This "Management's Discussion and Analysis" contains forward-looking statements within the meaning of Section 21B of the Securities and Exchange Act of 1934, as amended. These forward-looking statements represent the Company's present expectations or beliefs concerning future events on certain assumptions which are subject to risks and uncertainties, including, but not limited to, changes in general economic conditions and changing competition which could cause actual results to differ materially from those indicated. Results of Operations For the fiscal year ending October 31, 2013 , net sales were $16,082,938 compared to $17,819,945 in fiscal 2012, a decrease of 9.7 %. The decrease in net sales was the result of lower shipments of synthetic rubber balers, thirteen in fiscal 2013 versus twenty in 2012, and lower shipments of auto-tie balers in 2013. The lower shipments of auto-tie balers were the result of lower demand for balers for cardboard throughout the domestic markets in 2013. The market for rubber balers continues to be strong and the lower shipments in 2013 are related to the scheduling of the orders in 2013 and 2014. The Company had pre-tax income of $1,035,491 in fiscal 2013, compared to pre-tax income of $1,888,676 in fiscal 2012, a decrease of 45.2%. The decrease in income was the result of the lower shipments and higher selling expenses in the current fiscal year. Selling expenses were $971,387 in fiscal 2013 versus $802,864 in the prior fiscal year, primarily due to the addition of two regional sales managers in the third and fourth quarters of fiscal 2012. 4 Liquidity and Capital Resources The Company's working capital at October 31, 2013 was $6,048,952 as compared to $5,465,455 at October 31, 2012 . The increase in net working capital was primarily due to higher inventory and accounts receivable resulting from the increased operating activity in the fourth quarter of fiscal 2013. Average days sales outstanding (DSO) in fiscal 2013 were 36.8 days as compared to 30.1 days in fiscal 2012. DSO is calculated by dividing the total of the month-end net accounts receivable balances for the period by twelve, and dividing that result by the average day's sales for the period (period sales ÷ 365). The Company has a $1,650,000 line of credit agreement with First Merchants Bank of Muncie, Indiana that was entered into on January 7, 2013 . The line of credit allowed the Company to borrow at an interest rate equal to the sum of the LIBOR Rate applicable to each interest period plus 2.24%. The line of credit is secured by all assets of the Company and has a term of two years. The line of credit and the Company's previous line of credit had an outstanding balance of $1,648,649 at October 31, 2013 and no outstanding balance at October 31, 2012 . In 2013 The Company used the line of credit for inventory requirements primarily for three rubber baler orders with a sales value of over $6,500,000 at the end of fiscal 2013 and the beginning of fiscal 2014. In fiscal 2013 the Company made additions of $227,191 to its buildings and manufacturing equipment, compared to additions of $110,751 in fiscal 2012. There are no unusual or infrequent events or transactions or significant economic changes which materially affect the amount of reported income. The Company believes that its cash, line of credit, and results of operations are sufficient to fund future operations. The Company is unaware of any events or uncertainties which are reasonably likely to have a material impact on the Company's short-term or long-term liquidity or the net sales, or net income. The Company has no known or anticipated significant elements of income or loss that do not arise from the Company's operations. Off Balance Sheet Arrangements The Company has no off balance sheet arrangements. Inflation The costs of the Company are subject to the general inflationary trends existing in the general economy. The Company believes that expected pricing for its equipment will be able to include sufficient increases to offset any increase in costs due to inflation. Critical Accounting Policies and Estimates This discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America . The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosures of contingent assets and liabilities. We evaluate our estimates on an ongoing basis and we base our estimates on historical experience and various other assumptions we deem reasonable to the situation. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Changes in our estimates could materially impact our results of operations and financial condition in any particular period. We consider our critical accounting policies and estimates to be as follows based on the high degree of judgment or complexity in their application: Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts for estimated losses on trade receivables resulting from the inability to collect outstanding accounts due from its customers. The allowances include specific amounts for disputed, troubled and aged accounts using current knowledge of particular customer credit worthiness and general allowances based on historical collection experience, current economic trends, credit worthiness of customers and changes in customer payment terms. Management believes the estimates used in determining the allowance for doubtful accounts are critical accounting estimates because changes in credit worthiness and economic conditions, including bankruptcies, could have a material impact on operating results. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. 5 Inventory Allowance The Company analyzes inventory for excess or slow moving inventory. The Company reviews inventory for obsolescence on a regular basis. The allowance is estimated based on factors such as historical trends, current market conditions and management's assessment of when the inventory would likely be sold and the quantities and prices at which the inventory would likely be sold in the normal course of business. Changes in product specifications, customer product preferences or the loss of a customer could result in unanticipated impairment in net realizable value that may have a material impact on cost of goods sold, gross margin and net income. Obsolete or damaged inventory is disposed of or written down to net realizable value on a quarterly basis. Additional adjustments, if necessary, are made based on management's specific review of inventory on-hand. Management believes the estimates used in determining the allowance for excess and slow moving inventory are critical accounting estimates as changes in the estimates could have a material impact on net income and the estimates involve a high degree of judgment. Warranty Allowance The Company warranties its products for one (1) year from the date of sale as to materials and six (6) months as to labor, and offers a service plan for other required repairs and maintenance. The Company maintains an accrued liability for expected warranty claims. The warranty allowance is based on historical warranty costs, quantity and type of balers currently under warranty, and known potential warranty issues. Management believes the estimates used in determining the allowance for warranties are critical accounting estimates because changes in the estimate could have a material impact on operating results. Income Taxes Income taxes are accounted for under the asset and liability method. 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 and operating loss and tax credit carryforwards. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. There were no valuation allowances on the deferred tax assets at October 31, 2013 and 2012 as management believes it will fully utilize them. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. There were no accruals for uncertain tax positions at October 31, 2013 or 2012.
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