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, 1998
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 10, 1998:
Class A - Voting 84,112 shares
Class B - Non-voting 1,095,958 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, 1998 and 1997
Consolidated Condensed Balance Sheets at June 30, 1998 and
December 31, 1997
Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 1998 and 1997
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:
6/30/98 6/30/97 6/30/98 6/30/97
Net Sales $10,567,919 $9,107,033 $20,795,210 $17,985,992
Cost and Expenses
Costs of sales 7,439,196 6,307,370 14,323,818 12,180,629
Selling, general and
administrative 2,933,753 1,963,398 5,669,112 3,716,582
Research and development 835,371 633,407 1,620,537 1,243,027
Total Costs and Expenses 11,208,320 8,904,175 21,613,467 17,140,238
(Loss) Income from
Operations (640,401) 202,858 (818,257) 845,754
Other Income (Expense)
Interest and other income 230,426 703,407 458,956 1,115,585
Minority interests in
consolidated subsidiaries 42,332 7,112 97,226 15,762
Total Other Income and
Expense 272,758 710,519 556,182 1,131,347
(Loss) Income Before Taxes (367,643) 913,377 (262,075) 1,977,101
Provision for Taxes (87,000) 314,000 (82,000) 685,000
Net (Loss) Income $ (280,643) $ 599,377 $ (180,075) $ 1,292,101
Basic and Diluted (Loss)
Earnings Per Share $(0.24) $0.45 $(0.15) $0.98
Shares Used in Per Share
Calculation 1,180,554 1,319,271 1,180,554 1,319,271
Dividends Per Share - Cash $0.14 $0.14 $0.28 $0.28
Total Comprehensive
(Loss) Income $ (287,221) $ 873,298 $ (3,611) $ 1,402,771
See accompanying notes.
<PAGE>
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, 1998 Dec. 31,1997
ASSETS (Unaudited) (Audited)
Current Assets
Cash $ 1,738,594 $ 1,020,348
Investments Including Accrued Interest 18,142,217 20,040,334
Accounts Receivable 6,030,058 5,732,432
Inventories:
Raw Materials 8,343,238 8,532,962
Work in Process 7,469,960 7,343,590
Finished Goods 2,416,334 2,046,835
Total Inventories 18,229,532 17,923,387
Prepaid Income Taxes 386,437 232,895
Prepaid Expenses 706,605 483,300
Total Current Assets 45,233,443 45,432,696
Property, Plant and Equipment 20,693,289 20,084,544
Less Accumulated Depreciation (11,023,472) (10,569,532)
Total Property, Plant and Equipment 9,669,817 9,515,012
Other Assets
Prepaid Pension Costs 718,857 795,107
Inventory Held for Future Service 1,204,265 1,260,346
Note Receivable 620,227 203,557
Cash Value of Life Insurance 1,122,495 1,122,495
Intangible and Other Assets, net 4,013,807 4,232,791
Total Other Assets 7,679,651 7,614,296
Total Assets $ 62,582,911 $ 62,562,004
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 726,850 $ 913,110
Deferred Income Taxes 175,391 74,091
Other Accrued Expenses 1,034,213 692,282
Customer Deposits 1,557,589 1,308,001
Total Current Liabilities 3,494,043 2,987,484
Noncurrent Liabilities
Deferred Liabilities 717,514 721,264
Total Liabilities 4,211,557 3,708,748
Minority Interests 194,222 321,424
STOCKHOLDERS' EQUITY
Common Stock 1998 1997
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 12,758,610 12,758,610
Retained Earnings
Balance, Beginning 55,725,180 52,915,056
Net (Loss) Income (180,075) 3,512,142
Dividends - Cash 1998 and 1997 (330,535) (702,018)
Balance, End 55,214,570 55,725,180
Accumulated other comprehensive income:
Unrealized Gain on Investments 304,938 128,474
Treasury Stock
1998-43,120 Class A shares;314,657 Class B shares (11,638,979)
1997-43,120 Class A shares;314,155 Class B shares (11,618,425)
Total Stockholders' Equity 58,177,132 58,531,832
Total Liabilities and Stockholders' Equity $ 62,582,911 $ 62,562,004
See accompanying notes.
<PAGE>
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 3 Months Ended: For the 6 Months Ended:
6/30/98 6/30/97 6/30/98 6/30/97
CASH FLOWS FROM OPERATING
ACTIVITIES
Net (loss) income $ (280,643) $ 599,377 $ (180,075) $ 1,292,101
Adjustments to reconcile net
(loss) income to net
cash provided by operating
activities
Depreciation and amortization 389,374 241,590 767,913 468,520
Minority interest in
consolidated subsidiaries (42,332) (7,112) (97,226) (15,762)
Change in assets and liabilities,
(net of acquisition effects)
(Increase) Decrease in
accounts receivable (358,437) (87,833) (297,626) (175,954)
(Increase) Decrease in
inventories 613,030 (1,502,425) (250,064) (2,704,648)
(Increase) Decrease in prepaid
income taxes (116,000) 143,000 (153,542) 289,865
(Increase) Decrease in prepaid
expenses (58,010) (77,820) (223,305) (152,176)
(Increase) Decrease in prepaid
pension costs 16,250 48,668 76,250 116,165
(Decrease) Increase in
accounts payable (115,127) (126,654) (186,260) 162,206
(Decrease) Increase in accrued
expenses 120,080 (58,252) 341,931 191,624
(Decrease) Increase in
customer deposits 321,878 744,652 249,588 565,693
(Decrease) Increase in other
noncurrent liabilities (1,875) 41,774 (3,750) 39,899
Net Cash Provided by (Used In)
Operating Activities 488,188 (41,035) 43,834 77,533
CASH FLOW FROM INVESTING ACTIVITIES
Payment for acquisition ---- (1,512,000) ---- (1,512,000)
Additions to intangibles and
other assets (5,348) (71,950) (21,831) (71,950)
Increase in note receivable (416,670) ---- (416,670) ----
Net additions to plant and
equipment (393,378) (711,482) (681,903) (1,183,146)
Net sale (or purchase) of
short term investments 894,913 3,863,863 2,175,881 4,449,139
Net Cash Provided by
Investing Activities 79,517 1,568,431 1,055,477 1,682,043
CASH FLOWS FROM FINANCING ACTIVITIES
Reacquired Class B common
shares (20,554) (1,834,342) (20,554) (1,863,230)
Dividends paid in cash (165,234) (184,964) (330,535) (370,282)
Subsidiary stock reacquired
from minority shareholder (29,976) ---- (29,976) (14,675)
Subsidiary company stock issued
to minority shareholder ---- ---- ---- 18,382
Net Cash Used In Financing
Activities (215,764) (2,019,306) (381,065) (2,229,805)
NET INCREASE (DECREASE) IN CASH 351,941 (491,910) 718,246 (470,229)
CASH, BEGINNING 1,386,653 802,883 1,020,348 781,202
CASH, ENDING $1,738,594 $ 310,973 $1,738,594 $ 310,973
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for:
Income Taxes 14,000 171,500 36,050 395,500
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 1997 Annual Report on Form 10-K.
2. Pro Forma Financial Information
The following pro forma financial information has been prepared giving
effect to the April 1, 1997 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 6 Months Ended:
6/30/97
Net Sales $18,447,795
Net Income 1,271,914
Net Income Per Share $0.96
3. Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standard
("SFAS") No. 130 on "Reporting Comprehensive Income". SFAS 130
establishes new rules for the reporting of comprehensive income and its
components; however the adoption of SFAS 130 had no impact on the
Company's net income or stockholder's equity. SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale
securities to be included in other comprehensive income. These amounts
were reported in stockholder's equity prior to the adoption of SFAS
130. Prior year financial statements have been reclassified to conform
to the requirements of SFAS 130.
4. Note Receivable
The Company has entered into a second Split-Dollar Life Insurance
agreement with its President who is the owner and beneficiary of the
policy. The policy owner shall pay the portion of the premium equal to
the value of the economic benefit determined in accordance with
applicable IRS Revenue Rulings. The Company shall pay the balance of
the net premiums which shall approximate $400,000 annually.
The agreement provides that the Company shall be entitled to recover
the amount of premiums paid out of the built up cash value upon
termination of the agreement or out of the proceeds upon the death of
the insured. As security for repayment the Company is a collateral
assignee of the policy to the extent of any such unreimbursed premium.
The Company is also secured by the personal obligation of its
President. The note receivable exceeds the cash surrender value of
this policy by approximately $270,000 at June 30, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
Liquidity and Capital Resources:
Cash flows from operating activities remained approximately the same for
the six months ended June 30, 1998 and increased in the three month period
ended June 30, 1998 when compared to the same period in 1997, primarily due
to reductions in inventory in the Musical Instruments and Data
Communications segments.
Cash flows from investing activities reflects the Company's sale of
short-term investments net of the increase in notes receivable and amounts
used to purchase equipment. During the first six months of 1998 the
Company continued the implementation of its new information systems and
acquired an additional $250,000 of hardware and software. The Company
estimates that this project will require another $150,000 to complete.
Results of Operations:
Sales and Operating Income
For the 3 Months Ended: For the 6 Months Ended:
6/30/98 6/30/97 6/30/98 6/30/97
Net Sales to Unaffiliated
Customers
Musical Instruments $ 5,647,106 $ 4,908,158 $11,907,615 $10,435,621
Data Communications 2,793,461 2,129,804 4,946,674 4,283,190
Electronic Assemblies 1,444,435 1,491,572 2,592,792 2,689,682
Audio Equipment 682,917 577,499 1,348,129 577,499
Total $10,567,919 $ 9,107,033 $20,795,210 $17,985,992
Intersegment Sales
Musical Instruments $ 46,943 $ -- $ 88,112 $ --
Data Communications -- -- 594 52,398
Electronic Assemblies 44,184 422,742 292,149 666,443
Audio Equipment 87,192 6,583 111,047 6,583
Total $ 178,319 $ 429,325 $ 491,902 $ 725,424
Income (loss) from operations
Musical Instruments $ 204,360 $ 187,284 $ 974,186 $ 734,275
Data Communications (912,774) (190,223) (1,950,586) (241,452)
Electronic Assemblies 108,501 101,263 227,168 248,397
Audio Equipment (40,488) 104,534 (69,025) 104,534
Total $ (640,401) $ 202,858 $ (818,257) $ 845,754
Musical Instruments Segment
Sales increased $738,948 and $1,471,994 respectively for the three and
six months ended June 30, 1998 when compared to the same period in 1997 due
to higher order volume.
The gross profit percentage was 30% in the first six months of 1998
and 1997. The current quarter gross profit percentage was 27% compared
to 28% in the second quarter of 1997 due to changes in product mix.
Selling, general and administrative expenses increased approximately
$150,000 and $330,000 during the three and six months ended June 30, 1998,
respectively, when compared to the same period in 1997. These increases
are due to higher selling expenses associated with the higher sales volume
and implementation and training costs associated with the new information
systems.
Research and development expenditures increased approximately $40,000
during the first six months of 1998 when compared to the same period in
1997 due to new product development.
Data Communications Segment
Sales increased $660,000 for the three and six months ended June 30,
1998 when compared to the same period in 1997 from increased order volume.
Sales for the three months ended June 30, 1998 includes $350,000 in
engineering development fees received for a new product developed in
conjunction with an OEM agreement with one of Eastern Research's customers.
During the last quarter of 1997 the Company began to increase its
investment in the sales and marketing effort at Eastern Research. These
additional efforts are focused on expanding channels of distribution and
targeting markets for the company's DACS system products. The Company has
increased its incoming order volume, however, the sales cycle for the sale
of these more complex system products are generally in excess of 6 months.
Gross profit margins decreased to 43.5% and 40.6% respectively for the
three and six months ended June 30, 1998 compared to 47.7% and 48.8% when
compared to the same period in 1997 from competitive pressures on selling
prices and variations in product mix. The segment is focusing its
attention on more sophisticated high end products which generally have
higher gross margins.
Sales and marketing expenditures increased approximately $560,000 (130%)
and $940,000 (110%) respectively for the three and six months ended June
30, 1998 when compared to the same period in 1997. This was primarily due
to the expansion of sales and marketing efforts to further promote the
segment's products, obtain additional market share and develop new channels
of distribution.
General and administrative expenses increased approximately $135,000
(36%) and $318,000 (46%) respectively for the three and six months ended
June 30, 1998 when compared to the same period in 1997 resulting from
management and support personnel added to promote and oversee the segment.
Research and development expenditures increased approximately $ 220,000
and $ 340,000 respectively for the three and six months ended June 30, 1998
when compared to the same period in 1997. These expenditures have and will
continue to increase in the future reflecting the commitment to new product
development and support.
Electronic Assemblies Segment
Sales declined $47,137 and $96,890 respectively for the three and six
months ended June 30, 1998 when compared to the same period in 1997 from
changes in product mix and customer delivery requirements.
The gross profit percentage increased to 11% and 12.6% for the three and
six months ended June 30, 1998 compared to 8% and 11% in the same period
last year. These increases are due to changes in product mix and
efficiencies realized in the production processes.
Selling, general and administrative expenses increased slightly in the
first six months of 1998 when compared to the same period in 1997.
Audio Equipment Segment
Sales increased $105,418 and $308,827 for the three and six months ended
June 30, when compared to the same periods in 1997 on a pro forma basis.
Gross profit margins decreased to 35% in the first six months of 1998 as
compared to 45% in 1997. This decrease is attributable to changes in
distribution from direct marketing to dealer audition sites in several
markets. Selling, general and administrative costs increased in the first
six months of 1998 when compared to the same period in 1997 from increased
sales and marketing efforts and additional administrative personnel added
to support the company's growth.
Other Income and Expense
Investment income decreased in both the three and six months ended June
30, 1998 due to lower invested balances, as well as gains on investments
recognized in 1997 that did not recur in 1998.
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: April 21, 1998
(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
and Ernest Choquette.
(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 1997 and
all contracts, agreements, and employments by the Board of
Directors and officers since the previous annual meeting in
May 1997. All resolutions were adopted by the vote of all
shareholders present, in person or proxy.
Item 5. Other Information
Ernest J. Choquette was elected a Director at the annual
shareholders meeting on April 21, 1998. Mr. Choquette has
been a member of the law firm of Stevens & Lee, Reading PA
for almost twenty years and currently serves as Co-Chairman
of their Corporate Group.
Item 6. Exhibits and Reports on Form 8-K
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 1998.
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 11, 1998 STEVEN MARKOWITZ
Steven Markowitz, President and
Chief Executive Officer
Date: August 11, 1998 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, 1998 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-31-1998
<PERIOD-END> JUN-30-1998
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<RECEIVABLES> 6,030,058
<ALLOWANCES> 0
<INVENTORY> 18,229,532
<CURRENT-ASSETS> 45,233,443
<PP&E> 20,693,289
<DEPRECIATION> (11,023,472)
<TOTAL-ASSETS> 62,582,911
<CURRENT-LIABILITIES> 3,494,043
<BONDS> 0
<COMMON> 1,537,993
0
0
<OTHER-SE> 56,639,139
<TOTAL-LIABILITY-AND-EQUITY> 62,582,911
<SALES> 20,795,210
<TOTAL-REVENUES> 20,795,210
<CGS> 14,323,818
<TOTAL-COSTS> 14,323,818
<OTHER-EXPENSES> 7,289,649
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (262,075)
<INCOME-TAX> (82,000)
<INCOME-CONTINUING> (180,075)
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<NET-INCOME> (180,075)
<EPS-PRIMARY> (.15)
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