-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HTyWaz/znxAtxJ4OIPY76svpSbBoq6C26F9jqL4L/CnSinOe8VcOVQrJrNmfMyBM HttVcqenrt+6d++IVDYd4g== 0001047469-99-001069.txt : 19990114 0001047469-99-001069.hdr.sgml : 19990114 ACCESSION NUMBER: 0001047469-99-001069 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED DEVICES CORP CENTRAL INDEX KEY: 0000869495 STANDARD INDUSTRIAL CLASSIFICATION: BOLTS, NUTS, SCREWS, RIVETS & WASHERS [3452] IRS NUMBER: 133087510 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-24012 FILM NUMBER: 99505776 BUSINESS ADDRESS: STREET 1: 2365 MILBURN AVENUE CITY: BALDWIN STATE: NY ZIP: 11510 BUSINESS PHONE: 5162239100 FORMER COMPANY: FORMER CONFORMED NAME: ILLUSTRIOUS MERGERS INC DATE OF NAME CHANGE: 19600201 10KSB40 1 10KSB40 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, 1998 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 28, 1998 Common Stock, $.001 par value ----------------------------- 4,947,942 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: $18,448,483 The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last sale price on December 31,1998 is approximately $4,737,634. 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 used in the manufacture and maintenance of 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 poor customer service and 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 85,000 copies of its printed catalog over the last decade, of which approximately 35,000 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 in the Company's Internet website, making it simple for users to download the Company's standard technical data and drawings. Management projects that the catalog and its search tools will be ready for on-line interactive access on the Internet through a broad range of website links in January, 1999. The breadth and standardized nature of the 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, such as 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 constitute a small percentage of the OEM's direct cost of manufacturing, typically $250 to $800 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 1 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 as far as possible 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 35% of shipments. Geographic concentration 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 dividing operations into two 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 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.
1998 $14,507,000 1997 $13,604,000 1996 $15,145,000 1995 $13,363,000
2
1994 $10,509,000
The decrease in revenues for 1997 was the result of a sharp downturn in one sector of the U.S. economy (semiconductor manufacturing equipment). While such severe downturns have been abnormal for the industries served by Allied, they are not unprecedented. In this instance, it was 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 the year caused yet another downturn that appears to be continuing into fiscal 1999. The Company has therefore undertaken to replace this lost business with additional products and more intensive marketing. The return to growth in fiscal 1998 is attributable to these efforts. 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. MANUFACTURING SERVICE 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 on 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 3 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 diversified Joplin, Missouri 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 of complex Biddeford, Maine parts made from exotic materials and used in the medical, flow control, instrument, and seal/gland industries. Each of the support 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 oriented to shorter runs with higher margins. Pricing is based on combined material cost and standard hourly shop rates for labor and overhead. Approximate revenues for Manufacturing Services were as follows for the last three years:
Year Ended September 30, ------------------------------------------------------- 1998 1997 1996 ------------------------------------------------------- Sales to Catalog Operations * $2,422,000 $2,360,000 $2,812,000 Sales to Outside Customers 3,841,000 2,612,000 2,648,000 -------------------------------------------------------------------------------------------- Total Revenues $6,263,000 $4,972,000 $5,460,000 -------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------
----------- * These revenue figures for Catalog Operations represent interdivisional sales that are eliminated in consolidation. 4 Sales to Catalog Operations increased commensurate with the overall volume of shipments by Catalog Operations. The increase in Sales to Outside Customers in fiscal 1998 was 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 has stepped up efforts to market its Manufacturing Services, 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 content (and related cost) in its product. The Company is prepared to commit capital to making such improvements, 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. 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 management's opinion, loss of qualification under MIL-STD-45208A 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. The Company's measuring instruments are calibrated to standards traceable to the National Bureau of Standards. To ensure consistent awareness and application of quality procedures, management has established an on-going program of meetings, lessons and training sessions through its quality assurance manager, disseminating information 5 on basic skills, policies, procedures and new developments. Under the auspices of the New York State Industrial Effectiveness Program, the Company undertook in fiscal 1998 to implement a program of continuous improvement in pursuit of qualification under "Total Quality Management" and ISO-9000 (a voluntary set of standards and guidelines provided by the International Standards Organization). A certification audit is scheduled for February, 1999, to register the Company's first facilities as conforming to ISO-9002. Upon successful completion of that audit, management intends to continue with the process until all of the Company's facilities have been certified, with the goal of Company-wide registration by the end of fiscal 2000. 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 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 plans have commenced (principally an on-going advertising campaign and publication of an Internet catalog), while others are in development. Management is pursuing its acquisition strategy, having completed two acquisitions in fiscal 1998 and having targeted a series of additional strategic candidates for acquisition in fiscal 1999. Effectively all of the capital deployed in these acquisitions was raised in the form of senior debt. 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. 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 a widespread customer awareness in the markets it serves. Thus the principal thrust of the Company's plan is to make its target 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 6 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 carry out an acquisition program. By its own assessment, management views the market in which it competes as large (over $1 billion), highly fragmented, and poised for 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. 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 209 hourly personnel. Wage rates and benefits are competitive in the labor markets from which the Company draws. Thirty of its hourly employees are represented by two local unions (18 by the National Organization of Industrial Trade Unions ("NOITU") and 12 by Local 999 of the Teamsters). The contract with Local 999 expires in August 2000, and the contract with NOITU expires in November 2000. 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. 7 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. Nine 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 7.785% to 10.288%, and expiration dates range from 1999 to 2003. The aggregate value of these leases was $2,518,000 as of September 30, 1998. 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.
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 1999* Catalog Manufacturing Operations 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
- --------------------- *At the mutual convenience of the landlord and the Company, this facility has been leased on a month-to-month basis. Management expects to execute a new 3-year lease in January 1999. ITEM 3 - LEGAL PROCEEDINGS The Company knows of no litigation pending, threatened, or contemplated, or unsatisfied judgements, or any proceedings 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. 8 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 1,721 trades representing approximately 2,929,370 shares (as reported by NASDAQ in their routine statistical summaries) were completed during fiscal 1998. As of September 30, 1998, the Company had 441 holders of record of its common stock. The Company has 11 listed market-makers, and the trading ranges by quarter for the year were as follows:
Fiscal 1998 Fiscal 1997 --------------------- ----------------- High Low High Low ---- --- ---- --- First Quarter ........... $2.8125 $2.00 $3.0625 $1.9375 Second Quarter .......... $2.4375 $1.875 $3.375 $2.125 Third Quarter ........... $2.5625 $2.125 $3.0625 $2.375 Fourth Quarter .......... $3.00 $1.5312 $2.875 $2.0625
9 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.
Year Ended September 30, --------------------------------------------- 1998 1997 ---- ---- STATEMENT OF OPERATIONS DATA: Net sales ..................... $18,448,483 $16,215,931 Net income .................... $ 1,030,673 $ 1,061,883 Earnings per share: Basic ...................... $ .22 $ .24 Diluted .................... $ .22 $ .22 Weighted average number of shares outstanding Basic ...................... 4,699,526 4,472,141 Diluted .................... 4,763,404 4,751,739 BALANCE SHEET DATA: Total assets .................. $22,973,619 $10,976,983 Working capital ............... $ 9,594,752 $ 7,307,751 Long-term debt ................ $11,031,687 $ 2,084,239 Stockholders' equity .......... $ 9,116,101 $ 7,025,928
10 RESULTS OF OPERATIONS: YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1997. 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. 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. Management expects that, for the first year, the revamped operation will be dedicated to gaining a thorough understanding of production economies and the existing marketing mix (product focus, pricing, distribution strategy, competition, inventory balancing, and customer service strategy). Thereafter, management expects to be aggressive in promoting the Kay product line, both through its Catalog Operations and under the Kay trade name. - Atlantic Precision Products, Inc. ("APPI" or "Atlantic") is a state-of-the-art CNC machining operation with locations in Biddeford and Windham, Maine. 11 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 its 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 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, 12 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, and management expects the period of transition following each acquisition to be approximately six months. Following this, management projects a return to gross margins 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. - 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. Management projects that this will come into line with the Company's objectives by the end of the first quarter of fiscal 1999. 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; 13 (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. RESULTS OF OPERATIONS: YEAR ENDED SEPTEMBER 30, 1997, COMPARED WITH YEAR ENDED SEPTEMBER 30, 1996 Net sales for fiscal 1997 were $16,216,000 as compared to $17,793,000 in fiscal 1996. This decrease of 8.9% was principally the result of a sharp downturn in the semiconductor equipment sector of the U.S. economy. The impact of this was evident in the Company's shipments from July, 1996 through August, 1997, during which time the Company's customers in that industry virtually stopped all shipments of materials for production requirements. Collectively, all other sectors showed continued growth, materializing in both Catalog Operations and Manufacturing Services. Management continues to attribute such growth to a combination of factors: (1) a continuing series of advertisements in various industry/trade magazines, which appear to be gradually creating more wide-spread awareness of the Company and its products and services; (2) carrying out of a series of programs of continuous improvement, 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) continued strength in certain sectors of the U.S. economy serviced by the Company. In particular, the aerospace instrumentation, medical equipment, robotics and scientific instrumentation sectors remained healthy throughout the year. The Company's gross margin was 36.49% of net sales in fiscal 1997, up from 33.60% in fiscal 1996. The lower level of sales activity permitted the Company 14 to manufacture more and purchase less, resulting in the following changes from fiscal 1996: (1) net materials expense decreased as a percentage of sales, increasing gross margins by 4.75%; and (2) the Company shipped a lower volume of product on relatively stable costs of factory operations, decreasing gross margins by 1.86%. The Company did not increase prices materially in fiscal 1997. Selling, general and administrative expenses as a percentage of net sales were 24.8% in fiscal 1997, as compared to 23.2% in fiscal 1996. While actual expenditures in fiscal 1997 were $98,000 lower than in fiscal 1996, such costs did not decrease as much as sales volume. The following factors account for these changes: (1) selling and shipping expenses and commissions increased as a percentage of net sales by approximately 0.4% as shipping volume decreased more than spending on the Company's marketing strategy; (2) administrative payroll, benefits, and expenses increased by $133,000, resulting in an increase of such expenses of 1.8% as a percentage of net sales; and (3) other administrative expenses (collectively) decreased as a percentage of net sales by approximately 0.6%. Interest expense decreased by $60,000 in fiscal 1997, as the Company lowered its borrowings and enjoyed more favorable rates as a result of its new credit agreement. Provision for income taxes in fiscal 1997 was $629,000, or 37.2% of pre-tax income. See the notes to the consolidated financial statements for a reconciliation to the federal statutory rate. YEAR 2000 Management believes that all of the Company's computer systems, applications and operating software are Year 2000 compliant. The Company has also undertaken a review of the major vendors and third party suppliers critical to its operation to assess their Year 2000 readiness. Although the Company is not aware that any such company's systems are noncompliant in a way that will materially adversely affect the Company, there can be no assurances that the computer systems of other companies upon which the Company's systems rely will be timely compliant, or that such failure to comply by another company would not 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 healthy during fiscal 1998 as operations generated net cash of $599,000. In addition, financing activities (net) generated cash of $8,212,000 over the course of the year. These funds were used 15 for capital expenditures (net) of $417,000 and acquisition financing of $8,281,000, with the remaining $113,000 being added to cash on hand. Net working capital increased by $2,287,000 to $9,595,000 during the year. The following are changes in current assets and current liabilities for the year ended September 30, 1998: - Accounts receivable (net of reserve for doubtful accounts) increased by $200,000 during the year. This increase was a function of lower shipping rates at year end ($346,000); the acquisition of $91,000 of Kay receivables; the acquisition of $576,000 of Atlantic receivables; and a decrease in the average collection period from 47 days at the end of fiscal 1997 to 45 days at the end of fiscal 1998 ($121,000). - Inventories increased by $2,501,000 during the fiscal year, with the turnover rate decreasing from 1.6 times in fiscal 1997 to 1.4 times at the end of fiscal 1998. Of this increase, a portion ($1,595,000) was acquired with Kay and Atlantic. The balance ($906,000) built up from the combined effects of losing the computer-based inventory and production control systems and a sharp slowdown with many of the Company's most important customers. Current industrial procurement practices, Kanban and demand-pull systems in particular, leave manufacturers vulnerable to such temporary build-ups, since production builds on the basis of forecasted needs as much as three months in advance of actual demand. Management expects that most of the inventory built up at year-end will be shipped during fiscal 1999 as the industrial sectors impacted by Asia recover. 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 improvement in the inventory turnover rate. - Prepaid expenses and other current assets increased by $298,000 as the Company capitalized certain prepaid administrative expenses $32,000, and accrued for casualty losses reimbursable from insurance of $266,000. - Current liabilities, exclusive of current portions of long-term debt and capital lease obligations, decreased by $43,000 (net), as the acquisitions completed during the year added $314,000 to payables, acquired payables were brought to standard terms (a decrease of $169,000), the Company's average payment period on accounts payable and accrued expenses was shortened from 36 days in fiscal 1997 to 35 days in fiscal 1998 (a decrease of $43,000), and the Company's income taxes payable decreased by $145,000. - Current portions of long-term debt and capital lease obligations increased by $868,000 (net) as a function of the terms of acquisition financings. - Cash balances increased by $113,000. 16 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 1998, to finance acquisitions and to allow for on-going working capital requirements, the Company entered into a new credit facility with its bank consisting of a $6.25 million term loan, a $10 million revolving credit facility, and an increase to the existing equipment lease line from $2 million to $3.2 million. The Company, at the end of fiscal 1998, was using approximately $3,250,000 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 1998 amounted to $637,000 ($869,000 including capital leases, net of equipment dispositions), as compared to $309,000 ($328,000 in new equipment, net of $19,000 in equipment dispositions; no new equipment leases) in fiscal 1997. These expenditures represent two facets of the Company's capital spending program: (1) a continuation of management's program of continuous improvement through modernization and automation of facilities ($709,000), and (2) support and installation of a comprehensive new computer system ($168,000). Capital spending plans for fiscal 1999 call for additional investment in software and hardware for the Company's computer system and a somewhat increased level of additions to high-efficiency production machinery. Management expects to fund such spending plans out of working capital and credit facilities. During the second quarter, the Company acquired Kay Pneumatic Valves, Inc. for $850,000 in cash. Additional expenditures attendant to this acquisition amounted to approximately $110,000, including legal fees, moving expenses, space preparation, additions to tooling and inventories, training costs, and certain marketing expenses. The acquisition price was funded through new term debt of $1,000,000, provided by the Company's bank and secured in the fixed assets of the Company. During the third quarter, the Company acquired effectively all of the assets, properties, business and rights of, and assumed specified liabilities of Atlantic. 17 Consideration for the assets, net of liabilities, of Atlantic consisted of the following: (i) $7,237,500 in cash, delivered at Closing; (ii) 250,000 shares of the Company's common stock delivered at Closing; and (iii) a commitment to make additional payments to the seller based on the performance of APPI during each of the first three one-year operating periods following the Closing. $6,250,000 of the cash consideration at closing was provided by the term loan and $987,500 was drawn from the revolving credit facility. Refinancing of assumed term debt in the amount of $1,233,000 was completed by drawing against the Company's equipment lease line. 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 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 plans have commenced (principally an on-going advertising campaign and publication of an Internet catalog), while others are in development. Management is pursuing its acquisition strategy, having completed two acquisitions in fiscal 1998 and having targeted a series of additional strategic candidates for acquisition in fiscal 1999. 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. 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 18 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. Comprehensive Income In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which established standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. SFAS 130 is not expected to materially impact the Company's disclosures when adopted. B) Reporting Segments of an Enterprise In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise". SFAS 131 establishes standards for the way public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. The Company is currently evaluating the impact of the statement on its financial reporting. 19 C) 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, 1999. Because of the recent issuance of this standard, management has been unable to fully evaluate the impact, if any, the standard will have on future financial statements. 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 PART III ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS The Executive Officers and Directors of the Company are as follows:
NAME AGE POSITION(S) HELD WITH COMPANY - ------ ------- ------------------------------- Mark Hopkinson 51 Chairman of the Board of Directors, Chief Executive Officer, Secretary P.K. Bartow 50 President, Director Salvator Baldi 76 Executive Vice President, Director Andrew J. Beck 50 Assistant Secretary Christopher T. Linen 51 Director Michael Michaelson 76 Director Paul M. Cervino 44 Principal Financial Officer, Principal Operating Officer, Principal Accounting Officer, Treasurer
21 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 51, 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. P.K. Bartow, age 50, has been President of the Company since March 1994. He also served as Vice President of the Company from when he and Mr. Hopkinson organized its acquisition in 1981 until March 1994. Prior to acquiring Allied Devices, Mr. Bartow had joined the Nicholson Group in 1978, and performed facility and feasibility studies for emerging growth companies. While at Allied Devices, he has been the Director of Marketing from 1981 onwards, and in that capacity has set up a network of independent manufacturers' representatives across the United States and in the United Kingdom, Israel and selected regions in Canada. He has also organized and published Allied Devices' 650+ page catalog. Mr. Bartow received a B.A. degree from Williams College in 1970, and a M.Arch degree from the University of Pennsylvania in 1974. Salvator Baldi, age 76, 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. 22 ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS (CONTINUED) Andrew J. Beck, age 50, has been a partner with the law firm of Haythe & Curley since prior to 1989. He became Assistant Treasurer 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. Christopher T. Linen, age 51, 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 76, has been a Director of the Company since 1990. He has been President and sole stockholder of Rainwater Enterprises, Ltd. 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 44, has been the Chief Operating Officer of the Company since November 1998. From January 1995 until October 1998, he served as Chief Financial Officer. Prior to 1995, 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 ITEM 10 - EXECUTIVE COMPENSATION The following table sets forth the salary and bonus compensation paid during the fiscal years ended September 30, 1998, 1997 and 1996 to the Chairman and Chief Executive Officer of the Company. No other Executive Officer of the Company received fiscal 1998 salary and bonus compensation which exceeded $100,000. The Company's Directors receive $1,250 per meeting for their services as such and reimbursement for any expenses they may incur in connection with their services as Directors.
"Summary Compensation Table" - -------------------------------------------------------------------------------------------------- Name and Principal Fiscal Year Salary Other Annual Long Term Compensation Position Compensation Awards-Options/ SAR's - -------------------------------------------------------------------------------------------------- Mark Hopkinson, 1998 $110,005 $0 0 Chairman and Chief Executive Officer 1997 $97,221 $0 27,400 1996 $98,098 $0 29,000
Under the terms of the Company's 1993 Incentive Stock Option Plan, the following options were granted to the Chief Executive Officer of the Company during fiscal year 1998.
"Option/SAR Grants in Last Fiscal Year" - -------------------------------------------------------------------------------------------------- Name Number of % of Total Options Exercise or Expiration Securities Granted to Base Price Date Underlying Employees in Fiscal ($/Sh) Options Granted Year - -------------------------------------------------------------------------------------------------- Mark Hopkinson 0 0%
Aggregated Options/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values.
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 - -------------------------------------------------------------------------------------------------- Mark Hopkinson - $ - 257,000/0 $43,706/$0
(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 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 1998, the Company had granted options to purchase an aggregate of 1,192,000 shares to key employees and Directors, with exercise prices ranging from $0.35 to $3.00 per share. During fiscal 1998, the Company granted options to purchase 50,000 shares of the Company's common stock, at exercise prices ranging from $1.88 to $2.25, to 13 individuals (one executive, and twelve non-executive managers). Also in fiscal 1998, options to purchase 135,000 shares expired unexercised with exercise prices ranging from $2.35 to $ 3.00. 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, 1998:
Name Number of Current Shares Owned Percentage ------------------------------------------------------------------------- Mark Hopkinson(1) (3) (7) 2365 Milburn Avenue 1,012,571 19.76% PO Box 502 Baldwin, NY 11510 P.K. Bartow (1) (4) (7) 850,688 16.73% 2365 Milburn Ave. PO Box 502 Baldwin, NY 11510 Salvator Baldi (1) (5) (7) 756,473 14.62% 2365 Milburn Ave. PO Box 502 Baldwin, NY 11510 Michael Michaelson (2)(6)(7) 183,584 3.63% 2365 Milburn Ave. PO Box 502 Baldwin, NY 11510 Christopher T. Linen (2)(10) 203 Poverty Hollow Road 115,000 2.31% Redding, CT 06896 Andrew J. Beck (8)(9) 16,000 0.30% 71 Willow Street, Apt. 1 Brooklyn, NY 11201 Paul M. Cervino (8) (11) 110,000 2.18% 2365 Milburn Ave. PO Box 502 Baldwin, NY 11510 All Executive Officers and 3,044,316 51.55% Directors as a Group (7 persons)
25 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. Mr. Hopkinson owns 33,500 shares in his own name. Also included in Mr. Hopkinson's shareholdings are 5,660 shares represented by warrants exercisable by Mr. Hopkinson until December 31, 1999 and 257,000 shares represented by currently exercisable options. Mr. Hopkinson disclaims beneficial ownership of 15,700 shares owned by his wife. (4) Included in Mr. Bartow's shareholdings are 1,722 shares represented by warrants exercisable by Mr. Bartow until December 31, 1999 and 225,000 shares represented by currently exercisable options. 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 and 225,000 shares represented by currently exercisable options. (6) Included in Mr. Michaelson's shareholdings are 2,584 shares represented by warrants exercisable by Mr. Michaelson until December 31, 1999 and 110,000 shares represented by currently exercisable options. 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, 1998. (8) Officer only. (9) Includes 10,000 shares represented by currently exercisable options. (10) Includes 25,000 shares represented by currently exercisable options. (11) Includes 94,400 shares represented by currently exercisable options. 26 ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In April 1990, Allied Devices granted Michael Michaelson, a Director, 50,000 warrants to purchase Allied Devices shares in return for uncompensated service to the Company. Each warrant was exercisable at a price of $.30 per warrant into one share of Common Stock until April 15, 1998. Mr. Michaelson exercised these warrants in fiscal 1998. 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:
Principal Value of Number of Cash Paid New Notes Warrants --------- --------- --------- 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
Each warrant is 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. 27 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 A report on Form 8-K was filed with the Securities and Exchange Commission in July, 1998. An amendment to that report was filed on Form 8-K/A in September, 1998. 28 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 -------------------------- 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 - ---------- ----- ---- Chairman of the Board, - ------------------------- Principal Executive Officer, Mark Hopkinson and Director - ------------------------- President and Director Philip Key Bartow - ------------------------- Executive Vice President Salvator Baldi and Director - ------------------------- Director Michael Michaelson - ------------------------- Director Christopher T. Linen - ------------------------- Principal Financial Officer, Principal Operating Officer, Paul M. Cervino Principal Accounting Officer, Treasurer
29 CONSENT OF BDO SEIDMAN, LLP 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 8, 1999 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, 1998. BDO SEIDMAN, LLP January 13, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ALLIED DEVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1998 AND 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F-1 ALLIED DEVICES CORPORATION AND SUBSIDIARIES INDEX - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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
F-2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Allied Devices Corporation Baldwin, New York We have audited the accompanying consolidated balance sheets of Allied Devices Corporation and subsidiaries as of September 30, 1998 and 1997 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 financial consolidated statements referred to above present fairly, in all material respects, the financial position of Allied Devices Corporation and subsidiaries at September 30, 1998 and 1997, 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 8, 1999 F-3 ALLIED DEVICES CORPORATION AND SUBSIDIARIES BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1998 1997 - ------------------------------------------------------------------------------------------------------------------- ASSETS (NOTE 5) cURRENT: Cash $ 275,238 $ 162,094 Accounts receivable, net of allowance for doubtful accounts of $42,706 and $47,876, respectively (Note 5) 2,526,068 2,326,179 Inventories (Notes 3 and 5) 8,903,220 6,402,688 Prepaid expenses and other current assets 366,057 67,606 Deferred income taxes (Note 10) 41,000 41,000 - ------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 12,111,583 8,999,567 PROPERTY, PLANT AND EQUIPMENT, AT COST, NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION (NOTES 4, 5 AND 7) 7,607,246 1,837,225 ---------- --------- EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET OF ACCUMULATED AMORTIZATION OF $412,569 AND $349,661 (NOTE 2) 2,880,523 88,664 ---------- --------- OTHER ASSETS 374,267 51,527 - ------------------------------------------------------------------------------------------------------------------- $22,973,619 $10,976,983 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT: Accounts payable $ 1,243,306 $ 1,186,291 Income taxes payable (Note 10) - 145,263 Accrued expenses and other (Note 6) 286,900 241,781 Current portion of long-term debt and capital lease obligations (Note 7) 986,625 118,481 - ------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 2,516,831 1,691,816 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (NOTES 5 AND 7) 11,031,687 2,084,239 DEFERRED INCOME TAXES (NOTE 10) 309,000 175,000 - ------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 13,857,518 3,951,055 - ------------------------------------------------------------------------------------------------------------------- COMMITMENTS (NOTES 2, 8 AND 9) STOCKHOLDERS' EQUITY (NOTES 2 AND 9) Common stock, $.001 par value, authorized 25,000,000 shares, issued and outstanding 4,947,942 and 4,609,942 4,948 4,610 Additional paid-in capital 3,624,721 2,565,559 Retained earnings 5,486,432 4,455,759 - ------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 9,116,101 7,025,928 - ------------------------------------------------------------------------------------------------------------------- $22,973,619 $10,976,983 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-4 ALLIED DEVICES CORPORATION AND SUBSIDIARIES STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ YEAR ENDED SEPTEMBER 30, 1998 1997 - ------------------------------------------------------------------------------------------------------------ NET SALES $18,448,483 $16,215,931 COST OF SALES 12,163,602 10,298,766 - ------------------------------------------------------------------------------------------------------------ GROSS PROFIT 6,284,881 5,917,165 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,282,634 4,022,326 - ------------------------------------------------------------------------------------------------------------ INCOME FROM OPERATIONS 2,002,247 1,894,839 INTEREST EXPENSE, NET 387,574 203,956 - ------------------------------------------------------------------------------------------------------------ INCOME BEFORE PROVISION FOR TAXES ON INCOME 1,614,673 1,690,883 TAXES ON INCOME (NOTE 10) 584,000 629,000 - ------------------------------------------------------------------------------------------------------------ NET INCOME $ 1,030,673 $ 1,061,883 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ NET INCOME PER SHARE - BASIC (NOTE 1) $ .22 $ .24 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ NET INCOME PER SHARE - DILUTED ( NOTE 1) $ .22 $ .22 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-5 ALLIED DEVICES CORPORATION AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Common-Stock $0.001 par value -------------------------------------- Additional Total Number of Paid-in Retained stockholders Shares Amount Capital Earnings equity - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1996 4,401,842 $4,402 $2,409,086 $3,393,876 $5,807,364 NET INCOME - - - 1,061,883 1,061,883 PROCEEDS FROM THE EXERCISE OF OPTIONS AND WARRANTS (NOTE 9) 208,100 208 156,473 - 156,681 - ---------------------------------------------------------------------------------------------------------------------------------- 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 ACQUISITION (NOTE 2) 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 (NOTE 9) 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 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-6 ALLIED DEVICES CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (NOTE 11)
- --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, 1998 1997 - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,030,673 $ 1,061,883 - --------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 701,362 485,550 Deferred income taxes 134,000 (48,188) Gain on sale and involuntary conversion of equipment (142,825) (12,428) Provision for doubtful accounts - 1,899 Changes in assets and liabilities, net of effects from acquisitions: (Increase) decrease in: Accounts receivable 468,422 (134,472) Inventories (906,249) (520,132) Prepaid expenses and other current assets (298,451) (25,987) Other assets (30,740) 23,320 Increase (decrease) in: Accounts payable and accrued expenses (211,628) (102,721) Income taxes payable (145,263) 89,570 - --------------------------------------------------------------------------------------------------------------------- Total adjustments (431,372) (243,589) - --------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 599,301 818,294 - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (636,907) (328,468) Business acquisitions, net of cash acquired (8,280,674) - Proceeds from sale and involuntary conversion of equipment 219,886 19,750 - --------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (8,697,695) (308,718) - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from term note 6,250,000 - Increase in revolving credit borrowings 1,325,000 - Proceeds from financing of equipment 1,067,400 - Principal payments on long-term debt and capital lease obligations (291,408) (559,082) Net proceeds from sale of common stock, options and warrants 71,000 156,681 Deferred financing costs (210,454) - - --------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,211,538 (402,401) - --------------------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH 113,144 107,175 CASH, BEGINNING OF PERIOD 162,094 54,919 - --------------------------------------------------------------------------------------------------------------------- CASH, AT END OF PERIOD $ 275,238 $ 162,094 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-7 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1. SUMMARY OF (a) BUSINESS ACCOUNTING POLICIES The Company is comprised of Allied Devices Corporation ("ADCO"), and its wholly-owned subsidiaries, Empire Tyler Company ("Empire") and APPI, Inc. ("APPI"), (collectively the "Company"). The Company is engaged primarily in the manufacture and distribution of standard and custom precision mechanical 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 useful lives are as follows:
Machinery and equipment 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 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED 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 During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings Per Share". The statement, effective for financial statements issued after December 15, 1997, provides for the calculation of "basic" and "diluted" net 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. As required by this statement, all periods presented have been restated to comply with the provisions of SFAS 128. A reconciliation of the shares used in calculating basic and diluted earnings per share follows:
YEAR ENDED SEPTEMBER 30, 1998 1997 --------------------------------------------------------------- Weighted average shares outstanding - basic 4,699,526 4,472,141 Dilutive effect of options and warrants 63,878 279,598 --------------------------------------------------------------- Weighted average shares outstanding diluted 4,763,404 4,751,739 --------------------------------------------------------------- ---------------------------------------------------------------
Options and warrants totalling 988,500 and 331,500 at September 30, 1998 and 1997, respectively, were antidilutive and accordingly, excluded from the diluted calculation. F-9 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED 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 reported periods. Actual results could differ from those estimates. (k) FAIR VALUE FINANCIAL INSTRUMENTS The carrying amounts of financial instruments, including cash and short-term debt, approximated fair value as of September 30, 1998 and 1997. The carrying value of long-term debt and obligations under capital leases, including the current portion, approximates fair value as of September 30, 1998 and 1997 based upon the borrowing rates currently available to the Company for bank loans with similar terms and average maturities. F-10 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (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 significant. (m) RECENT ACCOUNTING PRONOUNCEMENTS (i) COMPREHENSIVE INCOME In June, 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which addresses standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. SFAS 130 is not expected to materially impact the Company's disclosures when adopted. F-11 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (ii) REPORTING FOR SEGMENTS OF AN ENTERPRISE In June 1997, the Financial Accounting Standards Board issued SFAS No., 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise". SFAS 131 establishes standards for the way public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. The Company is currently evaluting the impact of the statement on its financial reporting. (iii) 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, 1999. Because of the recent issuance of this standard, management has been unable to evaluate fully, the impact if any, the standard will have on future financial statements. F-12 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (n) RECLASSIFICATION Certain 1997 balances were reclassified to conform with the 1998 presentation. 2. ACQUISITIONS (a) On July 8, 1998 (effective as 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 tangible consideration was $7,237,500 in cash and 250,000 shares of the Company's common stock. The common stock portion of the tangible 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 tangible portion of 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 with proceeds from a new credit agreement with its bank (see Note 5). 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, 1998, no contingent consideration has been recorded. All such contigent consideration is subject to a subordination agreement between the Seller and the Lending Institution (note 5). The acquisition of APPI has been 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. F-13 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The summarized unaudited pro forma results set forth below assumes the acquisition occurred as of the beginning of each of these periods:
YEAR ENDED SEPTEMBER 30, 1998 1997 -------------------------------------------------------------------- Net sales $ 24,660,580 $ 25,195,387 Net income 1,290,135 2,015,834 Net income per share - basic $ .26 $ .43 Net income per share - diluted $ .26 $ .40 -------------------------------------------------------------------- --------------------------------------------------------------------
(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. 3. INVENTORIES Inventories are summarized as follows:
SEPTEMBER 30, 1998 1997 ---------------------------------------------------------------- Raw materials $ 1,056,504 $ 310,260 Work-in-process 964,563 514,437 Finished goods 8,392,905 6,888,412 ---------------------------------------------------------------- 10,413,972 7,713,109 Less: adjustment to LIFO 1,510,752 1,310,421 ---------------------------------------------------------------- $ 8,903,220 $6,402,688 ---------------------------------------------------------------- ----------------------------------------------------------------
F-14 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The adjustment to LIFO represents the excess of current cost (valued at first-in, first-out FIFO) over the LIFO value of the inventories. 4. PROPERTY, PLANT AND Property, plant and equipment EQUIPMENT consists of the following:
SEPTEMBER 30, 1998 1997 ------------------------------------------------------------------- Machinery and equipment $10,231,675 $4,656,948 Tools, molds and dies 1,913,027 1,553,884 Furniture, fixtures and office equipment 607,312 453,205 Leasehold improvements 322,615 169,749 Building and improvements 94,520 94,520 Land 5,000 5,000 ------------------------------------------------------------------- 13,174,149 $6,933,306 Less: accumulated depreciation and amortization 5,566,903 5,096,081 ------------------------------------------------------------------- $ 7,607,246 $1,837,225 -------------------------------------------------------------------
Included in machinery and equipment and office equipment at September 30, 1998 and 1997 is approximately $2,922,000 and $560,000 of equipment under capital lease agreements (see Note 7) with related accumulated amortization amounts of approximately $326,000 and $165,000, respectively. Depreciation expense for the years ended September 30, 1998 and 1997 was approximately $625,000 and $447,000, 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 line and a term note. Under the terms of the new three year revolving credit loan, the Company may borrow up to the lesser of (a) $10,000,000 or (b) 85% of eligible receivables plus 60% of eligible inventory (to an inventory maximum of $5,000,000). Interest is computed at the higher of the bank's prime lending rate (8.25% at September 30, 1998) 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 $3,250,000 at September 30, 1998. The revolving credit loan matures in July 2001. Under the terms of the five and one half years (66 months) term note, the Company borrowed F-15 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $6,250,000, and 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 a portion of the funds drawn against the revolving credit loan were used to finance the APPI acquisition (see 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 (see Note 9). The value of the warrants totaled $97,000 and was accounted for as deferred financing costs (include 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. Under its previous three year credit facility, the Company had available a revolving credit agreement permitting it to borrow the lesser of $4,000,000 or stipulated percentages of eligible receivables and inventories. Borrowings were collateralized by a first priority security interest in the Company's assets. Borrowings under this credit agreement were $1,925,000 at September 30, 1997. 6. ACCRUED EXPENSES Accrued expenses consist of the AND OTHER following:
SEPTEMBER 30, 1998 1997 ---------------------------------------------------- Commissions $ 69,603 $ 93,285 Payroll and related 63,531 83,548 Other 153,766 64,948 ---------------------------------------------------- $286,900 $241,781 ---------------------------------------------------- ----------------------------------------------------
7. LONG-TERM DEBT AND Long term debt consists of the CAPITAL LEASE following: OBLIGATIONS F-16 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1998 1997 ------------------------------------------------------------------------- Revolving credit loan (Note 5) $ 3,250,000 $1,925,000 Term note (Note 5) 6,250,000 - Capital lease obligations with varying monthly payments and interest rates ranging from 7.8% to 10.3% per annum maturing 1999 through 2003; secured by an interest in specific machinery and equipment (Note 4) 2,518,312 277,720 ------------------------------------------------------------------------- Subtotal 12,018,312 2,202,720 Less: current maturities 986,625 118,481 ------------------------------------------------------------------------- Long-term debt and capital lease obligations $11,031,687 $2,084,239 ------------------------------------------------------------------------- -------------------------------------------------------------------------
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, 1998:
1999 $ 722,016 2000 681,945 2001 620,476 2002 617,028 2003 364,654 --------------------------------------------------------------------- Total minimum lease payments 3,006,119 Less: amount representing interest 487,807 --------------------------------------------------------------------- Present value of net minimum lease payments $2,518,312 --------------------------------------------------------------------- ---------------------------------------------------------------------
F-17 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The following is a schedule of long term debt maturities (including capital lease obligations) as of September 30, 1998: 1999 $ 986,625 2000 1,441,665 2001 4,773,311 2002 1,750,891 2003 1,953,320 2004 1,112,500 -------------------------------------------------------------------- $12,018,312 -------------------------------------------------------------------- -------------------------------------------------------------------- 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 (see Note 7). Rent expense amounted to approximately $325,000 and $277,000 for the fiscal years ended September 30, 1998 and 1997, respectively. 9. STOCKHOLDERS' EQUITY (a) WARRANTS At September 30, 1998 and 1997, the Company had 195,864 and 120,864 stock warrants outstanding, respectively. The warrants to purchase the Company's common stock were held by the following parties:
Officers/stockholders/consultants (1) 10,864 Public (1) 60,000 Bank (2) 125,000 --------------------------------------------------------- 195,864 --------------------------------------------------------- ---------------------------------------------------------
F-18 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Each warrant held by members of management and certain stockholders grant them the right to purchase one share of common stock at various prices between $.30 and $2.00 per share. These warrants have a weighted average exercise price of $.60 per share and a weighted average remaining contractual life of 0.8 years. During fiscal 1996 the Company issued warrants to purchase 60,000 shares of common stock, respectively, at prices ranging from $3.00 to $4.25 per share to financial consultants to the Company. The weighted average exercise price, of these warrants is $3.75 per share, with a term that expired in October, 1998. (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. As of September 30, 1998, the Company had issued options to purchase an aggregate of 1,053,400 shares of the Company's common stock to members of the Company's Board of Directors and employees. 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 1997 and 1998; no dividend yield, expected volatility of 46.10%, risk free interest rates of 5.50% to 5.59%, 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 1997 and 1998 by approximately $54,000 and $18,000, respectively, and net income per share would have been $.21 for each year. The following table summarizes information about stock options F-19 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- outstanding at September 30, 1998:
Options Outstanding Options Exercisable -------------------------------------------------------------- Number Weighted Outstanding Average Weighted Weighted Remaining Average Average Contractual Exercise Number Exercise Life (years) Price Exercisable Price -------------------------------------------------------------------------------- Exercise Prices: $1.00 - 2.35 775,000 4.4 2.35 775,000 2.35 .35 - 3.00 24,600 6.2 2.50 24,600 2.50 2.00 - 3.00 99,400 7.5 2.65 99,400 2.65 .35 - 2.44 104,400 8.5 1.91 79,900 1.73 1.88 - 2.25 50,000 9.3 1.94 22,000 1.91 -------------------------------------------------------------------------------- 1,053,400 5.4 2.32 1,000,900 2.33 -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
F-20 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Changes in qualified and non-qualified options and warrants outstanding are summarized as follows:
Warrants Options -------------------------------------------------------------------------------- Option price Weighted average Shares Exercise Price Shares per share exercise price -------------------------------------------------------------------------------------------------------- Outstanding September 30, 1996 1,275,414 $.30 - $4.25 1,077,600 $.35 - $3.00 2.34 Granted - - 92,000 2.25 - 2.44 2.28 Cancelled - - - - - Exercised (202,500) .35 - .70 (5,600) 2.25 2.25 Warrants converted to options (12,400) .35 - .70 12,400 .35 - .70 .69 Expired (939,650) 2.50 - 3.00 - - - -------------------------------------------------------------------------------------------------------- Outstanding September 30, 1997 120,864 $2.00 - $4.25 1,176,400 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 Warrants converted to options - - - - - Expired - - - - - -------------------------------------------------------------------------------------------------------- Outstanding September 30, 1998 195,864 1,053,400 2.32 -------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------
At September 30, 1998, there were 1,000,900 options exercisable at a weighted average exercise price of $2.33. The weighted average fair value of options granted during fiscal 1997 and 1998 were $1.40 and $1.94, respectively. F-21 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 10. TAXES ON INCOME Provisions for income taxes (benefit) on income in the consolidated statement of operations consist of the following:
YEAR ENDED SEPTEMBER 30, 1998 1997 ------------------------------------------------------------ Current: Federal $425,000 $570,192 State 25,000 106,996 ------------------------------------------------------------ Total current 450,000 677,188 ------------------------------------------------------------ Deferred: Federal 113,000 (40,574) State 21,000 (7,614) ------------------------------------------------------------ 134,000 (48,188) ------------------------------------------------------------ Total taxes on income $584,000 $629,000 ------------------------------------------------------------ ------------------------------------------------------------
Deferred tax (assets) liabilities consist of the following:
YEAR ENDED SEPTEMBER 30, 1998 1997 ------------------------------------------------------------------------ Tax depreciation in excess of book $ 457,000 $ 385,000 Investment tax credit carryforward (198,000) (222,000) Insurance recovery - IRC section 1136 adjustments) 91,000 - Provision on note receivable (included in other assets) (35,000) (38,000) Inventory capitalization (30,000) (23,000) Other temporary differences - net (32,000) 17,000 ------------------------------------------------------------------------ Deferred tax liabilities 253,000 119,000 Valuation allowance 15,000 15,000 ------------------------------------------------------------------------ Net deferred tax liabilities $ 268,000 $ 134,000 ------------------------------------------------------------------------ ------------------------------------------------------------------------
F-22 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED 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:
YEAR ENDED SEPTEMBER 30, 1998 1997 --------------------------------------------------------------------------------- Provision for Federal income taxes at the statutory rate $549,000 $574,900 Increase (decrease): State taxes, net of Federal tax benefit 30,000 65,600 Other 5,000 (11,500) --------------------------------------------------------------------------------- Provision for taxes on income $584,000 $629,000 --------------------------------------------------------------------------------- ---------------------------------------------------------------------------------
11. CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1998 1997 --------------------------------------------------------------------------------- Supplemental disclosure of cash flow information Cash paid during the year: Interest $387,574 $221,265 --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- Income taxes $561,575 $637,521 --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- Supplemental schedule of non-cash investing and financing: Equipment acquired under capital lease $232,000 $ - Value of warrants issued in $ 97,000 $ - connection with financing
F-23 ALLIED DEVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- In connection with the business acquisitions (Note 2), the Company used cash as follows:
SEPTEMBER 30 1998 -------------------------------------------------------------- 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 -------------------------------------------------------------- --------------------------------------------------------------
*excludes non-cash portion of purchase price relating to stock issued totalling $891,500. **the Company also refinanced approximately $1,233,000 of the assumed capitalized leases in conjunction with this acquisition. F-24 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER 1998 10-K. 0000869495 ALLIED DEVICES CORP YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 275,238 0 2,568,774 42,706 8,903,220 12,111,583 13,174,149 5,566,903 22,973,619 2,516,831 0 0 0 4,948 9,111,153 22,973,619 18,448,483 18,448,483 12,163,602 12,163,602 4,282,634 42,706 387,574 1,614,673 584,000 1,030,673 0 0 0 1,030,673 .22 .22
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