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. The Company's results for 2001 were negatively affected by the downturn that occurred in the economy, particularly in the Data Communications and Electronic Assemblies segments. The Company's Data Communications segment was hard hit in the first half of 2001 since some of this segments products had been sold to Competitive Local Exchange Carriers (CLEC's) many of which had difficulty raising capital and became insolvent. This segment has since redirected its sales efforts away from CLEC's and has focused on other markets for which its product line is well suited including the wireless and certain international markets. As a result, this segment was successful in increasing its order rate during the second half of 2001 to be near the sales level of the same period in 2000. The economic downturn also negatively affected the Company's Electronic Assemblies segment customers resulting in a significant reduction in this segments order rate in the second half of 2001. The Company expects this lower order rate to continue into future quarters and has taken steps to reduce its costs at its Macungie, PA plant. While there are many factors that may affect the future business of the Company, the Company is particularly concerned with the weak economic environment, which may alter or delay customers purchasing decisions in any of the four industry segments that it operates.
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 18 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 40%, 39% and 47% of revenue in 2001, 2000 and 1999 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. Historically, certain electronic components had been put on allocation by their suppliers. This was not a significant issue during 2001 with the economic slowdown. Also, as life cycles for electronic components have shortened in recent years the Company has had to redesign some circuit boards to satisfy the needs of current and 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 12 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 2002 and 2001 was $5.2 million and $4.7 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 consists of Eastern Research, Inc. (ERI) into which the Company, combined the operations of VIR Linear Switch during 2001. The combined operations are headquartered at ERI's facility in Moorestown, New Jersey. ERI designs and markets data inter-networking products enabling network service providers to deliver services to their customers. This segment accounted for 43%, 46% and 40% of revenues in 2001, 2000 and 1999 respectively. Data Communications products are sold directly to end-users, 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 that 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. Historically, certain electronic components had been put on allocation by their suppliers. This was not a significant issue during 2001 with the economic slowdown. Also as life cycles for electronic components have shortened in recent years, the Company has had to redesign some circuit boards to satisfy the needs of current and past customers. At the present time the Company does not expect this to significantly affect future product shipments. The Data Communications segment derived 13% and 16% of its revenue from 1 customer in 2001 and 2000 respectively, and 52% of its 1999 revenue from three customers. ERI's 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 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 since its introduction and now considers the DNX its flagship product. The DNX revenues represent approximately 90% of ERI's sales for 2001. To properly capitalize on this market's opportunities, ERI has implemented aggressive marketing strategies and 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 markets the VIR Linear Switch products that consist of patch and testing equipment, often referred to as tech control products and test access equipment. These products are of varying complexity and are used to connect, switch, test and trouble shoot data lines in large computer installations. The segment derived approximately 13% and 23% of its revenue from international markets in 2001 and 2000 respectively, primarily from Australia, Europe and the Far East. ERI will continue to pursue growth opportunities in markets outside the United States. The realization of future business from these opportunities could be adversely affected by currency fluctuations, social and political risks and changes in foreign economies. ERI has in the past developed strategic customer relationships to expand distribution of its products through other networking companies. These relationships do not currently represent a significant portion of ERI's total sales. The dollar amount of unshipped order backlog at the end of February, 2002 and 2001 was $3.0 million and $1.0 million respectively. All orders are expected to be filled in the current year. Due to the previously mentioned weakness in the telecommunications markets and economy in general, the Company's Data Communications segment sales and operating results decreased significantly in the first half of 2001. This segment has since redirected its sales and marketing efforts to focus on other markets for which its product line is well suited, including the wireless and certain international markets. This segment has been successful in increasing its order rate during the second half of 2001 to be near the sales level of the same period in 2000. While ERI's business has stabilized, ERI's visibility of future sales remains limited. Consequently, the Company has developed a business plan that focuses on bottom line profits, as well as top line sales growth. During the second quarter of 2001 ERI launched a new product platform-the DNX-88 that provides 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. (As a point of comparison, prior to the DNX-88, the largest DNX configuration could scale to only 88 T1/E1 ports.) Envision is a comprehensive element manager system designed to manage and control the DNX family of products. Also during the fourth quarter of 2001, ERI introduced an OC3/STM-1 card, adding ERI's first optical interface capabilities to the DNX family. The 2001 product enhancements have strengthened the DNX product line. They have begun 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 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 for its musical instruments business. This segment accounted for 14% of 2001 revenue, 12% of 2000 revenue and 10% of revenue in 1999. AIA derived 82%, 76% and 68% of its revenues from 3 customers in 2001, 2000 and 1999 respectively. The Electronic Assemblies segment is very competitive with numerous manufacturers offering such services. AIA customers are generally obtained from a geographic area located close to the manufacturer. The dollar amount of the segment's unshipped order backlog at the end of February 2002 and 2001 was $529,000 and $3.4 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 2001, 2000 and 1999 respectively. 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 is consumers for home use. The segment's products are mainly distributed through independent retail dealers and directly to end-users. This segment's business is not seasonal. LAI historically sold its products through a direct marketing program. The Company believes that this method of distribution has limited its ability to penetrate the broader market. During 2001 the Company began implementing plans to distribute its products through a more traditional dealer network. The Company has added independent retail dealers and will continue to do so in a conservative manner to build a quality dealer network. During this period Legacy has been shifting marketing resources to the new method of distribution. In addition, the general economic slowdown has slowed sales for consumer goods. This has resulted in a sales decrease in direct sales that has not been offset by dealer sales. The high-end audio market is evolving from the traditional two- channel to the multi-channel market, which is utilized in home theater applications. Legacy Audio has developed and markets products specifically for these home theater applications. Many of LAI's manufacturing needs are similar to those required in the Company's Musical Instruments segment. The Company is manufacturing a growing percentage 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 2002 and 2001 was $244,000 and $267,000 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. 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 $8,004,838, $7,340,209, and $4,910,278 annually in 2001, 2000, and 1999 respectively on research and development. The increases are a result of the Company's ongoing commitment to new product development and support, primarily in its Data Communications segment. The Company and its subsidiaries employ approximately 510 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 geographic areas.
The Company does not own manufacturing or sales facilities in any foreign countries. See Note 17 to the financial statements, for additional information on export sales. Export sales are all made in US dollars and for the most part are made under Letter of Credit or on a prepaid basis. The Company has established a Foreign Sales Corporation within the meaning of the Internal Revenue Code of 1986. This wholly-owned subsidiary is Allen Organ International, Inc., a Virgin Islands corporation.
Item 2.
Item 2. Properties
The following sets forth the location, approximate square footage and use of the Company's operating locations segregated by segment. The Company believes that its facilities are generally suitable and adequate for its needs.
Approximate Location Square Footage Use Musical Instruments and Electronic Assemblies:
Macungie, Pennsylvania 242,000 Administrative, research and manufacturing facility. Owned by Allen Organ Company. Operating at approximately 85% capacity.
Macungie, Pennsylvania 27,000 International sales, exhibition center, museum and teaching facility. Owned by Allen Organ Company.
Data Communications:
Southampton, Pennsylvania 22,000 Operations closed in 2001. Attempting to sublet. Leased until August, 2005.
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. at Operating approximately 90% 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.
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 2001.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder 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:
2001 High Low First Quarter 55 33 Second Quarter 39 31.75 Third Quarter 36.473 30.02 Fourth Quarter 33.5 30.4
2000 High Low First Quarter 85 38.375 Second Quarter 74 55 Third Quarter 71 57.25 Fourth Quarter 68 44
The Company has 7 Class A Shareholders and 261 Class B Shareholders of record as of March 8, 2002.
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 2001 Record Date Payable Amount Cash 2/16/2001 3/2/2001 $.14 Cash 5/18/2001 6/1/2001 $.14 Cash 8/17/2001 8/31/2001 $.14 Cash 11/16/2001 11/30/2001 $.14
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
Item 6.
Item 6. Selected Financial Data
Years Ended December 31, 2001 2000 1999 1998 1997
Net Sales $60,490,513 $72,516,208 $58,018,742 $44,966,075 $40,348,084 Net Income (Loss) $(4,083,810) $ 3,954,896 $ 2,884,488 $ (616,711) $ 3,512,142 Earnings (Loss) per share $(3.49) $3.38 $2.46 $(0.52) $2.79 Cash dividends per share $ 0.56 $0.56 $0.56 $ 0.56 $0.56
At Year End
Total Assets $66,472,252 $80,807,742 $67,466,070 $61,989,953 $62,562,004 Long-Term Debt, net of current portion $ 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, 2001 2000 Working Capital $37,845,509 $40,957,743 Current Ratio 5.9 to 1 3.3 to 1 Debt to Equity Ratio 0.18 to 1 0.29 to 1
As indicated in Note 10 of the financial statements, Eastern Research, Inc. had obtained bank financing to provide them with 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. During June of 2001 ERI repaid all outstanding bank loans totaling $12,000,000 with funds provided by Allen Organ Company. The Company originally obtained these loans to give ERI financial autonomy as it explored strategic alternatives. As a result of the changes in the financial markets, the Company decided to repay the outstanding loans to eliminate the costs related to this financing. Cash flows provided by operating activities decreased during 2001, as compared to 2000 and 1999 primarily due to operating losses incurred in the Data Communications segment. These decreases were partially offset by reductions in inventory levels in the Musical Instruments, Electronic Assemblies and Data Communications segments. Cash flows provided by operating activities increased during 2000 as compared to 1999 primarily due to increases in operating income in the Musical Instruments segment resulting from higher sales volume and operational improvements. Cash flows provided by investing activities during 2001 includes the sale of more than $12,000,000 in short term investments to fund the repayment of ERI's bank loans. Cash flows were used to purchase approximately $529,000 and $736,000 of property and equipment in the Musical Instruments and Data Communications segments respectively. 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.
Results of Operations:
Sales and Operating Income
Consolidated sales for 2001 decreased $12,025,695 (17%) when compared to 2000, primarily due to lower sales in the Data Communications segment. Consolidated sales for 2000 increased $14,497,466 (25%) when compared to the prior year primarily due to higher sales at Eastern Research, Inc (ERI) as well as in the Musical Instruments segment.
December 31, 2001 2000 1999 Net Sales Musical Instruments Domestic $20,616,513 $24,422,709 $23,769,362 Export 3,759,129 3,635,123 3,563,383 Total 24,375,642 28,057,832 27,332,745
Data Communications Domestic 22,567,298 25,556,745 22,149,842 Export 3,342,587 7,764,597 1,146,137 Total 25,909,885 33,321,342 23,295,979
Electronic Assemblies Domestic 8,382,021 8,624,199 5,650,917
Audio Equipment Domestic 1,603,650 2,323,865 1,651,566 Export 219,315 188,970 87,535 Total 1,822,965 2,512,835 1,739,101
Total $60,490,513 $72,516,208 $58,018,742
Income (Loss) from Operations Musical Instruments $ 2,184,321 $ 5,029,871 $ 2,950,251 Data Communications (8,284,232) (2,063,221) (805,738) Electronic Assemblies 125,000 1,284,806 430,031 Audio Equipment (988,353) (429,386) (761,688) Total $(6,963,264) $ 3,822,070 $ 1,812,856
Musical Instruments Segment
The domestic sales for 2001 decreased $3,806,000. While the order rate for 2001 was approximately equal to orders for 2000, the 2000 sales were higher due to shipments made to domestic customers against a higher order backlog. The 2000 increase in domestic sales reflects increased order volume and shipments made against a higher order backlog. As discussed on page 3, the economic downturn may affect future order volume. Export sales were approximately equal for the three years ended December 31, 2001. Certain foreign markets continue to be affected by unfavorable economic conditions, 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 30.1%, 36.5% and 30.5% for the three years ended December 31, 2001. The 2001 decrease is due to lower sales over which to absorb fixed costs and changes in product mix. The increase in gross profit in 2000 over 1999 was a result of higher sales volume over which to absorb fixed costs. Selling and advertising expenses remained approximately equal for the three years ended December 31, 2001. General and administrative expenses in 2001 were approximately equal to 2000 and decreased in 2000 due to lower personnel requirements and related benefits. Research and development expenses decreased approximately $25,000 in 2001 and increased approximately $264,000 in 2000.
Data Communications Segment
Domestic sales decreased $2,989,447 in 2001 and increased $3,406,903 in 2000 when compared to 1999. International sales decrease $4,422,010 in 2001 and increased $6,618,460 during 2000. The increase in international sales in 2000 was primarily from sales to two customers in the Far East. The decrease in 2001 sales is attributable to a general slowdown in the world economy and a more significant industry-wide slowdown in Data Communications markets. Some of this segment's products had been sold to Competitive Local Exchange Carriers (CLEC), many of which had difficulty raising capital and became insolvent. This segment has since redirected its sales efforts away from CLEC's and has focused on other markets for which its product line is well suited including the wireless and certain international markets. As a result, this segment was successful in increasing its order rate during the second half of 2001 to be near the sales level of the same period in 2000. Cost of goods sold for 2001 includes $1,539,000 of additional non-cash inventory valuation adjustments recorded at VIR, Inc. for slow moving and obsolete inventory associated with discontinued product lines. The result of these adjustments was to decrease the 2001 gross profit margin by 6% from 46% to 40%. The decrease in the 2001 gross profit margin, excluding the inventory valuation adjustments, was due to lower sales volume over which to absorb fixed costs and competitive pressures to lower selling prices of products. Gross profit margins were 47% and 48% for 2000 and 1999, respectively. While the company strives 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 decreased approximately $1,123,000 in 2001 and increased approximately $2,500,000 in 2000 over 1999. The 2001 decrease is related to lower sales and cost cutting measures initiated in the first half of 2001 due to the economic downturn. Administrative expenses decreased approximately $347,000 in 2001 from cost cutting measures initiated in the first half of 2001 due to the economic downturn. Administrative expenses increased approximately $900,000 in 2000 over 1999 primarily related to additional management and administrative personnel added at ERI to support its growth. Research and development expenses were $6,599,104, $5,911,740 and $3,759,183 for the years ended December 31, 2001, 2000 and 1999, respectively primarily related to ERI. The segment is committed to new product development and support and expects these expenditures to continue at approximately the same level in 2002.
Electronic Assemblies Segment
Sales decreased approximately $242,000 in 2001 and increased approximately $2,973,000 in 2000. The 2001 order rate decreased significantly in the second half of 2001 as a result of the economic slowdown that has also affected the Company's contract manufacturing customers. The order rate is expected to continue at a lower level in future quarters. Because of this decrease in sales the Company has taken steps to reduce its costs at its Macungie, PA plant including reductions in personnel related to this segment of the business Gross profit margins were 7.1%, 19.5% and 15.2% for the three years ended December 31, 2001. The 2001 decrease is the result of lower sales in the second half of 2001 over which to absorb fixed costs. The 2000 increase over 1999 is due to higher order volume over which to absorb fixed costs and changes in product mix. Selling, general and administrative expenses increased approximately $95,000 in 2001 and decreased slightly in 2000. The segment continues its efforts to diversify its customer base and to improve its production capabilities to offer state of the art manufacturing services to its customers.
Audio Equipment Segment
Sales for 2001 decreased approximately $690,000 and increased approximately $773,000 in 2000 when compared to 1999. Gross profit margins were 12%, 43% and 38% for the years ended December 31, 2001, 2000 and 1999, respectively. The 2001 decrease is attributable to lower sales volume over which to absorb fixed costs. Selling, general and administrative costs decreased approximately $250,000 during 2001 as a result of steps taken to reduce operating cost and because of Legacy Audio's switch to a dealer based selling model. Selling, general and administrative costs increased approximately $82,000 during 2000 over 1999. Legacy Audio has historically sold its products through a direct marketing program. The Company believes that this method of distribution has limited its ability to penetrate the broader market. Legacy has begun distributing its products through a more traditional dealer network. The Company has added independent retail dealers and will continue to do so in a conservative manner to build a quality dealer network. During this period Legacy has been shifting marketing resources to the new method of distribution. In addition, the general economic slowdown has slowed the sales of consumer goods. This has resulted in a sales decrease in direct sales that has not been offset by dealer sales. The Company has developed a line of Public Address System products and in connection therewith has formed Allen Audio, Inc. to develop and market these products. Allen Audio began shipping units in late 1999.
Other Income (Expense)
Investment income for the year ended December 31, 2001 decreased when compared to 2000 due to lower invested balances. Investment income for 2000 increased compared to 1999 due to higher returns on investments and higher invested balances. Interest expense was incurred in 2001 and 2000 on short-term bank financing related to Eastern Research. The 2001 loss on sale of property, plant & equipment includes approximately $158,000 of losses related to the disposition of property and equipment at VIR's Southampton, PA facility that was closed in September 2001. The 1999 gain 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 (benefit) rate was (36.8%), 22.4% and 30.6% in 2001, 2000 and 1999 respectively. The 2001 effective tax rate increased due to tax credits and other preference items increasing the benefit to the Company related to the current year loss. The decrease in the 2000 effective tax rate is due to higher tax credits and other non-taxable items.
Significant Accounting Policies
The significant accounting policies of the Company are described in Note 1 of the financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United State of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Certain accounting estimates and assumptions are particularly sensitive because of their significance to the consolidated financial statements and possibility that future events affecting them may differ markedly. The accounting policies of the Company with significant estimates and assumptions are described below.
Carrying Value of Obsolete and Slow Moving Inventory: The Company has written down the value of inventory which may become obsolete or that will not be used in the normal course of business to its estimated net realizable value.
Allowance for Doubtful Accounts: The Company has recorded allowance for the estimated amount of accounts which may become uncollectible.
Carrying Value of Goodwill and Intangible Assets: The Company reviews the recoverability of its goodwill and intangible assets. Any impairment in value is charged against current operations.
Realization of Deferred Income Tax Benefits: As discussed in Note 9 of the financial statements, the Company has recorded valuation allowances related to the uncertainty of realizing state and federal net operating loss carry forwards.
Risk factors that may affect these judgements 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.
Contractual Obligations and Commercial Commitments
Following is a summary of contractual obligations and other commercial commitments of the Company:
Payments Due by Period Contractual Less Obligations than 1-3 4-5 After Total 1 year years years 5 years Operating Leases $ 602,452 $ 329,229 $273,223 $0 $0
Amount of Commitment Expiration Per Period Other Commercial Less Commitments Total Amounts than 1-3 4-5 After Committed 1 year years years 5 years Contingent Repurchase Commitments Related to Customer Financing Arrangements $2,041,909 $2,041,909 $0 $0 $0
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 2002. 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
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.
Item 8. Financial Statements See Item 14 for index.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no reportable events as described in Item 304(b).
KPMG 4905 Tilghman Street Allentown, PA 18104
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Allen Organ Company
We have audited the accompanying consolidated balance sheets of Allen Organ Company and Subsidiaries as of December 31, 2001 and 2000, 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, 2001. These consolidated financial statements and the 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2001 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, presents fairly, in all material respects, the information set forth therein.
/s/KPMG LLP
Allentown, PA February 5, 2002
ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 ASSETS 2001 2000 CURRENT ASSETS Cash $ 4,449,998 $ 2,712,368 Investments including accrued interest 11,609,416 24,694,377 Accounts receivable, net of allowance for doubtful accounts of $350,492 in 2001 and $428,791 in 2000 9,947,842 10,285,659 Inventories 16,485,908 19,808,173 Prepaid income taxes 1,106,214 13,972 Prepaid expenses 386,421 304,342 Deferred income tax benefits 1,561,138 1,094,701 Total Current Assets 45,546,937 58,913,592
PROPERTY, PLANT AND EQUIPMENT, NET 11,491,549 12,523,133 OTHER ASSETS Prepaid pension costs -- 506,702 Inventory held for future service 811,249 690,657 Note receivable from related party 1,997,107 1,556,721 Cash value of life insurance 2,173,566 2,034,867 Deferred income tax benefits 2,022,725 398,476 Goodwill, net 194,523 221,449 Intangible assets, net 2,218,504 3,943,553 Other assets 16,092 18,592 Total Other Assets 9,433,766 9,371,017 Total Assets $66,472,252 $80,807,742
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable - Bank $ -- $ 8,700,000 Accounts payable 2,750,251 3,448,119 Other accrued expenses 1,973,154 2,816,102 Customer deposits 2,978,023 2,991,628 Total Current Liabilities 7,701,428 17,955,849 NONCURRENT LIABILITIES Deferred and other noncurrent liabilities 707,769 310,016 Accrued Pension Costs 1,748,040 -- Total Noncurrent Liabilities 2,455,809 310,016 Total Liabilities 10,157,237 18,265,865
MINORITY INTERESTS -- 106,976 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, par value $1 per share Authorized Class A Voting Shares- 400,000 in 2001 and 2000 Class B Non-Voting Shares-3,600,000 in 2001 and 2000 Issued 2001 2000 Class A 127,232 shares; 127,232 shares 127,232 127,232 Class B 1,410,761 shares; 1,410,761 shares 1,410,761 1,410,761 Total Common Stock 1,537,993 1,537,993 Capital in excess of par value 12,903,610 12,758,610 Retained earnings 55,237,713 59,977,002 Accumulated other comprehensive income (1,374,300) 139,990 Sub-total 68,305,016 74,413,595 Less cost of common shares in treasury 2001-43,368 Class A shares;324,304 Class B shares (11,990,001) -- 2000-43,230 Class A shares;324,148 Class B shares -- (11,978,694) Total Stockholders' Equity 56,315,015 62,434,901 Total Liabilities and Stockholders' Equity $66,472,252 $80,807,742
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001 2000 1999
NET SALES $60,490,513 $72,516,208 $58,018,742 COSTS AND EXPENSES Cost of sales 41,707,417 43,730,716 36,793,515 Selling, administrative and other expenses 15,811,522 17,623,213 14,502,093 Research and development 8,004,838 7,340,209 4,910,278 Costs to close Southampton plant 530,000 -- -- Impairment of VIR, Inc. goodwill and intangibles 1,400,000 -- -- Total Costs and Expenses 67,453,777 68,694,138 56,205,886
(LOSS) INCOME FROM OPERATIONS (6,963,264) 3,822,070 1,812,856
OTHER INCOME (EXPENSE) Investment income 1,018,162 1,542,347 1,128,524 Interest expense (315,083) (320,942) -- (Loss) gain on sale of property, plant and equipment (175,358) (58,288) 1,063,722 Other income (expense), net 25,008 20,414 (9,593) Minority interests in consolidated subsidiaries (33,275) 68,295 112,979 Total Other Income (expense) 519,454 1,251,826 2,295,632
(LOSS) INCOME BEFORE TAXES (6,443,810) 5,073,896 4,108,488
PROVISION FOR TAXES Current (1,168,000) 1,736,000 2,030,000 Deferred (1,192,000) (617,000) (806,000) Total (2,360,000) 1,119,000 1,224,000
NET (LOSS) INCOME $(4,083,810) $ 3,954,896 $ 2,884,488
OTHER COMPREHENSIVE (LOSS), INCOME NET OF TAX Unrealized (loss) gain on investments: Unrealized (loss) gain arising during period $ (138,420) $ (171,313) $ 230,132 Less: reclassified adjustment for (loss) gain included in income (41,153) (11,097) (42,068) Total (179,573) (182,410) 188,064 Minimum pension liability adjustment (1,334,717) -- -- Other comprehensive (loss) income (1,514,290) (182,410) 188,064 COMPREHENSIVE (LOSS) INCOME $(5,598,100) $ 3,772,486 $ 3,072,552
BASIC AND DILUTED EARNINGS PER SHARE $ (3.49) $ 3.38 $ 2.46
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, 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
Tax benefit from exercise of subsidiary stock options 145,000
Balance-December 31, 2001 127,232 $127,232 1,410,761 $1,410,761 $12,903,610
Accumulated Other Retained Comprehensive Treasury Stock Earnings Income Shares Amount
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 $139,990 367,378 $(11,978,694)
Net Loss (4,083,810) Reacquired Class B Shares 156 (6,891) Reacquired Class A Shares 138 (4,416) Change in unrealized gain (loss) on securities available for sale (179,573) Minimum pension liability adjustment (1,334,717) Cash dividend paid ($.56 per share) (655,479)
Balance-December 31, 2001 $55,237,713 $(1,374,300) 367,672 $(11,990,001)
See accompanying notes to Consolidated Financial Statements.
ALLEN ORGAN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $(4,083,810) $3,954,896 $2,884,488 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization 2,974,898 2,519,496 1,916,970 Minority interest in consolidated subsidiaries 33,275 (68,295) (112,979) Loss from impairment of VIR, Inc. goodwill and intangibles, included in operating expenses 1,400,000 -- -- Loss (Gain) on sale of property, plant and equipment 175,358 58,288 (1,063,722) Gain on sale of investments (65,635) (17,684) (67,244) Change in assets and liabilities Accounts receivable 337,817 158,771 (3,375,842) Inventories 3,201,673 (3,050,201) (1,724,698) Prepaid income taxes (1,092,242) (13,972) 422,656 Prepaid expenses (82,079) (17,204) 224,816 Deferred income tax benefits (1,296,667) (711,566) (474,799) Prepaid pension costs 126,006 (36,548) 172,455 Other assets 2,500 22,548 (34,641) Accounts payable (697,868) (145,589) 2,031,276 Accrued income taxes -- (683,133) 683,133 Other accrued expenses (842,948) 888,946 504,871 Customer deposits (13,605) 1,406,432 57,767 Deferred and other noncurrent liabilities 397,753 130,101 (100,589) Net Cash Provided by Operating Activities 474,426 4,395,286 1,943,918 CASH FLOWS FROM INVESTING ACTIVITIES Cash proceeds from sale of investments classified as available for sale 18,682,314 9,908,680 5,993,248 Cash paid for purchase of investments classified as available for sale (5,711,291) (15,118,347) (5,399,027) Increase in cash value of life insurance (138,699) (313,370) (321,163) Increase in note receivable (440,386) (445,574) (451,261) Additions to goodwill and intangible assets (156,243) (906,700) (733,194) Cash proceeds from sale of property, plant and equipment 11,250 100,206 1,382,716 Cash paid for purchase of property, plant and equipment (1,458,233) (3,157,814) (3,260,719) Net Cash (Provided by) Used In Investing Activities 10,788,712 (9,932,919) (2,789,400) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bank loans 3,300,000 8,700,000 -- Repayment of bank loans (12,000,000) -- -- Dividends paid in cash (655,479) (655,544) (655,598) Reacquired Class B common shares (6,891) (3,732) -- Subsidiary company stock reacquired from minority stockholders (255,055) -- (13,238) Proceeds from sale of subsidiary stock 96,333 -- -- Reacquired Class A common shares (4,416) -- (3,959) Net Cash (Used in) Provided by Financing Activities (9,525,508) 8,040,724 (672,795) NET INCREASE (DECREASE) IN CASH 1,737,630 2,503,091 (1,518,277) CASH, JANUARY 1 2,712,368 209,277 1,727,554 CASH, DECEMBER 31 $ 4,449,998 $2,712,368 $ 209,277
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash (refunded) paid for income taxes $ (218,816) $2,535,061 $1,625,400 Cash paid for interest $ 315,084 $ 320,942 $ -- The above changes in assets and liabilities excludes the following adjustments related to the minimum pension liability. Accumulated other comprehensive income 1,334,717 -- -- Deferred income tax benefits 794,019 -- -- Accrued Pension Costs (2,128,736) -- --
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 18 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 100.00% Rocky Mount Instruments, Inc. 100.00% VIR, Inc. 100.00%
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.
Financial Instruments: 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 direct to customers and to 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 and Intangible Assets: Goodwill represents the excess of cost over the identifiable 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 $128,195 and $101,269 at December 31, 2001 and 2000 respectively.
Intangible assets represent identifiable assets such as customer lists, developed technology and trademarks acquired in connection with the purchase of the Company's subsidiaries. Intangible assets are amortized on a straight-line basis over various periods generally from 5 - 20 years and are presented net of accumulated amortization of $2,381,307 and $1,736,548 at December 31, 2001 and 2000 respectively.
The carrying value of goodwill and intangible assets for each business is continually reviewed to assess its recoverability from future operations, 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 20)
Reclassifications: Certain amounts in the 2000 and 1999 financial statements have been reclassified to conform to the 2001 presentation.
New Accounting Standards: Effective January 1, 2001, the Company adopted Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This standard requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company has no derivative instruments or hedging activities and therefore this standard did not have an affect on its financial statements.
During 2001 the Financial Accounting Standards Board issued the following new Statements that are applicable to the Company. These statements did not have a material effect on the Company's financial statements.
SFAS 141, "Business Combinations" - requires the use of the purchase method for all business combinations initiated after June 30, 2001. SFAS 142, "Goodwill and Other Intangible Assets" - replaces the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement for an impairment test. The statement will be adopted beginning 2002. SFAS 143, "Accounting for Asset Retirement Obligations" - addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" - Establishes one accounting model, used for long-lived assets to be held and used, disposed of by sale or otherwise disposed. The Company does not expect that these statements will have a material affect on future financial statements.
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 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 Impairment of Goodwill and Intangibles During March 2001 the Company recorded a charge to operating expenses of $1,400,000 related to the impairment in the value of goodwill and intangibles which arose in connection with the acquisition of VIR, Inc. This write down is attributable to the downturn in the data communications industry, the combination of VIR into the Company's subsidiary Eastern Research, Inc. and closure of the VIR facility discussed in more detail in Note 4 below, all of which reduced expectations of future cash flows from VIR's operations.
NOTE 4 Combination of Subsidiaries During 2001 the Company combined its Data Communications subsidiaries VIR Linear Switch (VIR) of Southampton, PA into Eastern Research, Inc. (ERI), which is also a subsidiary of the Company. The combination was completed during the third quarter of 2001 and the Southampton, PA facility has been closed. The combined operations are headquartered at ERI's facility in Moorestown, New Jersey. Manufacturing of some of VIR's products has been moved to ERI's supplier with other manufacturing being transferred to the Macungie, PA plant. The Company has estimated the restructuring charges (including employee severance and benefits for 19 employees and other exit costs) related to this combination and plant closure to be approximately $530,000 of which $390,000 has been paid as of December 31, 2001. The Company believes that the remaining $140,000 of accrued termination costs is adequate to cover the estimated remaining expenditures, which relate primarily to future lease payments and building maintenance costs.
NOTE 5 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, 2001 Available for sale Equity securities $ 129,310 $ -- $ 92,000 $ 37,310 Mutual Funds Short Term Gov't Funds 6,602,414 158,818 -- 6,761,232 Municipal Bond Funds 4,137,455 62,906 -- 4,200,361 Equity Funds 803,440 4,020 196,947 610,513 Totals $11,672,619 $225,744 $288,947 $11,609,416
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
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 2001, 2000 and 1999, sales proceeds and gross realized gains and losses on securities classified as available for sales were:
2001 2000 1999
Sales proceeds $18,682,314 $9,908,680 $5,993,248
Gross realized losses $ 216,546 $ 37,974 $ 60,606
Gross realized gains $ 282,181 $ 55,658 $ 127,850
The change in net unrealized holding gains on securities available for sale in the amount of $283,786, $276,948, and $285,677 net of deferred tax expense of $104,213, $94,538, and $97,613 has been included in other comprehensive income in stockholders' equity for the years ended December 31, 2001, 2000, and 1999, respectively.
NOTE 6 Inventories December 31, 2001 2000 Finished goods $4,720,318 $5,950,327 Work in process 6,249,775 6,172,954 Raw materials 5,515,815 7,684,892 Total $16,485,908 $19,808,173
The Company also maintains an inventory of various parts to be used to service musical instruments as future needs arise which are reported as a noncurrent asset.
NOTE 7 Property, Plant and Equipment Estimated December 31, Useful 2001 2000 Lives Land and improvements $ 2,407,298 $ 2,407,298 10 yrs Buildings and improvements 9,000,465 8,955,230 2 - 40 yrs Machinery and equipment 10,481,698 9,993,291 5 - 10 yrs Office furniture and equipment 4,548,093 4,341,718 3 - 8 yrs Vehicles 163,411 164,244 4 yrs Sub-total 26,600,965 25,861,781 Less accumulated depreciation 15,109,416 13,338,648 Total $11,491,549 $12,523,133
Depreciation expense charged to operations was $2,303,209, $1,897,715 and $1,424,189 in 2001, 2000 and 1999 respectively.
NOTE 8 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 $450,000 and $483,000 at December 31, 2001 and 2000, respectively.
NOTE 9 Income Taxes The provision for income taxes consists of the following: 2001 2000 1999 Currently Currently Currently Payable Deferred Payable Deferred Payable Deferred
Federal $(1,347,000) $(1,014,000) $1,392,000 $(251,000) $1,620,000 $(658,000) State 179,000 (178,000) 344,000 (366,000) 410,000 (148,000) Total $(1,168,000) $(1,192,000) $1,736,000 $(617,000) $2,030,000 $(806,000)
A reconciliation of the provision for income taxes with the statutory rate follows: 2001 2000 1999 Statutory provision for federal income tax $(2,180,000) (34.0)% $1,702,000 34.0% $1,359,000 34.0% State taxes, net of federal tax benefits (549,000) (8.6) (14,000) (0.3) 73,000 1.8 Tax credits (363,000) (5.7) (325,000) (6.5) (179,000) (4.5) Tax-exempt income (96,000) (1.5) (106,000) (2.1) (110,000) (2.8) Exempt income of foreign sales corporation (100,000) (1.6) (151,000) (3.0) (77,000) (1.9) Other items, net 28,000 0.4 13,000 0.3 58,000 1.5 Effect of change in valuation allowance of deferred tax assets: Federal 350,000 5.4 -- -- -- -- State 550,000 8.6 -- -- 100,000 2.5 Total $(2,360,000) (36.8)% $1,119,000 22.4% $1,224,000 30.6%
The following temporary differences give rise to the net deferred tax asset at December 31, 2001 and 2000.
2001 2000 Deferred Tax Liabilities Excess of tax depreciation/amortization over book depreciation/amortization $ -- $(398,666) Excess of pension expense for tax purposes over book -- (188,722) Unrealized gain not recognized for tax purposes -- (80,806) Total Deferred Tax Liabilities -- (668,194) Deferred Tax Assets Excess of book depreciation/amortization over tax depreciation/amortization 328,155 -- Excess of book over tax pension expense 652,031 -- Unrealized loss not recognized for tax purposes 23,434 -- Deferred compensation not recognized for tax purposes 226,047 118,082 Net operating loss carry forwards 1,743,391 888,981 Other Liabilities 247,466 70,275 Reserve for Bad Debts 131,943 163,008 Inventory Reserve 1,231,396 1,021,025 Sub-total 4,583,863 2,261,371 Valuation Allowance (1,000,000) (100,000) Total Deferred Tax Assets 3,583,863 2,161,371 Net Deferred Tax Asset $3,583,863 $1,493,177
Deferred taxes are included in the Company's financial statements as follows: 2001 2000 Current deferred tax asset $1,561,138 $1,094,701 Non-current deferred tax asset 2,022,725 398,476 Net deferred tax asset $3,583,863 $1,493,177
At December 31, 2001 the Company has available approximately $5,212,000 of federal net operating losses of which approximately $3,145,000 are eligible for carry back to offset prior years taxes paid. The Company expects to receive approximately $1,200,000 of tax refunds during 2002 related to these loss and tax credit carry backs. The Company also has available at December 31, 2001, approximately $17,454,000 of unused state net operating loss carry forwards that may be applied against future taxable income and that expire in various years from 2002 to 2021.
At December 31, 2001 the Company has a valuation allowance of $1,000,000 for the deferred tax assets related to the uncertainty of realizing state net operating loss carry forwards and federal net operating losses of a subsidiary not included in the consolidated federal income tax return.
NOTE 10 Notes Payable - Bank In June 2000 Eastern Research, Inc. (ERI), a subsidiary of the Company, obtained a term loan and revolving line of credit from a bank. During June 2001 Eastern Research, Inc. repaid all outstanding bank loans totaling $12,000,000 with funds provided by Allen Organ Company.
NOTE 11 Other Accrued Expenses December 31, 2001 2000 Accrued salaries and commissions $1,386,646 $996,254 Accrued additional purchase price -- 906,700 Accrued plant closing costs 140,700 -- Other 445,808 913,148 Total $1,973,154 $2,816,102
NOTE 12 Commitments and Contingencies As of December 31, 2001, the Company is contingently liable for a maximum amount of approximately $2,041,909 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, 2001, the shareholder owned or would have includable in her estate 261,797 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 and 1999 amounted to $906,700 and $733,319, respectively. The agreement provided that the total of these payments 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. Legacy Audio, Inc. leases warehouse space under a non-cancelable operating lease which expires in July 2003. Rent expense for all Company operating leases was $ 495,816, $440,971 and $321,368 for 2001, 2000 and 1999, respectively. Minimum annual rent payments for the operating leases are as follows:
2002 $329,229 2003 110,054 2004 103,054 2005 60,115 Total $ 602,452
NOTE 13 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:
2001 2000 1999 Pension benefit obligation Balance, beginning of year $15,194,233 $15,065,101 $14,923,318 Service cost 353,266 324,423 380,650 Interest cost 1,055,508 1,024,441 999,772 Benefits paid to participants (1,012,126) (976,612) (812,359) Increase (decrease) on updated data/assumptions 522,034 (243,120) (426,280) Balance, end of year $16,112,915 $15,194,233 $15,065,101
Plan assets Fair value, beginning of year $15,689,627 $17,477,871 $15,611,950 Actual investment returns (1,278,937) (811,632) 2,678,280 Benefits paid to participants (1,012,126) (976,612) (812,359) Fair value, end of year $13,398,564 $15,689,627 $17,477,871
The Funded status of the plans were as follows: December 31, 2001 2000 1999 Excess of the value of plan assets over the benefit obligation $(2,714,351) $ 495,394 $ 2,412,770 Unrecognized prior service cost -- -- 73,323 Unrecognized net transition liability (asset) -- (72,012) (144,020) Unrecognized net actuarial loss (gain) 3,095,047 83,320 (1,871,919) Adjustment to recognize minimum liability (2,128,736) -- -- (Accrued) prepaid benefit cost $(1,748,040) $ 506,702 $ 470,154
The adjustment to recognize the minimum pension liability in the amount of $2,128,736 net of deferred tax expense of $794,019 has been included in other comprehensive income in stockholders' equity at December 31, 2001.
The following weighted-average rates were used:
Discount rate on the benefit obligation 6.75% 7.00% 7.00% Rate of return on plan assets 8.00% 8.00% 8.00% Rate of long-term compensation increase 6.00% 6.00% 6.00%
Pension expense is comprised as follows:
2001 2000 1999
Service cost $ 356,266 $ 324,423 $ 380,650 Interest cost 1,055,508 1,024,441 999,772 Expected return on plan assets 1,210,756 (1,357,306) (1,209,949) Amortization of net gain from prior periods -- (29,421) -- Amortization of unrecognized prior service cost -- 73,323 73,990 Amortization of transition asset (72,012) (72,008) (72,008) Net Pension Cost $ 126,006 $ (36,548) $ 172,455
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 rela ting to underfunded plans are as follows: December 31, 2001 2000 1999 Projected benefit obligation $16,112,915 $8,078,231 $-- Accumulated benefit obligation 15,146,604 7,167,545 -- Fair value of plan assets 13,398,564 7,827,166 --
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 $248,650, $125,374 and $93,388 to the plans in 2001, 2000 and 1999 respectively.
The Company provides 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 14 Deferred and Other Noncurrent Liabilities
December 31, 2001 2000 Deferred compensation expense $ 587,769 $ 250,016 Other Noncurrent Liabilities 120,000 60,000 Total $ 707,769 $ 310,016
NOTE 15 Accumulated Other Comprehensive Income
December 31, 2001 2000 Unrealized (loss) gain on investments, net $(39,583) $ 139,990 Minimum pension liability adjustment (1,334,717) -- Total $(1,374,300) $ 139,990
NOTE 16 Earnings Per Share Earnings per share were computed using 1,170,480 shares in 2001, 1,170,618 shares in 2000, and 1,170,719 shares in 1999, the weighted average number of shares outstanding during each year. The Company does not have any dilutive equity instruments.
NOTE 17 Export Sales In 2001, 2000 and 1999, net sales by the Musical Instruments segment include export sales, principally to Canada, Europe and the Far East of $3,759,129, $3,635,123, and $3,563,383, respectively. Net sales by the Data Communications segment include export sales principally to Australia, Europe and the Far East of $3,342,587 for 2001, $7,764,597 for 2000, and $1,146,137 for 1999. Net sales by the Audio Equipment segment include export sales principally to Europe and the Far East of $219,315 for 2001, $188,970 for 2000 and $87,535 for 1999.
NOTE 18 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, sale and distribution of data communications equipment. Data communications products are sold direct to customers and 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 primarily through independent retail dealers and to a lesser extent directly to individual customers. The Company through its subsidiary Allen Audio, Inc., designs, markets and sells through distributors 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 2001, 2000 and 1999.
December 31, 2001 2000 1999 Net Sales to Unaffiliated Customers Musical Instruments $24,375,642 $28,057,832 $27,332,745 Data Communications 25,909,885 33,321,342 23,295,979 Electronic Assemblies 8,382,021 8,624,199 5,650,917 Audio Equipment 1,822,965 2,512,835 1,739,101 Total $60,490,513 $72,516,208 $58,018,742
Intersegment Sales Musical Instruments $ 91,820 $ 294,146 $ 109,667 Data Communications 193,664 120,712 174,516 Electronic Assemblies 79,651 15,577 37,742 Audio Equipment 87,777 35,563 58,253 Total $ 452,912 $ 465,998 $ 380,178
Income (Loss) from Operations Musical Instruments $ 2,184,321 $ 5,029,871 $ 2,950,251 Data Communications (8,284,232) (2,063,221) (805,738) Electronic Assemblies 125,000 1,284,806 430,031 Audio Equipment (988,353) (429,386) (761,688) Total $(6,963,264) $ 3,822,070 $ 1,812,856
Identifiable Assets Musical Instruments $17,664,908 $18,693,577 $18,912,763 Data Communications 19,596,306 31,011,641 19,764,425 Electronic Assemblies 3,377,712 4,444,349 3,658,915 Audio Equipment 2,795,550 2,658,110 2,209,810 Sub-total 43,434,476 56,807,677 44,545,913 General corporate assets 23,037,776 24,000,065 22,920,157 Total $66,472,252 $80,807,742 $67,466,070
Capital Expenditures Musical Instruments $ 528,998 $ 837,828 $ 1,268,726 Data Communications 736,538 2,297,046 1,908,323 Electronic Assemblies 188,272 5,320 5,670 Audio Equipment 4,425 17,620 78,000 Total $ 1,458,233 $ 3,157,814 $ 3,260,719
Depreciation and Amortization Musical Instruments $ 690,084 $ 683,673 $ 697,587 Data Communications 2,093,476 1,632,861 992,933 Electronic Assemblies 113,027 120,750 145,948 Audio Equipment 78,311 82,212 80,502 Total $ 2,974,898 $ 2,519,496 $ 1,916,970
Income Tax Expense (Benefit) Musical Instruments $ 1,186,000 $ 1,984,000 $ 1,985,000 Data Communications (3,565,000) (1,156,000) (619,000) Electronic Assemblies 47,000 484,000 159,000 Audio Equipment (28,000) (193,000) (301,000) Total $(2,360,000) $ 1,119,000 $ 1,224,000
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 82%, 76% and 68% of its revenues from three customers in 2001, 2000 and 1999 respectively. The Data Communications segment derived 13% and 16% of its revenue from one customer in 2001 and 2000, 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 19 Investment Income December 31, 2001 2000 1999
Interest Income $ 910,144 $1,109,751 $ 935,290 Dividend Income 173,653 414,912 125,990 Gain (Loss) on Sale of Investments (65,635) 17,684 67,244 Total $1,018,162 $1,542,347 $1,128,524
NOTE 20 Stock Option Plans Eastern Research, Inc. (ERI) provides an employee stock-based compensation plan to assist them in attracting and retaining personnel. The maximum number of subsidiary shares that may be issued under the plan approximates a 15% interest in the company. 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.
VIR, Inc. also sponsored an employee stock-based compensation plan. This plan was terminated in connection with the closure of the Southampton plant and combination of VIR Inc. into ERI during 2001. As of December 31, 2001, total options issued represents 14% of the ERI shares currently outstanding. Vested options consist of 9% of the currently outstanding shares of ERI.
ERI recognized compensation expense of $59,375 and $29,687 during 2001 and 2000 respectively, related to options granted with an exercise price less than the fair market value on the date of grant. Had compensation cost been determined pursuant to FASB Statement No. 123, net income (loss) and earnings per share would have been:
2001 2000 1999 Net (loss) income $(4,123,257) $3,820,658 $2,775,220 Earnings per share $(3.52) $3.26 $2.37
NOTE 21 Related Party Transactions Two members of the Company's Board of Directors are employed by firms providing legal and financial advisory services, respectively. Legal fees paid were $75,094, $131,543 and $75,221 during 2001, 2000 and 1999 respectively. Financial advisory fees paid were $11,753, $63,546 and $16,418 during 2001, 2000 and 1999 respectively.
NOTE 22 Quarterly Financial Data (Unaudited)
First Second Third Fourth 2001 Quarter Quarter Quarter Quarter Total Net Sales $13,259,398 $15,119,294 $15,385,870 $16,725,951 $60,490,513 Gross Profit 3,381,851 3,890,162 5,173,502 6,337,581 18,783,096 Net (Loss) Income (2,625,492) (1,565,281) (263,425) 370,388 (4,083,810) (Loss) Earnings per Share (2.24) (1.34) (0.23) 0.32 (3.49)
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
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
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 48 Director Since 1980 Meeting in 2002 Eugene Moroz (1) Next Annual 78 Director Since 1968 Meeting in 2002 Leonard W. Helfrich Next Annual 72 Director 1964 - 1968 and Meeting in 2002 1972 to present Orville G. Hawk (1) Next Annual 84 Director Since 1989 Meeting in 2002 Albert F. Schuster Next Annual 82 Director Since 1989 Meeting in 2002 Martha Markowitz Next Annual 80 Director Since 1991 Meeting in 2002 Jeffrey L. Schucker (1) Next Annual 47 Director Since July 1996 Meeting in 2002 Ernest Choquette Next Annual 48 Director Since April 1998 Meeting in 2002
(1) Audit Committee member.
(b) Identification of Executive Officers. Time Period Date Term Position Name Expires Age Position Held Steven Markowitz Next Annual 48 President 1990 to Meeting in 2002 present Barry J. Holben Next Annual 49 Vice President October 1995 Meeting in 2002 to present Dwight A. Beacham Next Annual 55 Vice President October 1995 Meeting in 2002 to present Nathan S. Eckhart Next Annual 38 Vice President, May 1996 Meeting in 2002 Treasurer, to present Secretary
(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, Barry Holben and Dwight Beacham, have been employees of the Company in executive capacities for at least the last five years. 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. Mrs. Markowitz is the widow of Jerome Markowitz, the Company's founder, and represents the family interests. Mr. Schucker is currently a Managing Director with Griffin Financial Group and formerly President of Middle Market Capital Advisors, L.L.C. (MMCA) and Vice President of Meridian Capital Markets. Griffin Financial Group 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.
(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 2001 140,616 - 48,739 (1) (Chief Executive Officer) 2000 135,923 - 42,322 1999 126,840 - 42,059
Leonard W. Helfrich, 2001 - - Vice President - Finance 2000 38,970 - (Secretary) 1999 116,416 -
(1)-Value of Split Dollar Life Insurance. See Note 8 to the accompanying consolidated financial statements for additional information on this arrangement.
(f) Defined Benefit or Actuarial Plan Disclosure.
Estimated Annual Benefit obtained from 2001 Actuarial Valuation Report:
Steven A. Markowitz $63,533 Age 48 (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, Vice President, 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.
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, 2002. Amount and Nature of Names and Title of Beneficial % of Addresses Class Ownership Class Jerome Markowitz A 81,531 97.22% 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, 2001.
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) 97.22 % 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 19,781 (1) (3) 1.82% 81,531* (2) (4) 97.22 % 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** 288,045** 97.29%** 26.51%
(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 12 to Financial Statements, concerning an agreement between the Company and Martha Markowitz, a Director of the Company.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements The following consolidated financial statements of Allen Organ Company and its subsidiaries are included in Part II, Item 8: Independent Auditors' Reports. Consolidated Balance Sheets as of December 31, 2001 and 2000. Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999. Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000, and 1999. Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999. 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, 2001.
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(6) 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. 6. Incorporated by reference to the exhibit filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 2000.
(b) Reports on Form 8-K. None filed during fourth quarter of 2001.
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 12, 2002 /s/STEVEN A. MARKOWITZ Steven A. Markowitz Chief Executive Officer, President and Director
Date: March 12, 2002 /s/NATHAN S. ECKHART Nathan S. Eckhart Vice President-Finance, Chief Financial and Principal Accounting Officer
Date: March 12, 2002 /s/LEONARD W. HELFRICH Leonard W. Helfrich Director
Date: March 12, 2002 /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, 2001, 2000 and 1999
Additions Balance at Additions Charged Write Balance Beginning Charged to to Other Offs And at End Description Of Year Expense Accounts Recoveries Of Year
Year Ended December 31, 2001 Allowance for Doubtful Accounts $ 428,791 $ 96,259 $ - $ (174,558) $ 350,492 Valuation Allowance Deferred Tax Asset 100,000 900,000 - - 1,000,000
Year Ended December 31, 2000 Allowance for Doubtful Accounts $ 300,823 $174,034 $ - $ (46,066) $ 428,791 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 Valuation Allowance Deferred Tax Asset 94,000 100,000 - - 194,000