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, 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 November 10, 1998:
Class A - Voting 84,112 shares
Class B - Non-voting 1,087,058 shares
<PAGE>
ALLEN ORGAN COMPANY
INDEX
Part I Financial Information
Item 1.Financial Statements
Consolidated Condensed Statements of Income for the nine months
ended September 30, 1998 and 1997
Consolidated Condensed Balance Sheets at September 30, 1998 and
December 31, 1997
Consolidated Condensed Statements of Cash Flows for the nine
months ended September 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 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 9 Months Ended:
9/30/98 9/30/97 9/30/98 9/30/97
Net Sales $11,812,748 $11,159,819 $32,607,958 $29,145,811
Cost and Expenses
Costs of sales 9,049,514 7,385,097 23,373,332 19,565,726
Selling, general and
administrative 2,938,614 2,115,943 8,607,726 5,832,525
Research and development 881,845 683,197 2,502,382 1,926,224
Total Costs and
Expenses 12,869,973 10,184,237 34,483,440 27,324,475
(Loss) Income from
Operations (1,057,225) 975,582 (1,875,482) 1,821,336
Other Income and (Expense)
Interest and other income 252,284 407,606 711,240 1,523,191
Minority interests in
consolidated subsidiaries (44,760) 4,819 52,466 20,581
Total Other Income and
Expense 207,524 412,425 763,706 1,543,772
(Loss) Income Before Taxes (849,701) 1,388,007 (1,111,776) 3,365,108
Provision for Taxes (250,000) 255,000 (332,000) 940,000
Net (Loss) Income $ (599,701) $ 1,133,007 $ (779,776) $ 2,425,108
Basic and Diluted (Loss)
Earnings Per Share $(0.51) $0.88 $(0.66) $1.89
Shares Used in Per Share
Calculation 1,179,170 1,285,336 1,179,170 1,285,336
Dividends Per Share - Cash $0.14 $0.14 $0.42 $0.42
Total Comprehensive
(Loss) Income $ (774,412) $ 1,316,725 $ (778,023) $ 2,719,496
See accompanying notes.
<PAGE>
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, Dec 31,
ASSETS 1998 1997
(Unaudited) (Audited)
Current Assets
Cash $ 1,496,554 $ 1,020,348
Investments Including Accrued Interest 18,742,912 20,040,334
Accounts Receivable 6,663,534 5,732,432
Inventories:
Raw Materials 8,211,182 8,532,962
Work in Process 5,265,121 7,343,590
Finished Goods 2,442,525 2,046,835
Total Inventories 15,918,828 17,923,387
Prepaid Income Taxes 720,437 232,895
Prepaid Expenses 639,033 483,300
Total Current Assets 44,181,298 45,432,696
Property, Plant and Equipment 21,053,667 20,084,544
Less Accumulated Depreciation (11,278,925) (10,569,532)
Total Property, Plant and Equipment 9,774,742 9,515,012
Other Assets
Prepaid Pension Costs 680,733 795,107
Inventory Held for Future Service 1,219,547 1,260,346
Note Receivable 620,227 203,557
Cash Value of Life Insurance 1,366,625 1,122,495
Intangible and Other Assets, net 4,005,153 4,232,791
Total Other Assets 7,892,285 7,614,296
Total Assets $61,848,325 $62,562,004
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 1,066,684 $ 913,110
Deferred Income Taxes 75,096 74,091
Other Accrued Expenses 1,013,136 692,282
Customer Deposits 1,539,563 1,308,001
Total Current Liabilities 3,694,479 2,987,484
Noncurrent Liabilities
Deferred Liabilities 715,639 721,264
Total Liabilities 4,410,118 3,708,748
Minority Interests 238,982 321,424
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 (779,776) 3,512,142
Dividends - Cash 1998 and 1997 (495,745) (702,018)
Balance, End 54,449,659 55,725,180
Accumulated other comprehensive income:
Unrealized Gain (Loss) on Investments 130,227 128,474
Treasury Stock
1998-43,120 Class A shares;315,703 Class B shares(11,677,264)
1997-43,120 Class A shares;314,155 Class B shares (11,618,425)
Total Stockholders' Equity 57,199,225 58,531,832
Total Liabilities and Stockholders' Equity $61,848,325 $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 9 Months Ended:
9/30/98 9/30/97 9/30/98 9/30/97
CASH FLOWS FROM OPERATING
ACTIVITIES
Net (loss) income $ (599,701) $ 1,133,007 $ (779,776) $ 2,425,108
Adjustments to reconcile net
(loss) income to net
cash provided by operating
activities
Depreciation and amortization 392,718 269,879 1,160,631 738,399
Minority interest in
consolidated subsidiaries 44,760 9,856 (52,466) (5,906)
Change in assets and liabilities,
(net of acquisition effects)
(Increase) Decrease in
accounts receivable (633,476) (782,890) (931,102) (958,844)
(Increase) Decrease in
inventories 2,295,422 (631,352) 2,045,358 (3,336,000)
(Increase) Decrease in
prepaid income taxes (334,000) 8,359 (487,542) 298,224
(Increase) Decrease in
prepaid expenses 67,572 36,118 (155,733) (116,058)
(Increase) Decrease in
prepaid pension costs 38,124 (75,830) 114,374 40,335
(Decrease) Increase in
accounts payable 339,834 18,916 153,574 181,122
(Decrease) Increase in
accrued expenses (21,077) (163,962) 320,854 27,662
(Decrease) Increase in
customer deposits (18,026) (24,152) 231,562 541,541
(Decrease) Increase in other
noncurrent liabilities (1,875) 8,695 (5,625) 48,594
Net Cash Provided by (Used in)
Operating Activities 1,570,275 (193,356) 1,614,109 (115,823)
CASH FLOW FROM INVESTING ACTIVITIES
Payment for acquisition -- -- -- (1,512,000)
Additions to intangibles and
other assets (110,276) -- (132,107) (71,950)
Increase in note receivable -- (40,409) (416,670) (40,409)
Net additions to plant and
equipment (378,713) (376,501)(1,060,616) (1,559,647)
Increase in cash value of
life insurance (244,130) (251,270) (244,130) (251,270)
Net sale (or purchase) of
short-term investments (875,701) 5,002,524 1,300,180 9,451,663
Net Cash Provided by (Used in)
Investing Activities (1,608,820) 4,334,344 (553,343) 6,016,387
CASH FLOWS FROM FINANCING ACTIVITIES
Reacquired Class B
common shares (38,285) (3,763,487) (58,839) (5,626,717)
Dividends paid in cash (165,210) (166,435) (495,745) (536,717)
Subsidiary company stock issued
to minority shareholders -- -- -- 18,382
Subsidiary company stock
reacquired from minority
shareholders -- (60,600) (29,976) (75,275)
Net Cash Used In
Financing Activities (203,495) (3,990,522) (584,560) (6,220,327)
NET INCREASE (DECREASE) IN CASH (242,040) 150,466 476,206 (319,763)
CASH, BEGINNING 1,738,594 310,973 1,020,348 781,202
CASH, ENDING $1,496,554 $ 461,439 $1,496,554 $ 461,439
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for:
Income Taxes $ 84,000 $ 223,000 $ 120,050 $ 618,500
See accompanying notes.
<PAGE>
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 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 9 Months Ended:
9/30/97
Net Sales $29,607,614
Net Income 2,509,211
Net Income Per Share $1.95
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
September 30, 1998.
5. Subsequent Event
During October 1998 the Company announced plans to permanently close its
manufacturing plant in Rocky Mount, NC. Rocky Mount Instruments, Inc. (RMI)
manufactured small organs and sub-assemblies for the Company's Musical
Instruments segment. RMI employs approximately 60 people, half of which
will be terminated in December 1998, and the remainder during first six
months of 1999. The Company estimates the termination costs (including
employee severance and benefits) related to this closure to be approximately
$415,000, which will be included in the operating results for the fourth
quarter of 1998.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
Liquidity and Capital Resources:
Cash flows from operating activities increased during the nine month period
ended September 30, 1998, primarily due to reductions in inventory in the
Musical Instruments and Electronic Assemblies segments. These reductions are
the result of improvements in manufacturing methods and inventory management
discussed further below.
Cash flows used in investing activities reflects the Company's purchase of
equipment and increases in notes receivable, net of sales of short-term
investments. During the nine months ended September 30, 1998, the Company
continued the implementation of its new information systems and acquired an
additional $300,000 of hardware and software. The Company estimates that this
project will require another $100,000 to complete.
Results of Operations:
Sales and Operating Income
For the 3 Months Ended: For the 9 Months Ended:
9/30/98 9/30/97 9/30/98 9/30/97
Net Sales to Unaffiliated
Customers
Musical Instruments $ 6,824,925 $ 6,338,653 $18,732,540 $16,774,274
Data Communications 3,271,863 2,549,548 8,218,537 6,832,738
Electronic Assemblies 1,123,344 1,614,003 3,716,136 4,303,685
Audio Equipment 592,616 657,615 1,940,745 1,235,114
Total $11,812,748 $11,159,819 $32,607,958 $29,145,811
Intersegment Sales
Musical Instruments $ 15,922 $ -- $ 104,034 $ --
Data Communications -- 1,473 594 53,871
Electronic Assemblies 92,788 136,571 384,937 803,014
Audio Equipment 25,754 -- 136,801 6,583
Total $ 134,464 $ 138,044 $ 626,366 $ 863,468
Income (Loss) from Operations
Musical Instruments $ (124,768) $ 844,286 $ 849,418 $ 1,578,561
Data Communications (937,965) (188,241) (2,888,551) (429,693)
Electronic Assemblies (61,892) 215,539 165,276 463,936
Audio Equipment 67,400 103,998 (1,625) 208,532
Total $(1,057,225) $ 975,582 $(1,875,482) $ 1,821,336
Musical Instruments Segment
Sales increased $486,272 and $1,958,266 respectively for the three and nine
months ended September 30, 1998 when compared to the same periods in 1997 due
to higher order volume.
The gross profit percentage decreased to 17% and 25% of sales respectively
for the three and nine months ended September 30, 1998 compared to 30% in the
same periods in 1997. These decreases are primarily due to additional costs
incurred as part of a business improvement program initiated to up-grade
production and product planning processes. As part of this program the
Company is implementing new information systems, the majority of which will be
in place early in 1999. The Company at the same time has been improving
manufacturing methods and inventory management, which has resulted in a
reduction in inventory of approximately $2,500,000 in this segment for the
nine months ended September 30, 1998. During this reorganization, and in
reducing its work-in-process and finished goods inventories, the segment
incurred approximately $750,000 in additional overheads and expenses related
to unapplied labor and related overhead as it trained its work force. By the
end of 1997, manufacturing improvements enabled the Company to stop organ
production at its North Carolina facility leaving only subassembly production
there, consolidating all organ production at the main manufacturing facility
in Macungie, PA. The North Carolina plant's remaining production of
subassemblies will be phased out in 1999. Increased capabilities at the
Macungie, PA facility will allow the Company to meet demand for organs. It is
anticipated that these business improvement programs will provide long-term
benefits to the Company.
Selling, general and administrative expenses increased approximately
$135,000 and $375,000 for the three and nine months ended September 30, 1998
respectively when compared to the same period in 1997. These increases are
due to higher selling costs associated with higher sales volume and
implementation and training costs related to the new information systems.
Research and development expenditures increased approximately $90,000
during the nine months ended September 30, 1998 primarily due to new product
development.
Data Communications Segment
Segment sales increased $722,315 and $1,385,799 respectively for the three
and nine months ended September 30, 1998 when compared to the same period in
1997 from increased order volume. Sales for the three and nine months ended
September 30, 1998 include $125,000 and $475,000 respectively, 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 significantly 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 DNX (DACS) system products. Eastern
Research has increased its incoming order volume, however, the sales cycle for
these more complex system products are generally in excess of 6 months. This
segment is working towards developing strategic relationships with customers,
which will help expand their channels of distribution. This segment will
continue to invest in sales and marketing programs.
Gross profit margins decreased to 38% and 39% respectively for the three
and nine months ended September 30, 1998 when compared to 47% and 48% in the
same period in 1997. While Eastern Research's gross profit margins have
increased during the three and nine months ended September 30, 1998, this
increase has been offset by lower gross profits at VIR Linear Switch due to
lower sales volume. This segment has been focusing on more sophisticated high-
end products that generally have higher gross margins.
Sales and marketing expenditures increased approximately $553,000 (136%)
and $1.5 million (118%) respectively for the three and nine months ended
September 30, 1998 when compared to the same periods in 1997. This was
primarily due to the expansion of its efforts to further promote the segment's
products, obtain additional market share, and develop new channels of
distribution.
General and administrative expenses increased approximately $83,000 (17%)
and $401,000 (34%) respectively for the three and nine months ended September
30, 1998 when compared to the same periods in 1997 resulting from management
and support personnel added to promote and oversee the segment.
Research and development expenditures increased approximately $142,000
(29%) and $482,000 (37%) for the three and nine months ended September 30,
1998 when compared to the same periods 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 $490,659 and $587,549 respectively for the three and nine
months ended September 30, 1998 when compared to the same period in 1997 from
lower incoming orders, changes in product mix and customer delivery
requirements.
The gross profit percentage decreased to 5.9% and 10.6% in the three and
nine months ending September 30, 1998 compared to 20% and 15% for the same
periods in 1997. These declines are primarily associated with the segment's
efforts to restructure operations along with the Musical Instruments segment.
Selling, general and administrative expenses increased approximately
$65,000 during the nine months ended September 30, 1998 when compared to the
same period in 1997.
Audio Equipment Segment
Sales decreased $64,999 for the three months ended September 30, 1998 when
compared to the same period in 1997. Sales for the nine months ended
September 30, 1998 increased $243,828 when compared to the same periods in
1997 on a proforma basis.
The gross profit percentage decreased to 40% in the nine months ended
September 30, 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 for the period increased as
compared to the prior year from increased sales and marketing efforts and
administrative personnel added to support the segment's growth.
Other Income and Expense
Investment and other income for the nine months ended September 30, 1998
decreased approximately $810,000 compared to the same period in 1997 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.
Year 2000
The Year 2000 issue relates to the ability of computer systems,
microprocessors and other electronic devices to deal appropriately with dates
on or after January 1, 2000. The effect of the Year 2000 issue may include
computer failures and business interruption.
The Company has taken action to make its systems, products and
infrastructure Year 2000 compliant. The Company began work several years ago
to prepare its products and its financial information and other computer-based
systems for the Year 2000, including replacing and/or updating existing
systems. Internally the Company is in the process of implementing new, Year
2000 compliant, information systems that are expected to be in place early in
1999. Externally, the Company has and will survey its suppliers, financial
institutions, and other organizations that may impact the Company's operation
to assess their level of Year 2000 compliance. This external review is
expected to be completed in early 1999. The Company will continue to monitor
its Year 2000 compliance program, address any material issues and develop
contingency plans, as it deems appropriate. While the Company has and will
take steps to address material Year 2000 issues, the failure to identify or
correct a material internal or external Year 2000 problem could result in an
interruption in the Company's business operations.
While these Year 2000 efforts will involve additional costs, the Company
believes, based on available information, that it will be able to manage its
total Year 2000 transition without any material adverse effect on its business
operations, products or financial condition.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) No reports on Form 8-K were filed during the quarter ended
September 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: November 11, 1998 STEVEN MARKOWITZ
Steven Markowitz, President and
Chief Executive Officer
Date: November 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
SEPTEMBER 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,496,554
<SECURITIES> 18,742,912
<RECEIVABLES> 6,663,534
<ALLOWANCES> 0
<INVENTORY> 15,918,828
<CURRENT-ASSETS> 44,181,298
<PP&E> 21,053,667
<DEPRECIATION> (11,278,925)
<TOTAL-ASSETS> 61,848,325
<CURRENT-LIABILITIES> 3,694,479
<BONDS> 0
<COMMON> 1,537,993
0
0
<OTHER-SE> 55,661,232
<TOTAL-LIABILITY-AND-EQUITY> 61,848,325
<SALES> 32,607,958
<TOTAL-REVENUES> 32,607,958
<CGS> 23,373,332
<TOTAL-COSTS> 23,373,332
<OTHER-EXPENSES> 11,110,108
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,111,776)
<INCOME-TAX> (332,000)
<INCOME-CONTINUING> (779,776)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (779,776)
<EPS-PRIMARY> (.66)
<EPS-DILUTED> (.66)
</TABLE>
