ESPEY MFG & ELECTRONICS CORP — Interim / Quarterly Report 1997

May 8, 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 March 31, 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 12866-4755 (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 - March 31, 1997 1 and June 30, 1996 Statements of Earnings - Three Months 3 and Nine Months Ended March 31, 1997 and 1996 Statements of Cash Flows - Nine Months 4 Ended March 31, 1997 and 1996 Notes to Financial Statements 5 March 31, 1997 and 1996 Item 2 Management's Discussion and Analysis of 7 Financial Condition and Results of Operations. PART II OTHER INFORMATION 10 SIGNATURES 11

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 accruals) necessary to present fairly the financial position of the Company as of March 31, 1997, and the results of operations for each of the nine months ended March 31, 1997 and 1996 and cash flows for the nine months ended March 31, 1997 and 1996. The operating results for the nine months ended March 31, 1997 are not necessarily indicative of the operating results to be expected for the full fiscal year. These statements should be read in conjunction with the Company's most recent Annual Report to Stockholders and Annual Report on Form 10-K. 2. The earnings per share computations for March 31, 1997 were based on 1,112,358 shares and on 1,319,375 shares for March 31, 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. 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. - 5 - 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 March 31, 1997 there were 131,439 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 Financial Condition and Results of Operations Sales for the nine months ended March 31, 1997 were $12,458,847 as compared to $12,787,976 for the same period in 1996. Sales volume is largely dependent on both lead times required for new orders and the specific delivery needs of our customers. Net earnings for the current nine month period were $600,215 compared to $393,825 for the corresponding period last year. This is an increase of approximately 52%. Current earnings per common share rose to $.54 per share from $.30 per common share last year. This increase reflects not only the increase in net earnings but the decrease in the average number of common shares outstanding during the comparable nine month periods from 1,319,375 to 1,112,358. Similar to the first half of this year, many of the contracts shipped in the current quarter carried a somewhat higher gross profit margin than those shipped during the corresponding half of last year. As a result, Cost of Sales for the current nine month period dropped to 84% compared to the 89% reflected last year. This factor was the primary reason for the increase in net profits although there was a decrease in sales of nearly 3%. The Company is still striving to enhance and expand its Sales and Marketing departments. In this regard the Company has contacted, and is developing, a number of new customers. As indicated previously, certain specifics concerning the products that the Company is concentrating on are addressed in both the President's message accompanying our 1996 Annual Report to Stockholders and in our most recently filed Form 10K. Selling and General & Administrative expenses show an increase of approximately 18% for the current nine month period. This is primarily due to the reclassification of certain salaries from manufacturing expenses to general and administrative expenses, in addition to an increase in legal expenses thru the Company's efforts to obtain patents on a number of its products. In the Statements of Cash Flows the decrease in inventories is due for the most part to a decrease in material purchases in keeping with the reduction in our current backlog. Investment income declined by approximately 22% for the current nine month period primarily due to a reduction in our investment base brought about by a major repurchase of our common stock during the latter part of our last fiscal year. Management presently does not feel that there is any risk associated with its investment policy, since the majority of our investments are represented by U.S. Government securities, Certificates of Deposit and money market accounts. - 7 - 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 also eliminated the offsetting accruals from the Balance Sheets. The Company, when possible, funds all of its operations including Financing Activities and Investing Activities with cash flows resulting from Operating Activities. Management currently feels that during the next fiscal year, funds from Operating Activities will continue to be adequate to meet these needs. For the current nine month period capital expenditures were approximately $300,000. During the nine month period ended March 31, 1997 the Company repurchased 7,426 shares of its common stock. Under existing authorizations, as of March 31, 1997, funds in the amount of $1,883,969 were available for the continuing repurchase of the Company's shares. The backlog as of March 31, 1996 was $18,666,969. The backlog as of March 31, 1997 was $9,404,756. As indicated in prior reports 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 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, if any, this will have on the receipt of currently pending new business from this customer. The Company is hopeful that any further delay will be minimal. In spite of this, in light of our projected expanding customer base, the Company believes that in the long term it will continue to obtain contracts consistent with our past experience. The Company conservatively estimates that it currently has outstanding quotations well in excess of $35,000,000 for both repeat and new programs, in addition to increase option clauses in various existing contracts. The Company is presently optimistic that a significant portion of these quotations and options will result in firm contracts. A dividend in the amount of $.70 per share was paid November 22, 1996 to shareholders of record on October 28, 1996. 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 - 8 - 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. -9- ESPEY MFG. & ELECTRONICS CORP. PART II: Other Information and Signatures Item 4. Submission of Matters to a Vote of Security Holders None during this quarter. Item 5. Other Information None during this quarter. Item 6. Exhibits and Reports on Form 8-K 27 Financial Data Schedule (for electronic filing only) - 10 - 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 07 May 1997 Date - 11 -