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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, 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) (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 21, 2003:
Class A - Voting 83,864 Class B - Non-voting 1,086,196
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act).
Yes No X
The aggregate market value of the Class B Common Shares held by non-affiliates
of the Registrant as of June 30, 2002: $32,665,937
ALLEN ORGAN COMPANY
INDEX
Item
PART I
1. Business
- General developments of business
- Industry Segments
- Description of business
- Financial information about geographic areas
- Available information
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 Consolidated Financial Data
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
7A.Quantitative and Qualitative Disclosures About Market Risk
8. Financial Statements and Supplemental Data
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
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
14. Controls and Procedures
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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.
During 2002 the Company's Data Communications segment increased
its sales and operating results when compared to 2001. This was
mainly the result of new product introductions, cost cutting
initiated in previous years, and from the redirection of the
Company's sales and marketing efforts away from Competitive Local
Exchange Carriers (CLEC's) to other Data Communications markets. The
Company continues to be cautious because the Data Communications
industry remains in a long recession and the general weak economic
environment. Future sales in this segment have become increasingly
dependent on larger sales opportunities that could result in the
amount and timing of future revenue being more volatile.
The economic downturn has negatively affected the Company's
Electronic Assemblies segment as well resulting in a significant
reduction in its order rate in 2002. Management expects this lower
order rate to continue into future quarters.
While there are many factors that may affect the Company's
future business, the Company is particularly concerned with the weak
economic environment that 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 21 to the Consolidated 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 37%, 40% and 39%
of net sales in 2002, 2001 and 2000, 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. Traditionally, organs
have longer service requirements than other digital products. 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, management
does not expect this issue to significantly affect future product
shipments.
This 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 Consolidated 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 2003 and 2002 was $4.2
million and $5.2 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. Management believes
it has a major position in the institutional market in the United
States (largest world 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). During 2001 the Company combined the operations of VIR
Linear Switch with ERI. The combined operations are headquartered at
ERI's facility in Moorestown, New Jersey. ERI designs and markets
data networking products enabling network service providers to
deliver services to their customers. This segment accounted for 54%,
43% and 46% of net sales in 2002, 2001 and 2000, respectively.
Data Communications products are sold directly to end-users, to
wholesale and retail distributors worldwide and to a smaller extent
under OEM agreements with some 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 materials used in the Data Communications
products are electronic components, which are readily available from
various sources without undue difficulty. 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, management does not expect
this to significantly affect future product shipments.
The Data Communications segment derived 40% of its net sales
from two customers in 2002 and 13% and 16% of its net sales from one
customer in 2001 and 2000, respectively.
ERI's customer base includes major end-user corporations,
Network Service Providers, Wireless 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 Adtran, 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 and
considers the DNX its flagship product. The DNX revenues represent
approximately 89% of ERI's net sales for 2002. 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.
This segment derived approximately 28% and 13% of its net sales
from international markets in 2002 and 2001, respectively, primarily
from Asia Pacific and Europe. 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.
The dollar amount of unshipped order backlog at the end of
February 2003 and 2002 was $2.0 million and $3.0 million
respectively. All orders are expected to be filled in the current
year.
This segment has redirected its sales and marketing efforts to
focus on markets for which its product line is well suited, including
the wireless, enterprise, government and certain international
markets. This segment has been successful in increasing its sales
and operating income during 2002. Future sales in this segment have
become increasingly dependent on larger sales opportunities that
could result in the amount and timing of future revenue being more
volatile.
During 2002, ERI introduced the DNX-1u, which is targeted at
Wireless Service Providers. This and prior product introductions
have strengthened the DNX product line and contributed to the sales
growth during 2002.
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 7% of 2002 net sales, 14% of 2001 net sales and
12% of net sales in 2000. AIA derived 73%, 82% and 76% of its net
sales from three customers in 2002, 2001 and 2000, respectively.
The Electronic Assemblies segment is very competitive with
numerous manufacturers offering similar services. AIA customers are
generally obtained from a geographic area located close to the
Company.
The dollar amount of the segment's unshipped order backlog at
the end of February 2003 and 2002 was $721,000 and $529,000,
respectively. All orders are expected to be filled in the current
year.
Audio Equipment.
The Audio Equipment segment operates through Legacy Audio, Inc
and Allen Audio, Inc. This segment accounted for 2% of net sales in
2002 and 3% of net sales in 2001 and 2000, 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 direct marketing.
Management believes that this method of distribution has limited its
ability to penetrate the broader market. During 2001 the Company
began implementing a plan 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 LAI has been shifting
marketing resources to the new method of distribution. In addition,
the general economic slowdown has negatively affected 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. LAI has developed and markets products
specifically for these home theater applications.
In August 2002, LAI closed its manufacturing facility in
Springfield, Illinois and consolidated all production into the
Company's manufacturing facility in Macungie, PA.
LAI 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 2003 and 2002 was $106,000 and
$244,000, 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 public address 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 public address 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 $7,782,571, $8,004,838, and $7,340,209 in
2002, 2001, and 2000, respectively, on research and development. The
Company maintains an ongoing commitment to new product development
and expects future expenditures for these activities to be comparable
to the 2002 level.
The Company and its subsidiaries employ approximately 490
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 14 to the Consolidated Financial
Statements for additional information on export sales.
Export sales are all made in US dollars and, based on customer
credit information, are made either on open credit terms, 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.
Available information.
The Company files annual reports on Form 10-K, quarterly reports
of Form 10-Q, current reports on Form 8-K and amendments to those
reports pursuant to Section 13(a) or 15(d) of the exchange Act with
the Commission. The public may read and copy any materials filed
with the Securities and Exchange Commission at their Public Reference
Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
also obtain this information by calling the Commission at 1-800-SEC-
0330. The Securities and Exchange also maintains as Internet site
that contains reports and other information statements and other
information regarding electronic filers at www.sec.gov.
Item 2. Properties
The following sets forth the location, approximate square
footage and use of the Company's operating locations by segment.
Management believes that its facilities are generally suitable and
adequate for its needs.
Approximate
Location Square Footage Use
Musical Instruments, Audio Equipment and Electronic Assemblies:
Macungie, Pennsylvania 242,000 Administrative, research and
manufacturing facility. Owned
by Allen Organ Company.
Operating at approximately
80% capacity.
Macungie, Pennsylvania 27,000 International sales,
exhibition center, museum
and teaching facility. Houses
the sales offices for Musical
Instruments, Allen Audio and
Legacy Audio. Owned by Allen
Organ Company.
Data Communications:
Moorestown, New Jersey 39,000 Administrative, sales and
research facility. Leased
until September 2005.
During 2002, the Company's subsidiary, VIR, Inc., entered into
an agreement to terminate the lease on its Southampton, Pennsylvania
facility, which it had vacated in 2001.
In October 2002, the Company's subsidiary, Legacy Audio, Inc.,
sold its manufacturing and sales facility located in Springfield,
Illinois. See Note 21 to the Consolidated 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 2002.
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:
2002 High Low
First Quarter $ 35.18 $ 30
Second Quarter 42.5 33.69
Third Quarter 41.25 37.4
Fourth Quarter 41.23 37
2001 High Low
First Quarter 55 33
Second Quarter 39 31.75
Third Quarter 36.473 30.02
Fourth Quarter 33.5 30.4
The Company has 7 Class A Shareholders and 250 Class B
Shareholders of record as of March 20, 2003.
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 2002
Record Date Payable Amount
Cash 2/15/2002 3/1/2002 $0.14
Cash 5/17/2002 5/31/2002 $0.14
Cash 8/16/2002 8/30/2002 $0.14
Cash 11/15/2002 11/29/2002 $0.14
Record of Quarterly Dividends Paid in 2001
Record Date Payable Amount
Cash 2/16/2001 3/2/2001 $0.14
Cash 5/18/2001 6/1/2001 $0.14
Cash 8/17/2001 8/31/2001 $0.14
Cash 11/16/2001 11/30/2001 $0.14
Item 6. Selected Financial Data
Years Ended December 31,
2002 2001 2000 1999 1998
Net Sales $67,739,548 $60,490,513 $72,516,208 $58,018,742 $44,966,075
Net Income
(Loss) $ 2,685,357 $(4,083,810) $ 3,954,896 $ 2,884,488 $ (616,711)
Basis and
diluted
earnings (loss)
per share $ 2.29 $ (3.49) $ 3.38 $ 2.46 $ (0.52)
Cash dividends
per share $ 0.56 $ 0.56 $ 0.56 $ 0.56 $ 0.56
At Year End
Total Assets $73,362,868 $66,472,252 $80,807,742 $67,466,070 $61,989,953
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,
2002 2001
Working Capital $41,551,688 $38,656,758
Current Ratio 4.8 to 1 6.0 to 1
Debt to Equity Ratio 0.30 to 1 0.18 to 1
Cash flows provided by operating activities increased during 2002, as
compared to 2001 and 2000 primarily due to higher operating income in the
Data Communications segment, reductions in inventory in the Musical
Instruments and Electronic Assemblies segments and income tax refunds.
Cash flows provided by operating activities decreased during 2001 as
compared to 2000, primarily due to operating losses incurred in the Data
Communications segment.
Cash flows used in investing activities during 2002 were used to
purchase approximately $1,039,000, $188,000 and $672,000 of property and
equipment in the Musical Instruments, Electronic Assemblies and Data
Communications segments, respectively.
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
$2,148,000 for leasehold improvements and new computer, office and test
equipment to support the growth of ERI.
As indicated in Note 8 of the Consolidated Financial Statements, ERI
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 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
changes in the financial markets, the Company decided to repay the
outstanding loans to eliminate the costs related to this financing.
Results of Operations:
Sales and Operating Income
Consolidated sales for 2002 increased $7,252,035 (12%) when compared
to 2001, primarily due to higher sales in the Data Communications segment.
Consolidated sales for 2001 decreased $12,025,695 (17%) when compared to
2000, primarily due to lower sales in the Data Communications segment, as
well as in the Musical Instruments segment.
December 31,
2002 2001 2000
Net Sales
Musical Instruments
Domestic $21,694,445 $20,616,513 $24,422,709
Export 3,248,480 3,759,129 3,635,123
Total 24,942,925 24,375,642 28,057,832
Data Communications
Domestic 26,107,275 22,567,298 25,556,745
Export 10,428,899 3,342,587 7,764,597
Total 36,536,174 25,909,885 33,321,342
Electronic Assemblies
Domestic 4,750,143 8,382,021 8,624,199
Audio Equipment
Domestic 1,441,084 1,603,650 2,323,865
Export 69,222 219,315 188,970
Total 1,510,306 1,822,965 2,512,835
Total $67,739,548 $60,490,513 $72,516,208
Income (Loss) from Operations
Musical Instruments $ 2,017,527 $ 2,184,321 $ 5,029,871
Data Communications 2,105,802 (8,284,232) (2,063,221)
Electronic Assemblies (401,165) 125,000 1,284,806
Audio Equipment (615,317) (988,353) (429,386)
Total $ 3,106,847 $(6,963,264) $ 3,822,070
Musical Instruments Segment
The domestic sales for 2002 increased $1,077,932. While the order
rate for 2002 was slightly lower than 2001, the 2002 sales were higher due
to shipments made to customers against a higher order backlog. The 2001
decrease in domestic sales was the result of shipments in 2000 made
against a higher order backlog. As discussed on page 3, the economic
downturn may affect future order volume.
Export sales were lower in 2002, as compared to the previous year, and
approximately equal in 2001 and 2000. Certain foreign markets continue to
be affected by unfavorable economic conditions. While the value of the US
dollar compared to certain foreign currencies has decreased, there is a
time lag before any such change can have an impact on export sales.
In recent years the Company has entered a different subset of the
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 29.5%, 30.1% and 36.5% for the
years ended December 31, 2002, 2001 and 2000, respectively. The 2002
decrease was due to higher operating costs, primarily employee pension
expense and lower absorption of fixed costs related to planned decreases
in the level of inventory necessitating slightly lower levels of
production. The decrease in gross profit in 2001, when compared to 2000,
was a result of lower sales volume over which to absorb fixed costs and
changes in product mix.
Selling and advertising expenses remained relatively constant in 2002,
2001 and 2000. General and administrative expenses increased
approximately $38,000 in 2002 when compared to 2001, which was
approximately equal to 2000.
Research and development expenses decreased approximately $29,000 in
2002 from 2001 and decreased approximately $25,000 in 2001 from 2000.
Several of the Company's operating expenses continue to rise at
significant rates including business insurances, medial insurance and
pension expense. The Company's pension expense has increased due to 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
Domestic sales increased $3,539,977 in 2002, compared to the previous
year, and decreased $2,989,447 in 2001 when compared to 2000.
International sales increased $7,086,312 in 2002, compared to the previous
year, and decreased $4,422,010 during 2001 when compared to 2000. The
increase in international sales in 2002 was primarily from sales to one
customer. The 2002 sales increased due to new product introductions and
from redirecting the Company's sales and marketing efforts away from
CLEC's to other Data Communications markets, for which its product line is
well suited, including the wireless, enterprise, government and certain
international markets. The 2001 sales decreased from 2000 due 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 CLEC's, many of which had difficulty raising capital and
became insolvent.
Gross profit margins were 50%, 40% and 47% in 2002, 2001 and 2000,
respectively. The 2002 increase is attributable to higher sales volume
over which to absorb fixed costs and changes in product mix. 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 from 2000, 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. While the Company strives to maintain profit margins
by developing products that offer desirable features, the industry is very
competitive which often results in pricing changes to obtain and maintain
market share.
Selling expenses decreased approximately $654,000 in 2002 compared to
2001, and decreased approximately $1,123,000 in 2001 from 2000. These
decreases are related to cost cutting measures initiated in the first half
of 2001 due to the economic downturn. In addition, 2001 expenses
decreased due to lower sales in 2001.
Administrative expenses decreased approximately $21,000 in 2002
compared to 2001, and decreased approximately $347,000 in 2001 compared to
2000, from cost cutting measures initiated in the first half of 2001 due
to the economic downturn.
Research and development expenses were $6,352,909, $6,599,104 and
$5,911,740 for the years ended December 31, 2002, 2001 and 2000,
respectively. The 2002 decrease is primarily due to the combination of
the VIR operations into ERI during the second half of 2001. The segment
is committed to new product development and expects these expenditures to
continue at approximately the same level in 2003.
The combination of increased sales, higher gross margins and lower
operating costs resulted in operating income of $2,105,802 during 2002 for
this segment compared to an operating loss of $8,284,232 in 2001. The
2001 operating loss was negatively affected by inventory valuation
adjustments, plant closing costs, and a charge to write down the goodwill
and intangible assets of VIR totaling $3,469,000. Future sales visibility
remains limited throughout the Data Communications market that ERI serves
with many companies that buy equipment continuing to lower their capital
expenditures for such equipment. These factors, along with continued
uncertainty in completing sales to larger accounts, create significant
uncertainty of operating results in future quarters.
Electronic Assemblies Segment
Sales decreased $3,631,878 and $242,178 in 2002 and 2001, respectively
compared to the previous year. The segment's order rate decreased
significantly beginning 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 continues to take steps to reduce its costs at its Macungie, PA
plant.
Gross profit margin for 2002 was a loss of approximately $(61,000)
(1%). Gross profit margins were 7.1% and 19.5% for 2001 and 2000,
respectively. These decreases are the result of lower sales over which to
absorb fixed costs.
Selling, general and administrative expenses decreased approximately
$52,000 in 2002 compared to 2001, and increased approximately $95,000 in
2001 compared to 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 decreased $312,659 and $689,870 in 2002 and 2001, respectively,
compared to the previous year. Legacy Audio has historically sold its
products through a direct marketing program. Management believes that
this method of distribution has limited its ability to penetrate the
broader market. In 2002, Legacy began 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 some consumer goods.
This has resulted in a decrease in direct sales that has not been offset
by dealer sales.
Gross profit margins were 22%, 12% and 43% for the years ended
December 31, 2002, 2001 and 2000, respectively. The 2002 increase over
the previous year was due to steps taken to reduce this segment's costs,
including the consolidation of all manufacturing into the Macungie, PA
plant. The 2001 decrease compared to 2000 is attributable to lower sales
volume over which to absorb fixed costs.
Selling, general and administrative costs decreased approximately
$233,000 and $250,000 in 2002 and 2001, respectively, compared to the
previous year, as a result of steps taken to reduce operating costs and
because of Legacy Audio's switch to a dealer based selling model.
The Company has developed a line of Public Address System products
which it markets under the name Allen Audio. These products are sold
through a dealer network, some of which are also organ dealers.
Other Income (Expense)
Investment income increased slightly for the year ended December 31,
2002 when compared to 2001 due to realized gains on investments and higher
invested balances that offset lower rates of return on invested funds.
Investment income for the year ended December 31, 2001 decreased when
compared to 2000 due to lower invested balances. Interest expense was
incurred in 2001 and 2000 on short-term bank financing related to ERI.
The 2001 loss on the 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.
Income Taxes
The effective tax rate (benefit) was 29.3%, (36.8%) and 22.4% in 2002,
2001 and 2000, respectively. The decrease in the 2002 effective tax rate
is due to tax credits and other non-taxable items. The 2001 effective tax
rate increased due to tax credits and other preference items increasing
the benefit to the Company related to the 2001 loss.
Significant Accounting Policies
The significant accounting policies of the Company are described in
Note 1 of the Consolidated 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 the possibility that future events affecting them may
differ markedly. The accounting policies of the Company , which require
significant estimates and assumptions, are described below.
Carrying Value of Obsolete and Slow Moving Inventory: The Company
has written down the value of inventory that 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 an
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
17 of the Consolidated Financial Statements, the Company has recorded
valuation allowances related to the uncertainty of realizing certain
state and federal net operating loss carryforwards.
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
Obligations Total Less than 1-3 4-5 After
1 year years years 5 years
Operating Leases $868,606 $312,856 $555,750 $0 $0
Total Amount of Commitment Expiration Per Period
Other Commercial Amounts Less than 1-3 4-5 After
Commitments Committed 1 year years years 5 years
Contingent
Repurchase
Commitments
Related to
Customer
Financing
Arrangements $1,644,038 $1,644,038 $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 and 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 2003. 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.
New Accounting Standards
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure-an amendment of SFAS No. 123." This statement amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company continues to account for stock-based compensation using Accounting
Principles Board Statement No. 25, "Accounting for Stock Issued to
Employees," and has not adopted the recognition provisions of SFAS No.
123, as amended by SFAS No. 148. However, the Company has adopted the
disclosure provisions for the current fiscal year and has included this
information in the Company's consolidated financial statements.
Effective January 1, 2002, the Company adopted SFAS No. 142.
Accordingly, no amortization of goodwill was recognized in the
accompanying consolidated financial statements of operations for the year
ended December 31, 2002, compared to $52,666 and $129,627 for the years
ended December 31, 2001 and 2000, respectively. In accordance with the
provisions of SFAS No. 142, management has performed the required
transitional impairment test of goodwill and has determined that no
impairment loss need be recognized in the year ended December 31, 2002.
As required by SFAS No. 142, prior results have not been restated. A
reconciliation of the previously reported net income (loss) and earning
(loss) per common share for the years ended December 31, 2001 and 2000, as
if SFAS No. 142 had been adopted as of January 1, 2000, is as follows:
December 31,
2001 2000
Reported net (loss) income $(4,083,810) $3,954,896
Add back: Goodwill amortization,
net of related tax effect 32,165 79,612
Adjusted net (loss) income $(4,051,645) $4,034,508
Basic and diluted (loss) earnings
per share, as reported $ (3.49) $ 3.38
Impact of goodwill amortization,
net of tax 0.03 0.07
Adjusted basic and diluted (loss)
earnings per share $ (3.46) $ 3.45
During 2002 the FASB issued. SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses financial
accounting and reporting for costs associated with exit or disposal
activities. The Company does not expect the adoption of SFAS No. 146 to
have a material effect on the Company's consolidated financial statements.
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 and Supplemental Data
The information required by this Item is set forth on pages 15 through
34 hereto and is incorporated by reference herein.
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, 2002 and 2001,
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, 2002. These
consolidated financial statements and 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 schedules 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, 2002 and 2001,
and the results of their operations and their cash flows for each of the
years in the three year period ended December 31, 2002 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.
As discussed in Note 1 to the consolidated financial statements,
effective January 1, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets".
/s/KPMG LLP
Allentown, PA
February 28, 2003
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 2002 2001
CURRENT ASSETS
Cash $ 4,515,189 $ 4,449,998
Investments including accrued interest 17,176,750 11,609,416
Accounts receivable, net of allowance for
doubtful accounts of $502,209 in 2002
and $350,492 in 2001 12,184,564 9,947,842
Inventories 16,223,682 17,297,157
Prepaid income taxes 161,071 1,106,214
Prepaid expenses 318,943 386,421
Deferred income taxes 1,992,694 1,561,138
Total Current Assets 52,572,893 46,358,186
PROPERTY, PLANT AND EQUIPMENT, NET 10,857,494 11,491,549
OTHER ASSETS
Note receivable from related party 2,397,291 1,997,107
Cash value of life insurance 2,273,163 2,173,566
Deferred income taxes 3,422,448 2,022,725
Intangible assets, net 1,628,964 2,218,504
Goodwill, net 194,523 194,523
Other assets 16,092 16,092
Total Other Assets 9,932,481 8,622,517
Total Assets $73,362,868 $66,472,252
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,688,967 $ 2,750,251
Accrued expenses 2,638,258 1,973,154
Customer deposits 2,693,980 2,978,023
Total Current Liabilities 11,021,205 7,701,428
NONCURRENT LIABILITIES
Deferred and other noncurrent liabilities 1,028,785 707,769
Accrued pension costs 5,006,546 1,748,040
Total Noncurrent Liabilities 6,035,331 2,455,809
Total Liabilities 17,056,536 10,157,237
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share
Authorized
Class A Voting Shares-400,000 in 2002 and 2001
Class B Non-Voting Shares-3,600,000 in 2002 and 2001
Issued 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 12,961,610 12,903,610
Retained earnings 57,267,763 55,237,713
Accumulated other comprehensive loss (3,460,463) (1,374,300)
Less cost of common shares in treasury
2002-43,368 Class A shares;324,565 Class B shares (12,000,571)
2001-43,368 Class A shares;324,304 Class B shares (11,990,001)
Total Stockholders' Equity 56,306,332 56,315,015
Total Liabilities and Stockholders' Equity $73,362,868 $66,472,252
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2002 2001 2000
NET SALES $67,739,548 $60,490,513 $72,516,208
COSTS AND EXPENSES
Cost of sales 41,963,839 41,707,417 43,730,716
Selling, administrative and
other expenses 14,886,291 15,811,522 17,623,213
Research and development 7,782,571 8,004,838 7,340,209
Plant closure costs -- 530,000 --
Impairment of goodwill and intangibles -- 1,400,000 --
Total Costs and Expenses 64,632,701 67,453,777 68,694,138
INCOME (LOSS) FROM OPERATIONS 3,106,847 (6,963,264) 3,822,070
OTHER INCOME (EXPENSE)
Investment income 716,335 1,018,162 1,542,347
Interest expense -- (315,083) (320,942)
Loss on sale of property, plant
and equipment (55,184) (175,358) (58,288)
Other income, net 28,359 25,008 20,414
Minority interests in
consolidated subsidiaries -- (33,275) 68,295
Total Other Income 689,510 519,454 1,251,826
INCOME (LOSS) BEFORE TAXES 3,796,357 (6,443,810) 5,073,896
PROVISION FOR TAXES
Current 1,669,000 (1,168,000) 1,736,000
Deferred (558,000) (1,192,000) (617,000)
Total Provision for Taxes 1,111,000 (2,360,000) 1,119,000
NET INCOME (LOSS) $ 2,685,357 $(4,083,810) $ 3,954,896
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX
Unrealized gain (loss) on
investments:
Unrealized gain (loss) arising
during period $ 132,305 $ (138,420) $ (171,313)
Less: reclassified adjustment
for (loss) gain included in
income (97,186) (41,153) (11,097)
Total 35,119 (179,573) (182,410)
Minimum pension liability
adjustment (2,121,282) (1,334,717) --
Other comprehensive loss (2,086,163) (1,514,290) (182,410)
COMPREHENSIVE INCOME (LOSS) $ 599,194 $(5,598,100) $ 3,772,486
BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE $ 2.29 $ (3.49) $ 3.38
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Capital
in
Class A Class B Excess of
Shares Amount Shares Amount Par Value
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
Tax benefit from
exercise of subsidiary
stock options 58,000
Balance-December 31, 2002 127,232 $127,232 1,410,761 $1,410,761 $12,961,610
Accumulated
Other
Retained Comprehensive Treasury Stock
Earnings Income (Loss) Shares Amount
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
($0.56 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
($0.56 per share) (655,479)
Balance-December 31, 2001 55,237,713 (1,374,300) 367,672 (11,990,001)
Net income 2,685,357
Reacquired Class B Shares 261 (10,570)
Change in unrealized
gain (loss) on securities
available for sale 35,119
Minimum pension liability
adjustment (2,121,282)
Cash dividend paid
($0.56 per share) (655,307)
Balance-December 31, 2002 $57,267,763 $(3,460,463) 367,933 $(12,000,571)
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $2,685,357 $(4,083,810) $3,954,896
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Depreciation and amortization 2,801,512 2,974,898 2,519,496
Minority interest in consolidated
subsidiaries -- 33,275 (68,295)
Loss from impairment of goodwill and
intangibles -- 1,400,000 --
Loss on sale of property, plant and
equipment 55,184 175,358 58,288
Gain on sale of investments (156,248) (65,635) (17,684)
Tax benefit from exercise of stock
options 58,000 145,000 --
Deferred income taxes (518,984) (1,296,667) (711,566)
Change in assets and liabilities
Accounts receivable (2,236,722) 337,817 158,771
Inventories 1,073,475 3,201,673 (3,050,201)
Prepaid income taxes 945,143 (1,092,242) (13,972)
Prepaid expenses 67,478 (82,079) (17,204)
Prepaid pension costs (175,071) 126,006 (36,548)
Other assets -- 2,500 22,548
Accounts payable 2,938,716 (697,868) (145,589)
Accrued income taxes -- -- (683,133)
Accrued expenses 665,104 (842,948) 888,946
Customer deposits (284,043) (13,605) 1,406,432
Deferred and other noncurrent
liabilities 321,016 397,753 130,101
Net Cash Provided by Operating
Activities 8,239,917 619,426 4,395,286
CASH FLOWS FROM INVESTING ACTIVITIES
Cash proceeds from sale of investments
classified as available for sale 30,633,381 18,682,314 9,908,680
Cash paid for purchase of investments
classified as available for sale (36,009,348) (5,711,291) (15,118,347)
Increase in cash value of life
insurance (99,597) (138,699) (313,370)
Increase in note receivable (400,184) (440,386) (445,574)
Additions to intangible assets (89,386) (156,243) (906,700)
Cash proceeds from sale of property,
plant and equipment 319,155 11,250 100,206
Cash paid for purchase of property,
plant and equipment (1,898,586) (1,458,233) (3,157,814)
Net Cash (Used In) Provided by
Investing Activities (7,544,565) 10,788,712 (9,932,919)
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 (655,307) (655,479) (655,544)
Reacquired Class A common shares -- (4,416) --
Reacquired Class B common shares (10,570) (6,891) (3,732)
Subsidiary company stock reacquired
from minority stockholders -- (400,055) --
Proceeds from sale of subsidiary stock 35,716 96,333 --
Net Cash (Used in) Provided by
Financing Activities (630,161) (9,670,508) 8,040,724
NET INCREASE IN CASH 65,191 1,737,630 2,503,091
CASH, JANUARY 1 4,449,998 2,712,368 209,277
CASH, DECEMBER 31 $4,515,189 $4,449,998 $2,712,368
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid (refunded) for income taxes $ 750,008 $ (218,816) $2,535,061
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 $2,121,282 $1,334,717 $ --
Deferred income tax benefits 1,312,295 794,019 --
Accrued pension costs (3,433,577) (2,128,736) --
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Background and Significant Accounting Policies
Background:
Allen Organ Company and Subsidiaries (Company) operate in four
industry segments: Musical Instruments, Data Communications, Electronic
Assemblies, and Audio Equipment. See Note 21 for additional information
on the operating activities of each segment.
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries (Allen Audio, Inc., Allen
Diversified, Inc., Legacy Audio, Inc.) and majority-owned subsidiary
(Eastern Research, Inc.). In addition, the Company has other inactive,
wholly-owned subsidiaries. All material intercompany transactions have
been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States 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 (SFAS) 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.
Accounts Receivable Reserve:
The Company records an allowance for uncollectible accounts
receivable based on historical loss experience, customer payment patterns
and current economic trends. Management reviews the adequacy of the
allowance for uncollectible accounts receivable on a quarterly basis and,
if necessary, increases or decreases the reserve.
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 the estimated useful asset lives using both straight-line
and accelerated methods for financial reporting and accelerated methods
for tax reporting purposes.
Goodwill and Intangible Assets:
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. The Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and
intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed
for impairment in accordance with SFAS No. 144, Accounting for Impairment
or Disposal of Long-Lived Assets.
Prior to January 1, 2002, goodwill was amortized to expense on a
straight-line basis over various periods of 5-20 years. The carrying value
of goodwill was reviewed for possible impairment whenever events or
changes in circumstances indicated that an impairment might exist.
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 $3,024,517 and
$2,381,307 at December 31, 2002 and 2001 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.
Revenue Recognition:
The Company recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement
exists and the sales price is fixed or determinable.
Research and Development and Advertising:
Research and development and advertising expenditures are charged to
expense as incurred. Research and development expenses are separately
disclosed in the consolidated statements of operations while advertising
costs were $333,695, $440,757, and $505,170 in 2002, 2001 and 2000,
respectively.
Income Taxes:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
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 its
products direct to customers, to distributors worldwide and to a lesser
extent 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.
Reclassifications:
Certain amounts in the 2001 and 2000 financial statements have been
reclassified to conform to the 2002 presentation.
New Accounting Standards:
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure-an amendment of SFAS No. 123." This statement amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company continues to account for stock-based compensation using Accounting
Principles Board Statement No. 25, "Accounting for Stock Issued to
Employees," and has not adopted the recognition provisions of SFAS No.
123, as amended by SFAS No. 148. However, the Company has adopted the
disclosure provisions for the current fiscal year and has included this
information in the Company's consolidated financial statements.
Effective January 1, 2002, the Company adopted SFAS No. 142.
Accordingly, no amortization of goodwill was recognized in the
accompanying consolidated financial statements of operations for the year
ended December 31, 2002, compared to $52,666 and $129,627 for the years
ended December 31, 2001 and 2000, respectively. In accordance with the
provisions of SFAS No. 142, management has performed the required
transitional impairment test of goodwill and has determined that no
impairment loss need be recognized in the year ended December 31, 2002.
As required by SFAS No. 142, prior results have not been restated. A
reconciliation of the previously reported net income (loss) and earning
(loss) per common share for the years ended December 31, 2001 and 2000, as
if SFAS No. 142 had been adopted as of January 1, 2000, is as follows:
December 31,
2001 2000
Reported net (loss) income $(4,083,810) $3,954,896
Add back: Goodwill amortization, net of
related tax effect 32,165 79,612
Adjusted net (loss) income $(4,051,645) $4,034,508
Basic and diluted (loss) earnings
per share, as reported $ (3.49) $ 3.38
Impact of goodwill amortization, net of
tax 0.03 0.07
Adjusted basic and diluted (loss)
earnings per share $ (3.46) $ 3.45
During 2002 the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting
and reporting for costs associated with exit or disposal activities. The
Company does not expect the adoption of SFAS No. 146 to have a material
effect on the Company's consolidated financial statements.
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, as amended by
SFAS No. 148, Accounting for Stock-Based Compensation, it has elected only
to comply with the disclosure requirements set forth in the Statements
(see Note 19).
Had compensation cost been determined on the basis of fair value
pursuant to SFAS No. 123, as amended by SFAS No. 148, net income (loss)
and earnings per share would have been decreased as follows:
2002 2001 2000
Net income (loss)
As reported $2,685,357 $(4,083,810) $3,954,896
Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards, net
of related tax effects (69,374) (39,447) (134,238)
Pro forma $2,615,983 $(4,123,257) $3,820,658
Earnings (loss) per share
As reported $2.29 $(3.49) $3.38
Pro forma $2.23 $(3.52) $3.26
The fair value of each option granted is estimated on the grant date
using the Black-Scholes option pricing model. The following assumptions
were made in estimating the fair value of options granted under the Allen
Organ Company stock option plan:
Assumptions
Dividend yield 1.40%
Risk-free interest rate 2.50%
Expected life 7 years
Expected volatility 10%
NOTE 2 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, 2002
Available for sale
Equity securities $ 39,310 $ -- $ 5,139 $ 34,171
Mutual Funds
Short Term Gov't Funds 2,218,717 620 7,931 2,211,406
Municipal Bond Funds 14,891,036 9,612 -- 14,900,648
Equity Funds 34,929 -- 4,404 30,525
Totals $17,183,992 $ 10,232 $ 17,474 $17,176,750
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
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 2002, 2001
and 2000, sales proceeds and gross realized gains and losses on securities
classified as available for sale were:
2002 2001 2000
Sales proceeds $30,633,381 $18,682,314 $9,908,680
Gross realized losses $ 379,804 $ 216,546 $ 37,974
Gross realized gains $ 536,052 $ 282,181 $ 55,658
The change in net unrealized holding gains on securities available for
sale of $55,961, $283,786, and $276,948, net of deferred tax expense of
$20,842, $104,213, and $94,538, has been included in other comprehensive
income in stockholders' equity for the years ended December 31, 2002,
2001, and 2000, respectively.
NOTE 3 Inventories
December 31,
2002 2001
Finished goods $ 5,064,803 $ 4,720,318
Work in process 5,707,215 6,249,775
Raw materials 5,451,664 6,327,064
Total $16,223,682 $17,297,157
NOTE 4 Property, Plant and Equipment
Estimated
December 31, Useful
2002 2001 Lives
Land and improvements $ 2,369,298 $ 2,407,298 10 yrs
Buildings and improvements 9,030,910 9,000,465 2 - 40 yrs
Machinery and equipment 10,855,793 10,481,698 5 - 10 yrs
Office furniture and equipment 4,886,443 4,548,093 3 - 8 yrs
Vehicles 186,187 163,411 4 yrs
Sub-total 27,328,631 26,600,965
Less accumulated depreciation 16,471,137 15,109,416
Total $10,857,494 $11,491,549
Depreciation expense charged to operations was $2,158,302,
$2,303,209 and $1,897,715 in 2002, 2001 and 2000, respectively.
NOTE 5 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 is required to pay the portion of the
premiums equal to the value of the economic benefit determined in
accordance with applicable IRS Revenue Rulings. The Company pays 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 $445,000 and $450,000 at December 31,
2002 and 2001, respectively. However, the Company's President has an
adequate level of personal net assets to cover these amounts.
NOTE 6 Intangible Assets
Intangible assets subject to amortization are as follows:
As of December 31, 2002
Gross Carrying Accumulated Weighted Average
Amount Amortization Amortization Period
Customer Lists $ 105,679 $ 82,015 7 years
Unpatented Technology 4,269,406 2,862,463 7 years
Trademarks 278,396 80,039 20 years
Total $4,653,481 $3,024,517
Amortization expense was $643,210, $671,689 and $621,781 in 2002,
2001 and 2000, respectively. Estimated amortization expense for the
next five years is as follows:
2003 $ 636,251
2004 405,935
2005 121,465
2006 63,214
2007 27,789
Upon adoption of SFAS No. 142, the Company was required to evaluate
its existing intangible assets and goodwill that were recorded in
purchase business combinations, and to make any necessary
reclassifications in order to conform with the new classification
criteria in SFAS No. 141 for recognition separate from goodwill. The
Company was also required to reassess the useful lives and residual
values of all intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first interim period
after adoption. For intangible assets identified as having indefinite
useful lives, the Company was required to test those intangible asset for
impairment in accordance with the provisions of SFAS No. 142 within the
first interim period. Impairment was measured as the excess of carrying
value over the fair value of an intangible asset with an indefinite life.
The results of this analysis did not require the Company to recognize an
impairment loss.
NOTE 7 Plant Closure Costs and Impairment Charges
During 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 previous acquisition of a
company. This write down was attributable to the downturn in the data
communications industry in which the company operated, the combination of
this company into another subsidiary and closure of the company's
facility, all of which reduced expectations of future cash flows.
In connection with the consolidation of the operations of these two
subsidiaries and the closure of one plant, the Company recorded a charge
of $530,000 (including employee severance and benefits for nineteen
employees and other exit costs). All of these costs were paid by December
31, 2002.
NOTE 8 Notes Payable - Bank
In June 2000 Eastern Research, Inc. (ERI) obtained a term loan and
revolving line of credit from a bank. During June 2001 ERI repaid all
outstanding bank loans totaling $12,000,000 with funds provided by Allen
Organ Company.
NOTE 9 Accrued Expenses
December 31,
2002 2001
Accrued salaries and commissions $1,930,782 $1,386,646
Accrued plant closing costs -- 140,700
Other 707,476 445,808
Total $2,638,258 $1,973,154
NOTE 10 Deferred and Other Noncurrent Liabilities
December 31,
2002 2001
Deferred compensation expense (see Note 15) $ 848,785 $ 587,769
Other noncurrent liabilities 180,000 120,000
Total $1,028,785 $ 707,769
NOTE 11 Warranty Costs
The Company provides a warranty covering manufacturing defects for
certain of its products for varying lengths of time. The Company's
policy is to accrue the estimated cost of warranty coverage at the time
the sale is recorded. The activity in the warranty accrual during the
year ended December 31, 2002 is summarized as follows:
Accrual at beginning of year $240,000
Additions charged to warranty expense 223,086
Claims paid and charged against the accrual (163,086)
Accrual at end of year $300,000
NOTE 12 Commitments and Contingencies
As of December 31, 2002, the Company is contingently liable for a
maximum amount of approximately $1,644,000 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 of the Company, 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, 2002, the shareholder owned
or would have includable in her estate 262,882 shares of Class B Common
Stock. The Company's obligation under this agreement is limited to the
insurance proceeds to be received by the Company on life insurance
purchased on the life of the shareholder, which policy has a face value
of $6,000,000.
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. 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 $413,733, $495,816 and
$440,971 in 2002, 2001 and 2000, respectively. Minimum annual rent
payments for the operating leases are as follows:
2003 $312,856
2004 314,438
2005 241,312
Total $868,606
NOTE 13 Accumulated Other Comprehensive Loss
December 31,
2002 2001
Unrealized loss on investments, net $ (4,464) $ (39,583)
Minimum pension liability adjustment (3,455,999) (1,334,717)
Total $(3,460,463) $(1,374,300)
NOTE 14 Export Sales
In 2002, 2001 and 2000, net sales by the Musical Instruments
segment include export sales, principally to Canada, Europe and the Far
East of $3,248,480, $3,759,129, and $3,635,123, respectively. Net
sales by the Data Communications segment include export sales
principally to Europe and Asia Pacific of $10,428,899 for 2002,
$3,342,587 for 2001, and $7,764,597 for 2000. Net sales by the Audio
Equipment segment include export sales principally to Europe and the
Far East of $69,222 for 2002, $219,315 for 2001 and $188,970 for 2000.
NOTE 15 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 at December 31, 2002 and cash equivalents, U.S.
Government obligations, fixed income securities, and equity securities at
December 31, 2001 and 2000.
Following are reconciliations of the pension benefit obligation and
the value of plan assets:
2002 2001 2000
Pension benefit obligation
Balance, beginning of year $16,112,915 $15,194,233 $15,065,101
Service cost 393,927 353,266 324,423
Interest cost 1,085,299 1,055,508 1,024,441
Benefits paid to
participants (1,117,494) (1,012,126) (976,612)
Increase (decrease) due to
changes in data/assumptions 993,779 522,034 (243,120)
Balance, end of year $17,468,426 $16,112,915 $15,194,233
Plan assets
Fair value, beginning of year $13,398,564 $15,689,627 $17,477,871
Actual investment returns (1,663,508) (1,278,937) (811,632)
Company contributions 852,041 -- --
Benefits paid to
participants (1,072,753) (1,012,126) (976,612)
Fair value, end of year $11,514,344 $13,398,564 $15,689,627
The funded status of the plans is as follows:
December 31,
2002 2001 2000
Excess of the value of plan
assets over the
benefit obligation $(5,954,082) $(2,714,351) $495,394
Unrecognized net transition
asset -- -- (72,012)
Unrecognized net actuarial
loss 6,509,847 3,095,047 83,320
Adjustment to recognize
minimum liability (5,562,313) (2,128,736) --
(Accrued) prepaid benefit
cost $(5,006,548) $(1,748,040) $506,702
The adjustment to recognize the minimum pension liability of
$5,562,313 net of deferred tax benefit of $2,106,314, has been included
in other comprehensive income (loss) in stockholders' equity at December
31, 2002.
The following weighted-average rates were used in determining the
above plan information:
Discount rate on the benefit obligation 6.25% 6.75% 7.00%
Rate of return on plan assets 7.00% 8.00% 8.00%
Rate of long-term compensation increase 5.00% 6.00% 6.00%
Pension expense is comprised as follows:
2002 2001 2000
Service cost $ 393,927 $ 353,266 $ 324,423
Interest cost 1,085,299 1,055,508 1,024,441
Expected return on plan assets (1,036,157) (1,210,756) (1,357,306)
Amortization of net gain from
prior periods 133,903 -- (29,421)
Amortization of unrecognized
prior service cost -- -- 73,323
Amortization of transition asset -- (72,012) (72,008)
Net pension cost $ 576,972 $ 126,006 $ (36,548)
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 relating to
underfunded plans are as follows:
December 31,
2002 2001 2000
Projected benefit obligation $17,468,426 $16,112,915 $8,078,231
Accumulated benefit obligation 16,520,892 15,146,604 7,167,545
Fair value of plan assets 11,514,344 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. Profit-sharing
contributions to the plan are discretionary as determined by the
Company's board of directors. The Company contributions were $85,658,
$248,650 and $125,374 to the plans in 2002, 2001 and 2000, respectively.
The Company provides supplemental executive retirement plans
(deferred compensation) for three of its officers. These plans provide
for discretionary company contributions, which vest over a five year
period, accrue interest at the prime rate, not to exceed 9%, and are
payable upon the executive's death or retirement.
NOTE 16 Investment Income
December 31,
2002 2001 2000
Interest Income $ 550,697 $ 910,144 $1,109,751
Dividend Income 9,390 173,653 414,912
Gain (Loss) on Sale of Investments 156,248 (65,635) 17,684
Total $ 716,335 $1,018,162 $1,542,347
NOTE 17 Income Taxes
The provision for income taxes consists of the following:
2002 2001 2000
Currently Currently Currently
Payable Deferred Payable Deferred Payable Deferred
Federal $1,252,000 $(456,000) $(1,347,000) $(1,014,000) $1,392,000 $(251,000)
State 417,000 (102,000) 179,000 (178,000) 344,000 (366,000)
Total $1,669,000 $(558,000) $(1,168,000) $(1,192,000) $1,736,000 $(617,000)
A reconciliation of the provision for income taxes with the
statutory rate follows:
2002 2001 2000
Statutory provision
for federal
income tax $1,291,000 34.0% $(2,180,000) (34.0)% $1,702,000 34.0%
State taxes, net
of federal tax
benefits 143,000 3.8 (549,000) (8.6) (14,000) (0.3)
Tax credits (311,000) (8.2) (363,000) (5.7) (325,000) (6.5)
Tax-exempt income (64,000) (1.7) (96,000) (1.5) (106,000) (2.1)
Exempt income of
foreign sales
corporation (136,000) (3.6) (100,000) (1.6) (151,000) (3.0)
Other items, net 18,000 0.5 28,000 0.4 13,000 0.3
Effect of change
in valuation
allowance of deferred
tax assets:
Federal 105,000 2.8 350,000 5.4 -- --
State 65,000 1.7 550,000 8.6 -- --
Total $1,111,000 29.3% $(2,360,000) (36.8)% $1,119,000 22.4%
The following temporary differences give rise to the net deferred
tax asset at December 31, 2002 and 2001.
2002 2001
Deferred Tax Assets
Excess of book depreciation/amortization
over tax depreciation/amortization $ 479,305 $ 328,155
Excess of book over tax pension expense 1,831,377 652,031
Loss on investments not recognized
for tax purposes 36,839 23,434
Deferred compensation not recognized
for tax purposes 330,424 226,047
Net operating loss carry forwards 1,876,210 1,743,391
Other liabilities 477,412 247,466
Reserve for bad debts 194,586 131,943
Inventory reserve 1,358,989 1,231,396
Sub-total 6,585,142 4,583,863
Valuation Allowance (1,170,000) (1,000,000)
Total Deferred Tax Assets $5,415,142 $3,583,863
Deferred taxes are included in the Company's financial statements as
follows:
2002 2001
Current deferred tax asset $1,992,694 $1,561,138
Non-current deferred tax asset 3,422,448 2,022,725
Total deferred tax asset $5,415,142 $3,583,863
At December 31, 2002, the Company has available approximately
$2,315,000 of unused federal and $17,949,000 of unused state net
operating loss carry forwards that may be applied against future taxable
income and that expire in various years from 2004 to 2022. The Company
has a valuation allowance of $1,170,000 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 18 Earnings Per Share
Earnings per share were computed using 1,170,191 shares in 2002,
1,170,480 shares in 2001, and 1,170,618 shares in 2000, the weighted
average number of shares outstanding during each year. Outstanding
stock options were not included in computing earnings per share because
their effect was antidilutive.
NOTE 19 Stock Option Plans
In July 2002, the Company established an employee stock-based
compensation plan to assist in attracting and retaining personnel. The
maximum number of the Company's Class B shares that may be issued under
the plan approximates a 9% interest in the Company. Options are issued
at the fair market value on the date of grant. The maximum term of the
options is 10 years, and generally vest equally over 4 years.
As of December 31, 2002, total options issued represent 1% of the
shares currently outstanding. Vested options represent 0.2% of the
currently outstanding shares.
Following is a summary of the activity under the plan during the
year ended December 31, 2002:
Weighted
Average
Number of Exercise
Shares Price
Outstanding at beginning of year -- $ --
Granted 12,000 39.00
Exercised -- --
Forfeited -- --
Outstanding at end of year 12,000 $39.00
Weighted average fair value of
options granted during the year $ 5.03
Following is a summary of the status of options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
Weighted Avg.
Remaining Weighted Avg.
Exercise Number Contractual Exercise Number Weighted Avg.
Price Outstanding Life Price Exercisable Exercise Price
$39.00 12,000 9.56 years $39.00 2,400 $39.00
Eastern Research, Inc. (ERI) also provides an employee stock-based
compensation plan to assist in attracting and retaining personnel. The
maximum number of subsidiary shares that may be issued under the plan
approximates a 15% interest in the subsidiary. Options are generally
issued at the estimated fair market value. The maximum term of the
options is 6 years, and generally vest equally over 4 years.
As of December 31, 2002, total options issued represents 13% of the
ERI shares currently outstanding. Vested options consist of 10% of the
currently outstanding shares of ERI.
ERI recognized compensation expense of $59,375 in both 2002 and
2001 and $29,687 in 2000 related to options granted with an exercise
price less than the fair market value on the date of grant.
See Note 1 for the pro forma effects on net income (loss) and
earnings per share had compensation cost been determined on the basis
of fair value pursuant to SFAS No. 123, as amended by SFAS No. 148.
NOTE 20 Related Party Transactions
A member of the Company's Board of Directors is a principal in
firms providing legal and financial advisory services. Legal fees paid
were $45,851, $75,094 and $131,543 in 2002, 2001 and 2000,
respectively. Financial advisory fees paid were $6,000, $11,753 and
$63,546 in 2002, 2001 and 2000, respectively.
NOTE 21 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 dealers 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 been targeted at small to mid-sized churches, auditoriums
and similar customers.
Intersegment sales are generally priced at cost plus a percentage
mark-up, and are generally 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 statements of income. 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 73%, 82% and 76% of its
revenues from three customers in 2002, 2001 and 2000, respectively.
The Data Communications segment derived 40% of its net sales from two
customers in 2002 and 13% and 16% of its net sales from one customer in
2001 and 2000, respectively. The Company's Musical Instrument and
Audio Equipment segments are not dependent on any single customer.
In October 2002, Legacy Audio, Inc. sold its manufacturing plant
located in Springfield, Illinois for $285,000 (net of selling expenses)
and recognized a gain on the sale of approximately $7,000. Legacy
ceased operations at this facility effective August 31, 2002 and
consolidated all of its production into the Company's manufacturing
facility in Macungie, PA.
Following is a summary of segmented information for 2002, 2001 and
2000.
December 31,
2002 2001 2000
Net Sales to Unaffiliated Customers
Musical Instruments $24,942,925 $24,375,642 $28,057,832
Data Communications 36,536,174 25,909,885 33,321,342
Electronic Assemblies 4,750,143 8,382,021 8,624,199
Audio Equipment 1,510,306 1,822,965 2,512,835
Total $67,739,548 $60,490,513 $72,516,208
Intersegment Sales
Musical Instruments $ 435,915 $ 91,820 $ 294,146
Data Communications -- 193,664 120,712
Electronic Assemblies 131,540 79,651 15,577
Audio Equipment 88,909 87,777 35,563
Total $ 656,364 $ 452,912 $ 465,998
Income (Loss) from Operations
Musical Instruments $ 2,017,527 $ 2,184,321 $ 5,029,871
Data Communications 2,105,802 (8,284,232) (2,063,221)
Electronic Assemblies (401,165) 125,000 1,284,806
Audio Equipment (615,317) (988,353) (429,386)
Total $ 3,106,847 $(6,963,264) $ 3,822,070
Identifiable Assets
Musical Instruments $17,301,133 $17,664,908 $18,693,577
Data Communications 25,868,894 19,596,306 31,011,641
Electronic Assemblies 2,373,162 3,377,712 4,444,349
Audio Equipment 1,623,546 2,795,550 2,658,110
Sub-total 47,166,735 43,434,476 56,807,677
General corporate assets 26,196,133 23,037,776 24,000,065
Total $73,362,868 $66,472,252 $80,807,742
Capital Expenditures
Musical Instruments $ 1,037,338 $ 528,998 $ 837,828
Data Communications 670,320 736,538 2,297,046
Electronic Assemblies 188,487 188,272 5,320
Audio Equipment 2,441 4,425 17,620
Total $ 1,898,586 $ 1,458,233 $ 3,157,814
Depreciation and Amortization
Musical Instruments $ 759,689 $ 690,084 $ 683,673
Data Communications 1,864,921 2,093,476 1,632,861
Electronic Assemblies 126,321 113,027 120,750
Audio Equipment 50,581 78,311 82,212
Total $ 2,801,512 $ 2,974,898 $ 2,519,496
Income Tax Expense (Benefit)
Musical Instruments $ 1,240,000 $ 1,186,000 $ 1,984,000
Data Communications 138,000 (3,565,000) (1,156,000)
Electronic Assemblies (152,000) 47,000 484,000
Audio Equipment (115,000) (28,000) (193,000)
Total $ 1,111,000 $(2,360,000) $ 1,119,000
NOTE 22 Quarterly Financial Data (Unaudited)
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter Total
Net Sales $15,977,488 $17,403,733 $15,705,708 $18,652,619 $67,739,548
Gross Profit 6,628,428 7,158,583 5,755,644 6,233,054 25,775,709
Net Income 931,539 1,009,634 528,362 215,822 2,685,357
Earnings per Share 0.80 0.86 0.45 0.18 2.29
2001
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
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 49 Director Since 1980
Meeting in 2003
Eugene Moroz (1) Next Annual 79 Director Since 1968
Meeting in 2003
Leonard W. Helfrich Next Annual 73 Director 1964 - 1968
Meeting in 2003 and 1972 to
present
Orville G. Hawk (1) Next Annual 85 Director Since 1989
Meeting in 2003
Albert F. Schuster Next Annual 83 Director Since 1989
Meeting in 2003
Martha Markowitz Next Annual 81 Director Since 1991
Meeting in 2003
Jeffrey L. Schucker (1) Next Annual 48 Director Since July
Meeting in 2003 1996
Ernest Choquette Next Annual 49 Director Since April
Meeting in 2003 1998
Michael F. Doyle Next Annual 48 Director Since April
Meeting in 2003 2001
(1) Audit Committee member.
(b) Identification of Executive Officers.
Time Period
Date Term Position
Name Expires Age Position Held
Steven Markowitz Next Annual 49 President 1990 to
Meeting in 2003 present
Barry J. Holben Next Annual 50 Vice President October 1995
Meeting in 2003 to present
Dwight A. Beacham Next Annual 56 Vice President October 1995
Meeting in 2003 to present
Nathan S. Eckhart Next Annual 39 Vice President, May 1996
Meeting in 2003 Treasurer, to present
Secretary
(c) Identification of Certain Significant Employees.
Not applicable.
(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, Dwight
Beacham and Nathan Eckhart, have been employees of
the Company in executive capacities for at least the
last five years.
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 she represents
the family's interest in the Company.
Mr. Schucker is a Vice President at
National Penn Bank. Prior to joining the bank, he
worked as an investment banker at various firms
including Managing Director with Griffin Financial
Group, President of Middle Market Capital Advisors,
L.L.C. (MMCA) and Vice President of Meridian Capital
Markets.
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.
Mr. Doyle is President of the Company's
subsidiary Eastern Research, Inc. Prior to joining
ERI in May of 1997, Mr. Doyle had 20 years
experience in the data communications industry
including positions at Infotron Systems, Inc., Dowty
Communications, Inc., Teleos Communications, Inc.
and Madge Networks, Inc.
(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 applicable.
(b) SUMMARY COMPENSATION TABLE:
Long Term
Compen- Compensation All Other
Annual sation Securities Compen-
Salary Bonus Underlying sation
Name and Principal Position Year $ $ Options(#) $
Steven A. Markowitz, President 2002 147,855 - - 20,969 (1)
(Chief Executive Officer) 2001 140,616 - - 48,739
2000 135,923 - - 42,322
Dwight A. Beacham, 2002 101,918 - 4,000 12,049 (2)
Vice President - Product 2001 99,209 - - 8,985
Development 2000 96,085 - - 3,513
Barry J. Holben, 2002 104,008 - 4,000 12,049 (2)
Vice President - Sales 2001 99,964 - - 8,985
2000 95,969 - - 11,780
Nathan S. Eckhart, 2002 102,823 - 4,000 9,527 (2)
Vice President - Finance, 2001 99,586 - - 13,699
(Treasurer and Secretary) 2000 95,241 - - 8,308
(1)-Value of split dollar life insurance policy. See Note 12 to the
accompanying Consolidated Financial Statements for additional information
on this arrangement.
(2)-Value of vested deferred compensation earned under supplemental
executive retirement plans. See Note 15 to the accompanying Consolidated
Financial Statements for additional information on these arrangements.
(c) OPTION GRANTS IN LAST FISCAL YEAR:
Grant Date
Individual Grants in 2002 Present Value
Number of % of Total
Securities Options (1)
Underlying Granted to Exercise Expir- Grant Date
Name Options Employees Price ation Present
Granted (#) in Fiscal Year $ Date Value $
Dwight A. Beacham 4,000 33.3% $39.00 7/25/2012 $20,000
Barry J. Holben 4,000 33.3% $39.00 7/25/2012 $20,000
Nathan S. Eckhart 4,000 33.3% $39.00 7/25/2012 $20,000
(1) The grant date present value of each option granted is estimated on the
grant date using the Black-Scholes option pricing model. See Notes 1 and
19 to the accompanying Consolidated Financial Statements for additional
information.
There were no stock options exercised during 2002.
(f) Defined Benefit or Actuarial Plan Disclosure.
Estimated annual benefit obtained from 2002 Actuarial
Valuation Report:
Steven A. Markowitz $64,702 Age 49 (1)
Dwight A. Beacham $31,937 Age 56 (1)
Barry J. Holben $36,234 Age 50 (1)
Nathan S. Eckhart $53,180 Age 39 (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 $450 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 five 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 five percent of
any class of such securities. Class A Common Shares
constitute the only securities with voting rights.
Information as of February 28, 2003.
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, 2002.
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) 22.28%
Eugene Moroz 6,290 (1) (3) as
to 6,290
6,000 (2) (4) as
to 6,000 1.13%
Leonard W. Helfrich 293 (2) (4) .03%
Orville G. Hawk 50 (2) (4) .005%
Martha Markowitz 20,866 (1) (3) 1.92%
81,531* (2) (4) 97.22 %
242,016* (2) (4) 22.28%
Percent Percent
All Directors of of
and Officers Class Class Class Class
as a Group A B A B
7 81,589** 289,077** 97.29%** 26.61%
(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 is 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 applicable.
(d) Securities authorized for issuance under equity compensation
plans:
Plan category Number of Weighted-average Number of
securities to be exercise price of securities
issued upon outstanding remaining
exercise of options, warrants available for
outstanding and rights future issuance
options, warrants under equity
and rights compensation
plans (excluding
securities
reflected in
column (a))
(a) (b) (c)
Equity
compensation
plans approved
by security
holders 12,000 $39.00 88,000
Equity
compensation
plans not
approved by
security
holders -- -- --
Total 12,000 $39.00 88,000
Item 13. Certain Relationships and Related Transactions
See Note 12 to the Consolidated Financial Statements concerning
an agreement between the Company and Martha Markowitz, a
Director of the Company.
Ernest Choquette, a member of the Company's Board of Directors,
is a principal in firms providing legal and financial advisory
services. Legal fees paid were $45,851, $75,094 and $131,543
in 2002, 2001 and 2000, respectively. Financial advisory fees
paid were $6,000, $11,753 and $63,546 in 2002, 2001 and 2000,
respectively.
Item 14. Controls and Procedures
Within ninety days prior to filing this report, the Company,
under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and
the Chief Financial Officer, evaluated the effectiveness of the
design and operation of the Company's disclosure controls and
procedures, which are designed to insure that the Company
records, processes, summarizes and reports in a timely and
effective manner the information required to be disclosed in
the reports filed with of submitted to the Securities and
Exchange Commission. Based on that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are
effective. There were no significant changes to the Company's
internal controls or in other factors that could significantly
affect these controls subsequent to the date of their
evaluation.
PART IV
Item 15. 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, 2002
and 2001.
Consolidated Statements of Income for the years ended
December 31, 2002, 2001, and 2000.
Consolidated Statement of Stockholders' Equity for
the years ended December 31, 2002, 2001, and 2000.
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001, and 2000.
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, 2002.
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
10.1(7) Allen Organ Company Stock Option Plan
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
99.2 Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
99.3 Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
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.
7. Incorporated by reference to the exhibit filed with
the Registrants Quarterly Report on Form 10-Q for the
period ended September 30, 2002.
(b) Reports on Form 8-K. None filed during the fourth
quarter of 2002.
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 24, 2003 /s/STEVEN A. MARKOWITZ
Steven A. Markowitz
Chief Executive Officer,
President and Director
Date: March 24, 2003 /s/NATHAN S. ECKHART
Nathan S. Eckhart
Vice President-Finance,
Chief Financial and
Principal Accounting Officer
Date: March 24, 2003 /s/LEONARD W. HELFRICH
Leonard W. Helfrich
Director
Date: March 24, 2003 /s/MARTHA MARKOWITZ
Martha Markowitz
Director
ALLEN ORGAN COMPANY AND SUBSIDIARIES
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Steven Markowitz, certify that:
1. I have reviewed this annual report on Form 10-K of Allen Organ
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b)any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/STEVEN A. MARKOWITZ
Steven Markowitz
Chief Executive Officer
March 24, 2003
ALLEN ORGAN COMPANY AND SUBSIDIARIES
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Nathan S. Eckhart, certify that:
1. I have reviewed this annual report on Form 10-K of Allen Organ
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b)any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/NATHAN S. ECKHART
Nathan S. Eckhart
Chief Financial Officer
March 24, 2003
Allen Organ Company and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 2002, 2001 and 2000
Additions
Additions Charged Write
Balance at Charged to Offs Balance
Beginning to Other And at End
Description Of Year Expense Accounts Recoveries Of Year
Year Ended
December 31, 2002
Allowance for
Doubtful
Accounts $ 350,492 $234,117 $ - $ (82,400) $ 502,209
Valuation
Allowance
Deferred Tax
Asset 1,000,000 170,000 - - 1,170,000
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