ESPEY MFG & ELECTRONICS CORP — Interim / Quarterly Report 1997

Nov 13, 1997

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, 1997 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 1,111,220 . 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 Statments: Balance Sheets - September 30, 1997 1 and June 30, 1997 Statements of Earnings - Three Months 3 Ended September 30, 1997 and 1996 Statements of Cash Flows - Three Months 4 Ended September 30, 1997 and 1996 Notes to Financial Statements 5 Item 2 Management's Discussion and Analysis of 7 Financial Condition and Results of Operations. PART II OTHER INFORMATION 9 SIGNATURES 10

ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements _______ 1. The unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of September 30, 1997, and the results of operations for each of the three months ended September 30, 1997 and 1996 and cash flows for each of the three months ended September 30, 1997 and 1996. The operating results for the three months ended September 30, 1997 are not necessarily indicative of the operating 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 principals have been condensed or omitted pursuant to such rules and regulations applicable to interim financial statements, although management believes the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company's most recent audited financial statements included in its 1997 Annual Report to Stockholders and its 1997 Form 10-K. 2. The earnings per share computations for September 30, 1997 were based on 1,111,220 shares and on 1,114,610 shares for September 30, 1996. 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 and money market accounts. 4. There were no material unusual charges or credits to operations or a change in accountants during the most recently completed quarter which would require the filing of a Form 8-K. 5. There were no securities sold by the Company during the current quarter which were not registered under the Securities Act of 1934 in reliance upon an exemption from registration provided in Section 4 (2) of the Act. - 5 - 6. 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. 7. 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 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, 1997 there were 152,214 shares allocated to participants. 8. The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", as of July 1, 1995. This accounting standard required that certain long-lived assets be reviewed for impairment when events or circumstances indicate that the carrying amount of the assets may not be recoverable. If such review indicates that the carrying value is written down to fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. The adoption of this accounting standard had no effect on the financial position or results of operations of the Company. - 6 - ESPEY MFG. & ELECTRONICS CORP. Management's Discussion and Analysis of Results of Operations Sales for the three months ended September 30, 1997 were $2,503,584 as compared to $4,586,892 for the same period in 1996. This decrease in sales resulted primarily from the consolidation and relocation of the facilities and personnel of one of the Company's major customers. The cost of sales, as a percentage of sales, dropped slightly to 83% for the first quarter of fiscal 1998 as compared to the 85% reflected for the same period last year. The resulting increase in the gross profit margin can be attributed to many of the contracts shipped in the current quarter calling for a somewhat higher gross profit margin than those shipped in the corresponding quarter in the prior year: however, this was partially offset by an increase in selling and general & administrative expenses of 13%. The increase in selling and general & administrative expenses cannot be attributed to any specific factor. The 20% increase in interest income, between the first quarter of fiscal 1998 and the corresponding quarter of fiscal 1997, was directly related to the net increase in cash and short-term investments. The increase in short-term investments was explained in detail in the most recently filed Form 10-K in Item 7, "Management"s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Expenditures." The Company does not feel that there is any risk associated with its investment policy, since the majority of our investments are represented by Certificates of Deposit, United States Government Treasury Securities and a Money Market account. Net earnings for the three month period ended September 30, 1997 were $45,009 or $.04 per share compared to $228,719 or $.21 per share for the corresponding period of last year. The net earnings decrease was due to reduced sales and the increase in selling, general & administrative expenses. Liquidity and Capital Expenditures As of September 30, 1997 the total cash and short-term investments was $11,421,188 as compared to $12,123,583 as of June 30, 1997. This decrease in cash and short- term investments at the end of the period is substantially attributable to the increases in inventories and accounts receivable. Most of these receivables have already been paid, and the Company feels that its reserve is adequate. 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 $27,366. 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. Under existing authorizations, as of September 30, 1997, funds in the amount of $1,884,000 were available for the continuing repurchase of the Company's shares. Business Outlook Customer order patterns are inherently difficult to predict. As previously disclosed, one of the Company's major customers has announced the consolidation and relocation of several of its facilities and various personnel. The -7- transition stage of this consolidation has caused delays in both ongoing and newly proposed programs. At the present time, the Company does not know what effect this will have on the receipt of currently pending new business from this customer. The Company is hopeful that any further delays will be minimal. The backlog as of September 30, 1996 was $12,218,320. The backlog as of September 30, 1997 was $7,661,378. The Company believes that it will continue to obtain contracts consistent with our past experience. We are currently anticipating a new contract for our high power radar transmitters, which, if received, along with our other anticipated new business will result in substantially increasing our backlog. Despite the significant sales decrease in this period, management anticipates that sales for the final three quarters of fiscal 1998 will approximate or exceed those for the final three quarters of fiscal 1997. The Company is continuing to expand its Sales and Marketing departments. Various specifics concerning the products we are concentrating on are addressed in both the President's message accompanying our 1997 Annual Report and in our most recently filed Form 10-K in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Outlook. "Management currently anticipates that the course of action the Company has taken will enhance the Company's revenues and profitability in future periods. Other Matters A dividend in the amount of $.70 per share was declared payable November 21, 1997 to shareholders of record on October 24, 1997. 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. 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 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. - 8 - 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 None during the quarter. Item 6. Exhibits and Reports on Form 8-K None during the quarter. - 9 - 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. Joseph Canterino, President Herbert Potoker, Treasurer and Chief Financial Officer 12 September 1997 Date - 10 -