**U.S. SECURITIES AND EXCHANGE COMMISSION**

 

**WASHINGTON, D.C.20549**

 

**FORM 10-K**

 

| **ý** | **ANNUAL REPORT UNDER SECTION 13 OR 15  (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                               |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                               |
|       | **FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002**                                                                                                                                                                   |
|       |                                                                                                                                                                                                               |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                      |
|       |                                                                                                                                                                                                               |
|       | **For the transition period from                  to                ** |

 

**Commission file number 0-24012**

 

**ALLIED DEVICES CORPORATION**

(Exact name of Registrant as specified in its charter)

 

| **Nevada**                                                                                  |   | **13-3087510**                    |
|---------------------------------------------------------------------------------------------|--------|-----------------------------------|
| (State of incorporation)                                                                    |   | (IRS Employer Identification No.) |
|                                                                                        |   |                              |
| **325 Duffy Avenue, Hicksville, New York**                                                  |   | **11801**                         |
| (Address of principal executive offices)                                                    |   | (Zip Code)                        |
|                                                                                        |   |                              |
| Registrant’s  telephone number, including area code: **(516)  935-1300**               |
|                                                                                        |   |                              |
| Securities  registered pursuant to Section 12 (b) of the Exchange Act:   **NONE** |
|                                                                                        |   |                              |
| Securities  registered pursuant to Section 12 (g) of the Exchange Act:                      |

 

| **Title of  Class**           |
|-------------------------------|
| Common Stock, $.001 par value |

 

Indicate by check mark whether the registrant (1) filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.                          YESý                     NOo

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. ý

 

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

 

DOCUMENTSINCORPORATED BY REFERENCE:  NONE

 

 

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**ITEM 1  -****               BUSINESS**

 

AlliedDevices Corporation (“Allied Devices”, “Allied” or the “Company”) is amanufacturer and distributor of a broad line of high precision mechanicalcomponents and sub-assemblies used in industrial and commercial instruments andequipment.  The Company’s products areused in a broad range of applications, including, amongst others, light dutytransmission of motion, measurement and control of fluids and gases in criticalprocesses, positioning devices and actuation mechanisms.  The Company has the capability of producingvery close tolerance and intricate assemblies at competitive cost and withshort lead times.  A part of theCompany’s business strategy is to provide prompt service and extensivetechnical support in certain industrial and technology-intensive markets wherecustomers generally expect extended or erratic lead times, missed deadlines andmediocre technical support and customer service.

 

TheCompany’s major product groups include precision motion control and servoassemblies, gears and gear products, and other precision machined componentsand sub-assemblies built to customer specifications.  Allied Devices’ customers are primarily original equipmentmanufacturers (“OEMs”).

 

AlliedDevices’ principal marketing tool is its highly effective technical manual ofstandardized instrument components available through the Company.  This catalog is in the hands of buyers andengineers throughout the United States and generates sales nationwide.  Management estimates that the Company hasdistributed more than 90,000 copies of its printed catalog over the lastdecade, of which approximately 40,000 copies were distributed during the lastthree 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 fullydigitized and formatted for inclusion as live data on the Company’s Internetwebsite, enabling users to download the Company’s standard technical data anddrawings.  The catalog and its searchtools have been accessible on the Internet through a broad range of websitelinks since January, 1999.

 

Withits breadth and standardized nature, the Company’s standard product line (asoffered in its catalog) is useful for highly varied applications in multipleindustries, resulting in demand at the level of both OEMs anddistributors.  The Company sells tocustomers in a diverse range of industries, principally medical operating roomand diagnostic equipment; semiconductor capital goods makers; laser equipment;robotics; computer peripherals; aerospace instrumentation and controls; factoryautomation equipment and controls; machine tool builders; research anddevelopment facilities; high vacuum and spectrometric devices; flow control andmetering equipment makers; mechanical seals and glands; scientificinstrumentation and apparatus; and optics.

 

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

 

AlliedDevices has adopted a strategy designed to build proprietary relationships withcompanies requiring broader or more technical manufacturing or productionsupport by levering off of capabilities represented by the catalog and itsrange of standard products.  Inmanagement’s estimation, success in manufacturing precision mechanicalinstrument assemblies and related components often requires a high level ofintegration between sophisticated mechanical engineering, assembly andcomponent manufacturing capabilities and that few companies in the US have beeneffective in providing such services on an integrated basis.  There is a strong trend, especially amongOEMs with technologically advanced products, towards outsourcing sub-systemsfrom original design on through production roll-out, and, in management’sopinion, such companies are frequently not well served.  Management has structured Allied to provideadvanced mechanical engineering expertise, prototype manufacturing and testing,product improvement and value engineering, integrated component/sub-assemblyproduction, contract manufacturing, and distribution support. The Company’sorganization, production facilities and inventory policies are designed toprovide fast and timely response to design issues as well as customer orders,large and small, and to support “just in time” (“JIT”) methods of materialsourcing being used by more and more companies.  Allied’s lead times in response to customer orders are generallyshort (four weeks or less).  Schedulesfor future deliveries are generally subject to change or cancellation withoutnotice; therefore, backlog is not considered a meaningful indicator of businesstrends and management makes no effort to monitor or analyze backlog carefully.

 

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

 

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Company’sshipping volume, as has been evident from the severe downturns in that industryseen in 1997-1998, 1998-1999, and again beginning in 2001.  Management estimates that customers serving,directly or indirectly, the semiconductor equipment markets have accounted for27%, 63%, 42%, and 24% of the Company’s sales volume in fiscal years 1999,2000, 2001 and 2002, respectively.  Thecurrent down-cycle in that industry has been accompanied by a variety ofbusiness consolidations, acquisitions, mergers, and failures, with the resultthat the industry is increasingly dominated by a few large companies offeringequipment portfolios that cover the full range of processing and test equipmentneeds for chip manufacturers.

 

Withinthe US, geographic concentration of the Company’s customers is relatively lowand fluctuates with conditions in each of the regions served.  Allied Devices relies principally onindependent multi-line manufacturers’ representatives to gain nationalcoverage, altogether fielding some 75 sales people in virtually all significantterritories in the United States.  Thevolume of Allied’s sales to customers outside the US is insignificant.

 

Asthe market for the Company’s products has evolved, management has perceivedthat customers have two differing needs, closely interrelated and thereforeboth requiring servicing from Allied. Accordingly, the Company has been structured to meet both of these needsby organizing operations into two functional areas: Catalog Sales andDistribution (“Catalog Operations”) and Manufacturing and Subcontracting (“ManufacturingServices”).  These two areas of theCompany have been defined solely for internal operating convenience andeffectiveness.  Both areas serve thesame markets and customers and do not represent separate business segments.

 

*CatalogOperations*

 

Themajority of product sold through Catalog Operations is either manufactured byCatalog Operations or procured from the Manufacturing Services operations ofthe Company.  The product mix includesstandard products (as listed in the Company’s catalogs) and customized ornon-standard products manufactured to the specific requirements of a givencustomer.  Management periodically addsor drops products offered through the catalog based on its judgment of appealto customers or actual history of sales. What is not manufactured internally is purchased from a broad variety ofreliable sources. This operation’s activities include telephone sales,inventory and shipping, gear-making, assembly and light duty/short runmanufacturing.  This part of the Companyalso sells certain of its standard catalog products to its major competitors ona wholesale basis.  In the aggregate,revenues for the Catalog Operations were approximately as follows for the fiveyears 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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Thedecreases in revenues for 1999 and 2001-2002 were the result of successivecyclical downturns in the semiconductor equipment sector of the U.S.economy.  Historically, such declines insales have been abnormal for the Company because of the diversified nature ofits customer mix.  Beginning in themid-1990s, however, the semiconductor equipment sector emerged as a majorconsumer, directly and indirectly, for precision mechanical components andsub-assemblies as manufactured by the Company and its competitors.  In 1997, a downturn occurred, caused byovercapacity and excess inventory accumulation, and the duration of theslowdown appears to have been one year. While a recovery in this sector started in fiscal 1998, financial andeconomic turmoil in Asia during that year caused yet another downturn thatcontinued through fiscal 1999.  Infiscal 2000, boom conditions prevailed, driven largely by capital spending aschip makers supported growth in demand from manufacturers of computerequipment, telecommunications equipment (including cell phones), andinternet-related routing and data processing devices.  In November, 2000, shrinking demand for semiconductors coincidedwith significant additions to industry capacity coming on line, resulting in adramatic surplus of capacity.  A deepand sudden decline in demand for chip-making and testing equipment ensued andhas continued unabated through all of fiscal 2002.  The Company has undertaken to further diversify its business withadditional products and more intensive marketing in industries unrelated to thesemiconductor equipment sector.

 

*CatalogIndustry Competition*

 

TheCompany’s Catalog Operations compete principally with W.M. Berg Co., asubsidiary of Invensys; PIC Design; Nordex Inc.; and Sterling Instrument, adivision of Designatronics.  Each ofthese companies publishes a catalog similar to that issued by the Company,offering a wide range of mechanical instrument components built around a singleset of standards.  Other competitorsinclude many companies offering a limited selection of materials or “singleproduct” catalogs, often not adhering to any widely accepted standards.  This marketplace is highly competitive, yetmanagement believes, based upon feedback from vendors and customers, that theCompany’s operating principles of immediate product availability, excellentquality control, competitive pricing, responsive customer service and technicalsupport have permitted the Company to maintain and improve its market position.

 

*ManufacturingServices Operations*

 

Centralto management’s strategy for achieving above average growth is ManufacturingServices Operations.  That strategy includesthe following two elements: (a) the majority of products sold through thecatalog will be manufactured

 

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in-housein the belief that such vertical integration ensures superior quality, timelydeliveries, control of priorities, and cost efficiencies; and (b) theCompany will seek to develop direct contract manufacturing relationships with“key accounts”, OEMs that enter into blanket or long-term purchasingarrangements with the Company as an outside contractor instead of manufacturingfor themselves.  In pursuit of theseelements 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 capitalequipment, (3) implementation of various late stage manufacturingtechniques (such as cellular manufacturing), and (4) enhancement ofelectro-mechanical engineering and technical support capabilities.  In seeking to prepare for continued growthand improve its manufacturing responsiveness and flexibility, the Company,during fiscal 2000, consolidated several smaller locations on Long Island intoone new facility, and, during 2001, consolidated three smaller locations inMaine into one new and larger facility. Allied now has three manufacturing divisions, each with a particularfocus and core competencies.  Inaddition to the product produced by each division in support of CatalogOperations, each manufacturing operation also markets and sells itscapabilities direct to key customer accounts.

 

Thefollowing 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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TheManufacturing Services operation in Hicksville, NY, sells both through CatalogOperations direct to customers and through distributors and other cataloghouses, generally at uniform list prices. In addition, each Manufacturing Services operation bids for specializedcustom manufacturing work in the open market, taking on machining jobs underfixed price contracts.  While longproduction runs are sought and periodically won, the structure of ManufacturingServices’ organization and facilities is generally oriented to limited runswith higher margins.  Pricing is basedon a combination of outside costs (for materials and processing services) andstandard hourly shop rates (for labor and overhead).

 

Approximaterevenues from Manufacturing Services were as follows for the five years endedSeptember 30th:

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

 

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

 

TheCompany does not report results or allocate resources for Catalog Operationsand Manufacturing Services separately, but management believes that both areasof the business make a positive contribution to operations.  While the Company is intensively marketingits Manufacturing Services capability, management believes that existingcapacity will support substantial increases in volume without significantadditions to current production facilities. Operations are now running on a reduced single shift, representing anestimated 40% of capacity, giving the Company substantial flexibility torespond to increases in sales volume. Management does not anticipate having difficulty in filling its needsfor skilled and semi-skilled production staff in responding to growth in demandand shipments.  It is a policy ofmanagement, on a continuous basis, to examine its manufacturing methods,equipment and tooling, and to seek ways to improve the quality andresponsiveness of its capacity while minimizing the labor and skill content(and related cost) in its product; however, no capital expenditures related tothis policy are planned for fiscal 2003.

 

*ManufacturingServices Competition*

 

Eachof the divisions in Manufacturing Services faces intense competition from themany thousands of machine shops throughout the United States.  Each division endeavors to differentiateitself strategically from its competition on the basis of: i) acceptingshort-run work; ii) offering short lead times; iii) providing exceptionalresponsiveness to customer requirements; iv) supporting demand-pull and JITrequirements; v) providing engineering and technical support not typicallyoffered

 

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bymachine shops; and vi) conforming consistently to unbending qualitystandards.  As part of this strategy,the Company has developed and offers a portfolio of specialized machiningcapabilities that management believes are in increasing demand in its targetmarkets but that are not readily available in the open market.

 

*QualityAssurance*

 

Althoughnot legally required to do so in order to conduct its current business, theCompany has emphasized rigorous standards of high quality in its products andin its manufacturing methods.  In the1980s, this led to the development of an internal quality control manual thatset forth policies and procedures used throughout the Company.  In fiscal 1999, the Company started theprocess of qualifying all of its operations for certification to ISO-9002,receiving original certification for its APPI facilities in May, 1999 and forits Hicksville operation in August, 2001. In 2000, the International Standards Board undertook to revise andupdate the ISO-9000 standards. Management believes that the revisions to such standards will not resultin disqualification for any of the Company’s facilities and anticipatesconformance and certification to the revised standards before the deadline forre-certification in 2004.  Inmanagement’s opinion, loss of qualification under ISO-9002 would not have amaterial impact on the Company’s ability to do business; however, suchqualification does provide an indication to customers and potential customersof the degree of diligence that the Company exercises in adhering rigorously tohigh standards in pursuit of consistent quality and manufacturing excellence.

 

*ExpansionPlans*

 

Since1996, management has been carrying out a plan to expand the size of theCompany.  The plan has four basicelements: (1) expand and diversify the core business through more intensivemarketing of assemblies and custom engineered products; (2) add selectedstandard products within the existing line of business; (3) expand beyond theCompany’s core business into related lines of business through an acquisitionprogram that will not only add volume and capacity but also provide marketing,operating and administrative synergies; and (4) raise additional equity capitalto support the expansion plans as they are being implemented.  The sharp and prolonged downturn in fiscal2001-2002 has prompted management to suspend implementation of such plans untiloperating and financial conditions are more favorable.

 

*MarketingPrograms*

 

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

 

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Theplan includes a number of programs, including expansion and focusing of theCompany’s advertising campaign (currently suspended till recovery in industrialmarkets appears to be imminent and the Company has the funds to undertake suchan initiative).  In another program,management has undertaken to improve, on a continuous basis, the standards ofservice and support provided to the Company’s customers.  Other facets of the plan include phasing inof expanded engineering support, expansion of assembly capabilities,introduction of new products, and providing electronic accessibility forcustomers. The Company’s website currently gives access to a digital version ofthe Allied Devices catalog, with drawing files available for downloading ontoCAD systems. During fiscal 2003, management intends to go live with acustomer-interactive system (currently in testing) through its website thatwill 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.

 

*AcquisitionProgram*

 

Aspart of its plans for growth, management intends to carry out an acquisitionprogram.  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 intendsto focus on acquiring businesses with the following characteristics: (a)significant potential for sales growth; (b) high prospects for synergy and/orconsolidation in marketing, manufacturing and administrative support functions;(c) relatively high gross margins (30% or more); (d) effective operatingmanagement 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 fiscal2001.  No additional acquisitionactivity is planned before market and the Company’s economic conditionsimprove.

 

*Other Factors*

 

Rawmaterials for the Company’s operations are normally readily available frommultiple sources, such as bar stock of stainless steel and aircraft gradealuminum from metal distributors. Management expects no change to this situation in the foreseeablefuture.  The technological maturity ofthe Company’s product line has resulted in general stability of demand in itsmarkets (exclusive of normal business cycles) and ready availability of rawmaterials at stable prices.  Theinventories carried by the Company, both as raw materials and as finishedgoods, thus bear a relatively low risk of technological obsolescence, except tothe 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) productlife cycle for customer-specific product. Economic cycles, especially in the semiconductor equipment industry,may, during a down-cycle, cause an immediate production stop-order forcustom-made components for periods in excess of a year, resulting inaccumulation of inventory that may not be saleable when an up-cycle comes.  Conservative accounting policies (as inforce at the Company) require that such inventories be written off if they areslow-moving or inactive, whether or not

 

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managementfeels they will ultimately sell.  Shouldpricing be high relative to market, or should management remove products fromthe standard catalog offering, then related inventory would likely beslow-moving or surplus but may ordinarily be liquidated.  Management periodically reviews the range ofproducts offered in the catalog and, based on its judgment of what customersusing the catalog will find pertinent and useful, adds and drops products totailor the offering.  No materialportion of the Company’s business is subject to renegotiation of profits ortermination of contracts at the election of the United States government or itsprime contractors.  Procurement ofpatents is not material to the Company’s present marketing program.

 

*Regulation*

 

TheCompany is not subject to any particular form of regulatory control.  The Company does not expect that continuedcompliance with existing federal, state or local environmental regulations willhave a material effect on its capital expenditures, earnings or competitiveposition.

 

*Employees*

 

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

 

*CapitalEquipment*

 

TheCompany uses a wide variety of machinery and equipment in the manufacturing andassembly of its product line.  Althoughthe Company or its subsidiaries own much of this equipment, certain pieces ofequipment are leased.  Seventeen leases,covering specific CNC machines, have original lease terms of five years, withpurchase options at the end of each lease. Rates vary from 7.2% to 9.9%, and expiration dates range from 2003 to2006.  The obligations due under capitalleases were approximately $5,786,000 as of September 30, 2002.

 

**ITEM 2  -****               PROPERTIES**

 

Listedbelow are the principal plants and offices of the Company.  All property occupied by the Company isleased except as otherwise noted. Management consolidated operations from Biddeford, ME, Windham, ME andRaymond, ME into one building in Sanford, ME during fiscal year 2001.  The lease for the Sanford, ME facility wasexecuted in April, 2001, for a period of ten years.  The facilities in Windham and Raymond have been re-leased andsub-leased, respectively.  Management isseeking to sub-let or re-lease the remaining vacant space at the Biddefordfacility; 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             |   |

 

**ITEM3  -****               LEGAL PROCEEDINGS**

 

TheCompany knows of no material pending legal proceedings (other than routineclaims incidental to its business) in which it or any of its officers ordirectors in their capacity as such is a party.

 

**ITEM4  -****               SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

Notapplicable.

 

**PART II**

 

**ITEM 5  -**               MARKET FORCOMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

TheCompany’s common stock was originally listed on the National Association ofSecurities Dealers Automated SmallCap Market (“NASDAQ”) as of November 17,1994.  Following the downturn in salesand profits in 2001-2002, the Company no longer met the listing criteria forNASDAQ’s SmallCap Market and accordingly the Company’s stock was delisted inSeptember, 2002.  Allied’s shares arecurrently traded over the counter on the OTC Bulletin Board under the symbolALDV.OB.  As of December 31, 2002, theCompany 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  |   | $               | 0.700  |            | $      | 0.351 |   | $ | 3.350 |   | $ | 1.800 |   |
| Fourth Quarter |   | $               | 0.470  |            | $      | 0.050 |   | $ | 2.250 |   | $ | 0.760 |   |

 

**ITEM6  -****               SELECTED FINANCIALDATA**

 

Thefollowing selected consolidated financial data have been derived from theaudited financial statements of Allied Devices Corporation.  The selected financial data should be readin conjunction with the consolidated financial statements and related notesincluded elsewhere in this Form 10-K.

 
|                                           |   | **As of and for the Year Ended September 30,** |       |
|------------------------------------------------|--------|------------------------------------------------|------------|
|                                           |   | **2002**                                       |       | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| STATEMENT OF OPERATIONS DATA:                  |   |                                           |       |   |   |   |   |   |   |   |   |
|                                           |   |                                           |       |   |   |   |   |   |   |   |   |
| Net sales                                      |   | $                                              | 18,246,189 |   | $ | 29,868,056 |   | $ | 32,575,127 |   | $ | 22,827,298 |   | $ | 18,448,483 |   |
|                                           |   |                                           |       |   |   |   |   |   |   |   |   |
| Gross profit                                   |   | $                                              | 845,392    |   | $ | 4,958,005 |   | $ | 9,795,720 |   | $ | 7,897,701 |   | $ | 6,485,212 |   |
|                                           |   |                                           |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses   |   | $                                              | 6,175,483  |   | $ | 8,031,342 |   | $ | 7,507,908 |   | $ | 6,013,032 |   | $ | 4,282,634 |   |
|                                           |   |                                           |       |   |   |   |   |   |   |   |   |
| Interest expense, net                          |   | $                                              | 1,809,372  |   | $ | 1,706,338 |   | $ | 1,220,592 |   | $ | 1,007,807 |   | $ | 387,574 |   |
|                                           |   |                                           |       |   |   |   |   |   |   |   |   |
| Net (loss) income                              |   | $                                              | (8,469,056 | ) | $ | (3,656,111 | ) | $ | 638,594 |   | $ | 560,417 |   | $ | 1,158,885 |   |
|                                           |   |                                           |       |   |   |   |   |   |   |   |   |
| (Loss) earnings per share:                     |   |                                           |       |   |   |   |   |   |   |   |   |
| Basic                                          |   | $                                              | (1.71      | ) | $ | (.74 | ) | $ | .13 |   | $ | .11 |   | $ | .25 |   |
| Diluted                                        |   | $                                              | (1.71      | ) | $ | (.74 | ) | $ | .12 |   | $ | .11 |   | $ | .24 |   |
| Weighted average number of shares outstanding: |   |                                           |       |   |   |   |   |   |   |   |   |
| Basic                                          |   | 4,948,392                                      |       | 4,935,965 |   | 4,847,592 |   | 4,913,524 |   | 4,699,526 |   |
| Diluted                                        |   | 4,948,392                                      |       | 4,935,965 |   | 5,537,748 |   | 4,948,546 |   | 4,763,404 |   |
|                                           |   |                                           |       |   |   |   |   |   |   |   |   |
| BALANCE SHEET DATA:                            |   |                                           |       |   |   |   |   |   |   |   |   |
|                                           |   |                                           |       |   |   |   |   |   |   |   |   |
| Total assets                                   |   | $                                              | 24,755,243 |   | $ | 34,300,780 |   | $ | 31,866,647 |   | $ | 26,471,002 |   | $ | 24,484,371 |   |
|                                           |   |                                           |       |   |   |   |   |   |   |   |   |
| Total debt                                     |   | $                                              | 22,389,292 |   | $ | 23,901,833 |   | $ | 14,154,233 |   | $ | 12,508,974 |   | $ | 12,018,312 |   |
|                                           |   |                                           |       |   |   |   |   |   |   |   |   |
| Stockholders’ (deficit) equity            |   | $                                              | (1,272,197 | ) | $ | 7,196,859 |   | $ | 10,956,620 |   | $ | 10,318,026 |   | $ | 9,886,780 |   |

 

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**ITEM7  -****               MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

**RESULTS OF OPERATIONS:YEAR ENDED SEPTEMBER 30, 2002, COMPARED WITH YEAR ENDEDSEPTEMBER 30, 2001**

 

All statements containedherein that are not historical facts, including, but not limited to, statementsregarding the Company’s current business strategy, the Company’s projectedsources and uses of cash, and the Company’s plans for future development andoperations, are based upon current expectations.  These statements are forward-looking in nature and involve anumber of risks and uncertainties.  Actualresults may differ materially.  Amongthe factors that could cause actual results to differ materially are thefollowing: the availability of sufficient capital to finance the Company’sbusiness plans on terms satisfactory to the Company and the Company’s abilityto obtain forbearance from its lenders; competitive factors; changes in labor,equipment and capital costs; changes in

 

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regulations affecting theCompany’s business; future acquisitions or strategic partnerships; generalbusiness and economic conditions; and factors described from time to time inthe reports filed by the Company with the Securities and ExchangeCommission.  The Company cautions readers not to place undue reliance onany such forward-looking statements, which statements are made pursuant to thePrivate Litigation Reform Act of 1995 and, as a result, are pertinent only asof the date made.

 

Fiscal year 2002 startedin the immediate aftermath of September 11, 2001.  This twelve month period (from October, 2001, through September,2002) was one of grave political and economic uncertainty, more severe than anyin recent U.S. history.  The impact onthe manufacturing sector in this country was dramatic.  Throughout the year, businesses in general,with no forewarning, suspended or postponed capital spending, cut R&Dbudgets, implemented drastic inventory reduction plans, pared payrolls,extended payment terms, and cancelled, suspended or curtailed long-termpurchasing agreements.  All of thesehave had a significant impact on Allied’s sales volume.  Throughout fiscal 2002, theCompany encountered a seemingly continuous series of contractions in thevarious industrial sectors into which the Company sells its products.  Such sustained and extreme deterioration inbusiness conditions has been unprecedented since the Company first started in1947.  As each such contractionoccurred, management formulated and carried out plans of action to address andcounteract the situation, all the while adhering to the Company’s core strategies.  The outcome has provided for the continuedoperation of the business, although the financial condition of the Company hasdeteriorated significantly.

 

Oneof management’s central strategies has been to position Allied Devices as anexceptional supplier of critical mechanical and electro-mechanical componentsand sub-assemblies to OEMs that are leaders or prospective leaders in a diversearray of industries.  Such criticalcomponents and sub-assemblies include devices with engineering value added, madefrom exotic or tough materials, with features that are beyond the capabilitiesof many machining businesses to produce with reliable, consistent quality. TheCompany has dedicated substantial effort and resources over the past severalyears to developing capabilities that are scarce in the markets in which itcompetes, and management believes that the Company has successfully gainedrecognition and respect for its capabilities in target markets and for itsworld class performance in manufacturing such devices.  Sales initiatives undertaken during thisslow period have secured new customer relationships and favorable opportunitiesfor manufacturing new product when market conditions improve.

 

Throughmuch of its history, Allied has sought to maintain a diverse mix of companiesin its customer base, a strategy that has served to mitigate the impact ofdownturns in particular sectors or industries by relying on continued strengthin other sectors.  As happened in threequarters of fiscal 2001 and throughout fiscal 2002, effectively all of theindustries that the Company serves experienced significant and simultaneousslow-downs.  The impact on Company salesbegan to register part way through the second quarter of its fiscal year 2001and has continued unmitigated through all of fiscal 2002.  Broad and steady deterioration in the U.S.economic climate, particularly in the manufacturing sector, prompted a

 

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markeddownturn in capital spending, resulting in dramatic slow-downs for Allied’scustomers, which in turn prompted a contraction over the two years of nearly50% in sales for the Company.  Fiscalyear 2003, to date, has not shown any improvement, thus perpetuating anenvironment highly averse to risk-taking and capital spending.

 

Despiteconscious efforts by management to maintain industry diversification, thesemiconductor equipment sector had grown dramatically in the period beginning1999, becoming the largest in the Company’s revenue mix, representing anestimated 63% of sales at its peak in fiscal year 2000.  While industry analysts report varyingnumbers, overall contraction in semiconductor equipment volume appears to havebeen about 75%; while there is some potential for further deterioration,experts project that the industry has “bottomed” with prospects for improvementbeginning during or after the third quarter of calendar 2003.  When this highly cyclical industry is in adownturn phase, its OEMs typically place new business with their suppliers onlywhen they have firm orders for product, resulting in erratic and meager volumeswith substantial pressure for lower costs and short lead-times.  That has been the Company’s experienceduring this downturn: shipments to this sector have shrunk by 75% and representedsome 24% of its revenue mix in fiscal 2002.

 

Otherindustries important to the Company’s revenue stream include aerospaceinstrumentation and controls, defense contractors, mass flow metering andcontrol devices, medical diagnostics, scientific instrumentation, robotics,oil-field equipment and telecommunications. Management’s research indicates that all of these sectors but defensealso experienced material declines in activity during 2001 and 2002.

 

Net sales for fiscal 2002were approximately $18,246,000, as compared to $29,868,000 in fiscal 2001, adecrease of approximately 39%.  Thissignificant reduction in sales volume is a result of comparing record highlevels of sales in the early months of fiscal 2001 with unprecedented weaknessthroughout fiscal 2002.  The weakness insales volume is, in management’s opinion, the product of economic and marketfactors, not loss of customers or market share.

 

During fiscal 2001,management had established and pursued its strategy for weathering the downturnby targeting to operate at cash break-even while waiting for the economy torecover.  The Company continued tofollow this strategy throughout fiscal 2002. “Cash break-even” for these purposes included a plan whereby theCompany’s various lenders would accommodate the Company with forbearance onprincipal repayments until a recovery plan could be reasonably carriedout.  To date, such lenders haveprovided such forbearance.  On thepremise that the Company will ultimately resume pursuit of its growth plans andreturn to sales levels and gross margins experienced in late fiscal 2000 andearly 2001, management has not planned to sell off equipment or downsizefacilities; indeed, its objectives and general strategy for achieving themremain essentially unchanged.

 

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Gross profit for fiscal2002 and fiscal 2001 was 4.63% and 16.60%, respectively.  The following factors account for thisdecline:

 

1.               Net materialsexpense (expressed as a percentage of sales) increased by 7.14%, therebydecreasing gross margins.  Included inthis year-to-year change is a write off of discontinued, inactive and excessinventories, amounting to 4.62% of this increase.  The remainder of the increase is principally the product of twooffsetting factors: manufacturing (rather than purchasing) certain productscreated cash savings and lowered materials expense, but such savings were morethan offset by higher unit costs inherent in small lots related to prototypes,qualification articles and short runs. Compounding these effects were two other issues, forcing Allied to turnto higher cost sources: certain low cost suppliers either went out of businessor discontinued production, and certain traditional sources for materials wereunwilling to extend credit terms acceptable to the Company.  All of these effects were particularlypronounced in the third and fourth quarters of fiscal 2002.

 

2.               Factory labor costs decreased as an absolute number, but, expressed as apercentage of sales, increased during fiscal 2002.  Indirect payrolls (for supervisory, quality and support staff)are relatively fixed costs, limiting the timing and degree to which cuts can bemade without impairing the Company’s ability to produce.  Direct labor costs (expressed asa percentage of sales) increased, impactingmargins as a function of two principal factors during fiscal 2002: (1) the mixof manufacturing work changed, from being more heavily production oriented infiscal 2001, to being, in fiscal 2002, exclusively short runs, prototypes, andqualification lots (all of which are typically low in productivity); and (2)the Company, as a policy decision, manufactured a range of products in-housethat had previously been purchased, substituting in-house direct labor foroutside costs.  The combined net effectof these factors on labor expense for product shipped was a decrease in grossmargins of 0.20%.

 

3.               Factory overhead expenses increased as a percentage of sales by 4.63%.While aggressive action on management’s part cut controllable overhead costssubstantially, certain non-labor factory costs are fixed in nature, principallyrent, depreciation, and casualty and liability insurances. Controllableexpenses decreased as a percentage of sales, improving gross margins by 1.39%;offsetting these improvements was the steep decline in shipments againstrelatively fixed costs, reducing gross margins by 6.02%.

 

During the second half of fiscal 2002, the Companylaunched a program to increase prices on its catalog products over the courseof 12 months.  The impact on fiscal 2002results is deemed negligible by management.

** **

Selling, general and administrative expenses declinedapproximately $1,856,000, from $8,031,000 in fiscal 2001 to approximately$6,175,000 in fiscal 2002.  This

 

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year-to-year decrease of approximately 23.11% was theresult of implementing a series of cost-cutting measures devised bymanagement.  However, because of theseverity of the sales downturn, such costs represented an increase of 6.96% in fiscal2002 when expressed as a percentage of net sales. The following factors accountfor the change from fiscal 2001:

 

1.               Selling, shipping and commission expenses decreased by 42.52%, butexpressed as a percentage of net sales decreased by only 0.29%.

 

2.               Administrative payroll, benefits, and related expenses decreased by 21.71%from the prior year but, expressed as a percentage of net sales, increased by3.98% as management refrained from laying off certain human resources itconsiders critical to the Company’s strategies.

 

3.               Other administrative expenses (collectively) decreased by 13.30%.  Excluding the effect of non-cash expenses(depreciation and amortization), these expenses decreased by 38.69% from theprior year. However, when expressed as a percentage of decreased levels of netsales, these expenses (cash and non-cash combined) increased by approximately3.27%.  Of this increase, 3.26%represented non-cash expenses.

 

In the fourth quarter of fiscal 2002, the Companyrecorded a charge of approximately $2,324,000 representing an impairment losson the goodwill of its APPI subsidiary. Analysis of current business trends of APPI indicated that undiscountedfuture cash flows would be less than the carrying value of its net assets.  The resultant charge represents thedifference between the carrying and fair value of those assets.  Fair value is estimated based on discountedprojected future cash flows.

** **

Interest expense, net, was approximately $1,809,000 infiscal 2002 as compared to $1,706,000 in fiscal 2001.  This increase is attributable to a higher average level ofindebtedness (from financing of new production equipment in late fiscal 2001,financing of restructuring plans and lay-offs implemented during fiscal 2001,an increase in the fair value of an interest rate collar, and issuance ofcertain notes in connection with acquisitions).  Lower market interest rates partially offset the increase in theyear-to-year comparable periods.

 

Benefit for income taxes is estimated at 8.83% and35.7% of pre-tax loss for fiscal 2002 and 2001, respectively, as a combinationof federal and state taxes.  See thenotes to the consolidated financial statements for reconciliation to thefederal statutory rate.

 

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**RESULTSOF OPERATIONS: YEAR ENDED SEPTEMBER 30, 2001, COMPARED WITH YEAR ENDEDSEPTEMBER 30, 2000**

 

During fiscal 2001, the Companydealt with a continuous series of challenges that arose from events generallybeyond management’s control.  As eachchallenge materialized, management formulated and carried out plans of actionto address the situation, all the while consistently adhering to the Company’score strategies. The outcome has provided for the continued operation of thebusiness, although the financial condition of the Company has deterioratedmaterially.

 

Net sales for fiscal 2001 wereapproximately $29,868,000 as compared to $32,575,000 in fiscal 2000.  This decrease, year-on-year, of 8.3% was theresult of an exceptionally strong start to the year followed by a very weaksecond half, as shown in the following table:

 
| **Quarter  of Fiscal  2001** |   | **Calendar  Period** |   | **Period Sales** |      | **Annualized  Revenues** |   | **% Change  from Same  Period Prior  Year** |   |
|------------------------------|--------|----------------------|--------|------------------|-----------|--------------------------|--------|---------------------------------------------|--------|
| 1                            |   | Oct-Dec 2000         |   | $                | 9,672,000 |                     | $      | 38,690,000                                  |   | +42.9 | % |
| 2                            |   | Jan-Mar 2001         |   | $                | 9,576,000 |                     | $      | 38,304,000                                  |   | +22.6 | % |
| 3                            |   | Apr-Jun 2001         |   | $                | 5,932,000 |                     | $      | 23,727,000                                  |   | -28.8 | % |
| 4                            |   | Jul-Sep 2001         |   | $                | 4,688,000 |                     | $      | 18,751,000                                  |   | -51.5 | % |

 

Management believed the severecontraction in capital spending in the economy had been the most pronounced(sudden and deep) to affect the Company’s shipments in over 20 years.  To the best of management’s knowledge, theCompany had not lost any significant customers during this period.  Indeed, the Company had endeavored to takeadvantage of this slow period to gain attention and market share from accountsthat were previously difficult to penetrate; the sales force was deployedaggressively to reach decision makers who were too busy “keeping up” in boomtimes to consider the merits of changing vendors.  In all its operations, the Company remained dedicated toproviding top quality and superior service to all of its customers, regardlessof sector.  Management expected that, asa result of the value package it markets and delivers to its customers, theCompany would enjoy success in attracting sales through consistent applicationand continuous re-evaluation of its marketing strategy, in the belief that theCompany would realize a steady improvement in market share and quality ofcustomer relationships.  While currentsales levels were depressed, management believed that new accounts gainedduring the slowdown would yield a growth rate well above industry average oncethe recovery began in the U.S. manufacturing sector.  The principal stimulants to such growth would have been, inmanagement’s estimation, the following: (1) a continued focus on sellingproduct requiring sophisticated engineering content; (2) a series of programsof continuous improvement, including maintaining its ISO-9002 status,particularly in the areas of customer service and support; (3) a program todevelop “key accounts” by offering an expanded range of support services,including contract manufacturing services; and (4) a continued effort todiversify into new or under-developed industries, thereby reducing dependenceon volatile technology-related sectors of the economy.

 

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From an operating perspective,management reacted to this downturn in stages, tailoring spending and staffingto anticipated sales volume. Strategically, the Company’s goal has been to cut the minimum amountnecessary to survive the current downturn so that valuable resources marshaledor developed to support long term growth would not be sacrificed to short termexigencies.  Thus, by the end of thefiscal year, a series of layoffs and cost-cutting measures had been completed,effectively curtailing discretionary spending, cutting operating hours, layingoff a substantial number of people, and cutting administrative pay rates.  The benefits of such cost-cutting measures,as a general rule, become evident in the Company’s operating accounts on adelayed basis, principally as a result of satisfying on-going obligationsbefore spending actually stops. Management created a restructuring reserve to account for the expensesattendant to reducing the size of the business.  In addition to such operating considerations, management reviewedinventory valuations in light of current business conditions and wrote offpotentially unsaleable materials.  Inthe interest of continuing to improve the Company’s market position during thecurrent softness, management completed certain in-process expansion projectsrather than “throw away” investment spending already completed.  In particular, the Company moved its APPIsubsidiary into a new and larger facility in Sanford, Maine, consolidatingthree locations in Maine into one plant. There were certain impacts on theCompany’s operating statements related to this move:

 

1.               The process of moving caused a number of abnormal expenses: short termdisruptions to production flow; abnormally high levels of overtime; the directcosts of preparing the new building, vacating the old buildings, the physicalmove, and starting up in a new location; and the additional project staffingretained for organizing the move.

 

2.               To avoid disappointing customer expectations any more than necessary, theCompany subcontracted a higher amount of manufacturing work than normal duringa period of approximately three months.

 

3.               The Company sought to dispose of its lease obligations at the threefacilities vacated through arranging for new tenants or findingsub-tenants.  As of fiscal year-end, anew tenant had been secured for one facility and the Company’s lease had been forgivenby the landlord; 60% of the space in a second facility was sub-leased inDecember, 2001; and the third remained vacant. The occupancy expense in Maine will continue to be high until the spaceremaining vacant is sub-leased.

 

The Company’s gross margin was 16.60% of net sales infiscal 2001, as compared to 30.07% in fiscal 2000.  Amongst others, the following three factors accounted for thebulk of this decline:

1.               the time required to effect cost cuts following the sudden and steepdecline in sales volume resulted in higher factory staffing costs as apercentage of net sales than normal payroll expense;

 

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2.               fixed expenses of operation, most notably occupancy costs anddepreciation, do not decrease as a function of lower sales volume, levering theimpact on operating margins; and

3.               in light of current business conditions, management wrote offapproximately $2.7 million of inventory.

 

The following factorshad the indicated impact on the cost of goods sold:   (1) net materials expense (exclusive of inventory write-offs)decreased as a percentage of sales, increasing gross margins by 3.91%, as theCompany brought more manufacturing in-house to fill idle capacity, therebypurchasing less from the outside;  (2)management wrote off approximately $2.7 million of inventory and decreased itsLIFO reserve, decreasing gross margins by 5.08%; (3) payroll costs increased asa percentage of sales, thereby lowering the gross profit percentage by 7.28%,as a by-product of the sudden and steep slowdown and certain temporaryinefficiencies related to consolidating facilities in Maine; (4) the Companyshipped a lower volume of product on relatively stable costs of factoryoverhead, decreasing gross margins by 3.14%; and (5) depreciation (a non-cashexpense) increased as the Company added equipment to handle the strong growthexperienced in the first two quarters of the fiscal year, and the largerdepreciation expense was defrayed against lower shipments, reducing grossmargins by 1.88%.  Management believesthat margins will be restored to customary levels as the Company grows out ofthe downturn.

 

The Company did notincrease prices materially in fiscal 2001.

 

Selling, general, administrative and restructuringexpenses as a percentage of net sales were 29.95% in fiscal 2001, as comparedto 23.05% in fiscal 2000. The following factors accounted for this change:  (1) selling and shipping expenses andcommissions decreased approximately $50,000 during fiscal 2001 but when expressedas a percentage of net sales increased by 0.25%; (2) administrative payroll,benefits, and related expenses increased as a percentage of net sales by 1.61%,principally because reductions in staffing did not happen as rapidly as thedecline in sales volume; (3) other administrative expenses (exclusive ofdepreciation and amortization) increased as a percentage of net sales byapproximately 1.02%; (4) depreciation and amortization expenses (non-cashexpenses) increased as a percentage of net sales by 0.96%; and (5)non-recurring expenses (restructuring and moving charges) increased SG&Aexpense by 3.06% as a percentage of net sales. One-time costs related to moving and downsizing/restructuring in fiscal 2001were approximately $915,000.

 

Interest expense increased by $486,000 in fiscal 2001as a function of: (1) higher borrowings incurred to finance new equipmentacquired in fiscal 2001; (2) borrowings incurred to finance restructuring andmoving; (3) higher interest rates during the first half of the fiscal year, and(4) recognition of the fair value (cost) of an interest rate collar.

 

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As a result of a tax loss carryback, an income taxrefund of $606,000 has been accrued for fiscal 2001.  (Benefit) provision for income taxes in fiscal 2001 and 2000 was35.7% and 36.0% of pre-tax income.  Seethe notes to the consolidated financial statements for reconciliation to thefederal statutory rate.

 

**LIQUIDITY AND FINANCIAL RESOURCES**

 

During fiscal 2002, the Company’s financial conditioneroded as a result of the effects of continued severe recessionary businessconditions in the U.S. manufacturing sector. Operating activities provided cash totaling approximately $1,413,000,net financing activities provided approximately $135,000, and capitalexpenditures used approximately $67,000, resulting in an increase in cash onhand of approximately $1,481,000 (see page F-7 of the Consolidated FinancialStatements).  Because the Company is indefault on certain of its institutional borrowings, all such borrowings havebeen classified as current. The Company is therefore operating with a workingcapital deficit, having classified approximately $16,460,000 million of debt ascurrent.  The Company’s working capitaldeficit increased by $2,224,000 during fiscal 2002, to approximately$(9,638,000) at the end of the period. The following changes in assets and liabilities account for this change:

 

1.               Accounts receivable (net of reserve for doubtful accounts) increased byapproximately $160,000 during fiscal 2002. The average collection period forthe year remained at approximately 45 days.

 

2.               Inventories decreased by approximately $298,000 (exclusive of a $2.5million write off of inactive and slow-moving products) during fiscal2002.  Turns on inventory during fiscal2002 averaged approximately 2.5 times, as compared to 2.0 times for fiscal2001.  This improvement is in line withthe Company’s strategy to conserve cash by working down inventory levels wherepossible.

 

3.               Management wrote off approximately $2,504,000 of slow moving and inactiveinventory.  In light of the protractedperiod of decreased sales, the Company conducted a review of saleability of itsinventories in light of current business conditions and concluded that anadditional write-off would be prudent.

 

4.               Prepaid andother current assets (including income tax refund receivable) decreased by$561,000, principally as a result of the collection of an income tax refund.

 

5.               Current liabilities, exclusive of current portions of long-term debt andcapital lease obligations, increased approximately $342,000, as a result of

 

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higherlevels of payables, accrued expenses and an increase in the fair value of aninterest rate collar.

 

6.               Currentportions of long-term debt and capital lease obligations increased by $161,000.

 

7.               Cashbalances increased by approximately $1,481,000.

 

Outlays for capital expenditures in fiscal 2002amounted to $67,000.  Property, plantand equipment (net) decreased approximately $1,923,000 as a result of returningto the lessor certain under-utilized equipment on a capitalized lease inexchange for retirement of the full amount of related debt outstanding(approximately $2,113,000).  The Companyrecorded a related gain of approximately $173,000, net of disposition costs.

 

The Company’s net borrowings, exclusive of thecapitalized lease obligation described hereinabove, increased by approximately$135,000 during fiscal 2002. This is the result of certain accruals recordedfor interest payments not currently due that are included in long-term debt andclassified as long term.  The Company iscurrently in default on certain of its debt agreements and has classified suchdebt as current.

 

The following is a summary schedule of the Company’ssignificant contractual cash obligations for the periods indicated that existedas of September 30, 2002, based on information appearing in Notes 10 and 11 tothe Consolidated Financial Statements:

 
|                                |   | **2003**  |       | **2004** |   | **2005** |   | **After  2005** |    | **Total** |   |
|-------------------------------------|--------|-----------|------------|----------|--------|----------|--------|-----------------|---------|-----------|--------|
| Long-term debt                      |   | $         | 10,712,500 |     | $      | —   |   | $               | —  |      | $      | 5,890,697 |   | $ | 16,603,197 |   |
| Capital lease  obligations          |   | 5,765,759 |       | 17,765   |   | 2,571    |   | —          |    | 5,786,095 |   |
| Operating leases                    |   | 859,942   |       | 875,098  |   | 891,005  |   | 4,809,755       |    | 7,435,800 |   |
| Total contractual  cash obligations |   | $         | 17,338,201 |     | $      | 892,863  |   | $               | 893,576 |      | $      | 10,700,452 |   | $ | 29,825,092 |   |

 

 

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The Company has a stockholders’ deficit ofapproximately $1,272,000, declining revenues and substantial current operatinglosses. Management believes that the Company’s working capital as nowconstituted will not suffice for the needs of the on-going business, andaccordingly management is attempting to raise additional equity capital.  The Company is currently in default oncertain of its debt agreements and is unable to generate sufficient cash fromoperations to fund its short term debt obligations.  The Company’s management has been in negotiations with certaindebt holders for over one year to obtain forbearance on these defaults and onmaking principal payments on its debt. Active discussions are underway with certain prospective investors andwith the Company’s principal lenders with the goals of amending certain termsof its credit and equipment lease agreements, entering into forbearanceagreements suspending principal payments for a period of time, modifyingcertain financial covenants, compromising principal amounts and infusingadditional equity capital.

 

There can be no assurance that forbearance will beobtained, that the Company will return to profitability upon economic recovery,or that additional financing, if available, will be on terms acceptable to theCompany.  Any additional stock orconvertible financing could result in substantial dilution tostockholders.  Should management beunable to obtain forbearance or additional financing, the Company will not beable to continue in its present form.

 

In connection with their report on the Company’sConsolidated Financial Statements as of and for the year ended September 30,2002, BDO Seidman, LLP, our independent certified public accountants, expressedsubstantial doubt about our ability to continue as a going concern because ofrecurring net losses and inability to fund current debt obligations.

 

**CRITICALACCOUNTING POLICES**

 

The Company’s significant accounting polices aredisclosed in the Notes to Consolidated Financial Statements.  Of those accounting polices, the followingare more critical and are summarized below.

 

Revenue Recognition:

Sales are recognized upon shipment of products.  All sales are shipped F.O.B. shipping pointand are not sold subject to a right of return unless the products aredefective.  The Company’s level ofreturns arising from defective products has historically been immaterial.

 

Inventory Valuation:

Inventories are valued at the lower of cost (first-in,first-out (FIFO) method) or market. Cost is comprised of material, direct labor and manufacturing overheadon manufactured product.  Based onhistorical usage and management’s evaluation of estimated future demand, marketconditions and alternative uses for possible excess, inactive, slow-moving orobsolete parts, reserves are recorded. Excess and obsolete inventory is periodically disposed of throughalternative uses or scrapping.

 

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Impairment of Long-LivedAssets:

Long-lived assets, including goodwill, are reviewedperiodically for impairment whenever events or circumstances indicate that thecarrying amounts may not be recoverable.

 

Use of Estimates:

As required under accounting principles generallyaccepted in the United States, the consolidated financial statements includeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses. Actual results could differ from these estimates and assumptions.

 

**VULNERABILITY TO RECESSION**

 

The Company’s cost structure islargely made up of “fixed costs”, with “variable costs” accounting for lessthan 40% of net sales.  The Company expects,therefore, to experience materially adverse effects on profitability from anymarked downturn in sales volume until management is able to reduce fixed costs.Because the Company’s delivery lead-times are relatively short, there isrelatively little backlog at any given time, and the effect of a downturn insales volume is felt almost immediately. A material portion of the Company’s sales are made to customers in thesemiconductor equipment industry, an industry noted for its highly cyclicalnature.  The Company is making effortsto diversify the composition of its sales profile to mitigate its exposure tosuch cyclicality and the related impact on the Company’s sales.

 

**IMPACT OF INFLATION AND OTHER BUSINESSCONDITIONS**

 

Management believes that inflationhas no material impact on the operations of the business. The Company hascustomarily been able to react to increases in market costs of material andlabor through a combination of greater productivity and selective priceincreases. The Company has no exposure to long-term fixed price contracts.

 

**RECENT ACCOUNTING STANDARDS**

 

In June 2001, theFinancial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting No. 141, “BusinessCombinations” (“FAS No. 141”), which requires that the purchase method ofaccounting be used for all business combinations initiated after June 30, 2001,establishes specific criteria for the recognition of intangible assetsseparately from goodwill, and requires that unallocated negative goodwill bewritten off immediately as an extraordinary gain instead of being deferred andamortized.  The Company will account forbusiness combinations after June 30, 2001 in accordance with the guidance inFAS No. 141.

 

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In June 2001, the FASB also issued Statement ofFinancial Accounting No. 142, “Goodwill and Other Intangible Assets” (“FAS No.142”).  Under FAS No. 142, goodwill andindefinite lived tangible assets will no longer be amortized.  Instead, goodwill and indefinite livedtangible assets will be subject to annual impairment tests performed under theguidance of the statement. Additionally, the amortization period of intangible assets with finitelives will no longer be limited to forty years.  The Company’s business combinations prior to adoption of FAS No.142 have been accounted for using the purchase method.  As of September 30, 2002, the net carryingvalue of goodwill was $5,230,653, which is net of a write off of $2,323,765related to an impairment.  Amortizationexpense during the year ended September 30, 2002, was approximately$696,000.  The Company will implementFAS No. 142 on October 1, 2002.  TheCompany is studying the effects of implementing FAS No. 142 which may have amaterial adverse effect on the Company’s financial statements.

 

In June, 2001, the FASB also issued Statement No. 143,“Accounting for Obligations Associated with the Retirement of Long-LivedAssets” (“Statement 143”). The objective of Statement 143 is to establish anaccounting standard for the recognition and measurement of an asset retirementobligation on certain long-lived assets. The retirement obligation must be onethat results from the acquisition, construction or normal operation of along-lived asset. Statement 143 requires the legal obligation associated withthe retirement of a tangible long-lived asset to be recognized at fair value asa liability when incurred, and the cost to be capitalized by increasing thecarrying amount of the related long-lived asset. Statement 143 will beeffective for the Company’s fiscal year beginning October 1, 2002. The Companyis currently evaluating the effect of implementing Statement 143, but does notexpect it to have a material adverse effect on the financial statements.

 

In October, 2001, the FASB issued Statement No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“Statement144”). Statement 144 supersedes Statement No. 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”(“Statement 121”) and retains the basic requirements of Statement 121 regardingwhen and how to measure an impairment loss. Statement 144 provides additionalimplementation guidance on accounting for an impairment loss. Statement 144 iseffective for all fiscal years beginning after December 15, 2001.  The Company anticipates that the adoption ofStatement 144 will not have a material effect on the Company’s financialposition or results of operations.

 

In April, 2002, the FASB issued Statement No. 145,“Rescission of Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,and Technical Correction” (“Statement 145”). Statement 145 eliminatesextraordinary accounting treatment for reporting gains or losses on debtextinguishments, and amends other existing authoritative pronouncements to makevarious technical corrections, clarify

 

25

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meanings, or describe their applicability underchanged conditions. The provisions of this Statement are effective for fiscalyears beginning after May 15, 2002; however, early application of Statement 145is encouraged. Debt extinguishments reported as extraordinary items prior toscheduled or early adoption of this Statement would be reclassified to otherincome in most cases following adoption. The Company is currently evaluating the impact the adoption of Statement145 would have on its consolidated results of operations subject to theevaluation in accordance with APB 30, “Reporting the Results of Operations -Reporting the Effects of Disposal of a Segment of a Business and Extraordinary,Unusual and Infrequently Occurring Events and Transactions”.

 

In June, 2002, the FASB issued Statement No. 146,“Accounting for Costs Associated with Exit or Disposal Activities” (“Statement146”), which changes the accounting for costs such as lease termination costsand certain employee severance costs that are associated with a restructuring,discontinued operation, plant closing, or other exit or disposal activityinitiated after December 31, 2002. The standard requires companies to recognizethe fair value of costs associated with exit or disposal activities when theyare incurred rather than at the date of a commitment to an exit or disposalplan.  The Company anticipates that theadoption of Statement 146 will not have a material effect on the Company’sfinancial position or results of operations.

 

**ITEM7A  -****            QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company’s exposure to market risk for changes ininterest rate relates primarily to the Company’s variable rate debt.  The Company manages this risk through theutilization of an interest rate collar in an amount not exceeding the principalamount of its outstanding debt.  AtSeptember 30, 2002, the notional amount of the Company’s interest rate collarwas $6,000,000 with an interest rate cap of 6.25% and an interest rate floor of5%.  The interest rate collar expiresDecember 31, 2003.  The interest ratecollar is accounted for as a fair value hedge and the Company recorded aninterest expense as calculated using the mark-to-market method.

 

**ITEM8  -****               FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

(1)                                  Financial Statements

 

See index to FinancialStatements on Page F-2.

 

**ITEM9  -****               CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None

 

26

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**PART III**

 

**ITEM10  -****             DIRECTORS ANDEXECUTIVE OFFICERS**

 

TheExecutive Officers and Directors of the Company are as follows:

 
| **Name**              |   | **Age** |   | **Position(s) Held with Company**                                       |
|-----------------------|--------|---------|--------|-------------------------------------------------------------------------|
|                  |   |    |   |                                                                    |
| Mark  Hopkinson       |   | 55      |   | Chairman  of the Board of Directors, Chief Executive Officer, Secretary |
|                  |   |    |   |                                                                    |
| Salvator  Baldi       |   | 81      |   | Executive  Vice President, Director                                     |
|                  |   |    |   |                                                                    |
| P.K.  Bartow          |   | 55      |   | Director                                                                |
|                  |   |    |   |                                                                    |
| Christopher  T. Linen |   | 55      |   | Director                                                                |
|                  |   |    |   |                                                                    |
| Michael  Michaelson   |   | 80      |   | Director                                                                |
|                  |   |    |   |                                                                    |
| Michael  Foster       |   | 67      |   | Director                                                                |
|                  |   |    |   |                                                                    |
| Paul  M. Cervino      |   | 48      |   | President,  Principal Operating Officer, Treasurer                      |
|                  |   |    |   |                                                                    |
| Andrew  J. Beck       |   | 54      |   | Assistant  Secretary                                                    |
|                  |   |    |   |                                                                    |
| Gerald J. Bentivegna  |   | 53      |   | Chief Financial Officer, Principal Accounting Officer                   |

 

Brief biographies of theExecutive Officers and Directors of the Company are set forth below.  All Directors hold office until the nextAnnual Stockholders’ Meeting or until their death, resignation, retirement, removal,disqualification or until their successors have been elected andqualified.  Vacancies in the existingBoard may be filled by majority vote of the remaining Directors.  Officers of the Company serve at the will ofthe Board of Directors.  There are nowritten employment contracts outstanding.

 

27

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Mark Hopkinson, age 55, has beenChairman of the Board since 1981, when he and Mr. Bartow organized theacquisition of the Company.  He alsoserved as President of the Company from 1981 until March, 1994.  He is a graduate of the University ofPennsylvania and of the Harvard Graduate School of BusinessAdministration.  Prior to acquiring AlliedDevices, he was a management consultant, working originally with Theodore Barry& Associates from 1977 to 1978 and later as an independent and with theNicholson Group from 1978 to 1981.  Thefocus of his work in the period leading up to 1981 was development of emerginggrowth companies, both in the United States and in lesser-developedcountries.  He served as an officer inthe United States Navy from 1969 to 1972.

 

Salvator Baldi, age 81, was oneof the original founders of the Company in 1947. He has been a Director of theCompany since February, 1994.  Thebusiness was started as a general machine shop and developed through the yearsas a supplier to certain principal competitors of the Company in the market forstandardized precision mechanical parts. By the late 1970’s, the Company had become a competitor, offering itsown catalog of components.  He and hispartners sold the Company to the investor group assembled by Mr. Hopkinson andMr. Bartow in October, 1981, with Mr. Baldi remaining with the Company under anemployment contract.  By the time hiscontract expired two years later, Mr. Baldi had negotiated to repurchase aninterest in the Company.  He currentlyworks on an abbreviated work schedule.

 

P.K. Bartow, age 55, isPresident of The InterBusiness Marketing Group.  From March, 1994 through November, 1998, he was President of theCompany.  He served as Vice President ofthe Company from when he and Mr. Hopkinson organized its acquisition in 1981until March, 1994. While active in management at the Company, Mr. Bartow wasDirector of Marketing and Sales, and he continues to provide marketingconsulting services to the Company. Prior to acquiring the Company, Mr. Bartow had joined the NicholsonGroup in 1978, and performed facility and feasibility studies for emerginggrowth companies.  Mr. Bartow received aB.A. degree from Williams College in 1970, and a M. Arch degree from theUniversity of Pennsylvania in 1974.

 

Christopher T. Linen, age 55,became a Director of the Company during fiscal 1997.  He is currently the principal of Christopher Linen & Company,through which he has invested in a series of early stage, internet andtechnology-related enterprises.  Priorto this, from 1975 until 1996, he was an executive with Time Inc. (later TimeWarner Inc.) where he managed a series of six subsidiaries or divisions inAsia, Latin America, the United States, and worldwide.  Prior to that, he was Assistant FinancialDirector of the Italhai Holding Company, Ltd. (Bangkok), during which tenure hewas Publisher of the Bangkok World, an English language daily newspaper.  He is Chairman of Nirvana Soft Inc., and aTrustee of The Family Academy, an experimental public school.  He holds a B.A. from Williams College andattended the Graduate School of Business Administration at New York University.

 

Michael Michaelson, age 80, hasbeen a Director of the Company since 1990. He has been President and sole stockholder of Rainwater Associates, Inc.since 1979,

 

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providing management andmarketing consultation services to clients principally in publishing andrelated industries.  From 1986 to 1989,he was Chairman of the Council on Economic Priorities.  From 1977 to 1979, he was co-founder andChairman of the Board of Games Magazine, which was sold to Playboy magazine in1979.  From 1970 to 1978, Mr. Michaelsonworked for Publishers Clearing House, where he was Senior Vice President. From1968 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 WarII, where he was a Company Commander in the 35th infantry, 25th division andreceived the Bronze Star and the Purple Heart. He received a B.S. degree from New York University in 1948.

 

Michael Foster, age 67, became aDirector of the Company in fiscal 2001. In 1999, Mr. Foster retired as Chairman and CEO of WPI Group, Inc., apublicly traded manufacturer and marketer of a broad range of rugged hand heldDOS and Windows based computers for industrial applications, as well as a groupof power products, including electronic ballasts, transformers and completepower systems. He has also served as a Director and member of the ExecutiveCommittee and Audit Committee of Foilmark, Inc., a Massachusetts basedmanufacturer of metalized foils and foil stamping equipment whose stock waspublicly traded.

 

Paul M. Cervino, age 48, hasbeen the President of the Company since August, 2000 and Chief OperatingOfficer of the Company since November, 1998. From January, 1996, until October, 1998, he served as Chief FinancialOfficer of the Company.  Prior to 1996,he was employed by Sotheby’s Holdings, Inc., an international art auctionhouse.  From 1992 to 1995, he was amember of the European Board of Directors and Chief Financial Officer ofSotheby’s Europe and Asia, operating in London.  From 1985 to 1992, he was a Director and Chief Financial andAdministrative Officer of Sotheby’s North America.  From 1976 to 1985, he worked for Sotheby’s in various otherfinancial capacities.  Mr. Cervinoreceived a B.S. in Accounting from St. John’s University and an M.B.A. inFinance from Pace University.

 

Andrew J. Beck, age 54, has beena partner with the law firm of Torys LLP since prior to 1989.  He became Assistant Secretary of the Companyin March, 1994. Mr. Beck holds a B.A. in economics from Carleton College and aJ.D. from Stanford University Law School.

 

Gerald J. Bentivegna, age 53,has been the Chief Financial Officer of the Company since July, 2001.  Prior to 2001, he was employed by CopyTele,Inc., an encryption and display company. From 1994 to 2000, he served as Vice President - Finance and ChiefFinancial Officer of CopyTele, and was elected to their Board of Directors in1995. Prior to 1994, Mr. Bentivegna was employed at Marino Industries Corp. forapproximately 10 years, where he served as Chief Financial Officer, Treasurerand Controller.  He holds an M.B.A.degree in Finance from Long Island University and a B.B.A. degree in Accountingfrom Dowling College.

 

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**ITEM11  -****             EXECUTIVECOMPENSATION**

 

The following table sets forththe salary and bonus compensation paid during the fiscal years ended September30, 2002, 2001 and 2000 to the Chairman and Chief Executive Officer of theCompany.  No other Executive Officer ofthe Company received fiscal 2002 salary and bonus compensation which exceeded$100,000. The Company’s non-employee Directors received options to purchase theCompany’s stock in lieu of the monetary portion of consideration for theirservices, 25,000 options per year for their services as such, and reimbursementfor any expenses they may incur in connection with their services as Directors.

 
| “Summary Compensation Table”                |
|-------------------------------------------------------|
|                                                  |
| **Name and  Principal  Position**                     |   | **Fiscal Year** |   | **Salary** |   | **Other Annual  Compensation** |   | **Long Term Compensation  Awards-Options/ SAR’s** |   |
| Mark  Hopkinson, Chairman and Chief Executive Officer |   | 2002 |   | $ | 121,516 |   | $ | 0 |   | 0 |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |
|                                                  |   | 2001 |   | $ | 160,741 |   | $ | 25,000 |   | 0 |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |
|                                                  |   | 2000 |   | $ | 128,535 |   | $ | 0 |   | 225,000 |   |

 

Under the terms of the Company’s1993 Incentive Stock Option Plan, the following options were granted to theChief Executive Officer of the Company during fiscal year 2002.

 
| “Option/SAR Grants in Last Fiscal Year” |
|---------------------------------------------------|
|                                              |
| **Name**                                          |   | **Number of Securities  Underlying Options  Granted** |   | **% of Total Options  Granted to Employees in  Fiscal Year** |   | **Exercise or****Base Price($/Sh)** |   | **Expiration****Date** |   |
| Mark Hopkinson                                    |   | 0 |   | 0 | % | N/A |   | N/A |   |

 

Aggregated Options/SAR Exercisesin Last Fiscal Year and FY-End Option/SAR Values.

 
|           |   |                                 |   |                    |   | **Number of  Securities****UnderlyingUnexercisedOptions/SARs atFY-End (#)** |      | **Value of****Unexercised  In-the-MoneyOptions/SARs atFY-End(1)** |   |
|----------------|--------|--------------------------------------|--------|-------------------------|--------|-----------------------------------------------------------------------------|-----------|-------------------------------------------------------------------|--------|
|           |   |                                 |   |                    |   |                                                                        |      |                                                              |   |
| **Name**       |   | **Shares Acquired  on Exercise (#)** |   | **Value Realized  ($)** |   | **Exercisable/****Unexercisable**                                           |      | **Exercisable/****Unexercisable**                                 |   |
| Mark Hopkinson |   | —                               |   | $                       | — |                                                                        | 279,000/0 |                                                              | $      | 0/$0 |   |
|                |        |                                      |        |                         |        |                                                                             |           |                                                                   |        |  |  |

 

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(1) In-the-money options are those for which the fairmarket value of the underlying Common Stock exceeds the exercise price of theoption. The value of the in-the-money options is determined in accordance withregulations of the Securities and Exchange Commission by subtracting theaggregate exercise price of the option from the aggregate year-end value of theunderlying Common Stock.

 

Mr.Hopkinson deferred $40,145 in salary in fiscal 2002, which has been accrued.

 

Underthe terms of the Company's 1993 Incentive Stock Option Plan (adopted inOctober, 1993 and amended in December, 1995, January, 1998 and February, 2001),the Board of Directors is empowered at its discretion to award options topurchase an aggregate of 2,000,000 shares of the Company’s common stock to keyemployees. Prior to fiscal 2002, the Company had granted options to purchase anaggregate of 1,509,000

 

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sharesto key employees and Directors, with exercise prices ranging from $0.35 to$3.00 per share.  During fiscal 2002,66,000 of such options were cancelled. Also during fiscal 2002, the Company granted options to purchase 303,750shares of the Company’s common stock, with exercise prices ranging from $0.55to $0.91 per share, to 6 individuals (four Directors, one Officer, and one non-executive manager).

 

**ITEM12  -****             SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Thefollowing table sets forth the number and percentage of the shares of theCompany’s Common Stock owned of record and beneficially by each person orentity owning more than 5% of such shares and by all executive officers,officers and directors, as a group at December 27, 2002:

 

| **Name**                                                               |   | **Number of****Shares  Owned** |   | **Current****Percentage** |   |
|------------------------------------------------------------------------|--------|--------------------------------|--------|---------------------------|--------|
| Mark  Hopkinson(1)(3)325 Duffy AvenueHicksville, NY  11801        |   | 1,032,011                      |   | 19.74                     | %      |
|                                                                   |   |                           |   |                      |   |
| P.K.  Bartow(2)(4)325 Duffy Avenue  Hicksville, NY  11801         |   | 914,366                        |   | 17.43                     | %      |
|                                                                   |   |                           |   |                      |   |
| Salvator  Baldi(1)(5)325 Duffy AvenueHicksville, NY  11801        |   | 653,075                        |   | 12.62                     | %      |
|                                                                   |   |                           |   |                      |   |
| Michael  Michaelson(2)(6)325 Duffy AvenueHicksville, NY  11801    |   | 257,500                        |   | 4.95                      | %      |
|                                                                   |   |                           |   |                      |   |
| Christopher  T. Linen(2)(8)325 Duffy AvenueHicksville, NY  11801  |   | 262,250                        |   | 5.12                      | %      |
|                                                                   |   |                           |   |                      |   |
| Michael  Foster(2)(10)325 Duffy Avenue  Hicksville, NY  11801     |   | 72,500                         |   | 1.44                      | %      |
|                                                                   |   |                           |   |                      |   |
| Andrew  J. Beck(7)(11)325 Duffy AvenueHicksville, NY  11801       |   | 16,000                         |   | 0.32                      | %      |
|                                                                   |   |                           |   |                      |   |
| Paul  M. Cervino(7)(9)325 Duffy AvenueHicksville, NY  11801       |   | 254,667                        |   | 4.91                      | %      |
|                                                                   |   |                           |   |                      |   |
| Gerald  J. Bentivegna(7)(12)325 Duffy AvenueHicksville, NY  11801 |   | 2,000                          |   | 0.04                      | %      |
|                                                                   |   |                           |   |                      |   |
| All  Executive Officers, Officers andDirectors  as a Group (9 persons) |   | 3,464,369                      |   | 53.24                     | %      |

 

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----

(1)                                  Executive Officer and Director.

 

(2)                                  Director only.

 

(3)                                  Mark Hopkinson is General Partner of the Hopkinson Family Partnership (in which hehas exclusive management rights), which owns 700,000 of the shares includedherein.  Also included in Mr.Hopkinson’s shareholdings are 279,000 shares represented by currentlyexercisable options. Mr. Hopkinson disclaims beneficial ownership of 15,700shares owned by his wife.

 

(4)                                  Included in Mr. Bartow’s shareholdings are297,500 shares represented by currently exercisable options.  Mr. Bartow disclaims beneficial ownership of15,000 shares owned by his immediate family.

 

(5)                                  Included in Mr. Baldi’s shareholdings are 225,000shares represented by currently exercisable options.  Mr. Baldi disclaims beneficial ownership of 100,000 shares ownedby his wife and 95,000 shares owned by various members of his immediate family.

 

(6)                                  Mr. Michaelson’s shareholdings are comprised of257,500 shares represented by currently exercisable options.  Mr. Michaelson disclaims beneficialownership of 216,000 shares owned by his wife.

 

(7)                                  Officer only.

 

(8)                                  Included in Mr. Linen’s shareholdings are 176,250shares represented by currently exercisable options.

 

(9)                                  Included in Mr. Cervino’s shareholdings are239,067 shares represented by currently exercisable options.

 

(10)                            Mr. Foster’s shareholdings are comprised of72,500 shares represented by currently exercisable options.

 

(11)                            Included in Mr. Beck’s shareholdings are 10,000shares represented by currently exercisable options.

 

(12)                            Mr. Bentivegna’s shareholdings are comprised of2,000 shares represented by currently exercisable options.

 

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**ITEM13  -****             CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**

 

Not applicable.

 

**ITEM14  -****             CONTROLS ANDPROCEDURES**

 

The Company’s Chief Executive Officer, Chief OperatingOfficer, and Chief Financial Officer (its principal executive officer,principal operating officer, and principal financial officer, respectively)have concluded, based on their evaluation as of a date within 90 days prior tothe filing of this report, that the Company’s disclosure controls andprocedures are effective to ensure that information required to be disclosed bythe Company in the reports filed or submitted by it under the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, and include controls and procedures designed toensure that information required to be disclosed by the Company in such reportsis accumulated and communicated to the Company’s management, including theChief Executive Officer, Chief Operating Officer and the Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

There were no significant changes in the Company’sinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of such evaluation including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

**PART IV**

 

**ITEM15  -****             EXHIBITS AND REPORTSON FORM 8-K**

 

(a)                  (1)(2)    FinancialStatements and Financial Statement ScheduleSee Index to Financial Statements on page F-2

 

(3)          Exhibits 

                        23.1 Consent of BDO Seidman, LLP

                        99.1 – 99.3 PEO, POO and PFO Certifications

 

(b)                 Reports on Form 8-K

 

No reports on Form 8-K were filed in the last quarter offiscal 2002.

 

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**SIGNATURES**

 

In accordance with Section 13 or 15 (d) of theExchange Act, the Registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   | ALLIED DEVICES CORPORATION |
|--------|----------------------------|
|   | /s/ Mark Hopkinson         |
|   | Mark Hopkinson             |
|   | Chairman of the Board      |

 

In accordance with the Exchange Act, this reporthas been signed below by the following persons on behalf of the Registrant inthe capacities and on the dates indicated.

 
| **Signatures**           |   | **Title**                      |   | **Date**         |
|--------------------------|--------|--------------------------------|--------|------------------|
|                     |   |                           |   |             |
| /s/ Mark Hopkinson       |   | Chairman of the Board,         |   | January 13, 2003 |
| Mark Hopkinson           |   | Principal Executive Officer,   |   |             |
|                     |   | and Director                   |   |             |
|                     |   |                           |   |             |
| /s/ Salvator Baldi       |   | Executive Vice President       |   | January 13, 2003 |
| Salvator Baldi           |   | and Director                   |   |             |
|                     |   |                           |   |             |
| /s/ Philip Key Bartow    |   | Director                       |   | January 13, 2003 |
| Philip Key Bartow        |   |                           |   |             |
|                     |   |                           |   |             |
| /s/ Michael Michaelson   |   | Director                       |   | January 13, 2003 |
| Michael Michaelson       |   |                           |   |             |
|                     |   |                           |   |             |
| /s/ Christopher T. Linen |   | Director                       |   | January 13, 2003 |
| Christopher T. Linen     |   |                           |   |             |
|                     |   |                           |   |             |
| /s/ Michael Foster       |   | Director                       |   | January 13, 2003 |
| Michael Foster           |   |                           |   |             |
|                     |   |                           |   |             |
| /s/ Paul M. Cervino      |   | President, Principal Operating |   | January 13, 2003 |
| Paul M. Cervino          |   | Officer, and Treasurer         |   |             |
|                     |   |                           |   |             |
| /s/ Gerald J. Bentivegna |   | Chief Financial Officer and    |   | January 13, 2003 |
| Gerald J. Bentivegna     |   | Principal Accounting Officer   |   |             |

 

34

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CERTIFICATION

Pursuant to 18 U.S.C.Section 1350,

 

As adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002

 

I, Mark Hopkinson certify that:

 

1.                    I havereviewed this annual report on Form 10-K of Allied Devices Corporation (the“registrant”);

 

2.                    Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                    Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.                    Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(a)  designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

(b)  evaluated the effectiveness ofthe registrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

(c)  presented in this annual reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                    Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons fulfilling the equivalentfunction):

 

(a)  all significant deficiencies inthe design or operation of  internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and

 

35

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report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

(b)         any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                    Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:   January 13, 2003 |   | Signature: | /s/  Mark  Hopkinson    |   |
|-------------------------------|--------|------------|------------------------------|--------|
|                          |   |       | Principal  Executive Officer |

 

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CERTIFICATION

Pursuant to 18 U.S.C. Section 1350,

 

As adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Paul M. Cervino certify that:

 

1.                    I havereviewed this annual report on Form 10-K of Allied Devices Corporation (the“registrant”);

 

2.                    Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                    Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.                    Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(a)          designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

(b)         evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)          presented in this annualreport our conclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                    Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons fulfilling the equivalentfunction):

 

(a)          all significantdeficiencies in the design or operation of internal controls which could adversely affect the registrant’s abilityto record, process, summarize and

 

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report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

(b)         any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                    Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:   January 13, 2003 |   | Signature: | /s/  Paul M.  Cervino   |
|-------------------------------|--------|------------|------------------------------|
|                          |   |       | Principal  Operating Officer |

 

38

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CERTIFICATION

Pursuant to 18 U.S.C.Section 1350,

 

As adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Gerald J. Bentivegna certify that:

 

1.                    I havereviewed this annual report on Form 10-K of Allied Devices Corporation (the“registrant”);

 

2.                    Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                    Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.                    Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(a)          designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

(b)         evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)          presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                    Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons fulfilling the equivalent function):

 

(a)          all significantdeficiencies in the design or operation of internal controls which could adversely affect the registrant’s abilityto record, process, summarize and

 

39

----

 

report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

(b)         any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                    Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:   January 13, 2003 |   | Signature: | /s/  Gerald  J. Bentivegna |
|-------------------------------|--------|------------|---------------------------------|
|                          |   |       | Principal  Financial Officer    |

 

40

----

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** |   | **Description**                                                                                                                |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                           |
| 23.1                |   | Consent of BDO Seidman                                                                                                         |
|                |   |                                                                                                                           |
| 99.1                |   | Principal Executive Officer  Certification pursuant to 18 U.S.C. Section 1350 (Section 906 of the  Sarbanes-Oxley Act of 2002) |
|                |   |                                                                                                                           |
| 99.2                |   | Principal Operating Officer  Certification pursuant to 18 U.S.C. Section 1350 (Section 906 of the  Sarbanes-Oxley Act of 2002) |
|                |   |                                                                                                                           |
| 99.3                |   | Principal Financial Officer  Certification pursuant to 18 U.S.C. Section 1350 (Section 906 of the  Sarbanes-Oxley Act of 2002) |

 

41

----

 

**Allied DevicesCorporation**

**and Subsidiaries**

** **

** **

** **

** **

** **

ConsolidatedFinancial Statements

**Years Ended September 30, 2002, 2001 and 2000**

** **

** **

** **

**F-1**

----

**Index**

** **
| **Report  of independent certified public accountants** |   |   |   |
|---------------------------------------------------------|--------|--------|--------|
|                                                    |   |   |   |
| **Consolidated  financial statements**                  |   |   |   |
| Balance sheets                                          |   |   |   |
| Statements of  operations                               |   |   |   |
| Statements  of stockholders’ (deficit) equity      |   |   |   |
| Statements  of cash flows                               |   |   |   |
| Notes to  financial statements                          |   |   |   |
| Schedule II                                             |   |   |   |

 

 

F-2

----

 

### **Reportof Independent Certified Public Accountants**

Stockholders and Board of Directors of

Allied Devices Corporation

Hicksville, New York

 

We have audited the accompanying consolidated balancesheets of Allied Devices Corporation and subsidiaries as of September 30, 2002and 2001, and the related consolidated statements of operations, stockholders’(deficit) equity, and cash flows for each of the three years in the periodended September 30, 2002.  We have alsoaudited the schedule listed in the accompanying index for the sameperiods.  These financial statements andschedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditingstandards generally accepted in the United States.  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements and scheduleare free of material misstatement.  Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements and schedule.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement and schedule presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Allied Devices Corporation and subsidiaries at September 30, 2002and 2001, and the results of their operations and their cash flows for each ofthe three years in the period ended September 30, 2002 in conformity withaccounting principles generally accepted in the United States.  Also, in our opinion, the schedule presentsfairly, in all material respects, the information set forth therein for each ofthe three years in the period ended September 30, 2002.

The accompanying consolidated financial statementshave been prepared assuming that the Company will continue as a goingconcern.  As discussed in Note 2, theCompany has been unprofitable for the past two fiscal years and is in defaulton certain financial covenants contained in its debt agreements and is attemptingto negotiate changes to the terms of its debt obligations.  In the absence of such contemplated changes,its current inability to generate sufficient cash from operations to fund itsdebt obligations raises substantial doubt about its ability to continue as agoing concern.  Management’s plansconcerning these matters are discussed in Note 2.  The consolidated financial statements do not include anyadjustments that may result from the outcome of this uncertainty.

As discussed in Note 6 to the financial statements,the Company changed its method of accounting for inventories in fiscal 2002.

BDO Seidman, LLP

Melville, New York

January 3, 2003

 

F-3

----

**Consolidated Balance Sheets**

 
| **September  30,**                                                                                     |   | **2002**       |           | **2001**   |   |
|--------------------------------------------------------------------------------------------------------|--------|----------------|----------------|------------|--------|
| **Assets**                                                                                             |   |           | ** **     |       |   |
| **Current:**                                                                                           |   |           | ** **     |       |   |
| Cash                                                                                                   |   | **$**          | **1,536,299**  | ** ** | $      | 54,722 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $58,000 and $60,000,  respectively     |   | **2,291,625**  | ** **     | 2,131,273  |   |
| Inventories                                                                                            |   | **5,620,833**  | ** **     | 8,422,690  |   |
| Prepaid expenses  and other current assets                                                             |   | **299,511**    | ** **     | 549,432    |   |
| Income tax  refund receivable                                                                          |   | **294,000**    | ** **     | 605,503    |   |
| **Total current assets**                                                                               |   | **10,042,268** | ** **     | 11,763,620 |   |
| **Property, plant and equipment, at  cost, net of accumulated depreciation and amortization**          |   | **9,368,554**  | ** **     | 13,182,951 |   |
| **Goodwill and other intangibles, net  of accumulated amortization of $1,686,160 and $1,448,238**      |   | **5,280,653**  | ** **     | 8,295,464  |   |
| **Deferred income taxes**                                                                              |   | **—**     | ** **     | 885,400    |   |
| **Other assets**                                                                                       |   | **63,768**     | ** **     | 173,345    |   |
|                                                                                                   |   | **$**          | **24,755,243** | ** ** | $      | 34,300,780 |   |
| **Liabilities and Stockholders’  (Deficit) Equity**                                               |   |           | ** **     |       |   |
| **Current:**                                                                                           |   |           | ** **     |       |   |
| Accounts payable                                                                                       |   | **$**          | **2,017,381**  | ** ** | $      | 1,648,924 |   |
| Accrued expenses  and other                                                                            |   | **1,184,787**  | ** **     | 1,211,534  |   |
| Current portion  of long-term debt and capital lease obligations                                       |   | **16,478,259** | ** **     | 16,317,496 |   |
| **Total current liabilities**                                                                          |   | **19,680,427** | ** **     | 19,177,954 |   |
| **Long-term debt and accrued interest**                                                                |   | **5,911,033**  | ** **     | 7,584,337  |   |
| **Other liabilities**                                                                                  |   | **435,980**    | ** **     | 341,630    |   |
| **Total liabilities**                                                                                  |   | **26,027,440** | ** **     | 27,103,921 |   |
| **Stockholders’ (deficit) equity**                                                                |   |           | ** **     |       |   |
| Common stock,  $.001 par value, authorized 25,000,000 shares, issued 5,048,742; outstanding  4,948,392 |   | **5,049**      | ** **     | 5,049      |   |
| Additional  paid-in capital                                                                            |   | **3,520,970**  | ** **     | 3,520,970  |   |
| Retained  (deficit) earnings                                                                           |   | **(4,669,045** | **)**          | 3,800,011  |   |
| **Subtotal**                                                                                           |   | **(1,143,026** | **)**          | 7,326,030  |   |
| Treasury stock,  at cost (100,350 shares)                                                              |   | **(129,171**   | **)**          | (129,171   | )      |
| **Total stockholders’ (deficit)  equity**                                                         |   | **(1,272,197** | **)**          | 7,196,859  |   |
|                                                                                                   |   | **$**          | **24,755,243** | ** ** | $      | 34,300,780 |   |

*Seeaccompanying notes to consolidated financial statements.*

 

F-4

----

**ConsolidatedStatements of Operations**

 
| **Year  ended September 30,**                |   | **2002**       |           | **2001**   |   | **2000**       |   |
|---------------------------------------------------|--------|----------------|----------------|------------|--------|----------------|--------|
|                                              |   |           |           |       |   | **(Restated)** |   |
| **Net sales**                                     |   | **$**          | **18,246,189** | ** ** | $      | 29,868,056     |   | $ | 32,575,127 |   |
| **Cost of sales**                                 |   | **14,897,237** | ** **     | 22,191,192 |   | 22,779,407     |   |
| **Write-off of discontinued products**            |   | **2,503,560**  | ** **     | 2,718,859  |   | —         |   |
| **Gross profit**                                  |   | **845,392**    | ** **     | 4,958,005  |   | 9,795,720      |   |
| **Selling, general and administrative  expenses** |   | **6,175,483**  | ** **     | 8,031,342  |   | 7,507,908      |   |
| **Impairment of goodwill**                        |   | **2,323,765**  | ** **     | —     |   | —         |   |
| **Restructuring expense**                         |   | **—**     | ** **     | 914,785    |   | —         |   |
| **(Loss) income from operations**                 |   | **(7,653,856** | **)**          | (3,988,122 | )      | 2,287,812      |   |
| **Other (income) expense**                        |   | **(173,458**   | **)**          | (7,536     | )      | 69,503         |   |
| **Interest expense, net**                         |   | **1,809,372**  | ** **     | 1,706,338  |   | 1,220,592      |   |
| **(Loss) income before tax (benefit)  expense**   |   | **(9,289,770** | **)**          | (5,686,924 | )      | 997,717        |   |
| **Tax (benefit) expense**                         |   | **(820,714**   | **)**          | (2,030,813 | )      | 359,123        |   |
| **Net (loss) income**                             |   | **$**          | **(8,469,056** | **)**      | $      | (3,656,111     | )      | $ | 638,594 |   |
| **Net (loss) income per share — basic**      |   | **$**          | **(1.71**      | **)**      | $      | (.74           | )      | $ | .13 |   |
| **Net (loss) income per share —  diluted**   |   | **$**          | **(1.71**      | **)**      | $      | (.74           | )      | $ | .12 |   |

*Seeaccompanying notes to consolidated financial statements.*

 

 

F-5

----

**ConsolidatedStatements of Stockholders' (Deficit) Equity**

 
|                                                                                 |   | **Common  Stock  $0.001 par value** |       |       |      |                             |   |                |       |                              |         |
|--------------------------------------------------------------------------------------|--------|-------------------------------------|------------|------------|-----------|----------------------------------|--------|---------------------|------------|-----------------------------------|--------------|
|                                                                                 |   | **Number  of Shares**               |       | **Amount** |      | **Additional  Paid-in  Capital** |   | **Treasury  Stock** |       | **Retained  (Deficit)  Earnings** |         | **Total  Stockholders’  (Deficit)  Equity** |   |
| **Balance, September 30, 1999, as  reported**                                        |   | 4,947,942                           |       | $          | 4,948     |                             | $      | 3,624,721           |       | $                                 | (129,171     | ) | $ | 5,981,426 |   | $ | 9,481,924 |   |
| **Cumulative effect on prior years of  change in inventory costing method (Note 6)** |   |                                |       |       |      |                             |   |                |       | 836,102                           |         | 836,102 |   |
| **Balance, September 30, 1999, as  restated**                                        |   |                                |       |       |      |                             |   |                |       | 6,817,528                         |         | 10,318,026 |   |
| **Net income**                                                                       |   |                                |       |       |      |                             |   |                |       | 638,594                           |         | 638,594 |   |
| **Balance, September 30, 2000**                                                      |   | 4,947,942                           |       | 4,948      |      | 3,624,721                        |   | (129,171            | )          | 7,456,122                         |         | 10,956,620 |   |
| **Net loss**                                                                         |   |                                |       |       |      |                             |   |                |       | (3,656,111                        | )            | (3,656,111 | ) |
| **Sale of common stock**                                                             |   | 800                                 |       | 1          |      | 2,599                            |   |                |       |                              |         | 2,600 |   |
| **Shares issued for acquisition**                                                    |   | 100,000                             |       | 100        |      | 399,900                          |   |                |       |                              |         | 400,000 |   |
| **Stock price guarantee related to  acquisition**                                    |   |                                |       |       |      | (506,250                         | )      |                |       |                              |         | (506,250 | ) |
| **Balance, September 30, 2001**                                                      |   | 5,048,742                           |       | 5,049      |      | 3,520,970                        |   | (129,171            | )          | 3,800,011                         |         | 7,196,859 |   |
| **Net loss**                                                                         |   |                                |       |       |      |                             |   |                |       | (8,469,056                        | )            | (8,469,056 | ) |
| **Balance, September 30, 2002**                                                      |   | **5,048,742**                       | ** ** | **$**      | **5,049** | ** **                       | **$**  | **3,520,970**       | ** ** | **$**                             | **(129,171** | **)** | **$** | **(4,669,045** | **)** | **$** | **(1,272,197** | **)** |
|                                                                                      |        |                                     |            |            |           |                                  |        |                     |            |                                   |              |  |  |  |  |  |  |  |  |  |  |  |  |  |

*Seeaccompanying notes to consolidated financial statements.*

 

 

F-6

----

**ConsolidatedStatements of Cash Flows**

**(Note 15)**

 
| **Year  ended September 30,**                                                                   |   | **2002**      |           | **2001**   |   | **2000**       |   |
|------------------------------------------------------------------------------------------------------|--------|---------------|----------------|------------|--------|----------------|--------|
|                                                                                                 |   |          |           |       |   | **(Restated)** |   |
| **Cash flows from operating  activities:**                                                           |   |          | ** **     |       |   |           |   |
| Net (loss)  income                                                                                   |   | **$**         | **(8,469,056** | **)**      | $      | (3,656,111     | )      | $ | 638,594 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities: |   |          | ** **     |       |   |           |   |
| Depreciation and  amortization                                                                       |   | **2,850,147** | ** **     | 2,469,080  |   | 1,806,807      |   |
| Allowance for  doubtful accounts                                                                     |   | **(2,000**    | **)**          | (7,000     | )      | —         |   |
| Provision  (benefit) for income taxes                                                                |   | **885,400**   | ** **     | (1,112,400 | )      | (408,000       | )      |
| Write-off of  inventories                                                                            |   | **2,503,560** | ** **     | 2,718,859  |   | —         |   |
| Impairment of  goodwill                                                                              |   | **2,323,765** | ** **     | —     |   | —         |   |
| Loss (gain) on  sale of equipment                                                                    |   | **(189,903**  | **)**          | (7,536     | )      | 78,012         |   |
| Unrealized loss  on interest rate collar                                                             |   | **47,248**    | ** **     | 200,000    |   | —         |   |
| Changes in  assets and liabilities, net of effects from acquisitions:                                |   |          | ** **     |       |   |           |   |
| Decrease  (increase) in:                                                                             |   |          | ** **     |       |   |           |   |
| Accounts  receivable                                                                                 |   | **(158,352**  | **)**          | 2,814,891  |   | (1,888,280     | )      |
| Inventories                                                                                          |   | **298,297**   | ** **     | (833,626   | )      | 742,952        |   |
| Prepaid expenses  and other current assets                                                           |   | **249,921**   | ** **     | (393,263   | )      | 6,941          |   |
| Income tax  refund receivable                                                                        |   | **311,503**   | ** **     | (605,503   | )      | —         |   |
| Other assets                                                                                         |   | **(80**       | **)**          | 141,047    |   | (114,043       | )      |
| (Decrease) increase  in:                                                                             |   |          | ** **     |       |   |           |   |
| Accounts payable  and accrued expenses                                                               |   | **715,649**   | ** **     | (1,583,237 | )      | 2,438,551      |   |
| Other  liabilities                                                                                   |   | **47,102**    | ** **     | 50,411     |   | 91,218         |   |
| Income taxes  payable                                                                                |   | **—**    | ** **     | (881,801   | )      | 601,023        |   |
| Total  adjustments                                                                                   |   | **9,882,257** | ** **     | 2,969,922  |   | 3,355,181      |   |
| **Net cash provided by (used in)  operating activities**                                             |   | **1,413,201** | ** **     | (686,189   | )      | 3,993,775      |   |
| **Cash flows from investing  activities:**                                                           |   |          | ** **     |       |   |           |   |
| Capital  expenditures                                                                                |   | **(66,936**   | **)**          | (515,648   | )      | (775,453       | )      |
| Business  acquisitions, net of cash acquired                                                         |   | **—**    | ** **     | (682,975   | )      | (896,129       | )      |
| Proceeds from  sale of equipment                                                                     |   | **—**    | ** **     | 180,000    |   | 275,450        |   |
| **Net cash used in investing  activities**                                                           |   | **(66,936**   | **)**          | (1,018,623 | )      | (1,396,132     | )      |
| **Cash flows from financing  activities:**                                                           |   |          | ** **     |       |   |           |   |
| Increase  (decrease) in revolving credit borrowings                                                  |   | **200,000**   | ** **     | 3,900,000  |   | (500,000       | )      |
| Principal  payments on long-term debt and capital lease obligations                                  |   | **(64,688**   | **)**          | (2,777,363 | )      | (2,105,496     | )      |
| Proceeds from  equipment financing                                                                   |   | **—**    | ** **     | 224,111    |   | —         |   |
| Proceeds from  sale of common stock                                                                  |   | **—**    | ** **     | 2,600      |   | —         |   |
| Deferred  financing costs                                                                            |   | —        | ** **     | —     |   | (25,000        | )      |
| **Net cash provided by (used in)  financing activities**                                             |   | **135,312**   | ** **     | 1,349,348  |   | (2,630,496     | )      |
| **Net increase (decrease) in cash**                                                                  |   | **1,481,577** | ** **     | (355,464   | )      | (32,853        | )      |
| **Cash, beginning of period**                                                                        |   | **54,722**    | ** **     | 410,186    |   | 443,039        |   |
| **Cash, end of period**                                                                              |   | **$**         | **1,536,299**  | ** ** | $      | 54,722         |   | $ | 410,186 |   |

*Seeaccompanying notes to consolidated financial statements.*

 

F-7

----

**Notesto Consolidated Financial Statements**

 

**1.                Summary of Accounting Policies**

*(a)**                                        Business*

The Company iscomprised of Allied Devices Corporation (“ADCO”), and its wholly ownedsubsidiaries, Empire - Tyler Corporation (“Empire”) and APPI, Inc. (“APPI”),(collectively the “Company”).

The Company isengaged primarily in the manufacture and distribution of standard and customprecision mechanical assemblies and components.  The Company sells all of its products to the same base ofcustomers located throughout the United States.  Because the Company’s product line comprises a comparable groupof precision manufactured parts sold to a similar customer base, it considersitself to be engaged in a single business segment.

*(b)**                                        Basisof Presentation*

The consolidatedfinancial statements include the accounts of ADCO and its subsidiaries.  All significant intercompany balances andtransactions have been eliminated.

*(c)**                                         Inventories*

During the firstquarter of fiscal 2002, the Company changed its method of inventory costingfrom last-in first-out (LIFO) to first-in first-out (FIFO).  Prior periods have been restated to reflectthis change (Note 6).

Inventories arevalued at the lower of cost (first-in, first-out (FIFO) method) or market.  Management periodically analyzes inventoriesfor obsolescence and records write-offs as required.

*(d)**                                        Depreciationand Amortization*

Property, plantand equipment are stated at cost. Depreciation and amortization of property, plant and equipment iscomputed using the straight-line method over the estimated useful lives of theassets.  The estimated lives are asfollows:

 
| Machinery and equipment                   |   | 3 - 10 years                                                               |
|-------------------------------------------|--------|----------------------------------------------------------------------------|
| Tools, molds and dies                     |   | 8 years                                                                    |
| Furniture, fixtures and  office equipment |   | 5 - 7 years                                                                |
| Buildings and  improvements               |   | 30 years                                                                   |
| Leasehold  improvements                   |   | Shorter of the  lease term or the estimated useful life of the improvement |

 

F-8

----

 

*(e)**                                         Incometaxes*

The Company andits subsidiaries file a consolidated federal income tax return and separatestate income tax returns.

Deferred taxassets and liabilities are recognized for the future tax consequences attributableto differences between the financial statement carrying amounts of existingassets and liabilities and their respective tax bases and tax loss and creditcarry forwards.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled.  The effect ondeferred tax assets and liabilities of a change in tax rate is recognized inincome in the period that includes the enactment date.

*(f)**                                            Earnings(loss) per share*

Basic earnings(loss) per share are computed by dividing income available to commonshareholders by the weighted average shares outstanding for the period andreflect no dilution for the potential exercise of stock options andwarrants.  Diluted earnings (loss) pershare reflect, in periods in which they have a dilutive effect, the dilutionthat would occur upon the exercise of stock options and warrants.   A reconciliation of the shares used incalculating basic and diluted earnings (loss) per share follows:

 
| **Year ended September 30,**                        |   | **2002**      |   | **2001**  |   | **2000**  |
|-----------------------------------------------------|--------|---------------|--------|-----------|--------|-----------|
| Weighted  average shares outstanding — basic   |   | **4,948,392** |   | 4,935,965 |   | 4,847,592 |
| Dilutive effect  of options and warrants            |   | **—**    |   | —    |   | 690,156   |
| Weighted average  shares outstanding — diluted |   | **4,948,392** |   | 4,935,965 |   | 5,537,748 |

 

Options andwarrants totaling 1,750,717, 1,511,234 and 143,500 at September 30, 2002, 2001and 2000, respectively, were antidilutive and, accordingly, excluded from thediluted calculation.

*(g)**                                        Intangibleassets*

The excess of costover the fair value of net assets acquired is being amortized over periods of15 and 20****years.  Deferred financing costs are amortized overthe life of the related debt.

 

F-9

----

 

*(h)**                                        Long-livedassets*

The Companyreviews the carrying values of its long-lived and identifiable intangibleassets for possible impairment whenever events or changes in circumstancesindicate that the carrying amount of the assets may not be recoverable.  Any long-lived assets held for disposal arereported at the lower of their carrying amounts or fair value less cost tosell.  The Company recorded an assetimpairment loss of $2,323,765 for the year ended September 30, 2002 (Note 3).

*(i)**                                           Revenuerecognition*

Sales arerecognized upon shipment of products. All sales are shipped F.O.B. shipping point and are not sold subject toa right of return unless the products are defective.  The Company’s level of returns arising from defective productshas historically been immaterial.

*(j)**                                            Shippingand Handling Costs*

The Companyrecords its shipping and handling fee costs as required under EITF No. 00-10,“Accounting for Shipping and Handling Fee Costs.”  Accordingly, shipping and handling fee costs are recorded inSales and Cost of Sales.

*(k)**                                        Advertisingexpenses*

Advertisingexpenses are expensed as incurred and amounted to approximately $67,000,$206,000 and $203,000 for the years ended September 30, 2002, 2001 and 2000,respectively.

*(l)**                                           Stockbased compensation*

The Companyaccounts for stock based compensation using the intrinsic value method aspermitted by SFAS No. 123 and will account for such transactions in accordancewith Accounting Principles Board (“APB”) No. 25 and, as required by SFAS No.123, provides pro forma information regarding net income (loss) as ifcompensation costs for the Company’s stock plan had been determined inaccordance with the fair value method presented by SFAS No. 123.

*(m)**                                      Useof estimates*

In preparingfinancial statements in conformity with generally accepted accountingprinciples, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the dates of the financial statements andthe reported amounts of revenues and expenses during the reportingperiods.  Actual results could differfrom those estimates.

 

F-10

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*(n)**                                        Fairvalue of financial instruments*

The carryingamounts of financial instruments, including cash, receivables, payables andshort-term debt, approximated fair value as of September 30, 2002 and2001.  The carrying value of long-termdebt, approximates fair value as of September 30, 2002 and 2001 based upon theborrowing rates currently available to the Company for bank loans with similarterms and average maturities.

*(o)**                                        Concentrationsof risk*

The Companyextends credit based on an evaluation of its customer’s financial condition,generally without requiring collateral. Exposure to losses on receivables is principally dependent on eachcustomer’s financial condition.  TheCompany monitors its exposure for credit losses and maintains allowances foranticipated losses.  No individualcustomer is considered to be a significant risk.

In the fiscalyears 2002, 2001 and 2000, the Company’s ten largest customers representedapproximately 49%, 52% and 48%, respectively, of sales.  The Company’s sales to the semiconductorequipment industry, which is experiencing economic difficulties, representedapproximately 24%, 42% and 63% of total sales for the years ended September 30,2002, 2001 and 2000, respectively.

*(p)**                                        Recentaccounting pronouncements*

*(i)**                                  BusinessCombinations*

In June 2001, the Financial Accounting Standards Boardissued Statement of Financial Accounting No. 141, “Business Combinations” (“FASNo. 141”), which requires that the purchase method of accounting be used forall business combinations initiated after June 30, 2001, establishes specificcriteria for the recognition of intangible assets separately from goodwill, andrequires that unallocated negative goodwill be written off immediately as anextraordinary gain instead of being deferred and amortized.  The Company will account for businesscombinations after June 30, 2001 in accordance with the guidance in FAS No.141.

 

F-11

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*(ii)**                              Goodwilland Other Intangible Assets*

In June 2001, the Financial Accounting Standards Boardalso issued Statement of Financial Accounting No. 142, “Goodwill and OtherIntangible Assets” (“FAS No. 142”). Under FAS No. 142, goodwill and indefinite lived tangible assets will nolonger be amortized.  Instead, goodwilland indefinite lived tangible assets will be subject to annual impairment testsperformed under the guidance of the statement. Additionally, the amortization period of intangible assets with finitelives will no longer be limited to forty years.  The Company’s business combinations prior to adoption of FAS No.142 have been accounted for using the purchase method.  As of September 30, 2002, the net carryingvalue of goodwill was $5,230,653, which is net of a write off in fiscal 2002 of$2,323,765 related to an impairment. Amortization expense during the year ended September 30, 2002, wasapproximately $696,000.  The Companywill implement FAS No. 142 on October 1, 2002. The Company is currently studying the effects of implementing FAS No.142 which may have a material adverse effect on the Company’s financialstatements.

*(iii)**                          Accountingfor Obligations Associated with the Retirement of Long-Lived Assets*

In June 2001, the Financial Accounting Standards Boardalso issued Statement of Financial Accounting No. 143, “Accounting forObligations Associated with the Retirement of Long-Lived Assets” (“FAS No.143”).  The objective of FAS No. 143 isto establish an accounting standard for the recognition and measurement of anasset retirement obligation on certain long-lived assets. The retirement obligationmust be one that results from the acquisition, construction or normal operationof a long-lived asset.  FAS 143 requiresthe legal obligation associated with the retirement of a tangible long-livedasset to be recognized at fair value as 

 

F-12

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a liability when incurred, and the cost to becapitalized by increasing the carrying amount of the related long-livedasset.  FAS No. 143 will be effectivefor the Company on October 1, 2002.  TheCompany is currently evaluating the effect of implementing FAS No. 143, butdoes not expect it to have a material adverse effect on the financialstatements.

*(iv)**                            Accountingfor the Impairment or Disposal of Long-Lived Assets*

In October 2001, the Financial Accounting StandardsBoard also issued Statement of Financial Accounting No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets” (“FAS No. 144”), whichsupersedes Statement No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed Of” (“FAS 121”).  Although it retains the basic requirementsof FAS 121 regarding when and how to measure an impairment loss, FAS 144provides additional implementation guidance. FAS 144 will be effective for the Company on October 1, 2002.  The Company anticipates that the adoption ofStatement 144 will not have a material effect on the Company’s financialposition or results of operations.

*(v)**                                Rescissionof Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, andTechnical Correction*

In April 2002, the FASB issued Statement No. 145,“Rescission of Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,and Technical Correction” (“Statement 145”). Statement 145 eliminatesextraordinary accounting treatment for reporting gains or losses on debt extinguishments,and amends other existing authoritative pronouncements to make varioustechnical corrections, clarify meanings, or describe their applicability underchanged conditions. The provisions of this Statement are effective for fiscalyears beginning after May 15, 2002; however, early application of Statement 145is encouraged. Debt extinguishments reported as extraordinary items prior toscheduled or early adoption of this Statement would be reclassified to otherincome in most cases following adoption.

The Company is currently evaluating the impact theadoption of Statement 145 would have on its consolidated results of operationssubject to the evaluation in accordance with APB 30, “Reporting the Results ofOperations - Reporting the Effects of Disposal of a Segment of a Business andExtraordinary, Unusual and Infrequently Occurring Events and Transactions”.

 

F-13

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*(vi)**                            Accounting for Costs Associated with Exit orDisposal Activities*

In June 2002, the FASB issued Statement No. 146,“Accounting for Costs Associated with Exit or Disposal Activities” (“Statement146”), which changes the accounting for costs such as lease termination costsand certain employee severance costs that are associated with a restructuring,discontinued operation, plant closing, or other exit or disposal activityinitiated after December 31, 2002. The standard requires companies to recognizethe fair value of costs associated with exit or disposal activities when theyare incurred rather than at the date of a commitment to an exit or disposalplan.  The Company anticipates that theadoption of Statement 146 will not have a material effect on the Company’sfinancial position or results of operations.

*(q)**            Investmentderivatives and hedging activities*

In June 1998, theFinancial Accounting Standards Board issued FAS No. 133, “Accounting forDerivative Investments and Hedging Activities” (“FAS 133”), as amended, whichrequires the recording of all derivative instruments as assets or liabilitiesmeasured at fair value.  Among otherdisclosures, FAS 133 requires that all derivatives be recognized and measuredat fair value regardless of the purpose or intent of holding the derivative.

The Companyadopted FAS 133 on October 31, 2000. The effect of the adoption was immaterial.  The Company has an interest rate collar contract.  The notional amount is $6,000,000 with aninterest rate cap of 6.25% and an interest rate floor of 5.00%. The interestrate collar expires December 31, 2003. The collar reduces the Company’s exposure to interest rate increases onits variable rate debt.  The interestrate collar is accounted for as a fair value hedge.

During the yearsended September 30, 2002 and 2001, the Company recorded approximately $47,000and $200,000, respectively, of interest expense related to the fair value ofthe collar.

* *

*(r)**             **Reclassification*

Certain amounts inthe prior years’ consolidated financial statements have been reclassified toconform with the presentation in the current year.

 

**2.                Going Concern**

The Company iscurrently in default on certain of its debt agreements, is unable to generatesufficient cash from operations to fund its short term debt obligations, andhas been unprofitable for the last two fiscal years resulting in a $1,272,197deficit in stockholders’ equity.  TheCompany’s management has been in negotiations with certain debt holders forover one year to obtain forbearance on these defaults and on making principalpayments on its debt.  Activediscussions are underway with certain prospective investors and with theCompany’s principal lenders with the goals of amending certain terms of itscredit and equipment lease agreements, entering into forbearance agreementssuspending principal payments for a period of time, modifying certain financialcovenants, compromising principal amounts and infusing additional equitycapital.

There can be noassurance that forbearance will be obtained, that the Company will return toprofitability upon economic recovery, or that additional financing, ifavailable, will be on terms acceptable to the Company.  Any additional stock or convertiblefinancing could result in substantial dilution to stockholders.  Should management be unable to obtainforbearance or additional financing, the Company will not be able to continuein its present form.  The financialstatements do not contain any adjustments that might be necessary if theCompany is unable to continue as a going concern.

 

F-14

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**3.****                                      AssetImpairment Loss**

In accordance withFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed Of”, the Company recorded an impairment lossof $2,323,765 on the goodwill of APPI (including goodwill from its MartinMachine, Inc. acquisition).  Currentbusiness trends of APPI indicated that the undiscounted future cash flows forthis business would be less than the carrying value of the long-lived assetsrelated to that business.  The lossrecognized is the difference between the carrying value of APPI’s net assetsand the estimated fair value of those assets based on discounted estimatedfuture cash flows.

 

**4.****                                      Restructuring**

In the thirdquarter of fiscal 2001, the Company developed and began to implement a costsavings initiative to increase long-term profitability.  The Company closed three manufacturingfacilities and consolidated these operations into a new facility in Sanford,Maine, following an orderly transition of production to the new facility.

Otherrestructuring costs associated with downsizing to current business conditionsinclude severance for layoffs throughout the Company and professional feesincurred in restructuring and forbearance negotiations. The Company estimatedthe costs associated with the restructuring to be approximately $915,000 andrecorded this expense for the year ended September 30, 2001.  The restructuring expense consisted of$243,000 in moving costs paid and $672,000 in accrued expenses and liabilities.  The accrual in fiscal 2001 included approximately$392,000 ($142,000 in severance, $50,000 in moving costs, and $200,000 inprofessional fees with approximately $86,000 remaining at the end of fiscal2002), and $280,000 in lease abandonment costs (approximately $138,000remaining at the end of fiscal 2002) which will be paid through fiscal 2005.

 

**5.****                                      Acquisition**

On July 8, 1998,with an effective date of July 1, 1998, the Company acquired the assets andbusiness of APPI from Atlantic Precision Products, Inc., a manufacturer of highprecision, machined components for original equipment manufacturers withadvanced engineering requirements.  Theprice of net assets acquired (including assumption of specified liabilities)was made up of cash, stock, and performance consideration.  The consideration was $7,237,500 in cash and250,000 shares of the Company’s common stock. The common stock portion of the consideration was recorded at $4 pershare, the value guaranteed by the Company. On July 9, 2001, the Company settled the stock price guarantee portionof the APPI acquisition by issuing

 

F-15

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a note to theseller in the amount of $506,250 with interest thereon at 7% per annum. Thenote represents the difference between the guaranteed stock price of $4 pershare and the average stock price from July 6 to July 9, 2001 for 250,000shares of stock.  The Company hasrecorded this as a long term note payable (Note 10) and reduction ofstockholders’ equity. The note is subject to a subordination agreement betweenthe seller and the Company’s lending institution (Note 8).

The performanceconsideration was a stipulated percentage of the future earnings (as defined)for APPI for three years.  The Company’spolicy with respect to any such contingent consideration was to record aliability for such amounts as the defined earnings were achieved.  After September 30, 2001 no furthercontingent consideration was accrued. As of that date, contingent consideration of $5,981,061 was recorded asadditional goodwill, of which $1,521,998 was paid in cash and $4,459,063 wasdelivered in the form of five year notes, subordinated to the bank creditfacility (Note 8), due through September 30, 2006 bearing interest at 7% perannum, in accordance with the terms of the asset purchase agreement.  The total amount of goodwill amounted to$8,827,797 and is being amortized over a (15) fifteen-year period (Note 3).

On November 15, 2000, the Company acquired MartinMachine, Inc., (“Martin Machine”) located in Raymond, Maine.  The acquisition was accounted for using thepurchase method of accounting, and results of operations of this company havebeen included in the Company’s consolidated financial statements from the dateof acquisition.  Original purchaseconsideration amounted to $1,031,000, including the value of 100,000 shares ofcommon stock (issued immediately following closing), $400,000 in cash, and a$300,000 five year note payable subordinated to the bank credit facility (Notes8 and 10), due through September 30, 2006, bearing interest at 7% perannum.  Subsequent to the closing theCompany paid an additional $18,912 in cash, which was recognized as additionalgoodwill.  The total excess of cost overthe fair value of assets acquired amounted to $448,374, which has been recordedas goodwill and is being amortized over a (15) fifteen-year period (Note3).

The Company recorded an impairment loss of $2,323,765on the goodwill of APPI (including goodwill from its Martin Machine, Inc.acquisition) (Note 3).

The acquisition of Martin Machine was immaterial tonet sales and net income of the Company for the years ended September 30, 2001and 2000 and therefore no pro forma information is provided.

The Company isadopting FAS No. 142 “Goodwill and Other Intangible Assets” on October 1, 2002.  At that date, the above goodwill will nolonger be amortized and will be subject to annual impairment tests.

 

F-16

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**6.****                                      Inventories**

Inventories aresummarized as:

 
| **September  30,** |   | **2002**      |          | **2001**  |   |
|--------------------|--------|---------------|---------------|-----------|--------|
| Raw materials      |   | **$**         | **634,604**   |      | $      | 542,060 |   |
| Work-in-process    |   | **1,043,629** |          | 1,616,320 |   |
| Finished goods     |   | **3,942,600** |          | 6,264,310 |   |
|               |   | **$**         | **5,620,833** |      | $      | 8,422,690 |   |

 

In recognition ofcurrent business conditions, the Company wrote off approximately $2,500,000 and$2,700,000 for the years ended September 30, 2002 and 2001, respectively, ofinactive, slow moving and excess inventories.

During the quarterended December 31, 2001, the Company changed its method of inventory costingfrom last-in first-out (LIFO) to first-in first-out (FIFO).  Prior periods have been restated to reflectthis change.  Management instituted thischange in method in part due to the Company’s write-off of certain slowerselling inventories and the resultant elimination of the LIFO reserve, and inpart because the rate of inflation has been minimal over the past severalyears.  In the current businessenvironment, the FIFO method presents a more accurate valuation of inventory,achieving a better matching of revenues and expenses.  The change decreased net income in fiscal 2001 and 2000 by $0 and$836,102 ($.00 and $.00, and $.17 and $.15 per share basic and diluted,respectively) and increased retained earnings by the equal amount for yearsprior to 2000.

 

F-17

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The followingtable presents the effect of the change on earnings for the years endedSeptember 30:

 
| **September  30,**                           |   | **2001** |       | **2000** |   |
|----------------------------------------------|--------|----------|------------|----------|--------|
| Net (loss)  income as reported               |   | $        | (3,656,111 | )        | $      | 1,474,696 |   |
| Change in  inventory costing method          |   | —   |       | 836,102  |   |
| Net (loss) income  as restated               |   | $        | (3,656,111 | )        | $      | 638,594 |   |
| Basic (loss)  earnings per share             |   | $        | (.74       | )        | $      | .30 |   |
| Change in  inventory costing method          |   | $        | —     |     | $      | .17 |   |
| Basic (loss)  earnings per share as restated |   | $        | (.74       | )        | $      | .13 |   |
| Diluted (loss)  earnings per share           |   | $        | (.74       | )        | $      | .27 |   |
| Change in  inventory costing method          |   | $        | —     |     | $      | .15 |   |
| Basic (loss)  earnings per share as restated |   | $        | (.74       | )        | $      | .12 |   |

 

**7.****                                      Property,Plant and Equipment**

Property, plantand equipment consists of:

 
| **September  30,**                               |   | **2002**       |           | **2001**   |   |
|--------------------------------------------------|--------|----------------|----------------|------------|--------|
| Machinery and  equipment                         |   | **$**          | **17,201,771** |       | $      | 19,312,691 |   |
| Tools, molds and  dies                           |   | **1,317,591**  |           | 1,312,124  |   |
| Furniture,  fixtures and office equipment        |   | **675,933**    |           | 675,933    |   |
| Leasehold  improvements                          |   | **266,144**    |           | 247,162    |   |
| Building and  improvements                       |   | **94,520**     |           | 94,520     |   |
| Land                                             |   | **5,000**      |           | 5,000      |   |
|                                             |   | **19,560,959** |           | 21,647,430 |   |
| Less:  accumulated depreciation and amortization |   | **10,192,405** |           | 8,464,479  |   |
| Property, plant  and equipment (net)             |   | **$**          | **9,368,554**  |       | $      | 13,182,951 |   |

 

F-18

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Included inmachinery and equipment and office equipment at September 30, 2002 and 2001 isapproximately $8,931,000 and $11,116,000, respectively, of equipment undercapital lease agreements (Note 10).  AtSeptember 30, 2002 and 2001, the related accumulated depreciation amounts wereapproximately $3,174,000 and $2,224,000, respectively.  Property, plant and equipment decreasedapproximately $2,184,000 and accumulated depreciation decreased approximately$261,000 as a result of returning to a lessor certain under-utilized equipmenton a capitalized lease in exchange for retirement of the full amount of relateddebt outstanding.  The Company recordeda related gain of approximately $173,000, net of disposition costs.

Depreciation andamortization expense totaled $1,989,000, $1,906,000 and $1,394,000 for thefiscal years ended September 30, 2002, 2001 and 2000, respectively.

 

**8.****                                      CreditFacilities**

In July 1998, theCompany entered into a new credit agreement with its existing lender and repaidall amounts due with respect to its previous credit facility.  The new credit agreement provided for arevolving credit loan and a term note. During fiscal 1999, the revolving credit facility was amended.  Beginning in October 2001 and continuingcurrently, the Company and its lenders undertook to negotiate a ForbearanceAgreement, prompted by the Company’s default on certain financial covenantscontained in its lending agreements (Note 2). No such agreement has been finalized to-date.

Under its creditagreement, the Company may borrow up to the lesser of $7,000,000 or 85% ofeligible receivables and 60% of eligible inventory to a maximum of$5,000,000.  Interest is computed at thehigher of the bank’s prime lending rate (5.0% at September 30, 2002) plus 1/2%or a LIBOR rate plus 2.50%.  Theweighted average interest rate for fiscal 2002 was 5.21%.  The Company is required to pay a commitmentfee on the average unused portion of the revolving credit commitment of 1⁄4% perannum.  Borrowings under the revolvingcredit loan were $7,000,000 and $6,800,000 at September 30, 2002 and 2001,respectively.

Under the terms ofthe five and one-half year (66 months) term note, the Company originallyborrowed $6,250,000. Interest thereon is computed at the higher of the bank’sprime rate plus 1/2% or a LIBOR rate plus 2.50%.  The weighted average interest rate for fiscal 2002 was5.17%.  The term note is payable intwenty quarterly installments of principal, which began in March 1999.  The quarterly principal installmentsincrease ratably from $150,000 per quarter during the first year to $400,000per quarter for the last year plus a final installment of $950,000 on December31, 2003.  The Company has not made anyprincipal payments since September 30, 2001.

 

F-19

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The proceeds ofthe term note and a portion of the funds drawn against the revolving creditloan were used to finance the APPI acquisition (Note 5).  In conjunction with the issuance of the termnote, the Company issued the lender warrants to purchase 125,000 shares of itscommon stock (Note 12).  The value ofthe warrants totaled $97,000 and was accounted for as deferred financing costs(included in other assets) and is being amortized over the term of the creditagreement.

Borrowings underthe credit facility are secured by a first priority security interest in theCompany’s assets.

 

**9.****                                      AccruedExpenses and Other**

Accrued expensesconsist of:
| **September  30,**   |   | **2002**    |          | **2001** |   |
|----------------------|--------|-------------|---------------|----------|--------|
| Commissions          |   | **$**       | **88,788**    |     | $      | 74,256 |   |
| Payroll and  related |   | **391,155** |          | 347,594  |   |
| Other                |   | **704,844** |          | 789,684  |   |
|                 |   | **$**       | **1,184,787** |     | $      | 1,211,534 |   |

 

**10.****                               Long-termDebt and Capital Lease Obligations**

Long-term debtconsists of:
| **September  30,**                                                                                                                                                                                                |   | **2002**       |          | **2001**   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|---------------|------------|--------|
| Revolving credit  loan (Note 8)                                                                                                                                                                                   |   | **$**          | **7,000,000** |       | $      | 6,800,000 |   |
| Term note (Note  8)                                                                                                                                                                                               |   | **3,712,500**  |          | 3,712,500  |   |
| Acquisition  notes plus accrued interest (Note 5)                                                                                                                                                                 |   | **5,890,697**  |          | 5,456,759  |   |
| Capital lease  obligations with varying monthly payments and interest rates ranging from  7.2% to 9.9% per annum maturing 2003 through 2006; secured by an interest in  specific machinery and equipment (Note 7) |   | **5,786,095**  |          | 7,932,574  |   |
| Subtotal                                                                                                                                                                                                          |   | **22,389,292** |          | 23,901,833 |   |
| Less: current  maturities                                                                                                                                                                                         |   | **16,478,259** |          | 16,317,496 |   |
| Long-term debt  and capital lease obligations                                                                                                                                                                     |   | **$**          | **5,911,033** |       | $      | 7,584,337 |   |

 

F-20

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Deferred financingcosts (gross) included in other assets amounted to $297,223 at September 30,2002 and 2001.  Accumulated amortizationamounted to $226,701 and $170,283 at September 30, 2002 and 2001, respectively.

The Company is indefault on certain of its debt agreements, the outstanding amount of which hasall been classified as current.  Thefollowing is a schedule of long-term debt maturities (including capital leaseobligations) as of September 30, 2002:

 
| 2003          |   | $         | 16,478,259 |   |
|---------------|--------|-----------|------------|--------|
| 2004          |   | 17,765    |       |
| 2005          |   | 2,571     |       |
| Not scheduled |   | 5,890,697 |       |
|          |   | $         | 22,389,292 |   |

 

**11.****                               Leases**

The Company rentsfacilities in Hicksville, New York and in Sanford, Maine under variousoperating lease agreements expiring through April 2011.  In addition, the Company is also obligatedfor two leases in buildings it no longer occupies in Maine.  As part of a restructuring in 2001, theCompany expensed $280,000, representing the full amount due under the remaininglease obligations.  The Company alsoleases certain machinery, equipment and office equipment under various capitallease agreements expiring through 2006 (Note 10).  Rent expense amounted to approximately $983,000, $1,003,000 and$688,000 for the fiscal years ended September 30, 2002, 2001 and 2000,respectively.  Future minimum rentalpayments for operating leases as of September 30, 2002 are as follows:

 
| 2003       |   | $         | 859,942   |   |
|------------|--------|-----------|-----------|--------|
| 2004       |   | 875,098   |      |
| 2005       |   | 891,005   |      |
| 2006       |   | 908,112   |      |
| 2007       |   | 926,119   |      |
| Thereafter |   | 2,975,524 |      |
| Total      |   | $         | 7,435,800 |   |

 

F-21

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**12.****                               Stockholders’Equity**

*(a)**                                        Warrants*

At September 30,2002, the Company had 125,000 stock warrants outstanding.  As further discussed in Note 8, the Companyissued warrants to its secured lender to purchase 125,000 shares of commonstock at an exercise price of $2.00 per share. These warrants expire on July 7, 2003.

*(b)**                                        IncentiveStock Option Plan*

In October 1993,the Board of Directors adopted an incentive stock option plan.  The Plan, as amended in December 1995,January 1998, and February 2001, allows the Board of Directors to issue optionsto purchase an aggregate of 2,000,000 shares of the Company’s common stock tokey employees.

As of September30, 2002, the Company had issued options to purchase an aggregate of 1,746,750shares of the Company’s common stock to employees and members of the Company’sBoard of Directors.  The Companyestimates the fair value of each stock option at the grant date by using theBlack-Scholes option-pricing model with the following weighted averageassumptions used for grants in 2002, 2001 and 2000: no dividend yield, expectedvolatility of approximately 80.00% to 46.00%, risk free interest rates of 4.72%to 6.29%, with an expected life of 7.5 to 10 years.  If compensation cost for the Company’s Stock Option Plan had beendetermined in accordance with SFAS No. 123, net income would have been reducedin 2002, 2001 and 2000 by approximately $76,000, $ 86,000 and $375,000,respectively, and net (loss) income per diluted share would have been $(1.73),$(.76) and $.05 for each year, respectively.

 

The following tablesummarizes information about stock options outstanding at September 30, 2002:

 
|                |   | **Options  Outstanding** |   | **Options  Exercisable**                                 |   |
|---------------------|--------|--------------------------|--------|----------------------------------------------------------|--------|
| **Exercise  Price** |   | **Number  Outstanding**  |   | **Weighted  Average Remaining Contractual Life (years)** |   | **Weighted  Average Exercise Price** |   | **Number  Exercisable** |   | **Weighted  Average Exercise Price** |   |
| $0.35               |   | 4,600                    |   | 2.5                                                      |   | $ | 0.35 |   | 4,600 |   | $ | 0.35 |   |
| $0.35-2.44          |   | 55,400                   |   | 4.6                                                      |   | 1.55 |   | 55,400 |   | 1.55 |   |
| $1.88-2.19          |   | 44,500                   |   | 5.3                                                      |   | 1.91 |   | 44,500 |   | 1.91 |   |
| $1.06-1.31          |   | 210,500                  |   | 6.6                                                      |   | 1.15 |   | 208,400 |   | 1.16 |   |
| $1.03-2.03          |   | 944,400                  |   | 2.4                                                      |   | 1.08 |   | 944,400 |   | 1.08 |   |
| $1.00               |   | 130,000                  |   | 9.0                                                      |   | 1.00 |   | 108,000 |   | 1.00 |   |
| $0.55-0.91          |   | 303,750                  |   | 9.5                                                      |   | 0.67 |   | 260,417 |   | 0.64 |   |
|                |   | 1,693,150                |   | 4.9                                                      |   | $ | 1.05 |   | 1,625,717 |   | $ | 1.05 |   |
|                     |        |                          |        |                                                          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

F-22

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Changes in qualified andnon-qualified options and warrants outstanding are summarized as follows:
|                            |   | **Warrants** |   | **Options**         |   |
|---------------------------------|--------|--------------|--------|---------------------|--------|
|                            |   | **Shares**   |   | **Exercise  Price** |   | **Shares** |   | **Option  price per  share** |   | **Weighted  average  exercise price** |   |
| Outstanding  September 30, 1999 |   | 135,864      |   | $                   | 2.00   |   | 400,500 |   | $0.35 - $3.00 |   | $ | 1.56 |   |
| Granted                         |   | —       |   | —              |   | 1,049,400 |   | $1.03 - $2.88 |   | $ | 1.25 |   |
| Cancelled                       |   | —       |   | —              |   | (12,000 | ) | $1.06 - $2.38 |   | $ | 1.92 |   |
| Expired                         |   | (10,864      | )      | $                   | 2.00   |   | — |   | — |   | — |   |
| Outstanding  September 30, 2000 |   | 125,000      |   | $                   | 2.00   |   | 1,437,900 |   | $0.35 - $3.00 |   | $ | 1.34 |   |
| Granted                         |   | —       |   | —              |   | 130,000 |   | $ 1.00 |   | $ | 1.00 |   |
| Cancelled                       |   | —       |   | —              |   | (112,500 | ) | $1.06 - $2.88 |   | $ | 2.76 |   |
| Outstanding  September 30, 2001 |   | 125,000      |   | $                   | 2.00   |   | 1,455,400 |   | $0.35 - $3.00 |   | $ | 1.20 |   |
| Granted                         |   | —       |   | —              |   | 303,750 |   | $0.55 - $0.91 |   | $ | .67 |   |
| Cancelled                       |   | —       |   | —              |   | (66,000 | ) | $1.03 - $3.00 |   | $ | 2.60 |   |
| Outstanding  September 30, 2002 |   | 125,000      |   | $                   | 2.00   |   | 1,693,150 |   | $0.35 - $2.44 |   | $ | 1.05 |   |

 

At September 30, 2002,there were 1,625,717 options exercisable at a weighted average exercise priceof $1.05.  The weighted average fairvalue of options granted during fiscal 2002, 2001 and 2000 was $ .25, $..82 and $ .70, respectively.

 

**13.****                               Commitments**

The Company has adiscretionary 401(k) plan.  For theyears ended September 30, 2002, 2001 and 2000, the Company contributed $73,153,$110,835 and $68,363, respectively.

 

F-23

----

 

**14.****                               Taxes(Benefit) on Income (Loss)**

Provisions forincome taxes (benefit) on income (loss) in the consolidated statement ofoperations consist of the following:

 
| **Year  ended September 30,**      |   | **2002**       |           | **2001**   |   | **2000**   |   |
|-----------------------------------------|--------|----------------|----------------|------------|--------|------------|--------|
| Current:                                |   |           | ** **     |       |   |       |   |
| Federal                                 |   | **$**          | **(1,686,714** | **)**      | $      | (854,496   | )      | $ | 678,156 |   |
| State                                   |   | **(19,000**    | **)**          | (64,317    | )      | 88,967     |   |
| Total current:                          |   | **(1,705,714** | **)**          | (918,813   | )      | 767,123    |   |
| Deferred:                               |   |           | ** **     |       |   |       |   |
| Federal                                 |   | **823,000**    | ** **     | (1,034,000 | )      | (359,000   | )      |
| State                                   |   | **62,000**     | ** **     | (78,000    | )      | (49,000    | )      |
| Total deferred                          |   | **885,000**    | ** **     | (1,112,000 | )      | (408,000   | )      |
| Total taxes  (benefit) on income (loss) |   | **$**          | **(820,714**   | **)**      | $      | (2,030,813 | )      | $ | 359,123 |   |
|                                         |        |                |                |            |        |            |        |  |  |  |  |

 

Deferred tax(assets) liabilities consist of the following:

 
| **Year  ended September 30,**      |   | **2002**       |          | **2001**   |   |
|-----------------------------------------|--------|----------------|---------------|------------|--------|
| Tax depreciation  in excess of book     |   | **$**          | **1,226,000** | ** ** | $      | 914,000 |   |
| Impairment of  goodwill                 |   | **(871,000**   | **)**         | —     |   |
| Investment tax  credit carryforward     |   | **(36,000**    | **)**         | (92,000    | )      |
| Restructuring                           |   | **(46,000**    | **)**         | (145,000   | )      |
| Provision for  accounts receivable      |   | **(22,000**    | **)**         | (23,000    | )      |
| Inventory  capitalization               |   | **(68,000**    | **)**         | (59,000    | )      |
| Other temporary  differences — net |   | **(134,000**   | **)**         | (63,000    | )      |
| Accrued expenses                        |   | **(190,000**   | **)**         | —     |   |
| Net operating  loss carryforward        |   | **(2,484,000** | **)**         | (1,617,000 | )      |
| Less valuation  allowance               |   | **2,625,000**  | ** **    | 200,000    |   |
| Net deferred tax  (assets)              |   | **$**          | **—**    | ** ** | $      | (885,000 | ) |

 

At September 30,2002, the Company has approximately $6,100,000 in NOL carryforwards to offset futuretaxable income.  The NOL will expire infiscal 2022.

 

The Company hasprovided a 100% valuation allowance against the net deferred tax assets.

The provision forincome taxes on income before taxes differs from the amounts computed applyingthe applicable Federal statutory rates due to the following:

 

F-24

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| **Year  ended September 30,**                         |   | **2002**      |           | **2001** |   | **2000**   |   |
|------------------------------------------------------------|--------|---------------|----------------|----------|--------|------------|--------|
| Provision for  Federal income taxes at the statutory rates |   | **$**         | **(3,158,522** | **)**    | $      | (1,933,554 | )      | $ | 339,098 |   |
| Increase  (decrease):                                      |   |          | ** **     |     |   |       |   |
| State taxes, net  of Federal tax benefit                   |   | **(325,142**  | **)**          | (185,079 | )      | 35,558     |   |
| Change in  valuation allowance                             |   | **2,425,000** | ** **     | 200,000  |   |       |   |
| Other                                                      |   | **237,950**   | ** **     | (112,180 | )      | (15,533    | )      |
| Provision  (benefit) for taxes on income                   |   | **$**         | **(820,714**   | **)**    | $      | (2,030,813 | )      | $ | 359,123 |   |

 

**15.****                               CashFlows**

Supplementaldisclosure of cash flow information:

 
| **Year  ended September 30,**                           |   | **2002** |           | **2001**   |   | **2000**  |   |
|--------------------------------------------------------------|--------|----------|----------------|------------|--------|-----------|--------|
| Cash paid  (received) during the year:                       |   |     | ** **     |       |   |      |   |
| Interest                                                     |   | **$**    | **1,312,161**  | ** ** | $      | 1,332,334 |   | $ | 1,168,000 |   |
| Income taxes                                                 |   | **$**    | **(2,511,770** | **)**      | $      | 691,480   |   | $ | 166,100 |   |
| Supplemental  schedule of non-cash investing and financing:  |   |     | ** **     |       |   |      |   |
| Equipment  (returned) acquired under capital leases          |   | **$**    | **(1,891,889** | **)**      | $      | 4,153,000 |   | $ | 3,355,000 |   |
| Debt change from  equipment returned and acquired            |   | **$**    | **2,081,791**  | ** ** | — |      | — |   |
| Consideration in  connection with acquisition paid with debt |   | **$**    | **60,000**     | ** ** | $      | 3,816,000 |   | $ | 896,000 |   |

 

F-25

----

 

In connection with the Martin Machine business acquisition in fiscal 2001(Note 5), the Company issued $300,000 in notes payable and 100,000 shares ofcommon stock valued at $400,000.

 

**16.****                               SummarizedQuarterly Data (Unaudited)**

The following is a summary of the quarterly results of operations for theyears ended September 30:

 
|                             |   | **Fiscal  Quarter** |      |
|----------------------------------|--------|---------------------|-----------|
|                             |   | **First**           |      | **Second** |   | **Third** |   | **Fourth*** |   | **Total** |   |
| 2002                             |   |                |      |   |   |   |   |   |   |   |   |
| Net sales                        |   | $                   | 4,133,522 |   | $ | 4,520,406 |   | $ | 4,925,527 |   | $ | 4,666,734 |   | $ | 18,246,189 |   |
| Gross profit  (loss)             |   | 743,912             |      | 775,117 |   | 898,923 |   | (1,572,560 | ) | 845,392 |   |
| Net (loss)                       |   | (1,233,115          | )         | (1,164,281 | ) | (1,159,452 | ) | (4,912,208 | ) | (8,469,056 | ) |
| Basic (loss) per  share          |   | (.25                | )         | (.24 | ) | (.23 | ) | (.99 | ) | (1.71 | ) |
| Diluted (loss)  per share        |   | (.25                | )         | (.24 | ) | (.23 | ) | (.99 | ) | (1.71 | ) |
|                             |   |                |      |   |   |   |   |   |   |   |   |
| 2001                             |   |                |      |   |   |   |   |   |   |   |   |
| Net sales                        |   | $                   | 9,672,478 |   | $ | 9,576,042 |   | $ | 5,931,847 |   | $ | 4,687,689 |   | $ | 29,868,056 |   |
| Gross profit  (loss)             |   | 3,282,035           |      | 3,005,546 |   | 1,278,754 |   | (2,608,330 | ) | 4,958,005 |   |
| Net income  (loss)               |   | 540,938             |      | 304,887 |   | (518,910 | ) | (3,983,026 | ) | (3,656,111 | ) |
| Basic income  (loss) per share   |   | .11                 |      | .06 |   | (.10 | ) | (.81 | ) | (.74 | ) |
| Diluted income  (loss) per share |   | .09                 |      | .05 |   | (.10 | ) | (.81 | ) | (.74 | ) |
|                             |   |                |      |   |   |   |   |   |   |   |   |
|                                  |        |                     |           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

* In the Fourth Quarter of 2002, the Company wrote off $2,323,765 ofgoodwill and $2,503,560 of inventory. The Company also increased the deferred tax allowance by$2,425,000.  In the Fourth Quarter of2001, the Company wrote off  $2,718,859of inventory, accrued restructuring expense of $672,000, and established a$200,000 deferred tax allowance.

 

F-26

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**SCHEDULEII**

Valuation and Qualifying Accounts

For the years ended September 30,
| **Description**                |   | **Balance at  Beginning  of Period** |    | **Additions** |    | **Deductions** |   | **Balance at  End  of Period** |   |
|--------------------------------|--------|--------------------------------------|---------|---------------|---------|----------------|--------|--------------------------------|--------|
| Allowances:                    |   |                                 |    |          |    |           |   |                           |   |
| Doubtful  accounts:            |   |                                 |    |          |    |           |   |                           |   |
| 2002                           |   | $                                    | 60,000  |          | $       | 69,000         |   | $                              | 71,000 |   | $ | 58,000 |   |
| 2001                           |   | $                                    | 67,000  |          | $       | 35,000         |   | $                              | 42,000 |   | $ | 60,000 |   |
| 2000                           |   | $                                    | 57,000  |          | $       | 10,000         |   | —                         |   | $ | 67,000 |   |
| Deferred tax  asset allowance: |   |                                 |    |          |    |           |   |                           |   |
| 2002                           |   | $                                    | 200,000 |          | $       | 2,425,000      |   | —                         |   | $ | 2,625,000 |   |
| 2001                           |   | —                               |    | $             | 200,000 |           | — |                           | $      | 200,000 |   |
| 2000                           |   | —                               |    | —        |    | —         |   | —                         |   |

 

 

S-1

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