RESULTS OF OPERATIONS: FISCAL YEAR 2012
NET SALES
Net sales of $6,686,782 for the Fiscal Year 2012 increased $766,885 or 13% from $5,919,897 in Fiscal 2011. This increase was due to a general improvement in demand for our products in Fiscal 2012.
COST OF SALES
Cost of sales increased $701,134 or 18% to $4,662,974 for Fiscal 2012 compared to $3,961,840 Fiscal 2011. 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 2012 were $1,031,197, an increase of $134,496 or approximately 15% from $896,701 in Fiscal 2011. 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 decreased $68,745 or approximately 6% to $992,611 in Fiscal 2012 from $1,061,356 in Fiscal 2011. The decrease from Fiscal 2011 is in large part due to resolution of OSHA claim discussed in last year's Annual Report and higher salary expenses and professional fee expenses.
OTHER INCOME
Other income for Fiscal Year 2012 increased $231,570 to $493,000 from $261,430 for Fiscal Year 2011, primarily because of our recognition of gains on income securities sold primarily during the fourth quarter of Fiscal Year 2012 and receipt of a higher level of interest and dividend income from a full year of operation of our income securities portfolio.
NET INCOME
Net income of $938,640 or $1.21 per share for Fiscal 2012 increased approximately 9% from $862,660 or $1.11 per share for Fiscal 2011 as a result of the factors described above.
9
BACKLOG OF ORDERS
Our backlog of unshipped orders stood at $1,830,700 at the end of Fiscal Year 2012, down $635,600 from the end of Fiscal Year 2011 and up $285,700 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 2013.
RESULTS OF OPERATIONS: FISCAL YEAR 2011
Fiscal 2011 ended with net sales of $5,919,897 an increase of $1,019,914 or 21% over Fiscal 2010. This was due to a general improvement in demand for our products, especially after the steep decline in sales during Fiscal Year 2009 and early Fiscal Year 2010. Operating expenses, including selling expenses, were $896,701 for Fiscal 2011, an increase of $68,118 or 8% from Fiscal 2010. Operating income increased $434,267 or 69% to $1,061,356 In Fiscal 2011 from $627,089 in 2010. Other income was $261,430 compared to $75,293 for Fiscal 2010 primarily as a result of increased dividends and interest from the Company's portfolio of income securities. Net income after taxes of $862,660 or $1.11 per share for Fiscal 2011 increased 87% from $460,650 for Fiscal 2010.
INFLATION
During the three year period that ended on October 27,
2012, 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 planned acquisition of an additional facility, together with 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 2012 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 64% of sales during fiscal 2012 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 us. 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.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Our Directors serve until the next annual meeting of
stockholders, or until their successors have been elected. Our officers
serve at the pleasure of the Board of Directors.
Anderson L. McCabe, 57 years old, is our President, Chief
Executive Officer and Chief Financial Officer. He graduated from the
University of South Carolina in 1977 and received a B.S. in Chemical
Engineering. From 1977 to 1985, he was employed by United Engineers and
Constructors, Inc., a subsidiary of Raytheon Corporation as a Process
Engineer with managerial responsibilities. In 1986 he became our president.
He has been a director of the Company since 1987.
Arthur J. Kania, 81 years old, is our Secretary. He is not
active in our day-to-day operations. Mr. Kania's principal occupations
during the past five years have been as Principal of Trikan Associates (real
estate ownership and management - investment firm); and as a partner of the
law firm of Kania, Lindner, Lasak and Feeney. He has been a director of the
Company since 1977.
Arthur J. Kania, Jr., 57 years old, has been a director of
the Company since 1987. He is not active in our day-to-day operations. He is
a principal of Trikan Associates (real estate ownership and management-
investment firm) and vice-president of Newtown Street Road Associates (real
estate ownership and management).
12
BOARD MEETINGS AND COMMITTEES
Audit Committee and Audit Committee Financial Expert
Our Board of Directors functions as an audit committee and performs some of the same functions as an audit committee including: (1) selection and oversight of our independent accountant; (2) establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls and auditing matters; and (3) engaging outside advisors. We are not a "listed company" under SEC rules and are therefore not required to have an audit committee with independent directors. Our Board of Directors does not have an independent director. Our Board of Directors has determined that each of its members is able to read and understand fundamental financial statements and has substantial relevant business and accounting experience. Accordingly, the Board of Directors believes that each of its members has sufficient knowledge and experience necessary to fulfill the duties and obligations that an audit committee would have in a company such as ours.
Board Meetings; Nominating and Compensation Committees
Given the small size of the Company and its limited staff and operations, its directors frequently make determinations informally by telephone calls or by written consent. The Board met before and after the Annual Shareholders Meeting, and at one additional time during the Fiscal Year. Each Meeting was attended by all directors. We pay each of our Directors a fixed annual stipend for acting as Director. No such payment shall preclude any director from serving us in any other capacity and receiving compensation therefor. A total of $12,500 has been paid to each director for services as director during the last fiscal year.
We are not a "listed company" under SEC rules and are therefore not required to have a compensation committee or a nominating committee. We do not currently have a compensation committee. Our Board of Directors is currently comprised of only three members, one of whom acts as Chief Executive Officer and Chief Financial Officer.
We do not have a policy regarding the consideration of any director candidate which may be recommended by our shareholders, including the minimum qualification for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our shareholders, including the procedures to be followed. Because our largest shareholder holds a majority of all issued stock, we do not solicit proxies for the election of directors, since that shareholder has the full power by its vote to elect all directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), requires the Company's officers, directors and
any person owning ten percent or more of the Company's common stock, to file
in their personal capacities initial statements of beneficial ownership,
statements of change in beneficial ownership and annual statements of
beneficial ownership with the Securities and Exchange Commission (the
"SEC"). Persons filing such beneficial ownership arrangements are required
by SEC regulation to furnish to the Company copies of all such statements
filed with the SEC. The rules of the SEC regarding the filing of such
statements require that "late filings" of such statements be disclosed in
the Company's information statement. Based solely on the Company's review of
copies of such statements received by, and on representations from, the
Company's existing directors and officers that no annual statements of
beneficial ownership were required to be filed in 2012.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain summary information concerning compensation paid or accrued to its sole executive officer during the past two fiscal years. He did not receive any awards, stock awards, option compensation, non equity incentive plan earnings or non-qualified deferred compensation.
13
Name
and Principal
Positions
|
Fiscal
Year
|
Salary(1)
|
Bonus
|
All Other
Compensation*
|
Total
Compensation
|
Anderson L. McCabe
President, CEO, CFO,
Treasurer & Director
|
2012
|
$130,000
|
$50,000
|
$16,400
|
$196,400
|
|
2011
|
$130,000
|
$25,000
|
$11,400
|
$166,400
|
*Includes an annual retainer as Director of Company of $12,500 for 2012 and $7,500 for 2011 in addition to a 401(k) Contribution of $3,900 for each of 2012 and 2011.
EMPLOYMENT AGREEMENTS AND NARRATIVE REGARDING EXECUTIVE COMPENSATION
How Mr. McCabe's compensation is determined
Mr. McCabe, who has served as our CEO since 1986, is not a party to an employment agreement. The non-employee directors meet on an annual basis to review his base compensation and to consider the granting of a bonus. They take into account the scope of his duties and responsibilities in the Company, the challenges the Company faced during the preceding year and his contribution to the profitability of the Company. The base salary and bonus are in the judgment of those directors fair to the Company when taking the above factors into account. Those directors did not consult with any experts or other third parties in fixing the amount of Mr. McCabe's compensation, but based their determinations upon their overall respective business experiences.
OPTION/SAR GRANTS; DEFERRED EXECUTIVE COMPENSATION PLAN; EQUITY COMPENSATION PLAN
The Company did not grant restricted stock awards, stock options or stock appreciation rights during Fiscal Year 2012, nor does it have any of such awards, options or rights outstanding from prior years. The Company does not have any deferred executive compensation plan. The Company does not have any securities authorized for issuance under an equity compensation plan.
DIRECTOR COMPENSATION TABLE FOR FISCAL YEAR 2012
We do not have a standard compensation arrangement for our directors, and the compensation payable to each individual for service rendered is determined by our Board of Directors based upon the amount of time expended on behalf of the Company and also, to a limited extent, the success of the Company in the prior year. The Directors do not receive any compensation other than cash compensation. They do not receive stock awards, option awards, non-equity incentive plan compensation or non-qualified deferred compensation.
The following table sets forth the compensation of our non-employee directors. Our employee director, Anderson L. McCabe, receives the same compensation as the other directors for his services as director. His director fees are included in his total compensation in the Summary Compensation Table above.
|
Name
|
Cash Retainer
|
Total Compensation
|
|
Arthur J. Kania
|
$12,500
|
$12,500*
|
|
Arthur J. Kania, Jr.
|
$12,500
|
$12,500
|
* Excludes payments for legal services to law firm of which Mr. Kania is
a partner. See Certain Transactions and Relationships below.
CODE OF ETHICS
The Company's Code of Ethics is posted at its website at
optsciences.com. It applies to all employees, including the CEO, CFO,
principal accounting officer and persons performing similar functions.
14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. The following table
sets forth common stock ownership information as of the record date with
respect to (i) each person known to us to be the beneficial owner of more
than 5% of our issued and outstanding common stock; and (ii) each of our
directors and executive officers.
|
Name and Address of Beneficial Owner
|
Amount and Nature of Beneficial Owner
|
Percent of Class
|
Arthur John Kania Trust 3/30/67
Rose Sayen, Trustee
560 E. Lancaster Avenue, Suite 108
St. Davids, PA
|
510,853
|
66%
|
|
|
|
|
|
Security Ownership of Directors and Officers
|
|
|
|
|
|
|
Name & Address of Beneficial Owner
|
Amount and Nature of
Beneficial Owner
|
Percent of Class
|
Anderson L. McCabe
P.O. Box 221
1912
Bannard Street
Riverton, NJ 08077
|
1,064(1)
|
*
|
|
|
|
|
Arthur J. Kania
560 E. Lancaster Avenue,
Suite 108
St. Davids, PA 19087-5049
|
23,723(1)
|
3%
|
|
|
|
|
Arthur J. Kania, Jr.
560 E. Lancaster
Avenue, Suite 108
St. Davids, PA 19087-5049
|
0(1)
|
*
|
|
|
|
|
|
Directors and Officers as a Group
|
24,787(1)
|
3%
|
|
|
|
|
|
* Less than 1% of outstanding stock.
|
|
|
1. Excludes 510,853 shares (66% of the outstanding shares) owned by a trust for the benefit of Arthur J. Kania's children and a total of 10,000 shares (1.3% of the outstanding shares) owned by separate trusts
for the benefit of each of Arthur J. Kania's grandchildren. Mr. Kania has no voting power or investment power with respect to such securities and disclaims beneficial ownership in all such shares. Mr. McCabe, husband of a beneficiary of the first aforementioned trust, disclaims beneficial ownership in all such shares. Arthur J. Kania, Jr., a son of Arthur J. Kania, is a beneficiary of the first aforementioned trust and father of beneficiaries of the second aforementioned trusts, but has no voting power and no investment power over such shares in said trusts and is not a beneficial owner under the applicable rules.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Arthur J. Kania is the father of Arthur J. Kania, Jr. and the father-in-law of Anderson L. McCabe. Those individuals constitute the Board of Directors. Anderson L. McCabe is the sole executive officer. Rose Sayen, an employee of Arthur J. Kania, is the Trustee of the Arthur J. Kania Trust, which is the principal shareholder of the Company.
During Fiscal year 2012, we incurred legal fees of $ 90,000 to the firm of Kania, Lindner, Lasak and Feeney, of which Arthur J. Kania is the senior partner. Mr. Kania does not share or participate in fees generated from the Company.
15
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
|
Type
|
2011
|
2012
|
|
Audit Fees: (1)
|
$ 37,678
|
$ 42,458
|
|
Audit Related Fees:(2)
|
-0-
|
-0-
|
|
Tax Fees: (3)
|
-0-
|
-0-
|
|
Other Fees: (4)
|
-0-
|
-0-
|
|
Total Fees
|
$ 37,678
|
$ 42,458
|
(1) AUDIT FEES
This category includes the aggregate fees billed or accrued for each of the last two fiscal years for professional services
rendered by the independent auditors for the audit of the Company's annual financial statements and review of financial statements included in the Company's Annual and Quarterly Reports filed with the SEC or services that are normally provided by the accountant in connection with other statutory and regulatory filings or engagements for those fiscal years.
(2) AUDIT-RELATED FEES
This category includes the aggregate fees billed in each of the last two fiscal years for services by the independent auditors that
are reasonably related to the performance of the audits of the financial statements and are not reported above under "Audit Fees".
(3) TAX FEES
This category includes the aggregate fees billed in each of the last two years for professional services rendered by the independent
auditors for tax compliance, tax planning and tax advice.
(4) ALL OTHER FEES
This category includes the aggregate fees billed in each of the last two fiscal years for products and services by the independent
auditors that are not reported under "Audit Fees", "Audit Related Fees" or "Tax Fees".
RE-APPROVAL POLICIES AND PROCEDURES
Before the accountant is engaged by the issuer to render audit or non-audit services, the engagement is approved by the Company's Board of Directors acting as the audit committee.
16
