ESPEY MFG & ELECTRONICS CORP — Interim / Quarterly Report 2000

May 12, 2000

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2000 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 Identification No.) 233 Ballston Avenue, Saratoga Springs, New York 12866 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 518-584-4100 --------------------------- Number of shares outstanding of issuer's class of common stock $.33-1/3 par value as of May 10, 2000: 1,033,631. 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: Consolidated Balance Sheets - March 31, 2000 and June 30, 1999 1 Consolidated Statements of Income - Three and Nine Months Ended March 31, 2000 and 1999 3 Consolidated Statements of Cash Flows - Nine Months Ended March 31, 2000 and 1999 4 Notes to Consolidated Financial Statements 5 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. 7 PART II OTHER INFORMATION 10 SIGNATURES 11

See accompanying notes to the financial statements (Continued) 1

See accompanying notes to the financial statements 2

See accompanying notes to the financial statements 3

See accompanying notes to the financial statements 4 ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements ------------------- 1. In the opinion of management the accompanying unaudited consolidated 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 1999 Form 10-K. 2. The earnings per share computations for the nine months ended March 31, 2000 were based on 1,048,854 shares and on 1,105,157 shares for March 31, 1999. 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 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 March 31, 2000 there were 171,125 shares allocated to participants. 6. Total comprehensive income consists of: 5

1. Stock Options On October 29, 1999, the Board of Directors approved, subject to shareholder approval, the 2000 Stock Option Plan (the Plan). Under the Plan and related incentive stock option agreements, options will be granted to purchase shares of common stock of the Company with an exercise price not less than the fair value of a share of such common stock at the date of the grant and vest over a period not to exceed ten years as will be determined by the Option Committee which will administer the Plan. Non-Qualified stock options will be issued in accordance with the Plan. Shareholders approved the Plan at the Annual Meeting on January 4, 2000. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for the Plan. To determine the necessary pro forma disclosure information the Company utilizes Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation". On March 1, 2000, 11,500 stock options were granted under the plan. All options were granted at fair market value. The options granted did not create any difference between basic and diluted earnings per share. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net sales for the nine months ended March 31, 2000 were $10,001,220 as compared to $8,747,908 for the same period in 1999. Net sales for the three months ended March 31, 2000 were $3,289,816 as compared to $3,089,547 for the same period in 1999. The Company's increase in sales for the three and nine month periods ended March 31, 2000 as compared to March 31, 1999 is largely due to increased industrial power supply and radar test equipment sales. Successful marketing efforts with new and existing customers have lead the Company to recognize higher net sales levels as backlog orders are completed and shipped. Net income for the nine months ended March 31, 2000 was $350,332 or $.33 per share compared to $349,694 or $.32 per share for the corresponding period ended March 31, 1999. During the first nine months of fiscal 2000 gross profits as a percentage of sales remained constant as compared with the first nine months of fiscal 1999. The primary reason for the increase in gross profit and net income was product mix. Higher employee related expenses and an overall increase in selling, general and administrative expenses somewhat offset the increases in gross profit and net income. Management has expanded the Company's workforce to ensure that production and overall execution of the large increase in backlog orders and additional anticipated orders are successfully performed. Present employment has reached 235 people. The backlog at March 31, 2000 was approximately $31,300,000, an increase of approximately $15 million over the prior year. The Company continues to increase the backlog while increasing current sales levels. New orders for the quarter totaled approximately $5,989,000. Selling, general and administrative expenses were $1,493,450 for the nine months ended March 31, 2000, an increase of $122,566, or 8.9%, as compared to the nine months ended March 31, 1999. The increase is primarily due to an increase in selling expenses offset partially by a decrease in professional fees. This increase was expected as the Company added employees to manage the continued growth in sales and order backlog. Other income for the three and nine months ended March 31, 2000 remained relatively the same as compared to the three and nine months ended March 31, 1999. The Company does not believe there is any significant 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. 7 Liquidity and Capital Resources As of March 31, 2000, the Company had working capital of $20.3 million compared to $20.5 million at March 31, 1999. The Company meets its short-term financing needs through cash from operations and when necessary, from its existing cash and short term investments. The table below presents the summary of cash flow for the periods indicated: Nine Months Ended March 31, ----------------------------- 2000 1999 -------- -------- Net cash provided by (used in) operating activities $ 333,694 (1,422,932) Net cash provided by investing activities 2,236,153 250,312 Net cash used in financing activities (486,267) (134,589) Net cash provided by (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 provided by (used in) investing activities is due to the maturity of investment securities with no offsetting purchase of new investments. The increase in net cash used in financing activities is due to the quarterly dividend payment and increased treasury stock purchases. The Company currently believes that the cash generated from operations and when necessary, from cash and cash equivalents, will be sufficient to meet its long-term funding requirements. On April 26, 2000, management established a $3,000,000 line of credit to help fund further growth. For the first nine months of fiscal 2000 capital expenditures were approximately $679,000. Since the debt of the Company's ESOP is not to an outside party the Company has eliminated from the Consolidated Statements of Income the offsetting items of interest income and interest expense relating to ESOP. The Company has eliminated the offsetting accruals from the Consolidated Balance Sheets. During the nine months ended March 31, 2000 the Company repurchased 25,027 shares of its common stock from the Company's ESOP and through other public transactions. As of March 31, 2000, Management was authorized by the Board of Directors to repurchase $1,000,000 in Company stock. On May 4, 2000, under this authorization, management repurchased 5,000 shares of company stock. Year 2000 Issues The Company's information technology systems successfully completed the transition into the year 2000. The beginning of the new year resulted in no adverse or negative impact on operations. The Company believes that the risk associated with the year 2000 problem has been identified and eliminated. The Company will continue to evaluate the 2000 readiness of its business systems and significant vendors to ensure a complete transition through the year 2000. The estimated total cost of the year 2000 assessment and remediation plan has been less than $25,000. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 It should be noted that 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. 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 a) The Company's Annual Meeting of Shareholders (the "Annual Meeting") was held on January 4, 2000. 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. All three nominees listed in the proxy statement were elected. c) The following matters were voted upon at the annual meeting: The election of three Class C directors. The votes were cast as follows: Nominee: Shares Voted For: -------- ----------------- Paul Corr 866,771 Barry Pinsley 864,951 Michael W. Wool 866,571 Ratification of PricewaterhouseCoopers LLP, as independent auditors for the Corporation for the fiscal year ending June 30, 2000. The votes were cast as follows: Shares IN FAVOR 947,150 Shares AGAINST 15,790 ABSTENTIONS 21,511 Proposal to increase the authorized shares of the Company's common stock from 2,500,000 to 10,000,000. The votes were cast as follows: Shares IN FAVOR 764,994 Shares AGAINST 215,603 ABSTENTIONS 3,855 Proposal to approve the Company's 2000 Stock Option Plan. The votes were cast as follows: Shares IN FAVOR 559,270 Shares AGAINST 212,570 ABSTENTIONS 12,257 Item-5. Other Information None 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 None 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. /s/ Howard Pinsley -------------------------------- Howard Pinsley, President and Chief Executive Officer /s/ David O'Neil -------------------------------- David O'Neil, Treasurer and Principal Financial Officer May 10, 2000 - --------------- Date 10