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RISK GEORGE INDUSTRIES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 13, 2014

Executive Overview __________________

George Risk Industries, Inc. (GRI) is a diversified manufacturer of electronic components, encompassing the security industry's widest variety of door and window contact switches, environmental products, proximity switches and custom keyboards. The security products division comprises the largest portion of GRI sales and are sold worldwide through distributors, who in turn sell these products to security installing companies. These products are used for residential, commercial, industrial and government installations. International sales accounted for approximately 13.7% of revenues for fiscal year 2014 and 6.3% for 2013.

GRI is known for its quality American made products, top-notch customer service and the willingness to work with customers on their special applications.

GRI owns and operates its main manufacturing plant and offices in Kimball, Nebraska with a satellite plant 40 miles away in Gering, Nebraska.

The company has substantial marketable securities holdings and these holdings have a material impact on the financial results. For the fiscal year ending April 30, 2014, other income accounted for 23.10% of income before income taxes. In comparison, other income accounted for 31.66% of the income before income taxes for the year ending April 30, 2013. Management's philosophy behind having holdings in marketable securities is to keep the money working and gaining interest on the cash that is not needed to be put back into the business. And over the years, the investments have kept the earnings per share up when the results from operations have not fared as well.

Management is always open to the possibility of acquiring a business that would complement our existing operations. This would probably not require any outside financing. The intent would be to utilize the equipment, marketing techniques and established customers to increase sales and profits.

There are no known seasonal trends with any of GRI's products, since we mostly sell to distributors and OEM manufacturers. The products are tied to the housing industry and will fluctuate with building trends.

Liquidity and Capital Resources _______________________________


Net cash increased $1,013,000 during the year ended April 30, 2014 compared to a decrease of $914,000 during the year ended April 30, 2013. Accounts receivable increased $119,000 during the current year and showed a $244,000 increase in the prior year. The increase in cash flow from accounts receivable is a reflection of increased sales and stronger attention to collections. At April 30, 2014, 75.47% of the receivables were less than 45 days and less than 1% were over 90 days. In comparison, 69.77% of the receivables were considered current (less than 45 days) and 0.43% of the total were over 90 days past due for the prior year during the same period.

Inventories increased by $159,000 in fiscal year ended April 30, 2014 while the prior period showed a decrease of $277,000 at year end.

Prepaid expenses increased by a net of $72,000 in the current year and decreased by $80,000 for the year ended April 30, 2013, primarily due to prepaid orders for parts not yet received at year end.

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For the year ended April 30, 2014, accounts payable increased by $41,000 as compared to a decrease of $28,000 for the same period the year before. The change in cash in regards to accounts payable is largely based on timing. Payables are paid within terms and fluctuate based primarily on inventory needs for production. Accrued expenses increased $19,000 for the year ended April 30, 2014, primarily due to timing of personnel related items. Income taxes payable increased for the year ended April 30, 2014, up $379,000 from the prior year due in part to the gain on the sale of the company airplane, sale of investments, and the elimination of the loss carry forward from prior years.


As for our investment activities, $81,000 was spent on purchases of property and equipment during the current fiscal year, compared to $104,000 during the year ended April 30, 2013. Additionally, the Company continues to purchase marketable securities, which include municipal bonds and quality stocks. Cash spent on purchases of marketable securities for the year ended April 30, 2014 was $620,000 and $760,000 was spent for the corresponding period last year. Conversely, net proceeds from the sale of marketable securities for the year ended April 30, 2014 were $5,000 and $89,000 for the same period last year. We use "money manager" accounts for most stock transactions. By doing this, the Company gives an independent third party firm, who are experts in this field, permission to buy and sell stocks at will. The Company pays a quarterly service fee based on the value of the investments. Furthermore, the Company continues to purchase back its common stock when the opportunity arises. For the year ended April 30, 2014, the Company purchased $38,000 of treasury stock and $36,000 was bought back for the year ended April 30, 2013. We have been actively searching for stockholders that have been "lost" over the years. The payment of dividends over the last nine fiscal years has also prompted many stockholders and/or their relatives and descendants to sell back their stock to the Company.

As for investment activities, a net amount of $4,000 was spent on other assets manufactured for the year ended April 30, 2014, while $1,000 was capitalized on these activities during the prior year. Additionally, the company airplane was sold during the year ended April 30, 2014 with proceeds from that sale amounting to $127,000.


Cash used in financing activities were $1,374,000 for the year ended April 30, 2014, which mostly consisted of dividends paid. The company declared a dividend of $0.30 per share of common stock on September 30, 2013 for the current year, while a $0.28 per share of common stock dividend September 30, 2012 and a dividend of $0.22 per share of common stock on December 16, 2012 were issued in the prior year.

Results of Operations _____________________

GRI completed the fiscal year ending April 30, 2014, with a net profit of 28.31% of net sales. Net sales were at $11,025,000, up 4.9% over the previous year. The slight increase in sales is a result of continued quality service and a price increase implemented in January, 2014. Cost of goods sold was 44.46% of net sales for the year ended April 30, 2014 and 48.42% for the same period last year. Management continues to keep labor and other manufacturing expenses in check, therefore keeping the cost of goods sold percentage in the desired range of 45 to 50%.

Operating expenses were 23.66% of net sales for the year ended April 30, 2014 as compared to 25.91% for the corresponding period last year. Management's goal is to keep the operating expenses around 30% or less of net sales, so the goal has been met for the current fiscal year. Income from operations for the year ended April 30, 2014 was at $3,514,000, which is a 30.24% increase from the corresponding period last year, which had income from operations of $2,698,000.

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Other income and expense results for the fiscal year ended April 30, 2014 produced a gain of $1,055,000. This is in comparison to a gain of $1,250,000 for the fiscal year ended April 30, 2013. Dividend and interest income was $668,000, which was down 15.34% for the year. Dividend and interest expense at April 30, 2013 was $789,000. Gains on investments for the current fiscal year were $384,000, which is a 16.52% decrease over the prior year. Gains on investments for the fiscal year ending April 30, 2013 were $460,000.

Net income for the year ended April 30, 2014 was $3,122,000, which is up dramatically from the prior year, which produced a net gain of $2,721,000. Earnings per common share for the year ended April 30, 2014 was $0.62 per share. EPS for the year ended April 30, 2013 was $0.54 per share.

Management expects sales to stay steady for the fiscal year ending April 30, 2015. The company's main division of products that are sold (security switches) are directly tied to the housing industry. And since the housing industry's performance has improved, the company's sales have also improved in relation to the economy. We are always researching and developing new products that will help our sales increase. While we were not successful in launching the anticipated new products in fiscal year 2014, we continue to work toward a new release date for those products, and to search for products that complement our current offerings.

At April 30, 2014, working capital increased 7.03% in comparison to the previous fiscal year. The company measures liquidity using the quick ratio, which is the ratio of cash, securities and accounts receivables to current obligations. The company's quick ratio decreased to 14.565 for the year ended April 30, 2014 compared to 18.390 for the year ended April 30, 2013, reflecting a strong position in ability to meet capital needs as they arise.

New product development

The GRI Engineering department continues to develop enhancements to our existing products as well as to develop new products that will continue to secure our position in the industry.

Wireless technology is a main area of focus for product development. We are looking into adding wireless technology to some of our current products. First of all, we are working on a wireless version of our Pool Alarm that will be easy to install in current construction. We are also concentrating on making products compatible with the increasing popular Z-Wave standard for wireless home automation.

We are working on high security switches. We have a triple biased high security switch design nearly complete and an adjustable magnet design was completed for recessed mounting applications.

Our molding department is working on new molds for enhancements to our new Current Controller and a 29-series switch. The new versions of the Current Controller will allow the user to control more lights with a single controller or to handle higher voltage applications for use overseas.

We continue to research the possibilities of fuel level sensing and how that may also serve other agricultural based needs. Several companies from around the world have been looking for ways to secure fuel tanks and trucks. Our emphasis would be in ways to safely monitor fuel levels and report tampering.

Page 9 Critical Accounting Policies ____________________________

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently actual results could differ from those estimates. Our most critical accounting policies relate to accounts receivable; marketable securities; inventory; income taxes; and segment reporting.

Accounts Receivable-Accounts receivable are customer obligations due under normal trade terms. The company sells its products to security alarm distributors, alarm installers, and original equipment manufacturers. Management performs continuing credit evaluations of its customers' financial condition and the company generally does not require collateral.

The company records an allowance for doubtful accounts based on an analysis of specifically identified customer balances. The company has a limited number of customers with individually large amounts due at any given date. Any unantici- pated change in any one of these customers' credit worthiness or other matters affecting the collectibility of amounts due from such customers could have a material effect on the results of operations in the period in which such changes or events occur. After all attempts to collect a receivable have failed, the receivable is written off.

Marketable securities-The Company has investments in publicly traded equity securities, state and municipal debt securities, and hedge funds. The invest- ments in securities are classified as available-for-sale securities, and are reported at fair value. The investments in hedge funds are reported at cost. The Company uses the average cost method to determine the cost of securities sold and the amount reclassified out of accumulated other comprehensive income into earnings. Unrealized gains and losses are excluded from earnings and reported separately as a component of stockholder's equity. Dividend and interest income are reported as earned.

In accordance with the Generally Accepted Accounting Principles in the United States (US GAAP), the Company evaluates all marketable securities for other- than temporary declines in fair value. When the cost basis exceeds the fair market value for approximately one year, management evaluates the nature of the investment, cause of impairment and number of investments that are in an unrealized position. When it is determined that a security will probably remain impaired, a recognized loss is booked and the investment is written down to its new fair value. The investments are periodically evaluated to determine if impairment changes are required.

Inventories-Inventories are valued at the lower of cost or market value. Costs are determined using the average cost-pricing method. The company uses standard costs to price its manufactured inventories, approximating average costs. The reported net value of inventory includes finished saleable products, work-in- process and raw materials that will be sold or used in future periods. Inventory costs include raw materials, direct labor and overhead. The Company's overhead expenses are applied, based in part, upon estimates of the proportion of those expenses that are related to procuring and storing raw materials as compared to the manufacture and assembly of finished products. These proportions, the method of their application, and the resulting overhead included in ending inventory, are based in part on subjective estimates and approximations and actual results could differ from those estimates.

In addition, the Company records an inventory obsolescence reserve, which represents the cost of the inventory that has had no movement in over two years. There is inherent professional judgment and subjectivity made by management in determining the estimated obsolescence percentage. In addition, and as necessary, the Company may establish specific reserves for future known or anticipated events.

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Income Taxes-US GAAP requires use of the liability method, whereby current and deferred tax assets and liabilities are determined based on tax rates and laws enacted as of the balance sheet date. Deferred tax expense represents the change in the deferred tax asset/liability balances.

Segment Reporting and Related Information-The Company designates the internal organization that is used by management for allocating resources and assessing performance as the source of the Company's reportable segments. US GAAP also requires disclosures about products and services, geographic area and major customers.

Related Party Transactions - The Company leases a building from Bonnie Risk. Ken Risk was the Chairman of the Board and President and CEO of the company until his death in February 2013. Bonnie Risk is Ken's wife, who is a director and an employee of the company. This building contains the Company's sales and accounting departments, maintenance department, engineering department and some production facilities. This lease requires a minimum payment of $1,535 on a month-to-month basis. The total lease expense for this arrangement was $18,420 for the fiscal years ended April 30, 2014 and 2013.

The company also leased its airplane from former President and CEO Ken Risk, who was also a majority stockholder, on a month-to-month basis requiring payments of $2,250. Airplane lease expenses charged to operations for the fiscal year ended April 30, 2013 were $22,500. During the year ended April 30, 2000, the Company paid $210,000 and the former President/CEO contributed the airplane in trade for another airplane. The Company and this officer jointly owned the airplane. The airplane was sold during the year ended April 30, 2014.

One of the directors of the board, Joel Wiens, is the principal shareholder of FirsTier Bank. FirsTier Bank is the financial institution the company uses for its day to day banking operations. Year end balances of accounts held at this bank are $3,879,000 for the year ended April 30, 2014 and $3,350,000 for the year ended April 30, 2013. The Company also received interest income from FirsTier Bank in the amount of $1,500 for the year ended April 30, 2014 and $2,000 for the year ended April 30, 2013.

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Source: Edgar Glimpses

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