UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005
[ ] TRANSISTION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number I-4383
ESPEY MFG. & ELECTRONICS CORP.
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(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
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(Address of principal executive offices)
Issuer's telephone number, including area code 518-584-4100
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Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act during the past 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 a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at November 10, 2005
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Common stock, $.33-1/3 par value 1,151,212 shares
Transitional Small Business Disclosure Format YES [X] NO [ ]
ESPEY MFG. & ELECTRONICS CORP.
Quarterly Report on Form 10-QSB
I N D E X
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements:
Balance Sheet (Unaudited) - September 30, 2005 1
Statements of Income (Unaudited) -
Three Months Ended September 30, 2005 and 2004 3
Statements of Cash Flows (Unaudited)-
Three Months Ended September 30, 2005 and 2004 4
Notes to Financial Statements (Unaudited) 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations. 8
Item 3 Controls and Procedures 11
PART II OTHER INFORMATION AND SIGNATURES
Item 1 Legal Proceedings 12
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 12
Item 3 Defaults on Senior Securities 12
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 14
PART I: Financial Information
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheet (Unaudited)
September 30, 2005
-------------------------
A S S E T S
2005
September 30,
-------------
ASSETS:
Cash and cash equivalents $ 9,014,126
Short term investments 3,360,000
Trade accounts receivable, net 2,919,461
Other receivables 9,455
Inventories:
Raw materials and supplies 1,754,412
Work-in-process 2,723,012
Costs relating to contracts in
process, net of advance payments of
$97,758 at September 30, 2005 6,389,404
-------------
Total inventories 10,866,828
-------------
Deferred income taxes 135,997
Prepaid expenses and other current assets 636,946
-------------
Total current assets 26,942,813
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Property, plant and equipment, net 2,898,312
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Total assets $ 29,841,125
=============
See accompanying notes to the financial statements. (Continued)
1
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheet (Unaudited), Continued
September 30, 2005
------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
2005
September 30,
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 841,463
Accrued expenses:
Salaries, wages and commissions 92,083
Employees' insurance costs --
Vacation 442,488
ESOP payable 83,901
Other 48,103
Payroll and other taxes withheld and accrued 44,266
Income taxes payable 178,221
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Total current liabilities 1,730,525
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Deferred income taxes 280,557
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Total liabilities 2,011,082
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Common stock, par value .33-1/3 per share. Authorized 10,000,000
shares; issued 1,514,937 shares on September 30, 2005
Outstanding 1,001,212 on September 30, 2005 504,979
Capital in excess of par value 12,405,915
Retained earnings 25,352,395
-------------
Less: Cost of 150,000 Unearned ESOP Shares
on September 30, 2005 (4,335,000)
Cost of 363,725 Treasury shares on September 30, 2005 (6,098,246)
-------------
Total stockholders' equity 27,830,043
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Total liabilities and
stockholders' equity $ 29,841,125
=============
See accompanying notes to the financial statements.
2
ESPEY MFG. & ELECTRONICS CORP.
Statements of Income (Unaudited)
Three Months Ended September 30, 2005 and 2004
----------------------------------------
Three Months
2005 2004
--------------------------
Net sales $ 4,560,574 $ 4,730,327
Cost of sales 3,680,284 4,081,185
----------- -----------
Gross profit 880,290 649,142
Selling, general and
administrative expenses 669,719 600,679
----------- -----------
Operating income 210,571 48,463
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Other income (expense)
Interest and
dividend income 98,934 34,870
Other (2,823) 3,217
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96,111 38,087
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Income before income taxes 306,682 86,550
Provision for income taxes 88,938 25,965
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Net income $ 217,744 $ 60,585
=========== ===========
Net income per share:
Basic $ .22 $ .06
Diluted $ .21 $ .06
----------- -----------
Weighted average number of shares outstanding:
Basic 1,008,582 1,013,160
Diluted 1,027,471 1,020,880
=========== ===========
See accompanying notes to the financial statements.
3
ESPEY MFG. & ELECTRONICS CORP.
Statements of Cash Flows (Unaudited)
Three Months Ended September 30, 2005 and 2004
September 30,
2005 2004
------------ ------------
Cash Flows From Operating Activities:
Net income $ 217,744 $ 60,585
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 128,874 127,722
ESOP compensation expense 106,401 --
Loss on disposal of assets 8,077
Deferred income tax (17,500) 10,731
Changes in assets and liabilities:
Decrease (increase) in trade receivables, net 73,779 (729,310)
Increase in other receivables (6,282) (5,390)
(Increase) decrease in inventories (499,276) 333,673
(Increase) decrease in prepaid expenses and
other current assets (300,951) 87,581
Increase in accounts payable 462,692 496,057
Increase in accrued salaries, wages and commissions 29,805 17,133
Increase in accrued employees' insurance costs -- 1,304
(Decrease) increase in other accrued expenses (5,680) 3,941
Decrease in vacation accrual (55,527) (64,519)
Increase in payroll and other taxes withheld and accrued 8,289 8,529
Decrease in income taxes payable (133,907) (49,669)
Decrease in ESOP payable (22,500) --
------------ ------------
Net cash (used in) provided by operating activities (5,962) 298,368
------------ ------------
Cash Flows From Investing Activities:
Unearned ESOP Shares (4,335,000) --
Additions to property, plant & equipment (50,426) (113,761)
Purchase of short-term investments (1,920,000) (384,000)
Maturity of short-term investments 1,632,000 --
------------ ------------
Net cash used in investing activities (4,673,426) (497,761)
------------ ------------
Cash Flows From Financing Activities:
Sale of treasury stock 4,396,424 --
Dividends on common stock (149,903) (151,621)
Purchase of treasury stock (417,684) (90,315)
Proceeds from exercise of stock options 61,170 3,590
------------ ------------
Net cash provided by (used in) financing activities 3,890,007 (238,346)
------------ ------------
Decrease in cash and cash equivalents (789,381) (437,739)
Cash and cash equivalents, beginning of period 9,803,507 12,310,972
------------ ------------
Cash and cash equivalents, end of period 9,014,126 11,873,233
============ ============
Income Taxes Paid $ 240,345 $ 64,903
============ ============
See accompanying notes to the financial statements.
4
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements (Unaudited)
-------------------
Note 1. Basis of Presentation
In the opinion of management the accompanying unaudited 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 United
States 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 2005 Form 10-K.
Note 2. Net income per Share
Basic net income per share excludes dilution and is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the income of the Company. As
Unearned ESOP shares are released or committed-to-be-released the shares become
outstanding for earnings-per-share computations.
Note 3. Stock Based Compensation
The Company has elected to account for its stock-based compensation plans under
the intrinsic value-based method of accounting as permitted by SFAS No. 123 and
as prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations including FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB No. 25," in accounting for its fixed
stock option plans. Under this method, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price.
The following table illustrates the effect on net income and net income per
share if the Company had applied the fair value recognition provisions of SFAS
no. 123 to stock-based employee compensation.
5
Three Months
Ended September 30,
2005 2004
-----------------------
Net income as reported $ 217,744 $ 60,585
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (4,858) (8,377)
---------- ----------
Pro forma net income $ 212,886 $ 52,208
========== ==========
Net income per share:
Basic-as reported $ .22 $ .06
========== ==========
Basic-pro forma $ .21 $ .05
========== ==========
Diluted-as reported $ .21 $ .06
========== ==========
Diluted-pro forma $ .21 $ .05
========== ==========
Note 4. Commitments and Contingencies
The Company has entered into standby letters of credit agreements with financial
institutions primarily relating to the guarantee of future performance on
certain contracts. Contingent liabilities on outstanding standby letters of
credit agreements aggregated $39,300 at September 30, 2005. The Company does not
expect to fund any of the amounts under the standby letters of credit. As a
government contractor, the Company is continually subject to audit by various
agencies of the U.S. Government to determine compliance with various procurement
laws and regulations. As a result of such audits and as part of normal business
operations of the Company, various claims and charges are asserted against the
Company. It is not possible at this time to predict the outcome of all such
actions. However, management is of the opinion that it has good defenses against
such actions and believes that none of these matters will have a material effect
on the consolidated financial position, results of operations or cash flows of
the Company.
Note 5. Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment." SFAS No.
123R requires companies to recognize in the income statement the grant-date fair
value of stock options and other equity-based compensation issued to employees.
SFAS No. 123R was originally effective for interim and annual periods beginning
after December 15, 2005. The effective date has been delayed by the SEC until
annual periods beginning after December 15, 2005. The SFAS No. 123R is not
expected to have a material impact on the Company's results of operations and
financial condition.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets
- Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary
Transactions. SFAS No. 153 requires that exchanges should be recorded and
measured at the fair value of the assets exchanged, with certain exceptions.
SFAS No. 153 is effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to
have a significant impact on the Company's results of operations or financial
position.
6
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", a replacement of APB Opinion No. 20, "Accounting Changes", and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements". SFAS
No. 154 changes the requirements of the accounting for and reporting of a change
in accounting principle. Previously, most voluntary changes in accounting
principles required recognition via a cumulative effect adjustment within net
income of the period of the change. SFAS No. 154 requires retrospective
application to prior periods' financial statements, unless it is impractical to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005; however, the Statement does not change the
transition provisions of any of the existing accounting pronouncements. We do
not believe adoption of SFAS No. 154 will have a material effect on our
consolidated financial position, results of operations or cash flows.
Note 6. Employee Stock Ownership Plan
The Company sponsors a leveraged employee stock ownership plan (the "ESOP") that
covers all nonunion employees who work 1,000 or more hours per year and are
employed on June 30. Prior to July 15, 2005, the ESOP owned 230,120 shares, all
of which were allocated to employees. On July 15, 2005, pursuant to a Stock
Purchase Agreement dated as of such date, the Company, by selling 150,000 shares
of its common stock, par value $0.33 1/3 per share, to the Espey Mfg. &
Electronics Corp. Employee Stock Ownership Plan Trust, provided more shares to
be allocated to employees for services rendered over the next 15 years. The ESOP
paid $28.90 per share, for an aggregate purchase price of $4,335,000. The
determination of the purchase price was based on a fairness opinion obtained by
an independent valuation firm. The ESOP borrowed from the Corporation an amount
equal to the purchase price. The loan will be repaid in fifteen (15) equal
annual installments of principal and the unpaid balance will bear interest at a
fixed rate of 6.25% per annum, the "prime rate" as quoted in The Wall Street
Journal on the date of closing.
The Board of Directors of the Company had approved a purchase price per share
equal to a 5% discount on the average trading price of the Company's common
stock on the American Stock Exchange on the date before closing, but in no event
greater than the fair market value as determined by an independent valuation
firm retained by the ESOP. The average trading price of the Company's common
stock on the American Stock Exchange on July 14, 2005 was $30.72.
In making the sale, the Company relied on the exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended, because the shares sold
were offered only to the ESOP.
After giving effect to the transaction the ESOP owned 380,120 shares of the
Company's 1,158,294 outstanding shares of common stock as of July 15, 2005.
The Company makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends received by the ESOP. All dividends on unallocated shares
received by the ESOP are used to pay debt service. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings. As the debt is repaid,
shares are released and allocated to active employees, based on the proportion
of debt service paid in the year. The Company accounts for its ESOP in
accordance with Statement of Position 93-6. Accordingly, the shares purchased by
the ESOP are reported as Unearned ESOP Shares in the statement of financial
position. As shares are released or committed-to-be-released, the Company
reports compensation expense equal to the current average market price of the
shares, and the shares become outstanding for earnings-per-share (EPS)
computations. ESOP compensation expense was $106,401 for the quarter ended
September 30, 2005. The ESOP shares as of September 30 were as follows:
Allocated Shares 219,738
Committed-to-be-released shares 3,229
Unreleased shares 146,771
----------
Total shares held by the ESOP 369,738
==========
Fair value of unreleased shares at September 30 $5,144,324
==========
7
Item 2. Management's Discussion and Analysis
Overview
Espey Mfg. & Electronics Corp. (the "Company") located in Saratoga Springs, New
York, is engaged principally in the development, design, production and sale of
specialized electronic power supplies, a wide variety of transformers and other
types of iron-core components, and electronic system components. In some cases,
the Company manufactures such products in accordance with pre-developed
mechanical and electrical requirements ("build to print"). In other cases, the
Company is responsible for both the overall design and manufacture of the
product. The Company does not generally manufacture standardized components and
does not have a product line. The products manufactured by the Company find
application principally in (i) shipboard and land based radar, (ii) locomotives,
(iii) aircraft, (iv) short and medium range communication systems, (v)
navigation systems, and (vi) land based military vehicles.
Business is solicited from large industrial manufacturers and defense companies,
the government of the United States and foreign governments and major foreign
electronic equipment companies. In certain countries the Company has external
sales representatives to help solicit and coordinate foreign contracts. The
Company is also on the eligible list of contractors of the United States
Department of Defense and generally is automatically solicited by such agencies
for procurement needs falling within the major classes of products produced by
the Company. In addition, the Company directly solicits bids from the United
States Department of Defense for prime contracts.
There is competition in all classes of products manufactured by the Company from
divisions of the largest electronic companies, as well as from many small
companies. The Company's sales do not represent a significant share of the
industry's market for any class of its products. The principal methods of
competition for electronic products of both a military and industrial nature
include, among other factors, price, product performance, the experience of the
particular company and history of its dealings in such products. The Company, as
well as other companies engaged in supplying equipment for military use, is
subject to various risks, including, without limitation, dependence on United
States and foreign government appropriations and program allocations, the
competition for available military business, and government termination of
orders for convenience.
Management is optimistic about the future of the Company. In the first three
months of fiscal 2006, the Company received approximately $18.1 million in new
orders. These orders include both follow-on production quantities for mature
products, and engineering development orders which will enable the Company to
utilize its engineering expertise in developing new customer specific products.
Some of these products, once developed, will be produced in the Company's
manufacturing facility and are expected to provide large production order
quantities over several years. These orders are in line with the Company's
strategy of getting involved in long-term high quantity military and industrial
products.
The sales backlog of approximately $45.3 million at September 30, 2005 gives the
Company a solid base of future sales and, therefore, management expects a
significant increase in sales during fiscal 2006 as compared to fiscal 2005. In
addition to the backlog, the Company currently has outstanding quotations
representing in excess of $27 million in the aggregate for both repeat and new
programs. Many potential orders are currently being discussed and negotiated
with our customers.
The outstanding quotations encompass various new and previously manufactured
power supplies, transformers, and subassemblies. However, there can be no
assurance that the Company will acquire any or all of the anticipated orders
described above, many of which are subject to allocations of the United States
defense spending and factors affecting the defense industry and military
procurement generally.
The total backlog for the Company of $45.3 million at September 30, 2005, up
$29.7 million over September 30, 2004, represents the estimated remaining sales
value of work to be performed under firm contracts. The funded portion of this
backlog at September 30, 2005 is approximately $36.6 million. This includes
items that have been authorized and appropriated by Congress and/or funded by
the customer. The unfunded backlog is approximately $8.7 million and represents
firm multi-year orders for which funding
8
has not yet been appropriated by Congress. While there is no guarantee that
future budgets and appropriations will provide funding for a given program,
management has included in unfunded backlog only those programs that it believes
are likely to receive funding. The unfunded backlog at September 30, 2004 was
zero. The backlog at September 30, 2005, as discussed above, includes
significant orders for military and industrial power supplies, and contracts to
manufacture certain customer products in accordance with pre-engineered
requirements.
Management, along with the Board of Directors, continues to evaluate the need
and use of the Company's working capital. Expectations are that the working
capital will be required to fund the increase in orders over the next several
quarters, dividend payments, and general operations of the business. Also, the
Mergers and Acquisitions Committee of the Board of Directors continues to
evaluate potential strategic alternatives on a periodic basis.
Critical Accounting Policies and Estimates
We believe our most critical accounting policies include revenue recognition and
cost estimation on our contracts.
Revenue Recognition and Estimates
A significant portion of our business is comprised of development and production
contracts. Generally revenues 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.
Percentage of completion accounting requires judgment relative to expected
sales, estimating costs and making assumptions related to technical issues and
delivery schedule. Contract costs include material, subcontract costs, labor and
an allocation of overhead 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, based on changes in circumstances, in the estimation of
cost at completion. When a change in expected sales value or estimated cost is
determined, changes are reflected in current period earnings.
Results of Operations
Net Sales for the three months ended September 30, 2005 and 2004, were
$4,560,574 and $4,730,327, respectively. The 3.6% decrease in net sales for the
three months ended September 30, 2005 as compared to 2004, was a result of
shipments being delayed due to customer sourcing requirements and quality
control inspections that could not be performed by the Company's customers until
after the quarter ended. New orders received in first quarter of fiscal 2006
were approximately $18.1 million compared to approximately $4.8 in the first
quarter of fiscal 2005.
The primary factor in determining gross profit and net income is product mix.
The gross profits on mature products and build to print contracts are higher
than with respect to the products, which are still in the engineering
development stage or in the early stages of production. In any given accounting
period the mix of product shipments between higher margin mature programs and
less mature programs including loss contracts, has a significant impact on gross
profit and net income.
For the three months ended September 30, 2005 and 2004 gross profits were
$880,290, and $649,142, respectively. Gross profit as a percentage of sales was
19.3% and 13.7%, for the three months ended September 30, 2005 and 2004,
respectively. The improved gross profit percentage in the three months ended
September 30, 2005, relates to favorable product mix, offset partially by
decreased sales and higher ESOP contribution expense. ESOP contribution expense
included in cost of sales was $85,120 for the three months ended September 30,
2005, and zero for the three months ended September 30, 2004, (see note 6 to the
financial statements). 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
September 30, 2005 was 173 people compared to 178 people at September 30, 2004.
9
Selling, general and administrative expenses were $669,719, for the three months
ended September 30, 2005, an increase of $69,040, or 11.5% as compared to the
same period in the prior year. This increase is primarily due to increased
selling salaries and ESOP contribution expense, offset partially by a decrease
in professional fees.
Other income for three months ended September 30, 2005 increased as compared to
the three months ended September 30, 2004 due to increased interest income on
the Company's cash equivalents and short-term investments due to higher interest
rates. The Company does not believe that there is significant risk associated
with its investment policy, since at September 30, 2005 all of the investments
are primarily represented by short-term liquid investments including
certificates of deposit and money market accounts.
The effective income tax rate at September 30, 2005 and 2004 was 29.0% and
30.0%, respectively. The effective tax rate is less than the statutory tax rate
mainly due to the foreign exportation benefit the Company receives on its
international sales, the Qualified Production Activities benefit, and the
benefit derived from the ESOP dividends paid on allocated shares.
Net income for the three months ended September 30, 2005, was $217,744 or $.22
and $.21 per share, basic and diluted, respectively, compared to $60,585 or $.06
per share, both basic and diluted, for the three months ended September 30,
2004. The increase in net income per share was due to improved gross profit as a
percentage of sales, offset partially by the decrease in sales and increase in
selling, general and administrative expenses.
Liquidity and Capital Resources
The Company's working capital is an appropriate indicator of the liquidity of
its business, and during the past three fiscal years, the Company, when
possible, has funded all of its operations with cash flows resulting from
operating activities and when necessary from its existing cash and investments.
The Company did not borrow any funds during the last three fiscal years.
Management has available a $3,000,000 line of credit to help fund further growth
or working capital needs, if necessary, but does not anticipate the need for any
borrowed funds in the foreseeable future.
The Company's working capital as of September 30, 2005 was $25.2 million. During
the three months ended September 30, 2005 and 2004 the Company repurchased
12,142, and 4,014 shares, respectively, of its common stock from the Company's
Employee Retirement Plan and Trust ("ESOP"), for a total purchase price of
$417,685 and $90,315, respectively. Under existing authorizations from the
Company's Board of Directors, as of September 30, 2005, management is authorized
to purchase an additional $582,315 million of Company stock.
Three Months Ended September 30,
--------------------------------
2005 2004
-------------- --------------
Net cash (used in) provided by operating activities $ (5,962) $ 298,368
Net cash used in investing activities 4,673,426 497,761
Net cash provided by (used in) financing activities 3,890,007 (238,346)
Net cash provided by operating activities fluctuates between periods primarily
as a result of differences in net income, the timing of the collection of
accounts receivable, purchases of inventory, receipt of progress payments, level
of sales and payments of accounts payable. Net cash used in investing activities
increased in the first quarter of fiscal 2006 due to the purchase of short-term
investments and the ESOP transaction described in note 6. The increase in cash
provided by financing activities is due primarily to the sale of treasury shares
to the ESOP in the first quarter of fiscal 2006.
The Company believes that the cash generated from operations and when necessary,
from existing cash and cash equivalents, will be sufficient to meet its
long-term funding requirements for the foreseeable future.
10
Management believes that the Company's reserve for bad debts of $3,000 is
adequate given the customers with whom the Company does business. Historically,
bad debt expense has been minimal.
During the three months ended September 30, 2005 and 2004, the Company expended
$50,426 and $113,761, respectively, for plant improvements and new equipment.
The Company has budgeted approximately $500,000 for new equipment and plant
improvements in fiscal 2006. Management presently anticipates that the funds
required will be available from current operations.
The Company has entered into standby letters of credit agreements with financial
institutions primarily relating to the guarantee of future performance on
certain contracts. Contingent liabilities on outstanding standby letters of
credit agreements aggregated $39,300 at September 30, 2005. The Company does not
expect to fund any of the amounts under the standby letters of credit.
Other Matters
An Employee Retirement Plan and Trust ("ESOP") was established for the eligible
non-union employees of the Company, effective as of July 1, 1988. The ESOP used
the proceeds of a loan from the Company made on June 5, 1989 to purchase 316,224
shares of the Company's common stock for approximately $8,400,000 and the
Company contributed approximately $400,000 in 1989 to the ESOP, which was used
by the ESOP to purchase an additional 15,000 shares of the Company's common
stock.
Each year the Company made contributions to the ESOP, which were used to make
loan interest and principal payments. With each loan and interest payment, a
portion of the common stock is allocated to participating employees. As of
September 30, 2005, there were 219,738 shares allocated to participants.
Dividends attributable to allocated shares were likewise allocated to the
participants' accounts, whereas the dividends on unallocated shares were used
toward the loan repayment, thus reducing the Company's required contribution.
The loan from the Company to the ESOP was repayable in annual installments of
$1,039,605, including interest through June 30, 2004. Interest was payable at a
rate of 9% per annum. The Company's receivable from the ESOP was recorded as
common stock subscribed in the accompanying balance sheet.
Effective June 30, 2004 the loan from the Company to the ESOP was paid in full
and all shares have been allocated to participant's accounts.
On July 15, 2005, pursuant to a Stock Purchase Agreement dated as of such date,
the Company sold 150,000 shares of its common stock, par value $0.33 1/3 per
share, to the Espey Mfg. & Electronics Corp. Employee Stock Ownership Plan Trust
(the "ESOP"). The ESOP paid $28.90 per share, for an aggregate purchase price of
$4,335,000. The determination of the purchase price was based on a fairness
opinion obtained by an independent valuation firm. The ESOP borrowed from the
Corporation an amount equal to the purchase price. The loan will be repaid in
fifteen (15) equal annual installments of principal and the unpaid balance will
bear interest at a fixed rate of 6.25% per annum, the "prime rate" as quoted in
The Wall Street Journal on the date of closing.
The Board of Directors of the Company approved a purchase price per share equal
to a 5% discount on the average trading price of the Company's common stock on
the American Stock Exchange on the date before closing, but in no event greater
than the fair market value as determined by an independent valuation firm
retained by the ESOP. The average trading price of the Company's common stock on
the American Stock Exchange on July 14, 2005 was $30.72.
In making the sale, the Company relied on the exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended, because the shares sold
were offered only to the ESOP.
After giving effect to the transaction the ESOP owned 380,120 shares of the
Company's 1,158,294 outstanding shares of common stock as of July 15, 2005.
11
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning 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, supply and manufacturing constraints, potential
new orders from customers 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 3. Controls and Procedures
(a) The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this Quarterly Report on Form 10-QSB. Based on such
evaluation, our chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report.
(b) There have been no changes in our internal controls over financial reporting
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
12
PART II: Other Information and Signatures
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Securities Sold - For the three-month period ended September
30, 2005, 3,300 stock options were exercised
under the Company's existing stock option
plan. In addition to the stock option
shares, the Company sold 1,760 shares to the
ESOP. The securities were sold for cash and
the sales were made without registration
under the Securities Act in reliance upon
the exemption from registration afforded
under Section 4(2) of the Securities Act of
1933. Proceeds were used for general working
capital purposes.
(c) Securities Repurchased
Purchases of Equity Securities
Total Number Maximum Number
of Shares (or Approximate
Purchased Dollar Value)
as Part of of Shares
Total Average Publicly that May Yet
Number Price Announced Be Purchased
of Shares Paid Plan or Under the Plan
Period Purchased per Share Program or Program (1)
-----------------------------------------------------------------------------------------
August 1 to
August 31, 2005 12,142 $34.40 12,142 $582,315
-----------------------------------------------------------------------------------------
Total 12,142 12,142
=========================================================================================
(1) Pursuant to a prior Board of Directors authorization, as of
September 30, 2005 the Company can repurchase up to $582,315 of
its common stock pursuant to an ongoing plan.
Item 3 Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer pursuant to
Rules 13a-14(a) and 15d-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Principal Financial Officer
pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Form 8-K filed July 15, 2005 announcing the unregistered sales
of equity securities to the Company's ESOP.
Form 8-K filed August 18, 2005 announcing the issuance of a
press release detailing the financial results for the fiscal
year ended June 30, 2005.
14
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
November 10, 2005
-------------------------
Date
15