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, 2003
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 24, 2004:
Class A - Voting 83,864 Class B - Non-voting 1,072,379
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, 2003: $32,438,239
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 Stockholder 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
9A Controls and Procedures
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. Principal Accountant Fees and Services
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
Financial Statement Schedules
Exhibits
PART I
Item 1. Business
General developments of business.
Incorporated in Pennsylvania in 1945, Allen Organ Company and
Subsidiaries ("Company") operate in four industry segments: Musical
Instruments, Data Communications, Electronic Assemblies and Audio
Equipment.
The Musical Instruments segment consists of the manufacture and
sale of electronic keyboard musical instruments, primarily digital
church organs and accessories. During 2003 the Musical Instruments
segment was negatively affected by the continued weakness in the
economy, declines in financial markets and general global uncertainty
caused by the war in Iraq. These factors negatively impacted
contributions to religious institutions, this segments major market,
and led to a reduction in the 2003 order rate resulting in lower net
sales and operating losses for this segment. Management believes
that recent signs of improvement in both the economy and financial
markets may have a positive effect on the order rate for 2004.
However, the budgets and spending patterns of religious institutions
often lag the general economy and, as a result, the recovery for this
segment may take longer than the economy's overall recovery. During
2003 management took steps to lower operating costs at its Macungie,
PA plant.
The Data Communications segment designs and markets data
networking products. This segment's 2003 sales were approximately
equal to 2002, while gross margins and operating income increased
when compared to 2002. The increase in gross margin was mainly the
result of favorable product mix changes. 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 markets in which this segment
operates have seen improvement in the level of business activity, as
well as the way financial markets view the industry.
The Electronics Assemblies segment provides subcontract
manufacture of electronic assemblies for outside customers. The
economic downturn has negatively affected the Electronic Assemblies
segment, resulting in a significant reduction in its order rate in
2003 compared to earlier periods. Management believes that its
efforts to diversify its customer base and recent signs of
improvement in the economy may improve the order rate for this
segment in 2004.
The Audio Equipment segment designs, manufactures and markets
high-quality audio speaker cabinets for hi-fi stereo and home theater
applications. This segment's 2003 sales were approximately equal to
2002. The economic downturn also negatively affected this segment
whose products are discretionary spending items. This segment
continues its efforts to develop an expanded dealer network.
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 22 to the Consolidated Financial Statements.
Description of business.
Musical Instruments.
Allen Organ Company is a leading manufacturer of electronic
keyboard musical instruments, primarily digital church organs and
accessories. This segment accounted for 34%, 37% and 40% of net
sales in 2003, 2002 and 2001, 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, 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
extended payment terms, or lease guarantees. The Company is
contingently liable in connection with certain customers' financing
arrangements (see Note 13 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 2004 and 2003 was $3.6
million and $4.2 million, respectively. All orders are expected to
be filled in the current year.
The organ industry is competitive involving at least five (5)
domestic and foreign companies manufacturing digital organs. In
addition, there are many small pipe organ companies that serve the
institutional organ market. The organ market consists of two basic
divisions, institutional (primarily churches) and home or
entertainment. Management believes it is the largest supplier of
organs for 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 organ market.
This segment also markets its organ consoles and control electronics
to customers that want to retain their wind-blown pipes and augment
them with digital voices. Allen Organ Company maintains an
aggressive research and development program to take advantage of the
latest in technological developments relating to digital sound
generation.
Data Communications.
The Data Communications segment consists of Eastern Research,
Inc. (ERI). This segments operations are headquartered 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 59%, 54% and 43% of the
Company's net sales in 2003, 2002 and 2001, 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 16% of its 2003 net
sales from one customer, 40% of its net sales from two customers in
2002, and 13% of its net sales from one customer in 2001.
ERI's customer base includes major end-user corporations,
network service providers, wireless service providers, and others,
both in the domestic and international markets. There are many
competitors in this market that is dominated by large data
communications companies, such as Adtran, Tellabs and Alcatel. The
Company's strategy has been to target market niches with products
that provide desirable 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 making the
DNX its flagship product. The DNX revenues represent approximately
89% of ERI's net sales for 2003. During 2002, ERI introduced the DNX-
1u, which is targeted at wireless service providers. The DNX-1u is
the smallest product in the DNX family and includes up 8 T1 or E1
circuits. This and prior product introductions have strengthened the
DNX product line. The largest product in the DNX line is the DNX-88
that can handle as many as 600 T1 circuits and also includes T3 and
OC3 (optical) capabilities. 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 economic environment.
On July 24, 2003, ERI purchased the assets of Avail Networks,
Inc. (Avail) in exchange for $200,000 in cash and contingent payments
based on future revenue related to the sale of Avail products during
the 30 months after the acquisition.
Avail's intelligent last-mile broadband solutions enable service
providers to deliver more revenue-generating services to their
enterprise customers from a single customer located platform across
metro fiber, traditional wireline and wireless access networks.
Avail's flagship FronteraT products deliver multiple services to end-
user sites in a variety of subscriber locations and configurations.
With the addition of the Frontera products to its existing
product offerings, ERI is positioned as a supplier of network access
solutions for next-generation convergence applications, such as
integrated data, voice and video over single broadband connections.
In addition, this acquisition gives ERI access to Avail's advanced
ATM (Asynchronous Transmission Mode) technology.
Avail's sales prior to the acquisition date were minimal. ERI
is introducing Avail products to its established customer base. Due
to lengthy sales cycles, these products are not expected to add
significant revenues in the near-term.
This segment derived approximately 19%, 28% and 13% of its net
sales from international markets in 2003, 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 2004 and 2003 was $7.0 million and $2.0 million,
respectively. All orders are expected to be filled in the current
year.
This segment has directed 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. 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.
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. AIA
services are supplied out of the Macungie, PA plant, the same plant
in which the Company manufactures Allen Organ and Legacy Audio
products. This segment accounted for 5%, 7% and 14% of 2003, 2002
and 2001 net sales, respectively. AIA derived 61% of its 2003 net
sales from two customers and 73% and 82% of its net sales from three
customers in 2002 and 2001, respectively. AIA is working to
diversify its customer base.
The Electronic Assemblies segment is very competitive with
numerous manufacturers offering similar services. AIA customers are
generally obtained from a geographic area located relatively close to
the Company's manufacturing facility.
The dollar amount of the segment's unshipped order backlog at
the end of February 2004 and 2003 was $909,000 and $721,000,
respectively. All orders are expected to be filled in the current
year.
Audio Equipment.
The Audio Equipment segment operates mainly through Legacy
Audio, Inc. (LAI). 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. This segment accounted for 2% of net sales in 2003
and 2002, respectively, and 3% of net sales in 2001.
The principal raw materials used in the segment's products are
audio speakers, electronic components and wood, 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.
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 determined that this method of distribution 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 shifted
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 and continues to develop and market
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.
The dollar amount of the segment's unshipped order backlog at
the end of February 2004 and 2003 was $179,000 and $106,000,
respectively. All orders are expected to be filled in the current
year.
General.
The Company's working capital is sufficient to meet the normal
expansion of inventory and receivables.
The Company spent $8,785,522, $7,782,571 and $8,004,838 in 2003,
2002 and 2001, respectively, on research and development. The 2003
increase was mainly within the Data Communications segment. The
Company maintains an ongoing commitment to new product development
and expects future expenditures for these activities to exceed the
2003 level.
The Company and its subsidiaries employ approximately 450
people.
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 15 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 had established a Foreign Sales Corporation within
the meaning of the Internal Revenue Code of 1986. This wholly-owned
subsidiary, Allen Organ International, Inc., a Virgin Islands
corporation, has been dissolved effective December 31, 2003.
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 an 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 85% capacity.
Macungie, Pennsylvania 27,000 International sales, exhibition
center, museum and teaching
facility. Houses the sales offices
for Musical Instruments and
Legacy Audio. Owned by Allen
Organ Company.
Data Communications:
Moorestown, New Jersey 39,000 Administrative, sales and
research facility. Leased until
September 2005.
Ann Arbor, Michigan 5,000 Research facility. Leased
until July 2004.
In October 2002, the Company's subsidiary, Legacy Audio, Inc.,
sold its manufacturing and sales facility located in Springfield,
Illinois. See Note 22 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 2003.
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:
2003 High Low
First Quarter $ 40.64 $ 37.00
Second Quarter 42.58 35.46
Third Quarter 44.11 37.97
Fourth Quarter 50.03 43.00
2002 High Low
First Quarter $ 35.18 $ 30.00
Second Quarter 42.50 33.69
Third Quarter 41.25 37.40
Fourth Quarter 41.23 37.00
The Company has 7 Class A Shareholders and 241 Class B
Shareholders of record as of March 24, 2004.
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 2003
Record Date Payable Amount
Cash 2/14/2003 2/28/2003 $0.14
Cash 5/16/2003 5/30/2003 $0.14
Cash 8/15/2003 8/29/2003 $0.14
Cash 11/14/2003 11/28/2003 $0.14
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
Item 6. Selected Financial Data
The selected consolidated financial data presented below have been
derived from the Company's consolidated financial statements for each of
the periods indicated. The data set forth below is qualified by reference
to and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Company's Consolidated Financial Statements included as Items 7 and 8 in
this Annual Report on Form 10-K.
Years Ended December 31,
2003 2002 2001 2000 1999
Net Sales $60,788,058 $67,739,548 $60,490,513 $72,516,208 $58,018,742
Operating Income
(Loss) $ 889,497 $ 3,080,022 $(7,113,614) $ 3,784,196 $ 2,866,985
Net Income (Loss)$ 1,396,896 $ 2,685,357 $(4,083,810) $ 3,954,896 $ 2,884,488
Basis and
diluted earnings
(loss) per share $ 1.20 $ 2.29 $ (3.49) $ 3.38 $ 2.46
Cash dividends
per share $ 0.56 $ 0.56 $ 0.56 $ 0.56 $ 0.56
At Year End:
Cash $ 5,907,576 $ 4,515,189 $ 4,449,998 $ 2,712,368 $ 209,277
Investments $17,143,171 $17,176,750 $11,609,416 $24,694,377 $19,649,433
Working Capital $43,917,002 $41,551,690 $38,656,758 $41,648,400 $40,908,583
Total Assets $71,950,276 $73,362,868 $66,472,252 $80,807,742 $67,466,070
Long-Term Debt,
net of current
portion $ 0 $ 0 $ 0 $ 0 $ 0
Stockholders'
Equity $56,364,833 $56,306,332 $56,315,015 $62,434,901 $59,321,691
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,
2003 2002
Working Capital $43,917,002 $41,551,690
Current Ratio 6.5 to 1 4.8 to 1
Total Liabilities to
Equity Ratio 0.28 to 1 0.30 to 1
Cash flows provided by operating activities decreased during 2003 as
compared to 2002, primarily due to operating losses incurred in the Musical
Instruments segment, reduction in accounts payable in the Data
Communications segment due to the payment in early 2003 of inventory
purchased to fulfill a large customer order in the fourth quarter of 2002.
This decrease was partially offset by decreases in inventory in all
segments of the Company.
Cash flows provided by operating activities increased during 2002, as
compared to 2001 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 used in investing activities during 2003 were used to
purchase approximately $160,000 and $900,000 of property and equipment in
the Musical Instruments and Data Communications segments, respectively. In
addition, the Data Communications segment used $200,000 as payment for the
acquisition of Avail Networks.
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.
As indicated in Note 9 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 2003 decreased $6,951,490 (10%) when compared to
2002, primarily due to lower sales in the Musical Instruments and
Electronic Assemblies segments. Consolidated sales for 2002 increased
$7,249,035 (12%) when compared to 2001, primarily due to higher sales in
the Data Communications segment.
December 31,
2003 2002 2001
Net Sales
Musical Instruments
Domestic $17,033,746 $21,694,445 $20,616,513
Export 3,348,158 3,248,480 3,759,129
Total 20,381,904 24,942,925 24,375,642
Data Communications
Domestic 29,252,691 26,107,275 22,567,298
Export 6,769,565 10,428,899 3,342,587
Total 36,022,256 36,536,174 25,909,885
Electronic
Assemblies
Domestic 2,819,640 4,750,143 8,382,021
Audio Equipment
Domestic 1,390,526 1,441,084 1,603,650
Export 119,780 69,222 219,315
Total 1,564,258 1,510,306 1,822,965
Total $60,788,058 $67,739,548 $60,490,513
Income (Loss) from Operations
Musical Instruments $ (764,639) $ 2,024,144 $ 2,174,970
Data Communications 2,446,213 2,091,520 (8,425,231)
Electronic Assemblies (457,366) (401,165) 125,000
Audio Equipment (334,711) (634,477) (988,353)
Total $ 889,497 $ 3,080,022 $(7,113,614)
Musical Instruments Segment
The domestic sales for 2003 decreased $4,660,699. The 2003 decrease in
domestic sales was the result of lower order volume, which management
believes was caused by the economic downturn, declines in financial markets
and general global uncertainty caused by the war in Iraq. While the order
rate for 2002 was slightly lower than 2001, the 2002 sales were higher than
2001 due to shipments made to customers against a higher order backlog.
Export sales were approximately equal in 2003 and 2002, and decreased
in 2002, as compared to the previous year. 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 impact export
sales.
Gross profit margins on sales were 21.1%, 29.5% and 30.1% for the years
ended December 31, 2003, 2002 and 2001, respectively. The 2003 decrease
was a result of lower sales volume over which to absorb fixed costs and
higher operating costs including employee pension expense, which increased
by $597,000 (103%) in 2003 versus 2002. The decrease in gross profit in
2002, when compared to 2001, 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 lower levels of
production. The Company has taken steps to reduce its operating costs at
the Macungie, PA plant, including reductions in personnel.
Selling and advertising expenses decreased approximately $71,000 during
2003 when compared to 2002, due to lower sales volume and was approximately
equal in 2002 and 2001. General and administrative expenses decreased
approximately $60,000 in 2003 when compared to 2002, and increased
approximately $38,000 in 2002 when compared to 2001.
Research and development expenses increased approximately $82,000
during 2003 when compared to 2002, and decreased approximately $29,000 in
2002 from 2001.
Several of the Company's operating expenses continue to rise at
significant rates including business insurances, medical 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.
As discussed in Note 16 to the financial statements, effective December 31,
2003 the Company has frozen future benefit accruals in both of its defined
benefit pension plans and replaced this benefit with a discretionary
contribution to the Allen Organ Company Savings and Profit Sharing Plan.
Data Communications Segment
Domestic sales increased $3,145,416 and $3,539,977 in 2003 and 2002,
respectively. International sales decreased $3,659,334 in 2003 when
compared to 2002 and increased $7,086,312 in 2002 when compared to 2001.
International sales in 2002 were higher than both 2003 and 2001 due
primarily from sales made to one customer. The total 2003 sales were
approximately equal to 2002, which increased over 2001 due to new product
introductions and from redirecting the Company's sales and marketing
efforts away from CLEC's to other Data Communications markets, including
the wireless, enterprise, government and certain international markets.
Gross profit margins were 56%, 50% and 40% in 2003, 2002 and 2001,
respectively. The 2003 increase is due to favorable product mix changes
and was lowered by an $850,000 accrual for warranty costs.
The 2002 increase is attributable to higher sales volume over which to
absorb fixed costs, as well as 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%. 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 increased approximately $823,000 in 2003 when compared
to 2002 due to increases in ERI's sales force and higher costs associated
with international sales efforts. Selling expenses decreased approximately
$654,000 in 2002 compared to 2001 due to cost cutting measures initiated in
the first half of 2001 due to the economic downturn.
Administrative expenses increased approximately $50,000 in 2003
compared to 2002, and decreased approximately $21,000 in 2002 compared to
2001.
Research and development expenses were $7,173,393, $6,352,909 and
$6,599,104 for the years ended December 31, 2003, 2002 and 2001,
respectively. The 2003 increase was due to increased expenditures incurred
in connection with the acquisition of Avail Networks and the commencement
of work on next generation products. The 2002 decrease is primarily due to
the combination of the VIR development operations into ERI during the
second half of 2001. The segment is committed to new product development
and expects these expenditures to increase during 2004.
The combination of higher sales, change in product mix, and higher
gross margins resulted in operating income of $2,474,257 and $2,105,802
during 2003 and 2002, respectively, 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 in this segment have become increasingly
dependent on larger sales opportunities that could result in the amount and
timing of future revenue and operating income to be more volatile.
Electronic Assemblies Segment
Sales decreased $1,930,503 and $3,631,878 in 2003 and 2002,
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. Management believes that its efforts to diversify
its customer base and recent signs of improvement in the economy may
improve this segment's order rate in 2004. Because of lower sales volume,
the Company has taken steps to reduce costs at its Macungie, PA plant.
Gross profit margin for 2003 and 2002 was a loss of approximately
$(114,000) (4%) and $(61,000) (1%), respectively. Gross profit margins
were 7.1% in 2001. These decreases are the result of lower sales over
which to absorb fixed costs.
Selling, general and administrative expenses in 2003 were approximately
equal to 2002, which decreased approximately $52,000 compared to 2001. 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 increased $53,952 in 2003 and decreased $312,659 in 2002 when
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 shifted marketing
resources to the new method of distribution. In addition, the general
economic slowdown has slowed the sales of some consumer goods.
Gross profit margins were 35%, 22%, and 12% for the years ended
December 31, 2003, 2002 and 2001, respectively. The 2003 and 2002
increases over the previous year was due to steps taken to reduce this
segment's costs, including the consolidation of all of Legacy's
manufacturing into the Macungie, PA plant.
Selling, general and administrative costs decreased approximately
$29,000 and $233,000 in 2003 and 2002, 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.
Other Income (Expense)
Investment income decreased during 2003 when compared to 2002 due to
lower rates of return available on invested funds and increased slightly
during 2002 when compared to 2001 due to realized gains on investments and
higher invested balances that offset lower rates of return on invested
funds. Interest expense was incurred in 2001 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 (5.7%), 29.3% and (36.8%) in 2003,
2002 and 2001, respectively. The effective tax rate in 2003, 2002 and 2001
are lower than statutory tax rates due to tax credits and other non-taxable
items.
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.
Management considers the following accounting estimates to be the most
critical in preparing the consolidated financial statements. These
critical accounting estimates have been discussed with the Company's audit
committee.
Allowance for Doubtful Accounts: Management performs ongoing credit
evaluations of customers and adjusts credit limits based upon payment
history and the customer's current credit worthiness, as determined by
a review of their current credit information. Management continuously
monitors collections and payments from customers and maintains a
provision for estimated credit losses based upon historical experience
and any specific customer collection issues that have been identified.
If the financial condition of a specific customer or the Company's
general customer base were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be
required.
Carrying Value of Obsolete and Slow Moving Inventory: The Company
values inventory at the lower of cost or market. Management regularly
reviews inventory quantities on-hand and records a provision for
excess and obsolete inventory based primarily on estimated forecasts
of product demand and historical usage, after considering the impact
of new products. If actual market conditions and product demand are
less favorable than projected, additional inventory write-downs may be
required.
Carrying Value of Goodwill and Intangible Assets: In assessing the
recoverability of goodwill and intangible assets, management is
required to make assumptions regarding estimated future cash flows and
other factors to determine whether the fair value of the business
supports the carrying value of goodwill, intangible assets and net
operating assets. This analysis includes assumptions and estimates
about future sales, costs, working capital, capital expenditures, and
cost of capital. If these assumptions and estimates change in the
future, the Company may be required to record an impairment charge
related to goodwill and intangible assets.
Realization of Deferred Income Tax Benefits: As discussed in Note 18
of the Consolidated Financial Statements, the Company has recorded
valuation allowances related to the uncertainty of realizing certain
federal and state net operating loss carryforwards and state credit
carryforwards. If the estimates and related assumptions relating to
the likely utilization of the deferred tax asset change in the future,
the valuation allowance may change accordingly.
Warranty Reserve: The Company provides warranties on some of its
products for varying lengths of time. A warranty liability is recorded
at the time of product sale based on estimates that are developed from
historical information and certain assumptions about future events.
Future warranty obligations are affected by product failure rates,
usage and service costs incurred in addressing warranty claims. These
factors are impacted by the level of new product introductions and the
mix of equipment sold. If actual warranty costs differ from the
estimates, adjustments to the warranty liability would be required.
Contractual Obligations and Commercial Commitments
Following is a summary of contractual obligations and other commercial
commitments of the Company:
Payments Due by Period
Contractual Less than After
Obligations Total 1 year 1-3 years 4-5 years 5 years
Operating Leases $614,188 $372,876 $241,312 $0 $0
Other Commercial Amount of Commitment Expiration Per Period
Commitments Total Amounts Less than After
Committed 1 year 1-3 years 4-5 years 5 years
Contingent Repurchase
Commitments Related to
Customer Financing
Arrangements $1,309,112 $1,309,112 $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
2004. 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
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 years ended
December 31, 2003 and 2002, compared to $52,666 for the year ended December
31, 2001. 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, 2003 and 2002. As required by SFAS No. 142, prior results
have not been restated. A reconciliation of the previously reported net
loss and loss per common share for the year ended December 31, 2001, as if
SFAS No. 142 had been adopted as of January 1, 2001, is as follows:
Reported net (loss) income $(4,083,810)
Add back: Goodwill amortization,
net of related tax effect 32,165
Adjusted net (loss) income $(4,051,645)
Basic and diluted (loss) earnings
per share, as reported $ (3.49)
Impact of goodwill amortization,
net of tax 0.03
Adjusted basic and diluted (loss)
earnings per share $ (3.46)
In December 2002, the FASB finalized EITF Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables". This Issue is
applicable to agreements entered into in fiscal periods beginning after
June 15, 2003. This Issue addresses how to determine whether arrangements
involve the delivery or performance of multiple products, services, and/or
rights to use assets. The adoption of this Issue did not have a material
effect on the Company's consolidated financial statements.
During 2003 the Financial Accounting Standards Board issued the
following new statements that are applicable to the Company. These
statements did not have a material effect on the Company's financial
statements.
SFAS 132 (revised), "Employers Disclosures about Pensions and Other
Postretirement Benefits" - revises employers' disclosures about pension
plans and other postretirement benefit plans. This additional disclosure
is included in Note 16.
SFAS 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" - amends and clarifies financial accounting and
reporting for derivative instruments under SFAS 133.
SFAS 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" - establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantors, Including Indirect Guarantees of Indebtedness
to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a
rescission of FASB Interpretation No. 34", requires that a guarantor
recognize, at inception of a guarantee, a liability for the fair value of
the obligation undertaken and enhances the disclosures to be made by a
guarantor. See Note 13 for disclosure of the Company's guarantee of
financing arrangements of certain customers and Note 12 for disclosures
related to the Company's product warranties. The adoption of this
Interpretation did not 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 to a smaller extent 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 16 through
36 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).
Item 9A. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
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 or submitted to the Securities and Exchange Commission. Based
upon this evaluation, they concluded that the Company's disclosure controls
are effective as of December 31, 2003. There has been no change in the
Company's internal control over financial reporting that occurred during
the year ended December 31, 2003 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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, 2003 and 2002, 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, 2003. 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 schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Allen Organ
Company and Subsidiaries as of December 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 2003 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 6, 2004
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 2003 2002
CURRENT ASSETS
Cash $ 5,907,576 $ 4,515,189
Investments including accrued interest 17,143,171 17,176,750
Accounts receivable, net of allowance for
doubtful accounts of $605,496 in 2003
and $502,209 in 2002 11,652,365 12,184,564
Inventories 13,926,173 16,223,682
Prepaid income taxes -- 161,071
Prepaid expenses 491,444 318,943
Deferred income taxes 2,741,167 1,992,694
Total Current Assets 51,861,896 52,572,893
PROPERTY, PLANT AND EQUIPMENT, NET 10,167,004 10,857,494
OTHER ASSETS
Note receivable from related party 2,397,291 2,397,291
Cash value of life insurance 2,474,002 2,273,163
Deferred income taxes 3,493,238 3,422,448
Intangible assets, net 1,347,822 1,628,964
Goodwill, net 194,523 194,523
Other assets 14,500 16,092
Total Other Assets 9,921,376 9,932,481
Total Assets $ 71,950,276 $ 73,362,868
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,278,535 $ 5,688,967
Accrued income taxes 657,941 --
Accrued expenses 3,811,025 2,638,256
Customer deposits 2,197,393 2,693,980
Total Current Liabilities 7,944,894 11,021,203
NONCURRENT LIABILITIES
Deferred and other noncurrent liabilities 1,946,696 1,028,785
Accrued pension costs 5,693,853 5,006,548
Total Noncurrent Liabilities 7,640,549 6,035,333
Total Liabilities 15,585,443 17,056,536
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A Voting Common stock, $1 par value,
400,000 shares authorized,
127,232 shares issued 127,232 127,232
Class B Non-Voting Common stock, $1 par value,
3,600,000 shares authorized,
1,410,761 shares issued 1,410,761 1,410,761
Additional paid-in capital 13,150,610 12,961,610
Retained earnings 58,015,139 57,267,763
Accumulated other comprehensive loss (3,832,694) (3,460,463)
Treasury stock, at cost, 43,368 Class A shares
in 2003 and 2002, 338,380 Class B shares
in 2003 and 324,565 in 2002 (12,506,215) (12,000,571)
Total Stockholders' Equity 56,364,833 56,306,332
Total Liabilities and Stockholders' Equity $ 71,950,276 $ 73,362,868
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2003 2002 2001
NET SALES $ 60,788,058 $ 67,739,548 $ 60,490,513
COSTS AND EXPENSES
Cost of sales 35,693,613 41,963,839 41,707,417
Selling, administrative and
other expenses 15,390,231 14,886,291 15,811,522
Research and development 8,785,522 7,782,571 8,004,838
Other expense, net 29,195 26,825 150,350
Plant closure costs -- -- 530,000
Impairment of goodwill and
intangibles -- -- 1,400,000
Total Cost and Expenses 59,898,561 64,659,526 67,604,127
INCOME (LOSS) FROM OPERATIONS 889,497 3,080,022 (7,113,614)
OTHER INCOME (EXPENSE)
Investment income 432,399 716,335 1,018,162
Interest expense -- -- (315,083)
Minority interests in
consolidated subsidiaries -- -- (33,275)
Total Other Income (Expense) 432,399 716,335 669,804
INCOME (LOSS) BEFORE INCOME TAXES 1,321,896 3,796,357 (6,443,810)
INCOME TAXES
Current 571,000 1,669,000 (1,168,000)
Deferred (646,000) (558,000) (1,192,000)
Total (75,000) 1,111,000 (2,360,000)
NET INCOME (LOSS) $ 1,396,896 $ 2,685,357 $ (4,083,810)
OTHER COMPREHENSIVE LOSS,
NET OF TAX
Unrealized (loss) gain on
investments:
Unrealized (loss) gain arising
during period $ (26,898) $ 132,305 $ (138,420)
Less: reclassified adjustment
for gain (loss) included in
income 2,495 (97,186) (41,153)
Total (24,403) 35,119 (179,573)
Minimum pension liability
adjustment (347,828) (2,121,282) (1,334,717)
Other comprehensive loss (372,231) (2,086,163) (1,514,290)
COMPREHENSIVE INCOME (LOSS) $ 1,024,665 $ 599,194 $ (5,598,100)
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE $ 1.20 $ 2.29 $ (3.49)
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
Class A Class B Paid-in
Shares Amount Shares Amount Capital
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
Tax benefit from exercise
of subsidiary stock options 189,000
Balance-December 31, 2003 127,232 $127,232 1,410,761 $1,410,761 $13,150,610
Accumulated
Other
Retained Comprehensive Treasury Stock
Earnings Income (Loss) Shares Amount
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)
Net income 1,396,896
Reacquired Class B Shares 13,815 (505,644)
Change in unrealized
loss on securities
available for sale (24,403)
Minimum pension
liability adjustment (347,828)
Cash dividend paid
($0.56 per share) (649,520)
Balance-December 31, 2003 $58,015,139 $(3,832,694) 381,748 $(12,506,215)
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $1,396,896 $2,685,357 $(4,083,810)
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities
Depreciation and amortization 2,518,612 2,801,512 2,974,898
Minority interest in consolidated
subsidiaries -- -- 33,275
Loss from impairment of goodwill
and intangibles -- -- 1,400,000
Loss on sale of property, plant
and equipment 16,554 55,184 175,358
Loss (Gain) on sale of investments 4,000 (156,248) (65,635)
Tax benefit from exercise of stock
options 189,000 58,000 145,000
Deferred income taxes (624,135) (518,984) (1,296,667)
Change in assets and liabilities
Accounts receivable 532,199 (2,236,722) 337,817
Inventories 2,297,509 1,073,475 3,201,673
Prepaid income taxes 161,071 945,143 (1,092,242)
Prepaid pension costs 144,349 (175,069) 126,006
Other assets 1,592 -- 2,500
Accounts payable (4,410,432) 2,938,716 (697,868)
Accrued income taxes 657,941 -- --
Accrued expenses 1,172,769 665,102 (842,948)
Customer deposits (496,587) (284,043) (13,605)
Deferred and other noncurrent
liabilities 1,062,260 145,947 523,759
Net Cash Provided by Operating
Activities 4,306,748 8,239,917 619,426
CASH FLOWS FROM INVESTING ACTIVITIES
Cash proceeds from sale of investments
classified as available for sale 526,866 30,633,381 18,682,314
Cash paid for purchase of investments
classified as available for sale (521,690) (36,009,348) (5,711,291)
Increase in cash value of life
insurance (200,839) (99,597) (138,699)
Increase in note receivable -- (400,184) (440,386)
Payment for acquisition of business (200,000) -- --
Cash proceeds from sale of property,
plant and equipment 5,100 319,155 11,250
Cash paid for purchase of property,
plant and equipment (1,063,231) (1,898,586) (1,458,233)
Net Cash (Used In) Provided by
Investing Activities (1,453,794) (7,455,179) 10,944,955
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans -- -- 3,300,000
Repayment of bank loans -- -- (12,000,000)
Dividends paid in cash (649,520) (655,307) (655,479)
Reacquired Class A common shares -- -- (4,416)
Reacquired Class B common shares (505,644) (10,570) (6,891)
Subsidiary company stock reacquired
from minority stockholders (448,659) (89,386) (556,298)
Proceeds from sale of subsidiary stock 143,256 35,716 96,333
Net Cash Used in Financing Activities (1,460,567) (719,547) (9,826,751)
NET INCREASE IN CASH 1,392,387 65,191 1,737,630
CASH, JANUARY 1 4,515,189 4,449,998 2,712,368
CASH, DECEMBER 31 $5,907,576 $4,515,189 $4,449,998
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid (refunded) for income taxes $ (439,012) $ 750,008 $ (218,816)
Cash paid for interest $ -- $ -- $ 315,084
The above changes in assets and
liabilities excludes the following
adjustments related to the minimum
pension liability.
Accumulated other comprehensive income $ 347,828 $2,121,282 $1,334,717
Deferred income tax benefits 195,128 1,312,295 794,019
Accrued pension costs (542,956) (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 22 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 Diversified, Inc. and
Legacy Audio, Inc.) and majority-owned subsidiary (Eastern Research,
Inc.). In addition, the Company has other inactive, wholly-owned
subsidiaries. All material intercompany accounts and 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 Allowance:
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 allowance.
Inventories:
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first- out (FIFO) method for 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 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 $3,696,762 and
$3,024,517 at December 31, 2003 and 2002, 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. Service revenues are
recognized when the services are performed. Deferred revenues represent
cash received from customers in advance of revenues being recognized for
the related payment.
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 $278,327, $333,695, and $440,757 in 2003, 2002 and 2001,
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 2002 and 2001 financial statements have been
reclassified to conform to the 2003 presentation.
New Accounting Standards:
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 years
ended December 31, 2003 and 2002, compared to $52,666 for the year ended
December 31, 2001. 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, 2003 and 2002. As required by SFAS No. 142,
prior results have not been restated. A reconciliation of the previously
reported net loss and loss per common share for the year ended December
31, 2001, as if SFAS No. 142 had been adopted as of January 1, 2001, is as
follows:
Reported net (loss) income $(4,083,810)
Add back: Goodwill amortization,
net of related tax effect 32,165
Adjusted net (loss) income $(4,051,645)
Basic and diluted (loss) earnings
per share, as reported $ (3.49)
Impact of goodwill amortization,
net of tax 0.03
Adjusted basic and diluted (loss)
earnings per share $ (3.46)
In December 2002, the FASB finalized EITF Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables". This Issue is
applicable to agreements entered into in fiscal periods beginning after
June 15, 2003. This Issue addresses how to determine whether arrangements
involve the delivery or performance of multiple products, services, and/or
rights to use assets. The adoption of this Issue did not have a material
effect on the Company's concolidated financial statements.
During 2003 the Financial Accounting Standards Board issued the
following new statements that are applicable to the Company. These
statements did not have a material effect on the Company's financial
statements.
SFAS 132 (revised), "Employers Disclosures about Pensions and Other
Postretirement Benefits" - revises employers' disclosures about pension
plans and other postretirement benefit plans. This additional disclosure
is included in Note 16.
SFAS 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" - amends and clarifies financial accounting and
reporting for derivative instruments under SFAS 133. The Company has no
derivative instruments or hedges.
SFAS 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" - establishes standards
for how an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. The Company does not
have any financial instruments to which this would be applicable.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantors, Including Indirect Guarantees of Indebtedness
to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a
rescission of FASB Interpretation No. 34", requires that a guarantor
recognize, at inception of a guarantee, a liability for the fair value of
the obligation undertaken and enhances the disclosures to be made by a
guarantor. See Note 13 for disclosure of the Company's guarantee of
financing arrangements of certain customers and Note 12 for disclosures
related to the Company's product warranties. The adoption of this
Interpretation did not 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", only the
disclosure requirements set forth in the Statements are presented.
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:
2003 2002 2001
Net income (loss)
As reported $1,396,896 $2,685,357 $(4,083,810)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (31,457) (69,374) (39,447)
Pro forma $1,365,439 $2,615,983 $(4,123,257)
Basic and diluted earnings
(loss) per share
As reported $1.20 $2.29 $(3.49)
Pro forma $1.18 $2.23 $(3.52)
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 in 2002; dividend yield of 1.40%, risk-
free interest rate of 2.50%, expected life of seven years and expected
volatility of 10%. There were no option grants under the Allen Organ
Company stock option plan in 2003 and 2001.
NOTE 2 Business Acquisition
On July 24, 2003, the Company's subsidiary, Eastern Research, Inc.
(ERI), purchased the assets of Avail Networks, Inc. (Avail) in exchange
for $200,000 in cash and contingent payments based on future revenue
related to the sale of Avail products during the first 30 months after the
acquisition.
Avail's intelligent last-mile broadband solutions enable service
providers to deliver more revenue-generating services to their enterprise
customers from a single customer located platform across metro fiber,
traditional wireline and wireless access networks. Avail's flagship
FronteraT products deliver multiple services to end-user sites in a
variety of subscriber locations and configurations. In addition, this
acquisition gives ERI access to Avail's advanced ATM (Asynchronous
Transmission Mode) technology.
Avail's sales prior to the acquisition date were minimal. As such,
pro-forma financial information is not required for this acquisition. Due
to lengthy sales cycles, these products did not add significant revenues
in 2003.
The purchase price was allocated $114,300 to property and equipment
and $85,700 to intangibles.
NOTE 3 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, 2003
Available for sale
Equity securities $ 29,310 $ -- $ 50 $ 29,260
Mutual Funds
Short Term Gov't Funds 2,281,775 -- 36,422 2,245,353
Municipal Bond Funds 14,840,033 -- 6,593 14,833,440
Equity Funds 35,832 -- 714 35,118
Totals $17,186,950 $ -- $ 43,779 $17,143,171
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
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 2003, 2002
and 2001, sales proceeds and gross realized gains and losses on securities
classified as available for sale were:
2003 2002 2001
Sales proceeds $ 526,866 $30,633,381 $18,682,314
Gross realized losses $ 4,000 $ 379,804 $ 216,546
Gross realized gains $ -- $ 536,052 $ 282,181
The change in net unrealized holding (loss) gain on securities
available for sale of $(36,537), $55,961, and $283,786, net of deferred
tax (benefit) expense of $(12,134), $20,842, and $104,213, has been
included in accumulated other comprehensive loss in stockholders' equity
for the years ended December 31, 2003, 2002, and 2001, respectively.
NOTE 4 Inventories
December 31,
2003 2002
Finished goods $ 3,945,007 $ 5,064,803
Work in process 5,525,106 5,707,215
Raw materials 4,456,060 5,451,664
Total $13,926,173 $16,223,682
NOTE 5 Property, Plant and Equipment
Estimated
December 31, Useful
2003 2002 Lives
Land and improvements $ 2,369,298 $ 2,369,298 10 yrs
Buildings and improvements 9,085,523 9,030,910 2 - 40 yrs
Machinery and equipment 11,263,861 10,855,793 5 - 10 yrs
Office furniture and equipment 5,385,231 4,886,443 3 - 8 yrs
Vehicles 179,369 186,187 4 yrs
Sub-total 28,283,282 27,328,631
Less accumulated depreciation 18,116,278 16,471,137
Total $10,167,004 $10,857,494
Depreciation expense charged to operations was $1,846,367
$2,158,302 and $2,303,209 in 2003, 2002 and 2001, respectively.
NOTE 6 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. Due to rules
included in the Sarbanes-Oxley Act of 2002 prohibiting the payment of
these types of premiums, the Company did not pay any insurance premiums
in 2003 related to these split-dollar agreements. In the past, the
Company paid 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 note receivable is also secured by the personal obligation of its
President. The note receivable exceeds the cash surrender value of
these policies by approximately $431,000 and $445,000 at December 31,
2003 and 2002, respectively. However, the Company's President has an
adequate level of personal net assets to cover these amounts.
NOTE 7 Intangible Assets
Intangible assets subject to amortization are as follows:
December 31, 2003 December 31, 2002
Weighted
Average
Gross Accumulated Gross Accumulated Amortization
Amount Amortization Amount Amortization Period
Customer Lists $ 105,679 $ 87,583 $ 105,679 $ 82,015 7 years
Developed
Technology 4,660,509 3,515,220 4,269,406 2,862,463 5 years
Trademark 278,396 93,959 278,396 80,039 20 years
Total $5,044,584 $3,696,762 $4,653,481 $3,024,517
Amortization expense was $672,245, $643,210 and $671,689 in 2003, 2002
and 2001, respectively. Estimated amortization expense for the next five
years is as follows:
2004 $462,473
2005 178,004
2006 119,752
2007 84,328
2008 34,464
As discussed in Note 2, ERI acquired the assets of Avail Networks
for $200,000, which included $85,700 of intangible assets allocated to
developed technology and will be amortized over five years. In addition,
intangible assets of $305,403, $53,670 and $459,965 were recorded in 2003,
2002 and 2001, respectively, in connection with stock transactions with
minority stockholders of ERI.
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 assets 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 or to change the
classification of intangible assets and amortization lives.
NOTE 8 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 an
entity. This write down was attributable to the downturn in the data
communications industry in which the entity operated, the combination of
this entity into another subsidiary and closure of the entity'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 9 Notes Payable - Bank
In June 2000 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 10 Accrued Expenses
December 31,
2003 2002
Accrued salaries and commissions $1,876,287 $1,930,782
Accrued warranty costs 970,000 120,000
Deferred revenue 405,959 297,103
Other 558,779 290,371
Total $3,811,025 $2,638,256
NOTE 11 Deferred and Other Noncurrent Liabilities
December 31,
2003 2002
Deferred compensation
expense (see Note 16) $1,190,549 $ 848,785
Deferred revenue 516,147 --
Accrued warranty costs 240,000 180,000
Total $1,946,696 $1,028,785
NOTE 12 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 is summarized as
follows:
December 31,
2003 2002
Accrual at beginning of year $ 300,000 $ 300,000
Additions charged to warranty expense 1,080,357 223,086
Claims paid and charged against
the accrual (170,357) (163,086)
Accrual at end of year $1,210,000 $ 300,000
NOTE 13 Commitments and Contingencies
As of December 31, 2003, the Company is contingently liable for a
maximum amount of approximately $1,309,000 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, 2003, the shareholder owned or
would have includable in her estate 263,382 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.
In connection with the purchase of Avail Networks (see Note 2), ERI
agreed to pay royalties of 5% of total net sales of qualifying products
through January 2006 in excess of $1,500,000. The royalties are payable
quarterly. There were no royalty payments made during 2003.
ERI leases its offices and production facility under non-cancelable
operating leases which expire at various dates through August 2005. Rent
expense for all Company operating leases was $453,414, $413,733, and
$495,816 in 2003, 2002 and 2001, respectively. Minimum annual rent
payments for the operating leases are $372,876 in 2004 and $241,312 in
2005.
NOTE 14 Accumulated Other Comprehensive Loss
December 31,
2003 2002
Unrealized loss on investments, net $ (28,867) $ (4,464)
Minimum pension liability adjustment (3,803,827) (3,455,999)
Total $(3,832,694) $(3,460,463)
NOTE 15 Export Sales
In 2003, 2002 and 2001, net sales by the Musical Instruments segment
include export sales, principally to Canada, Europe and the Far East of
$3,348,158, $3,248,480, and $3,759,129, respectively. Net sales by the
Data Communications segment include export sales principally to Europe and
Asia Pacific of $6,769,565 for 2003, $10,428,899 for 2002, and $3,342,587
for 2001. Net sales by the Audio Equipment segment include export sales
principally to Europe and the Far East of $119,780 for 2003, $69,222 for
2002, and $219,315 for 2001.
NOTE 16 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.
Effective December 31, 2003, the Company froze future benefit accruals
under both the salaried and hourly defined benefit pension plans. The
Company will continue to fund the plans and may terminate the plans in the
future. The Company has replaced the retirement benefit previously
provided to its employees under the defined benefit pension plan with a
discretionary contribution to the Allen Organ Company Saving and Profit
Sharing Plan. The discretionary contribution will be allocated to
employee accounts based on their salary.
Following are reconciliations of the pension benefit obligation and
the value of plan assets:
2003 2002 2001
Pension benefit obligation
Balance, beginning of year $17,468,426 $16,112,915 $15,194,233
Service cost 436,305 393,927 353,266
Interest cost 1,089,526 1,085,299 1,055,508
Benefits paid to participants (1,112,879) (1,117,494) (1,012,126)
Increase due to changes
in data/assumptions 64,574 993,779 522,034
Balance, end of year $17,945,952 $17,468,426 $16,112,915
Plan assets
Fair value, beginning of year $11,514,344 $13,398,564 $15,689,627
Actual investment returns 820,634 (1,663,508) (1,278,937)
Company contributions 1,030,000 852,041 --
Benefits paid to participants (1,112,879) (1,072,753) (1,012,126)
Fair value, end of year $12,252,099 $11,514,344 $13,398,564
The funded status of the plans is as follows:
December 31,
2003 2002 2001
Excess of the value of plan
assets over the benefit
obligation $(5,693,853) $(5,954,082) $(2,714,351)
Unrecognized net actuarial loss 6,105,269 6,509,847 3,095,047
Adjustment to recognize
minimum liability (6,105,269) (5,562,313) (2,128,736)
(Accrued) prepaid benefit cost $(5,693,853) $(5,006,548) $(1,748,040)
The adjustment to recognize the minimum pension liability of
$6,105,269, net of deferred tax benefit of $2,301,442, has been included
in other comprehensive income (loss) in stockholders' equity at December
31, 2003.
The following weighted-average rates were used in determining the
above plan information:
2003 2002 2001
Discount rate on the benefit obligation 5.75% 6.25% 6.75%
Expected long-term rate of return
on plan assets 7.00% 7.00% 8.00%
Rate of long-term compensation increase 5.00% 5.00% 6.00%
The Company's overall expected long-term rate of return on assets is
7.0 percent. The expected long-term rate of return is based on the
portfolio that management expects to maintain as a whole and not on the
sum of the returns on individual asset categories. The return is based
exclusively on historical returns, without adjustments.
Pension expense is comprised as follows:
2003 2002 2001
Service cost $ 436,305 $ 393,927 $ 353,266
Interest cost 1,089,526 1,085,299 1,055,508
Expected return on plan assets (768,716) (1,036,157) (1,210,756)
Amortization of net gain from
prior periods -- 133,903 --
Amortization of transition asset -- -- (72,012)
Net pension cost $1,174,349 $ 576,972 $ 126,006
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,
2003 2002 2001
Projected benefit obligation $17,945,952 $17,468,424 $16,112,915
Accumulated benefit obligation 17,945,952 16,520,892 15,146,604
Fair value of plan assets 12,252,099 11,514,344 13,398,564
The allocation of the fair value of plan assets of the Company's
pension plans at December 31, 2003, 2002 and 2001 were as follows:
December 31,
2003 2002 2001
Equity Security Funds 20% -- 61%
Debt Security Funds -- -- 39%
Stable Asset Fund 34% -- --
Cash and Equivalents Fund 46% 100% --
Total 100% 100% 100%
The Company's investment policies and strategies for the pension
benefit plans do not use target allocations for the individual asset
categories. The Company expects to increase its allocation to Equity
Security Funds to approximately 50% while decreasing its allocation to the
Cash and Equivalents Fund to approximately 30%. Management will continue
to monitor market conditions and make changes in asset allocation that it
feels are appropriate to balance the risk and return on plan investments.
The Company's investment goals are to maximize returns subject to specific
risk management policies. Its risk management policies permit investments
in mutual funds and prohibit direct investments in debt and equity
securities and derivative financial instruments. The Company addresses
diversification by the use of mutual fund investments whose underlying
investments are in domestic and international fixed income securities and
domestic and international equity securities. These mutual funds are
readily marketable and can be sold to fund benefit payment obligations as
they become payable.
The Company expects to contribute a total of $1,000,000 to its pension
plans in 2004.
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 $58,325, $85,658 and $248,650
in 2003, 2002 and 2001, 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. Expense related to these
arrangements was $72,318, $70,871 and $78,303 in 2003, 2002 and 2001,
respectively. The accrued benefits were $405,174 and $332,856 at December
31, 2003 and 2002, respectively.
NOTE 17 Investment Income
December 31,
2003 2002 2001
Interest Income $ 429,440 $ 550,697 $ 910,144
Dividend Income 6,959 9,390 173,653
Gain (Loss) on Sale of Investments (4,000) 156,248 (65,635)
Total $ 432,399 $ 716,335 $1,018,162
NOTE 18 Income Taxes
The provision for income taxes consists of the following:
2003 2002 2001
Currently Currently Currently
Payable Deferred Payable Deferred Payable Deferred
Federal $439,000 $(448,000) $1,252,000 $(456,000) $(1,347,000) $(1,014,000)
State 132,000 (198,000) 417,000 (102,000) 179,000 (178,000)
Total $571,000 $(646,000) $1,669,000 $(558,000) $(1,168,000) $(1,192,000)
A reconciliation of the provision for income taxes with the
statutory rate follows:
2003 2002 2001
Statutory provision for
federal income tax $449,000 34.0% $1,291,000 34.0% $(2,180,000)(34.0)%
State taxes, net of
federal tax benefits 106,000 8.0 143,000 3.8 (549,000) (8.6)
Tax credits (347,000)(26.3) (311,000) (8.2) (363,000) (5.7)
Tax-exempt income (56,000) (4.2) (64,000) (1.7) (96,000) (1.5)
Exempt income of
foreign sales
corporation (104,000) (7.9) (136,000) (3.6) (100,000) (1.6)
Other items, net 27,000 2.0 18,000 0.5 28,000 0.4
Effect of change in
valuation allowance of
deferred tax assets:
Federal -- -- 105,000 2.8 350,000 5.4
State (150,000)(11.3) 65,000 1.7 550,000 8.6
$(75,000) (5.7)% $1,111,000 29.3% $(2,360,000)(36.8)%
The following temporary differences give rise to the net deferred
tax asset at December 31, 2003 and 2002.
2003 2002
Deferred Tax Assets
Excess of book depreciation/amortization
over tax depreciation/amortization $ 375,529 $ 479,305
Excess of book over tax pension expense 1,766,324 1,831,377
Loss on investments not recognized
for tax purposes 14,913 36,839
Deferred compensation not recognized
for tax purposes 447,759 330,424
Net operating loss and credit carryforwards 1,872,221 1,876,210
Other liabilities 646,331 361,453
Reserve for bad debts 227,846 194,586
Warranty reserve 454,989 115,959
Inventory reserve 1,448,493 1,358,989
Sub-total 7,254,405 6,585,142
Valuation Allowance (1,020,000) (1,170,000)
Total Deferred Tax Assets $6,234,405 $5,415,142
Deferred taxes are included in the Company's financial statements as
follows:
2003 2002
Current deferred tax asset $2,741,167 $1,992,694
Non-current deferred tax asset 3,493,238 3,422,448
Total deferred tax asset $6,234,405 $5,415,142
At December 31, 2003, the Company has available approximately
$2,337,000 of unused federal and $15,132,000 of unused state net operating
loss carryforwards that may be applied against future taxable income and
that expire in various years from 2004 to 2023. In addition, the Company
has $750,000 in state tax credit carryforwards that expire in various
years from 2008 to 2018. The Company has a valuation allowance of
$1,020,000 for the deferred tax assets related to the uncertainty of
realizing state net operating loss carryforwards, state credit
carryforwards and federal net operating losses of a subsidiary prior to
inclusion in the consolidated federal income tax return. The decrease in
the 2003 valuation allowance is primarily related to the loss of VIR,Inc's
state net operating loss carryforwards, which were previously fully
reserved.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which
the deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these
deductible differences, net of the existing valuation allowances at
December 31, 2003. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
NOTE 19 Earnings Per Share
The following shows the amounts used in computing earnings per share
and the effect on weighted average number of shares for dilutive potential
common stock.
2003 2002 2001
Weighted average number of
common shares used in basic
earnings per share 1,160,008 1,170,191 1,170,480
Effect of stock options 473 -- --
Weighted average number of
common shares use in diluted
earnings per share 1,160,481 1,170,191 1,170,480
Outstanding stock options to purchase 12,000 shares of common stock
were not included in computing earnings per share for 2002 because the
effect was antidilutive. There were no stock options outstanding in 2001.
NOTE 20 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 ten years, and generally vest equally over four years.
As of December 31, 2003, total options issued represent 1% of the
shares currently outstanding. Vested options represent 0.4% of the
currently outstanding shares.
Following is a summary of the activity under the plan:
December 31,
2003 2002
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
Outstanding at beginning of year 12,000 $39.00 -- $ --
Granted -- -- 12,000 39.00
Exercised -- -- -- --
Forfeited -- -- -- --
Outstanding at end of year 12,000 $39.00 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, 2003:
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 8.56 years $39.00 4,800 $39.00
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 six years, and generally vest
equally over four years.
As of December 31, 2003, total options issued represents 9% of the ERI
shares currently outstanding. Vested options consist of 5% of the
currently outstanding shares of ERI.
ERI recognized compensation expense of $144,875 in 2003 and $59,375 in
both 2002 and 2001 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 21 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
$153,149, $45,851 and $75,094 in 2003, 2002 and 2001, respectively.
Financial advisory fees paid were $6,000 in both 2003 and 2002 and $11,753
in 2001.
NOTE 22 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 to a
smaller extent under OEM agreements with some 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 (Legacy Audio, Inc.) 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.
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 61% of its 2003 net sales
from two customers and 73% and 82% of its net sales from three customers
in 2002 and 2001, respectively. The Data Communications segment derived
16% of its 2003 net sales from one customer, 40% of its net sales from two
customers in 2002 and 13% of its net sales from one customer in 2001. 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 2003, 2002 and
2001.
December 31,
2003 2002 2001
Net Sales to
Unaffiliated Customers
Musical Instruments $20,381,904 $24,942,925 $24,375,642
Data Communications 36,022,256 36,536,174 25,909,885
Electronic Assemblies 2,819,640 4,750,143 8,382,021
Audio Equipment 1,564,258 1,510,306 1,822,965
Total $60,788,058 $67,739,548 $60,490,513
Intersegment Sales
Musical Instruments $ 823,199 $ 435,915 $ 91,820
Data Communications 84,418 -- 193,664
Electronic Assemblies 344,553 131,540 79,651
Audio Equipment 88,205 88,909 87,777
Total $ 1,340,375 $ 656,364 $ 452,912
Income (Loss) from Operations
Musical Instruments $ (764,639) $ 2,024,144 $ 2,174,970
Data Communications 2,446,213 2,091,520 (8,425,231)
Electronic Assemblies (457,366) (401,165) 125,000
Audio Equipment (334,711) (634,477) (988,353)
Total $ 889,497 $ 3,080,022 $(7,113,614)
Identifiable Assets
Musical Instruments $16,762,054 $17,301,133 $17,664,908
Data Communications 26,164,502 25,868,894 19,596,306
Electronic Assemblies 2,065,776 2,373,162 3,377,712
Audio Equipment 1,541,238 1,623,546 2,795,550
Sub-total 46,533,570 47,166,735 43,434,476
General corporate assets 25,416,706 26,196,133 23,037,776
Total $71,950,276 $73,362,868 $66,472,252
Capital Expenditures
Musical Instruments $ 155,195 $ 1,037,338 $ 528,998
Data Communications 904,861 670,320 736,538
Electronic Assemblies -- 188,487 188,272
Audio Equipment 3,175 2,441 4,425
Total $ 1,063,231 $ 1,898,586 $ 1,458,233
Depreciation and Amortization
Musical Instruments $ 765,196 $ 759,689 $ 690,084
Data Communications 1,596,862 1,864,921 2,093,476
Electronic Assemblies 120,679 126,321 113,027
Audio Equipment 35,875 50,581 78,311
Total $ 2,518,612 $ 2,801,512 $ 2,974,898
Income Tax Expense (Benefit)
Musical Instruments $ (20,000) $ 1,240,000 $ 1,186,000
Data Communications 312,000 138,000 (3,565,000)
Electronic Assemblies (204,000) (152,000) 47,000
Audio Equipment (163,000) (115,000) (28,000)
Total $ (75,000) $ 1,111,000 $(2,360,000)
NOTE 23 Quarterly Financial Data (Unaudited)
First Second Third Fourth
2003 Quarter Quarter Quarter Quarter Total
Net Sales $13,874,464 $12,725,880 $14,932,091 $19,255,623 $60,788,058
Gross Profit 5,274,954 5,222,827 6,588,075 8,008,589 25,094,445
Net Income
(Loss) (19,808) (149,898) 200,923 1,365,679 1,396,896
Easrnings (Loss)
per Share (0.02) (0.13) 0.17 1.18 1.20
2002
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)
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 50 Director Since 1980
Meeting in 2004
Eugene Moroz (1) Next Annual 80 Director Since 1968
Meeting in 2004
Leonard W. Helfrich Next Annual 74 Director 1964 - 1968
Meeting in 2004 and 1972 to
present
Orville G. Hawk (1) Next Annual 86 Director Since 1989
Meeting in 2004
Albert F. Schuster Next Annual 84 Director Since 1989
Meeting in 2004
Martha Markowitz Next Annual 82 Director Since 1991
Meeting in 2004
Jeffrey L. Schucker (1) Next Annual 49 Director Since 1996
Meeting in 2004
Ernest Choquette Next Annual 50 Director Since 1998
Meeting in 2004
Michael F. Doyle Next Annual 49 Director Since 2001
Meeting in 2004
(1) Audit Committee member.
(b) Identification of Executive Officers.
Date Term Time Period
Name Expires Age Position Position Held
Steven Markowitz Next Annual 50 President 1990 to present
Meeting in 2004
Barry J. Holben Next Annual 51 Vice President-Sales October 1995 to
Meeting in 2004 present
Dwight A. Beacham Next Annual 57 Vice President- October 1995 to
Meeting in 2004 Product Development present
Nathan S. Eckhart Next Annual 40 Vice President- May 1996 to
Meeting in 2004 Finance, Treasurer, 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) Section 16(a) Beneficial Ownership Reporting
Compliance.
Based on a review of forms required to be filed
under Section 16 of the Securities and Exchange Act of
1934 and furnished to the Company as required by SEC
rules, no person subject to Section 16 of the Exchange
Act failed to file on a timely basis any forms required
by such Section during 2003.
(h) Audit Committee Financial Expert
The Company's Board of Directors has determined that
Jeffrey L. Schucker is a financial expert serving on the
Company's audit committee and that he is independent
within the meaning of NASDAQ listing standards.
(i) Code of Ethics.
The Company has adopted a Code of Business Conduct
and Ethics that applies to all company employees
including its principle executive and principal financial
officers. A copy of the Code of Business Conduct and
Ethics is filed as Exhibit 14 to this form 10-K.
Item 11. Executive Compensation.
Deleted paragraphs and/or columns are not applicable.
(b) SUMMARY COMPENSATION TABLE:
Long Term
Compensation
Annual Compensation Securities All Other
Salary Bonus Underlying Compensation
Name and Principal Position Year $ $ Options(#) $
Steven A. Markowitz, President 2003 151,675 - - 38,886 (1)
(Chief Executive Officer) 2002 147,855 - - 20,969
2001 140,616 - - 48,739
Dwight A. Beacham, 2003 104,850 - - 17,052 (2)
Vice President - Product 2002 101,918 - 4,000 12,049
Development 2001 99,209 - - 8,985
Barry J. Holben, 2003 106,628 - - 17,052 (2)
Vice President - Sales 2002 104,008 - 4,000 12,049
2001 99,964 - - 8,985
Nathan S. Eckhart, 2003 107,630 - - 13,533 (2)
Vice President - Finance, 2002 102,823 - 4,000 9,527
(Treasurer and Secretary) 2001 99,586 - - 13,699
(1)-Value of split dollar life insurance policy. See Note 16 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 16 to the accompanying Consolidated
Financial Statements for additional information on these arrangements.
(c) OPTION GRANTS IN LAST FISCAL YEAR:
There were no stock options granted or exercised
during 2003 under the Allen Organ Company stock
option plan.
(d) AGGREGATE OPTIONS EXERCISED IN LAST YEAR
AND DECEMBER 31, 2003 OPTION VALUE:
Number of Securities Value of
Underlying Unexercised In-The
Unexercised Options Money Options at
Shares at December 31, 2003 December 31, 2003
Acquired on Value (#) ($)
exercise Realized (1) (1)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
Dwight A.
Beacham 0 0 1,600 2,400 $9,600 $14,400
Barry J.
Holben 0 0 1,600 2,400 $9,600 $14,400
Nathan S.
Eckhart 0 0 1,600 2,400 $9,600 $14,400
(1) Based on market value of $45.00 per share for Allen Organ Company
Class B common stock at December 31, 2003
(f) Defined Benefit or Actuarial Plan Disclosure.
As discussed in Note 16 to the Company's
financial statements included in Item 8, future benefit
accruals under the Company's defined benefit pension plan
were frozen as of December 31, 2003. Based on the 2003
actuarial report fro the Plan the estimated annual
retirement benefit under the Plan to each of the named
executive officers would be as follows: Steven A.
Markowitz (age 50) - $30,985; Dwight A. Beacham (age 57)
- $19,557; Barry J. Holben (age 51) - $13,876; Nathan S.
Eckhart (age 40) - $12,015.
(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.
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
beneficially owned directly or indirectly by all directors
naming them and directors and officers of the registrant, as a
group, without naming them. Directors not named in the
following table do not beneficially own any equity securities
of the registrant. Information as of December 31, 2003.
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) 1.26%
81,531* (2) (4) 97.22 %
242,016* (2) (4) 22.57%
Eugene Moroz 6,290 (1) (3) as
to 6,290
6,000 (2) (4) as
to 6,000 1.15%
Leonard W. Helfrich 258 (2) (4) .02%
Orville G. Hawk 50 (2) (4) .005 %
Martha Markowitz 21,366 (1) (3) 1.99%
81,531* (2) (4) 97.22 %
242,016* (2) (4) 22.57%
Percent Percent
All Directors of of
and Officers Class Class Class Class
as a Group A B A B
12 81,589** 289,542** 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 13 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 $153,149, $45,851 and $75,094
in 2003, 2002 and 2001, respectively. Financial advisory fees
paid were $6,000 in both 2003 and 2002 and $11,753 in 2001.
Item 14. Principal Accountant Fees and Services
2003 2002
(1) Audit Fees $116,000 $121,551
(2) Audit-Related Fees 13,500 17,500
(3) Tax Fees 116,200 113,250
(4) All Other Fees - -
Total Fees $245,700 $252,301
Audit-Related Fees include assurance services provided for the
Company's retirement plans and other fees related to
understanding and implementing new Financial Accounting
Standards.
Tax Fees include fees for compliance services, assistance with
compliance documentation and various other tax issues that
arise from time to time.
The audit committee of the Board of Directors pre-approves all
audit and permissible non-audit services provided by the
Company's independent auditors. All of the services provided
by the Company's independent auditors set forth above were pre-
approved by the audit committee.
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' Report.
Consolidated Balance Sheets as of December 31, 2003
and 2002.
Consolidated Statements of Income for the years ended
December 31, 2003, 2002, and 2001.
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2003, 2002, and 2001.
Consolidated Statements of Cash Flows for the years
ended December 31, 2003, 2002, and 2001.
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, 2003.
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
14 Code of Business Conduct and Ethics
21 Subsidiaries of the registrant
31.1 Rule 13a-14(a)/15d-14(a)
Certification - Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a)
Certification - Chief Financial Officer
32 Section 1350 Certifications
99.1(6) Audit Committee Charter
1. Incorporated by reference to the exhibit
filed with the Registrants Annual Report on Form 10-K
for the year ended December 31, 1984.
2. Incorporated by reference to the exhibit
filed with the Registrants Quarterly Report on Form
10-Q for the period ended September 30, 1996.
3. Incorporated by reference to the exhibit
filed with the Registrants Annual Report on Form 10-K
for the year ended December 31, 1992.
4. Incorporated by reference to the exhibit filed with the
Registrants Current Report on Form 8-K dated August 1, 1995.
5. Incorporated by reference to the exhibit filed with the
Registrants Quarterly Report on Form 10-Q for the period
ended September 30, 1999.
6. Incorporated by reference to the exhibit filed with the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2000.
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 2003.
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 26, 2004 /s/STEVEN A. MARKOWITZ
Steven A. Markowitz
Chief Executive Officer,
President and Director
Date: March 26, 2004 /s/NATHAN S. ECKHART
Nathan S. Eckhart
Vice President-Finance,
Chief Financial and
Principal Accounting Officer
Date: March 26, 2004 /s/LEONARD W. HELFRICH
Leonard W. Helfrich
Director
Date: March 26, 2004 /s/MARTHA MARKOWITZ
Martha Markowitz
Director
Date: March 26, 2004 /s/ERNEST CHOQUETTE
Ernest Choquette
Director
Date: March 26, 2004 /s/MICHAEL F. DOYLE
Michael F. Doyle
Director
Allen Organ Company and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 2003, 2002 and 2001
Additions Additions Write Balance
Balance at Charged Charged Offs at
Beginning to to Other And End
Description Of Year Expense Accounts Recoveries Of Year
Year Ended
December 31, 2003
Allowance for
Doubtful
Accounts $ 502,209 $174,614 $ - $ (71,328) $ 605,496
Valuation
Allowance
Deferred Tax
Asset 1,170,000 - - (150,000) 1,020,000
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