U.S. SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

Commission file number  0-24012

 

ALLIED DEVICES CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ý                     NO o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. ý

 

On December 27, 2002, 4,948,392 shares of the Registrant’s common stock, $.001 par value per share, were outstanding.  The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last sale price on December 27, 2002, is approximately $365,141.

 

DOCUMENTS INCORPORATED BY REFERENCE:  NONE

 

 

ITEM 1  -               BUSINESS

 

Allied Devices Corporation (“Allied Devices”, “Allied” or the “Company”) is a manufacturer and distributor of a broad line of high precision mechanical components and sub-assemblies used in industrial and commercial instruments and equipment.  The Company’s products are used in a broad range of applications, including, amongst others, light duty transmission of motion, measurement and control of fluids and gases in critical processes, positioning devices and actuation mechanisms.  The Company has the capability of producing very close tolerance and intricate assemblies at competitive cost and with short lead times.  A part of the Company’s business strategy is to provide prompt service and extensive technical support in certain industrial and technology-intensive markets where customers generally expect extended or erratic lead times, missed deadlines and mediocre technical support and customer service.

 

The Company’s major product groups include precision motion control and servo assemblies, gears and gear products, and other precision machined components and sub-assemblies built to customer specifications.  Allied Devices’ customers are primarily original equipment manufacturers (“OEMs”).

 

Allied Devices’ principal marketing tool is its highly effective technical manual of standardized instrument components available through the Company.  This catalog is in the hands of buyers and engineers throughout the United States and generates sales nationwide.  Management estimates that the Company has distributed more than 90,000 copies of its printed catalog over the last decade, of which approximately 40,000 copies were distributed during the last three fiscal years. The current edition was originally published in November, 1998, has been edited and reprinted once, and is over 650 pages in length.  In addition, the catalog has been fully digitized and formatted for inclusion as live data on the Company’s Internet website, enabling users to download the Company’s standard technical data and drawings.  The catalog and its search tools have been accessible on the Internet through a broad range of website links since January, 1999.

 

With its breadth and standardized nature, the Company’s standard product line (as offered in its catalog) is useful for highly varied applications in multiple industries, resulting in demand at the level of both OEMs and distributors.  The Company sells to customers in a diverse range of industries, principally medical operating room and diagnostic equipment; semiconductor capital goods makers; laser equipment; robotics; computer peripherals; aerospace instrumentation and controls; factory automation equipment and controls; machine tool builders; research and development facilities; high vacuum and spectrometric devices; flow control and metering equipment makers; mechanical seals and glands; scientific instrumentation and apparatus; and optics.

 

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A typical customer is an OEM selling high-ticket capital goods equipment.  The components supplied by Allied Devices going into such equipment generally constitute a small percentage of the OEM’s direct cost of manufacturing, normally less than $1,000 per unit.  In many cases, however, the customer OEM’s system or equipment is dependent on the reliability and/or precision of the Company’s components, despite their modest cost, for its functional integrity and competitive performance.  Failure to deliver reliable quality in a timely manner can have an impact far in excess of the direct cost of the parts.  As a result, the majority of Allied Devices’ customers deem it imperative that parts supplied be on time and of reliably high quality.  While these performance criteria are not always contractual requirements, they are critical determinants in stimulating repeat business.

 

Allied Devices has adopted a strategy designed to build proprietary relationships with companies requiring broader or more technical manufacturing or production support by levering off of capabilities represented by the catalog and its range of standard products.  In management’s estimation, success in manufacturing precision mechanical instrument assemblies and related components often requires a high level of integration between sophisticated mechanical engineering, assembly and component manufacturing capabilities and that few companies in the US have been effective in providing such services on an integrated basis.  There is a strong trend, especially among OEMs with technologically advanced products, towards outsourcing sub-systems from original design on through production roll-out, and, in management’s opinion, such companies are frequently not well served.  Management has structured Allied to provide advanced mechanical engineering expertise, prototype manufacturing and testing, product improvement and value engineering, integrated component/sub-assembly production, contract manufacturing, and distribution support. The Company’s organization, production facilities and inventory policies are designed to provide fast and timely response to design issues as well as customer orders, large and small, and to support “just in time” (“JIT”) methods of material sourcing being used by more and more companies.  Allied’s lead times in response to customer orders are generally short (four weeks or less).  Schedules for future deliveries are generally subject to change or cancellation without notice; therefore, backlog is not considered a meaningful indicator of business trends and management makes no effort to monitor or analyze backlog carefully.

 

Allied Devices’ sales volume is not dependent on just a few prominent customers. The Company draws from a customer list of over 6,000, thereby limiting its exposure to the fortunes of any one industry or group of customers.  In each of the past three years, the Company’s ten largest customers have represented as many as six different industries and accounted collectively, on average, for about 50% of sales volume.  Notwithstanding this diversification in direct customer relationships, an increasing and meaningful share of overall demand in the United States for high precision motion control devices in the past five years has been driven by requirements of the semiconductor equipment industry (companies building chip-making machinery).  While that industry has shown, over the long term, a compound annual growth rate of approximately 15%, it is prone to wide swings in volume on a cyclical basis.  Such cyclical fluctuation has had a material effect on the

 

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Company’s shipping volume, as has been evident from the severe downturns in that industry seen in 1997-1998, 1998-1999, and again beginning in 2001.  Management estimates that customers serving, directly or indirectly, the semiconductor equipment markets have accounted for 27%, 63%, 42%, and 24% of the Company’s sales volume in fiscal years 1999, 2000, 2001 and 2002, respectively.  The current down-cycle in that industry has been accompanied by a variety of business consolidations, acquisitions, mergers, and failures, with the result that the industry is increasingly dominated by a few large companies offering equipment portfolios that cover the full range of processing and test equipment needs for chip manufacturers.

 

Within the US, geographic concentration of the Company’s customers is relatively low and fluctuates with conditions in each of the regions served.  Allied Devices relies principally on independent multi-line manufacturers’ representatives to gain national coverage, altogether fielding some 75 sales people in virtually all significant territories in the United States.  The volume of Allied’s sales to customers outside the US is insignificant.

 

As the market for the Company’s products has evolved, management has perceived that customers have two differing needs, closely interrelated and therefore both requiring servicing from Allied.  Accordingly, the Company has been structured to meet both of these needs by organizing operations into two functional areas: Catalog Sales and Distribution (“Catalog Operations”) and Manufacturing and Subcontracting (“Manufacturing Services”).  These two areas of the Company have been defined solely for internal operating convenience and effectiveness.  Both areas serve the same markets and customers and do not represent separate business segments.

 

Catalog Operations

 

The majority of product sold through Catalog Operations is either manufactured by Catalog Operations or procured from the Manufacturing Services operations of the Company.  The product mix includes standard products (as listed in the Company’s catalogs) and customized or non-standard products manufactured to the specific requirements of a given customer.  Management periodically adds or drops products offered through the catalog based on its judgment of appeal to customers or actual history of sales.  What is not manufactured internally is purchased from a broad variety of reliable sources. This operation’s activities include telephone sales, inventory and shipping, gear-making, assembly and light duty/short run manufacturing.  This part of the Company also sells certain of its standard catalog products to its major competitors on a wholesale basis.  In the aggregate, revenues for the Catalog Operations were approximately as follows for the five years ended September 30th.

 

2002		$	9,991,000
2001		$	14,199,000
2000		$	16,186,000
1999		$	12,644,000
1998		$	14,507,000

 

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The decreases in revenues for 1999 and 2001-2002 were the result of successive cyclical downturns in the semiconductor equipment sector of the U.S. economy.  Historically, such declines in sales have been abnormal for the Company because of the diversified nature of its customer mix.  Beginning in the mid-1990s, however, the semiconductor equipment sector emerged as a major consumer, directly and indirectly, for precision mechanical components and sub-assemblies as manufactured by the Company and its competitors.  In 1997, a downturn occurred, caused by overcapacity and excess inventory accumulation, and the duration of the slowdown appears to have been one year.  While a recovery in this sector started in fiscal 1998, financial and economic turmoil in Asia during that year caused yet another downturn that continued through fiscal 1999.  In fiscal 2000, boom conditions prevailed, driven largely by capital spending as chip makers supported growth in demand from manufacturers of computer equipment, telecommunications equipment (including cell phones), and internet-related routing and data processing devices.  In November, 2000, shrinking demand for semiconductors coincided with significant additions to industry capacity coming on line, resulting in a dramatic surplus of capacity.  A deep and sudden decline in demand for chip-making and testing equipment ensued and has continued unabated through all of fiscal 2002.  The Company has undertaken to further diversify its business with additional products and more intensive marketing in industries unrelated to the semiconductor equipment sector.

 

Catalog Industry Competition

 

The Company’s Catalog Operations compete principally with W.M. Berg Co., a subsidiary of Invensys; PIC Design; Nordex Inc.; and Sterling Instrument, a division of Designatronics.  Each of these companies publishes a catalog similar to that issued by the Company, offering a wide range of mechanical instrument components built around a single set of standards.  Other competitors include many companies offering a limited selection of materials or “single product” catalogs, often not adhering to any widely accepted standards.  This marketplace is highly competitive, yet management believes, based upon feedback from vendors and customers, that the Company’s operating principles of immediate product availability, excellent quality control, competitive pricing, responsive customer service and technical support have permitted the Company to maintain and improve its market position.

 

Manufacturing Services Operations

 

Central to management’s strategy for achieving above average growth is Manufacturing Services Operations.  That strategy includes the following two elements: (a) the majority of products sold through the catalog will be manufactured

 

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in-house in the belief that such vertical integration ensures superior quality, timely deliveries, control of priorities, and cost efficiencies; and (b) the Company will seek to develop direct contract manufacturing relationships with “key accounts”, OEMs that enter into blanket or long-term purchasing arrangements with the Company as an outside contractor instead of manufacturing for themselves.  In pursuit of these elements of the Company’s strategy, the Company has added significantly (beginning in 1998) to its manufacturing sophistication and capacity through (1) acquisition of two state-of-the-art machine shop facilities, (2) complementary additions of new and highly productive capital equipment, (3) implementation of various late stage manufacturing techniques (such as cellular manufacturing), and (4) enhancement of electro-mechanical engineering and technical support capabilities.  In seeking to prepare for continued growth and improve its manufacturing responsiveness and flexibility, the Company, during fiscal 2000, consolidated several smaller locations on Long Island into one new facility, and, during 2001, consolidated three smaller locations in Maine into one new and larger facility.  Allied now has three manufacturing divisions, each with a particular focus and core competencies.  In addition to the product produced by each division in support of Catalog Operations, each manufacturing operation also markets and sells its capabilities direct to key customer accounts.

 

The following operations comprise Manufacturing Services:

 

Allied Devices Corp. Hicksville, New York		Includes (1) a sophisticated computer numerically controlled (“CNC”) machining department specializing in close tolerance, intricate machining of small complex parts that are sold both direct to end users in the instrument and fluid power industries and through Catalog Operations, and (2) a highly efficient secondary manufacturing operation that performs multi-step finishing on product that has been rough-finished by other divisions of the Company’s operations or by outside vendors.  The output of this plant, both standard stock and non-standard components, is sold to OEMs, jobbers, distributors and wholesalers.
Astro Instrument Co. Joplin, Missouri		A general machine shop with diversified CNC and conventional capabilities, producing the Kay Pneumatics product line and manufacturing components for an established customer base in several industries.
APPI, Inc. (Atlantic Precision Products) Sanford, Maine		A state-of-the-art CNC machining operation specializing in close tolerance, intricate machining of complex parts, made from exotic and non-exotic materials, and used in the fluid metering and flow control, instrument, and seal/gland industries.

 

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The Manufacturing Services operation in Hicksville, NY, sells both through Catalog Operations direct to customers and through distributors and other catalog houses, generally at uniform list prices.  In addition, each Manufacturing Services operation bids for specialized custom manufacturing work in the open market, taking on machining jobs under fixed price contracts.  While long production runs are sought and periodically won, the structure of Manufacturing Services’ organization and facilities is generally oriented to limited runs with higher margins.  Pricing is based on a combination of outside costs (for materials and processing services) and standard hourly shop rates (for labor and overhead).

 

Approximate revenues from Manufacturing Services were as follows for the five years ended September 30th:

 

2002		$	8,255,000
2001		$	15,669,000
2000		$	16,389,000
1999*		$	10,183,000
1998		$	3,841,000

 

* The large increase in fiscal 1999 was attributable principally to the acquisition of Atlantic Precision Products in July, 1998.

 

The Company does not report results or allocate resources for Catalog Operations and Manufacturing Services separately, but management believes that both areas of the business make a positive contribution to operations.  While the Company is intensively marketing its Manufacturing Services capability, management believes that existing capacity will support substantial increases in volume without significant additions to current production facilities.  Operations are now running on a reduced single shift, representing an estimated 40% of capacity, giving the Company substantial flexibility to respond to increases in sales volume.  Management does not anticipate having difficulty in filling its needs for skilled and semi-skilled production staff in responding to growth in demand and shipments.  It is a policy of management, on a continuous basis, to examine its manufacturing methods, equipment and tooling, and to seek ways to improve the quality and responsiveness of its capacity while minimizing the labor and skill content (and related cost) in its product; however, no capital expenditures related to this policy are planned for fiscal 2003.

 

Manufacturing Services Competition

 

Each of the divisions in Manufacturing Services faces intense competition from the many thousands of machine shops throughout the United States.  Each division endeavors to differentiate itself strategically from its competition on the basis of: i) accepting short-run work; ii) offering short lead times; iii) providing exceptional responsiveness to customer requirements; iv) supporting demand-pull and JIT requirements; v) providing engineering and technical support not typically offered

 

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by machine shops; and vi) conforming consistently to unbending quality standards.  As part of this strategy, the Company has developed and offers a portfolio of specialized machining capabilities that management believes are in increasing demand in its target markets but that are not readily available in the open market.

 

Quality Assurance

 

Although not legally required to do so in order to conduct its current business, the Company has emphasized rigorous standards of high quality in its products and in its manufacturing methods.  In the 1980s, this led to the development of an internal quality control manual that set forth policies and procedures used throughout the Company.  In fiscal 1999, the Company started the process of qualifying all of its operations for certification to ISO-9002, receiving original certification for its APPI facilities in May, 1999 and for its Hicksville operation in August, 2001.  In 2000, the International Standards Board undertook to revise and update the ISO-9000 standards.  Management believes that the revisions to such standards will not result in disqualification for any of the Company’s facilities and anticipates conformance and certification to the revised standards before the deadline for re-certification in 2004.  In management’s opinion, loss of qualification under ISO-9002 would not have a material impact on the Company’s ability to do business; however, such qualification does provide an indication to customers and potential customers of the degree of diligence that the Company exercises in adhering rigorously to high standards in pursuit of consistent quality and manufacturing excellence.

 

Expansion Plans

 

Since 1996, management has been carrying out a plan to expand the size of the Company.  The plan has four basic elements: (1) expand and diversify the core business through more intensive marketing of assemblies and custom engineered products; (2) add selected standard products within the existing line of business; (3) expand beyond the Company’s core business into related lines of business through an acquisition program that will not only add volume and capacity but also provide marketing, operating and administrative synergies; and (4) raise additional equity capital to support the expansion plans as they are being implemented.  The sharp and prolonged downturn in fiscal 2001-2002 has prompted management to suspend implementation of such plans until operating and financial conditions are more favorable.

 

Marketing Programs

 

The Company has developed a program designed to stimulate substantial growth within its existing line of business. Feedback from customers and informal market research indicate that Allied Devices is only just beginning to gain widespread customer awareness in the markets it serves.  Thus, the principal thrust of the Company’s plan is to make its target customers and markets more fully aware of the Company’s range of capabilities, of the usefulness of standardized components in general, and of the value of integrated engineering, assembly and manufacturing services.  The program is divided into modules and is being implemented as management deems appropriate and as budgets permit.

 

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The plan includes a number of programs, including expansion and focusing of the Company’s advertising campaign (currently suspended till recovery in industrial markets appears to be imminent and the Company has the funds to undertake such an initiative).  In another program, management has undertaken to improve, on a continuous basis, the standards of service and support provided to the Company’s customers.  Other facets of the plan include phasing in of expanded engineering support, expansion of assembly capabilities, introduction of new products, and providing electronic accessibility for customers. The Company’s website currently gives access to a digital version of the Allied Devices catalog, with drawing files available for downloading onto CAD systems. During fiscal 2003, management intends to go live with a customer-interactive system (currently in testing) through its website that will enable customers to place inquiries, enter orders, view inventory status, and check on delivery status of existing orders.  Management believes that these plans, to the extent implemented, have resulted in improved market share for the Company.

 

Acquisition Program

 

As part of its plans for growth, management intends to carry out an acquisition program.  By its own assessment, management views the market in which it competes as large (over $1 billion), highly fragmented, and poised for certain forms of consolidation.  When and as appropriate, management intends to focus on acquiring businesses with the following characteristics: (a) significant potential for sales growth; (b) high prospects for synergy and/or consolidation in marketing, manufacturing and administrative support functions; (c) relatively high gross margins (30% or more); (d) effective operating management in place; (e) a reputation for quality in its products; and (f) represent lateral or vertical integration.  Management completed two acquisitions in fiscal 1998, and one in fiscal 2001.  No additional acquisition activity is planned before market and the Company’s economic conditions improve.

 

Other Factors

 

Raw materials for the Company’s operations are normally readily available from multiple sources, such as bar stock of stainless steel and aircraft grade aluminum from metal distributors.  Management expects no change to this situation in the foreseeable future.  The technological maturity of the Company’s product line has resulted in general stability of demand in its markets (exclusive of normal business cycles) and ready availability of raw materials at stable prices.  The inventories carried by the Company, both as raw materials and as finished goods, thus bear a relatively low risk of technological obsolescence, except to the extent they are customer-specific.  Management views inventory risk as a function of several factors, principally the following: (1) pricing; (2) economic cycles; and (3) product life cycle for customer-specific product.  Economic cycles, especially in the semiconductor equipment industry, may, during a down-cycle, cause an immediate production stop-order for custom-made components for periods in excess of a year, resulting in accumulation of inventory that may not be saleable when an up-cycle comes.  Conservative accounting policies (as in force at the Company) require that such inventories be written off if they are slow-moving or inactive, whether or not

 

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management feels they will ultimately sell.  Should pricing be high relative to market, or should management remove products from the standard catalog offering, then related inventory would likely be slow-moving or surplus but may ordinarily be liquidated.  Management periodically reviews the range of products offered in the catalog and, based on its judgment of what customers using the catalog will find pertinent and useful, adds and drops products to tailor the offering.  No material portion of the Company’s business is subject to renegotiation of profits or termination of contracts at the election of the United States government or its prime contractors.  Procurement of patents is not material to the Company’s present marketing program.

 

Regulation

 

The Company is not subject to any particular form of regulatory control.  The Company does not expect that continued compliance with existing federal, state or local environmental regulations will have a material effect on its capital expenditures, earnings or competitive position.

 

Employees

 

The Company currently employs 49 salaried and 136 hourly personnel.  Wage rates and benefits are competitive in the labor markets from which the Company draws.  The Company has been able to provide for all of its labor requirements in fiscal 2002.  None of the Company’s employees are represented by labor unions.  The Company has had no strikes, walkouts or other forms of business disruption attributable to poor labor relations.  Relations with employees are open and constructive.

 

Capital Equipment

 

The Company uses a wide variety of machinery and equipment in the manufacturing and assembly of its product line.  Although the Company or its subsidiaries own much of this equipment, certain pieces of equipment are leased.  Seventeen leases, covering specific CNC machines, have original lease terms of five years, with purchase options at the end of each lease.  Rates vary from 7.2% to 9.9%, and expiration dates range from 2003 to 2006.  The obligations due under capital leases were approximately $5,786,000 as of September 30, 2002.

 

ITEM 2  -               PROPERTIES

 

Listed below are the principal plants and offices of the Company.  All property occupied by the Company is leased except as otherwise noted.  Management consolidated operations from Biddeford, ME, Windham, ME and Raymond, ME into one building in Sanford, ME during fiscal year 2001.  The lease for the Sanford, ME facility was executed in April, 2001, for a period of ten years.  The facilities in Windham and Raymond have been re-leased and sub-leased, respectively.  Management is seeking to sub-let or re-lease the remaining vacant space at the Biddeford facility; the Biddeford lease expires in June, 2003.

 

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Location		Square Feet		Lease Expiration		Principal Activities
Hicksville, NY		60,000		June, 2010		Catalog Operations and Manufacturing Services
Sanford, ME		57,600		April, 2011		CNC Machine Shop
Joplin, MO		13,000		(Owned)		CNC and Conventional Machine Shop

 

ITEM 3  -               LEGAL PROCEEDINGS

 

The Company knows of no material pending legal proceedings (other than routine claims incidental to its business) in which it or any of its officers or directors in their capacity as such is a party.

 

ITEM 4  -               SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Not applicable.

 

PART II

 

ITEM 5  -               MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

The Company’s common stock was originally listed on the National Association of Securities Dealers Automated SmallCap Market (“NASDAQ”) as of November 17, 1994.  Following the downturn in sales and profits in 2001-2002, the Company no longer met the listing criteria for NASDAQ’s SmallCap Market and accordingly the Company’s stock was delisted in September, 2002.  Allied’s shares are currently traded over the counter on the OTC Bulletin Board under the symbol ALDV.OB.  As of December 31, 2002, the Company had 422 holders of record of its common

 

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stock.  The Company has seven listed market makers, and the trading ranges by quarter for fiscal 2002 and 2001 were as follows:

 

		Fiscal 2002						Fiscal 2001
		High			Low			High			Low
First Quarter		$	1.450		$	0.650		$	4.000		$	1.563
Second Quarter		$	1.160		$	0.400		$	3.688		$	2.281
Third Quarter