UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Under Section 13 or 15(D) of The Securities Exchange
Act of 1934 For Quarter Ended March 31, 2004
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
Commission File Number 0-275
Allen Organ Company
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1263194
(State of Incorporation) (I.R.S. Employer Identification No.)
150 Locust Street, P. O. Box 36, Macungie, Pennsylvania 18062-0036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-966-2200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Exchange Act.
Yes No X
Number of shares outstanding of each of the issuer's classes of common
stock, as of May 13, 2004:
Class A - Voting 83,864 shares
Class B - Non-voting 1,072,379 shares
ALLEN ORGAN COMPANY
INDEX
Part I Financial Information
Item 1.Financial Statements
Consolidated Condensed Statements of Income for the three months
ended March 31, 2004 and 2003
Consolidated Condensed Balance Sheets at March 31, 2004 and
December 31, 2003
Consolidated Condensed Statements of Cash Flows for the three
months ended March 31, 2004 and 2003
Notes to Consolidated Condensed Financial Statements
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
Part II Other Information
Item 2.Changes in Securities and Use of Proceeds
Item 6.Exhibits and Reports on Form 8-K
Signatures
Exhibits
PART I FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
2004 2003
Net Sales $16,718,716 $13,874,464
Costs and Expenses
Costs of sales 8,839,700 8,599,510
Selling, general and administrative 4,320,415 3,467,966
Research and development 2,826,396 1,930,495
Other expense, net 11,688 878
Total costs and expenses 15,998,199 13,998,849
Income (Loss) from Operations 720,517 (124,385)
Interest and Other Income 83,157 104,577
Income (Loss) Before Taxes 803,674 (19,808)
Income Taxes 121,000 --
Net Income (Loss) $ 682,674 $ (19,808)
Basic and Diluted Earnings (Loss)
Per Share $ 0.59 $ (0.02)
Dividends Per Share - Cash $ 0.14 $ 0.14
Total Comprehensive Income (Loss) $ 692,190 $ (22,322)
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
ASSETS 2004 2003
(Unaudited) (Audited)
Current Assets
Cash $6,859,159 $5,907,576
Investments Including Accrued Interest 17,206,668 17,143,171
Accounts Receivable, net of reserves of
$616,892 and $605,496, respectively 9,510,525 11,652,365
Inventories:
Raw Materials 4,454,634 4,456,060
Work in Process 5,944,017 5,525,106
Finished Goods 3,977,327 3,945,007
Total Inventories 14,375,978 13,926,173
Prepaid Expenses 956,151 491,444
Deferred Income Taxes 2,736,191 2,741,167
Total Current Assets 51,644,672 51,861,896
Property, Plant and Equipment 28,784,968 28,283,282
Less Accumulated Depreciation (18,567,428)(18,116,278)
Net Property, Plant and Equipment 10,217,540 10,167,004
Other Assets
Note Receivable from Related Party 2,397,291 2,397,291
Cash Value of Life Insurance 2,474,002 2,474,002
Deferred Income Taxes 3,493,238 3,493,238
Intangible Assets, net 1,232,204 1,347,822
Goodwill, net 194,523 194,523
Other Assets 14,500 14,500
Total Other Assets 9,805,758 9,921,376
Total Assets $71,667,970 $71,950,276
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $1,219,585 $1,278,535
Accrued Income Taxes 383,626 657,941
Other Accrued Expenses 3,903,412 3,811,025
Customer Deposits 2,364,774 2,197,393
Total Current Liabilities 7,871,397 7,944,894
Noncurrent Liabilities
Deferred and Other Noncurrent Liabilities 2,069,661 1,946,696
Accrued Pension Costs 4,831,853 5,693,853
Total Noncurrent Liabilities 6,901,514 7,640,549
Total Liabilities 14,772,911 15,585,443
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
Capital in Excess of Par Value 13,150,610 13,150,610
Retained Earnings
Balance, Beginning 58,015,139 57,267,763
Net Income 682,674 1,396,896
Dividends - Cash 2004 and 2003 (161,874) (649,520)
Balance, End 58,535,939 58,015,139
Accumulated Other Comprehensive Loss (3,823,178) (3,832,694)
Sub-total 69,401,364 68,871,048
Treasury Stock, at cost, 43,368 Class A
shares in 2004 and 2003,338,382 Class B
shares in 2004 and 338,380 in 2003 (12,506,305)(12,506,215)
Total Stockholders' Equity 56,895,059 56,364,833
Total Liabilities and Stockholders' Equity $71,667,970 $71,950,276
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $682,674 $(19,808)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities
Depreciation and amortization 566,768 606,069
Deferred income taxes 4,976 (1,083)
Change in assets and liabilities:
Accounts receivable 2,141,840 3,992,215
Inventories (449,805) 267,349
Prepaid income taxes -- 161,071
Prepaid expenses (464,707) (325,294)
Other assets -- 1,092
Accounts payable (58,950) (4,364,594)
Accrued income taxes (274,315) 33,175
Other accrued expenses 92,387 (16,735)
Customer deposits 167,381 (258,888)
Accrued pension costs (862,000) 249,999
Deferred and other noncurrent liabilities 122,965 79,065
Net Cash Provided by Operating
Activities 1,669,214 403,633
CASH FLOW FROM INVESTING ACTIVITIES
Net additions to property, plant and
equipment (501,686) (189,545)
Net purchase of short term investments (53,981) (60,278)
Net Cash Used In Investing Activities (555,667) (249,823)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid in cash (161,874) (163,808)
Reacquired Class B common shares (90) --
Proceeds from exercise of subsidiary
stock options -- 121,250
Subsidiary company stock reacquired from
minority shareholders -- (194,656)
Net Cash Used In Financing Activities (161,964) (237,214)
NET INCREASE (DECREASE) IN CASH 951,583 (83,404)
CASH, BEGINNING 5,907,576 4,515,189
CASH, ENDING $6,859,159 $4,431,785
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid (refunded) for:
Income Taxes $ 395,315 $ (194,246)
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Interim Financial Statements
In the opinion of management, the information contained herein reflects
all adjustments necessary to present fairly the Company's financial
position, results of operations and cash flows. All such adjustments
are of a normal recurring nature. The results of operations for the
interim periods shown in this report are not necessarily indicative of
results to be expected for the fiscal year.
Certain notes and other information have been condensed or omitted from
the interim financial statements presented in the Quarterly Report on
Form 10-Q. Therefore, these financial statements should be read in
conjunction with the Company's 2003 Annual Report on Form 10-K.
2. Stock-Based Compensation
The Company accounts for its stock-based compensation plans using the
accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Since the Company is not
required to adopt the fair value based recognition provisions
prescribed under Statement of Financial Accounting Standards No. 123,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation, it
has elected only to comply with the disclosure requirements set forth
in the Statements.
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:
Three Months Ended March 31,
2004 2003
Net income (loss)
As reported $682,674 $(19,808)
Total stock-based employee
compensation (expense) benefit
determined under fair value based
method for all awards, net of
related tax effects (16,079) 11,790
Pro forma $666,595 $ (8,018)
Earnings (Loss) per share
As reported $ 0.59 $ (0.02)
Pro forma $ 0.58 $ (0.01)
The Company granted options on an additional 4,500 shares of its Class
B stock during the three months ended March 31, 2004. 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 during 2004:
Assumptions
Dividend yield 1.40%
Risk-free interest rate 2.25%
Expected life 7 years
Expected volatility 15%
3. 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 for the
three months ended March 31, 2004 is summarized as follows:
Accrual at January 1, 2004 $1,210,000
Additions charged to warranty expense 88,750
Claims paid and charged against the accrual (231,038)
Accrual at March 31, 2004 $1,067,712
4. 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 common
stock.
Three Months Ended March 31,
2004 2003
Weighted average number of common
shares used in basic
earnings per share 1,156,244 1,170,160
Effect of stock options 1,113 --
Weighted average number of common
shares use in diluted
earnings per share 1,157,357 1,170,160
Outstanding stock options to purchase 12,000 shares of common stock
were not included in computing earnings per share for the three months
ended March 31, 2003 because the effect was antidilutive.
5. Retirement Plan
The net periodic pension benefit cost included in the statement of
income is as follows:
Three Months Ended March 31,
2004 2003
Service Cost $ -- $109,076
Interest Cost 249,163 272,382
Expected return of plan assets (205,090) (192,179)
Amortization of net loss from
prior periods 94,517 104,308
Net Pension Cost $138,590 $293,587
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
Liquidity and Capital Resources:
Cash flows from operating activities increased during the three months
ended March 31, 2004, due to higher operating results in the Musical
Instruments, Electronic Assemblies and Data Communications segments and a
decrease in accounts receivable in the Data Communications segment. Cash
inflows from these activities were partially offset by a $1,000,000
contribution made to the Company's defined benefit pension plans. Cash
flows from operating activities during the three month period ended March
31, 2003, included a decrease in accounts receivable and accounts payable
in the Data Communications segment related to a large customer order
produced and shipped in the fourth quarter of 2002.
Cash flows from investing activities for the three months ended March
31, 2004, includes approximately $500,000 of plant and equipment additions
primarily computer and test equipment purchased for the Data Communications
segment.
Sales and Operating Income
Three Months Ended March 31,
2004 2003
Net Sales to Unaffiliated Customers
Musical Instruments $ 5,066,244 $ 5,370,725
Data Communications 10,572,051 7,331,983
Electronic Assemblies 628,554 776,393
Audio Equipment 451,867 395,363
Total $16,718,716 $13,874,464
Intersegment Sales
Musical Instruments $ 257,369 $ 159,311
Data Communications 20,174 --
Electronic Assemblies 331,855 --
Audio Equipment 2,782 12,051
Total $ 612,180 $ 171,362
Income (Loss) from Operations
Musical Instruments $ 26,774 $ (89,194)
Data Communications 882,236 245,832
Electronic Assemblies (21,466) (235,010)
Audio Equipment (167,027) (46,013)
Total $ 720,517 $ (124,385)
Musical Instruments Segment
Sales decreased $304,481 in the first quarter of 2004 when compared to
the same period in 2003 due to lower order volume during the second half of
2003, which management believes was attributable to the overall economic
slowdown. While the order rate has improved during the first quarter of
2004, as compared to the same period in 2003, the order backlog at the
beginning of 2004 was lower than at the beginning of 2003 resulting in
fewer orders produced and shipped in the first quarter of 2004 versus 2003.
Gross profit margins increased to 27.1% of sales in the first quarter of
2004 from 22.4% in the same period in 2003. This increase is due to cost
reduction efforts that were initiated during 2003 to reduce material and
other operating costs.
Selling, general and administrative expenses and research and
development expenditures increased slightly during the three months ended
March 31, 2004 when compared to the same period in 2003.
Data Communications Segment
This segment's sales in the first quarter of 2004 increased $3,240,068
(44%) when compared to the same period in 2003. This increase is due to
higher order volume which management believes is attributable to an
improvement in the data communications market and the timing of completing
sales with larger customers.
Gross profit margins in the first quarter of 2004 increased to 58.7%,
compared to 54.9% in the same period of 2003, due to reductions in product
costs and changes in product mix.
Sales and marketing expenses increased approximately $580,000 (35%)
during the three month ended March 31, 2003, when compared to the same
period in 2003, due to the addition of sales and marketing personnel,
higher travel costs related to international sales efforts and higher sales
volume.
General and administrative expenditures in the first quarter of 2004
increased slightly when compared to the same period in 2003.
Research and development expenses increased approximately $884,000 (58%)
in the first quarter of 2004 when compared to the same period in 2003.
This increase is related to increased expenditures incurred in connection
with the acquisition of Avail Networks and additional personnel and related
costs associated with the development of next generation products.
Electronic Assemblies Segment
Sales for the first quarter of 2004 decreased $147,839, when compared to
the same period in 2003, due to lower order volume from the Company's
contract manufacturing customers. This segment is focused on diversifying
its customer base.
The gross profit margin was 6.3% in the first quarter of 2004, compared
to a loss of approximately $(148,006) (19%) in the first quarter of 2003.
This increase is due to cost reduction efforts that were initiated during
2003 to reduce operating costs.
Selling, general and administrative expenses decreased slightly when
compared to the same period in 2003.
Audio Equipment Segment
Sales for the first quarter of 2004 increased slightly when compared to
the same period in 2003. Legacy Audio remains focused on developing a
quality independent dealer network of high end audio-video stores and
custom installers.
Gross profit margins in the first quarter of 2004 decreased to 34.2% as
compared to 39.2% for the same period in 2003, primarily due to reductions
in wholesale selling prices to comparable industry levels.
Selling, general and administrative costs for the period increased in
the first quarter of 2004 when compared to the same period in 2003.
Other Income and Expense
Investment income for the three months ended March 31, 2004 was lower
than the same period in 2003 due to lower rates of return available on
invested funds.
Income Taxes
The tax provision for the three months ended March 31, 2004 is based on
the estimated effective tax rate for the year, which is less than the
statutory rate due to tax credits and exempt income.
Contractual Obligations and Commercial Commitments
During the three months ended March 31, 2004, there have been no items
that significantly impacted the Company's commitments and contingencies as
disclosed in the notes to the 2003 consolidated financial statements as
filed on Form 10-K. In addition, the Company has no off balance sheet
arrangements.
Factors that May Affect Operating Results
The statements contained in this report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, including statements regarding the Company's expectations,
hopes, intentions or strategies regarding the future. Forward looking
statements include: statements regarding future products or product
development; statements regarding future research and development spending
and the Company's marketing and product development strategy, statements
regarding future production capacity. All forward looking statements
included in this document are based on information available to the Company
on the date hereof, and the Company assumes no obligation to update any
such forward looking statements. Readers are cautioned not to place undue
reliance on these forward looking statements, which reflect management's
opinions only as of the date hereof. Readers should carefully review the
risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission, including the Annual
Report on Form 10-K. It is important to note that the Company's actual
results could differ materially from those in such forward looking
statements. Some of the factors that could cause actual results to differ
materially are set forth below.
The Company has experienced and expects to continue to experience
fluctuations in its results of operations. Factors that affect the
Company's results of operations include the volume and timing of orders
received, changes in global economics and financial markets, changes in the
mix of products sold, market acceptance of the Company's and its customer's
products, competitive pricing pressures, global currency valuations, the
availability of electronic components that the Company purchases from
suppliers, the Company's ability to meet increasing demand, the Company's
ability to introduce new products on a timely basis, the timing of new
product announcements and introductions by the Company or its competitors,
changing customer requirements, delays in new product qualifications, the
timing and extent of research and development expenses and fluctuations in
manufacturing yields. As a result of the foregoing or other factors, there
can be no assurance that the Company will not experience material
fluctuations in future operating results on a quarterly or annual basis,
which would materially and adversely affect the Company's business,
financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No change from information disclosed in the Company's 2003 annual
report on form 10-K.
ITEM 4. 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 March 31, 2004.
There has been no change in the Company's internal control over
financial reporting that occurred during the quarter ended March 31,
2004 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(e) The following table sets forth certain information
relating to shares of the Company's common stock repurchased by the
Company during the quarter ended March 31, 2004.
Issuer Purchases of Equity Securities
Maximum
Number (or
Approximate
Total Dollar
Number of Value) of
Shares (or Shares (or
Units) Units)
Purchased that May
Total Average as Part of Yet Be
Number of Price Paid Publicly Purchased
Shares (or per Share Announced Under the
Units) (or Units) Plans or Plans or
Period Purchased Purchased Programs Programs
Month #1 (January 1-31, 2004) 2 $ 45.00 -- --
Month #2 (February 1-29, 2004) -- -- -- --
Month #3 (March 1-31, 2004) -- -- -- --
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
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 Audit Committee Charter
(b) Forms 8-K
1. The Company filed a Form 8-K dated February 13, 2004 announcing its
2003 earnings for the fourth quarter and full year results of
operations.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Allen Organ Company
(Registrant)
Date:May 14, 2004 /s/STEVEN MARKOWITZ
Steven Markowitz, President and Chief Executive Officer
Date:May 14, 2004 /s/NATHAN S. ECKHART
Nathan S. Eckhart, Vice President-Finance,
Chief Financial and Principal Accounting Officer