ESPEY MFG & ELECTRONICS CORP — Interim / Quarterly Report 1997

Feb 10, 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 December 31, 1996 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 - December 31, 1996 1 and June 30, 1996 Statements of Earnings - Three Months 3 and Six Months Ended December 31, 1996 and 1995 Statements of Cash Flows - Six Months 4 Months Ended December 31, 1996 and 1995 Notes to Financial Statements 5 December 31, 1996 and 1995 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. 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 December 31, 1996, and the results of operations for each of the six months ended December 31, 1996 and 1995 and cash flows for each of the three months ended December 30, 1996 and 1995. 2. The earnings per share computations for December 31, 1996 were based on 1,112,915 shares and on 1,339,951 shares for December 31, 1995. 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. - 5 - 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 December 30, 1996 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 six months ended December 31, 1996 were $8,653,278 as compared to $8,435,701 for the same period in 1995. 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 six month period were $472,845 or $.42 per share compared to $224,346 or $.17 per share for the corresponding period of last year. Similar to the first quarter 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 quarter of last year. As a result, cost of sales for the current six month period dropped to 85% compared to the 90% reflected last year. This factor, together with the increase in sales, are the primary reasons for the increase in net profits. The Company is continuing 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 acompanying our 1996 Annual Report and in our most recently filed Form 10K. Selling and General & Administrative expenses show an increase of approximately 7% during the current period. This is principally 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 in part to the increase in sales, but to a greater extent it is due to a decrease in material purchases in keeping with the reduction in our current backlog. Investment income declined by approximately 24% for the current six 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. 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. -7- 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 six month period capital expenditures were approximately $167,747. During the six month period ended December 31, 1996 the Company repurchased 7,426 shares of its common stock. Under existing authorizations, as of December 31, 1996, funds in the amount of $1,883,969 were available for the continuing repurchase of the Company's shares. The backlog as of December 31, 1995 was $18,596,016. The backlog as of December 31, 1996 was $10,031,312. As indicated in prior reports customer order patterns are inherently difficult to predict. One of the Company's major customers has recently announced the consolidation and relocation of several of its facilities and various personnel. The transition stage of this consolidation will possibly cause delays in both ongoing and newly proposed programs. At the present time Management does not know what effect, if any, this will have on the receipt of pending new business from this customer. Management is hopeful that any delay will be minimal. In spite of this, in light of our projected expanding customer base, the Company still believes that it will continue to obtain contracts consistent with our past experience. The Company currently has outstanding in excess of $35,000,000 in quotations, for both repeat and new programs, in addition to increase option clauses in various existing contracts. Management 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 above are forward- looking and based on current expectations. The matters covered by those 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. -8- ESPEY MFG. & ELECTRONICS CORP. PART II: Other Information and Signatures Item 4. Submission of Matters to a Vote of Security Holders At the 1996 Annual Meeting of Shareholders held on December 6, 1996 three shareholder proposals, none of which received a majority of the votes cast, were included in the proxy statement as follows: Proposal 1 A recommendation to the Board of Directors that the 1989 Shareholder Rights Plan be redeemed. Proposal 2 A recommendation to the Board of Directors to amend the corporate bylaws so that the Board of Directors would consist of a majority of independent Directors and that each Director be required to be a shareholder. Proposal 3 A recommendation to the Board of Directors to declassify the Board so that all directors are elected each year. The result of the voting was as follows: Proposal 1 Proposal 2 Proposal 3 For 261,077 243,925 257,008 Against 614,333 627,810 613,587 Abstain 35,925 39,600 40,740 Broker non-votes 184,237 184,237 184,237 Item 5. Other Information None during the quarter. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Employment contract of John J. Pompay, Jr., Vice President - Director of Marketing. 27 Financial Data Schedule (for electronic filing only) (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1996. - 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 10 February 1997 Date - 10 -