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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 2001
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
Commission File Number 0-275
Allen Organ Company
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1263194
(State of Incorporation) (IRS Employer Identification No.)
150 Locust Street, P. O. Box 36, Macungie, Pennsylvania 18062-0036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-966-2200
Securities registered pursuant to section 12 (b) of the Act:
None
Securities registered pursuant to section 12 (g) of the Act:
Class B Common Shares, par value $1 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of
this Form 10-K. ( X )
The Class A voting stock of the registrant is not registered pursuant to the
Securities Exchange Act of 1934, is not publicly traded, and, therefore, no
market value information exists for such stock held by non-affiliates.
The number of shares outstanding of each of the Registrant's classes of common
stock, as of the close of business on March 8, 2002:
Class A - Voting 83,864 Class B - Non-voting 1,086,457
ALLEN ORGAN COMPANY
INDEX
PART I
1. Business
- General developments of business
- Industry Segments
- Description of business
- Financial information about geographic areas
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for the Registrants Common Stock and
Related Security Holder Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
9. Financial Statements
PART III
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
Financial Statement Schedules
Exhibits
PART I
Item 1. Business
General developments of business.
Incorporated in Pennsylvania in 1945, Allen Organ Company and
Subsidiaries ("Company") operate in four industry segments: Musical
Instruments, Data Communications, Electronic Assemblies and Audio
Equipment.
The Company's results for 2001 were negatively affected by the
downturn that occurred in the economy, particularly in the Data
Communications and Electronic Assemblies segments. The Company's
Data Communications segment was hard hit in the first half of 2001
since some of this segments products had been sold to Competitive
Local Exchange Carriers (CLEC's) many of which had difficulty raising
capital and became insolvent. This segment has since redirected its
sales efforts away from CLEC's and has focused on other markets for
which its product line is well suited including the wireless and
certain international markets. As a result, this segment was
successful in increasing its order rate during the second half of
2001 to be near the sales level of the same period in 2000.
The economic downturn also negatively affected the Company's
Electronic Assemblies segment customers resulting in a significant
reduction in this segments order rate in the second half of 2001.
The Company expects this lower order rate to continue into future
quarters and has taken steps to reduce its costs at its Macungie, PA
plant.
While there are many factors that may affect the future business
of the Company, the Company is particularly concerned with the weak
economic environment, which may alter or delay customers purchasing
decisions in any of the four industry segments that it operates.
Industry segments.
The Company operates in four industry segments: Musical
Instruments, Data Communications, Electronic Assemblies and Audio
Equipment. For financial information concerning the segments, see
Note 18 to the financial statements.
Description of business.
Musical Instruments.
Allen Organ Company is a leading manufacturer of electronic
keyboard musical instruments, primarily digital electronic church
organs and accessories. This segment accounted for 40%, 39% and 47%
of revenue in 2001, 2000 and 1999 respectively.
The principal market for the Musical Instruments segment is
institutions, primarily churches. Sales to the home market make up a
smaller portion of this segment's sales. Musical Instruments are
distributed mostly through dealers, primarily independent retail
music stores throughout the United States, with a lesser percentage
distributed through dealers internationally. The segment's business
is not seasonal.
The principal raw materials used in the segment's products are
electronic components and wood, all of which are readily available
from various sources without undue difficulty. Historically, certain
electronic components had been put on allocation by their suppliers.
This was not a significant issue during 2001 with the economic
slowdown. Also, as life cycles for electronic components have
shortened in recent years the Company has had to redesign some
circuit boards to satisfy the needs of current and past customers.
Traditionally organs have longer service requirements than other
digital products. At the present time the Company does not expect
this issue to significantly affect future product shipments.
The segment does not engage in any significant amounts of
consignments, extended payment terms, or lease guarantees. The
Company is contingently liable in connection with certain customers'
financing arrangements. See Note 12 to the financial statements.
The dollar amounts and number of times the Company has had to honor
these repurchase agreements are negligible.
The Musical Instruments segment is not dependent on any single
or small group of customers, the loss of which would have a material
adverse effect on the business. The dollar amount of the segment's
unshipped order backlog at the end of February 2002 and 2001 was
$5.2 million and $4.7 million respectively. All orders are expected
to be filled in the current year.
The electronic organ industry is competitive involving at least
five (5) domestic and foreign companies. In addition, there are many
small pipe organ companies in the institutional organ market. The
organ market consists of two basic divisions, institutional
(primarily churches) and home or entertainment. The Company believes
it has a major position in the institutional market because of
product performance and competitive prices, and a smaller percentage
of the home or entertainment market.
Data Communications.
The Data Communications segment consists of Eastern Research,
Inc. (ERI) into which the Company, combined the operations of VIR
Linear Switch during 2001. The combined operations are headquartered
at ERI's facility in Moorestown, New Jersey. ERI designs and markets
data inter-networking products enabling network service providers to
deliver services to their customers. This segment accounted for 43%,
46% and 40% of revenues in 2001, 2000 and 1999 respectively.
Data Communications products are sold directly to end-users, to
wholesale and retail distributors worldwide and under OEM agreements
with several customers. The segment maintains an inventory of in-
process and finished goods to allow for rapid fulfillment of customer
orders that is expected in the industry.
The principal raw material used in the Data Communications
products are electronic components, which are readily available from
various sources without undue difficulty. Historically, certain
electronic components had been put on allocation by their suppliers.
This was not a significant issue during 2001 with the economic
slowdown. Also as life cycles for electronic components have
shortened in recent years, the Company has had to redesign some
circuit boards to satisfy the needs of current and past customers.
At the present time the Company does not expect this to significantly
affect future product shipments.
The Data Communications segment derived 13% and 16% of its
revenue from 1 customer in 2001 and 2000 respectively, and 52% of its
1999 revenue from three customers.
ERI's customer base includes major end-user corporations,
Network Service Providers, Internet Service Providers and systems
integrators. There are many competitors in this market that is
dominated by several large data communications companies, such as
Cisco Systems, Tellabs and Alcatel. The Company's strategy has been
to target market niches with products that provide new features and
packaging with attractive pricing.
ERI initially built its business in the CSU/DSU market and also
developed router technology products. In 1997, ERI introduced its
multi-service access concentrator (DNX) family of products. ERI has
expanded this product family and broadened its feature set since its
introduction and now considers the DNX its flagship product. The DNX
revenues represent approximately 90% of ERI's sales for 2001. To
properly capitalize on this market's opportunities, ERI has
implemented aggressive marketing strategies and product development
work and will continue to do so in a way that takes into account
ERI's needs and the current economic environment.
ERI markets the VIR Linear Switch products that consist of patch
and testing equipment, often referred to as tech control products and
test access equipment. These products are of varying complexity and
are used to connect, switch, test and trouble shoot data lines in
large computer installations.
The segment derived approximately 13% and 23% of its revenue
from international markets in 2001 and 2000 respectively, primarily
from Australia, Europe and the Far East. ERI will continue to pursue
growth opportunities in markets outside the United States. The
realization of future business from these opportunities could be
adversely affected by currency fluctuations, social and political
risks and changes in foreign economies.
ERI has in the past developed strategic customer relationships
to expand distribution of its products through other networking
companies. These relationships do not currently represent a
significant portion of ERI's total sales.
The dollar amount of unshipped order backlog at the end of
February, 2002 and 2001 was $3.0 million and $1.0 million
respectively. All orders are expected to be filled in the current
year.
Due to the previously mentioned weakness in the
telecommunications markets and economy in general, the Company's Data
Communications segment sales and operating results decreased
significantly in the first half of 2001. This segment has since
redirected its sales and marketing efforts to focus on other markets
for which its product line is well suited, including the wireless and
certain international markets. This segment has been successful in
increasing its order rate during the second half of 2001 to be near
the sales level of the same period in 2000. While ERI's business has
stabilized, ERI's visibility of future sales remains limited.
Consequently, the Company has developed a business plan that focuses
on bottom line profits, as well as top line sales growth.
During the second quarter of 2001 ERI launched a new product
platform-the DNX-88 that provides carriers the ability to scale their
edge or co-location sites to 688 T1/E-1 ports, 24 DS3 and/or 8
OC3/STM1 interfaces, all managed by Envision. (As a point of
comparison, prior to the DNX-88, the largest DNX configuration could
scale to only 88 T1/E1 ports.) Envision is a comprehensive element
manager system designed to manage and control the DNX family of
products. Also during the fourth quarter of 2001, ERI introduced an
OC3/STM-1 card, adding ERI's first optical interface capabilities to
the DNX family.
The 2001 product enhancements have strengthened the DNX product
line. They have begun to position ERI as an optical access solution
provider helping carriers migrate their T-1/T-3 networks onto the
optical backbones already in place and begin to break the bottlenecks
in the "last mile".
Electronic Assemblies.
Allen Integrated Assemblies (AIA), a division of Allen Organ
Company, provides subcontract manufacture of electronic assemblies
for outside customers. The Electronic Assemblies segment is an
outgrowth of the technical skills and manufacturing capabilities
developed by the Company for its musical instruments business. This
segment accounted for 14% of 2001 revenue, 12% of 2000 revenue and
10% of revenue in 1999. AIA derived 82%, 76% and 68% of its revenues
from 3 customers in 2001, 2000 and 1999 respectively.
The Electronic Assemblies segment is very competitive with
numerous manufacturers offering such services. AIA customers are
generally obtained from a geographic area located close to the
manufacturer.
The dollar amount of the segment's unshipped order backlog at
the end of February 2002 and 2001 was $529,000 and $3.4 million
respectively. All orders are expected to be filled in the current
year.
Audio Equipment.
The Audio Equipment segment operates through two subsidiaries,
Legacy Audio, Inc and Allen Audio, Inc. This segment accounted for
3% of revenue in 2001, 2000 and 1999 respectively.
The principal raw materials used in the segment's products are
audio speakers, electronic components and wood, all of which are
readily available from various sources without undue difficulty.
The Audio Equipment segment is not dependent on any single or
small group of customers, the loss of which would have a material
adverse effect on the business
Legacy Audio, Inc. (LAI) Designs, manufactures and markets high-
quality audio speaker cabinets for hi-fi stereo and home theater
applications. It also markets electronic audio equipment such as
amplifiers that are manufactured to its specifications by third party
suppliers.
The principal market for LAI's products is consumers for home
use. The segment's products are mainly distributed through
independent retail dealers and directly to end-users. This segment's
business is not seasonal.
LAI historically sold its products through a direct marketing
program. The Company believes that this method of distribution has
limited its ability to penetrate the broader market. During 2001 the
Company began implementing plans to distribute its products through a
more traditional dealer network. The Company has added independent
retail dealers and will continue to do so in a conservative manner to
build a quality dealer network. During this period Legacy has been
shifting marketing resources to the new method of distribution. In
addition, the general economic slowdown has slowed sales for consumer
goods. This has resulted in a sales decrease in direct sales that
has not been offset by dealer sales.
The high-end audio market is evolving from the traditional two-
channel to the multi-channel market, which is utilized in home
theater applications. Legacy Audio has developed and markets
products specifically for these home theater applications.
Many of LAI's manufacturing needs are similar to those required
in the Company's Musical Instruments segment. The Company is
manufacturing a growing percentage of LAI's speaker cabinets at its
Macungie, PA facility.
The Company competes with several other high-end audio speaker
cabinet manufacturers including Martin-Logan, Thiel, B&W, Celestion,
and others.
LAI is not dependent on any single, or small group, of
customers. The dollar amount of the segment's unshipped order
backlog at the end of February 2002 and 2001 was $244,000 and
$267,000 respectively. All orders are expected to be filled in the
current year.
Allen Audio, Inc. (AAI) Designs, manufactures and markets
Public Address System products. AAI has developed a PA system mixer
utilizing Digital Signal Processor (DSP) technology also used in the
Allen digital organs. AAI has also developed a line of speaker
cabinets for the PA field. These products are being distributed
through dealers, primarily in the sound reinforcement business.
General.
The Company's working capital is sufficient to meet the normal
expansion of inventory and receivables.
The Company spent $8,004,838, $7,340,209, and $4,910,278
annually in 2001, 2000, and 1999 respectively on research and
development. The increases are a result of the Company's ongoing
commitment to new product development and support, primarily in its
Data Communications segment.
The Company and its subsidiaries employ approximately 510
persons.
The Company monitors its compliance with applicable federal,
state, or local provisions with regard to the environment and
implements procedures or modifies its equipment as necessary. The
Company does not expect any significant capital additions in the
coming year to maintain its compliance.
Financial information about geographic areas.
The Company does not own manufacturing or sales facilities in
any foreign countries. See Note 17 to the financial statements, for
additional information on export sales.
Export sales are all made in US dollars and for the most part
are made under Letter of Credit or on a prepaid basis.
The Company has established a Foreign Sales Corporation within
the meaning of the Internal Revenue Code of 1986. This wholly-owned
subsidiary is Allen Organ International, Inc., a Virgin Islands
corporation.
Item 2. Properties
The following sets forth the location, approximate square
footage and use of the Company's operating locations segregated by
segment. The Company believes that its facilities are generally
suitable and adequate for its needs.
Approximate
Location Square Footage Use
Musical Instruments and Electronic Assemblies:
Macungie, Pennsylvania 242,000 Administrative, research
and manufacturing facility.
Owned by Allen Organ Company.
Operating at approximately
85% capacity.
Macungie, Pennsylvania 27,000 International sales,
exhibition center, museum
and teaching facility.
Owned by Allen Organ Company.
Data Communications:
Southampton, Pennsylvania 22,000 Operations closed in 2001.
Attempting to sublet.
Leased until August, 2005.
Moorestown, New Jersey 39,000 Administrative, sales and
research facility. Leased
until September, 2002.
Audio Equipment:
Springfield, Illinois 15,000 Administrative, research and
manufacturing facility. Owned
by Legacy Audio, Inc. at
Operating approximately 90%
capacity.
In April 1999, the Company sold its manufacturing and sales
facility located in Rocky Mount, North Carolina. See Note 2 to the
financial statements, for additional information.
Item 3. Legal Proceedings
There is no litigation requiring disclosure pursuant to Item 103
of regulation S-K.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of fiscal year 2001.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's Class A voting shares are not registered pursuant
to the Securities Exchange Act of 1934 and are not publicly traded.
The Company's Class B non-voting stock trades on The NASDAQ Stock
Market under the symbol AORGB.
The high and low bid quotations for each quarter during the last
two years as reported by NASDAQ Market Information System is as
follows:
2001 High Low
First Quarter 55 33
Second Quarter 39 31.75
Third Quarter 36.473 30.02
Fourth Quarter 33.5 30.4
2000 High Low
First Quarter 85 38.375
Second Quarter 74 55
Third Quarter 71 57.25
Fourth Quarter 68 44
The Company has 7 Class A Shareholders and 261 Class B
Shareholders of record as of March 8, 2002.
During the past two fiscal years, the Company has declared
dividends on both its class A and B shares as follows:
Record of Quarterly Dividends Paid in 2001
Record Date Payable Amount
Cash 2/16/2001 3/2/2001 $.14
Cash 5/18/2001 6/1/2001 $.14
Cash 8/17/2001 8/31/2001 $.14
Cash 11/16/2001 11/30/2001 $.14
Record of Quarterly Dividends Paid in 2000
Record Date Payable Amount
Cash 2/18/2000 3/3/2000 $.14
Cash 5/19/2000 6/2/2000 $.14
Cash 8/18/2000 9/1/2000 $.14
Cash 11/17/2000 12/1/2000 $.14
Item 6. Selected Financial Data
Years Ended December 31,
2001 2000 1999 1998 1997
Net Sales $60,490,513 $72,516,208 $58,018,742 $44,966,075 $40,348,084
Net Income
(Loss) $(4,083,810) $ 3,954,896 $ 2,884,488 $ (616,711) $ 3,512,142
Earnings (Loss)
per share $(3.49) $3.38 $2.46 $(0.52) $2.79
Cash dividends
per share $ 0.56 $0.56 $0.56 $ 0.56 $0.56
At Year End
Total Assets $66,472,252 $80,807,742 $67,466,070 $61,989,953 $62,562,004
Long-Term Debt,
net of
current
portion $ 0 $ 0 $ 0 $ 0 $ 0
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources:
The Company continues to maintain a strong financial position and high
level of liquidity, which enables it to generate funds internally to meet
operating needs, capital expenditures and short-term obligations. Key
indicators of the Company's liquidity are presented below:
December 31,
2001 2000
Working Capital $37,845,509 $40,957,743
Current Ratio 5.9 to 1 3.3 to 1
Debt to Equity Ratio 0.18 to 1 0.29 to 1
As indicated in Note 10 of the financial statements, Eastern Research,
Inc. had obtained bank financing to provide them with working capital as
well as funds to repay $7,000,000 of ERI's inter-company loans due to
Allen Organ Company. The proceeds of the term loan were invested in the
Company's short-term investment accounts. During June of 2001 ERI repaid
all outstanding bank loans totaling $12,000,000 with funds provided by
Allen Organ Company. The Company originally obtained these loans to give
ERI financial autonomy as it explored strategic alternatives. As a result
of the changes in the financial markets, the Company decided to repay the
outstanding loans to eliminate the costs related to this financing.
Cash flows provided by operating activities decreased during 2001, as
compared to 2000 and 1999 primarily due to operating losses incurred in
the Data Communications segment. These decreases were partially offset by
reductions in inventory levels in the Musical Instruments, Electronic
Assemblies and Data Communications segments.
Cash flows provided by operating activities increased during 2000 as
compared to 1999 primarily due to increases in operating income in the
Musical Instruments segment resulting from higher sales volume and
operational improvements.
Cash flows provided by investing activities during 2001 includes the
sale of more than $12,000,000 in short term investments to fund the
repayment of ERI's bank loans. Cash flows were used to purchase
approximately $529,000 and $736,000 of property and equipment in the
Musical Instruments and Data Communications segments respectively.
Cash flows used in investing activities during 2000 were used to
purchase approximately $3,157,000 in plant and equipment including
approximately $2,148,000 for leasehold improvements and new computer,
office and test equipment to support the growth of Eastern Research, Inc.
Cash flows used in investing activities during 1999 were used to
purchase approximately $3,260,000 in plant and equipment including
$775,000 for a new air handling system in the wood and metal finishing
area and $150,000 for a new automated router in the woodworking area of
the Macungie, PA plant. Plant and equipment purchases of approximately
$1,567,000 in the Data Communications segment are primarily related to
leasehold improvements, new computers, office and test equipment to
support the growth of Eastern Research.
Results of Operations:
Sales and Operating Income
Consolidated sales for 2001 decreased $12,025,695 (17%) when compared
to 2000, primarily due to lower sales in the Data Communications segment.
Consolidated sales for 2000 increased $14,497,466 (25%) when compared to
the prior year primarily due to higher sales at Eastern Research, Inc
(ERI) as well as in the Musical Instruments segment.
December 31,
2001 2000 1999
Net Sales
Musical Instruments
Domestic $20,616,513 $24,422,709 $23,769,362
Export 3,759,129 3,635,123 3,563,383
Total 24,375,642 28,057,832 27,332,745
Data Communications
Domestic 22,567,298 25,556,745 22,149,842
Export 3,342,587 7,764,597 1,146,137
Total 25,909,885 33,321,342 23,295,979
Electronic Assemblies
Domestic 8,382,021 8,624,199 5,650,917
Audio Equipment
Domestic 1,603,650 2,323,865 1,651,566
Export 219,315 188,970 87,535
Total 1,822,965 2,512,835 1,739,101
Total $60,490,513 $72,516,208 $58,018,742
Income (Loss) from Operations
Musical Instruments $ 2,184,321 $ 5,029,871 $ 2,950,251
Data Communications (8,284,232) (2,063,221) (805,738)
Electronic Assemblies 125,000 1,284,806 430,031
Audio Equipment (988,353) (429,386) (761,688)
Total $(6,963,264) $ 3,822,070 $ 1,812,856
Musical Instruments Segment
The domestic sales for 2001 decreased $3,806,000. While the order
rate for 2001 was approximately equal to orders for 2000, the 2000 sales
were higher due to shipments made to domestic customers against a higher
order backlog. The 2000 increase in domestic sales reflects increased
order volume and shipments made against a higher order backlog. As
discussed on page 3, the economic downturn may affect future order volume.
Export sales were approximately equal for the three years ended
December 31, 2001. Certain foreign markets continue to be affected by
unfavorable economic conditions, particularly Far East countries, and
changes in the value of the US dollar compared to foreign currencies.
In recent years the Company has entered a different subset of the
institutional organ market that includes the sale of its organ consoles
and control electronics to customers that want to retain their wind-blown
pipes. In the past this market was served by pipe organ manufacturers and
local pipe organ maintenance organizations. The Company's ability to
produce both the wood cabinetry and digital electronics gives it an
advantage in this market.
Gross profit margins on sales were 30.1%, 36.5% and 30.5% for the
three years ended December 31, 2001. The 2001 decrease is due to lower
sales over which to absorb fixed costs and changes in product mix. The
increase in gross profit in 2000 over 1999 was a result of higher sales
volume over which to absorb fixed costs.
Selling and advertising expenses remained approximately equal for the
three years ended December 31, 2001. General and administrative expenses
in 2001 were approximately equal to 2000 and decreased in 2000 due to
lower personnel requirements and related benefits.
Research and development expenses decreased approximately $25,000 in
2001 and increased approximately $264,000 in 2000.
Data Communications Segment
Domestic sales decreased $2,989,447 in 2001 and increased $3,406,903
in 2000 when compared to 1999. International sales decrease $4,422,010 in
2001 and increased $6,618,460 during 2000. The increase in international
sales in 2000 was primarily from sales to two customers in the Far East.
The decrease in 2001 sales is attributable to a general slowdown in the
world economy and a more significant industry-wide slowdown in Data
Communications markets. Some of this segment's products had been sold to
Competitive Local Exchange Carriers (CLEC), many of which had difficulty
raising capital and became insolvent. This segment has since redirected
its sales efforts away from CLEC's and has focused on other markets for
which its product line is well suited including the wireless and certain
international markets. As a result, this segment was successful in
increasing its order rate during the second half of 2001 to be near the
sales level of the same period in 2000.
Cost of goods sold for 2001 includes $1,539,000 of additional non-cash
inventory valuation adjustments recorded at VIR, Inc. for slow moving and
obsolete inventory associated with discontinued product lines. The result
of these adjustments was to decrease the 2001 gross profit margin by 6%
from 46% to 40%. The decrease in the 2001 gross profit margin, excluding
the inventory valuation adjustments, was due to lower sales volume over
which to absorb fixed costs and competitive pressures to lower selling
prices of products. Gross profit margins were 47% and 48% for 2000 and
1999, respectively. While the company strives to maintain profit margins
by developing products that offer more features, the industry is
competitive which often results in pricing changes to obtain and maintain
market share.
Selling expenses decreased approximately $1,123,000 in 2001 and
increased approximately $2,500,000 in 2000 over 1999. The 2001 decrease
is related to lower sales and cost cutting measures initiated in the first
half of 2001 due to the economic downturn.
Administrative expenses decreased approximately $347,000 in 2001 from
cost cutting measures initiated in the first half of 2001 due to the
economic downturn. Administrative expenses increased approximately
$900,000 in 2000 over 1999 primarily related to additional management and
administrative personnel added at ERI to support its growth.
Research and development expenses were $6,599,104, $5,911,740 and
$3,759,183 for the years ended December 31, 2001, 2000 and 1999,
respectively primarily related to ERI. The segment is committed to new
product development and support and expects these expenditures to continue
at approximately the same level in 2002.
Electronic Assemblies Segment
Sales decreased approximately $242,000 in 2001 and increased
approximately $2,973,000 in 2000. The 2001 order rate decreased
significantly in the second half of 2001 as a result of the economic
slowdown that has also affected the Company's contract manufacturing
customers. The order rate is expected to continue at a lower level in
future quarters. Because of this decrease in sales the Company has taken
steps to reduce its costs at its Macungie, PA plant including reductions
in personnel related to this segment of the business
Gross profit margins were 7.1%, 19.5% and 15.2% for the three years
ended December 31, 2001. The 2001 decrease is the result of lower sales
in the second half of 2001 over which to absorb fixed costs. The 2000
increase over 1999 is due to higher order volume over which to absorb
fixed costs and changes in product mix.
Selling, general and administrative expenses increased approximately
$95,000 in 2001 and decreased slightly in 2000. The segment continues its
efforts to diversify its customer base and to improve its production
capabilities to offer state of the art manufacturing services to its
customers.
Audio Equipment Segment
Sales for 2001 decreased approximately $690,000 and increased
approximately $773,000 in 2000 when compared to 1999.
Gross profit margins were 12%, 43% and 38% for the years ended
December 31, 2001, 2000 and 1999, respectively. The 2001 decrease is
attributable to lower sales volume over which to absorb fixed costs.
Selling, general and administrative costs decreased approximately
$250,000 during 2001 as a result of steps taken to reduce operating cost
and because of Legacy Audio's switch to a dealer based selling model.
Selling, general and administrative costs increased approximately $82,000
during 2000 over 1999.
Legacy Audio has historically sold its products through a direct
marketing program. The Company believes that this method of distribution
has limited its ability to penetrate the broader market. Legacy has begun
distributing its products through a more traditional dealer network. The
Company has added independent retail dealers and will continue to do so in
a conservative manner to build a quality dealer network. During this
period Legacy has been shifting marketing resources to the new method of
distribution. In addition, the general economic slowdown has slowed the
sales of consumer goods. This has resulted in a sales decrease in direct
sales that has not been offset by dealer sales.
The Company has developed a line of Public Address System products and
in connection therewith has formed Allen Audio, Inc. to develop and market
these products. Allen Audio began shipping units in late 1999.
Other Income (Expense)
Investment income for the year ended December 31, 2001 decreased when
compared to 2000 due to lower invested balances. Investment income for
2000 increased compared to 1999 due to higher returns on investments and
higher invested balances. Interest expense was incurred in 2001 and 2000
on short-term bank financing related to Eastern Research.
The 2001 loss on sale of property, plant & equipment includes
approximately $158,000 of losses related to the disposition of property
and equipment at VIR's Southampton, PA facility that was closed in
September 2001. The 1999 gain on sale of property, plant and equipment
includes approximately $1,068,000 of gains related to the sale of the
Rocky Mount, North Carolina facility.
Income Taxes
The effective tax (benefit) rate was (36.8%), 22.4% and 30.6% in 2001,
2000 and 1999 respectively. The 2001 effective tax rate increased due to
tax credits and other preference items increasing the benefit to the
Company related to the current year loss. The decrease in the 2000
effective tax rate is due to higher tax credits and other non-taxable
items.
Significant Accounting Policies
The significant accounting policies of the Company are described in
Note 1 of the financial statements. The preparation of financial
statements in conformity with accounting principles generally accepted in
the United State of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expense
during the reporting period.
Certain accounting estimates and assumptions are particularly
sensitive because of their significance to the consolidated financial
statements and possibility that future events affecting them may differ
markedly. The accounting policies of the Company with significant
estimates and assumptions are described below.
Carrying Value of Obsolete and Slow Moving Inventory: The Company
has written down the value of inventory which may become obsolete or
that will not be used in the normal course of business to its
estimated net realizable value.
Allowance for Doubtful Accounts: The Company has recorded allowance
for the estimated amount of accounts which may become uncollectible.
Carrying Value of Goodwill and Intangible Assets: The Company
reviews the recoverability of its goodwill and intangible assets.
Any impairment in value is charged against current operations.
Realization of Deferred Income Tax Benefits: As discussed in Note 9
of the financial statements, the Company has recorded valuation
allowances related to the uncertainty of realizing state and federal
net operating loss carry forwards.
Risk factors that may affect these judgements include the volume and
timing of orders received, changes in global economics and financial
markets, changes in the mix of products sold, market acceptance of the
Company's and its customer's products, competitive pricing pressures,
global currency valuations, the availability of electronic components that
the Company purchases from suppliers, the Company's ability to meet
increasing demand, the Company's ability to introduce new products on a
timely basis, the timing of new product announcements and introductions by
the Company or its competitors, changing customer requirements, delays in
new product qualifications, the timing and extent of research and
development expenses and fluctuations in manufacturing yields.
Contractual Obligations and Commercial Commitments
Following is a summary of contractual obligations and other commercial
commitments of the Company:
Payments Due by Period
Contractual Less
Obligations than 1-3 4-5 After
Total 1 year years years 5 years
Operating Leases $ 602,452 $ 329,229 $273,223 $0 $0
Amount of Commitment Expiration Per Period
Other Commercial Less
Commitments Total Amounts than 1-3 4-5 After
Committed 1 year years years 5 years
Contingent Repurchase
Commitments Related to
Customer Financing
Arrangements $2,041,909 $2,041,909 $0 $0 $0
Factors that May Affect Operating Results
The statements contained in this report on Form 10-K that are not
purely historical are forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding the
Company's expectations, hopes, intentions or strategies regarding the
future. Forward looking statements include: statements regarding future
products or product development; statements regarding future research and
development spending and the Company's marketing and product development
strategy, statements regarding future production capacity. All forward
looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward looking statements. Readers are
cautioned not to place undue reliance on these forward looking statements,
which reflect management's opinions only as of the date hereof. Readers
should carefully review the risk factors described in other documents the
Company files from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be filed by
the Company in fiscal year 2002. It is important to note that the
Company's actual results could differ materially from those in such
forward looking statements. Some of the factors that could cause actual
results to differ materially are set forth below.
The Company has experienced and expects to continue to experience
fluctuations in its results of operations. Factors that affect the
Company's results of operations include the volume and timing of orders
received, changes in global economics and financial markets, changes in
the mix of products sold, market acceptance of the Company's and its
customer's products, competitive pricing pressures, global currency
valuations, the availability of electronic components that the Company
purchases from suppliers, the Company's ability to meet increasing demand,
the Company's ability to introduce new products on a timely basis, the
timing of new product announcements and introductions by the Company or
its competitors, changing customer requirements, delays in new product
qualifications, the timing and extent of research and development expenses
and fluctuations in manufacturing yields. As a result of the foregoing or
other factors, there can be no assurance that the Company will not
experience material fluctuations in future operating results on a
quarterly or annual basis, which would materially and adversely affect the
Company's business, financial condition and results of operations.
See Note 1 to the financial statements for information concerning the
effects of changes in accounting policies.
Item 7A Quantitative and Qualitative Disclosures About Market Risk.
Financial instruments that potentially subject the Company to market
and/or credit risk consist principally of short-term investments and trade
receivables. The Company places substantially all of its investments in
mutual funds holding federal, state and local government obligations and,
by policy, limits the amount of credit exposure in any one investment.
The Company's Musical Instruments segment sells most of its products
through established dealer networks. The Data Communications segment
sells most of their products directly to end-users, to wholesale and
retail distributors worldwide and under OEM agreements with other data
communications companies. The market and credit risk associated with
related receivables is limited due to the large number of dealers and
distributors and their geographic dispersion. The Company has no other
material exposure to market risk.
Item 8. Financial Statements
See Item 14 for index.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no reportable events as described in Item 304(b).
KPMG
4905 Tilghman Street
Allentown, PA 18104
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Stockholders
Allen Organ Company
We have audited the accompanying consolidated balance sheets of
Allen Organ Company and Subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of income, stockholders' equity
and cash flows and the related financial statement schedule for each of
the years in the three year period ended December 31, 2001. These
consolidated financial statements and the financial statement schedule
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Allen Organ Company and Subsidiaries as of December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the
years in the three year period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
/s/KPMG LLP
Allentown, PA
February 5, 2002
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
ASSETS 2001 2000
CURRENT ASSETS
Cash $ 4,449,998 $ 2,712,368
Investments including accrued interest 11,609,416 24,694,377
Accounts receivable, net of allowance for
doubtful accounts of $350,492 in 2001
and $428,791 in 2000 9,947,842 10,285,659
Inventories 16,485,908 19,808,173
Prepaid income taxes 1,106,214 13,972
Prepaid expenses 386,421 304,342
Deferred income tax benefits 1,561,138 1,094,701
Total Current Assets 45,546,937 58,913,592
PROPERTY, PLANT AND EQUIPMENT, NET 11,491,549 12,523,133
OTHER ASSETS
Prepaid pension costs -- 506,702
Inventory held for future service 811,249 690,657
Note receivable from related party 1,997,107 1,556,721
Cash value of life insurance 2,173,566 2,034,867
Deferred income tax benefits 2,022,725 398,476
Goodwill, net 194,523 221,449
Intangible assets, net 2,218,504 3,943,553
Other assets 16,092 18,592
Total Other Assets 9,433,766 9,371,017
Total Assets $66,472,252 $80,807,742
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - Bank $ -- $ 8,700,000
Accounts payable 2,750,251 3,448,119
Other accrued expenses 1,973,154 2,816,102
Customer deposits 2,978,023 2,991,628
Total Current Liabilities 7,701,428 17,955,849
NONCURRENT LIABILITIES
Deferred and other noncurrent liabilities 707,769 310,016
Accrued Pension Costs 1,748,040 --
Total Noncurrent Liabilities 2,455,809 310,016
Total Liabilities 10,157,237 18,265,865
MINORITY INTERESTS -- 106,976
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share
Authorized
Class A Voting Shares- 400,000 in 2001 and 2000
Class B Non-Voting Shares-3,600,000 in 2001 and 2000
Issued 2001 2000
Class A 127,232 shares; 127,232 shares 127,232 127,232
Class B 1,410,761 shares; 1,410,761 shares 1,410,761 1,410,761
Total Common Stock 1,537,993 1,537,993
Capital in excess of par value 12,903,610 12,758,610
Retained earnings 55,237,713 59,977,002
Accumulated other comprehensive income (1,374,300) 139,990
Sub-total 68,305,016 74,413,595
Less cost of common shares in treasury
2001-43,368 Class A shares;324,304 Class B shares (11,990,001) --
2000-43,230 Class A shares;324,148 Class B shares -- (11,978,694)
Total Stockholders' Equity 56,315,015 62,434,901
Total Liabilities and Stockholders' Equity $66,472,252 $80,807,742
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2001 2000 1999
NET SALES $60,490,513 $72,516,208 $58,018,742
COSTS AND EXPENSES
Cost of sales 41,707,417 43,730,716 36,793,515
Selling, administrative and other
expenses 15,811,522 17,623,213 14,502,093
Research and development 8,004,838 7,340,209 4,910,278
Costs to close Southampton plant 530,000 -- --
Impairment of VIR, Inc. goodwill
and intangibles 1,400,000 -- --
Total Costs and Expenses 67,453,777 68,694,138 56,205,886
(LOSS) INCOME FROM OPERATIONS (6,963,264) 3,822,070 1,812,856
OTHER INCOME (EXPENSE)
Investment income 1,018,162 1,542,347 1,128,524
Interest expense (315,083) (320,942) --
(Loss) gain on sale of property,
plant and equipment (175,358) (58,288) 1,063,722
Other income (expense), net 25,008 20,414 (9,593)
Minority interests in
consolidated subsidiaries (33,275) 68,295 112,979
Total Other Income (expense) 519,454 1,251,826 2,295,632
(LOSS) INCOME BEFORE TAXES (6,443,810) 5,073,896 4,108,488
PROVISION FOR TAXES
Current (1,168,000) 1,736,000 2,030,000
Deferred (1,192,000) (617,000) (806,000)
Total (2,360,000) 1,119,000 1,224,000
NET (LOSS) INCOME $(4,083,810) $ 3,954,896 $ 2,884,488
OTHER COMPREHENSIVE (LOSS), INCOME
NET OF TAX
Unrealized (loss) gain on
investments:
Unrealized (loss) gain arising
during period $ (138,420) $ (171,313) $ 230,132
Less: reclassified adjustment
for (loss) gain included in
income (41,153) (11,097) (42,068)
Total (179,573) (182,410) 188,064
Minimum pension liability
adjustment (1,334,717) -- --
Other comprehensive (loss) income (1,514,290) (182,410) 188,064
COMPREHENSIVE (LOSS) INCOME $(5,598,100) $ 3,772,486 $ 3,072,552
BASIC AND DILUTED EARNINGS PER SHARE $ (3.49) $ 3.38 $ 2.46
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Capital
in
Class A Class B Excess of
Shares Amount Shares Amount Par Value
Balance-December 31, 1998 127,232 $127,232 1,410,761 $1,410,761 $12,758,610
Balance-December 31, 1999 127,232 $127,232 1,410,761 $1,410,761 $12,758,610
Balance-December 31, 2000 127,232 $127,232 1,410,761 $1,410,761 $12,758,610
Tax benefit from exercise
of subsidiary stock options 145,000
Balance-December 31, 2001 127,232 $127,232 1,410,761 $1,410,761 $12,903,610
Accumulated
Other
Retained Comprehensive Treasury Stock
Earnings Income Shares Amount
Balance-December 31, 1998 $54,448,760 $134,336 367,172 $(11,971,003)
Net Income 2,884,488
Reacquired Class A Shares 110 (3,959)
Change in unrealized
gain on securities
available for sale 188,064
Cash dividend paid
($.56 per share) (655,598)
Balance-December 31, 1999 $56,677,650 $322,400 367,282 $(11,974,962)
Net Income 3,954,896
Reacquired Class B Shares 96 (3,732)
Change in unrealized
gain on securities
available for sale (182,410)
Cash dividend paid
($.56 per share) (655,544)
Balance-December 31, 2000 $59,977,002 $139,990 367,378 $(11,978,694)
Net Loss (4,083,810)
Reacquired Class B Shares 156 (6,891)
Reacquired Class A Shares 138 (4,416)
Change in unrealized
gain (loss) on securities
available for sale (179,573)
Minimum pension
liability adjustment (1,334,717)
Cash dividend paid
($.56 per share) (655,479)
Balance-December 31, 2001 $55,237,713 $(1,374,300) 367,672 $(11,990,001)
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(4,083,810) $3,954,896 $2,884,488
Adjustments to reconcile net income
(loss) to net
cash provided by operating activities
Depreciation and amortization 2,974,898 2,519,496 1,916,970
Minority interest in consolidated
subsidiaries 33,275 (68,295) (112,979)
Loss from impairment of VIR, Inc.
goodwill and intangibles, included in
operating expenses 1,400,000 -- --
Loss (Gain) on sale of property,
plant and equipment 175,358 58,288 (1,063,722)
Gain on sale of investments (65,635) (17,684) (67,244)
Change in assets and liabilities
Accounts receivable 337,817 158,771 (3,375,842)
Inventories 3,201,673 (3,050,201) (1,724,698)
Prepaid income taxes (1,092,242) (13,972) 422,656
Prepaid expenses (82,079) (17,204) 224,816
Deferred income tax benefits (1,296,667) (711,566) (474,799)
Prepaid pension costs 126,006 (36,548) 172,455
Other assets 2,500 22,548 (34,641)
Accounts payable (697,868) (145,589) 2,031,276
Accrued income taxes -- (683,133) 683,133
Other accrued expenses (842,948) 888,946 504,871
Customer deposits (13,605) 1,406,432 57,767
Deferred and other noncurrent
liabilities 397,753 130,101 (100,589)
Net Cash Provided by Operating
Activities 474,426 4,395,286 1,943,918
CASH FLOWS FROM INVESTING ACTIVITIES
Cash proceeds from sale of investments
classified as available for sale 18,682,314 9,908,680 5,993,248
Cash paid for purchase of investments
classified as available for sale (5,711,291) (15,118,347) (5,399,027)
Increase in cash value of life insurance (138,699) (313,370) (321,163)
Increase in note receivable (440,386) (445,574) (451,261)
Additions to goodwill and intangible
assets (156,243) (906,700) (733,194)
Cash proceeds from sale of property,
plant and equipment 11,250 100,206 1,382,716
Cash paid for purchase of property,
plant and equipment (1,458,233) (3,157,814) (3,260,719)
Net Cash (Provided by) Used In
Investing Activities 10,788,712 (9,932,919) (2,789,400)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans 3,300,000 8,700,000 --
Repayment of bank loans (12,000,000) -- --
Dividends paid in cash (655,479) (655,544) (655,598)
Reacquired Class B common shares (6,891) (3,732) --
Subsidiary company stock reacquired
from minority stockholders (255,055) -- (13,238)
Proceeds from sale of subsidiary stock 96,333 -- --
Reacquired Class A common shares (4,416) -- (3,959)
Net Cash (Used in) Provided by
Financing Activities (9,525,508) 8,040,724 (672,795)
NET INCREASE (DECREASE) IN CASH 1,737,630 2,503,091 (1,518,277)
CASH, JANUARY 1 2,712,368 209,277 1,727,554
CASH, DECEMBER 31 $ 4,449,998 $2,712,368 $ 209,277
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash (refunded) paid for income taxes $ (218,816) $2,535,061 $1,625,400
Cash paid for interest $ 315,084 $ 320,942 $ --
The above changes in assets and
liabilities excludes the following
adjustments related to the minimum
pension liability.
Accumulated other comprehensive income 1,334,717 -- --
Deferred income tax benefits 794,019 -- --
Accrued Pension Costs (2,128,736) -- --
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Significant Accounting Policies
Background:
Allen Organ Company and Subsidiaries operate in four industry
segments: Musical Instruments, Data Communications, Electronic
Assemblies, and Audio Equipment. See Note 18 for additional information
on the operating activities of each segment.
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Allen Organ Company and the following subsidiaries. All material
intercompany transactions have been eliminated.
Subsidiary Name Ownership %
Allen Audio, Inc. 100.00%
Allen Diversified, Inc. 100.00%
Allen Organ International, Inc. 100.00%
Eastern Research, Inc. 92.52%
Legacy Audio, Inc. 75.00%
Linear Switch Corporation 100.00%
Rocky Mount Instruments, Inc. 100.00%
VIR, Inc. 100.00%
Revenue and Cost Recognition:
The Company's financial statements are prepared using the accrual
method of accounting. In accordance with this method of accounting,
revenue is recognized in the period in which it is earned and expenses are
recognized in the period in which they are incurred. Revenue on product
shipments is recognized when title has transferred pursuant to shipping
terms with the Company's customers. All revenue and expenses which are
applicable to future periods have been presented as deferred or prepaid on
the accompanying financial statements.
Financial Instruments:
Financial instruments that potentially subject the Company to credit
risk consist principally of short-term investments and trade receivables.
The Company places substantially all of its investments in mutual funds
holding federal, state and local government obligations and, by policy,
limits the amount of credit exposure in any one investment. The Company's
Musical Instruments segment sells most of its products through established
dealer networks. The Data Communications segment sells most of their
products direct to customers and to distributors worldwide and under OEM
agreements with other data communications companies. The credit risk
associated with related receivables is limited due to the large number of
dealers and distributors and their geographic dispersion.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
Investments:
The Company accounts for its short-term investments in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Management determines
the appropriate classification of its investments in debt and equity
securities at the time of purchase and reevaluates such determination at
each balance sheet date.
Inventories:
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first- out (FIFO) method for substantially
all inventories.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation is
computed over estimated useful asset lives using both straight-line and
accelerated methods for financial reporting and accelerated methods for
tax reporting.
Goodwill and Intangible Assets:
Goodwill represents the excess of cost over the identifiable net
assets of acquired subsidiaries. Goodwill is amortized on a straight-line
basis over various periods generally from 5 - 20 years and is presented
net of accumulated amortization of $128,195 and $101,269 at December 31,
2001 and 2000 respectively.
Intangible assets represent identifiable assets such as customer
lists, developed technology and trademarks acquired in connection with the
purchase of the Company's subsidiaries. Intangible assets are amortized
on a straight-line basis over various periods generally from 5 - 20 years
and are presented net of accumulated amortization of $2,381,307 and
$1,736,548 at December 31, 2001 and 2000 respectively.
The carrying value of goodwill and intangible assets for each business
is continually reviewed to assess its recoverability from future
operations, based on future cash flows (undiscounted) expected to be
generated by such operations. Any impairment in value indicated by the
assessment would be computed based on discounted cash flows and charged
against current operations.
Income Taxes:
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes. Deferred taxes are recognized for differences between the
basis of assets and liabilities for financial statement and income tax
purposes.
Research and Development:
Research and development expenditures are charged to expense as
incurred.
Stock-Based Compensation:
The Company accounts for its stock-based compensation plans using the
accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Since the Company is not
required to adopt the fair value based recognition provisions prescribed
under Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, it has elected only to comply with the
disclosure requirements set forth in the Statement. (See Note 20)
Reclassifications:
Certain amounts in the 2000 and 1999 financial statements have been
reclassified to conform to the 2001 presentation.
New Accounting Standards:
Effective January 1, 2001, the Company adopted Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. This standard requires that all derivative
instruments be reported on the balance sheet at fair value and establishes
criteria for designation and effectiveness of hedging relationships. The
Company has no derivative instruments or hedging activities and therefore
this standard did not have an affect on its financial statements.
During 2001 the Financial Accounting Standards Board issued the
following new Statements that are applicable to the Company. These
statements did not have a material effect on the Company's financial
statements.
SFAS 141, "Business Combinations" - requires the use of the purchase
method for all business combinations initiated after June 30,
2001.
SFAS 142, "Goodwill and Other Intangible Assets" - replaces the
requirement to amortize intangible assets with indefinite lives
and goodwill with a requirement for an impairment test. The
statement will be adopted beginning 2002.
SFAS 143, "Accounting for Asset Retirement Obligations" - addresses
financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated
asset retirement costs.
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" - Establishes one accounting model, used for long-lived
assets to be held and used, disposed of by sale or otherwise
disposed.
The Company does not expect that these statements will have a material
affect on future financial statements.
NOTE 2 Sale of Manufacturing Facility
In April 1999 the Company sold its manufacturing plant located in
Rocky Mount, North Carolina for $1,360,000 (net of selling expenses) and
recognized a gain on the sale of approximately $1,068,000. The Company
ceased operations at this facility effective March 31, 1999 and
consolidated all of its Musical Instruments production into its
manufacturing facility in Macungie, PA.
NOTE 3 Impairment of Goodwill and Intangibles
During March 2001 the Company recorded a charge to operating expenses
of $1,400,000 related to the impairment in the value of goodwill and
intangibles which arose in connection with the acquisition of VIR, Inc.
This write down is attributable to the downturn in the data communications
industry, the combination of VIR into the Company's subsidiary Eastern
Research, Inc. and closure of the VIR facility discussed in more detail in
Note 4 below, all of which reduced expectations of future cash flows from
VIR's operations.
NOTE 4 Combination of Subsidiaries
During 2001 the Company combined its Data Communications subsidiaries
VIR Linear Switch (VIR) of Southampton, PA into Eastern Research, Inc.
(ERI), which is also a subsidiary of the Company. The combination was
completed during the third quarter of 2001 and the Southampton, PA
facility has been closed. The combined operations are headquartered at
ERI's facility in Moorestown, New Jersey. Manufacturing of some of VIR's
products has been moved to ERI's supplier with other manufacturing being
transferred to the Macungie, PA plant. The Company has estimated the
restructuring charges (including employee severance and benefits for 19
employees and other exit costs) related to this combination and plant
closure to be approximately $530,000 of which $390,000 has been paid as of
December 31, 2001. The Company believes that the remaining $140,000 of
accrued termination costs is adequate to cover the estimated remaining
expenditures, which relate primarily to future lease payments and building
maintenance costs.
NOTE 5 Investments
The cost and fair value of investments in debt and equity securities
are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2001
Available for sale
Equity securities $ 129,310 $ -- $ 92,000 $ 37,310
Mutual Funds
Short Term Gov't Funds 6,602,414 158,818 -- 6,761,232
Municipal Bond Funds 4,137,455 62,906 -- 4,200,361
Equity Funds 803,440 4,020 196,947 610,513
Totals $11,672,619 $225,744 $288,947 $11,609,416
December 31, 2000
Available for sale
Equity securities $ 129,315 $ -- $100,067 $ 29,248
Mutual Funds
Short Term Gov't Funds 13,345,217 138,061 -- 13,483,278
Municipal Bond Funds 7,769,342 68,453 57 7,837,738
Equity Funds 3,229,923 233,541 119,351 3,344,113
Totals $24,473,797 $440,055 $219,475 $24,694,377
Marketable debt securities have an average contractual maturity of
approximately 1 year or less.
Realized gains and losses are determined based on the original cost of
these investments using a first-in, first-out method. During 2001, 2000
and 1999, sales proceeds and gross realized gains and losses on securities
classified as available for sales were:
2001 2000 1999
Sales proceeds $18,682,314 $9,908,680 $5,993,248
Gross realized losses $ 216,546 $ 37,974 $ 60,606
Gross realized gains $ 282,181 $ 55,658 $ 127,850
The change in net unrealized holding gains on securities available for
sale in the amount of $283,786, $276,948, and $285,677 net of deferred tax
expense of $104,213, $94,538, and $97,613 has been included in other
comprehensive income in stockholders' equity for the years ended December
31, 2001, 2000, and 1999, respectively.
NOTE 6 Inventories
December 31,
2001 2000
Finished goods $4,720,318 $5,950,327
Work in process 6,249,775 6,172,954
Raw materials 5,515,815 7,684,892
Total $16,485,908 $19,808,173
The Company also maintains an inventory of various parts to be used
to service musical instruments as future needs arise which are reported
as a noncurrent asset.
NOTE 7 Property, Plant and Equipment
Estimated
December 31, Useful
2001 2000 Lives
Land and improvements $ 2,407,298 $ 2,407,298 10 yrs
Buildings and improvements 9,000,465 8,955,230 2 - 40 yrs
Machinery and equipment 10,481,698 9,993,291 5 - 10 yrs
Office furniture and equipment 4,548,093 4,341,718 3 - 8 yrs
Vehicles 163,411 164,244 4 yrs
Sub-total 26,600,965 25,861,781
Less accumulated depreciation 15,109,416 13,338,648
Total $11,491,549 $12,523,133
Depreciation expense charged to operations was $2,303,209,
$1,897,715 and $1,424,189 in 2001, 2000 and 1999 respectively.
NOTE 8 Note Receivable
The Company has entered into two Split-Dollar Life Insurance
agreements with its President who is the insured and owner of the
policies. The policy owner shall pay the portion of the premiums equal
to the value of the economic benefit determined in accordance with
applicable IRS Revenue Rulings. The Company shall pay the balance of
the net premiums, which approximates $450,000 annually.
The agreements provide that the Company shall be entitled to
recover the amount of premiums paid out of the built up cash value upon
termination of the agreement or out of the proceeds upon the death of
the insured. As security for repayment the Company is a collateral
assignee of the policy to the extent of any such unreimbursed premiums.
The Company is also secured by the personal obligation of its
President. The note receivable exceeds the cash surrender value of
these policies by approximately $450,000 and $483,000 at December 31,
2001 and 2000, respectively.
NOTE 9 Income Taxes
The provision for income taxes consists of the following:
2001 2000 1999
Currently Currently Currently
Payable Deferred Payable Deferred Payable Deferred
Federal $(1,347,000) $(1,014,000) $1,392,000 $(251,000) $1,620,000 $(658,000)
State 179,000 (178,000) 344,000 (366,000) 410,000 (148,000)
Total $(1,168,000) $(1,192,000) $1,736,000 $(617,000) $2,030,000 $(806,000)
A reconciliation of the provision for income taxes with the
statutory rate follows:
2001 2000 1999
Statutory provision for
federal income tax $(2,180,000) (34.0)% $1,702,000 34.0% $1,359,000 34.0%
State taxes, net of
federal tax benefits (549,000) (8.6) (14,000) (0.3) 73,000 1.8
Tax credits (363,000) (5.7) (325,000) (6.5) (179,000) (4.5)
Tax-exempt income (96,000) (1.5) (106,000) (2.1) (110,000) (2.8)
Exempt income of
foreign sales
corporation (100,000) (1.6) (151,000) (3.0) (77,000) (1.9)
Other items, net 28,000 0.4 13,000 0.3 58,000 1.5
Effect of change in
valuation allowance of
deferred tax assets:
Federal 350,000 5.4 -- -- -- --
State 550,000 8.6 -- -- 100,000 2.5
Total $(2,360,000) (36.8)% $1,119,000 22.4% $1,224,000 30.6%
The following temporary differences give rise to the net deferred
tax asset at December 31, 2001 and 2000.
2001 2000
Deferred Tax Liabilities
Excess of tax depreciation/amortization
over book depreciation/amortization $ -- $(398,666)
Excess of pension expense for tax
purposes over book -- (188,722)
Unrealized gain not recognized for
tax purposes -- (80,806)
Total Deferred Tax Liabilities -- (668,194)
Deferred Tax Assets
Excess of book depreciation/amortization
over tax depreciation/amortization 328,155 --
Excess of book over tax pension
expense 652,031 --
Unrealized loss not recognized for
tax purposes 23,434 --
Deferred compensation not recognized
for tax purposes 226,047 118,082
Net operating loss carry forwards 1,743,391 888,981
Other Liabilities 247,466 70,275
Reserve for Bad Debts 131,943 163,008
Inventory Reserve 1,231,396 1,021,025
Sub-total 4,583,863 2,261,371
Valuation Allowance (1,000,000) (100,000)
Total Deferred Tax Assets 3,583,863 2,161,371
Net Deferred Tax Asset $3,583,863 $1,493,177
Deferred taxes are included in the Company's financial statements
as follows:
2001 2000
Current deferred tax asset $1,561,138 $1,094,701
Non-current deferred tax asset 2,022,725 398,476
Net deferred tax asset $3,583,863 $1,493,177
At December 31, 2001 the Company has available approximately
$5,212,000 of federal net operating losses of which approximately
$3,145,000 are eligible for carry back to offset prior years taxes paid.
The Company expects to receive approximately $1,200,000 of tax refunds
during 2002 related to these loss and tax credit carry backs. The
Company also has available at December 31, 2001, approximately
$17,454,000 of unused state net operating loss carry forwards that may be
applied against future taxable income and that expire in various years
from 2002 to 2021.
At December 31, 2001 the Company has a valuation allowance of
$1,000,000 for the deferred tax assets related to the uncertainty of
realizing state net operating loss carry forwards and federal net
operating losses of a subsidiary not included in the consolidated federal
income tax return.
NOTE 10 Notes Payable - Bank
In June 2000 Eastern Research, Inc. (ERI), a subsidiary of the
Company, obtained a term loan and revolving line of credit from a bank.
During June 2001 Eastern Research, Inc. repaid all outstanding bank loans
totaling $12,000,000 with funds provided by Allen Organ Company.
NOTE 11 Other Accrued Expenses
December 31,
2001 2000
Accrued salaries and commissions $1,386,646 $996,254
Accrued additional purchase price -- 906,700
Accrued plant closing costs 140,700 --
Other 445,808 913,148
Total $1,973,154 $2,816,102
NOTE 12 Commitments and Contingencies
As of December 31, 2001, the Company is contingently liable for a
maximum amount of approximately $2,041,909 in connection with the
financing arrangements of certain customers.
Under the terms of an agreement with the wife of the late Chairman
and principal shareholder, the Company may be required to purchase within
eight months of her death, at the option of her personal representative,
an amount of Class B Common Shares then owned by her or includable in her
estate for Federal Estate Tax purposes sufficient to pay estate taxes and
costs, subject to the limitations of Section 303 of the Internal Revenue
Code. At December 31, 2001, the shareholder owned or would have
includable in her estate 261,797 shares of Class B Common Stock. The
Company has purchased life insurance on the life of the shareholder with
a face value of $6,000,000. While the potential obligation related to
this agreement is in large part dependent on the value placed on the
Company's stock for estate tax purposes, the Company believes that it
would have access to sufficient resources to fund this obligation if
necessary.
In connection with the purchase of VIR, Eastern Research and Linear
Switch, the Company agreed to pay a contingent purchase price equal to
4.5% of the sales of these Companies in excess of $7,000,000 per year
through December 2000. The total additional payment for 2000 and 1999
amounted to $906,700 and $733,319, respectively. The agreement provided
that the total of these payments not exceed $2,000,000 and this limit was
met during 2000.
The Company's Data Communications segment leases its offices and
production facility under non-cancelable operating leases which expire at
various dates through August 2005. These leases include renewal options
for periods ranging up to ten years with increases of lease payments
based on changes in the Consumer Price Index. Legacy Audio, Inc. leases
warehouse space under a non-cancelable operating lease which expires in
July 2003. Rent expense for all Company operating leases was $ 495,816,
$440,971 and $321,368 for 2001, 2000 and 1999, respectively. Minimum
annual rent payments for the operating leases are as follows:
2002 $329,229
2003 110,054
2004 103,054
2005 60,115
Total $ 602,452
NOTE 13 Retirement Plans
The Company sponsors two noncontributory defined benefit pension
plans, which cover substantially all of its employees. Salaried plan
benefits are generally based on the employee's years of service and
compensation levels. Hourly plan benefits are based on various monthly
amounts for each year of credited service. The Company's funding policy
is to contribute amounts to the plans sufficient to meet the minimum
funding requirements set forth in the Employee Retirement Income Security
Act of 1974, plus such additional amounts as the Company may determine to
be appropriate from time to time. Plan assets are comprised principally
of cash equivalents, U.S. Government obligations, fixed income
securities, and equity securities.
Following are reconciliations of the pension benefit obligation and
the value of plan assets:
2001 2000 1999
Pension benefit obligation
Balance, beginning of year $15,194,233 $15,065,101 $14,923,318
Service cost 353,266 324,423 380,650
Interest cost 1,055,508 1,024,441 999,772
Benefits paid to
participants (1,012,126) (976,612) (812,359)
Increase (decrease) on
updated data/assumptions 522,034 (243,120) (426,280)
Balance, end of year $16,112,915 $15,194,233 $15,065,101
Plan assets
Fair value, beginning of year $15,689,627 $17,477,871 $15,611,950
Actual investment returns (1,278,937) (811,632) 2,678,280
Benefits paid to participants (1,012,126) (976,612) (812,359)
Fair value, end of year $13,398,564 $15,689,627 $17,477,871
The Funded status of the plans were as follows:
December 31,
2001 2000 1999
Excess of the value of
plan assets over the
benefit obligation $(2,714,351) $ 495,394 $ 2,412,770
Unrecognized prior
service cost -- -- 73,323
Unrecognized net transition
liability (asset) -- (72,012) (144,020)
Unrecognized net actuarial
loss (gain) 3,095,047 83,320 (1,871,919)
Adjustment to recognize
minimum liability (2,128,736) -- --
(Accrued) prepaid
benefit cost $(1,748,040) $ 506,702 $ 470,154
The adjustment to recognize the minimum pension liability in the
amount of $2,128,736 net of deferred tax expense of $794,019 has been
included in other comprehensive income in stockholders' equity at
December 31, 2001.
The following weighted-average rates were used:
Discount rate on the
benefit obligation 6.75% 7.00% 7.00%
Rate of return on plan assets 8.00% 8.00% 8.00%
Rate of long-term
compensation increase 6.00% 6.00% 6.00%
Pension expense is comprised as follows:
2001 2000 1999
Service cost $ 356,266 $ 324,423 $ 380,650
Interest cost 1,055,508 1,024,441 999,772
Expected return on plan assets 1,210,756 (1,357,306) (1,209,949)
Amortization of net
gain from prior periods -- (29,421) --
Amortization of unrecognized
prior service cost -- 73,323 73,990
Amortization of transition asset (72,012) (72,008) (72,008)
Net Pension Cost $ 126,006 $ (36,548) $ 172,455
The foregoing net amounts regarding the pension benefit obligation
and the value of plan assets are based on a combination of both
overfunded and underfunded plans. The aggregate amounts rela ting to
underfunded plans are as follows:
December 31,
2001 2000 1999
Projected benefit obligation $16,112,915 $8,078,231 $--
Accumulated benefit obligation 15,146,604 7,167,545 --
Fair value of plan assets 13,398,564 7,827,166 --
The Company provides a 401(k) deferred compensation and profit
sharing plan for the benefit of eligible employees. The plan allows
eligible employees to defer a portion of their annual compensation,
pursuant to Section 401(k) of the Internal Revenue Code. Company profit-
sharing contributions to the plan are discretionary as determined by the
Company's board of directors. The Company contributions were $248,650,
$125,374 and $93,388 to the plans in 2001, 2000 and 1999 respectively.
The Company provides supplemental executive retirement plans
(deferred compensation) for 3 of its officers. These plans provide for
discretionary company contributions, which vest over a 5 year period,
accrue interest at the prime rate, not to exceed 9%, and are payable upon
the executive's death or retirement.
NOTE 14 Deferred and Other Noncurrent Liabilities
December 31,
2001 2000
Deferred compensation expense $ 587,769 $ 250,016
Other Noncurrent Liabilities 120,000 60,000
Total $ 707,769 $ 310,016
NOTE 15 Accumulated Other Comprehensive Income
December 31,
2001 2000
Unrealized (loss) gain on investments, net $(39,583) $ 139,990
Minimum pension liability adjustment (1,334,717) --
Total $(1,374,300) $ 139,990
NOTE 16 Earnings Per Share
Earnings per share were computed using 1,170,480 shares in 2001,
1,170,618 shares in 2000, and 1,170,719 shares in 1999, the weighted
average number of shares outstanding during each year. The Company
does not have any dilutive equity instruments.
NOTE 17 Export Sales
In 2001, 2000 and 1999, net sales by the Musical Instruments
segment include export sales, principally to Canada, Europe and the Far
East of $3,759,129, $3,635,123, and $3,563,383, respectively. Net
sales by the Data Communications segment include export sales
principally to Australia, Europe and the Far East of $3,342,587 for
2001, $7,764,597 for 2000, and $1,146,137 for 1999. Net sales by the
Audio Equipment segment include export sales principally to Europe and
the Far East of $219,315 for 2001, $188,970 for 2000 and $87,535 for
1999.
NOTE 18 Industry Segment Information
The Company's operations are classified into four industry
segments: Musical Instruments, Data Communications, Electronic
Assemblies, and Audio Equipment. The Musical Instruments segment is
comprised of operations principally involved in the design,
manufacture, sale and distribution of electronic keyboard musical
instruments, primarily digital organs and related accessories. Musical
instruments are sold primarily to retail distributors worldwide.
The Data Communications segment is involved in the design, sale and
distribution of data communications equipment. Data communications
products are sold direct to customers and distributors worldwide and
under OEM agreements with several customers.
The Electronic Assemblies segment is involved in the manufacture,
sale and distribution of electronic assemblies for outside customers
used primarily as control devices and other circuitry in their
products. Subcontract assembly services are provided primarily to
industrial concerns in Pennsylvania and New Jersey.
The Audio Equipment segment is involved in the design, manufacture,
sale and distribution of high quality speaker cabinets and related
equipment for hi-fi stereo and home theater applications. Legacy's
products are sold worldwide primarily through independent retail
dealers and to a lesser extent directly to individual customers. The
Company through its subsidiary Allen Audio, Inc., designs, markets and
sells through distributors a line of Public Address system products,
which have initially been targeted at small to mid-sized churches,
auditoriums and similar customers.
Following is a summary of segmented information for 2001, 2000 and
1999.
December 31,
2001 2000 1999
Net Sales to Unaffiliated Customers
Musical Instruments $24,375,642 $28,057,832 $27,332,745
Data Communications 25,909,885 33,321,342 23,295,979
Electronic Assemblies 8,382,021 8,624,199 5,650,917
Audio Equipment 1,822,965 2,512,835 1,739,101
Total $60,490,513 $72,516,208 $58,018,742
Intersegment Sales
Musical Instruments $ 91,820 $ 294,146 $ 109,667
Data Communications 193,664 120,712 174,516
Electronic Assemblies 79,651 15,577 37,742
Audio Equipment 87,777 35,563 58,253
Total $ 452,912 $ 465,998 $ 380,178
Income (Loss) from Operations
Musical Instruments $ 2,184,321 $ 5,029,871 $ 2,950,251
Data Communications (8,284,232) (2,063,221) (805,738)
Electronic Assemblies 125,000 1,284,806 430,031
Audio Equipment (988,353) (429,386) (761,688)
Total $(6,963,264) $ 3,822,070 $ 1,812,856
Identifiable Assets
Musical Instruments $17,664,908 $18,693,577 $18,912,763
Data Communications 19,596,306 31,011,641 19,764,425
Electronic Assemblies 3,377,712 4,444,349 3,658,915
Audio Equipment 2,795,550 2,658,110 2,209,810
Sub-total 43,434,476 56,807,677 44,545,913
General corporate assets 23,037,776 24,000,065 22,920,157
Total $66,472,252 $80,807,742 $67,466,070
Capital Expenditures
Musical Instruments $ 528,998 $ 837,828 $ 1,268,726
Data Communications 736,538 2,297,046 1,908,323
Electronic Assemblies 188,272 5,320 5,670
Audio Equipment 4,425 17,620 78,000
Total $ 1,458,233 $ 3,157,814 $ 3,260,719
Depreciation and Amortization
Musical Instruments $ 690,084 $ 683,673 $ 697,587
Data Communications 2,093,476 1,632,861 992,933
Electronic Assemblies 113,027 120,750 145,948
Audio Equipment 78,311 82,212 80,502
Total $ 2,974,898 $ 2,519,496 $ 1,916,970
Income Tax Expense (Benefit)
Musical Instruments $ 1,186,000 $ 1,984,000 $ 1,985,000
Data Communications (3,565,000) (1,156,000) (619,000)
Electronic Assemblies 47,000 484,000 159,000
Audio Equipment (28,000) (193,000) (301,000)
Total $(2,360,000) $ 1,119,000 $ 1,224,000
Intersegment sales are generally priced at cost plus a percentage
mark-up, and are generally thought to be marginally less than prices
which would be charged for the same product to unaffiliated customers.
Intersegment sales are excluded from net sales reported in the
accompanying consolidated income statements. Identifiable assets by
segment are those assets that are used in the Company's operations
within that segment. General corporate assets consist principally of
cash and short-term investments.
The Electronic Assemblies segment derived 82%, 76% and 68% of its
revenues from three customers in 2001, 2000 and 1999 respectively. The
Data Communications segment derived 13% and 16% of its revenue from one
customer in 2001 and 2000, respectively and 52% of its 1999 revenue
from three customers. The Company's Musical Instrument and Audio
Equipment segments are not dependent on any single customer.
NOTE 19 Investment Income
December 31,
2001 2000 1999
Interest Income $ 910,144 $1,109,751 $ 935,290
Dividend Income 173,653 414,912 125,990
Gain (Loss) on Sale of Investments (65,635) 17,684 67,244
Total $1,018,162 $1,542,347 $1,128,524
NOTE 20 Stock Option Plans
Eastern Research, Inc. (ERI) provides an employee stock-based
compensation plan to assist them in attracting and retaining personnel.
The maximum number of subsidiary shares that may be issued under the
plan approximates a 15% interest in the company. Options are generally
issued at estimated fair market value. The maximum term of the options
is 6 years, and they generally vest equally over 4 years.
VIR, Inc. also sponsored an employee stock-based compensation plan.
This plan was terminated in connection with the closure of the
Southampton plant and combination of VIR Inc. into ERI during 2001.
As of December 31, 2001, total options issued represents 14% of the
ERI shares currently outstanding. Vested options consist of 9% of the
currently outstanding shares of ERI.
ERI recognized compensation expense of $59,375 and $29,687 during
2001 and 2000 respectively, related to options granted with an exercise
price less than the fair market value on the date of grant. Had
compensation cost been determined pursuant to FASB Statement No. 123,
net income (loss) and earnings per share would have been:
2001 2000 1999
Net (loss) income $(4,123,257) $3,820,658 $2,775,220
Earnings per share $(3.52) $3.26 $2.37
NOTE 21 Related Party Transactions
Two members of the Company's Board of Directors are employed by
firms providing legal and financial advisory services, respectively.
Legal fees paid were $75,094, $131,543 and $75,221 during 2001, 2000
and 1999 respectively. Financial advisory fees paid were $11,753,
$63,546 and $16,418 during 2001, 2000 and 1999 respectively.
NOTE 22 Quarterly Financial Data (Unaudited)
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter Total
Net Sales $13,259,398 $15,119,294 $15,385,870 $16,725,951 $60,490,513
Gross Profit 3,381,851 3,890,162 5,173,502 6,337,581 18,783,096
Net (Loss)
Income (2,625,492) (1,565,281) (263,425) 370,388 (4,083,810)
(Loss) Earnings
per Share (2.24) (1.34) (0.23) 0.32 (3.49)
2000
Net Sales $16,808,032 $18,931,735 $17,850,297 $18,926,144 $72,516,208
Gross Profit 6,953,628 7,751,695 6,891,620 7,188,549 28,785,492
Net Income 869,852 1,356,195 658,528 1,070,321 3,954,896
Earnings per Share 0.74 1.16 0.56 0.91 3.38
1999
Net Sales $11,699,573 $13,887,775 $15,590,813 $16,840,581 $58,018,742
Gross Profit 3,637,359 4,878,932 6,107,161 6,601,775 21,225,227
Net Income
(Loss) (136,631) 1,044,946 741,718 1,234,455 2,884,488
Earnings (Loss)
per Share (0.12) 0.89 0.63 1.05 2.46
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) Identification of Directors
Time Period
Date Term Position
Name Expires Age Position Held
Steven Markowitz Next Annual 48 Director Since 1980
Meeting in 2002
Eugene Moroz (1) Next Annual 78 Director Since 1968
Meeting in 2002
Leonard W. Helfrich Next Annual 72 Director 1964 - 1968 and
Meeting in 2002 1972 to present
Orville G. Hawk (1) Next Annual 84 Director Since 1989
Meeting in 2002
Albert F. Schuster Next Annual 82 Director Since 1989
Meeting in 2002
Martha Markowitz Next Annual 80 Director Since 1991
Meeting in 2002
Jeffrey L. Schucker (1) Next Annual 47 Director Since July 1996
Meeting in 2002
Ernest Choquette Next Annual 48 Director Since April 1998
Meeting in 2002
(1) Audit Committee member.
(b) Identification of Executive Officers.
Time Period
Date Term Position
Name Expires Age Position Held
Steven Markowitz Next Annual 48 President 1990 to
Meeting in 2002 present
Barry J. Holben Next Annual 49 Vice President October 1995
Meeting in 2002 to present
Dwight A. Beacham Next Annual 55 Vice President October 1995
Meeting in 2002 to present
Nathan S. Eckhart Next Annual 38 Vice President, May 1996
Meeting in 2002 Treasurer, to present
Secretary
(c) Identification of Certain Significant Employees.
Not required to be answered.
(d) Family Relationships.
Except for Martha Markowitz and Steven Markowitz,
who are mother and son, there is no family relationship
between any officers or directors of the Company.
(e) Business Experience.
(1) Steven Markowitz, Barry Holben and Dwight
Beacham, have been employees of the Company in
executive capacities for at least the last five
years.
Mr. Eckhart has been employed by the
Company since 1993, previously serving as
Controller. Prior to that time he was a manager for
a public accounting firm.
Mr. Moroz was employed by the Company for
over 50 years, having last held the position of Vice
President. He retired from active employment in May
1998 and continues to serve on the Board of
Directors.
Mr. Helfrich was employed by the Company
for nearly 40 years as Vice President-Finance and
Secretary before retiring in March 2000 and
continues to serve on the Board of Directors.
Mr. Hawk who has been retired more than
five (5) years was formerly Chairman of the Board
and President of First National Bank of Allentown.
Mr. Schuster is a church director of music
and prior to his retirement more than five (5) years
ago was a supervisor at Bethlehem Steel Corporation.
Mrs. Markowitz is the widow of Jerome
Markowitz, the Company's founder, and represents the
family interests.
Mr. Schucker is currently a Managing
Director with Griffin Financial Group and formerly
President of Middle Market Capital Advisors, L.L.C.
(MMCA) and Vice President of Meridian Capital
Markets. Griffin Financial Group provides financial
advisory services to the Company from time to time.
Mr. Choquette has been a member of the law
firm of Stevens & Lee, Reading PA, for over 20 years
and currently serves as Co-Chairman of their
Corporate Group. Stevens & Lee serves as general
counsel to the Company.
(f) Involvement in Certain Legal Proceedings by
Directors or Officers.
None.
(g) Compliance with Section 16(a) of the Exchange Act.
No transaction required to be reported.
Item 11. Executive Compensation.
Deleted paragraphs and/or columns are not required to be
answered.
(b) SUMMARY COMPENSATION TABLE:
Annual Compensation All Other
Salary Bonus Compensation
Name and Principal Position Year $ $ $
Steven A. Markowitz, President 2001 140,616 - 48,739 (1)
(Chief Executive Officer) 2000 135,923 - 42,322
1999 126,840 - 42,059
Leonard W. Helfrich, 2001 - -
Vice President - Finance 2000 38,970 -
(Secretary) 1999 116,416 -
(1)-Value of Split Dollar Life Insurance. See Note 8 to the accompanying
consolidated financial statements for additional information on this
arrangement.
(f) Defined Benefit or Actuarial Plan Disclosure.
Estimated Annual Benefit obtained from 2001 Actuarial
Valuation Report:
Steven A. Markowitz $63,533 Age 48 (1)
(1) Amount shown is calculated from prior compensation to
date and estimated compensation to normal retirement age (65)
(g) Compensation of Directors:
Non-employee Directors receive $350 for
each Board and committee meeting attended plus reasonable
expenses in connection with attendance. Employee
Directors receive no additional compensation for their
services as a Director.
(h) Employment Contracts and Termination of
Employment and Change in Control Arrangements:
There are no employment contracts between
the Company and any of the Company's Executive Officers.
The Company has established an Executive Bonus Program in
the form of executive supplemental retirement plans for
the benefit of Mr. Beacham, Mr. Holben and Mr. Eckhart.
These plans provide for discretionary company
contributions, which vest over a 5 year period, accrue
interest at the prime rate, not to exceed 9%, and are
payable upon the executives death or retirement.
(j) Additional Information with Respect to
Compensation Committee Interlocks and Insider
Participation in Compensation Decisions:
(1) Nathan S. Eckhart, Vice President,
Treasurer and Secretary and Ernest J. Choquette,
Director of the Company, serve on the Compensation
Committee of the Board of Directors whose function
is to set the compensation of the President.
The compensation of all other employees is set by
or at the direction of the President.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Voting securities of the registrant owned of record or
beneficially by each person who owns of record, or is known by
the registrant to own beneficially, more than 5 percent of any
class of such securities. Class A Common Shares constitute
the only securities with voting rights. Information as of
February 28, 2002.
Amount and
Nature of
Names and Title of Beneficial % of
Addresses Class Ownership Class
Jerome Markowitz A 81,531 97.22%
Trust (2) (1)
821 N. 30th St.
Allentown, PA
(1) Sole voting and investment power
(2) The shares are held by Trustees under an Inter Vivos
Trust established by Mr. Markowitz, who died in February,
1991, for the benefit of his family, principally his widow,
Martha Markowitz. The Trustees are Steven Markowitz,
President and a Director of the Company, and Martha
Markowitz, a Director of the Company.
(b) Each class of equity securities of the registrant or any
of its parents or subsidiaries, other than directors'
qualifying shares, beneficially owned directly or indirectly by
all directors naming them and directors and officers of the
registrant, as a group, without naming them. Information as of
December 31, 2001.
Percent Percent
Nature of of of
Class Class Beneficial Class Class
Directors A B Ownership A B
Steven Markowitz 58 (1) (3) .07 %
13,562 (1) (3) 1.25%
81,531* (2) (4) 97.22 %
242,016* (2) (4) 22.27%
Eugene Moroz 6,290 (1) (3) as
to 6,290
6,000 (2) (4) as
to 6,000 1.13%
Leonard W. Helfrich 346 (2) (4) .03%
Orville G. Hawk 50 (2) (4) .005 %
Martha Markowitz 19,781 (1) (3) 1.82%
81,531* (2) (4) 97.22 %
242,016* (2) (4) 22.27%
Percent Percent
All Directors of of
and Officers Class Class Class Class
as a Group A B A B
7 81,589** 288,045** 97.29%** 26.51%
(1) Sole voting power
(2) Shared voting power
(3) Sole investment power
(4) Shared investment power
* Shares owned by the Jerome Markowitz Trust for
which Martha Markowitz and Steven Markowitz, Co-
Trustees, have shared voting and investment power and of
which Martha Markowitz is the primary beneficiary and
Steven Markowitz, one of the residuary beneficiaries.
** The shares held by the Jerome Markowitz Trust are
not duplicated in the totals for the Class A and Class B
Shares.
(c) Changes in Control. Not required to be answered.
Item 13. Certain Relationships and Related Transactions
See Note 12 to Financial Statements, concerning an agreement
between the Company and Martha Markowitz, a Director of the
Company.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The following consolidated financial statements of
Allen Organ Company and its subsidiaries are included in
Part II, Item 8:
Independent Auditors' Reports.
Consolidated Balance Sheets as of December 31, 2001
and 2000.
Consolidated Statements of Income for the years ended
December 31, 2001, 2000, and 1999.
Consolidated Statement of Changes in Stockholders'
Equity for the years ended December 31, 2001, 2000, and
1999.
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000, and 1999.
Notes to Consolidated Financial Statements.
The individual financial statements of the
Registrant's subsidiaries have been omitted, as they are
all included in the consolidated financial statements
referred to above.
(a) (2) Financial Statement Schedules
Schedule II. Valuation and Qualifying Accounts for
the three years ended December 31, 2001.
Schedules other than those
listed above are omitted because they are
either not required, are not applicable or the
required information is presented in the
Consolidated Financial Statements.
(a) (3) Exhibits
Exhibit No. Description
2(4) Plan of acquisition
3.1(1) Articles of Incorporation as amended
3.2(2) Bylaws, as amended
10.2(3) Agreement of Amendment between the Company
and Martha Markowitz
10.3(5) Executive Bonus Program and
Endorsement Split Dollar Life Insurance
Agreements between the Company and Dwight
A. Beacham, Nathan S. Eckhart and Barry J.
Holben
21 Subsidiaries of the registrant
99.1(6) Audit Committee Charter
1. Incorporated by reference to the exhibit
filed with the Registrants Annual Report on Form 10-K
for the year ended December 31, 1984.
2. Incorporated by reference to the exhibit
filed with the Registrants Quarterly Report on Form
10-Q for the period ended September 30, 1996.
3. Incorporated by reference to the exhibit
filed with the Registrants Annual Report on Form 10-K
for the year ended December 31, 1992.
4. Incorporated by reference to the exhibit filed with the
Registrants Current Report on form 8-K dated
August 1, 1995.
5. Incorporated by reference to the exhibit filed with the
Registrants Quarterly Report on Form 10-Q for the
period ended September 30, 1999.
6. Incorporated by reference to the exhibit filed with the
Registrants Annual Report on Form 10-K for the
year ended December 31, 2000.
(b) Reports on Form 8-K. None filed during fourth
quarter of 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ALLEN ORGAN COMPANY
Date: March 12, 2002 /s/STEVEN A. MARKOWITZ
Steven A. Markowitz
Chief Executive Officer,
President and Director
Date: March 12, 2002 /s/NATHAN S. ECKHART
Nathan S. Eckhart
Vice President-Finance,
Chief Financial and
Principal Accounting Officer
Date: March 12, 2002 /s/LEONARD W. HELFRICH
Leonard W. Helfrich
Director
Date: March 12, 2002 /s/JEFFREY L. SCHUCKER
Jeffrey L. Schucker
Director
Allen Organ Company and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 2001, 2000 and 1999
Additions
Balance at Additions Charged Write Balance
Beginning Charged to to Other Offs And at End
Description Of Year Expense Accounts Recoveries Of Year
Year Ended
December 31, 2001
Allowance for
Doubtful Accounts $ 428,791 $ 96,259 $ - $ (174,558) $ 350,492
Valuation
Allowance
Deferred Tax
Asset 100,000 900,000 - - 1,000,000
Year Ended
December 31, 2000
Allowance for
Doubtful Accounts $ 300,823 $174,034 $ - $ (46,066) $ 428,791
Valuation
Allowance
Deferred Tax
Asset 194,000 - - (94,000) 100,000
Year Ended
December 31, 1999
Allowance for
Doubtful Accounts $ 191,057 $109,766 $ - $ - $ 300,823
Valuation
Allowance
Deferred Tax
Asset 94,000 100,000 - - 194,000