Item 1. Business
General developments of business. Incorporated in Pennsylvania in 1945, Allen Organ Company ("Company") designs, manufacturers and markets electronic musical instruments, primarily digital computer organs and related accessories. The Company's Allen Integrated Assemblies division designs and manufacturers electronic assemblies for outside customers.
Industry segments. The Company conducts business in two industry segments. The primary business is electronic keyboard musical instruments and accessories. The secondary business provides subcontract design and manufacture of electronic assemblies for outside customers. For financial information concerning the segments, see Note 14 to the financial statements.
Description of business. The Company has manufacturing, research, and sales facilities at its Macungie, Pennsylvania headquarters; and a wholly-owned subsidiary, Rocky Mount Instruments, Inc., a North Carolina corporation, has a manufacturing and sales facility at Rocky Mount, North Carolina. The principal source of the Company's musical instruments sales are through dealers, primarily independent retail music stores throughout the United States, with a lesser percentage distributed internationally. The electronic assemblies segment is an outgrowth of the technical skills and manufacturing capabilities developed by the Company in its own musical instruments business. This segment accounted for 13%, 11% and 9% of revenue in 1994, 1993, and 1992 respectively. The principal raw materials used in the Company's products are electronic components and wood, both of which are readily available from various sources without undue difficulty. Although the Company has two major selling cycles, peaking at Easter and Christmas, the difference between these periods and the rest of the Company's fiscal year sales is not significant enough for the Company to deem its business as seasonal. The Company's working capital is sufficient to meet the normal expansion of inventory and receivables. No excessive inventories are required to meet rapid delivery. The Company does not engage in any significant amounts of consignments, extended payment terms, or lease guarantees of its customers as are utilized by the industry. The Company has entered into product repurchase agreements concerning certain customers' financing arrangements. See Note 7 to the financial statements. The dollar amounts and number of times the Company has had to honor these repurchase agreements are negligible. The Company is not dependent on any single, or small group of customers the loss of which would have a material adverse effect on the Company's business in connection with its principal business segment of electronic musical instruments. The second segment of manufacture of electronic assemblies for outside customers receives a majority of its business from one customer. The dollar amount of order backlog believed to be firm at the end of the year was 3.9 million for 1993 and 3.3 million for 1994. 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 at competitive prices and a smaller percentage of the home or entertainment market which is dominated by special marketing techniques. The electronic assemblies segment is very competitive with numerous manufacturers capable of producing these products. Customers are generally obtained from a geographic area close to the manufacturer. The Company spent $668,552, $612,631, and $625,190 annually in 1992, 1993, and 1994 respectively on research and development. The Company and its subsidiaries employ approximately 450 persons. The Company is not aware of any problem in complying with applicable federal, state, or local provisions with regard to the environment. The manufacturing requirements do not require any special expenditures to meet environmental compliances.
Financial information about foreign operations and export sales. International export sales have been $4,786,299 in 1992, $4,607,680 in 1993, and $5,398,667 in 1994. The Company does not own manufacturing or sales facilities in any foreign countries. Effective January 3, 1994, the Company has established a Foreign Sales Corporation within the meaning of the Internal Revenue Code of 1986. This wholly-owned subsidiary is Allen Organ International, Inc., a Virgin Islands corporation.
Item 2.
Item 2. Properties
The Company believes that its facilities are generally suitable and adequate for its administrative, sales, research, and manufacturing functions. The Company is reviewing a potential need to upgrade or expand its current production facilities. All land and buildings are owned by the Company, except number 4 which is currently owned by Rocky Mount Instruments.
(1) One-story masonry manufacturing building, about 222,000 square feet, plus a two-story 20,000 square foot technical headquarters, located on 20 acres in Macungie, Lehigh County, Pennsylvania.
(2) 160 acre tract of unimproved land adjacent to property (1) above.
(3) An international sales and exhibition center including a 500 seat auditorium and a 12,500 square foot museum and teaching facility on 17 acres, having an approximately 200 foot common boundary with Company owned land described above.
(4) One-story masonry manufacturing building, about 70,000 square feet, located on 47 acres in Rocky Mount, Nash County, North Carolina
Item 3.
Item 3. Legal Proceedings
There is no litigation requiring disclosure pursuant to Item 103 of regulation S-K.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1994.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters
The Company's Class A voting shares are not registered pursuant to the Securities Exchange Act of 1934 and are not publicly traded. The Company's Class B non-voting stock trades on The NASDAQ Stock Market under the symbol AORGB.
The high and low trade price information for each quarter during the last two years as reported by NASDAQ Market Information System is as follows:
1993 High Low
First Quarter 34 29 Second Quarter 30 3/4 28 1/2 Third Quarter 32 29 1/4 Fourth Quarter 34 29 3/4
1994 High Low
First Quarter 34 29 1/2 Second Quarter 39 31 1/2 Third Quarter 41 1/2 36 1/2 Fourth Quarter 39 35
The Company has 9 Class A Shareholders and 432 Class B Shareholders of record as of March 10, 1995.
During the past two fiscal years, the Company has declared dividends as follows:
Record of Quarterly Dividends Paid in 1993
Record Date Payable Amount
Cash 2/19/93 3/05/93 $.12 Cash 5/21/93 6/04/93 $.12 Cash 8/20/93 9/03/93 $.12 Cash11/19/93 12/03/93 $.14
Record of Quarterly Dividends Paid in 1994
Record Date Payable Amount
Cash 2/18/94 3/04/94 $.13 Cash 5/20/94 6/03/94 $.13 Cash 8/19/94 9/02/94 $.13 Cash11/18/94 12/02/94 $.16
Item 6.
Item 6. Selected Financial Data
Years Ended December 31, 1994 1993 1992 1991 1990
Net Sales $28,842,789 $26,477,983 $26,238,092 $25,276,374 $25,720,937
Net Income $4,449,703 $3,456,154 $3,397,045 $3,689,207 $4,688,719
Earnings per share $ 3.25 $ 2.48 $ 2.41 $ 2.55 $ 3.18
Cash dividends per share $ .55 $ .50 $ .50 $ .48 $ .48
At Year End
Total Assets $58,464,695 $55,752,570 $53,581,050 $51,115,657 $49,666,906
Long-Term Liabilities Liabilities $ 0 $ 0 $ 0 $ 0 $ 0
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources: The Company continues to maintain a strong financial position and high level of liquidity which enables it to generate funds internally to meet operating needs, capital expenditures and short- term obligations. Key indicators of the Company's liquidity are presented below:
December 31, 1994 1993 Working Capital $47,937,778 $45,033,700 Current Ratio 39.6 to 1 29.6 to 1 Debt to Equity Ratio .05 to 1 .05 to 1
The Company's ratio of debt to equity has remained very low because of management's continuing policy of financing expansion with internally generated funds. This policy has enabled the Company to maintain its competitive advantage without incurring the costs associated with borrowed funds. The Company presently has no major commitments for capital expenditures which would require significant capital resources.
Results of Operations:
Sales and Net Income Net sales increased $2,364,806 (8.9%) during 1994 as compared to 1993 when sales increased $239,891 (1.0%) from 1992. Domestic and export sales by industry segment for the last three years are summarized below: December 31, 1994 1993 1992 Musical Instruments Organ Products - Domestic $19,772,391 $18,916,491 $18,984,935 Organ Products - Export 5,398,667 4,607,680 4,786,299 Subtotal 25,171,058 23,524,171 23,771,234 Electronic Assemblies - Domestic 3,671,731 2,953,812 2,466,858 Total $28,842,789 $26,477,983 $26,238,092
The 1994 increase in domestic sales of organ products resulted from a higher volume of incoming orders, a reduction of the order backlog and from modest increases in selling prices. During 1994 new organ models were introduced in the majority of the Company's product line. These new models were very well received by both the Company's dealers and customers. Continued increases in domestic interest rates may have an adverse affect on the Company's future operating results. The 1993 domestic sales of organ products was virtually unchanged from 1992, reflecting the limited changes in the economic climate. Organ products export sales increased in 1994 due to the relative weakness of the U. S. dollar in relation to foreign currencies. Economic changes in foreign countries and foreign exchange rates may affect future export sales. Additional marketing efforts and production capabilities have contributed to the sales increases in the Company's electronic assemblies segment. Gross profit margins on sales were 32.3%, 31.4% and 31.0% for the three years ended December 31, 1994. The increase in the 1994 gross profit margin when compared to 1993 and 1992 reflects increased sales levels and continued improvement in production efficiencies, despite continued rising costs.
Income from Operations Operating income in the Company's musical instruments segment increased $544,589 (14.3%) in 1994, and $242,036 (6.8%) in 1993. These increases in operating income are attributable to higher sales over which to absorb fixed costs and continued efforts to improve production efficiencies by employing some of the latest technology in the manufacture of the Company's products. Operating income from the Company's electronic assemblies segment has increased primarily due to increases in sales volume.
Other Income The variations in interest income in 1994, 1993, and 1992 are primarily attributable to the yields available on short-term investments and the amounts of principal invested. During 1994 the Company settled a lawsuit for wrongful prosecution brought against the attorneys for one of the Company's competitors. This resulted from a lawsuit the Company settled with its competitor in 1992. Other income-net for 1994 and 1992 includes $385,000 and $200,000 respectively, less legal expenses related to these settlements.
Selling, Administrative and Other Expenses Selling, administrative and other expenses increased by $283,228 (7.5%) in 1994 due to higher variable sales expenses related to the higher sales volume, while in 1993 these expenses decreased by $236,179 (5.9%), primarily due to lower advertising and legal costs. Income Taxes The effective tax rate decreased in 1994, primarily due to the formation of Allen Organ International, a Foreign Sales Corporation, and higher tax-free non-operating investment income. The decrease in 1993, when compared to 1992, was primarily due to an increase in tax exempt income generated by a larger portion of the company's assets being invested in tax exempt municipal bonds throughout 1993. In 1992, the Financial Accounting Standards Board issued the Financial Accounting Standard No. 109 - Accounting for Income Taxes. The Corporation adopted the new standard effective January 1992. The cumulative effect of this change in accounting for income taxes was to reduce the Corporation's deferred tax liability by $22,025 and also resulted in a one time increase in net income for 1992 in the same amount.
Item 8.
Item 8. Financial Statements
See Item 14 for index.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
CONCANNON, GALLAGHER, MILLER & COMPANY, P.C. CERTIFIED PUBLIC ACCOUNTANTS Michael J. Gallagher, CPA Michael R. Miller, CPA William C. Mason, CPA Dale E. Grate, CPA E. Barry Hetzel, CPA Edward J. Quigley, Jr., CPA John G. Estock, CPA Howard D. Gneiding, CPA Robert A. Oster, CPA Robert E. Vitale, CPA John F. Sharkey, Jr., CPA Victor J. Meyer, CPA David C. Gehringer, CPA Gerard D. Stanus, CPA Robert M. Caster, CPA INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Allen Organ Company
We have audited the accompanying consolidated balance sheets of Allen Organ Company and Subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Allen Organ Company and Subsidiaries at December 31, 1994 and 1993 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
Concannon, Gallagher, Miller and Company, P.C.
Allentown, PA January 27, 1995
Member of AICPA Division for CPA Firms SEC and Private Companies Practice Sections
ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, ASSETS 1994 1993 CURRENT ASSETS Cash $105,067 $456,433 Investments, including accrued interest 36,783,908 34,960,608 Accounts receivable 3,052,683 3,050,496 Inventories 8,794,765 7,872,339 Prepaid income taxes 276,580 101,063 Prepaid expenses 98,903 157,068 Deferred income tax benefits 67,420 8,439 Total Current Assets 49,179,326 46,606,446 PROPERTY, PLANT AND EQUIPMENT, AT COST, LESS ACCUMULATED DEPRECIATION 7,163,476 7,329,495 OTHER ASSETS Intangible pension asset 443,273 517,263 Inventory held for future service 1,145,511 1,098,861 Deferred income tax benefits 43,116 0 Cash value of life insurance 408,138 200,505 Note receivable 81,855 0 Total Other Assets 2,121,893 1,816,629 Total Assets $58,464,695 $55,752,570
LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $171,791 $191,562 Accrued taxes on income 0 60,983 Accrued salaries and commissions 308,941 274,331 Other accrued expenses 314,159 150,478 Customer deposits 446,657 895,392 Total Current Liabilities 1,241,548 1,572,746 NONCURRENT LIABILITIES Deferred liabilities 77,917 233,128 Accrued pension cost 1,374,007 1,076,870 Total Noncurrent Liabilities 1,451,924 1,309,998 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, par value $1 per share Authorized Class A shares - 400,000 in 1994 and 1993 Class B shares - 3,600,000 in 1994 and 1993 Issued Class A shares (voting) - 128,104 in 1994 and 1993 128,104 128,104 Class B shares (nonvoting) - 1,409,889 in 1994 and 1993 1,409,889 1,409,889 Total Common Stock 1,537,993 1,537,993 Capital in excess of par value 12,610,377 12,610,377 Retained earnings 46,524,142 42,828,013 Unrealized loss on investments (98,399) (11,612) Pension liability adjustment (489,823) (256,740) Subtotal 60,084,290 56,708,031 Less cost of common shares in treasury 1994 - 43,120 Class A shares and 130,336 Class B shares 4,313,067 1993 - 43,120 Class A shares and 115,890 Class B shares 3,838,205 Total Shareholders' Equity 55,771,223 52,869,826 Total Liabilities and Shareholders' Equity $58,464,695 $55,752,570
The accompanying notes are an integral part of the consolidated financial statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Years Ended December 31, 1994 1993 1992 NET SALES $28,842,789 $26,477,983 $26,238,092 COSTS AND EXPENSES Cost of sales 19,535,326 18,153,170 18,102,730 Selling, administrative and other expenses 4,058,058 3,774,830 4,011,009 Total Costs and Expenses 23,593,384 21,928,000 22,113,739 INCOME FROM OPERATIONS 5,249,405 4,549,983 4,124,353 OTHER INCOME Interest income 1,355,304 1,074,100 1,202,927 Other income, net 345,994 28,071 278,740 Total Other Income 1,701,298 1,102,171 1,481,667 INCOME BEFORE TAXES ON INCOME AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 6,950,703 5,652,154 5,606,020 TAXES ON INCOME Current 2,525,000 2,228,000 2,261,000 Deferred (24,000) (32,000) (30,000) Total Taxes on Income 2,501,000 2,196,000 2,231,000 INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 4,449,703 3,456,154 3,375,020 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 0 0 22,025 NET INCOME 4,449,703 3,456,154 3,397,045 RETAINED EARNINGS Balance, January 1 42,828,013 40,067,860 37,376,135 Deduct cash dividends (1994 - $.55, 1993 - $.50, 1992 - $.50) 753,574 696,001 705,320 Balance, December 31 $46,524,142 $42,828,013 $40,067,860 EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 3.25 $ 2.48 $ 2.39 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- .02 EARNINGS PER SHARE $ 3.25 $ 2.48 $ 2.41
The accompanying notes are an integral part of the consolidated financial statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1994 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES Net income $4,449,703 $3,456,154 $3,397,045 Adjustments to reconcile net income to net cash provided by operating activities Cumulative effect of change in accounting principle 0 0 (22,025) Depreciation and amortization 562,241 594,144 628,688 Amortization of bond premiums 218,519 252,278 56,142 Loss (Gain) on sale of property, plant and equipment 43,829 7,654 (974) Loss (Gain) on sale of investments 1,853 (1,530) (268) Loss on sale of other assets 0 1,831 0 Change in assets and liabilities Accounts receivable (2,187) (44,205) 737,464 Inventories (969,076) (880,826) 194,573 Prepaid income taxes (175,517) (62,787) 545,188 Prepaid expenses 58,165 43,682 (29,962) Deferred income tax benefits 64,729 (8,439) 115,303 Accounts payable (19,771) (2,955) (76,458) Accrued taxes on income (60,983) 28,983 8,934 Accrued salaries and commissions 34,610 34,269 (139,686) Other accrued expenses 163,681 39,698 69,688 Customer deposits (448,735) 285,847 244,338 Deferred taxes and liabilities (155,211) (38,500) (152,803) Other noncurrent liabilities (28,782) 418 21,774 Net Cash Provided by Operating Activities 3,737,068 3,705,716 5,596,961 CASH FLOWS FROM INVESTING ACTIVITIES Cash proceeds from maturity of investments classified as held to maturity 40,285,010 52,777,125 69,620,665 Cash paid for purchase of investments classified as held to maturity (40,883,194) (52,589,537) (73,873,342) Cash paid for purchase of investments classified as available for sale (1,532,275) (1,868,470) 0 Cash proceeds from sale of other assets 0 7,830 0 Increase in cash value of life insurance (207,633) (121,474) (79,031) Increase in note receivable (81,855) 0 0 Cash proceeds from sale of property, plant and equipment 100 27,410 1,355 Cash paid for purchase of property, plant and equipment (440,151) (438,843) (321,599) Net Cash Used in Investing Activities (2,859,998) (2,205,959) (4,651,952) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid in cash (753,574) (696,001) (705,320) Reacquired Class A and B common shares (474,862) (850,791) (103,924) Net Cash Used in Financing Activities (1,228,436) (1,546,792) (809,244)
NET (DECREASE) INCREASE IN CASH (351,366) (47,035) 135,765
CASH, JANUARY 1 456,433 503,468 367,703
CASH, DECEMBER 31 $105,067 $456,433 $503,468
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION CASH PAID DURING THE YEAR FOR INCOME TAXES $2,767,260 $2,240,173 $1,727,427
The accompanying notes are an integral part of the consolidated financial statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Significant Accounting Policies The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Effective January 3, 1994, 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. 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 federal, state and local government obligations and, by policy, limits the amount of credit exposure in any one investment. The Company sells its products through an established dealer network. The credit risk associated with related receivables is limited due to the large number of dealers and their geographic dispersion. Inventories are valued at the lower of cost or ma rket. Cost is determined using the first-in, first- out (FIFO) method for substantially all inventories. 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. 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. The differences relate primarily to depreciable assets (use of different depreciation methods and lives for financial statement and income tax purposes), additional pension liability and unrealized losses on investments not recognized for tax purposes. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. During 1993, the Company adopted Statement of Financial Accounting, Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires the company to classify its investments in marketable debt and equity securities as "held to maturity" if it has the positive intent and ability to hold the securities to maturity. All other marketable debt and equity securities are classified as "available for sale." Securities classified as "available for sale" are carried in the financial statements at fair value. Realized gains and losses, determined using the first-in, first-out (FIFO) method, are included in earnings; unrealized holding gains and losses are reported as a separate component of stockholders' equity net of deferred tax benefit or liability. Securities classified as held to maturity are carried at amortized cost.
NOTE 2 Investments The cost and fair value of investments in debt and equity securities are as follows: Gross Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value December 31, 1994 Available for sale Equity securities $435,462 $ $27,257 $408,205 Mutual Funds 2,959,627 14,169 152,732 2,821,064
Held to maturity U.S. Treasury Bills 18,478,846 18,478,846 Municipal Bonds 14,560,581 235,510 14,325,071 Federal Agency Bonds 515,212 31,977 483,235
Totals $36,949,728 $14,169 $447,476 $36,516,421
December 31, 1993 Available for sale Equity securities $ 29,310 $ $ $ 29,310 Mutual Funds 1,839,495 20,051 1,819,444
Held to maturity U.S. Treasury Bills 22,138,695 22,138,695 Municipal Bonds 10,973,159 79,419 11,052,578
Totals $34,980,659 $79,419 $20,051 $35,040,027
Marketable debt securities classified as held to maturity have an average contractual maturity of approximately 1 year or less. The change in net unrealized holding losses on securities available for sale in the amount of $145,769 and $20,051, net of deferred tax benefits of $58,982 and $8,439 has been charged to shareholders' equity for the years ended December 31, 1994 and 1993 respectively.
NOTE 3 Inventories December 31, 1994 1993 Finished goods $ 450,015 $ 770,514 Work in process 4,884,735 4,361,553 Raw materials 3,460,015 2,740,272 Total $8,794,765 $7,872,339
The Company maintains an inventory of various parts to be used to service organs as future needs arise. This inventory, $1,145,511 and $1,098,861 at December 31, 1994 and 1993, respectively, is reported as a noncurrent asset.
NOTE 4 Property, Plant and Equipment December 31, 1994 1993
Land and improvements $2,405,086 $2,353,086 Buildings and improvements 7,161,749 7,138,927 Machinery and equipment 5,280,722 5,432,881 Office furniture and equipment 858,745 834,732 Vehicles 171,685 167,442 Subtotal 15,877,987 15,927,068 Less accumulated depreciation 8,714,511 8,597,573 Total $7,163,476 $7,329,495
NOTE 5 Note Receivable The Company has entered into a Split-Dollar Life Insurance agreement with its President who is the insured and owner of the policy. The policy owner shall pay the portion of the premium equal to the value of the economic benefit determined in accordance with applicable IRS Revenue Rulings. The Company shall pay the balance of the net premiums which shall approximate $40,000 annually. The agreement provides that the Company shall be entitled to recover the amount of premiums paid out of the built up cash value upon termination of the agreement or out of the proceeds upon the death of the insured. As security for repayment the Company is a collateral assignee of the policy to the extent of any such unreimbursed premium.
NOTE 6 Income Taxes The provision for income taxes consists of the following: 1994 1993 1992 Currently Currently Currently Payable Deferred Payable Deferred Payable Deferred Federal $1,958,000 $ (17,000) $1,705,000 $(24,000) $1,717,000 $ (22,000) State 567,000 (7,000) 523,000 (8,000) 544,000 (8,000) Total $2,525,000 $ (24,000) $2,228,000 $(32,000) $2,261,000 $ (30,000) A reconciliation of the provision for income taxes with the statutory rate follows:
1994 1993 1992 Statutory provision for federal income tax $2,363,000 34.0% $1,922,000 34.0% $1,906,000 34.0% State taxes, net of federal tax benefits 370,000 5.3 340,000 6.0 353,000 6.3 Tax credits (22,000)(0.3) (9,000)(0.2) (16,000)(0.3) Other items, net (210,000)(3.0) (57,000)(1.0) (12,000)(0.2) Total $2,501,000 36.0% $2,196,000 38.8% $2,231,000 39.8%
The following temporary differences give rise to the net deferred tax liability at December 31, 1994 and 1993. 1994 1993 Deferred Tax Liability Excess of tax depreciation over book depreciation $(381,000) $(420,529)
Deferred Tax Assets Deferred compensation not recognized for tax purposes 32,659 35,947 Pension liability adjustment not recognized for tax purposes 353,419 186,564 Excess of pension expense for book purposes over tax 38,038 50,307 Unrealized loss not recognized for tax purposes 67,420 8,439 Total Deferred Tax Assets 491,536 281,257 Net Deferred Tax Asset (Liability) $110,536 $(139,272)
Deferred taxes are presented in the company's financial statements as follows: 1994 1993 Current deferred tax asset $67,420 $8,439 Non-current deferred tax asset 43,116 0 Non-current deferred tax liability 0 (147,711) Net deferred tax asset (liability) $110,536 $(139,272)
Effective January 1, 1992, the Company adopted SFAS No. 109 and recorded a tax credit of $22,025 or $.02 per share, which amount represents the net decrease to the deferred tax liability as of that date. Such amount has been reflected in the consolidated statements of income as the cumulative effect of an accounting change. The effect of the change on 1992 net income, excluding the cumulative effect upon adoption, was not significant.
NOTE 7 Commitments and Contingencies As of December 31, 1994, the Company is contingently liable for a maximum amount of approximately $1,145,525 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, certain Class B Common Shares then owned by her or includable in her estate for Federal Estate Tax purposes, subject to the limitations of Section 303 of the Internal Revenue Code. At December 31, 1994, the shareholder owned or would have includable in her estate 258,950 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 to assist in funding possible future liability under the terms of the agreement.
NOTE 8 Retirement Plans The Company sponsors two noncontributory 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.
A summary of the components of net periodic pension cost for the plans is as follows: 1994 1993 1992 Service cost - benefits earned during the period $274,987 $281,265 $275,000 Interest cost on projected benefit obligations 839,838 802,143 705,000 Return on assets Actual 27,301 (771,932) (670,000) Deferred gain (loss) (834,046) 16,014 (56,000) Amortization of net loss from prior periods 8,649 2,010 Amortization of unrecognized prior service cost 73,990 73,990 74,000 Amortization of initial unrecognized net asset (72,008) (72,008) (72,000) Net Pension Cost $318,711 $331,482 $256,000
The funded status of the Company's pension plans at December 31, 1994 and 1993 is as follows: 1994 1993 Plans Whose Plans Whose Plans Whose Plan Whose Assets Accumulated Assets Accumulated Exceed Plan Exceed Plan Accumulated Benefits Accumulated Benefits Plan Exceed Plan Exceed Benefits Assets Benefits Assets Actuarial present value of benefit obligations: Vested benefits $(5,052,381) $(5,827,204) $(4,542,394) $(5,637,291) Nonvested benefits (19,778) (27,906) (130,055) (40,732) Accumulated benefit obligation (5,072,159) (5,855,110) (4,672,449) (5,678,023) Effect of assumed increase in compensation levels for salaried plan (955,449) - (981,359) - Projected benefit obligations for service rendered to date (6,027,608) (5,855,110) (5,653,808) (5,678,023) Plan assets at fair value 5,507,072 4,639,396 5,588,195 4,755,402 Plan assets in excess of (less than) projected benefit obligation (520,536) (1,215,714) (65,613) (922,621) Unrecognized prior service cost - 443,273 - 517,263 Unrecognized net asset at transition (452,052) (52,008) (516,630) (59,438) Unrecognized net loss 814,295 895,221 427,994 502,742 Adjustment to recognize minimum liability - (1,286,486) - (960,567) Accrued Pension Cost $(158,293) $(1,215,714) $ (154,249) $ (922,621)
Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" requires the recognition of an additional minimum liability for defined benefit plans for which the accumulated benefit obligation exceeds plan assets. This amount, $1,286,486 in 1994 and $960,567 in 1993, has been recorded as a noncurrent liability with an offsetting intangible asset amounting to $443,273 in 1994 and $517,263 in 1993. Because the asset recognized may not exceed the amount of unrecognized prior service cost, the balance of $843,213 in 1994 and $443,304 in 1993, net of tax benefits of $353,390 in 1994 and $186,564 in 1993, is reported as a separate reduction of shareholders' equity. The projected benefit obligation for the plans was determined using an assumed discount rate of 7.5%. An assumed long-term compensation increase rate of 7% was used for the salaried plan. The assumed long-term rate of return on plan assets was 8%. In November 1994, the Company established a 401(k) deferred compensation and profit sharing plan for the benefit of all 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 contributed $136,501 to the plan in 1994.
NOTE 9 Other Deferred Liabilities December 31, 1994 1993 Deferred compensation expense $ 77,917 $ 85,417 Deferred income taxes 0 147,711 Total $ 77,917 $ 233,128
NOTE 10 Common Stock, Capital in Excess of Par Value and Treasury Stock
Common Stock Capital In Class A Class B Excess of Treasury Stock Shares Amount Shares Amount Par Value Shares Amount Balance, December 31, 1991 128,104 $128,104 1,409,889 $1,409,889 $12,610,377 126,604 $2,883,490 Reacquired Class B shares 3,800 103,924 1992 128,104 128,104 1,409,889 1,409,889 12,610,377 130,404 2,987,414 Reacquired Class B Shares 28,606 850,791 1993 128,104 128,104 1,409,889 1,409,889 12,610,377 159,010 3,838,205 Reacquired Class B Shares 14,446 474,862 1994 128,104 $128,104 1,409,889 $1,409,889 $12,610,377 173,456 $4,313,067
NOTE 11 Earnings Per Share Earnings per share were computed using 1,370,486 shares in 1994, 1,392,119 shares in 1993, and 1,410,373 shares in 1992, the weighted average number of shares outstanding during each year.
NOTE 12 Export Sales In 1994, 1993 and 1992, net sales by the musical instruments segment include export sales, principally to Canada, Europe and the Far East of $5,398,667, $4,607,680 and $4,786,299, respectively.
NOTE 13 Research and Development Expense Research and development expenditures are charged to expense as incurred. During 1994, 1993 and 1992, research and development expenditures aggregated $625,190, $612,631 and $688,552, respectively.
NOTE 14 Industry Segment Information The Company's operations are classified into two industry segments: musical instruments and electronic assemblies. The musical instruments segment is comprised of operations principally involved in the design, manufacture, sale and distribution of electronic keyboard musical instruments, primarily digital computer organs and related accessories. The electronic assemblies segment is involved in the design, manufacture, sale and distribution of electronic assemblies for outside customers used primarily as control devices and other circuitry in their products. Following is a summary of segmented information for 1994, 1993 and 1992. December 31, 1994 1993 1992 Net Sales to Unaffiliated Customers Musical instruments $25,171,058 $23,524,171 $23,771,234 Electronic assemblies 3,671,731 2,953,812 2,466,858 Total $28,842,789 $26,477,983 $26,238,092
Income from Operations Musical instruments $4,356,912 $3,812,323 $3,570,287 Electronic assemblies 892,493 737,660 554,066 Total $5,249,405 $4,549,983 $4,124,353
Identifiable Assets Musical instruments $18,827,345 $18,319,110 $17,793,018 Electronic assemblies 1,329,090 1,032,081 823,507 Subtotal 20,156,435 19,351,191 18,616,525 General corporate assets 38,308,260 36,401,379 34,964,525 Total $58,464,695 $55,752,570 $53,581,050
Capital Expenditures Musical instruments $ 440,151 $ 438,843 $ 321,599 Depreciation Musical instruments $ 562,241 $ 594,144 $ 628,688
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 Company's electronic assemblies segment derived the majority of its revenues from one customer. The Company's musical instrument segment is not dependent on any single customer.
NOTE 15 Legal Settlement During 1994 the Company settled a lawsuit for wrongful prosecution brought against the attorneys for one of the Company's competitors. This resulted from a lawsuit the Company settled with its competitor in 1992. Other income-net for 1994 includes $385,000 less legal expenses related to this settlement.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
(a) Identification of Directors Time Period Date Term Position Name Expires Age Position Held
Steven Markowitz Next Annual 41 Director Since 1980 Meeting in 1995
Eugene Moroz Next Annual 71 Director Since 1968 Meeting in 1995
Leonard W. Helfrich Next Annual 65 Director 1964 - 1968 and Meeting in 1995 1972 to present
Orville G. Hawk Next Annual 77 Director Since 1989 Meeting in 1995
Albert F. Schuster Next Annual 75 Director Since 1989 Meeting in 1995
Martha Markowitz Next Annual 73 Director Since 1991 Meeting in 1995
(b) Identification of Executive Officers. All have served in executive capacities for at least five years. Time Period Date Term Position Name Expires Age Position Held
Steven Markowitz Next Annual 41 President* 1990 to Meeting in 1995 present
Eugene Moroz Next Annual 71 Vice President, Since 1965 Meeting in 1995 Assistant Secretary
Leonard W. Helfrich Next Annual 65 Secretary, 1958 - 1968 Meeting in 1995 Treasurer** and 1971 to present
William H. Kemmler Next Annual 67 Vice President May, 1991 Meeting in 1995 to present
Dwight A. Beacham Next Annual 48 Assistant Vice May, 1991 Meeting in 1995 President to present
* Steven Markowitz was elected President at the annual meeting on May 22, 1990. He previously was Vice President--International Operations.
** Leonard Helfrich who was formerly Assistant Treasurer became Treasurer at the annual meeting on May 22, 1990.
(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) All officers and directors, except Orville G. Hawk, Albert F. Schuster, and Martha Markowitz, have been employees of the Company in executive capacities for at least the last five years. 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. Mrs. Markowitz is the widow of Jerome Markowitz, the Company's founder, and represents the family interests.
(f) Involvement in Certain Legal Proceedings by Directors or Officers.
None.
(g) Compliance with Section 16(a) of the Exchange Act.
No transaction required to be reported.
Item 11.
Item 11. Executive Compensation. Deleted paragraphs and/or columns are not required to be answered.
(b) SUMMARY COMPENSATION TABLE: Annual Compensation All Other Salary Bonus Compensation * Name and Principal Position Year $ $ $
Steven A. Markowitz, President 1994 90,607 22,105 32,249 (Chief Executive Officer) 1993 86,944 19,225 32,905 1992 78,956 17,780
Leonard W. Helfrich, Secretary 1994 82,722 20,875 (Treasurer) 1993 80,288 18,155 1992 73,650 17,255
*Value of Split Dollar Life Insurance. See Note 5 to the accompanying consolidated financial statements for additional information on this arrangement.
(f) Defined Benefit or Actuarial Plan Disclosure.
Estimated Annual Benefit obtained from 1994 Actuarial Valuation Report:
Steven A. Markowitz $52,166. Age 41. Leonard W. Helfrich $24,495. Age 65.
Amounts shown are calculated from prior compensation to date and estimated compensation to normal retirement age (65).
(g) Compensation of Directors:
Non-employee Directors receive $250 for each Board and committee meeting attended plus reasonable expenses in connection with attendance. EmployeeDirectors 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. Mr. Markowitz, Mr. Moroz and Mr. Helfrich participate in an officer bonus plan whereby a bonus is distributed to each participant officer in proportion to the annual salary of all participants. The bonus pool is .9% of consolidated pre-tax profit for the fiscal year after elimination of bonus accrual, patent income, patent litigation, and non-operating extraordinary gains or losses.
(j) Additional Information with Respect to Compensation Committee Interlocks and Insider Participation in Compensation Decisions:
(1) Leonard W. Helfrich, Secretary, Treasurer, and Director of the Company, is the sole member of the Compensation Committee of the Board of Directors whose function is to set the compensation of the President. The compensation of all other employees is set by or at the direction of the President.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Voting securities of the registrant owned of record or beneficially by each person who owns of record, or is known by the registrant to own beneficially, more than 5 per cent of any class of such securities. Class A Common Shares constitute the only securities with voting rights. Information as of December 31, 1994. Amount and Nature of Names and Title of Beneficial % of Addresses Class Ownership Class Jerome Markowitz A 81,531 95.9% 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, 1994.
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) 1.0 % 81,531* (2) (4) 95.9 % 242,016* (2) (4) 18.7 %
Eugene Moroz 799 (1) (3) as to 799 12,156 (2) (4) as to 12,156 1.0 % Leonard W. Helfrich 328 (2) (4) .03%
Orville G. Hawk 50 (2) (4) .004 %
Martha Markowitz 16,934 (1) (3) 1.3 % 81,531* (2) (4) 95.9 % 242,016* (2) (4) 18.7 %
Percent Percent All Directors of of and Officers Class Class Class Class as a Group A B A B
6 81,589** 285,845** 95.97%** 22.12%
(1) Sole voting power (2) Shared voting power (3) Sole investment power (4) Shared investment power
* Shares owned by the Jerome Markowitz Trust for which Martha Markowitz and Steven Markowitz, Co- Trustees, have shared voting and investment power and of which Martha Markowitz is the primary beneficiary and Steven Markowitz, one of the residuary beneficiaries.
** The shares held by the Jerome Markowitz Trust are not duplicated in the totals for the Class A and Class B Shares.
(c) Changes in Control. Not required to be answered.
Item 13.
Item 13. Certain Relationships and Related Transactions
See Note 7 to Financial Statements, Item 14(a)(1), incorporated by reference hereto concerning an agreement between the Company and Martha Markowitz, a Director of the Company.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The following consolidated financial statements of Allen Organ Company and its subsidiaries are included in Part II, Item 8:
Independent Auditors Report.
Consolidated Balance Sheets as of December 31, 1994 and 1993.
Consolidated Statements of Income and Retained Earnings for the years ended December 31, 1994, 1993, and 1992.
Consolidated Statements of cash flows for the years ended December 31, 1994, 1993, and 1992.
Notes to Consolidated Financial Statements.
The individual financial statements of the Registrant have been omitted since it is primarily an operating company and all subsidiary companies are wholly owned.
(a) (2) Financial Statement Schedules
Financial schedules are omitted as not applicable.
(a) (3) Exhibits Exhibit No. Description 3.1(1) Articles of Incorporation as amended 3.2(2) Bylaws, as amended 10.1(2) Officers Bonus Plan as amended December 2, 10.2(3) Agreement of Amendment between the Company and Martha Markowitz
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 Annual Report on Form 10-K for the year ended December 31, 1991. 3. Incorporated by reference to the exhibit filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 1992.
(b) Reports on Form 8-K. None filed during fourth quarter of 1994.
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 10, 1995 STEVEN MARKOWITZ Steven Markowitz President and Director
Date: March 10, 1995 LEONARD HELFRICH Leonard Helfrich Secretary, Treasurer, and Director, Principal Financial and Accounting Officer
Date: March 10, 1995 EUGENE MOROZ Eugene Moroz Vice President and Director
Date: March 10, 1995 MARTHA MARKOWITZ Martha Markowitz Director