SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from Not Applicable to __________________
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Commission file number 1-6016
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ALLEN TELECOM INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 38-0290950
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
25101 Chagrin Boulevard, Suite 350, Beachwood, Ohio 44122
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(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) (216) 765-5800
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NOT APPLICABLE
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No ___
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Outstanding at
Class of Common Stock April 30, 2002
--------------------- --------------
Par value $1.00 per share 30,465,172
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ALLEN TELECOM INC.
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TABLE OF CONTENTS
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Page
No.
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PART I. FINANCIAL INFORMATION:
ITEM 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Income (Loss) -
Three Months Ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2001 5
Condensed Consolidated Statements of Stockholders'
Equity - Three Months Ended March 31, 2002 and 2001 6
Notes to the Condensed Consolidated Financial Statements 7 - 12
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 18
ITEM 3 - Quantitative and Qualitative Disclosures About
Market Risks 19
PART II. OTHER INFORMATION:
ITEM 2 - Changes in Securities and Use of Proceeds 19
ITEM 6 - Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
2
ALLEN TELECOM INC.
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Amounts in Thousands)
March 31, December 31,
2002 2001
---------------------- --------------------
(Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 14,213 $ 16,368
Accounts receivable (less allowance for doubtful
accounts of $3,411 and $3,338, respectively) 94,266 92,291
Inventories: Raw materials 65,844 66,957
Work in process 20,009 23,639
Finished goods 27,423 33,430
------------ ------------
Total inventories (net of reserves) 113,276 124,026
------------ ------------
Deferred income taxes 2,271 2,660
Recoverable income taxes 22,511 20,169
Other current assets 2,436 2,416
------------ ------------
Total current assets 248,973 257,930
Property, plant and equipment, net 39,177 41,290
Goodwill 141,060 140,995
Deferred income taxes 39,751 39,401
Other assets 30,606 32,340
------------ ------------
TOTAL ASSETS $ 499,567 $ 511,956
============ ============
LIABILITIES
Current Liabilities:
Notes payable and current maturities of long-term
obligations $ 12,154 $ 12,318
Accounts payable 35,036 40,355
Accrued expenses 27,211 27,827
Income taxes payable 2,883 4,781
Deferred income taxes 9,911 9,852
------------ ------------
Total current liabilities 87,195 95,133
Long-term debt 91,206 140,530
Deferred income taxes 2,130 2,164
Other liabilities 15,996 15,772
------------ ------------
TOTAL LIABILITIES 196,527 253,599
------------ ------------
REDEEMABLE CONVERTIBLE PREFERRED STOCK
1,000,000 shares at redemption value (liquidation
preference of $50.00 per share) (Note 3) 50,000 --
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 32,500 32,500
Paid-in capital 203,536 203,548
Retained earnings 65,899 69,676
Accumulated other comprehensive loss (32,286) (30,671)
Less: Treasury stock (common shares, at cost) (15,415) (15,440)
Unearned compensation (1,194) (1,256)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 253,040 258,357
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 499,567 $ 511,956
============ ============
See accompanying Notes to the Condensed Consolidated Financial Statements.
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ALLEN TELECOM INC.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
--------------------------------------------------
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
2002 2001
--------- ---------
Sales $ 89,869 $ 108,543
Cost of sales (68,702) (78,639)
--------- ---------
Gross profit 21,167 29,904
Operating expenses:
Selling, general and administrative expenses (13,154) (14,365)
Research and development and product engineering costs (6,609) (6,900)
Amortization of goodwill (Note 5) -- (1,980)
--------- ---------
Operating income 1,404 6,659
Interest expense (2,500) (2,916)
Interest income 134 321
--------- ---------
(Loss) income before taxes and minority interest (962) 4,064
Benefit (provision) for income taxes 340 (1,585)
--------- ---------
(Loss) income before minority interest (622) 2,479
Minority interest (20) (42)
--------- ---------
NET (LOSS) INCOME $ (642) $ 2,437
========= =========
(LOSS) EARNINGS PER COMMON SHARE:
Basic and Diluted $ (.02) $ .09
========= =========
Weighted average common shares outstanding:
Basic 30,030 27,930
Assumed exercise of stock options -- 420
--------- ---------
Diluted 30,030 28,350
========= =========
See accompanying Notes to the Condensed Consolidated Financial Statements.
4
ALLEN TELECOM INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Amounts in Thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------------------------------
2002 2001
-------------------- -------------------
CASH FLOW FROM OPERATIONS:
Net (loss) income $ (642) $ 2,437
Adjustments to reconcile (loss) income to operating cash flow:
Depreciation 3,023 3,753
Amortization of goodwill -- 1,980
Amortization of capitalized software 897 668
Other amortization 150 78
Changes in operating assets and liabilities:
Receivables (2,488) (4,998)
Inventories 10,083 (31,197)
Accounts payable and accrued expenses (6,203) 17,088
Income tax payable (4,177) 1,413
Other, net (10) (1,275)
------------ ------------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES 633 (10,053)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,479) (3,859)
Capitalized software product costs (419) (890)
Sales and retirements of fixed assets 164 5,808
Investment in subsidiaries (59) --
------------ ------------
CASH (USED) PROVIDED BY INVESTING ACTIVITIES (1,793) 1,059
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings (49,461) (5,748)
Acquisition of treasury stock (167) (1,111)
Issuance of preferred stock 47,488 --
Collection on installment note receivable 1,100 1,000
Treasury stock sold to employee benefit plan 180 196
Exercise of stock options -- 657
------------ ------------
CASH USED BY FINANCING ACTIVITIES (860) (5,006)
------------ ------------
NET CASH USED (2,020) (14,000)
Effect of foreign currency exchange rate changes on cash (135) 1,539
Net cash flow from change in year-end of subsidiaries (Note 1) -- 20,431
Cash and equivalents at beginning of year 16,368 10,539
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 14,213 $ 18,509
============ ============
Supplemental cash flow data:
Cash paid during the period for:
Interest $ 1,492 $ 1,837
Income taxes 4,288 1,706
See accompanying Notes to the Condensed Consolidated Financial Statements.
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ALLEN TELECOM INC.
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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
(Amounts in Thousands)
(Unaudited)
Common Paid-In Comprehensive Retained
Total Stock Capital (Loss) Income Earnings
----------- ----------- --------- -------------- ----------
FOR THE THREE MONTHS ENDED MARCH 31, 2002:
Beginning Balance, January 1, 2002 $258,357 $32,500 $203,548 $69,676
Preferred stock issuance costs (3,135) (3,135)
Comprehensive loss:
Net loss (642) $ (642) (642)
Foreign currency translation adjustments (1,615) (1,615)
----------
Comprehensive loss $ (2,257)
==========
Treasury stock reissued 180 (12)
Acquisition of treasury stock (167)
Amortization of unearned compensation 62
-------- ------- -------- -------
Ending Balance, March 31, 2002 $253,040 $32,500 $203,536 $65,899
======== ======= ======== =======
FOR THE THREE MONTHS ENDED MARCH 31, 2001:
Beginning Balance, January 1, 2001 $234,981 $30,092 $184,066 $69,067
Net income from change in fiscal year-end
of subsidiaries (Note 1) 2,432 2,432
Comprehensive income:
Net income 2,437 $ 2,437 2,437
Foreign currency translation adjustments 4,285 4,285
---------
Comprehensive income $ 6,722
=========
Treasury stock reissued 195 102
Acquisition of treasury stock (1,111)
Exercise of stock options 657 101 556
Amortization of unearned compensation 78
-------- ------- -------- -------
Ending Balance, March 31, 2001 $243,954 $30,193 $184,724 $73,936
======== ======= ======== =======
Accumulated
Other
Comprehensive Treasury Unearned
Income (Loss) Stock Compensation
-------------- ---------- ------------
FOR THE THREE MONTHS ENDED MARCH 31, 2002:
Beginning Balance, January 1, 2002 $(30,671) $(15,440) $ (1,256)
Preferred stock issuance costs
Comprehensive loss:
Net loss
Foreign currency translation adjustments (1,615)
Comprehensive loss
Treasury stock reissued 192
Acquisition of treasury stock (167)
Amortization of unearned compensation 62
-------- -------- --------
Ending Balance, March 31, 2002 $(32,286) $(15,415) $ (1,194)
======== ======== ========
FOR THE THREE MONTHS ENDED MARCH 31, 2001:
Beginning Balance, January 1, 2001 $(31,948) $(14,730) $ (1,566)
Net income from change in fiscal year-end
of subsidiaries (Note 1)
Comprehensive income:
Net income
Foreign currency translation adjustments 4,285
Comprehensive income
Treasury stock reissued 93
Acquisition of treasury stock (1,111)
Exercise of stock options
Amortization of unearned compensation 78
-------- -------- --------
Ending Balance, March 31, 2001 $(27,663) $(15,748) $ (1,488)
======== ======== ========
See accompanying Notes to the Condensed Consolidated Financial Statements.
6
ALLEN TELECOM INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
In the opinion of the management of Allen Telecom Inc. (the "Company"),
the accompanying unaudited condensed consolidated interim financial
statements reflect all adjustments necessary to present fairly the
financial position of the Company as of March 31, 2002 and the
consolidated results of its operations, cash flows and changes in
stockholders' equity for the periods ended March 31, 2002 and 2001. The
results of operations for such interim periods are not necessarily
indicative of the results for the full year. The year-end 2001
condensed consolidated balance sheet was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001.
CONSOLIDATION POLICY
The Company's consolidated financial statements include the accounts of
all wholly owned and majority owned subsidiaries. Intercompany accounts
and transactions have been eliminated. To facilitate preparation of
financial statements, the Company's principal European operations, for
periods on or prior to December 31, 2000, were included in the
consolidated financial statements on a two-month delayed basis.
Effective January 1, 2001, such European operations changed their
fiscal year-end from October 31 to December 31, consistent with the
balance of the Company's operations. The results of operations (net
income of $2,432,000) for these European subsidiaries for the period
November and December 2000, were recorded directly to retained earnings
in the first quarter of 2001 and the results of operations for the
period January 1, 2001 through March 31, 2001 were included in first
quarter 2001 reported results of operations.
Cash flow of such European operations for the two month period November
and December 2000 is summarized as follows (amounts in millions):
Net income from operations $ 2.4
Increase in inventories (8.7)
Decrease in receivables 3.2
Increase in accounts payable 14.1
Decrease in taxes payable (6.1)
Net increase in fixed assets (1.2)
Borrowings 16.1
Other .6
------
Increase in cash and equivalents $ 20.4
======
7
ALLEN TELECOM INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
(Continued)
2. SPECIAL CHARGES:
In the fourth quarter 2001, the Company incurred incremental pretax
charges of $2,305,000, or $.05 per basic and diluted share after
related income tax effect, with respect to the planned closing of the
Company's U.S. base station subsystem and components manufacturing
facility in Nevada and consolidation into the newly acquired Bartley
manufacturing facility in Massachusetts. These costs included
termination costs of substantially all employees at the Nevada
manufacturing facility of $570,000, closedown costs of the
manufacturing facility of $744,000, a loss on assets, principally
relating to disposal of equipment, of $591,000 and inventory related
charges of $400,000. The following is a summary of the status of exit
costs remaining (amounts in thousands, except employee data):
SEVERANCE
----------------------- DISPOSITION
NUMBER OF OF BUILDING
ACCRUAL EMPLOYEES AND EQUIPMENT OTHER
------- --------- ------------- -----
Balance, December 31, 2001.................. $ 570 76 $ 601 $ 338
Charged against accrual..................... (164) (61) (101) (61)
---------------------------------------------------------
Balance, March 31, 2002..................... $ 406 15 $ 500 $ 277
=======================================================
The term of severance is based on years of service or determined by
contractual obligation, and is payable over a period of time. Severance
will be paid out in its entirety by January 31, 2003
3. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 20, 2002, the Company issued 1,000,000 shares of Series D
7.75% Convertible Preferred Stock (liquidation preference of $50.00 per
share).
Dividends on the Preferred Stock may be paid in cash, common stock, or
a combination thereof. Unpaid and/or undeclared dividends do not
accumulate but the number of shares of common shares entitled to be
received upon conversion of the Convertible Preferred Stock will
automatically increase, as specified in the stock agreement.
8
ALLEN TELECOM INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
(Continued)
3. REDEEMABLE CONVERTIBLE PREFERRED STOCK (continued):
Each share of Convertible Preferred Stock is convertible at the option
of the holder at any time into shares of common stock of the Company,
par value $1 per share, at an initial conversion rate of $7.70 per
share (equivalent to a conversion rate of 6.4935 shares of common stock
at a liquidation preference of $50.00), subject to adjustment under
certain conditions (including the occurrence of certain change of
control transactions). On or after February 20, 2005, the Company may,
at its option, as discussed below, cause all of the outstanding shares
of Convertible Preferred Stock to be automatically converted into
common stock at the then prevailing conversion ratio. The Company may
exercise that conversion right if, for at least 20 trading days within
any consecutive 30-day trading period (including the last trading day),
the closing price of its common stock equals or exceeds 125% of the
then prevailing conversion price of the Convertible Preferred Stock.
Subject to legal availability of funds, the shares of Convertible
Preferred Stock are mandatorily redeemable by the Company for cash at
their liquidation preference on or after February 15, 2014 (unless
previously converted into common shares of the Company) and are not
redeemable by the Company before that date.
The net proceeds from the issuance of $47,488,000, after deducting the
underwriters discount and issuance costs incurred to date, was used to
repay a portion of the Company's outstanding indebtedness under its
domestic revolving credit facility. The underwriting discount and the
estimated total expenses of the offering, aggregating $3,135,000, were
charged directly to retained earnings.
9
ALLEN TELECOM INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
(Continued)
4. SEGMENT DISCLOSURES:
The following table shows sales to external customers, results of
operations and asset positions for the Company's two operating segments
(amounts in thousands):
Three Months Ended
March 31,
2002 2001
------------------- ----------------------
Sales to external customers:
Wireless communications equipment:
Base station subsystems and components $ 33,707 $ 59,423
Repeater and in-building coverage products 22,470 22,820
Base station and mobile antennas 16,626 20,520
Geolocation products 12,490 --
-------------------------------------------
Total wireless communications equipment 85,293 102,763
Wireless engineering and consulting services 4,576 5,780
-------------------------------------------
Total sales $ 89,869 $ 108,543
-------------------------------------------
Results of operations:
Wireless communications equipment $ 3,289 $ 10,262
Wireless engineering and consulting services (17) 158
-------------------------------------------
3,272 10,420
Goodwill amortization (Note 5) -- (1,980)
General corporate expenses (1,868) (1,781)
-------------------------------------------
Operating income $ 1,404 $ 6,659
-------------------------------------------
As of
March 31, 2002 December 31, 2001
------------------- ----------------------
Segment Assets:
Wireless communications equipment $ 260,678 $ 272,674
Wireless engineering and consulting services 12,715 12,360
-------------------------------------------
Total segment assets 273,393 285,034
Goodwill 141,060 140,995
Deferred income taxes 42,022 42,061
Other general corporate assets 43,092 43,866
-------------------------------------------
Total assets $ 499,567 $ 511,956
-------------------------------------------
10
ALLEN TELECOM INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
(Continued)
5. Impact of New Accounting Pronouncements:
Effective January 1, 2002, the Company implemented Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 changed the accounting for goodwill
from an amortization method to an impairment-only approach.
Accordingly, the Company ceased amortizing goodwill (including goodwill
reported in past business combinations) in the first quarter 2002. This
change improved the reported Net (Loss) Income Per Common Share by $.07
per common share (basic and diluted).
The following supplemental information is presented, on a pro-forma
basis, for the consolidated results of operations for the first quarter
of 2001, as compared with actual first quarter 2002, adjusted to
exclude amortization of goodwill in the first quarter of 2001 (amounts
in thousands):
Three Months Ended
March 31,
----------------------------------------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------------------------------
Reported net (loss) income $ (642) $ 2,437
Add back goodwill amortization (net of related
income taxes) -- 1,975
------------------------------------------
Pro-forma net (loss) income $ (642) $ 4,412
------------------------------------------
Reported (loss) earnings per common share
(basic and diluted) $(.02) $.09
Effect of add back of goodwill amortization -- .07
------------------------------------------
Pro-forma (loss) earnings per common share $(.02) $.16
----------------------------------------------------------------------------------------------------
The Company has not yet completed the initial assessment of goodwill
under the new fair value model for determining impairment. The fair
value measurement of goodwill under the new model will reflect the
estimates and expectations of the market as of January 1, 2002, the
date of adoption. Impairment charges, if any, from this initial
evaluation would be reported as a "Cumulative Effect of an Accounting
Change" in the Company's consolidated statement of income (loss).
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, "Accounting for Asset Retirement Obligations", which
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long lived assets and associated asset
retirement costs. The new rules apply to legal obligations associated
with the retirement of long-lived assets
11
ALLEN TELECOM INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
(Continued)
5. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS (continued):
that result from the acquisition, construction, development and (or)
normal operation of a long-lived asset. SFAS No. 143 is effective for
the Company at the beginning of January 1, 2003. The Company believes
the adoption of SFAS No. 143 will not, at this time, have a material
impact on its consolidated financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes
FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", for the disposal of a
segment of a business (as previously defined in that opinion). SFAS No.
144 requires that one accounting model be used for long-lived assets to
be disposed of by sale, whether previously held and used or newly
acquired, and broadens the presentation of discontinued operations to
include more disposal transactions than were included under the
previous standards. The Company implemented SFAS No. 144 on January 1,
2002, as required, and the adoption of this statement did not have a
material impact on the Company's financial position or results of
operations.
6. ACQUISITION:
On December 18, 2001, the Company acquired substantially all of the
assets and certain liabilities of Bartley R.F. Systems, Inc.
("Bartley"). The results of Bartley's operations are included in the
consolidated financial statements for the three-month period ended
March 31, 2002. The Company is in process of obtaining third-party
valuations of acquired intangible assets; thus, the allocation of the
purchase price and the amount of goodwill currently recorded (in the
amount of $20,168,000) are subject to refinement.
7. RECLASSIFICATIONS:
Certain prior year balances have been reclassified to conform to the
current year presentation.
12
ALLEN TELECOM INC.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
OVERVIEW
We design, manufacture, and market wireless communications infrastructure
equipment and provide wireless engineering and consulting services for the
global wireless communications markets. Our products and services improve the
capacity, coverage and performance of wireless networks, including emerging 3G
networks. As part of our commitment to our customers' evolving needs, we have
also developed new products for E 911 geolocation and other emerging wireless
equipment markets such as next generation power amplifiers. Our products and
services serve all major wireless standards and frequencies.
RESULTS OF OPERATIONS
SUMMARY:
We reported a net loss of $0.6 million ($.02 per common share, basic and
diluted) for the first quarter 2002, as compared with net income of $2.4 million
($.09 per common share, basic and diluted) for the first quarter 2001. Total
sales decreased 17% from $108.5 million in the first quarter 2001 to $89.9
million in the first quarter 2002.
The weighted average common shares outstanding for the Basic Earnings Per Common
Share computation increased for the first quarter of 2002, as compared with the
comparable 2001 period, due primarily to shares issued in connection with our
fourth quarter 2001 acquisition of Bartley R.F. Systems Inc. In the future, when
computing Basic Earnings Per Common Share, net income will be reduced by
dividends, to the extent declared, on the Redeemable Convertible Preferred Stock
issued in the first quarter of 2002. Such dividends, as and if declared, would
amount to $3,875,000 annually. For purposes of computing Diluted Earnings Per
Common Share, and only if such calculation results in dilution, Preferred Stock
dividends will not reduce earnings; however, the weighted average shares
outstanding will increase by 6,493,500 common shares representing the amount of
common shares into which the Preferred Stock is currently convertible.
The strong U.S. dollar relative to the Euro negatively impacted reported sales
of European operations in the first quarter of 2002 as compared to the first
quarter of 2001. As a result of exchange differences, reported sales in the
three months ended March 31, 2002 were $1.7 million lower, as compared with the
corresponding prior year period, assuming the exchange rates stayed the same.
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Continued)
WIRELESS COMMUNICATIONS EQUIPMENT:
Wireless communications equipment sales were down 17% from $102.8 million in
first quarter 2001 to $85.3 million in the first quarter 2002. Sales for the
geolocation product line were $12.5 million in first quarter 2002 compared with
no sales in first quarter 2001. Sales for the repeaters and in-building coverage
product line were essentially flat at $22.5 million in first quarter 2002
compared with $22.8 million in first quarter 2001. Sales decreased for the base
station subsystems and components and base station and mobile antenna product
lines from $59.4 million to $33.7 million, or 43%, and from $20.5 million to
$16.6 million, or 19%, respectively. These sales declines are due to reduced
spending by wireless communications carriers and OEM's in most world markets.
Geographically, sales were down in all parts of the world with the exception of
the United States, where sales increased 20% due to the Bartley acquisition,
which improved sales of our base station subsystems and components product line,
and strong sales of geolocation products.
The following table sets forth our wireless communications equipment segment
sales by product line:
-------------------------------------------------------------------------------------------
SALES BY PRODUCT LINE
-------------------------------------------------------------------------------------------
($ MILLIONS) 1Q 2002 1Q 2001
--------------------------------
Base Station Subsystems and Components $ 33.7 $ 59.4
Repeater and In-Building Coverage Products 22.5 22.8
Base Station and Mobile Antennas 16.6 20.6
Geolocation Products 12.5 --
-------------------------------------------------------------------------------------------
Total Wireless Communications Equipment $85.3 $ 102.8
--------------------------------
Backlog for this segment decreased 23% from $122.6 million at December 31, 2001
to $94.8 million at March 31, 2002. The decrease was due primarily to reduced
orders, capital spending and the lack of future market visibility from our
domestic and European OEM customers, as well as a decrease in Geolocation
backlog.
Gross profit margins were 23.7% in the first quarter 2002, as compared with
27.4% in the first quarter 2001. The lower gross profit margins in 2002 were due
to lower sales volumes and increased price discounting, particularly in the base
station subsystems and components product lines. These lower gross profit
margins were partially offset by higher margins from our geolocation product
line.
Selling, general and administrative expenses were $10.3 million, or 12.1% of
sales, and $11.0 million, or 10.7% of sales, for the first quarters of 2002 and
2001, respectively. Spending is lower due primarily to lower volume related
sales commissions. Spending as a percentage of sales is higher due to the
spreading of fixed costs on lower sales.
14
ALLEN TELECOM INC.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Continued)
WIRELESS ENGINEERING AND CONSULTING SERVICES:
Wireless engineering and consulting services sales were down $1.2 million or 21%
from $5.8 million in first quarter 2001 to $4.6 million in first quarter 2002.
Sales decreased due to the low level of software sales and a decline in
engineering consulting services in the Company's markets. Gross profit margins
for this segment were 20.6% in the first quarter 2002, as compared with 30.6% in
the first quarter 2001. This decrease in margins is primarily attributable to
lower software sales, which contribute higher margins than other products and
services, as well as less than full deployment of engineers. Selling, general
and administrative expenses decreased to 21.0% of sales for the first quarter of
2002 compared to 27.8% for the first quarter of 2001. This lower ratio was
primarily due to lower bad debt expense and lower personnel expenses.
RESEARCH AND DEVELOPMENT:
Research and development and product engineering costs were 7.4% and 6.4% of
sales in the first quarter of 2002 and 2001, respectively. The increased rate of
spending as a percentage of sales is attributable to the decrease in sales. We
believe that product development costs will remain fairly consistent in dollars
throughout the year.
INTEREST AND FINANCING EXPENSES:
Net interest expense decreased $.2 million, or 8.8%, to $2.4 million in the
first quarter 2002 from $2.6 million in the first quarter 2001. The decrease in
net interest expense is primarily due to lower interest rates offset in part, by
increased average quarterly debt levels and lower interest income. On March 20,
2002, we issued $50.0 million of Preferred Stock that generated cash proceeds,
net of fees and expenses, of $47.5 million. After payment of all fees and
expenses, we expect net proceeds from the offering to approximate $46.9 million.
The $47.5 million of net proceeds, to date, was used to pay down domestic bank
borrowings. We estimate interest savings as a result of this debt reduction
would approximate $2.4 million on an annual basis based on our current average
interest rate of approximately 5.0%.
15
ALLEN TELECOM INC.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Continued)
PROVISION FOR INCOME TAXES:
Our effective income tax rate was 35.0% and 39.0% for the quarters ended March
31, 2002 and 2001, respectively. The principal reason for the decrease is due to
the change in accounting for goodwill amortization that was almost entirely
non-deductible for income taxes purposes in 2001. The 2002 tax rate is in line
with our current expectation for the full year.
Through March 31, 2002, we have recorded a net U.S. deferred tax asset
pertaining to recognition of net operating loss carryforwards, net deductible
temporary differences and tax credits in the amount of approximately $41.8
million. The U.S. deferred tax asset has remained unchanged from December 31,
2001. We have not provided a valuation allowance relating to this asset, as we
believe it is more likely than not that we will realize the value of this asset.
This determination is primarily based upon our expectation that future U.S.
operations will be sufficiently profitable to utilize the operating loss
carryforwards, as well as various tax, business and other planning strategies
available to us. We cannot provide assurance that we will be able to realize
this asset or that future valuation allowances will not be required. The failure
to utilize this asset would adversely effect our results of operations and
financial position.
NEW ACCOUNTING STANDARDS:
Effective January 1, 2002, we implemented Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets". Accordingly,
amortization of goodwill, including goodwill recorded in past business
combinations, ceased upon adoption of this statement. Earnings per common share
for the period ending March 31, 2001 would have increased by $.07 per share,
excluding the amortization of goodwill, which was eliminated in 2002 when this
new Standard went into effect. We have not yet completed the initial assessment
of goodwill under the new fair value model for determining impairment. The fair
value measurement of goodwill under the new model will reflect the estimates and
expectations of the market as of January 1, 2002, the date of adoption.
Impairment charges, if any, from this initial evaluation would be reported as a
"Cumulative Effect of an Accounting Change" in the Company's consolidated
statement of income (loss). See Note 5 of the Notes to Condensed Consolidated
Financial Statements for additional information.
16
ALLEN TELECOM INC.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Continued)
-----------
LIQUIDITY AND CAPITAL RESOURCES:
As set forth in the Condensed Consolidated Statements of Cash Flows, $.6 million
of cash was generated by operations for the three months ended March 31, 2002 as
compared to $10.1 million of cash used in the comparable 2001 period. This
improvement of cash generation is due primarily to a reduction of inventory,
partially offset by lower trade payables and income tax payments. From March 31,
2001 to March 31, 2002, our consolidated inventory decreased $29.4 million to
$113.3 million. We used $1.8 million of cash in investing activities in the
first quarter 2002, due principally to $1.5 million for capital expenditures.
For the first quarter 2001, $1.1 million was generated from investing activities
that included proceeds from the sale of an unused facility. Cash used by
financing activities for the three months ended March 31, 2002 and March 31,
2001 was $.9 million and $5.0 million, respectively. On March 20, 2002, we
issued $50.0 million of Redeemable Convertible Preferred Stock, which netted, to
date, $47.5 million of cash after deduction of certain fees and expenses (see
Note 3 of the Condensed Consolidated Financial Statements for additional
information). Cash proceeds from this offering, as well as cash generated by
other activities, were used to repay borrowings of $49.5 million in the first
quarter 2002. The $5.0 million cash usage from financing activities in the first
quarter of 2001 was principally the result of repayment of borrowings. As a
result of our preferred stock offering, and the resulting pay-down of domestic
revolving debt, we permanently reduced our domestic revolving credit agreement
commitment from $105.0 million to $76.9 million. On a worldwide basis, at March
31, 2002, we had $123.9 million of lines of credit of which $92.3 million were
unused and available, as compared with $71.4 million of available unused credit
lines at December 31, 2001.
17
ALLEN TELECOM INC.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(Continued)
LEGAL DISCLAIMER:
Statements included in this Form 10-Q, which are not historical in nature, are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
regarding the Company's future performance and financial results are subject to
a number of risks and uncertainties that could cause actual results to differ
materially from those set forth in the forward-looking statements. Factors that
could cause the Company's actual results to materially differ from
forward-looking statements made by the Company, include, among others, the cost
incurred, savings realized and timing of the integration of acquisitions, such
as the integration of Bartley R.F. Systems and the consolidation of the
Company's Nevada facility into Bartley's Amesbury, MA facility; the cost,
success and timetable for new product development including, for example,
products for 3G, E 911 and power amplification; the health, economic stability
and relative currency valuations in world and national markets; the cost and
outcome of litigation, including, for example, a lawsuit filed by a competitor
in the E 911 geolocation business claiming infringement by the Company of
intellectual property rights; the cost and availability of capital and financing
to the Company and its customers; the uncertain timing and level of purchases by
the limited number of the Company's customers of both current products and
services, and those under development; the effective realization of inventory,
receivables and other working capital assets to cash; the impact of competitive
products and pricing in the Company's markets; the ability of the company to
generate future U.S. profits or to implement other tax planning strategies
needed to utilize the Company's tax loss carry forwards; the impact of U.S. and
foreign government legislative/regulatory actions, including, for example, the
scope and timing of E 911 geolocation requirements in the U.S. markets and
spectrum availability and licensing for new wireless applications; the impact of
future business conditions on the Company's ability to meet terms and conditions
of the Company's borrowing agreements; the cost, timing and availability of
personnel, facilities, materials and vendors required for the Company's current
and future products; and whether and when backlog will be converted to customer
sales. Allen Telecom Inc.'s Annual Report on Form 10-K and Quarterly Reports on
Form 10-Q may contain additional factors.
18
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
- ---------------------------------------------------------------------
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of its Annual Report on Form 10-K for the year ended
December 31, 2001. There has been no material change from the end of the
previous fiscal year to March 31, 2002.
PART II - OTHER INFORMATION
---------------------------
ITEM 2 - CHANGE IN SECURITIES AND USE OF PROCEEDS.
On March 20, 2002, the Company issued 1,000,000 shares of its Series D 7.75%
Convertible Preferred Stock in a public offering for consideration of
$50,000,000, before underwriter's discount and issuance costs. The Series D
Convertible Preferred Stock has a liquidation preference of $50.00 per share and
will initially be convertible into common stock at the rate of approximately
6.4935 shares of common stock per share of Series D Convertible Preferred Stock,
for a per share conversion price of $7.70 per share of common stock. Additional
information on the Series D Convertible Preferred Stock transaction is contained
in this Form 10-Q for the quarterly period ended March 31, 2002 in "Part I
Financial Information" under the caption "Notes to Condensed Consolidated
Financial Statements" under "Note 3: Redeemable Convertible Preferred Stock" and
is incorporated herein by reference.
The effective date of the registration statement under which the Series D 7.75%
Convertible Preferred Stock was registered was March 14, 2002. The Commission
File number assigned to the registration statement is 333-82696. The managing
underwriter of the offering was Bear Stearns & Co. Inc. Underwriting discounts
were $2,500,000 and other fees are estimated to be approximately $635,000, for a
total of $3,135,000 in fees. Net proceeds of the offering are anticipated to
aggregate approximately $46,865,000. The net proceeds of the offering to date
were used to repay a portion of the outstanding indebtedness under the Company's
domestic revolving credit facility.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
(3) Articles of Incorporation
(b) Reports on Form 8-K
--------------------
On February 14, 2002, the Company filed a Current Report on Form 8-K,
under Item 5 "Other Events", whereby it filed a press release dated
February 13, 2002, reporting Allen Telecom's fourth quarter and full year
2001 sales and earnings results.
19
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 Telecom Inc.
------------------
(Registrant)
Date: May 10, 2002 By: /s/ Robert A. Youdelman
------------ -------------------------------------
Robert A. Youdelman
Executive Vice President
(Chief Financial Officer)
Date: May 10, 2002 By: /s/ James L. LePorte, III
------------ -------------------------------------
James L. LePorte, III
Vice President Finance
(Principal Accounting Officer)
20
EXHIBIT INDEX
-------------
ALLEN TELECOM INC.
------------------
Exhibit Number
(3.1) Certificate of Designations of Series D 7.75% Convertible
Preferred Stock of Allen Telecom Inc.
21