UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 For the Fiscal Year Ended December 31, 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) (IRS 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
Securities registered pursuant to section 12 (b) of the Act:
None
Securities registered pursuant to section 12 (g) of the Act:
Class B Common Shares, par value $1 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. ( X )
The Class A voting stock of the registrant is not registered pursuant to
the Securities Exchange Act of 1934, is not publicly traded, and,
therefore, no market value information exists for such stock held by non-
affiliates.
The number of shares outstanding of each of the Registrant's classes of
common stock, as of the close of business on March 15, 1999:
Class A - Voting 84,002 Class B - Non-voting 1,086,709
<PAGE>
ALLEN ORGAN COMPANY
INDEX
PART I
1. Business
- General developments of business
- Industry Segments
- Description of business
- Financial information about foreign operations and export sales
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for the Registrants Common Stock and
Related Security Holder Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
8. Financial Statements
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
Exhibit
<PAGE>
PART I
Item 1. Business
General developments of business.
Incorporated in Pennsylvania in 1945, Allen Organ Company
and Subsidiaries ("Company") operate in four industry segments:
musical instruments, data communications, electronic assemblies,
and audio equipment.
During October 1998, the Company announced its 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.
In December 1998, the Company established Allen Diversified,
Inc. as a wholly owned subsidiary of Allen Organ Company to hold
and manage the Company's investment in its subsidiary Companies.
The Company is developing a line of Public Address System
products, which it demonstrated at an industry trade show in
January 1999. The Mixer portion of these products utilizes
Digital Signal Processor (DSP) technology also used in the Allen
digital organs. The speaker technology was developed in
conjunction with the Company's subsidiary, Legacy Audio. The
product line will initially be targeted at small to mid- sized
churches, auditoriums and the like. The Company expects to begin
shipping these products in the second half of 1999.
Industry segments.
The Company operates in four industry segments: musical
instruments, data communications, electronic assemblies, and
audio equipment. For financial information concerning the
segments, see Note 15 to the financial statements.
Description of business.
Musical Instruments.
Allen Organ Company is a leading manufacturer of electronic
keyboard musical instruments, primarily digital electronic church
organs and accessories. This segment accounted for 57%, 58% and
69% of revenue in 1998, 1997 and 1996 respectively.
The principal market for the musical instruments segment are
institutions, primarily churches. Sales to the home market make
up a smaller portion of the segment's sales. The segment's
musical instruments are distributed mostly through dealers,
primarily independent retail music stores throughout the United
States, with a lesser percentage distributed through dealers
internationally. The segment's business is not seasonal.
The principal raw materials used in the segment's products
are electronic components and wood, all of which are readily
available from various sources without undue difficulty.
The segment does not engage in any significant amounts of
consignments, extended payment terms, or lease guarantees. The
Company is contingently liable in connection with certain
customers' financing arrangements. See Note 10 to the financial
statements. The dollar amounts and number of times the Company
has had to honor these repurchase agreements are negligible.
The musical instruments segment is not dependent on any
single or small group of customers, the loss of which would have
a material adverse effect on the business. The dollar amount of
the segment's unshipped order backlog at the end of February 1999
and 1998 was $6.3 million and $4.4 million respectively.
Approximately $5.7 million of these orders will be filled in the
current year with the remaining $600,000 to be filled in the
following year.
The electronic organ industry is competitive involving at
least five (5) domestic and foreign companies. In addition,
there are many small pipe organ companies in the institutional
organ market. The organ market consists of two basic divisions,
institutional (primarily churches) and home or entertainment.
The Company believes it has a major position in the institutional
market because of product performance and competitive prices, and
a smaller percentage of the home or entertainment market.
Data Communications.
The data communications segment operates through three
majority owned subsidiaries, VIR, Inc., Linear Switch Corporation
and Eastern Research, Inc. This segment accounted for 27%, 22%
and 21% of revenues in 1998, 1997 and 1996 respectively.
Data communications products are sold primarily to wholesale
and retail distributors worldwide and under OEM agreements with
several of its customers. The segment maintains an inventory of
in-process and finished goods to allow for rapid fulfillment of
customer orders which is expected in the industry.
The principal raw material used in the data communications
products are electronic components, which are readily available
from various sources without undue difficulty.
The data communications segment derived 13% and 12% of its
1998 and 1997 revenue from one customer.
VIR, Inc. (VIR) and Linear Switch Corporation (LSC) During
1997, these two companies combined their marketing and research &
development functions under the name of "VIR Linear Switch". The
companies design, manufacture, and market a number of data
communication products including patch and testing equipment,
often referred to as tech control products, test access equipment
and a matrix switch which can transport high-speed digital
signals and allow "any-to-any" connectivity between and among
connections. The products are of varying complexity and are used
to connect, switch, test and trouble shoot data lines in large
computer installations.
The companies compete in a relatively mature field,
producing high quality products at competitive prices. The
companies have approximately four major competitors, all of which
are larger than VIR/LSC.
With the need for higher speed and more reliable
communications circuits increasing, VIR/LSC introduced in 1998, a
new family of products to provide the ability to access and
configure these higher speed circuits for various test
procedures. Management is pursuing strategic customer
relationships in an effort to expand distribution of its
products.
The dollar amount of unshipped order backlog at the end of
February 1999 and 1998 was $56,000 and $555,000 respectively.
All orders are expected to be filled in the current year.
Eastern Research, Inc. (ERI) Designs and markets data inter-
networking products. These products include direct access
equipment that allow users to utilize a broad range of services
offered by the telephone companies.
ERI competes in a growing market that is in excess of $10
billion. However, the company's current and projected product
lines and sales programs are targeted at only a fraction of that
market. There are many competitors in this market that is
dominated by several large data communications companies, such as
Cisco Systems, Inc., Paradyne, Premisys and ADC Kentrox. The
company's strategy has been to target existing, yet still
growing, market niches with products that provide new features
and packaging with attractive pricing.
ERI initially built its business in the CSU/DSU market and
has also developed router technology products. These products
are relatively inexpensive and easy to manufacture. Thus, this is
a competitive field where margins can erode as new products
emerge. During 1998, the company introduced a Frame Aware
CSU/DSU that it developed in conjunction with an OEM agreement
with one of its customers.
ERI is focusing on its DNX (Digital Exchange Network)
product line, a narrowband DACS (Digital Access Cross-connect
Switch) capable of access speeds from subrate to DS3. The DNX
revenues have increased as a percentage of sales and is
considered ERI's flagship product. In order to properly
capitalize on this market's opportunities, ERI is implementing a
more aggressive marketing strategy and is also increasing product
development work. This will continue to require further
investment through the coming year.
ERI has been able to increase sales by working with, and
developing strategic customer relationships to expand
distribution of its products. One such relationship, which ERI
entered into, is an OEM agreement to supply Lucent Technologies
with its DACS product line.
The dollar amount of unshipped order backlog at the end of
February, 1999 and 1998 was $3.0 million and $1.2 million
respectively. All orders are expected to be filled in the
current year.
Electronic Assemblies.
Allen Integrated Assemblies (AIA), a division of the Allen
Organ Company, provides subcontract manufacture of electronic
assemblies for outside customers. The electronic assemblies
segment is an outgrowth of the technical skills and manufacturing
capabilities developed by the Company in its musical instruments
business. This segment accounted for 10%, 15% and 10% of revenue
in 1998, 1997, and 1996 respectively. AIA derived 68% of its
revenues from three customers in 1998 and 55% and 85% of its
revenues from one customer in 1997 and 1996 respectively.
The electronic assemblies segment is very competitive with
numerous manufacturers capable of producing such products.
Customers are generally obtained from a geographic area close to
the manufacturer. In order to improve its contract manufacturing
capabilities, the segment is upgrading its manufacturing systems
and increasing its sales and marketing efforts.
The dollar amount of the segment's unshipped order backlog
at the end of February 1999 and 1998 was $2.6 million and $3.0
million respectively. All orders are expected to be filled in
the current year.
Audio Equipment.
The Audio Equipment segment began on April 1, 1997 with the
acquisition of Legacy Audio, Inc. (LAI) discussed in Note 2 of
the Financial Statements. LAI designs, manufactures and markets
high-quality audio speaker cabinets for hi-fi stereo and home
theater applications. It also markets electronic audio equipment
amplifiers that are manufactured to its specifications by third
party suppliers. This segment accounted for 6% of revenue in
1998 and 5% of revenues for the 9 month period from acquisition
to December 31, 1997.
The principal market for the audio equipment segment is
individual consumers for home use. The segment's products are
distributed directly to the customer and through Dealer Audition
Sites. This segment's business is not seasonal.
LAI's manufacturing facility is currently operating near
full capacity. Many of their manufacturing needs are similar to
those required in the Company's musical instruments segment. The
Company is now building some of LAI's speaker cabinets at its
Macungie, PA facility.
The principal raw materials used in the segment's products
are audio speakers, electronic components and wood, all of which
are readily available from various sources without undue
difficulty.
The company competes with several other high-end audio
speaker cabinet manufacturers including Martin-Logan, Thiel, B&W,
Celestion, and others.
LAI is not dependent on any single, or small group, of
customers. The dollar amount of the segment's unshipped order
backlog at the end of February 1999 and 1998 was $246,000 and
$579,000 respectively. All orders are expected to be filled in
the current year.
General.
The Company's working capital is sufficient to meet the
normal expansion of inventory and receivables.
The Company spent $3,478,775, $2,654,662, and $2,786,390
annually in 1998, 1997, and 1996 respectively on research and
development. The increase in 1998 is a result of the Company's
ongoing commitment to new product development and support,
primarily at Eastern Research. The decrease in the 1997 expense
relates primarily to the combining of the research and
development efforts of VIR and LSC.
The Company and its subsidiaries employ approximately 544
persons.
The Company is not aware of any problem in complying with
applicable federal, state, or local provisions with regard to the
environment. The manufacturing requirements do not require any
special expenditures to meet environmental compliance.
Financial information about foreign operations and export sales.
The Company does not own manufacturing or sales facilities
in any foreign countries. See Note 14 to the financial
statements, for additional information on export sales.
Export sales are all made in US dollars and for the most
part are made under Letter of Credit or on a prepaid basis.
The Company has established a Foreign Sales Corporation
within the meaning of the Internal Revenue Code of 1986. This
wholly-owned subsidiary is Allen Organ International, Inc., a
Virgin Islands corporation.
Item 2. Properties
The following sets forth the location, approximate square
footage and use of the Company's operating locations segregated
by segment. The Company believes that its facilities are
generally suitable and adequate for its needs.
Approximate
Location Square Footage Use
Musical Instruments and Electronic Assemblies:
Macungie, Pennsylvania 242,000 Administrative, research and
manufacturing facility.
Owned by Allen Organ Company.
Operating at approximately
90% capacity.
Macungie, Pennsylvania 27,000 International sales,
exhibition center, museum
and teaching facility.
Owned by Allen Organ Company.
Rocky Mount, North Carolina 70,000 Manufacturing and sales
facility. Owned by Rocky
Mount Instruments. Operating
at approximately 30%
capacity. Operation will be
closed during 1999 and the
property will be marketed for
sale.
Data Communications:
Southampton, Pennsylvania 22,000 Administrative, research
and manufacturing facility.
Leased until July, 2000.
Operating at approximately
80% capacity.
Moorestown, New Jersey 16,800 Administrative, sales and
research facility. Leased
until February, 2001.
Audio Equipment:
Springfield, Illinois 15,000 Administrative, research
and manufacturing facility.
Owned by Legacy Audio, Inc.
Operating at approximately
95% capacity.
Item 3. Legal Proceedings
There is no litigation requiring disclosure pursuant to Item
103 of regulation S-K.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders
during the fourth quarter of fiscal year 1998.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
The Company's Class A voting shares are not registered
pursuant to the Securities Exchange Act of 1934 and are not
publicly traded. The Company's Class B non-voting stock trades
on The NASDAQ Stock Market under the symbol AORGB.
The high and low bid quotations for each quarter during the
last two years as reported by NASDAQ Market Information System is
as follows:
1998 High Low
First Quarter 43 38
Second Quarter 42 1/2 37
Third Quarter 40 1/2 35
Fourth Quarter 39 33
1997 High Low
First Quarter 41 38 1/2
Second Quarter 41 1/4 39
Third Quarter 40 1/2 38 7/8
Fourth Quarter 44 3/4 39 3/4
The Company has 8 Class A Shareholders and 340 Class B
Shareholders of record as of March 15, 1999.
During the past two fiscal years, the Company has declared
dividends on both its class A and B shares as follows:
Record of Quarterly Dividends Paid in 1998
Record Date Payable Amount
Cash 2/20/98 3/6/98 $.14
Cash 5/22/98 6/5/98 $.14
Cash 8/21/98 9/4/98 $.14
Cash 11/20/98 12/4/98 $.14
Record of Quarterly Dividends Paid in 1997
Record Date Payable Amount
Cash 2/21/97 3/7/97 $.14
Cash 5/23/97 6/6/97 $.14
Cash 8/22/97 9/5/97 $.14
Cash 11/21/97 12/5/97 $.14
Item 6. Selected Financial Data
Years Ended December 31,
1998 1997 1996 1995 1994
Net Sales $44,966,075 $40,348,084 $36,715,128 $30,024,761 $28,842,789
Net (Loss)
Income $ (616,711) $ 3,512,142 $ 3,865,876 $ 4,015,105 $ 4,449,703
Earnings (Loss)
per share $ (0.52) $ 2.79 $ 2.88 $ 2.94 $ 3.25
Cash dividends
per share $ .56 $ .56 $ .55 $ .55 $ .55
At Year End
Total Assets $61,989,953 $62,562,004 $63,966,646 $65,299,426 $58,464,695
Long-Term Debt,
net of current
portion $ 0 $ 0 $ 0 $ 1,388,000 $ 0
The 1998 and 1997 results of operations include the audio equipment
segment acquired April April 1, 1997. The 1998, 1997, 1996 and 1995 results
of operations include the data communications segment acquired August 1, 1995.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources:
The Company continues to maintain a strong financial position and
high level of liquidity which enables it to generate funds internally
to meet operating needs, capital expenditures and short-term
obligations. Key indicators of the Company's liquidity are presented
below:
December 31,
1998 1997
Working Capital $39,994,941 $42,445,212
Current Ratio 10 to 1 15 to 1
Debt to Equity Ratio .08 to 1 .06 to 1
The Company's ratio of debt to equity has remained very low
because of management's continuing policy of financing expansion with
internally generated funds. This policy has enabled the Company to
maintain its competitive advantage without incurring the costs
associated with borrowed funds.
Cash flows provided by operating activities increased during 1998
as compared to 1997 primarily due to reductions in inventory in the
Musical Instruments and Electronic Assemblies segments. These
decreases are the result of improvements in manufacturing methods and
inventory management discussed further below. Inventory decreased
approximately $3.2 million and $600,000 in the Musical Instruments and
Electronic Assemblies segments, respectively, and increased slightly
in the Data Communications and Audio Equipment segments. The Company
does not expect that inventory levels will change significantly during
1999. Cash flows provided by operating activities declined during
1997 compared to 1996 primarily due to increased working capital
requirements, particularly accounts receivable and inventory. These
increases were due primarily to new product introductions and higher
order volumes in most segments. The Company expects that
approximately $2,000,000 will be required in 1999 to fund increases in
working capital, primarily related to the growth of its subsidiary
Eastern Research.
Cash flows used in investing activities during 1998 were used to
purchase approximately $925,000 in machinery and equipment to be used
in the Musical Instruments and Electronic Assemblies segments
including approximately $200,000 for hardware and software related to
new information systems. The Data Communications segment used
approximately $552,000 primarily related to computer, office and test
equipment purchased to support the growth of Eastern Research. To
continue Eastern Research's growth through 1999, the Company estimates
that capital expenditures will approximate $1,500,000.
During 1997 and 1996, cash flows from investing activities were
used primarily to fund the purchase of treasury shares. Cash flows
from investing activities were also used to fund the acquisition of
Legacy Audio, Inc. in April, 1997. During 1997, the company increased
its expenditures for property and equipment including approximately
$700,000 additional automated equipment and building improvements to
enhance its electronics manufacturing capabilities used in the musical
instruments and electronic assemblies segments.
During December 1998, the Company engaged an outside contractor to
upgrade the air handling systems in the wood and metal finishing area
of its Macungie, PA plant. This addition is being made to improve
product quality for the Company's musical instruments and Legacy
speaker cabinet production. The total cost of this project will be
approximately $950,000 of which $177,000 has been paid through
December 31, 1998.
During 1997 the Company began implementing new information systems
which will be in place by mid 1999. Through December 31, 1998 the
Company has invested nearly $850,000 in software and computer
equipment as part of this project. The Company has undertaken this
implementation as part of a business improvement program initiated to
up-grade production and product planning processes. It is anticipated
that these improvements will provide long-term benefits in all areas
of the Company.
See Note 1 to the consolidated financial statements regarding new
accounting standards.
Results of Operations:
Sales and Operating Income
Consolidated net sales increased $4,617,991 (11%) during 1998 as
compared to 1997 primarily due to increased sales in the Musical
Instruments segment related to higher order volume and changes in
product mix and from the Data Communications segment resulting from
additional sales and marketing efforts initiated since the
acquisition. In 1997, sales increased $3,632,956 (10%) as compared to
1996 primarily due to sales from the audio equipment segment which was
acquired in April, 1997 and increased sales in the data communications
segment.
December 31,
1998 1997 1996
Net Sales
Musical Instruments
Domestic $21,748,131 $18,918,509 $19,824,334
Export 3,676,981 4,432,974 5,594,286
Total 25,425,112 23,351,483 25,418,620
Data Communications
Domestic 11,036,926 6,933,787 6,229,961
Export 1,261,029 2,103,734 1,417,636
Total 12,297,955 9,037,521 7,647,597
Electronic Assemblies
Domestic 4,727,975 5,935,381 3,648,911
Audio Equipment
Domestic 2,422,507 1,812,138 0
Export 92,526 211,561 0
Total 2,515,033 2,023,699 0
Total $44,966,075 $40,348,084 $36,715,128
Income (Loss) from Operations
Musical Instruments $ 795,773 $ 2,718,085 $ 3,634,901
Data Communications (3,397,020) (1,069,165) (349,785)
Electronic Assemblies 326,609 631,521 520,602
Audio Equipment (9,846) 337,495 0
Total $(2,284,484) $ 2,617,936 $ 3,805,718
Musical Instruments Segment
The 1998 increase in domestic sales reflects continuing
customer acceptance of the Company's Renaissance product line. The
1998 order rate exceeded 1997 resulting in an increase in the order
backlog at year end of approximately $1,400,000 when compared to
1997.
The 1997 decrease in domestic sales reflects lower order rates
during the early part of the year. New orders in the fourth
quarter of 1997 were approximately $500,000 ahead of the same
period in 1996. However, the product mix of these orders required
production lead times beyond year end and increased the order
backlog at year end by approximately $900,000 when compared to
1996.
Export sales decreased in 1998 and 1997, primarily from changes
in economic conditions in certain world markets, particularly Far
East countries. Continuing economic troubles in foreign countries
and foreign exchange rate fluctuations may affect future export
sales.
Gross profit margins on sales were 24.6%, 28.1% and 31.8% for
the three years ended December 31, 1998. The decrease in the 1998
gross profit margin is 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 by mid 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 $3,200,000 in this segment during 1998. During this
process, and in reducing its work-in-process and finished goods
inventories, the segment incurred approximately $1,100,000 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 and
electronic assemblies. It is anticipated that these business
improvements programs will provide long-term benefits to the
Company. The decrease in the 1997 gross profit margin is a result
of start-up expenses of new organ models introduced in May, 1997,
increases in overhead costs and lower sales over which to absorb
fixed costs.
Selling, administrative, and other expenses increased
approximately $230,000 in 1998 due to increased selling costs
associated with higher sales volume and implementation and training
costs related to the new information systems. Selling,
administrative and other expenses increased approximately $200,000
in 1997 as a result of marketing and advertising of new products.
Research and development expenses increased approximately
$147,000 and $40,000 in 1998 and 1997 respectively. These
increases are primarily due to increases in personnel to continue
new product development.
Data Communications Segment
Domestic sales in each of the last two years have increased as
a result of additional sales and marketing efforts initiated since
the acquisition. International sales for 1998 decreased primarily
from changes in economic conditions in certain world markets,
particularly Far East countries.
The Company has significantly increased its investment in the
sales and marketing effort at Eastern Research and will continue to
do so in 1999. These additional efforts are focused on expanding
channels of distribution and targeting markets for the
Company's products. The segment is developing strategic
relationships with customers to expand their channels of
distribution. One such relationship, which Eastern Research has
entered into in February 1999, is an OEM agreement to supply Lucent
Technologies with its DACS product line. These relationships could
provide additional sales volume in 1999. This segment will
continue to invest in sales and marketing programs.
Gross profit margins were 41% in 1998 compared to 46% in 1997,
a result of competitive pressures on selling prices and variations
in product mix. While Eastern Research's gross profit margins have
increased during 1998, this increase was offset by lower gross
profits at VIR Linear Switch due to lower sales volume. While the
companies strive to maintain profit margins by developing products
that offer more features, the industry is competitive which often
results in pricing changes to obtain and maintain market share.
Selling expenses increased approximately $2,000,000 and
$500,000 in 1998 and 1997 respectively, reflecting the additional
sales and marketing efforts. Selling expenses will continue to
increase in the future as sales and marketing programs and
personnel are added to further promote the segment's products and
obtain additional market share.
Administrative expenses increased approximately $518,000 and
$550,000 in 1998 and 1997 respectively, resulting from additional
management and support personnel added to promote and oversee the
segment.
Research and development expenses were $2,464,808, $1,799,665
and $1,972,167 for the years ended December 31, 1998, 1997 and
1996, respectively. The 1997 decrease is attributed to the
combining of the research and development efforts of VIR, Inc. and
Linear Switch Corporation. The segment is committed to new product
development and support and expects these expenditures to continue
to increase during 1999.
Electronic Assemblies Segment
Sales decreased $1,207,000 during 1998 from lower incoming
orders. Sales increased during 1997 and 1996 from higher order
volume from existing customers and orders received from several new
customers.
Gross profit margins were 13.6%, 14.5% and 20.0% for the three
years ended December 31, 1998. The decrease is related to
competitive pressures common in the industry and the segment's
efforts to restructure operations along with the Musical
Instruments segment.
Selling, general and administrative expenses have increased
approximately $86,000 in 1998 as compared to 1997. The segment
continues its marketing efforts and has begun to diversify its
customer base. The Company continues to improve its production
capabilities to offer state of the art manufacturing services to
its customers.
Audio Equipment Segment
Sales for the year ended December 31, 1998 increased
approximately 7% when compared to 1997 on a pro forma basis. This
increase is a result of greater awareness of the Company through
both increased marketing and sales efforts, establishment of Dealer
Audition Sites in several markets and positive product reviews in
several industry publications during the year. The Company will
continue to promote awareness of its products through increased
marketing efforts.
Gross profit margins were 39.6% and 49.7% for the year ended
December 31, 1998 and the nine month period ended 1997,
respectively. This decrease is attributable to changes in
distribution in certain areas from direct marketing to Dealer
Audition Sites.
Selling, general and administrative costs increased
approximately $360,000 during 1998 as compared to 1997 resulting
from increased sales and marketing efforts and additional
administrative personnel added to support the company's growth.
Other Income (Expense)
The decrease in investment income during 1998 is due to lower
invested balances, as well as gains on investments recognized in
1997 not recurring in 1998. The variations in investment income in
1997 and 1996 are primarily attributable to the yields available on
short-term investments, realized gains, and the amounts of
principal invested. The 1998, 1997, and 1996 amounts include
$242,227, $765,109 and $287,982 of realized capital gains
respectively.
Interest expense represents interest on the notes payable
issued in connection with the acquisition of VIR, Inc. and Eastern
Research, Inc.
Income Taxes
The increase in the effective tax rate related to the 1998 tax
benefit is due to higher effective state tax rates applicable to
the Data Communications segments which incurred losses during 1998.
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 a change in state revenue
allocations.
Factors that May Affect Operating Results
The statements contained in this report on Form 10-K that are
not purely historical are forward looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, including statements
regarding the Company's expectations, hopes, intentions or
strategies regarding the future. Forward looking statements
include: statements regarding future products or product
development; statements regarding future research and development
spending and the Company's marketing and product development
strategy, statements regarding future production capacity. All
forward looking statements included in this document are based on
information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward looking
statements. Readers are cautioned not to place undue reliance on
these forward looking statements, which reflect management's
opinions only as of the date hereof. Readers should carefully
review the risk factors described in other documents the Company
files from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be
filed by the Company in fiscal year 1999. 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.
See Note 1 to the financial statements for information
concerning the effects of changes in and new accounting standards
and Year 2000 issues.
Item 8. Financial Statements
See Item 14 for index.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no reportable events as described in Item 304(b).
<PAGE>
KPMG
4905 Tilghman Street
Allentown, PA 18104
Independent Auditors' Report
The Board of Directors and Stockholders
Allen Organ Company:
We have audited the accompanying consolidated balance sheets of Allen Organ
Company and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Allen Organ Company and Subsidiaries as of December 31, 1998
and 1997, and the consolidated results of their operations and their cash
flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Allentown, PA
January 29, 1999
<PAGE>
CONCANNON, GALLAGHER, MILLER & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
Michael J. Gallagher, CPA
Michael R. Miller, CPA
William C. Mason, CPA
E. Barry Hetzel, CPA
Edward J. Quigley, Jr., CPA
John G. Estock, CPA
Howard D. Gneiding, CPA
Robert A. Oster, CPA
Robert E. Vitale, CPA
John F. Sharkey, Jr., CPA
Victor J. Meyer, CPA
David C. Gehringer, CPA
Gerard D. Stanus, CPA
Robert M. Caster, CPA
Anthony M. Bragano, CPA
Kenneth P. Harmony, Jr., CPA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Shareholders
Allen Organ Company
We have audited the accompanying consolidated balance sheet of Allen
Organ Company and Subsidiaries as of December 31, 1996 and the related
consolidated statements of income, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Allen Organ Company and Subsidiaries at December 31, 1996 and
the consolidated results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting
principles.
/s/ CONCANNON, GALLAGHER, MILLER AND COMPANY, P.C.
Allentown, PA
January 30, 1997
Member of AICPA Division for CPA Firms SEC and Private Companies Practice
Sections
<PAGE>
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1998 1997
CURRENT ASSETS
Cash $ 1,727,554 $ 1,020,348
Investments including accrued interest 19,988,346 20,040,334
Accounts receivable 7,068,588 5,732,432
Inventories 14,481,177 17,923,387
Prepaid income taxes 422,656 232,895
Prepaid expenses 511,954 483,300
Deferred income tax benefits 306,812 --
Total Current Assets 44,507,087 45,432,696
PROPERTY, PLANT AND EQUIPMENT, NET 9,911,637 9,515,012
OTHER ASSETS
Prepaid pension costs 642,609 795,107
Inventory held for future service 1,242,754 1,260,346
Note receivable 659,886 203,557
Cash value of life insurance 1,400,334 1,122,495
Goodwill, net 3,619,147 3,755,483
Intangible and other assets, net 6,499 477,308
Total Other Assets 7,571,229 7,614,296
Total Assets $61,989,953 $62,562,004
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,562,432 $ 913,110
Deferred income taxes -- 74,091
Other accrued expenses 1,422,285 692,282
Customer deposits 1,527,429 1,308,001
Total Current Liabilities 4,512,146 2,987,484
NONCURRENT LIABILITIES
Deferred liabilities 280,504 721,264
Total Liabilities 4,792,650 3,708,748
MINORITY INTERESTS 288,607 321,424
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share
Authorized
Class A Shares - 400,000 in 1998 and 1997
Class B Shares - 3,600,000 in 1998 and 1997
Issued
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
Total Common Stock 1,537,993 1,537,993
Capital in excess of par value 12,758,610 12,758,610
Retained earnings 54,448,760 55,725,180
Accumulated other comprehensive income:
Unrealized gain on investments, net 134,336 128,474
Sub-total 68,879,699 70,150,257
Less cost of common shares in treasury
1998 - 43,120 Class A shares and
324,052 Class B shares (11,971,003) --
1997 - 43,120 Class A shares and
314,155 Class B shares -- (11,618,425)
Total Stockholders' Equity 56,908,696 58,531,832
Total Liabilities and Stockholders' Equity $61,989,953 $62,562,004
See accompanying notes to Consolidated Financial Statements.
<PAGE>
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1998 1997 1996
NET SALES $44,966,075 $40,348,084 $36,715,128
COSTS AND EXPENSES
Cost of sales 31,870,469 26,785,916 23,789,872
Selling, administrative and
other expenses 11,486,315 8,289,570 6,333,148
Research and development 3,478,775 2,654,662 2,786,390
Costs to close Rocky Mount plant 415,000 -- --
Total Costs and Expenses 47,250,559 37,730,148 32,909,410
(LOSS) INCOME FROM OPERATIONS (2,284,484) 2,617,936 3,805,718
OTHER INCOME (EXPENSE)
Investment income 1,223,699 2,114,722 2,025,024
Other income, net 12,925 14,443 24,621
Interest expense -- -- (10,309)
Minority interests in
consolidated subsidiaries 61,958 6,041 55,822
Total Other Income (Expense) 1,298,582 2,135,206 2,095,158
(LOSS) INCOME BEFORE TAXES (985,902) 4,753,142 5,900,876
PROVISION FOR TAXES
Current (11,000) 1,296,000 2,087,000
Deferred (646,000) (55,000) (52,000)
Total Provision For Taxes (657,000) 1,241,000 2,035,000
NET (LOSS) INCOME BEFORE
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE $ (328,902) $ 3,512,142 $ 3,865,876
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (net of
income tax benefit of $183,000) (287,809) -- --
NET (LOSS) INCOME $ (616,711) $ 3,512,142 $ 3,865,876
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gains on investments:
Unrealized gains arising
during period $ 162,874 $ 525,168 $ 166,334
Less: reclassified adjustment
for gains included in income (157,012) (486,074) (171,090)
Other comprehensive income 5,862 39,094 (4,756)
COMPREHENSIVE (LOSS) INCOME $ (610,849) $ 3,551,236 $ 3,861,120
BASIC AND DILUTED EARNINGS
PER SHARE:
Net (loss) income before cumulative
effect of change in accounting
principle $ (0.28) $ 2.79 $ 2.88
Cumulative effect of change in
accounting principle (0.24) -- --
NET (LOSS) INCOME $ (0.52) $ 2.79 $ 2.88
See accompanying notes to Consolidated Financial Statements.
<PAGE>
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Capital
in
Class A Class B Excess of
Shares Amount Shares Amount Par Value
Balance-December 31, 1995 128,104 $128,104 1,409,889 $1,409,889 $12,758,610
Balance-December 31, 1996 128,104 $128,104 1,409,889 $1,409,889 $12,758,610
Exchange Class A Shares
for Class B Shares (872) (872) 872 872
Balance-December 31, 1997 127,232 $127,232 1,410,761 $1,410,761 $12,758,610
Balance-December 31, 1998 127,232 $127,232 1,410,761 $1,410,761 $12,758,610
Accumulated
Other
Retained Comprehensive Treasury Stock
Earnings Income Shares Amount
Balance-December 31, 1995 $49,786,163 $ 94,136 174,955 $4,522,049
Net Income 3,865,876
Reacquired Class B Shares 38,801 1,469,659
Change in unrealized gain on
securities available
for sale (4,756)
Cash dividend paid
($.55 per share) (736,983)
Balance-December 31, 1996 $52,915,056 $ 89,380 213,756 $5,991,708
Net Income 3,512,142
Reacquired Class B Shares 143,519 5,626,717
Change in unrealized gain on
securities available
for sale 39,094
Cash dividend paid
($.56 per share) (702,018)
Balance-December 31, 1997 $55,725,180 $128,474 357,275 $11,618,425
Net Loss (616,711)
Reacquired Class B Shares 9,897 352,578
Change in unrealized gain on
securities available
for sale 5,862
Cash dividend paid
($.56 per share) (659,709)
Balance-December 31, 1998 $54,448,760 $134,336 367,172 $11,971,003
See accompanying notes to Consolidated Financial Statements.
<PAGE>
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (616,711) $ 3,512,142 $ 3,865,876
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities
Depreciation and amortization 1,478,379 1,114,639 815,277
Minority interest in consolidated
subsidiaries (61,958) (6,041) (55,822)
Amortization of bond premiums -- -- 4,349
Cumulative effect of change in
accounting principle (excluding
income tax effects) 470,809 -- --
Loss (Gain) on sale of property,
plant and equipment 8,153 (3,984) 5,692
Gain on sale of investments (242,227) (765,110) (287,982)
Change in assets and liabilities (net
of acquisition effects)
Accounts receivable (1,336,156) (914,493) (386,440)
Inventories 3,459,802 (3,188,750) (1,292,561)
Prepaid income taxes (189,761) 164,509 459,226
Prepaid expenses (28,654) (328,631) (39,349)
Deferred income tax benefits (306,812) -- --
Prepaid pension costs 152,498 94,099 132,311
Accounts payable 649,322 498,632 (139,103)
Other accrued expenses 730,003 192,927 (1,518,438)
Customer deposits 219,428 546,262 298,720
Deferred liabilities (514,851) (32,217) (59,500)
Net Cash Provided by Operating
Activities 3,871,264 883,984 1,802,256
CASH FLOWS FROM INVESTING ACTIVITIES
Cash proceeds from sale of investments
classified as available for sale 2,526,721 30,263,188 38,938,452
Cash paid for purchase of investments
classified as available for sale (2,226,644) (20,497,033) (36,914,531)
Increase in cash value of life
insurance (277,839) (264,278) (228,736)
Increase in note receivable (456,329) (40,409) (40,562)
Payment for acquisition, net of cash
acquired -- (1,512,000) --
Additions to intangible and other
assets (238,534) (211,690) --
Purchase of minority stockholders'
interest in subsidiary -- -- (20,000)
Cash proceeds from sale of property,
plant and equipment 28,170 7,841 10,000
Cash paid for purchase of property,
plant and equipment (1,477,340) (2,046,097) (761,483)
Net Cash (Used In) Provided by
Investing Activities (2,121,795) 5,699,522 983,140
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid in cash (659,709) (702,018) (736,983)
Reacquired Class B common shares (352,578) (5,626,717) (1,469,659)
Subsidiary company stock reacquired
from minority stockholders (29,976) (15,625) (3,572)
Subsidiary company stock issued to
minority stockholders -- -- 9,920
Net Cash Used in
Financing Activities (1,042,263) (6,344,360) (2,200,294)
NET INCREASE IN CASH 707,206 239,146 585,102
CASH, JANUARY 1 1,020,348 781,202 196,100
CASH, DECEMBER 31 $1,727,554 $ 1,020,348 $ 781,202
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for income taxes $ 167,050 $ 1,758,833 $ 1,793,338
Cash paid for interest $ -- $ -- $ 53,322
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Purchase price adjustment
of August 1,1995 acquisition $ -- $ -- $ 630,885
Decrease of accrued liability to
purchase inventory -- -- 1,735,000
Decrease in long term debt -- -- 86,641
Decrease in minority interest -- -- (630,885)
Decrease in inventory -- -- (864,291)
Decrease in intangible assets
(Goodwill) -- -- (957,350)
Increase in current accrued
liabilities $ -- $ -- $ --
See accompanying notes to Consolidated Financial Statements.
<PAGE>
ALLEN ORGAN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Significant Accounting Policies
Background:
Allen Organ Company and Subsidiaries operate in four industry segments:
musical instruments, data communications, electronic assemblies, and audio
equipment. See note 15 for additional information on the operating
activities of each segment.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Allen
Organ Company and the following subsidiaries. All material intercompany
transactions have been eliminated.
Subsidiary Name Ownership %
Allen Diversified, Inc. 100.00%
Rocky Mount Instruments, Inc. 100.00%
Allen Organ International, Inc. 100.00%
VIR, Inc. 98.59%
Eastern Research, Inc. 92.52%
Linear Switch Corporation 92.20%
Legacy Audio, Inc. 75.00%
In December 1998 the Company established Allen Diversified, Inc. to
hold and manage the Company's investments in its subsidiaries.
Reclassifications:
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
Off-Balance Sheet Risk:
Financial instruments that potentially subject the Company to credit
risk consist principally of short-term investments and trade receivables.
The Company places substantially all of its investments in mutual funds
holding federal, state and local government obligations and, by policy,
limits the amount of credit exposure in any one investment. The Company
sells most of its products through established dealer networks. The credit
risk associated with related receivables is limited due to the large
number of dealers and their geographic dispersion.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
Investments:
The Company accounts for its short-term investments in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Management determines
the appropriate classification of its investments in debt and equity
securities at the time of purchase and reevaluates such determination at
each balance sheet date.
Inventories:
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first- out (FIFO) method for substantially
all inventories.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation is
computed over estimated useful asset lives using both straight-line and
accelerated methods for financial reporting and accelerated methods for
tax reporting.
Goodwill and Intangibles:
Goodwill represents the excess of cost over the net assets of acquired
subsidiaries. Goodwill is amortized on a straight-line basis over various
periods from 3 - 20 years and is presented net of accumulated amortization
of $782,850 and $348,862 at December 31, 1998 and 1997 respectively. The
carrying value of goodwill for each business is continually reviewed to
assess its recoverability from future operations of the acquired
subsidiaries, based on future cash flows (undiscounted) expected to be
generated by such operations. Any impairment in value indicated by the
assessment would be charged against current operations.
During 1997 the Company re-evaluated the useful life of goodwill
acquired through business acquisitions and began amortizing the goodwill
associated with acquisitions over useful lives of 3 - 20 years.
Previously, goodwill was being amortized over 40 years. This change in
the estimated life of the goodwill had the effect of decreasing net income
for 1997 by approximately $60,000 ($0.05 per share).
Intangible assets consisted of organization costs (presented net of
accumulated amortization of $134,225 at December 31, 1997) which are
stated at cost and amortized using the straight-line method over ten
years. Inaccordance with the AICPA Accounting Standards Executive
Committee Statement of Position, 98-5, Reporting on the Costs of Start-up
Activities, the net book value of these organizational costs was expensed
in 1998, as acumulative effect of a change in accounting principle.
Income Taxes:
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes. Deferred taxes are recognized for differences between the
basis of assets and liabilities for financial statement and income tax
purposes.
Research and Development:
Research and development expenditures are charged to expense as
incurred.
Stock-Based Compensation:
The Company accounts for its stock-based compensation plans using the
accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Since the Company is not
required to adopt the fair value based recognition provisions prescribed
under Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, it has elected only to comply with the
disclosure requirements set forth in the Statement. (See Note 17.)
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 by mid 1999. Externally, the Company has surveyed
its suppliers, financial institutions, and other organizations that may
impact the Company's operation to assess their level of Year 2000
compliance. 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.
Change in Accounting Policies:
Effective January 1, 1998, the Company adopted the AICPA Accounting
Standards Executive Committee Statement of Position, 98-5, Reporting on
the Costs of Start-up Activities, (SOP 98-5). In accordance with SOP 98-5,
costs associated with start-up activities, including organizational costs,
should be expensed as incurred. The effect of the change resulted in a
decrease to net income of $287,809 (net of taxes of $183,000). These
amounts were a result of unamortized organizational costs associated with
the acquisitions of the Data Communications and Audio Equipment segments.
During 1998, the Company also adopted the following new Statements
issued by the Financial Accounting Standards Board. These Statements did
not have a material effect on the Company's financial Statements.
SFAS 130, Reporting Comprehensive Income - establishes standards for
reporting and display of comprehensive income and its components in
a full set of general purpose financial statements.
SFAS 131, Disclosures about Segments of an Enterprise and Related
Information - establishes standards for reporting selected
information about operating segments in interim financial reports.
It also establishes standards for related disclosures about products
and services.
SFAS 132, Employers' Disclosures about Pensions and Other Post
Retirement Benefits - revises disclosures about pensions and other
post retirement benefit plans.
NOTE 2 Business Acquisitions
Legacy Audio:
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
financial statements from the date of acquisition. Assets and liabilities
have been recorded at their estimated fair market values with the excess
being recorded as goodwill which will be amortized over periods from 10 -
20 years.
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 respective year. The pro forma
financial information is not necessarily indicative of the results of
operations which would have been attained had the acquisitions been
consummated on any of the foregoing dates or which may be attained in the
future.
Years Ended December 31,
1997 1996
Pro forma Net Sales $40,809,887 $38,681,238
Pro forma Net Income 3,490,772 3,889,960
Pro forma Net Income Per Share $2.77 $2.90
NOTE 3 Plant Closing
In 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. The Company expects to terminate a total of
60 people by June 30, 1999. 28 employees had been terminated as of
December 31, 1998. The Company estimates the termination costs (including
employee severance and benefits) related to this closure to total
approximately $415,000, which is included in the operating results for the
year ended December 31, 1998. $110,569 of termination costs were paid as
of December 31, 1998, the balance of $304,431 is included in other accrued
expenses at December 31, 1998. The Company does not expect to incur
losses on the disposition of the plant assets.
NOTE 4 Investments
The cost and fair value of investments in debt and equity securities
are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1998
Available for sale
Equity securities $ 181,473 $ 42 $ 139,696 $ 41,819
Mutual Funds
Short Term Gov't Funds 10,331,781 135,266 -- 10,467,047
Municipal Bond Funds 6,066,165 112,575 -- 6,178,740
Equity Funds 2,779,074 118,495 14,829 2,882,740
U.S. Treasury Bills 418,000 -- -- 418,000
Totals $19,776,493 $366,378 $ 154,525 $19,988,346
December 31, 1997
Available for sale
Equity securities $ 215,354 $ 82 $ 69,663 $ 145,773
Mutual Funds
Short Term Gov't Funds 10,268,613 -- -- 10,268,613
Municipal Bond Funds 5,725,690 111,096 -- 5,836,786
Equity Funds 2,071,521 169,121 7,480 2,233,162
U.S. Treasury Bills 1,556,000 -- -- 1,556,000
Totals $19,837,178 $280,299 $ 77,143 $20,040,334
Marketable debt securities have an average contractual maturity of
approximately 1 year or less.
Realized gains and losses are determined based on the original cost of
these investments using a first-in, first-out method. During 1998, 1997
and 1996, sales proceeds and gross realized gains and losses on securities
classified as available for sales were:
1998 1997 1996
Sales proceeds $2,526,721 $30,263,188 $38,938,452
Gross realized losses $ -- $ 44,448 $ 9,100
Gross realized gains $ 242,227 $ 809,558 $ 297,082
The change in net unrealized holding gains (losses) on securities
available for sale in the amount of $8,697, $53,746, and $(9,046) net of
deferred tax expense (benefits) of $2,835, $14,650, and $(4,290) has been
included in other comprehensive income in stockholders' equity for the
years ended December 31, 1998, 1997, and 1996, respectively.
NOTE 5 Inventories
December 31,
1998 1997
Finished goods $ 2,631,290 $ 2,046,835
Work in process 4,932,978 7,343,590
Raw materials 6,916,909 8,532,962
Totals $14,481,177 $17,923,387
The Company maintains an inventory of various parts to be used to
service musical instruments as future needs arise. This inventory,
$1,242,754 and $1,260,346 at December 31, 1998 and 1997, respectively,
is reported as a noncurrent asset.
NOTE 6 Property, Plant and Equipment
Estimated
December 31, Useful
1998 1997 Lives
Land and improvements $ 2,445,579 $2,445,579 10 yrs
Buildings and improvements 8,250,158 8,100,068 10-40 yrs
Machinery and equipment 8,385,676 7,751,766 5-10 yrs
Office furniture and equipment 2,109,192 1,545,262 3-8 yrs
Vehicles 224,632 241,869 4 yrs
Sub-total 21,415,237 20,084,544
Less accumulated depreciation 11,503,600 10,569,532
Property, plant and equipment net
of accumulated deprecitation $ 9,911,637 $9,515,012
Depreciation expense charged to operations was $1,044,393, $836,769
and $676,775 in 1998, and 1997 and 1996 respectively.
NOTE 7 Note Receivable
The Company has entered into two Split-Dollar Life Insurance
agreements with its President who is the insured and owner of the
policies. The policy owner shall pay the portion of the premiums 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 $450,000 annually.
The agreements provide 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 premiums.
The Company is also secured by the personal obligation of its President.
The note receivable exceeds the cash surrender value of these policies
by approximately $340,000 at December 31, 1998.
NOTE 8 Income Taxes
The provision for income taxes consists of the following:
1998 1997 1996
Currently Currently Currently
Payable Deferred Payable Deferred Payable Deferred
Federal $(151,000) $(420,000) $1,270,000 $ 73,000 $1,620,000 $59,000
State 125,000 (394,000) 26,000 (128,000) 467,000 (111,000)
Total $ (26,000) $(814,000) $1,296,000 $ (55,000) $2,087,000 $(52,000)
The total 1998 tax benefit of $840,000 is included in current and
deferred taxes on income and in the tax effect of the cumulative effect
of change in accounting principle on the consolidated statements of
income.
A reconciliation of the provision for income taxes with the
statutory rate follows:
1998 1997 1996
Statutory provision for
federal income tax $(516,000) 34.0% $1,614,000 34.0% $1,987,000 34.0%
State taxes, net of
federal tax benefits (177,000) 11.7 81,000 1.6 235,000 4.0
Tax credits -- -- (60,000) (1.3) (60,000) (1.0)
Tax-exempt income (97,000) 6.4 (110,000) (2.3) (65,000) (1.1)
Exempt income of foreign
sales corporation (61,000) 4.0 (101,000) (2.1) (104,000) (1.8)
Other items, net 11,000 (0.7) (38,000) (0.8) (42,000) (0.7)
Effect of change in
prior year's state tax
revenue allocations -- -- (229,000) (4.8) -- --
Effect of change in
state valuation allowance
of deferred tax asset -- -- 84,000 1.8 -- --
Total $(840,000) 55.4% $1,241,000 26.1% $2,035,000 34.8%
The following temporary differences give rise to the net deferred
tax liability at December 31, 1998 and 1997.
1998 1997
Deferred Tax Liabilities
Excess of tax depreciation/amortization
over book depreciation/amortization $ (359,778) $ (533,989)
Excess of pension expense for tax
purposes over book (224,910) (288,801)
Unrealized gain not recognized
for tax purposes (74,522) (74,091)
Total Deferred Tax Liabilities (659,210) (896,881)
Deferred Tax Assets
Deferred compensation not recognized
for tax purposes 16,856 20,211
State net operating loss carry forwards 383,516 185,716
Accrued expenses to close Rocky Mount plant 112,652 --
Reserve for Bad Debts 70,702 11,383
Inventory Reserve 243,709 23,633
Sub-total 827,435 240,943
Valuation Allowance (94,000) (84,000)
Total Deferred Tax Assets 733,435 156,943
Net Deferred Tax Asset (Liability) $ 74,225 $ (739,938)
Deferred taxes are included in the company's financial statements as
follows:
1998 1997
Current deferred tax asset (liability) $ 306,812 $ (74,091)
Non-current deferred tax liability (232,587) (665,847)
Net deferred tax asset (liability) $ 74,225 $ (739,938)
The Company has available at December 31, 1998, approximately
$6,400,000 of unused state net operating loss carry forwards that may be
applied against future taxable income and that expire in various years
from 2002 to 2008.
At December 31, 1998 and 1997 the Company recorded a valuation
allowance of $94,000 and $84,000, respectively against the deferred tax
assets relating to uncertainty of realizing state net operating loss carry
forwards.
NOTE 9 Other Accrued Expenses
December 31,
1998 1997
Accrued salaries and commissions $ 552,099 $ 385,176
Accrued plant closing costs 304,431 --
Other 565,756 307,106
Total $1,422,286 $ 692,282
NOTE 10 Commitments and Contingencies
As of December 31, 1998, the Company is contingently liable for a
maximum amount of approximately $1,821,332 in connection with the
financing arrangements of certain customers.
Under the terms of an agreement with the wife of the late Chairman
and principal shareholder, the Company may be required to purchase within
eight months of her death, at the option of her personal representative,
an amount of Class B Common Shares then owned by her or includable in her
estate for Federal Estate Tax purposes sufficient to pay estate taxes and
costs, subject to the limitations of Section 303 of the Internal Revenue
Code. At December 31, 1998, the shareholder owned or would have
includable in her estate 261,072 shares of Class B Common Stock. The
Company has purchased life insurance on the life of the shareholder with a
face value of $6,000,000. Management believes that the insurance proceeds
would be sufficient to substantially fund this possible future commitment
and that any excess would not have a material effect on the financial
condition of the Company.
During December 1998, the Company engaged an outside contractor to
upgrade the air handling systems in the wood and metal finishing area of
its Macungie, PA plant. This addition is being made to improve product
quality for the Company's musical instruments and Legacy speaker cabinet
production. The total cost of this project will be approximately $950,000
of which $177,000 has been paid through December 31, 1998.
In connection with the purchase of VIR, Eastern Research and Linear
Switch, the Company agreed to pay a contingent purchase price equal to
4.5% of the sales of these Companies in excess of $7,000,000 per year
through December 2000. The total contingent payment for 1998, 1997 and
1996 amounted to $238,535, $92,432 and $29,142, respectively. The
agreement provides that the total of the contingent payments shall not
exceed $2,000,000.
The Company's data communications segment leases its offices and
production facility under non-cancelable operating leases which expire at
various dates through February, 2001. These leases include renewal
options for periods ranging from two to fifteen years with increases of
lease payments based on changes in the Consumer Price Index. Rent expense
was $230,447, $179,765 and $169,493 for 1998, 1997 and 1996, respectively.
Minimum annual rent payments for the operating leases are as follows:
1999 $ 236,320
2000 199,220
2001 24,220
Total $ 459,760
NOTE 11 Retirement Plans
The Company sponsors two noncontributory defined benefit pension
plans which cover substantially all of its employees. Salaried plan
benefits are generally based on the employee's years of service and
compensation levels. Hourly plan benefits are based on various monthly
amounts for each year of credited service. The Company's funding policy
is to contribute amounts to the plans sufficient to meet the minimum
funding requirements set forth in the Employee Retirement Income Security
Act of 1974, plus such additional amounts as the Company may determine to
be appropriate from time to time. Plan assets are comprised principally
of cash equivalents, U.S. Government obligations, fixed income securities,
and equity securities.
Following are reconciliations of the pension benefit obligation and
the value of plan assets:
1998 1997 1996
Pension benefit obligation
Balance, beginning of year $13,222,392 $13,252,456 $12,450,935
Service cost 310,909 299,166 282,303
Interest cost 983,147 953,842 952,301
Benefits paid to participants (792,052) (757,090) (815,577)
Gain (loss) on updated
data/assumptions 1,198,922 (525,982) 382,494
Balance, end of year $14,923,318 $13,222,392 $13,252,456
Plan assets
Fair value, beginning of year $14,764,799 $13,641,779 $12,788,615
Actual investment returns 1,639,203 1,750,515 1,544,571
Company contributions -- 129,595 124,170
Benefits paid to participants (792,052) (757,090) (815,577)
Fair value, end of year $15,611,950 $14,764,799 $13,641,779
The Funded status of the plans were as follows:
December 31,
1998 1997 1996
Excess of the value of plan assets
over the benefit obligation $ 688,632 $ 1,542,407 $ 389,323
Unrecognized prior service cost 147,313 221,303 295,293
Unrecognized net transition
liability (asset) (216,028) (288,036) (360,044)
Unrecognized net actuarial loss 22,692 (680,567) 564,634
Prepaid benefit cost $ 642,609 $ 795,107 $ 889,206
The following weighted-average rates were used:
Discount rate on the benefit obligation 6.75% 7.5% 7.5%
Rate of return on plan assets 8.0% 8.0% 8.0%
Rate of long-term compensation increase 6.0% 6.5% 7.0%
Pension expense is comprised as follows:
1998 1997 1996
Service cost $ 310,909 $ 299,166 $ 282,303
Interest cost 983,147 953,842 952,301
Expected return on plan assets (1,143,540) (1,031,296) (989,618)
Amortization of net loss from
prior periods -- -- 9,513
Amortization of unrecognized prior
service cost 73,990 73,990 73,990
Amortization of transition asset (72,008) (72,008) (72,008)
Net Pension Cost $ 152,498 $ 223,694 $ 256,481
The foregoing net amounts regarding the pension benefit obligation
and the value of plan assets are based on a combination of both
overfunded and underfunded plans. The aggregate amounts relating to
underfunded plans are as follows:
December 31,
1998 1997 1996
Projected benefit obligation $ 7,798,136 $ -- $7,068,885
Accumulated benefit obligation 6,708,396 -- 5,645,393
Fair value of plan assets 7,707,085 -- 6,663,437
The Company provides a 401(k) deferred compensation and profit
sharing plan for the benefit of eligible employees. The plan allows
eligible employees to defer a portion of their annual compensation,
pursuant to Section 401(k) of the Internal Revenue Code. Company profit-
sharing contributions to the plan are discretionary as determined by the
Company's board of directors. The Company contributions were $112,981,
$147,160 and $139,732 to the plans in 1998, 1997 and 1996 respectively.
NOTE 12 Deferred Liabilities
December 31,
1998 1997
Deferred compensation expense $ 47,917 $ 55,417
Deferred income taxes 232,587 665,847
Total $ 280,504 $ 721,264
NOTE 13 Earnings Per Share
Earnings per share were computed using 1,178,064 shares in 1998,
1,258,966 shares in 1997, and 1,340,047 shares in 1996, the weighted
average number of shares outstanding during each year. The Company does
not have any dilutive equity instruments.
NOTE 14 Export Sales
In 1998, 1997 and 1996, net sales by the musical instruments segment
include export sales, principally to Canada, Europe and the Far East of
$3,676,981, $4,432,974, and $5,594,286, respectively. Net sales by the
data communications segment include export sales principally to Europe
and the Far East of $1,261,029 for 1998, $2,103,734 for 1997, and
$1,417,636 for 1996. Net sales by audio equipment segment include
export sales principally to Europe and the Far East of $92,526 for 1998
and $211,561 for the nine months ended December 31, 1997.
NOTE 15 Industry Segment Information
The Company's operations are classified into four industry segments:
musical instruments, data communications, electronic assemblies, and
audio equipment. The musical instruments segment is comprised of
operations principally involved in the design, manufacture, sale and
distribution of electronic keyboard musical instruments, primarily
digital computer organs and related accessories. Musical instruments
are sold primarily to retail distributors worldwide.
The data communications segment is involved in the design,
manufacture, sale and distribution of data communications equipment.
Data communications products are sold primarily to wholesale and retail
distributors worldwide and under OEM agreements with several of its
customers.
The electronic assemblies segment is involved in the manufacture,
sale and distribution of electronic assemblies for outside customers
used primarily as control devices and other circuitry in their products.
Subcontract assembly services are provided primarily to industrial
concerns in Pennsylvania and New Jersey.
The audio equipment segment began in 1997 with the acquisition
discussed in Note 2. The segment is involved in the design,
manufacture, sale and distribution of high quality speaker cabinets and
related equipment for hi-fi stereo and home theater applications. The
segment's products are sold worldwide directly to individual customers
for home use with a lesser percentage distributed through dealer
audition sites.
Following is a summary of segmented information for 1998, 1997 and
1996.
December 31,
1998 1997 1996
Net Sales to Unaffiliated Customers
Musical instruments $25,425,112 $23,351,483 $25,418,620
Data communications 12,297,955 9,037,521 7,647,597
Electronic assemblies 4,727,975 5,935,381 3,648,911
Audio equipment 2,515,033 2,023,699 0
Total $44,966,075 $40,348,084 $36,715,128
Intersegment Sales
Musical Instruments $ 136,123 $ 5,252 $ 0
Data Communications 594 84,939 125,288
Electronic Assemblies 495,266 938,479 296,132
Audio Equipment 148,573 52,244 0
Total $ 780,556 $ 1,080,914 $ 421,420
Income (Loss) from Operations
Musical instruments $ 795,773 $ 2,718,085 $ 3,634,901
Data communications (3,397,020) (1,069,165) (349,785)
Electronic assemblies 326,609 631,521 520,602
Audio equipment (9,846) 337,495 0
Total $(2,284,484) $ 2,617,936 $ 3,805,718
Identifiable Assets
Musical instruments $19,777,418 $22,669,782 $20,790,307
Data communications 11,532,523 10,294,411 8,937,839
Electronic assemblies 3,501,492 4,422,908 2,600,627
Audio equipment 2,259,185 2,153,922 0
Sub-total 37,070,618 39,541,023 32,328,773
General corporate assets 24,919,335 23,020,981 31,637,873
Total $61,989,953 $62,562,004 $63,966,646
Capital Expenditures
Musical instruments $ 926,718 $ 1,574,743 $ 530,624
Data communications 542,030 386,308 230,859
Audio equipment 8,592 85,046 0
Total $ 1,477,340 $ 2,046,097 $ 761,483
Depreciation and Amortization
Musical instruments $ 786,582 $ 657,686 $ 580,090
Data communications 618,380 392,108 235,187
Audio equipment 73,417 64,845 0
Total $ 1,478,379 $ 1,114,639 $ 815,277
Intersegment sales are generally priced at cost plus a percentage
mark-up, and are generally thought to be marginally less than prices
which would be charged for the same product to unaffiliated customers.
Intersegment sales are excluded from net sales reported in the
accompanying consolidated income statements. Identifiable assets by
segment are those assets that are used in the Company's operations
within that segment. General corporate assets consist principally of
cash and short-term investments.
The electronic assemblies segment derived 68% of its revenues from
three customers in 1998, and 55% and 85% of its revenues from one
customer in 1997 and 1996 respectively. The data communications segment
derived 13%, 12% and 14% of its revenue from one customer in 1998, 1997
and 1996, respectively. The Company's musical instrument and audio
equipment segments are not dependent on any single customer.
NOTE 16 Investment Income
December 31,
1998 1997 1996
Interest Income $ 887,338 $1,198,362 $1,382,301
Dividend Income 94,134 151,250 354,741
Gain on Sale of Investments 242,227 765,110 287,982
Total $1,223,699 $2,114,722 $2,025,024
NOTE 17 Stock Option Plans
During 1997, VIR, Inc. (VIR) and Eastern Research, Inc. (ERI)
established employee stock-based compensation plans to assist them in
attracting and retaining personnel. The maximum number of these
subsidiaries' shares that may be issued under the plans approximates a
15% interest in each of the respective companies. Options are issued at
estimated fair market value. The maximum term of the options is 6
years, and they generally vest equally over 4 years.
As of December 31, 1997, total options issued for VIR and ERI
represent 10% and 11%, respectively, of the shares currently
outstanding. Vested options consist of 2% and 3% of the currently
outstanding shares of VIR and ERI, respectively.
No compensation expense was recognized for these plans in 1998 and
1997. Had compensation cost been determined pursuant to FASB Statement
No. 123, net income (loss) and earnings per share would have been:
1998 1997
Net (loss) income $(686,811) $3,431,897
Earnings per share $(0.58) $2.73
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) Identification of Directors
Time Period
Date Term Position
Name Expires Age Position Held
Steven Markowitz Next Annual 45 Director Since 1980
Meeting in 1999
Eugene Moroz Next Annual 75 Director Since 1968
Meeting in 1999
Leonard W. Helfrich (1) Next Annual 69 Director 1964-1968 and
Meeting in 1999 1972 to present
Orville G. Hawk (1) Next Annual 81 Director Since 1989
Meeting in 1999
Albert F. Schuster (1) Next Annual 79 Director Since 1989
Meeting in 1999
Martha Markowitz Next Annual 77 Director Since 1991
Meeting in 1999
Jeffrey L. Schucker (1) Next Annual 44 Director Since July 1996
Meeting in 1999
Ernest Choquette Next Annual 45 Director Since April 1998
Meeting in 1999
(1) Audit Committee member.
(b) Identification of Executive Officers.
Time Period
Date Term Position
Name Expires Age Position Held
Steven Markowitz Next Annual 45 President 1990 to
Meeting in 1999 present
Leonard W. Helfrich Next Annual 69 Vice President, 1958 - 1968
Meeting in 1999 Secretary and 1971 to
present
Barry J. Holben Next Annual 46 Vice President October 1995
Meeting in 1999 to present
Dwight A. Beacham Next Annual 52 Vice President October 1995
Meeting in 1999 to present
Nathan S. Eckhart Next Annual 35 Treasurer, May 1996
Meeting in 1999 Assistant Secretary to present
(c) Identification of Certain Significant Employees.
Not required to be answered.
(d) Family Relationships.
Except for Martha Markowitz and Steven Markowitz,
who are mother and son, there is no family relationship
between any officers or directors of the Company.
(e) Business Experience.
(1) Steven Markowitz, , Leonard W. Helfrich
and Dwight Beacham, have been employees of the
Company in executive capacities for at least the
last five years.
Mr. Holben has been employed by the
Company since 1989, spending two years in product
development and then serving in various sales
capacities.
Mr. Eckhart has been employed by the
Company since 1993, previously serving as
Controller. Prior to that time he was a manager for
a public accounting firm.
Mr. Moroz was employed by the Company for
over 50 years, having last held the position of Vice
President. He retired from active employment in May
1998 and continues to serve on the Board of
Directors.
Mr. Hawk who has been retired more than
five (5) years was formerly Chairman of the Board
and President of First National Bank of Allentown.
Mr. Schuster is a church director of music
and prior to his retirement more than five (5) years
ago was a supervisor at Bethlehem Steel Corporation.
Mr. Schucker is currently President of
Middle Market Capital Advisors, L.L.C. and formerly
a Vice President of Meridian Capital Markets.
Mr. Choquette has been a member of the law
firm of Stevens & Lee, Reading PA, for almost 20
years and currently serves as Co-Chairman of their
Corporate Group.
Mrs. Markowitz is the widow of Jerome
Markowitz, the Company's founder, and represents the
family interests.
(f) Involvement in Certain Legal Proceedings by
Directors or Officers.
None.
(g) Compliance with Section 16(a) of the Exchange Act.
No transaction required to be reported.
Item 11. Executive Compensation.
Deleted paragraphs and/or columns are not required to be
answered.
(b) SUMMARY COMPENSATION TABLE:
Annual Compensation All Other
Salary Bonus Compensation *
Name and Principal Position Year $ $ $
Steven A. Markowitz, President 1998 105,115 17,000 35,558
(Chief Executive Officer) 1997 100,090 18,598 30,650
1996 96,547 22,865 30,766
Leonard W. Helfrich, 1998 95,065 16,000
Vice President - Finance 1997 93,624 17,402
(Secretary) 1996 88,113 21,385
*Value of Split Dollar Life Insurance. See Note 7 to the accompanying
consolidated financial statements for additional information on this
arrangement.
(f) Defined Benefit or Actuarial Plan Disclosure.
Estimated Annual Benefit obtained from 1998 Actuarial
Valuation Report:
Steven A. Markowitz $57,354 Age 45. (1)
Leonard W. Helfrich $39,817 Age 69. (2)
(1) Amount shown is calculated from prior compensation to date and
estimated compensation to normal retirement age (65).
(2) Amount shown is calculated from prior compensation to current
age.
(g) Compensation of Directors:
Non-employee Directors receive $350 for each Board
and committee meeting attended plus reasonable expenses
in connection with attendance. Employee Directors
receive no additional compensation for their services
as a Director.
(h) Employment Contracts and Termination of Employment and
Change in Control Arrangements:
There are no employment contracts between the Company
and any of the Company's Executive Officers. The Company
has discontinued the Executive Incentive Plan adopted
October 24, 1996. The Company is presently evaluating
its executive compensation plans with assistance from
outside consultants and will implement appropriate plans
during 1999.
(j) Additional Information with Respect to Compensation
Committee Interlocks and Insider Participation in
Compensation Decisions:
(1) Leonard W. Helfrich, Vice President, Secretary,
and Director of the Company, is the sole member
of the Compensation Committee of the Board of
Directors whose function is to set the compensation
of the President. Thecompensation of all other employees
is set by or at the direction of the President.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Voting securities of the registrant owned of record or
beneficially by each person who owns of record, or is known by
the registrant to own beneficially, more than 5 percent of any
class of such securities. Class A Common Shares constitute
the only securities with voting rights. Information as of
February 28, 1998.
Amount and
Nature of
Names and Title of Beneficial % of
Addresses Class Ownership Class
Jerome Markowitz A 81,531 97.06%
Trust (2) (1)
821 N. 30th St.
Allentown, PA
(1) Sole voting and investment power
(2) The shares are held by Trustees under an Inter Vivos
Trust established by Mr. Markowitz, who died in February,
1991, for the benefit of his family, principally his widow,
Martha Markowitz. The Trustees are Steven Markowitz,
President and a Director of the Company, and Martha
Markowitz, a Director of the Company.
(b) Each class of equity securities of the registrant or any
of its parents or subsidiaries, other than directors'
qualifying shares, beneficially owned directly or indirectly by
all directors naming them and directors and officers of the
registrant, as a group, without naming them. Information as of
December 31, 1998.
Percent Percent
Nature of of of
Class Class Beneficial Class Class
Directors A B Ownership A B
Steven Markowitz 58 (1) (3) .07 %
13,562 (1) (3) 1.25%
81,531* (2) (4) 97.06 %
242,016* (2) (4) 22.27%
Eugene Moroz 6,290 (1) (3) as
to 6,290
6,000 (2) (4) as
to 6,000 1.13%
Leonard W. Helfrich 278 (2) (4) .03%
Orville G. Hawk 50 (2) (4) .005%
Martha Markowitz 19,056 (1) (3) 1.75%
81,531* (2) (4) 97.06 %
242,016* (2) (4) 22.27%
Percent Percent
All Directors of of
and Officers Class Class Class Class
as a Group A B A B
7 81,589** 287,252** 97.13%** 26.43%
(1) Sole voting power
(2) Shared voting power
(3) Sole investment power
(4) Shared investment power
* Shares owned by the Jerome Markowitz Trust for
which Martha Markowitz and Steven Markowitz, Co-
Trustees, have shared voting and investment power and of
which Martha Markowitz is the primary beneficiary and
Steven Markowitz, one of the residuary beneficiaries.
** The shares held by the Jerome Markowitz Trust are
not duplicated in the totals for the Class A and Class B
Shares.
(c) Changes in Control. Not required to be answered.
Item 13. Certain Relationships and Related Transactions
See Note 10 to Financial Statements, concerning an agreement
between the Company and Martha Markowitz, a Director of the
Company.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The following consolidated financial statements of
Allen Organ Company and its subsidiaries are included in
Part II, Item 8:
Independent Auditors' Reports.
Consolidated Balance Sheets as of December 31, 1998
and 1997.
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996.
Consolidated Statement of Changes in Stockholders'
Equity for the years ended December 31, 1998, 1997, and
1996.
Consolidated Statements of cash flows for the years
ended December 31, 1998, 1997, and 1996.
Notes to Consolidated Financial Statements.
The individual financial statements of the
Registrant's subsidiaries have been omitted, as they are
all included in the consolidated financial statements
referred to above.
(a) (2) Financial Statement Schedules
Financial schedules are omitted as not applicable.
(a) (3) Exhibits
Exhibit No. Description
2(4) Plan of acquisition
3.1(1) Articles of Incorporation as amended
3.2(2) Bylaws, as amended
10.2(3) Agreement of Amendment between the Company
and Martha Markowitz
21 Subsidiaries of the registrant
1. Incorporated by reference to the exhibit
filed with the Registrants Annual Report on
Form 10-K for the year ended December 31, 1984.
2. Incorporated by reference to the exhibit
filed with the Registrants Quarterly Report
on Form 10-Q for the period ended
September 30, 1996.
3. Incorporated by reference to the exhibit
filed with the Registrants Annual Report on
Form 10-K for the year ended December 31, 1992.
4. Incorporated by reference to the exhibit
filed with the Registrants Current Report on
Form 8-K dated August 1, 1995.
(b) Reports on Form 8-K. None filed during fourth
quarter of 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
Date: March 17, 1999 /s/ STEVEN A. MARKOWITZ
Steven A. Markowitz
Chief Executive Officer,
President and Director
Date: March 17, 1999 /s/ LEONARD W. HELFRICH
Leonard W. Helfrich
Vice President-Finance,
and Director, Chief
Financial and Principal
Accounting Officer
Date: March 17, 1999 /s/ MARTHA MARKOWITZ
Martha Markowitz
Director
Date: March 17, 1999 /s/ JEFFREY L. SCHUCKER
Jeffrey L. Schucker
Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,727,554
<SECURITIES> 19,988,346
<RECEIVABLES> 7,068,588
<ALLOWANCES> 0
<INVENTORY> 14,481,177
<CURRENT-ASSETS> 44,507,087
<PP&E> 21,415,237
<DEPRECIATION> 11,503,600
<TOTAL-ASSETS> 61,989,953
<CURRENT-LIABILITIES> 4,512,146
<BONDS> 0
<COMMON> 1,537,993
0
0
<OTHER-SE> 55,370,703
<TOTAL-LIABILITY-AND-EQUITY> 61,989,953
<SALES> 44,966,075
<TOTAL-REVENUES> 44,966,075
<CGS> 31,870,469
<TOTAL-COSTS> 31,870,469
<OTHER-EXPENSES> 15,380,090
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (985,902)
<INCOME-TAX> (657,000)
<INCOME-CONTINUING> (328,902)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (287,809)
<NET-INCOME> (616,711)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
ALLEN ORGAN COMPANY
Exhibit 21 - Subsidiaries of the Registrant
Subsidiaries Name Trade Name (if different) State of
Incorporation
Rocky Mount Instruments, Inc. North Carolina
Allen Diversified, Inc Delaware
Allen Organ International, Inc. US Virgin Islands
VIR, Inc. VIR Linear Switch Pennsylvania
Eastern Research, Inc. New Jersey
Linear Switch Corporation New Jersey
Legacy Audio, Inc. Illinois
