ESPEY MFG & ELECTRONICS CORP — Interim / Quarterly Report 2000

Feb 14, 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 December 31, 1999 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 February 10, 2000: 1,043,631. 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 - December 31, 1999 and June 30, 1999 1 Consolidated Statements of Income - Three and Six Months Ended December 31, 1999 and 1998 3 Consolidated Statements of Cash Flows - Six Months Ended December 31, 1999 and 1998 4 Notes to Consolidated Financial Statements 5 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. Consolidated Balance Sheets December 31, 1999 and June 30, 1999 ------------------------------------ A S S E T S

See accompanying notes to the financial statements (Continued) -1- ESPEY MFG. & ELECTRONICS CORP. Consolidated Balance Sheets, Continued December 31, 1999 and June 30, 1999 ------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY

See accompanying notes to financial statements - 3 - ESPEY MFG. & ELECTRONICS CORP. Consolidated Statements of Cash Flows Six Months Ended December 31, 1999 and 1998

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 six months ended December 31, 1999 were based on 1,050,754 shares and on 1,106,557 shares for December 31, 1998. 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 - 5 - 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, 1999 there were 161,125 shares allocated to participants. 6. Total comprehensive income consists of:

• 6 - 7. 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. The Company will apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for the stock option plans and determine the necessary pro forma disclosure information required by Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation". No options have been granted under the plan. Shareholders approved the Plan at the Annual Meeting on January 4, 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operation Net sales for the six months ended December 31, 1999 were $6,711,404 as compared to $5,658,362 for the same period in 1998. Net sales for the three months ended December 31, 1999 were $3,412,424 as compared to $3,134,377 for the same period in 1998. The Company's increase in sales for the three and six month periods ended December 31, 1999 as compared to December 31, 1998 is largely due to increased commercial power supply and radar test equipment sales. Due to successful marketing efforts with new and existing customers the Company should continue to see increased net sales levels as backlog orders are completed and shipped. Net income for the six months ended December 31, 1999 was $86,688 or $.08 per share compared to $250,152 or $.23 per share for the corresponding period ended December 31, 1998. During the first six months of fiscal 2000 gross profits as a percentage of sales decreased approximately 4.5% as compared with the first six months of fiscal 1999. The primary reason for the decrease in gross profit and net income was product mix, higher employee related expenses and an overall increase in selling, general and administrative expenses. Management continues to expand 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 exceeded 225 people as compared to December 31, 1998 when 175 people were employed. Several of these employees require on the job training prior to working at maximum efficiency. The benefits of this training should begin to positively impact operations in the fourth quarter of fiscal 2000. The Company continues to diversify its customer base and product line. The backlog at December 31, 1999 was approximately $28,600,000 an increase of approximately 62% over the prior year. The Company continues to increase the backlog while increasing current sales levels. Management presently anticipates that the Company will realize both an increase in revenues and income in fiscal 2000, however, there can be no assurances made since such a forward-looking statement is subject to future events. Selling, general and administrative expenses were $1,025,951 for the six months ended December 31, 1999, an increase of $87,433, or 9.3%, as compared to the six months ended December 31, 1998. 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 continues to add employees to increase and manage the continued growth in sales and order backlog. Other income for the three and six months ended December 31, 1999 remained relatively the same as compared to the three and six months ended December 31, 1998. 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. Liquidity and Capital Resources As of December 31, 1999, the Company had working capital of $20.4 million compared to $20.6 million at December 31, 1998. The Company meets its short-term financing needs through cash from operations and when necessary, from its existing cash and short term investments. - 7 - The table below presents the summary of cash flow for the periods indicated:

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. Management is currently analyzing the need for a line of credit to help fund further growth. For the first half of fiscal 2000 capital expenditures were approximately $361,000. 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 expenses relating to ESOP. The Company has eliminated the offsetting accruals from the Consolidated Balance Sheets. During the six months ended December 31, 1999 the Company repurchased 15,027 shares of its common stock from the Company's ESOP and through other public transactions. Under existing authorizations, as of December 31, 1999, 57,473 shares could be repurchased at a price not to exceed $13.50. Under this authorization, on February 8, 2000 the company repurchased an additional 5000 shares of common stock. Year 2000 Issues The Company's information technology systems successfully completed the "roll over" to the year 2000. The transition resulted in no adverse or negative impact on operations. The company believes that the risk addociated 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. - 8 - 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. -9- 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 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 Form 8-k, filed December 21, 1999 reporting under Items 5 and 7, announcing an amendment to certain provisions of the Rights Agreeement dated March 31, 1989, as amended February 12, 1999. - 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. /s/ Howard Pinsley -------------------------------- Howard Pinsley, President and Chief Executive Officer /s/ David O'Neil -------------------------------- David O'Neil, Treasurer and Principal Financial Officer 14 February 2000 ---------------- Date - 11 -