REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
SHAREHOLDERS
AND BOARD
OF DIRECTORS
HICKOK
INCORPORATED
CLEVELAND,
OHIO
We
have
audited
the accompanying consolidated balance sheet of HICKOK INCORPORATED as
of
September 30, 2012 and 2011, and the related consolidated statements of
income, stockholders' equity and cash flows
for each of
the years in the three-year period ended September 30, 2012. These
consolidated financial statements are the responsibility of the
Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted
our audits in accordance with the standards of the Public Company
Accounting
Oversight Board "United States". Those standards require that we plan
and
perform the audit to obtain reasonable assurance that the consolidated
financial
statements
are free from material misstatement. The Company has determined it is
not
required to have, nor were we engaged to perform, an audit of its
internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures
that are appropriate in the circumstances but not for the purpose of
expressing
an opinion on the effectiveness of the Company's internal control over
financial
reporting. Accordingly, we express no such opinion. An audit
also
includes
examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial
statements, assessing the accounting principles used and significant
estimates
made by management, as well as evaluating the overall financial
statement
presentation. We believe that our audits provide a reasonable basis for
our
opinion.
In
our
opinion,
the consolidated financial statements referred to above present fairly,
in all
material
respects, the consolidated financial position of Hickok Incorporated as
of
September 30, 2012 and 2011, and the consolidated results of their
operations
and their cash flows for each of the years in the three-year period
ended
September 30, 2012 in conformity with accounting principles generally
accepted
in the United States of America.
/s/
Meaden
& Moore, Ltd.
MEADEN
& MOORE, Ltd.
CERTIFIED
PUBLIC ACCOUNTANTS
January 3,
2013
CLEVELAND,
OHIO
F-1
CONSOLIDATED
BALANCE SHEET
HICKOK
INCORPORATED
SEPTEMBER
30
ASSETS
|
2012
|
2011
|
|
|
CURRENT
ASSETS:
|
|
|
Cash
and cash
equivalents
|
$258,798
|
$274,530
|
Accounts
receivable-less
allowance for
|
702,846
|
722,731
|
|
doubtful
accounts
of $10,000 ($10,000, 2011)
|
Notes receivable-current
|
3,600
|
2,400
|
Inventories-less
allowance
for obsolete
|
1,734,770
|
1,963,943
|
|
inventory of $851,000
($714,000, 2011)
|
Deferred
income
taxes-less valuation
|
|
|
|
allowance
of $332,800
($270,100, 2011)
|
-
|
-
|
Prepaid
expenses
|
123,957
|
53,267
|
|
|
|
Total
Current
Assets
|
2,823,971
|
3,016,871
|
|
|
|
|
|
|
PROPERTY,
PLANT
AND
EQUIPMENT:
|
|
|
Land
|
233,479
|
233,479
|
Buildings
|
1,429,718
|
1,429,718
|
Machinery
and
equipment
|
2,374,319
|
2,336,995
|
|
|
|
4,037,516
|
4,000,192
|
Less accumulated depreciation
|
3,688,266
|
3,613,913
|
|
|
|
349,250
|
386,279
|
|
|
|
OTHER
ASSETS:
|
|
|
Deferred
income
taxes-less
valuation
|
|
|
|
allowance
of $3,903,900
($3,779,200, 2011)
|
-
|
-
|
Notes receivable-long-term
|
31,000
|
35,700
|
Deposits
|
1,750
|
1,750
|
|
|
|
32,750
|
37,450
|
|
|
|
|
|
|
Total
Assets
|
$3,205,971
|
$3,440,600
|
|
|
See
accompanying
summary of accounting policies and notes to consolidated financial
statements.
F-2
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
2012
|
2011
|
|
|
CURRENT
LIABILITIES:
|
|
|
Convertible notes payable
|
$208,591
|
$-
|
Accounts
payable
|
178,835
|
173,848
|
Accrued
payroll
and
related expenses
|
149,636
|
142,949
|
Accrued
expenses
|
306,475
|
205,208
|
Accrued
taxes
other
than income
|
44,559
|
47,786
|
|
|
Total
Current
Liabilities
|
888,096
|
569,791
|
|
|
|
|
|
|
Long-term financing
|
-
|
250,000
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
Common
shares - no par value
|
|
|
Class
A
3,750,000
shares authorized,
1,045,597
shares
|
|
|
issued
(809,024
shares 2011)
|
1,045,597
|
793,229
|
Class
B
1,000,000
convertible shares authorized,
|
|
|
475,533
shares
issued
|
474,866
|
454,866
|
Contributed
capital
|
1,662,981
|
1,862,652
|
Treasury
shares
-
15,795
(2012 and 2011)
|
|
|
Class A shares and
667
(20,667 2011)
|
|
|
Class B shares
|
(253,341)
|
(661,676)
|
Retained
earnings
|
(612,228)
|
171,738
|
|
|
Total
Stockholders'
Equity
|
2,317,875
|
2,620,809
|
|
|
Total
Liabilities
and Stockholders' Equity
|
$3,205,971
|
$3,440,600
|
|
|
F-3
CONSOLIDATED
STATEMENT OF CASH FLOWS
HICKOK
INCORPORATED
FOR THE
YEARS
ENDED SEPTEMBER 30
|
2012
|
2011
|
|
2010
|
|
|
CASH
FLOWS FROM
OPERATING
ACTIVITIES:
|
|
|
|
|
Cash
received
from
customers
|
$4,781,174
|
$4,696,268
|
|
$6,038,214
|
Cash
paid to
suppliers
and
employees
|
(5,177,377)
|
(5,396,080)
|
|
(5,972,126)
|
Interest
paid
|
(6,641)
|
(6,849)
|
|
-
|
Interest
received
|
1,057
|
644
|
|
4,824
|
|
|
Net
Cash
Provided
by (Used in) Operating Activities
|
(401,787)
|
(706,017)
|
|
70,912
|
|
|
|
|
|
CASH
FLOWS FROM
INVESTING
ACTIVITIES:
|
|
|
|
|
Capital
expenditures
|
(55,180)
|
-
|
|
(19,456)
|
Payments received (advances) on notes receivable
|
3,500
|
(38,100)
|
|
-
|
Proceeds
on
sale of
assets
|
9,500
|
-
|
|
325
|
|
|
Net
Cash Provided by (Used in) Investing Activities
|
(42,180)
|
(38,100)
|
|
(19,131)
|
|
|
|
|
|
CASH
FLOWS FROM
FINANCING
ACTIVITIES:
|
|
|
|
|
Long-term
borrowings
|
-
|
250,000
|
|
-
|
Payments on long-term borrowings
|
(250,000)
|
-
|
|
-
|
Increase in Convertible Notes Payable
|
675,470
|
-
|
|
-
|
Sale of Class B shares from treasury
|
37,000
|
-
|
|
-
|
Convertible Notes issue costs
|
(34,235)
|
-
|
|
-
|
|
|
Net
Cash
Provided
by (Used in) Financing Activities
|
428,235
|
250,000
|
|
-
|
|
|
|
|
|
|
|
Increase
(Decrease)
in Cash and Cash Equivalents
|
(15,732)
|
(494,117)
|
|
51,781
|
|
|
|
|
|
Cash
and Cash
Equivalents
at Beginning of Year
|
274,530
|
768,647
|
|
716,866
|
|
|
Cash
and Cash
Equivalents
at End of Year
|
$258,798
|
$274,530
|
|
$768,647
|
|
|
|
|
|
|
|
See
accompanying
summary
of accounting policies and notes to consolidated financial statements.
|
F-6
|
2012
|
2011
|
2010
|
|
|
RECONCILIATION
OF
NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
Loss
|
$(783,966)
|
$(672,535)
|
$(949,496)
|
ADJUSTMENTS
TO
RECONCILE NET LOSS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
|
|
|
|
Depreciation
|
86,257
|
108,924
|
131,800
|
(Gain)loss
on
disposal of assets
|
(3,548)
|
-
|
1,938
|
Share-based compensation expense
|
11,388
|
12,615
|
16,045
|
CHANGES
IN
ASSETS AND LIABILITIES:
|
|
|
|
Decrease
(Increase)
in accounts receivable
|
19,885
|
(372,345)
|
779,202
|
Decrease in
inventories
|
229,173
|
159,029
|
61,676
|
Decrease (Increase)
in prepaid
expenses
|
(70,690)
|
17,156
|
5,129
|
Increase
(Decrease)
in accounts payable
|
4,987
|
(9,188)
|
25,709
|
Increase
(Decrease)
in accrued payroll and
related expenses
|
6,687
|
(6,852)
|
10,459
|
Increase
(Decrease)
in other accrued
expenses and accrued taxes other than
income
|
98,040
|
57,179
|
(7,590)
|
Increase
(Decrease)
in accrued income
taxes
|
-
|
-
|
(3,960)
|
|
|
Total
Adjustments
|
382,179
|
(33,482)
|
1,020,408
|
|
|
|
|
|
|
Net
Cash
Provided by (Used in) Operating
Activities
|
$(401,787)
|
$(706,017)
|
$70,912
|
|
|
Supplemental Schedule of
Non-Cash Financing
Activities:
|
|
|
|
Conversion of convertible notes payable
to Class A shares
|
$466,879
|
$-
|
$-
|
|
|
|
|
|
|
|
|
F-7
F-8
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
HICKOK
INCORPORATED
SEPTEMBER
30, 2012, 2011 AND 2010
1.
NATURE OF OPERATIONS
Hickok
Incorporated
and its wholly-owned domestic subsidiaries ("Company") develop and
manufacture
products used by companies in the transportation and emissions testing
industries.
Among the products are indicators and gauges sold to companies in
aircraft
and locomotive markets. On a much larger scale, the Company
manufactures
diagnostic equipment used by technicians to test the various electronic
systems
in automobiles and trucks, and emissions testing equipment specified by
various
states for testing vehicle emissions.
The
Company
serves
the automotive, locomotive and general aviation markets predominately
in
North America. Sales in the Company's principal product classes, as a
percent of consolidated sales, are as follows:
Product
Classes
|
2012
|
2011
|
2010
|
|
|
Automotive
Test
Equipment
|
|
66.1
|
%
|
75.3
|
%
|
74.2
|
%
|
Indicating
Instruments
|
33.9
|
24.7
|
|
25.8
|
|
|
|
|
|
|
|
Total
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|
|
Current
operating
properties consist of a manufacturing plant in Greenwood, Mississippi,
and
a corporate headquarters, marketing and product development facility in
Cleveland,
Ohio.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation :
The
consolidated
financial statements include the accounts of Hickok Incorporated and
its
wholly-owned domestic subsidiaries. Significant intercompany
transactions
and balances have been eliminated in the financial statements.
Adoption
of New Accounting Standards :
The Company did not
incur any material
impact
to its financial condition or results of operations due to the adoption
of
any new accounting standards during the periods reported.
Concentration
of
Credit Risk :
The
Company
sells its products and services primarily to customers in the United
States
of America and to a lesser extent overseas. All sales are made in
United
States of America dollars. The
Company extends normal credit terms to
its customers.
Customers
in
the automotive industry comprise
73%
of outstanding receivables at September 30, 2012 (
77%
in 2011).
Sales
to three customers approximated
$905,000,
$710,000
and $229,000
(2012)
,
$883,000,
$459,000 and $418,000 (2011), $
542,000
,
$581,000
and $455,000
(2010), and accounts receivable to these customers amounted to
approximately
$
327,000,
$66,000 and $25,000
(2012)
,
$309,000,
$93,000 and $28,000 (2011)
.
Use
of
Estimates
in the
Preparation of Financial Statements :
The
preparation
of financial statements in conformity with generally accepted
accounting
principles requires management to make estimates and assumptions that
may
affect the reported amounts of certain assets and liabilities and
disclosure
of contingencies at the date of the financial statements, and the
reported
amounts of revenue and expenses during the reporting period. Actual
results
could differ from those estimates.
Revenue
Recognition :
The
Company
records sales as manufactured items are shipped to customers on an FOB
shipping
point arrangement, at which time title passes and the earnings process
is
complete. The Company primarily records service sales as the items are
repaired.
The customer does not have a right to return merchandise unless
defective
or warranty related and there are no formal customer acceptance
provisions.
Sales
returns and allowances were immaterial during each of
the
three years in the period ending September 30, 2012.
Product
Warranties :
The
Company warrants certain products against defects for
periods
ranging primarily from 12 to 48
months.
The
Company's
estimated future warranty claims is
included
in
"Accrued
expenses"
and are as follows:
|
2012
|
2011
|
2010
|
|
|
Balance
October 1
|
$993
|
$3,415
|
$4,482
|
|
Current year
provisions
|
7,564
|
163
|
3,602
|
|
Expenditures
|
(8,106)
|
(2,585)
|
(4,669)
|
|
|
|
|
|
Balance
September 30
|
$451
|
$993
|
$3,415
|
|
|
|
|
|
|
|
Product
Development
Costs :
Product
development
costs, which include engineering production support, are expensed as
incurred.
Research and development performed for customers represents no more
than
1% of sales in each year. The arrangements do not include a repayment
obligation
by the Company.
Cash
and
Cash
Equivalents :
For
purposes
of the Statement of Cash Flows, the Company considers all highly liquid
debt
instruments purchased with a maturity of three months or less to be
cash equivalents.
From time to time the Company maintains cash balances in excess of the
FDIC
limits. The cash balance at September 30, 2012 and 2011 amounted to
$258,798
and
$274,530,
respectively.
Accounts
Receivable
:
The
Company
establishes an allowance for doubtful accounts based upon factors
surrounding
the credit risk of specific customers, historical trends and other
information.
Inventories
:
Inventories
are valued at the lower of cost (first-in, first-out) or market and
consist
of:
|
2012
|
2011
|
|
|
Raw
materials
and
component parts
|
$1,061,957
|
$1,145,278
|
Work-in-process
|
451,733
|
515,885
|
Finished
products
|
221,080
|
302,780
|
|
|
|
|
|
|
$1,734,770
|
$1,963,943
|
|
|
Property,
Plant and Equipment :
Property,
plant
and equipment are carried at cost. Maintenance and repair costs are
expensed
as incurred. Additions and betterments are capitalized. The
depreciation
policy of the Company is generally as follows:
Class
|
Method
|
Estimated
Useful Lives
|
|
Buildings
|
Straight-line
|
10
to 40 years
|
Machinery
and equipment
|
Straight-line
|
3
to 10 years
|
Tools
and dies
|
Straight-line
|
3
years
|
Depreciation
amounted to $86,257 (2012), $108,924 (2011), and $131,800 (2010).
Valuation
of Long-Lived Assets :
Long-lived
assets
such as property, plant and equipment and software are reviewed for
impairment
whenever events or changes in circumstances indicate that the carrying
amount
may not be recoverable. If the total of the expected future
undiscounted
cash flows is less than the carrying amount of the asset, a loss is
recognized
for the difference between the fair value and carrying value of the
asset.
Shipping
and
Handling
Costs :
Shipping
and
handling costs are classified as cost of product sold.
Advertising
Costs
:
Advertising
costs are expensed as incurred and amounted to
$6,940
(2012),
$16,756 (2011)
and $17,854 (2010).
Income
Taxes :
The
provision
for
income taxes is determined using the asset and liability approach of
accounting for
income taxes. Under this approach, deferred taxes represent the future
tax
consequences expected to occur when the reported amounts of assets and
liabilities
are recovered or paid. The provision for income taxes represents income
taxes
paid or payable for the current year plus any change in deferred taxes
during
the year. Deferred taxes result from differences between the tax basis
of
assets and liabilities and their reported amounts in the consolidated
financial
statements and are adjusted for changes in tax rates and tax laws when
changes
are enacted. Valuation allowances are recorded to reduce deferred tax
assets
when it is more likely than not that a tax benefit will not be realized.
Income
per Common Share :
Income per
common
share information is computed on the weighted average number of shares
outstanding
during each period as disclosed in Note 10.
3. NOTES
RECEIVABLE
The Company has
notes receivable with a current and former employee at an
interest rate of three percent per annum. Selected details of
notes receivable are as follows:
|
Current
Portion
|
Total
|
|
|
2012
|
2012
|
2011
|
Unsecured note receivable from current
employee which bears
interest at 3% per annum
|
$-
|
$4,100
|
$4,100
|
|
|
|
|
Unsecured note receivable from former
employee which bears
interest at 3% per annum, currently paying $300 per month
|
$3,600
|
30,500
|
34,000
|
|
|
|
|
|
$3,600
|
34,600
|
38,100
|
|
|
|
|
Less current portion
|
|
3,600
|
2,400
|
|
|
|
|
Long-term portion
|
|
$31,000
|
$35,700
|
|
|
|
|
|
|
|
|
4. CONVERTIBLE
NOTES PAYABLE
On December
30,
2011, Hickok Incorporated entered into a Convertible
Loan Agreement with Roundball, LLC and the Aplin Family Trust. Under
the Convertible Loan Agreement, the Company issued a convertible note
to Roundball in the amount of $466,879 and a convertible note to the
Aplin Family Trust in the amount of $208,591. In
addition, Roundball, LLC shall have the right to cause the Company to
borrow up to an additional $466,880 from Roundball, LLC. The notes
are
unsecured, bear interest at a rate of 0.20% per annum and will mature
on
December 30, 2012.
In
addition, the Company sold 20,000 Class B Common Shares currently held
in
treasury to Roundball at a price of $1.85 per share per a subscription
agreement between the Company and Roundball dated December 30, 2011.
The notes may be converted by the Investors at any time into Class A
Common Shares of the Company, at a conversion price of $1.85 per share,
although up to no more than 504,735 Conversion Shares for Roundball and
no more than 112,752 Conversion Shares for the Aplin Family Trust. The
Company has the option to convert the notes at
the expiration date, if the investors
have not during the course of the agreement. On
December 30, 2011, Roundball converted $233,438 into Class A Common
Shares
of the Company. In addition, on August 20, 2012 Roundball converted the
remaining $233,441 under the Convertible Loan Agreement into Class A
Common Shares of the Company.
The Company recorded
interest expense on the Roundball and Aplin Family Trust notes of $303
and $314 respectively through September 30, 2012. As of September
30, 2012 no interest was paid.
Subsequent to September 30, 2012, the Aplin Family Trust converted the
$208,591 under the Convertible Loan Agreement into Class A Common
Shares of the Company.
In
addition,
subsequent to September 30, 2012 management entered into an amended
Convertible Loan Agreement which may provide approximately $467,000 of
liquidity to meet on going working capital requirements.
The amended
Convertible Loan Agreement is by
and
between the Company and a major shareholder who is also a Director
modifying the terms and
extending the due date of the loan agreement from December
30, 2012 to December 31, 2013 and modifying the terms to allow $250,000
of borrowing on the agreement at the Company's discretion at an
interest rate of 0.24%.
This agreement also
includes a
three year warrant for 100,000 shares of Class A common stock at a
price of $2.50 per share.
5. LONG-TERM
FINANCING
The
Company has a
credit
agreement of $250,000 with one of its major shareholders who is also an
employee of the Company. The agreement was set to
expire in April
2013.
Effective October 30, 2012
for the remainder of the agreement, the lender may terminate the
agreement with 45 days written notice, but it is at the discretion of
the Company to deny the termination notice until April 2013 if it will
have a negative effect on the solvency of the Company.
The agreement
provides for a
revolving credit
facility of
$250,000 with interest generally equal to three percent per annum plus
prime and is unsecured. In addition, the
agreement
generally allows for borrowing based on an amount equal to
eighty percent
of eligible accounts receivables or a maximum of $250,000.
The Company repaid the outstanding
balance of $250,000 on February 1, 2012. The Company recorded
interest expense of $5,338 through September 30, 2012. As of September
30, 2012 interest in the amount of $6,641 was paid.
The
Company had no outstanding
borrowings under this loan facility at September 30, 2012.
Selected details of
long-term
borrowings are as follows:
|
Amount
|
Weighted
Average
Interest Rate
|
|
Balance
at September 30, 2012
|
$-
|
6.25%
|
Average
during 2012
|
$83,333
|
6.25%
|
Maximum
during 2012 (month end)
|
$250,000
|
6.25%
|
|
|
|
Balance
at September
30,
2011
|
$250,000
|
6.25%
|
Average
during 2011
|
$62,500
|
6.25%
|
Maximum
during 2011
(month
end)
|
$250,000
|
6.25%
|
Subsequent to
September 30, 2012 management entered into a new
revolving line of credit which will provide $250,000 of
liquidity to meet on going working capital requirements.
The
Revolving Credit Agreement is by and
between the Company and a major shareholder who is also an
employee of the Company extending the due date of the line of credit
agreement from April 13, 2013 to December 31, 2013 at an interest rate
of 0.24% and includes a three year warrant for 100,000 shares of
Class A common stock at a price of $2.50 per share.
6.
LEASES
Operating
:
The
Company
leases a facility and certain equipment under operating leases expiring
through
May
2015
.
The Company's minimum commitment under these operating leases are as
follows:
2013
|
$8,859
|
2014
|
8,859
|
2015
|
6,866
|
|
|
|
Total
|
$24,584
|
|
|
Rental
expense
under these commitments was
$
7,971
(2012),
$2,880 (2011)
and $5,782 (2010).
A
facility
held under a capital lease has a net book value of $0 at September 30,
2012.
Future minimum lease payments which extend through 2061 are immaterial.
7.
STOCK OPTIONS
Under
the
Company's Key
Employees Stock
Option Plans (collectively the "Employee Plans") the Compensation
Committee of the Board of Directors had the authority to grant options
to Key Employees to purchase Class A shares. The options were
exercisable for up to 10 years.
Incentive stock options were available
at an exercise price of not less than market price on the date the
option were granted. However, options available to an individual owning
more
than
10% of the Company's Class A shares at the time of grant must be at a
price not less than 110% of the market price. Non-qualified stock
options may be issued at such exercise price and on such other terms
and conditions as the Compensation Committee may determine. No options
may be granted at a price
less than $2.925.
Under
the Employee Plans there are no options currently available for grant
and there are no options outstanding at September 30, 2012.
The
Company's
Outside Directors Stock Option Plans (collectively the "Directors
Plans") provide for the automatic grant of options to purchase up to
42,00
0
shares
of
Class A common stock over a
three
year
period to
members
of the Board of Directors who are not employees of the Company, at the
fair
market value on the date of grant.
The
options are exercisable for up to 10 years.
All options
granted under the
Directors
Plans become fully exercisable on
March 8,
2015.
Non-cash
compensation expense related to stock option plans for fiscal years
ended September 30, 2012, 2011 and 2010 was $11,388, $12,615 and
$16,045 respectively.
Transactions
involving
the plan are summarized as follows:
|
|
|
|
|
|
|
|
Weighted
Average
Exercise
|
|
Weighted
Average
Exercise
|
|
Weighted
Average
Exercise
|
|
2012
|
Price
|
2011
|
Price
|
2010
|
Price
|
|
Option
Shares
|
|
|
|
|
|
|
Employee
Plans:
|
|
|
|
|
|
|
|
Outstanding
October
1,
|
26,850
|
$3.55
|
41,500
|
$3.41
|
59,400
|
$3.81
|
|
|
|
|
|
|
|
Granted
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Canceled/expired
|
(26,850)
|
3.55
|
(14,650)
|
3.15
|
(17,900)
|
4.73
|
|
|
|
|
|
|
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Outstanding
September
30, ($
0
per
share)
|
-
|
-
|
26,850
|
3.55
|
41,500
|
3.41
|
Exercisable
September
30,
|
-
|
-
|
26,850
|
3.55
|
41,500
|
3.41
|
|
|
|
|
|
|
|
Directors
Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
October
1,
|
38,000
|
$5.95
|
44,000
|
$6.30
|
41,000
|
$6.51
|
|
|
|
|
|
|
|
Granted
|
7,000
|
2.925
|
5,000
|
2.925
|
6,000
|
6.00
|
|
|
|
|
|
|
|
Canceled/expired
|
(3,000)
|
3.55
|
(11,000)
|
5.98
|
(3,000)
|
8.50
|
|
|
|
|
|
|
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Outstanding
September
30, ($2.925 to $11.00
per share)
|
42,000
|
5.62
|
38,000
|
5.95
|
44,000
|
6.30
|
Exercisable
September
30,
|
30,000
|
6.52
|
28,334
|
6.62
|
33,000
|
6.46
|
The following is a summary of the range of exercise prices for stock
options
outstanding and exercisable under the Directors
Plans
at September 30, 2012.
Directors
Plans
|
Outstanding
Stock
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Life
|
Number
of
Stock
Options
Exercisable
|
Weighted
Average
Exercise
Price
|
|
Range
of exercise
prices:
|
|
|
|
|
|
$2.925
- 5.25
|
23,000
|
$3.43
|
6.5
|
12,667
|
$3.84
|
$6.00
- 7.25
|
11,000
|
$6.46
|
4.5
|
9,333
|
$6.55
|
$10.50
- 11.00
|
8,000
|
$10.75
|
5.0
|
8,000
|
$10.75
|
|
|
|
|
|
|
|
42,000
|
$5.62
|
|
30,000
|
$6.52
|
The Company accounts for Share-Based Payments under the modified
prospective method for its stock options for both employees and
non-employee Directors. Compensation cost for fixed based awards are
measured at the grant date, and
the Company uses the Black-Scholes option pricing model to determine
the
fair value estimates for recognizing the cost of employee and director
services
received in exchange for an award of equity instruments. The
Black-Scholes option pricing model requires the use of subjective
assumptions which can materially affect the fair value estimates.
Employee stock options are immediately exercisable while Director's
stock options are exercisable over a three year period. The fair value
of stock option grants to Directors is amortized over
the three year vesting period. During fiscal year ended September 30,
2012
and 2011, $11,388 and $12,615 respectively was expensed as share-based
compensation.
Total
compensation costs related to nonvested awards not yet recognized is
$6,465
(2013) and
$2,837
(2014) and $543 (2015). The
following
weighted-average
assumptions were used in the
option
pricing model for 2012 and 2011: a risk free interest
rate
of
5.0%
and 5.5%
;
an expected life of 10 and 10 years; an expected dividend
yield
of
0.0%
and 0.0%
;
and a volatility factor of .87 and .75.
8.
CAPITAL STOCK, TREASURY STOCK,
AND CONTRIBUTED CAPITAL
Unissued
shares
of Class A common stock (
881,985
and
519,716 shares in 2012
and 2011 respectively) are reserved for the share-for-share conversion
rights of the Class B common stock and stock options under the Employee
Plans and the Directors Plans (see
note 7 and 14). The Class A shares have one
vote per share and the Class B shares have three votes per share,
except under certain circumstances such as voting on voluntary
liquidation, sale of substantially all the assets, etc. Dividends up to
$.10 per year, noncumulative, must be paid on Class A
shares before any dividends are paid on Class B shares.
9.
INCOME TAXES
A
reconciliation of
the provision (recovery) of income taxes to the statutory Federal
income
tax rate is as follows:
|
2012
|
2011
|
2010
|
|
|
|
|
|
|
Income
(Loss)
Before
Provision for Income Taxes
|
$(783,966)
|
$(672,535)
|
$(949,496)
|
|
Statutory
rate
|
34%
|
34%
|
34%
|
|
|
|
|
|
(266,548)
|
(228,662)
|
(322,829)
|
|
|
|
|
|
|
Permanent
differences
|
2,500
|
2,500
|
32,700
|
|
Research
and
development
credit - net
|
(8,500)
|
(27,500)
|
(18,500)
|
|
Valuation allowance
|
274,600
|
255,600
|
310,500
|
|
Other
|
(2,052)
|
(1,938)
|
(1,871)
|
|
|
|
|
|
$-
|
$-
|
$-
|
|
|
|
Deferred
tax assets (liabilities) consist of the following:
|
2012
|
2011
|
|
|
|
Current:
|
|
|
|
Inventories
|
$295,300
|
$244,300
|
|
Bad
debts
|
3,400
|
3,400
|
|
Accrued
liabilities
|
45,600
|
39,200
|
|
Prepaid
expense
|
(11,500)
|
(16,800)
|
|
|
|
|
|
332,800
|
270,100
|
|
Valuation allowance
|
(332,800)
|
(270,100)
|
|
|
|
|
Total
current
deferred
income taxes
|
-
|
-
|
|
|
|
|
Noncurrent:
|
|
|
|
Depreciation
and
amortization
|
53,400
|
86,500
|
|
Research
and
development
and other credit carryforwards
|
1,716,300
|
1,700,400
|
|
Net
operating loss
carryforward
|
1,934,200
|
1,709,000
|
|
Contribution carryforward
|
163,200
|
250,400
|
|
Directors
stock
option
plan
|
36,800
|
32,900
|
|
|
|
|
|
3,903,900
|
3,779,200
|
|
Valuation allowance
|
(3,903,900)
|
(3,779,200)
|
|
|
|
|
|
Total long-term deferred income taxes
|
-
|
-
|
|
|
|
|
Total
|
$-
|
$-
|
|
|
|
The
Company did not
incur any material impact to its financial condition or results of
operations due to the financial statement recognition and measurement
of a tax position taken
or expected to be taken in a tax return.
The
Company is
subject to U.S federal jurisdiction income tax examinations for the tax
years 2008 through 2010. In addition, the Company is subject to state
and local income tax examinations for the tax years 2008 through 2010.
T
he
Company has
available a net operating loss carryforward of approximately
$5,689,000
and a
contribution carryforward of approximately
$480,000. The
net operating loss and
research and
development credit carryforwards will begin to expire in 2015.
Management
recorded
a valuation allowance on the entire
balance
of deferred tax assets at September 30, 2009 due to the continued
losses during the past
several years,
the current
economic uncertainties, the negative effects of the current economic
crisis on all the Company's markets
and concern that a more likely than not expiration of the Company's net
operating
loss and research and development credit carryforwards could occur
before
they can be used.
Management recorded a
valuation allowance in
the amount of $255,600
on
the fiscal year ended September
30, 2011 deferred taxes. In
addition, management recorded a valuation allowance in
the amount of $187,400
on
the current year deferred taxes.
The
Company's
ability
to realize the entire benefit of its deferred tax assets requires that
the
Company achieve certain future earning levels prior to the expiration
of
its net operating loss and research and development credit
carryforwards. Because of the uncertainties involved with this
significant estimate, it
is reasonably possible that the Company's estimate may change in the
near
term.
10.
EARNINGS PER COMMON SHARE
The
following
table
sets forth the computation of basic and diluted earnings per share.
|
2012
|
2011
|
2010
|
|
|
Basic
Loss Per Share
|
|
|
|
Loss
available
to common stockholders
|
$(783,966)
|
$(672,535)
|
$(949,496)
|
|
|
|
|
Shares
denominator
|
1,372,812
|
1,248,095
|
1,248,095
|
|
|
|
|
Per
share
amount
|
$(.57)
|
$(.54)
|
$(.76)
|
|
|
Effect
of Dilutive Securities
|
|
|
|
Average
shares
outstanding
|
1,372,812
|
1,248,095
|
1,248,095
|
|
|
|
|
Stock
options
|
-
|
-
|
-
|
|
|
|
1,372,812
|
1,248,095
|
1,248,095
|
Diluted
Loss Per Share
|
|
|
|
Loss
available
to common stockholders
|
$(783,966)
|
$(672,535)
|
$(949,496)
|
|
|
|
|
Per
share
amount
|
$(.57)
|
$(.54)
|
$(.76)
|
|
|
11.
EMPLOYEE BENEFIT PLANS
The
Company
has a formula based profit sharing bonus plan for officers and key
employees.
For fiscal years ended September 30, 2012, 2011 and 2010, the formula
produced
no bonus distribution.
The
bonus
distribution is determined by the Compensation Committee of the Board
of Directors.
The
Company
has a 401(k) Savings and Retirement Plan covering all full-time
employees.
Company contributions to the plan, including matching of employee
contributions,
are at the Company's discretion. For fiscal years ended September 30,
2012, 2011 and 2010, the Company made matching contributions to the
plan in
the amount
of $15,178, $17,009 and
$15,380 respectively.
The
Company
does
not provide any other post retirement benefits to its employees.
12.
SEGMENT AND RELATED INFORMATION
The
Company's
four business units have
a common management team and infrastructure.
The
indicators and gauges unit has different technologies and customers
than
the other business units. Therefore, the business units have been
aggregated
into two reportable segments: 1.) indicators and gauges and 2.)
automotive related diagnostic tools and equipment. The Company's
management evaluates segment performance based primarily on operating
earnings before taxes. Non-operating
items such as interest income and interest expense are included in
general
corporate expenses. Depreciation expense on assets used in
manufacturing
are considered part of each segment's operating performance.
Depreciation expense on non-manufacturing assets are included in
general corporate expenses.
Indicators
and Gauges
This
segment
consists of products manufactured and sold primarily to companies in
the
aircraft and locomotive industry. Within the aircraft market, the
primary customers are those companies that manufacture or service
business and pleasure aircraft. Within the locomotive market,
indicators and gauges are sold to
both original equipment manufacturers and to operators of railroad
equipment.
Automotive
Diagnostic Tools and Equipment
This
segment
consists
primarily of products designed and manufactured to support the testing
or
servicing of automotive systems using electronic means to measure
vehicle
parameters. These products are sold to OEMs and to the aftermarket
using
several brand names and a variety of distribution methods. Included in
this
segment are products used for state required testing of vehicle
emissions.
Information
by industry segment is set forth below:
Years
Ended
September
30,
|
2012
|
2011
|
2010
|
|
|
|
Net
Sales
|
|
|
|
|
Indicators
and
Gauges
|
|
$1,612,943
|
|
$1,253,975
|
|
$1,357,114
|
|
Automotive
Diagnostic Tools and Equipment
|
3,148,346
|
3,814,638
|
3,901,898
|
|
|
|
|
$4,761,289
|
|
$5,068,613
|
|
$5,259,012
|
|
|
Income
(Loss)
Before
Provision for Income Taxes
|
|
|
|
|
Indicators
and
Gauges
|
|
$271,343
|
|
$94,178
|
|
$34,647
|
|
Automotive
Diagnostic
Tools and Equipment
|
(78,433)
|
229,355
|
188,037
|
|
General
Corporate
Expenses
|
(976,876)
|
(996,068)
|
(1,172,180)
|
|
|
|
|
$(783,966)
|
|
$(672,535)
|
|
$(949,496)
|
|
|
Asset
Information
:
Years
Ended
September
30,
|
2012
|
2011
|
|
|
|
Identifiable
Assets
|
|
|
|
Indicators
and
Gauges
|
|
$850,186
|
|
$701,543
|
|
Automotive
Diagnostic Tools and Equipment
|
1,586,634
|
1,980,789
|
|
Corporate
|
769,151
|
758,268
|
|
|
|
|
$3,205,971
|
|
$3,440,600
|
|
|
|
|
|
Geographical
Information :
Included
in
the consolidated financial statements are the following amounts related
to
geographic locations:
Years
Ended
September
30,
|
2012
|
2011
|
2010
|
|
|
|
Revenue:
|
|
|
|
|
United
States
of
America
|
$4,598,029
|
$4,854,871
|
$5,168,432
|
|
Australia
|
14,018
|
26,945
|
44,377
|
|
Canada
|
72,535
|
119,667
|
35,228
|
|
England
|
-
|
28,924
|
-
|
|
Mexico
|
36,960
|
23,520
|
1,681
|
|
Taiwan
|
34,935
|
-
|
-
|
|
Other
foreign
countries
|
4,812
|
14,686
|
9,294
|
|
|
|
$4,761,289
|
$5,068,613
|
$5,259,012
|
|
|
All
export
sales to Australia, Canada, England, Mexico, Taiwan and other foreign
countries are
made in United States of America
Dollars.
13.
COMMITMENTS AND
CONTINGENCIES
Legal
Matters
The
Company is the plaintiff
in a suit pursuing patent infringement against a competitor in the
emissions
market. Management believes that it is not currently possible to
estimate the impact, if any, that the ultimate resolution of this
matter will have on the Company's results of operations, financial
position or cash flows.
The
Company was a named defendant along with numerous other companies in a
suit in the State of New York regarding asbestos harm to the plaintiff.
The Company was dismissed from the suit in July 2012.
The
Company is a named defendant along with numerous other companies in a
suit in the State of Michigan regarding asbestos harm to the plaintiff.
The Company has engaged a Michigan attorney to provide representation.
The Company believes the suit is without merit and expects it will be
able to obtain a dismissal for similar reasons as the dismissal in the
New York action.
14.
SUBSEQUENT EVENTS
The Company has
analyzed its operations subsequent to September 30, 2012 through the
date the financial statements were submitted to the Securities and
Exchange Commission and has determined that no subsequent events have
occurred that would require recognition in the consolidated financial
statements or disclosure in the notes to the consolidated financial
statements, except as follows:
On October 11, 2012,
the Company's
Amended Articles of Incorporation and the Amended Code of Regulations
were adopted
by an
affirmative vote of more than two-thirds of the Company's Class A and
Class B Shareholders.
The Amended Articles amend and restate the Current Articles in a number
of significant ways and are primarily as follows: increased the number
of Class A Shares and Class B Shares from 3,750,000 and 1,000,000 to
10,000,000 and 2,500,000 respectively, and added a class of 1,000,000
Serial Preferred Shares; eliminated par value for for Class A Shares
and Class B Shares; updated certain provisions relating to the payment
of dividends; removed restrictions on the issuance of additional Class
A Shares; clarified the method by which the Company may repurchase its
shares; reduced the percentage of shareholder vote required to
authorize corporate actions from two-thirds of the voting power to a
majority of the voting power; and made other technical or conforming
changes.
The Amended Regulations amend and restate the Current Regulations
in a number of
significant ways and are primarily as follows: updated certain
provisions relating to the Company's meetings of shareholders in order
to provide more consistency in the regulations regarding the Company's
practices in this area; further clarifying the roles of the Company's
officers and directors in conducting the Company's business; updated
the Company's policy regarding the indemnification of its directors,
officers, employees, and others;
revised
provisions allowing for the Board of Directors to adopt amendments to
the Amended Regulations to the extent permitted by Ohio law; and
made other
technical or conforming changes.
Detailed information related to the two changes approved by
shareholders may be
found in the 2012 Proxy Statement for the Special Meeting held October
11, 2012 which was filed with the Securities and Exchange Commission on
September 14, 2012.
On December 28, 2012, the Aplin Family Trust converted the
$208,591 convertible note into Class A Common Shares of the Company.
On
December 30, 2012, management entered into a new
revolving line of credit and an amended Convertible Loan Agreement
which may provide approximately $717,000 of
liquidity to meet on going working capital requirements.
The
Revolving Credit Agreement is by and
between the Company and a major shareholder who is also an
employee of the Company extending the due date of the line of credit
agreement from April 13, 2013 to December 31, 2013 at a reduced
interest rate and includes a three year warrant for 100,000 shares of
Class A common stock at a price of $2.50 per share. The amended
Convertible Loan Agreement is by
and
between the Company and a major shareholder who is also a Director
modifying the terms and
extending the due date of the loan agreement from December
30, 2012 to December 30, 2013 and modifying the terms to allow $250,000
of borrowing on the agreement at the Company's discretion.
This amendment
also
includes a
three year warrant for 100,000 shares of Class A common stock at a
price of $2.50 per share.
Both agreements are
unsecured, bear interest at a rate of 0.24% per annum.
15.
BUSINESS CONDITION
AND
MANAGEMENT PLAN
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has suffered
recurring losses from operations during the past several years due
primarily to decreasing sales of existing product lines and a general
economic downturn in all markets the Company serves. The resulting
lower sales levels have impacted the Company's accounts receivable and
cash balances, if this situation continues it may prevent the Company
from generating sufficient cash flow to sustain its operations.
The ability of the Company to continue as a going concern is dependent
on improving the Company's profitability and cash flow and securing
additional financing if needed. Management continues to review and
revise its strategic plan and believes in the viability of its strategy
to increase revenues and profitability through increased sales of
existing products and the introduction of new products to the market
place. Management believes that the actions presently being taken by
the Company will provide the stimulus for it to continue as a going
concern, however, because of the inherent uncertainties there can be no
assurances to that effect. These consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Management took steps to reduce expenses throughout the Company in
fiscal 2009, 2010 and 2011 in the form of substantial reductions in
personnel, wage reductions for all personnel and expenditure
restrictions in most aspects of the Company’s operations. Anticipated
cost savings were achieved during the past four years and management
expects these measures to continue through fiscal 2013. During the
first quarter of fiscal 2012 management entered into two unsecured
convertible loan agreements that have provided approximately $675,000
of cash to date. One of the
convertible loan agreements was fully
converted during fiscal 2012 and the other on December 28, 2012.
In
addition, on December 30, 2012 management entered into an
amended unsecured convertible loan agreement and an additional
revolving line of credit which may provide approximately $717,000 of
liquidity to meet on going working capital requirements. One agreement
is an unsecured revolving line of credit with a major shareholder
who is also an employee and the other is an unsecured convertible loan
agreement with a major shareholder who is also a Director as discussed
in Note 14.
These facilities are available through December 2013.
The above available financing resources together with
management’s revised strategic plan to increase revenues and
profitability through increased sales of existing products, the
introduction of new products to the market place and the large order
from a Tier 1 Supplier should provide the Company with the needed
working capital for the foreseeable future.
16.
QUARTERLY DATA (UNAUDITED)
|
First
|
Second
|
Third
|
Fourth
|
|
|
Net
Sales
|
|
|
|
|
2012
|
$1,181,501
|
$1,178,538
|
$1,271,803
|
$1,129,447
|
2011
|
1,112,643
|
1,312,896
|
1,276,544
|
1,366,530
|
2010
|
1,636,717
|
1,394,060
|
1,390,355
|
837,880
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
2012
|
392,712
|
402,681
|
479,189
|
482,546
|
2011
|
422,618
|
552,725
|
483,899
|
582,854
|
2010
|
876,542
|
528,246
|
642,349
|
271,148
|
|
|
|
|
|
Net
Income
(Loss)
|
|
|
|
|
2012
|
(183,140)
|
(224,781)
|
(170,975)
|
(205,070)
|
2011
|
(317,982)
|
(213,681)
|
(125,949)
|
(14,923)
|
2010
|
64,709
|
(335,542)
|
(151,479)
|
|
(527,184)
|
|
|
|
|
|
Net
Income
(Loss)
per Common Share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
2012
|
(.15)
|
(.16)
|
(.12)
|
(.14)
|
2011
|
(.25)
|
(.17)
|
(.10)
|
(.02)
|
2010
|
.05
|
(.27)
|
(.12)
|
(.42)
|
|
|
|
|
|
Diluted
|
|
|
|
|
2012
|
(.15)
|
(.16)
|
(.12)
|
(.14)
|
2011
|
(.25)
|
(.17)
|
(.10)
|
(.02)
|
2010
|
.05
|
(.27)
|
(.12)
|
(.42)
|
|
|