-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NeQrTYLHRwHfFTk0JTVR0MteJGtsCWuXgA54KK/83p60zvWe7FthPYyFb+qjzGZE /0Zj6aP2mzACrce+dPzKMQ== 0000003753-01-500013.txt : 20010514 0000003753-01-500013.hdr.sgml : 20010514 ACCESSION NUMBER: 0000003753-01-500013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLEN ORGAN CO CENTRAL INDEX KEY: 0000003753 STANDARD INDUSTRIAL CLASSIFICATION: MUSICAL INSTRUMENTS [3931] IRS NUMBER: 231263194 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-00275 FILM NUMBER: 1630563 BUSINESS ADDRESS: STREET 1: 150 LOCUST ST STREET 2: PO BOX 36 CITY: MACUNGIE STATE: PA ZIP: 18062 BUSINESS PHONE: 2159662200 MAIL ADDRESS: STREET 1: 150 LOCUST STREET STREET 2: PO BOX 36 CITY: MACUNGIE STATE: PA ZIP: 18062-0036 10-Q 1 m10q032001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) (X) Quarterly Report Under Section 13 or 15(D) of The Securities Exchange Act of 1934 For Quarter Ended March 31, 2001 OR ( ) Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Commission File Number 0-275 Allen Organ Company (Exact name of registrant as specified in its charter) Pennsylvania 23-1263194 (State of Incorporation) (I.R.S. Employer Identification No.) 150 Locust Street, P. O. Box 36, Macungie, Pennsylvania 18062-0036 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 610-966-2200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Number of shares outstanding of each of the issuer's classes of common stock, as of May 10, 2001: Class A - Voting 84,002 shares Class B - Non-voting 1,086,457 shares ALLEN ORGAN COMPANY INDEX Part I Financial Information Item 1.Financial Statements Consolidated Condensed Statements of Income for the three months ended March 31, 2001 and 2000 Consolidated Condensed Balance Sheets at March 31, 2001 and December 31, 2000 Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2001 and 2000 Notes to Consolidated Condensed Financial Statements Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations Part II Other Information Item 6.Exhibits and Reports on Form 8-K Signatures PART I FINANCIAL INFORMATION ITEM 1.FINANCIAL STATEMENTS ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) For the 3 Months Ended: 3/31/2001 3/31/2000 Net Sales $13,259,398 $16,808,032 Costs and Expenses Costs of sales 9,877,547 9,854,404 Selling, general and administrative 4,300,272 4,256,717 Research and development 2,196,308 1,687,055 Impairment of VIR, Inc. goodwill 1,400,000 - Total Costs and Expenses 17,774,127 15,798,176 (Loss) Income from Operations (4,514,729) 1,009,856 Other Income and (Expense) Interest and other income 354,143 267,395 Interest expense (151,029) - Minority interests in consolidated subsidiaries 50,123 34,601 Total Other Income and Expense 253,237 301,996 (Loss) Income Before Taxes (4,261,492) 1,311,852 Income Tax (Benefit) Provision (1,636,000) 442,000 Net (Loss) Income $(2,625,492) $ 869,852 Basic and Diluted (Loss) Earnings Per Share $(2.24) $0.74 Shares Used in Per Share Calculation 1,170,592 1,170,627 Dividends Per Share - Cash $0.14 $0.14 Total Comprehensive (Loss) Income $(2,726,504) $ 969,417 See accompanying notes. ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS March 31, Dec 31, ASSETS 2001 2000 (Unaudited) (Audited) Current Assets Cash $ 1,750,237 $ 2,712,368 Investments Including Accrued Interest 24,592,969 24,694,377 Accounts Receivable, net of reserves of 7,524,630 10,285,659 $442,821 and $428,791, respectively Inventories: Raw Materials 6,754,296 7,684,892 Work in Process 6,955,017 6,172,954 Finished Goods 7,238,698 5,950,327 Total Inventories 20,948,011 19,808,173 Income Taxes Prepaid and Receivable 1,495,715 13,972 Prepaid Expenses 694,249 304,342 Deferred Income Tax Benefits 1,139,843 1,094,701 Total Current Assets 58,145,654 58,913,592 Property, Plant and Equipment 26,491,748 25,861,781 Less Accumulated Depreciation (13,947,741) (13,338,648) Total Property, Plant and Equipment 12,544,007 12,523,133 Other Assets Prepaid Pension Costs 535,278 506,702 Inventory Held for Future Service 769,078 690,657 Note Receivable 1,955,779 1,556,721 Cash Value of Life Insurance 2,034,867 2,034,867 Deferred Income Tax Benefits 354,476 398,476 Goodwill, net 2,578,950 4,165,002 Other Assets 18,592 18,592 Total Other Assets 8,247,020 9,371,017 Total Assets $78,936,681 $80,807,742 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Current Liabilities Notes Payable - Bank $10,900,000 $ 8,700,000 Accounts Payable 3,102,029 3,448,119 Other Accrued Expenses 1,862,584 2,816,102 Customer Deposits 3,010,462 2,991,628 Total Current Liabilities 18,875,075 17,955,849 Noncurrent Liabilities Deferred and Other Noncurrent Liabilities 344,869 310,016 Total Liabilities 19,219,944 18,265,865 Minority Interests 56,853 106,976 STOCKHOLDERS' EQUITY Common Stock 2001 2000 Class A 127,232 shares; 127,232 shares 127,232 127,232 Class B 1,410,761 shares; 1,410,761 shares 1,410,761 1,410,761 Capital in Excess of Par Value 12,854,943 12,758,610 Retained Earnings Balance, Beginning 59,977,002 56,677,650 Net Income (2,625,492) 3,954,896 Dividends - Cash 2001 and 2000 (163,886) (655,544) Balance, End 57,187,624 59,977,002 Accumulated Other Comprehensive Income: Unrealized Gain on Investments 63,753 139,990 Sub-total 71,644,313 74,413,595 Treasury Stock 2001- 43,230 Class A shares; 324,270 Class B shares (11,984,429) -- 2000- 43,230 Class A shares; 324,148 Class B shares -- (11,978,694) Total Stockholders' Equity 59,659,884 62,434,901 Total Liabilities and Stockholders' Equity $78,936,681 $80,807,742 See accompanying notes. ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) For the 3 Months Ended: 3/31/2001 3/31/2000 CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $(2,625,492) $ 869,852 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities Depreciation and amortization 795,812 520,171 Loss from impairment of VIR, Inc. goodwill, included in operating expenses 1,400,000 -- Minority interest in consolidated subsidiaries (50,123) (34,601) Change in assets and liabilities Accounts receivable 2,761,029 3,116,661 Inventories (1,218,259) (1,912,966) Income taxes prepaid and receivable (1,481,743) -- Prepaid expenses (389,907) (79,997) Prepaid pension costs (28,576) 43,113 Deferred income tax benefits 44,000 -- Other assets -- 3,640 Accounts payable (346,090) (417,423) Accrued income taxes -- 287,049 Accrued expenses (953,518) 436,787 Customer deposits 18,834 (121,933) Deferred and other noncurrent liabilities 34,853 32,525 Net Cash (Used In) Provided by Operating Activities (2,039,180) 2,742,878 CASH FLOW FROM INVESTING ACTIVITIES Increase in note receivable (399,058) (405,612) Net additions to plant and equipment (630,634) (916,522) Additions to goodwill -- (277,804) Net (purchase) sale of short-term investments (19,971) 1,894,305 Net Cash (Used In) Provided by Investing Activities (1,049,663) 294,367 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bank loans 2,200,000 -- Proceeds from sale of subsidiary stock 96,333 -- Reacquired Class B common shares (5,735) (3,732) Dividends paid in cash (163,886) (163,887) Net Cash Provided by (Used In) Financing Activities 2,126,712 (167,619) NET (DECREASE) INCREASE IN CASH (962,131) 2,869,626 CASH, BEGINNING 2,712,368 209,277 CASH, ENDING $ 1,750,237 $3,078,903 SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash paid for: Income Taxes $ 94,000 $ 169,750 Interest $ 151,029 $ -- See accompanying notes. ALLEN ORGAN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. Interim Financial Statements The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature. Certain notes and other information have been condensed or omitted from the interim financial statements presented in the Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company's 2000 Annual Report on Form 10-K. 2. Impairment of Goodwill During March 2001 the Company recorded a charge to operating expenses of $1,400,000 related to the impairment in the value of goodwill which arose in connection with the acquisition of VIR, Inc. This write down of goodwill is attributable to the recent downturn in the data communications industry, the announced combination of VIR into the Company's subsidiary Eastern Research and closure of the VIR facility discussed in more detail below, all of which reduced expectations of future cash flows from VIR's operations. 3. Subsequent Event During April 2001 the Company announced plans to combine its Data Communications subsidiaries VIR Linear Switch (VIR) of Southampton, PA into Eastern Research, Inc. (ERI), which is also a subsidiary of the Company. VIR designs, manufactures and markets a number of test access and tech control products for use in customer networks. The Southampton, PA facility will be closed later this year. The combined operations will be headquartered at ERI's facility in Moorestown, New Jersey. Manufacturing of some of VIR's products will be moved to ERI's supplier with other manufacturing being transferred to the Macungie, PA plant. The Company estimates the restructuring charges (including employee severance, benefits and other exit costs) related to this combination and plant closure to be approximately $530,000 which will be included in the operating results for the second quarter of 2001. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. Liquidity and Capital Resources: Cash flows from operating activities decreased during the three month period ended March 31, 2001, primarily due to operating losses incurred in the Data Communications segment and increases in inventory. Inventory increased approximately $100,000 and $1,100,000 respectively in the Musical Instruments and Data Communications segments during the three months ended March 31, 2001. Cash flows from investing activities were used to purchase property and equipment including approximately $546,000 in new computer, office and test equipment for the Data Communications segment during the three months ended March 31, 2001. The Company will reduce capital expenditures in the Data Communications segment for the balance of the year as part of its plan to improve this segment's operating results. Sales and Operating Income For the 3 Months Ended: 3/31/2001 3/31/2000 Net Sales to Unaffiliated Customers Musical Instruments $ 5,923,121 $ 6,671,347 Data Communications 3,600,016 8,058,089 Electronic Assemblies 3,293,360 1,503,855 Audio Equipment 442,901 574,741 Total $13,259,398 $16,808,032 Intersegment Sales Musical Instruments $ 16,291 $ 74,042 Data Communications 132,126 -- Electronic Assemblies -- 15,577 Audio Equipment 10,127 1,182 Total $ 158,544 $ 90,801 Income (Loss) from Operations Musical Instruments $ 414,141 $ 1,070,625 Data Communications (5,005,185) 59,832 Electronic Assemblies 287,388 127,425 Audio Equipment (211,073) (248,026) Total $(4,514,729) $ 1,009,856 Musical Instruments Segment Sales decreased $748,226 in the first quarter of 2001 when compared to the same period in 2000. While the order rate for the first quarter of 2001 was approximately equal to 2000, the first quarter of 2000 sales were higher due to shipments made against a higher order backlog in 2000. Gross profit margins decreased to 29.1% of sales in the first quarter of 2000 from 37.1% in the same period in 2000. This decrease is due to lower sales over which to absorb fixed costs and changes in product mix. Selling, general and administrative expenses and research and development expenditures decreased when compared to the same period in 2000 due to lower sales and lower personnel requirements. Data Communications Segment This segment's sales in the first quarter of 2001 decreased $4,458,000 when compared to the same period in 2000, resulting in a significant operating loss for the first quarter. This segment's order rate in the first quarter of 2001 was significantly lower than the same period in 2000. The Company expects lower sales to continue through the balance of the year and has begun implementing plans, discussed below, to improve operating results. The sales decrease is attributable to a slowdown in the national economy and an industry wide slowdown in the Data Communications markets. Some of this segment's products are sold to Competitive Local Exchange Carriers (CLEC). These carriers have been especially hard hit by the recent economic down turn in the industry, with many having difficulty raising capital required to continue to build out their networks (purchase equipment) and deliver services. Gross profit margins in the first quarter of 2001 decreased to 30.1% compared to 49.8% in the same period of 2000 due to the lower sales volume over which to absorb fixed costs and $360,000 of additional inventory reserves recorded at VIR, Inc. for slow moving and obsolete inventory associated with discontinued product lines. The Company continues to review the VIR inventory and product lines, which may result in additional increases in inventory reserves in future periods. Sales and marketing expenditures increased approximately $35,000 (2%) in the first quarter of 2001 when compared to the same period in 2000. General and administrative expenses increased approximately $222,097 (31%) in the first quarter of 2001 when compared to the same period in 2000, primarily related to additional management and support personnel added at Eastern Research, Inc. (ERI). Research and development expenses increased approximately $520,000 (40%) in the first quarter of 2001 when compared to the same period in 2000. As discussed in Note 2 above, the first quarter of 2001 operating expenses includes a charge of $1,400,000 related to the write down of the value of VIR's goodwill. In April 2001 the Company announced plans for restructuring its Data Communications segment. The Company will combine the VIR operations, located in Southampton, PA into ERI with the combined operations being headquartered in Moorestown, NJ. The Southampton, PA facility will be closed later this year. Manufacture of some of VIR's products will be moved to ERI's supplier with other manufacturing being transferred to the Macungie, PA plant. VIR employs about 30 people, approximately 11 will be transferred to the Moorestown or Macungie facility. See Note 3 above for additional information on this plant closing. Because of the current economic climate and this segment's significant reduction in sales volume the Company has taken other steps to reduce its expenditures for this segment. ERI reduced its workforce by 11 positions during the first quarter of 2001 resulting in severance and related costs of approximately $100,000. In April of 2001 ERI reduced its workforce by an additional 12 positions. These additional terminations along with the VIR plant closure costs discussed above will result in a total restructuring charge for the Data Communications segment of $640,000 which will be included in the operating results of the second quarter of 2001. In addition this segment has reduced its planned operating and capital expenditures for the balance of the year. The Company's Data Communications segment is also redirecting its sales and marketing efforts, specifically for ERI's DACs product, the DNX. In recent years ERI has had significant growth in the CLEC market, which has been radically affected by the economic problems discussed above. ERI has more recently focused on healthier markets for which the DNX is suited, including the wireless and certain international markets. While initial results are promising, the long sales cycles involved in DNX sales will require a couple of quarters for this program to be evaluated. The Company's Data Communications segment has significant new product introductions planned for the remainder of 2001 as previously discussed in the Company's 2000 Annual Report on Form 10-K. These products are well positioned for the markets listed in the previous paragraph. With the cost reductions and new markets focus listed above the Company has plans for the Data Communications segment to approach breakeven from operations in the last quarter of 2001. However, the current economic and market conditions make future sales visibility problematic and could jeopardize achievement of this goal. Electronic Assemblies Segment Sales for the first quarter of 2001 increased $1,789,505 over the same period in 2000 from higher order volume. Some of the Company's contract manufacturing customers have been affected by the current economic slowdown which may lower sales for this segment during future quarters. The gross profit percentage was 12% and 15% in the first quarter of 2001 and 2000 respectively. Selling, general and administrative expenses increased slightly when compared to the same period in 2000. Audio Equipment Segment Sales for the first quarter of 2001 decreased $131,840 when compared to the same period in 2000. Gross profit margins in the first quarter of 2001 decreased to 31.7% as compared to 37.1% for the same period in 2000, primarily due to lower sales volume over which to absorb fixed costs. Selling, general and administrative costs for the period decreased in the first quarter of 2001 when compared to the same period in 2000. Legacy Audio has historically sold its products through a direct marketing program. The Company believes that this method of distribution has limited its ability to penetrate the broader market. Legacy has developed plans to begin distributing its products through a more traditional dealer network. The Company plans to begin adding dealers in a conservative manner beginning in the third quarter of this year. During this period Legacy will begin shifting marketing resources to the new method of distribution while at the same time attempting to maintain its current level of direct sales. Other Income and Expense Investment income for the three months ended March 31, 2001 was higher than the same period in 2000 due to higher invested balances and higher rates of return available on invested funds. Factors that May Affect Operating Results The statements contained in this report on Form 10-Q that are not purely historical are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. Forward looking statements include: statements regarding future products or product development; statements regarding future research and development spending and the Company's marketing and product development strategy, statements regarding future production capacity. All forward looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward looking statements. 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 Annual Report on Form 10-K. 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 global economics and financial markets, 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 availability of electronic components that the Company purchases from suppliers, the Company's ability to meet increasing demand, the Company's ability to introduce new products on a timely basis, the timing of new product announcements and introductions by the Company or its competitors, changing customer requirements, delays in new product qualifications, the timing and extent of research and development expenses and fluctuations in manufacturing yields. As a result of the foregoing or other factors, there can be no assurance that the Company will not experience material fluctuations in future operating results on a quarterly or annual basis, which would materially and adversely affect the Company's business, financial condition and results of operations. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (b) Forms 8-K 1. The Company filed a Form 8-K dated March 23, 2001 announcing significantly lower sales and operating income in its Data Communication segment for the first quarter of 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Allen Organ Company (Registrant) Date: May 11, 2001 /s/STEVEN MARKOWITZ Steven Markowitz, President and Chief Executive Officer Date: May 11, 2001 /s/NATHAN S. ECKHART Nathan S. Eckhart, Vice President-Finance, Chief Financial and Principal Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----