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. On March 7, 2000 the Company announced that it is exploring strategic alternatives for its subsidiary Eastern Research, Inc. (ERI). These alternatives include a public offering by the Company or ERI, divestiture, merger or other options, which would provide ERI with resources to continue its growth. The Company is weighing various alternatives for ERI and has not decided on what course of action is in the Company's best interest nor when this evaluation will be completed.
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 47%, 57% and 58% of revenue in 1999, 1998 and 1997 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. Certain electronic components have been placed on allocation by the suppliers and order lead times have been significantly increased for numerous electronic components. At the present time the Company does not expect this to significantly affect future product shipments. 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 2000 and 1999 was $7.0 million and $6.3 million respectively. All orders are expected to be filled in the current 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 40%, 27% and 22% of revenues in 1999, 1998 and 1997 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. Certain electronic components have been placed on allocation by the suppliers and order lead times have been significantly increased for numerous electronic components. At the present time the Company does not expect this to significantly affect future product shipments. The data communications segment derived 52% of its 1999 revenue from three customers and 13% and 12% of its 1998 and 1997 revenues 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 (TAS DS1 and DS3) to provide the ability to access and configure these higher speed circuits for various test procedures. These products require long sales cycles. During the second half of 1999 VIR/LSC began delivering products to Competitive Local Exchange Carriers (CLEC), which is one of the targeted markets for these products. The dollar amount of unshipped order backlog at the end of February 2000 and 1999 was $955,000 and $56,000 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. The customer base includes major end-user corporations, public carriers, Internet Service Providers and systems integrators. There are many competitors in this market that is dominated by several large data communications companies, such as Cisco Systems, Tellabs and Alcatel. 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 also developed router technology products. These products are relatively inexpensive and easy to manufacture. Thus, this is a competitive field where margins erode as new products emerge. 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 significantly increased as a percentage of sales and is ERI's flagship product. In order to properly capitalize on this market's opportunities, ERI is continuing to implement more aggressive marketing strategies 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, 2000 and 1999 was $2.0 million and $3.0 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%, 10% and 15% of revenue in 1999, 1998, and 1997 respectively. AIA derived 68% of its revenues from three customers in 1999 and 1998, and 55% of its revenues from one customer in 1997. The Electronic Assemblies segment is very competitive with numerous manufacturers offering such services. 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 2000 and 1999 was $1.6 million and $2.6 million respectively. All orders are expected to be filled in the current year.
Audio Equipment.
The Audio Equipment segment operates through two subsidiaries, Legacy Audio, Inc and Allen Audio, Inc. This segment accounted for 3% and 6% of revenue in 1999 and 1998 respectively, and 5% of revenues for the 9 month period from acquisition to December 31, 1997. 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 Audio Equipment 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 Legacy Audio, Inc. (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. The principal market for LAI's products are 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. The high-end audio market is going through significant changes as it evolves from the traditional two-channel to the multi-channel market, which is utilized in home theater applications. Legacy Audio has recently developed and has begun marketing products specifically for the home theater market. 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 building some of LAI's speaker cabinets at its Macungie, PA facility. 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 2000 and 1999 was $674,000 and $246,000 respectively. All orders are expected to be filled in the current year. Allen Audio, Inc. (AAI) Designs, manufactures and markets Public Address System products. AAI has developed a PA System mixer utilizing Digital Signal Processor (DSP) technology also used in the Allen digital organs. AAI has also developed a line of speakers for the PA field. The Company began marketing these PA Systems to mid-sized churches, auditoriums and the like during 1999. These products are being distributed through dealers primarily in the sound reinforcement business. AAI began shipping products primarily for dealer inventory during the second half of 1999.
General.
The Company's working capital is sufficient to meet the normal expansion of inventory and receivables. The Company spent $4,910,278, $3,478,775, and $2,654,662 annually in 1999, 1998, and 1997 respectively on research and development. The increases are a result of the Company's ongoing commitment to new product development and support, primarily at Eastern Research. The Company and its subsidiaries employ approximately 567 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.
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.
Data Communications: Southampton, Pennsylvania 22,000 Administrative, research and manufacturing facility. Leased until July, 2000. Operating at approximately 80% capacity.
Moorestown, New Jersey 29,000 Administrative, sales and research facility. Leased until September, 2002.
Audio Equipment: Springfield, Illinois 15,000 Administrative, research and manufacturing facility. Owned by Legacy Audio, Inc. Operating at approximately 95% capacity.
In April 1999, the Company sold its manufacturing and sales facility located in Rocky Mount, North Carolina. See Note 3 to the financial statements, for additional information.
Item 3.
Item 3. Legal Proceedings
There is no litigation requiring disclosure pursuant to Item 103 of regulation S-K.
Item 4.
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 1999.
PART II
Item 5.
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:
1999 High Low
First Quarter 41 1/8 33 Second Quarter 39 33 1/2 Third Quarter 40 1/2 35 1/4 Fourth Quarter 39 3/4 37
1998 High Low
First Quarter 43 38 Second Quarter 42 1/2 37 Third Quarter 40 1/2 35 Fourth Quarter 39 33
The Company has 8 Class A Shareholders and 325 Class B Shareholders of record as of March 10, 2000.
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 1999
Record Date Payable Amount
Cash 2/19/99 3/5/99 $.14 Cash 5/23/99 6/6/99 $.14 Cash 8/20/99 9/3/99 $.14 Cash 11/19/99 12/3/99 $.14
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
Item 6.
Item 6. Selected Financial Data Years Ended December 31, 1999 1998 1997 1996 1995
Net Sales $58,018,742 $44,966,075 $40,348,084 $36,715,128 $30,024,761
Net Income (Loss) $ 2,884,488 $ (616,711) $ 3,512,142 $ 3,865,876 $ 4,015,105
Earnings (Loss) per share $ 2.46 $ (0.52) $ 2.79 $ 2.88 $ 2.94
Cash dividends per share $ .56 $ .56 $ .56 $ .55 $ .55
At Year End Total Assets $67,466,070 $61,989,953 $62,562,004 $63,966,646 $65,299,426
Long-Term Debt, net of current portion $ 0 $ 0 $ 0 $ 0 $ 1,388,000
The 1999, 1998 and 1997 results of operations include the Audio Equipment segment acquired April 1, 1997.
Item 7.
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, 1999 1998 Working Capital $40,175,282 $39,994,941 Current Ratio 6 to 1 10 to 1 Debt to Equity Ratio .13 to 1 .08 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 decreased during 1999 as compared to 1998 primarily due to a 3,075,000 increase in accounts receivable and $2,800,000 increase in inventory at Eastern Research, Inc. as a result of that subsidiaries growth. Cash flows provided by operating activities increased during 1998 compared to 1997 primarily due to $3,200,000 and $600,000 reduction in inventory levels in the Musical Instruments and Electronic Assemblies segments' respectively. The Company expects that cash flows from operating activities will be sufficient to fund expected increases in working capital during 2000. Cash flows used in investing activities during 1999 were used to purchase approximately $3,260,000 in plant and equipment including $775,000 for a new air handling system in the wood and metal finishing area and $150,000 for a new automated router in the woodworking area of the Macungie, PA plant. Plant and equipment purchases of approximately $1,567,000 in the Data Communications segment are primarily related to leasehold improvements, new computers, office and test equipment to support the growth of Eastern Research. To continue Eastern Research's growth through 2000, the Company estimates that capital expenditures will approximate $1,700,000. 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. During 1997, 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.
Results of Operations:
Sales and Operating Income Consolidated net sales increased $13,052,667 (29%) during 1999 as compared to 1998 primarily due to higher sales at Eastern Research, Inc (ERI) as well as in the Musical Instruments segment. ERI increased its incoming order volume, expanded its customer base, and shipped products under OEM agreements with other data communication equipment companies. In 1998, sales increased $4,617,991 (11%) 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.
December 31, 1999 1998 1997 Net Sales Musical Instruments Domestic $23,769,362 $21,748,131 $18,918,509 Export 3,563,383 3,676,981 4,432,974 Total 27,332,745 25,425,112 23,351,483 Data Communications Domestic 22,149,842 11,036,926 6,933,787 Export 1,146,137 1,261,029 2,103,734 Total 23,295,979 12,297,955 9,037,521 Electronic Assemblies Domestic 5,650,917 4,727,975 5,935,381 Audio Equipment Domestic 1,651,566 2,422,507 1,812,138 Export 87,535 92,526 211,561 Total 1,739,101 2,515,033 2,023,699
Total $58,018,742 $44,966,075 $40,348,084
Income (Loss) from Operations Musical Instruments $ 2,950,251 $ 795,773 $ 2,718,085 Data Communications (805,738) (3,397,020) (1,069,165) Electronic Assemblies 430,031 326,609 631,521 Audio Equipment (761,688) (9,846) 337,495 Total $ 1,812,856 $(2,284,484) $ 2,617,936
Musical Instruments Segment
The 1999 and 1998 increase in domestic sales reflects continuing customer acceptance of the Company's products based on Renaissance technology. In addition, churches, which are the primary customer for the segments products, have also been the beneficiary of the strong US economy and financial markets, which has increased the segments order volume during these same periods. Export sales decreased in 1999, 1998 and 1997, primarily from changes in economic conditions in certain world markets, particularly Far East countries. The order volume from certain foreign markets improved during 1999. Gross profit margins on sales were 30.5%, 24.6% and 28.1% for the three years ended December 31, 1999. The increase in the 1999 gross profit is a result of higher sales volume and the business improvement programs, which negatively affected the 1998 gross profit. These programs included, implementation of new information systems, up-graded production and product planning processes and the closure of the North Carolina production facility and consolidated of all organ production at the Macungie, PA facility. Selling, administrative, and other expenses increased approximately $200,000 and $230,000 in 1999 and 1998 respectively, due to increased selling costs associated with the higher sales volume. Research and development expenses increased approximately $151,000 and $147,000 in 1999 and 1998 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 in 1999 and 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, marketing and research and development efforts at Eastern Research and will continue to do so in the future. 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. Gross profit margins were 48%, 41% and 46% for the three years ended December 31, 1999. The 1999 increase is due to higher sales of VIR's DS3/DS1 Test Access Systems and ERI's DNX product line. 1998 gross profits were lower due to variations in product mix. 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 $2,200,000 and $2,000,000 in 1999 and 1998 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 remained approximately equal in 1999 and 1998. Research and development expenses were $3,759,183, $2,464,808 and $1,799,665 for the years ended December 31, 1999, 1998 and 1997, respectively. The segment is committed to new product development and support and expects these expenditures to continue to increase the future.
Electronic Assemblies Segment
Sales increased during 1999 from higher incoming order volume. Gross profit margins were 15.2%, 13.6% and 14.5% for the three years ended December 31, 1999. The 1999 increase is due to changes in product mix. The 1998 decrease was related to the segment's efforts to restructure operations along with the Musical Instruments segment. Selling, general and administrative expenses increased approximately $115,000 in 1999 when compared to 1998. 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, 1999 decreased approximately $775,000 when compared to 1998. Gross profit margins were 38.1%, 39.6% and 49.7% for the years ended December 31, 1999 and 1998, and the nine month period ended 1997, respectively. This decrease is attributable to lower sales volume and changes in distribution in certain areas from direct marketing to Dealer Audition Sites. Selling, general and administrative costs increased approximately $390,000 during 1999 as compared to 1998 resulting from increased sales and marketing efforts and additional administrative personnel added to support the company's growth. As previously discussed, the Company has developed a line of Public Address System products and in connection therewith has formed Allen Audio, Inc. to continue development, establish marketing and distribution for these products. Allen Audio began shipping units in the second half of 1999 and began to incur expenses associated with the initiation of its sales and marketing efforts during 1999.
Other Income (Expense)
The decrease in investment income during 1999 and 1998 is due to lower invested balances. The 1999, 1998, and 1997 amounts include $67,244, $242,227 and $765,109 of realized capital gains respectively. Gain (loss) on sale of property, plant and equipment includes approximately $1,068,000 of gains related to the sale of the Rocky Mount, North Carolina facility
Income Taxes
The 1999 effective tax rate was 30.6%, which is net of the benefits of tax credits and tax exempt income. The 1998 effective rate was 55.4%, this increase related primarily to the effect of tax exempt income.
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 accounting policies.
Item 7A
Item 7A Quantitative and Qualitative Disclosures About Market Risk.
Financial instruments that potentially subject the Company to market and/or 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's Musical Instruments segment sells most of its products through established dealer networks. The Data Communications segment sells most of their products to wholesale and retail distributors worldwide and under OEM agreements with other data communications companies. The market and credit risk associated with related receivables is limited due to the large number of dealers and distributors and their geographic dispersion. The Company has no other material exposure to market risk.
Item 8.
Item 8. Financial Statements See Item 14 for index.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no reportable events as described in Item 304(b).
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, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1999. 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 financial position of Allen Organ Company and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Allentown, PA February 2, 2000
ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 ASSETS 1999 1998 CURRENT ASSETS Cash $ 209,277 $ 1,727,554 Investments including accrued interest 19,649,433 19,988,346 Accounts receivable, net of allowance for doubtful accounts of $300,823 in 1999 and $191,057 in 1998 10,444,430 7,068,588 Inventories 16,715,328 14,481,177 Prepaid income taxes -- 422,656 Prepaid expenses 287,138 511,954 Deferred income tax benefits 658,869 306,812 Total Current Assets 47,964,475 44,507,087
PROPERTY, PLANT AND EQUIPMENT, NET 11,429,173 9,911,637
OTHER ASSETS Prepaid pension costs 470,154 642,609 Inventory held for future service 733,301 1,242,754 Note receivable 1,111,147 659,886 Cash value of life insurance 1,721,497 1,400,334 Deferred income tax benefits 122,742 -- Goodwill, net 3,872,441 3,619,147 Other assets 41,140 6,499 Total Other Assets 8,072,422 7,571,229 Total Assets $67,466,070 $61,989,953
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES Accounts payable $ 3,593,708 $ 1,562,432 Accrued income taxes 683,133 -- Other accrued expenses 1,927,156 1,422,285 Customer deposits 1,585,196 1,527,429 Total Current Liabilities 7,789,193 4,512,146 NONCURRENT LIABILITIES Deferred liabilities 179,915 280,504 Total Liabilities 7,969,108 4,792,650
MINORITY INTERESTS 175,271 288,607
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, par value $1 per share Authorized Class A Shares - 400,000 in 1999 and 1998 Class B Shares - 3,600,000 in 1999 and 1998 Issued 1999 1998 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 56,677,650 54,448,760 Accumulated other comprehensive income: Unrealized gain on investments, net 322,400 134,336 Sub-total 71,296,653 68,879,699 Less cost of common shares in treasury 1999 - 43,230 Class A shares and 324,052 Class B shares (11,974,962) -- 1998 - 43,120 Class A shares and 324,052 Class B shares -- (11,971,003) Total Stockholders' Equity 59,321,691 56,908,696 Total Liabilities and Stockholders' Equity $67,466,070 $61,989,953
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999 1998 1997
NET SALES $58,018,742 $44,966,075 $40,348,084 COSTS AND EXPENSES Cost of sales 36,793,515 31,870,469 26,785,916 Selling, administrative and other expenses 14,502,093 11,486,315 8,289,570 Research and development 4,910,278 3,478,775 2,654,662 Costs to close Rocky Mount plant -- 415,000 -- Total Costs and Expenses 56,205,886 47,250,559 37,730,148
INCOME (LOSS) FROM OPERATIONS 1,812,856 (2,284,484) 2,617,936
OTHER INCOME (EXPENSE) Investment income 1,128,524 1,223,699 2,114,722 Gain (loss) on sale of property, plant and equipment 1,063,722 (8,153) 3,984 Other income (expense), net (9,593) 21,078 10,459 Minority interests in consolidated subsidiaries 112,979 61,958 6,041 Total Other Income 2,295,632 1,298,582 2,135,206
INCOME (LOSS) BEFORE TAXES 4,108,488 (985,902) 4,753,142
PROVISION FOR TAXES Current 2,030,000 (11,000) 1,296,000 Deferred (806,000) (646,000) (55,000) Total Provision for Taxes 1,224,000 (657,000) 1,241,000
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 2,884,488 $ (328,902) $ 3,512,142
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (net of income tax benefit of $183,000) -- (287,809) --
NET INCOME (LOSS) $ 2,884,488 $ (616,711) $ 3,512,142
OTHER COMPREHENSIVE INCOME, NET OF TAX Unrealized gains on investments: Unrealized gains arising $ 230,132 $ 162,874 $ 525,168 during period Less: reclassified adjustment for gains included in income (42,068) (157,012) (486,074) Other comprehensive income 188,064 5,862 39,094 COMPREHENSIVE INCOME (LOSS) $ 3,072,552 $ (610,849) $ 3,551,236
BASIC AND DILUTED EARNINGS PER SHARE: Net income (loss) before cumulative effect of change in accounting principle $ 2.46 $ (0.28) $ 2.79 Cumulative effect of change in accounting principle -- (0.24) --
NET INCOME (LOSS) $ 2.46 $ (0.52) $ 2.79
See accompanying notes to Consolidated Financial Statements.
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, 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
Balance-December 31, 1999 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, 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 $11,971,003
Net Income 2,884,488 Reacquired Class A Shares 110 3,959 Change in unrealized gain on securities available for sale 188,064 Cash dividend paid ($.56 per share) (655,598)
Balance-December 31, 1999 $56,677,650 $322,400 367,282 $11,974,962
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $2,884,488 $ (616,711) $3,512,142 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization 1,916,970 1,478,379 1,114,639 Minority interest in consolidated subsidiaries (112,979) (61,958) (6,041) Cumulative effect of change in accounting principle (excluding income tax effects) -- 470,809 -- (Gain) Loss on sale of property, plant and equipment (1,063,722) 8,153 (3,984) Gain on sale of investments (67,244) (242,227) (765,110) Change in assets and liabilities (net of acquisition effects) Accounts receivable (3,375,842) (1,336,156) (914,493) Inventories (1,724,698) 3,459,802 (3,188,750) Prepaid income taxes 422,656 (189,761) 164,509 Prepaid expenses 224,816 (28,654) (328,631) Deferred income tax benefits (474,799) (306,812) -- Prepaid pension costs 172,455 152,498 94,099 Other assets (34,641) -- -- Accounts payable 2,031,276 649,322 498,632 Accrued income taxes 683,133 -- -- Other accrued expenses 504,871 730,003 192,927 Customer deposits 57,767 219,428 546,262 Deferred liabilities (100,589) (514,851) (32,217) Net Cash Provided by Operating Activities 1,943,918 3,871,264 883,984 CASH FLOWS FROM INVESTING ACTIVITIES Cash proceeds from sale of investments classified as available for sale 5,993,248 2,526,721 30,263,188 Cash paid for purchase of investments classified as available for sale (5,399,027) (2,226,644) (20,497,033) Increase in cash value of life insurance (321,163) (277,839) (264,278) Increase in note receivable (451,261) (456,329) (40,409) Payment for acquisition, net of cash acquired -- -- (1,512,000) Additions goodwill (733,194) (238,534) (211,690) Cash proceeds from sale of property, plant and equipment 1,382,716 28,170 7,841 Cash paid for purchase of property, plant and equipment (3,260,719) (1,477,340) (2,046,097) Net Cash (Used In) Provided by Investing Activities (2,789,400) (2,121,795) 5,699,522 CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid in cash (655,598) (659,709) (702,018) Reacquired Class B common shares -- (352,578) (5,626,717) Subsidiary company stock reacquired from minority stockholders (13,238) (29,976) (15,625) Reacquired Class A common shares (3,959) -- -- Net Cash Used in Financing Activities (672,795) (1,042,263) (6,344,360) NET (DECREASE) INCREASE IN CASH (1,518,277) 707,206 239,146
CASH, JANUARY 1 1,727,554 1,020,348 781,202
CASH, DECEMBER 31 $ 209,277 $1,727,554 $1,020,348
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for income taxes $1,625,400 $ 167,050 $1,758,833
See accompanying notes to Consolidated Financial Statements.
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 Audio, Inc. 100.00% Allen Diversified, Inc. 100.00% Allen Organ International, Inc. 100.00% Eastern Research, Inc. 92.52% Legacy Audio, Inc. 75.00% Linear Switch Corporation 92.20% Rocky Mount Instruments, Inc. 100.00% VIR, Inc. 98.59%
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's Musical Instruments segment sells most of its products through established dealer networks. The Data Communications segment sells most of their products to wholesale and retail distributors worldwide and under OEM agreements with other data communications companies. The credit risk associated with related receivables is limited due to the large number of dealers and distributors 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: 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 $1,275,630 and $782,850 at December 31, 1999 and 1998 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.
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 18.)
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 for the year ended December 31, 1998 of $287,809 (net of taxes of $183,000). These amounts were a result of unamortized organizational costs associated with the subsidiaries in the Data Communications and Audio Equipment segments.
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 is being amortized over a 20 year period.
NOTE 3 Sale of Manufacturing Facility In April 1999 the Company sold its manufacturing plant located in Rocky Mount, North Carolina for $1,360,000 (net of selling expenses) and recognized a gain on the sale of approximately $1,068,000. The Company announced the closing of this facility in October 1998 at which time the Company accrued termination costs of $415,000 of which approximately $370,000 has been paid as of December 31, 1999. The Company believes that the remaining $45,000 of accrued termination costs is adequate to cover the estimated remaining expenditures. The Company ceased operations at this facility effective March 31, 1999 and has consolidated all of its Musical Instruments production into its manufacturing facility in Macungie, PA.
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, 1999 Available for sale Equity securities $ 129,311 $ 218 $ 88,966 $ 40,563 Mutual Funds Short Term Gov't Funds 9,854,584 -- 97,841 9,756,743 Municipal Bond Funds 5,873,745 -- 211,713 5,662,032 Equity Funds 2,211,262 895,833 -- 3,107,095 U.S. Treasury Bills 1,083,000 -- -- 1,083,000 Totals $19,151,902 $896,051 $398,520 $19,649,433
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
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 1999, 1998 and 1997, sales proceeds and gross realized gains and losses on securities classified as available for sales were:
1999 1998 1997
Sales proceeds $5,993,248 $2,526,721 $30,263,188
Gross realized losses $ 60,606 $ -- $ 44,448
Gross realized gains $ 127,850 $ 242,227 $ 809,558
The change in net unrealized holding gains (losses) on securities available for sale in the amount of $285,677, $8,697, and 53,746 net of deferred tax expense (benefits) of $97,613, $2,835, and $14,650 has been included in other comprehensive income in stockholders' equity for the years ended December 31, 1999, 1998, and 1997, respectively.
NOTE 5 Inventories December 31, 1999 1998 Finished goods $ 5,915,057 $ 2,631,290 Work in process 4,803,969 4,932,978 Raw materials 5,996,302 6,916,909 Totals $16,715,328 $14,481,177
The Company also maintains an inventory of various parts to be used to service musical instruments as future needs arise which are reported as a noncurrent asset.
NOTE 6 Property, Plant and Equipment Estimated December 31, Useful 1999 1998 Lives Land and improvements $ 2,369,994 $ 2,445,579 10 yrs Buildings and improvements 8,636,998 8,250,158 10-40 yrs Machinery and equipment 8,629,366 8,385,676 5-10 yrs Office furniture and equipment 3,283,352 2,109,192 3-8 yrs Vehicles 194,087 224,632 4 yrs Sub-total 23,113,797 21,415,237 Less accumulated depreciation 11,684,624 11,503,600 $11,429,173 $ 9,911,637
Depreciation expense charged to operations was $1,424,189, $1,044,393 and $836,769 in 1999, and 1998 and 1997 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 $415,000 and $340,000 at December 31, 1999 and 1998, respectively.
NOTE 8 Income Taxes The provision for income taxes consists of the following: 1999 1998 1997 Currently Currently Currently Payable Deferred Payable Deferred Payable Deferred
Federal $1,620,000 $(658,000) $(151,000) $(420,000) $1,270,000 $ 73,000 State 410,000 (148,000) 125,000 (394,000) 26,000 (128,000) Total $2,030,000 $(806,000) $ (26,000) $(814,000) $1,296,000 $(55,000)
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: 1999 1998 1997 Statutory provision for federal income tax $1,359,000 34.0% $ (516,000) 34.0% $1,614,000 34.0% State taxes, net of federal tax benefits 73,000 1.8 (177,000) 11.7 81,000 1.6 Tax credits (179,000) (4.5) -- -- (60,000) (1.3) Tax-exempt income (110,000) (2.8) (97,000) 6.4 (110,000) (2.3) Exempt income of foreign sales corporation (77,000) (1.9) (61,000) 4.0 (101,000) (2.1) Other items, net 58,000 1.5 11,000 (0.7) (38,000) (0.8) Effect of change in prior years state tax revenue allocations -- -- -- -- (229,000) (4.8) Effect of change in state valuation allowance of deferred tax asset 100,000 2.5 -- -- 84,000 1.8 Total $1,224,000 30.6% $ (840,000) 55.4% $1,241,000 26.1%
The following temporary differences give rise to the net deferred tax asset at December 31, 1999 and 1998. 1999 1998 Deferred Tax Liabilities Excess of tax depreciation/amortization over book depreciation/amortization $ (389,932) $ (359,778) Excess of pension expense for tax purposes over book (172,872) (224,910) Unrealized gain not recognized for tax purposes (184,206) (74,522) Total Deferred Tax Liabilities (747,010) (659,210) Deferred Tax Assets Deferred compensation not recognized for tax purposes 66,612 16,856 Net operating loss carry forwards 740,368 383,516 Accrued expenses to close Rocky Mount plant -- 112,652 Reserve for Bad Debts 113,714 70,702 Inventory Reserve 801,927 243,709 Sub-total 1,722,621 827,435 Valuation Allowance (194,000) (94,000) Total Deferred Tax Assets 1,528,621 733,435 Net Deferred Tax Asset $ 781,611 $ 74,225
Deferred taxes are included in the Company's financial statements as follows: 1999 1998 Current deferred tax asset $ 658,869 $ 306,812 Non-current deferred tax asset (liability) 122,742 (232,587) Net deferred tax asset $ 781,611 $ 74,225
The Company has available at December 31, 1999, approximately $756,000 of unused federal and $8,100,000 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 2019. At December 31, 1999 and 1998 the Company recorded a valuation allowance of $194,000 and $94,000, respectively against the deferred tax assets relating to the uncertainty of realizing state net operating loss carry forwards.
NOTE 9 Other Accrued Expenses December 31, 1999 1998 Accrued salaries and commissions $ 722,336 $ 552,099 Accrued additional purchase price 733,319 238,535 Accrued plant closing costs 44,588 304,431 Other 426,913 327,221 Total $1,927,156 $1,422,286
NOTE 10 Commitments and Contingencies As of December 31, 1999, the Company is contingently liable for a maximum amount of approximately $1,891,000 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, 1999, 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. While the potential obligation related to this agreement is in large part dependent on the value placed on the Company's stock for estate tax purposes, the Company believes that it would have access to sufficient resources to fund this obligation if necessary. 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 additional payment for 1999, 1998 and 1997 amounted to $733,319, $238,535 and $92,432, respectively. The agreement provides that the total of these 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 September 2002. These leases include renewal options for periods ranging up to fifteen years with increases of lease payments based on changes in the Consumer Price Index. Rent expense was $321,368, $230,447and $179,765 for 1999, 1998 and 1997, respectively. Minimum annual rent payments for the operating leases are as follows:
2000 $ 313,258 2001 305,040 2002 228,173 Total $ 846,471
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:
1999 1998 1997 Pension benefit obligation Balance, beginning of year $14,923,318 $13,222,392 $13,252,456 Service cost 380,650 310,909 299,166 Interest cost 999,772 983,147 953,842 Benefits paid to participants (812,359) (792,052) (757,090) Gain (loss) on updated data/assumptions (426,280) 1,198,922 (525,982) Balance, end of year $15,065,101 $14,923,318 $13,222,392
Plan assets Fair value, beginning of year $15,611,950 $14,764,799 $13,641,779 Actual investment returns 2,678,280 1,639,203 1,750,515 Company contributions -- -- 129,595 Benefits paid to participants (812,359) (792,052) (757,090) Fair value, end of year $17,477,871 $15,611,950 $14,764,799
The Funded status of the plans were as follows: December 31, 1999 1998 1997 Excess of the value of plan assets over the benefit obligation $ 2,412,770 $ 688,632 $ 1,542,407 Unrecognized prior service cost 73,323 147,313 221,303 Unrecognized net transition liability (asset) (144,020) (216,028) (288,036) Unrecognized net actuarial loss (gain) (1,871,919) 22,692 (680,567) Prepaid benefit cost $ 470,154 $ 642,609 $ 795,107
The following weighted-average rates were used:
Discount rate on the benefit obligation 7.0% 6.75% 7.5% Rate of return on plan assets 8.0% 8.0% 8.0% Rate of long-term compensation increase 6.0% 6.0% 6.5%
Pension expense is comprised as follows: 1999 1998 1997
Service cost $ 380,650 $ 310,909 $ 299,166 Interest cost 999,772 983,147 953,842 Expected return on plan assets (1,209,949) (1,143,540) (1,031,296) 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 $ 172,455 $ 152,498 $ 223,694
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, 1999 1998 1997 Projected benefit obligation $ -- $ 7,798,136 $ -- Accumulated benefit obligation -- 6,708,396 -- Fair value of plan assets -- 7,707,085 --
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 $93,388, $112,981and $147,160 to the plans in 1999, 1998 and 1997 respectively. During 1999, the Company established supplemental executive retirement plans for 3 of its officers. These plans provide for discretionary company contributions, which vest over a 5 year period, accrue interest at the prime rate, not to exceed 9%, and are payable upon the executives death or retirement.
NOTE 12 Deferred Liabilities December 31, 1999 1998 Deferred compensation expense $ 179,915 $ 47,917 Deferred income taxes -- 232,587 $ 179,915 $ 280,504
NOTE 13 Earnings Per Share Earnings per share were computed using 1,170,719 shares in 1999, 1,178,064 shares in 1998, and 1,258,966 shares in 1997, the weighted average number of shares outstanding during each year. The Company does not have any dilutive equity instruments.
NOTE 14 Export Sales In 1999, 1998 and 1997, net sales by the Musical Instruments segment include export sales, principally to Canada, Europe and the Far East of $3,563,383, $3,676,981, and $4,432,974, respectively. Net sales by the Data Communications segment include export sales principally to Europe and the Far East of $1,146,137 for 1999, $1,261,029 for 1998, and $2,103,734 for 1997. Net sales by the Audio Equipment segment include export sales principally to Europe and the Far East of $87,535 for 1999, $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 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 of Legacy Audio discussed in Note 2. Legacy 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. Legacy's products are sold worldwide directly to individual customers for home use with a lesser percentage distributed through dealer audition sites. During 1999 the Company established the subsidiary Allen Audio, Inc. and introduced a line of Public Address system products, which have initially been targeted at small to mid-sized churches, auditoriums and similar customers. Following is a summary of segmented information for 1999, 1998 and 1997. December 31, 1999 1998 1997 Net Sales to Unaffiliated Customers Musical Instruments $27,332,745 $25,425,112 $23,351,483 Data Communications 23,295,979 12,297,955 9,037,521 Electronic Assemblies 5,650,917 4,727,975 5,935,381 Audio Equipment 1,739,101 2,515,033 2,023,699 Total $58,018,742 $44,966,075 $40,348,084
Intersegment Sales Musical Instruments $ 109,667 $ 136,123 $ 5,252 Data Communications 174,516 594 84,939 Electronic Assemblies 37,742 495,266 938,479 Audio Equipment 58,253 148,573 52,244 Total $ 380,178 $ 780,556 $ 1,080,914
Income (Loss) from Operations Musical Instruments $ 2,950,251 $ 795,773 $ 2,718,085 Data Communications (805,738) (3,397,020) (1,069,165) Electronic Assemblies 430,031 326,609 631,521 Audio Equipment (761,688) (9,846) 337,495 Total $ 1,812,856 $(2,284,484) $ 2,617,936
Identifiable Assets Musical Instruments $18,912,763 $19,777,418 $22,669,782 Data Communications 19,764,425 11,532,523 10,294,411 Electronic Assemblies 3,658,915 3,501,492 4,422,908 Audio Equipment 2,209,810 2,259,185 2,153,922 Sub-total 44,545,913 37,070,618 39,541,023 General corporate assets 22,920,157 24,919,335 23,020,981 Total $67,466,070 $61,989,953 $62,562,004
Capital Expenditures Musical Instruments $ 1,268,726 $ 866,868 $ 1,070,108 Data Communications 1,908,323 542,030 386,308 Electronic Assemblies 5,670 59,850 504,635 Audio Equipment 78,000 8,592 85,046 Total $ 3,260,719 $ 1,477,340 $ 2,046,097
Depreciation and Amortization Musical Instruments $ 697,587 $ 614,670 $ 518,144 Data Communications 992,933 618,380 392,108 Electronic Assemblies 145,948 171,912 139,542 Audio Equipment 80,502 73,417 64,845 Total $ 1,916,970 $ 1,478,379 $ 1,114,639
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 1999 and 1998, and 55% of its revenues from one customer in 1997. The Data Communications segment derived 52% of its revenue from three customers in 1999 and 13% and 12% of its revenue from one customer in 1998 and 1997, respectively. The Company's Musical Instrument and Audio Equipment segments are not dependent on any single customer.
NOTE 16 Investment Income
December 31, 1999 1998 1997
Interest Income $ 935,290 $ 887,338 $1,198,362 Dividend Income 125,990 94,134 151,250 Gain on Sale of Investments 67,244 242,227 765,110 Total $1,128,524 $1,223,699 $2,114,722
NOTE 17 Stock Option Plans VIR, Inc. (VIR) and Eastern Research, Inc. (ERI) have 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, 1999, total options issued for VIR and ERI represent 9% and 12%, respectively, of the shares currently outstanding. Vested options consist of 4% and 5% of the currently outstanding shares of VIR and ERI, respectively. No compensation expense was recognized for these plans. Had compensation cost been determined pursuant to FASB Statement No. 123, net income (loss) and earnings per share would have been:
1999 1998 1997 Net income (loss) $2,775,220 $(686,811) $3,431,897 Earnings per share $2.37 $(0.58) $2.73
PART III
Item 10.
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 46 Director Since 1980 Meeting in 2000 Eugene Moroz Next Annual 76 Director Since 1968 Meeting in 2000 Leonard W. Helfrich (1) Next Annual 70 Director 1964 - 1968 and Meeting in 2000 1972 to present Orville G. Hawk (1) Next Annual 82 Director Since 1989 Meeting in 2000 Albert F. Schuster (1) Next Annual 80 Director Since 1989 Meeting in 2000 Martha Markowitz Next Annual 78 Director Since 1991 Meeting in 2000 Jeffrey L. Schucker (1) Next Annual 45 Director Since July 1996 Meeting in 2000 Ernest Choquette Next Annual 46 Director Since April 1998 Meeting in 2000
(1) Audit Committee member.
(b) Identification of Executive Officers. Time Period Date Term Position Name Expires Age Position Held Steven Markowitz Next Annual 46 President 1990 to Meeting in 2000 present Leonard W. Helfrich Next Annual 70 Vice President, 1958 - 1968 Meeting in 2000 Secretary and 1971 to present Barry J. Holben Next Annual 47 Vice President October 1995 Meeting in 2000 to present Dwight A. Beacham Next Annual 53 Vice President October 1995 Meeting in 2000 to present Nathan S. Eckhart Next Annual 36 Treasurer, May 1996 Meeting in 2000 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.
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 1999 126,840 - 42,059 (1) (Chief Executive Officer) 1998 105,115 17,000 35,558 1997 100,090 18,598 30,650
Leonard W. Helfrich, 1999 116,416 - Vice President - Finance 1998 95,065 16,000 (Secretary) 1997 93,624 17,402
(1)-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 1999 Actuarial Valuation Report:
Steven A. Markowitz $62,461 Age 46 (1) Leonard W. Helfrich $42,415 Age 70 (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 established an Executive Bonus Program in the form of executive supplemental retirement plans for the benefit of Mr. Beacham, Mr. Holben and Mr. Eckhart. These plans provide for discretionary company contributions, which vest over a 5 year period, accrue interest at the prime rate, not to exceed 9%, and are payable upon the executives death or retirement.
(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. The compensation of all other employees is set by or at the direction of the President.
Item 12.
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 29, 2000. 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, 1999.
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 346 (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** 287,320** 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.
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.
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, 1999 and 1998.
Consolidated Statements of Income for the years ended December 31, 1999, 1998, and 1997.
Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998, and 1997.
Consolidated Statements of cash flows for the years ended December 31, 1999, 1998, and 1997.
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 10.3(5) Executive Bonus Program and Endorsement Split Dollar Life Insurance Agreements between the Company and Dwight A. Beacham, Nathan S. Eckhart and Barry J. Holben 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. 5. Incorporated by reference to the exhibit filed with the Registrants Quarterly Report on Form 10-Q for the period ended September 30, 1999.
(b) Reports on Form 8-K. None filed during fourth quarter of 1999.
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 14, 2000 /s/ STEVEN A. MARKOWITZ Steven A. Markowitz Chief Executive Officer, President and Director
Date: March 14, 2000 /s/ LEONARD W. HELFRICH Leonard W. Helfrich Vice President-Finance, and Director, Chief Financial and Principal Accounting Officer
Date: March 14, 2000 /s/ MARTHA MARKOWITZ Martha Markowitz Director
Date: March 14, 2000 /s/ JEFFREY L. SCHUCKER Jeffrey L. Schucker Director