ESPEY MFG & ELECTRONICS CORP — Interim / Quarterly Report 1998

Feb 13, 1998

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, 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 Statements: Balance Sheets - December 31, 1997 1 and June 30, 1997 Statements of Earnings - Three and 3 Six Months ended December 31, 1997 and 1996 Statements of Cash Flows - Six Months 4 Ended December 31, 1997 and 1996 Notes to Financial Statements 5 Item 2 Management's Discussion and Analysis of 8 Financial Condition and Results of Operations. PART II OTHER INFORMATION 11 SIGNATURES 12

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 December 31, 1997, and the results of operations for each of the three and six month periods ended December 31,1997 and 1996 and cash flows for each of the six month period ended December 31, 1997 and 1996. The operating results for the three month and six month periods 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 December 31, 1997 were based on 1,111,220 shares and on 1,112,915 shares for December 31,1996. These represent the average number of shares outstanding for each respective period. Pursuant to the Company's STOCK RIGHTS PLAN (as described in the 1997 Form 10- K),common stock purchase rights under the Plan could potentially dilute earnings per common share in the future. These shares were not included in a computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented. - 5 - 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. 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, 1997 there were 145,372 shares allocated to participants. - 6 - 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. - 7 - ESPEY MFG. & ELECTRONICS CORP. Management's Discussion and Analysis of Financial Condition and Results of Operation Results of Operations Sales for the six months ended December 31, 1997 were $6,053,281 as compared to $8,653,278 for the same period in 1996. The Company's sales volume continues to be effected by 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, rose marginally to 86% for the first half of fiscal 1998 as compared to the 84% reflected for the same period last year. Although the gross profit margins remained about the same, net earnings, and net earnings per share, were adversely effected by the decrease in sales volume. The 17% increase in interest income, between the first half of fiscal 1998 and the corresponding period of fiscal 1997, was directly related to the net increase in cash and short-term investments available during the course of the current period for the generating of interest income. There was also a slight increase in the short term interest rates available to the Company. The reclassification of 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 six month period ended December 31, 1997 were $69,964 or $.06 per share compared to $472,845 or $.42 per share for the corresponding period of last year. As indicated above, the net earnings decrease was due mainly to reduced sales. Selling , general and administrative expenses increased by approximately 16%. No one material factor accounted for this increase. The increase in accounts receivable in the Statements of Cash Flows is the result of shipments made toward the end of the period. The majority of these receivables have already been collected. The increase in inventories shown in the Statements of Cash Flows reflects additional purchasing during the second quarter of the current year due to an increase in our backlog. However, the net inventories shown on the Balance Sheets at December 31, and June 30, 1997 were relatively the same. Liquidity and Capital Expenditures As of December 31, 1997 the total cash and short-term investments was $10,298,946 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. - 8 - The Company, in the first half of fiscal 1998 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 these activities will be adequate to meet funding requirements. For the first half of fiscal 1998 capital expenditures were approximately $98,856. 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 likewise eliminated the offsetting accruals from the Balance Sheets. Under existing authorizations, as of December 31, 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 transition stage of this consolidation is still causing delays in both ongoing and newly proposed programs, however based on the incoming flow of new business this situation shows definite signs of easing. At the present time, the Company does not know what the final effect this will have on the receipt of pending new business from this customer. The backlog as of December 31, 1996 was $10,031,312. The backlog as of December 31, 1997 was $11,494,387. As a positive sign, for the past twelve months, the Company has been receiving orders at a faster rate than those being shipped. This was particularly evident in the quarter recently ended, during which the Company received in excess of $7,000,000 in new orders. A sizable portion of these orders were connected with the establishment of a repair site for our high power radar transmitters. The Company is still anticipating a new contract for additional transmitters. Despite the significant sales decrease in this period, management anticipates that sales for the second half of fiscal 1998 will approximate or exceed those of the second half 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 continues to anticipate that the course of action 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. - 9 - The Company is aware of the problems which may arise at the turn of the century as regards the programming of our computers to accommodate the year 2000. All necessary steps have been taken to assure that this transition will be made smoothly. The cost of these efforts has been, and will continue to be minimal. 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. - 10 - ESPEY MFG. & ELECTRONICS CORP. PART II: Other Information and Signatures Item 4. Submission of Matters to a Vote of Security Holders At the 1997 Annual Meeting of Shareholders held on December 5, 1997 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 321,742 210,469 311,387 Against 580,710 690,172 589,254 Abstain 4,150 5,961 5,961 Broker non-votes 156,559 156,559 156,559 Item 5. Other Information None during the quarter. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 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, 1997. - 11 - 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 February 1998 Date - 12 -