Restatement of Financial Statements In prior years (2009-2013), the Company has had a policy of capitalizing pre-production costs (i.e. engineering and drafting costs) related to preparing technical data manuals for us by customers and the Company. In May 2013 , the Company began a review of its inventory and fixed assets. As a result of the Company's investigation, management determined that the Company's accounting practice for capitalization of engineering and drafting costs in inventory and fixed assets related to long-term supply contracts was incorrect. These costs per Accounting Standards Codification (ASC) 340-10-25 should be expensed as incurred to the extent they exceed amounts specifically reimbursable by the customer or otherwise relieved from inventory when such reimbursable amounts are billed to the customer. In both July 2010 and July 2012 , the Company amended certain convertible debt agreements which extended the maturity of the debt and lowered the conversion price. The Company had originally incorrectly not recorded any loss associated with these amendments which essentially represented the incremental value conveyed by lowering the conversion price. The Company has made all necessary adjustments to correct these errors for all periods presented in this Form 10-K. See Note 3 in the Notes to the Consolidated Financial Statements of this Form 10-K for a summary of the effects of the restatement on the Company's consolidated financial statements. The accompanying Management Discussion, Analysis of Financial Conditions, and Results of Operations give effect of these corrections. FISCAL 2013 LIQUIDITY AND CAPITAL RESOURCES The Company relies on cash flow from its two business segments to meet operating needs, fund debt service, and fund capital requirements. The cemetery and Stinar operations did provide sufficient cash during fiscal year 2013 to support day-to-day operations, amended debt service, and capital expenditures. During fiscal 2013, the Company amended and refinanced a majority of its debt. Subsequent to these amendments and refinancings, Stinar, as of June 30, 2013 , has three notes payable aggregating $1,850,249 which mature from February 2016 through March 2033 . Stinar also has a $1,089,303 term loan to finance inventories that matures in May 2018 and a $550,000 interest only line of credit to finance non-foreign accounts receivable, maturing in January 2014 and also a $1,000,000 line of credit to finance foreign accounts receivable and related inventories, maturing in May 2014 . In 2013, the cemetery operations entered into three installment loans totaling approximately $84 thousand to finance the purchase of certain equipment. . The Company expects that completion of the previously noted transaction to sell the cemetery operations will strengthen the Company's balance sheet and provide increased flexibility to its Stinar business to execute its operating plans in the future.. During 2008, 2010 and 2012, the Company issued convertible subordinated debentures in the aggregate principal amount of $555,000 to certain individuals who are officers or directors of the Company. During 2010, $20,000 of the debentures was satisfied. On July 1, 2010 , $485,000 of the debentures initially due July 1, 2010 , were amended, whereby the conversion rate of the debentures was revised from $0.90 to $0.50 per share (fair value of the Company's common stock at July 1, 2010 was $0.38 per share) and the maturity date was extended from July 1, 2010 to July 1, 2012 . On November 12, 2010 , an outside investor purchased a $30,000 debenture and in February 2011 another $75,000 debentures were purchased by an officer and a director of the Company. On July 1, 2012 , all convertible debentures were amended, whereby the conversion rate of the debentures was revised from $0.50 to $0.40 per share (fair value of the Company's common stock at July 1, 2012 was $.40 per share) and the maturity date was extended from July 1, 2012 to July 1, 2014 , at which time the Company expects to be able to pay all amounts under the debentures or to be able to extend the debentures' maturity date. In connection with the pending sale of the cemetery operations, the purchase price of $2,060,000 consists of (1) $1,500,000 in cash and (2) satisfaction of $560,000 in indebtedness owed by the Company to Mr. Harvey in the form of (i) $410,000 principal amount of debentures and (ii) a short-term loan of $150,000 . The remaining $230,000 of the debentures outstanding at June 30, 2013 are expected to be satisfied with a portion of the proceeds from the sale of the cemeteries. The cemetery operations expect to hire no full-time sales employee during 2014, and the Company expects no changes in part-time or seasonal employees. Pending the sale of the cemetery operation, the Company expects all compensation-related expenditures at the cemetery to cease. Stinar operations expect to hire no full-time or part-time employees during 2014. 8 -------------------------------------------------------------------------------- The Company's five year business plan calls for approximately $1,100,000 in capital expenditures which started in 2012. The cemetery operations' capital expenditures are expected to be approximately $600,000 under the five-year plan. The funds are planned to be used for building improvements for the Oakridge cemetery mausoleum, increasing inventory of niches and crypts in mausoleums and outdoors, computer software and hardware equipment, ground improvements and ground equipment. Repairs for the mausoleum, originally estimated at $200,000 to $300,000 , will continue in the spring of 2013 and 2014. The Company expects to spend approximately $200,000 in 2014 on its cemetery operations for repairs on the front building of the mausoleum, lawn mowers and gator utility vehicles for the grounds. The cemeteries' capital expenditures for 2013 were approximately $142,000 and were primarily used for the following: $36,000 for various ground vehicles, $67,000 for various equipment for the grounds with the largest amounts being $28,000 for a backhoe, $27,000 for three mowers, $12,000 for various pumps, lowering devices, snow plows for trucks, lot markers, and various equipment for the grounds, $32,000 for roof repairs, garage insulation, required exit signs and wiring required by the state of Illinois , four new furnaces and awnings for the office and mausoleum and repairs to the two mausoleums, $4,000 for computer and software equipment, and $3,000 for a copier, two vacuums, and a book shelf for the office. Pending the sale of the cemetery operation, which is expected to close before January 1, 2014 , the Company expects all capital expenditures at the cemeteries to cease. Stinar's capital expenditures are expected to be approximately $500,000 under the five-year plan. The funds are planned to be used for improvements of the manufacturing plant and office, technical manuals and drawings packages for the building of new first time equipment, plant and office equipment, and computer software and hardware. These expenditures are expected to take place evenly over the five-year plan. Stinar's capital expenditures for 2013 were approximately $32,000 , $14,000 for various hand tools, $13,000 for building improvements which consist of heater/air conditioner, masonry work on the building, improvements on the roof, and the water well, $3,000 for land improvements which consisted of blacktop patching, and $2,000 for software and hardware equipment. The Company expects to spend approximately $25,000 in 2014 for Stinar's capital expenditures. RESULTS OF OPERATIONS - 2013 COMPARED TO 2012 CEMETERY OPERATIONS: In 2013, cemetery revenue decreased $99,633 , or less than 3%, from $3,442,466 in 2012 to $3,342,833 . The decrease was due to a decrease in land sales of cemetery plots of $33,504 , grave boxes of $19,755 , and interment fees of $95,851 or a total decrease of $149,110 . This decrease was offset by an increase in cemetery care fund income of $39,818 and cremation fees of $20,105 or a total increase of $59,923 . All other sales account changes were immaterial. The overall total funerals decreased, which caused the decrease in grave boxes, land sales and interment fees. Cost of sales in 2013 was $2,143,115 , an increase of $54,141 , or 2.6%, compared to 2012. In 2013, cost of sales was 64% of revenue, compared to 61% of revenue in 2012. The increase in cost of sales related to an increase in workers compensation insurance of $57,733 and payroll of $59,139 . The decreases in cost of sales consisted of grave boxes of $23,550 , foundations of $10,431 , health insurance of $8,899 , repairs and maintenance of $13,053 and utilities expense of $10,647 . All other cost account changes were immaterial. Selling expenses decreased $42,141 , or 14.6%, from $289,514 in 2012 to $247,373 . This decrease was due to lower commission expenses and lower health insurance expenses. General and administrative expenses decreased $24,630 , or 4%, from $608,322 in 2012 to $583,692 . The decrease was primarily attributable to decreases in donation of Company products and services of $17,366 , depreciation expenses of $14,000 and health insurance of $8,922 . The increases were bank service fees of $12,291 and temporary outside employee of $6,664 . The decreases were due to a concentrated effort to decrease overall expenses. As previously noted, the Company has entered into an agreement to sell the cemetery operations, the closing of which is expected to occur before January 1, 2014 . STINAR OPERATIONS: In 2013, revenue decreased $458,038 , or 4.6%, from $9,872,259 in 2012 to $9,414,221 . The decrease was primarily due to decreases in government and commercial sales in the United States of $502 , 758 and $1,886,691 , respectively, which were partially offset by an increase in international sales of $1,949,220 . The decrease in government sales related to no United States government GSA contracts and no options being exercised on contracts with the United States Air Force , which were caused by the budget cut backs. The commercial sales in the United States still continue to be small or nonexistent. 9 -------------------------------------------------------------------------------- Cost of sales in 2013 was $9,278,326 , or 98.6% of sales, compared to 99.6% in 2012. Accordingly, gross profit percentage increased to 1.4% in 2013 compared to 0.4% in 2012. Gross profit has been lower the past few years due to a U.S. Government contract that was over-engineered. This contract expired the third quarter of fiscal year 2013. In 2014, a new contract for substantially the same types of product was entered into with the U.S. Government with improved pricing, which is expected to significantly improve Stinar's gross margins. Selling expenses increased $3,915 , or 2.9%, from $137,372 in 2012 to $141,287 . The increase was primarily due to increased commissions paid to international agents. General and administrative expenses increased $47,277 , or 17.4%, from $272,051 in 2012 to $319,328 . The increase was primarily attributable to an increase in office salaries of $15,091 and fines and penalties of $23,132 , related to a change in a U.S. Government contract. Interest expense on Stinar specific debt decreased $116,308 , or 28%, from $412,780 in 2012 to $296,472 . The decrease was attributable to less equipment being built on a chassis and a decrease in bank debt. HOLDING OPERATIONS: Operating expenses increased $18,372 , or 6.2%, from $294,032 in 2012 to $312,404 . The increase was primarily attributable to an increase in accounting expense of $7,144 and office rental expense $11,400 . Interest expense increased $1,007 , or 1%, from $84,600 in 2012 to $85,607 . In July 2012 , the Company amended its convertible debentures. The amendment extended the maturity date of the debentures from July 2013 to July 2014 and reduced the conversion rate from $0.50 to $0.40 per common share. As a result of the amendment, the existing debentures were considered extinguished and a loss on extinguishment of $224,000 , equal to the excess fair value of the new debt over the carrying value of the existing debt, was charged to earnings. Effective with the aforementioned sale of the cemetery operations, the Company expects operating expenses and interest expense for Holdings in 2014 to be significantly reduced as result of reduced corporate payroll, professional fees, general and administrative fees and the satisfaction of the debentures and short-term debt. RESULTS OF OPERATIONS - 2012 COMPARED TO 2011 CEMETERY OPERATIONS: In 2012, cemetery revenue increased $189,659 , or 6%, from $3,252,807 in 2011 to $3,442,466 . The increase was due to an increase in marker sales of $231,989 , cemetery plot sales of land of $66,998 , foundations of $35,769 , overtime of $18,250 , vault sealing fees of $10,550 and Care Fund income of $15,560 . The decrease in revenue accounts were grave boxes of $115,289 and interment fees of $79,389 . All other sales account changes were immaterial. The increase in sales were primarily driven by a new cemetery law instituted by the State of Illinois that now requires all families to come out to the cemetery to arrange the funeral, whereby in the past the funeral director made all arrangements. In having the families present at the cemetery, the cemeteries are getting more up-selling opportunities which increased the sales of markers, which results in an increase in the sales of foundations, higher selection of land sales and results in more funerals taking place on Saturday. A higher number of funerals taking place on Saturday resulted in an increase in the overtime revenue. Overall total funerals decreased, which caused the decrease in grave boxes and interment fees. Cost of sales in 2012 was $2,088,974 , an increase of $89,127 , or 4%, compared to 2011. In 2012, cost of sales was 61% of revenue, or constant with 2011. The increase in cost of sales related to an increase in markers of $52,432 , general insurance of $43,368 and payroll and related payroll taxes of $65,912 . Partially mitigating these cost increases were decreases in health insurance of $20,932 , utilities expense of $17,990 and depreciation of $45,000 . All other cost account changes were immaterial. Selling expenses decreased $5,551 , or 2%, from $295,065 in 2011 to $289,514 . This decrease was due to no advertising or general insurance expenses being allocated to the sales department. General and administrative expenses increased $28,341 , or 5%, from $579,981 in 2011 to $608,322 . The increase was primarily attributable to increases in donation of funeral services of $14,904 to a former employee, health insurance of $17,804 and office salaries of $7,550 . Partially mitigating these increases were cost reductions in bank service fees of $10,988 and temporary outside employees of $16,863 . STINAR OPERATIONS (Restated): In 2012, revenue decreased $3,374,624 , or 25.5%, compared to 2011. The decrease was primarily due to decreases in international sales of $1,426,298 and U.S. government sales of $2,753,899 , which was offset by an increase in domestic sales of $826,397 . The decrease in international sales was due to the economic problems in Europe and government sales in relation to the GSA contracts, which were minimal due to the budget cut backs. The increase in domestic sales is due to the improved financial position of most airlines such that they have positive earnings and a higher demand for equipment after not buying new equipment for several years. 10 -------------------------------------------------------------------------------- Cost of sales in 2012 was $9,834,461 , or 99.6% of sales, compared to 95% in 2011. Accordingly, gross profit percentage dropped to 0.4% in 2012 compared to 5% in 2011. Cost of sales increased because of a write-off of obsolete inventory of $190,000 , fines and penalties from the U.S. Government of $75,818 due to fuel issues, impairment of inventory of $172,340 , an increase in raw materials of 4%, an increase in chassis costs of 2%, and an increase in direct labor costs of 1%. The increase in cost of sales was also due to a U.S. government contract that was over-engineered. Without this contract the Company's cost of sales in 2012 would have been comparable to past years. This contract had a negative impact on gross profit of approximately 33% on sales of $3,220,778 . Selling expenses decreased $19,282 , or 12%, from $156,654 in 2011 to $137,372 . The decrease was primarily due to decreased commissions paid to international agents of $12,089 , and travel expenses of $8,253 . General and administrative expenses increased $17,056 , or 7%, from $254,995 in 2011 to $272,051 . The increase was attributable to an increase in depreciation of $35,826 due to a more significant amount of capital expenditures the last couple of years. All other expenses decreased or the change is immaterial. Interest expense increased $29,174 , or 9%, from $383,606 in 2011 to $412,780 . The increase was attributable to a higher level of debt associated with chassis purchases. HOLDING OPERATIONS: Operating expenses increased $6,534 , or 2%, from $300,566 in 2011 to $294,032 . Interest expense increased $1,468 , or 2%, from $83,132 in 2011 to $84,600 . The increase was primarily due to greater debt. OFF-BALANCE SHEET ARRANGEMENTS None.
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