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 September 30, 1997
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 _____
Number of shares outstanding of each of the issuer's classes of common
stock, as of November 10, 1997:
Class A - Voting 84,112 shares
Class B - Non-voting 1,096,606 shares
ALLEN ORGAN COMPANY
INDEX
Part I Financial Information
Item 1.Financial Statements
Consolidated Condensed Statements of Income for the nine months
ended September 30, 1997 and 1996
Consolidated Condensed Balance Sheets at September 30, 1997 and
December 31, 1996
Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996
Notes to Consolidated Condensed Financial Statements
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II Other Information
Item 6.Exhibits and Reports on Form 8-K
Signatures
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 9 Months Ended:
9/30/97 9/30/96 9/30/97 9/30/96
Net Sales $11,159,819 $8,985,237 $29,145,811 $26,363,056
Cost and expenses
Costs of sales 7,385,097 6,138,645 19,565,726 17,193,168
Selling, general and
administrative 2,115,943 1,474,311 5,832,525 4,509,307
Research and
development 683,197 632,148 1,926,224 1,975,991
Total Costs and
Expenses 10,184,237 8,245,104 27,324,475 23,678,466
Income from operations 975,582 740,134 1,821,336 2,684,590
Other Income (Expense)
Investment and other
income 407,606 397,752 1,523,191 1,441,245
Interest expense -- (1,706) -- (10,309)
Minority interests in
consolidated subsidiaries 4,819 27,780 20,581 82,391
Total Other Income and
Expense 412,425 423,826 1,543,772 1,513,327
Income before taxes on
income 1,388,007 1,163,960 3,365,108 4,197,917
Provision for taxes on
income 255,000 400,000 940,000 1,447,000
Net Income $ 1,133,007 $ 763,960 $ 2,425,108 $ 2,750,917
Earnings per share $0.88 $0.58 $1.89 $2.05
Shares used in per
share calculation 1,285,336 1,344,314 1,285,336 1,344,314
Dividends per share -Cash $0.14 $0.13 $0.42 $0.39
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, Dec 31,
ASSETS 1997 1996
(Unaudited) (Audited)
Current Assets
Cash $ 461,439 $ 781,202
Investments Including Accrued Interest 20,018,888 29,016,935
Accounts Receivable 5,776,783 4,817,939
Inventories:
Raw Materials 8,451,239 6,449,729
Work in Process 7,555,549 5,912,456
Finished Goods 1,999,684 1,709,962
Total Inventories 18,006,472 14,072,147
Prepaid Income Taxes 99,180 397,404
Prepaid Expenses 270,727 142,769
Total Current Assets 44,633,489 49,228,396
Property, Plant and Equipment 19,749,874 17,741,131
Less Accumulated Depreciation (10,439,354) (9,893,616)
Total Property, Plant and Equipment 9,310,520 7,847,515
Other Assets
Prepaid Pension Costs 848,871 889,206
Inventory Held for Future Service 1,324,511 1,237,986
Note Receivable 203,557 163,148
Cash Value of Life Insurance 1,109,487 858,217
Intangible and Other Assets 4,509,926 3,742,178
Total Other Assets 7,996,352 6,890,735
Total Assets $61,940,361 $63,966,646
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 595,600 $ 396,173
Deferred Income Taxes 219,261 60,033
Other Accrued Expenses 527,017 499,355
Customer Deposits 1,303,280 761,739
Total Current Liabilities 2,645,158 1,717,300
Noncurrent Liabilities
Deferred Liabilities 830,783 782,189
Total Liabilities 3,475,941 2,499,489
STOCKHOLDERS' EQUITY
Common Stock 1997 1996
Class A 127,232 shares; 128,104 shares 127,232 128,104
Class B 1,410,761 shares; 1,409,889 shares 1,410,761 1,409,889
Capital in Excess of Par Value 12,758,610 12,758,610
Retained Earnings
Balance, Beginning 52,915,056 49,786,163
Net Income 2,425,108 3,865,876
Dividends - Cash 1997 and 1996 (536,717) (736,983)
Balance, End 54,803,447 52,915,056
Unrealized Gain (Loss) on Investments 383,768 89,380
Minority Interest 599,027 157,826
Treasury Stock
1997 - 43,120 Class A shares
314,155 Class B shares (11,618,425) --
1996 - 43,120 Class A shares
170,636 Class B shares -- (5,991,708)
Total Stockholders' Equity 58,464,420 61,467,157
Total Liabilities and Stockholders' Equity $61,940,361 $63,966,646
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 3 Months Ended: For the 9 Months Ended:
9/30/97 9/30/96 9/30/97 9/30/96
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $1,133,007 $ 763,960 $2,425,108 $2,750,917
Adjustments to reconcile
net income to net cash
provided by operating
activities
Depreciation and amortization 269,879 204,938 738,399 617,181
Minority interest in
consolidated subsidiaries 9,856 (27,780) (5,906) (82,391)
Change in assets and
liabilities,(net of
acquisition effects)
(Increase) Decrease in
accounts receivable (782,890)(1,033,598) (958,844) (1,016,873)
(Increase) Decrease in
inventories (631,352) (149,733) (3,336,000) (1,254,434)
(Increase) Decrease in
prepaid income taxes 8,359 (48,914) 298,224 807,716
(Increase) Decrease in
prepaid expenses 36,118 (34,385) (116,058) (152,083)
(Increase) Decrease in
prepaid pension costs (75,830) 62,625 40,335 70,205
(Decrease) Increase in
accounts payable 18,916 (53,933) 181,122 44,689
(Decrease) Increase in
accrued taxes -- (62,190) -- --
(Decrease) Increase in
accrued expenses (163,962) (193,329) 27,662 (1,397,263)
(Decrease) Increase in
customer deposits (24,152) 42,480 541,541 499,711
(Decrease) Increase in other
noncurrent liabilities 8,695 53,522 48,594 (6,254)
Net Cash Provided by (Used
in) Operating Activities (193,356) (476,337) (115,823) 881,121
CASH FLOW FROM INVESTING
ACTIVITIES
Payment for acquisition -- -- (1,512,000) --
Increase in other assets -- -- (71,950) --
Net additions to plant and
equipment (376,501) (121,770) (1,559,647) (396,221)
Increase in cash value
of life insurance (251,270) (222,130) (251,270) (222,130)
Increase in note receivable (40,409) (40,562) (40,409) (40,562)
Purchase of minority
shareholders' interest in
subsidiary -- -- -- (20,000)
Net sale (or purchase) of
investments 5,002,524 1,838,013 9,451,663 2,610,666
Net Cash Provided by (Used
in)Investing Activities 4,334,344 1,453,551 6,016,387 1,931,753
CASH FLOWS FROM FINANCING
ACTIVITIES
Reacquired Class B common
shares (3,763,487) (297,375) (5,626,717) (1,312,036)
Dividends paid in cash (166,435) (172,691) (536,717) (524,454)
Subsidiary company stock issued
to minority shareholders -- -- 18,382 4,840
Subsidiary company stock
reacquired from minority
shareholders (60,600) (3,572) (75,275) (3,572)
Net Cash Used In Financing
Activities (3,990,522) (473,638) (6,220,327) (1,835,222)
NET INCREASE (DECREASE) IN CASH 150,466 503,576 (319,763) 977,652
CASH, BEGINNING 310,973 670,176 781,202 196,100
CASH, ENDING $ 461,439 $1,173,752 $ 461,439 $1,173,752
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for:
Income Taxes $ 223,000 $ 530,000 $ 618,500 $ 823,338
Interest $ -- $ 1,706 $ -- $ 53,322
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Purchase price adjustment of
August 1, 1995 acquisition
Decrease of accrued liability incurred
to purchase inventory $ -- $ -- $ -- $ 630,885
Decrease in long term debt -- -- -- 1,735,000
Decrease in minority interest -- -- -- 86,641
Decrease in inventory -- -- -- (630,885)
Decrease in intangible assets
(Goodwill) -- -- -- (864,291)
Increase in current accrued
liabilities -- -- -- (957,350)
Total $ -- $ -- $ -- $ --
See accompanying notes.
ALLEN ORGAN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 1996 Annual Report on Form 10-K.
2. Acquisition of Assets
On April 1, 1997 the Company purchased a 75% interest in Legacy Audio in
exchange for $1,512,000 in cash.
In connection with the acquisition, the company established a new
subsidiary, Legacy Audio, Inc. (LAI), to acquire the assets of the seller.
A founding owner of the seller contributed the remaining 25% of the assets
of the seller to the new company in exchange for a 25% interest in LAI.
Additionally, this founding owner has been named the President and Chief
Designer of LAI.
The acquisition has been accounted for as a purchase. The results of
operations of LAI have been included in the Company's consolidated
condensed financial statements from the date of the acquisition. Assets
and liabilities have been recorded at their estimated fair market values
with the excess being recorded as goodwill.
3. Change in Accounting Estimate
During the third quarter of 1997 the Company re-evaluated the useful life
of intangible assets acquired through business acquisitions and began
amortizing these assets over useful lives of 3-20 years. Previously,
these intangible assets were amortized over 40 years. These changes will
result in an increase in amortization expense of approximately $70,000 a
quarter.
4. New Accounting Standards
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128") was issued in February 1997 and is effective for financial
statements issued after December 15, 1997. The statement establishes new
standards for computing and presenting earnings per share ("EPS") and will
require restatement of prior years' information. The presentation of
basic EPS and diluted EPS would have been the same as EPS actually
reported for the respective periods.
5. Pro Forma Financial Information
The following pro forma financial information has been prepared giving
effect to the acquisition of Legacy Audio, Inc. as if the transaction had
taken place at the beginning of the applicable period. The pro forma
financial information is not necessarily indicative of the results of
operations which would have been attained had the acquisition been
consummated on any of the foregoing dates or which may be attained in the
future.
For the 3 Months Ended: For the 9 Months Ended:
9/30/96 9/30/97 9/30/96
Net Sales $ 9,424,271 $ 29,607,614 $27,820,862
Net Income 766,081 2,509,211 2,763,427
Net Income Per Share $0.57 $1.95 $2.06
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 nine month period
ended September 30, 1997, primarily due to increased working capital
requirements, particularly inventory. Inventory increased approximately
$1,200,000, $750,000, and $1,300,000 respectively in the Musical Instruments,
Data Communications, and Electronic Assemblies segments during the nine months
ended September 30, 1997. Increases in the Musical Instruments segment are
primarily related to production start-up of new models introduced at the May
1997 Dealer Sales Seminar. The Data Communication segments inventory increase
is primarily due to increased order volume and changes in product mix to
system level products which are more complex and require longer lead times for
manufacture and pre-shipment testing. The increase in the Electronic
Assemblies segment is primarily due to increased order volume.
Cash used in financing activities related primarily to the repurchase of
Company stock.
Cash flows from investing activities reflects the Company's sale of short-term
investments net of amounts used to purchase equipment and the assets of Legacy
Audio. During the first nine months of 1997 the Company purchased
approximately $500,000 of additional automated equipment for use in the
manufacture of electronic assemblies. During the second quarter of 1997 the
Company began implementing new information systems and has invested nearly
$500,000 in software and computer equipment as part of this project which the
Company estimated will require another $300,000 to complete.
Sales and Operating Income
For the 3 Months Ended: For the 9 Months Ended
9/30/97 9/30/96 9/30/97 9/30/96
Net Sales
Musical Instruments $ 6,338,653 $6,065,251 $16,774,274 $17,920,842
Data Communications 2,549,548 2,111,289 6,832,738 5,605,243
Electronic Assemblies 1,614,003 808,698 4,303,685 2,836,971
Audio Equipment 657,615 -- 1,235,114 --
Total $11,159,819 $8,985,238 $29,145,811 $26,363,056
Income (loss) from operations
Musical Instruments $ 844,286 $ 635,556 $ 1,578,561 $ 2,304,267
Data Communications (188,241) (10,777) (429,693) (26,335)
Electronic Assemblies 215,539 115,355 463,936 406,658
Audio Equipment 103,998 -- 208,532 --
Total $ 975,582 $ 740,134 $ 1,821,336 $ 2,684,590
Musical Instruments Segment
Sales decreased $1,146,568 for the nine months ended September 30, 1997 when
compared to the same period in 1996 primarily from reduced foreign shipments
caused by the strengthening of the U.S. Dollar. Sales increased $273,402 for
the three months ended September 30, 1997 when compared to the same period in
1996 primarily from higher shipment of new organ models introduced in May
1997. The gross profit percentage decreased to 30% in the first nine months
of 1997 compared to 31% in the same period last year. This decline is due to
start-up expenses of new organ models introduced at the May 1997 Dealer Sales
Seminar, increases in overhead costs, and lower sales over which to absorb
fixed costs. The current quarter gross profit percentage was 30% compared to
27% in the third quarter of 1996. This increase is the result of higher sales
volume, improved operating efficiencies, and a more favorable product mix.
General and administrative expenses for the three and nine months ended
September 30, 1997 remained approximately the same as compared to the same
period in 1996. Research and development expenditures increased approximately
$36,000 during the nine months ended September 30, 1997 primarily due to new
model development. Selling and advertising costs increased approximately
$100,000 during the nine months ended September 30, 1997 as a result of
marketing and advertising of new products.
Data Communications Segment
Sales increased $438,259 and $1,227,495 respectively for the three and nine
months ended September 30, 1997 when compared to the same period in 1996 from
increased order volume. This is attributable to increased sales and marketing
efforts initiated since the acquisition. Gross profit margins decreased to
47% and 48% respectively for the three and nine months ended September 30,
1997 when compared to 48% and 52% in 1996 from competitive pressures on
selling prices and variations in product mix.
Selling, general and administrative expenses increased $305,346 and $805,114
respectively for the three and nine months ended September 30, 1997 when
compared to the same period in 1996. These increases are primarily due to the
expansion of the sales and marketing programs to further promote the segment's
products and obtain additional market share.
Research and development expenditures declined $96,340 for the nine months
ended September 30, 1997 when compared to the same period in 1996 primarily
due to the combining of the R&D efforts of VIR, Inc. and Linear Switch
Corporation. Research and development expenditures increased $41,059 for the
three months ended September 30, 1997 when compared to the same period in
1996, reflecting the Company's commitment to new product development and
support.
Electronic Assemblies Segment
Sales increased $805,305 and $1,466,714 respectively for the three and nine
months ended September 30, 1997 when compared to the same period in 1996 from
increased order volume and expanded customer base. The gross profit
percentage decreased to 15% in the first nine months of 1997 compared to 16%
for the same period in 1996. This decline is due to higher production costs
related to inefficiencies in production scheduling caused by the rapid growth
in sales. The current quarter gross profit percentage was 20% compared to 16%
in the third quarter of 1996. This increase is related to the higher sales
volume over which to absorb fixed costs. Selling, general and administrative
expenses remained approximately equal to the same periods in 1996.
Audio Equipment Segment
Sales for the three months ended September 30, 1997 increased $80,116 when
compared to the three months ended June 30, 1997. The gross profit percentage
was 49% of sales. Selling, general and administrative costs for the period
increased $45,403 as compared to the prior quarter from expanded sales and
marketing efforts and personnel additions required for sales and
administrative support.
Other Income and Expense
Investment and other income for the nine months ended September 30, 1997
increased slightly compared to the same period in 1996.
Provision for Taxes on Income
The decrease in the 1997 tax provision is attributable to a decrease in the
estimated effective tax rate for the current and prior tax year resulting from
the utilization of state tax planning opportunities.
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. 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 the
mix of products sold, market acceptance of the Company's and its customer's
products, competitive pricing pressures, global currency valuations, 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.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Forms 8-K
1. The Company filed a Form 8-K dated July 31, 1997
announcing the change in the Company's certifying accountant.
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: November 11, 1997 STEVEN MARKOWITZ
Steven Markowitz, President and
Chief Executive Officer
Date: November 11, 1997 LEONARD W. HELFRICH
Leonard W. Helfrich, Vice President-
Finance, Chief Financial and Principal
Accounting Officer