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, 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) (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 8, 2003:
Class A - Voting 83,864 shares
Class B - Non-voting 1,072,696 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, 2003 and 2002
Consolidated Condensed Balance Sheets at March 31, 2003 and
December 31, 2002
Consolidated Condensed Statements of Cash Flows for the three
months ended March 31, 2003 and 2002
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 6.Exhibits and Reports on Form 8-K
Signatures
Certifications
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,
2003 2002
Net Sales $13,874,464 $15,977,488
Costs and Expenses
Costs of sales 8,599,510 9,349,060
Selling, general and administrative 3,467,966 3,509,633
Research and development 1,930,495 1,967,117
Total costs and expenses 13,997,971 14,825,810
(Loss) Income from Operations (123,507) 1,151,678
Interest and Other Income 103,699 141,861
(Loss) Income Before Taxes (19,808) 1,293,539
Income Taxes -- 362,000
Net (Loss) Income $ (19,808) $ 931,539
Basic and Diluted (Loss)
Earnings Per Share $(0.02) $0.80
Weighted Average Shares Used in
Per Share Calculation 1,170,160 1,170,321
Dividends Per Share - Cash $0.14 $0.14
Total Comprehensive (Loss) Income $ (22,322) $ 922,233
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, Dec 31,
ASSETS 2003 2002
(Unaudited) (Audited)
Current Assets
Cash $ 4,431,785 $ 4,515,189
Investments Including Accrued Interest 17,234,514 17,176,750
Accounts Receivable, net of reserves of
$558,753 and $502,209, respectively 8,192,349 12,184,564
Inventories:
Raw Materials 5,143,849 5,451,664
Work in Process 5,629,460 5,707,215
Finished Goods 5,183,024 5,064,803
Total Inventories 15,956,333 16,223,682
Prepaid Income Taxes -- 161,071
Prepaid Expenses 644,237 318,943
Deferred Income Taxes 1,993,777 1,992,694
Total Current Assets 48,452,995 52,572,893
Property, Plant and Equipment 27,504,001 27,328,631
Less Accumulated Depreciation (16,903,968) (16,471,137)
Net Property, Plant and Equipment 10,600,033 10,857,494
Other Assets
Note Receivable from Related Party 2,397,291 2,397,291
Cash Value of Life Insurance 2,273,163 2,273,163
Deferred Income Taxes 3,422,448 3,422,448
Intangible Assets, net 1,543,307 1,628,964
Goodwill, net 194,523 194,523
Other Assets 15,000 16,092
Total Other Assets 9,845,732 9,932,481
Total Assets $68,898,760 $73,362,868
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 1,324,373 $ 5,688,967
Accrued Income Taxes 33,175 --
Other Accrued Expenses 2,621,523 2,638,258
Customer Deposits 2,435,092 2,693,980
Total Current Liabilities 6,414,163 11,021,205
Noncurrent Liabilities
Deferred and Other Noncurrent Liabilities 1,107,850 1,028,785
Accrued Pension Costs 5,256,545 5,006,546
Total Noncurrent Liabilities 6,364,395 6,035,331
Total Liabilities 12,778,558 17,056,536
STOCKHOLDERS' EQUITY
Common Stock 2003 2002
Class A 127,232 shares; 127,232 shares 127,232 127,232
Class B 1,410,761 shares; 1,410,761 shares 1,410,761 1,410,761
Capital in Excess of Par Value 12,961,610 12,961,610
Retained Earnings
Balance, Beginning 57,267,763 55,237,713
Net (Loss) Income (19,808) 2,685,357
Dividends - Cash 2003 and 2002 (163,808) (655,307)
Balance, End 57,084,147 57,267,763
Accumulated Other Comprehensive Loss (3,462,977) (3,460,463)
68,120,773 68,306,903
Treasury Stock
2003-43,368 Class A shares;
324,565 Class B shares (12,000,571) --
2002-43,368 Class A shares;
324,565 Class B shares -- (12,000,571)
Total Stockholders' Equity 56,120,202 56,306,332
Total Liabilities and Stockholders' Equity $68,898,760 $73,362,868
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net(loss) income $ (19,808) $ 931,539
Adjustments to reconcile net (loss) income
to net cash provided by operating activities
Depreciation and amortization 606,069 715,946
Deferred income taxes (1,083) 684
Change in assets and liabilities
Accounts receivable 3,992,215 1,095,189
Inventories 267,349 (532,806)
Prepaid income taxes 161,071 246,820
Prepaid expenses (325,294) (206,518)
Other assets 1,092 --
Accounts payable (4,364,594) (155,324)
Accrued income taxes 33,175 --
Other accrued expenses (16,735) 230,918
Customer deposits (258,888) (107,452)
Accrued pension costs 249,999 (120,043)
Deferred and other noncurrent liabilities 79,065 80,254
Net Cash Provided by Operating Activities 403,633 2,179,207
CASH FLOW FROM INVESTING ACTIVITIES
Increase in note receivable -- (400,184)
Net additions to plant and equipment (189,545) (281,168)
Additions to goodwill and intangible assets (194,656) (2,780)
Net purchase of short term investments (60,278) (96,624)
Net Cash Used In Investing Activities (444,479) (780,756)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of subsidiary
stock options 121,250 2,040
Dividends paid in cash (163,808) (163,845)
Net Cash Used In Financing Activities (42,558) (161,805)
NET (DECREASE) INCREASE IN CASH (83,404) 1,236,646
CASH, BEGINNING 4,515,189 4,449,998
CASH, ENDING $4,431,785 $5,686,644
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid (refunded) for:
Income Taxes $ (194,246) $ 115,180
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 2002 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 (loss) income
and earnings per share would have been decreased as follows:
Three Months Ended March 31,
2003 2002
Net (loss) income
As reported $(19,808) $ 931,539
Total stock-based employee
compensation benefit (expense) determined
under fair value based method for all
awards, net of related tax effects 11,790 (17,344)
Pro forma $(8,018) $ 914,195
(Loss) Earnings per share
As reported $ (0.02) $ 0.80
Pro forma $ (0.01) $ 0.78
The fair value of each option granted is estimated on the grant
date using the Black-Scholes option pricing model. The following
assumptions were made in estimating the fair value of options granted
under the Allen Organ Company stock option plan:
Assumptions
Dividend yield 1.40%
Risk-free interest rate 2.50%
Expected life 7 years
Expected volatility 10%
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 during the
three months ended March 31, 2003 is summarized as follows:
Accrual at January 1, 2003 $ 300,000
Additions charged to warranty expense 30,443
Claims paid and charged against the accrual (15,443)
Accrual at March 31, 2003 $ 315,000
4. Earnings Per Share
Outstanding stock options were not included in computing earnings per
share because their effect was antidilutive as the exercise price of
the options was above the average trading price of the underlying
stock. Options excluded were 12,000 for the three months ended March
31, 2003 at a weighted average exercise price of $39.00 per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
Liquidity and Capital Resources:
Cash flows from operating activities decreased during the three month
period ended March 31, 2003, primarily due to lower operating income in the
Musical Instruments and Data Communications segments. Cash flows from
operating activities during the three months ended March 31, 2002 also
included a decrease in accounts receivable primarily in the Data
Communications segment.
Sales and Operating Income
Three Months Ended March 31,
2003 2002
Net Sales to Unaffiliated Customers
Musical Instruments $ 5,370,725 $ 6,306,201
Data Communications 7,331,983 8,666,294
Electronic Assemblies 776,393 585,855
Audio Equipment 395,363 419,138
Total $13,874,464 $15,977,488
Intersegment Sales
Musical Instruments $ 159,311 $ 72,409
Data Communications -- --
Electronic Assemblies -- 75,861
Audio Equipment 12,051 42,397
Total $ 171,362 $ 190,667
(Loss) Income from Operations
Musical Instruments $ (91,089) $ 823,910
Data Communications 251,696 699,852
Electronic Assemblies (235,010) (237,802)
Audio Equipment (49,104) (134,282)
Total $ (123,507) $ 1,151,678
Musical Instruments Segment
Sales decreased $935,476 in the first quarter of 2003 when compared to
the same period in 2002 due to lower order volume, which management
believes is attributable to the overall economic slowdown. The first
quarter of 2002 sales were also higher due to the shipment of organs from
the order backlog which was higher at the beginning of 2002.
Gross profit margins decreased to 22.4% of sales in the first quarter of
2003 from 32.8% in the same period in 2002. This decrease is due to higher
operating costs including employee pension expense and lower sales volume
over which to absorb fixed costs.
Selling, general and administrative expenses and research and
development expenditures increased slightly during the three months ended
March 31, 2003 when compared to the same period in 2002.
Data Communications Segment
This segment's sales in the first quarter of 2003 decreased $1,334,311
when compared to the same period in 2002. This decrease is attributable to
the continued economic weakness in the data communications market and the
timing of completing sales with larger customers.
Gross profit margins in the first quarter of 2003 increased to 54.9%
compared to 52.6% in the same period of 2002 due to changes in product mix.
Sales and marketing and general and administrative expenditures in the
first quarter of 2003 were approximately equal to the same period in 2002.
Research and development expenses decreased approximately $131,000 (8%)
in the first quarter of 2003 when compared to the same period in 2002. The
2002 expenses included product development costs related to the DNX-1u,
which was introduced in mid-2002.
Future sales visibility remains limited throughout the data
communications market that ERI serves with many companies that buy Data
Communications equipment continuing to lower their capital expenditure
spending for such equipment. These factors, along with continued
uncertainty in completing sales to larger accounts, create significant
uncertainty of operating results in future quarters.
Electronic Assemblies Segment
Sales for the first quarter of 2003 increased $190,538 when compared to
the same period in 2002 from higher order volume from the Company's
contract manufacturing customers. This segment is focused on diversifying
its customer base and though this market is very competitive it has been
successful in obtaining new customers. The potential sales significance of
these new accounts cannot be determined at this time.
The gross profit margin was a loss of approximately $(148,006) (19%) and
$(154,000) (27%) in the first quarter of 2003 and 2002, respectively.
Selling, general and administrative expenses increased slightly when
compared to the same period in 2002.
Audio Equipment Segment
Sales for the first quarter of 2003 decreased slightly when compared to
the same period in 2002. Legacy Audio remains focused on developing a
quality independent dealer network of high end audio video stores and
custom installers. While the Company has succeeded in adding additional
distribution, sales from these channels have not yet completely offset the
sales that previously came from Legacy's direct marketing program.
Gross profit margins in the first quarter of 2003 increased to 39.2% as
compared to 28.7% for the same period in 2002, primarily due to lower
operating costs related to the closure of the Springfield, IL plant and
consolidation of all production into the Macungie, PA plant.
Selling, general and administrative costs for the period decreased in
the first quarter of 2003 when compared to the same period in 2002.
Other Income and Expense
Investment income for the three months ended March 31, 2003 was lower
than the same period in 2002 due to lower rates of return available on
invested funds.
Income Taxes
The tax provision for the three months ended March 31, 2003 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.
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 2002 annual
report on form 10-K.
ITEM 4. CONTROLS AND PROCEDURES.
Within ninety days prior to the filing of this Report, the Company's
Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's disclosure
controls and procedures, which are designed to insure that the Company
records, processes, summarizes and reports in a timely and effective
manner the information required to be disclosed in the reports filed
with or submitted to the Securities and Exchange Commission. Based
upon this evaluation, they concluded that, as of the date of the
evaluation, the Company's disclosure controls are effective. Since the
date of this evaluation, there have been no significant changes in the
Company's internal controls or in other factors that could
significantly affect those controls.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Forms 8-K
1. The Company filed a Form 8-K dated February 13, 2003 announcing that
its subsidiary Eastern Research, Inc. had been chosen by Harris
Corporation as a supplier of its ISP Intelligent Switch Patch System
for the FAA Telecommunications Infrastructure (FTI) Program.
2. The Company filed a Form 8-K dated February 28, 2003 announcing its
2002 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 8, 2003 /s/STEVEN MARKOWITZ
Steven Markowitz, President and Chief
Executive Officer
Date:May 8, 2003 /s/NATHAN S. ECKHART
Nathan S. Eckhart, Vice President-Finance,
Chief Financial and Principal Accounting
Officer
ALLEN ORGAN COMPANY AND SUBSIDIARIES
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Steven Markowitz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allen Organ
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b)any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/STEVEN MARKOWITZ
Steven Markowitz
Chief Executive Officer
May 8, 2003
ALLEN ORGAN COMPANY AND SUBSIDIARIES
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Nathan S. Eckhart, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allen Organ
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b)any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/NATHAN S. ECKHART
Nathan S. Eckhart
Chief Financial Officer
May 8, 2003