<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
SEPTEMBER 30, 1999 0-24012 .
- ------------------------- ----------------------
ALLIED DEVICES CORPORATION
---------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 13-3087510
------------------------ -------------------------
(State of incorporation) IRS Employer
Identification Number)
2365 MILBURN AVENUE, BALDWIN, NEW YORK 11510
- ----------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 223-9100
Securities registered pursuant to Section 12 (b) of the Exchange Act:
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Title of Class Number of Shares Outstanding
as of December 30, 1999
- ----------------------------- ----------------------------
Common Stock, $.001 par value 4,847,592
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days
YES X NO
--- ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB X
---
Issuer's revenues for its most recent fiscal year: $22,827,298
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sale price on December 31, 1999 is approximately
$5,603,296.
<PAGE>
PART I
ITEM 1 - BUSINESS
Allied Devices Corporation ("Allied Devices" or the "Company")
is a broad-line manufacturer and distributor of high precision
mechanical components and sub-assemblies used in controlling
and transmitting motion in industrial and commercial
instruments and equipment. The Company has the capability of
producing close tolerance parts and intricate assemblies at
competitive costs and with short lead times. The Company's
business strategy is to provide prompt service and technical
support in certain industrial and high technology markets
where customers generally expect extended lead times, missed
deadlines and otherwise mediocre customer service and
technical support.
The Company's major product groups include precision motion
control and servo assemblies, instrument related fasteners,
gears and gear products, and other 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 published in November, 1998, and is
over 650 pages in length. During 1998, the catalog was fully
digitized and formatted for inclusion as live data in the
Company's Internet website, making it simple for 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.
The breadth and standardized nature of the Company's standard
product line result in multiple applications in many
industries, stimulating demand at the level of both OEMs and
distributors. The Company sells to a wide range of industries,
principally medical and operating room equipment; laser
equipment; robotics; computer peripherals; aerospace
instrumentation; factory automation equipment and controls;
machine tool builders; research and development facilities;
semiconductor equipment makers; high vacuum and spectrometric
devices; flow control and metering equipment makers; seals and
glands; scientific instrumentation; 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
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constitute a small percentage of the OEM's direct cost of
manufacturing, typically less than $1000 per unit. Failure to
deliver reliable quality in a timely manner can have an impact
far in excess of the modest 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 contractual
requirements, they are critical determinants in the placement
of repeat business.
Allied Devices has structured itself generally to provide the
service of "one stop shopping" for mechanical instrument
assemblies and components. Furthermore, the Company's
organization and inventory policies are designed to provide
fast and timely response to customer orders, and to support
"just in time" ("JIT") methods of material sourcing being used
by more and more companies. Because the Company's lead times
in response to customer orders are generally short (four weeks
or less), backlog is not a meaningful indicator of business
trends; therefore, no effort is made to monitor backlog
closely.
Allied Devices' sales volume is not dependent on just a few
large 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 twenty largest customers have
represented as many as ten different industries and account
collectively for only about 40% of shipments. Despite this
diversity in direct customer relationships, a meaningful share
of overall demand in the United States for high precision
motion control devices has been driven by the requirements of
the semiconductor equipment industry (building chip-making
machinery). Fluctuations in demand for such equipment has an
indirect but meaningful impact on the Company's shipping
volume, as was evident from the severe downturn in that
industry in the aftermath of the economic and financial crises
in East Asia in 1997-1998. Within the US, the geographic
concentration of the Company's customers is relatively low and
fluctuates with conditions in each of the regions served.
Allied Devices uses independent multi-line manufacturers'
representatives to gain national coverage, thereby fielding
some 70 salespeople in virtually all significant territories
in the United States.
As the market for the Company's products has evolved, the
Company has met its customers' 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 effectiveness.
Both areas serve the same markets and customer base 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
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the specific requirements of a given customer. What is not
manufactured internally is purchased from a broad variety of
reliable sources. This operation includes telephone sales,
inventory and shipping, gear-making, assembly and light
manufacturing operations. 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 last five years ended September 30th.
<TABLE>
<S> <C>
1999 $12,644,000
1998 $14,507,000
1997 $13,604,000
1996 $15,145,000
1995 $13,363,000
</TABLE>
The decreases in revenues for 1997 and 1999 were the result of
successive sharp downturns in the semiconductor manufacturing
equipment sector of the U.S. economy. Historically, such
severe downturns have been abnormal for the industries served
by Allied. In recent years, the semiconductor equipment sector
has 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, the
downturn appears to have been caused by excess inventory
accumulation and overcapacity, 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. The Company has undertaken
to diversify its business with additional products and more
intensive marketing in industries unrelated to the
semiconductor equipment sector.
CATALOG INDUSTRY COMPETITION
The Company competes principally with W.M. Berg Co., a
subsidiary of BTR Ltd.; PIC Design, a subsidiary of Wells
Benrus; 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 adhering to a single set
of standards. In addition, there are many other companies
offering a limited selection of materials or "single product"
catalogs, most 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 and responsive customer service and
technical support have permitted the Company to maintain and
improve its market position.
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MANUFACTURING SERVICES OPERATIONS
The Company's strategy has called for manufacturing the
majority of the products that it sells. Management believes
that such vertical integration ensures superior quality
control, timely deliveries, control of priorities and cost
efficiencies. During fiscal 1998, the Company added
significantly to its manufacturing capacity through
acquisition of a state-of-the-art machine shop facility. Thus,
Allied now has four manufacturing divisions, each with
particular specialties and focus in its capabilities. In order
to promote maximum utilization of productive equipment, each
manufacturing operation markets and sells its capabilities
direct to customers. The following operations comprise
Manufacturing Services:
Absolute Precision Co. A sophisticated computer numerically
Ronkonkoma ,New York controlled ("CNC") machine shop
specializing in close tolerance,
intricate machining of small
complex parts that are sold both
direct to end users in the fluid
power and instrument industries and
through Catalog Operations.
Adco Devices Co. A screw-machine house manufacturing
Freeport, New York instrument quality shoulder screws,
thumb screws, nuts, shafting, pins,
knobs and washers. Standard stock
and custom components are sold to
numerous jobbers, distributors and
wholesalers.
Astro Instrument Co. A general machine shop with
Joplin, Missouri diversified CNC and conventional
capabilities, producing the Kay
Pneumatics product line and
manufacturing components for an
established customer base in
several industries.
APPI, Inc. A state-of-the-art CNC machining
(Atlantic Precision operation specializing in close
Products) tolerance, intricate machining
Biddeford, Maine of complex parts, made from exotic
materials, and used in the medical,
fluid flow control, instrument, and
seal/gland industries.
Each of the operations in Manufacturing Services produces
components sold both through Catalog Operations and to other
catalog houses, generally at uniform list prices. In addition,
each operation bids for specialized custom manufacturing work
in the open market, taking on machining jobs on fixed price
contracts. While long production runs are periodically
accepted, the structure of Manufacturing Services'
organization and facilities is generally oriented to shorter
runs with higher margins. Pricing is based on combined
material cost and standard hourly shop rates for labor and
overhead.
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Approximate revenues for Manufacturing Services were as
follows for the last three years:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------ ---------------- -------------------
1999 1998 1997
------------------ ---------------- -------------------
<S> <C> <C> <C>
Sales to Catalog Operations * $2,102,000 $2,422,000 $2,360,000
Sales to Outside Customers 10,183,000 3,841,000 2,612,000
------------------------------------ ------------------ ---------------- -------------------
Total Revenues $12,285,000 $6,263,000 $4,972,000
==================================== ================== ================ ===================
</TABLE>
* These revenue figures for Catalog Operations represent
interdivisional sales that are eliminated in consolidation.
Sales to Catalog Operations increase or decrease commensurate
with the overall volume of shipments by Catalog Operations.
The increases in Sales to Outside Customers in fiscal 1998 and
1999 were attributable principally to the acquisition of
Atlantic Precision Products in July, 1998. The Company does
not report results for Catalog Operations and Manufacturing
Services separately, but management believes that both
divisions make a positive contribution to operations. While
the Company is intensively marketing its Manufacturing
Services capability, management believes that existing
capacity will support a substantial increase in volume without
significant additions to current production facilities.
Operations are now primarily single shift, representing an
estimated 65% of capacity, giving the Company the flexibility
to respond to increases in sales volume. Management intends,
on a continuous basis, to examine its manufacturing methods,
equipment and tooling, seeking ways to improve the quality and
responsiveness of its capacity while minimizing the labor and
skill content (and related cost) in its product. The Company
has embarked on a program specifically oriented to making such
improvements, and management intends to commit the capital
necessary to carry out the program consistent with internal
and confidential rate-of-return guidelines established by
management.
MANUFACTURING SERVICES COMPETITION
Each of the divisions in Manufacturing Services faces intense
competition from the many thousands of machine shops and screw
machine houses throughout the United States. Each division
endeavors to differentiate itself 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;
and v) conforming consistently to unbending quality standards.
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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 sets
forth both policies and procedures used throughout the
Company. This manual meets or exceeds the requirements of
MIL-STD-45208A, which defines acceptable standards for small
business suppliers to the U.S. Government. In fiscal 1999, the
Company successfully started the process of qualifying all of
its operations for certification to ISO-9002, receiving
certification for its Atlantic Precision Products facility in
Biddeford, ME. A project is underway for obtaining
certification for all of the Company's New York operations to
ISO-9002 during fiscal 2000. In management's opinion, loss of
qualification under MIL-STD-45208A or ISO-9002 would not have
a material impact on the Company's ability to do business;
likewise, in management's opinion, such qualification provides
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.
EXPANSION PLANS
Management has developed a plan to expand the size of the
Company. The plan has four basic elements: (1) expand the core
business through more intensive marketing efforts; (2) add
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 as required to reduce the Company's indebtedness,
thereby limiting financial leverage while expansion plans are
being implemented. Certain elements of management's marketing
strategy have been implemented (principally an ongoing
advertising campaign and publication of an Internet catalog).
In August, 1999, the Company engaged the services of a
marketing professional to oversee the implementation of the
remaining elements of its marketing plan. In November, 1999,
the Company leased a 60,000 square foot space in Hicksville,
NY, to consolidate and expand its New York operations,
allowing for growth in Catalog Operations and Manufacturing
Services over the next several years. At the same time,
management is pursuing its acquisition strategy, having
completed two acquisitions in fiscal 1998 and having targeted
additional strategic candidates for acquisition in fiscal
2000. Management has raised (cumulatively) $2,163,000 in
equity since the beginning of fiscal 1994, 60% in a private
placement and the balance through the exercise of warrants and
options. All such equity funds have been applied to working
capital. Additional equity funds, if and when raised, will
also be applied, at management's discretion, to working
capital, thus being available for use in routine operations or
for carrying out the Company's expansion plans.
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MARKETING PROGRAMS
The Company has developed a program to stimulate substantial
growth within its existing line of business. Feedback from
customers and informal market research indicate that Allied
Devices does not yet have 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 and of the
usefulness of standardized components in general. The program
is divided into modules and is being implemented as management
deems appropriate.
The plan includes expansion of the Company's advertising
campaign, begun on a restricted budget in 1993. As part of the
program, management has undertaken to improve, on a continuous
basis, the standards of service and support provided to the
Company's customers. Phasing in of expanded engineering
support, assembly capabilities, new products, and electronic
accessibility for customers are also important elements of the
Company's program. Management believes that implementation of
its plan will result in accelerated growth of sales and
profits.
ACQUISITION PROGRAM
As part of its plans for growth, management intends to
continue with its acquisition program. By its own assessment,
management views the market in which it competes as large
(over $1 billion), highly fragmented, and poised for
consolidation. Strategically, 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)
represents lateral or vertical integration. Management has
completed two acquisitions and is assessing additional
prospective candidates.
OTHER FACTORS
Raw materials for the Company's operations are 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 and of availability of raw materials at
stable prices. 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.
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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 52 salaried and 186 hourly
personnel. Wage rates and benefits are competitive in the
labor markets from which the Company draws. Twenty-nine of its
hourly employees are represented by two local unions (19 by
the National Organization of Industrial Trade Unions ("NOITU")
and 10 by Local 999 of the Teamsters). The contract with Local
999 expires in August 2000, and the contract with NOITU
expires in November 2000. Management intends to negotiate new
contracts before the expiration of current contracts. The
Company has had no strikes, walkouts or other forms of
business disruption attributable to poor labor relations.
Relations with employees and the unions are open and
constructive.
CAPITAL EQUIPMENT
The Company uses a wide variety of machinery and equipment in
manufacturing and assembly of its product line. While most of
the equipment is owned by the Company or its subsidiaries,
certain key pieces of equipment are leased. Fourteen leases,
covering certain specific CNC machines, have original lease
terms ranging from four to five years, with purchase options
at the end of each lease. Rates vary from 7.01% to 10%, and
expiration dates range from 2000 to 2004. The aggregate value
of these leases was $2,720,000 as of September 30, 1999.
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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 plans to consolidate operations
currently in Baldwin, NY, Freeport, NY and Ronkonkoma, NY into
one building in Hicksville, NY during fiscal year 2000. Thus,
the leases in three of the four New York locations to be
vacated are on a month-to-month basis through April, 2000; the
lease on the fourth will be cancelled at the mutual
convenience of the landlord and the Company. The lease for the
Hicksville, NY facility was executed in November, 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Location Square Feet Lease Expiration Principal Activities
- ---------------------- -------------- -------------------- -----------------------------
Baldwin, NY 18,000 December, 1999* Catalog Manufacturing and
Distribution Operations
Freeport, NY 10,000 December, 1999* Screw Machine Operations
Freeport, NY 5,200 January, 2000* Catalog Manufacturing
Operations
Hicksville, NY 60,000 April, 2010 Consolidation of Catalog
Operations and
Manufacturing Services
Biddeford, ME 30,000 June, 2003 CNC Machine Shop
Windham, ME 10,000 June, 2003 CNC Machine Shop
Ronkonkoma, NY 8,200 April, 2004** CNC Machine Shop
Joplin, MO 13,000 (Owned) CNC and Conventional
Machine Shop
</TABLE>
*At the mutual convenience of the respective landlords and
the Company, these facilities are occupied on a
month-to-month basis pending completion of consolidation
into Hicksville. **At the mutual convenience of the landlord
and the Company, this lease will be cancelled when the
Company completes its move into the Hicksville facility.
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 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
Not applicable.
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PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock was originally listed on National
Association of Securities Dealers Automated SmallCap Market
("NASDAQ") as of November 17, 1994. Trading in the Company's
stock has been active and regular since then. A total of 2,545
trades representing approximately 3,927,719 shares (as
reported by NASDAQ in their routine statistical summaries)
were completed during fiscal 1999. During fiscal 1999, the
Board of Directors of the Company approved a plan to
repurchase shares from the open market, and pursuant to that
plan the Company repurchased 100,350 shares from time to time
at an average price of $1.29 per share. As of September 30,
1999, the Company had 426 holders of record of its common
stock. The Company has nine listed market-makers, and the
trading ranges by quarter for fiscal 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $1.5155 $1.344 $2.8125 $2.00
Second Quarter $1.672 $1.2345 $2.4375 $1.875
Third Quarter $1.3435 $1.2185 $2.5625 $2.125
Fourth Quarter $1.422 $1.203 $3.00 $1.5312
</TABLE>
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ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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-KSB.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------- --------------
<S> <C> <C>
1999 1998
---- ----
STATEMENT OF
OPERATIONS DATA:
Net sales $ 22,827,298 $18,448,483
Net income $ 494,994 $ 1,030,673
Earnings per share:
Basic $ .10 $.22
Diluted $ .10 $.22
Weighted average
number of
shares
outstanding
Basic 4,913,255 4,699,526
Diluted 4,966,836 4,763,404
BALANCE SHEET DATA:
Total assets $24,858,026 $22,973,619
Working capital $ 9,398,931 $ 9,594,752
Long-term debt $10,931,435 $11,031,687
Stockholders' equity $ 9,481,924 $ 9,116,101
</TABLE>
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RESULTS OF OPERATIONS: YEAR ENDED SEPTEMBER 30, 1999, COMPARED
WITH YEAR ENDED SEPTEMBER 30, 1998
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;
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.
Net sales for fiscal 1999 were $22,827,000 as compared to
$18,448,000 in fiscal 1998. This increase of 23.7% was the
result of a combination of factors: (1) sales generated by the
operations acquired in the second half of fiscal 1998
contributed approximately $6.7 million of incremental volume
in fiscal 1999; (2) economic and financial instability in East
Asia induced a sharp downturn in the semiconductor equipment
sector of the U.S. economy, with depressed conditions enduring
for effectively all of fiscal 1999, resulting in a decrease in
volume estimated by management to be approximately $4.2
million; and (3) continued intense marketing efforts resulted
in improved sales to companies in other sectors, adding an
estimated $1.9 million to shipments during fiscal 1999.
Management believes that the Company's marketing strategy,
consistently applied, will continue to result in above average
growth in sales. The principal contributors to such growth
will be, in management's estimation, the following: (1) a
continuing series of advertisements in various industry/trade
magazines, designed to create more wide-spread awareness of
the Company and its products and services; (2) a series of
programs of continuous improvement, including qualification
for ISO-9002, particularly in the areas of customer service
and support; (3) a program to expand the range of support
services provided to the Company's larger customers; and (4)
diversification of sales to reduce dependence on the
semiconductor equipment sector.
The Company's gross margin was 34.15% of net sales in fiscal
1999, up from 34.07% in fiscal 1998. The lower level of sales
activity permitted the Company to manufacture more and
purchase less, resulting in the following changes from fiscal
1998: (1) net materials expense decreased as a percentage of
sales,
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increasing gross margins by 3.57%; (2) careful management of
wages and overtime through the slowdown resulted in lower
payroll costs as a percentage of sales, improving gross
margins by 0.83%; (3) the Company shipped a lower volume of
product on relatively stable costs of factory operations,
decreasing gross margins by 2.43%; and (4) additions to
production equipment increased depreciation (a non-cash
expense) as a percentage of sales, decreasing gross margins by
1.89%.
The Company did not increase prices materially in fiscal 1999.
Selling, general and administrative expenses as a percentage
of net sales were 26.3% in fiscal 1999, as compared to 23.2%
in fiscal 1998. The following factors account for this change:
(1) selling and shipping expenses and commissions decreased as
a percentage of net sales by approximately 2.2% as
expenditures on marketing were decreased during the downturn
in shipping volume; (2) administrative payroll, benefits, and
related expenses increased as a percentage of net sales by
2.7%, principally as a result of certain termination and
lay-off expenses incurred during the downturn; (3) other
administrative expenses (collectively) increased as a
percentage of net sales by approximately 1.8%, partially as a
function of expenses and write-downs related to the Company's
impending move and consolidation of New York facilities into
one building; and (4) depreciation and amortization (non-cash
expenses) increased by 0.8% as a result of goodwill incurred
in making the two acquisitions in fiscal 1998.
Interest expense increased by $620,000 in fiscal 1999 as a
function of higher borrowings incurred to finance the two
acquisitions completed in fiscal 1998 .
Provision for income taxes in fiscal 1999 was 36.1% of pre-tax
income, as compared to 36.2% in fiscal 1998. See the notes to
the consolidated financial statements for a reconciliation to
the federal statutory rate.
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RESULTS OF OPERATIONS: YEAR ENDED SEPTEMBER 30, 1998 COMPARED
WITH YEAR ENDED SEPTEMBER 30, 1997.
During fiscal 1998, the Company successfully completed two
acquisitions as part of its plan for growth by acquisition.
The two companies acquired were as follows:
- Kay Pneumatic Valves, Inc. ("Kay"), manufactures a line
of three-way and four-way direction control and power
valves with a reputation for exceptional durability and
speed. The standard, "off-the-shelf" product is described
in a set of detailed catalogs and appears to offer
attractive potential as a lateral addition to the
Company's other catalog offerings to its targeted
markets. Kay's revenues were somewhat over $800,000 in
calendar 1997, and management believes that, under the
stewardship of prior management, marketing efforts were
ineffective and production inefficient. The assets and
operations of the business were acquired for $850,000 in
cash in January, 1998, and transferred from Long Island
to the Company's Astro Instrument facilities in Joplin,
Missouri in February, 1998. For the first year,
operations were dedicated to establishing acceptable
levels of customer service and gaining a thorough
understanding of production costs and the existing
marketing mix (product focus, pricing, distribution
strategy, competition, inventory balancing, and customer
service strategy). Since then, management has been
developing a marketing plan for aggressive promotion of
the Kay product line under the Kay and King trade names.
- Atlantic Precision Products, Inc. ("APPI" or "Atlantic")
is a state-of-the-art CNC machining operation with
locations in Biddeford and Windham, Maine. APPI sells
intricate and complex custom machined components to
leading edge customers in the aircraft instrument, flow
metering/control, and seal/gland industries, primarily in
New England. Sales volume of $9.3 million in calendar 1997
was relatively concentrated in 5 customers, with four of
those being on Kanban or other dedicated sole-source
supply arrangements. Management believes that their
manufacturing methods and know-how will permit substantial
growth in throughput at Atlantic while, through technology
interchange, enabling the Company as a whole to
manufacture more efficiently. Consideration at closing for
the business was $7.2 million in cash and 250,000 shares
of the Company's common stock. Performance consideration
is a negotiated percentage of earnings for APPI for each
of the first three years of operation as a division of
Allied.
On the night of April 8, 1998, a fire broke out at the
Company's headquarters in Baldwin, New York, destroying all of
the Company's central computer and data communications
equipment and certain underlying records. The Company thus had
to reconstruct those portions of its records which were lost
from the remaining hard-copy records and back up files. The
result, during the succeeding four months, was a substantial
number of late deliveries and a low rate of responsiveness to
new business while records were being reconstructed
14
<PAGE>
and data was being built into the new system. While it is
impossible to determine the exact impact of the fire,
management estimates that between $350,000 and $500,000 of
business was lost during the recovery period. While many of
the Company's customers were patient and tolerated the
recovery process, others were not and switched to competitors
during this period. Management has launched a program to
recover those customers lost in the aftermath of the fire.
Net sales for fiscal 1998 were $18,448,000 as compared to
$16,216,000 in fiscal 1997. This increase of 13.8% was
principally the result of four factors: (1) the added revenues
from Kay and Atlantic amounted to $2,225,000, mostly
concentrated in the fourth quarter; (2) the fire caused a loss
of sales estimated by management at between $350,000 and
$500,000; (3) the economic and financial turmoil in East Asia
induced a sharp downturn in several capital goods sectors of
the U.S. economy beginning in the third quarter of the fiscal
year, resulting in a commensurate slowdown for the Company
with customers in those industries estimated by management to
amount to over $1 million; and (4) on-going marketing
initiatives appear to have been effective in stimulating
continued growth in other sectors of approximately 10%. In
particular, the aerospace instrumentation, medical equipment,
robotics and scientific/analytical instrumentation sectors
exhibited strength throughout the year.
The Company's gross margin was 34.07% of net sales in fiscal
1998, down from 36.49% in fiscal 1997. This was principally
the result of two elements: (1) materials expense as a
percentage of sales decreased, increasing gross margins by
0.81%; and (2) factory payroll and overhead as a percentage of
sales increased, lowering gross margins by 3.23%. This
decrease in margin is attributable to the following factors:
- The consummation and assimilation of the two acquisitions
completed during the fiscal year resulted in temporary
operating diseconomies while integrating the acquired
entities into the Company. Higher levels of payroll and
duplication of overhead expenses are common at such times,
with the period of transition following each acquisition
being approximately six months. Following this, gross
margins returned to being more in line with the Company's
objectives.
- The fire in April destroyed the Company's production
planning and control system. As a direct outcome, during
the ensuing five months, the normally orderly flow of
production work in Catalog Operations was regularly
disrupted by "emergency" production runs made to cover
late deliveries of materials. The resultant combination of
high levels of overtime and extremely short lot sizes
eroded margins during the recovery period (April through
September, 1998). Management made a conscious decision to
tolerate this temporary condition rather than risk further
deterioration of the Company's service performance to its
customers.
15
<PAGE>
- When signs of slowdown in certain sectors materialized at
the end of the third fiscal quarter, management made a
decision to delay taking cost cutting measures until after
the end of the fiscal year. This decision was also
prompted by management's asserting a higher priority on
maintaining service levels than on short term maintenance
of gross margins. The lower level of throughput to sales
and inventory on relatively fixed costs of factory
operations resulted in a decrease in gross margins during
the fourth quarter.
- Atlantic's factory operations rely more heavily on
state-of-the-art equipment than do the Company's other
operations, displacing operating costs with depreciation
charges and increasing operating leverage. Atlantic's
productivity during the Company's fourth quarter of fiscal
1998 was lower than historic norms, as often happens in
the six months following an acquisition. Thus,
depreciation charges during this quarter were higher
without an offset of lower operating costs.
The Company did not increase prices materially in fiscal 1998.
Selling, general and administrative expenses as a percentage
of net sales were 23.2% in fiscal 1998, as compared to 24.8%
in fiscal 1997. While actual expenditures in fiscal 1998 were
$260,000 higher than in fiscal 1997, such costs did not
increase as much as sales volume. The following factors
account for this change: (1) selling and shipping expenses and
commissions decreased as a percentage of net sales by
approximately 0.8% as shipping volume increased while spending
on the Company's marketing strategy remained effectively flat;
(2) administrative payroll, benefits and expenses increased by
$106,000 but decreased as a percentage of net sales by 0.8%;
and (3) other administrative expenses (collectively) remained
unchanged as a percentage of net sales. Included in
administrative expenses were certain non-recurring costs
incurred during the third and fourth quarters of fiscal 1998
related to recovery from the fire, as extraordinary hours put
in by Allied's employees, supplemented by some outside
professional help, minimized the potentially disastrous
effects of the fire, but at a cost. While the Company's
casualty and business interruption insurance reimbursed much
of this, management estimates that approximately $100,000 of
cost was not recovered from insurance. In addition, there were
approximately $70,000 of additional administrative expenses in
the fourth quarter that resulted from acquiring Atlantic.
Interest expense increased by $184,000 in fiscal 1998, as the
Company increased its borrowings to finance the acquisitions
of Kay and Atlantic.
Provision for income taxes in fiscal 1998 was $584,000, or
36.2% of pre-tax income. See the notes to the consolidated
financial statements for a reconciliation to the federal
statutory rate.
16
<PAGE>
YEAR 2000
Neither the Company nor any of its major vendors or critical
third party suppliers appear to have experienced any material
problems as a result of the advent of the Year 2000. However,
there can be no assurances that any Year 2000 compliance
measures taken will not fail to function, which failures could
have a material adverse effect on the Company's business.
The statements contained in this Year 2000 readiness
disclosure are subject to certain protection under the Year
2000 Information and Readiness Disclosure Act.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained consistent during
fiscal 1999 as operations generated net cash of $1,806,000.
Financing activities (net) used cash of $949,000 over the
course of the year, capital expenditures (net) used $210,000,
deferred acquisition financing used $350,000, and repurchase
of common stock in the open market used $129,000, with the
remaining $168,000 being added to cash on hand. Net working
capital decreased by $196,000 to $9,399,000 during the year.
The changes in current assets and current liabilities for the
year ended September 30, 1999 contributed to the decrease in
working capital as follows:
- Accounts receivable (net of reserve for doubtful accounts)
increased by $525,000 during the year. This increase was a
function of higher sales volume at year-end ($501,000) and
a slight increase in the average collection period from 45
days at the end of fiscal 1998 to 45.3 days at the end of
fiscal 1999 ($24,000).
- Inventories increased by $828,000 during the fiscal year,
with the turnover rate increasing from 1.4 times in fiscal
1998 to 1.6 times in fiscal 1999. This increase was
achieved despite a sharp slowdown with many of the
Company's most important customers. Current industrial
procurement practices, Kanban and demand-pull ("JIT")
systems in particular, leave manufacturers vulnerable to
temporary build-ups, since production builds on the basis
of forecasted needs as much as three months in advance of
actual demand. As an operating principle, management has
made prompt service, product availability and quick
turnaround of production orders key strategic factors in
gaining a strong competitive position in the Company's
markets. Substantial inventories are, in management's
judgment, a necessity in supporting this strategy and
responding to demanding delivery requirements imposed by
the Company's customers. As the Company's growth plan
continues to unfold, management expects to see continued
improvement in the inventory turnover rate.
17
<PAGE>
- Prepaid expenses and other current assets decreased by
$115,000 as the result of capitalizing certain prepaid
administrative expenses ($27,000), collecting certain
casualty losses (previously accrued) from insurance
carriers of $266,000, and booking certain deferred income
taxes ($124,000).
- Current liabilities, exclusive of current portions of
long-term debt and capital lease obligations, increased by
$1,011,000 (net), as higher levels of manufacturing
activity increased accounts payable by $360,000, the
Company's average payment period on accounts payable and
accrued expenses was increased from 35 days in fiscal 1998
to 42 days in fiscal 1999 (an increase of $370,000), and
the Company's income taxes payable increased by $281,000.
- Current portions of long-term debt and capital lease
obligations increased by $591,000 (net) as a function of
the terms of acquisition and lease financings.
- Cash balances increased by $168,000.
Management believes that the Company's working capital as now
constituted will be adequate for the needs of the on-going
core business (inclusive of acquired entities). During fiscal
1999, the Company and its principal lending institution
mutually agreed to amend certain terms of its credit facility,
reducing its revolving credit facility from $10 million to
$7.5 million and modifying certain financial covenants in
recognition of industry-wide business conditions. The Company,
at the end of fiscal 1999, was using approximately $3,400,000
of its revolving credit facility.
Management believes that, in light of the Company's expansion
objectives, the Company's working capital will not be adequate
to provide for all of the on-going cash needs of the business.
In particular, management expects to require additional
financing to carry out its acquisition objectives. Success in
this part of the Company's growth program will rely, in large
measure, upon success in completing such additional financing.
The Company is not relying on receipt of such funds in its
operating budgets or projections. It is important to note
that, absent new capital, the Company will not be in a
position to undertake some of the most promising elements of
management's plans for expansion. In the event that new equity
funds are raised, management intends to implement its plans
and will do so in keeping with its judgment at that time as to
how best to deploy any such capital.
Outlay for capital expenditures in fiscal 1999 amounted to
$173,000 ($969,000 including capital leases, net of equipment
dispositions), as compared to $637,000 ($869,000 including
capital leases, net of equipment dispositions) in fiscal 1998.
These expenditures represent both facets of the Company's
capital spending program: (1) a continuation of management's
program of continuous improvement through modernization and
automation of facilities ($753,000), and (2) upgrading,
support and installation of new computer and communications
equipment ($215,000). Capital spending plans for fiscal 2000
call for similar levels of investment in software and hardware
for the Company's computer
18
<PAGE>
system and further additions and upgrades to high-efficiency
production machinery. Management expects to fund such spending
plans out of working capital and credit facilities.
During fiscal 1998, the Company acquired effectively all of
the assets, properties, business and rights of, and assumed
specified liabilities of Atlantic Precision Products, Inc.
Consideration for the assets, net of liabilities, of APPI
included a commitment to make supplemental payments of
purchase consideration to the seller based on the performance
of APPI during each of the first three one-year operating
periods following the Closing. The supplemental consideration
earned for the first year following closing (12 months ended
June 30, 1999) amounted to approximately $939,000, of which
$350,000 was paid in cash and the balance in notes payable
over three years.
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 could, therefore, experience materially
adverse effects on profitability from any marked downturn in
sales volume until management was able to reduce fixed costs.
Because the Company's delivery lead-times are relatively
short, there is, as a result, little backlog at any given
time, and the effect of a downturn in sales volume would be
felt almost immediately.
EXPANSION PLANS
Management has developed a plan to expand the size of the
Company. Basically, the plan has four elements: (1) expand the
core business through more intensive and focused marketing
efforts; (2) add 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 as required to reduce the
Company's indebtedness, thereby limiting financial leverage
while expansion plans are being implemented. In August, 1999,
the Company engaged the services of a marketing professional
to oversee the implementation of the remaining elements of its
marketing plan. In November, 1999, the Company leased a 60,000
square foot space in Hicksville, NY, to expand and consolidate
its New York operations, allowing for growth in Catalog
Operations and Manufacturing Services over the next few years.
At the same time, management is pursuing its acquisition
strategy, having completed two acquisitions in fiscal 1998 and
having targeted additional strategic candidates for
acquisition in fiscal 2000. Plans to raise additional equity
will be carried out when management considers it appropriate
to do so and believes market conditions to be favorable to
existing stockholders.
19
<PAGE>
IMPACT OF INFLATION AND OTHER BUSINESS CONDITIONS
Management believes that inflation has no material impact on
the operations of the business. The Company has been able to
react to increases in material and labor costs through a
combination of greater productivity and selective price
increases. The Company has no exposure to long-term fixed
price contracts.
RECENT ACCOUNTING PRONOUNCEMENTS
A) Investment Derivatives and Hedging Activities Income
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivatives and Hedging
Activities Income" ("SFAS 133"), which requires the recording
of all derivative instruments as assets or liabilities
measured at fair value. Among other disclosures, SFAS 133
requires that all derivatives be recognized and measured at
fair value regardless of the purpose or intent of holding the
derivative.
SFAS 133 is effective for financial statements for periods
beginning after June 15, 2000. To date, the Company has not
traded in derivatives or engaged in hedging activities.
ITEM 7 - FINANCIAL STATEMENTS
(1) Financial Statements
See index to Financial Statements on Page F-2.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
20
<PAGE>
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS
The Executive Officers and Directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD WITH COMPANY
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Mark Hopkinson 52 Chairman of the Board of Directors,
President, Chief Executive Officer,
Secretary
Salvator Baldi 77 Executive Vice President, Director
Andrew J. Beck 51 Assistant Secretary
P.K. Bartow 52 Director
Christopher T. Linen 52 Director
Michael Michaelson 77 Director
Paul M. Cervino 45 Principal Financial Officer, Principal
Operating Officer, Principal
Accounting Officer, Treasurer
</TABLE>
21
<PAGE>
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS (CONTINUED)
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 52, 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 77, 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.
Andrew J. Beck, age 51, has been a partner with the law firm
of Torys Haythe 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.
22
<PAGE>
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS (CONTINUED)
P.K. Bartow, age 52, is President of The InterBusiness
Marketing Group. From March, 1994 through November, 1998, he
was President of the Company. Prior to 1994, 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 Allied Devices, Mr. Bartow was
Director of Marketing and Sales, and he continues to provide
marketing consulting services to the Company. Prior to
acquiring Allied Devices, 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 52, became a Director of the Company
during fiscal 1997. He is currently 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 a director
of Starmedia Networks Inc., 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 77, 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. He is also on the board of
directors of Retail Entertainment Group, Inc., a public
company. 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.
Paul M. Cervino, age 45, has been the Chief Operating Officer
of the Company since November, 1998. From January, 1996 until
October, 1998, he served as Chief Financial Officer. 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.
23
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
The following table sets forth the salary and bonus
compensation paid during the fiscal years ended September 30,
1999, 1998 and 1997 to the Chairman and Chief Executive
Officer of the Company. No other Executive Officer of the
Company received fiscal 1999 salary and bonus compensation
which exceeded $100,000. The Company's Directors receive
$1,250 per quarter and 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.
<TABLE>
<CAPTION>
"Summary Compensation Table"
- --------------------------------------------------------------------------------------------------
Name and Principal Fiscal Year Salary Other Annual Long Term Compensation
Position Compensation Awards-Options/ SAR's
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark Hopkinson, 1999 $123,725 $0 22,000
Chairman and Chief
Executive Officer
1998 $110,005 $0 0
1997 $97,221 $0 27,400
</TABLE>
Under the terms of the Company's 1993 Incentive Stock Option
Plan, the following options were granted to the Chief
Executive Officer of the Company during fiscal year 1999
<TABLE>
<CAPTION>
"Option/SAR Grants in Last Fiscal Year"
- --------------------------------------------------------------------------------------------------
Name Number of % of Total Options Exercise or Expiration
Securities Granted to Base Price Date
Underlying Employees in Fiscal ($/Sh)
Options Granted Year
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark Hopkinson 22,000 10% $1.063 4/7/09
Aggregated Options/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values.
</TABLE>
<TABLE>
<CAPTION>
Name Shares Value Number of Value of
Acquired on Realized Securities Unexercised
Exercise (#) ($) Underlying In-the-Money
Unexercised Options/SARs at
Options/SARs at FY-End ($)
FY-End (#) Exercisable/
Exercisable/ Unexercisable
Unexercisable
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark Hopkinson - $ - 54,000/0 $44,036/$0
</TABLE>
(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.
No compensation to management has been waived or accrued to
date.
24
<PAGE>
Under the terms of its employee stock option plan (adopted in
October, 1993 and amended in December, 1995 and March, 1998),
the Board of Directors is empowered at its discretion to award
options to purchase an aggregate of 1,500,000 shares of the
Company's common stock to key employees. Prior to fiscal 1999,
the Company had granted options to purchase an aggregate of
1,107,000 shares to key employees and Directors, with exercise
prices ranging from $0.35 to $3.00 per share. During fiscal
1999, the Company granted options to purchase 219,000 shares
of the Company's common stock, at exercise prices ranging from
$1.063 to $1.25, to 14 individuals (one executive, two
Directors and nine non-executive managers). In January, 1999,
all Directors and certain Officers voluntarily surrendered
974,400 options awarded to them in prior years as part of a
comprehensive review of the compensation of Directors and
Officers.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of
the Company's shares of Common Stock owned of record and
beneficially by each person or entity owning more than 5% of
such shares and by all executive officers and directors, as a
group at September 30, 1999:
<TABLE>
<CAPTION>
Name Number of Current
Shares Owned Percentage
<S> <C> <C>
-------------------------------------------- ------------- -------------
Mark Hopkinson(1) (3) (7)
2365 Milburn Avenue 809,571 16.50%
PO Box 502
Baldwin, NY 11510
P.K. Bartow (2) (4) (7) 625,688 12.90%
2365 Milburn Ave.
PO Box 502
Baldwin, NY 11510
Salvator Baldi (1) (5) (7) 531,473 10.96%
2365 Milburn Ave.
PO Box 502
Baldwin, NY 11510
Michael Michaelson (2)(6)(7) 123,584 2.52%
2365 Milburn Ave.
PO Box 502
Baldwin, NY 11510
Christopher T. Linen (2)(9) 140,000 2.86%
203 Poverty Hollow Road
Redding, CT 06896
Andrew J. Beck (8) 6,000 0.12%
71 Willow Street, Apt. 1
Brooklyn, NY 11201
Paul M. Cervino (8) (10) 133,600 2.69%
2365 Milburn Ave.
PO Box 502
Baldwin, NY 11510
All Executive Officers and 2,369,916 46.19%
Directors as a Group (7 persons)
</TABLE>
25
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (CONTINUED)
(1) 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 5,660 shares represented by
warrants exercisable by Mr. Hopkinson until December
31, 1999 and 54,000 shares represented by currently
exercisable options. These warrants expired
unexercised in fiscal 2000. Mr. Hopkinson disclaims
beneficial ownership of 15,700 shares owned by his
wife.
(4) Included in Mr. Bartow's shareholdings are 1,722
shares represented by warrants exercisable by Mr.
Bartow until December 31, 1999. These warrants
expired unexercised in fiscal 2000. Mr. Bartow
disclaims ownership of 15,000 shares owned by members
of his immediate family.
(5) Included in Mr. Baldi's shareholdings are 898
shares represented by warrants exercisable by Mr.
Baldi until December 31, 1999. These warrants
expired unexercised in fiscal 2000.
(6) Included in Mr. Michaelson's shareholdings are 2,584
shares represented by warrants exercisable by Mr.
Michaelson until December 31, 1999 and 50,000 shares
represented by currently exercisable options. These
warrants expired unexercised in fiscal 2000. Mr.
Michaelson disclaims ownership of 160,000 shares
owned by his wife.
(7) As consideration for various services rendered to the
Company in the period 1983 until 1990, the Company
issued certain stockholders warrants to purchase up
to 340,000 shares of common stock at prices ranging
from $0.30 per share to $0.70 per share. 329,136 of
those warrants have been exercised, prior to their
expiration, and 10,864 of those warrants remained
exercisable at September 30, 1999. All warrants
unexercised at the end of fiscal 1999 expired
unexercised in fiscal 2000.
(8) Officer only.
(9) Includes 50,000 shares represented by currently
exercisable options.
(10) Includes 118,000 shares represented by options, some
currently exercisable and others vesting in periods
out through fiscal 2002.
26
<PAGE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1987, certain officers and stockholders purchased
unsecured 10% promissory notes from Allied Devices in the
aggregate amount of $157,680: Mark Hopkinson, $75,000; P.K.
Bartow; $25,000; Salvator Baldi, $7,680; Michael Michaelson,
$25,000; and Edward G. Lord, $25,000. In December 1994, all
such notes were retired by paying 10% of the principal amount
due in cash, the balance in the form of new 10% unsecured
promissory notes due December 31, 1995, and granting warrants
to purchase Common Stock at the rate of one warrant per $20 of
principal on the notes being retired, as follows:
<TABLE>
<CAPTION>
Principal
Value of Number of
Cash Paid New Notes Warrants
--------- --------- --------
<S> <C> <C> <C>
Salvator Baldi $ 1,796.59 $ 16,169.32 898
P.K. Bartow $ 3,445.14 $ 31,006.25 1,722
Mark Hopkinson $11,319.74 $101,877.69 5,660
Michael Michaelson $ 5,167.71 $ 46,509.37 2,584
</TABLE>
Each warrant was exercisable at a price of $2.00 per warrant
into one share of Common Stock until December 31, 1999. The
notes were retired during fiscal 1996. The warrants expired
unexercised.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits required to be filed as a part of the form
are listed in the attached Index to Exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the last quarter
of fiscal 1999.
27
<PAGE>
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, President,
Mark Hopkinson Principal Executive Officer,
and Director
/s/ Salvator Baldi
- ------------------------ Executive Vice President
Salvator Baldi and Director
/s/ Philip Key Bartow
- ------------------------ Director
Philip Key Bartow
/s/ Michael Michaelson
- ------------------------ Director
Michael Michaelson
/s/ Christopher T. Linen
- ------------------------ Director
Christopher T. Linen
/s/ Paul M. Cervino
- ------------------------ Principal Financial Officer,
Paul M. Cervino Principal Operating Officer,
Principal Accounting Officer,
Treasurer
28
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders' and Board of Directors of
Allied Devices Corporation
Baldwin, New York
We hereby consent to the incorporation by reference and inclusion in the
Prospectuses constituting part of the Registration Statements filed on Form S-8
on April 6, 1994 and April 8, 1996 of our report dated January 12, 2000 relating
to the consolidated financial statements of Allied Devices Corporation and
subsidiaries appearing in the Company's Annual Report on Form 10-KSB for the
year ended September 30, 1999.
BDO SEIDMAN, LLP
Melville, New York
January 13, 2000
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
F-1
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets F-4
Statements of income F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7
Notes to financial statements F-8 - F-24
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders' and Board of Directors of
Allied Devices Corporation
Baldwin, New York
We have audited the accompanying consolidated balance sheets of Allied Devices
Corporation and subsidiaries as of September 30, 1999 and 1998 and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement 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, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
BDO Seidman, LLP
Melville, New York
January 12, 2000
F-3
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT:
Cash $ 443,039 $ 275,238
Accounts receivable, net of allowance for doubtful
accounts of $57,000 and $42,000, respectively 3,050,884 2,526,068
Inventories 9,731,773 8,903,220
Prepaid expenses and other current assets 126,902 366,057
Deferred income taxes 165,000 41,000
- -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 13,517,598 12,111,583
PROPERTY, PLANT AND EQUIPMENT, AT COST, NET OF ACCUMULATED
DEPRECIATION AND AMORTIZATION 7,335,000 7,607,246
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET OF
ACCUMULATED AMORTIZATION OF $648,560 AND $412,569 3,584,512 2,880,523
OTHER ASSETS 420,916 374,267
- -----------------------------------------------------------------------------------------------------------------
$ 24,858,026 $ 22,973,619
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable $ 1,867,578 $ 1,243,306
Income taxes payable 280,778 --
Accrued expenses and other 392,772 286,900
Current portion of long-term debt and capital lease obligations 1,577,539 986,625
- -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,118,667 2,516,831
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 10,931,435 11,031,687
DEFERRED INCOME TAXES 326,000 309,000
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 15,376,102 13,857,518
- -----------------------------------------------------------------------------------------------------------------
COMMITMENTS (NOTES 2, 8, 9 AND 10)
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, authorized
25,000,000 shares, issued and outstanding 4,947,942
and 4,947,942 4,948 4,948
Additional paid-in capital 3,624,721 3,624,721
Retained earnings 5,981,426 5,486,432
- -----------------------------------------------------------------------------------------------------------------
SUBTOTAL 9,611,095 9,116,101
Treasury stock, at cost (100,350 shares) (129,171) --
- -----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 9,481,924 9,116,101
- -----------------------------------------------------------------------------------------------------------------
$ 24,858,026 $ 22,973,619
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES $22,827,298 $18,448,483
COST OF SALES 15,031,821 12,163,602
- ---------------------------------------------------------------------------------------------------
GROSS PROFIT 7,795,477 6,284,881
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,013,032 4,282,634
- ---------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 1,782,445 2,002,247
INTEREST EXPENSE, NET 1,007,807 387,574
- ---------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR TAXES ON INCOME 774,638 1,614,673
TAXES ON INCOME 279,644 584,000
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 494,994 $ 1,030,673
- ---------------------------------------------------------------------------------------------------
NET INCOME PER SHARE - BASIC $ .10 $ .22
- ---------------------------------------------------------------------------------------------------
NET INCOME PER SHARE - DILUTED $ .10 $ .22
- ---------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock $0.001 par
value
------------------------------
Additional Total
Number of Paid-in Treasury Retained Stockholders'
Shares Amount Capital Stock Earnings Equity
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30,
1997 4,609,942 $ 4,610 $ 2,565,559 $ -- $ 4,455,759 $ 7,025,928
NET INCOME -- -- -- -- 1,030,673 1,030,673
STOCK ISSUED IN
CONJUNCTION WITH
APPI ACQUISITION 250,000 250 891,250 -- -- 891,500
PROCEEDS FROM THE
EXERCISE OF OPTIONS
AND WARRANTS AND
VALUE OF WARRANTS
GRANTED IN
CONJUNCTION WITH
BANK FINANCING 88,000 88 167,912 -- -- 168,000
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30,
1998 4,947,942 4,948 3,624,721 -- 5,486,432 9,116,101
NET INCOME -- -- -- -- 494,994 494,994
TREASURY STOCK ACQUIRED (129,171) -- (129,171)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30,
1999 4,947,942 $ 4,948 $ 3,624,721 $(129,171) $ 5,981,426 $ 9,481,924
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(NOTE 12)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 494,994 $ 1,030,673
- ------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,622,679 701,362
Deferred income taxes (107,000) 134,000
Gain on sale and involuntary conversion of equipment (2,300) (142,825)
Changes in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in:
Accounts receivable (524,816) 468,422
Inventories (828,553) (906,249)
Prepaid expenses and other current assets 239,155 (298,451)
Other assets (99,307) (30,740)
Increase (decrease) in:
Accounts payable and accrued expenses 730,144 (211,628)
Income taxes payable 280,778 (145,263)
- ------------------------------------------------------------------------------------------------------------
Total adjustments 1,310,780 (431,372)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,805,774 599,301
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (212,344) (636,907)
Business acquisitions, net of cash acquired (350,000) (8,280,674)
Proceeds from sale and inventory conversion of equipment 2,500 219,886
- ------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (559,844) (8,697,695)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from term note -- 6,250,000
Increase in revolving credit borrowings 150,000 1,325,000
Proceeds from financing of equipment -- 1,067,400
Principal payments on long-term debt and capital lease obligations (1,043,608) (291,408)
Treasury stock acquired (129,171) --
Net proceeds from sale of common stock, options and warrants -- 71,000
Deferred financing costs (55,350) (210,454)
- ------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,078,129) 8,211,538
- ------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 167,801 113,144
CASH, BEGINNING OF PERIOD 275,238 162,094
- ------------------------------------------------------------------------------------------------------------
CASH, AT END OF PERIOD $ 443,039 $ 275,238
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO 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 and a line of screw machine
products. 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
Inventories are valued at the lower of
cost (last-in, first-out (LIFO)
method) or market. Management
periodically analyzes inventories for
obsolescence and records writeoffs as
required. Such writeoffs have
historically been immaterial.
(D) DEPRECIATION AND AMORTIZATION
Property, plant and equipment is 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:
Machinery and equipment 8-10 years
Tools, molds and dies 8 years
Furniture, fixtures and office
equipment 5-7 years
Buildings and improvements 30 years
Leasehold improvements Lease term
F-8
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(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 credit
carryforwards. Deferred tax assets and
liabilities are measured using enacted tax
rates expected to apply to taxable income in
the years in which those temporary differences
are expected to be recovered or settled. The
effect on deferred tax assets and liabilities
of a change in tax rate is recognized in
income in the period that includes the
enactment date.
(F) EARNINGS PER SHARE
Basic earnings per share is 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 per
share reflect, in periods in which they have a
dilutive effect, the dilution which would
occur upon the exercise of stock options and
warrants. A reconciliation of the shares used
in calculating basic and diluted earnings per
share follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999 1998
----------------------------------------------
<S> <C> <C>
Weighted average shares
outstanding - basic 4,913,524 4,699,526
Dilutive effect of options
and warrants 35,022 63,878
----------------------------------------------
Weighted average shares
outstanding - diluted 4,948,546 4,763,404
----------------------------------------------
</TABLE>
Options and warrants totaling 282,864 and
988,500 at September 30, 1999 and 1998,
respectively, were antidilutive and,
accordingly, excluded from the diluted
calculation.
F-9
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(G) INTANGIBLE ASSETS
The excess of cost over the fair value of net
assets acquired is being amortized over
periods of 15 years (for the 1998
acquisitions, see Note 2) and 20 years (for
prior acquisitions).
(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.
(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) 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.
F-10
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(K) FAIR VALUE FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments,
including cash and short-term debt,
approximated fair value as of September 30,
1999 and 1998. The carrying value of long-term
debt, including the current portion,
approximates fair value as of September 30,
1999 and 1998 based upon the borrowing rates
currently available to the Company for bank
loans with similar terms and average
maturities.
(L) CONCENTRATIONS OF CREDIT RISK
The Company extends credit based on an
evaluation of the 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.
(M) RECENT ACCOUNTING PRONOUNCEMENTS
(I) INVESTMENT DERIVATIVES AND HEDGING
ACTIVITIES
In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and
Hedging Activities" ("SFAS 133"), which
requires the recording of all derivative
instruments as assets or liabilities
measured at fair value. Among other
disclosures, SFAS 133 requires that all
derivatives be recognized and measured at
fair value regardless of the purpose or
intent of holding the derivative.
SFAS 133 is effective for financial
statements for periods beginning after
June 15, 2000. To date, the Company has
not traded in derivatives or engaged in
hedging activities.
F-11
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(N) RESTATEMENTS
Certain prior year amounts have been restated
to conform to the current year presentation.
2. ACQUISITIONS (A) On July 8, 1998, with an effective date of
July 1, 1998, the Company acquired the assets
and business of Atlantic Precision Products,
Inc. ("APPI"), a manufacturer of high
precision, machined components for original
equipment manufacturers with advanced
engineering requirements. The price of net
assets (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
the value guaranteed by the Company ($4 per
share), discounted to its present value. The
Company also capitalized approximately
$190,000 of costs related to the acquisition.
The purchase price exceeded the fair value of
the net assets acquired (principally machinery
and equipment and inventory) by $2,846,026.
This excess has been recorded as goodwill
which is being amortized over a fifteen year
period.
The Company financed this acquisition using
proceeds from a new credit agreement with its
bank (see Note 5).
F-12
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The performance consideration is 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 is to
record a liability for such amounts as the
defined earnings are achieved. As of
September 30, 1999, contingent
consideration of $ 938,803 has been
recorded, as additional goodwill. As of
September 30, 1999, $ 350,000 has been paid
and $ 588,803 has been delivered in the
form of a three year note, subordinated to
the bank credit facility (Note 5), due
September 30, 2002 bearing interest at 7%
per annum, in accordance with the terms of
the asset purchase agreement. All such
contingent consideration is subject to a
subordination agreement between the seller
and the lending institution (Note 5).
The acquisition of APPI was accounted for by
the purchase method of accounting and,
accordingly, the operating results of APPI
have been included in the Company's results of
operations from the effective date.
The summarized unaudited pro forma results set
forth below project results assuming the
acquisition had occurred as of the beginning
of the following period:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
----------------------------------------------
<S> <C>
Net sales $24,660,580
Net income 1,290,135
Net income per share - basic $ .26
Net income per share - diluted $ .26
</TABLE>
(B) In January 1998, the Company acquired Kay
Pneumatic Valves Inc. ("Kay") for $850,000 in
cash. Kay's assets were comprised principally
of inventories and fixed assets. The
operations of Kay prior to acquisition were
not material and, accordingly, pro forma
operational results have not been presented
herein.
F-13
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
3. INVENTORIES Inventories are summarized as:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 1,312,565 $ 1,056,504
Work-in-process 1,041,542 964,563
Finished goods 8,990,642 8,392,905
- ------------------------------------------------------------------------
11,344,749 10,413,972
Less: adjustment to LIFO 1,612,976 1,510,752
- ------------------------------------------------------------------------
$ 9,731,773 $ 8,903,220
- ------------------------------------------------------------------------
</TABLE>
The adjustment to LIFO represents the
excess of current cost ((valued at
first-in, first-out) (FIFO)) over the LIFO
value of the inventories. The company's
LIFO reserve increased $ 102,224 and $
200,331 for the years ended September 30,
1999 and 1998, respectively.
4. PROPERTY, PLANT Property, plant and equipment consists of:
AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 1998
- ---------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $11,067,498 $10,231,675
Tools, molds and dies 1,944,329 1,913,027
Furniture, fixtures and office equipment 614,197 607,312
Leasehold improvements 116,955 322,615
Building and improvements 94,520 94,520
Land 5,000 5,000
- ---------------------------------------------------------------------
13,842,499 13,174,149
Less: accumulated depreciation and
amortization 6,507,499 5,566,903
- ---------------------------------------------------------------------
$ 7,335,000 $ 7,607,246
- ---------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Included in machinery and equipment and office
equipment at September 30, 1999 and 1998 is
approximately $3,712,000 and $2,922,000,
respectively, of equipment under capital lease
agreements (Note 7). At September 30, 1999 and
1998, the related accumulated amortization
amounts were approximately $698,000 and
$326,000, respectively. Depreciation expense
for the years ended September 30, 1999 and
1998 was approximately $1,280,000 and
$625,000, respectively.
5. 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.
Under the amended terms of the three year
revolving credit loan, the Company may borrow
up to the lesser of $7,500,000 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 (8.25% at September 30, 1999) or
the Federal Funds Rate plus 1/2%. The Company
is required to pay a commitment fee on the
average unused portion of the revolving credit
commitment of 1/4% per annum. Borrowings under
the revolving credit loan were $3,400,000 and
$3,250,000 at September 30, 1999 and 1998,
respectively. The revolving credit loan
matures in July 2001.
F-15
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 1/4% or the Federal
Funds Rate plus 1/2%. The term note is payable
in twenty quarterly installments of principal
beginning 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 proceeds of the
term note and portion of the funds drawn
against the revolving credit loan were used
to finance the APPI acquisition (Note 2).
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 9). 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. In addition, the
Company must meet certain financial covenants.
6. ACCRUED EXPENSES AND Accrued expenses consist of the following:
OTHER
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 1998
- ---------------------------------------------------------------
<S> <C> <C>
Commissions $ 73,871 $ 69,603
Payroll and related 177,091 63,531
Other 141,810 153,766
- ---------------------------------------------------------------
$392,772 $286,900
- ---------------------------------------------------------------
</TABLE>
F-16
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
7. LONG-TERM DEBT Long-term debt consists of:
AND CAPITAL LEASE
OBLIGATIONS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 1998
- ---------------------------------------------------------------------
<S> <C> <C>
Revolving credit loan (Note 5) $ 3,400,000 $ 3,250,000
Term note (Note 5) 5,800,000 6,250,000
Acquisition note (Note 2) 588,803 --
Capital lease obligations with varying
monthly payments and interest rates
ranging from 7.01% to 10.0% per annum
maturing 2000 through 2004; secured
by an interest in specific machinery
and equipment (Note 4) 2,720,171 2,518,312
- ---------------------------------------------------------------------
Subtotal 12,508,974 12,018,312
Less: current maturities 1,577,539 986,625
- ---------------------------------------------------------------------
Long-term debt and capital lease
obligations $10,931,435 $11,031,687
- ---------------------------------------------------------------------
</TABLE>
The following is a schedule by years of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments as of September 30, 1999:
<TABLE>
<S> <C>
2000 $ 870,609
2001 812,738
2002 809,290
2003 556,916
2004 116,762
- ----------------------------------------------------------------------
Total minimum lease payments 3,166,315
Less: amount representing interest 446,144
- ----------------------------------------------------------------------
Present value of net minimum lease payments $2,720,171
- ----------------------------------------------------------------------
</TABLE>
F-17
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The following is a schedule of long-term debt maturities (including capital
lease obligations) as of September 30, 1999:
<TABLE>
<S> <C>
2000 $ 1,577,539
2001 5,074,000
2002 2,502,557
2003 2,129,344
2004 1,225,534
- ------------------------------------------------------------------------
$12,508,974
- ------------------------------------------------------------------------
</TABLE>
8. LEASES The Company rents facilities in Baldwin,
Ronkonkoma and Freeport, New York and in
Biddeford and Windham, Maine under various
operating lease agreements expiring through
June 2003. In addition, the Company also
leases certain machinery and equipment and
office equipment under various capital lease
agreements expiring through 2004 (Note 7).
Rent expense amounted to approximately
$660,000 and $325,000 for the fiscal years
ended September 30, 1999 and 1998,
respectively. Future minimum rental payments
for operating leases as of September 30, 1999
are as follows:
<TABLE>
<S> <C>
2000 $378,000
2001 210,000
2002 210,000
2003 158,000
----------------------------------
$956,000
----------------------------------
</TABLE>
9. STOCKHOLDERS' (A) WARRANTS
EQUITY
At September 30, 1999, the Company had 135,864
stock warrants outstanding. The warrants to
purchase the Company's common stock were held
by the following parties:
F-18
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Officers/stockholders/consultants (1) 10,864
Bank (2) 125,000
- ---------------------------------------------------------------
135,864
- ---------------------------------------------------------------
</TABLE>
(1) Each warrant held by members of management
and certain stockholders grant them the
right to purchase one share of common
stock at $2.00 per share. These warrants
have a remaining contractual life of 0.3
years.
(2) As discussed in Note 5, 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 and March
1998 allows the Board of Directors to issue
options to purchase an aggregate of 1,500,000
shares of the Company's common stock to key
employees.
F-19
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
As of September 30, 1999, the Company had
issued options to purchase an aggregate of
400,500 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 1999 and 1998: no dividend yield, expected
volatility of 46.00%, risk free interest
rates of 4.80% to 5.80%, with an expected
life of 7.5 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 1999
and 1998 by approximately $94,000 and
$18,000, respectively, and net income per
share would have been $.08 and $.21 for
each year, respectively.
The following table summarizes information
about stock options outstanding at September
30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
Remaining Exercise Exercise
Contractual Price Price
Life (years)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Exercise Prices:
$ .35 4,600 5.5 $ .35 4,600 $ .35
$ 2.00-3.00 45,000 6.6 2.92 45,000 2.92
$ .35 - 2.44 79,400 7.5 1.80 62,900 1.65
$ 1.88-2.25 50,000 8.4 1.94 34,000 1.92
$ 1.06-1.31 221,500 9.6 1.15 156,300 1.18
- --------------------------------------------------------------------------------
400,500 8.7 $1.57 302,800 $1.61
- --------------------------------------------------------------------------------
</TABLE>
Changes in qualified and non-qualified options and warrants outstanding are
summarized as follows:
F-20
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Warrants Options
------------------------- --------------------------------------------
Shares Exercise Price Shares Option price Weighted
per share average
exercise price
---------------------------------------------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Outstanding
September 30, 1997 120,864 $ .30- $ 4.25 1,176,400 $ .35 - $ 3.00 $ 2.32
Granted 125,000 $ 2.00 50,000 $ 1.88 - $ 2.25 $ 1.94
Cancelled - - (135,000) $ 2.35 - $ 3.00 $ 2.43
Exercised (50,000) $ .30 (38,000) $ 1.00 - $ 2.00 $ 1.47
---------------------------------------------- ----------- ---------------- ---------------
Outstanding
September 30, 1998 195,864 $ 2.00- $4.25 1,053,400 $ .35 - $ 3.00 $ 2.32
Granted - - 221,500 $ 1.06 - $ 1.31 $ 1.15
Cancelled - - (874,400) $ 2.25 - $ 3.00 $ 2.37
Exercised - - - - -
Expired 60,000 $ 3.25- $4.25 - - -
---------------------------------------------- ----------- ---------------- ---------------
Outstanding
September 30, 1999 135,864 $2.00 400,500 $ .35 - $ 3.00 $ 1.56
---------------------------------------------- ----------- ---------------- ---------------
</TABLE>
At September 30, 1999, there were 302,800 options exercisable at a weighted
average exercise price of $1.61. The weighted average fair value of options
granted during fiscal 1999 and 1998 was $.70 and $1.94, respectively.
10. COMMITMENTS The Company has a discretionary 401(k) plan.
For the years ended September 30, 1999 and
1998, the Company contributed $ 26,915 and
$3,442, respectively.
11. TAXES ON INCOME Provisions for income taxes (benefit) on
income in the consolidated statement of
operations consist of the following:
F-21
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Current:
Federal $ 359,644 $ 425,000
State 27,000 25,000
- ------------------------------------------------------------------
Total current: 386,644 450,000
- ------------------------------------------------------------------
Deferred:
Federal (90,000) 113,000
State (17,000) 21,000
- ------------------------------------------------------------------
(107,000) 134,000
- ------------------------------------------------------------------
Total taxes on income $ 279,644 $ 584,000
- ------------------------------------------------------------------
</TABLE>
Deferred tax (assets) liabilities consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Tax depreciation in excess of
book $ 662,000 $ 548,000
Investment tax credit
carryforward (181,000) (198,000)
Alternative minimum tax credit (155,000) --
Provision for accounts receivable (22,000) (16,000)
Provision on note receivable
(included in other assets) (32,000) (35,000)
Inventory capitalization (39,000) (30,000)
Accrued bonus (37,500) --
Other temporary differences - net (34,500) (16,000)
- ------------------------------------------------------------------
Deferred tax liabilities 161,000 253,000
Valuation allowance -- 15,000
- ------------------------------------------------------------------
Net deferred tax liabilities $ 161,000 $ 268,000
- ------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The provision for income taxes on income before taxes differs from the
amounts computed applying the applicable Federal statutory rates due to the
following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999 1998
- ---------------------------------------------------------------
<S> <C> <C>
Provision for Federal income taxes at
the statutory rates $263,400 $549,000
Increase (decrease):
State taxes, net of Federal tax
benefit 6,600 30,000
Other 9,644 5,000
- ---------------------------------------------------------------
Provision for taxes on income $279,644 $584,000
- ---------------------------------------------------------------
</TABLE>
12. CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
Supplemental disclosure of cash flow
information
Cash paid during the year:
Interest $1,018,000 $378,293
- -----------------------------------------------------------------
Income taxes $ 56,380 $561,575
- -----------------------------------------------------------------
Supplemental schedule of non-cash investing
and financing:
Equipment acquired under capital
lease $795,000 $232,000
Value of warrants issued in
connection with financing -- $ 97,000
</TABLE>
F-23
<PAGE>
ALLIED DEVICES CORPORATION
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
In connection with the business acquisitions
(Note 2), the Company used cash as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
- ----------------------------------------------------------------------
<S> <C>
Fair value of assets acquired, excluding cash* $9,827,036
Less liabilities assumed** 1,546,362
- ----------------------------------------------------------------------
Net cash paid (including acquisition costs) $8,280,674
- ----------------------------------------------------------------------
</TABLE>
*excludes non-cash portion of purchase price
relating to stock issued totaling $891,500.
**the Company also refinanced approximately
$1,233,000 of the assumed capitalized leases
in conjunction with this acquisition. In
fiscal 1999, in connection with the above
acquisition, the Company incurred an
additional non-cash charge of $ 588,803,
relating to contingent consideration earned
in connection with this acquisition.
13. SUBSEQUENT EVENTS In November 1999, the Company entered into a
new lease for a new manufacturing facility
that expires in April 2010 and requires total
minimum rental payments of $4,999,000.
F-24
