CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Specifically, inventory is estimated quarterly and reconciled at the end of the fiscal year when a detailed audit is conducted (also see Consolidated Financial Statements, Note 1. Summary of Significant Accounting Policies and Note 2. Inventories). GENERAL This Management's Discussion and Analysis as of October 26, 2013 should be read in conjunction with the audited consolidated financial statements and notes thereto set forth in this report. It also contains forward looking statements as defined in Part I hereof. 8 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES. We have sufficient liquidity and credit to fund our contemplated capital and operating activities through Fiscal 2014. We continue to use our working capital to finance current operations, including equipment purchases, capital improvements, inventory, payroll and accounts receivable. Our cash increased during Fiscal Year 2013 to $3,446,819 from $2,834,374 at the end of Fiscal Year 2012, primarily because of earnings and the sale of securities. Other income decreased from the prior year primarily due to recognition of losses on sale of securities from the Company's portfolio of income securities. Our total current assets increased $37,625 to $12,485,480 in Fiscal 2013 from $12,447,863 in Fiscal 2012. This relatively small increase was due primarily to use of cash for the purchase of a new building and for a one time cash dividend to stockholders in the first quarter of 2013. It may be necessary to make future investments in new equipment and processes to compete successfully in the aerospace and commercial display markets. RESULTS OF OPERATIONS: FISCAL YEAR 2013 NET SALES Net sales of $6,219,616 for the Fiscal Year 2013 decreased $467,166 or about 7.0% from $6,686,782 in Fiscal 2012. This decrease was due to a general reduction in demand for certain products in Fiscal 2013. COST OF SALES Cost of sales decreased $709,657 or 15.2% to $3,953,317 for Fiscal 2013 compared to $4,662,974 Fiscal 2012. This decrease was due not only to reduced sales, but also to a more efficient use of raw materials resulting in lower scrap and rework costs and to a reduction in overtime labor costs and associated overhead costs. During Fiscal 2013 we increased our work in progress and finished goods inventories in an effort to better serve our customers' short term, just-in-time material requirements.Cost of sales consists of costs to manufacture the products we sell and is comprised of raw materials, manufacturing direct labor and overhead expenses. The overhead portion of cost of sales is primarily comprised of salaries, medical and dental benefits, building expenses, production supplies, and costs related to our production, inventory control and quality departments. OPERATING EXPENSES Operating expenses for Fiscal 2013 were $1,099,758 , an increase of $68,561 or approximately 6.6% from $1,031,197 in Fiscal 2012. Operating expenses include both general and administrative expenses and sales and delivery expenses. Our general and administrative expenses consist of marketing and business development expenses, professional expenses, salaries and benefits for executive and administrative personnel, hiring, legal, accounting, and other general corporate expenses. OPERATING INCOME Operating income increased $173,930 or approximately 17.5% to $1,166,541 in Fiscal 2013 from $992,611 in Fiscal 2012. The increase from Fiscal 2012 is in part due to the non-recurring 2012 expenses of $39,300 incurred in the resolution of an OSHA claim and associated professional expenses. OTHER INCOME Other income for Fiscal Year 2013 decreased $175,006 to $317,994 from $493,000 for Fiscal Year 2012, primarily because of our recognition of losses on the sale of income securities during Fiscal Year and reduced interest and dividend income. PROVISONS FOR INCOME TAX Income tax expense for Fiscal Year 2013 was $541,414 or 36.5% of pre-tax income compared to $546,971 and 36.8% of pre-tax income for Fiscal Year 2012. NET INCOME Net income of $943,121 or $1.22 per share for Fiscal 2013 increased approximately 0.5% from $938,640 or $1.21 per share for Fiscal 2012 as a result of the factors described above. 9 -------------------------------------------------------------------------------- BACKLOG OF ORDERS Our backlog of unshipped orders stood at $2,112,500 at the end of Fiscal Year 2013, up $113,900 from the end of Fiscal Year 2012 and down $59,600 from the end of the third quarter. Of the backlog of orders existing at year end, we expect to deliver 50% within the first quarter of Fiscal Year 2014. RESULTS OF OPERATIONS: FISCAL YEAR 2012 Fiscal 2012 ended with net sales of $6,686,782 an increase of $766,885 or 13% over Fiscal 2011. This was due to a general improvement in demand for our products. Operating expenses, including selling expenses, were $1,031,197 for Fiscal 2012, an increase of $134,496 or 15% from Fiscal 2011. Operating income decreased $68,745 or 6% to $992,611 in Fiscal 2012 from $1,061,356 in 2011. Other income was $493,000 compared to $261,430 for Fiscal 2011 primarily as a result of increased dividends and interest from the Company's portfolio of income securities. Net income after taxes of $938,640 or $1.21 per share for Fiscal 2012 increased 9% from $862,660 for Fiscal 2011. INFLATION During the three year period that ended on October 26, 2013 , inflation did not have a material effect on our operating results. OFF BALANCE SHEET ARRANGEMENTS We do not currently have any off balance sheet arrangements. COMPANY RISK FACTORS An investment in our common stock involves investment risks. A prospective investor should evaluate all information about us and the risk factors discussed below in relation to his financial circumstances before investing in us. 1. The market price of our common stock may fluctuate significantly. In addition, since our common stock has been thinly traded, it is difficult for our shareholders to sell shares of our common stock at a predictable price. 2. Any continuation of weakness in the global economy may have negative implications for our Company. Since our products are incorporated into very expensive new and retrofitted aircraft, the lack of a strong global economy and orderly capital markets may result in reduced demand for our products. 3. Our acquisition of an additional facility, together with planned aquisition of new manufacturing equipment, may not be supported by increases in profitable orders for our products. Significant quarterly fluctuations in backlog and orders challenge the Company to adjust the scale of its activities to the demand for its products; the larger the fluctuations, the more difficult it is to have efficient operations. 4. Our product offerings are concentrated. During Fiscal 2013 we derived approximately 95% of our revenues from instrument glass used for avionics and related aerospace products. 5. Our revenues come from a limited number of customers, with approximately 59% of sales during fiscal 2013 arising from two customers. The loss of one or both of such customers would be a materially adverse development for the Company. 6. For a major portion of our business, we rely on raw materials manufactured in foreign countries. An interruption of such supplies would have a significant impact on sales and our ability to support our customers. 10 -------------------------------------------------------------------------------- 7. Our success depends on the efforts and expertise of our President, Anderson L. McCabe . He is our chief executive officer, our chief financial officer and our principal marketing officer. His death, disability or termination of employment would adversely affect the future of our Company. We do not have employment contracts with Mr. McCabe or other management personnel. We do not maintain key man life insurance on Mr. McCabe or other key personnel. 8. The market for our products is very competitive. 9. In order to increase income on our liquid assets, we invested a very substantial portion of our cash assets in a managed investment portfolio, which is subject to valuation decline in the event of a market downturn for all or any of the income securities in that portfolio. 10. Purchase orders and specifications from our customers may include extensive product warranties and contractual undertakings. Accordingly, future claims by our customers may have an adverse effect on our future operating results. 11. Our industry is also subject to significant risk from outside influences, such as terrorist attacks (9/11) and biological epidemics (SARs and Avian flu outbreaks in Asia ). Other factors that may in the future influence our industry are inflation, changes in diplomatic and trade relations with other countries, tariffs, trade barriers and other regulatory barriers. 12. We are controlled by our major stockholder, the Arthur John Kania Trust . The Arthur John Kania Trust beneficially owns approximately 66% of our outstanding common stock. Such concentrated control of the Company may adversely affect the price of our common stock. Because of the high percentage of beneficial ownership, the Trustee of that Trust is able to control matters requiring the vote of stockholders, including the election of our board of directors and certain other significant corporate actions. This control could delay, defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would benefit our other stockholders and the Company. This control could adversely affect the voting and other rights of our other stockholders and could depress the market price of our common stock. If you acquire common stock, you may have no effective voice in the management of the Company.
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