SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------
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, 2003
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 __________________
Commission file number 1-6016
ALLEN TELECOM INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 38-0290950
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
25101 Chagrin Boulevard, Suite 350, Beachwood, Ohio 44122
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) (216) 765-5800
NOT APPLICABLE
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 | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No | |
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Outstanding at
Class of Common Stock April 30, 2003
--------------------- --------------
Par value $1.00 per share 30,728,695
ALLEN TELECOM INC.
TABLE OF CONTENTS
Page
No.
-------
PART I. FINANCIAL INFORMATION:
ITEM 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Income (Loss) -
Three Months Ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002 5
Condensed Consolidated Statements of Stockholders'
Equity - Three Months Ended March 31, 2003 and 2002 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 Risk 19
ITEM 4 - Controls and Procedures 19
PART II. OTHER INFORMATION:
ITEM 6 - Exhibits and Reports on Form 8-K 19 - 20
Signatures 21
Certifications 22 - 25
Exhibit Index 26
2
ALLEN TELECOM INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
March 31, December 31,
2003 2002
----------- -----------
(Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 78,751 $ 48,420
Accounts receivable (less allowance for doubtful
accounts of $3,414 and $3,141, respectively) 100,661 105,463
Inventories: Raw materials 62,610 59,092
Work in process 32,145 30,117
Finished goods 12,751 11,265
--------- ---------
Total inventories (net of reserves) 107,506 100,474
--------- ---------
Deferred income taxes 6,167 5,480
Recoverable income taxes 3,074 20,379
Other current assets 3,833 2,710
--------- ---------
Total current assets 299,992 282,926
Property, plant and equipment, net 38,236 38,214
Goodwill 139,136 139,126
Deferred income taxes 31,626 36,365
Other assets 33,797 33,407
--------- ---------
TOTAL ASSETS $ 542,787 $ 530,038
========= =========
LIABILITIES
Current Liabilities:
Notes payable and current maturities of long-term
obligations $ 12,938 $ 13,277
Accounts payable 47,238 54,003
Accrued expenses 46,634 36,192
Income taxes payable 2,447 4,443
Deferred income taxes 7,145 10,157
--------- ---------
Total current liabilities 116,402 118,702
Long-term debt 64,300 64,084
Other liabilities 24,080 23,628
--------- ---------
TOTAL LIABILITIES 204,782 205,784
--------- ---------
REDEEMABLE CONVERTIBLE PREFERRED STOCK
1,000 shares at redemption value (liquidation preference
of $50.00 per share) 50,000 50,000
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 32,633 32,502
Paid-in capital 204,302 203,292
Retained earnings 75,974 67,322
Accumulated other comprehensive loss (9,549) (13,243)
Less: Treasury stock (common shares, at cost) (14,409) (14,612)
Unearned compensation (946) (1,007)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 288,005 274,254
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 542,787 $ 530,038
========= =========
See accompanying Notes to the Condensed Consolidated Financial Statements.
3
ALLEN TELECOM INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
2003 2002
--------- --------
Sales $ 110,934 $ 89,869
Cost of sales (Note 2) (72,997) (68,702)
--------- --------
Gross profit 37,937 21,167
Operating expenses:
Selling, general and administrative expenses (Note 2) (17,079) (13,154)
Research and development costs (Note 2) (8,000) (6,609)
--------- --------
Operating income 12,858 1,404
Interest expense (1,391) (2,500)
Interest income 222 134
--------- --------
Income (loss) before taxes and minority interest 11,689 (962)
(Provision) benefit for income taxes (Note 3) (2,042) 340
--------- --------
Income (loss) before minority interest 9,647 (622)
Minority interest (27) (20)
--------- --------
Income (loss) from continuing operations 9,620 (642)
Cumulative effect of change in accounting principle (Note 1) -- (3,397)
--------- --------
NET INCOME (LOSS) 9,620 (4,039)
Preferred stock dividends (968) --
--------- --------
Income (loss) applicable to common shareholders $ 8,652 $ (4,039)
========= ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
Income (loss) from continuing operations $ .28 $ (.02)
Cumulative effect of change in accounting principle -- (.11)
--------- --------
Net Income (loss) $ .28 $ (.13)
========= ========
Diluted:
Income (loss) from continuing operations $ .26 $ (.02)
Cumulative effect of change in accounting principle -- (.11)
--------- --------
Net Income (loss) $ .26 $ (.13)
========= ========
Weighted average common shares:
Basic 30,570 30,300
Effect of dilution:
Stock options 406 --
Convertible preferred stock 6,494 --
--------- --------
Diluted 37,470 30,300
========= ========
See accompanying Notes to the Condensed Consolidated Financial Statements.
4
ALLEN TELECOM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Three Months Ended
March 31,
------------------------
2003 2002
-------- --------
CASH FLOW FROM OPERATIONS:
Net income (loss) $ 9,620 $ (4,039)
Adjustments to reconcile income to operating cash flow: `
Depreciation 2,544 3,023
Goodwill impairment charge -- 3,397
Amortization of capitalized software 634 897
Other amortization 166 150
Changes in operating assets and liabilities:
Receivables 4,932 (2,488)
Inventories (4,602) 10,083
Accounts payable and accrued expenses 1,820 (6,203)
Income taxes 15,705 (4,177)
Other, net (2,559) (10)
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 28,260 633
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,355) (1,479)
Capitalized software product costs (536) (419)
Sales and retirements of fixed assets 106 164
Return of purchase price (investment in) acquisition 2,000 (59)
-------- --------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES 215 (1,793)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 1,051 --
Treasury stock sold to employee benefit plan 293 180
Proceeds from (repayment of) borrowings 142 (49,461)
Preferred stock dividends (968) --
Acquisition of treasury shares -- (167)
Issuance of preferred stock, net -- 47,488
Collection on installment note receivable -- 1,100
-------- --------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES 518 (860)
-------- --------
NET CASH PROVIDED (USED) 28,993 (2,020)
Effect of foreign currency exchange rate changes on cash 1,338 (135)
Cash and equivalents at beginning of year 48,420 16,368
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 78,751 $ 14,213
======== ========
Supplemental cash flow data:
Cash (paid) refunded during the period for:
Interest $ (386) $ (1,492)
Income taxes 14,287 (4,288)
See accompanying Notes to the Condensed Consolidated Financial Statements.
5
ALLEN TELECOM INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in Thousands)
(Unaudited)
Common Paid-In Comprehensive
Total Stock Capital Income (Loss)
--------- ------- -------- -------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003:
Beginning Balance, January 1, 2003 $ 274,254 $32,502 $203,292
Net income 9,620 $ 9,620
Comprehensive income:
Foreign currency translation adjustments 3,694 3,694
-------
Comprehensive income $13,314
=======
Treasury stock reissued 293 90
Preferred stock dividends (968)
Exercise of stock options 1,051 131 920
Amortization of unearned compensation 61
--------- ------- --------
Ending Balance, March 31, 2003 $ 288,005 $32,633 $204,302
========= ======= ========
FOR THE THREE MONTHS ENDED MARCH 31, 2002:
Beginning Balance, January 1, 2002 $ 258,357 $32,500 $203,548
Preferred stock issuance costs (3,135)
Comprehensive loss:
Net loss (4,039) $(4,039)
Foreign currency translation adjustments (1,615) (1,615)
-------
Comprehensive loss $(5,654)
=======
Treasury stock reissued 180 (12)
Acquisition of treasury stock (167)
Amortization of unearned compensation 62
--------- ------- --------
Ending Balance, March 31, 2002 $ 249,643 $32,500 $203,536
========= ======= ========
Accumulated
Other
Retained Comprehensive Treasury Unearned
Earnings Income (Loss) Stock Compensation
-------- ------------- -------- ------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003:
Beginning Balance, January 1, 2003 $67,322 $(13,243) $(14,612) $ (1,007)
Net income 9,620
Comprehensive income:
Foreign currency translation adjustments 3,694
Comprehensive income
Treasury stock reissued 203
Preferred stock dividends (968)
Exercise of stock options
Amortization of unearned compensation 61
------- -------- -------- --------
Ending Balance, March 31, 2003 $75,974 $ (9,549) $(14,409) $ (946)
======= ======== ======== ========
FOR THE THREE MONTHS ENDED MARCH 31, 2002:
Beginning Balance, January 1, 2002 $69,676 $(30,671) $(15,440) $ (1,256)
Preferred stock issuance costs (3,135)
Comprehensive loss:
Net loss (4,039)
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 $62,502 $(32,286) $(15,415) $ (1,194)
======= ======== ======== ========
See accompanying Notes to the Condensed Consolidated Financial Statements.
6
ALLEN TELECOM INC.
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 normal recurring adjustments necessary to present
fairly the financial position of the Company as of March 31, 2003 and the
consolidated results of its operations, cash flows and changes in
stockholders' equity for the periods ended March 31, 2003 and 2002. The
results of operations for such interim periods are not necessarily
indicative of the results for the full year. The year-end 2002 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, 2002.
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.
Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
Other Intangible Assets." This Statement 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) beginning in 2002. In 2002, the
Company completed its initial evaluation of goodwill pursuant to SFAS 142
and recorded an initial charge of $3,397,000 as a cumulative effect of a
change in accounting principle. The Company estimates the fair value of
goodwill for each of its reporting units. Under SFAS 142, estimated fair
values were based upon the expected present value of future cash flows.
Goodwill was tested for impairment in the first quarter of 2003, as of
January 1, 2003. We test goodwill annually (or more frequently if other
impairment indicators exist) as part of the annual forecasting process.
The results of this analysis indicated no goodwill impairment review is
required.
Intangible assets subject to amortization are recorded at cost and are
amortized over their estimated useful lives unless those lives are
determined to be indefinite. An impairment loss on intangible assets
subject to amortization would be recognized if the carrying amount is not
recoverable and its carrying amount exceeds fair value, as defined. Such
assets will be tested for recoverability whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable.
All of the Company's intangible assets, other than goodwill, are subject
to amortization.
7
ALLEN TELECOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies (continued):
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition to SFAS No.
123's fair value method of accounting for stock-based employee
compensation. SFAS No. 148 does not require companies to account for
employee stock options using the fair value method but does require
additional disclosures.
If the Company had elected to recognize compensation cost for its
stock-based compensation plans based on the fair value determined pursuant
to the Black-Scholes option pricing model at the grant dates for awards
under those plans in accordance with SFAS No. 123, net income and earnings
per common share would have been reduced to the pro forma amounts below
(amounts in thousands, except per common share data):
Three Months Ended
March 31,
2003 2002
--------- ---------
Net income (loss):
As reported .................................... $ 9,620 $ (4,039)
Plus: Stock-based employee compensation
(net of tax) included in net income ....... -- --
Less: Stock-based employee compensation
(net of tax) using the fair value method .. (633) (657)
--------- ---------
Pro forma ...................................... $ 8,987 $ (4,696)
========= =========
Earnings (loss) per common share
Basic:
As reported ............................... $ .28 $ (.13)
Pro forma ................................. $ .26 $ (.15)
Diluted:
As reported ............................... $ .26 $ (.13)
Pro forma ................................. $ .24 $ (.15)
8
ALLEN TELECOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
2. Special Charges:
In the first quarter 2003, the Company incurred $840,000 of restructuring
charges ($.02 per basic and diluted common share after related tax effect)
in connection with headcount reductions at its Base Station Subsystems and
Components product line in North America, as well as its Repeater and
In-building Coverage product line in Europe. Of these restructuring
charges, $20,000 were included in Cost of sales, $205,000 in Selling,
general and administrative expenses and $615,000 in Research and
development costs.
The following is a summary of the status of certain exit costs incurred
(amounts in thousands, except employee data):
SEVERANCE
------------------------ DISPOSITION
NUMBER OF OF BUILDING
ACCRUAL EMPLOYEES AND EQUIPMENT OTHER
------- --------- ------------- -----
Balance, December 31, 2002 ... $ 1,111 46 $ 678 $ 78
Additions to accrual ......... 820 10 -- 20
Charged against accrual ...... (857) (43) (29) (29)
------- --- ----- ----
Balance, March 31, 2003 ...... $ 1,074 13 $ 649 $ 69
======= === ===== ====
The term of severance is based on years of service or determined by
contractual obligation, and is payable in its entirety through December
31, 2003.
3. Income Taxes
The Company recorded a one-time net tax benefit of $2,048,000 (or $.06 and
$.05 per basic and diluted common share, respectively) in the first
quarter of 2003 resulting primarily from favorable European tax
legislation. This one-time net tax benefit reduced the effective tax rate
for the first quarter 2003 to 17.5% from an expected ongoing rate of 35%
for the full year 2003.
9
ALLEN TELECOM INC.
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,
2003 2002
--------- ---------
Sales to external customers:
Wireless communications equipment:
Geolocation products $ 43,618 $ 12,490
Base station subsystems and components 32,890 33,707
Repeater and in-building coverage products 16,419 22,470
Base station and mobile antennas 14,244 16,626
--------- ---------
Total wireless communications equipment 107,171 85,293
Wireless engineering and consulting services 3,763 4,576
--------- ---------
Total sales $ 110,934 $ 89,869
--------- ---------
Results of operations:
Wireless communications equipment $ 14,995 $ 3,289
Wireless engineering and consulting services (461) (17)
--------- ---------
14,534 3,272
General corporate expenses (1,676) (1,868)
--------- ---------
Operating income $ 12,858 $ 1,404
--------- ---------
As of
March 31, 2003 December 31, 2002
-------------- -----------------
Segment Assets:
Wireless communications equipment $ 304,567 $ 295,953
Wireless engineering and consulting services 9,527 9,737
--------- ---------
Total segment assets 314,094 305,690
Goodwill 139,136 139,126
Deferred income taxes 37,793 41,845
Other general corporate assets 51,764 43,377
--------- ---------
Total assets $ 542,787 $ 530,038
--------- ---------
10
ALLEN TELECOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
5. Impact of New Accounting Pronouncements:
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 that result from the acquisition, construction, development and/or
normal operation of a long-lived asset. SFAS No. 143 is effective for the
Company beginning January 1, 2003. The adoption of SFAS No. 143 had no
material impact on the Company's financial statements.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal
plan. This statement supercedes the guidance provided by Emerging Issues
Task Force 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)". SFAS No. 146 is required to be adopted for
exit or disposal activities initiated after December 31, 2002. SFAS No.
146 only affects the timing of the recognition of the costs to be incurred
if an entity makes a decision to exit or dispose of a particular business
activity. The Company adopted the provisions of SFAS No. 146 as of January
1, 2003.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), which expands previously
issued accounting guidance and disclosure requirements for certain
guarantees. FIN 45 requires an entity to recognize an initial liability
for the fair value of an obligation assumed by issuing a guarantee. The
recognition requirements of FIN 45 are to be applied prospectively to
guarantees issued after December 31, 2002. The adoption of FIN 45 had no
material impact on the Company's financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No 149 is applied prospectively and is
effective for contracts entered into or modified after June 30, 2003,
except for SFAS No. 133 implementation issues that have been effective for
fiscal quarters that began prior to June 15, 2003 and certain provisions
relating to forward purchases and sales on securities that do not yet
exist. The Company has not determined the effect, if any, that SFAS No.
149 will have on its consolidated financial statements.
11
ALLEN TELECOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
6. Other Matters:
On February 18, 2003, Andrew Corporation (Andrew) and the Company
announced the signing of a definitive agreement under which Andrew will
acquire the Company in a stock-for-stock transaction. Under the terms of
the agreement, the Company's stockholders will receive 1.775 shares of
newly-issued Andrew common stock for each common share of the Company that
they currently own. Completion of the transaction, which is expected to
occur in the first half of 2003, is subject to approval of shareholders of
both companies, expiration of the applicable waiting periods under the
anti-trust filings and other customary closing conditions.
7. Reclassifications:
Certain prior year balances have been reclassified to conform to the
current year presentation.
12
ALLEN TELECOM INC.
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 net income of $9.6 million ($.26 per diluted common share) for the
first quarter 2003, as compared with a net loss of $0.6 million ($.02 per
diluted common share) for the first quarter 2002. Included in the net income for
the first quarter 2003 are restructuring charges of $0.8 million ($.02 per
diluted common share), transaction costs incurred in connection with the planned
acquisition of the Company by Andrew Corporation of $0.5 million ($.01 per
diluted common share) and a one-time net tax benefit of approximately $2.0
million ($.05 per diluted common share). For more information on restructuring
charges and the one-time tax benefit, please see Notes 2 and 3 of the Notes to
Condensed Consolidated Financial Statements. Sales increased 23% from $89.9
million in the first quarter 2002 to $110.9 million in the first quarter 2003.
The strong Euro currency relative to the U.S. dollar positively impacted
reported sales in the first quarter of 2003 as compared to the first quarter of
2002. As a result of foreign currency rate changes, reported sales in the first
quarter 2003 were $6.3 million higher, as compared with the corresponding prior
year period, assuming the exchange rate had stayed the same as 2002. The impact
on operating earnings was not significant since most costs related to the sales
were also incurred in Euro currency.
We expect second quarter 2003 sales to be between $113.0 million and $120.0
million. Our expectations are based on the continuing strength in our
geolocation product line and improvements in most other product lines resulting
from an improved outlook at some of our OEM customers and on seasonal
improvements with many of our products.
Under the Company's contract with its major geolocation customer, there are a
number of technological and other benchmarks that we are required to meet. From
time to time, the customer has raised concerns regarding our ability to meet
certain of the performance benchmarks in a timely fashion. Such concerns are
typically resolved by the companies' respective technology and operations
departments in the ordinary course of business. We believe that we have met our
obligations under the contract and that we will continue to be able to do so in
the future in accordance with the terms of the contract. However, if we fail to
meet such performance benchmarks, such failure would have a negative impact on
our sales, operating margins and income.
13
ALLEN TELECOM INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Wireless Communications Equipment:
Wireless communications equipment sales were up 26% from $85.3 million in first
quarter 2002 to $107.2 million in the first quarter 2003. Sales for the
geolocation product line increased 249% from $12.5 million in first quarter 2002
to $43.6 million in the first quarter 2003. Second quarter 2003 sales of
geolocation products are expected to be very close to first quarter 2003 sales
levels to meet specific installation dates mandated by the FCC. Virtually all of
the projected geolocation product sales for the second quarter 2003 are in
backlog at March 31, 2003. Backlog for this product line was $94.2 million at
March 31, 2003.
Sales for the repeaters and in-building coverage products line decreased 27%
from $22.5 million in first quarter 2002 to $16.4 million in first quarter 2003.
The decrease in sales of repeaters and in-building products was due to lower
project sales in Europe and North America. Sales of base station subsystems and
components and base station and mobile antenna products decreased from $33.7
million to $32.9 million, or 2.4%, and from $16.6 million to $14.3 million, or
14%, respectively. This decrease in sales of base station subsystems and
component products was primarily due to a decrease in sales to U.S. OEM
customers which was partially offset by increased sales to customers in Europe
and China. Geographically, sales of wireless communications equipment increased
from the first quarter 2002 to the first quarter 2003 in all regions except for
Latin America, where sales were down $0.5 million from prior year levels
primarily due to weaker sales of base station antenna products. The large
increase in geolocation product sales, which are all based in the U.S., was
partially offset by weaker sales across all other product lines, as wireless
carriers and OEMs continued to reduce capital expenditures.
The following table sets forth our wireless communications equipment segment
sales by product line:
SALES BY PRODUCT LINE
($ MILLIONS) 1Q 2003 1Q 2002
------- -------
Geolocation Products $ 43.6 $ 12.5
Base Station Subsystems and Components 32.9 33.7
Repeater and In-Building Coverage Products 16.4 22.5
Base Station and Mobile Antennas 14.3 16.6
------ ------
Total Wireless Communications Equipment $107.2 $ 85.3
------ ------
Backlog for this segment increased 13% from $140.0 million at December 31, 2002
to $158.7 million at March 31, 2003. The increase was due primarily to increased
orders of geolocation products and base station subsystems and components.
14
ALLEN TELECOM INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Gross profit margins were 34.5% in the first quarter 2003, as compared with
23.7% in the first quarter 2002. The higher gross profit margins in 2003 were
due to cost reduction efforts taken in the latter part of 2002 that lowered our
cost of goods sold by $1.7 million on an annualized basis, as well as a higher
proportion of sales of our geolocation product line, which have higher margins
than the overall company average (geolocation product sales increased from 15%
of wireless communications equipment sales in the first quarter 2002 to 41% of
sales in the first quarter 2003). Margins are expected to decline slightly in
the second quarter of 2003 compared to first quarter 2003 levels due to
increased pricing pressure on all of our product lines, as well as anticipated
increased sales in base station subsystems and components and base station and
mobile antennas, which have lower gross profit margins than the overall company
average. Sales of repeater and in-building coverage products, which have gross
profit margins essentially the same as the overall company average, are expected
to remain flat from the first quarter 2003 to the second quarter 2003.
Selling, general and administrative expenses were $14.5 million, or 13.5% of
sales, and $10.3 million, or 12.1% of sales, for the first quarters of 2003 and
2002, respectively. Spending is higher primarily due to higher volume related
sales commissions, bad debt expense, year over year severance costs and the
stronger Euro in relation to the U.S. dollar, which causes higher U.S. dollar
expenses.
Research and development (R&D) and product engineering costs were $8.0 million
in first quarter 2003 (7.2% of sales) and $6.6 million in first quarter 2002
(7.4% of sales). The increase results from restructuring costs incurred in the
first quarter 2003 within the R&D groups and an increase in spending for new
product initiatives regarding our repeater and in-building coverage and base
station subsystems and components product lines.
Wireless Engineering and Consulting Services:
Wireless engineering and consulting services sales were down $0.8 million, or
18%, from $4.6 million in first quarter 2002 to $3.8 million in first quarter
2003. 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 25.8% in the first quarter 2003, as compared with 19.5% in
the first quarter 2002. This increase in margins is primarily attributable to
cost savings from restructuring actions during 2002. Selling, general and
administrative expenses increased to 38.0% of sales for the first quarter of
2003 compared to 21.0% for the first quarter of 2002. This higher ratio was
primarily due to higher bad debt expense, higher personnel expenses, and lower
sales.
15
ALLEN TELECOM INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Interest and Financing Expenses:
Net interest expense decreased $1.2 million, or 50.6%, to $1.2 million in the
first quarter 2003 from $2.4 million in the first quarter 2002. The significant
decrease is due to both lower borrowing levels and lower interest rates. In the
first quarter of 2002, we issued $50.0 million of Convertible Preferred Stock
("Preferred Stock") that generated net cash proceeds of $47.5 million, which was
used to pay down domestic bank borrowings. This, along with cash generated from
operations of $98.6 million since March 31, 2002, has allowed the Company to
eliminate all domestic bank borrowings at March 31, 2003 and substantially
increase its interest earnings on cash and cash equivalent investments.
Provision for Income Taxes:
The Company recorded a one-time tax benefit of approximately $2.0 million (or
$.06 and $.05 per basic and diluted common share, respectively) in the first
quarter of 2003 resulting primarily from favorable European tax legislation.
This one-time net tax benefit reduced the effective tax rate for the first
quarter 2003 to 17.5% from an expected ongoing rate of 35% for the balance of
the year 2003.
Through March 31, 2003, we 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 $35.3 million as
compared with $40.2 million at December 31, 2002. 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.
16
ALLEN TELECOM INC.
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, $28.3
million of cash was generated by Operating Activities for the first quarter
2003, as compared to $0.6 million of cash generated in the comparable 2002
period. This significant improvement in cash generation is due primarily to the
receipt of a tax refund in Europe and the improvement in net income.
We generated $0.2 million of cash from Investing Activities in the first quarter
of 2003, due principally to $1.8 million for capital expenditures and software
purchases which was partially offset by the return of $2.0 million of the
purchase price relating to the Company's acquisition of Bartley R.F. Systems,
Inc. For the first quarter of 2002, $1.8 million was used in Investing
Activities primarily for capital expenditures.
Cash provided by Financing Activities for the first quarter 2003 was $0.5
million. Cash used by Financing Activities for the first quarter 2002 was $0.9
million and resulted primarily from the issuance of $50.0 million of Preferred
Stock, which generated $47.5 million of cash after deduction of certain fees and
expenses. Cash proceeds from this offering, as well as cash generated by
operating activities, were used to repay borrowings of $49.5 million in the
first quarter 2002.
On a worldwide basis, at March 31, 2003, we had $122.3 million of lines of
credit, of which $108.1 million were unused and available. At March 31, 2002, we
had available unused lines of credit of $92.3 million.
Our cash balance at March 31, 2003 of approximately $78.8 million and our
available unused credit lines provide the Company with the ability to fund
operations and take advantage of acquisition opportunities. We do not anticipate
that our cash balance will continue to grow at the same rates as we have seen
over the last four quarters.
The strong Euro currency, relative to the U.S. dollar, has positively impacted
the translated value of our European subsidiaries, whose assets and liabilities
are denominated principally in Euros. The foreign currency translation loss
adjustment included as a portion of our "Accumulated Other Comprehensive Loss"
declined $3.7 million to $1.8 million at March 31, 2003 from $5.5 million at
December 31, 2002.
In the patent infringement matter involving True Position, Inc. and its
subsidiary, KSI, the parties are in the process of completing discovery on
liability issues, narrowing claims for consideration by the judge and drafting
dispositive motions, which are to be filed by the upcoming deadline in mid-May.
The court date for the trial of this matter is currently scheduled for September
22, 2003. This matter relates to all of the Company's geolocation products and
revenue. Potential costs and expenses, as well as the need to pay any damages
awarded in favor of the plaintiffs, could adversely affect the Company's
business, financial position, results of operations or cash flow.
17
ALLEN TELECOM INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
LEGAL DISCLAIMER:
Statements included in this Form 10-Q that 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,
success and timetable for new product development, including, products for 3G,
E911 and power amplification; the cost and outcome of pending litigation,
including, for example, a lawsuit filed by a competitor in the E911 geolocation
business claiming infringement by the Company of intellectual property rights;
the health and economic stability of the world and national markets; the cost
and availability of capital and financing to the Company and its customers; loss
or bankruptcy of one or more of the Company's customers, which could adversely
affect the Company's ability to make future sales or collect its accounts
receivable; the uncertain timing and level of purchases of both current products
and those under development for current and prospective customers of the
Company's products and services; the effective realization of inventory and
other working capital assets to cash; the impact of competitive products and
pricing in the Company's markets; the impact of changes in the market value of
pension fund assets held by, and the actuarial assumptions used by, the
Company's defined benefit pension plans; the ability of the Company to generate
future profits or to implement other tax planning strategies needed to utilize
the Company's tax loss carry forwards; changes in business conditions and/or
changes in assumptions that could result in goodwill impairment charges; the
impact of U.S. and foreign government legislative/regulatory actions, including,
for example, the scope and timing of E911 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; whether and when backlog will be
converted to customer sales; the impact, if any, on current or future sales,
earnings or financial condition of the Company resulting from the previously
announced agreement under which Andrew Corporation will acquire Allen Telecom;
and the Company's ability to consummate the merger with Andrew. Allen Telecom
Inc.'s Annual Report on Form 10-K and other Quarterly Reports on Form 10-Q may
contain additional details concerning these factors.
18
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2002. There has been no material change from the end of the
previous fiscal year to March 31, 2003.
ITEM 4 - CONTROLS AND PROCEDURES.
As of March 31, 2003 (the "Evaluation Date"), under the supervision and with the
participation of our management, including our Chief Executive Officer and our
Chief Financial Officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures, as required pursuant to
Rule 13a-14 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon this evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that, to the best of their knowledge as of the
Evaluation Date, our disclosure controls and procedures were effective to ensure
that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Additionally, our Chief Executive Officer and Chief Financial Officer have
determined that there have been no significant changes in our internal controls
or in other factors that could significantly affect these controls, subsequent
to the Evaluation Date.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(99.1) Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(99.2) Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On January 8, 2003, the Company filed a current report on Form 8-K under
Item 5, "Other Events", and Item 7 whereby it filed a press release, dated
January 8, 2003, characterizing sales and earnings for the fourth quarter
and full year 2002.
On February 6, 2003, the Company filed a current report on Form 8-K under
Item 5, "Other Events", and Item 7 whereby it filed a press release, dated
February 6, 2003, reporting sales and earnings results for the fourth
quarter and full year 2002.
19
PART II - OTHER INFORMATION
(continued)
(b) Reports on Form 8-K (continued)
On February 18, 2003, the Company filed a current report on Form 8-K under
Item 5, "Other Events", and Item 7 whereby it filed a press release, dated
February 18, 2003, reporting that the Company had signed a definitive
merger agreement with Andrew Corporation on February 17, 2003.
On February 27, 2003, the Company filed a current report on Form 8-K under
Item 5, "Other Events", and Item 7 whereby it filed the definitive merger
agreement with Andrew Corporation which had been signed on February 17,
2003.
On February 28, 2003, the Company filed a current report on Form 8-K under
Item 5, "Other Events", and Item 7 whereby it filed a press release, dated
February 28, 2003, reporting that it had indefinitely postponed its annual
meeting pending the consummation of the previously announced merger with
Andrew Corporation.
20
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 14, 2003 By: /s/ Robert A. Youdelman
------------------------------------
Robert A. Youdelman
Executive Vice President
(Chief Financial Officer)
Date: May 14, 2003 By: /s/ James L. LePorte, III
------------------------------------
James L. LePorte, III
Vice President Finance
(Chief Accounting Officer)
21
CERTIFICATION
ALLEN TELECOM INC.
I, Robert G. Paul, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allen Telecom Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
22
CERTIFICATION
ALLEN TELECOM INC.
(Continued)
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Robert G. Paul
-----------------------------------
Robert G. Paul
President
(Chief Executive Officer)
23
CERTIFICATION
ALLEN TELECOM INC.
(Continued)
I, Robert A. Youdelman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allen Telecom Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
24
CERTIFICATION
ALLEN TELECOM INC.
(Continued)
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Robert A. Youdelman
-----------------------------------
Robert A. Youdelman
Executive Vice President
(Chief Financial Officer)
25
EXHIBIT INDEX
ALLEN TELECOM INC.
Exhibit Number
(99.1) Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(99.2) Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
26