Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
_X_ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2011
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from__________to____________
_______Commission File No. 0-2892
THE DEWEY ELECTRONICS CORPORATION
A New York Corporation I.R.S. Employer Identification
No. 13-1803974
27 Muller Road
Oakland, New Jersey 07436
(201) 337-4700
Indicate by check mark whether the registrant has(1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES_X_ NO___
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(SS232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). YES X No ___
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer", "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer__ ___ Accelerated filer _____
Non-accelerated filer _____ Smaller reporting company__X_
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES___ NO_X_
1
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 1,362,031 at May 11, 2011.
2
THE DEWEY ELECTRONICS CORPORATION
INDEX
Page No.
Part I Financial Information
Item 1. Condensed Financial Statements
Condensed Balance Sheets -
March 31, 2011(unaudited) and June 30, 2010 4
Condensed Statements of Operations -
Three and Nine-months Ended March 31, 2011
and 2010 (unaudited) 5
Condensed Statements of Cash Flows for
the Nine-months Ended March 31, 2011
and 2010 (unaudited) 6
Notes to Condensed Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Item 4. Controls and Procedures 19
Part II Other Information
Item 6. Exhibits 20
3
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
CONDENSED BALANCE SHEETS
MARCH 31, JUNE 30,
2011 2010
(unaudited)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 457,318 $ 777,511
Accounts receivable (net of
allowance for doubtful accounts
of $25,000 at March 31, 2011) 719,931 659,852
Inventories 719,714 553,472
Contract costs and related estimated
profits in excess of billings 703,394 730,977
Prepaid expenses and other current
Assets 70,331 47,829
--------- ----------
TOTAL CURRENT ASSETS 2,670,688 2,769,641
--------- ----------
PLANT, PROPERTY AND EQUIPMENT:
Land and improvements 651,015 651,015
Building and improvements 1,885,653 1,885,653
Machinery and equipment 3,200,410 3,189,648
Furniture and fixtures 259,096 257,777
---------- ----------
5,996,174 5,984,093
Less accumulated depreciation 5,132,047 5,080,666
---------- ----------
864,127 903,427
---------- ----------
DEFERRED COSTS 65,095 65,095
---------- ----------
TOTAL ASSETS $3,599,910 $3,738,163
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Trade accounts payable $ 195,294 $ 91,187
Accrued expenses and other
Liabilities 341,175 242,127
Accrued compensation and benefits
Payable 152,105 170,822
Accrued pension costs 19,946 50,022
---------- ----------
TOTAL CURRENT LIABILITIES 708,520 554,158
---------- ----------
LONG-TERM PENSION LIABILITY 525,905 525,905
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00;
authorized 250,000 shares,
issued and outstanding-none, -- --
Common stock, par value $.01;
authorized 3,000,000 shares;
issued 1,693,397 at March 31,
2011 and June 30, 2010 16,934 16,934
Additional paid-in capital 2,854,332 2,827,457
Retained earnings 348,389 667,879
Accumulated other comprehensive
Loss (367,142) (367,142)
---------- ---------
2,852,513 3,145,128
Less: Treasury stock 331,366
shares at cost (487,028) (487,028)
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 2,365,485 2,658,100
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $3,599,910 $3,738,163
========== ==========
See accompanying notes to condensed financial statements
4
THE DEWEY ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE-MONTHS ENDED NINE-MONTHS ENDED
March 31, March 31,
2011 2010 2011 2010
REVENUES $2,098,668 $1,243,986 $5,667,432 $5,983,893
COST OF REVENUES 1,784,492 1,020,251 4,795,437 4,962,638
---------- ---------- ---------- ----------
GROSS PROFIT 314,176 223,735 871,995 1,021,255
SELLING, GENERAL &
ADMINISTRATIVE 348,954 398,018 1,186,385 1,239,891
--------- ---------- ---------- ----------
OPERATING INCOME/(LOSS) (34,778) (174,283) (314,390) (218,636)
INTEREST INCOME/
(EXPENSE) (1,387) -- (1,387) (1,387)
OTHER INCOME/
(EXPENSE)- NET (3,897) (2,650) (3,713) (7,453)
--------- ---------- ---------- ---------
INCOME/(LOSS) BEFORE
INCOME TAXES (40,062) (176,933) (319,490) (227,476)
PROVISION FOR INCOME
TAX -- -- -- --
-------- ---------- ---------- ---------
NET INCOME/(LOSS) $(40,062) $(176,933) $(319,490) $(227,476)
======== ========= ========= =========
NET INCOME/(LOSS) PER
COMMON SHARE-BASIC $ (0.03) $ (0.13) $ (0.23) $ (0.17)
NET INCOME/(LOSS) PER
COMMON SHARE-DILUTED $ (0.03) $ (0.13) $ (0.23) $ (0.17)
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
BASIC 1,362,031 1,362,031 1,362,031 1,362,031
DILUTED 1,362,031 1,362,031 1,362,031 1,362,031
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
5
THE DEWEY ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine-MONTHS ENDED
March 31,
2011 2010
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME/(LOSS) $(319,490) $(227,476)
--------- ---------
ADJUSTMENTS TO RECONCILE NET INCOME/
(LOSS) TO NET CASH (USED IN)/PROVIDED
BY OPERATING ACTIVITIES:
DEPRECIATION 60,391 78,978
STOCK OPTION COMPENSATION EXPENSE 26,875 2,361
GAIN ON SALE OF PLANT,PROPERTY AND
EQUIPMENT (200) (2,500)
INCREASE IN ALLOWANCE FOR DOUBTFUL
ACCOUNTS 25,000 --
(INCREASE)/DECREASE IN ACCOUNTS
RECEIVABLE (85,079) 448,226
(INCREASE)/DECREASE IN INVENTORIES (166,242) (406,524)
DECREASE IN CONTRACT COSTS AND RELATED
ESTIMATED PROFITS IN EXCESS OF BILLINGS 27,583 1,329,298
(INCREASE) IN PREPAID EXPENSES AND
OTHER CURRENT ASSETS (22,502) (10,863)
INCREASE IN CUSTOMER DEPOSITS 1,133 9,000
INCREASE/(DECREASE) IN ACCOUNTS PAYABLE 104,107 (458,375)
INCREASE/(DECREASE) IN ACCRUED EXPENSES
AND OTHER LIABILITIES 79,198 (64,033)
(DECREASE) IN ACCRUED PENSION COSTS (30,076) (10,880)
-------- --------
TOTAL ADJUSTMENTS 20,188 914,688
-------- --------
NET CASH (USED IN)/PROVIDED BY OPERATING
ACTIVITIES (299,302) 687,212
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
EXPENDITURES FOR PROPERTY AND EQUIPMENT (21,091) (15,061)
PROCEEDS FROM SALE OF ASSETS 200 10,500
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (20,891) (4,561)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
SHORT TERM BORROWINGS 250,000 250,000
REPAYMENT OF SHORT TERM BORROWINGS (250,000) (250,000)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES -- --
-------- --------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS (320,193) 682,651
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 777,511 518,600
-------- --------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 457,318 $ 1,201,251
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
INTEREST RECEIVED $ 516 $ 409
INTEREST PAID $ 1,387 $ 1,387
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
6
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Significant Accounting Policies
-------------------------------------
Basis of Presentation
---------------------
The accompanying unaudited condensed financial statements have been prepared
by The Dewey Electronics Corporation (the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC") for
interim reporting. Certain information and disclosures normally included in
notes to financial statements have been condensed or omitted pursuant to such
rules and regulations, but resultant disclosures are in accordance with
accounting principles generally accepted in the United States of America as
they apply to interim reporting. The condensed financial statements should
be read in conjunction with the financial statements and the notes thereto in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2010 (the "2010 Form 10-K").
In the opinion of the Company's management, the accompanying unaudited
condensed financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly, in all material respects,
the Company's financial position as of March 31, 2011, and the results of
operations for the three-months and nine-months then ended and cash flows for
the nine-months then ended. The results of operations and cash flows for the
period ended March 31, 2011 are not necessarily indicative of the results of
operations or cash flows to be expected for any subsequent quarter or the
full fiscal year ending June 30, 2011.
As of March 31, 2011, there have been no material changes to any of the
significant accounting policies described in our 2010 Form 10-K.
Liquidity
---------
The Company has experienced recurring losses from operations and net cash
outflows from operations in recent quarters. In addition, as previously
reported, the Company's 10 year indefinite quantity, indefinite delivery
contract with the U.S. Army to supply 2kW generator sets expires at the end
of August 2011. The U.S Army has announced that it no longer plans to issue
a new multiple year indefinite quantity, indefinite delivery fixed price
contract and will transfer the 2kW program to a 'sustainment' command.
The Company anticipates that the Government will continue to require these
generators, which could be ordered under individual "Purchase Orders" or via
the General Services Administration's GSA.gov Web site. We are unable to
predict whether, when or to what extent the Government will continue to place
orders for these generators.
Historically, the Company's capital expenditures, debt servicing requirements
and working capital needs have been financed by cash flow from operations,
progress payments on various Government contracts (based on cost incurred)
and a line of credit of $500,000, described under "Financing Activities" in
the Management's Discussion and Analysis section of this Form 10-Q.
Management believes that the Company's current cash and its line of credit,
combined with progress payments as well as billings at the time of delivery
of products will be sufficient to support short-term liquidity requirements,
working capital needs and capital expenditures at their current or expected
levels.
7
Revenue Recognition
-------------------
Revenues and estimated earnings under long-term defense contracts (including
research and development contracts, except as described below in this
paragraph) are recorded using the percentage-of-completion method of
accounting, measured as the percentage of costs incurred to estimated total
costs of each contract. For the Company's indefinite delivery, indefinite
quantity contract to provide 2kW generator sets to the military and for
orders from other Government subcontractors for 2kW generator sets,
percentage-of-completion calculations are based on individual "Delivery
Orders" which are periodically received for specified quantities. For
research and development contracts total costs incurred are compared to total
expected costs for each contract. The Company has one development sub-
contract for which it recognizes revenues on a time and material basis.
The Company uses the percentage-of-completion method to recognize revenues
for its replacement parts business when the dollar amount of the order to be
delivered in a future period or periods is material, and the duration of the
work will span multiple reporting periods. Revenues and earnings for all
other orders for replacement parts (including orders for replacement parts
for snowmaking equipment) are recorded when deliveries of product are made
and title and risk of loss have been transferred to the customer and
collection is probable.
For those contracts where revenue has been recognized using the percentage-
of-completion method of accounting, provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and income and are recognized
in the period in which the revisions are determined.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. These estimates include, among others,
lower of cost or market estimates for inventories, realization of deferred
tax assets, revenue recognition, allowance for doubtful accounts and certain
accrued expenses. Actual results could differ from those estimates.
Income Taxes
------------
Under the asset and liability method of accounting for taxes under ASC Topic
740, "Income Taxes", deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The effect on deferred tax assets and liabilities of a
change in tax laws is recognized in the results of operations in the period
the new laws are enacted. A valuation allowance is recorded to reduce the
carrying amounts of deferred tax assets unless it is more likely than not,
that such assets will be realized.
2. Accounting Standards Updates
-------------------------------
In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition -
Milestone Method. This ASU provides guidance on the criteria that should be
met for determining whether the milestone method of revenue recognition is
appropriate. Under the milestone method of revenue recognition,
consideration that is contingent upon achievement of a milestone in its
entirety can be recognized as revenue in the period in which the milestone is
achieved only if the milestone meets all criteria to be considered
substantive. This standard provides the criteria to be met for a milestone
to be considered substantive which includes that performance consideration
earned by achieving the milestone: a) be commensurate with either performance
to achieve the milestone or the enhancement of the value of the item
delivered as a result of a specific outcome resulting from performance to
achieve the milestone; and b) relate to past performance and be reasonable
relative to all deliverables and payment terms in the arrangement. This
standard is effective on a prospective basis for milestones in fiscal years
beginning on or after June 15, 2010. The Company currently has no milestone
delineated contracts, therefore the adoption of this ASU in the first quarter
of fiscal 2011 had no affect on the Company's financial position or results
of operations.
8
Accounting Standards Updates Not Yet Effective
----------------------------------------------
Other Accounting Standards Updates not effective until after March 31, 2011
are not expected to have a significant effect on the Company's financial
position or results of operations.
3. Inventories
---------------
Inventories consist of:
March 31, 2011 June 30, 2010
Finished Goods $47,958 $54,912
Work In Progress 128,947 48,892
Raw Materials 542,809 449,668
------- -------
Total $719,714 $553,472
======== ========
4. Taxes on Income
-------------------
The Company has provided a valuation allowance against its net deferred tax
assets as it believes that it is more likely than not that it will not
realize these tax attributes. The Company has approximately $1,049,000 and
$211,000 of federal and state net deferred tax assets respectively, primarily
arising from net operating loss carry-forwards, expiring beginning in 2012.
In the nine month period ended March 31, 2011 these federal and state net
deferred tax assets increased by approximately $108,000 and $29,000,
respectively, as a result of a net loss for the nine month period.
5. Earnings/(Loss) Per Share
-----------------------------
Net income (loss) per share has been presented pursuant to ASC Topic 260,
"Earnings per Share". Basic net income (loss) per share is computed by
dividing reported net income (loss) available to common shareholders by
weighted average shares outstanding for the period. Diluted net income
(loss) per share is computed by dividing reported net income (loss) available
to common shareholders by weighted average shares outstanding for the period,
adjusted for the dilutive effect of common stock equivalents, which consist
of stock options, using the treasury stock method.
The tables below set forth the reconciliation of the numerators and
denominators of the basic and diluted net income (loss) per common share
computations. For the three-months ended March 31, 2011 and March 31, 2010,
respectively, the number of shares excluded from the calculation were 52,700
and 40,700 respectively due to their anti-dilutive effect on the net loss for
those periods.
For the nine-month period ended March 31, 2011 and March 31, 2010, the number
of shares excluded from the calculation were 52,700 and 40,700 respectively
as a result of their anti-dilutive effect on the net loss for those periods.
9
Three-months Ended March 31,
2011 2010
Per Per
Net Loss Shares Share Net Loss Shares Share
Amount Amount
Basic
Net
loss
per
common
share $(40,062) 1,362,031 $(.03) $(176,933) 1,362,031 $(.13)
Effect
Of
dilutive
Securities -- -- -- -- -- --
------- --------- ---- -------- -------- ----
Diluted
Net
Loss
per
common
share $(40,062) 1,362,031 $(.03) $(176,933) 1,362,031 $(.13)
======== ========= ===== ========= ========= =====
Nine-months Ended March 31,
2011 2010
Per Per
Net Loss Shares Share Net Loss Shares Share
Amount Amount
Basic
net
loss
Per
common
share $(319,490) 1,362,031 $(.23) $(227,476) 1,362,031 $(.17)
Effect
Of
dilutive
Securities -- -- -- -- -- --
-------- --------- ---- -------- -------- ----
Diluted
Net
loss
per
common
share $(319,490) 1,362,031 $(.23) $(227,476) 1,362,031 $(.17)
========= ========= ===== ========= ========= =====
6. Stock Option Plan
---------------------
On December 2, 1998, the Employee Stock Option Committee adopted a Stock
Option Plan of 1998 which was amended and restated effective December 5,
2001, pursuant to which options to purchase a maximum of 85,000 shares of
common stock may be granted to executives and key employees. Incentive stock
options have been granted under the plan with an exercise price no less than
fair market value of the stock on the date of grant. Outstanding options
generally are exercisable for ten years from the date of grant, except for
three grants totaling 8,800 options which are exercisable for a 5-year term.
Outstanding options have expiration dates ranging from December 12, 2012 to
December 12, 2020.
The following disclosures are based on stock options granted to employees of
the Company in the second quarter of fiscal 2011 (quarter ended December 31,
2010). For the three months ended March 31, 2011, the Company recorded a
stock option compensation expense of $12,634 compared to no stock option
compensation expense for the three months ended March 31, 2010. For the nine
months ended March 31, 2011, the Company recorded stock option compensation
expense of $26,875 compared to stock option compensation expense of $2,361
for the nine month period ended March 31, 2010.
For the full fiscal year ending June 30, 2011, the Company expects
approximately $33,002 in stock option compensation expense based on stock
options already granted and assuming no further option grants during the
remainder of the fiscal year. However, our assessment of the estimated
compensation expense will be affected by our stock price and actual stock
option grants (if any) during the remainder of the year as well as
assumptions regarding a number of complex and subjective variables. These
variables include, but are not limited to, the volatility of our stock price
and employee stock option exercise behaviors. The Company issues shares of
common stock upon the exercise of stock options.
10
The Company used its historical stock price volatility to compute the
expected volatility for purposes of valuing stock options issued. The period
used for the historical stock price corresponded to the expected term of the
options and was between five and ten years. The expected dividend yield is
based on the Company's practice of not paying dividends. The risk-free rate
of return is based on the yield of U.S. Treasury Strips with terms equal to
the expected life of the options as of the grant date. The expected life in
years is based on historical actual stock option exercise experience.
The following weighted average assumptions were used in the valuation of
stock options granted in the second quarter of fiscal 2011.
Expected dividend yield --
Expected volatility 74.3%
Risk-free interest rate 2.95%
Expected life in years 7.1
Based on the assumptions in the table above, the grant date fair value of
stock options granted in the second quarter of fiscal 2011 was $24,509.
Stock option transactions for the Company's employee stock option plans for
the three and nine months ended March 31, 2011 are as follows:
March 31, 2011
Three Months Nine Months
------------ -----------
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
Price Price
Beginning balance 52,700 2.66 40,700 2.80
Granted -- -- 16,000 2.05
Exercised -- -- -- --
Cancelled or expired -- -- 4,000 1.63
Ending balance 52,700 2.66 52,700 2.66
Options exercisable at
end of period 36,700 2.92 36,700 2.92
11
THE DEWEY ELECTRONICS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------------------
The following discussion should be read in conjunction with the unaudited
condensed financial statements, including the notes thereto, appearing
elsewhere in this Form 10-Q, and with the audited financial statements,
including the notes thereto, appearing in the Company's 2010 Form 10-K.
Certain statements in this report may be deemed "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934.
All statements, other than statements of historical fact that address
activities, events or developments that the Company or management intends,
expects, projects, believes or anticipates will or may occur in the future
are forward-looking statements. Such statements are based upon certain
assumptions and assessments made by management of the Company in light of its
experience and its perception of historical trends, current conditions,
expected future developments and other factors it believes to be appropriate.
The forward-looking statements included in this report are also subject to a
number of material risks and uncertainties, including but not limited to
economic, governmental, competitive and technological factors affecting the
Company's operations, markets, products, services and prices and,
specifically, the factors discussed below under "Financing Activities", and
"Company Strategy" and in Item 1 (Description of Business - Operational
Risks) of the Company's 2010 Form 10-K. Such forward-looking statements are
not guarantees of future performance and actual results, developments and
business decisions may differ from those envisaged by such forward-looking
statements.
The Company's operating cycle is long-term and includes various types of
products and varying delivery schedules. Accordingly, results of a particular
period or period-to-period comparison of recorded revenues and earnings may
not be indicative of future operating results. The following comparative
analysis should be viewed in this context.
Critical Accounting Policies and Estimates
------------------------------------------
The Company's financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States
of America. Preparing financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. These estimates and assumptions affect the application of our
accounting policies. Actual results could differ from these estimates.
Critical accounting policies are those that require application of
management's most difficult, subjective or complex judgments, often as a
result of matters that are inherently uncertain and may change in subsequent
periods. The Company's critical accounting policies include revenue
recognition on contracts and contract estimates, pensions, impairment of
long-lived assets, and valuation of deferred tax assets and liabilities. For
additional discussion of the application of these and other accounting
policies, see Management's Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Policies and Note 1 of the Notes
to the Financial Statements included in the Company's 2010 Form 10-K.
Results of Operations - Revenues
--------------------------------
Revenues and estimated earnings under long-term defense contracts (including
research and development contracts, except as described below in this
paragraph) are recorded using the percentage-of-completion method of
accounting, measured as the percentage of costs incurred to estimated total
costs of each contract. For the Company's indefinite delivery, indefinite
quantity contract to provide 2kW generator sets to the military and for
orders from other Government subcontractors for 2kW generator sets,
percentage-of-completion calculations are based on individual "Delivery
Orders" which are periodically received for specified quantities. For
research and development contracts total costs incurred are compared to total
expected costs for each contract. The Company has one development sub-
contract for which it recognizes revenues on a time and material basis.
12
The Company uses the percentage-of-completion method to recognize revenues
for its replacement parts business when the dollar amount of the order to be
delivered in a future period or periods is material, and the duration of the
work will span multiple reporting periods. Revenues and earnings for all
other orders for replacement parts (including orders for replacement parts
for snowmaking equipment) are recorded when deliveries of product are made
and title and risk of loss have been transferred to the customer and
collection is probable.
For those contracts where revenue has been recognized using the percentage-
of-completion method of accounting, provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and income and are recognized
in the period in which the revisions are determined.
Revenues for the third quarter of fiscal year 2011, the three month period
ended March 31, 2011, were $854,682 higher when compared to same period in
2010. Revenues were higher principally due to an increase in production of
generator sets under the Company's prime contract to provide 2kW generator
sets to the U.S. Army as well as for delivery to other defense contractors
outside the Company's prime contract and a small increase in customer funded
research and development. These increases were partly offset by a small
decrease in sales of spare and replacement parts when compared to the same
period in fiscal year 2010.
For the three months ended March 31, 2011, production efforts to provide the
Armed Forces with diesel operated generator sets provided approximately 89%
of revenues compared to approximately 81% in the third quarter of fiscal year
2010 (quarter ended March 31, 2010). The Company's research and development
contracts provided approximately 3% of revenues in the third quarter of
fiscal 2011, and approximately 5% of revenues in the third quarter of fiscal
2010. Replacement parts and other short-term business provided approximately
8% of revenues in the third quarter of fiscal year 2011 and approximately 14%
of revenues in the same period of fiscal 2010.
Revenues for the nine-month period ended March 31, 2011 were $316,461 lower
when compared to the same period in 2010. This decrease in revenue is
attributable to a decrease in production of diesel operated generator sets
and a decrease in customer funded research and development partly offset by a
small increase in sales of replacement parts and other short term business
when compared to the same nine-month period last year.
During the nine-month period ended March 31, 2011, production efforts to
provide the Armed Forces with diesel operated generator sets provided
approximately 86% of revenues compared to approximately 87% in the same
period in 2010. The Company's research and development contracts provided
approximately 2% of revenues during the nine-month period ended March 31,
2011, versus approximately 3% in the same period in 2010. Replacement parts
and other short-term business provided approximately 12% of revenues in the
nine-month period ended March 31, 2011, and approximately 10% of revenues in
the same period in 2010.
The aggregate value of the Company's backlog of sales orders was $1.0 million
on March 31, 2011 and $0.6 million on March 31, 2010. It is estimated that
most of the present backlog will be billed during the next 3 months and be
substantially recognized as fiscal year 2011 revenues.
13
Gross Profit
------------
The Company earned a gross profit of $314,176 (which was approximately 15% of
revenues) for the three months ended March 31, 2011 compared to a gross
profit of $223,735 (which was approximately 18% of revenues) for the same
period in 2010.
Gross profit is affected by a variety of factors including, among other
items, production volume, product mix, product pricing, and product costs.
The increased gross profit for the third quarter of fiscal year 2011 is the
result of several factors. Principal among these is a change in production
volume resulting from higher demand for the Company's 2kW diesel generator
sets for delivery under the Company's prime contract with the U.S. Army. This
increase in the proportion of revenues from 2kw generator sets, which have a
lower gross margin as a percentage of revenues relative to the Company's
other products, resulted in a decrease in the overall percentage of gross
profit as a percentage of revenue when compared to the same period last year.
For the nine-month period ended March 31, 2011 the Company's gross profit was
$871,995 (which was approximately 15% of revenues) compared to a gross profit
of $1,021,255 (which was approximately 17% of revenues) for the nine-month
period ended March 31, 2010.
These lower results are due to decreased production of 2kW diesel generator
sets for delivery under the Company's prime contract with the U.S. Army as
well as for delivery to other customers and a change in product mix with a
smaller proportion of more profitable 2kw generators produced for delivery
outside the Company's prime contract when compared to the same period last
year.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, General and Administrative expenses for the three months ended March
31, 2011 were $348,954 or approximately 17% of revenues compared to $398,018
or approximately 32% of revenues for the three month period ended March 31,
2010. The most significant changes in expense and their approximate amounts
were decreases in expenditures for consulting services ($20,000), marketing
expenses ($13,000), general corporate expenses ($9,000), legal and
professional ($7,000), and Company sponsored research and development expense
($6,000).
Selling, General and Administrative expenses for the nine months ended March
31, 2011 were $1,186,385 or approximately 21% of revenues compared to
$1,239,891 or approximately 21% of revenues for the nine month period ended
March 31, 2010. The most significant changes in expense and their
approximate amounts were reductions in legal and professional fees ($42,000),
consulting fees ($36,000), Marketing Expense ($23,000) and general corporate
expense ($19,000), all of which were partly offset by an increase in
allowance for doubtful accounts of $25,000, and an increase in Company
sponsored research and development expense of $38,000.
Interest Expense
----------------
The Company had interest expense of $1,387 in the three month period ended
March 31, 2011 compared to no interest expense in the three month period
ended March 31, 2010.
For the nine-month period ended March 31, 2011 the Company had interest
expense of $1,387 compared to interest expense of $1,387 in the nine month
period ended March 31, 2010.
14
Other Expense/Income - Net
-------------------------
Amounts reported as other income or expense represent the net effect of
interest income and miscellaneous items such as the sale of scrap, bank
transaction fees and other like items.
Other expense of $3,897 for the three months ended March 31, 2011 was
comprised of franchise tax of $1,040 and bank fees of $3,057 partly offset by
a gain on the sale of an asset of $200.
Other expense of $2,650 for the three months ended March 31, 2010 resulted
from franchise tax of $1,187 and bank fees and other charges of $1,463.
Other expense of $3,713 for the nine months ended March 31, 2011 was
comprised of franchise taxes of $2,105 and bank fees of $4,337 partly offset
by miscellaneous income of $2,729.
Other expense of $7,453 for the nine months ended March 31, 2010 was
comprised of franchise taxes of $5,596 and bank fees of $4,766 partly offset
by a gain on the sale of an asset of $2,500 and interest income of $409.
Net Loss/Income before income taxes
-----------------------------------
Net loss before income taxes for the three months ended March 31, 2011 was
$40,062 and $176,933 for the three months ended March 31, 2010.
Results for the third quarter of fiscal year 2011 improved when compared to
the same period in fiscal year 2010 primarily due to an increase in gross
profit resulting from increased production of 2kW generator sets as discussed
above.
Net loss before income taxes for the nine-month period ended March 31, 2011
was $319,490. For the same period in 2010 net loss before income taxes was
$227,476.
Results for the nine-month period ended March 31, 2011 decreased when
compared to the same period in fiscal year 2010 due to the lower gross profit
resulting from lower revenues and less favorable product mix for the nine-
month period as discussed above.
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts and for tax loss
and credit carry-forwards.
A valuation allowance is provided against deferred tax assets when it is
determined to be more likely than not that these amounts will not be
realized.
The Company has provided a valuation allowance against its net deferred tax
assets as it believes that it is more likely than not that it will not
realize these tax attributes. The Company has approximately $1,049,000 and
$211,000 of federal and state net deferred tax assets respectively, primarily
arising from net operating loss carryforwards, expiring beginning in 2012.
In the nine month period ended March 31, 2011 these federal and state net
deferred tax assets increased by approximately $108,000 and $29,000,
respectively, as a result of a net loss for the period.
15
Liquidity and Capital Resources
-------------------------------
Historically, the Company's capital expenditures, debt servicing requirements
and working capital needs have been financed by cash flow from operations,
progress payments on various Government contracts (based on cost incurred)
and a line of credit of $500,000, described under "Financing Activities"
below.
As of March 31, 2011, the Company had no material capital expenditure
commitments. Management believes that the Company's current cash and its
line of credit, combined with progress payments as well as billings at the
time of delivery of products will be sufficient to support short-term
liquidity requirements, working capital needs and capital expenditures at
their current or expected levels.
At March 31, 2011, the Company's working capital was $1,962,168 compared to
$2,258,538 at March 31, 2010.
The ratio of current assets to current liabilities was 3.77 to 1 at March 31,
2011 and 3.85 to 1 at March 31, 2010.
The following table is a summary of the Statements of Cash Flows in the
Company's Financial Statements:
Nine Months ended March 31,
2011 2010
Net cash provided by/(used in)
Operating activities $ (299,302) $ 687,212
Investing activities (20,891) (4,561)
Financing activities -- --
Operating Activities:
--------------------
Adjustments to reconcile net income to net cash used in operations are
presented in the Condensed Statements of Cash Flows in the Company's
Financial Statements.
Net cash used in operating activities in the nine-month period ended March
31, 2011 was comprised primarily of net loss before depreciation and
amortization and increases in accounts receivable, allowance for doubtful
accounts, inventories and prepaid expenses and a decreases in accrued pension
costs. These were partly offset by a decrease in contract costs and estimated
related profits in excess of applicable billings and an increase in trade
accounts payable and accrued expenses and other liabilities.
Net cash provided by operating activities in the nine-month period ended
March 31, 2010 was comprised primarily of net loss before depreciation and
amortization, decreases in contract costs and estimated related profits in
excess of applicable billings and accounts receivable and an increase in
customer deposits, which were partly offset by decreases in accounts payable,
accrued expenses, and accrued pension expenses and increases in inventory and
prepaid expense.
The Company expenses its research and development costs as incurred. These
costs consist primarily of salaries and material costs. For the nine month
period ended March 31, 2011 and March 31, 2010, the Company expensed $109,780
and $72,055 respectively, of research and development costs. Research and
development projects performed under contract for customers are billed to the
customer and are recorded as contract costs as they are incurred.
16
Investing Activities:
--------------------
During the first nine months of fiscal 2011, net cash of $20,891 was used in
investing activities which was used for capital expenditures, principally for
demonstration and test equipment partly offset by the receipt of $200 from
the sale of an asset.
During the first nine months of fiscal 2010, net cash of $4,561 was used in
investing activities. This net amount reflects the use of $15,061 for
capital expenditures, principally for demonstration and test equipment, and
the receipt of $10,500 from the sale of assets.
Financing Activities:
--------------------
The Company did not use any cash in financing activities during the nine
month periods ended March 31, 2011 and 2010, respectively.
On April 27, 2009 the Company entered into a $500,000 line of credit with TD
Bank, NA. (See Note 10 of the Notes to Financial Statements in the Company's
2010 Form 10-K). On May 11, 2010, the Company received a notice from the
Bank informing the Company that the Bank had extended this line of credit to
October 31, 2011 (See Item 5 (Other Information) in Part II of the Company's
Quarterly Report for the quarter ended March 31, 2010). As of the date of
this Quarterly Report the Company has no outstanding debt against this line
of credit. The Company does not regard this credit facility as vital to its
continued operations.
The Company owns approximately 90 acres of land and the building, which it
occupies in Bergen County, New Jersey, adjacent to an interchange of
Interstate Route 287. The Company is continuing to actively pursue possible
methods of monetizing 68 undeveloped and unused acres of this property, by
its sale and/or development. This endeavor has become more complex with the
implications of New Jersey's "Highlands Water Protection and Planning Act".
The Act identifies approximately 400,000 acres of New Jersey as The Highlands
Preservation Area. Pursuant to the statute, this area has the most onerous
restrictions on future development. The Company's property is in this area,
and further development would not be permitted without a waiver or other
relief from the State. The Company continues to believe that there are
strong reasons why its property should not be subject to the severe
restrictions of the preservation area, and is attempting to affect a
solution.
Since the Act was passed in June of 2004, the State repeatedly delayed
promulgation of final regulations and a master plan. Originally expected in
2005, final regulations and a master plan were approved by the Governor on
September 5, 2008. At the same time the Governor issued executive order 114
further defining the framework by which the Highlands Council, other State
agencies, and both county and municipal governments are to work together.
The Company believes that a regulatory environment is now developing within
which monetization of the land may be possible. In light of these 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.
17
Accounting Standards Updates
----------------------------
Refer to Note 2, Significant Accounting Policies in the Notes to the
Financial Statements section of this Quarterly Report.
Company Strategy
----------------
The Company has many years of experience in contracting with the Department
of Defense and has been successful in obtaining many contracts to provide a
wide array of products and services. Management believes that this
experience is a significant positive competitive factor. Management is
continuing to explore other areas of business with the Department of Defense,
which are capable of providing stability and growth.
The Company is focusing its efforts within the market for military compact
diesel power generation on select product categories which management
believes represent the best chances of successfully growing the Company's
business. Although no assurances can be made that such a strategy will be
successful, management believes that long-term growth can best be achieved
by: 1) growing the Company's market share in areas where the Company already
has a strong presence, 2) expanding into related markets with existing
products and capabilities, and 3) further taking advantage of the Company's
strengths by expanding into related product categories.
The Company faces competition in many areas and from companies of various
sizes, capabilities and resources. Competitive factors include product
quality, technology, product availability, price, and customer service.
Management believes that the reputation of the Company in these areas
provides a significant positive competitive factor. As part of its overall
business strategy management is continuing to reinforce customer awareness of
the Company's current and past performance as a Department of Defense
supplier, its product quality and reliability, and its historically strong
customer relationships.
As previously reported, the Company's 10 year indefinite quantity, indefinite
delivery contract with the U.S. Army to supply 2kW generator sets expires at
the end of August 2011. The U.S Army has announced that it no longer plans to
issue a new multiple year indefinite quantity, indefinite delivery fixed
price contract and will transfer the 2kW program to a 'sustainment' command.
The Company anticipates that the Government will continue to require these
generators, which could be ordered under individual "Purchase Orders" or via
the General Services Administration's GSA.gov Web site. We are unable to
predict whether, when or to what extent the Government will continue to place
orders for these generators.
In response to the U.S. Army's change in priorities away from long-term
product improvements regarding the 2kW Generator Program in 2007, management
re-evaluated its approach to the second and third strategic objectives
described above. Rather than continuing to develop new longer term internal
technologies, the Company is now attempting to capitalize on its previous
investments in technology to obtain business in related military power
markets and to expand into related military product categories.
Two contracts in recent years with the U.S. Department of Defense to develop
generators as auxiliary power units for vehicles are examples of the second
strategic objective, expanding into related power markets. One contract for a
Logistics Vehicle Power Supply "LVPS" (a diesel powered 3.5 kilowatt
generator set providing power to equipment that protects against improvised
explosive devices) utilized the Company's core expertise in compact and
highly reliable diesel engine power generation. Another contract to develop
a prototype 'idle reduction' system consisting of an environmental control
unit and diesel generator built on the Company's accomplishments with vehicle
mounted auxiliary power units, and management believes it will allow the
Company to further expand into related power applications while increasing
its technology base. In furtherance of the third strategic objective,
expanding into related military product categories, the Company is utilizing
its experience in military-grade portable power systems under a customer
funded research and development sub-contract where the Company is designing
and prototyping electronic controls for diesel fuel cell systems.
18
In the near term, a return to profitability and broadening the line of
product offerings are the Company's primary objectives. The development
contracts and subcontracts described above as well as internal Company
sponsored development efforts contribute to this goal. The Company is
continuing to pursue possible partnering and sub-contracting relationships
with other companies and defense contractors that leverage the Company's
current expertise and technology in generators and auxiliary power units.
Recent Events
-------------
On April 4, 2011 the Company received a delivery order for its 2kW diesel
operated Military Tactical Generators (MTG) in the amount of approximately
$2.3 million. See "Company Strategy" above.
This order was made under the Company's prime contract, a 10 year indefinite-
delivery/indefinite quantity contract awarded in September 2001 by the U.S.
Army, CECOM, Fort Monmouth, NJ. The delivery order is for both the AC and DC
versions of the generator with shipments scheduled to begin in August 2011
through February 2012.
ITEM 4. Controls and Procedures
--------------------------------
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
The Company carried out, under the supervision and with the participation of
the Company's management, including its Chief Executive Officer and
Treasurer, an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rules 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the fiscal quarter covered by this Form 10-Q. Based upon that evaluation,
the Chief Executive Officer and Treasurer concluded that, as of March 31,
2011, the design and operation of the Company's disclosure controls and
procedures were effective.
Nonetheless, a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system
are met, and no evaluation of controls can provide absolute assurance that all
control issues have been detected.
Changes in Internal Control over Financial Reporting
----------------------------------------------------
There were no changes in the Company's internal control over financial
reporting during the fiscal quarter ended March 31, 2011 that materially
affected, or are reasonably likely to affect, the Company's internal control
over financial reporting.
19
PART II - OTHER INFORMATION
Item 6. Exhibits
------------------------------------------------------------------
See the accompanying Index to Exhibits to this Quarterly Report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE DEWEY ELECTRONICS CORPORATION
/s/ John H.D. Dewey
Date: May 13, 2011 John H.D. Dewey
President and Chief Executive Officer
/s/ Stephen P. Krill
Date: May 13, 2011 Stephen P. Krill
Treasurer
20
THE DEWEY ELECTRONICS CORPORATION
INDEX TO EXHIBITS
The following exhibits are included with this report. For convenience of
reference, exhibits are listed according to the numbers assigned in the
Exhibit table to Regulation S-K.
Number
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Treasurer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
32.2 Certification of Treasurer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
21
