 1,010,804 and 1,014,618 on September
30, 2004 and June 30, 2004, respectively 504,979 504,979
Capital in excess of par value 10,410,675 10,411,915
Retained earnings 24,820,884 24,911,920
----------- -----------
35,736,538 35,828,814
Less: Common stock subscribed -- --
Cost of 504,133 and 500,319 shares on
September 30, 2004 and June 30, 2004
respectively of common stock in treasury (8,072,393) (7,986,908)
----------- -----------
Total stockholders' equity 27,664,145 27,841,906
----------- -----------
Total liabilities and
stockholders' equity $29,377,006 $29,131,260
=========== ===========
See accompanying notes to the financial statements.
2
ESPEY MFG. & ELECTRONICS CORP.
Statements of Income (Unaudited)
Three Months Ended September 30, 2004 and 2003
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Three Months
2004 2003
--------------------------
Net sales $ 4,730,327 $ 5,095,317
Cost of sales 4,081,185 4,195,145
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Gross profit 649,142 900,172
Selling, general and
administrative expenses 600,679 549,803
----------- -----------
Operating income 48,463 350,369
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Other income (expense)
Interest and
dividend income 34,870 23,365
Other 3,217 1,240
----------- -----------
38,087 24,605
----------- -----------
Income before income taxes 86,550 374,974
Provision for income taxes 25,965 94,009
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Net income $ 60,585 $ 280,965
=========== ===========
Net income per share:
Basic and diluted
Net income per share $ .06 $ .28
----------- -----------
Weighted average number of shares outstanding:
Basic 1,013,160 1,016,105
Diluted 1,020,880 1,018,805
=========== ===========
See accompanying notes to the financial statements.
3
ESPEY MFG. & ELECTRONICS CORP.
Statements of Cash Flows (Unaudited)
Three Months Ended September 30, 2004 and 2003
September 30,
2004 2003
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Cash Flows From Operating Activities:
Net income $ 60,585 $ 280,965
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 127,722 122,901
Deferred income tax 10,731 33,200
Changes in assets and liabilities:
Increase in receivables (734,700) (371,645)
Decrease in inventories 333,673 631,807
Decrease in prepaid expenses
and other current assets 87,581 27,974
Increase (Decrease) in accounts payable 496,057 (7,273)
Increase in accrued salaries, wages
and commissions 17,133 7,060
Increase in accrued employee
insurance costs 1,304 424
Increase (Decrease) in other accrued expenses 3,941 (25,290)
Decrease in vacation accrual (64,519) (65,450)
Increase in payroll & other
taxes withheld and accrued 8,529 5,413
Decrease in income taxes payable (49,669) (151,908)
Increase in ESOP payable -- 134,413
----------- -----------
Net cash provided by
operating activities 298,368 622,591
----------- -----------
Cash Flows From Investing Activities:
Additions to property, plant & equipment (113,761) (66,140)
Purchase of short term investments (384,000) --
----------- -----------
Net cash used
by investing activities (497,761) (66,140)
----------- -----------
Cash Flows From Financing Activities:
Dividends on common stock (151,621) (632,946)
Purchase of treasury stock (90,315) (170,093)
Proceeds from exercise of stock options 3,590 36,565
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Net cash used in
financing activities (238,346) (766,474)
----------- -----------
Decrease in cash and cash equivalents (437,739) (210,023)
Cash and cash equivalents, beginning of period 12,310,972 10,996,483
----------- -----------
Cash and cash equivalents, end of period 11,873,233 10,786,460
=========== ===========
Income Taxes Paid $ 64,903 $ 216,501
=========== ===========
See accompanying notes to the financial statements.
4
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements (Unaudited)
-------------------
Note 1. Basis of Presentation
In the opinion of management the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation for results for such periods. The results for
any interim period are not necessarily indicative of the results to be expected
for the full fiscal year. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with United States
generally accepted accounting principles have been condensed or omitted. These
financial statements should be read in conjunction with the Company's most
recent audited financial statements included in its 2004 Form 10-K.
Note 2. Net income per Share
Basic net income per share excludes dilution and is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the income of the Company.
Note 3. Employee Stock Ownership Plan
In fiscal 1989 the Company established an Employee Stock Ownership Plan (ESOP)
for eligible non-union employees. The ESOP used the proceeds of a loan from the
Company to purchase 316,224 shares of the Company's common stock for
approximately $8.4 million and the Company contributed approximately $400,000 to
the ESOP, which was used by the ESOP to purchase an additional 15,000 shares of
the Company's common stock. Effective June 30, 2004, the ESOP loan was paid in
full and all shares in the ESOP are allocated to participant's accounts. As of
September 30, 2004, there were 236,735 shares allocated to participants.
Note 4. Stock Based Compensation
The Company has elected to account for its stock-based compensation plans under
the intrinsic value-based method of accounting as permitted by SFAS No. 123 and
as prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations including FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB No. 25," in accounting for its fixed
stock option plans. Under this method, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price.
The following table illustrates the effect on net income and net income per
share if the Company had applied the fair value recognition provisions of SFAS
no. 123 to stock-based employee compensation.
5
Three Months
Ended September 30
2004 2003
-------------------------
Net income
as reported $ 60,585 $ 280,965
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (8,377) (9,227)
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Pro forma net income $ 52,208 $ 271,738
========= =========
Net income per share:
Basic-as reported $ .06 $ .28
========= =========
Basic-pro forma $ .05 $ .27
========= =========
Diluted-as reported $ .06 $ .28
========= =========
Diluted-pro forma $ .05 $ .27
========= =========
Note 5. Commitments and Contingencies
The Company has entered into standby letters of credit agreements with financial
institutions primarily relating to the guarantee of future performance on
certain contracts. Contingent liabilities on outstanding standby letters of
credit agreements aggregated approximately $190,000 at September 30, 2004. The
Company does not expect to fund any of the amounts under the standby letters of
credit.
The Company also has an operating lease commitment for a copier machine for $500
per month which expires on June 1, 2008.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Espey Mfg. & Electronics Corp. (the "Company") located in Saratoga Springs, New
York, is engaged principally in the development, design, production and sale of
specialized electronic power supplies, a wide variety of transformers and other
types of iron-core components, and electronic system components. In some cases,
the Company manufactures such products in accordance with pre-developed
mechanical and electrical requirements ("build to print"). In other cases, the
Company is responsible for both the overall design and manufacture of the
product. The Company does not generally manufacture standardized components. The
products manufactured by the Company find application principally in (i)
shipboard and land based radar, (ii) locomotives, (iii) aircraft, (iv) short and
medium range communication systems, (v) navigation systems, and (vi) land based
military vehicles.
Business is solicited from large industrial manufacturers and defense companies,
the government of the United States and foreign governments and major foreign
electronic equipment companies. In certain countries, the Company has external
sales representatives to help solicit and coordinate foreign contracts. The
Company is also on the eligible list of contractors of the United States
Department of Defense and generally is automatically solicited by such agencies
for procurement needs falling within the major classes of products produced by
the Company. In addition, the Company directly solicits bids from the United
States Department of Defense for prime contracts.
There is competition in all classes of products manufactured by the Company from
divisions of the largest electronic companies, as well as from many small
companies. The Company's sales do not represent a significant share of the
industry's market for any class of its products. The principal methods of
competition for electronic products of both a military and industrial nature
include, among other factors, price, product performance, the experience of the
particular company and history of its dealings in such products. The Company, as
well as other companies engaged in supplying equipment for military use, is
subject to various risks, including, without limitation, dependence on United
States and foreign government appropriations and program allocations, the
competition for available military business, and government termination of
orders for convenience.
Business Outlook
Management of the Company is optimistic about the future of the Company. In the
first quarter of fiscal 2005, the Company received approximately $4.8 million in
new orders. These orders include both follow-on production quantities for mature
products, and engineering development orders which will enable the Company to
utilize its engineering expertise in developing new customer specific products.
These products, once developed, will be produced in the Company's manufacturing
facility and are expected to provide large production order quantities over
several years. These orders are in line with the Company's strategy of getting
involved in long-term high quantity military programs.
Management expects to receive several more orders in fiscal 2005. These orders
will increase the Company's backlog which is approximately $15.5 million at
November 10, 2004. Many potential orders are currently being discussed and
negotiated with our customers. In addition to the backlog, the Company currently
has outstanding quotations representing in excess of $38 million in the
aggregate for both repeat and new programs. Based on management's communications
with customers, the Company expects to receive substantial orders for spare
parts on the various types of transmitters already in service, a number of
contracts for the further development and manufacture of power supplies and
transformers,as well as, additional contracts for pre-engineered hardware. We
expect these contracts to substantially increase sales in years beyond 2005. The
outstanding quotations encompass various new and previously manufactured power
supplies, transformers, and subassemblies. However, there can be no assurance
that the Company will acquire any or all of the anticipated orders described
above, many of which are subject to allocations of the United States defense
spending and factors affecting the defense industry and military procurement
generally.
7
Management, along with the Board of Directors, continues to evaluate the need
and use of the Company's working capital. Expectations are that the working
capital will be required to fund the expected increase in orders over the next
several quarters, dividend payments, and general operations of the business.
Also, the Mergers and Acquisitions committee of the Board continues to evaluate
potential strategic alternatives.
As stated in the Company's 10-K filed for the year ended June 30, 2004, the
Company anticipates a decrease in sales for fiscal 2005. During fiscal 2004,
while net sales increased, new orders received by the Company did not keep pace
with backlog relieved. Thus, while the sales backlog of approximately $15.4
million at June 30, 2004 gave the Company a solid base of future sales, the
Company continues to anticipate a reduction of sales during fiscal 2005.
Critical Accounting Policies and Estimates
We believe our most critical accounting policies include revenue recognition and
cost estimation.
Revenue recognition and cost estimation
A significant portion of our business is comprised of development and production
contracts. Generally, revenues on long-term fixed-price contracts are recorded
on a percentage of completion basis using units of delivery as the measurement
basis for progress toward completion.
Percentage of completion accounting requires judgment relative to expected
sales, estimating costs and making assumptions related to technical issues and
delivery schedule. Contract costs include material, subcontract costs, labor and
an allocation of overhead costs. The estimation of cost at completion of a
contract is subject to numerous variables involving contract costs and estimates
as to the length of time to complete the contract. Given the significance of the
estimation processes and judgments described above, it is possible that
materially different amounts of contract costs could be recorded if different
assumptions were used, based on changes in circumstances, in the estimation of
cost at completion. When a change in expected sales value or estimated cost is
determined, changes are reflected in current period earnings.
Results of Operations
The Company's operating cycle is long-term and includes various types of
products and varying delivery schedules. Accordingly, results of a particular
period or period-to-period comparison of recorded revenues and income may not be
indicative of future operating results. The following comparative analysis
should be viewed in this context.
Net sales for the three months ended September 30, 2004 were $4,730,327 as
compared to $5,095,317 for the same period in 2003. The $364,990 or 7.2%
decrease in sales for the three month period ended September 30, 2004 is mainly
due to a decrease in shipments of radar transmitter components.
The primary factor in determining gross profit and net income is product mix. In
any given accounting period, the mix of product shipments between higher margin
mature programs and less mature programs has a significant impact on gross
profit and net income. For the three months ended September 30, 2004, gross
profit and net income were lower, as shipments were made on less mature programs
with lower gross margins, as compared to the three month period ended September
30, 2003. In addition, the Company continued to invest in engineering contracts
that resulted in charges to cost of sales for loss contracts in the current
accounting period. These contracts are expected to improve the operating results
of the Company when the engineering phase of these contracts are completed and
follow-on production orders are received. Also, as discussed above, the overall
decrease in net sales contributed to the decline in gross profit and net income.
Management continues to evaluate the Company's workforce to ensure that
production and overall execution of the backlog orders and additional
anticipated orders are successfully performed. Employment at September 30, 2004
was 178 people compared to 193 people at September 30, 2003.
8
The backlog at September 30, 2004 was approximately $15.6 million compared to
approximately $20.9 million at September 30, 2003. Management continues to
market the engineering capabilities and products of the Company. Currently,
approximately $38 million in quotations are outstanding to various customers of
the Company. New orders for the quarter totaled approximately $4.8 million.
Selling, general and administrative expenses were $600,679 for the three months
ended September 30, 2004, an increase of $50,876 compared to the three months
ended September 30, 2003. The increase is primarily due to an increase in
professional fees and general selling salaries.
Other income for the three months ended September 30, 2004 increased to $38,087
as compared to $24,605 for the three months ended September 30, 2003. This
increase is due to the higher return on short-term investments. The Company does
not believe there is significant risk associated with its investment policy,
since at September 30, 2004 all of the investments are primarily represented by
short-term liquid investments including certificates of deposit and money market
accounts.
The Company estimates its income taxes using an estimated effective tax rate for
the annual period. The effective income tax rate at September 30, 2004 and 2003
was 30.0% and 25.1%, respectively. The effective tax rate fluctuates between
periods and is less than the statutory tax rate mainly due to the foreign
exportation benefit the Company receives on its foreign sales.
Liquidity and Capital Resources
As of September 30, 2004, the Company had working capital of $24.9 million
compared to $25.1 million at June 30, 2004. The Company meets its short-term
financing needs through cash flow from operations and when necessary, from its
existing cash and cash equivalents.
The table below presents the summary of cash flow for the periods indicated:
Three Months Ended September 30,
--------------------------------
2004 2003
--------- ---------
Net cash provided by operating activities $ 298,368 $ 622,591
Net cash used provided by investing activities (497,761) (66,140)
Net cash used in financing activities (238,346) (766,474)
Net cash provided by operating activities fluctuates between periods primarily
as a result of differences in net income, the timing of the collection of
accounts receivable, purchase of inventory, level of sales and payment of
accounts payable. The change in net cash used by investing activities is due to
the purchase of short-term certificates of deposit. The decrease in net cash
used in financing activities is due mainly to decreased dividends. The first
quarter of fiscal year ended June 30, 2004 included the payment of a special
dividend in the amount of $506,357 or $.50 per share.
The Company currently believes that the cash flow generated from operations and
when necessary, from cash and cash equivalents, will be sufficient to meet its
long-term funding requirements. Management, if necessary, has at its disposal a
$3,000,000 line of credit to help fund further growth. For the first three
months of fiscal 2004 capital expenditures were $113,761.
During the three months ended September 30, 2004, the Company repurchased 4,014
shares of its common stock for a total of $90,315. The Company repurchased 9,529
shares of its common stock for a total of $170,093 during the three months ended
September 30, 2003. As of September 30, 2004, under existing Board
authorization, $452,251 could be utilized to repurchase shares of company stock.
For the three month period ended September 30, 2004, 200 stock options were
exercised under the Company's existing stock option plan.
9
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The terms "believe,"
"anticipate," "intend," "goal," "expect," and similar expressions may identify
forward-looking statements. These forward-looking statements represent the
Company's current expectations or beliefs concerning future events. The matters
covered by these statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those set forth in the
forward-looking statements, including the Company's dependence on timely
development, introduction and customer acceptance of new products, the impact of
competition and price erosion, supply and manufacturing constraints, potential
new orders from customers and other risks and uncertainties. The foregoing list
should not be construed as exhaustive, and the Company disclaims any obligation
subsequently to revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made.
Item 4. Controls and Procedures
(a) The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, our chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report.
(b) There have been no changes in our internal controls over financial reporting
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
10
PART II: Other Information and Signatures
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Securities Repurchased
(a) Securities Sold - For the three month period ended September
30, 2004, 200 stock options were exercised
under the Company's existing stock option
plan. The securities were sold for cash and
were made without registration under the
Securities Act in reliance upon the
exemption from registration afforded under
Section 4(2) of the Securities Act of 1933.
Proceeds were used for general working
capital purposes.
(c) Securities Repurchased
Purchases of Equity Securities
Total Number Maximum Number
of Shares (or Approximate
Purchased Dollar Value)
as Part of of Shares
Total Average Publicly that May Yet
Number Price Announced Be Purchased
of Shares Paid Plan or Under the Plan
Period Purchased per Share Program or Program (1)
--------------------------------------------------------------------
August 1 to
August 31, 2004 4,014 $22.50 4,014 $452,251
--------------------------------------------------------------------
Total 4,014 4,014
====================================================================
(1) The Board of Directors has authorized the Company to repurchase
up to $452,251 of its common stock pursuant to an ongoing plan.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of the Principal Financial Officer pursuant to
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of the Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
11
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESPEY MFG. & ELECTRONICS CORP.
/s/ Howard Pinsley
--------------------------------
Howard Pinsley, President and
Chief Executive Officer
/s/ David O'Neil
--------------------------------
David O'Neil, Treasurer and
Principal Financial Officer
November 12, 2004
-----------------
Date
12