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, 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 August 12, 1997:
Class A - Voting 84,112 shares
Class B - Non-voting 1,112,773 shares
<PAGE>
ALLEN ORGAN COMPANY
INDEX
Part I Financial Information
Item 1.Financial Statements
Consolidated Condensed Statements of Income for the six months
ended June 30, 1997 and 1996
Consolidated Condensed Balance Sheets at June 30, 1997 and
December 31, 1996
Consolidated Condensed Statements of Cash Flows for the six
months ended June 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 4.Submission of Matters to a Vote of Security Holders
Item 5.Other Information
Item 6.Exhibits and Reports on Form 8-K
Signatures
<PAGE>
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:
6/30/97 6/30/96 6/30/97 6/30/96
Net Sales $9,107,033 $8,928,612 $17,985,992 $17,377,818
Cost and expenses
Costs of sales 6,307,370 5,659,230 12,180,629 11,054,523
Selling, general and
administrative 1,963,398 1,557,709 3,716,582 3,034,996
Research and
development 633,407 682,334 1,243,027 1,343,843
Total Costs and
Expenses 8,904,175 7,899,273 17,140,238 15,433,362
Income from operations 202,858 1,029,339 845,754 1,944,456
Other Income (Expense)
Interest and other
income 703,407 421,238 1,115,585 1,043,493
Interest expense -- -- -- (8,603)
Minority interests in
consolidated subsidiaries 7,112 32,392 15,762 54,611
Total Other Income and
Expense 710,519 453,630 1,131,347 1,089,501
Income before taxes on
income 913,377 1,482,969 1,977,101 3,033,957
Provision for taxes on
income 314,000 505,000 685,000 1,047,000
Net Income $ 599,377 $ 977,969 $ 1,292,101 $ 1,986,957
Earnings per share $0.45 $0.73 $0.98 $1.47
Shares used in per
share calculation 1,319,271 1,350,739 1,319,271 1,350,739
Dividends per share -Cash $0.14 $0.13 $0.28 $0.26
See accompanying notes.
<PAGE>
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, Dec. 31,
ASSETS 1997 1996
(Unaudited) (Audited)
Current Assets
Cash $ 310,973 $ 781,202
Investments Including Accrued Interest 24,753,279 29,016,935
Accounts Receivable 4,993,893 4,817,939
Inventories:
Raw Materials 8,332,518 6,449,729
Work in Process 7,037,566 5,912,456
Finished Goods 2,097,515 1,709,962
Total Inventories 17,467,599 14,072,147
Prepaid Income Taxes 107,539 397,404
Prepaid Expenses 306,845 142,769
Total Current Assets 47,940,128 49,228,396
Property, Plant and Equipment 19,396,765 17,741,131
Less Accumulated Depreciation (10,262,992) (9,893,616)
Total Property, Plant and Equipment 9,133,773 7,847,515
Other Assets
Prepaid Pension Costs 773,041 889,206
Inventory Held for Future Service 1,232,032 1,237,986
Note Receivable 163,148 163,148
Cash Value of Life Insurance 858,217 858,217
Intangible and Other Assets 4,580,051 3,742,178
Total Other Assets 7,606,489 6,890,735
Total Assets $64,680,390 $63,966,646
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 576,684 $ 396,173
Deferred Income Taxes 134,846 60,033
Other Accrued Expenses 690,979 499,355
Customer Deposits 1,327,432 761,739
Total Current Liabilities 2,729,941 1,717,300
Noncurrent Liabilities
Deferred Liabilities 822,088 782,189
Total Liabilities 3,552,029 2,499,489
STOCKHOLDERS' EQUITY
Common Stock 1997 1996
Class A 128,104 shares; 128,104 shares 128,104 128,104
Class B 1,409,889 shares; 1,409,889 shares 1,409,889 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 1,292,101 3,865,876
Dividends - Cash 1997 and 1996 (370,282) (736,983)
Balance, End 53,836,875 52,915,056
Unrealized Gain on Investments 200,050 89,380
Minority Interests 649,771 157,826
Treasury Stock
1997 - 43,120 Class A shares
217,840 Class B shares (7,854,938) --
1996 - 43,120 Class A shares
170,636 Class B shares -- (5,991,708)
Total Stockholders' Equity 61,128,361 61,467,157
Total Liabilities and Stockholders' Equity $64,680,390 $63,966,646
See accompanying notes.
<PAGE>
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 3 Months For the 6 Months
Ended: Ended:
6/30/97 6/30/96 6/30/97 6/30/96
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 599,377 $ 977,969 $1,292,101 $1,986,957
Adjustments to reconcile net
income to net cash provided by
operating activities
Depreciation and amortization 241,590 199,711 468,520 412,243
Minority interest in
consolidated subsidiaries (7,112) (32,392) ( 15,762) (54,611)
Change in assets and liabilities,
(net of acquisition effects)
(Increase) Decrease in
accounts receivable (87,833) 61,679 (175,954) 16,725
(Increase) Decrease in
inventories (1,502,425) (584,434) (2,704,648)(1,104,701)
(Increase) Decrease in prepaid
income taxes 143,000 316,630 289,865 856,630
(Increase) Decrease in prepaid
expenses (77,820) 53,488 (152,176) (117,698)
(Increase) Decrease in prepaid
pension costs 48,668 (112,420) 116,165 7,580
(Decrease) Increase in
accounts payable (126,654) (5,797) 162,206 98,622
(Decrease) Increase in accrued
income taxes -- 62,190 -- 62,190
(Decrease) Increase in accrued
expenses (58,252) (1,042,861) 191,624 (1,203,934)
(Decrease) Increase in
customer deposits 744,652 240,048 565,693 457,231
(Decrease) Increase in other
noncurrent liabilities 41,774 (17,865) 39,899 (59,776)
Net Cash (Used In) Provided
by Operating Activities (41,035) 115,946 77,533 1,357,458
CASH FLOW FROM INVESTING
ACTIVITIES
Payment for acquisition (1,512,000) -- (1,512,000) --
Increase in other assets (71,950) -- (71,950) --
Net additions to plant and
equipment (711,482) (157,705) (1,183,146) (274,451)
Purchase of minority
shareholders' interest in
subsidiary -- -- -- (20,000)
Net sale (or purchase) of
short term investments 3,863,863 1,063,987 4,449,139 772,653
Net Cash Provided by (Used
In) Investing Activities 1,568,431 906,282 1,682,043 478,202
CASH FLOWS FROM FINANCING
ACTIVITIES
Reacquired Class B common
shares (1,834,342) (620,281) (1,863,230)(1,014,661)
Dividends paid in cash (184,964) (174,581) (370,282) (351,763)
Subsidiary stock reacquired
from minority shareholder -- -- (14,675) --
Subsidiary company stock
issued to minority shareholder -- 4,840 18,382 4,840
Net Cash Used In Financing
Activities (2,019,306) (790,022) (2,229,805)(1,361,584)
NET (DECREASE) INCREASE IN CASH (491,910) 232,206 (470,229) 474,076
CASH, BEGINNING 802,883 437,970 781,202 196,100
CASH, ENDING $ 310,973 $ 670,176 $ 310,973 $ 670,176
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for:
Income Taxes 171,500 293,338 395,500 293,338
Interest -- -- -- 51,616
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Purchase price adjustment of
August 1, 1995 acquisition:
Decrease in accrued liability $ -- $ -- $ -- $ 630,885
incurred to purchase inventory
Decrease in long term debt -- -- -- 1,735,000
Decrease in minority interest -- -- -- 86,641
Decrease in inventory -- -- -- (630,885)
Decrease in intangible asset -- -- -- (864,291)
(Goodwill)
Increase in current accrued -- -- -- (957,350)
liabilities
Total $ -- $ -- $ -- $ --
See accompanying notes.
<PAGE>
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 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. 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. This
statement simplifies the standards for computing EPS previously found
in APB Opinion 15. It replaces the presentation of primary and fully
diluted EPS with a presentation of basic EPS and diluted EPS, requires
a dual presentation on the face of the financial statements, and
requires a reconciliation of basic EPS to diluted EPS. The
presentation of basic EPS and diluted EPS would have been the same as
EPS actually reported for the respective periods.
4. 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 6 Months Ended:
6/30/96 6/30/97 6/30/96
Net Sales $ 9,428,978 $18,447,795 $18,396,591
Net Income 985,551 1,271,914 2,002,904
Net Income Per Share $0.73 $0.96 $1.48
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
Liquidity and Capital Resources:
Cash flows from operating activities decreased in both the three and
six month periods ended June 30, 1997, primarily due to increased
working capital requirements, particularly inventory. Inventory
increased approximately $1,000,000, $925,000 and $700,000 respectively
in the Musical Instruments, Data Communications and Electronic
Assemblies segments during the six months ended June 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 increase in the Data Communication segment is
primarily due to higher order volume and changes in product mix towards
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 six 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 $400,000 in software and
computer equipment as part of this project which the Company estimates
will require another $300,000 to complete.
Results of Operations:
Sales and Operating Income
For the 3 Months Ended: For the 6 Months Ended:
6/30/97 6/30/96 6/30/97 6/30/96
Net Sales
Musical Instruments $4,908,158 $5,972,198 $10,435,621 $11,855,591
Data Communications 2,129,804 1,864,383 4,283,190 3,493,954
Electronic Assemblies 1,491,572 1,092,031 2,689,682 2,028,273
Audio Equipment 577,499 -- 577,499 --
Total $9,107,033 $8,928,612 $17,985,992 $17,377,818
Income (loss) from operations
Musical Instruments $ 187,284 $ 929,340 $ 734,275 $ 1,668,711
Data Communications (190,223) (57,065) (241,452) (15,558)
Electronic Assemblies 101,263 157,064 248,397 291,303
Audio Equipment 104,534 -- 104,534 --
Total $ 202,858 $1,029,339 $ 845,754 $ 1,944,456
Musical Instruments Segment
Sales decreased $1,064,040 and $1,419,970 respectively for the three and
six months ended June 30, 1997 when compared to the same period in 1996
primarily from lower foreign shipments caused by the strengthening of the
U.S. Dollar. The gross profit percentage decreased to 30% in the first six
months of 1997 compared to 33% in the same period last year. The current
quarter gross profit percentage was 28% compared to 35% in the second
quarter of 1996. These declines are 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. Selling,
general and administrative expenses for the three and six months ended June
30, 1997 remained approximately the same as compared to the same period in
1996. Research and development expenditures increased approximately $50,000
during the six months ended June 30, 1997 primarily due to new model
development.
Data Communications Segment
Sales increased $265,421 and $789,236 respectively for the three and six
months ended June 30, 1997 when compared to the same period in 1996 from
increased order volume. This is attributable to the sales and marketing
effort initiated since the acquisition. Gross profit margins decreased to
47.7% and 48.8% respectively for the three and six months ended June 30,
1997 when compared to 51.3% and 55.6% when compared to the same period in
1996 from competitive pressures on selling prices and variations in product
mix.
Selling, general and administrative expenses increased $243,099 and
$499,768 respectively for the three and six months ended June 30, 1997 when
compared to the same period in 1996. This was primarily due to the
expansion of sales and marketing programs to further promote the segment's
products and obtain additional market share.
Research and development expenditures declined $87,545 and $137,399
respectively for the three and six months ended June 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. These expenditures are
expected to increase in the future reflecting the commitment to new product
development and support.
Electronic Assemblies Segment
Sales increased $399,541 and $661,409 respectively for the three and six
months ended June 30, 1997 when compared to the same period in 1996 from
increased order volume and expanded customer base. The gross profit percentage
decreased to 11% in the first six months of 1997 compared to 15% in the same
period last year. The current quarter gross profit percentage was 8% compared
to 18% in the second quarter of 1996. These declines are due to higher
production and overhead costs resulting from inefficiencies in production
scheduling caused by the rapid growth in sales. The Company is implementing
improved scheduling and cost containment measures.
Audio Equipment Segment
Sales for the three months ended were $577,499. The gross profit
percentage was 47.5% of sales. Selling, general and administrative costs
for the period were $172,709.
Other Income and Expense
Interest and other income for the six months ended June 30 1997 increased
slightly from the same period in 1996. The second quarter of 1997 included
realized gains from investments which contributed to higher income in that
quarter.
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 4. Submission of Matters to a Vote of Security Holders
(a) Annual Meeting: May 20, 1997
(b) Election of the following directors for a one-year term:
Steven Markowitz, Eugene Moroz, Leonard Helfrich, Martha
Markowitz, Orville Hawk, Albert Schuster and Jeffrey Schucker
(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 1996 and
all contracts, agreements, and employment's by the Board of
Directors and officers since the previous annual meeting in
May, 1996. All resolutions were adopted by the vote of all
shareholders present, in person or proxy.
Item 5. Other Information
Business Update
Musical Instruments
The Company introduced at its May 1997 National Sales Seminar a new
organ series called Renaissance(tm). These instruments are positioned for
the upper end of the organ market. This new line utilizes advanced DSP
(Digital Signal Processor) technology allowing the musician more
control and customizing capabilities including the ability to choose
specific sounds to match individual tastes. Initial customer response
has been positive.
Renaissance(tm) continues with the Company's tradition of advancing the
state-of-the-art of technology for keyboard musical instruments.
RenaissanceT shipments will begin the third quarter and will not reach
full production capacity until later this year.
Data Communications
Eastern Research, Inc. (ERI) initially built its business in the
CSU/DSU market and has also developed router technology products,
sometimes referred to as "box" products. More recently this company
has introduced a Digital Access Cross-connect Switch (DACs), a systems
product called DNX (Digital Exchange Network). The DNX is beginning to
contribute to revenues and will become ERI's flagship product. The
company will integrate additional technologies including its router
technology, along with xDSL (Digital Subscriber Line) technology, into
the DNX. In order to properly capitalize on this market's
opportunities, ERI will develop a more comprehensive marketing strategy
and will also increase product development work. This will require
further investment in the coming quarters. In May 1997, Michael Doyle
became ERI's President. Michael Doyle has 20-years experience in the
industry including positions at Infotron Systems Inc., Dowty
Communications, Inc., Teleos Communications, Inc., and Madge Networks,
Inc.
VIR, Inc. (VIR) and Linear Switch Corporation (LSC) are consolidating
their marketing and R&D functions. These companies will focus on the
test access market. With the need for higher speed and more reliable
communications circuits increasing, VIR/LSC will develop new products
to provide the ability to access and configure these circuits for
various test procedures. In April of 1997, Thomas Infantino was named
President of VIR/LSC. Tom brings over 25-years experience in the field
including positions at T-Bar, Inc., Dynatech Communications, and Hadax
Electronics, Inc.
Electronic Assemblies
Electronic assembly sales are made through our AIA division. AIA has
been diversifying its customer base. The Company is introducing new
manufacturing techniques to help AIA more efficiently serve customers
while improving the Company's profitability. AIA will focus on
customers for which it can supply a high degree of value added
services.
Audio Products
The Company acquired the assets of Legacy Audio Company in April, 1997.
Legacy's production capabilities have limited its growth in the past
and the Company is taking steps to increase these capabilities.
Expanded marketing programs are also being implemented.
Item 6. Exhibits and Reports on Form 8-K
(b) Forms 8-K
1. The Company filed a Form 8-K dated April 1, 1997
announcing the acquisition of the assets of Legacy Audio, Inc.
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, 1997 STEVEN MARKOWITZ
Steven Markowitz, President and
Chief Executive Officer
Date: August 13, 1997 LEONARD W. HELFRICH
Leonard W. Helfrich, Vice President-
Finance, Chief Financial and Principal
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 310,973
<SECURITIES> 24,753,279
<RECEIVABLES> 4,993,893
<ALLOWANCES> 0
<INVENTORY> 17,467,599
<CURRENT-ASSETS> 47,940,128
<PP&E> 19,396,765
<DEPRECIATION> (10,262,992)
<TOTAL-ASSETS> 64,680,390
<CURRENT-LIABILITIES> 2,729,941
<BONDS> 0
<COMMON> 1,537,993
0
0
<OTHER-SE> 59,590,368
<TOTAL-LIABILITY-AND-EQUITY> 64,680,390
<SALES> 17,985,992
<TOTAL-REVENUES> 17,985,992
<CGS> 12,180,629
<TOTAL-COSTS> 12,180,629
<OTHER-EXPENSES> 4,959,609
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,977,101
<INCOME-TAX> 685,000
<INCOME-CONTINUING> 1,292,101
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,292,101
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.98
</TABLE>
