UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
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Commission File Number I-4383
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ESPEY MFG. & ELECTRONICS CORP.
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(Exact name of registrant as specified in charter)
NEW YORK 14-1387171
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(State of Incorporation) (I.R.S. Employer's Identification No.)
233 Ballston Avenue, Saratoga Springs, New York 12866
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, include area code 518-584-4100
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Number of shares outstanding of issuer's class of common stock $.33-1/3
par value as of February 2, 1999: 1,102,458.
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 [ ]
ESPEY MFG. & ELECTRONICS CORP.
I N D E X
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements:
Balance Sheets - December 31, 1998 1
and June 30, 1998
Statements of Income - Three and 3
Six Months ended December 31, 1998
and 1997
Statements of Cash Flows - Six Months 4
Ended December 31, 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 12
Item 4 Submission of Matters to a Vote
of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES 13
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets
December 31, 1998 and June 30, 1998
A S S E T S
Unaudited
1998 1998
December 31 June 30
------------------------------
CURRENT ASSETS:
Cash and cash equivalents ................. $ 92,783 $ 191,739
Short-term investments .................... 1,900,000 2,400,000
------------ ------------
Total Cash and Short-term
Investments .... 1,992,783 2,591,739
------------ ------------
Investments securities .................... 7,246,781 7,235,749
Trade accounts receivable net of
$3,000 allowance at December 31, 1998
and June 30, 1998 ...................... 2,333,791 1,866,336
Other receivables ......................... 57,808 289,050
------------ ------------
Net Receivables ......... 2,391,599 2,155,386
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Inventories:
Raw materials and supplies ............. 400,227 558,951
Work-in-process ........................ 2,091,255 2,905,269
Costs relating to contracts in
process ................................ 7,536,589 5,324,491
Total Inventories ....... 10,028,071 8,788,711
------------ ------------
Deferred income taxes ..................... 337,714 348,514
Prepaid expenses and other current assets . 350,161 189,559
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Total Current Assets .... 22,347,109 21,309,658
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ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets
December 31, 1998 and June 30, 1998
A S S E T S
(continued)
Unaudited
1998 1998
December 31 June 30
------------------------------
Deferred Income Taxes .............................. 80,793 80,793
Property, Plant and Equipment at cost............... 12,536,655 12,344,139
Less: Accumulated depreciation and
amortization ........................ (9,377,293) (9,160,482)
------------ ------------
Net Property, Plant and Equipment 3,159,362 3,183,657
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Total Assets ........... $ 25,587,264 $ 24,574,108
============ ============
- 1 - (Continued)
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets, Continued
December 31, 1998 and June 30, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
Unaudited
1998 1998
December 31 June 30
------------------------------
CURRENT LIABILITIES:
Accounts Payable .......................... $ 717,807 $ 207,886
Accrued expenses:
Salaries, wages and commissions ........ 610,156 583,058
Employees' insurance costs ............. 44,388 37,472
ESOP payable ........................... 279,331 --
Other .................................. 13,905 12,204
Payroll and other taxes withheld
and accrued ...................... 101,861 43,360
------------ ------------
Total Current Liabilities 1,767,448 883,980
STOCKHOLDERS' EQUITY:
Common stock, par value .33-1/3 per
share. Authorized 2,250,000 shares;
issued 1,514,937 shares at December
31, 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 ......................... 22,921,992 22,671,840
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33,930,518 33,680,366
Less: Common stock subscribed ............ (3,351,974) (3,351,974)
Cost of 412,479 shares on
December 31, 1998 and 403,717
on June 30, 1998 of common
stock in treasury .............. (6,758,728) (6,638,264)
------------ ------------
Total Stockholders' Equity........ 23,819,816 23,690,128
------------ ------------
Total Liabilities and
Stockholders' Equity ........ $ 25,587,264 $ 24,574,108
============ ============
See accompanying notes to financial statements
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ESPEY MFG. & ELECTRONICS CORP.
STATEMENTS OF INCOME
Three and Six Months Ended December 31, 1998 and 1997
Unaudited Unaudited
Three Months Six Months
1998 1997 1998 1997
------------------------------------------------------------
Net Sales ........................... $ 3,134,377 $ 3,549,697 $ 5,658,362 $ 6,053,281
Cost of sales ....................... 2,508,924 3,148,397 4,634,203 5,223,379
----------- ----------- ----------- -----------
Gross profit ...... 625,453 401,300 1,024,159 829,902
Selling, general and administrative
Expenses ........................... 532,737 500,660 938,518 1,007,825
----------- ----------- ----------- -----------
Operating income (loss) .... 92,716 (99,360) 85,641 (177,923)
----------- ----------- ----------- -----------
Other income
Interest and dividend income 143,138 140,933 292,241 290,298
Sundry income .............. 255 382 270 1,589
----------- ----------- ----------- -----------
143,393 141,315 292,511 291,887
----------- ----------- ----------- -----------
Income before income taxes .......... 236,109 41,955 378,152 113,964
Provision for income taxes .......... 70,000 17,000 128,000 44,000
----------- ----------- ----------- -----------
Net Income ........ $ 166,109 $ 24,955 $ 250,152 $ 69,964
=========== =========== =========== ===========
Income per share:
Basic and dilutive income per share . $ .15 $ .02 $ .23 $ .06
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding ................ 1,104,675 1,111,220 1,106,557 1,111,220
=========== =========== =========== ===========
See accompanying notes to Financial Statements
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ESPEY MFG. & ELECTRONICS CORP.
Statements of Cash Flows
Six Months Ended December 31, 1998 and 1997
Unaudited
December 31
1998 1997
------------------------------
Cash Flows From Operating Activities:
Net income ......................................................... $ 250,152 $ 69,964
Adjustments to reconcile net income to net cash used by operating activities:
Tax effect of dividends on unallocated ESOP shares ................. -- 39,084
Depreciation ....................................................... 216,811 210,040
Changes in assets and liabilities:
Increase in receivables, net .............................. (236,213) (1,419,002)
Increase in inventories, net .............................. (1,239,360) (38,241)
Increase in other current assets .......................... (160,602) (238,073)
Increase in accounts payable .............................. 509,921 219,859
Increase in accrued salaries, wages and commissions ....... 27,098 107,984
Increase (decrease) in accrued employee insurance costs ... 6,916 (2,756)
Increase in other accrued expenses ........................ 1,701 4,530
Increase in payroll & other
taxes withheld and accrued ....................... 58,501 26,049
Increase (decrease) in income tax payable ................. -- (148,606)
Decrease (increase) in deferred income taxes .............. 10,800 (6,611)
Increase in accrued ESOP contributions .................... 279,331 227,852
------------ ------------
Net cash used in
operating activities ............ (274,944) (947,927)
------------ ------------
Cash Flows From Investing Activities:
Proceeds from maturity of investment
securities ...................................................... 6,000,000 --
Purchases of investment securities ................................. (6,011,032) --
Additions to property, plant & equipment ........................... (192,516) (98,856)
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Net cash used in
investing activities ............ (203,548) (98,856)
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ESPEY MFG. & ELECTRONICS CORP.
Statements of Cash Flows
Six Months Ended December 31, 1998 and 1997
(continued)
Unaudited
December 31
1998 1997
------------------------------
Cash Flows From Financing Activities:
Dividends on common stock .......................................... -- (777,854)
Purchase of treasury stock ......................................... (120,464) --
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Net cash used in
financing activities ............ (120,464) (777,854)
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Decrease in cash and short-term investments ................................. (598,956) (1,824,637)
Cash and short-term investments, beginning of period ........................ 2,591,739 12,123,583
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Cash and short-term investments, end of period .............................. $ 1,992,783 $ 10,298,946
============ ============
Income Taxes Paid ........................................................... $ -- $ 195,000
============ ============
See accompanying notes to financial statements
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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 income per share computations for December 31, 1998 were based on
1,106,557 shares and on 1,111,220 shares for December 31, 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 dividends 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
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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 December 31, 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 standards had no material effect on the financial position
or results of operations of the Company.
- 6 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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Results of Operations
- ---------------------
Net sales for the six months ended December 31, 1998 were $5,658,362 as compared
to $6,053,281 for the same period in 1997. Net sales for the three months ended
December 31, 1998 were $3,134,377 as compared to $3,549,697 for the same period
in 1997. The Company's decline in sales for the three and six month periods
ended December 31, 1998 as compared to December 31,1997 is largely due to
customer determined delivery schedules and the time required for product
development.
Net income for the six months ended December 31, 1998 was $250,152 or $.23 per
share compared to $69,964 or $.06 per share for the corresponding period ended
December 31, 1997. The net earnings increase was due to favorable product mix
and an overall decrease in selling, general and administrative expenses.
The Company continues to diversify its customer base and product line. The
backlog at December 31, 1998 was approximately $17,700,000, an increase of 50%
over the prior year. (See Business Outlook section for further discussion).
During the first half and second quarter of fiscal 1999, gross profits were 23%
and 56% higher, respectively, than in the same periods of fiscal 1998. The
increase in gross profit was predominately due to favorable product mix and
increased efficiency in manufacturing and engineering.
Selling, general and administrative expenses were $938,518 for the six months
ended December 31, 1998, a decrease of $69,307, or 6.9%, as compared to the six
months ended December 31, 1997. The reduction is primarily due to a decrease in
professional fees and employment related expenses.
Other income for the three and six months ended December 31, 1998 remained
relatively the same as compared to the three and six months ended December 31,
1997. The Company does not feel that there is any risk associated with its
investment policy, since a majority of the investments are represented by United
States Government Treasury Securities, preferred equity securities, and a money
market account.
Liquidity and Capital Resources
- -------------------------------
As of December 31, 1998, the Company had working capital of $20.6 million
compared to $20.4 million at December 31, 1997. The Company meets its short-term
financing needs through cash from operations and when necessary, from its
existing cash and short term investments.
- 7 -
The table below presents the summary of cash flow for the periods indicated:
Six Months Ended December 31,
-----------------------------
1998 1997
-------- --------
Net cash used in operating activities .......... $274,944 $947,927
Net cash used in investing activities .......... 203,548 98,856
Net cash used in financing activities .......... 120,464 777,854
Net cash used in operating activities fluctuates between periods primarily as a
result of differences in net income, the timing of the collection of accounts
receivable, purchase of inventory, level of sales and payment of accounts
payable. The increase in net cash used in investing activities relates mainly to
increased plant and equipment expenditures. The decrease in cash used in
financing activities is due to the suspension of the 1998 dividends by the
Company's Board of Directors. The Board is hopeful of reinstituting the payment
of dividends when the Company returns to profitability on a consistent basis.
The Company believes that the cash generated from operations and when necessary,
from cash and short-term investments, will be sufficient to meet its long-term
funding requirements. For the first half of fiscal 1999 capital expenditures
were approximately $193,000.
Since the debt of the Company's ESOP is not to an outside party the Company has
eliminated from the Statements of Income the offsetting items of interest income
and interest expense relating to the ESOP. The Company has eliminated the
offsetting accruals from the Balance Sheets.
During the six months ended December 31, 1998 the Company repurchased 8,762
shares of its common stock from the Company's ESOP. Under existing
authorizations, as of December 31, 1998, funds in the amount of $1,763,527 were
available for the continuing repurchase of the Company's shares.
Business Outlook
- ----------------
The backlog as of December 31, 1998 was approximately $17,700,000, as compared
to approximately $11,500,000 as of December 31, 1997. The Company continues to
grow the backlog while maintaining current sales levels. This was particularly
evident in the six months ended December 31, 1998, during which the Company
received in excess of $11 million in new orders. Management expects this trend
to continue and is currently anticipating several new contracts.
Management continues to anticipate that the course of action the Company is
taking will enhance revenue and profitability in future periods. Both Item 7,
"Management's
- 8 -
Discussion and Analysis of Financial Condition and Results of Operations -
Business Outlook" of our 1998 Form 10-K, and the President's message
accompanying our 1998 Annual Report to Shareholders, describe in detail the
products the Company is concentrating on and the type of contracts the Company
expects to receive.
Accounting Pronouncements
- -------------------------
In June 1997, Statement of Financial Accounting Standards No.130, "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 impact on
the Company's financial statements since there are no significant items between
the Company's statement of income and the information that would be presented in
a statement of comprehensive income.
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,
Transformers and Magnetic Components, and Electronics Systems and Assemblies)
and Statement No. 131 did not have an impact on its financial statements.
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.
The Company formed a team to address the Year 2000 issue that encompasses
operating and administrative areas of the Company. The team has the
responsibility of identifying and resolving significant Year 2000 issues in a
timely manner. In addition, executive
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management continues to monitor the status of the Company's Year 2000
remediation. 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 continues
to communicate 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. To date no significant issues have been
identified as to internally used software, computer hardware and use of computer
applications in the Company's manufacturing processes and products. In addition,
no issues have been identified regarding significant suppliers and large
customers.
Finally, with regard to products sold by the Company, Management has determined
that contingencies related to the Year 2000 Issue are unlikely to have a
material adverse effect. Accordingly, the Company has not established a
contingency plan and does not anticipate creating such a plan.
The Company is utilizing both internal and external resources to reprogram, or
replace and test, the software it currently uses for Year 2000 modifications.
The Company had expected its Year 2000 assessment and remediation program to be
substantially completed by January 31, 1999. The Company now plans to
substantially complete its Year 2000 assessment and remediation by June 30,
1999. The delay is not a result of the Company encountering any Year 2000
difficulties. Management was simply optimistic in its earlier targeted
completion date. The total project cost has not yet been determined. To date,
the Company has not incurred any material costs and does not anticipate
incurring any material costs, related to the assessment and remediation of 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 80% of its review and, when necessary, 100% of
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.
- 10 -
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
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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. Any or all of the Company's
forward looking statements may turn out to be wrong. The matters covered by
these statements are subject to certain risks and uncertainties that could cause
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 foregoing 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.
- 11 -
ESPEY MFG. & ELECTRONICS CORP.
PART II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders
----------------------------------------------------
a) The Company's Annual Meeting of Shareholders (the "Annual
Meeting") was held on December 11, 1998.
b) Proxies for the Annual Meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as
amended. There were no solicitations in opposition to management's
nominees listed in the proxy statement. Both of the nominees
listed in the proxy statement were elected.
c) The following matters were voted upon at the Annual Meeting:
1. The election of two Class B directors. The votes were cast as
follows:
For Withheld
--- --------
William P. Greene 923,611 26,644
Seymour Saslow 921,601 28,654
2. Ratification of PricewaterhouseCoopers L.L.P. as the
Company's independent public auditors for the fiscal year
ending June 30, 1999. The votes were cast as follows:
For Against Abstain
------- ------- -------
928,755 3,200 18,200
3. A shareholder proposal recommending that the Board of
Directors consider the initiation and consummation of a
merger, sale or other extraordinary transaction. The votes
were cast as follows:
For Against Abstain
------- ------- -------
61,399 728,627 13,878
Item 5. Other Information
-----------------
Effective December 11, 1998, Mr. Howard Pinsley was elected to serve as
President and Chief Executive Officer. Mr. Pinsley had been interim
President and Chief Operating Officer since June 9, 1998.
- 12 -
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
EX-27 - Financial Data Schedule (for electronic filing only)
(b) Reports on Form 8-K
Form 8-K, filed October 30, 1998, reporting under Items 4 and 7,
announcing a change in audit firms.
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.
February 5, 1999 /s/Howard Pinsley
-----------------
Howard Pinsley, President and
Chief Executive Officer
February 5, 1999 /s/David O'Neil
---------------
David O'Neil, Controller
And Assistant Treasurer
- 13 -