UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Under Section 13 or 15(D) of The Securities Exchange
Act of 1934 For Quarter Ended June 30, 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 August 13, 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 and
six months ended June 30, 2003 and 2002
Consolidated Condensed Balance Sheets at June 30, 2003 and
December 31, 2002
Consolidated Condensed Statements of Cash Flows for the three
and six months ended June 30, 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 4.Submission of Matters to a Vote of Security Holders
Item 6.Exhibits and Reports on Form 8-K
Signatures
Exhibits
PART I FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
For the 3 Months Ended: For the 6 Months Ended:
6/30/2003 6/30/2002 6/30/2003 6/30/2002
Net Sales $12,725,880 $17,403,733 $26,600,344 $33,381,221
Cost and Expenses
Costs of sales 7,503,053 10,245,150 16,102,563 19,594,210
Selling, general and
administrative 3,641,661 3,747,172 7,109,627 7,256,805
Research and
development 1,920,082 2,035,534 3,850,577 4,002,651
Total Costs and
Expenses 13,064,796 16,027,856 27,062,767 30,853,666
(Loss) Income from
Operations (338,916) 1,375,877 (462,423) 2,527,555
Investment and Other
Income 79,018 103,757 182,717 245,618
(Loss) Income Before
Taxes (259,898) 1,479,634 (279,706) 2,773,173
Income Tax Provision
(Benefit) (110,000) 470,000 (110,000) 832,000
Net (Loss) Income $(149,898) $1,009,634 $(169,706) $1,941,173
Basic and Diluted
(Loss) Earnings
Per Share $ (0.13) $ 0.86 $(0.15) $ 1.66
Weighted Average Shares
Used in Per Share
Calculation 1,163,662 1,170,321 1,163,662 1,170,321
Dividends Per Share -
Cash $ 0.14 $ 0.14 $ 0.28 $ 0.28
Total Comprehensive
(Loss) Income $(143,796) $1,054,941 $(166,118) $1,977,174
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, 2003 Dec 31, 2002
ASSETS (Unaudited) (Audited)
Current Assets
Cash $5,679,470 $4,515,189
Investments Including Accrued Interest 17,299,940 17,176,750
Accounts Receivable, net of reserves of
$565,203 and $502,209, respectively 5,952,896 12,184,564
Inventories:
Raw Materials 5,067,984 5,451,664
Work in Process 6,081,279 5,707,215
Finished Goods 4,300,891 5,064,803
Total Inventories 15,450,154 16,223,682
Prepaid Income Taxes 79,825 161,071
Prepaid Expenses 572,279 318,943
Deferred Income Taxes 1,994,713 1,992,694
Total Current Assets 47,029,277 52,572,893
Property, Plant and Equipment 27,527,301 27,328,631
Less Accumulated Depreciation (17,193,732) (16,471,137)
Net Property, Plant and Equipment 10,333,569 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 1,365,932 1,628,964
Goodwill, net 194,523 194,523
Other Assets 15,000 16,092
Total Other Assets 9,668,357 9,932,481
Total Assets $67,031,203 $73,362,868
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 763,714 $5,688,967
Other Accrued Expenses 2,654,736 2,638,258
Customer Deposits 2,490,175 2,693,980
Total Current Liabilities 5,908,625 11,021,205
Noncurrent Liabilities
Deferred and Other Noncurrent Liabilities 1,272,417 1,028,785
Accrued Pension Costs 4,534,663 5,006,546
Total Noncurrent Liabilities 5,807,080 6,035,331
Total Liabilities 11,715,705 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 (169,706) 2,685,357
Dividends - Cash 2003 and 2002 (325,727) (655,307)
Balance, End 56,772,330 57,267,763
Accumulated Other Comprehensive Loss (3,464,051) (3,460,463)
Sub-total 67,807,882 68,306,903
Treasury Stock
2003- 43,368 Class A shares
338,065 Class B shares (12,492,384) --
2002- 43,368 Class A shares
324,565 Class B shares -- (12,000,571)
Total Stockholders' Equity 55,315,498 56,306,332
Total Liabilities and Stockholders' Equity $67,031,203 $73,362,868
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 3 Months Ended: For the 6 Months Ended:
6/30/2003 6/30/2002 6/30/2003 6/30/2002
CASH FLOWS FROM OPERATING
ACTIVITIES
Net(loss) income $(149,898) $1,009,634 $(169,706) $1,941,173
Adjustments to reconcile net
(loss) income to net cash
provided by operating activities
Depreciation and amortization 614,720 703,509 1,220,789 1,419,455
Deferred income tax benefits (936) 18,347 (2,019) 19,031
Change in assets and liabilities
Accounts receivable 2,239,453 (843,689) 6,231,668 251,500
Inventories 506,179 1,021,806 773,528 489,000
Income taxes prepaid and
receivable (79,825) (525,598) 81,246 (278,778)
Prepaid expenses 71,958 42,525 (253,336) (163,993)
Other assets -- -- 1,092 --
Accounts payable (560,659) (10,481) (4,925,253) (165,805)
Accrued taxes on income (33,175) -- -- --
Accrued expenses 33,213 194,079 16,478 424,997
Customer deposits 55,083 176,691 (203,805) 69,239
Accrued pension costs (721,882) 293,486 (471,883) 173,443
Deferred and other noncurrent
liabilities 164,567 12,465 243,632 92,719
Net Cash Provided by
Operating Activities 2,138,798 2,092,774 2,542,431 4,271,981
CASH FLOW FROM INVESTING
ACTIVITIES
Increase in note receivable -- -- -- (400,184)
Net additions to plant and
equipment (179,117) (666,082) (368,662) (947,250)
Additions to goodwill and
intangible assets 6,886 -- (187,770) (2,780)
Net sale of short term
investments (66,500) 1,892,322 (126,778) 1,795,698
Net Cash (Used In) Provided
by Investing Activities (238,731) 1,226,240 (683,210) 445,484
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from sales of
subsidiary stock 1,350 -- 122,600 2,040
Reacquired Class B common
shares (491,813) -- (491,813) --
Dividends paid in cash (161,919) (163,845) (325,727) (327,690)
Net Cash Used In Financing
Activities (652,382) (163,845) (694,940) (325,650)
NET INCREASE IN CASH 1,247,685 3,155,169 1,164,281 4,391,815
CASH, BEGINNING 4,431,785 5,686,644 4,515,189 4,449,998
CASH, ENDING $5,679,470 $8,841,813 $5,679,470 $8,841,813
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid (refunded) for:
Income Taxes $ -- $ 995,598 $ (194,246) $1,110,778
Interest $ -- $ -- $ -- $ --
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Interim Financial Statements
The results of operations for the interim periods shown in this report
are not necessarily indicative of results to be expected for the fiscal
year. In the opinion of management, the information contained herein
reflects all adjustments necessary to make the results of operations
for the interim periods a fair statement of such operations. All such
adjustments are of a normal recurring nature.
Certain notes and other information have been condensed or omitted from
the interim financial statements presented in the Quarterly Report on
Form 10-Q. Therefore, these financial statements should be read in
conjunction with the Company's 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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Net (loss) income
As Reported $(149,898) $1,009,634 $ (169,706) $1,941,173
Total stock-based
employee compensation
benefit (expense)
determined under fair
value based method for
all awards, net of
related tax effects 11,790 (17,343) 23,580 (34,687)
Pro forma $(138,108) $992,291 $ (146,126) $1,906,486
(Loss) earnings per share
As reported $ (0.13) $ 0.86 $ (0.15) $ 1.66
Pro forma $ (0.12) $ 0.85 $ (0.13) $ 1.63
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
six months ended June 30, 2003 is summarized as follows:
Accrual at January 1, 2003 $ 300,000
Additions charged to warranty expense 60,886
Claims paid and charged against the accrual (30,886)
Accrual at June 30, 2003 $ 330,000
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 and six months ended
June 30, 2003 at a weighted average exercise price of $39.00 per share.
5. Subsequent Event
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 Avail products during the next 30 months.
Avail's intelligent last-mile broadband solutions enable service
providers worldwide 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.
The acquisition of Avail reinforces ERI's commitment to the access
network market. 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 have been minimal. With
the Frontera products ready for production, ERI will introduce them to
their established customer base. Due to lengthy sales cycles, these
products are not expected to add significant revenues in the near-term.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
Liquidity and Capital Resources:
Cash flows from operating activities during the three months ended June
30, 2003 were approximately equal to the same period in 2002 and decreased
during the six months ended June 30, 2003 primarily due to lower operating
income in the Musical Instruments and Data Communications segments.
Results of Operations:
Sales and Operating Income
For the 3 Months For the 6 Months
Ended: Ended:
6/30/2003 6/30/2002 6/30/2003 6/30/2002
Net Sales to
Unaffiliated Customers
Musical Instruments $ 4,819,569 $ 6,616,642 $10,190,294 $12,922,843
Data Communications 6,709,970 8,858,220 14,041,953 17,524,514
Electronic Assemblies 752,751 1,510,961 1,529,144 2,096,816
Audio Equipment 443,590 417,910 838,953 837,048
Total $12,725,880 $17,403,733 $26,600,344 $33,381,221
Intersegment Sales
Musical Instruments $ 254,398 $ 92,737 $ 413,709 $ 165,146
Data Communications -- -- -- --
Electronic Assemblies -- 6,616 -- 82,477
Audio Equipment 23,988 15,837 36,039 58,234
Total $ 278,386 $ 115,190 $ 449,748 $ 305,857
Income (Loss) from Operations
Musical Instruments $ (423,300) $ 821,967 $ (514,389) $ 1,645,877
Data Communications 301,563 772,376 553,259 1,472,228
Electronic Assemblies (174,446) (110,660) (409,456) (348,462)
Audio Equipment (42,733) (107,806) (91,837) (242,088)
Total $ (338,916) $ 1,375,877 $ (462,423) $ 2,527,555
Musical Instruments Segment
Sales decreased $1,797,073 and $2,732,549, respectively, for the three
and six months ended June 30, 2003 when compared to the same periods in
2002 due to lower order volume, which management believes is attributable
to the overall economic slowdown. The first six months of 2002 sales were
also higher due to the shipment of organs from the order backlog, which was
higher at the beginning of 2002.
The gross profit percentage decreased to 19.1% and 20.8%, respectively,
in the three and six months ended June 30, 2003 from 33.7% and 33.3%,
respectively, in the same periods in 2002. These decreases are due to
lower sales volume over which to absorb fixed costs and higher operating
costs including employee pension expense. The Company has taken steps to
reduce its operating costs at the Macungie, PA plant, including reductions
in personnel.
Selling, general and administrative, research and development expenses
increased slightly during the three and six months ended June 30, 2003 when
compared to the same periods in 2002 due primarily to higher pension
expense.
Data Communications Segment
Sales decreased $2,148,250 and $3,482,561, respectively, for the three
and six months ended June 30, 2003 when compared to the same periods 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 increased to 62.3% and 58.4%, respectively, during
the three and six months ended June 30, 2003 from 54.5% and 53.6%. These
increases are primarily related to $1,400,000 of revenue recognized on
product software development for a customer during the second quarter of
2003. Excluding this item, gross margins were approximately equal to the
same periods in 2002.
Sales & marketing and general & administrative expenditures during the
three and six months ended June 30, 2003 were approximately equal to the
same periods in 2002.
Research and development expenses decreased approximately $181,000 (11%)
and $312,000 (9%), respectively, during the three and six months ended June
30, 2003 when compared to the same periods in 2002. The 2002 expenses
included product development costs related to the DNX-1u, which was
introduced in mid-2002. Research and development expenses will increase in
future periods due to the acquisition of Avail Networks discussed in Note 5
above. In connection with this acquisition, ERI will employ approximately
10 additional development people.
Future sales visibility remains limited throughout the data
communications market that ERI serves with certain 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 for operating results in future quarters.
Electronic Assemblies Segment
Sales decreased $758,210 and $567,672, respectively, for the three and
six months ended June 30, 2003, when compared to the same periods in 2002,
due to lower order volume from the Company's contract manufacturing
customers who were affected by the economic slowdown. This segment is
focused on diversifying its customer base and 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 $(86,000) (11%) and
$(234,000) (15%), respectively, for the three and six months ended June 30,
2003, compared to a loss of approximately $(24,000) (2%) and $(178,000)
(8%) during the same periods in 2002. These losses are primarily due to
lower sales volume over which to absorb fixed costs. Selling, general and
administrative expenses during the three and six months ended June 30, 2003
were approximately equal to the same periods in 2002. The Company has
taken steps to reduce its operating costs at the Macungie, PA plant
including reductions in personnel.
Audio Equipment Segment
Sales for the three and six months ended June 30, 2003 increased
slightly when compared to the same periods in 2002. Legacy Audio remains
focused on developing a quality independent dealer network of high end
audio video stores and custom installers.
Gross profit margins were 34% and 36%, respectively, in the three and
six months ended June 30, 2003, as compared to 21% and 25% in the same
periods 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
during the three and six months ended June 30, 2003 when compared to the
same periods in 2002.
Other Income and Expense
Investment income decreased during the three and six months ended June
30, 2003 when compared to the same periods in 2002 due to lower rates of
return available on invested funds.
Income Taxes
The tax provision for the three and six months ended June 30, 2003 are
based on the estimated effective tax rate for the year, which is less than
the statutory rate due to tax credits and exempt income.
Factors that May Affect Operating Results
The statements contained in this report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, including statements regarding the Company's expectations,
hopes, intentions or strategies regarding the future. Forward looking
statements include: statements regarding future products or product
development; statements regarding future research and development spending
and the Company's marketing and product development strategy, statements
regarding future production capacity. All forward looking statements
included in this document are based on information available to the Company
on the date hereof, and the Company assumes no obligation to update any
such forward looking statements. Readers are cautioned not to place undue
reliance on these forward looking statements, which reflect management's
opinions only as of the date hereof. Readers should carefully review the
risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission, including the Annual
Report on Form 10-K. It is important to note that the Company's actual
results could differ materially from those in such forward looking
statements. Some of the factors that could cause actual results to differ
materially are set forth below.
The Company has experienced and expects to continue to experience
fluctuations in its results of operations. Factors that affect the
Company's results of operations include the volume and timing of orders
received, changes in global economics and financial markets, changes in the
mix of products sold, market acceptance of the Company's and its customer's
products, competitive pricing pressures, global currency valuations, the
availability of electronic components that the Company purchases from
suppliers, the Company's ability to meet increasing demand, the Company's
ability to introduce new products on a timely basis, the timing of new
product announcements and introductions by the Company or its competitors,
changing customer requirements, delays in new product qualifications, the
timing and extent of research and development expenses and fluctuations in
manufacturing yields. As a result of the foregoing or other factors, there
can be no assurance that the Company will not experience material
fluctuations in future operating results on a quarterly or annual basis,
which would materially and adversely affect the Company's business,
financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No change from information disclosed in the Company's 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 4. Submission of Matters to a Vote of Security Holders
(a) Annual Meeting: April 24, 2003
(b) Election of the following directors for a one-year term:
Steven Markowitz, Eugene Moroz, Leonard Helfrich, Martha
Markowitz, Orville Hawk, Albert Schuster, Jeffrey Schucker,
Ernest Choquette and Michael Doyle.
(c) In addition to the election of directors and the waiver of
reading of the minutes of the prior meeting, the shareholders
ratified charitable deductions made in 2002 and all contracts,
agreements, and employments by the Board of Directors and
officers since the previous annual meeting in April 2002. All
resolutions were adopted by the vote of all shareholders
present, in person or proxy.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
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
(b) No reports on Form 8-K were filed during the quarter ended June 30,
2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Allen Organ Company
(Registrant)
Date: August 13, 2003 /s/STEVEN MARKOWITZ
Steven Markowitz, President and Chief
Executive Officer
Date: August 13, 2003 /s/NATHAN S. ECKHART
Nathan S. Eckhart, Vice President-Finance,
Chief Financial and Principal Accounting Officer