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 September 30, 2011
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from__________to____________
_______Commission File No. 0-2892
THE DEWEY ELECTRONICS CORPORATION
A New York Corporation
I.R.S. Employer Identification
No. 13-1803974
27 Muller Road
Oakland, New Jersey 07436
(201) 337-4700
Indicate by check mark whether the registrant has(1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES_X_ NO___
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(SS232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). YES X No ___
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer", "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer__ ___ Accelerated filer _____
Non-accelerated filer _____ Smaller reporting company__X_
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES___ NO_X_
1
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 1,362,031 at November 4,
2011.
2
THE DEWEY ELECTRONICS CORPORATION
INDEX
Page No.
Part I Financial Information
Item 1. Condensed Financial Statements
Condensed Balance Sheets -
September 30, 2011(unaudited) and June 30, 2011 4
Condensed Statements of Operations -
Three-months Ended September 30, 2011
and 2010 (unaudited) 5
Condensed Statements of Cash Flows for
the Three-months Ended September 30, 2011
and 2010 (unaudited) 6
Notes to Condensed Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 4. Controls and Procedures 19
Part II Other Information
Item 6. Exhibits 20
3
PART I: FINANCIAL INFORMATION
ITEM 1.CONDENSED FINANCIAL STATEMENTS
THE DEWEY ELECTRONICS CORPORATION
CONDENSED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2011 2011
ASSETS: (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 425,065 $ 474,381
Note receivable-net of provision for
loss of $25,000 at September 30, 2011
and June 30, 2011 3,138 13,048
Accounts receivable 625,964 695,911
Inventories 670,392 721,565
Contract costs and related estimated
profits in excess of billings 524,233 623,521
Prepaid expenses and other current assets 35,696 53,912
__________ ________
TOTAL CURRENT ASSETS 2,284,488 2,582,338
__________ _________
PLANT, PROPERTY AND EQUIPMENT:
Land and improvements 651,015 651,015
Building and improvements 1,930,119 1,885,653
Machinery and equipment 3,271,583 3,247,924
Furniture and fixtures 263,030 259,096
__________ _________
6,115,747 6,043,688
Less accumulated depreciation 5,170,670 5,155,939
__________ _________
945,077 887,749
__________ _________
DEFERRED COSTS 65,095 65,095
__________ _________
TOTAL ASSETS $3,294,660 $3,535,182
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Note payable - current portion $ 14,822 $ --
Trade accounts payable 190,720 230,018
Accrued expenses and other liabilities 210,760 306,650
Accrued compensation and benefits
Payable 139,694 154,724
Accrued pension costs 51,969 45,325
__________ ___________
TOTAL CURRENT LIABILITIES 607,965 736,717
__________ ___________
LONG-TERM PORTION OF NOTE PAYABLE 28,409 --
__________ ___________
LONG-TERM PENSION LIABILITY 533,621 533,621
__________ ___________
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00;
authorized 250,000 shares, issued
and outstanding-none -- --
Common stock, par value $.01; authorized
3,000,000 shares; 1,693,397 shares
issued and 1,362,031 shares outstanding
at September 30, 2011 and June 30, 2011 16,934 16,934
Additional paid-in capital 2,867,154 2,860,459
Retained earnings 102,463 249,337
Accumulated other comprehensive loss (374,858) (374,858)
__________ ___________
2,611,693 2,751,872
Less: Treasury stock 331,366 shares
at cost (487,028) (487,028)
__________ ___________
TOTAL STOCKHOLDERS' EQUITY 2,124,665 2,264,844
__________ ___________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $3,294,660 $3,535,182
========== ==========
See accompanying notes to condensed financial statements
4
THE DEWEY ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE-MONTHS ENDED
SEPTEMBER 30,
2011 2010
Revenues $1,739,335 $1,615,483
Cost of revenues 1,535,750 1,349,383
__________ __________
Gross profit 203,585 266,100
Selling, general & administrative 350,058 391,684
__________ __________
Operating Loss (146,473) (125,584)
Interest expense -- --
Other income/(expense) net (401) 1,319
__________ _________
Loss before income taxes (146,874) (124,265)
Provision for income tax -- --
___________ _________
NET LOSS $(146,874) $(124,265)
=========== =========
NET LOSS PER COMMON SHARE-BASIC $(0.11) $(0.09)
NET LOSS PER COMMON SHARE-DILUTED $(0.11) $(0.09)
Weighted average number of shares
outstanding:
Basic 1,362,031 1,362,031
Diluted 1,362,031 1,362,031
See accompanying notes to condensed financial statements
5
THE DEWEY ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE-MONTHS ENDED
SEPTEMBER 30,
2011 2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(146,874) $(124,265)
_________ _________
Adjustments to reconcile net loss to
Net cash (used in)/provided by
operating activities:
Depreciation 14,731 20,130
Stock based compensation expense 6,695 6,507
Decrease/(increase) in accounts
receivable and notes receivable 79,857 (122,930)
Increase in allowance for doubtful
Accounts -- $25,000
Decrease/(increase) in inventories 51,173 (245,520)
Decrease in contract costs and
related estimated profits in
excess of billings 99,288 46,649
Decrease/(increase) in prepaid
expenses and other current assets 18,216 (5,965)
(Decrease)/increase in trade
accounts payable (39,298) 375,949
(Decrease) in accrued expenses and
other liabilities (110,920) (88,712)
Increase/(decrease) in accrued
pension costs 6,644 (33,783)
________ _______
Total adjustments 126,386 (22,675)
________ _______
NET CASH USED IN OPERATING ACTIVITIES (20,488) (146,940)
________ ________
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for plant, property and
Equipment (72,059) (4,494)
________ ________
NET CASH USED IN INVESTING ACTIVITIES (72,059) (4,494)
________ ________
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term borrowings -- --
Repayment of short term borrowings -- --
Proceeds from long term debt 44,466 --
Repayment of long term debt (1,235) --
________ ________
NET CASH FROM FINANCING ACTIVITIES 43,231 --
________ ________
NET DECREASE IN CASH AND CASH
EQUIVALENTS (49,316) (151,434)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 474,381 777,511
________ _________
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 425,065 $ 626,077
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Interest paid $ -- $ --
========== ==========
See accompanying notes to condensed financial statements
6
THE DEWEY ELECTRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Significant Accounting Policies
-------------------------------------
Basis of Presentation
---------------------
The accompanying unaudited condensed financial statements have been prepared
by The Dewey Electronics Corporation (the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC")for
interim reporting. Certain information and disclosures normally included in
notes to financial statements have been condensed or omitted pursuant to such
rules and regulations, but resultant disclosures are in accordance with
accounting principles generally accepted in the United States of America as
they apply to interim reporting. The condensed financial statements should
be read in conjunction with the financial statements and the notes thereto in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2011 (the "2011 Form 10-K").
In the opinion of the Company's management, the accompanying unaudited
condensed financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly, in all material respects,
the Company's financial position as of September 30, 2011, and the results of
operations and cash flows for the three-months then ended. The results of
operations and cash flows for the period ended September 30, 2011 are not
necessarily indicative of the results of operations or cash flows to be
expected for any subsequent quarter or the full fiscal year ending June 30,
2012.
As of September 30, 2011, there have been no material changes to any of the
significant accounting policies described in our 2011 Form 10-K.
Liquidity
---------
The Company has experienced recurring losses from operations and net cash
outflows from operations in recent quarters. In addition, as previously
reported, the Company's 10 year indefinite delivery, indefinite quantity
contract with the U.S. Army to supply 2kW generator sets expired at the end
of September 2011. Prior to the expiration of the contract the Company
received a final delivery order in the amount of $7.9 million with deliveries
scheduled through September 2013. The U.S Army has announced that it no
longer plans to issue a new multiple year indefinite delivery, indefinite
quantity fixed price contract and will transfer the 2kW program to a
'sustainment' command.
The Company anticipates that the Government will continue to require these
generators, which can be ordered under individual "Purchase Orders" or via
the General Services Administration's GSA.gov Web site. We are unable to
predict whether, when or to what extent the Government will continue to place
orders for these generators.
Historically, the Company's capital expenditures, debt servicing requirements
and working capital needs have been financed by cash flow from operations,
progress payments on various Government contracts (based on cost incurred)
and a line of credit, described under "Financing Activities" in the
Management's Discussion and Analysis section of this Form 10-Q.
Management believes that the Company's current cash and its line of credit,
combined with progress payments as well as billings at the time of delivery
of products will be sufficient to support short-term liquidity requirements,
working capital needs and capital expenditures at their current or expected
levels.
7
Revenue Recognition
-------------------
Revenues and estimated earnings under long-term defense contracts (including
research and development contracts, except as described below in this
paragraph) are recorded using the percentage-of-completion method of
accounting, measured as the percentage of costs incurred to estimated total
costs of each contract. For the Company's indefinite delivery, indefinite
quantity contract to provide 2kW generator sets to the military, which
expired on September 30, 2011, and for orders from other Government
subcontractors for 2kW generator sets, percentage-of-completion calculations
are based on individual "Delivery Orders" which are periodically received for
specified quantities. These calculations require management to estimate the
cost to complete open orders. Changes between those estimates and the actual
cost of completion of delivery orders impact the revenue recognition in each
reporting period. Estimates are adjusted as necessary on a quarterly basis.
For research and development contracts total costs incurred are compared to
total expected costs for each contract. The Company has one development sub-
contract for which it recognizes revenues on a time and material basis.
The Company uses the percentage-of-completion method to recognize revenues
for its replacement parts and other short term business when the dollar
amount of the order to be delivered in a future period or periods is
material, and the duration of the work will span multiple reporting periods.
Revenues and earnings for all other orders for replacement parts and other
short term business (including orders for replacement parts for snowmaking
equipment) are recorded when deliveries of product are made and title and
risk of loss have been transferred to the customer and collection is
probable.
For those contracts where revenue has been recognized using the percentage-
of-completion method of accounting, provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and income and are recognized
in the period in which the revisions are determined.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. These estimates include, among others,
lower of cost or market estimates for inventories, realization of deferred
tax assets, revenue recognition and certain accrued expenses. Actual results
could differ from those estimates.
Income Taxes
------------
Under the asset and liability method of accounting for taxes under ASC Topic
740, "Income Taxes", deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The effect on deferred tax assets and liabilities of a
change in tax laws is recognized in the results of operations in the period
the new laws are enacted. A valuation allowance is recorded to reduce the
carrying amounts of deferred tax assets unless it is more likely than not,
that such assets will be realized.
8
The Company accounts for uncertain tax positions in accordance with Generally
Accepted Accounting Principles in the U.S. Income tax positions must meet a
more-likely-than-not recognition in order to be recognized in the financial
statements. The Company recognizes potential accrued interest and penalties
related to unrecognized tax benefits within operations as income tax expense.
As new information becomes available, the assessment of the recognition
threshold and the measurement of the associated tax benefit of uncertain tax
positions may result in financial statement recognition or derecognition.
2. Accounting Standards Updates
-------------------------------
Accounting Standards Updates Not Yet Effective
----------------------------------------------
In May 2011, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2011-04 (ASU No. 2011-4), Fair Value
Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRSs to provide a uniform
framework for fair value measurements and related disclosures between U.S.
GAAP and International Financial Reporting Standards (IFRS). Additional
disclosure requirements in the update include: (1) for Level 3 fair value
measurements, quantitative information about unobservable inputs used, a
description of the valuation processes used by the entity, and a qualitative
discussion about the sensitivity of the measurements to changes in the
unobservable inputs; (2) for an entity's use of a nonfinancial asset that is
different from the asset's highest and best use, the reason for the
difference; (3) for financial instruments not measured at fair value but for
which disclosure of fair value is required, the fair value hierarchy level in
which the fair value measurements were determined; and (4) the disclosure of
all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU
No. 2011-04 requires prospective application for interim and annual periods
beginning on or after December 15, 2011. The Company is currently evaluating
the impact that ASU No. 2011-04 will have on its financial position and
results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic
220):Presentation of Comprehensive Income which improves the comparability,
consistency, and transparency of financial reporting and increases the
prominence of items reported in other comprehensive income ("OCI") by
eliminating the option to present components of OCI as part of the statement
of changes in stockholders' equity. The amendments in this standard require
that all non-owner changes in stockholders' equity be presented either in a
single continuous statement of comprehensive income or in two separate but
consecutive statements. Under either method, an entity is required to present
on the face of the financial statements reclassification adjustments for
items that are reclassified from OCI to net income in the statement(s) where
the components of net income and the components of OCI are presented. The
amendments in this standard do not change the items that must be reported in
OCI, when an item of OCI must be reclassified to net income, or change the
option for an entity to present components of OCI gross or net of the effect
of income taxes. The amendments in ASU No. 2011-05 are effective for interim
and annual periods beginning after December 15, 2011 and are to be applied
retrospectively. The adoption of the provisions of ASU No. 2011-05 will not
have a material impact on the Company's financial position or results of
operations.
Other Accounting Standards Updates not effective until after September 30,
2011 are not expected to have a significant effect on the Company's financial
position or results of operations.
9
3. Inventories
---------------
Inventories consist of:
September 30, 2011 June 30, 2011
Finished Goods $23,123 $34,240
Work In Progress 184,651 140,344
Raw Materials 462,618 546,981
________ ________
Total $670,392 $721,565
======== ========
4. Taxes on Income
===================
The Company has provided a valuation allowance against its net deferred tax
assets as it believes that it is more likely than not that it will not
realize these tax attributes. The Company has approximately $1,125,000 and
$214,000 of federal and state net deferred tax assets respectively, primarily
arising from net operating loss carryforwards, expiring beginning in 2013.
In the three month period ended September 30, 2011 these federal and state
net deferred tax assets increased by approximately $50,000 and $9,000,
respectively, as a result of a net loss for the period.
5. Earnings/(Loss) Per Share
-----------------------------
Net income (loss) per share has been presented pursuant to ASC Topic 260,
"Earnings per Share". Basic net income (loss) per share is computed by
dividing reported net income (loss) available to common shareholders by
weighted average shares outstanding for the period. Diluted net income
(loss) per share is computed by dividing reported net income (loss) available
to common shareholders by weighted average shares outstanding for the period,
adjusted for the dilutive effect of common stock equivalents, which consist
of stock options, using the treasury stock method.
The tables below set forth the reconciliation of the numerators and
denominators of the basic and diluted net income (loss) per common share
computations. All outstanding stock options were excluded from the
computation of earnings per share due to their anti-dilutive effect, the
result of a net loss in the three month periods ended September 30, 2011 and
September 30, 2010. For the three-months ended September 30, 2011 and
September 30, 2010, respectively, the number of shares excluded from the
calculation were 62,500 and 36,700 respectively.
Three-months Ended September 30,
2011 2010
Per Per
Net Loss Shares Share Net Loss Shares Share
Amount Amount
Basic
Net
(loss)
Per
Common
Share $(146,874) 1,362,031 $(.11) $(124,265) 1,362,031 $(.09)
Effect
Of
dilutive
Securities -- -- -- -- -- --
________ ________ ____ ________ _________ _____
Diluted
Net
(loss)
Per
Common
Share $(146,874) 1,362,031 $(.11) $(124,265) 1,362,031 $(.09)
========= ========= ===== ========= ========= =====
6. Stock Option Plan
---------------------
On December 2, 1998, the Employee Stock Option Committee adopted a Stock
Option Plan of 1998 which was amended and restated effective December 5,
2001, pursuant to which options to purchase a maximum of 85,000 shares of
common stock may be granted to executives and key employees. Incentive stock
options have been granted under the plan with an exercise price no less than
fair market value of the stock on the date of grant. Outstanding options
generally are exercisable for ten years from the date of grant, except for
four grants totaling 13,500 options which are exercisable for a 5-year term.
Outstanding options have expiration dates ranging from December 12, 2012 to
September 21, 2021.
10
The following disclosures are based on stock options granted to employees of
the Company in the first quarter of fiscal 2012 (quarter ended September 30,
2011). For the three months ended September 30, 2011, the Company recorded
stock option compensation expense of $6,695. For the three months ended
September 30, 2010, the Company recorded stock option compensation expense of
$6,507.
For the full fiscal year ending June 30, 2012, the Company expects
approximately $20,113 in stock option compensation expense based on stock
options already granted and assuming no further option grants during the
remainder of the fiscal year. However, our assessment of the estimated
compensation expense will be affected by our stock price and actual stock
option grants (if any) during the remainder of the year as well as
assumptions regarding a number of complex and subjective variables. These
variables include, but are not limited to, the volatility of our stock price
and employee stock option exercise behaviors. The Company issues shares of
common stock upon the exercise of stock options.
The Company used its historical stock price volatility to compute the
expected volatility for purposes of valuing stock options issued. The period
used for the historical stock price corresponded to the expected term of the
options and was between five and ten years. The expected dividend yield is
based on the Company's practice of not paying dividends. The risk-free rate
of return is based on the yield of U.S. Treasury Strips with terms equal to
the expected life of the options as of the grant date. The expected life in
years is based on historical actual stock option exercise experience.
The following weighted average assumptions were used in the valuation of
stock options granted in the first quarter of fiscal 2012.
September 30, 2011
Expected dividend yield --
Expected volatility 76.8%
Risk-free interest rate 1.27%
Expected life in years 6.0
Based on the assumptions in the table above, the grant date fair value of
stock options granted in the first quarter of fiscal 2012 was $11,354.
Stock option transactions for the Company's employee stock options plans for
the quarter ended September 30, 2011 are as follows:
Weighted
Average
Shares Exercise Price
Beginning balance 52,700 $2.66
Granted 9,800 1.63
Exercised -- --
Cancelled or expired -- --
______ _____
Ending balance 62,500 2.50
====== =====
Options exercisable at end
of period 36,700 2.92
====== =====
11
7. Long Term Debt
----------------
In August 2011 the Company entered into a 36 month, interest free, financing
agreement with Wells Fargo Financial Leasing in the amount of $44,466 to
upgrade facility lighting. The loan is secured by the physical assets
financed under this loan. As of the date of this Quarterly Report the Company
has an outstanding balance of $43,231 on this note.
8. Line of Credit
-----------------
On April 27, 2009 the Company entered into a $500,000 line of credit with TD
Bank, NA. (See Note 10 of the Notes to Financial Statements in the Company's
Form 10-K for the fiscal year ended June 30, 2011). On November 2, 2011, the
Company and TD Bank entered into a modification of this line of credit,
effective as of October 31, 2011, which reduced the maximum borrowing amount
to $375,000 and extended this line of credit to November 30, 2012. No other
terms of the Company's April 27, 2009 revolving term note to TD Bank were
changed. (See Item 5 (Other Information) in Part II of this Quarterly
Report.) As of the date of this Quarterly Report the Company has no
outstanding debt against this line of credit. The Company does not regard
this credit facility as vital to its continued operations.
12
THE DEWEY ELECTRONICS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed financial statements, including the notes thereto, appearing
elsewhere in this Form 10-Q, and with the audited financial statements,
including the notes thereto, appearing in the Company's 2011 Form 10-K.
Certain statements in this report may be deemed "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934.
All statements, other than statements of historical fact that address
activities, events or developments that the Company or management intends,
expects, projects, believes or anticipates will or may occur in the future
are forward-looking statements. Such statements are based upon certain
assumptions and assessments made by management of the Company in light of its
experience and its perception of historical trends, current conditions,
expected future developments and other factors it believes to be appropriate.
The forward-looking statements included in this report are also subject to a
number of material risks and uncertainties, including but not limited to
economic, governmental, competitive and technological factors affecting the
Company's operations, markets, products, services and prices and,
specifically, the factors discussed below under "Financing Activities", and
"Company Strategy" and in Item 1 (Description of Business) of the Company's
2011 Form 10-K under the subheading "Operational Risks". Such forward-
looking statements are not guarantees of future performance and actual
results, developments and business decisions may differ from those envisaged
by such forward-looking statements.
The Company's operating cycle is long-term and includes various types of
products and varying delivery schedules. Accordingly, results of a
particular period or period-to-period comparisons of recorded revenues and
earnings may not be indicative of future operating results. The following
comparative analysis should be viewed in this context.
Critical Accounting Policies and Estimates
------------------------------------------
The Company's financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States
of America. Preparing financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. These estimates and assumptions affect the application of our
accounting policies. Actual results could differ from these estimates.
Critical accounting policies are those that require application of
management's most difficult, subjective or complex judgments, often as a
result of matters that are inherently uncertain and may change in subsequent
periods. The Company's critical accounting policies include revenue
recognition on contracts and contract estimates, pensions, impairment of
long-lived assets, and valuation of deferred tax assets and liabilities. For
additional discussion of the application of these and other accounting
policies, see Management's Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Policies and Note 1 of the Notes
to the Financial Statements included in the Company's 2011 Form 10-K.
Results of Operations - Revenues
--------------------------------
Revenues and estimated earnings under long-term defense contracts (including
research and development contracts, except as described below in this
paragraph) are recorded using the percentage-of-completion method of
accounting, measured as the percentage of costs incurred to estimated total
costs of each contract. For the Company's indefinite delivery, indefinite
quantity contract to provide 2kW generator sets to the military, which
expired on September 30, 2011, and for orders from other Government
subcontractors for 2kW generator sets, percentage-of-completion calculations
are based on individual "Delivery Orders" which are periodically received for
specified quantities. These calculations require management to estimate the
cost to complete open orders. Changes between those estimates and the actual
cost of completion of delivery orders impact the revenue recognition in each
reporting period. Estimates are adjusted as necessary on a quarterly basis.
For research and development contracts total costs incurred are compared to
total expected costs for each contract. The Company has one development sub-
contract for which it recognizes revenues on a time and material basis.
13
The Company uses the percentage-of-completion method to recognize revenues
for its replacement parts and other short term business when the dollar
amount of the order to be delivered in a future period or periods is
material, and the duration of the work will span multiple reporting periods.
Revenues and earnings for all other orders for replacement parts and other
short term business (including orders for replacement parts for snowmaking
equipment) are recorded when deliveries of product are made and title and
risk of loss have been transferred to the customer and collection is
probable.
For those contracts where revenue has been recognized using the percentage-
of-completion method of accounting, provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and income and are recognized
in the period in which the revisions are determined.
Revenues for the first quarter of fiscal year 2012, the three month period
ended September 30, 2011, were $123,852 higher when compared to the same
period in 2010. The increase in revenues was due to increased production of
generator sets for delivery under the Company's 10 year indefinite
delivery/indefinite quantity contract with the U.S. Army and an increase in
customer funded research and development. These increases were partly offset
by a reduction in revenues from production of generator sets for delivery to
other government contractors and sales of replacement parts and other short-
term business when compared to the same period in fiscal year 2011.
For the three months ended September 30, 2011 production efforts to provide
the Armed Forces with diesel operated generator sets provided approximately
84% of revenues compared to approximately 87% in the first quarter of fiscal
year 2011 (quarter ended September 30, 2010). Replacement parts and other
short-term business provided approximately 10% of revenues in the first
quarter of fiscal year 2012 and approximately 13% of revenues in the same
period of fiscal 2011. Revenues from research and development contracts
provided approximately 6% of revenues in the first quarter of fiscal 2012.
The Company realized no revenues from research and development contracts in
the first quarter of fiscal 2011.
The aggregate value of the Company's backlog of sales orders was $10.0
million on September 30, 2011, primarily the result of the receipt in
September of a final delivery order in the amount of $7.9 million under the
Company's contract to supply the U.S. Army with 2kW generator sets. The
Company's backlog of sales orders was $4.2 million on September 30, 2010. It
is estimated that substantially all of the present backlog will be billed
during the next 24 months and be recognized as fiscal year 2012 and 2013
revenues.
Gross Profit
------------
Gross profit is affected by a variety of factors including, among other
items, sales volume, product mix, product pricing, and product costs. The
Company earned a gross profit of $203,585 for the three months ended
September 30, 2011 compared to a gross profit of $266,100 for the same period
in 2010. The reduction in gross profit was a result of a higher proportion of
revenues from production of generators for delivery under the Company's prime
contract with the U.S. Army, which generate a lower gross profit than other
lines of business, as well as increases in material costs, and higher initial
production costs for a new accessory for 2kW generators which resulted in
lower margins in the Company's replacement parts and other short term
business. Partly offsetting these lower margins were increased gross profits
from an increase in revenues from customer funded research and development
work. As a result, gross profit as a percentage of revenues in the first
three months of fiscal year 2012 decreased when compared to the same period
last year.
14
The Company experienced decreased demand for its 2kW generator sets during
the first quarter of fiscal 2012 and temporarily reduced operating hours by
10% at the beginning of the fourth quarter of its fiscal year ended June 30,
2011 and continued to operate with reduced operating hours through August
2011. The Company returned to normal operating hours at the end of August
2011, during the first fiscal quarter of 2012.
Selling, General and Administrative Expenses
-------------------------------------------
Selling, General and Administrative Expenses for the first three months of
fiscal 2012 were $350,058 or 20% of revenues compared to $391,684 or 24% of
revenues in the first three months of fiscal 2011. The most significant
reductions in expense and their approximate amounts were in company sponsored
research and development ($20,000), bad debt expense ($20,000), and marketing
expense ($20,000), all of which were partly offset by an increase in legal
and professional fees of $14,000.
Interest Expense
----------------
The Company had no interest expense in the three month periods ended
September 30, 2011 and September 30, 2010 respectively.
Other Expense/Income - Net
--------------------------
Amounts reported as other income or expense represent the net effect of
interest income and miscellaneous items such as the sale of scrap, bank
transaction fees and other like items.
Other expense of $401 for the three months ended September 30, 2011 was
comprised primarily of franchise taxes and miscellaneous bank fees, partly
offset by interest income and scrap sales.
Other income of $1,319 for the three months ended September 30, 2010 was
comprised primarily of sales of scrap material and interest income, partially
offset by miscellaneous bank fees.
Loss before income taxes
------------------------
Loss before income taxes for the three months ended September 30, 2011 was
$146,874 and $124,265 for the three months ended September 30, 2010.
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts and for tax loss
and credit carry-forwards.
A valuation allowance is provided against deferred tax assets when it is
determined to be more likely than not that these amounts will not be
realized.
15
The Company has provided a valuation allowance against its net deferred tax
assets as it believes that it is more likely than not that it will not
realize these tax attributes. The Company has approximately $1,125,000 and
$214,000 of federal and state net deferred tax assets respectively, primarily
arising from net operating loss carryforwards, expiring beginning in 2013.
In the three month period ended September 30, 2011 these federal and state
net deferred tax assets increased by approximately $50,000 and $9,000,
respectively, as a result of a net loss for the period.
Liquidity and Capital Resources
-------------------------------
Historically, the Company's capital expenditures, debt servicing requirements
and working capital needs have been financed by cash flow from operations,
progress payments on various Government contracts (based on cost incurred)
and a line of credit, described under "Financing Activities" below.
As of September 30, 2011, the Company had no material capital expenditure
commitments. Management believes that the Company's current cash and its
line of credit, combined with progress payments as well as billings at the
time of delivery of products will be sufficient to support short-term
liquidity requirements, working capital needs and capital expenditures at
their current or expected levels.
At September 30, 2011, the Company's working capital was $1,676,523 compared
to $2,113,361 at September 30, 2010.
The ratio of current assets to current liabilities was 3.76 to 1 at September
30, 2011 and 3.62 to 1 at September 30, 2010.
The following table is a summary of the Statements of Cash Flows in the
Company's Financial Statements:
Three Months ended September 30,
2011 2010
Net cash provided by(used in)
Operating activities $ (20,488) $ (146,940)
Investing activities (72,059) (4,494)
Financing activities 43,231 --
Operating Activities:
--------------------
Adjustments to reconcile net income to net cash used in operations are
presented in the Condensed Statements of Cash Flows in the Company's
Financial Statements.
Net cash used in operating activities in the three-month period ended
September 30, 2011 was comprised primarily of net loss before depreciation
and amortization and non-cash compensation expense, and decreases in accounts
payable and accrued expenses partly offset by decreases in accounts
receivable, inventories, contract costs and estimated related profits in
excess of applicable billings, and prepaid expenses, and an increase in
accrued pension costs.
Net cash used in operating activities in the three-month period ended
September 30, 2010 was comprised primarily of net loss before depreciation
and amortization and non-cash compensation expense, and increases in accounts
receivable, allowance for doubtful accounts, inventories, and prepaid
expenses and decreases in accrued expenses and other liabilities, and accrued
pension costs. These were partly offset by a decrease in contract costs and
estimated related profits in excess of applicable billings and an increase in
trade accounts payable and other accrued expenses.
16
The Company expenses its research and development costs as incurred. These
costs consist primarily of salaries and material costs. For the three month
period ended September 30, 2011 and September 30, 2010, the Company expensed
$11,515 and $31,061 respectively, of research and development costs. Research
and development projects performed under contract for customers are billed to
the customer and are recorded as contract costs as they are incurred.
Investing Activities:
--------------------
During the first three months of fiscal 2012, net cash of $72,059 was used in
investing activities. The entire amount was used for capital expenditures,
principally for the replacement and upgrade of facility lighting and the
acquisition of additional demonstration and test equipment.
During the first three months of fiscal 2011, net cash of $4,494 was used in
investing activities. The entire amount was used for capital expenditures,
principally for demonstration and test equipment.
Financing Activities:
--------------------
In August 2011, the Company entered into a 36 month, interest free, financing
agreement with Wells Fargo Financial Leasing in the amount of $44,466 to
upgrade facility lighting. The loan is secured by the physical assets
financed under this loan. As of the date of this Quarterly Report the Company
has an outstanding balance of $43,231 on this note. The Company did not use
any cash in financing activities during the three month period 2010.
On April 27, 2009 the Company entered into a $500,000 line of credit with TD
Bank, NA. (See Note 10 of the Notes to Financial Statements in the Company's
Form 10-K for the fiscal year ended June 30, 2011). On November 2, 2011, the
Company and TD Bank entered into a modification of this line of credit,
effective as of October 31, 2011, which reduced the maximum borrowing amount
to $375,000 and extended this line of credit to November 30, 2012. No other
terms of the Company's April 27, 2009 revolving term note to TD Bank were
changed. (See Item 5 (Other Information) in Part II of this Quarterly
Report.) As of the date of this Quarterly Report the Company has no
outstanding debt against this line of credit. The Company does not regard
this credit facility as vital to its continued operations.
The Company owns approximately 90 acres of land and the building, which it
occupies in Bergen County, New Jersey, adjacent to an interchange of
Interstate Route 287. The Company is continuing to actively pursue possible
methods of monetizing 68 undeveloped and unused acres of this property, by
its sale and/or development. This endeavor has become more complex with the
implications of New Jersey's "Highlands Water Protection and Planning Act".
The Act identifies approximately 400,000 acres of New Jersey as The Highlands
Preservation Area. Pursuant to the statute, this area has the most onerous
restrictions on future development. The Company's property is in this area,
and further development would not be permitted without a waiver or other
relief from the State. The Company continues to believe that there are
strong reasons why its property should not be subject to the severe
restrictions of the preservation area, and is attempting to affect a
solution.
Since the Act was passed in June of 2004, the State repeatedly delayed
promulgation of final regulations and a master plan. Originally expected in
2005, final regulations and a master plan were approved by the Governor on
September 5, 2008. At the same time the Governor issued executive order 114
further defining the framework by which the Highlands Council, other State
agencies, and both county and municipal governments are to work together.
The Company believes that a regulatory environment is now developing within
which monetization of the land may be possible. In light of these events,
the Company is actively assessing its options. However, no assurances can be
given that the Company's efforts will be successful, that a satisfactory
valuation will be achieved, or that resolution will be timely.
17
In May 2008, the Company entered into a contract to sell a small parcel of
land, approximately 7 acres, for $205,000. The land is physically separated
from the main parcel of the Company's property by an interstate highway and
is contained within the Highlands Preservation Area. Among other things, the
sale of the land is subject to approval for development by the Highlands
Commission and various state and local government agencies. Accordingly, the
Company can make no assurance that the sale will be successfully consummated
or, if consummated, the timing thereof.
Accounting Standards Updates
----------------------------
Refer to Note 2. Accounting Standards Updates in the Notes to the Condensed
Financial Statements section of this Quarterly Report.
Company Strategy
----------------
The Company has many years of experience in contracting with the Department
of Defense and has been successful in obtaining many contracts to provide a
wide array of products and services. Management believes that this
experience is a significant positive competitive factor. Management is
continuing to explore other areas of business with the Department of Defense,
which are capable of providing stability and growth.
The Company is focusing its efforts within the market for military compact
diesel power generation on select product categories which management
believes represent the best chances of successfully growing the Company's
business. Although no assurances can be made that such a strategy will be
successful, management believes that long-term growth can best be achieved
by: 1) growing the Company's profitability in areas where the Company already
has a strong presence, 2) expanding into related markets with existing
products and capabilities, and 3) further taking advantage of the Company's
strengths by expanding into related product categories.
The Company faces competition in many areas and from companies of various
sizes, capabilities and resources. Competitive factors include product
quality, technology, product availability, price, and customer service.
Management believes that the reputation of the Company in these areas
provides a significant positive competitive factor. As part of its overall
business strategy management is continuing to reinforce customer awareness of
the Company's current and past performance as a Department of Defense
supplier, its product quality and reliability, and its historically strong
customer relationships.
The Company's 10 year indefinite delivery, indefinite quantity contract with
the U.S. Army to supply 2kW generator sets expired at the end of September
2011. Deliveries of orders received prior to the expiration of the contract
are scheduled to continue through September 2013. As previously reported the
U.S. Army has announced that it is not issuing a new multiple year fixed
price contract and will transfer the 2kW Generator Program to a 'sustainment'
command. The Company anticipates that the Government will continue to require
these generators, which can be ordered under individual "Purchase Orders" or
via the General Services Administration's GSA.gov Web site. Most
importantly, with the expiration of the contract the Company will be able to
set new pricing on future orders which could be adjusted on an annual basis.
New pricing would be restricted by defense acquisition regulations and
comprehensive government auditing. However, we are unable to predict whether,
when or to what extent the Government will continue to place orders for these
generators.
In approaching the second and third strategic objectives described above, the
Company is attempting to capitalize on its previous investments in technology
to obtain business in related military power markets and to expand into
related military product categories.
18
In recent months the Company has continued to act on the second strategic
objective, expanding into related power markets. Using our expertise in
Direct Current power generation we have designed and delivered diesel power
generation systems for use on other companies' trailer mounted military
systems. These power systems have integrated energy storage batteries and
digital controls combined with traditional diesel generators. That
integration delivers fuel savings as compared to traditional diesel
generators while also enabling the optional integration of opportunistic
power sources such as solar and wind. These accomplishments build on the
Company's previous accomplishments with vehicle mounted auxiliary power
units, and management believes it will allow the Company to further expand
into related power applications while increasing its technology base. In
furtherance of the third strategic objective, expanding into related military
product categories, the Company is utilizing its experience in military-grade
portable power systems under a customer funded research and development sub-
contract where the Company is designing and prototyping electronic controls
for diesel fuel cell systems.
In the near term, a return to profitability and broadening the line of
product offerings are the Company's primary objectives. The development
subcontract described above as well as internal Company sponsored development
efforts contribute to this goal. The Company is continuing to pursue
possible partnering and sub-contracting relationships with other companies
and defense contractors that leverage the Company's current expertise and
technology in generators and auxiliary power units.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
The Company carried out, under the supervision and with the participation of
the Company's management, including its Chief Executive Officer and
Treasurer, an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rules 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the fiscal quarter covered by this Form 10-Q. Based upon that evaluation,
the Chief Executive Officer and Treasurer concluded that, as of September 30,
2011, the design and operation of the Company's disclosure controls and
procedures were effective.
Nonetheless, a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system
are met, and no evaluation of controls can provide absolute assurance that
all control issues have been detected.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There were no changes in the Company's internal control over financial
reporting during the fiscal quarter ended September 30, 2011 that materially
affected, or are reasonably likely to affect, the Company's internal control
over financial reporting.
19
PART II - OTHER INFORMATION
Item 5. Other Information
(a) On November 2, 2011, the Company and TD Bank entered into a modification
of the Company's line of credit, effective as of October 31, 2011, which
reduced the maximum borrowing amount to $375,000 and extended this line of
credit to November 30, 2012. See Note 8. Line of Credit in the Notes to the
Condensed Financial Statements section of this Quarterly Report. As of the
date of this Quarterly Report, the Company has no outstanding debt against
this line of credit. The terms of the line of credit are otherwise unchanged
and provide among other things for an annual interest rate on borrowings
equal to TD Bank's prime rate plus one (1.00) percent with a minimum interest
rate of 4.25% and are subject to customary representations, covenants, and
default provisions in favor of TD Bank. Any loans drawn under the line of
credit are secured by a first lien on all of the Company's accounts
receivable, machinery, equipment, other personal property and a Commercial
Mortgage Security Agreement on the Company's real property.
Item 6. Exhibits
------------------------------------------------------------------
See the accompanying Index to Exhibits to this Quarterly Report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE DEWEY ELECTRONICS CORPORATION
/s/ John H.D. Dewey
Date: November 10, 2011 John H.D. Dewey
President and Chief Executive Officer
/s/ Stephen P. Krill
Date: November 10, 2011 Stephen P. Krill
Treasurer
20
THE DEWEY ELECTRONICS CORPORATION
INDEX TO EXHIBITS
The following exhibits are included with this report. For convenience of
reference, exhibits are listed according to the numbers assigned in the
Exhibit table to Regulation S-K.
Number
10.1 Modification Agreement dated as of October 31, 2011 between The
Dewey Electronics Corporation and TD Bank, N.A.
10.2 Amended and Restated Revolving Term Note made by The Dewey
Electronics Corporation in favor of TD Bank, NA dated October 31, 2011
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Treasurer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
32.2 Certification of Treasurer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
21
