-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L8PlHv8mr/fZNJEgfZd9lyTQ45SFBeSGkn73ohI4+Rb6cSXQFdsQi9GZFSC8iKXS G/puwCiUhQWMQCn1MrwW9w== 0000033533-96-000006.txt : 19960930 0000033533-96-000006.hdr.sgml : 19960930 ACCESSION NUMBER: 0000033533-96-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960927 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESPEY MANUFACTURING & ELECTRONICS CORP CENTRAL INDEX KEY: 0000033533 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 141387171 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04383 FILM NUMBER: 96636026 BUSINESS ADDRESS: STREET 1: PO BOX 422 STREET 2: CONGRESS & BALLSTON AVENUES CITY: SARATOGA SPRINGS STATE: NY ZIP: 12866 BUSINESS PHONE: 5185844100 10-K 1 FISCAL YEAR END 30 JUNE 1996 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended June 30, 1996 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the transition period from ________________ to ______________ Commission File No. 1-4383 ESPEY MFG. & ELECTRONICS CORP. (Exact name of registrant as specified in its charter) New York 14-1387171 (State or other jurisdiction of (IRS EmployerIdentification No.) incorporation or organization) Congress and Ballston Avenues, Saratoga Springs, NY 12866 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 584-4100 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Common Stock $.33-1/3 par value American Stock Exchange Common Stock Purchase Rights American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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, and (2) has been subject to such filing requirements for the past 90 days [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant: $12,287,269 as of September 20, 1996 based upon the closing sale price of $15.75 on the American Stock Exchange on September 20, 1996. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Class Outstanding at September 20,1996 Common Stock, $.33-1/3 par value 1,111,220 PART I Item 1. Business. General Espey Mfg. & Electronics Corp. (the "Company") was incorporated in 1928. The Company operates a one segment business. A significant portion of the Company's business is the production of military and industrial electronic equipment for use by the United States Government, its agencies, and certain industrial customers. In fiscal year ending June 30, 1996 (referred to herein as "1996"), the Company's total sales were $16,800,200. Sales were made to the United States Government and its agencies primarily on a subcontract basis. Sales were made to domestic and foreign customers on a prime and subcontract basis. Sales to two domestic customers and one foreign customer accounted for 28.9%, 22.8% and 17.8%, respectively, of total sales in 1996. In comparison, sales to two domestic customers and one foreign customer accounted for 31.5%, 24.2% and 16.2%, respectively, of total sales in 1995. Sales to one domestic customer accounted for 66.8% of total sales in 1994. Export sales in 1996 and 1995 aggregated approximately $3,073,000 and $2,602,000, respectively. Export sales in 1994 were not significant. Products The Company has been and intends to continue to be engaged principally in the development, design, production and sales of specialized electronic power conditioning apparatus (electronic power supplies), a wide variety of transformers and other types of iron-core components, and electronic systems. In some cases, the Company manufactures such products in accordance with pre-developed mechanical and electrical requirements. 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. The electronic power supplies and components manufactured by the Company find application principally in: (i) computers, (ii) aircraft, shipboard and land based radar, (iii) missile guidance and control systems, (iv) short, medium range and global communication systems, (v) navigation systems for aircraft, (vi) nuclear submarine control systems, and (vii) recently, in locomotives. The electronic systems manufactured by the Company include antenna systems and high power radar transmitters. These systems utilize the Company's own electronic power supplies, transformers, and other iron-core components and mechanical assemblies. The Company's iron-core components include: (i) transformers of the audio, power and pulse types, (ii) magnetic amplifiers, and (iii) audio filters. I-1 The following tabulation shows the percentage of the Company's total sales represented by sales of each class of similar products which contributed at least 4% of total sales during one or more of the last three fiscal years. Fiscal Year Ended June 30 1996 1995 1994 Electronic Power Supplies 81% 84% 85% Iron-Core Components 15% 11% 11% Electronic Systems and Assemblies 4% 5% 4% Raw Materials The Company has never experienced any significant delay or shortage with respect to the purchase of raw materials and components used in the manufacture of its products, and has at least two potential sources of supply for all raw materials used by it. Sales Backlog The total amount of backlog orders believed to be firm as of June 30, 1996 was approximately $16,297,000 as compared to approximately $20,878,000 as of June 30, 1995. It is anticipated that a minimum of $13,000,000 of orders comprising the June 30, 1996 backlog will be filled during the fiscal year ending June 30, 1997. This is in addition to any shipments which may be made against orders subsequently received during the fiscal year ending June 30, 1997. From June 30, 1996 to September 16, 1996, the Company did not book any significant new business due principally to the timing restraints of funding by both the United States Government and other major customers. The Company currently anticipates that new business will be booked in the immediate future based upon the ongoing negotiations revolving around the Company's outstanding quotations. Principal Customers A significant portion of the Company's business is conducted with the United States Government and its agencies, Lockheed Martin and General Electric. The loss of any of these customers would have a material adverse effect on the business of the Company. I-2 Military Contracts The Company, as well as other companies primarily engaged in supplying equipment for military use, is subject to various risks, including, without limitation, dependence on government appropriations and program allocations, the competition for available military business, and termination of orders for convenience. Marketing and Competition The Company is on the eligible list of contractors of many agencies of the 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 both the Department of Defense and other United States Government agencies for prime contracts. Subcontract work for government end use is solicited from major electronic and aircraft companies, primarily by the Company's own employees and sales representatives. There is competition in all classes of products manufactured by the Company, from divisions of the largest electronic companies in the country, as well as many small companies. The Company's sales do not represent a significant portion of the industry's production of any class of products made by the Company. The principal methods of competition for electronic products of both a military and industrial nature include, among other factors, price and product performance and the experience of the particular company and history of its dealings in such products. The Company's business is not considered to be of a seasonal nature. Research and Development The Company has increased its expenditures for research and development over the past three fiscal years. In 1996, approximately $205,000 was expended for this type of effort. In 1995 and 1994, the Company spent $141,000 and $119,000, respectively, on research and development. Some of the Company's professional employees spend varying degrees of time in either development of new products or improvement of existing products. Employees The number of persons employed by the Company as of September 20, 1996 was 211. I-3 Government Regulations Compliance with federal, state and local provisions that have been enacted or adopted to regulate the discharge of materials into the environment, or otherwise relating to the protection of the environment, did not in 1996, and the Company believes will not in the current or succeeding fiscal year, have a material effect upon the capital expenditures, earnings or competitive position of the Company. Item 2. Properties. The Company's principal manufacturing and all of its engineering facilities are at its plant in Saratoga Springs, New York, which the Company owns. The Company initially occupied the plant in 1952, and in 1955 consolidated all of its manufacturing operations at the plant when it terminated its manufacturing operations in New York, New York. The Saratoga Springs plant was originally constructed about 1900 and consists of various closely adjoining one-story buildings. The plant has a sprinkler system throughout and contains approximately 138,000 square feet of floor space, of which 60,000 is used for manufacturing, 23,000 for engineering, 33,000 for shipping and climatically secured storage, and 3,000 for offices. The offices and engineering are air conditioned and approximately 1,000 square feet of "white rooms" are completely climatically controlled. In addition to assembly and wiring operations, the plant includes facilities for varnishing, potting, impregnation, and spray painting operations, in addition to complete machine shop and sheet metal fabrication facilities adequate for substantially all of the Company's current operations. During fiscal year 1995, the Company expended about $800,000 for the upgrading of its plating department to more uniformly conform to the environmental standards set by the Federal Government and established a new plating division, called Saratoga Electro-Finishing. Besides normal test equipment, the Company maintains a sophisticated on-site environmental test facility. A fully staffed Automatic Data Processing Center is also on-site. The Company maintains additional manufacturing facilities in a three- story, fully sprinklered building of approximately 4,000 square feet at 146 Fulton Street, Gloversville, New York. The facility is used primarily for subcomponent wiring and assembly. The Company maintains a sales office in a modern office building at 445 Northern Boulevard, Great Neck, New York. This space, comprising approximately 750 square feet, is leased from a non-affiliated person for a term expiring on September 9, 2001. Item 3. Legal Proceedings. Not applicable. I-4 Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. Price Range of Common Stock The table below shows the range of high and low prices for the Company's common stock on the American Stock Exchange, the principal market for trading in the common stock, for each quarterly period for the last two fiscal years ended June 30: 1996 High Low First Quarter 16 1/4 14 1/4 Second Quarter 14 1/2 13 3/8 Third Quarter 14 1/4 12 7/8 Fourth Quarter 14 1/4 13 3/4 1995 High Low First Quarter 14 7/8 13 3/8 Second Quarter 14 1/4 12 1/2 Third Quarter 13 1/4 11 5/8 Fourth Quarter 13 5/8 12 1/4 Holders The approximate number of holders of the common stock was 240 on September 20, 1996. Included in this number are shares held in "nominee" or "street" name and, therefore, the number of beneficial owners of the common stock are believed to be substantially in excess of the foregoing number. Dividends On September 11, 1996 the Board of Directors declared a cash dividend of $.70 per share to be paid on November 22, 1996 to shareholders of record on October 28, 1996. The Company paid a cash dividend on the common stock of $.60 per share for its fiscal year ended June 30, 1995 and $.70 per share for its fiscal year ended June 30, 1996. II-1 Item 6. Selected Financial Data.
ESPEY MFG. & ELECTRONICS CORP. Five Years Ended June 30, 1996 Selected Income Statement Data Year ended June 30, 1996 1995 1994 1993 1992 Net Sales $ 16,800,200 14,574,097 14,678,303 15,206,921 15,985,621 Operating income 209,226 24,064 1,502,470 2,234,782 2,068,330 Other income, net 575,006 726,073 435,238 396,891 866,096 Cumulative effect of change in accounting principle -- -- 201,653 -- -- Net earnings 522,737 491,767 1,343,877 1,594,290 1,885,208 Earnings per common share: Earnings before cumulative effect of change in accounting principle $ .41 .37 .85 1.18 1.35 Cumulative effect of change in accounting principle -- -- .15 -- -- Net earnings $ .41 .37 1.00 1.18 1.35 Selected Balance Sheet Data Year ended June 30, 1996 1995 1994 1993 1992 Current Assets $ 21,499,805 25,243,909 25,364,435 24,160,510 23,281,654 Current liabilities 623,908 983,401 722,170 681,101 814,143 Working capital 20,875,897 24,260,508 24,642,265 23,479,409 22,467,511 Total assets 24,950,043 28,839,718 28,474,536 27,608,660 26,985,274 Long-term liabilities (deferred ( income taxes) -- 30,697 124,619 446,934 457,761 Stockholders' equity 24,326,135 27,825,620 27,627,747 26,480,625 25,713,370 Cash dividends declared and paid per common share $ .70 .60 .60 .60 .60
II-2 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operation The Company operates a one segment business. It principally manufactures power supplies and components for military and industrial use. Sales volume is dependent to a large extent on product mix in any given fiscal period. This mix is in turn subject to the dictates of customer needs and delivery requirements. These factors principally account for any variation in sales and operating income from year to year. Sales for fiscal years ended June 30, 1996, 1995, and 1994 were $16,800,200, $14,574,097, and $14,678,303, respectively. The corresponding cost of sales were 89%, 90%, and 80%, respectively. Although sales in 1996 increased by approximately 15% over the previous year the gross profit percentage increased only marginally. This was due not only to the shipping of orders with relatively low profit margins, but also due to the fact that a pre-tax write-off of $354,000 relating to inventory was taken in the fourth quarter. This write-off also resulted in the net earnings per share during the current fourth quarter being somewhat lower than the fourth quarter earnings per share of the two preceding years. As was the case last year, the Company has been accepting orders with reduced profit margins because of the increasingly competitive nature of the marketplace. The Company is making efforts to resolve this situation by expanding its efforts to develop technologies and products of a more proprietary nature for sale in the commercial and military marketplace. The Company's efforts and investment in the advancement and refinement of both military and industrial technologieshas resulted in the Company being able to apply for various patents which are currently pending. The Company has received a Notice of Allowance from the United States Patent Office on one product, which indicates that the issuance of the actual patent is imminent. Current demographics indicate a need for the products for which the Company is currently seeking patents, particularly in the military marketplace, as well as a worldwide need for the Company's long range radar transmitters and components for high power AC locomotives. The management currently anticipates that the course of action the Company has taken will enhance the Company's revenues and profitability in future periods based on these indicated needs. Selling, general and administrative expenses increased by approximately $142,000 in 1996 as compared to 1995. This increase was due principally to an increase in salaries of approximately $125,000 for sales personnel. Earnings before income taxes increased in 1996 to $784,232 from $750,137 in 1995. Net earnings per share increased to $.41 from $.37. II-3 The Statements of Cash Flows indicates an increase in inventories of $785,021. This is brought about by the liquidation of progress payments in the amount of $2,121,800 which were netted against inventories at the end of last year. The liquidation is a result of shipments to the customers involved during fiscal 1996. Taking this into consideration, the Company's inventories actually decreased by approximately $1,337,000, which is in line with the increased sales for 1996. All other changes, such as the decrease in both Accounts Receivable and Accounts Payable are the result of transactions in the normal course of business. The one exception to this is "proceeds received from the sale of marketable securities," which proceeds were used to purchase common stock of the Company. This transaction is more fully explained in the Notes to the Financial Statements set forth in Item 8 of this Annual Report and in "Liquidity and Capital Expenditures" immediately below. Liquidity and Capital Expenditures 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, including financing activities, with cash flows resulting from operating activities. The Company did not borrow any funds during the last three fiscal years and does not currently anticipate that it will borrow any funds during fiscal year 1997. The Company's working capital for fiscal years ended June 30, 1996, 1995, and 1994 was $20,875,897, $24,260,508, and $24,642,265, respectively. The principal reason for the decrease in working capital between 1996 and 1995 was the repurchase by the Company of its common stock during 1996 in the total amount of $3,696,340. On March 7, 1996, the Company purchased a combined total of 219,400 shares of common stock from the Entwistle Company and Global Securities at a total cost of $3,620,100. In addition, the Company purchased 5,402 shares of common stock from the Company's ESOP during 1996 for a total purchase price of $76,240. Under existing authorizations, as of August 31, 1996, funds in the amount of $1,884,000 were available for the continuing repurchase of the Company's shares of common stock. The Company's combined investment in both short-term investments and marketable investment securities was (i) $11,754,564 as of June 30, 1992, (ii) $12,226,531 as of June 30, 1993, (iii) $13,290,888 as of June 30, 1994, (iv) $12,022,004 as of June 30, 1995, and (v) $7,505,507 as of June 30, 1996. The short-term investments consisted of Certificates of Deposit and United States Treasury Bills. During fiscal years 1992 through 1996, interest rates on short-term investments ranged from 6.00% to 2.10%. This factor accounts for the fluctuation of interest income during much of the five-year period. Interest income was $430,496 in fiscal 1994, $718,785 in fiscal 1995, and $556,565 in fiscal 1996. Interest income fiscal 1996, however was affected by the decrease in our investment base arising from the capital expenditures of $1,080,000 in 1995 and purchase of the Company's common stock in the amount of $3,696,340 during II-4 fiscal 1996 as set forth above. A majority of the Company's investment base is represented by United States Government Treasury securities and Certificates of Deposit. Consequently, the Company does not feel that there is any significant risk associated with its investment policy. Management feels that the Company's reserve for bad debts of $3,000 is adequate, since given the customers with whom the Company deals, particularly the United States Government and its agencies, the amount of bad debts over the years has been minimal. The Company does not currently offer, nor does management currently contemplate offering in the future, any post-retirement or employment benefits. Consequently, no accruals or liabilities have been provided for in the financial statements. During fiscal year 1996, the Company expended approximately $349,000 for plant improvements and new equipment. The Company plans to expend approximately $425,000 for new equipment and plant improvements in fiscal 1997. Management presently anticipates that the funds required will be available from current operations. Changes in Accounting Principles and Policies The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", as of July 1, 1993 on a prospective basis. The cumulative effect of the change in accounting for income taxes as of July 1, 1993 was $201,653 and is separately identified in the statement of earnings for the year ended June 30, 1994. Prior years' financial statements have not been restated to apply the provisions of SFAS No. 109. Further discussion of SFAS 109 can be found in the Notes to the Financial Statements set forth in Item 8 of this Annual Report. The Company has adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", as of July 1, 1994, the effects of which are described in the Notes to the Financial Statements set forth in Item 8 of this Annual Report. The Company adopted the provisions of Statement of Financial Accounting Standards (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. The adoption of this accounting standard had no effect on the financial position or results of operations of the Company. II-5 Other Matters An Employee Retirement Plan and Trust ("ESOP") was established for the eligible non-union employees of the Company and was effective as of July 1, 1988. 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. Each year the Company makes contributions to the ESOP which are 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 June 30, 1996, there were 139,997 shares allocated to participants. Dividends attributable to allocated shares were likewise allocated to the participants' accounts, whereas the dividends on unallocated shares were used as part of the loan repayment, thus reducing the Company's required contribution. 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. In 1995 and 1996, 7,260 and 5,402 shares of the Company's common stock, respectively, was purchased from the ESOP representing distributions taken by participants. II-6 Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS Page Independent Auditors' Report II-8 Balance Sheets at June 30, 1996 and 1995 II-9 Statements of Earnings for the years ended June 30, 1996, 1995 and 1994 II-11 Statements of Changes in Stockholders' Equity for the years ended June 30, 1996, 1995 and 1994 II-12 Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994 II-13 Notes to Financial Statements II-15 II-7 Independent Auditors' Report The Board of Directors and Stockholders Espey Mfg. & Electronics Corp.: We have audited the financial statements of Espey Mfg. & Electronics Corp. as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Espey Mfg. & Electronics Corp. as of June 30, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Albany, New York /s/ KPMG PeatMarwick LLP August 30, 1996 II-8
ESPEY MFG. & ELECTRONICS CORP. Balance Sheets June 30, 1996 and 1995 Assets 1996 1995 Current assets:Cash $ 1,112,767 231,675 Short-term investments, at cost (market value - $4,577,305 in 1996 and $1,497,681 in 1995) 4,484,312 1,467,540 Total cash and short-term investments 5,597,079 1,699,215 Marketable investment securities - current (note 2) 3,021,195 10,554,464 Trade accounts receivable, net of $3,000 allowance in 1996 and 1995 1,556,404 1,925,778 Other receivables 18,177 20,627 Net receivables 1,574,581 1,946,405 Inventories: Raw materials and supplies 499,900 400,778 Work in process 1,561,742 1,078,169 Costs relating to contracts in process, net of progress payments of $2,121,800 in 1995 (notes 3 and 4) 8,971,704 8,769,378 Net inventories 11,033,346 10,248,325 Income tax refund receivable -- 410,467 Deferred income taxes (note 8) 796 -- Prepaid expenses and other current assets 272,808 385,033 Total current assets 21,499,805 25,243,909 Deferred income taxes (note 8) 9,088 -- Property, plant and equipment, at cost (note 5) 11,813,137 11,464,636 Less accumulated depreciation (8,371,987) (7,868,827) Net property, plant and equipment 3,441,150 3,595,809 $24,950,043 28,839,718
(Continued) II-9
ESPEY MFG. & ELECTRONICS CORP. Balance Sheets, Continued June 30, 1996 and 1995 Liabilities and Stockholders' Equity 1996 1995 Current liabilities: Accounts payable $ 158,631 596,832 Accrued expenses: Salaries, wages and commissions 116,351 104,269 Employee insurance costs 54,739 50,293 Other 17,440 14,588 Payroll and other taxes withheld and accrued 156,890 141,513 Income taxes payable 119,857 -- Deferred income taxes - current (note 8) -- 75,915 Total current liabilities 623,908 983,401 Deferred income taxes (note 8) -- 30,697 Total liabilities 623,908 1,014,098 Stockholders' equity: Common stock, par value $.33-1/3 per share (note 12) Authorized 2,250,000 shares; issued 1,514,937 shares in 1996 and 1995 504,979 504,979 Capital in excess of par value 10,496,287 10,496,287 Retained earnings 24,316,400 24,678,208 35,317,666 35,679,474 Less: Common stock subscribed (note 13) (4,469,299) (5,027,962) Cost of 396,291 shares in 1996 and 171,489 shares in 1995 of common stock in treasury (6,522,232) (2,825,892) Total stockholders' equity 24,326,135 27,825,620 $24,950,043 28,839,718 See accompanying notes to financial statements. II-10 ESPEY MFG. & ELECTRONICS CORP. Statements of Earnings Years ended June 30, 1996, 1995 and 1994 1996 1995 1994 Net sales $ 16,800,200 14,574,097 14,678,303 Cost of sales 14,973,018 13,074,247 11,812,195 Gross profit 1,827,182 1,499,850 2,866,108 Selling, general and administrative expenses 1,617,956 1,475,786 1,363,638 Operating income 209,226 24,064 1,502,470 Other income: Interest income 556,565 718,785 430,496 Sundry income 18,441 7,288 4,742 575,006 726,073 435,238 Earnings before income taxes and cumulative effect of change in accounting principle 784,232 750,137 1,937,708 Provision for income taxes (note 8) 261,495 258,370 795,484 Earnings before cumulative effect of change in accounting principle 522,737 491,767 1,142,224 Cumulative effect of change in accounting principle (note 1(e)) -- -- 201,653 Net earnings $ 522,737 491,767 1,343,877 Earnings per common share (note 9): Earnings before cumulative effect of change in accounting principle $ .41 .37 .85 Cumulative effect of change in accounting principle -- -- .15 Net earnings per common share $ .41 .37 1.00 See accompanying notes to financial statements. II-11 ESPEY MFG. & ELECTRONICS CORP. Statements of Changes in Stockholders' Equity Years ended June 30, 1996, 1995 and 1994 Capital Common Total Common in excess Retained stock Treasury stockholders' stock of par value earnings subscribed stock equity Balance at June 30, 1993 $ 504,979 10,496,287 24,356,952 (6,145,286) (2,732,307) 26,480,625 Dividends paid on common stock $.60 per share -- -- (810,424) -- -- (810,424) Net earnings - 1994 -- -- 1,343,877 -- -- 1,343,877 Tax effect of dividends on unallocated ESOP shares (note 8) -- -- 55,007 -- -- 55,007 Reduction of common stock subscribed -- -- -- 558,662 -- 558,662 Balance at June 30, 1994 504,979 10,496,287 24,945,412 (5,586,624) (2,732,307) 27,627,747 Dividends paid on common stock $.60 per share -- -- (809,041) -- -- (809,041) Net earnings - 1995 -- -- 491,767 -- -- 491,767 Tax effect of dividends on unallocated ESOP shares (note 8) -- -- 50,070 -- -- 50,070 Purchase of treasury stock (7,260 shares) -- -- -- -- (93,585) (93,585) Reduction of common stock subscribed -- -- -- 558,662 -- 558,662 Balance at June 30, 1995 504,979 10,496,287 24,678,208 (5,027,962) (2,825,892) 27,825,620 Dividends paid on common stock $.70 per share -- -- (937,119) -- -- (937,119) Net earnings - 1996 -- -- 522,737 -- -- 522,737 Tax effect of dividends on unallocated ESOP shares (note 8) -- -- 52,574 -- -- 52,574 Purchase of treasury stock (224,802 shares) -- -- -- -- (3,696,340) (3,696,340) Reduction of common stock subscribed -- -- -- 558,663 -- 558,663 Balance at June 30, 1996 $ 504,979 10,496,287 24,316,400 (4,469,299) (6,522,232) 24,326,135 See accompanying notes to financial statements. II-12 ESPEY MFG. ELECTRONICS CORP. Statements of Cash Flows Year ended June 30, 1996, 1995 and 1994 1996 1995 1994 Cash flows from operating activities: Net earnings $ 522,737 491,767 1,343,877 Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of change in accounting principle -- -- (201,653) Tax effect of dividends on unallocated ESOP shares 52,574 50,070 55,007 Depreciation 503,160 493,735 490,987 Gain on sale of marketable investment securities (5,796) -- -- Deferred income tax benefit (116,496) (87,651) (72,364) Change in assets and liabilities: Decrease (increase) in receivables, net 371,824 (774,451) 905,972 Increase in inventories, net (785,021) (69,763) (583,697) Decrease (increase) in income tax refund receivable 410,467 (52,049) (358,418) Decrease (increase) in prepaid expenses and other current assets 112,225 (199,116) 39,335 Increase (decrease) in accounts payable (438,192) 259,941 101,093 Increase (decrease) in accrued salaries, wages and commissions 12,082 4,717 (68,167) Increase (decrease) in accrued employee insurance costs 4,446 (7,979) (9,275) Increase (decrease) in other accrued expenses 2,852 (2,430) (4,679) Increase (decrease) in payroll and other taxes withheld and accrued 15,377 711 (17,922) Increase (decrease) in income taxes payable 119,857 -- (8,279) Net cash provided by operating activities 782,096 107,502 1,611,817 Cash flows from investing activities: Proceeds from maturity of marketable investment securities 10,454,464 3,887,307 -- Additions to property, plant and equipment (348,501) (1,079,443) (152,938) Reduction of common stock subscribed 558,663 558,662 558,662 Proceeds from sale of marketable investment securities 3,866,542 -- -- Purchases of marketable investment securities (6,781,941) (14,341,771) -- Net cash provided by (used in) investing activities 7,749,227 (10,975,245) 405,724 (continued) II-13 ESPEY MFG. ELECTRONICS CORP. Statements of Cash Flows, Continued Year ended June 30, 1996, 1995 and 1994 1996 1995 1994 Cash flows from financing activities: Dividends on common stock $ (937,119) (809,041) (810,424) Purchase of treasury stock (3,696,340) (93,585) -- Net cash used in financing activities (4,633,459) (902,626) (810,424) Increase (decrease) in cash and short-term investments 3,897,864 (11,770,369) 1,207,117 Cash and short-term investments, beginning of year 1,699,215 13,469,584 12,262,467 Cash and short-term investments, end of year $ 5,597,079 1,699,215 13,469,584 Supplemental disclosures of cash flow information: Income taxes paid (refund) $ (204,907) 348,000 1,179,538 See accompanying notes to financial statements.
II-14 ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements June 30, 1996, 1995 and 1994 (1) Summary of Significant Accounting Policies (a) Nature of Operations Espey Mfg. & Electronics Corp. (the "Company") is a manufacturer of electronic equipment used primarily in military applications. The principal markets for the Company's products have been the United States and Israel. (b) Inventory Valuation and Income Recognition Raw materials are valued at cost, principally on the first-in, first-out method. Inventoried work relating to contracts in process and work in process is valued at actual production cost, including factory overhead and initial set-up costs incurred to date, reduced by amounts identified with revenue recognized on units shipped and billed. Work in process represents spare parts and other inventory items acquired or produced to service units previously sold or anticipated to be sold in the future under contract. Provision for losses on contracts is made when existence of such losses becomes evident. The costs attributed to units delivered under contracts are based on the estimated average cost of all units expected to be produced.Certain contracts are expected to extend beyond twelve months. The cost elements of contracts in process consist of production costs of goods and services currently in process and overhead relative to those contracts where such costs are reimbursable under the terms of the contracts. General and administrative expenses are charged to operations in the period in which they are incurred. Revenue is recognized on contracts and orders in the period in which the units are shipped and billed (unit-of-delivery method). (c) Progress Payments The Company receives progress payments on certain sales contracts. Such payments are recorded as a reduction of inventory and are liquidated when customers are billed for completed items shipped. (d) Depreciation Depreciation of plant and equipment is computed generally on a straight-line basis over the estimated useful lives of the assets for book purposes and on an accelerated method for tax purposes. (continued) II-15 ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements, Continued (e) Income Taxes The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", as of July 1, 1993 on a prospective basis. The cumulative effect of the change in accounting for income taxes as of July 1, 1993 was $201,653 and is separately identified in the statement of earnings for the year ended June 30, 1994. Under the provisions of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In addition, SFAS No. 109 requires that the tax benefit of tax deductible dividends on unallocated ESOP shares be recorded as a direct addition to retained earnings rather than as a reduction of income tax expense. (f) Investment Tax Credits Investment tax credits are accounted for as a reduction of income tax expense in the year taxes payable are reduced. Such credits reduced State income tax expense by approximately $7,000 in 1994. No benefits for investment tax credits were recognized in 1996 and 1995. (g) Short-Term Investments and Cash Equivalents All short-term investments, consisting of certificates of deposit, money market accounts, and U.S. Teasury bills, maturing within three months are considered cash equivalents for purposes of the statements of cash flows. (h) Marketable Investment Securities Marketable investment securities at June 30, 1996 and 1995 consist of U.S. Treasury securities. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," at July 1, 1994. Upon adoption of SFAS No. 115, at July 1, 1994, all amounts included in short-term investments matured within three months of the adoption date. Therefore no amounts were transferred to marketable investmentsecurities upon adoption and there was no cumulative effect from this change. Under SFAS No. 115, the Company classifies certain U.S. Treasury securities as held-to-maturity. Held-to-maturity securities are those securities that the Company has the ability and intent to hold until their maturity. Held-to-maturity securities are recorded at amortized cost. (continued) II-16 ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements, Continued A decline in the market value of any held-to-maturity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accredited over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method. Interest income is recognized when earned. (i) Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (j) Reclassification Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. (2) Marketable Investment Securities Marketable investment securities at June 30, 1996 and 1995, consist of U.S. Treasury securities, which are classified as held-to-maturity securities, and recorded at amortized cost. There were no gross unrealized gains or losses on U.S. Treasury securities at June 30, 1996. The difference between cost and fair market value for the U.S.Treasury securities represents interest income, which has been recognized during 1996 and is included in accrued interest receivable at June 30, 1996. Maturities of investment securities classified as held-to-maturity were as follows: Amortized Fair Cost Value At June 30, 1996: Due after three months through 1 year $ 3,021,195 3,134,458 At June 30, 1995: Due after three months through 1 year $ 10,554,464 10,731,469 (continued) II-17 ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements, Continued On February 20, 1996, the Company realized a gain of $5,796 on the sale of marketable securities with an aggregate amortized cost of $3,860,746. These securities, which were classified as held to maturity, were sold for the purpose of acquiring 219,400 shares of the Company's common stock. (3) Inventories and Cost of Sales Included in costs relating to contracts in process at June 30, 1996, 1995 and 1994 are costs of $1,504,409, $1,023,945 and $835,056, respectively, relative to contracts that may not be completed within the ensuing year. Under the unit-of-delivery method, the related sale and cost of sales will not be reflected in the statement of earnings until the units under contract are shipped. (4) Contracts in Process Contracts in process at June 30, 1996 and 1995 are as follows: 1996 1995 Gross contract value $16,297,193 20,878,002 Carrying value of contracts in process 8,971,704 10,891,178 Less progress payments -- 2,121,800 Included in current assets as contracts in process, net of progress payments $ 8,971,704 8,769,378 (5) Property, Plant and Equipment A summary of property, plant and equipment at June 30, 1996 and1995 is as follows: 1996 1995 Land $ 50,000 50,000 Buildings and improvements 3,828,650 3,812,594 Machinery and equipment 7,614,027 7,288,397 Furniture, fixtures and office equipment 320,460 313,645 $11,813,137 11,464,636 (continued) II-18 ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements, Continued The estimated useful lives of depreciable assets are as follows: Buildings and improvements 20-25 years Machinery and equipment 10 years Furniture, fixtures and office equipment 10 years Autos and trucks 5 years 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 requires 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 amount of an asset exceeds the sum of its expected future cash flows, the asset's 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. (6) Research and Development Costs Research and development costs charged to operations during the years ended June 30, 1996, 1995 and 1994 were approximately $205,000, $141,000 and $119,000, respectively. (7) Pension Expense Under terms of a negotiated union contract, the Company is obligated to make contributions to a union-sponsored defined benefit pension plan covering eligible employees. Such contributions are based upon hours worked at a specified rate and amounted to $79,282 in 1996, $65,500 in 1995 and $57,300 in 1994. (8) Provision for Income Taxes A summary of the components of the provision for income taxes for the years ended June 30, 1996, 1995 and 1994 is as follows: 1996 1995 1994 Current tax expense - Federal $ 366,108 324,021 646,448 Current tax expense - State 11,883 22,000 221,400 Deferred tax benefit (116,496) (87,651) (72,364) $ 261,495 258,370 795,484 (continued) II-19 ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements, Continued Total income tax expense for the years ended June 30, 1996, 1995 and 1994 was allocated as follows: 1996 1995 1994 Earnings from operations $ 261,495 258,370 795,484 Stockholders' equity, for tax effect of dividends on unallocated ESOP shares (52,574) (50,070) (55,007) $ 208,921 208,300 740,477 Deferred income taxes reflect the impact of "temporary differences" between the amount of assets and liabilities for financial reporting purposes and such amounts measured by tax laws and regulations. These "temporary differences" are determined in accordance with SFAS No.109 (see note 1(e)). The combined U.S. Federal and state effective income tax rates of 33.3%, 34.4% and 41.1% for 1996, 1995 and 1994, respectively, differed from the statutory U.S. Federal income tax rate for the following reasons: 1995 1994 1993 U.S. statutory tax rate 34.0% 34.0% 34.0% Increase (reduction) in rate resulting from: Dividends received deduction (.3) (.3) (.1) State franchise tax, net of Federal income tax benefit 1.0 1.9 7.6 Other (1.4) (1.2) (.4) Effective tax rate 33.3% 34.4% 41.1% For the year ended June 30, 1996 deferred income tax benefit of $116,496 results from the changes in temporary differences for the year. The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of June 30, 1996 and 1995 are presented below: (continued) II-20 ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements, Continued 1996 1995 Deferred tax liabilities: Property, plant and equipment - principally due to differences in depreciation methods $ 501,110 543,396 Inventory - effect of uniform capitalization 179,625 41,682 Total gross deferred tax liabilities 680,735 585,078 Deferred tax assets: Inventory - differences in valuation methods 180,421 -- Common stock subscribed - due to difference in interest recognition 510,198 478,466 Total gross deferred tax assets 690,619 478,466 Net deferred tax (asset) liability $ (9,884) 106,612 In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projection for future taxable income over the period which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these temporary differences without consideration of a valuation allowance. The Company's Federal income tax returns have been audited and accepted without change through June 30, 1989. (9) Common Stock and Earnings Per Share Earnings per share information is based on the weighted average number of common shares outstanding during the respective periods. The weighted average number of shares used in the computation was 1,269,467 in 1996, 1,346,757 in 1995 and 1,350,708 in 1994. (10) Segment Reporting A significant portion of the Company's business is the production of military and industrial electronic equipment for use by the U.S. Government and its agencies and certain industrial customers. Sales made to the U.S. Government and its agencies are primarily on a subcontract basis. Sales to two domestic and one foreign customer accounted for 28.9%, 22.8% and 17.8%, respectively, of total sales in 1996. Sales to two domestic customers and one foreign customer accounted for 31.5%, 24.2%, and 16.2%, respectively, of total sales in 1995. Sales to one domestic customer accounted for 66.8% of total sales in 1994. II-21 ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements, Continued Export sales in 1996 and 1995 aggregated approximately $3,073,000 and $2,602,000, respectively. Export sales in 1994 were not significant. (11) Related Party Transactions Barry Pinsley, son of the Company's retired president and current chairman of the Board, Sol Pinsley, received from the Company approximately $54,000 in 1994 for consulting services. On March 28, 1994, the arrangement for consulting services was terminated and Barry Pinsley is now employed as a vice-president of the Company. (12) Stock Rights Plan During 1989, the Company adopted a Shareholder Rights Plan in which common stock purchase rights were distributed as a dividend at the rate of one right for each share of common stock outstanding as of or issued subsequent to April 14, 1989. Each right entitles the holder thereof to buy one-half share of common stock of the Company at an exercise price of $75 per share subject to adjustment. The rights are exercisable only if a person or group acquires beneficial ownership of 25% or more of the Company's common stock or commences a tender or exchange offer which, if consummated, would result in the offeror, together with all affiliates and associates thereof, being the beneficial owner of 30% or more of the Company's common stock. If a 25% or larger shareholder should engage in certain self-dealing transactions or a merger with the Company in which the Company is the surviving corporation and its shares of common stock are not changed or converted into equity securities of any other person, or if any person were to become the beneficial owner of 30% or more of the Company's common stock, then each right not owned by such shareholder or related parties of such shareholder (all of which will be void) will entitle its holder to purchase, at the right's then current exercise price, shares of the Company's common stock having a value of twice the right's exercise price. In addition, if the Company is involved in any other merger or consolidation with, or sells 50% or more of its assets or earning power to, another person, each right will entitle its holder to purchase, at the right's then current exercise price, shares of common stock of such other person having a value of twice the right's exercise price. The Company generally is entitled to redeem the rights at one cent per right at any time until the 15th day (or 25th day if extended by the Company's Board of Directors) following public announcement that a 25% position has been acquired or the commencement of a tender or exchange offer which, if consummated, would result in the offer or, together with all affiliates and associates thereof, being the beneficial owner of 30% or more of the Company's common stock. (continued) II-22 ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements, Continued 13) Employee Stock Ownership Plan In 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 in 1989 to the ESOP which was used by the ESOP to purchase an additional 15,000 shares of the Company's common stock. Since inception of the Plan, the ESOP has sold or distributed 23,131 shares of the Company's common stock to pay benefits to participants. At June 30, 1996, the ESOP held a total of 308,093 shares of the Company's common stock, of which 139,997 shares were allocated to participants in the Plan. 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. The company recognizes the principal payments of the ESOP debt, on a straight-line basis over the term of the note, as compensation expense. Each year, the Company makes contributions to the ESOP which are used to make loan payments. With each loan payment, a portion of the common stock is allocated to participating employees. In 1996, the Company's required contribution of $1,039,605 was reduced by $132,376 which represents the dividends paid to the unallocated ESOP shares. The resulting payment of $907,229 includes $426,287 classified as compensation expense. In 1995, the Company's required contribution of $1,039,605 was reduced by $126,072 which represents the dividends paid to the unallocated ESOP shares. The resulting payment of $913,533 includes $432,590 classified as compensation expense. In 1994, the Company's required contribution of $1,039,605 was reduced by $138,679 which represents the dividends paid to the unallocated ESOP shares. The resulting payment of $900,926 includes $419,983 classified as compensation expense. (14) Financial Instruments/Concentration of Credit Risk The carrying amounts of financial instruments, including cash, short-term investments, marketable investment securities, accounts receivable and accounts payable, approximated fair value as of June 30, 1996 and 1995 because of the relatively short maturity of these instruments. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and short-term investments and accounts receivable. The Company maintains cash and short-term investments with various financial institutions. At times such investments may be in excess of FDIC insurance limits. As disclosed in note 10, a significant portion of the Company's sales are made to the U.S. Government and its agencies and certain industrial customers. The related accounts receivable balance represented 54% and 57% of the Company's total trade accounts receivable balance at June 30, 1996 and 1995, respectively. (continued) II-23 ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements, Continued Although the Company's exposure to credit risk associated with nonpayment of these balances is affected by conditions or occurrences within the U.S. Government, the Company believes that its trade accounts receivable credit risk exposure is limited. The Company performs ongoing credit evaluations of its customers' financial conditions and requires collateral, such as progress payments, in certain circumstances. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. (15) Commitments and Contingencies Subsequent to June 30, 1996, the Company renewed its operating lease agreement for the rental of a sales office in Great Neck, New York. This lease, which expires on September 9, 2001, requires future minimum lease payments of $60,950 payable as follows: Year ending June 30, 1997 $ 10,158 1998 12,190 1999 12,190 2000 12,190 2001 12,190 Thereafter 2,032 $ 60,950 Rent expense for the years ended June 30, 1996, 1995 and 1994 was $22,624, $22,235 and $24,114, respectively. (16) Quarterly Financial Information (Unaudited) First Second Third Fourth Quarter Quarter Quarter Quarter 1996: Net sales $ 4,000,805 4,434,896 4,352,275 4,012,224 Gross profit 404,675 486,916 533,557 402,034 Net earnings 98,440 125,906 169,479 128,912 Net earnings per share $ .07 .09 .13 .12 1995: Net sales $ 4,161,569 2,814,595 3,496,584 4,101,349 Gross profit 614,354 293,631 267,462 324,403 Net earnings 174,765 33,407 74,149 209,446 Net earnings per share $ .13 .02 .06 .16 (continued) II-24 ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements, Continued First Second Third Fourth Quarter Quarter Quarter Quarter 1994: Net sales $4,500,088 4,371,411 1,989,770 3,817,034 Gross profit 970,794 751,934 587,038 556,342 Cumulative effect of change in accounting principle 201,653 -- -- -- Net earnings 645,254 257,737 223,401 217,485 Net earnings per share $ .48 .19 .17 .16 Financial information for the fourth quarter of 1996 reflects a pre-tax write off of approximately $354,000 related to inventory for which the Company expected to receive orders during the year. In the fourth quarter of 1996, management's assessment of this inventory resulted in the aforementioned write-off as previously anticipated orders did not materialize. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable. II-25 PART III Item 10. Directors and Executive Officers of the Registrant. Identification of Directors Date Present Term Other Positions Expires and Period and Offices Held Name Served as Director WithRegistrant Age Joseph Canterino Annual Meeting in President and 71 December 1998 Chief Executive Director since Officer December 11, 1992 Paul J. Corr Annual Meeting in None 52 December 1996 Director since April 3, 1992 William P. Greene Annual Meeting in None 66 December 1998 Director since April 3, 1992 Barry Pinsley Annual Meeting in Vice President- 54 December 1996 Special Projects Director since March 25, 1994 Howard Pinsley Annual Meeting in Vice President- December 1997 Special Power Director since Supplies 56 December 11, 1992 Sol Pinsley Annual Meeting in Chairman of 83 December 1997 the Board Director since 1950 (continued) III-1 Date Present Term Other Positions Expires and Period and Offices Held Name Served as Director With Registrant Age Seymour Saslow Annual Meeting in Vice President- 75 December 1998 Engineering Director since December 11, 1992 Michael W. Wool Annual Meeting in None 50 December 1996 Director since 1990 Identification of Executive Officers Positions and Offices Held Period Served As Name With Company Executive Officer Age Sol Pinsley Chairman of the President and Chief 83 Board and Executive Officer for Director more than the past five years prior to taking present position on August, 1996; Treasurer from August 4, 1988 to September 10, 1993 Seymour Saslow Vice President- Since April 3, 1992 75 Engineering and Director Joseph Canterino President and Chief Since April 3, 1992; 71 Executive Officer and Vice-President- Director Manufacturing prior to present position Howard Pinsley Vice President-Special Since April 3, 1992 56 Power Supplies and Director Barry Pinsley Vice President-Special Since March 25, 1994 54 Projects and Director (continued) III-2 Positions and Offices Held Period Served As Name With Company Executive Officer Age Herbert Potoker Treasurer and Principal Since September10, 67 Financial Officer 1993 Garry M. Jones Assistant Treasurer Since August 4, 1988; 56 and Principal Accounting Principal Financial Officer Officer from August 4, 1988 to September 10, 1993 Reita Wojtowecz Secretary Since June 27, 1994 67 Each officer's term is at the will of the Board of Directors, except for Sol Pinsley. The term of Mr. Pinsley's employment is subject to the provisions of an Employment Agreement, dated January 1, 1995. See "Executive Compensation-Employment Contracts and Termination of Employment and Change in Control Agreements." Family Relationships Sol Pinsley is the father of Barry Pinsley and uncle of Howard Pinsley. Barry Pinsley and Howard Pinsley are cousins. Howard Pinsley and Herbert Potoker are cousins. Business Experience of Directors and Officers Joseph Canterino has been President and Chief Executive Officer since Sol Pinsley retired from these positions on August 1, 1996. Prior to his election to his present position, Mr. Canterino served as Vice President -Manufacturing since April 3, 1992 and Plant Manager for more than five years prior to being elected Vice President-Manufacturing. Paul J. Corr is a Certified Public Accountant and currently a senior partner at the Latham, New York accounting firm of Richter & Company. Mr. Corr was a partner of the accounting firm of Corr & Company from 1982 to 1993. Since 1981 to date, Mr. Corr has been professor of Business at Skidmore College in Saratoga Springs, New York. Mr. Corr currently holds the position of Associate Professor. William P. Greene has been employed as Vice President of Operations for Bulk Materials International Co., Newton, Connecticut from 1994 to present. From 1991 to 1994 Mr. Greene was Associate Professor of Finance and International Business at Pennsylvania State University, Kutztown, Pennsylvania. From 1985 to 1990, he was Associate Dean at the School of Business, United States International University in San Diego, California. From 1982 to 1985, he was Chairman, Department of Business, Skidmore College, Saratoga Springs, New York. Prior to that time, he had been employed as an officer with several financial institutions. III-3 Garry M. Jones for more than the past five years has been employed by the Company on a full time basis as Senior Accountant prior to being elected Assistant Treasurer and Principal Financial and Accounting Officer on August 4, 1988. Barry Pinsley is a Certified Public Accountant who for five years acted as a consultant to the Company prior to his election as a Vice President- Special Projects on March 25, 1994. Mr. Pinsley has been a practicing Certified Public Accountant in Saratoga Springs, New York since 1975. Howard Pinsley for more than the past five years has been employed by the Company on a full time basis as Program Director prior to being elected Vice President-Special Power Supplies on April 3, 1992. Sol Pinsley has been for more than the past five years employed on a full time basis as the President and Chief Executive Officer of the Company. Mr. Pinsley retired from these positions effective August 1, 1996. He has remained with the Company as Chairman of the Board. Herbert Potoker for more than the past five years has been employed by the Company on a full time basis in a senior financial management position prior to being elected Treasurer and Principal Financial Officer on September 10, 1993. Mr. Potoker previously had been the Treasurer and Principal Financial and Accounting Officer of the Company until August 4, 1988. Seymour Saslow has been Vice President-Engineering since April 3, 1992. Mr. Saslow served as the Director of Engineering of the Company for more than five years prior to his election to his present position. Reita Wojtowecz has been Secretary of the Company since June 27, 1994. She has been employed by the Company as Director of Human Resources for more than the past five years. Michael W. Wool has been an attorney in private practice and a partner in the law firm of Langrock, Sperry & Wool in Burlington, Vermont for more than the past five years. Directorships None of the directors holds a directorship in any other company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of that Act or any company registered as an Investment company under the Investment Company Act of 1940. Legal Proceedings None of the directors or executive officers of the Company were involved during the past five years in any of the legal proceedings specified under Item 401(f) of Regulation S-K. III-4 Item 11. Executive Compensation. Executive Compensation Table The following table summarizes the annual compensation of the Company's Chief Executive Officer for fiscal years 1996, 1995 and 1994 and of the other five highest paid executive officers of the Company whowere such as of June 30, 1996 and for each of the two prior fiscal years that they were executive officers for any part of such years: SUMMARY COMPENSATION TABLE Name and Fiscal Annual All Other Principal Position Year Salary Bonus Compensation(1) Sol Pinsley 1996 $193,900 $25,000 $14,129 President and Chief 1995 $189,000 $25,000 $9,968 Executive Officer 1994 $189,000 $25,000 $11,661 Seymour Saslow 1996 $112,900 $25,000 $15,063 Vice President- 1995 $108,000 $25,000 $10,393 Engineering 1994 $108,000 $25,000 $12,553 Joseph Canterino 1996 $103,180 $25,000 $15,819 Vice President - 1995 $ 98,280 $25,000 $11,320 Manufacturing 1994 $ 98,280 $25,000 $12,780 Howard Pinsley 1996 $ 93,350 $20,000 $15,567 Vice President - 1995 $ 90,450 $12,000 $11,042 Special Power 1994 $ 90,450 $12,000 $12,544 Supplies Herbert Potoker 1996 $107,680 $25,000 $11,892 Treasurer and 1995 $101,280 $25,000 $9,320 Principal Financial Officer 1994 $101,280 $25,000 $10,280 Barry Pinsley 1996 $ 84,675 $10,000 $12,389 Vice President- 1995 $ 79,500 $10,000 $8,083 Special Projects _______________ (1) Represents (a) the cash and market value of the shares allocated for the respective fiscal years under the Company's Employee Retirement Plan and Trust ("ESOP") to the extent to which each named executive officer is vested, and (b) directors' fees except for Mr. Potoker. III-5 Insurance The executive officers of the Company are covered under group life and medical and health plans which do not discriminate in favor of the officers or directors of the Company and which are available generally to all salaried employees. The Company maintains insurance coverage, as authorized by Section 727 of the New York Business Corporation Law, providing for (a) reimbursement of the Company for payments it makes to indemnify officers and directors of the Company, and (b) payment on behalf of officers and directors of the Company for losses, costs and expenses incurred by them in actions. Employee Retirement Plan and Trust Under the Company's Employee Retirement Plan and Trust ("ESOP"), approved by the Board of Directors on June 2, 1989, effective July 1, 1988, all non-union employees of the Company, including the Company's executive officers, five of whom, Sol Pinsley, Seymour Saslow, Joseph Canterino, Barry Pinsley and Howard Pinsley, are also directors of the Company, are eligible to participate. The ESOP is a non-contributory plan which is designed to invest primarily in shares of common stock of the Company. Reference is made to, and there is incorporated by reference, the description of the ESOP, its implementation and pertinent documents attached as exhibits in the Company's Form 8-K dated June 16, 1989, filed with the Commission on June 20, 1989, and to the amendments thereto filed as an Exhibit to the 10-K Report for the fiscal year ended June 30, 1991. Certain technical amendments not considered material were adopted during the year effective as of June 30, 1994. Of the 139,997 shares of common stock of the Company allocated to participants of the ESOP as of June 30, 1996, 2,672.96 shares were allocated to Sol Pinsley, 4,377.96 each were allocated to Joseph Canterino and Herbert Potoker, 4,058.98 shares were allocated to Howard Pinsley, 4,187.96 shares were allocated to Seymour Saslow and 972 shares were allocated to Barry Pinsley. Compensation of Directors The Company's standard arrangement compensates each director of the Company a fee in the amount of $500 for each meeting of the Board of Directors attended by such director. No amount in excess of such fee per meeting of the Board of Directors was paid to any director during the last fiscal year for services as a director. Each member of the Audit Committee is compensated in the amount of $500 for each Committee meeting attended. Paul J. Corr and William P. Greene were paid $2,350 and $1,800, respectively, for consulting services to the Board of Directors for the fiscal year ended June 30, 1996. III-6 Employment Contracts and Termination of Employment and Change in Control Agreements There has been in effect since July 1, 1973 a full time employment contract with Sol Pinsley, who was President, Chief Executive Officer and a Director of the Company unti Aug. 1, 1996. The most recent employment contract was entered into by the Company with Mr. Pinsley on June 12, 1995 pursuant to prior authorization given by the Board of Directors on March 24, 1995. This employment contract which was approved and ratified by the Board of Directors on June 17, 1995 is dated and effective as of January 1, 1995 for a term expiring December 31, 1998, and covers Mr. Pinsley's employment as President (or Chairman of the Board) and Chief Executive Officer and also as a non-executive officer employee should Mr. Pinsley elect to become a non-executive officer employee. The agreement provided a minimum base annual compensation of $182,000 for each calendar year commencing 1995 and the Board of Directors in its discretion may increase such compensation for any calendar year and/or award Mr. Pinsley a bonus for any calendar year. The foregoing compensation is to be reduced by $40,000 per annum in the event Mr. Pinsley elected to become a non-executive officer employee. The employment agreement further provides that in the event of his disability the foregoing compensation shall continue to be paid to Mr. Pinsley until the expiration date of the agreement, and, in the event of his death, such compensation shall be paid to his estate until the expiration date of the agreement or 187 days after his death, whichever is later. The agreement provides for (i) a restrictive covenant of non-competition by Mr. Pinsley and (ii) his covenant not to divulge or use other than for the registrant confidential information concerning the registrant, during and for 18 months after the expiration date of the agreement. Effective August 1, 1996, Mr. Pinsley retired from the positions of President and Chief Executive Officer. In accordance with the terms of the above agreement, Mr. Pinsley has remained as Chairman of the Board and as a non-executive officer of the Company at a reduced salary. Item 12. Security Ownership of Certain Beneficial Owners and Management. Security Ownership of Certain Beneficial Owners The following information is furnished as of September 20, 1996 (unless otherwise indicated) with respect to any person (including any "group" as that term is used in Section 13(d)(3) of the Act) who is known to the Company to be the beneficial owner of more than five percent of any class of the Company's voting securities: Amount and Nature of Title of Name and Address Beneficial Percent of Class of Beneficial Owner Ownership Class Common Stock Sol Pinsley 80,261.00 -Direct (1) 7.4633% $.33-1/3 p.v. P.O. Box 422 2 632.96 -Indirect (1) Saratoga Springs, NY 12866 (continued) III-7 Amount and Nature of Title of Name and Address Beneficial Percent of Class of Beneficial Owner Ownership Class Common Stock Tweedy Browne 75,300.00 -Direct (2) 6.7853% $.33-1/3 p.v. Company L.P. 100.00 -Indirect (2) 52 Vanderbilt Avenue New York, NY 10017 " Dimensional Fund 75,100.00 -Direct (3) 6.7583% Advisors Inc. 1299 Ocean Avenue 11th Floor Santa Monica, CA 90401 " The Adirondack Trust 300,667.00 -Direct (4) 27.0574% Company, as Trustee of the Company's Employee Retirement Plan and Trust 473 Broadway Saratoga Springs, NY 12866 (1) Does not include 4,200 shares of common stock of the Company owned the testamentary trust of the deceased spouse of Sol Pinsley, Ruth Pinsley, beneficial ownership of which is disclaimed by Mr. Pinsley. The shares listed as indirectly owned by Sol Pinsley are the shares allocated to him as of June 30, 1996 as a participant in the Company's ESOP. Mr. Pinsley has the right under the ESOP to direct the manner in which such shares allocated to him are to be voted by the ESOP Trustee. (2) The information as to the number of shares of common stock of the Company that may be deemed beneficially owned by Tweedy Browne Company, L.P. ("TBC") is from Amendment No. 2 dated January 17, 1996, to the Schedule 13D dated March 14, 1995, both of which were filed with the Securities and Commission. The 100 shares that are included as indirectly owned by TBC are owned by TBK Partners L.P. ("TBK"), which may be deemed a member of a group with TBC. TBC and TBK in said Amendment No. 2 disclaim beneficial ownership of the common stock of the other and state that the filing of the Schedule 13D should not be deemed an admission that TBK comprise a group within the meaning of Section 13d-3 of the 1934 Act. TBC, a registered investment advisor, holds shares in the Company in a fiduciary capacity. TBC reported sole voting power with respect to 61,730 shares and sole dispositive power with respect to 75,300 shares. III-8 (3) The information as to the number of shares of common stock of the Company that may be deemed beneficially owned by Dimensional Fund Advisors Inc. ("Dimensional") is from the Schedule 13G dated January 30, 1995 filed with the Securities and Exchange Commission. Dimensional has informed the Company by letter dated February 9, 1995 that it disclaims beneficial ownership of all such shares. Dimensional, a registered investment advisor, holds shares in the Company in a fiduciary capacity. Dimensional reported sole voting power with respect to 49,500 shares and sole dispositive power with respect to 75,100 shares. (4) This information is from the Form 4 dated August 13, 1996, filed with the Securities and Exchange Commission by the Trustee on behalf of the Company's Employee Retirement Plan and Trust ("ESOP"). The ESOP Trustee has sole voting power with respect to unallocated common shares owned by the Trust, 168,096 shares as of August 24, 1996, as directed by the Plan Administrator appointed by the Company's Board of Directors. As to the common shares allocated to participants, 132,571 shares as of August 24, 1996, the ESOP Trustee has the power to vote such shares as directed by such Plan Administrator to the extent the participants do not direct the manner in which such shares are to be voted. Security Ownership of Management The following information is furnished as of September 20, 1996 (unless otherwise indicated), as to each class of equity securities of the Company beneficially owned by all the Directors and by Directors and Officers of the Company as a Group: Amount and Nature of Title of Name of Beneficial Percent of Class Beneficial Owner Ownership Class Common Stock $.33-1/3 p.v. Paul J. Corr 500.00 -Direct .0450% " William P. Greene 0.00 0.0% " Michael W. Wool 100.00 .0090% " Sol Pinsley 80,261.00 -Direct 7.4633% 2,672.96 -Indirect (1)(2) " Seymour Saslow 4,187.96 -Indirect (2) .3769% " Joseph Canterino 7,500.00 -Direct 1.0689% 4,377.96 -Indirect (2) (continued) III-9 Amount and Nature of Title of Name of Beneficial Percent of Class Beneficial Owner Ownership Class Common Stock Howard Pinsley 39,134.00 -Direct 3.8870% $.33-1/3 4,058.98 -Indirect (2) " Barry Pinsley 800.00 -Direct .5374% 5,172.00 -Indirect (2)(3)(4) " Herbert Potoker 6,490.00 -Direct .9780% 4,377.96 -Indirect (2)(5) " Garry M. Jones 0.00 -Direct .1790% 1,989.15 -Indirect (2) " Reita Wojtowecz 0.00 -Direct .1222% 1,358.02 -Indirect (2) " Officers and Directors 134,785.00 -Direct 14.6667% as a Group 28,194.99 -Indirect (6) _____________ (1) Excludes 4,200 shares owned by a testamentary trust of Ruth Pinsley, the deceased spouse of Sol Pinsley. Beneficial ownership of the shares owned by the trust is disclaimed by Mr. Pinsley. (2) Shares allocated to named officer as of June 30, 1996 as a participant in the Company's ESOP. Each such person has the right to direct the manner in which such shares allocated to him or her are to be voted by the ESOP Trustee. (3) Excludes 1,300 shares owned by Barry Pinsley's spouse, as to which beneficial ownership is disclaimed by Mr. Pinsley. (4) Includes 4,200 shares owned by a testamentary trust of Ruth Pinsley, the deceased spouse of Sol Pinsley. As trustee of the trust, Barry Pinsley is deemed the beneficial owner, as defined in Rule 13d-3, of the shares held by the trust. (5) Excludes 300 shares owned by Herbert Potoker's spouse, as to which beneficial ownership is disclaimed by Mr. Potoker. (6) Shares allocated to all officers as a group as of June 30, 1996 who participate in the Company's ESOP, Each such person has the right to direct the manner in which such shares allocated to him are to be voted by the ESOP Trustee. There are no arrangements known to the Company the operation of which may at a subsequent date result in change of control of the Company. III-10 Item 13. Certain Relationships and Related Transactions. For the fiscal year ended June 30, 1996, Christopher Canterino, who is a full time employee of the Company and the son of Joseph Canterino, President and Chief Executive Officer of the Company, received compensation as such employee of $79,950, as well as an ESOP allocation of Company Stock and dividends thereon totaling $9,082. As previously reported, the Company established and sold to the ESOP Trust on June 5, 1989, 331,224 shares of the Company's treasury stock at a price of $26.50 per share, which purchase price was funded by the Company making a cash contribution and loan. Each year, the Company makes contributions to the ESOP which are used to make loan interest and principal payments to the Company. With each such payment, a portion of the common stock held by the ESOP is allocated to participating employees. As of June 30, 1996, there were 139,997 shares allocated to participants. The loan from the Company to the ESOP is repayable in annual installments of $1,039,605, including interest, through June 30, 2004. Officers of the Company, including five (Sol Pinsley, Seymour Saslow, Joseph Canterino, Howard Pinsley and Barry Pinsley) who are also directors, are eligible to participate in the ESOP and to have shares and cash allocated to their accounts and distributed to them in accordance with the terms of the ESOP. The Company paid the law firm of Langrock, Sperry & Wool, of which Michael W. Wool, a director of the Company, is a partner, a total of $45,500 for legal services during the fiscal year ended June 30, 1996. The Company believes the services provided to it by Langrock, Sperry & Wool were provided to it at a cost comparable to that which the Company would have been required to pay for comparable services from an unaffiliated third party. III-11 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements Included in Part II of this report: Independent Auditors' Report Balance Sheets at June 30, 1996 and 1995 Statements of Earnings for the years ended June 30, 1996, 1995 and 1994 Statements of Changes in Stockholders' Equity forthe years ended June 30, 1996, 1995 and 1994 Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994 Notes to Financial Statements 2. Financial Statement Schedules Included in Part IV of this report: Page Schedule II - Valuation and Qualifying Accounts IV-2 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. 3. Exhibits Page 11.1 Statement re: computation of per share earnings IV-3 27 Financial Data Schedule (for electronic filing purposes only) (b) Reports on Form 8-K The Company filed a report on Form 8-K during the third quarter of the period covered by this report. The report was filed on March 11, 1996. On March 7, 1996, pursuant to the authorization of the Board of Directors, the Company purchased 219,400 shares of its common stock for an aggregate cash purchase price of $3,620,100. IV-1 SCHEDULE II ESPEY MFG. & ELECTRONICS CORP. Valuation and Qualifying Accounts Years ended June 30, 1996, 1995 and 1994 Balance at Additions Deductions Balance at beginning to from end of Description of period reserve reserve period Allowance for doubtful accounts: 1996 $ 3,000 - - 3,000 1995 $ 3,000 - - 3,000 1994 $ 3,000 - - 3,000 IV-2
EXHIBIT 11.1 ESPEY MFG. & ELECTRONICS CORP. Computation of per Share Earnings as Disclosed in Item 14 of Form 10-K Five years ended June 30, 1996 1996 1995 1994 1993 1992 Computation of earnings per share: Number of shares issued at beginning of year 1,514,937 1,514,937 1,514,937 1,514,937 1,514,937 Monthly weighted average number of treasury shares (245,470) (168,180) (164,229) (159,897) (119,786) Weighted average number of primary shares outstanding 1,269,467 1,346,757 1,350,708 1,355,040 1,395,151 Net earnings $ 522,737 491,767 1,343,877 1,594,290 1,885,208 Per share $ .41 .37 1.00 1.18 1.35
IV-3 S I G N A T U R E S Pursuant to the requirements of Section 13 and 15 (d) 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/ Joseph Canterino Joseph Canterino, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. President (Principal Executive Officer) /s/ Joseph Canterino September 20, 1996 Joseph Canterino Treasurer (Principal Financial Officer) /s/ Herbert Potoker September 20, 1996 Herbert Potoker Assistant Treasurer (Principal Accounting Officer) /s/ Garry M. Jones September 20, 1996 Garry M. Jones /s/ Howard Pinsley Vice-President and Director Howard Pinsley September 20, 1996 /s/ Barry Pinsley Vice-President and Director Barry Pinsley September 20, 1996 /s/ Sol Pinsley Chairman of the Board and Director Sol Pinsley September 20, 1996 (signatures continued) Vice-President and Director /s/ Seymour Saslow September 20, 1996 Seymour Saslow /s/ Michael W. Wool Director Michael W. Wool September 20, 1996 /s/ Paul J. Corr Director Paul J. Corr September 20, 1996 /s/ William P. Greene Director William P. Greene September 20, 1996 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE YEAR ENDING JUNE-30-1996 10-K FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1996 JUL-1-1995 JUN-30-1996 5,597,079 3,021,195 1,574,581 0 11,033,346 21,499,805 11,813,137 8,371,987 24,950,043 623,908 0 0 0 504,979 24,326,135 24,950,043 16,800,200 16,800,200 14,973,018 14,973,018 1,617,956 0 0 784,232 261,495 522,737 0 0 0 522,737 .41 0
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