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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Under Section 13 or 15(D) of The Securities Exchange
Act of 1934 For Quarter Ended June 30, 2002
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) (I.R.S. 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
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_____
Number of shares outstanding of each of the issuer's classes of common
stock, as of August 5, 2002:
Class A - Voting 83,864 shares
Class B - Non-voting 1,086,196 shares
ALLEN ORGAN COMPANY
INDEX
Part I Financial Information
Item 1.Financial Statements
Consolidated Condensed Statements of Income for the three and
six months ended June 30, 2002 and 2001
Consolidated Condensed Balance Sheets at June 30, 2002 and
December 31, 2001
Consolidated Condensed Statements of Cash Flows for the three
and six months ended June 30, 2002 and 2001
Notes to Consolidated Condensed Financial Statements
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
Part II Other Information
Item 4.Submission of Matters to a Vote of Security Holders
Item 6.Exhibits and Reports on Form 8-K
Signatures
Exhibits
PART I FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
For the 3 Months Ended: For the 6 Months Ended:
6/30/2002 6/30/2001 6/30/2002 6/30/2001
Net Sales $17,403,733 $15,119,294 $33,381,221 $28,378,692
Cost and Expenses
Costs of sales 10,245,150 11,229,132 19,594,210 21,106,679
Selling, general and
administrative 3,747,172 3,921,633 7,256,805 8,221,905
Research and
development 2,035,534 2,158,786 4,002,651 4,355,094
Costs to close
Southampton plant -- 530,000 -- 530,000
Impairment of
VIR, Inc. goodwill
and intangibles -- -- -- 1,400,000
Total Costs and
Expenses 16,027,856 17,839,551 30,853,666 35,613,678
Income (Loss) from
Operations 1,375,877 (2,720,257) 2,527,555 (7,234,986)
Other income (expense)
Investment and other
income 103,757 355,429 245,618 709,572
Interest expense -- (164,055) -- (315,084)
Minority interests in
consolidated subsidiaries -- (83,398) -- (33,275)
Total Other Income
and Expense 103,757 107,976 245,618 361,213
Income (Loss) Before
Taxes 1,479,634 (2,612,281) 2,773,173 (6,873,773)
Income Tax Provision
(Benefit) 470,000 (1,047,000) 832,000 (2,683,000)
Net Income (Loss) $1,009,634 $(1,565,281) $1,941,173 $(4,190,773)
Basic and Diluted
Earnings (Loss)
Per Share $0.86 $(1.34) $1.66 $(3.58)
Weighted Average Shares
Used in Per Share
Calculation 1,170,321 1,170,528 1,170,321 1,170,528
Dividends Per Share-Cash $ 0.14 $ 0.14 $ 0.28 $ 0.28
Total Comprehensive
Income (Loss) $1,054,941 $(1,661,534) $1,977,174 $(4,388,038)
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS June 30, 2002 Dec 31, 2001
(Unaudited) (Audited)
Current Assets
Cash $ 8,841,813 $ 4,449,998
Investments Including Accrued Interest 9,849,719 11,609,416
Accounts Receivable, net of reserves of
$485,985 and $350,492, respectively 9,696,342 9,947,842
Inventories:
Raw Materials 5,201,479 5,515,815
Work in Process 6,163,520 6,249,775
Finished Goods 4,630,546 4,720,318
Total Inventories 15,995,545 16,485,908
Income Taxes Prepaid and Receivable 1,384,992 1,106,214
Prepaid Expenses 550,414 386,421
Deferred Income Tax Benefits 1,542,107 1,561,138
Total Current Assets 47,860,932 45,546,937
Property, Plant and Equipment 27,337,847 26,600,965
Less Accumulated Depreciation (15,982,017) (15,109,416)
Total Property, Plant and Equipment 11,355,830 11,491,549
Other Assets
Inventory Held for Future Service 812,612 811,249
Note Receivable 2,397,291 1,997,107
Cash Value of Life Insurance 2,173,566 2,173,566
Deferred Income Tax Benefits 2,022,725 2,022,725
Goodwill, net 194,523 194,523
Intangible Assets, net 1,884,798 2,218,504
Other Assets 16,092 16,092
Total Other Assets 9,501,607 9,433,766
Total Assets $68,718,369 $66,472,252
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 2,584,446 $ 2,750,251
Other Accrued Expenses 2,398,151 1,973,154
Customer Deposits 3,047,262 2,978,023
Total Current Liabilities 8,029,859 7,701,428
Noncurrent Liabilities
Deferred and Other Noncurrent Liabilities 800,488 707,769
Accrued Pension Costs 1,921,483 1,748,040
Total Noncurrent Liabilities 2,721,971 2,455,809
Total Liabilities 10,751,830 10,157,237
STOCKHOLDERS' EQUITY
Common Stock 2002 2001
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
Capital in Excess of Par Value 12,905,650 12,903,610
Retained Earnings
Balance, Beginning 55,237,713 59,977,002
Net Income (Loss) 1,941,173 (4,083,810)
Dividends - Cash 2002 and 2001 (327,690) (655,479)
Balance, End 56,851,196 55,237,713
Accumulated Other Comprehensive Income (1,338,299) (1,374,300)
Sub-total 69,956,540 68,305,016
Treasury Stock
2002 - 43,368 Class A shares;
324,304 Class B shares (11,990,001) --
2001 - 43,368 Class A shares;
324,304 Class B shares -- (11,990,001)
Total Stockholders' Equity 57,966,539 56,315,015
Total Liabilities and Stockholders' Equity $68,718,369 $66,472,252
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 3 Months Ended: For the 6 Months Ended:
6/30/2002 6/30/2001 6/30/2002 6/30/2001
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $1,009,634 $(1,565,281) $1,941,173 $(4,190,773)
Adjustments to reconcile
net income (loss) to net
cash provided by (used in)
operating activities
Depreciation and
amortization 703,509 806,604 1,419,455 1,602,416
Loss from impairment of
VIR, Inc. goodwill and
intangibles, included
in operating expenses -- -- -- 1,400,000
Minority interest in
consolidated subsidiaries -- 83,398 -- 33,275
Change in assets and
liabilities
Accounts receivable (843,689) (477,690) 251,500 2,283,339
Inventories 1,021,806 2,277,673 489,000 1,059,414
Income taxes prepaid
and receivable (525,598) (1,502,000) (278,778) (2,983,743)
Prepaid expenses 42,525 (10,833) (163,993) (400,740)
Prepaid pension costs -- (2,391) -- (30,967)
Deferred income
tax benefits 18,347 (14,099) 19,031 29,901
Accounts payable (10,481) (1,222,676) (165,805) (1,568,766)
Accrued expenses 194,079 289,367 424,997 (664,151)
Customer deposits 176,691 (17,559) 69,239 1,275
Accrued pension costs 293,486 -- 173,443 --
Deferred and other
noncurrent liabilities 12,465 34,853 92,719 69,706
Net Cash Provided by
(Used In) Operating
Activities 2,092,774 (1,320,634) 4,271,981 (3,359,814)
CASH FLOW FROM INVESTING
ACTIVITIES
Increase in note
receivable -- -- (400,184) (399,058)
Net additions to plant
and equipment (666,082) (358,263) (947,250) (988,897)
Additions to goodwill
and intangible assets -- (156,243) (2,780) (156,243)
Net sale of short term
investments 1,892,322 12,544,103 1,795,698 12,524,132
Net Cash Provided by
Investing Activities 1,226,240 12,029,597 445,484 10,979,934
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from bank loans -- 1,100,000 -- 3,300,000
Repayment of bank loans -- (12,000,000) -- (12,000,000)
Proceeds from sales of
subsidiary stock -- -- 2,040 96,333
Subsidiary stock
reacquired from minority
shareholders -- (49,450) -- (49,450)
Reacquired Class B common
shares -- (1,156) -- (6,891)
Dividends paid in cash (163,845) (163,864) (327,690) (327,750)
Net Cash Used In
Financing Activities (163,845) (11,114,470) (325,650) (8,987,758)
NET INCREASE
(DECREASE) IN CASH 3,155,169 (405,507) 4,391,815 (1,367,638)
CASH, BEGINNING 5,686,644 1,750,237 4,449,998 2,712,368
CASH, ENDING $8,841,813 $1,344,730 $8,841,813 $1,344,730
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for:
Income Taxes $995,598 $55,000 $1,110,778 $242,000
Interest $ -- $164,055 $ -- $315,084
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Interim Financial Statements
The results of operations for the interim periods shown in this report
are not necessarily indicative of results to be expected for the fiscal
year. In the opinion of management, the information contained herein
reflects all adjustments necessary to make the results of operations
for the interim periods a fair statement of such operations. All such
adjustments are of a normal recurring nature.
Certain notes and other information have been condensed or omitted from
the interim financial statements presented in the Quarterly Report on
Form 10-Q. Therefore, these financial statements should be read in
conjunction with the Company's 2001 Annual Report on Form 10-K.
2. New Accounting Standards
Effective January 1, 2002, the Company adopted the following Statements
issued by the Financial Accounting Standards Board neither of which had
a material affect on the Company's financial statements.
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 amount of
goodwill amortization included in the operating expenses for the
three and six months ended June 30, 2001 was $32,407 and $64,814,
respectively.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
Liquidity and Capital Resources:
Cash flows from operating activities increased during the three and six
months ended June 30, 2002 when compared to the same period in 2001,
primarily due to higher operating income in the Musical Instruments and
Data Communications segments.
Results of Operations:
Sales and Operating Income
For the 3 Months Ended: For the 6 Months Ended:
6/30/2002 6/30/2001 6/30/2002 6/30/2001
Net Sales to
Unaffiliated Customers
Musical Instruments $ 6,616,642 $ 6,308,664 $12,922,843 $12,231,785
Data Communications 8,858,220 5,209,952 17,524,514 8,809,968
Electronic Assemblies 1,510,961 2,973,696 2,096,816 6,267,056
Audio Equipment 417,910 626,982 837,048 1,069,883
Total $17,403,733 $15,119,294 $33,381,221 $28,378,692
Intersegment Sales
Musical Instruments $ 92,737 $ 24,536 $ 165,146 $ 40,827
Data Communications -- 61,312 -- 193,438
Electronic Assemblies 6,616 -- 82,477 --
Audio Equipment 15,837 9,274 58,234 19,401
Total $ 115,190 $ 95,122 $ 305,857 $ 253,666
Income (Loss) from
Operations
Musical Instruments $ 821,967 $ 261,047 $ 1,645,877 $ 675,188
Data Communications 772,376 (3,028,951) 1,472,228 (8,034,136)
Electronic Assemblies (110,660) 146,244 (348,462) 433,632
Audio Equipment (107,806) (98,597) (242,088) (309,670)
Total $ 1,375,877 $(2,720,257) $ 2,527,555 $(7,234,986)
Musical Instruments Segment
Sales increased $307,978 and $691,058 respectively, for the three and
six months ended June 30, 2002 when compared to the same periods in 2001.
While the order rate for the first half of 2002 was slightly lower than the
same period in 2001, the first half of 2002 sales were higher due to
shipments made against the order backlog. This segment may be negatively
affected by recent events in the financial markets that may affect consumer
confidence as well as their donations to religious institutions. Religious
institutions are a primary market for this segments products, as such,
lower levels of donations may affect this segments future order rate.
The gross profit percentage increased to 33.7% and 33.3% respectively,
in the three and six months ended June 30, 2002 from 24.5% and 26.7%
respectively in the same periods in 2001. These increases are due to
higher sales over which to absorb fixed costs, changes in product mix and
operational improvements initiated in previous quarters.
Selling, general and administrative, research and development expenses
increased slightly during the three and six months ended June 30, 2002 when
compared to the same periods in 2001 due primarily to higher pension
expense resulting from lower investment returns realized in the Company's
defined benefit pension plans. The Company has reduced its long-term rate
of return assumption in both of its defined benefit pension plans due to
lower projected future investment returns and expects that pension related
costs will increase in future years.
Data Communications Segment
Sales increased $3,648,268 and $8,714,546 respectively, for the three
and six months ended June 20, 2002 when compared to the same periods in
2001. The 2002 sales increased due to new product introductions and from
redirection of the Company's sales and marketing efforts away from CLECs to
other Data Communications markets. The 2001 sales were negatively affected
by the slowdown in the overall Data Communications market.
Gross profit margins increased to 54.5% and 53.6% respectively during
the three and six months ended June 30, 2002 from 33.8% and 32.2% during
the same periods in 2001 due to the higher sales volume over which to
absorb fixed costs and changes in product mix. The gross margins for the
three and six months ended June 30, 2001 were negatively affected by
$360,000 and $720,000 respectively, of additional inventory valuation
adjustments recorded at VIR, Inc. for slow moving and obsolete inventory
associated with discontinued product lines.
Sales and marketing expenditures decreased approximately $140,000 (8%)
and $467,000 (12%) during the three and six months ended June 30, 2002 when
compared to the same periods in 2001 primarily due to cost reduction
programs.
General and administrative expenses for the three months ended June 30,
2002 were approximately equal to the same period in 2001 and decreased
approximately $283,000 (8%) during the six months ended June 30, 2002.
Research and development expenditures decreased approximately $98,000 (5%)
and $283,000 (8%) respectively for the three and six months ended June 30,
2002 when compared to the same periods in 2001. These decreases are
primarily due to the combination of the VIR Linear Switch operations into
Eastern Research, Inc. (ERI) during 2001 and an overall reduction in
personnel.
The combination of increased sales, higher gross margins and lower
operating costs resulted in operating income of approximately $772,000 and
$1,472,000, respectively for the three and six months ended June 30, 2002
for this segment compared to large operating losses in the same periods of
2001. The 2001 operating losses were also negatively affected by inventory
valuation adjustments, plant closing costs, and a charge to write down the
goodwill and intangible assets of VIR, Inc totaling $890,000 and $2,650,000
for the three and six months ended June 30, 2001, respectively. Future
sales visibility remains limited throughout the Data Communications market
that ERI serves.
Electronic Assemblies Segment
Sales decreased $1,462,735 and $4,170,240 respectively for the three and
six months ended June 30, 2002 when compared to the same periods in 2001
due to lower order volume from the Company's contract manufacturing
customers, who were affected by the economic slowdown. The order rate is
expected to continue at this lower level in future quarters.
The gross profit margin was a loss of approximately $(24,000) (2%) and
$(178,000) (8%) respectively for the three and six months ended June 30,
2002, primarily due to lower sales volume over which to absorb fixed costs.
The gross profit percentage was 11% during the three and six months ended
June 30, 2001. Selling, general and administrative expenses decreased
slightly when compared to the same periods in 2001.
Audio Equipment Segment
Sales decreased $209,072 and $232,835 for the three and six months ended
June 30, 2002 when compared to the same periods in 2001. Gross profit
margins were 21% and 25% respectively in the three and six months ended
June 30, 2002, as compared to 38% and 35% in the same periods in 2001.
Selling, general and administrative costs decreased during the three and
six months ended June 30, 2002 when compared to the same period in 2001.
Legacy Audio has historically sold its products through a direct
marketing program. This method of distribution limited Legacy's ability to
penetrate the broader market. Legacy has been implementing a program 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. This results in Legacy receiving a lower price per sale to
allow the dealers to realize a retail markup. The lower product prices
that Legacy receives are in part offset by eliminating Legacy's direct
marketing expense that is not required in the new sales model. In
addition, the general economic slowdown has affected the sales for consumer
goods including the Company's Legacy products.
Most of Legacy's speaker cabinets are now manufactured at the Company's
Macungie, PA plant, with a small percentage still manufactured at a smaller
facility in Springfield, IL. The Company plans to consolidate all Legacy
production at the Macungie plant by the third quarter of 2002. During July
2002 Legacy's sales offices was re-located to the Macungie facility. The
effect of this consolidation is expected to be immaterial.
Other Income and Expense
Investment income decreased during the three and six months ended June
30, 2002 when compared to the same periods in 2001 due to lower invested
balances and lower rates of return available on invested funds.
Income Taxes
The tax provision for the three and six months ended June 30, 2002 are
based on the estimated effective tax rate for the year, which is less than
the statutory rate due to tax credits and exempt income.
Factors that May Affect Operating Results
The statements contained in this report on Form 10-Q 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 Annual
Report on Form 10-K. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No change from information disclosed in the Company's 2001 annual
report of form 10-K.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) Annual Meeting: April 25, 2002
(b) Election of the following directors for a one-year term:
Steven Markowitz, Eugene Moroz, Leonard Helfrich, Martha
Markowitz, Orville Hawk, Albert Schuster, Jeffrey Schucker,
Ernest Choquette and Michael Doyle.
(c) In addition to the election of directors and the waiver of
reading of the minutes of the prior meeting, the shareholders
ratified charitable deductions made in 2001 and all contracts,
agreements, and employments by the Board of Directors and
officers since the previous annual meeting in April 2001. All
resolutions were adopted by the vote of all shareholders
present, in person or proxy.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
99.1 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) No reports on Form 8-K were filed during the quarter
ended June 30, 2002.
SIGNATURES
Pursuant to the requirements 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
(Registrant)
Date:August 7, 2002 /s/STEVEN MARKOWITZ
Steven Markowitz, President and Chief
Executive Officer
Date:August 7, 2002 /s/NATHAN S. ECKHART
Nathan S. Eckhart, Vice President-Finance,
Chief Financial and Principal Accounting
Officer