ITEM 1 - BUSINESS
Allied
Devices Corporation (“Allied Devices”, “Allied” or the “Company”) is a
manufacturer and distributor of a broad line of high precision mechanical
components and sub-assemblies used in industrial and commercial instruments and
equipment. The Company’s products are
used in a broad range of applications, including, amongst others, light duty
transmission of motion, measurement and control of fluids and gases in critical
processes, positioning devices and actuation mechanisms. The Company has the capability of producing
very close tolerance and intricate assemblies at competitive cost and with
short lead times. A part of the
Company’s business strategy is to provide prompt service and extensive
technical support in certain industrial and technology-intensive markets where
customers generally expect extended or erratic lead times, missed deadlines and
mediocre technical support and customer service.
The
Company’s major product groups include precision motion control and servo
assemblies, gears and gear products, and other precision machined components
and sub-assemblies built to customer specifications. Allied Devices’ customers are primarily original equipment
manufacturers (“OEMs”).
Allied
Devices’ principal marketing tool is its highly effective technical manual of
standardized instrument components available through the Company. This catalog is in the hands of buyers and
engineers throughout the United States and generates sales nationwide. Management estimates that the Company has
distributed more than 90,000 copies of its printed catalog over the last
decade, of which approximately 40,000 copies were distributed during the last
three fiscal years. The current edition was originally published in November,
1998, has been edited and reprinted once, and is over 650 pages in length. In addition, the catalog has been fully
digitized and formatted for inclusion as live data on the Company’s Internet
website, enabling users to download the Company’s standard technical data and
drawings. The catalog and its search
tools have been accessible on the Internet through a broad range of website
links since January, 1999.
With
its breadth and standardized nature, the Company’s standard product line (as
offered in its catalog) is useful for highly varied applications in multiple
industries, resulting in demand at the level of both OEMs and
distributors. The Company sells to
customers in a diverse range of industries, principally medical operating room
and diagnostic equipment; semiconductor capital goods makers; laser equipment;
robotics; computer peripherals; aerospace instrumentation and controls; factory
automation equipment and controls; machine tool builders; research and
development facilities; high vacuum and spectrometric devices; flow control and
metering equipment makers; mechanical seals and glands; scientific
instrumentation and apparatus; and optics.
A
typical customer is an OEM selling high-ticket capital goods equipment. The components supplied by Allied Devices
going into such equipment generally constitute a small percentage of the OEM’s
direct cost of manufacturing, normally less than $1,000 per unit. In many cases, however, the customer OEM’s
system or equipment is dependent on the reliability and/or precision of the
Company’s components, despite their modest cost, for its functional integrity
and competitive performance. Failure to
deliver reliable quality in a timely manner can have an impact far in excess of
the direct cost of the parts. As a
result, the majority of Allied Devices’ customers deem it imperative that parts
supplied be on time and of reliably high quality. While these performance criteria are not always contractual
requirements, they are critical determinants in stimulating repeat business.
Allied
Devices has adopted a strategy designed to build proprietary relationships with
companies requiring broader or more technical manufacturing or production
support by levering off of capabilities represented by the catalog and its
range of standard products. In
management’s estimation, success in manufacturing precision mechanical
instrument assemblies and related components often requires a high level of
integration between sophisticated mechanical engineering, assembly and
component manufacturing capabilities and that few companies in the US have been
effective in providing such services on an integrated basis. There is a strong trend, especially among
OEMs with technologically advanced products, towards outsourcing sub-systems
from original design on through production roll-out, and, in management’s
opinion, such companies are frequently not well served. Management has structured Allied to provide
advanced mechanical engineering expertise, prototype manufacturing and testing,
product improvement and value engineering, integrated component/sub-assembly
production, contract manufacturing, and distribution support. The Company’s
organization, production facilities and inventory policies are designed to
provide fast and timely response to design issues as well as customer orders,
large and small, and to support “just in time” (“JIT”) methods of material
sourcing being used by more and more companies. Allied’s lead times in response to customer orders are generally
short (four weeks or less). Schedules
for future deliveries are generally subject to change or cancellation without
notice; therefore, backlog is not considered a meaningful indicator of business
trends and management makes no effort to monitor or analyze backlog carefully.
Allied
Devices’ sales volume is not dependent on just a few prominent customers. The
Company draws from a customer list of over 6,000, thereby limiting its exposure
to the fortunes of any one industry or group of customers. In each of the past three years, the Company’s
ten largest customers have represented as many as six different industries and
accounted collectively, on average, for about 50% of sales volume. Notwithstanding this diversification in
direct customer relationships, an increasing and meaningful share of overall
demand in the United States for high precision motion control devices in the
past five years has been driven by requirements of the semiconductor equipment
industry (companies building chip-making machinery). While that industry has shown, over the long term, a compound
annual growth rate of approximately 15%, it is prone to wide swings in volume
on a cyclical basis. Such cyclical
fluctuation has had a material effect on the
Company’s
shipping volume, as has been evident from the severe downturns in that industry
seen in 1997-1998, 1998-1999, and again beginning in 2001. Management estimates that customers serving,
directly or indirectly, the semiconductor equipment markets have accounted for
27%, 63%, 42%, and 24% of the Company’s sales volume in fiscal years 1999,
2000, 2001 and 2002, respectively. The
current down-cycle in that industry has been accompanied by a variety of
business consolidations, acquisitions, mergers, and failures, with the result
that the industry is increasingly dominated by a few large companies offering
equipment portfolios that cover the full range of processing and test equipment
needs for chip manufacturers.
Within
the US, geographic concentration of the Company’s customers is relatively low
and fluctuates with conditions in each of the regions served. Allied Devices relies principally on
independent multi-line manufacturers’ representatives to gain national
coverage, altogether fielding some 75 sales people in virtually all significant
territories in the United States. The
volume of Allied’s sales to customers outside the US is insignificant.
As
the market for the Company’s products has evolved, management has perceived
that customers have two differing needs, closely interrelated and therefore
both requiring servicing from Allied.
Accordingly, the Company has been structured to meet both of these needs
by organizing operations into two functional areas: Catalog Sales and
Distribution (“Catalog Operations”) and Manufacturing and Subcontracting (“Manufacturing
Services”). These two areas of the
Company have been defined solely for internal operating convenience and
effectiveness. Both areas serve the
same markets and customers and do not represent separate business segments.
Catalog
Operations
The
majority of product sold through Catalog Operations is either manufactured by
Catalog Operations or procured from the Manufacturing Services operations of
the Company. The product mix includes
standard products (as listed in the Company’s catalogs) and customized or
non-standard products manufactured to the specific requirements of a given
customer. Management periodically adds
or drops products offered through the catalog based on its judgment of appeal
to customers or actual history of sales.
What is not manufactured internally is purchased from a broad variety of
reliable sources. This operation’s activities include telephone sales,
inventory and shipping, gear-making, assembly and light duty/short run
manufacturing. This part of the Company
also sells certain of its standard catalog products to its major competitors on
a wholesale basis. In the aggregate,
revenues for the Catalog Operations were approximately as follows for the five
years ended September 30th.
The
decreases in revenues for 1999 and 2001-2002 were the result of successive
cyclical downturns in the semiconductor equipment sector of the U.S.
economy. Historically, such declines in
sales have been abnormal for the Company because of the diversified nature of
its customer mix. Beginning in the
mid-1990s, however, the semiconductor equipment sector emerged as a major
consumer, directly and indirectly, for precision mechanical components and
sub-assemblies as manufactured by the Company and its competitors. In 1997, a downturn occurred, caused by
overcapacity and excess inventory accumulation, and the duration of the
slowdown appears to have been one year.
While a recovery in this sector started in fiscal 1998, financial and
economic turmoil in Asia during that year caused yet another downturn that
continued through fiscal 1999. In
fiscal 2000, boom conditions prevailed, driven largely by capital spending as
chip makers supported growth in demand from manufacturers of computer
equipment, telecommunications equipment (including cell phones), and
internet-related routing and data processing devices. In November, 2000, shrinking demand for semiconductors coincided
with significant additions to industry capacity coming on line, resulting in a
dramatic surplus of capacity. A deep
and sudden decline in demand for chip-making and testing equipment ensued and
has continued unabated through all of fiscal 2002. The Company has undertaken to further diversify its business with
additional products and more intensive marketing in industries unrelated to the
semiconductor equipment sector.
Catalog
Industry Competition
The
Company’s Catalog Operations compete principally with W.M. Berg Co., a
subsidiary of Invensys; PIC Design; Nordex Inc.; and Sterling Instrument, a
division of Designatronics. Each of
these companies publishes a catalog similar to that issued by the Company,
offering a wide range of mechanical instrument components built around a single
set of standards. Other competitors
include many companies offering a limited selection of materials or “single
product” catalogs, often not adhering to any widely accepted standards. This marketplace is highly competitive, yet
management believes, based upon feedback from vendors and customers, that the
Company’s operating principles of immediate product availability, excellent
quality control, competitive pricing, responsive customer service and technical
support have permitted the Company to maintain and improve its market position.
Manufacturing
Services Operations
Central
to management’s strategy for achieving above average growth is Manufacturing
Services Operations. That strategy includes
the following two elements: (a) the majority of products sold through the
catalog will be manufactured
in-house
in the belief that such vertical integration ensures superior quality, timely
deliveries, control of priorities, and cost efficiencies; and (b) the
Company will seek to develop direct contract manufacturing relationships with
“key accounts”, OEMs that enter into blanket or long-term purchasing
arrangements with the Company as an outside contractor instead of manufacturing
for themselves. In pursuit of these
elements of the Company’s strategy, the Company has added significantly
(beginning in 1998) to its manufacturing sophistication and capacity through
(1) acquisition of two state-of-the-art machine shop facilities,
(2) complementary additions of new and highly productive capital
equipment, (3) implementation of various late stage manufacturing
techniques (such as cellular manufacturing), and (4) enhancement of
electro-mechanical engineering and technical support capabilities. In seeking to prepare for continued growth
and improve its manufacturing responsiveness and flexibility, the Company,
during fiscal 2000, consolidated several smaller locations on Long Island into
one new facility, and, during 2001, consolidated three smaller locations in
Maine into one new and larger facility.
Allied now has three manufacturing divisions, each with a particular
focus and core competencies. In
addition to the product produced by each division in support of Catalog
Operations, each manufacturing operation also markets and sells its
capabilities direct to key customer accounts.
The
following operations comprise Manufacturing Services:
The
Manufacturing Services operation in Hicksville, NY, sells both through Catalog
Operations direct to customers and through distributors and other catalog
houses, generally at uniform list prices.
In addition, each Manufacturing Services operation bids for specialized
custom manufacturing work in the open market, taking on machining jobs under
fixed price contracts. While long
production runs are sought and periodically won, the structure of Manufacturing
Services’ organization and facilities is generally oriented to limited runs
with higher margins. Pricing is based
on a combination of outside costs (for materials and processing services) and
standard hourly shop rates (for labor and overhead).
Approximate
revenues from Manufacturing Services were as follows for the five years ended
September 30th:
*
The large increase in fiscal 1999 was attributable principally to the
acquisition of Atlantic Precision Products in July, 1998.
The
Company does not report results or allocate resources for Catalog Operations
and Manufacturing Services separately, but management believes that both areas
of the business make a positive contribution to operations. While the Company is intensively marketing
its Manufacturing Services capability, management believes that existing
capacity will support substantial increases in volume without significant
additions to current production facilities.
Operations are now running on a reduced single shift, representing an
estimated 40% of capacity, giving the Company substantial flexibility to
respond to increases in sales volume.
Management does not anticipate having difficulty in filling its needs
for skilled and semi-skilled production staff in responding to growth in demand
and shipments. It is a policy of
management, on a continuous basis, to examine its manufacturing methods,
equipment and tooling, and to seek ways to improve the quality and
responsiveness of its capacity while minimizing the labor and skill content
(and related cost) in its product; however, no capital expenditures related to
this policy are planned for fiscal 2003.
Manufacturing
Services Competition
Each
of the divisions in Manufacturing Services faces intense competition from the
many thousands of machine shops throughout the United States. Each division endeavors to differentiate
itself strategically from its competition on the basis of: i) accepting
short-run work; ii) offering short lead times; iii) providing exceptional
responsiveness to customer requirements; iv) supporting demand-pull and JIT
requirements; v) providing engineering and technical support not typically
offered
by
machine shops; and vi) conforming consistently to unbending quality
standards. As part of this strategy,
the Company has developed and offers a portfolio of specialized machining
capabilities that management believes are in increasing demand in its target
markets but that are not readily available in the open market.
Quality
Assurance
Although
not legally required to do so in order to conduct its current business, the
Company has emphasized rigorous standards of high quality in its products and
in its manufacturing methods. In the
1980s, this led to the development of an internal quality control manual that
set forth policies and procedures used throughout the Company. In fiscal 1999, the Company started the
process of qualifying all of its operations for certification to ISO-9002,
receiving original certification for its APPI facilities in May, 1999 and for
its Hicksville operation in August, 2001.
In 2000, the International Standards Board undertook to revise and
update the ISO-9000 standards.
Management believes that the revisions to such standards will not result
in disqualification for any of the Company’s facilities and anticipates
conformance and certification to the revised standards before the deadline for
re-certification in 2004. In
management’s opinion, loss of qualification under ISO-9002 would not have a
material impact on the Company’s ability to do business; however, such
qualification does provide an indication to customers and potential customers
of the degree of diligence that the Company exercises in adhering rigorously to
high standards in pursuit of consistent quality and manufacturing excellence.
Expansion
Plans
Since
1996, management has been carrying out a plan to expand the size of the
Company. The plan has four basic
elements: (1) expand and diversify the core business through more intensive
marketing of assemblies and custom engineered products; (2) add selected
standard products within the existing line of business; (3) expand beyond the
Company’s core business into related lines of business through an acquisition
program that will not only add volume and capacity but also provide marketing,
operating and administrative synergies; and (4) raise additional equity capital
to support the expansion plans as they are being implemented. The sharp and prolonged downturn in fiscal
2001-2002 has prompted management to suspend implementation of such plans until
operating and financial conditions are more favorable.
Marketing
Programs
The
Company has developed a program designed to stimulate substantial growth within
its existing line of business. Feedback from customers and informal market
research indicate that Allied Devices is only just beginning to gain widespread
customer awareness in the markets it serves.
Thus, the principal thrust of the Company’s plan is to make its target
customers and markets more fully aware of the Company’s range of capabilities,
of the usefulness of standardized components in general, and of the value of
integrated engineering, assembly and manufacturing services. The program is divided into modules and is
being implemented as management deems appropriate and as budgets permit.
The
plan includes a number of programs, including expansion and focusing of the
Company’s advertising campaign (currently suspended till recovery in industrial
markets appears to be imminent and the Company has the funds to undertake such
an initiative). In another program,
management has undertaken to improve, on a continuous basis, the standards of
service and support provided to the Company’s customers. Other facets of the plan include phasing in
of expanded engineering support, expansion of assembly capabilities,
introduction of new products, and providing electronic accessibility for
customers. The Company’s website currently gives access to a digital version of
the Allied Devices catalog, with drawing files available for downloading onto
CAD systems. During fiscal 2003, management intends to go live with a
customer-interactive system (currently in testing) through its website that
will enable customers to place inquiries, enter orders, view inventory status,
and check on delivery status of existing orders. Management believes that these plans, to the extent implemented,
have resulted in improved market share for the Company.
Acquisition
Program
As
part of its plans for growth, management intends to carry out an acquisition
program. By its own assessment,
management views the market in which it competes as large (over $1 billion),
highly fragmented, and poised for certain forms of consolidation. When and as appropriate, management intends
to focus on acquiring businesses with the following characteristics: (a)
significant potential for sales growth; (b) high prospects for synergy and/or
consolidation in marketing, manufacturing and administrative support functions;
(c) relatively high gross margins (30% or more); (d) effective operating
management in place; (e) a reputation for quality in its products; and (f)
represent lateral or vertical integration.
Management completed two acquisitions in fiscal 1998, and one in fiscal
2001. No additional acquisition
activity is planned before market and the Company’s economic conditions
improve.
Other Factors
Raw
materials for the Company’s operations are normally readily available from
multiple sources, such as bar stock of stainless steel and aircraft grade
aluminum from metal distributors.
Management expects no change to this situation in the foreseeable
future. The technological maturity of
the Company’s product line has resulted in general stability of demand in its
markets (exclusive of normal business cycles) and ready availability of raw
materials at stable prices. The
inventories carried by the Company, both as raw materials and as finished
goods, thus bear a relatively low risk of technological obsolescence, except to
the extent they are customer-specific.
Management views inventory risk as a function of several factors,
principally the following: (1) pricing; (2) economic cycles; and (3) product
life cycle for customer-specific product.
Economic cycles, especially in the semiconductor equipment industry,
may, during a down-cycle, cause an immediate production stop-order for
custom-made components for periods in excess of a year, resulting in
accumulation of inventory that may not be saleable when an up-cycle comes. Conservative accounting policies (as in
force at the Company) require that such inventories be written off if they are
slow-moving or inactive, whether or not
management
feels they will ultimately sell. Should
pricing be high relative to market, or should management remove products from
the standard catalog offering, then related inventory would likely be
slow-moving or surplus but may ordinarily be liquidated. Management periodically reviews the range of
products offered in the catalog and, based on its judgment of what customers
using the catalog will find pertinent and useful, adds and drops products to
tailor the offering. No material
portion of the Company’s business is subject to renegotiation of profits or
termination of contracts at the election of the United States government or its
prime contractors. Procurement of
patents is not material to the Company’s present marketing program.
Regulation
The
Company is not subject to any particular form of regulatory control. The Company does not expect that continued
compliance with existing federal, state or local environmental regulations will
have a material effect on its capital expenditures, earnings or competitive
position.
Employees
The
Company currently employs 49 salaried and 136 hourly personnel. Wage rates and benefits are competitive in
the labor markets from which the Company draws. The Company has been able to provide for all of its labor
requirements in fiscal 2002. None of
the Company’s employees are represented by labor unions. The Company has had no strikes, walkouts or
other forms of business disruption attributable to poor labor relations. Relations with employees are open and
constructive.
Capital
Equipment
The
Company uses a wide variety of machinery and equipment in the manufacturing and
assembly of its product line. Although
the Company or its subsidiaries own much of this equipment, certain pieces of
equipment are leased. Seventeen leases,
covering specific CNC machines, have original lease terms of five years, with
purchase options at the end of each lease.
Rates vary from 7.2% to 9.9%, and expiration dates range from 2003 to
2006. The obligations due under capital
leases were approximately $5,786,000 as of September 30, 2002.
ITEM 2
ITEM 2 - PROPERTIES
Listed
below are the principal plants and offices of the Company. All property occupied by the Company is
leased except as otherwise noted.
Management consolidated operations from Biddeford, ME, Windham, ME and
Raymond, ME into one building in Sanford, ME during fiscal year 2001. The lease for the Sanford, ME facility was
executed in April, 2001, for a period of ten years. The facilities in Windham and Raymond have been re-leased and
sub-leased, respectively. Management is
seeking to sub-let or re-lease the remaining vacant space at the Biddeford
facility; the Biddeford lease expires in June, 2003.
ITEM
3
ITEM
3 - LEGAL PROCEEDINGS
The
Company knows of no material pending legal proceedings (other than routine
claims incidental to its business) in which it or any of its officers or
directors in their capacity as such is a party.
ITEM
4
ITEM
4 - SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
PART II
ITEM 5
ITEM 5 - MARKET FOR
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The
Company’s common stock was originally listed on the National Association of
Securities Dealers Automated SmallCap Market (“NASDAQ”) as of November 17,
1994. Following the downturn in sales
and profits in 2001-2002, the Company no longer met the listing criteria for
NASDAQ’s SmallCap Market and accordingly the Company’s stock was delisted in
September, 2002. Allied’s shares are
currently traded over the counter on the OTC Bulletin Board under the symbol
ALDV.OB. As of December 31, 2002, the
Company had 422 holders of record of its common
stock. The Company has seven listed market makers,
and the trading ranges by quarter for fiscal 2002 and 2001 were as follows:
ITEM
6
ITEM
6 - SELECTED FINANCIAL
DATA
The
following selected consolidated financial data have been derived from the
audited financial statements of Allied Devices Corporation. The selected financial data should be read
in conjunction with the consolidated financial statements and related notes
included elsewhere in this Form 10-K.
ITEM
7
ITEM
7 - MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
YEAR ENDED SEPTEMBER 30, 2002, COMPARED WITH YEAR ENDED
SEPTEMBER 30, 2001
All statements contained
herein that are not historical facts, including, but not limited to, statements
regarding the Company’s current business strategy, the Company’s projected
sources and uses of cash, and the Company’s plans for future development and
operations, are based upon current expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual
results may differ materially. Among
the factors that could cause actual results to differ materially are the
following: the availability of sufficient capital to finance the Company’s
business plans on terms satisfactory to the Company and the Company’s ability
to obtain forbearance from its lenders; competitive factors; changes in labor,
equipment and capital costs; changes in
regulations affecting the
Company’s business; future acquisitions or strategic partnerships; general
business and economic conditions; and factors described from time to time in
the reports filed by the Company with the Securities and Exchange
Commission. The Company cautions readers not to place undue reliance on
any such forward-looking statements, which statements are made pursuant to the
Private Litigation Reform Act of 1995 and, as a result, are pertinent only as
of the date made.
Fiscal year 2002 started
in the immediate aftermath of September 11, 2001. This twelve month period (from October, 2001, through September,
2002) was one of grave political and economic uncertainty, more severe than any
in recent U.S. history. The impact on
the manufacturing sector in this country was dramatic. Throughout the year, businesses in general,
with no forewarning, suspended or postponed capital spending, cut R&D
budgets, implemented drastic inventory reduction plans, pared payrolls,
extended payment terms, and cancelled, suspended or curtailed long-term
purchasing agreements. All of these
have had a significant impact on Allied’s sales volume. Throughout fiscal 2002, the
Company encountered a seemingly continuous series of contractions in the
various industrial sectors into which the Company sells its products. Such sustained and extreme deterioration in
business conditions has been unprecedented since the Company first started in
1947. As each such contraction
occurred, management formulated and carried out plans of action to address and
counteract the situation, all the while adhering to the Company’s core strategies. The outcome has provided for the continued
operation of the business, although the financial condition of the Company has
deteriorated significantly.
One
of management’s central strategies has been to position Allied Devices as an
exceptional supplier of critical mechanical and electro-mechanical components
and sub-assemblies to OEMs that are leaders or prospective leaders in a diverse
array of industries. Such critical
components and sub-assemblies include devices with engineering value added, made
from exotic or tough materials, with features that are beyond the capabilities
of many machining businesses to produce with reliable, consistent quality. The
Company has dedicated substantial effort and resources over the past several
years to developing capabilities that are scarce in the markets in which it
competes, and management believes that the Company has successfully gained
recognition and respect for its capabilities in target markets and for its
world class performance in manufacturing such devices. Sales initiatives undertaken during this
slow period have secured new customer relationships and favorable opportunities
for manufacturing new product when market conditions improve.
Through
much of its history, Allied has sought to maintain a diverse mix of companies
in its customer base, a strategy that has served to mitigate the impact of
downturns in particular sectors or industries by relying on continued strength
in other sectors. As happened in three
quarters of fiscal 2001 and throughout fiscal 2002, effectively all of the
industries that the Company serves experienced significant and simultaneous
slow-downs. The impact on Company sales
began to register part way through the second quarter of its fiscal year 2001
and has continued unmitigated through all of fiscal 2002. Broad and steady deterioration in the U.S.
economic climate, particularly in the manufacturing sector, prompted a
marked
downturn in capital spending, resulting in dramatic slow-downs for Allied’s
customers, which in turn prompted a contraction over the two years of nearly
50% in sales for the Company. Fiscal
year 2003, to date, has not shown any improvement, thus perpetuating an
environment highly averse to risk-taking and capital spending.
Despite
conscious efforts by management to maintain industry diversification, the
semiconductor equipment sector had grown dramatically in the period beginning
1999, becoming the largest in the Company’s revenue mix, representing an
estimated 63% of sales at its peak in fiscal year 2000. While industry analysts report varying
numbers, overall contraction in semiconductor equipment volume appears to have
been about 75%; while there is some potential for further deterioration,
experts project that the industry has “bottomed” with prospects for improvement
beginning during or after the third quarter of calendar 2003. When this highly cyclical industry is in a
downturn phase, its OEMs typically place new business with their suppliers only
when they have firm orders for product, resulting in erratic and meager volumes
with substantial pressure for lower costs and short lead-times. That has been the Company’s experience
during this downturn: shipments to this sector have shrunk by 75% and represented
some 24% of its revenue mix in fiscal 2002.
Other
industries important to the Company’s revenue stream include aerospace
instrumentation and controls, defense contractors, mass flow metering and
control devices, medical diagnostics, scientific instrumentation, robotics,
oil-field equipment and telecommunications.
Management’s research indicates that all of these sectors but defense
also experienced material declines in activity during 2001 and 2002.
Net sales for fiscal 2002
were approximately $18,246,000, as compared to $29,868,000 in fiscal 2001, a
decrease of approximately 39%. This
significant reduction in sales volume is a result of comparing record high
levels of sales in the early months of fiscal 2001 with unprecedented weakness
throughout fiscal 2002. The weakness in
sales volume is, in management’s opinion, the product of economic and market
factors, not loss of customers or market share.
During fiscal 2001,
management had established and pursued its strategy for weathering the downturn
by targeting to operate at cash break-even while waiting for the economy to
recover. The Company continued to
follow this strategy throughout fiscal 2002.
“Cash break-even” for these purposes included a plan whereby the
Company’s various lenders would accommodate the Company with forbearance on
principal repayments until a recovery plan could be reasonably carried
out. To date, such lenders have
provided such forbearance. On the
premise that the Company will ultimately resume pursuit of its growth plans and
return to sales levels and gross margins experienced in late fiscal 2000 and
early 2001, management has not planned to sell off equipment or downsize
facilities; indeed, its objectives and general strategy for achieving them
remain essentially unchanged.
Gross profit for fiscal
2002 and fiscal 2001 was 4.63% and 16.60%, respectively. The following factors account for this
decline:
1. Net materials
expense (expressed as a percentage of sales) increased by 7.14%, thereby
decreasing gross margins. Included in
this year-to-year change is a write off of discontinued, inactive and excess
inventories, amounting to 4.62% of this increase. The remainder of the increase is principally the product of two
offsetting factors: manufacturing (rather than purchasing) certain products
created cash savings and lowered materials expense, but such savings were more
than offset by higher unit costs inherent in small lots related to prototypes,
qualification articles and short runs.
Compounding these effects were two other issues, forcing Allied to turn
to higher cost sources: certain low cost suppliers either went out of business
or discontinued production, and certain traditional sources for materials were
unwilling to extend credit terms acceptable to the Company. All of these effects were particularly
pronounced in the third and fourth quarters of fiscal 2002.
2. Factory labor costs decreased as an absolute number, but, expressed as a
percentage of sales, increased during fiscal 2002. Indirect payrolls (for supervisory, quality and support staff)
are relatively fixed costs, limiting the timing and degree to which cuts can be
made without impairing the Company’s ability to produce. Direct labor costs (expressed as
a percentage of sales) increased, impacting
margins as a function of two principal factors during fiscal 2002: (1) the mix
of manufacturing work changed, from being more heavily production oriented in
fiscal 2001, to being, in fiscal 2002, exclusively short runs, prototypes, and
qualification lots (all of which are typically low in productivity); and (2)
the Company, as a policy decision, manufactured a range of products in-house
that had previously been purchased, substituting in-house direct labor for
outside costs. The combined net effect
of these factors on labor expense for product shipped was a decrease in gross
margins of 0.20%.
3. Factory overhead expenses increased as a percentage of sales by 4.63%.
While aggressive action on management’s part cut controllable overhead costs
substantially, certain non-labor factory costs are fixed in nature, principally
rent, depreciation, and casualty and liability insurances. Controllable
expenses decreased as a percentage of sales, improving gross margins by 1.39%;
offsetting these improvements was the steep decline in shipments against
relatively fixed costs, reducing gross margins by 6.02%.
During the second half of fiscal 2002, the Company
launched a program to increase prices on its catalog products over the course
of 12 months. The impact on fiscal 2002
results is deemed negligible by management.
Selling, general and administrative expenses declined
approximately $1,856,000, from $8,031,000 in fiscal 2001 to approximately
$6,175,000 in fiscal 2002. This
year-to-year decrease of approximately 23.11% was the
result of implementing a series of cost-cutting measures devised by
management. However, because of the
severity of the sales downturn, such costs represented an increase of 6.96% in fiscal
2002 when expressed as a percentage of net sales. The following factors account
for the change from fiscal 2001:
1. Selling, shipping and commission expenses decreased by 42.52%, but
expressed as a percentage of net sales decreased by only 0.29%.
2. Administrative payroll, benefits, and related expenses decreased by 21.71%
from the prior year but, expressed as a percentage of net sales, increased by
3.98% as management refrained from laying off certain human resources it
considers critical to the Company’s strategies.
3. Other administrative expenses (collectively) decreased by 13.30%. Excluding the effect of non-cash expenses
(depreciation and amortization), these expenses decreased by 38.69% from the
prior year. However, when expressed as a percentage of decreased levels of net
sales, these expenses (cash and non-cash combined) increased by approximately
3.27%. Of this increase, 3.26%
represented non-cash expenses.
In the fourth quarter of fiscal 2002, the Company
recorded a charge of approximately $2,324,000 representing an impairment loss
on the goodwill of its APPI subsidiary.
Analysis of current business trends of APPI indicated that undiscounted
future cash flows would be less than the carrying value of its net assets. The resultant charge represents the
difference between the carrying and fair value of those assets. Fair value is estimated based on discounted
projected future cash flows.
Interest expense, net, was approximately $1,809,000 in
fiscal 2002 as compared to $1,706,000 in fiscal 2001. This increase is attributable to a higher average level of
indebtedness (from financing of new production equipment in late fiscal 2001,
financing of restructuring plans and lay-offs implemented during fiscal 2001,
an increase in the fair value of an interest rate collar, and issuance of
certain notes in connection with acquisitions). Lower market interest rates partially offset the increase in the
year-to-year comparable periods.
Benefit for income taxes is estimated at 8.83% and
35.7% of pre-tax loss for fiscal 2002 and 2001, respectively, as a combination
of federal and state taxes. See the
notes to the consolidated financial statements for reconciliation to the
federal statutory rate.
RESULTS
OF OPERATIONS: YEAR ENDED SEPTEMBER 30, 2001, COMPARED WITH YEAR ENDED
SEPTEMBER 30, 2000
During fiscal 2001, the Company
dealt with a continuous series of challenges that arose from events generally
beyond management’s control. As each
challenge materialized, management formulated and carried out plans of action
to address the situation, all the while consistently adhering to the Company’s
core strategies. The outcome has provided for the continued operation of the
business, although the financial condition of the Company has deteriorated
materially.
Net sales for fiscal 2001 were
approximately $29,868,000 as compared to $32,575,000 in fiscal 2000. This decrease, year-on-year, of 8.3% was the
result of an exceptionally strong start to the year followed by a very weak
second half, as shown in the following table:
Management believed the severe
contraction in capital spending in the economy had been the most pronounced
(sudden and deep) to affect the Company’s shipments in over 20 years. To the best of management’s knowledge, the
Company had not lost any significant customers during this period. Indeed, the Company had endeavored to take
advantage of this slow period to gain attention and market share from accounts
that were previously difficult to penetrate; the sales force was deployed
aggressively to reach decision makers who were too busy “keeping up” in boom
times to consider the merits of changing vendors. In all its operations, the Company remained dedicated to
providing top quality and superior service to all of its customers, regardless
of sector. Management expected that, as
a result of the value package it markets and delivers to its customers, the
Company would enjoy success in attracting sales through consistent application
and continuous re-evaluation of its marketing strategy, in the belief that the
Company would realize a steady improvement in market share and quality of
customer relationships. While current
sales levels were depressed, management believed that new accounts gained
during the slowdown would yield a growth rate well above industry average once
the recovery began in the U.S. manufacturing sector. The principal stimulants to such growth would have been, in
management’s estimation, the following: (1) a continued focus on selling
product requiring sophisticated engineering content; (2) a series of programs
of continuous improvement, including maintaining its ISO-9002 status,
particularly in the areas of customer service and support; (3) a program to
develop “key accounts” by offering an expanded range of support services,
including contract manufacturing services; and (4) a continued effort to
diversify into new or under-developed industries, thereby reducing dependence
on volatile technology-related sectors of the economy.
From an operating perspective,
management reacted to this downturn in stages, tailoring spending and staffing
to anticipated sales volume.
Strategically, the Company’s goal has been to cut the minimum amount
necessary to survive the current downturn so that valuable resources marshaled
or developed to support long term growth would not be sacrificed to short term
exigencies. Thus, by the end of the
fiscal year, a series of layoffs and cost-cutting measures had been completed,
effectively curtailing discretionary spending, cutting operating hours, laying
off a substantial number of people, and cutting administrative pay rates. The benefits of such cost-cutting measures,
as a general rule, become evident in the Company’s operating accounts on a
delayed basis, principally as a result of satisfying on-going obligations
before spending actually stops.
Management created a restructuring reserve to account for the expenses
attendant to reducing the size of the business. In addition to such operating considerations, management reviewed
inventory valuations in light of current business conditions and wrote off
potentially unsaleable materials. In
the interest of continuing to improve the Company’s market position during the
current softness, management completed certain in-process expansion projects
rather than “throw away” investment spending already completed. In particular, the Company moved its APPI
subsidiary into a new and larger facility in Sanford, Maine, consolidating
three locations in Maine into one plant. There were certain impacts on the
Company’s operating statements related to this move:
1. The process of moving caused a number of abnormal expenses: short term
disruptions to production flow; abnormally high levels of overtime; the direct
costs of preparing the new building, vacating the old buildings, the physical
move, and starting up in a new location; and the additional project staffing
retained for organizing the move.
2. To avoid disappointing customer expectations any more than necessary, the
Company subcontracted a higher amount of manufacturing work than normal during
a period of approximately three months.
3. The Company sought to dispose of its lease obligations at the three
facilities vacated through arranging for new tenants or finding
sub-tenants. As of fiscal year-end, a
new tenant had been secured for one facility and the Company’s lease had been forgiven
by the landlord; 60% of the space in a second facility was sub-leased in
December, 2001; and the third remained vacant.
The occupancy expense in Maine will continue to be high until the space
remaining vacant is sub-leased.
The Company’s gross margin was 16.60% of net sales in
fiscal 2001, as compared to 30.07% in fiscal 2000. Amongst others, the following three factors accounted for the
bulk of this decline:
1. the time required to effect cost cuts following the sudden and steep
decline in sales volume resulted in higher factory staffing costs as a
percentage of net sales than normal payroll expense;
2. fixed expenses of operation, most notably occupancy costs and
depreciation, do not decrease as a function of lower sales volume, levering the
impact on operating margins; and
3. in light of current business conditions, management wrote off
approximately $2.7 million of inventory.
The following factors
had the indicated impact on the cost of goods sold: (1) net materials expense (exclusive of inventory write-offs)
decreased as a percentage of sales, increasing gross margins by 3.91%, as the
Company brought more manufacturing in-house to fill idle capacity, thereby
purchasing less from the outside; (2)
management wrote off approximately $2.7 million of inventory and decreased its
LIFO reserve, decreasing gross margins by 5.08%; (3) payroll costs increased as
a percentage of sales, thereby lowering the gross profit percentage by 7.28%,
as a by-product of the sudden and steep slowdown and certain temporary
inefficiencies related to consolidating facilities in Maine; (4) the Company
shipped a lower volume of product on relatively stable costs of factory
overhead, decreasing gross margins by 3.14%; and (5) depreciation (a non-cash
expense) increased as the Company added equipment to handle the strong growth
experienced in the first two quarters of the fiscal year, and the larger
depreciation expense was defrayed against lower shipments, reducing gross
margins by 1.88%. Management believes
that margins will be restored to customary levels as the Company grows out of
the downturn.
The Company did not
increase prices materially in fiscal 2001.
Selling, general, administrative and restructuring
expenses as a percentage of net sales were 29.95% in fiscal 2001, as compared
to 23.05% in fiscal 2000. The following factors accounted for this change: (1) selling and shipping expenses and
commissions decreased approximately $50,000 during fiscal 2001 but when expressed
as a percentage of net sales increased by 0.25%; (2) administrative payroll,
benefits, and related expenses increased as a percentage of net sales by 1.61%,
principally because reductions in staffing did not happen as rapidly as the
decline in sales volume; (3) other administrative expenses (exclusive of
depreciation and amortization) increased as a percentage of net sales by
approximately 1.02%; (4) depreciation and amortization expenses (non-cash
expenses) increased as a percentage of net sales by 0.96%; and (5)
non-recurring expenses (restructuring and moving charges) increased SG&A
expense by 3.06% as a percentage of net sales.
One-time costs related to moving and downsizing/restructuring in fiscal 2001
were approximately $915,000.
Interest expense increased by $486,000 in fiscal 2001
as a function of: (1) higher borrowings incurred to finance new equipment
acquired in fiscal 2001; (2) borrowings incurred to finance restructuring and
moving; (3) higher interest rates during the first half of the fiscal year, and
(4) recognition of the fair value (cost) of an interest rate collar.
As a result of a tax loss carryback, an income tax
refund of $606,000 has been accrued for fiscal 2001. (Benefit) provision for income taxes in fiscal 2001 and 2000 was
35.7% and 36.0% of pre-tax income. See
the notes to the consolidated financial statements for reconciliation to the
federal statutory rate.
LIQUIDITY AND FINANCIAL RESOURCES
During fiscal 2002, the Company’s financial condition
eroded as a result of the effects of continued severe recessionary business
conditions in the U.S. manufacturing sector.
Operating activities provided cash totaling approximately $1,413,000,
net financing activities provided approximately $135,000, and capital
expenditures used approximately $67,000, resulting in an increase in cash on
hand of approximately $1,481,000 (see page of the Consolidated Financial
Statements). Because the Company is in
default on certain of its institutional borrowings, all such borrowings have
been classified as current. The Company is therefore operating with a working
capital deficit, having classified approximately $16,460,000 million of debt as
current. The Company’s working capital
deficit increased by $2,224,000 during fiscal 2002, to approximately
$(9,638,000) at the end of the period.
The following changes in assets and liabilities account for this change:
1. Accounts receivable (net of reserve for doubtful accounts) increased by
approximately $160,000 during fiscal 2002. The average collection period for
the year remained at approximately 45 days.
2. Inventories decreased by approximately $298,000 (exclusive of a $2.5
million write off of inactive and slow-moving products) during fiscal
2002. Turns on inventory during fiscal
2002 averaged approximately 2.5 times, as compared to 2.0 times for fiscal
2001. This improvement is in line with
the Company’s strategy to conserve cash by working down inventory levels where
possible.
3. Management wrote off approximately $2,504,000 of slow moving and inactive
inventory. In light of the protracted
period of decreased sales, the Company conducted a review of saleability of its
inventories in light of current business conditions and concluded that an
additional write-off would be prudent.
4. Prepaid and
other current assets (including income tax refund receivable) decreased by
$561,000, principally as a result of the collection of an income tax refund.
5. Current liabilities, exclusive of current portions of long-term debt and
capital lease obligations, increased approximately $342,000, as a result of
higher
levels of payables, accrued expenses and an increase in the fair value of an
interest rate collar.
6. Current
portions of long-term debt and capital lease obligations increased by $161,000.
7. Cash
balances increased by approximately $1,481,000.
Outlays for capital expenditures in fiscal 2002
amounted to $67,000. Property, plant
and equipment (net) decreased approximately $1,923,000 as a result of returning
to the lessor certain under-utilized equipment on a capitalized lease in
exchange for retirement of the full amount of related debt outstanding
(approximately $2,113,000). The Company
recorded a related gain of approximately $173,000, net of disposition costs.
The Company’s net borrowings, exclusive of the
capitalized lease obligation described hereinabove, increased by approximately
$135,000 during fiscal 2002. This is the result of certain accruals recorded
for interest payments not currently due that are included in long-term debt and
classified as long term. The Company is
currently in default on certain of its debt agreements and has classified such
debt as current.
The following is a summary schedule of the Company’s
significant contractual cash obligations for the periods indicated that existed
as of September 30, 2002, based on information appearing in Notes 10 and 11 to
the Consolidated Financial Statements:
The Company has a stockholders’ deficit of
approximately $1,272,000, declining revenues and substantial current operating
losses. Management believes that the Company’s working capital as now
constituted will not suffice for the needs of the on-going business, and
accordingly management is attempting to raise additional equity capital. The Company is currently in default on
certain of its debt agreements and is unable to generate sufficient cash from
operations to fund its short term debt obligations. The Company’s management has been in negotiations with certain
debt holders for over one year to obtain forbearance on these defaults and on
making principal payments on its debt.
Active discussions are underway with certain prospective investors and
with the Company’s principal lenders with the goals of amending certain terms
of its credit and equipment lease agreements, entering into forbearance
agreements suspending principal payments for a period of time, modifying
certain financial covenants, compromising principal amounts and infusing
additional equity capital.
There can be no assurance that forbearance will be
obtained, that the Company will return to profitability upon economic recovery,
or that additional financing, if available, will be on terms acceptable to the
Company. Any additional stock or
convertible financing could result in substantial dilution to
stockholders. Should management be
unable to obtain forbearance or additional financing, the Company will not be
able to continue in its present form.
In connection with their report on the Company’s
Consolidated Financial Statements as of and for the year ended September 30,
2002, BDO Seidman, LLP, our independent certified public accountants, expressed
substantial doubt about our ability to continue as a going concern because of
recurring net losses and inability to fund current debt obligations.
CRITICAL
ACCOUNTING POLICES
The Company’s significant accounting polices are
disclosed in the Notes to Consolidated Financial Statements. Of those accounting polices, the following
are more critical and are summarized below.
Revenue Recognition:
Sales are recognized upon shipment of products. All sales are shipped F.O.B. shipping point
and are not sold subject to a right of return unless the products are
defective. The Company’s level of
returns arising from defective products has historically been immaterial.
Inventory Valuation:
Inventories are valued at the lower of cost (first-in,
first-out (FIFO) method) or market.
Cost is comprised of material, direct labor and manufacturing overhead
on manufactured product. Based on
historical usage and management’s evaluation of estimated future demand, market
conditions and alternative uses for possible excess, inactive, slow-moving or
obsolete parts, reserves are recorded.
Excess and obsolete inventory is periodically disposed of through
alternative uses or scrapping.
Impairment of Long-Lived
Assets:
Long-lived assets, including goodwill, are reviewed
periodically for impairment whenever events or circumstances indicate that the
carrying amounts may not be recoverable.
Use of Estimates:
As required under accounting principles generally
accepted in the United States, the consolidated financial statements include
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses.
Actual results could differ from these estimates and assumptions.
VULNERABILITY TO RECESSION
The Company’s cost structure is
largely made up of “fixed costs”, with “variable costs” accounting for less
than 40% of net sales. The Company expects,
therefore, to experience materially adverse effects on profitability from any
marked downturn in sales volume until management is able to reduce fixed costs.
Because the Company’s delivery lead-times are relatively short, there is
relatively little backlog at any given time, and the effect of a downturn in
sales volume is felt almost immediately.
A material portion of the Company’s sales are made to customers in the
semiconductor equipment industry, an industry noted for its highly cyclical
nature. The Company is making efforts
to diversify the composition of its sales profile to mitigate its exposure to
such cyclicality and the related impact on the Company’s sales.
IMPACT OF INFLATION AND OTHER BUSINESS
CONDITIONS
Management believes that inflation
has no material impact on the operations of the business. The Company has
customarily been able to react to increases in market costs of material and
labor through a combination of greater productivity and selective price
increases. The Company has no exposure to long-term fixed price contracts.
RECENT ACCOUNTING STANDARDS
In June 2001, the
Financial Accounting Standards Board (“FASB”)
issued Statement of Financial Accounting No. 141, “Business
Combinations” (“FAS No. 141”), which requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
establishes specific criteria for the recognition of intangible assets
separately from goodwill, and requires that unallocated negative goodwill be
written off immediately as an extraordinary gain instead of being deferred and
amortized. The Company will account for
business combinations after June 30, 2001 in accordance with the guidance in
FAS No. 141.
In June 2001, the FASB also issued Statement of
Financial Accounting No. 142, “Goodwill and Other Intangible Assets” (“FAS No.
142”). Under FAS No. 142, goodwill and
indefinite lived tangible assets will no longer be amortized. Instead, goodwill and indefinite lived
tangible assets will be subject to annual impairment tests performed under the
guidance of the statement.
Additionally, the amortization period of intangible assets with finite
lives will no longer be limited to forty years. The Company’s business combinations prior to adoption of FAS No.
142 have been accounted for using the purchase method. As of September 30, 2002, the net carrying
value of goodwill was $5,230,653, which is net of a write off of $2,323,765
related to an impairment. Amortization
expense during the year ended September 30, 2002, was approximately
$696,000. The Company will implement
FAS No. 142 on October 1, 2002. The
Company is studying the effects of implementing FAS No. 142 which may have a
material adverse effect on the Company’s financial statements.
In June, 2001, the FASB also issued Statement No. 143,
“Accounting for Obligations Associated with the Retirement of Long-Lived
Assets” (“Statement 143”). The objective of Statement 143 is to establish an
accounting standard for the recognition and measurement of an asset retirement
obligation on certain long-lived assets. The retirement obligation must be one
that results from the acquisition, construction or normal operation of a
long-lived asset. Statement 143 requires the legal obligation associated with
the retirement of a tangible long-lived asset to be recognized at fair value as
a liability when incurred, and the cost to be capitalized by increasing the
carrying amount of the related long-lived asset. Statement 143 will be
effective for the Company’s fiscal year beginning October 1, 2002. The Company
is currently evaluating the effect of implementing Statement 143, but does not
expect it to have a material adverse effect on the financial statements.
In October, 2001, the FASB issued Statement No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“Statement
144”). Statement 144 supersedes Statement No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”
(“Statement 121”) and retains the basic requirements of Statement 121 regarding
when and how to measure an impairment loss. Statement 144 provides additional
implementation guidance on accounting for an impairment loss. Statement 144 is
effective for all fiscal years beginning after December 15, 2001. The Company anticipates that the adoption of
Statement 144 will not have a material effect on the Company’s financial
position or results of operations.
In April, 2002, the FASB issued Statement No. 145,
“Rescission of Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Correction” (“Statement 145”). Statement 145 eliminates
extraordinary accounting treatment for reporting gains or losses on debt
extinguishments, and amends other existing authoritative pronouncements to make
various technical corrections, clarify
meanings, or describe their applicability under
changed conditions. The provisions of this Statement are effective for fiscal
years beginning after May 15, 2002; however, early application of Statement 145
is encouraged. Debt extinguishments reported as extraordinary items prior to
scheduled or early adoption of this Statement would be reclassified to other
income in most cases following adoption.
The Company is currently evaluating the impact the adoption of Statement
145 would have on its consolidated results of operations subject to the
evaluation in accordance with APB 30, “Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions”.
In June, 2002, the FASB issued Statement No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities” (“Statement
146”), which changes the accounting for costs such as lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity
initiated after December 31, 2002. The standard requires companies to recognize
the fair value of costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. The Company anticipates that the
adoption of Statement 146 will not have a material effect on the Company’s
financial position or results of operations.
ITEM
7A
ITEM
7A - QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s exposure to market risk for changes in
interest rate relates primarily to the Company’s variable rate debt. The Company manages this risk through the
utilization of an interest rate collar in an amount not exceeding the principal
amount of its outstanding debt. At
September 30, 2002, the notional amount of the Company’s interest rate collar
was $6,000,000 with an interest rate cap of 6.25% and an interest rate floor of
5%. The interest rate collar expires
December 31, 2003. The interest rate
collar is accounted for as a fair value hedge and the Company recorded an
interest expense as calculated using the mark-to-market method.
ITEM
8
ITEM
8 - FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
(1) Financial Statements
See index to Financial
Statements on Page.
ITEM
9
ITEM
9 - CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM
10
ITEM
10 - DIRECTORS AND
EXECUTIVE OFFICERS
The
Executive Officers and Directors of the Company are as follows:
Brief biographies of the
Executive Officers and Directors of the Company are set forth below. All Directors hold office until the next
Annual Stockholders’ Meeting or until their death, resignation, retirement, removal,
disqualification or until their successors have been elected and
qualified. Vacancies in the existing
Board may be filled by majority vote of the remaining Directors. Officers of the Company serve at the will of
the Board of Directors. There are no
written employment contracts outstanding.
Mark Hopkinson, age 55, has been
Chairman of the Board since 1981, when he and Mr. Bartow organized the
acquisition of the Company. He also
served as President of the Company from 1981 until March, 1994. He is a graduate of the University of
Pennsylvania and of the Harvard Graduate School of Business
Administration. Prior to acquiring Allied
Devices, he was a management consultant, working originally with Theodore Barry
& Associates from 1977 to 1978 and later as an independent and with the
Nicholson Group from 1978 to 1981. The
focus of his work in the period leading up to 1981 was development of emerging
growth companies, both in the United States and in lesser-developed
countries. He served as an officer in
the United States Navy from 1969 to 1972.
Salvator Baldi, age 81, was one
of the original founders of the Company in 1947. He has been a Director of the
Company since February, 1994. The
business was started as a general machine shop and developed through the years
as a supplier to certain principal competitors of the Company in the market for
standardized precision mechanical parts.
By the late 1970’s, the Company had become a competitor, offering its
own catalog of components. He and his
partners sold the Company to the investor group assembled by Mr. Hopkinson and
Mr. Bartow in October, 1981, with Mr. Baldi remaining with the Company under an
employment contract. By the time his
contract expired two years later, Mr. Baldi had negotiated to repurchase an
interest in the Company. He currently
works on an abbreviated work schedule.
P.K. Bartow, age 55, is
President of The InterBusiness Marketing Group. From March, 1994 through November, 1998, he was President of the
Company. He served as Vice President of
the Company from when he and Mr. Hopkinson organized its acquisition in 1981
until March, 1994. While active in management at the Company, Mr. Bartow was
Director of Marketing and Sales, and he continues to provide marketing
consulting services to the Company.
Prior to acquiring the Company, Mr. Bartow had joined the Nicholson
Group in 1978, and performed facility and feasibility studies for emerging
growth companies. Mr. Bartow received a
B.A. degree from Williams College in 1970, and a M. Arch degree from the
University of Pennsylvania in 1974.
Christopher T. Linen, age 55,
became a Director of the Company during fiscal 1997. He is currently the principal of Christopher Linen & Company,
through which he has invested in a series of early stage, internet and
technology-related enterprises. Prior
to this, from 1975 until 1996, he was an executive with Time Inc. (later Time
Warner Inc.) where he managed a series of six subsidiaries or divisions in
Asia, Latin America, the United States, and worldwide. Prior to that, he was Assistant Financial
Director of the Italhai Holding Company, Ltd. (Bangkok), during which tenure he
was Publisher of the Bangkok World, an English language daily newspaper. He is Chairman of Nirvana Soft Inc., and a
Trustee of The Family Academy, an experimental public school. He holds a B.A. from Williams College and
attended the Graduate School of Business Administration at New York University.
Michael Michaelson, age 80, has
been a Director of the Company since 1990.
He has been President and sole stockholder of Rainwater Associates, Inc.
since 1979,
providing management and
marketing consultation services to clients principally in publishing and
related industries. From 1986 to 1989,
he was Chairman of the Council on Economic Priorities. From 1977 to 1979, he was co-founder and
Chairman of the Board of Games Magazine, which was sold to Playboy magazine in
1979. From 1970 to 1978, Mr. Michaelson
worked for Publishers Clearing House, where he was Senior Vice President. From
1968 to 1970, he was President and Founder of Campus Subscriptions, Inc. Mr.
Michaelson served in the United States Army in the South Pacific during World War
II, where he was a Company Commander in the 35th infantry, 25th division and
received the Bronze Star and the Purple Heart.
He received a B.S. degree from New York University in 1948.
Michael Foster, age 67, became a
Director of the Company in fiscal 2001.
In 1999, Mr. Foster retired as Chairman and CEO of WPI Group, Inc., a
publicly traded manufacturer and marketer of a broad range of rugged hand held
DOS and Windows based computers for industrial applications, as well as a group
of power products, including electronic ballasts, transformers and complete
power systems. He has also served as a Director and member of the Executive
Committee and Audit Committee of Foilmark, Inc., a Massachusetts based
manufacturer of metalized foils and foil stamping equipment whose stock was
publicly traded.
Paul M. Cervino, age 48, has
been the President of the Company since August, 2000 and Chief Operating
Officer of the Company since November, 1998.
From January, 1996, until October, 1998, he served as Chief Financial
Officer of the Company. Prior to 1996,
he was employed by Sotheby’s Holdings, Inc., an international art auction
house. From 1992 to 1995, he was a
member of the European Board of Directors and Chief Financial Officer of
Sotheby’s Europe and Asia, operating in London. From 1985 to 1992, he was a Director and Chief Financial and
Administrative Officer of Sotheby’s North America. From 1976 to 1985, he worked for Sotheby’s in various other
financial capacities. Mr. Cervino
received a B.S. in Accounting from St. John’s University and an M.B.A. in
Finance from Pace University.
Andrew J. Beck, age 54, has been
a partner with the law firm of Torys LLP since prior to 1989. He became Assistant Secretary of the Company
in March, 1994. Mr. Beck holds a B.A. in economics from Carleton College and a
J.D. from Stanford University Law School.
Gerald J. Bentivegna, age 53,
has been the Chief Financial Officer of the Company since July, 2001. Prior to 2001, he was employed by CopyTele,
Inc., an encryption and display company.
From 1994 to 2000, he served as Vice President - Finance and Chief
Financial Officer of CopyTele, and was elected to their Board of Directors in
1995. Prior to 1994, Mr. Bentivegna was employed at Marino Industries Corp. for
approximately 10 years, where he served as Chief Financial Officer, Treasurer
and Controller. He holds an M.B.A.
degree in Finance from Long Island University and a B.B.A. degree in Accounting
from Dowling College.
ITEM
11
ITEM
11 - EXECUTIVE
COMPENSATION
The following table sets forth
the salary and bonus compensation paid during the fiscal years ended September
30, 2002, 2001 and 2000 to the Chairman and Chief Executive Officer of the
Company. No other Executive Officer of
the Company received fiscal 2002 salary and bonus compensation which exceeded
$100,000. The Company’s non-employee Directors received options to purchase the
Company’s stock in lieu of the monetary portion of consideration for their
services, 25,000 options per year for their services as such, and reimbursement
for any expenses they may incur in connection with their services as Directors.
Under the terms of the Company’s
1993 Incentive Stock Option Plan, the following options were granted to the
Chief Executive Officer of the Company during fiscal year 2002.
Aggregated Options/SAR Exercises
in Last Fiscal Year and FY-End Option/SAR Values.
(1) In-the-money options are those for which the fair
market value of the underlying Common Stock exceeds the exercise price of the
option. The value of the in-the-money options is determined in accordance with
regulations of the Securities and Exchange Commission by subtracting the
aggregate exercise price of the option from the aggregate year-end value of the
underlying Common Stock.
Mr.
Hopkinson deferred $40,145 in salary in fiscal 2002, which has been accrued.
Under
the terms of the Company's 1993 Incentive Stock Option Plan (adopted in
October, 1993 and amended in December, 1995, January, 1998 and February, 2001),
the Board of Directors is empowered at its discretion to award options to
purchase an aggregate of 2,000,000 shares of the Company’s common stock to key
employees. Prior to fiscal 2002, the Company had granted options to purchase an
aggregate of 1,509,000
shares
to key employees and Directors, with exercise prices ranging from $0.35 to
$3.00 per share. During fiscal 2002,
66,000 of such options were cancelled.
Also during fiscal 2002, the Company granted options to purchase 303,750
shares of the Company’s common stock, with exercise prices ranging from $0.55
to $0.91 per share, to 6 individuals (four Directors, one Officer, and one
non-executive manager).
ITEM
12
ITEM
12 - SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth the number and percentage of the shares of the
Company’s Common Stock owned of record and beneficially by each person or
entity owning more than 5% of such shares and by all executive officers,
officers and directors, as a group at December 27, 2002:
(1) Executive Officer and Director.
(2) Director only.
(3) Mark Hopkinson is General Partner of the Hopkinson Family Partnership (in which he
has exclusive management rights), which owns 700,000 of the shares included
herein. Also included in Mr.
Hopkinson’s shareholdings are 279,000 shares represented by currently
exercisable options. Mr. Hopkinson disclaims beneficial ownership of 15,700
shares owned by his wife.
(4) Included in Mr. Bartow’s shareholdings are
297,500 shares represented by currently exercisable options. Mr. Bartow disclaims beneficial ownership of
15,000 shares owned by his immediate family.
(5) Included in Mr. Baldi’s shareholdings are 225,000
shares represented by currently exercisable options. Mr. Baldi disclaims beneficial ownership of 100,000 shares owned
by his wife and 95,000 shares owned by various members of his immediate family.
(6) Mr. Michaelson’s shareholdings are comprised of
257,500 shares represented by currently exercisable options. Mr. Michaelson disclaims beneficial
ownership of 216,000 shares owned by his wife.
(7) Officer only.
(8) Included in Mr. Linen’s shareholdings are 176,250
shares represented by currently exercisable options.
(9) Included in Mr. Cervino’s shareholdings are
239,067 shares represented by currently exercisable options.
(10) Mr. Foster’s shareholdings are comprised of
72,500 shares represented by currently exercisable options.
(11) Included in Mr. Beck’s shareholdings are 10,000
shares represented by currently exercisable options.
(12) Mr. Bentivegna’s shareholdings are comprised of
2,000 shares represented by currently exercisable options.
ITEM
13
ITEM
13 - CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
Not applicable.
ITEM
14
ITEM
14 - CONTROLS AND
PROCEDURES
The Company’s Chief Executive Officer, Chief Operating
Officer, and Chief Financial Officer (its principal executive officer,
principal operating officer, and principal financial officer, respectively)
have concluded, based on their evaluation as of a date within 90 days prior to
the filing of this report, that the Company’s disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and include controls and procedures designed to
ensure that information required to be disclosed by the Company in such reports
is accumulated and communicated to the Company’s management, including the
Chief Executive Officer, Chief Operating Officer and the Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
There were no significant changes in the Company’s
internal controls or in other factors that could significantly affect these
controls subsequent to the date of such evaluation including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART IV
ITEM
15
ITEM
15 - EXHIBITS AND REPORTS
ON FORM 8-K
(a) (1)(2) Financial
Statements and Financial Statement Schedule See Index to Financial Statements on page
(3) Exhibits
23.1
Consent of BDO Seidman, LLP
99.1 - 99.3
PEO, POO and PFO Certifications
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the last quarter of
fiscal 2002.
SIGNATURES
In accordance with Section 13 or 15 (d) of the
Exchange Act, the Registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ALLIED DEVICES CORPORATION
/s/ Mark Hopkinson
Mark Hopkinson
Chairman of the Board
In accordance with the Exchange Act, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Mark Hopkinson
Chairman of the Board,
January 13, 2003
Mark Hopkinson
Principal Executive Officer,
and Director
/s/ Salvator Baldi
Executive Vice President
January 13, 2003
Salvator Baldi
and Director
/s/ Philip Key Bartow
Director
January 13, 2003
Philip Key Bartow
/s/ Michael Michaelson
Director
January 13, 2003
Michael Michaelson
/s/ Christopher T. Linen
Director
January 13, 2003
Christopher T. Linen
/s/ Michael Foster
Director
January 13, 2003
Michael Foster
/s/ Paul M. Cervino
President, Principal Operating
January 13, 2003
Paul M. Cervino
Officer, and Treasurer
/s/ Gerald J. Bentivegna
Chief Financial Officer and
January 13, 2003
Gerald J. Bentivegna
Principal Accounting Officer
CERTIFICATION
Pursuant to 18 U.S.C.
Section 1350,
As adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Mark Hopkinson certify that:
1. I have
reviewed this annual report on Form 10-K of Allied Devices Corporation (the
“registrant”);
2. Based on my
knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based on my
knowledge, the financial statements, and other financial information included
in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The
registrant’s other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure
controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of
the registrant’s disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the “Evaluation Date”); and
(c) presented in this annual report
our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The
registrant’s other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons fulfilling the equivalent
function):
(a) all significant deficiencies in
the design or operation of internal
controls which could adversely affect the registrant’s ability to record,
process, summarize and
report financial data and have identified for the
registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrant’s internal controls; and
6. The
registrant’s other certifying officers and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
As adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Paul M. Cervino certify that:
1. I have
reviewed this annual report on Form 10-K of Allied Devices Corporation (the
“registrant”);
2. Based on my
knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based on my
knowledge, the financial statements, and other financial information included
in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The
registrant’s other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure
controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the
effectiveness of the registrant’s disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual report (the
“Evaluation Date”); and
(c) presented in this annual
report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The
registrant’s other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons fulfilling the equivalent
function):
(a) all significant
deficiencies in the design or operation of
internal controls which could adversely affect the registrant’s ability
to record, process, summarize and
report financial data and have identified for the
registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrant’s internal controls; and
6. The
registrant’s other certifying officers and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date:
January 13, 2003
Signature:
/s/ Paul M.
Cervino
Principal
Operating Officer
CERTIFICATION
Pursuant to 18 U.S.C.
Section 1350,
As adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Gerald J. Bentivegna certify that:
1. I have
reviewed this annual report on Form 10-K of Allied Devices Corporation (the
“registrant”);
2. Based on my
knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based on my
knowledge, the financial statements, and other financial information included
in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The
registrant’s other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure
controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the
effectiveness of the registrant’s disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual report (the
“Evaluation Date”); and
(c) presented in this annual
report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The
registrant’s other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons fulfilling the equivalent function):
(a) all significant
deficiencies in the design or operation of
internal controls which could adversely affect the registrant’s ability
to record, process, summarize and
report financial data and have identified for the
registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrant’s internal controls; and
6. The
registrant’s other certifying officers and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date:
January 13, 2003
Signature:
/s/ Gerald
J. Bentivegna
Principal
Financial Officer
EXHIBIT INDEX
Exhibit
Number
Description
23.1
Consent of BDO Seidman
99.1
Principal Executive Officer
Certification pursuant to 18 U.S.C. Section 1350 (Section 906 of the
Sarbanes-Oxley Act of 2002)
99.2
Principal Operating Officer
Certification pursuant to 18 U.S.C. Section 1350 (Section 906 of the
Sarbanes-Oxley Act of 2002)
99.3
Principal Financial Officer
Certification pursuant to 18 U.S.C. Section 1350 (Section 906 of the
Sarbanes-Oxley Act of 2002)
Allied Devices
Corporation
and Subsidiaries
Consolidated
Financial Statements
Years Ended September 30, 2002, 2001 and 2000
Index
Report
of independent certified public accountants
Consolidated
financial statements
Balance sheets
Statements of
operations
Statements
of stockholders’ (deficit) equity
Statements
of cash flows
Notes to
financial statements
Schedule II
Report
of Independent Certified Public Accountants Stockholders and Board of Directors of
Allied Devices Corporation
Hicksville, New York
We have audited the accompanying consolidated balance
sheets of Allied Devices Corporation and subsidiaries as of September 30, 2002
and 2001, and the related consolidated statements of operations, stockholders’
(deficit) equity, and cash flows for each of the three years in the period
ended September 30, 2002. We have also
audited the schedule listed in the accompanying index for the same
periods. These financial statements and
schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and schedule
are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement and schedule presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Allied Devices Corporation and subsidiaries at September 30, 2002
and 2001, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 2002 in conformity with
accounting principles generally accepted in the United States. Also, in our opinion, the schedule presents
fairly, in all material respects, the information set forth therein for each of
the three years in the period ended September 30, 2002.
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2, the
Company has been unprofitable for the past two fiscal years and is in default
on certain financial covenants contained in its debt agreements and is attempting
to negotiate changes to the terms of its debt obligations. In the absence of such contemplated changes,
its current inability to generate sufficient cash from operations to fund its
debt obligations raises substantial doubt about its ability to continue as a
going concern. Management’s plans
concerning these matters are discussed in Note 2. The consolidated financial statements do not include any
adjustments that may result from the outcome of this uncertainty.
As discussed in Note 6 to the financial statements,
the Company changed its method of accounting for inventories in fiscal 2002.
BDO Seidman, LLP
Melville, New York
January 3, 2003
Consolidated Balance Sheets
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Operations
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Stockholders' (Deficit) Equity
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Cash Flows
(Note 15)
See
accompanying notes to consolidated financial statements.
Notes
to Consolidated Financial Statements
1. Summary of Accounting Policies
(a) Business
The Company is
comprised of Allied Devices Corporation (“ADCO”), and its wholly owned
subsidiaries, Empire - Tyler Corporation (“Empire”) and APPI, Inc. (“APPI”),
(collectively the “Company”).
The Company is
engaged primarily in the manufacture and distribution of standard and custom
precision mechanical assemblies and components. The Company sells all of its products to the same base of
customers located throughout the United States. Because the Company’s product line comprises a comparable group
of precision manufactured parts sold to a similar customer base, it considers
itself to be engaged in a single business segment.
(b) Basis
of Presentation
The consolidated
financial statements include the accounts of ADCO and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
(c) Inventories
During the first
quarter of fiscal 2002, the Company changed its method of inventory costing
from last-in first-out (LIFO) to first-in first-out (FIFO). Prior periods have been restated to reflect
this change (Note 6).
Inventories are
valued at the lower of cost (first-in, first-out (FIFO) method) or market. Management periodically analyzes inventories
for obsolescence and records write-offs as required.
(d) Depreciation
and Amortization
Property, plant
and equipment are stated at cost.
Depreciation and amortization of property, plant and equipment is
computed using the straight-line method over the estimated useful lives of the
assets. The estimated lives are as
follows:
(e) Income
taxes
The Company and
its subsidiaries file a consolidated federal income tax return and separate
state income tax returns.
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 tax loss and credit
carry forwards. 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 rate is recognized in
income in the period that includes the enactment date.
(f) Earnings
(loss) per share
Basic earnings
(loss) per share are computed by dividing income available to common
shareholders by the weighted average shares outstanding for the period and
reflect no dilution for the potential exercise of stock options and
warrants. Diluted earnings (loss) per
share reflect, in periods in which they have a dilutive effect, the dilution
that would occur upon the exercise of stock options and warrants. A reconciliation of the shares used in
calculating basic and diluted earnings (loss) per share follows:
Options and
warrants totaling 1,750,717, 1,511,234 and 143,500 at September 30, 2002, 2001
and 2000, respectively, were antidilutive and, accordingly, excluded from the
diluted calculation.
(g) Intangible
assets
The excess of cost
over the fair value of net assets acquired is being amortized over periods of
15 and 20 years. Deferred financing costs are amortized over
the life of the related debt.
(h) Long-lived
assets
The Company
reviews the carrying values of its long-lived and identifiable intangible
assets for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. Any long-lived assets held for disposal are
reported at the lower of their carrying amounts or fair value less cost to
sell. The Company recorded an asset
impairment loss of $2,323,765 for the year ended September 30, 2002 (Note 3).
(i) Revenue
recognition
Sales are
recognized upon shipment of products.
All sales are shipped F.O.B. shipping point and are not sold subject to
a right of return unless the products are defective. The Company’s level of returns arising from defective products
has historically been immaterial.
(j) Shipping
and Handling Costs
The Company
records its shipping and handling fee costs as required under EITF No. 00-10,
“Accounting for Shipping and Handling Fee Costs.” Accordingly, shipping and handling fee costs are recorded in
Sales and Cost of Sales.
(k) Advertising
expenses
Advertising
expenses are expensed as incurred and amounted to approximately $67,000,
$206,000 and $203,000 for the years ended September 30, 2002, 2001 and 2000,
respectively.
(l) Stock
based compensation
The Company
accounts for stock based compensation using the intrinsic value method as
permitted by SFAS No. 123 and will account for such transactions in accordance
with Accounting Principles Board (“APB”) No. 25 and, as required by SFAS No.
123, provides pro forma information regarding net income (loss) as if
compensation costs for the Company’s stock plan had been determined in
accordance with the fair value method presented by SFAS No. 123.
(m) Use
of estimates
In preparing
financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ
from those estimates.
(n) Fair
value of financial instruments
The carrying
amounts of financial instruments, including cash, receivables, payables and
short-term debt, approximated fair value as of September 30, 2002 and
2001. The carrying value of long-term
debt, approximates fair value as of September 30, 2002 and 2001 based upon the
borrowing rates currently available to the Company for bank loans with similar
terms and average maturities.
(o) Concentrations
of risk
The Company
extends credit based on an evaluation of its customer’s financial condition,
generally without requiring collateral.
Exposure to losses on receivables is principally dependent on each
customer’s financial condition. The
Company monitors its exposure for credit losses and maintains allowances for
anticipated losses. No individual
customer is considered to be a significant risk.
In the fiscal
years 2002, 2001 and 2000, the Company’s ten largest customers represented
approximately 49%, 52% and 48%, respectively, of sales. The Company’s sales to the semiconductor
equipment industry, which is experiencing economic difficulties, represented
approximately 24%, 42% and 63% of total sales for the years ended September 30,
2002, 2001 and 2000, respectively.
(p) Recent
accounting pronouncements
(i) Business
Combinations
In June 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting No. 141, “Business Combinations” (“FAS
No. 141”), which requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001, establishes specific
criteria for the recognition of intangible assets separately from goodwill, and
requires that unallocated negative goodwill be written off immediately as an
extraordinary gain instead of being deferred and amortized. The Company will account for business
combinations after June 30, 2001 in accordance with the guidance in FAS No.
141.
(ii) Goodwill
and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board
also issued Statement of Financial Accounting No. 142, “Goodwill and Other
Intangible Assets” (“FAS No. 142”).
Under FAS No. 142, goodwill and indefinite lived tangible assets will no
longer be amortized. Instead, goodwill
and indefinite lived tangible assets will be subject to annual impairment tests
performed under the guidance of the statement.
Additionally, the amortization period of intangible assets with finite
lives will no longer be limited to forty years. The Company’s business combinations prior to adoption of FAS No.
142 have been accounted for using the purchase method. As of September 30, 2002, the net carrying
value of goodwill was $5,230,653, which is net of a write off in fiscal 2002 of
$2,323,765 related to an impairment.
Amortization expense during the year ended September 30, 2002, was
approximately $696,000. The Company
will implement FAS No. 142 on October 1, 2002.
The Company is currently studying the effects of implementing FAS No.
142 which may have a material adverse effect on the Company’s financial
statements.
(iii) Accounting
for Obligations Associated with the Retirement of Long-Lived Assets
In June 2001, the Financial Accounting Standards Board
also issued Statement of Financial Accounting No. 143, “Accounting for
Obligations Associated with the Retirement of Long-Lived Assets” (“FAS No.
143”). The objective of FAS No. 143 is
to establish an accounting standard for the recognition and measurement of an
asset retirement obligation on certain long-lived assets. The retirement obligation
must be one that results from the acquisition, construction or normal operation
of a long-lived asset. FAS 143 requires
the legal obligation associated with the retirement of a tangible long-lived
asset to be recognized at fair value as
a liability when incurred, and the cost to be
capitalized by increasing the carrying amount of the related long-lived
asset. FAS No. 143 will be effective
for the Company on October 1, 2002. The
Company is currently evaluating the effect of implementing FAS No. 143, but
does not expect it to have a material adverse effect on the financial
statements.
(iv) Accounting
for the Impairment or Disposal of Long-Lived Assets
In October 2001, the Financial Accounting Standards
Board also issued Statement of Financial Accounting No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets” (“FAS No. 144”), which
supersedes Statement No. 121, “Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of” (“FAS 121”). Although it retains the basic requirements
of FAS 121 regarding when and how to measure an impairment loss, FAS 144
provides additional implementation guidance.
FAS 144 will be effective for the Company on October 1, 2002. The Company anticipates that the adoption of
Statement 144 will not have a material effect on the Company’s financial
position or results of operations.
(v) Rescission
of Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Correction
In April 2002, the FASB issued Statement No. 145,
“Rescission of Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Correction” (“Statement 145”). Statement 145 eliminates
extraordinary accounting treatment for reporting gains or losses on debt extinguishments,
and amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The provisions of this Statement are effective for fiscal
years beginning after May 15, 2002; however, early application of Statement 145
is encouraged. Debt extinguishments reported as extraordinary items prior to
scheduled or early adoption of this Statement would be reclassified to other
income in most cases following adoption.
The Company is currently evaluating the impact the
adoption of Statement 145 would have on its consolidated results of operations
subject to the evaluation in accordance with APB 30, “Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions”.
(vi) Accounting for Costs Associated with Exit or
Disposal Activities
In June 2002, the FASB issued Statement No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities” (“Statement
146”), which changes the accounting for costs such as lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity
initiated after December 31, 2002. The standard requires companies to recognize
the fair value of costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. The Company anticipates that the
adoption of Statement 146 will not have a material effect on the Company’s
financial position or results of operations.
(q) Investment
derivatives and hedging activities
In June 1998, the
Financial Accounting Standards Board issued FAS No. 133, “Accounting for
Derivative Investments and Hedging Activities” (“FAS 133”), as amended, which
requires the recording of all derivative instruments as assets or liabilities
measured at fair value. Among other
disclosures, FAS 133 requires that all derivatives be recognized and measured
at fair value regardless of the purpose or intent of holding the derivative.
The Company
adopted FAS 133 on October 31, 2000.
The effect of the adoption was immaterial. The Company has an interest rate collar contract. The notional amount is $6,000,000 with an
interest rate cap of 6.25% and an interest rate floor of 5.00%. The interest
rate collar expires December 31, 2003.
The collar reduces the Company’s exposure to interest rate increases on
its variable rate debt. The interest
rate collar is accounted for as a fair value hedge.
During the years
ended September 30, 2002 and 2001, the Company recorded approximately $47,000
and $200,000, respectively, of interest expense related to the fair value of
the collar.
(r) Reclassification
Certain amounts in
the prior years’ consolidated financial statements have been reclassified to
conform with the presentation in the current year.
2. Going Concern
The Company is
currently in default on certain of its debt agreements, is unable to generate
sufficient cash from operations to fund its short term debt obligations, and
has been unprofitable for the last two fiscal years resulting in a $1,272,197
deficit in stockholders’ equity. The
Company’s management has been in negotiations with certain debt holders for
over one year to obtain forbearance on these defaults and on making principal
payments on its debt. Active
discussions are underway with certain prospective investors and with the
Company’s principal lenders with the goals of amending certain terms of its
credit and equipment lease agreements, entering into forbearance agreements
suspending principal payments for a period of time, modifying certain financial
covenants, compromising principal amounts and infusing additional equity
capital.
There can be no
assurance that forbearance will be obtained, that the Company will return to
profitability upon economic recovery, or that additional financing, if
available, will be on terms acceptable to the Company. Any additional stock or convertible
financing could result in substantial dilution to stockholders. Should management be unable to obtain
forbearance or additional financing, the Company will not be able to continue
in its present form. The financial
statements do not contain any adjustments that might be necessary if the
Company is unable to continue as a going concern.
3. Asset
Impairment Loss
In accordance with
FAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of”, the Company recorded an impairment loss
of $2,323,765 on the goodwill of APPI (including goodwill from its Martin
Machine, Inc. acquisition). Current
business trends of APPI indicated that the undiscounted future cash flows for
this business would be less than the carrying value of the long-lived assets
related to that business. The loss
recognized is the difference between the carrying value of APPI’s net assets
and the estimated fair value of those assets based on discounted estimated
future cash flows.
4. Restructuring
In the third
quarter of fiscal 2001, the Company developed and began to implement a cost
savings initiative to increase long-term profitability. The Company closed three manufacturing
facilities and consolidated these operations into a new facility in Sanford,
Maine, following an orderly transition of production to the new facility.
Other
restructuring costs associated with downsizing to current business conditions
include severance for layoffs throughout the Company and professional fees
incurred in restructuring and forbearance negotiations. The Company estimated
the costs associated with the restructuring to be approximately $915,000 and
recorded this expense for the year ended September 30, 2001. The restructuring expense consisted of
$243,000 in moving costs paid and $672,000 in accrued expenses and liabilities. The accrual in fiscal 2001 included approximately
$392,000 ($142,000 in severance, $50,000 in moving costs, and $200,000 in
professional fees with approximately $86,000 remaining at the end of fiscal
2002), and $280,000 in lease abandonment costs (approximately $138,000
remaining at the end of fiscal 2002) which will be paid through fiscal 2005.
5. Acquisition
On July 8, 1998,
with an effective date of July 1, 1998, the Company acquired the assets and
business of APPI from Atlantic Precision Products, Inc., a manufacturer of high
precision, machined components for original equipment manufacturers with
advanced engineering requirements. The
price of net assets acquired (including assumption of specified liabilities)
was made up of cash, stock, and performance consideration. The consideration was $7,237,500 in cash and
250,000 shares of the Company’s common stock.
The common stock portion of the consideration was recorded at $4 per
share, the value guaranteed by the Company.
On July 9, 2001, the Company settled the stock price guarantee portion
of the APPI acquisition by issuing
a note to the
seller in the amount of $506,250 with interest thereon at 7% per annum. The
note represents the difference between the guaranteed stock price of $4 per
share and the average stock price from July 6 to July 9, 2001 for 250,000
shares of stock. The Company has
recorded this as a long term note payable (Note 10) and reduction of
stockholders’ equity. The note is subject to a subordination agreement between
the seller and the Company’s lending institution (Note 8).
The performance
consideration was a stipulated percentage of the future earnings (as defined)
for APPI for three years. The Company’s
policy with respect to any such contingent consideration was to record a
liability for such amounts as the defined earnings were achieved. After September 30, 2001 no further
contingent consideration was accrued.
As of that date, contingent consideration of $5,981,061 was recorded as
additional goodwill, of which $1,521,998 was paid in cash and $4,459,063 was
delivered in the form of five year notes, subordinated to the bank credit
facility (Note 8), due through September 30, 2006 bearing interest at 7% per
annum, in accordance with the terms of the asset purchase agreement. The total amount of goodwill amounted to
$8,827,797 and is being amortized over a (15) fifteen-year period (Note 3).
On November 15, 2000, the Company acquired Martin
Machine, Inc., (“Martin Machine”) located in Raymond, Maine. The acquisition was accounted for using the
purchase method of accounting, and results of operations of this company have
been included in the Company’s consolidated financial statements from the date
of acquisition. Original purchase
consideration amounted to $1,031,000, including the value of 100,000 shares of
common stock (issued immediately following closing), $400,000 in cash, and a
$300,000 five year note payable subordinated to the bank credit facility (Notes
8 and 10), due through September 30, 2006, bearing interest at 7% per
annum. Subsequent to the closing the
Company paid an additional $18,912 in cash, which was recognized as additional
goodwill. The total excess of cost over
the fair value of assets acquired amounted to $448,374, which has been recorded
as goodwill and is being amortized over a (15) fifteen-year period (Note3).
The Company recorded an impairment loss of $2,323,765
on the goodwill of APPI (including goodwill from its Martin Machine, Inc.
acquisition) (Note 3).
The acquisition of Martin Machine was immaterial to
net sales and net income of the Company for the years ended September 30, 2001
and 2000 and therefore no pro forma information is provided.
The Company is
adopting FAS No. 142 “Goodwill and Other Intangible Assets” on October 1, 2002. At that date, the above goodwill will no
longer be amortized and will be subject to annual impairment tests.
6. Inventories
Inventories are
summarized as:
In recognition of
current business conditions, the Company wrote off approximately $2,500,000 and
$2,700,000 for the years ended September 30, 2002 and 2001, respectively, of
inactive, slow moving and excess inventories.
During the quarter
ended December 31, 2001, the Company changed its method of inventory costing
from last-in first-out (LIFO) to first-in first-out (FIFO). Prior periods have been restated to reflect
this change. Management instituted this
change in method in part due to the Company’s write-off of certain slower
selling inventories and the resultant elimination of the LIFO reserve, and in
part because the rate of inflation has been minimal over the past several
years. In the current business
environment, the FIFO method presents a more accurate valuation of inventory,
achieving a better matching of revenues and expenses. The change decreased net income in fiscal 2001 and 2000 by $0 and
$836,102 ($.00 and $.00, and $.17 and $.15 per share basic and diluted,
respectively) and increased retained earnings by the equal amount for years
prior to 2000.
The following
table presents the effect of the change on earnings for the years ended
September 30:
7. Property,
Plant and Equipment
Property, plant
and equipment consists of:
Included in
machinery and equipment and office equipment at September 30, 2002 and 2001 is
approximately $8,931,000 and $11,116,000, respectively, of equipment under
capital lease agreements (Note 10). At
September 30, 2002 and 2001, the related accumulated depreciation amounts were
approximately $3,174,000 and $2,224,000, respectively. Property, plant and equipment decreased
approximately $2,184,000 and accumulated depreciation decreased approximately
$261,000 as a result of returning to a lessor certain under-utilized equipment
on a capitalized lease in exchange for retirement of the full amount of related
debt outstanding. The Company recorded
a related gain of approximately $173,000, net of disposition costs.
Depreciation and
amortization expense totaled $1,989,000, $1,906,000 and $1,394,000 for the
fiscal years ended September 30, 2002, 2001 and 2000, respectively.
8. Credit
Facilities
In July 1998, the
Company entered into a new credit agreement with its existing lender and repaid
all amounts due with respect to its previous credit facility. The new credit agreement provided for a
revolving credit loan and a term note.
During fiscal 1999, the revolving credit facility was amended. Beginning in October 2001 and continuing
currently, the Company and its lenders undertook to negotiate a Forbearance
Agreement, prompted by the Company’s default on certain financial covenants
contained in its lending agreements (Note 2).
No such agreement has been finalized to-date.
Under its credit
agreement, the Company may borrow up to the lesser of $7,000,000 or 85% of
eligible receivables and 60% of eligible inventory to a maximum of
$5,000,000. Interest is computed at the
higher of the bank’s prime lending rate (5.0% at September 30, 2002) plus 1/2%
or a LIBOR rate plus 2.50%. The
weighted average interest rate for fiscal 2002 was 5.21%. The Company is required to pay a commitment
fee on the average unused portion of the revolving credit commitment of ¼% per
annum. Borrowings under the revolving
credit loan were $7,000,000 and $6,800,000 at September 30, 2002 and 2001,
respectively.
Under the terms of
the five and one-half year (66 months) term note, the Company originally
borrowed $6,250,000. Interest thereon is computed at the higher of the bank’s
prime rate plus 1/2% or a LIBOR rate plus 2.50%. The weighted average interest rate for fiscal 2002 was
5.17%. The term note is payable in
twenty quarterly installments of principal, which began in March 1999. The quarterly principal installments
increase ratably from $150,000 per quarter during the first year to $400,000
per quarter for the last year plus a final installment of $950,000 on December
31, 2003. The Company has not made any
principal payments since September 30, 2001.
The proceeds of
the term note and a portion of the funds drawn against the revolving credit
loan were used to finance the APPI acquisition (Note 5). In conjunction with the issuance of the term
note, the Company issued the lender warrants to purchase 125,000 shares of its
common stock (Note 12). The value of
the warrants totaled $97,000 and was accounted for as deferred financing costs
(included in other assets) and is being amortized over the term of the credit
agreement.
Borrowings under
the credit facility are secured by a first priority security interest in the
Company’s assets.
9. Accrued
Expenses and Other
Accrued expenses
consist of:
10. Long-term
Debt and Capital Lease Obligations
Long-term debt
consists of:
Deferred financing
costs (gross) included in other assets amounted to $297,223 at September 30,
2002 and 2001. Accumulated amortization
amounted to $226,701 and $170,283 at September 30, 2002 and 2001, respectively.
The Company is in
default on certain of its debt agreements, the outstanding amount of which has
all been classified as current. The
following is a schedule of long-term debt maturities (including capital lease
obligations) as of September 30, 2002:
11. Leases
The Company rents
facilities in Hicksville, New York and in Sanford, Maine under various
operating lease agreements expiring through April 2011. In addition, the Company is also obligated
for two leases in buildings it no longer occupies in Maine. As part of a restructuring in 2001, the
Company expensed $280,000, representing the full amount due under the remaining
lease obligations. The Company also
leases certain machinery, equipment and office equipment under various capital
lease agreements expiring through 2006 (Note 10). Rent expense amounted to approximately $983,000, $1,003,000 and
$688,000 for the fiscal years ended September 30, 2002, 2001 and 2000,
respectively. Future minimum rental
payments for operating leases as of September 30, 2002 are as follows:
12. Stockholders’
Equity
(a) Warrants
At September 30,
2002, the Company had 125,000 stock warrants outstanding. As further discussed in Note 8, the Company
issued warrants to its secured lender to purchase 125,000 shares of common
stock at an exercise price of $2.00 per share.
These warrants expire on July 7, 2003.
(b) Incentive
Stock Option Plan
In October 1993,
the Board of Directors adopted an incentive stock option plan. The Plan, as amended in December 1995,
January 1998, and February 2001, allows the Board of Directors to issue options
to purchase an aggregate of 2,000,000 shares of the Company’s common stock to
key employees.
As of September
30, 2002, the Company had issued options to purchase an aggregate of 1,746,750
shares of the Company’s common stock to employees and members of the Company’s
Board of Directors. The Company
estimates the fair value of each stock option at the grant date by using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2002, 2001 and 2000: no dividend yield, expected
volatility of approximately 80.00% to 46.00%, risk free interest rates of 4.72%
to 6.29%, with an expected life of 7.5 to 10 years. If compensation cost for the Company’s Stock Option Plan had been
determined in accordance with SFAS No. 123, net income would have been reduced
in 2002, 2001 and 2000 by approximately $76,000, $ 86,000 and $375,000,
respectively, and net (loss) income per diluted share would have been $(1.73),
$(.76) and $.05 for each year, respectively.
The following table
summarizes information about stock options outstanding at September 30, 2002:
Changes in qualified and
non-qualified options and warrants outstanding are summarized as follows:
At September 30, 2002,
there were 1,625,717 options exercisable at a weighted average exercise price
of $1.05. The weighted average fair
value of options granted during fiscal 2002, 2001 and 2000 was $ .25, $
.82 and $ .70, respectively.
13. Commitments
The Company has a
discretionary 401(k) plan. For the
years ended September 30, 2002, 2001 and 2000, the Company contributed $73,153,
$110,835 and $68,363, respectively.
14. Taxes
(Benefit) on Income (Loss)
Provisions for
income taxes (benefit) on income (loss) in the consolidated statement of
operations consist of the following:
Deferred tax
(assets) liabilities consist of the following:
At September 30,
2002, the Company has approximately $6,100,000 in NOL carryforwards to offset future
taxable income. The NOL will expire in
fiscal 2022.
The Company has
provided a 100% valuation allowance against the net deferred tax assets.
The provision for
income taxes on income before taxes differs from the amounts computed applying
the applicable Federal statutory rates due to the following:
15. Cash
Flows
Supplemental
disclosure of cash flow information:
In connection with the Martin Machine business acquisition in fiscal 2001
(Note 5), the Company issued $300,000 in notes payable and 100,000 shares of
common stock valued at $400,000.
16. Summarized
Quarterly Data (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended September 30:
* In the Fourth Quarter of 2002, the Company wrote off $2,323,765 of
goodwill and $2,503,560 of inventory.
The Company also increased the deferred tax allowance by
$2,425,000. In the Fourth Quarter of
2001, the Company wrote off $2,718,859
of inventory, accrued restructuring expense of $672,000, and established a
$200,000 deferred tax allowance.
SCHEDULE
II
Valuation and Qualifying Accounts
For the years ended September 30,
S-1