DEWEY ELECTRONICS CORP - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - DEWEY ELECTRONICS CORP	Financial_Report.xls
EX-32.2 - CERTIFICATION - DEWEY ELECTRONICS CORP	dewy_ex322.htm
EX-31.2 - CERTIFICATION - DEWEY ELECTRONICS CORP	dewy_ex312.htm
EX-31.1 - CERTIFICATION - DEWEY ELECTRONICS CORP	dewy_ex311.htm
EX-32.1 - CERTIFICATION - DEWEY ELECTRONICS CORP	dewy_ex321.htm
EX-10.2 - REVOLVING TERM NOTE - DEWEY ELECTRONICS CORP	dewy_ex102.htm
EX-10.1 - MODIFICATION AGREEMENT - DEWEY ELECTRONICS CORP	dewy_ex101.htm
EX-10.3 - COMMERCIAL MORTGAGE, SECURITY AGREEMENT - DEWEY ELECTRONICS CORP	dewy_ex103.htm

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, 2013

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, 2013.

THE DEWEY ELECTRONICS CORPORATION

INDEX

		Page No.
Part I	Financial Information

Item 1.	Condensed Financial Statements		3

	Condensed Balance Sheets - September 30, 2013(unaudited) and June 30, 2013		3

	Condensed Statements of Operations - Three-months Ended September 30, 2013 and 2012 (unaudited)		4

	Condensed Statement of Comprehensive Income/(Loss) - Three-months Ended September 30, 2013 and 2012 (unaudited)		4

	Condensed Statements of Cash Flows for the Three-months Ended September 30, 2013 and 2012 (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		21

Part II	Other Information

Item 6.	Exhibits		22

PART I: FINANCIAL INFORMATION

ITEM 1.CONDENSED FINANCIAL STATEMENTS

THE DEWEY ELECTRONICS CORPORATION

CONDENSED BALANCE SHEETS

	SEPTEMBER 30,			JUNE 30,
	2013			2013
ASSETS:	(unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	820,668		$	321,020
Accounts receivable		287,399			795,850
Inventories		1,811,386			1,221,944
Contract costs and related estimated profits in excess
of billings		63,800			699,343
Prepaid expenses and other current assets		73,069			86,664

TOTAL CURRENT ASSETS		3,056,322			3,124,821

PLANT, PROPERTY AND EQUIPMENT:
Land and improvements		651,015			651,015
Building and improvements		1,948,165			1,948,165
Machinery and equipment		3,300,850			3,272,541
Furniture and fixtures		263,030			263,030
		6,163,060			6,134,751
Less accumulated depreciation		5,268,684			5,255,646
		894,376			879,105

DEFERRED COSTS		65,095			65,095

TOTAL ASSETS	$	4,015,793		$	4,069,021

LIABILITIES AND STOCKHOLDERS’ EQUITY:
CURRENT LIABILITIES:
Note payable – current portion	$	514,822		$	14,822
Trade accounts payable		90,244			76,508
Accrued expenses and other liabilities		231,348			409,883
Accrued compensation and benefits payable		139,954			191,280
Accrued pension costs		153,457			154,960
TOTAL CURRENT LIABILITIES		1,129,825			847,453

LONG-TERM PORTION OF NOTE PAYABLE		--			2,470

LONG-TERM PENSION LIABILITY		694,129			714,986

TOTAL LIABILITIES		1,823,954			1,564,909

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, 2013 and June 30, 2013		16,934			16,934
Additional paid-in capital		2,882,842			2,882,842
Retained earnings		314,457			647,588
Accumulated other comprehensive loss		(535,366	)		(556,224	)
		2,678,867			2,991,140
Less: Treasury stock 331,366 shares at cost		(487,028	)		(487,028	)

TOTAL STOCKHOLDERS’ EQUITY		2,191,839			2,504,112
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	4,015,793		$	4,069,021

See accompanying notes to condensed financial statements

Table of Contents

THE DEWEY ELECTRONICS CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

	THREE-MONTHS ENDED SEPTEMBER 30,
	2013			2012

Revenues	$	484,716		$	2,958,191

Cost of revenues		397,313			2,159,241

Gross profit		87,403			798,950

Selling, general & administrative		414,967			420,080

Operating income/(loss)		(327,564	)		378,870

Interest expense		(1,830	)		(2,467	)

Other income/(expense) – net		(3,737	)		(610	)

Income/(loss) before income taxes		(333,131	)		375,793

Provision for income tax		--			--

NET INCOME/(LOSS)	$	(333,131	)	$	375,793

NET INCOME/(LOSS) PER COMMON SHARE-BASIC	$	(0.24	)	$	0.28
NET INCOME/(LOSS) PER COMMON SHARE-DILUTED	$	(0.24	)	$	0.28

Weighted average number of shares outstanding:
Basic		1,362,031			1,362,031
Diluted		1,362,031			1,362,031

CONDENSED STATEMENT OF COMPREHENSIVE INCOME/(LOSS)

	THREE MONTHS ENDED SEPTEMBER 30,
	2013			2012

Other comprehensive income/(loss)

Net income/(loss)	$	(333,131	)	$	375,793
Amortization of actuarial gains and losses		20,858			32,808

Comprehensive income/(loss)	$	(312,273	)	$	408,601

See accompanying notes to condensed financial statements

Table of Contents

THE DEWEY ELECTRONICS CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	THREE-MONTHS ENDED
	SEPTEMBER 30,
	2013			2012

CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss)	$	(333,131	)	$	375,793
Adjustments to reconcile net income/(loss) to
Net cash provided by operating activities:
Depreciation		13,038			15,444
Stock based compensation expense		--			2,271
Provision for inventory reserve		(2,366	)		11,180
Decrease in accounts receivable		508,451			249,036
(Increase)/decrease in inventories		(587,076	)		96,995
Decrease/(increase) in contract costs and related
estimated profits in excess of billings		635,543			(397,345	)
Decrease in prepaid expenses and
other current assets		13,595			13,633
Increase in trade accounts payable		13,736			95,717
Decrease in accrued expenses and other liabilities		(229,861	)		(12,943	)
Decrease in accrued pension costs		(1,502	)		(7,198	)
Total adjustments		363,558			66,790

NET CASH PROVIDED BY OPERATING ACTIVITIES		30,427			442,583

CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for plant, property and equipment		(28,309	)		--

NET CASH USED IN INVESTING ACTIVITIES		(28,309	)		--

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from/(repayment of) short term borrowings		500,000			(275,000	)
Repayment of long term debt		(2,470	)		(3,730	)

NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES		497,530			(278,730	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		499,648			163,853

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		321,020			328,313

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	820,668		$	492,166

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Interest paid	$	--		$	2,467

See accompanying notes to condensed financial statements

Table of Contents

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, 2013 (the “2013 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, 2013, 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, 2013 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, 2014.

As of September 30, 2013, there have been no material changes to any of the significant accounting policies described in our 2013 Form 10-K.

Liquidity

During the three months ended September 30, 2013, the Company had a net loss of approximately $333,000 and cash flows from operations were approximately $30,000. The Company 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.

The Company’s 10 year, sole source, indefinite delivery/indefinite quantity contract with the U.S. Army to produce 2kW generator sets expired on September 30, 2013. As of the date of this Quarterly Report the Company is negotiating a new 3 year, sole source, indefinite delivery/indefinite quantity contract with the U.S. Army to produce 2kW generator sets. No assurances can be given that the Company will be awarded such contract (or if awarded, the timing thereof) or that the Company would receive any delivery orders under the contract if awarded (or if delivery orders are received, the timing thereof).

The Company has a $500,000 line of credit (the “Line of Credit”) with TD Bank, NA (“the Bank”). On November 8, 2013 the Company and the Bank, entered into a modification to temporarily increase the maximum borrowing amount under the Line of Credit by an additional $500,000 for the 6 month period November 15, 2013 to May 15, 2014, effective November 15, 2013. At the same time the Company and the Bank entered into a further modification to extend the Line of Credit for one year until November 30, 2014.Reference is made to Note 7 “Notes Payable” under Notes to Condensed Financial Statements of this Quarterly Report for additional information regarding this line of credit.

Table of Contents

Revenue Recognition

Revenues and estimated earnings under long-term defense contracts (including research and development contracts) 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, 2013, 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.

Revenues and earnings for orders for replacement parts and other short-term business 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.

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.

Table of Contents

2. Accounting Standards Updates Not Yet Effective

In July 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update that provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carry-forward or a tax credit carry-forward exists. Under the new standard update, with certain exceptions, the Company’s unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry-forward or a tax credit carry-forward. This accounting standard update will be effective for the Company beginning in the first quarter fiscal 2015 and applied prospectively with early adoption permitted. The Company is currently evaluating the impact of this accounting standard update on its financial statements.

Other Accounting Standards Updates not effective until after September 30, 2013 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, 2013		June 30, 2013

Finished Goods	$	312,956	$	24,592
Work In Progress		510,210		310,836
Raw Materials		988,220		886,516
Total	$	1,811,386	$	1,221,944

The increase in Finished Goods inventory is the result of building finished 2kW generator sets to be able to respond more quickly to customer requirements. Work in Progress and Raw Material inventories increased as a result of production efforts for orders in house with deliveries scheduled beginning in December 2013.

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 $1,133,000 and $211,000 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, 2013 these federal and state net deferred tax assets increased by approximately $113,000 and $20,000, 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.

Table of Contents

The table below sets 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, 2013 and September 30, 2012, respectively, all outstanding stock options (46,500 shares on September 30, 2013 and 62,500 shares on September 30, 2012) were excluded from the computation of earnings per share due to their anti-dilutive effect.

	Three-months Ended September 30,
	2013								2012
	Net Loss			Shares		Per Share Amount			Net Income		Shares		Per Share Amount
Basic net income/(loss)
per common share	$	(333,131	)		1,362,031	$	(.24	)	$	375,793		1,362,031	$	.28

Effect of dilutive Securities		--			--		--			--		--		--

Diluted net income/(loss) per common share	$	(333,131	)		1,362,031	$	(.24	)	$	375,793		1,362,031	$	.28

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 4, 2013 to September 21, 2021. No additional options may be granted under this plan.

There were no stock options granted in the first quarter of fiscal 2014 (quarter ended September 30, 2013) or in the first quarter of fiscal 2013 (quarter ended September 30, 2012). For the three months ended September 30, 2013, the Company recorded no stock option compensation expense. For the three months ended September 30, 2012, the Company recorded stock option compensation expense of $2,271.

For the full fiscal year ending June 30, 2014, the Company does not expect any 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.

Table of Contents

Stock option transactions for the Company’s employee stock option plans for the quarter ended September 30, 2013 are as follows:

			Weighted
			Average
	Shares		Exercise Price
Beginning balance		46,500	$	2.00
Granted		--		--
Exercised		--		--
Cancelled or expired		--		--
Ending balance		46,500		2.00
Options exercisable at end of period		46,500		2.00

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, 2013 the Company had an outstanding balance of $14,822 on this note.

On April 27, 2009 the Company entered into a $500,000 line of credit ("the Line of Credit") with TD Bank, NA (the "Bank"). On November 2, 2011, the Company and the Bank entered into a modification of the Line of Credit, effective as of October 31, 2011, which reduced the maximum borrowing amount from $500,000 to $375,000, removed the minimum interest rate of 4.25% on outstanding borrowings and extended the Line of Credit to November 30, 2012. No other terms of the Company’s April 27, 2009 revolving term note to the Bank were changed. On November 16, 2012, the Company and the Bank entered into a further modification of the Line of Credit, effective as of November 30, 2012, which returned the maximum borrowing amount to $500,000 and extended the Line of Credit to November 30, 2013. No other terms of the Company’s revolving term note to the Bank (previously amended and restated as of October 31, 2011) were changed.

During the first three months of fiscal 2014 the Company borrowed $500,000 under the Line of Credit. As of September 30, 2013 the Company had $500,000 of outstanding debt against the Line of Credit. The rate applicable to the Line of Credit at September 30, 2013 was approximately 4.25%. The Company has previously utilized the Line of Credit during periods of increased production requirements and anticipates that it will continue to utilize this credit facility during future periods of peak production activity.

On November 8, 2013, the Company and the Bank entered into a modification of the Line of Credit, effective November 15, 2013, to temporarily increase the maximum borrowing amount under the Line of Credit $1,000,000 for the 6 month period November 15, 2013 to May 15, 2014, (after which it will return to $500,000). At the same time the Company and the Bank entered into a further modification of the Line of Credit, effective as of November 30, 2013 to extend the Line of Credit to November 30, 2014. In each case, no other terms of the Company’s revolving term note to the Bank (previously amended and restated as of November 30, 2012) were changed. As of the date of this Quarterly Report the Company has $500,000 of outstanding debt against the Line of Credit.

Table of Contents

The Line of Credit provides among other things for an annual interest rate on borrowings equal to the Bank’s prime rate plus one (1.00) percent and is subject to customary representations, covenants, and default provisions in favor of the 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 Commercial Mortgages on the Company’s real property.

8. Pension Plan

The Company has a non-contributory defined benefit retirement plan covering substantially all its employees. The impact of the plan on operations are as follows:

	THREE-MONTHS ENDED
	SEPTEMBER 30,
	2013			2012
Service cost-benefits earned during the period	$	15,115		$	16,861
Interest cost on projected benefit obligation		28,201			24,128
Expected return on plan assets		(22,600	)		(20,514	)
Amortization of actuarial loss		20,858			32,808
Net periodic pension cost	$	41,574		$	53,283

9. Subsequent Events

Renewal and Temporary Increase of Line of Credit

On November 8, 2013, the Company and the Bank entered into a modification of the Company’s Line of Credit to temporarily increase the maximum borrowing amount available under the Line of Credit and to extend the Line of Credit one year to November 30, 2014.

See Footnote 7 “Notes Payable” above for further information on the Line of Credit.

Table of Contents

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 2013 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 – General” and “Long-Term Strategy”, and in Item 1 (Description of Business) of the Company’s 2013 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 2013 Form 10-K.

Table of Contents

Business Environment

A significant reduction in Department of Defense spending at the federal level known as “sequestration” went into effect in March of 2013. Sequestration has resulted in a contraction of spending across the Department of Defense and has also created uncertainty in our customers about the continuation of funding and about initiating new programs. This uncertainty has led to a far larger reduction in actual spending than the legislated reduction, primarily due to delays in contract awards and the reduction or elimination of some programs. Since the Company derives virtually all its revenues from Government defense business, any delays in contract awards would significantly and adversely affect our future revenues and liquidity. These factors are contributing to a more difficult and more challenging business environment, and have already adversely affected revenues in the quarter reported in this Quarterly Report. This uncertainty as well as the reduction in overall government spending may continue through this Government fiscal year, ending October 2014, and we can give no assurances that this uncertainty or reduction in spending would end after such fiscal year.

Results of Operations – Revenues

Revenues and estimated earnings under long-term defense contracts (including research and development contracts 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, 2013, 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.

Revenues and earnings for orders for replacement parts and other short term business are recorded when deliveries of product are made and title and risk of loss have been transferred to the customer and collection is probable.

Revenues for the first quarter of fiscal year 2014 (the three month period ended September 30, 2013) were $2,473,475 lower when compared to the first quarter of fiscal year 2013 (the three month period ended September 30, 2012). The decrease in revenues was due to decreased 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 recorded decreased revenues from the sales of replacement parts and other short-term business and a reduction in revenues from customer funded research and development in the first quarter of fiscal year 2014 when compared to the same period in fiscal year 2013.

For further discussion of management initiatives regarding revenues see “Company Strategy” below.

Table of Contents

For the three months ended September 30, 2013 production efforts to provide the Armed Forces with diesel operated generator sets provided approximately 23% of revenues compared to approximately 83% for the first quarter of fiscal year 2013. Replacement parts and other short-term business provided approximately 77% of revenues for the first quarter of fiscal year 2014 and approximately 16% of revenues for the same period in fiscal year 2013. The Company had no revenues from customer sponsored research and development contracts for the first quarter of fiscal year 2014 while customer sponsored research and development contracts provided approximately 1% of revenues for the same period in fiscal year 2013.

The aggregate value of the Company’s backlog of sales orders was $4.8 million on September 30, 2013. The Company’s backlog of sales orders was $4.2 million on September 30, 2012. It is estimated that a significant portion of the present backlog will be billed during the next 9 months and be recognized as fiscal year 2014 revenues with the balance being recognized in fiscal years 2015 through 2019.

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 $87,403 or 18% of revenues for the three months ended September 30, 2013 compared to a gross profit of $798,950 or 27% of revenues for the same period in 2012. The lower gross profit for the first quarter of fiscal year 2014 was the result of a decrease in production volume across all of the Company’s lines of business as noted above under “Revenues”.

Selling, General and Administrative Expenses

Selling, General and Administrative Expenses for the first three months of fiscal year 2014 were $414,967 or 86% of revenues compared to $420,080 or 14% of revenues in the first three months of fiscal year 2013. The most significant changes in expense and the approximate amounts of the changes were decreases in Company sponsored research and development ($42,000) and compensation ($33,000), and increases in consulting fees of ($47,000) general corporate expense ($14,000) and outside services ($11,000).

Interest Expense

The Company had interest expense of $1,830 in the three month period ended September 30, 2013 compared with $2,467 in the three month period ended September 30, 2012.

Other Expense/Income – Net

Amounts reported as other income or expense, represent the net effect of interest income and miscellaneous items such as the sale of scrap, bank transaction fees and other like items.

Other expense of $3,737 for the three months ended September 30, 2013 was comprised primarily of franchise taxes and miscellaneous bank fees, partly offset by interest income.

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.

Table of Contents

Income/(Loss) Before Income Taxes

Loss before income taxes for the three months ended September 30, 2013 was $333,131. Income before income taxes was $375,793 for the three months ended September 30, 2012.

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.

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, 2013, 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, 2013, the Company’s working capital was $1,926,497 compared to $2,539,496 at September 30, 2012.

The ratio of current assets to current liabilities was 2.71 to 1 at September 30, 2013 and 3.54 to 1 at September 30, 2012.

The following table is a summary of the Statements of Cash Flows in the Company’s Financial Statements:

	Three Months ended September 30,
	2013			2012
Net cash provided by(used in)
Operating activities	$	30,427		$	442,583
Investing activities		(28,309	)		--
Financing activities		497,530			(278,730	)

Table of Contents

Operating Activities:

Adjustments to reconcile net income to net cash provided by 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, 2013 was comprised primarily of net loss before depreciation and amortization; decreases in accounts receivable, contract costs and estimated related profits in excess of applicable billings, and prepaid expenses; and an increase in accounts payable. These amounts were partly offset by an increase in inventories and a decrease in accrued costs and accrued pension costs.

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; 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.

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, 2013 and September 30, 2012, the Company expensed $3,798 and $45,563, 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 2014, net cash of $28,309 was used in investing activities. The entire amount was used for capital expenditures, principally for the acquisition of additional production and test equipment.

During the first three months of fiscal year 2013, the Company used no net cash in investing activities.

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, 2013 the Company had an outstanding balance of $14,822 on this note.

On April 27, 2009 the Company entered into a $500,000 line of credit (the “Line of Credit”) with TD Bank, NA (the “Bank”). On November 2, 2011, the Company and the Bank entered into a modification of the 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 the Line of Credit to November 30, 2012. No other terms of the Company’s April 27, 2009 revolving term note to the Bank were changed. On November 16, 2012, the Company and the Bank entered into a further modification of the Line of Credit, effective as of November 30, 2012, which returned the maximum borrowing amount to $500,000 and extended the Line of Credit to November 30, 2013. No other terms of the Company’s revolving term note to the Bank (previously amended and restated as of October 31, 2011) were changed. The Line of Credit provides among other things for an annual interest rate on borrowings equal to the Bank’s prime rate plus one (1.00) percent and is subject to customary representations, covenants, and default provisions in favor of the 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 Mortgages on the Company’s real property.

Table of Contents

During the three-month period ended September 30, 2013 the Company borrowed $500,000 under the Line of Credit and the Company had outstanding debt of $500,000 against the Line of Credit as of September 30, 2013. The rate applicable to the Line of Credit at September 30, 2013 was approximately 4.25 %. The Company has previously utilized this line of credit during periods of increased production requirements and anticipates that it will continue to utilize this credit facility during future periods of peak production activity.

The Company did not use any other cash in financing activities during the three-month periods ended September 30, 2013 and September 30, 2012, 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.

Table of Contents

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 agreed to lower the contract price of the parcel by $50,000 to $155,000. In January 2013, the Company and the buyer further extended the sales contract until December 31, 2013 to allow the buyer additional time as described above. However, the Company can make no assurances that the required approvals will be granted, or if granted, the timing thereof.

Accounting Standards Updates Not Yet Effective

Refer to Note 2. Accounting Standards Updates Not Yet Effective in the Notes to the Condensed Financial Statements section of this Quarterly Report.

Company Strategy - General

Beginning in March of 2013 the environment for Department of Defense contracting business has changed significantly with greatly reduced spending and delays in awarding contracts. Management believes that the reduced level of business opportunities directly with the U.S. government, as well as with other Department of Defense contractors, could continue through the government’s fiscal year ending September 30, 2014. Effects of this changed environment are reflected in the Company’s 83% drop in quarterly revenues for the three months ended September 30, 2013 when compared to the same quarter last year. In this changing business environment the Company has been pursuing new opportunities through foreign military sales and an expansion of its product offerings, most notably with the acquisition of certain product lines from Goodman Ball Incorporated as discussed below under “Long-Term Strategy”. The results of these efforts are reflected in the composition of the Company’s backlog at September 30, 2013.

The Company’s backlog of $4.8 million at September 30, 2013 includes approximately $3.1 million of orders for 2kW generators as part of a project by a U.S. customer for foreign military sales with deliveries scheduled between December 2013 and April 2014. The Company’s September 30, 2013 backlog also includes an additional $1.1 million of orders for former Goodman Ball products, also with U.S. customers, with deliveries scheduled between October 2013 and July 2018, most of which is also foreign military sales.

The Company also continues to work toward having its 2kW generators available on the General Services Administration’s GSA.gov website as well as through other websites and sales channels. In order to support these efforts the Company has begun to build generators for inventory in order to have them available for immediate delivery.

Long-Term 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.

Table of Contents

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.

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 2013. Deliveries of orders received prior to the expiration of the contract were scheduled to continue through September 30, 2013; however, shipment of a small number of generators, for which revenue was recognized during the quarter ended September 30, 2013, has been delayed until November 2013. The Company anticipates that the Government will continue to require the Company’s 2kW generators, which can be ordered under individual “Purchase Orders”.

As of the date of this Quarterly Report the Company has entered into negotiations with the U.S. Army for a new three year, sole source, indefinite delivery, indefinite quantity contract to produce 2kW generator sets. No assurances can be given that the Company will be awarded such contract (or if awarded, the timing thereof) or that the Company would receive any delivery orders under the contract if awarded (or if delivery orders are received, the timing thereof). Production traditionally begins six to twelve months after the receipt of an order.

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.

On February 20, 2013 the Company announced the purchase of certain assets, rights of manufacture and intellectual property from Goodman Ball Incorporated, a maker of military equipment based in Menlo Park, California. As part of this transaction, among other things, the Company agreed to assume responsibility to maintain certain Goodman Ball contracts with the U.S. Department of Defense that pertain to the acquired product lines, and it took possession of some of Goodman Ball’s existing inventory for these product lines on a consignment basis and agreed to pay Goodman Ball as the inventory is sold to customers. The product lines acquired do not compete with existing product lines of the Company.

Table of Contents

The Company believes that, by adding two generators to the Company’s list of offerings, this transaction provides a number of opportunities relating to the first and second strategic objectives described above (growing profitability in areas where the Company already has a strong presence and expanding into related markets). At the time of the acquisition, Goodman Ball had no backlog of production orders for these generators. Management believes that any material impact on the Company’s operating results or balance sheet, if it were to occur, would be after the second quarter of fiscal year 2014 (quarter ending December 31, 2013). If the Company is able to capitalize on these opportunities, there could be an accretive impact in subsequent period results, however we are unable to predict whether, when or to what extent these results will be achieved.

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, during the fiscal year ended June 30, 2013, the Company utilized its experience in military-grade portable power systems under a customer funded research and development sub-contract to design and prototype electronic controls and power conversion devices for diesel fuel cell systems.

Table of Contents

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, 2013, 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, 2013 that materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

Table of Contents

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS

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

Table of Contents

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, 2013	By:	/s/ John H.D. Dewey
		John H.D. Dewey
		President and Chief Executive Officer

Date: November 12, 2013	By:	/s/ Stephen P. Krill
		Stephen P. Krill
		Treasurer

Table of Contents

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 November 08, 2013 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, N.A. dated November 08, 2013.

10.3		Commercial Mortgage and Security Agreement and Assignment of Leases and Rents between The Dewey Electronics Corporation and TD Bank, NA dated November 08, 2013.

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

Attached files

Stock widget

Investing forum

DEWEY ELECTRONICS CORP Reports

Also read