ESPEY MFG & ELECTRONICS CORP — Interim / Quarterly Report 2003

Feb 12, 2003

10-Q 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, 2002 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, 2003: 1,019,861. 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 [ ] Indicate by check mark whether the registrant is an acelerated filer (as defined in Rule 12B-2 of the Exchange Act) YES [ ] NO [X]

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4 ESPEY MFG. & ELECTRONICS CORP. Notes to Consolidated 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 of the 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 2002 Form 10-K. 2. Other income consists principally of interest on money market accounts and dividends on an equity security. 3. 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. 4. In fiscal 1989 the Company established an Employee Stock Ownership Plan (ESOP) for eligible non-union employees. The ESOP used the proceeds of 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. As of December 31, 2002 there were 216,477 shares allocated to participants. 5. Total comprehensive income consists of:

5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates We believe our most critical accounting policies include revenue recognition and cost estimation on our contracts. Revenue recognition and cost estimation A significant portion of our business is comprised of development and production contracts which are accounted for under the provisions of the American Institute of Certified Public Accountants (AICPA) Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." Generally revenue on long-term fixed-price contracts are recorded on a percentage of completion basis using units of delivery as the measurement basis for progress toward completion. Contract accounting requires judgment relative to estimating costs and making assumptions related to technical issues and delivery schedule. Contract costs include material, subcontract costs, labor and an allocation of indirect costs. The estimation of cost at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Given the significance of the estimation processes and judgments described above, it is possible that materially different amounts of contract costs could be recorded if different assumptions were used in the estimation of cost at completion. When a change in contract value, contract performance status, or estimated cost is determined, changes are reflected in current period earnings. Results of Operations Net sales for the six months ended December 31, 2002 were $ 9,865,815 as compared to $9,785,032 for the same period in 2001, a .8% increase. Net sales for the three months ended December 31, 2002 were $5,374,456 as compared to $5,199,517 for the same period in 2001, a 3% increase. The Company's increase in sales for the three and six month periods ended December 31, 2002, as compared to December 31, 2001, is due primarily to an increase in radar transmitter component shipments. During the first six months of fiscal 2003 gross profits decreased to $713,967 as compared with $1,201,154 for the first six months of fiscal 2002. For the three months ended December 31, 2002 gross profit (loss) decreased to $(75,254) as compared to $593,569 for the same period in 2001. Net income (loss) for the six months ended December 31, 2002 was $(110,789) or $(.11) per share compared to $285,689 or $.28 per share for the corresponding period ended December 31, 2001. For the three months ended December 31, 2002 the net loss was $(417,334) or $(.41) as compared to net income of $81,999 or $.08 per share for the same period in 2001. The decrease in gross profit and net income for the three and six-month periods ended December 31, 2002, was primarily the result of higher than expected product development costs associated with a new customer specific product. We expect the investment in this product to be successful and improve the operating results of the Company future production orders are received. Management continues to evaluate the Company's workforce to ensure that production and overall execution of the backlog orders and additional anticipated orders are successfully performed. Employment at December 31, 2002 and 2001 was 190 people. The backlog at December 31, 2002 was approximately $25.5 million as compared to $25.9 at December 31, 2001. New orders for the six-month period ended December 31, 2002 were approximately $10.7 million. Selling, general and administrative expenses were $966,653 for the six months ended December 31, 2002, an increase of $45,520 as compared to the six months ended December 31, 2001. Selling, general and administrative expenses were $537,346 for the three months ended December 31, 2002, an increase of $10,245 as compared to the three months ended December 31, 2001. The increase is primarily due to an increase in Director's fees, professional fees and selling expenses. Other income for the six months ended December 31, 2002 decreased compared to the corresponding period ended December 31, 2001. The decrease is primarily due to lower interest rates on the Company's money market accounts. For the three months ended December 31, 2002 other income remained relatively consistent as compared to the same period in 2001. The Company does not believe there is any significant risk associated with its investment policy, since a majority of the investments are represented by preferred equity securities and a money market account. 6 Liquidity and Capital Resources As of December 31, 2002, the Company had working capital of $23.2 million compared to $22.7 million at December 31, 2001. 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:

Net cash provided by operating activities fluctuates between periods primarily as a result of differences in net income, the timing of shipments and the collection of accounts receivable, changes in inventory, level of sales and payment of accounts payable. The decrease in net cash provided by (used in) investing activities is due to the sale of an investment security in 2001. The increase in net cash used in financing activities is due to an increase in 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, if necessary, has at its disposal a $3,000,000 line of credit to help fund further growth. For the first half of fiscal 2003 capital expenditures were approximately $247,000. 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 the ESOP. During the six months ended December 31, 2002 the Company repurchased 15,000 shares of common stock for $296,455. Under existing Board authorizations, as of December 31, 2002, $1,000,000 could be utilized to repurchase the Company's common stock. 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. Item 4. Controls and Procedures Within the 90-day period prior to the filing date of this report, an evaluation was conducted under the supervision of and with the participation of Espey's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that all material information related to the company and its consolidated subsidiary is made known to them, particularly during the period when our periodic reports are being prepared. Subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation, there have been no significant changes in our internal controls, or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. 7 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 November 22, 2002. 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 A directors. The votes were cast as follows: Shares Voted Against Nominee: Shares Voted For: or withheld -------- ----------------- -------------------- Paul J. Corr 934,935 4,934 Barry Pinsley 934,768 5,101 Michael W. Wool 934,935 4,934 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K None 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 10 February 2003 - ---------------- Date 8 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Howard Pinsley, certify that: 1. I have reviewed this annual report on Form 10-Q of Espey Mfg. & Electronics Corp. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 10, 2003 /s/Howard Pinsley ----------------------- Howard Pinsley, President and Chief Executive Officer 9 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, David A. O'Neil, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Espey Mfg. & Electronics Corp. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 10, 2003 /s/David A. O'Neil --------------------------- David A. O'Neil, Treasurer and Principal Financial Officer 10 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with this quarterly report on Form 10-Q of Espey Mfg. & Electronics Corp. (the "Company"), I, Howard Pinsely, President and Chief Executive Officer of the Company, certify , pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the Company Date: February 10, 2003 /s/Howard Pinsley --------------------- Howard Pinsley, President and Chief Executive Officer Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with this quarterly report on Form 10-Q of Espey Mfg. & Electronics Corp. (the "Company"), I, David A. O'Neil, Treasurer and Principal Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 10, 2003 /s/David A. O'Neil --------------------------- David A. O'Neil, Treasurer and Principal Financial Officer 11