10-K 3 k2000.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) (X) Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2000 OR ( ) Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Commission File Number 0-275 Allen Organ Company (Exact name of registrant as specified in its charter) Pennsylvania 23-1263194 (State of Incorporation) (IRS Employer Identification No.) 150 Locust Street, P. O. Box 36, Macungie, Pennsylvania 18062-0036 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 610-966-2200 Securities registered pursuant to section 12 (b) of the Act: None Securities registered pursuant to section 12 (g) of the Act: Class B Common Shares, par value $1 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. ( X ) The Class A voting stock of the registrant is not registered pursuant to the Securities Exchange Act of 1934, is not publicly traded, and, therefore, no market value information exists for such stock held by non- affiliates. The number of shares outstanding of each of the Registrant's classes of common stock, as of the close of business on March 9, 2001: Class A - Voting 84,002 Class B - Non-voting 1,086,613 ALLEN ORGAN COMPANY INDEX PART I 1. Business - General developments of business - Industry Segments - Description of business - Financial information about foreign operations and export sales 2. Properties 3. Legal Proceedings 4. Submission of Matters to a Vote of Security Holders PART II 5. Market for the Registrants Common Stock and Related Security Holder Matters 6. Selected Financial Data 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7A. Quantitative and Qualitative Disclosures About Market Risk 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 9. Financial Statements PART III 10. Directors and Executive Officers of the Registrant 11. Executive Compensation 12. Security Ownership of Certain Beneficial Owners and Management 13. Certain Relationships and Related Transactions PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Signatures Financial Statement Schedules Exhibits PART I Item 1. Business General developments of business. Incorporated in Pennsylvania in 1945, Allen Organ Company and Subsidiaries ("Company") operate in four industry segments: Musical Instruments, Data Communications, Electronic Assemblies, and Audio Equipment. While there are many factors that may affect the future business of the Company, the Company is particularly concerned with the recent downturn in the economic environment, which may alter or delay customers purchasing decisions in any of the four industry segments that it operates. The Company's subsidiary Eastern Research, Inc. (ERI) has had significant growth in recent years. Due to the current weakness in the Data Communications markets the Company foresees significantly less growth during the first half of 2001 as compared to the same period in 2000. Consequently, ERI has developed a plan that reduces and delays planned expenditures to minimize the impact on operating results. In addition, some of the Company's Data Communications products are sold to carriers including Competitive Local Exchange Carriers (CLEC). The financial markets have significantly lowered the valuations for these types of companies, some of which require continued funding to build out their networks (purchase equipment) and deliver services. The Company has experienced some delays in completing sales to this sector. Future sales to some of these customers may be negatively affected by their ability to raise capital. As a result of the above, the Data Communications segments order rate for the first two months of 2001 is less than the same period in 2000. This segment is targeting alternative markets, including international, for its products. In March of 2000 the Company announced that it was exploring strategic alternatives for its subsidiary Eastern Research, Inc. (ERI). The recent volatility in the technology sector of the financial markets may affect alternatives available and will extend the timing for this process. 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 39%, 47% and 57% of revenue in 2000, 1999 and 1998 respectively. The principal market for the Musical Instruments segment is institutions, primarily churches. Sales to the home market make up a smaller portion of this segment's sales. 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 continue to be on allocation by their suppliers. The Company believes that these lead times will be reduced during the current economic slowdown. Also, as life cycles for electronic components have shortened in recent years the Company has had to make special efforts redesigning circuit boards to satisfy the needs of current customers and the long- term needs of past customers. Traditionally organs have longer service requirements than other digital products. At the present time the Company does not expect this issue 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 2001 and 2000 was $4.7 million and $7.0 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 46%, 40% and 27% of revenues in 2000, 1999 and 1998 respectively. Data communications products are sold directly to end-user, to wholesale and retail distributors worldwide and under OEM agreements with several 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 increased for numerous electronic components. Also, as life cycles for electronic components have shortened in recent years the Company has had to make special efforts redesigning circuit boards to satisfy the needs of current customers and the long-term needs of past customers. At the present time the Company does not expect this to significantly affect future product shipments. The data communications segment derived 16% and 13 % of its revenue from one customer in 2000 and 1998 respectively and 52% of its 1999 revenue from three customers. 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. One type of customer for these products are the Competitive Local Exchange Carriers (CLEC) whose ability to purchase equipment has been hampered due to the economic issues discussed above. VIR faces market condition similar to those listed below for ERI. To increase VIR's product visibility in the marketplace the Company will begin to utilize ERI's significantly larger direct sales force to market VIR's TAS products. VIR's TAS products are often sold to the same customers that ERI sells its DNX products. Also, Thomas Infantino, who has been VIR's President since April 1997, will be retiring in April 2001. In order to facilitate the ERI and VIR joint marketing efforts, Mike Doyle, President of ERI, will also assume the position as President of VIR. The dollar amount of unshipped order backlog at the end of February 2001 and 2000 was $363,000 and $955,000 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 enable network service providers to deliver services to their customers. 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, Network Service Providers, 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. In 1997, ERI introduced its multi-service access concentrator (DNX) family of products. ERI has expanded this product family and broadened its feature set over the past 3 years and now considers this its flagship product. The DNX revenues represent over 90% of ERI's sales for 2000. In order to properly capitalize on this market's opportunities, ERI has implemented aggressive marketing strategies and increased product development work and will continue to do so in a way that takes into account ERI's needs and the current economic environment ERI has expanded its sales efforts in international markets. ERI derived approximately 23% of its 2000 revenue from international markets, primarily the Far East. ERI will continue to pursue growth opportunities in markets outside the United States. The realization of future business from these opportunities or from current customers could be adversely affected by currency fluctuations, social and political risks and changes in foreign financial markets and economies. ERI has also developed strategic customer relationships to expand distribution of its products by supplying its multi- service access concentrator product line to other networking companies. The dollar amount of unshipped order backlog at the end of February, 2001 and 2000 was $1.0 million and $2.0 million respectively. All orders are expected to be filled in the current year. Due to the current weakness in the telecommunications markets, ERI foresees significantly less growth during the first half of 2001, as compared to the same period in 2000. Consequently, ERI has developed a plan that reduces and delays planned expenditures to minimize the impact on operating results during this period. At the same time ERI has significant new product introductions scheduled for 2001 that are designed to enhance the Company's position in the markets served and should create additional sales opportunities for the Company later in the year. During the first quarter of 2001 ERI will launch a new capability for the DNX 4/11 platforms called GR303. GR303 provides voice concentration enabling emerging and incumbent carriers to reduce capital outlay and operating expense for both their back-haul transmission facilities and service platform ports. During the second quarter of 2001 ERI will launch a new product platform-the DNX-88 that will provide carriers the ability to scale their edge or co-location sites to 688 T1/E-1 ports, 24 DS3 and/or 8 OC3/STM1 interfaces, all managed by Envision. Envision is a comprehensive element manager system designed to manage and control the DNX family of products and enable service providers to integrate the DNX family with existing OSS platforms. (As a point of comparison, prior to the DNX-88, the largest DNX configuration could scale to only 88 T1/E1 ports.) Also during the second quarter ERI will introduce OC3/STM-1 capability for the DNX family, ERI's first optical interface capabilities to the DNX family. The 2001 product enhancements are expected to strengthen both ERI's direct customer and OEM relationships. They also begin to position ERI as an optical access solution provider helping carriers migrate their T-1/T-3 networks onto the optical backbones already in place and begin to break the bottlenecks in the "last mile". 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 12% of 2000 revenue and 10% of revenue in 1999 and 1998. AIA derived 76% of its revenues from three customers in 2000 and 68% of its revenues from three customers in 1999 and 1998. The Electronic Assemblies segment is very competitive with numerous manufacturers offering such services. Customers are generally obtained from a geographic area located 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 2001 and 2000 was $3.4 million and $1.6 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%, of revenue in 2000 and 1999 and 6% of 1998 revenue. 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 such as 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 continues to go 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 2001 and 2000 was $267,000 and $674,000 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 speaker cabinets 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. General. The Company's working capital is sufficient to meet the normal expansion of inventory and receivables. The Company spent $7,340,209, $4,910,278, and $3,478,775 annually in 2000, 1999, and 1998 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 613 persons. The Company monitors its compliance with applicable federal, state, or local provisions with regard to the environment and implements procedures or modifies its equipment as necessary. The Company does not expect any significant capital additions in the coming year to maintain its compliance. Financial information about foreign operations and export sales. The Company does not own manufacturing or sales facilities in any foreign countries. See Note 14 to the financial statements, for additional information on export sales. Export sales are all made in US dollars and for the most part are made under Letter of Credit or on a prepaid basis. The Company has established a Foreign Sales Corporation within the meaning of the Internal Revenue Code of 1986. This wholly-owned subsidiary is Allen Organ International, Inc., a Virgin Islands corporation. Item 2. Properties The following sets forth the location, approximate square footage and use of the Company's operating locations segregated by segment. The Company believes that its facilities are generally suitable and adequate for its needs. Approximate Location Square Footage Use Musical Instruments and Electronic Assemblies: Macungie, Pennsylvania 242,000 Administrative, research and manufacturing facility. Owned by Allen Organ Company. Operating at approximately 90% capacity. Macungie, Pennsylvania 27,000 International sales, exhibition center, museum and teaching facility. Owned by Allen Organ Company. Data Communications: Southampton, Pennsylvania 22,000 Administrative, research and manufacturing facility. Leased until August, 2005. Operating at approximately 80% capacity. Moorestown, New Jersey 39,000 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 2 to the financial statements, for additional information. Item 3. Legal Proceedings There is no litigation requiring disclosure pursuant to Item 103 of regulation S-K. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2000. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters The Company's Class A voting shares are not registered pursuant to the Securities Exchange Act of 1934 and are not publicly traded. The Company's Class B non-voting stock trades on The NASDAQ Stock Market under the symbol AORGB. The high and low bid quotations for each quarter during the last two years as reported by NASDAQ Market Information System is as follows: 2000 High Low First Quarter 85 38 3/8 Second Quarter 74 55 Third Quarter 71 57 1/4 Fourth Quarter 68 44 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 The Company has 8 Class A Shareholders and 279 Class B Shareholders of record as of March 9, 2001. 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 2000 Record Date Payable Amount Cash 2/18/2000 3/3/2000 $.14 Cash 5/19/2000 6/2/2000 $.14 Cash 8/18/2000 9/1/2000 $.14 Cash 11/17/2000 12/1/2000 $.14 Record of Quarterly Dividends Paid in 1999 Record Date Payable Amount Cash 2/19/1999 3/5/1999 $.14 Cash 5/23/1999 6/6/1999 $.14 Cash 8/20/1999 9/3/1999 $.14 Cash 11/19/1999 12/3/1999 $.14 Item 6. Selected Financial Data Years Ended December 31, 2000 1999 1998 1997 1996 Net Sales $72,516,208 $58,018,742 $44,966,075 $40,348,084 $36,715,128 Net Income (Loss) $ 3,954,896 $ 2,884,488 $ (616,711) $ 3,512,142 $ 3,865,876 Earnings (Loss) per share $ 3.38 $ 2.46 $ (0.52) $ 2.79 $ 2.88 Cash dividends per share $ .56 $ .56 $ .56 $ .56 $ .55 At Year End Total Assets $80,807,742 $67,466,070 $61,989,953 $62,562,004 $63,966,646 Long-Term Debt, net of current portion $ 0 $ 0 $ 0 $ 0 $ 0 The 2000, 1999, 1998 and 1997 results of operations include Legacy Audio, Inc. acquired April 1, 1997. 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, 2000 1999 Working Capital $40,957,743 $40,175,282 Current Ratio 3.3 to 1 6.2 to 1 Debt to Equity Ratio .29 to 1 .13 to 1 As indicated in Note 8 of the financial statements, Eastern Research, Inc. has obtained bank financing to provide them with future working capital as well as funds to repay $7,000,000 of ERI's inter- company loans due to Allen Organ Company. The proceeds of the term loan were invested in the Company's short-term investment accounts. These financing facilities have been obtained to begin to provide ERI with financial autonomy as the Company considers strategic alternatives for ERI. Cash flows provided by operating activities increased during 2000 as compared prior years primarily due to increases in operating income in the Musical Instruments segment resulting from higher sales volume and operational improvements. 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 used in investing activities during 2000 were used to purchase approximately $3,157,000 in plant and equipment including approximately $2,148,000 for leasehold improvements and new computer, office and test equipment to support the growth of Eastern Research, Inc. 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. 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. Results of Operations: Sales and Operating Income Consolidated sales for 2000 and 1999 increased $14,497,466 (25%) and $13,052,667 (29%) respectively when compared to the prior year primarily due to higher sales at Eastern Research, Inc (ERI) as well as in the Musical Instruments segment. ERI increased its incoming order volume primarily by expanding its customer base. December 31, 2000 1999 1998 Net Sales Musical Instruments Domestic $24,422,709 $23,769,362 $21,748,131 Export 3,635,123 3,563,383 3,676,981 Total 28,057,832 27,332,745 25,425,112 Data Communications Domestic 25,556,745 22,149,842 11,036,926 Export 7,764,597 1,146,137 1,261,029 Total 33,321,342 23,295,979 12,297,955 Electronic Assemblies Domestic 8,624,199 5,650,917 4,727,975 Audio Equipment Domestic 2,323,865 1,651,566 2,422,507 Export 188,970 87,535 92,526 Total 2,512,835 1,739,101 2,515,033 Total $72,516,208 $58,018,742 $44,966,075 Income (Loss) from Operations Musical Instrument $ 5,029,871 $ 2,950,251 $ 795,773 Data Communications (2,063,221) (805,738) (3,397,020) Electronic Assemblies 1,284,806 430,031 326,609 Audio Equipment (429,386) (761,688) (9,846) Total $ 3,822,070 $ 1,812,856 $(2,284,484) Musical Instruments Segment The increases in domestic sales reflect 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. As discussed above, the recent downturn in economic and financial markets may affect future order volume. Export sales were approximately equal for the three years ended December 31, 2000. Foreign markets continue to be affected by unfavorable economic conditions in certain world markets, particularly Far East countries, and changes in the value of the US dollar compared to foreign currencies. In recent years the Company has entered a different subset of the institutional organ market that includes the sale of its organ consoles and control electronics to customers that want to retain their wind-blown pipes. In the past this market was served by pipe organ manufacturers and local pipe organ maintenance organizations. The Company's ability to produce both the wood cabinetry and digital electronics gives it an advantage in this market. Gross profit margins on sales were 36.5%, 30.5% and 24.6% for the three years ended December 31, 2000. These increases in gross profit are a result of higher sales volume and business improvement programs, which included implementation of new information systems, up-graded production and product planning processes and the closure of the North Carolina production facility consolidating all organ production at the Macungie, PA facility. Selling and advertising expenses for 2000 remained approximately equal to 1999. General and administrative expenses decreased in 2000 due to lower personnel requirements and related benefits. Selling, administrative and other expenses increased approximately $200,000 in 1999, due to increased selling costs associated with the higher sales volume. Research and development expenses increased approximately $264,000 and $151,000 in 2000 and 1999 respectively. These increases are primarily due to increases in personnel to continue new product development. Data Communications Segment Domestic sales increased $3,406,903 and $11,112,916 in 2000 and 1999 respectively. International sales increased $6,618,460 during 2000, primarily from sales to two customers in the Far East and decreased slightly during 1999. These increases are related to higher sales at Eastern Research, Inc. The Company significantly increased its investment in the sales, marketing and research and development efforts at Eastern Research and will continue to do so in a way that takes into account ERI's needs and the current economic environment. These additional efforts are focused on expanding the Company's product offering, and its channels of distribution and targeting markets, including foreign, for the Company's products. The segment has developed strategic relationships with customers to expand their channels of distribution through OEM agreements. Gross profit margins were 47%, 48% and 41% for the past three years ended December 31, 2000. The 2000 gross margin decreased primarily due to lower margins at VIR, Inc. that related to higher overhead costs. The 1999 increase was due to higher sales of ERI's DNX product line. 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 $2,500,000 and $2,200,000 in 2000 and 1999 respectively, reflecting the additional sales and marketing efforts at ERI. Selling expenses will continue to increase in line with the philosophy outlined above. Administrative expenses increased approximately $900,000 in 2000 primarily related to additional management and administrative personnel added at ERI to support its growth. Administrative expenses remained approximately unchanged during 1999 when compared to 1998. Research and development expenses were $5,911,740, $3,759,183 and $2,464,808 for the years ended December 31, 2000, 1999 and 1998, respectively primarily related to ERI. The segment is committed to new product development and support and expects these expenditures to increase in the future, again in line with the philosophy outlined above. Electronic Assemblies Segment Sales increased during 2000 and 1999 from higher incoming order volume. This segment has focused its sales efforts on larger customers whose products require a high degree of quality and the broad range of manufacturing services available at AIA. Gross profit margins were 19.5%, 15.2% and 13.6% for the three years ended December 31, 2000. These increases are due to higher order volume over which to absorb fixed costs and changes in product mix. Selling, general and administrative expenses decreased slightly in 2000 when compared to 1999 and increased $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, 2000 increased approximately $773,000 when compared to 1999 and decreased $775,000 in 1999 when compared to 1998. Gross profit margins were 43.5%, 38.1% and 39.6% for the years ended December 31, 2000, 1999 and 1998, respectively. The 2000 increase is attributable to higher sales volume over which to absorb fixed costs. Selling, general and administrative costs increased approximately $82,000 during 2000 as compared to 1999 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 late 1999. Allen Audio continues to build a dealer network and has initiated marketing programs to promote the Company's products. Other Income (Expense) Investment income for the year ended December 31, 2000 increased when compared to 1999 due to higher returns on investments and higher invested balances. These increases were offset by interest expense on short-term financing related to Eastern Research and other expenses. The 2000, 1999, and 1998 amounts include $17,684, $67,244 and $242,227 of realized capital gains respectively. The 1999 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 effective tax rate was 22.4%, 30.6% and 55.4% in 2000, 1999 and 1998 respectively. These decreases are due to higher tax credits and other non-taxable items. 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 2001. 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. See Note 1 to the financial statements for information concerning the effects of changes in accounting policies. 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 directly to end-users, 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. Financial Statements See Item 14 for index. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no reportable events as described in Item 304(b). 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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows and the related financial statement schedule for each of the years in the three year period ended December 31, 2000. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Allentown, PA February 7, 2001 ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31 ASSETS 2000 1999 CURRENT ASSETS Cash $ 2,712,368 $ 209,277 Investments including accrued interest 24,694,377 19,649,433 Accounts receivable, net of allowance for doubtful accounts of $428,791 in 2000 and $300,823 in 1999 10,285,659 10,444,430 Inventories 19,808,173 16,715,328 Prepaid income taxes 13,972 -- Prepaid expenses 304,342 287,138 Deferred income tax benefits 1,094,701 658,869 Total Current Assets 58,913,592 47,964,475 PROPERTY, PLANT AND EQUIPMENT, NET 12,523,133 11,429,173 OTHER ASSETS Prepaid pension costs 506,702 470,154 Inventory held for future service 690,657 733,301 Note receivable 1,556,721 1,111,147 Cash value of life insurance 2,034,867 1,721,497 Deferred income tax benefits 398,476 122,742 Goodwill, net 4,165,002 3,872,441 Other assets 18,592 41,140 Total Other Assets 9,371,017 8,072,422 Total Assets $80,807,742 $67,466,070 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable - Bank $ 8,700,000 $ -- Accounts payable 3,448,119 3,593,708 Accrued income taxes -- 683,133 Other accrued expenses 2,816,102 1,927,156 Customer deposits 2,991,628 1,585,196 Total Current Liabilities 17,955,849 7,789,193 NONCURRENT LIABILITIES Deferred and other noncurrent liabilities 310,016 179,915 Total Liabilities 18,265,865 7,969,108 MINORITY INTERESTS 106,976 175,271 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, par value $1 per share Authorized Class A Voting Shares-400,000 in 2000 and 1999 Class B Non-Voting Shares-3,600,000 in 2000 and 1999 Issued 2000 1999 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 59,977,002 56,677,650 Accumulated other comprehensive income: Unrealized gain on investments, net 139,990 322,400 Sub-total 74,413,595 71,296,653 Less cost of common shares in treasury 2000 - 43,230 Class A shares and 324,148 Class B shares (11,978,694) -- 1999 - 43,230 Class A shares and 324,052 Class B shares -- (11,974,962) Total Stockholders' Equity 62,434,901 59,321,691 Total Liabilities and Stockholders' Equity $80,807,742 $67,466,070 See accompanying notes to Consolidated Financial Statements. ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2000 1999 1998 NET SALES $72,516,208 $58,018,742 $44,966,075 COSTS AND EXPENSES Cost of sales 43,730,716 36,793,515 31,870,469 Selling, administrative and other expenses 17,623,213 14,502,093 11,486,315 Research and development 7,340,209 4,910,278 3,478,775 Costs to close Rocky Mount plant -- -- 415,000 Total Costs and Expenses 68,694,138 56,205,886 47,250,559 INCOME (LOSS) FROM OPERATIONS 3,822,070 1,812,856 (2,284,484) OTHER INCOME (EXPENSE) Investment income 1,542,347 1,128,524 1,223,699 Interest expense (320,942) -- -- (Loss) gain on sale of property, plant and equipment (58,288) 1,063,722 (8,153) Other income (expense), net 20,414 (9,593) 21,078 Minority interests in consolidated subsidiaries 68,295 112,979 61,958 Total Other Income 1,251,826 2,295,632 1,298,582 INCOME (LOSS) BEFORE TAXES 5,073,896 4,108,488 (985,902) PROVISION FOR TAXES Current 1,736,000 2,030,000 (11,000) Deferred (617,000) (806,000) (646,000) Total Provision for Taxes 1,119,000 1,224,000 (657,000) NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 3,954,896 $ 2,884,488 $ (328,902) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (net of income tax benefit of $183,000) -- -- (287,809) NET INCOME (LOSS) $ 3,954,896 $ 2,884,488 $ (616,711) OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Unrealized gains on investments: Unrealized (loss) gains arising during period $ (171,313) $ 230,132 $ 162,874 Less: reclassified adjustment for gains included in income (11,097) (42,068) (157,012) Other comprehensive income (loss) (182,410) 188,064 5,862 COMPREHENSIVE INCOME (LOSS) $ 3,772,486 $ 3,072,552 $ (610,849) BASIC AND DILUTED EARNINGS PER SHARE: Net income (loss) before cumulative effect of change in accounting principle $ 3.38 $ 2.46 $ (0.28) Cumulative effect of change in accounting principle -- -- (0.24) NET INCOME (LOSS) $ 3.38 $ 2.46 $ (0.52) 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, 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 Balance-December 31, 2000 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, 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 $11,974,962 Net Income 3,954,896 Reacquired Class B Shares 96 3,732 Change in unrealized gain on securities available for sale (182,410) Cash dividend paid ($.56 per share) (655,544) Balance-December 31, 2000 $59,977,002 $139,900 372,378 $11,978,694 See accompanying notes to Consolidated Financial Statements. ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $3,954,896 $2,884,488 $ (616,711) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization 2,519,496 1,916,970 1,478,379 Minority interest in consolidated subsidiaries (68,295) (112,979) (61,958) Cumulative effect of change in accounting principle (excluding income tax effects) -- -- 470,809 Loss (Gain) on sale of property, plant and equipment 58,288 (1,063,722) 8,153 Gain on sale of investments (17,684) (67,244) (242,227) Change in assets and liabilities Accounts receivable 158,771 (3,375,842) (1,336,156) Inventories (3,050,201) (1,724,698) 3,459,802 Prepaid income taxes (13,972) 422,656 (189,761) Prepaid expenses (17,204) 224,816 (28,654) Deferred income tax benefits (711,566) (474,799) (306,812) Prepaid pension costs (36,548) 172,455 152,498 Other assets 22,548 (34,641) -- Accounts payable (145,589) 2,031,276 649,322 Accrued income taxes (683,133) 683,133 -- Other accrued expenses 888,946 504,871 730,003 Customer deposits 1,406,432 57,767 219,428 Deferred and other noncurrent liabilities 130,101 (100,589) (514,851) Net Cash Provided by Operating Activities 4,395,286 1,943,918 3,871,264 CASH FLOWS FROM INVESTING ACTIVITIES Cash proceeds from sale of investments classified as available for sale 9,908,680 5,993,248 2,526,721 Cash paid for purchase of investments classified as available for sale (15,118,347) (5,399,027) (2,226,644) Increase in cash value of life insurance (313,370) (321,163) (277,839) Increase in note receivable (445,574) (451,261) (456,329) Additions to goodwill (906,700) (733,194) (238,534) Cash proceeds from sale of property, plant and equipment 100,206 1,382,716 28,170 Cash paid for purchase of property, plant and equipment (3,157,814) (3,260,719) (1,477,340) Net Cash Used In Investing Activities (9,932,919) (2,789,400) (2,121,795) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bank loans 8,700,000 -- -- Dividends paid in cash (655,544) (655,598) (659,709) Reacquired Class B common shares (3,732) -- (352,578) Subsidiary company stock reacquired from minority stockholders -- (13,238) (29,976) Reacquired Class A common shares -- (3,959) -- Net Cash Provided by (Used in) Financing Activities 8,040,724 (672,795) (1,042,263) NET INCREASE (DECREASE) IN CASH 2,503,091 (1,518,277) 707,206 CASH, JANUARY 1 209,277 1,727,554 1,020,348 CASH, DECEMBER 31 $2,712,368 $ 209,277 $1,727,554 SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash paid for income taxes $2,535,061 $1,625,400 $ 167,050 Cash paid for interest $ 320,942 $ -- $ -- 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. 98.84% Revenue and Cost Recognition: The Company's financial statements are prepared using the accrual method of accounting. In accordance with this method of accounting, revenue is recognized in the period in which it is earned and expenses are recognized in the period in which they are incurred. Revenue on product shipments is recognized when title has transferred pursuant to shipping terms with the Company's customers. All revenue and expenses which are applicable to future periods have been presented as deferred or prepaid on the accompanying financial statements. 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 generally from 5 - 20 years and is presented net of accumulated amortization of $1,837,816 and $1,275,630 at December 31, 2000 and 1999 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 computed based on discounted cash flows and 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 17.) 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 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 all of which has been paid as of December 31, 2000. The Company ceased operations at this facility effective March 31, 1999 and consolidated all of its Musical Instruments production into its manufacturing facility in Macungie, PA. NOTE 3 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, 2000 Available for sale Equity securities $ 129,315 $ -- $ 100,067 $ 29,248 Mutual Funds Short Term Gov't Funds 13,345,217 138,061 -- 13,483,278 Municipal Bond Funds 7,769,342 68,453 57 7,837,738 Equity Funds 3,229,923 233,541 119,351 3,344,113 Totals $24,473,797 $440,055 $219,475 $24,694,377 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 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 2000, 1999 and 1998, sales proceeds and gross realized gains and losses on securities classified as available for sales were: 2000 1999 1998 Sales proceeds $9,908,680 $5,993,248 $2,526,721 Gross realized losses $ 37,974 $ 60,606 $ -- Gross realized gains $ 55,658 $ 127,850 $ 242,227 The change in net unrealized holding gains on securities available for sale in the amount of $276,948, $285,677, and $8,697 net of deferred tax expense of $94,538, $97,613, and $2,835 has been included in other comprehensive income in stockholders' equity for the years ended December 31, 2000, 1999, and 1998, respectively. NOTE 4 Inventories December 31, 2000 1999 Finished goods $ 5,950,327 $ 5,915,057 Work in process 6,172,954 4,803,969 Raw materials 7,684,892 5,996,302 Totals $19,808,173 $16,715,328 Inventory is net of allowance for obsolete and slow moving items of $2,451,587 and $2,214,159 at December 31, 2000 and 1999, respectively. 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 and are net of allowance for obsolete and slow moving items of $196,000 at December 31, 2000 and 1999. NOTE 5 Property, Plant and Equipment Estimated December 31, Useful 2000 1999 Lives Land and improvements $ 2,407,298 $ 2,369,994 10 yrs Buildings and improvements 8,955,230 8,636,998 2-40 yrs Machinery and equipment 9,993,291 8,629,366 5-10 yrs Office furniture and equipment 4,341,718 3,283,352 3-8 yrs Vehicles 164,244 194,087 4 yrs Sub-total 25,861,781 23,113,797 Less accumulated depreciation 13,338,648 11,684,624 Total $12,523,133 $11,429,173 Depreciation expense charged to operations was $1,897,715, $1,424,189 and $1,044,393 in 2000, 1999 and 1998 respectively. NOTE 6 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 approximates $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 $483,000 and $415,000 at December 31, 2000 and 1999, respectively. NOTE 7 Income Taxes The provision for income taxes consists of the following: 2000 1999 1998 Currently Currently Currently Payable Deferred Payable Deferred Payable Deferred Federal $1,392,000 $ (251,000) $1,620,000 $ (658,000) $(151,000) $(420,000) State 344,000 (366,000) 410,000 (148,000) 125,000 (394,000) Total $1,736,000 $ (617,000) $2,030,000 $ (806,000) $ (26,000) $(814,000) 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: 2000 1999 1998 Statutory provision for federal income tax $1,702,000 34.0% $1,359,000 34.0% $ (516,000) 34.0% State taxes, net of federal tax benefits (14,000) (0.3) 73,000 1.8 (177,000) 11.7 Tax credits (325,000) (6.5) (179,000) (4.5) -- -- Tax-exempt income (106,000) (2.1) (110,000) (2.8) (97,000) 6.4 Exempt income of foreign sales corporation (151,000) (3.0) (77,000) (1.9) (61,000) 4.0 Other items, net 13,000 0.3 58,000 1.5 11,000 (0.7) Effect of change in state valuation allowance of deferred tax asset -- -- 100,000 2.5 -- -- Total $1,119,000 22.4% $1,224,000 30.6% $ (840,000) 55.4% The following temporary differences give rise to the net deferred tax asset at December 31, 2000 and 1999. 2000 1999 Deferred Tax Liabilities Excess of tax depreciation/amortization over book depreciation/amortization $ (398,666) $ (389,932) Excess of pension expense for tax purposes over book (188,722) (172,872) Unrealized gain not recognized for tax purposes (80,806) (184,206) Total Deferred Tax Liabilities (668,194) (747,010) Deferred Tax Assets Deferred compensation not recognized for tax purposes 118,082 66,612 Net operating loss carry forwards 888,981 740,368 Warranty Reserve 70,275 -- Reserve for Bad Debts 163,008 113,714 Inventory Reserve 1,021,025 801,927 Sub-total 2,261,371 1,722,621 Valuation Allowance (100,000) (194,000) Total Deferred Tax Assets 2,161,371 1,528,621 Net Deferred Tax Asset $1,493,177 $ 781,611 Deferred taxes are included in the Company's financial statements as follows: 2000 1999 Current deferred tax asset $1,094,701 $ 658,869 Non-current deferred tax asset (liability) 398,476 122,742 Net deferred tax asset $1,493,177 $ 781,611 The Company has available at December 31, 2000, approximately $979,838 of unused federal and $9,466,045 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 2020. At December 31, 1999 the Company has a valuation allowance of $100,000 for the deferred tax assets relating to the uncertainty of realizing state net operating loss carry forwards. The decrease in the 2000 valuation allowance is related to the write off of Linear Switch Corporation's net operating loss carryforwards, which were previously fully reserved. NOTE 8 Notes Payable - Bank On June 30, 2000 Eastern Research, Inc. (ERI), a subsidiary of the Company, entered into a Loan and Security Agreement with a bank. The agreement provides ERI with two credit facilities. The first is a term loan in the amount of $7,000,000 due on July 1, 2001, interest only payable monthly at the LIBOR Market Index Rate plus 1.25% (7.9450% at December 31, 2000). The proceeds of the term loan were received in July 2000 and all were used to repay a portion of the inter-company loans due to Allen Organ Company. The second facility is a $5,000,000 revolving line of credit, due on July 1, 2001, interest payable monthly at the LIBOR Market Index Rate plus 1.50% (8.1950% at December 31, 2000). The line of credit has been obtained to provide ERI with future working capital. Outstanding borrowings under the line of credit were $1,700,000 at December 31, 2000. Both credit facilities are secured by the assets of Eastern Research, Inc. and have been guaranteed by Allen Diversified, Inc. and Allen Organ Company. NOTE 9 Other Accrued Expenses December 31, 2000 1999 Accrued salaries and commissions $ 996,254 $ 722,336 Accrued additional purchase price 906,700 733,319 Accrued plant closing costs -- 44,588 Other 913,148 426,913 Total $2,816,102 $1,927,156 NOTE 10 Commitments and Contingencies As of December 31, 2000, the Company is contingently liable for a maximum amount of approximately $1,636,849 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, 2000, 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 2000, 1999 and 1998 amounted to $906,700, $733,319 and $238,535, respectively. The agreement provides that the total of these payments shall not exceed $2,000,000 and this limit was met during 2000. The Company's Data Communications segment leases its offices and production facility under non-cancelable operating leases which expire at various dates through August 2005. These leases include renewal options for periods ranging up to ten years with increases of lease payments based on changes in the Consumer Price Index. Rent expense was $440,971, $321,368 and $230,447 for 2000, 1999 and 1998, respectively. Minimum annual rent payments for the operating leases are as follows: 2001 $ 388,587 2002 315,229 2003 103,054 2004 103,054 2005 60,115 Total $ 970,039 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: 2000 1999 1998 Pension benefit obligation Balance, beginning of year $15,065,101 $14,923,318 $13,222,392 Service cost 324,423 380,650 310,909 Interest cost 1,024,441 999,772 983,147 Benefits paid to participants (976,612) (812,359) (792,052) Gain (loss) on updated data/assumptions (243,120) (426,280) 1,198,922 Balance, end of year $15,194,233 $15,065,101 $14,923,318 Plan assets Fair value, beginning of year $17,477,871 $15,611,950 $14,764,799 Actual investment returns (811,632) 2,678,280 1,639,203 Benefits paid to participants (976,612) (812,359) (792,052) Fair value, end of year $15,689,627 $17,477,871 $15,611,950 The Funded status of the plans were as follows: December 31, 2000 1999 1998 Excess of the value of plan assets over the benefit obligation $ 495,394 $ 2,412,770 $ 688,632 Unrecognized prior service cost -- 73,323 147,313 Unrecognized net transition liability (asset) (72,012) (144,020) (216,028) Unrecognized net actuarial loss (gain) 83,320 (1,871,919) 22,692 Prepaid benefit cost $ 506,702 $ 470,154 $ 642,609 The following weighted-average rates were used: Discount rate on the benefit obligation 7.0% 7.0% 6.75% Rate of return on plan assets 8.0% 8.0% 8.0% Rate of long-term compensation increase 6.0% 6.0% 6.0% Pension expense is comprised as follows: 2000 1999 1998 Service cost $ 324,423 $ 380,650 $ 310,909 Interest cost 1,024,441 999,772 983,147 Expected return on plan assets (1,357,306) (1,209,949) (1,143,540) Amortization of net gain from prior periods (29,421) -- -- Amortization of unrecognized prior service cost 73,323 73,990 73,990 Amortization of transition asset (72,008) (72,008) (72,008) Net Pension Cost $ (36,548) $ 172,455 $ 152,498 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, 2000 1999 1998 Projected benefit obligation $ 8,078,231 $ -- $ 7,798,136 Accumulated benefit obligation 7,167,545 -- 6,708,396 Fair value of plan assets 7,827,166 -- 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 $125,374, $93,388 and $112,981 to the plans in 2000, 1999 and 1998 respectively. During 1999, the Company established supplemental executive retirement plans (deferred compensation) 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 executive's death or retirement. NOTE 12 Deferred and Other Noncurrent Liabilities December 31, 2000 1999 Deferred compensation expense $ 250,016 $ 179,915 Other Noncurrent Liabilities 60,000 -- Total $ 310,016 $ 179,915 NOTE 13 Earnings Per Share Earnings per share were computed using 1,170,618 shares in 2000, 1,170,719 shares in 1999, and 1,178,064 shares in 1998, the weighted average number of shares outstanding during each year. The Company does not have any dilutive equity instruments. NOTE 14 Export Sales In 2000, 1999 and 1998, net sales by the Musical Instruments segment include export sales, principally to Canada, Europe and the Far East of $3,635,123, $3,563,383, and $3,676,981, respectively. Net sales by the Data Communications segment include export sales principally to Europe and the Far East of $7,764,597 for 2000, $1,146,137 for 1999, and $1,261,029 for 1998. Net sales by the Audio Equipment segment include export sales principally to Europe and the Far East of $188,970 for 2000, $87,535 for 1999 and $92,526 for 1998. 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 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 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 2000, 1999 and 1998. December 31, 2000 1999 1998 Net Sales to Unaffiliated Customers Musical Instruments $28,057,832 $27,332,745 $25,425,112 Data Communications 33,321,342 23,295,979 12,297,955 Electronic Assemblies 8,624,199 5,650,917 4,727,975 Audio Equipment 2,512,835 1,739,101 2,515,033 Total $72,516,208 $58,018,742 $44,966,075 Intersegment Sales Musical Instruments $ 294,146 $ 109,667 $ 136,123 Data Communications 120,712 174,516 594 Electronic Assemblies 15,577 37,742 495,266 Audio Equipment 35,563 58,253 148,573 Total $ 465,998 $ 380,178 $ 780,556 Income (Loss) from Operations Musical Instruments $ 5,029,871 $ 2,950,251 $ 795,773 Data Communications (2,063,221) (805,738 (3,397,020) Electronic Assemblies 1,284,806 430,031 326,609 Audio Equipment (429,386) (761,688) (9,846) Total $ 3,822,070 $ 1,812,856 $(2,284,484) Identifiable Assets Musical Instruments $18,693,577 $18,912,763 $19,777,418 Data Communications 31,011,641 19,764,425 11,532,523 Electronic Assemblies 4,444,349 3,658,915 3,501,492 Audio Equipment 2,658,110 2,209,810 2,259,185 Sub-total 56,807,677 37,070,618 39,541,023 General corporate assets 24,000,065 22,920,157 24,919,335 Total $80,807,742 $67,466,070 $61,989,953 Capital Expenditures Musical Instruments $ 837,828 $ 1,268,726 $ 866,868 Data Communications 2,297,046 1,908,323 542,030 Electronic Assemblies 5,320 5,670 59,850 Audio Equipment 17,620 78,000 8,592 Total $ 3,157,814 $ 3,260,719 $ 1,477,340 Depreciation and Amortization Musical Instruments $ 683,673 $ 697,587 $ 614,670 Data Communications 1,632,861 992,933 618,380 Electronic Assemblies 120,750 145,948 171,912 Audio Equipment 82,212 80,502 73,417 Total $ 2,519,496 $ 1,916,970 $ 1,478,379 Income Tax Expense (Benefit) Musical Instruments $ 1,984,000 $ 1,985,000 $ 726,000 Data Communications (1,156,000) (619,000) (1,458,000) Electronic Assemblies 484,000 159,000 115,000 Audio Equipment (193,000) (301,000) (40,000) Total $ 1,119,000 $ 1,224,000 $ (657,000) 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 76% of its revenues from three customers in 2000 and 68% of its revenues from three customers in 1999 and 1998. The Data Communications segment derived 16% and 13 % of its revenue from one customer in 2000 and 1998 respectively and 52% of its 1999 revenue from three customers. The Company's Musical Instrument and Audio Equipment segments are not dependent on any single customer. NOTE 16 Investment Income December 31, 2000 1999 1998 Interest Income $1,109,751 $ 935,290 $ 887,338 Dividend Income 414,912 125,990 94,134 Gain on Sale of Investments 17,684 67,244 242,227 Total $1,542,347 $1,128,524 $1,223,699 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 generally 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, 2000, total options issued for VIR and ERI represent 11% and 15%, respectively, of the shares currently outstanding. Vested options consist of 6% and 9% of the currently outstanding shares of VIR and ERI, respectively. ERI recognized compensation expense of $29,687 during 2000 related to options granted with an exercise price less than the fair market value on the date of grant. No compensation expense was recognized for the VIR plan. Had compensation cost been determined pursuant to FASB Statement No. 123, net income (loss) and earnings per share would have been: 2000 1999 1998 Net income (loss) $3,820,658 2,775,220 $(686,811) Earnings per share $3.26 $2.37 $(0.58) NOTE 18 Quarterly Financial Data (Unaudited) First Second Third Fourth 2000 Quarter Quarter Quarter Quarter Total Net Sales $16,808,032 $18,931,735 $17,850,297 $18,926,144 $72,516,208 Gross Profit 6,953,628 7,751,695 6,891,620 7,188,549 28,785,492 Net Income 869,852 1,356,195 658,528 1,070,321 3,954,896 Earnings per Share 0.74 1.16 0.56 0.91 3.38 1999 Net Sales $11,699,573 $13,887,775 $15,590,813 $16,840,581 $58,018,742 Gross Profit 3,637,359 4,878,932 6,107,161 6,601,775 21,225,227 Net Income (Loss) (136,631) 1,044,946 741,718 1,234,455 2,884,488 Earnings (Loss) per Share (0.12) 0.89 0.63 1.05 2.46 1998 Net Sales $10,227,291 $10,567,919 $11,812,748 $12,358,117 $44,966,075 Gross Profit 3,342,669 3,128,723 2,763,234 3,860,980 13,095,606 Income before cumulative effect of Accounting Change 100,568 (280,643) (599,701) 450,874 (328,902) Cumulative effect on prior years of SOP 98-5 (287,809) (287,809) Net Income (Loss) 100,568 (280,643) (599,701) 163,065 (616,711) Earnings (Loss) per Share: Income before cumulative effect of Accounting Change 0.09 (0.24) (0.51) 0.38 (0.28) Cumulative effect on prior years of SOP 98-5 (0.24) (0.24) Net Income (Loss) 0.09 (0.24) (0.51) 0.14 (0.52) PART III Item 10. Directors and Executive Officers of the Registrant. (a) Identification of Directors Time Period Date Term Position Name Expires Age Position Held Steven Markowitz Next Annual 47 Director Since 1980 Meeting in 2001 Eugene Moroz Next Annual 77 Director Since 1968 Meeting in 2001 Leonard W. Helfrich (1) Next Annual 71 Director 1964 - 1968 and Meeting in 2001 1972 to present Orville G. Hawk (1) Next Annual 83 Director Since 1989 Meeting in 2001 Albert F. Schuster (1) Next Annual 81 Director Since 1989 Meeting in 2001 Martha Markowitz Next Annual 79 Director Since 1991 Meeting in 2001 Jeffrey L. Schucker (1) Next Annual 46 Director Since July 1996 Meeting in 2001 Ernest Choquette Next Annual 47 Director Since April 1998 Meeting in 2001 (1) Audit Committee member. (b) Identification of Executive Officers. Time Period Date Term Position Name Expires Age Position Held Steven Markowitz Next Annual 47 President 1990 to Meeting in 2001 present Barry J. Holben Next Annual 48 Vice President October 1995 Meeting in 2001 to present Dwight A. Beacham Next Annual 54 Vice President October 1995 Meeting in 2001 to present Nathan S. Eckhart Next Annual 37 Treasurer, May 1996 Meeting in 2001 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 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. Helfrich was employed by the Company for nearly 40 years as Vice President-Finance and Secretary before retiring in March 2000 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. (MMCA) and formerly a Vice President of Meridian Capital Markets. MMCA provides financial advisory services to the Company from time to time. Mr. Choquette has been a member of the law firm of Stevens & Lee, Reading PA, for over 20 years and currently serves as Co-Chairman of their Corporate Group. Stevens & Lee serves as general counsel to the Company. Mrs. Markowitz is the widow of Jerome Markowitz, the Company's founder, and represents the family interests. (f) Involvement in Certain Legal Proceedings by Directors or Officers. None. (g) Compliance with Section 16(a) of the Exchange Act. No transaction required to be reported. Item 11. Executive Compensation. Deleted paragraphs and/or columns are not required to be answered. (b) SUMMARY COMPENSATION TABLE: Annual Compensation All Other Salary Bonus Compensation Name and Principal Position Year $ $ $ Steven A. Markowitz, President 2000 135,923 - 42,322 (1) (Chief Executive Officer) 1999 126,840 - 42,059 1998 105,115 17,000 35,558 Leonard W. Helfrich, 2000 38,970 - Vice President - Finance 1999 116,416 - (Secretary) 1998 95,065 16,000 (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 2000 Actuarial Valuation Report: Steven A. Markowitz $60,984 Age 47 (1) (1)Amount shown is calculated from prior compensation to date and estimated compensation to normal retirement age (65). (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) Nathan S. Eckhart, Treasurer and Secretary and Ernest J. Choquette, Director of the Company, serve on 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. Security Ownership of Certain Beneficial Owners and Management (a) Voting securities of the registrant owned of record or beneficially by each person who owns of record, or is known by the registrant to own beneficially, more than 5 percent of any class of such securities. Class A Common Shares constitute the only securities with voting rights. Information as of February 28, 2001. 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, 2000. 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. Certain Relationships and Related Transactions See Note 10 to Financial Statements, concerning an agreement between the Company and Martha Markowitz, a Director of the Company. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) Financial Statements The following consolidated financial statements of Allen Organ Company and its subsidiaries are included in Part II, Item 8: Independent Auditors' Reports. Consolidated Balance Sheets as of December 31, 2000 and 1999. Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998. Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998. Consolidated Statements of cash flows for the years ended December 31, 2000, 1999, and 1998. 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 Schedule II. Valuation and Qualifying Accounts for the three years ended December 31, 2000. Schedules other than those listed above are omitted because they are either not required, are not applicable or the required information is presented in the Consolidated Financial Statements. (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 99.1 Audit Committee Charter 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 2000. 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 13, 2001 /s/ STEVEN A. MARKOWITZ Steven A. Markowitz Chief Executive Officer, President and Director Date: March 13, 2001 /s/NATHAN S. ECKHART Nathan S. Eckhart Treasurer, Secretary, and Principal Accounting Officer Date: March 13, 2001 /s/LEONARD W. HELFRICH Leonard W. Helfrich Director Date: March 13, 2001 /s/JEFFREY L. SCHUCKER Jeffrey L. Schucker Director Allen Organ Company and Subsidiaries Schedule II - Valuation and Qualifying Accounts For the Years Ended December 31, 2000, 1999 and 1998 Additions Balance at Additions Charged Write Offs Balance Beginning Charged to Other And at End Description Of Year to Expense Accounts Recoveries Of Year Year Ended December 31, 2000 Allowance for Doubtful Accounts $ 300,823 $174,034 $ - $ (46,066) $ 428,791 Inventory Allowance for Obsolete and Slow Moving Items 2,410,159 545,857 - (308,429) 2,647,587 Valuation Allowance Deferred Tax Asset 194,000 - - (94,000) 100,000 Year Ended December 31, 1999 Allowance for Doubtful Accounts 191,057 109,766 - - 300,823 Inventory Allowance for Obsolete and Slow Moving Items 773,272 1,636,887 - - 2,410,159 Valuation Allowance Deferred Tax Asset 94,000 100,000 - - 194,000 Year Ended December 31, 1998 Allowance for Doubtful Accounts 30,000 161,057 - - 191,057 Inventory Allowance for Obsolete and Slow Moving Items 64,800 708,472 - - 773,272 Valuation Allowance Deferred Tax Asset - 94,000 - - 94,000