SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998 Commission File Number I-4383
ESPEY MFG. & ELECTRONICS CORP.
(Exact name of registrant as specified in charter)
NEW YORK 14-1387171
(State of Incorporation) (I.R.S. Employer's Ident No.)
233 Ballston Avenue, Saratoga Springs, New York 12866
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, include area code 518-584-4100
Number of shares outstanding of issuer's class of common stock $.33-1/3 par
value as at the end of the period covered by this report 1,104,977
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
<PAGE>
ESPEY MFG. & ELECTRONICS CORP.
I N D E X
PART I FINANCIAL INFORMATION PAGE
----
Item 1 Financial Statements:
Balance Sheets - September 30, 1998 1
and June 30, 1998
Statements of Income - Three Months 3
Ended September 30, 1998 and 1997
Statements of Cash Flows - Three Months 4
Ended September 30, 1998 and 1997
Notes to Financial Statements 5
Item 2 Management's Discussion and Analysis of 7
Financial Condition and Results of
Operations.
PART II OTHER INFORMATION 10
SIGNATURES 11
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<TABLE>
<CAPTION>
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets
September 30, 1998 and June 30, 1998
A S S E T S
Unaudited
1998 1998
September 30 June 30
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................. $ 225,829 $ 191,739
Short-term investments at cost
(market value September 30, 1998,
$2,300,000 and June 30, 1998,
$2,400,000) .......................... 2,300,000 2,400,000
------------ ------------
Total Cash and Short-term
Investments .... 2,525,829 2,591,739
------------ ------------
Investments securities .................... 7,235,749 7,235,749
Trade accounts receivable net of
$3,000 allowance at September 30, 1998
and June 30, 1998 ...................... 2,017,704 1,866,336
Other receivables ......................... 245,271 289,050
------------ ------------
Net Receivables ......... 2,262,975 2,155,386
------------ ------------
Inventories:
Raw materials and supplies ............. 399,137 558,951
Work-in-process ........................ 2,389,020 2,905,269
Costs relating to contracts in
process ................................ 6,376,628 5,324,491
------------ ------------
Net Inventories ......... 9,164,785 8,788,711
------------ ------------
Deferred income taxes ..................... 418,507 348,514
Prepaid expenses and other current assets . 79,996 189,559
------------ ------------
Total Current Assets .... 21,687,841 21,309,658
------------ ------------
DEFERRED INCOME TAXES .............................. -- 80,793
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT AT COST .............. 12,390,370 12,344,139
Less: Accumulated depreciation and
amortization ........................ (9,266,777) (9,160,482)
------------ ------------
Net Property, Plant and Equipment 3,123,593 3,183,657
------------ ------------
Total Assets ............ $ 24,811,434 $ 24,574,108
============ ============
</TABLE>
See accompanying notes to financial statements
- 1 -
<PAGE>
<TABLE>
<CAPTION>
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets, Continued
September 30, 1998 and June 30, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
Unaudited
1998 1998
September 30 June 30
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable ............................ $ 246,170 $ 207,886
Accrued expenses:
Salaries, wages and commissions .......... 591,943 583,058
Employees' insurance costs ............... 46,677 37,472
ESOP payable ............................. 139,666 --
Other .................................... 17,619 12,204
Payroll and other taxes withheld
and accrued ........................ 82,591 43,360
------------ ------------
TOTAL CURRENT LIABILITIES . 1,124,666 883,980
STOCKHOLDERS' EQUITY:
Common stock, par value .33-1/3 per
share. Authorized 2,250,000 shares;
issued 1,514,937 shares September 30, 1998
and June 30, 1998 .......................... 504,979 504,979
Unrealized gain on available-for-sale
securities, net $3,740 of income tax ........ 7,260 7,260
Capital in excess of par value .............. 10,496,287 10,496,287
Retained earnings ........................... 22,755,882 22,671,840
------------ ------------
33,764,408 33,680,366
Less: Common stock subscribed .............. (3,351,974) (3,351,974)
Cost of 409,960 shares on September
30, 1998 and 403,717 on June 30,
1998 of common stock in treasury ..... (6,725,666) (6,638,264)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ......... 23,686,768 23,690,128
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ............... $ 24,811,434 $ 24,574,108
============ ============
</TABLE>
See accompanying notes to financial statements
- 2 -
<PAGE>
<TABLE>
<CAPTION>
ESPEY MFG. & ELECTRONICS CORP.
Statements of Income
Three Months Ended September 30, 1998 and 1997
Unaudited
Three Months
September 1998 September 1997
-------------- --------------
<S> <C> <C>
Net Sales ................................................. $2,523,984 $2,503,584
Cost of sales ............................................. 2,125,279 2,074,981
---------- ----------
GROSS PROFIT ............................ 398,705 428,603
Selling, general and administrative
expenses ......................................... 416,781 507,165
---------- ----------
OPERATING LOSS .......................... (18,076) (78,562)
---------- ----------
Other Income:
Interest income .................................. 149,103 149,364
Sundry income .................................... 15 1,207
---------- ----------
149,118 150,571
Income before income taxes ................................ 131,042 72,009
Provision for income taxes ................................ 47,000 27,000
---------- ----------
NET INCOME .............................. $ 84,042 $ 45,009
========== ==========
Income per Share:
Basic and dilutive income per share ....................... $ .08 $ .04
========== ==========
Weighted average number of
shares outstanding ........................................ 1,110,474 1,111,220
========== ==========
</TABLE>
See accompanying notes to financial statements
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<TABLE>
<CAPTION>
ESPEY MFG. & ELECTRONICS CORP.
Statements of Cash Flows
Three Months Ended September 30, 1998 and 1997
Unaudited
September 30
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ............................................................ $ 84,042 $ 45,009
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Tax effect of dividends on unallocated ESOP shares .................... -- 39,084
Depreciation .......................................................... 106,295 105,434
Changes in assets and liabilities:
Increase in receivables ...................................... (107,589) (512,475)
Increase in inventories ...................................... (376,074) (562,634)
Decrease in other current assets ............................. 109,563 61,915
Increase in accounts payable ................................. 38,284 59,692
Increase in accrued salaries, wages and commissions .......... 8,885 47,670
Increase (decrease) in accrued employee insurance costs ...... 9,205 (7,375)
Increase in other accrued expenses ........................... 5,415 893
Increase in payroll & other taxes withheld
and accrued ................................................. 39,231 15,915
Decrease (increase) in deferred income taxes ................. 10,800 (1,223)
Increase (decrease) in income taxes payable .................. -- (80,861)
Increase in ESOP contributions payable ....................... 139,666 113,926
------------ ------------
Net cash provided by (used in)
operating activities ......................... 67,723 (675,030)
------------ ------------
Cash Flows From Investing Activities:
Additions to property, plant & equipment .............................. (46,231) (27,366)
------------ ------------
Net cash used in
investing activities ......................... (46,231) (27,366)
</TABLE>
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<TABLE>
<CAPTION>
ESPEY MFG. & ELECTRONICS CORP.
Statements of Cash Flows
Three Months Ended September 30, 1998 and 1997
(continued)
Unaudited
September 30
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows From Financing Activities:
Purchase of treasury stock ............................................ (87,402) --
------------ ------------
Net cash used in
financing activities ......................... (87,402) --
------------ ------------
Decrease in cash and short-term investments .................................... (65,910) (702,396)
Cash and short-term investments, beginning of period ........................... 2,591,739 12,123,583
------------ ------------
Cash and short-term investments, end of period ................................. $ 2,525,829 $ 11,421,187
------------ ------------
Income Taxes Paid .............................................................. $ -- $ 70,000
------------ ------------
</TABLE>
See accompanying notes to financial statements
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<PAGE>
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements
-----------------------------
1. In the opinion of management the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation for results for such periods. The
results for any interim period are not necessarily indicative of the results to
be expected for the full fiscal year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These financial statements should be read in conjunction with the Company's most
recent audited financial statements included in its 1998 Annual Report to
Stockholders and its 1998 Form 10-K.
2. The earnings per share computations for September 30, 1998 were based on
1,110,474 shares and on 1,111,220 shares for September 30, 1997. These represent
the average number of shares outstanding for each respective period.
3. Other income consists principally of interest on Certificates of
Deposit, Treasury Bills, money market accounts and dividend on equity
securities.
4. For purposes of the statements of cash flows, the Company considers all
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
5. In fiscal 1989 the Company established an Employee Stock Ownership Plan
(ESOP) for eligible non-union employees. The ESOP used the proceeds of a loan
from the Company to purchase 316,224 shares of the Company's common stock for
approximately $8.4 million and the Company contributed approximately $400,000 to
the ESOP which was used by the ESOP to purchase an additional 15,000 shares of
the Company's common stock.
The loan from the Company to the ESOP is repayable in annual
- 5 -
<PAGE>
installments of $1,039,605, including interest, through June 30,2004.
Interest is payable at a rate of 9% per annum. The Company's receivable
from the ESOP is recorded as common stock subscribed in the accompanying
balance sheets.
Each year, the Company will make contributions to the ESOP which will be
used to make loan interest and principal payments. With each loan and
interest payment, a portion of the common stock will be allocated to
participating employees. As of September 30, 1998 there were 165,139 shares
allocated to participants.
6. The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income", and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", as of July 1, 1998. The adoptions of these
accounting stands had no material effect on the financial position or results of
operations of the Company.
-6-
<PAGE>
ESPEY MFG. & ELECTRONICS CORP.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Results of Operations
Net sales for the three months ended September 30, 1998 were $2,523,984 as
compared to $2,503,584 for the same period in 1997. The lack of growth in sales
between the comparative quarters was due principally to the low backlog which
the Company experienced for most of fiscal 1998. The "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for fiscal 1998 ("1998 Form 10-K") reports the
reversal of this trend starting in the latter part of fiscal 1998, and
specifically reporting that approximately $5,000,000 in new orders was received
during the first two months of fiscal 1999. The timing of this reversal, and the
lead time required for manufacture and shipment of new orders would dictate that
the effect of this reversal would not become evident until the second quarter of
fiscal 1999.
The cost of sales, as a percentage of sales, rose slightly to 84% for the first
quarter of fiscal 1999 as compared to the 83% reflected for the same period last
year. This, however, is a decrease from the 87% which was reflected for the last
quarter of fiscal 1998. Although gross profit for the current period decreased
as compared to the corresponding period last year, net income increased due to a
substantial reduction in selling and general and administrative expenses. This
reduction in the current period was principally due to a reduction in both
professional fees and employment related expenses.
Other Income remained relatively the same for the comparative three month
periods, however the current period reflects the addition of dividend income,
arising from the purchase for investment of preferred equity securities during
the latter part of fiscal 1998. These dividends are non-taxable for Federal
Income Tax purposes to the extent of 80%. Cash and short-term investments
likewise reflected very little change between the comparative three month
periods. The Company does not feel that there is any significant risk associated
with its investment policy, since its investments are represented by
Certificates of Deposit, United States Government Treasury Securities, a Money
Market account, and more recently, preferred equity securities.
Net income for the three months ended September 30, 1998 were $84,042 or $.08
per share compared to $45,009, or $.04 per share for the corresponding period
last year. The net earnings increase was due to both reduced overall expenses
and the shipment of contracts with higher gross profit margins.
Liquidity and Capital Expenditures
There were no differences in the three month comparative periods of the
Statements of Cash Flows which were either material in nature or not self
explanatory.
The Company, in the first quarter, funded its operations with cash flows from
operating activities and investing activities. Management currently feels that
during the balance of the fiscal year, funds from operating activities will be
adequate to meet funding requirements. For the first quarter capital
expenditures were approximately $46,230.
<PAGE>
Since the debt of the Company's ESOP is not to an outside party, the Company has
eliminated from the Statements of Earnings the offsetting items of interest
income and interest expense relating to the ESOP. The Company has eliminated the
offsetting accruals from the Balance Sheets.
As previously announced in the 1998 Form 10-K the Board of Directors has decided
to forgo the annual dividend in 1998. The Board is hopeful of reinstituting the
payment of dividends when the Company returns to profitability on a consistent
basis.
-7-
<PAGE>
Under existing authorizations, as of September 30, 1998, funds in the amount of
$1,796,589 were available for the continuing repurchase of the Company's shares.
Business Outlook
Customer order patterns are inherently difficult to predict. As previously
disclosed in the 1998 Form 10-K one of the Company's major customers
consolidated and relocated several of its facilities and various personnel. The
ongoing transition stage of this consolidation which caused delays in both
ongoing and newly proposed programs is now complete and is reflected in our
increasing backlog. The backlog as of September 30, 1997 was $7,661,378. The
backlog as of September 30, 1998 was $14,632,470.
The Company presently believes that it will continue to obtain contracts more
consistent with its past experience. Both Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Business Outlook" of
our 1998 Form 10K and the President's message in the Annual Report to
Shareholders for 1998 describe in detail the products the Company is
concentrating on and the types of contracts the Company expects to receive.
Management presently anticipates that sales for the second half of fiscal 1999
will exceed those of the first half.
The Company is continuing to expand its Sales and Marketing departments and
restructuring its management team. Management currently anticipates that the
course of action the Company is taking will enhance the Company's revenues and
profitability in future periods.
Accounting Pronouncements
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" was issued. Statement No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Statement No. 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income are to be reported in a financial statement
that is displayed in equal prominence with other financial statements. The
Company adopted Statement No. 130 as of July 1, 1998, and the adoption had no
significant impact on the Company's financial statements.
In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," was issued. Statement
No. 131 establishes standards for the way that a public enterprise reports
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders, but not for interim periods in
the initial year of adoption. Statement No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company believes that it operates as one
segment, which includes three product lines (Electronic Power Supplies, Iron
Core Components and Electronic Systems and Assemblies) and that adoption of
Statement No. 131 will not have a significant impact on its financial
statements.
<PAGE>
Year 2000 Issues
The Year 2000 issue is the result of computer programs having been written using
two digits, rather than four, to define the applicable year. Any of the
Company's computers, computer programs, manufacturing and administration
equipment or products that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the Year 2000. If any of the Company's
systems or equipment that have date-sensitive software use only two digits,
system failures or miscalculations may result causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
send and receive electronic data with third parties or engage in similar normal
business activities.
- 8 -
<PAGE>
The Company has formed a team to address the Year 2000 issue that encompasses
operating and administrative areas of the Company. The team has begun to
identify and resolve significant Year 2000 issues in a timely manner. In
addition, executive management monitors the status of the Company's Year 2000
remediation plans. The process includes an assessment of issues and development
of remediation plans, where necessary, as they relate to internally used
software, computer hardware and use of computer applications in the Company's
manufacturing processes and products. In addition, the Company is engaged in
assessing the Year 2000 issue with significant suppliers. The Company has
initiated communications with its significant suppliers and large customers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issues. Finally, with regard to
products sold by the Company, the Company has determined that contingencies
related to the Year 2000 Issue will not have a material adverse effect on the
Company. Accordingly, the Company has not established a contingency plan and
does not anticipate creating such a plan.
The Company intends to use both internal and external resources to reprogram, or
replace and test, the software it currently uses for Year 2000 modifications.
The Company plans to substantially complete its Year 2000 assessment and
remediation by January 31, 1999. The total project cost has not yet been
determined. To date, the Company has not incurred any material costs related to
the assessment of, and preliminary efforts in connection with, its Year 2000
issues.
The costs of the project and the date on which the Company plans to complete its
Year 2000 assessment and remediation are based on management's estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ significantly from those plans.
Specific factors that might cause differences from management's estimates
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct relevant computer codes, and
similar uncertainties. Management believes that the Company is devoting the
necessary resources to identify and resolve significant Year 2000 issues in a
timely manner.
With regard to its internal Year 2000 compliance program, the Company has
completed approximately 75% of its review and, when necessary, remediation. With
regard to its Year 2000 compliance program addressing the status of the
Company's suppliers and customers, the Company has completed approximately 50%
of its review.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
It should be noted that certain statements in this Management's Discussion and
Analysis of Financial Condition and Results of Operations are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The terms "believe," "anticipate," "intend,"
"goal," "expect," and similar expressions may identify forward-looking
statements. These forward-looking statements represent the Company's current
expectations or beliefs concerning future events. The matters covered by these
statements are subject to certain risks and uncertainties that could cause
<PAGE>
actual results to differ materially from those set forth in the forward-looking
statements, including the Company's dependence on timely development,
introduction and customer acceptance of new products, the impact of competition
and price erosion, as well as supply and manufacturing constraints and other
risks and uncertainties. The forgoing list should not be construed as
exhaustive, and the Company disclaims any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events. The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made.
- 9 -
<PAGE>
ESPEY MFG. & ELECTRONICS CORP.
PART II: Other Information and Signatures
Item 4. Submission of Matters to a Vote of Security Holders
None during the quarter.
Item 5. Other Information
Effective October 30, 1998 Mr. Sol Pinsley resigned as both the
Chairman and a member of the Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
None during the quarter.
-10-
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESPEY MFG. & ELECTRONICS CORP.
/s/Howard Pinsley
---------------------------
Howard Pinsley, President
/s/Herbert Potoker
---------------------------------
Herbert Potoker, Treasurer and
Chief Financial Officer
11 November 1998
- ----------------
Date
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 225,829
<SECURITIES> 2,300,000
<RECEIVABLES> 2,262,975
<ALLOWANCES> 0
<INVENTORY> 9,164,785
<CURRENT-ASSETS> 21,687,841
<PP&E> 12,390,370
<DEPRECIATION> (9,266,777)
<TOTAL-ASSETS> 24,811,434
<CURRENT-LIABILITIES> 1,124,666
<BONDS> 0
0
0
<COMMON> 504,979
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 23,686,768
<SALES> 2,523,984
<TOTAL-REVENUES> 2,523,984
<CGS> 2,125,279
<TOTAL-COSTS> 2,125,279
<OTHER-EXPENSES> 416,781
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 131,042
<INCOME-TAX> 47,000
<INCOME-CONTINUING> 84,042
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,042
<EPS-PRIMARY> 84,042
<EPS-DILUTED> .08
</TABLE>
