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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Under Section 13 or 15(D) of The Securities Exchange
Act of 1934 For Quarter Ended September 30, 2004
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934
Commission File Number 0-275
Allen Organ Company
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1263194
(State of Incorporation) (I.R.S. Employer Identification No.)
150 Locust Street, P. O. Box 36, Macungie, Pennsylvania 18062-0036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-966-2200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Exchange Act.
Yes No X
Number of shares outstanding of each of the issuer's classes of common
stock, as of November 12, 2004:
Class A - Voting 83,864 shares
Class B - Non-voting 1,072,379 shares
ALLEN ORGAN COMPANY
INDEX
Page No.
Part I Financial Information
Item 1.Financial Statements (Unaudited)
Consolidated Condensed Statements of Income for the three and
nine months ended September 30, 2004 and 2003 3
Consolidated Condensed Balance Sheets at September 30, 2004 and
December 31, 2003 4
Consolidated Condensed Statements of Cash Flows for the three
and nine months ended September 30, 2004 and 2003 5
Notes to Consolidated Condensed Financial Statements 6-8
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-11
Item 3.Quantitative and Qualitative Disclosures About Market Risk. 12
Item 4.Controls and Procedures 12
Part II Other Information
Item 6.Exhibits 12
Signatures 12
Exhibits 13-15
PART I FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
For the 3 Months Ended: For the 9 Months Ended:
9/30/2004 9/30/2003 9/30/2004 9/30/2003
Net Sales $21,353,653 $14,932,091 $57,819,417 $41,532,435
Cost and Expenses
Costs of sales 10,799,709 8,344,016 29,528,474 24,446,579
Selling, general and
administrative 4,629,369 4,031,534 13,670,904 11,141,161
Research and
development 3,850,250 2,306,428 9,642,736 6,157,005
Other expense, net 9,885 3,079 32,935 25,760
Impairment of goodwill
and intangibles -- -- 362,611 --
Total Costs
and Expenses 19,289,213 14,685,057 53,237,660 41,770,505
Income (Loss) from
Operations 2,064,440 247,034 4,581,757 (238,070)
Investment Income 93,992 84,889 264,521 290,287
Income Before Taxes 2,158,432 331,923 4,846,278 52,217
Income Tax Provision 551,000 131,000 1,357,000 21,000
Net Income $ 1,607,432 $ 200,923 $ 3,489,278 $ 31,217
Earnings Per Share of
Common Stock
Basic $1.39 $0.17 $3.02 $0.03
Diluted $1.39 $0.17 $3.01 $0.03
Weighted Average Shares
Used in Computing
Earnings Per Share
Basic 1,156,243 1,161,269 1,156,243 1,161,269
Diluted 1,159,086 1,161,269 1,158,295 1,161,269
Dividends Per Share -
Cash $ 0.14 $ 0.14 $ 0.42 $ 0.42
Total Comprehensive
Income $ 1,627,275 $ 195,671 $ 3,461,629 $ 29,553
See accompanying notes.
-3-
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS Sept. 30, Dec. 31,
2004 2003
Current Assets
Cash $ 7,395,843 $ 5,907,576
Investments Including Accrued Interest 18,033,005 17,143,171
Accounts Receivable, net of reserves of
$685,364 and $605,496, respectively 12,321,416 11,652,365
Inventories:
Raw Materials 4,569,284 4,456,060
Work in Process 6,278,203 5,525,106
Finished Goods 4,166,562 3,945,007
Total Inventories 15,014,049 13,926,173
Prepaid Expenses 818,898 491,444
Deferred Income Taxes 2,755,385 2,741,167
Total Current Assets 56,338,596 51,861,896
Property, Plant and Equipment 29,916,552 28,283,282
Less Accumulated Depreciation (19,480,990) (18,116,278)
Net Property, Plant and Equipment 10,435,562 10,167,004
Other Assets
Note Receivable from Related Party 2,397,291 2,397,291
Cash Value of Life Insurance 2,696,302 2,474,002
Deferred Income Taxes 3,493,238 3,493,238
Intangible Assets, net 808,310 1,347,822
Goodwill, net 24,701 194,523
Other Assets 15,987 14,500
Total Other Assets 9,435,829 9,921,376
Total Assets $76,209,987 $71,950,276
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 2,013,050 $ 1,278,535
Accrued Expenses 5,178,908 3,811,025
Accrued Income Taxes 244,971 657,941
Customer Deposits 3,068,575 2,197,393
Total Current Liabilities 10,505,504 7,944,894
Noncurrent Liabilities
Deferred and Other Noncurrent Liabilities 1,310,960 1,946,696
Accrued Pension Costs 5,052,773 5,693,853
Total Noncurrent Liabilities 6,363,733 7,640,549
Total Liabilities 16,869,237 15,585,443
STOCKHOLDERS' EQUITY
Class A Voting Common stock, $1 par value,
400,000 shares authorized,
127,232 shares issued 127,232 127,232
Class B Non-Voting Common stock, $1 par value,
3,600,000 shares authorized,
1,410,761 shares issued 1,410,761 1,410,761
Capital in Excess of Par Value 13,150,610 13,150,610
Retained Earnings
Balance, Beginning 58,015,139 57,267,763
Net Income 3,489,278 1,396,896
Dividends - Cash 2004 and 2003 (485,622) (649,520)
Balance, End 61,018,795 58,015,139
Accumulated Other Comprehensive Loss (3,860,343) (3,832,694)
Sub-total 71,847,055 68,871,048
Treasury Stock, at cost, 43,368 Class A shares
in 2004 and 2003, 338,382 Class B shares in
2004 and 338,380 in 2003 (12,506,305) (12,506,215)
Total Stockholders' Equity 59,340,750 56,364,833
Total Liabilities and Stockholders' Equity $76,209,987 $71,950,276
See accompanying notes.
-4-
ALLEN ORGAN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 3 Months Ended: For the 9 Months Ended:
9/30/2004 9/30/2003 9/30/2004 9/30/2003
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $1,607,432 $ 200,923 $3,489,278 $ 31,217
Adjustments to reconcile net
income to net cash
(used in) provided by
operating activities
Depreciation and amortization 607,999 628,206 1,750,853 1,848,995
Impairment of goodwill and
intangibles -- -- 362,611 --
Deferred income taxes 10,240 (3,776) (14,218) (5,795)
Change in assets and liabilities
Accounts receivable (1,497,297) (3,299,996) (669,051) 2,931,672
Inventories (120,105) 936,201 (1,087,876) 1,709,729
Income taxes prepaid
and receivable -- 79,825 -- 161,071
Prepaid expenses 41,041 249,899 (327,454) (3,437)
Other assets (1,487) -- (1,487) 1,092
Accounts payable 800,763 111,016 734,515 (4,814,237)
Accrued expenses (33,988) 398,731 1,367,883 415,209
Accrued income taxes (368,655) 46,366 (412,970) 46,366
Customer deposits 173,666 (5,956) 871,182 (209,761)
Accrued pension costs 96,690 308,118 (641,080) (163,765)
Deferred and other noncurrent
liabilities (358,226) 79,066 (635,736) 322,698
Net Cash Provided by (Used
In) Operating Activities 958,073 (271,377) 4,786,450 2,271,054
CASH FLOW FROM INVESTING
ACTIVITIES
Net additions to plant and
equipment (726,471) (342,680) (1,675,027) (711,342)
Additions to intangible assets -- (85,991) -- (273,761)
Increase in cash value of life
insurance (222,300) (33,300) (222,300) (33,300)
Net purchase of short term
investments (328,556) (45,703) (917,483) (172,481)
Net Cash Used In Investing
Activities (1,277,327) (507,674) (2,814,810) (1,190,884)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from sales of
subsidiary stock -- 1,305 25,596 123,905
Subsidiary company stock
reacquired from minority
stockholders -- (7,001) (23,257) (7,001)
Reacquired Class B common
shares -- -- (90) (491,813)
Dividends paid in cash (161,874) (161,918) (485,622) (487,645)
Net Cash Used In Financing
Activities (161,874) (167,614) (483,373) (862,554)
NET (DECREASE) INCREASE IN CASH (481,128) (946,665) 1,488,267 217,616
CASH, BEGINNING 7,876,971 5,679,470 5,907,576 4,515,189
CASH, ENDING $7,395,843 $4,732,805 $7,395,843 $4,732,805
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid (refunded) for:
Income Taxes $919,655 $ 4,809 $1,769,970 $ (189,437)
See accompanying notes.
-5-
ALLEN ORGAN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Interim Financial Statements
The results of operations for the interim periods presented in this
report are not necessarily indicative of results to be expected for the
fiscal year. In the opinion of management, the information contained
herein reflects all adjustments necessary for a fair presentation of
the Company's financial position and results of operations for the
interim periods. All such adjustments are of a normal recurring
nature.
Certain notes and other information have been condensed or omitted from
the interim financial statements presented in the Quarterly Report on
Form 10-Q. Therefore, these financial statements should be read in
conjunction with the Company's 2003 Annual Report on Form 10-K.
2. 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,
as amended by SFAS No. 148, "Accounting for Stock-Based Compensation",
it has elected only to comply with the disclosure requirements set
forth in the Statements.
Had compensation cost been determined on the basis of fair value
pursuant to SFAS No. 123, as amended by SFAS No. 148, net income and
earnings per share would have been decreased as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Net income
As Reported $1,607,432 $ 200,923 $3,489,278 $ 31,217
Stock-based employee
compensation expense
included in reported net
income, net of tax 17,969 14,843 53,908 44,531
Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (34,048) (3,053) (102,144) (9,161)
Pro forma $1,591,353 $212,713 $3,441,042 $66,587
Earnings per share
As reported
Basic $1.39 $0.17 $3.02 $0.03
Diluted $1.39 $0.17 $3.01 $0.03
Pro forma
Basic $1.38 $0.18 $2.98 $0.06
Diluted $1.37 $0.18 $2.97 $0.06
-6-
ALLEN ORGAN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
3. Warranty Costs
The Company provides warranties covering manufacturing defects in its
products. The Musical Instruments segment provides a 10 year warranty
on its organs, the Data Communications segment provides a 2 year
warranty on all of its data communication products, the Electronic
Assemblies segment provides a 1 year warranty on assemblies
manufactured for outside customers and the Audio Equipment segment
provides a 5 year warranty of its line of home audio speakers. The
Company's policy is to accrue the estimated cost of warranty coverage
at the time the sale is recorded. The activity in the warranty accrual
during the nine months ended September 30, 2004 is summarized as
follows:
Accrual at January 1, 2004 $1,210,000
Additions charged to warranty expense 266,250
Claims paid and charged against the accrual (507,163)
Accrual at September 30, 2004 $ 969,087
4. Earnings Per Share
The following shows the amounts used in computing earnings per share
and the effect on weighted average number of shares for dilutive common
stock.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Weighted average number
of common shares used in
basic earnings per share 1,156,243 1,161,269 1,156,243 1,161,269
Effect of stock options 2,843 -- 2,052 --
Weighted average number
of common shares used
in diluted earnings
per share 1,159,086 1,161,269 1,158,295 1,161,269
Outstanding stock options to purchase 12,000 shares of common stock
were not included in computing earnings per share for the three and
nine months ended September 30, 2003 because the effect was
antidilutive.
5. Retirement Plan
The net periodic pension benefit cost included in the statement of
income is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Service Cost $ -- $109,076 $ -- $327,228
Interest Cost 254,020 272,381 762,059 817,144
Expected return of plan
assets (217,087) (192,179) (651,260) (576,537)
Amortization of net loss
from prior periods 77,056 104,309 231,167 312,926
Net Pension Cost $113,989 $293,587 $341,966 $880,761
The Company contributed $1,000,000 to its pension plan in March 2004.
6. Impairment of Goodwill and Intangibles
During June 2004 the Company recorded a charge to operating expenses of
$362,611 related to the impairment in the carrying value of goodwill
and intangibles which arose in connection with the acquisition of
Legacy Audio, Inc. This write down is attributable to Legacy's past
and continuing operating losses and its inability to significantly
expand distribution of its products, all of which reduced expectations
of future cash flows from Legacy's operations and correspondingly its
estimated fair market value.
-7-
ALLEN ORGAN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
7. 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. The Data Communications segme
nt is involved in the design, sale and distribution of data
communications equipment. 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. The Audio Equipment (Legacy Audio,
Inc.) 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.
Intersegment sales are generally priced at cost plus a percentage mark-
up, and are generally 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 condensed statements of income.
Sales and Operating Income
For the 3 Months For the 9 Months
Ended: Ended:
9/30/2004 9/30/2003 9/30/2004 9/30/2003
Net Sales to Unaffiliated
Customers
Musical Instruments $ 5,683,158 $ 5,017,156 $14,807,612 $15,207,450
Data Communications 14,781,760 9,024,930 39,858,844 23,066,883
Electronic Assemblies 652,356 531,546 2,085,387 2,060,690
Audio Equipment 236,379 358,459 1,067,574 1,197,412
Total $21,353,653 $14,932,091 $57,819,417 $41,532,435
Intersegment Sales
Musical Instruments $ 151,340 $ 190,941 $ 640,582 $ 604,650
Data Communications -- -- -- --
Electronic Assemblies 220,936 64,818 820,113 64,818
Audio Equipment 7,106 38,547 23,707 74,586
Total $ 379,382 $ 294,306 $ 1,484,402 $ 744,054
Income (Loss) from
Operations
Musical Instruments $ 420,627 $ (102,954) $ 164,381 $ (628,067)
Data Communications 1,856,993 546,379 5,340,197 1,086,332
Electronic Assemblies 969 (115,688) (29,245) (525,144)
Audio Equipment (214,149) (80,703) (893,576) (171,191)
Total $ 2,064,440 $ 247,034 $ 4,581,757 $ (238,070)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
Business Overview:
As discussed in Note 7 above, Allen Organ Company and Subsidiaries
("Company") operate in four industry segments: Musical Instruments, Data
Communications, Electronic Assemblies and Audio Equipment.
Sales for the three and nine months ended September 30, 2004 increased
$6,421,562 and $16,286,982, respectively, when compared to the same periods
in 2003, primarily due to increased sales in the Company's Data
Communications segment. Net income increased $1,406,509 and $3,458,061
during the three and nine months ended September 30, 2004, respectively,
when compared to the same periods in 2003, primarily due to higher sales in
the Data Communications segment and also improved operating results in the
Musical Instruments segment.
Net sales consist of revenues obtained for the sale of electronic
keyboard musical instruments in the Musical Instruments segment; data
networking products and support services in the Data Communications
Segment; electronic assembly services in the Electronic Assemblies segment;
and audio speakers and components in the Audio Equipment segment. Sales
credits and adjustments are also included in net sales.
Cost of sales consist primarily of material costs of products sold,
salary and benefit costs related to production and manufacturing support
personnel, incoming shipping and facility related costs, such as
depreciation and maintenance.
-8-
ALLEN ORGAN COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS. (Continued)
Business Overview: (Continued)
Consolidated selling, general and administrative expenses and research
and development expenses increased during both the three and nine months
ended September 30, 2004, primarily related to the growth in the Data
Communications segment. Selling expenses consist primarily of employee
salary and benefit costs, advertising and marketing expenses. General and
administrative expenses consist primarily of employee salary and benefit
costs, professional services fees and other general corporate expenses.
Research and development expenses consist primarily of employee salary and
benefit costs for engineering staff, third party contracted development
services, product prototyping and compliance costs.
Liquidity and Capital Resources:
Cash flows from operating activities increased by approximately
$2,515,000 during the nine months ended September 30, 2004 primarily due to
improved operating results in the Musical Instruments, Electronic
Assemblies and Data Communications segments. Net income improved by
approximately $3,458,000 in the nine months ended September 30, 2004 as
compared to 2003, after reflecting a non-cash charge of approximately
$363,000 in 2004 from the write-off of goodwill and intangibles in the
Audio Equipment segment. Cash of $802,000 was used to increase working
capital components in 2004, versus changes in working capital providing
cash of $397,000 in 2003. The increase in working capital components in
2004 is primarily attributable to higher levels of accounts receivable and
inventory (total of $1,757,000) from the increased sales activity and
payment of pension contributions ($641,000, net of current year accruals),
offset by increases in payables and other accruals (total of $2,102,000).
Working capital decreased in the 2003 period due to decreases in
receivables ($2,932,000) primarily from collection of a receivables from a
large sales transaction in late 2002, as well as decreased inventory levels
($1,710,000) resulting from lower sales activity in the nine months ended
September 30, 2003, offset by a decrease in payables and accruals
($4,399,000) primarily from payment of inventory purchases to fulfill the
large sales transaction in late 2002.
Cash flows from investing activities for the nine months ended September
30, 2004 includes approximately $1,675,000 of property additions, of which
approximately $1,530,000 is primarily computer and test equipment purchased
for the Data Communications segment.
Results of Operations:
Musical Instruments Segment
Sales increased $666,002 for the three months ended September 30, 2004
and decreased $399,838 for the nine months ended September 30, 2004, when
compared to the same periods in 2003. The increase in sales for the third
quarter of 2004 reflects initial shipments of organs containing QuantumT
technology introduced in the second quarter of this year. The 2004 order
rate and backlog continue to be higher than the same period of 2003,
reflecting favorable customer reaction to the Quantum organs that include
significant new features and product benefits. The decrease in sales for
the nine months ended September 30, 2004 is due to initial delays in
shipping the new QuantumT organs, caused by longer than expected production
changeover issues. This segment is seeing increasing changes in the type
of music used in Church's throughout North America, the primary market for
this segment's organs. Some churches have changed their music programs
from traditional styles that include the use of an organ, to more
"contemporary" services where the organ plays a lesser or no role. These
changes may negatively impact future sales volume of this segment. To
address the changing needs of church music, the Company recently introduced
products including the Allen EnsembleT that combines traditional organ
sounds and more contemporary General MIDI (Musical Instrument Digital
Interface) sounds. The Company also introduced a product called EACT
(Expanded Audio Capabilities) that allows churches that have both
traditional and contemporary programs to utilize the organ's audio
capabilities for playing back recorded music or amplifying other musical
instruments. The introduction of the Allen Ensemble and EAC are intended
to help maintain the organ as the cornerstone of church music programs.
-9-
ALLEN ORGAN COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS. (Continued)
Musical Instruments Segment (Continued)
The gross profit percentage increased to 30.0% and 27.9%, respectively,
in the three and nine months ended September 30, 2004, from 23.2% and 21.6%
in the same periods in 2003. These increases are due to higher sales
volume over which to absorb fixed operating costs in the third quarter of
2004 and cost reduction efforts that were initiated to reduce material and
other operating costs. This segment continues to experience double digit
percentage increases in its medical insurance programs offered to eligible
employees. These increases will have a negative effect on operating income
in the future.
Selling, general and administrative, and research and development
expenses during the three and nine months ended September 30, 2004 were
approximately equal to the same periods in 2003.
Data Communications Segment
Sales increased $5,756,830 (64%) and $16,791,961 (73%), respectively,
for the three and nine months ended September 30, 2004, when compared to
the same periods in 2003. These increases are due to higher order volume
which management believes is attributable to an improvement in the overall
data communications market and the timing of completing sales with the
Company's larger customers. Future sales visibility for this segment has
improved, but remains limited throughout the markets served by this
segment.
Gross profit margins were 58.6% and 58.8%, during the three and nine
months ended September 30, 2004, respectively, compared to 58.6% and 58.5%
in the same periods of 2003. The margin for the nine months ended
September 30, 2003 includes $1,400,000 of revenue recognized on product
software development for a customer during the second quarter of 2003.
Excluding this item, gross margin for the nine months ended September 30,
2003 was 55.8%. The increase in the 2004 gross margin is due to reductions
in product costs and changes in product mix.
Sales and marketing expenditures increased approximately $498,000 (24%)
and $1,932,000 (36%) during the three and nine months ended September 30,
2004, respectively, when compared to the same periods in 2003. These
increases are primarily due to increased efforts to promote this segment's
products, obtain additional market share and develop new channels of
distribution.
General and administrative expenditures increased approximately $14,000
(2%) and $252,000 (12%) during the three and nine months ended September
30, 2004, respectively, when compared to the same periods in 2003,
primarily due to additional management and administrative personnel to
support this segment's growth.
Research and development expenses increased approximately $1,539,000
(80%) and $3,485,000 (70%), respectively, during the three and nine months
ended September 30, 2004, when compared to the same periods in 2003. These
increases are related to increased expenditures incurred in connection with
the acquisition of Avail Networks and additional personnel and related
costs associated with the development of the Company's next generation
products.
The Data Communications segment experienced a significant improvement in
operating income during both the three and nine months ended September 30,
2004, when compared to the same periods in 2003, as a result of higher
sales and improved operating margins. This segment will increase future
operating costs, primarily research and development to develop next
generation products, which is expected to reduce future operating results.
Electronic Assemblies Segment
Sales increased $120,810 and $24,697 for the three and nine months ended
September 30, 2004, respectively, when compared to the same periods in 2003
due to higher order volume from the Company's contract manufacturing
customers. This segment is focused on diversifying its customer base and
has been successful in obtaining new customers. The potential sales
significance of these new accounts cannot be determined at this time.
Gross profit margins were 9.1% and 7.3% for the three and nine months
ended September 30, 2004, respectively, compared to a loss of approximately
$(33,000) (6%) and $(267,000) (13%) during the same periods in 2003. The
improved gross profit margin is due to the Company's efforts initiated to
reduce operating costs. Selling, general and administrative expenses
decreased slightly during the three and nine months ended September 30,
2004, when compared to the same periods in 2003. This segment continues to
experience double digit percentage increases in its medical insurance
programs offered to eligible employees. These increases will have a
negative effect on operating income in the future.
-10-
ALLEN ORGAN COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS. (Continued)
Audio Equipment Segment
Sales decreased $122,080 and $129,838, respectively, for the three and
nine months ended September 30, 2004, when compared to the same periods in
2003. Legacy Audio remains focused on developing a quality independent
dealer network of high end audio video stores and custom installers.
Gross profit margins were 29% and 31%, respectively, in the three and
nine months ended September 30, 2004, as compared to 31% and 35% in the
same periods in 2003, primarily due to reductions in wholesale selling
prices to comparable industry levels.
Selling, general and administrative costs increased approximately
$79,000 and $266,000 during the three and nine months ended September 30,
2004 when compared to the same periods in 2003, primarily related to
increased marketing and advertising costs associated with the introduction
of Legacy's new products.
As discussed in Note 6 above, operating expenses for the nine months
ended September 30, 2004 includes a charge of $362,611 related to the write
down of the carrying value of Legacy's goodwill and intangibles.
Investment Income
Investment income increased during the three months ended September 30,
2004, when compared to the same period in 2003 due to increasing rate of
return and higher invested balances during the third quarter of 2004.
Investment income decreased during the nine months ended September 30,
2004, when compared to the same periods in 2003, due to lower rates of
return available on invested funds during the first half of 2004.
Income Taxes
The tax provision for the three and nine months ended September 30, 2004
of 25.5% and 28.4%, are based on the estimated effective tax rate for the
year. This rate is less than the statutory income tax rate and is lower
than the 2003 effective tax rate primarily due to foreign income with the
benefit of lower tax rates, tax benefits and credit carryforwards related
to research and development activities and non-taxable investment income
derived from investment in municipal bond funds.
Contractual Obligations and Commercial Commitments
During the nine months ended September 30, 2004, there have been no
items that significantly impacted the Company's commitments and
contingencies as disclosed in the notes to the 2003 consolidated financial
statements as filed on Form 10-K. In addition, the Company has no
significant off balance sheet arrangements.
Factors that May Affect Operating Results
The statements contained in this report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, including statements regarding the Company's expectations,
hopes, intentions or strategies regarding the future. Forward looking
statements include: statements regarding future products or product
development; statements regarding future research and development spending,
the Company's marketing and product development strategy and statements
regarding future production capacity. All forward looking statements
included in this document are based on information available to the Company
on the date hereof, and the Company assumes no obligation to update any
such forward looking statements. Readers are cautioned not to place undue
reliance on these forward looking statements, which reflect management's
opinions only as of the date hereof. Readers should carefully review the
risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission, including the Annual
Report on Form 10-K. It is important to note that the Company's actual
results could differ materially from those in such forward looking
statements. Some of the factors that could cause actual results to differ
materially are set forth below.
The Company has experienced and expects to continue to experience
fluctuations in its results of operations. Factors that affect the
Company's results of operations include the volume and timing of orders
received, changes in global economics and financial markets, changes in the
mix of products sold, market acceptance of the Company's and its customer's
products, competitive pricing pressures, global currency valuations, the
availability of electronic components that the Company purchases from
suppliers, the Company's ability to meet increasing demand, the Company's
ability to introduce new products on a timely basis, the timing of new
product announcements and introductions by the Company or its competitors,
changing customer requirements, delays in new product qualifications, the
timing and extent of research and development expenses and fluctuations in
manufacturing yields. As a result of the foregoing or other factors, there
can be no assurance that the Company will not experience material
fluctuations in future operating results on a quarterly or annual basis,
which would materially and adversely affect the Company's business,
financial condition and results of operations.
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ALLEN ORGAN COMPANY AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No change from information disclosed in the Company's 2003 annual
report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES.
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures, which are designed to
insure that the Company records, processes, summarizes and reports in a
timely and effective manner the information required to be disclosed in
the reports filed with or submitted to the Securities and Exchange
Commission. Based upon this evaluation, they concluded that the
Company's disclosure controls are effective as of September 30, 2004.
There has been no change in the Company's internal control over
financial reporting that occurred during the quarter ended September
30, 2004 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
PART II OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits
Exhibit No. Description
31.1 Rule 13a-14(a)/15d-14(a) Certification - Chief Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification - Chief Financial
Officer
32 Section 1350 Certifications
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Allen Organ Company
(Registrant)
Date:November 12, 2004 /s/STEVEN MARKOWITZ
Steven Markowitz, President and Chief Executive
Officer
Date:November 12, 2004 /s/NATHAN S. ECKHART
Nathan S. Eckhart, Vice President-Finance,
Chief Financial and Principal Accounting
Officer
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