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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10 - Q
 
(Mark One)

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012
 
o 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 þ NO o

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 (§232.405 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 þ   No o

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 o Accelerated filer o
       
Non-accelerated filer o Smaller reporting company þ
(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 o NO þ
 
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 8, 2012.



 
 

 
THE DEWEY ELECTRONICS CORPORATION
 
INDEX
 
      Page No.  
Part I  Financial Information      
         
Item 1.  Condensed Financial Statements        
           
  Condensed Balance Sheets - September 30, 2012(unaudited) and June 30, 2012     3  
           
  Condensed Statements of Operations - Three-months Ended September 30, 2012 and 2011 (unaudited)      4  
           
  Statement of Comprehensive Income/Loss     4  
           
  Condensed Statements of Cash Flows for the Three-months Ended September 30, 2012 and 2011 (unaudited)      5  
           
  Notes to Condensed Financial Statements (unaudited)     6  
           
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  
 
 
2

 
 
PART I:  FINANCIAL INFORMATION

ITEM 1.CONDENSED FINANCIAL STATEMENTS

THE DEWEY ELECTRONICS CORPORATION
CONDENSED BALANCE SHEETS
 
   
SEPTEMBER 30,
   
JUNE 30,
 
   
2012
   
2012
 
ASSETS:
 
(unaudited)
       
CURRENT ASSETS:
           
  Cash and cash equivalents
  $ 492,166     $ 328,313  
  Accounts receivable
    995,426       1,244,462  
  Inventories
    672,862       781,037  
  Contract costs and related estimated profits in excess of billings
    1,324,423       927,078  
  Prepaid expenses and other current assets
    55,869       69,502  
                 
      TOTAL CURRENT ASSETS
    3,540,746       3,350,392  
                 
PLANT, PROPERTY AND EQUIPMENT:
               
  Land and improvements
    651,015       651,015  
  Building and improvements
    1,948,165       1,948,165  
  Machinery and equipment
    3,248,760       3,248,760  
  Furniture and fixtures
    263,030       263,030  
      6,110,970       6,110,970  
Less accumulated depreciation
    5,207,149       5,191,705  
      903,821       919,265  
                 
DEFERRED COSTS
    65,095       65,095  
                 
TOTAL ASSETS
  $ 4,509,662     $ 4,334,752  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
               
CURRENT LIABILITIES:
               
  Note payable – current portion
  $ 14,822     $ 289,822  
  Trade accounts payable
    503,711       407,994  
  Accrued expenses and other liabilities
    184,636       216,491  
  Accrued compensation and benefits payable
    239,487       220,575  
  Accrued pension costs
    58,594       65,792  
    TOTAL CURRENT LIABILITIES
    1,001,250       1,200,674  
                 
LONG-TERM PORTION OF NOTE PAYABLE
    13,562       17,292  
                 
LONG-TERM PENSION LIABILITY
    980,898       1,013,706  
                 
TOTAL LIABILITIES
    1,995,710       2,231,672  
                 
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, 2012 and June 30, 2012
      16,934           16,934  
  Additional paid-in capital
    2,882,842       2,880,571  
  Retained earnings
    923,339       547,546  
  Accumulated other comprehensive loss
    (822,135 )     (854,943 )
      3,000,980       2,590,108  
Less: Treasury stock 331,366 shares at cost
    (487,028 )     (487,028 )
                 
  TOTAL STOCKHOLDERS’ EQUITY
    2,513,952       2,103,080  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 4,509,662     $ 4,334,752  
 
See accompanying notes to condensed financial statements
 
 
3

 

THE DEWEY ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
THREE-MONTHS ENDED
SEPTEMBER 30,
 
   
2012
   
2011
 
             
Revenues
  $ 2,958,191     $ 1,739,335  
                 
Cost of revenues
    2,159,241       1,535,750  
                 
Gross profit
    798,950       203,585  
                 
Selling, general & administrative
    420,080       350,058  
                 
Operating income/(loss)
    378,870       (146,473 )
                 
   Interest expense
    (2,467 )     --  
                 
   Other income/(expense) – net
    (610 )     (401 )
                 
Income/(loss) before income taxes
    375,793       (146,874 )
                 
Provision for income tax
    --       --  
                 
NET INCOME/(LOSS)
  $ 375,793     $ (146,874 )
                 
NET INCOME/(LOSS) PER COMMON SHARE-BASIC
  $ 0.28     $ (0.11 )
NET INCOME/(LOSS) PER COMMON SHARE-DILUTED
  $ 0.28     $ (0.11 )
                 
Weighted average number of shares outstanding:
               
   Basic
    1,362,031       1,362,031  
   Diluted
    1,362,031       1,362,031  
 
STATEMENT OF COMPREHENSIVE INCOME/(LOSS)

   
THREE MONTHS ENDED
SEPTEMBER 30,
 
   
2012
   
2011
 
Other comprehensive income/loss - net of tax            
             
Net income/(loss)
  $ 375,793     $ (146,874 )
Amortization of actuarial gains and losses
    32,808       9,043  
                 
Comprehensive income/(loss)
  $ 408,601     $ (137,831 )

See accompanying notes to condensed financial statements
 
 
4

 

THE DEWEY ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
THREE-MONTHS ENDED
 
   
SEPTEMBER 30,
 
   
2012
   
2011
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income/(loss)
  $ 375,793     $ (146,874 )
Adjustments to reconcile net income/(loss) to
               
  Net cash provided by/(used in) operating activities:
               
   Depreciation
    15,444       14,731  
   Stock based compensation expense
    2,271       6,695  
   Provision for inventory reserve
    11,180       --  
   Decrease in accounts receivable and notes receivable
    249,036       79,857  
   Decrease in inventories
    96,995       51,173  
   (Increase)/decrease in contract costs and related
               
     estimated profits in excess of billings
    (397,345 )     99,288  
   Decrease in prepaid expenses and
               
     other current assets
    13,633       18,216  
   Increase/(decrease) in trade accounts payable
    95,717       (39,298 )
   (Decrease) in accrued expenses and other liabilities
    (12,943 )     (110,920 )
   (Decrease)/increase in accrued pension costs
    (7,198 )     6,644  
   Total adjustments
    66,790       126,386  
                 
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES
    442,583       (20,488 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
  Expenditures for plant, property and equipment
    --       (72,059 )
                 
NET CASH USED IN INVESTING ACTIVITIES
    --       (72,059 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayment of short term borrowings
    (275,000 )     --  
Proceeds from long term debt
    --       44,466  
Repayment of long term debt
    (3,730 )     (1,235 )
                 
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES
    (278,730 )     43,231  
                 
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    163,853       (49,316 )
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    328,313       474,381  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 492,166     $ 425,065  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
                 
      Interest paid
  $ 2,467     $ --  

See accompanying notes to condensed financial statements
 
 
5

 

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, 2012 (the “2012 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, 2012, 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, 2012 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, 2013.

As of September 30, 2012, there have been no material changes to any of the significant accounting policies described in our 2012 Form 10-K.
 
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, the ordering provision of 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 contract and one development sub-contract for which it recognizes revenues on a time and material basis.

Revenues and earnings for 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.

 
6

 
 
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.

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.

Reclassification of Prior Year Balances

Certain prior year balances have been reclassified to conform to the current period financial statement presentation.  This reclassification has no impact on the Company’s financial position, results of operations or cash flows.
 
2. Accounting Standards Updates

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 adoption of the provisions of ASU No. 2011-04 did not have a material impact on the Company's financial position or results of operations.
 
 
7

 
 
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 fiscal years, and interim periods within those years, beginning after December 15, 2011 and are to be applied retrospectively. The adoption of the provisions of ASU No. 2011-05 did not have a material impact on the Company's financial position or results of operations.

In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220):Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Income in Accounting Standards Update No. 2011-05 which defers the effective date of provisions of ASU No. 2011-05 that relate to the presentation of reclassification adjustments on the face of the financial statements. ASU No. 2011-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of the provisions of ASU No. 2011-12 did 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, 2012 are not expected to have a material effect on the Company’s financial position or results of operations.

3.  Inventories

Inventories consist of:
 
   
September 30,
2012
   
June 30,
2012
 
             
Finished Goods
  $ 25,110     $ 26,027  
Work In Progress
    84,860       200,939  
Raw Materials
    562,892       554,071  
Total
  $ 672,862     $ 781,037  

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 $1,016,000 and $191,000 of federal and state net deferred tax assets respectively, primarily arising from net operating loss carryforwards, expiring beginning in 2014.  In the three month period ended September 30, 2012 these federal and state net deferred tax assets decreased by approximately $128,000 and $23,000, respectively, as a result of a net income for the period.

 
8

 
 
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 September 30, 2012 and September 30, 2011, respectively, all outstanding stock options (62,500 shares) were excluded from the computation of earnings per share due to their anti-dilutive effect.

   
Three-months Ended September 30,
 
   
2012
   
2011
 
   
Net Income
   
Shares
   
Per Share Amount
   
Net Loss
   
Shares
   
Per Share Amount
 
Basic net income/(loss)
                                   
per common share
  $ 375,793       1,362,031     $ .28     $ (146,874 )     1,362,031     $ (.11 )
                                                 
Effect of dilutive Securities
     --        --        --        --       --        --  
Diluted net income/(loss) per common share
  $ 375,793         1,362,031     $ .28     $ (146,874 )       1,362,031     $ (.11 )
 
6.  Stock Option Plan

On September 22, 2011, the Board of Directors of the Company adopted the Company’s 2011 Stock Option Plan, which was approved by the shareholders of the Company on December 8, 2011. Under this plan options to purchase a maximum of 133,000 shares of common stock may be granted to any employee of the Company, including officers. Such options may be either incentive stock options or non-qualified options and must be granted with an exercise price no less than the fair market value of the stock on the date of the grant. No stock options have been granted under this plan.

On December 2, 1998, the Company adopted its 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 this 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. No additional options may be granted under this plan.

 
9

 
 
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). There were no stock options granted in the first quarter of fiscal 2013 (quarter ended September 30, 2012). For the three months ended September 30, 2012, the Company recorded stock option compensation expense of $2,271. For the three months ended September 30, 2011, the Company recorded stock option compensation expense of $6,695.

For the full fiscal year ending June 30, 2013, the Company expects approximately $2,271 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 compensation expense will be affected by the number of stock options actually granted (if any) during the remainder of the year as well as the number of outstanding options that are forfeited.

Estimating stock option compensation expense requires assumptions regarding a number of complex and subjective variables. Key assumptions used to estimate the fair value of stock options include, the expected volatility of the Company’s stock price, expected employee option exercise behaviors, risk free interest rate over the option’s expected term, and the annual dividend yield. Compensation cost is recognized over the vesting period of the option using the straight line method.

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 and assumes that no options will be forfeited.

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. No options were granted in the first quarter of fiscal 2013.

 
10

 
 
Stock option transactions for the Company’s employee stock option plans for the quarter ended September 30, 2012 are as follows:

         
Weighted
 
         
Average
 
   
Shares
   
Exercise Price
 
Beginning balance
    62,500     $ 2.50  
Granted
    --       --  
Exercised
    --       --  
Cancelled or expired
    --       --  
Ending balance
    62,500       2.50  
Options exercisable at end of period
    62,500       2.50  
 
7. Notes Payable
 
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 finance the upgrade of the Company’s facility lighting. The loan is secured by the physical assets financed under this loan. As of September 30, 2012 the Company had an outstanding balance of $28,384 on this note.

On April 27, 2009 the Company entered into a $500,000 line of credit with TD Bank, NA.  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, removed the minimum interest rate of 4.25% on outstanding borrowings 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. As of September 30, 2012 the Company had no outstanding debt against this line of credit. The Company does not regard this credit facility as vital to its continued operations.

 
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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 2012 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 2012 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 2012 Form 10-K.

 
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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, the ordering provision of 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 contract and one development sub-contract for which it recognizes revenues on a time and material basis.

Revenues and earnings for 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 2013 (the three month period ended September 30, 2012) were $1,218,856 higher when compared to the first quarter of fiscal year 2012 (the three month period ended September 30, 2011). 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 as well as for delivery to other government contractors. The Company also realized increased revenues from the sales of replacement parts and other short-term business. These increases were partly offset by a reduction in revenues from customer funded research and development in the first quarter of fiscal year 2013 when compared to the same period in fiscal year 2012.

For the three months ended September 30, 2012 production efforts to provide the Armed Forces with diesel operated generator sets provided approximately 83% of revenues compared to approximately 84% for the first quarter of fiscal year 2012. Replacement parts and other short-term business provided approximately 16% of revenues for the first quarter of fiscal year 2013 and approximately 10% of revenues for the same period in fiscal year 2012. Revenues from research and development contracts provided approximately 1% of revenues for the first quarter of fiscal year 2013 and approximately 6% of revenues for the same period in fiscal year 2012.

The aggregate value of the Company’s backlog of sales orders was $4.2 million on September 30, 2012. The Company’s backlog of sales orders was $10.0 million on September 30, 2011.  It is estimated that substantially all of the present backlog will be billed during the next 9 months and be recognized as fiscal year 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 $798,950 or 27% of revenues for the three months ended September 30, 2012 compared to a gross profit of $203,585 or 12% of revenues for the same period in 2011. The higher gross profit for the first quarter of fiscal year 2013 was the result of an increase in production volume, a more favorable product mix and a small increase in the contract price for 2kW generator sets for delivery orders placed under the Company’s prime contract with the U.S. Army prior to its expiration.

 
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Selling, General and Administrative Expenses
 
Selling, General and Administrative Expenses for the first three months of fiscal year 2013 were $420,080 or 14% of revenues compared to $350,058 or 20% of revenues in the first three months of fiscal year 2012. The most significant increases in expense and their approximate amounts were in compensation ($56,000), Company sponsored research and development ($34,000) and general corporate expense ($20,000), all of which were partly offset by decreases in legal and professional fees of $29,000 and marketing expense of $8,000.
 
Interest Expense

The Company had interest expense of $2,467 in the three month period ended September 30, 2012. The Company had no interest expense in the three month period ended September 30, 2011.

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 $610 for the three months ended September 30, 2012 was comprised primarily of franchise taxes and miscellaneous bank fees, partly offset by interest income.

Other expense of $401 for the three months ended September 30, 2011 was comprised primarily of sales of franchise taxes and miscellaneous bank fees, partly offset by interest income and scrap sales.

Income/Loss Before Income Taxes

Income before income taxes for the three months ended September 30, 2012 was $375,793. Loss before income taxes was $146,874 for the three months ended September 30, 2011.

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 $1,016,000 and $191,000 of federal and state net deferred tax assets respectively, primarily arising from net operating loss carryforwards, expiring beginning in 2014.  In the three month period ended September 30, 2012 these federal and state net deferred tax assets decreased by approximately $128,000 and $23,000, respectively, as a result of a net income for the period.

 
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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 described in “Financing Activities” below, during the first quarter of fiscal year 2013 the Company repaid $275,000 which it had borrowed against its current line of credit during the second quarter of fiscal year 2012. As of September 30, 2012, 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, 2012, the Company’s working capital was $2,539,496 compared to $1,676,523 at September 30, 2011.

The ratio of current assets to current liabilities was 3.54 to 1 at September 30, 2012 and 3.76 to 1 at September 30, 2011.

The following table is a summary of the Statements of Cash Flows in the Company’s Financial Statements:
 
   
Three Months ended September 30,
 
   
2012
   
2011
 
Net cash provided by(used in)
           
  Operating activities
  $ 442,583     $ (20,488 )
  Investing activities
    --       (72,059 )
  Financing activities
    (278,730 )     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 provided by operating activities in the three month period ended September 30, 2012 was comprised primarily of net income before depreciation and amortization and non-cash compensation expense, and decreases in accounts receivable, inventories, and prepaid expenses and an increase in accounts payable. These amounts were partly offset by decreases in contract costs and estimated related profits in excess of applicable billings, accrued costs, and accrued pension costs.
 
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. These amounts were 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.

 
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The Company expenses its research and development costs as incurred.  These costs consist primarily of salaries and material costs.  For the three month periods ended September 30, 2012 and September 30, 2011, the Company expensed $45,563 and $11,515, 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 year 2013, the Company used no net cash in 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.
 
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 finance the upgrade of the Company’s facility lighting. The loan is secured by the physical assets financed under this loan. As of September 30, 2012 the Company had an outstanding balance of $28,384 on this note.

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, removed the minimum interest rate of 4.25% on outstanding borrowings 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. In December 2011 the Company borrowed $275,000 against this line of credit which it repaid in August 2012. As of September 30, 2012 the Company had no outstanding borrowings against the line of credit. The Company does not regard this credit facility as vital to its continued operations.

The Company did not use any other cash in financing activities during the three-month periods ended September 30, 2012 and September 30, 2011, respectively.

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 has developed 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.

 
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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.

In November 2011 the Company and the buyer extended the sales contract described above until December 31, 2012 to allow the buyer additional time to gain the required approvals for development. In recognition of the additional expense on the part of the buyer to obtain the required development approvals the Company has agreed to lower the contract price of the parcel by $50,000 to $155,000. However, the Company can make no assurances that the required approvals will be granted, or if granted, 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 has been focused within the market for military compact diesel power generation and is expanding its capabilities to also include power management solutions aimed at delivering power systems with  high fuel efficiency that are engineered for operation in austere environments or for unattended operation over extended periods. Although no assurances can be made that this new initiative will be successful, management believes it is a strong addition to the Company’s long-term strategy for growth and targeted diversification. This strategy has three parts: 1) growing the Company’s profitability in areas where the Company already has a strong presence, 2) focused diversification into related markets with existing products and capabilities, and 3) further taking advantage of the Company’s strengths by additional expansion 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 expand and 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.

 
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The ordering provision under 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. The U.S. Army previously announced that it was not issuing a new multiple year fixed price contract and would transfer the 2kW Generator Program to a 'sustainment' command. However, management now believes that it is possible that the U.S. Army may put out for competitive bidding and award a new contract for 2kW generator sets within the next 12 to 24 months. No assurances can be given that the U.S. Army will take such action (or if taken, the timing thereof) or that the Company would be awarded any such new contract.

The Company anticipates that the Government will continue to require the Company’s 2kW generators, which can be ordered under individual “Purchase Orders”. The Company also continues to work toward having these generators available on the General Services Administration’s GSA.gov website as well as through other websites and sales channels.  Most importantly, with the expiration of the 2kW contract the Company is able to set new pricing on future orders which could be adjusted on an annual basis (although new pricing would be restricted by defense acquisition regulations and comprehensive government auditing). We are unable to predict whether, when or to what extent the Government will continue to place orders for these generators. However, we have made some progress toward achieving the first strategic objective during the last quarter of fiscal year 2012 and the first quarter of fiscal year 2013 with improved margin on the existing generator product line reversing a downward trend over the past several years.

In approaching the second and third strategic objectives of targeted diversification, 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.

The Company continues to act on the second strategic objective, working to expand into related power markets. Using our expertise in Direct Current power generation we have expanded our capabilities to include entire power systems integrating our traditional diesel power generation with renewable power sources, energy storage, power distribution and power management. The solutions remain man-portable or of similar scale and management believes that our best opportunities involve austere locations or unattended operation. For example we are providing power for another company’s trailer mounted military remote monitoring systems. This type of 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, while also working with a growing group of partner companies.   Management believes these activities can lead to expanded business with new types of military power requirements while also increasing our technical capabilities. 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 and power conversion devices for diesel fuel cell systems.

In the near term, continued profitability and broadening the line of product offerings are the Company’s primary objectives.  The customer sponsored development sub-contract 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 diesel generators, auxiliary power units and now power management.

 
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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, 2012, 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, 2012 that materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

 
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PART II - OTHER INFORMATION
 
ITEM 6.  EXHIBITS

See the accompanying Index to Exhibits to this Quarterly Report on Form 10-Q.

 
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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  
       
Date:  November 12, 2012
By:
/s/ John H.D. Dewey  
    John H.D. Dewey  
    President and Chief Executive Officer  
       
Date:  November 12, 2012 
By:
/s/ Stephen P. Krill  
    Stephen P. Krill  
    Treasurer  
 
 
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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
 
 
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