1
EXHIBIT 13
SEGMENT
SALES AND INCOME
(amounts in millions)
Product Line Sales 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------
Mobile Communications*
Systems Products $ 95.1 $ 76.1 $ 62.4 $ 51.3 $ 20.7
Site Management and Other
Non-Antenna Products 112.9 53.0 49.1 29.3 31.5
Mobile and Base Antennas 73.8 68.7 57.2 42.4 28.4
Frequency Planning, Systems Design
and Related Services 24.8 15.7 14.9 5.7 --
---------------------------------------------
306.6 213.5 183.6 128.7 80.6
- ----------------------------------------------------------------------------------
CENTRALIZED AUTOMOTIVE
EMISSIONS INSPECTIONS 8.8 2.8 2.7 .4 -
- ----------------------------------------------------------------------------------
Total Sales $ 315.4 $216.3 $186.3 $129.1 $ 80.6
- ----------------------------------------------------------------------------------
Operating Income 1995 1994 1993 1992 1991
Mobile Communications** $ 55.9 $ 39.9 $ 34.6 $ 34.9 $ 21.1
Centralized Automotive
Emissions Inspections (2.9) (1.2) (1.0) - -
Equity in Loss of JointVenture -- -- -- (.1) (.3)
---------------------------------------------
Operating Income 53.0 38.7 33.6 34.8 20.8
Financing Costs (1.8) (1.3) (2.2) (1.2) (.7)
General Corporate Expenses (3.4) (6.7) (6.8) (8.0) (11.5)
Income Before Taxes ---------------------------------------------
and Minority Interests $ 47.8 $ 30.7 $ 24.6 $ 25.6 $ 8.6
- ----------------------------------------------------------------------------------
* In 1995, the Company acquired on additional 40% interest in FOR.E.M.
S.p.A.; accordingly, the Company's sales include those of FOREM. and
its majority owned subsidiary, Mikom G.m.b.H., beginning in the second
quarter of 1995. In 1992, the Campany purchased Alliance
Telecommunications Corporation; accordingly, sales include those of
Alliance since the July 30, 1992 acquisition date.
** Includes amortization of goodwill in the amount of $2,087,000, $1,635,000,
$1,642,000 and $632,000 in 1995, 1994, 1993 and 1992, respectively.
14
2
CONSOLIDATED
[amounts in thousands, except per share data]
For the years ended December 31, 1995, 1994 & 1993 1995 1994 1993
Sales $ 315,377 $ 216,313 $ 186,371
COST AND EXPENSES:
Cost of sales 196,119 129,085 110,943
Selling, general and administrative expenses 52,614 46,362 40,710
Research and development and
new product engineering costs (Note 1) 17,006 8,865 7,886
INTEREST AND FINANCING EXPENSES:
Interest income 1,407 1,163 1,057
Interest expense (3,228) (2,457) (3,247)
------------------------------------------------
INCOME BEFORE TAXES AND MINORITY INTERESTS 47,817 30,707 24,642
PROVISION FOR INCOME TAXES (Note 7) (19,270) (10,973) (661)
------------------------------------------------
INCOME BEFORE MINORITY INTERESTS 28,547 19,734 23,981
MINORITY INTERESTS (3,027) (523) (518)
------------------------------------------------
Income from Continuing Operations 25,520 19,211 23,463
- ------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS (Note 9)
Income from discontinued operations 7,852 9,983 1,498
Spin-off transaction costs (733) -- --
Loss on disposal of discontinued operation -- -- (2,936)
-----------------------------------------------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 32,639 29,194 22,025
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES (Note 7) -- -- 2,102
- -----------------------------------------------------------------------------------------------------------
Net Income $ 32,639 $ 29,194 $ 24,127
- -----------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $ 32,639 $ 29,194 $ 21,947
- -----------------------------------------------------------------------------------------------------------
Earnings per Common Share
(Primary fully and diluted):
Income from continuing operations $ .95 $ .74 $.93
Discontinued operations:
Income from discontinued operations .30 .38 .06
Spin-off transaction costs (.03) -- --
Loss on disposal of discontinued operation -- -- (.13)
Cumulative effect of change in accounting for income taxes -- -- .10
-----------------------------------------------
Net Income $ 1.22 $ 1.12 $ .96
-----------------------------------------------
Average common and common equivalent
shares outstanding 26,900 26,100 22,900
- ------------------------------------------------------------------------------------------------------------
The Notes are an integral part of these statements.
15
3
CONSOLIDATED
BALANCE SHEETS
[amounts in thousands]
December 31, 1995 & 1994 1995 1994
Assets:
CURRENT ASSETS:
Cash and equivalents $ 15,706 $ 55,240
Accounts receivable, less allowance for doubtful accounts 1995, $1,232,000; 1994,$1,684,000 82,015 63,974
Inventories (Note 1) 70,152 58,316
Other current assets 9,941 661
-----------------------------
TOTAL CURRENT ASSETS 177,814 178,191
- -----------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST,
less accumulated depreciation and amortization (Note 1) 77,124 56,860
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Net investments in and advances to joint venture - 24,411
Investment in FOR.E.M. S.p.A - 8,458
Excess of cost over net assets of businesses acquired (Note 1) 68,310 56,525
Other assets (Note 3) 40,317 33,271
-----------------------------
Total Assets $ 363,565 $ 357,716
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
CURRENT LIABILITIES:
Notes payable and current maturities of long-term obligations (Note 2) $ 8,741 $ 154
Accounts payable 34,299 26,568
Accrued expenses (including accrued wages and commissions-
1995, $9,323,000; 1994, $7,422,000) 25,444 37,955
Income taxes payable (Note 7) 10,163 2,675
Deferred income taxes (Note 7) 5,796 2,899
-----------------------------
Total Current Liabilities 84,443 70,251
- -----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (Note 2) 47,058 44,910
Other Liabilities and Deferred Credits (Note 3) 21,687 18,374
-----------------------------
Total Liabilities 153,188 133,535
- -----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 5)
- -----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Note 4):
Common stock, par value $1.00; authorized - 50,000,000 shares; issued - 1995, 29,595,000;
1994, 29,146,000; outstanding - 1995, 26,560,000; 1994, 26,107,000 29,595 29,146
Paid-in capital 168,632 161,644
Retained earnings 34,948 56,902
Translation adjustments 102 23
Less: Treasury stock-common shares, at cost, 1995, 3,035,000; 1994, 3,039,000 shares (18,746) (7,479)
Unearned compensation (3,794) (4,310)
Minimum pension liability adjustment (360) (1,745)
-----------------------------
TOTAL STOCKERHOLDERS' EQUITY 210,377 224,181
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 363,565 $ 357,716
- -----------------------------------------------------------------------------------------------------------------------------------
The Notes are an integral part of these statements.
16
4
CONSOLIDATED
STATEMENTS OF CASH FLOWS
[amounts in thousands]
For the Years Ended December 31, 1995, 1994 & 1993 1995 1994 1993
Cash Flows from Operating Activities:
Income from continuing operations: $ 25,520 $ 19,211 $ 23,463
Accounting change -- -- 2,102
-----------------------------------------
25,520 19,211 25,565
Adjustments to reconcile income to net cash flow:
Depreciation and amortization of fixed assets 8,896 4,257 3,364
Amortization of goodwill 2,175 1,723 1,742
Amortization of capitalized software product costs 2,706 1,561 1,294
Other amortization 1,341 3,252 1,281
Deferred income taxes 7,041 (1,807) (925)
Changes in operating assets and liabilities:
Receivables (24,097) (3,534) (6,791)
Inventories (13,653) (1,393) (13,291)
Accounts payable and accrued expenses (4,162) 6,560 (6,672)
Income taxes payable (2,812) 16,401 (1,422)
Other, net (3,537) 397 1,876
---------------------------------------------
Cash (used) provided by operating activities (582) 46,628 6,021
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (16,829) (6,410) (6,466)
Centralized emissions inspection programs:
Program related expenditures (14,421) (36,746) (4,252)
Program payment received -- 37,261 --
Capitalized software product costs (4,483) (2,165) (1,912)
Proceeds from sale of automotive diagnostics and lease financing businesses -- 19,737 21,000
Sales and retirements of fixed assets 170 24 64
Investments in and loans to telecommunication ventures (1,077) (259) (2,838)
Acquisition of FOR.E.M. S.p.A., net of cash acquired (671) (8,458) -
---------------------------------------
Cash (used) provided by investing activities (37,311) 2,984 5,596
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net repavinnents of notes payable and long-term debt (4,888) (7,383) (1,661)
Dividends paid (3,942) (4,431) (4,023)
Cash distributed in spin-off transaction (4,002) -- --
Exercise of stock options 566 80 1,936
Treasury stock sold to employee benefit plans 1,435 854 671
----------------------------------------
Cash used by financing activities (10,831) (10,880) (3,077)
- ------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS 9,190 5,335 (1,792)
- -------------------------------------------------------------------------------------------------------------------------------
Total Company ( Decrease) Increase in Cash (39,534) 44,067 6,748
Cash at beginning of year 55,240 11,173 4,425
----------------------------------------
Cash at end of year $ 15,706 $ 55,240 $ 11,173
- ------------------------------------------------------------------------------------------------------------------------------
The Notes are an integral part of these statements.
17
5
CONSOLIDATED
[amounts in thousands]
For the Years Ended December 31, 1995, 1994 & 1993
Preferred Common Paid-in Retained Translation Treasury Unearned
Stock Stock Capital Earnings Adjustment Stock Compensation
Balance December 31, 1992 $ 2,300 $ 11,601 $ 156,164 $ 13,742 $ (1,303) $ (18,192) $ (4,973)
Net Income -- -- -- 24,126 -- -- --
Cash dividends -- -- -- (4,023) -- -- --
Preferrred stock redemption (2,300) 2,290 911 (1,174) -- -- --
Two-for-one stock split -- 14,436 (14,436) -- -- -- --
Conversion of convertible debentures -- 472 11,129 -- -- -- --
Exercise of stock options -- 165 1,883 -- -- (112) --
Treasury stock reissued, 55,088 common
shares, at cost -- -- 283 -- -- 388 --
Restricted shares issued, net -- 94 1,636 -- -- -- (1,730)
Remeasurement of restricted shares -- -- 770 -- -- -- (770)
Amortization of unearned compensation -- -- -- -- -- -- 1,281
Stock option tax benefits -- -- 1,649 -- -- -- --
Eliminate translation adjustment from
closed operation -- -- -- -- 1,569 -- --
Adjustment from translating foreign financial
statements into U.S. dollars -- -- -- -- (356) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1993 -- 29,058 159,989 32,671 (90) (17,916) (6,192)
Net Income -- -- -- 29,194 -- -- --
Cash dividends -- -- -- (4,431) -- -- --
Exercise of stock options -- 17 87 (24) --
Treasury' stock reissued, 54,504 common
shares, at cost -- -- 393 -- -- 461 --
Restricted shares issued, net -- 71 1,089 -- -- -- (1,159)
Remeasurement of restricted shares -- -- 44 -- -- -- (44)
Amortization of unearned compensation -- -- -- -- -- -- 1,723
Acceleration of restricted shares -- -- -- -- -- -- 1,362
Stock option tax benefits -- -- 42 -- -- -- --
Other -- -- -- (532) -- -- --
Adjustment from translating foreign financial
statements into U.S. dollars -- -- -- -- 113 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 -- 29,146 161,644 56,902 23 (17,479) (4,310)
Net Income -- -- -- 32,639 -- -- --
Cash dividends -- -- -- (3,942) -- -- --
Net assets distributed to Transpro (Note 9) -- -- -- (50,651) -- -- --
Exercise of stock options -- 72 463 -- -- 31 --
Conversion of convertible debentures -- 355 4,623 -- -- -- --
Treasury stock reissued, 61,781 common
shares, at cost -- -- 998 -- -- 437 --
Restricted shares issued, net -- 22 324 -- -- (1,735) (346)
Remeasurement of restricted shares -- -- 18 -- -- -- (18)
Amortization of unearned compenation -- -- -- -- -- -- 880
Stock option tax benefits -- -- 562 -- -- -- --
Adjustment from translating foreign financial
statements into U.S. dollars -- -- -- -- 79 -- --
----------------------------------------------------------------------------------
Balance December 31, 1995 $ -- $ 29,595 $ 168,632 $ 34,948 $ 102 $ (18,746) $ (3,794)
- ---------------------------------------------------------------------------------------------------------------------------------
The Notes are an integral part of these statements
18
6
NOTES
to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Accounting policies followed by the Company that materially affect the
determination of financial position and results of operations are described
below.
Accounting Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Basis of Consolidation: The Company's consolidated financial statements
include the accounts of all wholly owned and majority owned subsidiaries.
Investments in companies in which ownership interests range from twenty to
fifty percent and the Company exercises significant influence over operating
and financial policies are accounted for using the equity method. Other
investments are accounted for using the cost method. Intercompany accounts and
transactions have been eliminated. To facilitate preparation of financial
statements the Company's European operations are included in the consolidated
financial statements on a two-month delayed basis.
Cash and Cash Equivalents: Cash equivalents consist of temporary bank
deposits and money market instruments with an original maturity of three months
or less at the date of purchase. The Company invests its excess cash in bank
deposits, money market and tax-exempt securities which are afforded one of
the the two highest ratings by nationally recognized ratings firms.
Excess of Cost Over Net Assets of Businesses Acquired (Goodwill): The
excess of investments in consolidated subsidiaries over the net asset value at
acquisition is being amortized on a straight-line basis over periods not
exceeding forty years. The Company's policy is to evaluate the excess of cost
over the net assets of businesses acquired based on an evaluation of such
factors as the occurrence of a significant adverse event or change in the
environment in which the business operates or if the expected future net cash
flows (undiscounted and without interest) would become less than the carrying
amount of the asset. An impairment loss would be recorded in the period such
determination is made based on the fair value of the related businesses. The
Company's existing goodwill relates principally to the Company's Mobile
Communications segment.
Foreign Currency Translation: Assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars at the current rate of
exchange, while revenues and expenses are translated at the average exchange
rate during the year. Adjustments from translating foreign subsidiaries'
financial statements are excluded from the results of operations and are
reported as a separate component of stockholders' equity.
Valuation of Inventories: The Company values inventories including
materials, labor and overhead at the lower of cost (first-in, first-out) or
market. Inventories consisted of the following at December 31, 1995 and 1994
(amounts in thousands):
1995 1994
Raw material $36,809 $29,581
Work-in-process 21,310 19,433
Finished goods 12,033 9,302
-----------------
$70,152 $58,316
===================================
The Company's inventories relate to its Mobile Communications segment.
Certain of these inventories pertain to the production of sophisticated
equipment which could be subject to technological obsolescence. The Company
maintains and periodically revises reserves for excess inventory based on the
most current information available of anticipated usage requirements.
Property, Plant ainind Equipment: Property, plant and equipment is
recorded at cost, less accumulated depreciation and amortization. Land
improvements, buildings and machinery and equipment are depreciated over their
estimated useful lives under the straight-line method. The provision for
amortization of leasehold improvements and assets held under capital leases is
based on the term of the lease or the estimated useful lives, whichever is
shorter. Property, plant and equipment consisted of the following at December
31, 1995 and 1994 (amounts in thousands):
1995 1994
Land and improvements $ 4,241 $ 4,207
Buildings 22,370 30,004
Machinery and equipment 51,984 57,775
Leasehold improvments 3,066 2,670
Land and buildings under capital lease 16,375 --
------------------
98,036 94,656
Less accumulated depreciation
and amortization (20,912) (37,796)
------------------
$77,124 $56,860
- -----------------------------------------------------------
Computer Software Costs: The Company's policy is to capitalize costs
incurred in creating computer software products once technological feasibility
is established and to amortize such costs over periods ranging from two to ten
years. The Company also capitalizes costs incurred in the development of
computerized databases, which are amortized over periods of ten to twenty
years. In 1995,1994 and 1993, approximately $4,483,000, $2,165,000 and
$1,912,000, respectively, of these costs were capitalized and approximately
$2,706,000, $1,561,000 and $1,294,000, respectively, were amortized.
19
7
NOTES
to Consolidated Financial Statements
Software License Revenue: Revenues from software licenses for the
Company's frequency planning, Systems design and related services business are
recognized upon delivery of the software if vendor obligations are
insignificant and if collectibility is probable. Revenues from post-contract
support that are significant and/or unbundled with regards to the initial
licensing fee are recognized ratably over the post-contract period.
Deferred Start-Up Costs: Pre-operating costs incurred in connection
with the construction of centralized automotive emission testing program
facilities under long-term contracts with governmental entities are deferred.
Once operations have begun, these costs are amortized by the straight-line
method over the respective lives of the contracts, which currently range from
three to ten years.
Research and Development Costs: Expenditures relating to the
development of new products and processes, including significant improvements
to existing products, are expensed as incurred. Research and development
expenses were $13,453,000, $7,700,000 and $5,327,000 in 1995,1994 and 1993,
respectively. In addition, the Company incurred other engineering expenses
relating to new product development (that do not meet the accounting definition
of "Research and Development") in the amount of $3,553,000, $1,165,000 and
$2,559,000 in 1995, 1994 and 1993, respectively.
Stock Based Compensation: The Company accounts for stock based
compensation awards pursuant to Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," which prescribes the use of the
intrinsic value based method. See Note 4 for additional information.
Income Taxes: The Company accounts for income taxes in accordance
with the provisions of Statement of Financial Accounting Standard No. 109
("SFAS 109"), "Accounting for Income Taxes." SFAS 109 has been applied
prospectively from the January 1, 1993 adoption date. Under SFAS 109, deferred
income taxes are recorded to reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end.
Earnings Per Common Share: The primary earnings per common share
calculations are determined after deducting dividends on outstanding preferred
stock (prior to redemption in 1993) and are based upon the weighted average
number of common and common equivalent shares outstanding. The calculations
also include, if dilutive, the incremental number of common shares issuable on
a pro forma basis upon the exercise of employee stock options, assuming the
proceeds are used to repurchase outstanding shares at the average market price
during the year. The calculations of fully diluted earnings per common share
begin with the primary calculations but further reflect, if dilutive, the pro
forma effect of the conversion of the then outstanding preferred stock and
convertible debentures (redeemed in 1995 and 1993) into common stock at the
beginning of the year and such incremental stock option shares should the
market price of common stock at year-end exceed the average price. This
calculation resulted in no reportable dilution for the years 1995, 1994 and
1993.
Other: The 1994 and 1993 financial statements have been reclassified
to conform to the 1995 presentation.
Note 2: Financing
Long-term obligations consisted of the following (amounts in thousands):
1995 1994
Foreign credit agreement borrowings $ 6,687 $ --
Convertible subordinated debentures -- 4,970
Industrial revenue bonds:
7.5% bonds -- 750
Floating rate bonds due 2015 - 2025 12,000 25,000
Note payable to insurance company 15,000 15,000
Capital lease obligation 16,375 --
Other 115 326
Unamortized debt expense (701) (990)
--------------------
49,476 45,064
Less current maturities (2,418) (154)
--------------------
$ 47,058 $ 44,910
=============================================================
The Company maintains a domestic revolving credit agreement in the
aggregate amount of $147,000,000 expiring December 18, 1999. Of this total,
$60,000,000 has been specifically designated for use by the Company's
wholly-owned subsidiary, MARTA Technologies, Inc. ("MARTA"), and an additional
$12,000,000 has been designated for the issuance of letters of credit.
Interest may be determined on a LIBOR or prime rate basis at the Company's
option. The Company has agreed to pay a commitment fee varying from 1/8 - 1/2
of 1% per annum on the unused portion of the commitment. At December 31, 1995,
there were no outstanding borrowings under this agreement.
The Company also has short-term credit lines utilized bv its European
subsidiaries. At year-end, direct borrowings under these agreements totaled
$6,323,000; an additional $959,000 remained unused. These credit lines, due to
expire November 10, 1996, bear interest based on LIBOR. In late 1995, the
Company completed negotiations with a consortium of international banks to
obtain additional credit lines. Beginning in fiscal 1996, such credit lines will
total $11,300,000.
Foreign credit agreement borrowings indude long-term arrangements at
fixed and variable rates with the Industry' Ministry of Italy, totaling
$1,832,000 (due 1996 - 2000) and $1,271,000 (due 1998 - 2009), respectively,
and variable rate borrowings with various international banks of $3,584,000
(due 1996 - 2003). Further, two of the aforementioned arrangements are mortgage
notes, in which the Company has pledged the respective land and buildings as
collateral. These facilities had an aggregate net book value of $9,476,000 at
December 31, 1995. During 1995, the average interest rate for all foreign
credit arrangements approximated 5.78%.
20
8
NOTES
to Consolidated Financial Statements
In May, 1995, the Company called for the redemption of the remaining
Convertible Subordinated Debentures, issued in 1992 in connection with the
acquisition of Alliance Telecommunications Corporation; such debentures were
converted into 351,834 shares of the Company's common stock.
The floating rate industrial revenue bonds bear interest at rates based
upon a short-term tax exempt bond index, as defined in the bonds, and which
approximated 5.07% at December 31, 1995. The average interest rate for all
industrial revenue borrowings approximated 3.85% during 1995.
At December 31, 1995, the Company had outstanding a $15,000,000
borrowing from an insurance company which bears interest at a fixed rate of
8.13% per annum, and is due in installments of $5,000,000 in each year 2001
through 2003. The Note Agreement contains covenants and restrictions similar
to the Company's revolving credit agreement.
In connection with one of its emissions inspection programs, the
Company has entered a lease agreement under which it will lease the land and
inspection facilities for an initial lease term equal to the program life of
ten years. The lease agreement contains an extension agreement such that if the
inspection program is extended, the lease is automatically extended to run
concurrently with the program life. For financial reporting purposes the lease
has been classified as a capital lease; accordingly, an obligation and related
asset of approximately $16,375,000, have been recorded at December 31,1995.
The aggregate maturities of long-term obligations for the years 1996
through 2000 are as follows (amounts in thousands):
1996 1997 1998 1999 2000
$2,418 $2,398 $2,372 $2,247 $2,404
- -----------------------------------------------------------------------------
The Company's borrowing agreements include various restrictive
covenants as to the amount and type of indebtedness, investments and
guarantees, maintenance of net worth, the purchase or redemption of the
Company's shares and the disposition of assets of the Company not in the
ordinary course of business.
Note 3: Other Assets and Liabilities
Other assets consisted of the following (amounts in thousands):
1995 1994
Capitalized computer software and database files $12,645 $10,869
Deferred start-up and pre-operating costs 6,100 5,238
Investment in specialty rubber products business 4,344 4,344
Unliquidated assets of discontinued operations 3,282 2,227
Investement in telecommunication company, at cost 2,778 1,701
Prepaid pension costs 2,244 1,481
Other 8,924 7,411
-----------------
$40,317 $33,271
=======================================================================================
Other liabilities and deferred credits consisted of the following
(amounts in thousands):
1995 1994
Minority interests $ 7,376 $ 2,148
Deferred income taxes 5,549 1,596
Long-term pension liabilities 3,637 6,289
Accrued postretirement benefits 1,599 3,112
Casualty self insurance reserves 860 2,334
Deferred compensation liabilities 207 763
Other 2,459 2,132
---------------
$21,687 $18,374
=====================================================
Note 4: Capital Stock
The Company is authorized to issue up to 50,000,000 shares of common stock,
$1.00 par value, and 3,000,000 shares of preferred stock, without par value, in
one or more series. In addition, the Company can fix the powers, designations,
preferences and rights of each of the preferred stock series.
On September 29,1995, the Company completed the spin-off of its truck
products business (See Note 9). In connection therewith, the Company's stock
plans were amended to reflect the dilution caused by the Spin-off. Where
appropriate, all share and per share data have been amended to reflect this.
The Company has three stock plans, the 1982 Stock Plan, the 1992 Stock
Plan and the 1994 Non-Employee Directors Stock Option Plan. The 1982 Stock Plan
was terminated in 1992 and was replaced by the 1992 Stock Plan; however,
certain stock options and restricted shares of the Company's Common Stock under
the 1982 Stock Plan were awarded prior to the termination and remain
outstanding, The Company awarded 273,025 restricted shares under the 1982 Stock
Plan, and at December 31, 1995, 240,816 of these restricted shares have vested.
Vesting of such shares is subject to the restriction that the Company reports
net income per common share, before extraordinary and certain other
nonoperating items, of 10% or more in excess of the net income target for the
most recent preceding year during which restricted shares vested. The remaining
32,209 shares will vest on April 1,19%.
The Company's 1992 Stock Plan provides for the granting of options and
restricted shares of Common Stock to key employees. In 1995, the stockholders
approved an amendment to increase the number of shares available from
1,000,000 to 2,000,000 shares, such shares were subsequently adjusted for the
Spin-off. At December 31, 1995, the total number of shares for which the
Company may grant options and award restricted shares of the Company's Common
Stock cannot exceed 2,228,221 shares, subject to certain adjustments. Options
are awarded at a price not less than the fair market value on the date the
option is granted. Options may contain stock appreciation rights under which
the Company, upon request of the optionee, may at its discretion, purchase the
exercisable portion of an option for cash and/or shares at a price equal to the
difference between the option price and the market price of
21
9
NOTES
to Consolidated Financial Statements
the shares covered by such portion of the option in lieu of issuing shares upon
exercise. The Company made no charges to income in connection with the
exercise of stock appreciation rights in 1995,1994 and 1993.
Restricted stock awards made to date under the 1992 Stock Plan
were issued at no cash cost to the recipients; however, such employees have
agreed to forego salary increases and new stock option grants for a period of
two years, other than for exceptional promotions. Generally, the restricted
shares vest in 25% increments in the seventh, eighth, ninth and tenth year from
the year of award. An accelerated vesting schedule may be triggered if certain
performance targets are achieved. Specifically, the vesting of 50% of such
shares may be accelerated (but not sooner than three years from the award year)
based upon the average sale price of the Company's stock price during a period
of 91 consecutive calendar days exceeding specified target levels. The
remaining 50% of such shares may be accelerated based on average earnings per
common share over three consecutive fiscal years exceeding specified target
levels beginning with the award year. At December 31, 1995, the Company had
awarded 420,758 restricted shares, inducing 15,000 shares awarded in 1995,
31,202 shares awarded in 1994, and 133,500 shares awarded in 1993. During 1995,
34,870 restricted shares were canceled. To date, the Company has recognized the
vesting of 216,068 restricted shares on an accounting basis, of which, 100,475
shares were issued to certain restricted shareholders who qualified for
accelerated vesting in accordance with stock price targets set forth in the
restricted stock agreements under the 1992 Stock Plan.
Restricted shares are subject to forfeiture in certain circumstances
as defined in the Plans. Unearned compensation, with respect to the 1992 Stock
Plan awards, representing the fair value of the restricted shares at date of
award, is charged to income over a ten-year period or over the period of actual
vesting whichever period is shorter. The amount of unearned compensation
expense for the restricted stock awarded under the 1982 Plan is charged to
income based on the fair market value of such shares at the time the net income
targets are met. Compensation expense with respect to all restricted shares
amounted to $391,000 in 1995, $2,794,000 in 1994 and $1,183,000 in 1993.
In 1994, the stockholders of the Company approved the adoption
of the 1994 Non-Employee Directors Stock Option Plan. The total number of
shares to be issued under this plan may not exceed 278,528 shares. Each year,
each Non-Employee Director who previously has not been employed by the Company
will autumatically receive an option to purchase 1,000 shares of Common stock
("Formula Awards"). No Non-Employee Director who previously has been employed
by the Company is eligible to receive Formula Awards. However, Non-Employee
Directors who have been previously employed by the Company are eligible to
receive discretionary awards of options to purchase shares of common stock. At
December 31, 1995, the Company had granted options for 242,874 shares under
this Plan which includes 12,254 shares awarded during 1995 and 230,620 shares
awarded in 1994. The remaining 34,654 shares are reserved for future awards.
In addition to the 1994 Non-Employee Directors Stock Option Plan, the
Board of Directors granted to non-employee directors options to purchase 90,898
shares of common stock held in treasury at $5.25 per share. During 1995, 1994
and 1993, 9,800, 2,000 and 17,600 options, respectively, were exercised under
the directors stock option plan. At December 31, 1995, options for 61,498
shares remain outstanding and are all exercisable. These options expire in
1999.
With respect to employees of the Company, options to purchase 631,603
shares were exercisable on December 31, 1995 and 1,181,405 shares were
available for grant of future options. Options outstanding at December 31, 1995
are exercisable at various dates through the year 2005. Option activity for the
three years ended December 31, 1995 is summarized as follows:
Number Option
of Shares Price Range
Balance outstanding December 31, 1992 1,031,062 $ 4.66 to $12.57
Granted 38,010 $15.13 to $25.81
Exercised (345,710) $ 4.66 to $11.93
Terminated and canceled (18,150) $ 5.45 to $ 7.84
------------------------------
Balance outstanding December 31, 1993 705,202 $ 4.66 to $25.81
Granted 415,500 $15.75 to $21.88
Exercised (19,301) $ 4.66 to $ 7.84
Terminated and canceled (4,000) $ 12.00
------------------------------
Balance outstanding December 31, 1994 1,097,401 $ 4.66 to $25.81
Granted 301,700 $22.00 to $28.00
Spin-off adjustement 141,956 $ 4.18 to $20.76
Exercised (80,806) $ 4.18 to $22.25
Terminated and canceled (72,325) $ 7.84 to $23.13
------------------------------
Balance outstanding December 31, 1995 1,387,926 $ 4.18 to $28.00
- ------------------------------------------------------------------------------
At December 31, 1995 and 1994, 2,847,859 and 1,368,924 common shares,
respectively, were reserved for outstanding stock options and for future
grants of stock options and restricted shares. In addition, 125,000 shares of
Series B Junior Participating Preferred Stock are authorized for issuance under
the Company's Stockholder Rights Plan.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.123 ("SFAS 123"), Accounting for
Stock Based Compensation, which established accounting and reporting standards
for stock based employee compensation plans effective in 1996. SFAS 123
encourages entities to adopt the new method ("fair value based method") of
accounting; however, it also allows an entity to continue to measure
compensation cost prescribed under existing rules ("intrinsic value based
method"). Such entities who elect to remain on this method must make certain
pro forma disclosures in fiscal year 1996 as if the new fair value method had
been applied. At this time, the Company does not expect to adopt the
recognition provisions of SFAS 123 and will adopt the required disclosures in
1996.
22
10
NOTES
to Consolidated Financial Statements
Note 5: Commitments and Contingencies
The Company's leases consist primarily of facilities and equipment and expire
principally between 1996 and 2005. A number of leases require that the Company
pay certain executory costs (taxes, insurance and maintenance) and contain
renewal and purchase options. Annual rental expense for operating leases
included in results from continuing operations approximated $4,600,000 in 1995,
$3,000,000 in 1994, and $3,900,000 in 1993. Future minimum payments under
noncancelable leases as of December 31, 1995 were as follows (amounts in
thousands):
Operating Capitalized
Leases Lease
1996 $ 4,470 $ 2,450
1997 3,370 2,450
1998 2,670 2,450
1999 2,220 2,450
2000 2,050 2,450
Thereafter 6,730 12,250
-------------------------
Total minimum lease payments $21,510 24,500
-------
Less: amount representing interest (8,125)
--------
Present value of future minimum lease
payments including current maturities of $1,181 $16,375
- ------------------------------------------------------------------
The Company is self insured for health care, workers compensation,
general liability and product liability up to predetermined amounts above which
third party insurance applies. The Company is contingently liable to insurance
carriers under its workmen's compensation and liability policies and has
provided a letter of credit in the amount of $1,982,000.
Various legal actions are pending against or involve the Company and its
subsidiaries with respect to such matters as product liability and casualty
claims. In the opinion of management, after review and consultation with
counsel, the aggregate liability, if any, that ultimately may be incurred in
excess of amounts already provided should not have a material adverse effect on
the consolidated financial position or results of operations of the Company.
In connection with the sale of its former specialty rubber products
operations and spin-off of its Truck Products business, the Company remains as
guarantor or remains contingently liable under certain long-term leases or other
obligations assigned to the purchasing/spun-off company.
The Company has a Key Employee Severance Policy and has entered into
severance agreements with senior key employees in order to provide financial
assistance if employment with the Company is terminated under the
circumstances set forth in the policy and the agreements. The policy and
agreements provide for formalized severance benefits in the event of
non-voluntary termination (other than for "Cause" or "Disability") before or
after a "Change in Control" of the Company or voluntary termination for "Good
Reason" after a "Change in Control," all as defined.
The Company's Centralized Emissions testing business continues to be
hampered by an unsettled political climate and various program implementation
problems. For the current status of these programs, see the "Centralized
Automotive Emissions Inspection" section of the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 33 of this
Annual Report.
The Company is subject to federal, state and local laws designed to
protect the environment and believes that, as a general matter, its policies,
practices, and procedures are properly designed to reasonably prevent risk of
environmental damage and financial liability to the Company. The Company has
been named as a potentially responsible party under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") with
respect to alleged environmental conditions at one industrial site. This action
was dismissed on a motion for summary judgment, and the dismissal has been
appealed to the United States Court of Appeals for the Sixth Circuit. In
addition, the Company settled one environmental matter in 1995 for
approximately $70,000, and has submitted a remedial action plan to the Michigan
Department of Natural Resources with respect to one other site. The Company
believes it is reasonably possible that environmental related liabilities may
exist with respect to one industrial site formerly occupied by the Company.
Based upon environmental site assessments and the remedial action plan
discussed above, the Company believes that the cost of any potential
remediation, for which the Company may ultimately be responsible, will not have
a material adverse effect on the financial position, results of operations or
liquidity of the Company.
Note 6: Pension and Employee Benefit Plans
The Company has noncontributory pension plans covering the majority of its
full-time employees. Plans covering salaried employees provide benefits that
are based on years of service and compensation during the ten-year period prior
to retirement, while plans covering hourly employees typically provide benefits
based on specified amounts for each year of service. Domestic pension costs are
funded in compliance with the requirements of the Employee Retirement Income
Security Act of 1974, as amended, as employees become eligible to participate,
generally upon employment.
23
11
NOTES
to Consolidated Financial Statements
Net periodic pension cost of continuing operations for the Company's
plans included the following components (amounts in thousands):
1995 1994 1993
Service cost benefits earned
during the year $ 926 $ 1,311 $ 1,610
Interest cost on the projected
benefit obligation 2,487 3,282 3,196
Actual income on plan assets (5,781) (1,469)
Settlement (gains) costs (2,135) 35 549
Net amortization and deferral 3,193 (2,050) 4,642
------------------------------
Net periodic pension (benefit) cost (1,310) 1,109 2347
Less allocated to discontinued
operations -- (414) (977)
-------------------------------
$(1,310) $ 695 $ 1,370
In 1995, the Company experienced a settlement gain in the
amount of approximately $2,208,000 ($1,325,000 after related deferred income
taxes); this net gain was credited to retained earnings in connection with the
Spin-off. (See Note 9).
Plan assets consist principally of equity securities (including 120,000
common shares of the Company) and investments in the separate accounts and
general funds of insurance companies. The following tables set forth the plans'
combined funded status, principally at December 31, 1995 and 1994 (amounts in
thousands):
Plans Whose Plans Whose
Assets Accumulated
Exceed Benefits
Accumulated Exceed
Benefits Assets
1995:
Actuarial present value of benefit obligations:
Vested benefits $ 17,564 $ 9,870
Nonvested benefits 558 94
-------------------------
Accumulated benefit obligation 18,122 9,964
Effect of projected future compensation levels 1,384 --
-------------------------
Projected benefit obligations 19,506 9,964
Plan assets at fair market value 20,860 5,622
-------------------------
Projected benefit obligation less than (in excess of)
plan assets 1,354 (4,342)
Loss due to actual experience varying from
actuarial assumptions 1,207 606
Prior service cost not yet recognized in pension cost (141) 156
Transition liability (asset) on adoption of new
accounting standard to be recognized in the future (330) 15
Adjustment required to recognize minimum liability -- (777)
---------------------------
Prepaid (accrued) pension cost $ 2,090 $ (4,342)
- -----------------------------------------------------------------------------------
Plans Whose Plans Whose
Assets Accumulated
Exceed Benefits
Accumulated Exceed
Benefits Assets
1994:
Actuarial present value of benefit obligations:
Vested benefits $ 22,922 $ 15,783
Nonvested benefits 451 314
-------------------------
Accumulated benefit obligation 23,373 16,097
Effect of projected future compensation levels 1,930
-------------------------
Projected benefit obligations 25,303 16,097
Plan assets at fair market value 27,677 10,577
-------------------------
Projected benefit obligation less than (in excess of)
plan assets 2,374 (5,520)
(Gain) loss due to actual experience varying from
actuarial assumptions (959) 2,608
Prior service cost not yet recognized in pension cost (185) 549
Transition liability (asset) on adoption of new
accounting standard to be recognized in the future (611) 76
Adjustement required to recognize minimum liability -- (3,233)
-------------------------
Prepaid (accrued) pension cost $ 619 $ (5,520)
- ---------------------------------------------------------------------------------
Assumptions used in determining pension cost for the plans are:
1995 1994
Discount rate 7 1/4% - 8% 7 1/2% - 10%
Expected rate of increase in compensation 5 1/2% 5 1/2%
Expected long-term rate of return on plan assets 9% 9%
The discount rates used by the Company in 1995 are 7 1/4% for all U.S.
pension plans and 7 1/2% and 8% (the termination rate) for its Canadian plans
which will be terminated in 1996.
The Company provides health care and life insurance benefits for
certain retired employees who reach retirement age while working for the
Company. The components of the expense for postretirement health care and life
benefits from continuing operations are as follows (amounts in thousands);
1995 1994 1993
Net periodic cost:
Service cost benefits attributed to
service during peried $ 12 $ 182 $ 222
Interest cost on accumulated post-
retirement benefit obligation 108 348 417
Amortization of (gain) loss (7) 51
---------------------------
Net postretirement benefit cost $ 113 $ 581 $ 639
Less allocated to discontinued
operations -- (451) (433)
---------------------------
$ 113 $ 130 $ 206
- ------------------------------------------------------------------------
24
12
NOTES
to Consolidated Financial Statements
The components of the accumulated postretirement benefit obligation
(all of which are unfunded) are as follows (in thousands):
1995 1994 1993
Retirees $ 1,173 $ 1,742 $1,562
Fully eligible active plan participants 78 123 286
Other active plan participants 302 1,346 3,965
Unrecognized net gain (loss) 46 (99) (944)
Accumulated postretirement benefit -------------------------------
obligation $ 1,599 $ 3,112 $ 4,869
- ----------------------------------------------------------------------------
The actuarial calculation assumes a 13.7% increase in the health care
cost trend rate for 1995 (14.1% in 1994 and 14.6% in 1993). The assumed rate
decreases approximately .5% per year through the 20th year to 6.5% and remains
constant beyond that point. The health care cost trend rate has a significant
effect on the amounts reported. For example, a one percentage point increase in
the health care cost trend rate would increase the accumulated postretirement
benefit obligation by $89,000 and increase net periodic cost by $8,000. The
weighted average discount used in determining the accumulated postretirement
benefit obligation was 7.25% in 1995, 8.25% in 1994 and 7.25% in 1993,
respectively. In addition, the Company negotiated and modified certain
postretirement pension obligations in prior years which resulted in actuarially
based net gains. The Company reported a gain of $1,855,000 (of which,
$1,365,000 was included in income from discontinued operations) and $580,000
(all of which is included in income from discontinued operations) in 1994 and
1993, respectively.
The Company had a deferred bonus plan for select key management
employees, including officers, which was terminated as of the end of 1994. The
related bonus payments are paid ratably over the succeeding five years in cash,
restricted shares of the Company's Common Stock, pursuant to the 1992 Stock
Plan, or a combination thereof and may be subject to forfeiture in certain
circumstances. As a result of the plan's cessation, the Company continues to
pay the outstanding bonus awards over the remaining vesting terms. The bonus
awards accrued for 1994 and 1993 were $485,000 and $463,000, respectively.
Bonus awards for 1994 are to be paid 50% in restricted stock and 50% in cash.
Bonus awards for 1993 and 1992 are to be paid 60% in restricted stock and 40%
in cash; all prior awards were earned in cash.
Note 7: Income Taxes
Information with respect to income taxes in continuing operations is as
follows (amounts in thousands):
1995 1994 1993
Provision (Benefit) for income taxes:
Current:
Federal $ 3,936 $ 11,342 $ --
Foreign 7,323 -- 121
State and local 970 1,438 1,465
---------------------------------
12,229 12,780 1,586
---------------------------------
Deferred:
Federal 5,876 (1,807) (1,050)
Foreign 868 -- --
State and local 297 -- 125
---------------------------------
7,041 (1,807) (925)
---------------------------------
$ 19,270 $ 10,973 $ 661
---------------------------------
Income before taxes and minority
interests:
Domestic $ 33,012 $ 34,098 $ 28,887
Foreign 14,805 (3,391) (4,425)
---------------------------------
$ 47,817 $ 30,707 $ 24,642
- -------------------------------------------------------------------------------
A reconciliation of the provision for income taxes at the Federal
statutory rate of 35% to the reported tax provisions is as follows (amounts in
thousands):
1995 1994 1993
Provision computed at the Federal
statutory rate $ 16,736 $ 10,747 $ 8,624
State and local income taxes, net
of Federal income tax benefit 824 935 1,033
Net higher (lower) tax rates on
foreign income 4,166 (471) (682)
Benefit of foreign sales
corporation (1,523) (434) --
Tax benefit from utilization of U.S.
net operating loss carryforward
to reduce income tax expense -- -- (7,202)
Tax benefit from recognition of future
benefit of U.S. net operating loss
carry forward - -- -- (1,050)
Impact of minority interests (1,059) (183) (181)
Other 126 379 119
--------------------------------------
$ 19,270 $ 10,973 $ 661
- ---------------------------------------------------------------------------------------
25
13
NOTES
to Consolidated Financial Statements
The following table summarizes the Company's total provision (benefit)
for income taxes (amounts in thousands):
1995 1994 1993
Continuing operations $ 19,270 $ 10,973 $ 661
Discontinued operations 4,540 6,742 2,822
Cumulative effect of
accounting Change -- -- (2,102)
Tax Benefit of carry-forward
allocated to goodwill -- (1,330) (6,160)
Allocated to equity:
Stock options (509) (42) (1,649)
Pension gain (loss) from business
disposition and other
pension items 1,164 (940) --
-------------------------------------
$ 24,465 $ 15,403 $ (6,428)
- -----------------------------------------------------------------------------
The components of deferred tax assets (liabilities) are comprised of
the following as of December 31, 1995 and 1994 (amounts in thousands):
1995 1994
Gross deferred tax assets:
Inventory $ 3,732 $ 3,545
Pensions and deferred compensation 1,838 4,523
Tax credit carryforwards 2,986 2,907
Product warranty claims 861 1,696
Other 2,067 1,985
----------------------
11,484 14,656
----------------------
Gross deferred tax liabilities:
Intangible Assets (6,820) (4,981)
Depreciation (1,082) (2,989)
Unremitted foreign earnings (2,154) (4,721)
Plant closings and costs of
discontinued operations (1,719) --
Deferred start-up costs (1,811) --
Other (8,355) (6,460)
----------------------
(21,941) (19,151)
----------------------
Net deferred tax liabilities $(10,457) $ (4,495)
- --------------------------------------------------------------------
Deferred tax assets and (liabilities) are recorded in the consolidated
balance sheet as follows (amounts in thousands):
1995 1994
Other current assets $ 888 $ --
Current liabilities - deferred income taxes (5,796) (2,899)
Other liabilities and deferred credits (5,549) (1,596)
-------------------------
$ (10,457) $ (4,495)
- -----------------------------------------------------------------------------------
During 1995 and 1994, general business tax credits of approximately
$359,000 and $300,000, respectively, generated in the respective year, were
used to reduce the provision for income taxes. None were utilized in 1993. At
December 31, 1995, the Company has available business tax credits in the
aggregate amount of approximately $944,000 to reduce future federal income tax
liabilities; such tax credits expire during the period 2008 through 2010. The
Company also has alternative minimum tax credits in the amount of $2,042,000
available to reduce future federal income tax liabilities.
United States income taxes are not provided on undistributed earnings
of the Company's foreign subsidiaries because of the intent to reinvest these
earnings. The amount of undistributed earnings which are considered to be
indefinitely reinvested is approximately $3,600,000 at December 31, 1995. While
the amount of federal income taxes, if such earnings are distributed in the
future, cannot now be determined it is expected such taxes may be reduced by
tax credits and other deductions.
The Internal Revenue Service ("IRS") is currently auditing the
Company's tax returns filed for years 1991 and 1992. The last completed audit
of the Company's U.S. tax returns by the IRS covered income tax returns through
1980.
Note 8: Industry Segment and Geographic Data
Segment sales and income, identifiable assets, capital expenditures and
depreciation and amortization by industry segment are presented in the charts
on pages 32 to 35 of this Annual Report and are an integral part of these
statements. The distribution of the Company's geographic operations is as
follows (amounts in thousands):
1995 1994 1993
Sales and Income
Sales:
United States $ 254,031 $ 211,237 $ 180,083
Canada 6,112 2,068 445
Europe 55,234 3,008 5,843
------------------------------------
$ 315,377 $ 216,313 $ 186,371
- -------------------------------------------------------------------------------
Operating Income:
United States $ 37,764 $ 38,896 $ 33,774
Canada (56) 33 (104)
Europe 15,304 (256) (95)
------------------------------------
53,012 38,673 33,575
Financing costs (1,821) (1,294) (2,190)
General corporate expenses (3,374) (6,672) (6,743)
------------------------------------
$ 47,817 $ 30,707 $ 24,642
- -------------------------------------------------------------------------------
Assets
United States, including Mexican
Maquiladora $ 282,439 $ 339,135 $ 311,726
Canada 6,700 8,835 10,225
Europe 74,426 9,746 2,687
------------------------------------
$ 363,565 $ 357,716 $ 324,638
- -------------------------------------------------------------------------------
26
14
NOTES
to Consolidated Financial Statements
Export sales of continuing operations were $98,205,000, $62,175,000 and
$48,260,000 in 1995, 1994 and 1993, respectively. Sales and transfers among
industry segments of the Company were not significant in any year presented.
The aggregate net currency transaction and translation amounts in
income from continuing operations included a gain of $34,000 in 1995 and losses
of $32,000 and $47,000 in 1994 and 1993, respectively.
Note 9: Acquisitions and Dispositions
On September 8,1995, the Company's Board of Directors declared a
spin-off distribution of 100% of the common shares of a newly formed wholly
owned subsidiary, TransPro, Inc. ("TransPro") to the Company's common
shareholders of record at the close of business on September 29, 1995 (the
"Spin-off"). Common shares were distributed on the basis of one share of
TransPro common stock for every four shares of the Company's common stock.
Prior to the Spin-off, the Company contributed to TransPro cash, the ownership
interests in the net assets and liabilities of its Crown and G&O Manufacturing
Company divisions and the stock of AHTP II, Inc. and Allen Heat Transfer
Products, Inc., which owned the Company's 50% partnership joint venture
interest in GO/DAN Industries ("GDI"). These entities comprised the Company's
Truck Products Business (the "Business"). Following the distribution, TransPro
became an independent, publicly traded corporation.
On September 29, immediately prior to the Spin-off, the Company caused
GDI to redeem the remaining ownership interest from the Company's other joint
venture partner, Handy & Harman, thereby making GDI an indirect, wholly owned
partnership of the Company Handy & Harman received $24,750,000 in cash
consideration for its interests in GDI. TransPro financed its additional
investment in GDI through borrowings under the term loan portion of its new
credit facility.
In connection with the Spin-off, the Company has presented the Business
as a discontinued operation in the Consolidated Statements of Income. The
Company charged the net assets transferred to TransPro (which includes GDI on a
fully consolidated basis as a result of the aforementioned redemption on
September 29,1995) against its retained earnings. A summary of the net assets
distributed is as follows (amounts in thousands):
Cash $ 4,002
Accounts receivable 41,650
Inventories 46,963
Other current assets 3,728
Property, plant and equipment 36,186
Other assets 7,590
Accounts payable and accrued expenses (35,552)
Long-term debt (45,666)
Other liabilities (8,250)
---------
$ 50,651
- ---------------------------------------------------------------------------
Summarized income statement information relating to the Business'
results of operations (as reported in discontinued operations) is as follows
(amounts in thousands, except per share data):
Years Ended December 31,
1995* 1994 1993
Sales $ 92,933 $115,039 $ 93,660
Operating income 9,726 16,113 9,442
Equity in earnings of joint venture 2,219 1,368 407
Net income 7,852 9,983 6,061
Income per common share .30 .38 26
<FN>
*The fiscal year 1995 includes results of operations for the nine month period
ended September 30, 1995 and excludes transaction costs of $733,000 (after
related income taxes of $467,000) related to the distribution of the Business.
Further, results of operations are net of allocated interest of $205,000,
$402,000 and $718,000 in 1995,1994 and 1993, respectively.
On March 17, 1995, the Company acquired an additional 40% interest in
FOR.E.M. S.p.A. ("FOREM"), a manufacturer of wireless telecommunications
products located in Agrate Brianza (Milan), Italy. FOREM owns 62% of Mikom
G.m.b.H., located in Buchdorf, (Munich) Germany. The Company had previously
acquired an initial 40% of FOREM in December 1994. The purchase price for the
80% ownership interest has aggregated approximately $20,352,000 and includes
certain costs of acquisition. Pursuant to the terms of the acquisition, the
former shareholders of FOREM may earn additional purchase price based upon
earnings (including $3,469,000 earned in 1995). The remaining 20% of FOREM's
outstanding stock is subject to certain put/call arrangements between the
Company and the sellers. The purchase price for this remaining 20% ownership
interest is based upon a formula relative to future earnings.
This acquisition has been accounted for under the purchase method of
accounting. Results of operations for FOREM prior to the latest share
acquisition (reported under the equity method of accounting) were not
significant.
A summary of the net assets of FOREM acquired is as follows (amounts in
thousands):
Cash $ 7,701
Accounts Receivable 12,429
Inventories 7,178
Fixed Assets 12,860
Excess of cost over net assets acquired 13,875
Other assets 618
Accounts payable and accrued expenses (12,570)
Debt (17,877)
Other liabilities (3,862)
---------
$ 20,352
- ------------------------------------------------------------
27
15
NOTES
to Consolidated Financial Statements
Pro forma combined sales from continuing operations of the Company and
FOREM for 1995 and 1994 (assuming the acquisition was effected on November 1,
1993) would have been approximately $330,000,000 and $256,000,000,
respectively. Pro forma combined income from continuing operations for 1995
and 1994 would have been approximately $26,100,000 ($.97 per share) and
$18,900,000 ($.72 per share), respectively. However, in management's opinion,
the pro forma financial information is not necessarily indicative of the
results of operations that would have occurred had the acquisition of FOREM
taken place on such date or of future results of operations of the combined
businesses under the ownership of the Company.
On June 11,1993, the Company sold its Allen Testproducts division and
its wholly owned leasing subsidiary, The Allen Group Leasing Corp. ("Leasing"),
to SPX Corporation. The Company accounted for this transaction as a
discontinued operation. Pursuant to the sale agreement, the Company also will
receive non-competition payments for a three-year period through June 1996.
Such payments are recorded by the Company when earned and amounted to
$1,555,000, $1,760,000 and $880,000 in 1995, 1994 and 1993, respectively. Net
manufacturing sales and lease finance revenues of the sold businesses were
$25,879,000 and $6,845,000, respectively, through June 10,1993. Results of
discontinued operations are net of allocated interest of $253,000 and also
includes allocated income tax expense of $35,000. The loss on sale of this
business of $2,936,000 includes $850,000 of foreign currency translation
adjustments, previously included as a component of stock-holders' equity, as
well as transaction costs related to the sale.
Note 10: Fair Values of Financial Instruments
Financial Accounting Standards Board ("FASB") Statements No.107, "Disclosure
about Fair Value of Financial Instruments," and No.119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments," are
part of a continuing process by the FASB to improve information regarding
financial instruments. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for such financial instruments
as defined by the Statements.
Cash and Short-Term Investments: The carrying amount reported in the
balance sheet for cash and cash equivalents approximates its fair value.
Long-Term Investments: It is not practicable to estimate the fair value
of the Company's 8% investment in the common stock of its former specialty
rubber products business or its investment in a telecommunications company
because of the lack of quoted market prices and the inability to estimate fair
value without incurring excessive costs. However, management believes that the
carrying amounts recorded at December 31,1995 were not impaired and reflect the
corresponding fair values. No dividends were paid on these investments.
Long-Term Debt: The fair values of the Company's long-term debt either
approximate fair value or are estimated using discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Off-balance-sheet instruments: The Company utilizes letters of credit
to back certain financing instruments and insurance policies. The letters of
credit reflect fair value as a condition of their underlying purpose and are
subject to fees competitively determined in the market place. In addition, the
Company entered into a foreign currency contract, in December 1995, to offset
the impact of currency rate changes against certain assets and liabilities of
its Canadian subsidiary. The fair value of such contract is based on quoted
market prices of comparable contracts. The carrying amounts and fair values of
the Company's financial instruments at December 31,1995 and 1994 are as follows
(amounts in thousands):
Carrying Amount Fair Value
1995
Cash and cash equivalents $15,706 $15,706
Non-current investments 7,122 7,122
Long-term debt 50,177 49,315
Off balance sheet financial instruments:
Letters of credit 1,982 1,982
Foreign currency contract 4,469 4,472
- --------------------------------------------------------------
1994
Cash and cash equivalents $55,240 $55,240
Investment securities:
Non-current investment 6,045 6,045
Investment in Joint Venture 24,411 24,411
Long-term debt 46,054 46,054
Letters of credit 6,938 6,938
- --------------------------------------------------------------
28
16
NOTES
to Consolidated Financial Statements
Note 11: Unaudited Quarterly Finacial Data
Quarterly financial data are summarized as follows (amounts in thousands,
except per share amounts):
March 31 June 30 Sept. 30 Dec. 31
1995
Sales $59,265 $88,880 $83,300 $83,932
-------------------------------------
Gross profit $22,813 $32,728 $33,588 $30,129
-------------------------------------
Income from continuing
operations $ 4,687 $ 6,504 $ 7,608 $ 6,721
-------------------------------------
Income from discontinued
operations $ 2,369 $ 2,886 $ 1,864 $ --
-------------------------------------
Net income $ 7,056 $ 9,390 $ 9,472 $ 6,721
-------------------------------------
Earnings per common share:
Primary and Fully Diluted:
Continuing
operations $ .18 $ .24 $ .28 $ .25
-------------------------------------
Discontinued
operations $ .09 $ .11 $ .07 $ --
-------------------------------------
Net Income $ .27 $ .35 $ .35 $ .25
- ----------------------------------------------------------------------------
1994
Sales $49,196 $52,072 $55,230 $59,815
-------------------------------------
Gross profit $19,392 $22,070 $22,658 $23,108
-------------------------------------
Income from continuing
operations $ 4,260 $ 3,817 $ 5,445 $ 5,689
-------------------------------------
Income from discontinued
operations $ 1,130 $ 2,655 $ 3,123 $ 3,075
-------------------------------------
Net income $ 5,390 $ 6,472 $ 8,568 $ 8,764
-------------------------------------
Earnings per common share:
Primary and Fully Diluted:
Continuing
operations $ .16 $ .15 $ .21 $ .22
-------------------------------------
Discontinued
operations $ .05 $ .10 $ .12 $ .11
-------------------------------------
Net Income $ .21 $ .25 $ .33 $ .33
- ----------------------------------------------------------------------------
Note 12: Supplemental Cash Flow Disclosure
During 1995, the following non-cash transactions were effected and are not
reflected in the Consolidated Statement of Cash Flows:
The Company recorded fixed assets and a related capital lease
obligation in the amount of $16,375,000 in connection with leasing land and
facilities for one of its emissions inspection programs.
On September 29, 1995, the Company completed the largely non-cash
spin-off of 100% of the common shares of TransPro (See Note 9).
In May, 1995, the Company called for the redemption of the outstanding
$4,917,000 of Convertible Subordinated Debentures. Subsequent thereto, holders
converted such debentures into 351,834 shares of Common Stock. The Company had
no significant non-cash transactions in 1994.
During 1993, the following non-cash transactions were effected: On
June 11, 1993, the Company sold its Allen Testproducts and Lease Financing
operations. In conjunction with the sale, the Company received an installment
note receivable of $19,737,000 and the purchaser assumed $56,300,000 of Leasing
indebtedness.
Approximately $11,453,000 of convertible debentures were converted into
877,269 shares of Common Stock.
The Company declared a two-for-one stock split, which was paid on
October 18, 1993.
The Company exercised its redemption rights on its convertible
Preferred Stock prior to the planned redemption date in July, 1993. This action
resulted in the conversion of 2,289,615 shares of Preferred Stock into
4,579,230 shares of Common Stock.
Information with respect to cash paid during the year for interest and
taxes is as follows:
1995 1994 1993
Interest paid $3,840,000 $3,600,000 $4,210,000
Interest capitalized 440,000 970,000 --
Income taxes paid 18,890,000 240,000 2,930,000
- ------------------------------------------------------------
29
17
REPORT
of Independent Accountants of Management
To the Board of Directors and Stockholders of
The Allen Group Inc.
We have audited the accompanying consolidated balance sheets of The
Allen Group Inc. as of December 31, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Allen Group Inc. as of December 31, 1995 and 1994, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31,1995 in conformity with generally accepted accounting
principles.
As described in Note 1 to the Consolidated Financial Statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No 109, "Accounting for Income Taxes,"in 1993.
/s/ Coopers & Lybrand L.L.P.
- ---------------------------
Cleveland, Ohio
February 16, 1996
To the Board of Directors and Stockholders of
The Allen Group Inc.
The Company maintains accounting and related internal control systems
which are intended to provide reasonable assurance that assets are safeguarded
from loss or unauthorized use and to produce records necessary for the
preparation of financial information. There are limits inherent in all systems
of internal control, and the cost of the systems should not exceed the expected
benefits. Through the use of a program of internal audits and discussions with
and recommendations from its independent accounts, the Company periodically
reviews these systems and controls and compliance therewith.
The Audit Committee of the Board of Directors, comprised entirely of
nonemployee directors, meets regularly with management, the internal auditors
and the independent accountants to review the results of their work and to
satisfy itself that their responsibilities are being properly discharged. The
internal auditors and independent accountants have full and free access to the
Audit Committee and may have discussions regarding appropriate matters, with
and without the presence of management.
The primary responsibility for the integrity of financial information
rests with management. Certain valuations contained herein result, of
necessity, from estimates and judgments of management, actual results could
differ from these estimates. The accompanying consolidated financial
statements, notes thereto and other related information were prepared in
conformity with generally accepted accounting principles applied on a
consistent basis.
/s/ Robert G. Paul
- -------------------------------------
Robert G. Paul
President and Chief Executive Offleer
/s/ Robert A. Youdelman
- -------------------------------------
Robert A. Youdelman
Senior Vice President-Finance, Chief Financial Officer
/s/ James L. LePorte, III
- -------------------------------------
James L. LePorte, III
Vice President Treasurer & Controller, Chief Accounting Officer
30
18
FIVE-YEAR SUMMARY 0F OPERATIONS
(amounts in thousands, except per share data)
Five Years Ended December 31, 1995 1995 1994 1993 1992 1991
Operating Results:
Sales $ 315,377 $ 216,313 $ 186,371 $ 129,079 $ 80,559
Cost of sales 196,119 129,085 110,943 66,686 40,813
Selling, general and administrative expenses 52,614 46,362 40,710 31,045 27,603
Research and development and new product engineering 17,006 8,865 7,886 4,487 2,611
Interest and financing expense 1,821 1,294 2,190 1,165 666
Loss from joint venture -- -- -- (96) (250)
-----------------------------------------------------------------
Income before taxes and minority interests 47,817 30,707 24,642 25,600 8,616
Provision for income taxes 19,270 10,973 661 1,279 1,605
-----------------------------------------------------------------
Income before minority interests 28,547 19,734 23,981 24,321 7,011
Minority interests (3,027) (523) (518) (608) (201)
-----------------------------------------------------------------
Income from Continuing Operations 25,520 19,211 23,463 23,713 6,810
Discontinued Operations:
Income (loss) from discontinued operations 7,119 9,983 1,498 (5,606) 10,631
Gain (loss) on sale of discontinued businesses -- -- (2,936) -- 41
Cumulative Effect of Accounting Changes -- -- 2,102 (2,767) --
-----------------------------------------------------------------
Net Income $ 32,639 $ 29,194 $ 24,127 $ 15,340 $ 17,482
- --------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 32,639 $ 29,194 $ 21,947 $ 11,315 $ 13,457
- --------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Common Share
(Primary and Fully Diluted):
From continuing operations $ .95 $ .74 $ .93 $ 1.00 $ .15
Discontinued operations:
Income (loss) from discontinued operations .27 .38 .06 (.29) .57
Loss on sale of discontinued businesses -- -- (.13) -- --
Cumulative effect of accounting changes -- -- .10 (.14) --
-----------------------------------------------------------------
Net income per common share $ 1.22 $ 1.12 $ .96 $ .57 $ .72
- --------------------------------------------------------------------------------------------------------------------------
Financial Condition:
Total assets: Manufacturing $ 363,565 $ 357,716 $ 324,638 $ 304,111 $ 217,291
Lease financing -- -- -- 83,811 90,661
Total company 363,565 357,716 324,638 387,922 307,952
Working capital - Manufacturing 93,371 107,940 71,808 67,013 84,112
Current ratio - Manufacturing 2.11 2.54 2.22 1.96 2.71
Total debt: Manufacturing 55,799 45,064 52,597 68,083 25,398
Lease financing -- -- -- 63,151 67,943
Total company 55,799 45,064 52,597 128,177 85,127
Stockholder equity 210,377 224,181 195,161 159,339 141,807
Debt to equity ratio; Manufacturing .27 .20 .27 .47 .20
Lease financing -- -- -- 4.90 5.17
Total company .27 .20 .27 .81 .60
Book value per common share 7.92 8.59 7.52 5.08 4.48
Shares outstanding at year end 26,560 26,107 25,964 20,058 18,832
Return on stockholders' equity 14.7% 14.1% 12.6% 13.5% 13.0%
Capital expenditures 24,498 14,833 11,360 6,653 4,976
Depreciation 8,896 7,477 6,611 6,701 6,325
Number of employees 2,800 2,700 2,500 3,000 2,400
- --------------------------------------------------------------------------------------------------------------------------
<FN>
All per share data have been restated to reflect stock dividends and stock splits.
31
19
Management's Discussion and Analysis of
Financial Condition and Results
of Operations
Results of Operations
Overview
($ millions 1995 1994 1993
Sales $ 315.4 $ 216.3 $ 186.3
Income before taxes
and minority interests 47.8 30.7 24.6
Income from continuing operations 25.5 19.2 23.5
Net income 32.6 29.2 22.0
Total assets 363.6 357.7 324.6
Capital expenditures 24.5 14.8 11.4
Depreciation 8.9 7.5 6.6
===============================================================
Sales and income before taxes and minority interests increased by 46% and 56%,
respectively, over 1994. The increase in sales and income is due in large
measure to the 80% acquisition of Italy based FOR.E.M. S.p.A. and its majority
owned German subsidiary, Mikom G.m.b.H. (collectively referred to herein as
'FOREM'), manufacturers of wireless telecommunications products, which
contributed $55 million in sales for the nine-month period in which they are
included in the Company's consolidated statement of income. The balance of the
Company's sales growth is primarily due to increased sales of the Company's
existing mobile communications product lines.
The increase in sales in 1994 as compared with 1993 was primarily due
to the continued strong growth of the systems products and mobile and base
antennas product lines of the Mobile Communications segment. In 1994, income
before taxes and minority interests increased due to higher sales; however,
this was more than offset by a significantly higher provision for income taxes.
This increase in income tax expense was a result of the recognition, in 1993,
of the Company's remaining U.S. tax loss carryforwards and resultant accrual of
a full effective tax rate in 1994. As a result of the higher tax provision,
income from continuing operations in 1994 of $19.2 million ($.74 per common
share) declined from the 1993 earnings level of $23.5 million ($.93 per common
share). The higher proportionate decline in earnings per common share than
otherwise indicated by the level of decline in income from continuing
operations was due to higher average common and common equivalent shares
outstanding. This higher level of shares was a result of the conversion of the
Company's convertible preferred stock and a portion of its convertible
debentures into common shares during the latter part of 1993.
Mobile Communications
(In millions) 1995 1994 1993
Sales $ 306.6 $ 213.5 $ 183.6
Operating income 55.9 39.9 34.6
Identifiable assets 277.9 195.1 184.7
Capital expenditures 16.8 6.5 6.4
Depreciation 8.3 3.6 2.7
========================================================
Sales of systems products increased $19 million (25%) to $95.1 million while in
1994 sales grew $13.7 million (22%) to $76.1 million. Sales in 1993 were $62.4
million. The increase in sales is largely attributable to the addition of
FOREM's repeater products which added $16 million of sales in 1995. In
addition, demand for the Company's Extend-A-Cell and microcell products was
strong; however, the emphasis in sales has, as anticipated, shifted from
domestic to international markets. Increased sales in the international markets
in 1995 more than offset a decline in domestic sales. The Company expects
international sales growth of systems products to outpace domestic growth in
1996. The Company introduced its new SmartCell product in the latter part of
1995, which is anticipated to provide incremental sales in 1996. In 1994, the
domestic market continued a strong build-out of cellular systems, particularly
in rural areas; however, during the latter part of 1994, the Company began to
see indications that domestic demand was peaking which, as indicated above, was
realized in 1995.
Site management and other non-antenna products sales increased $59.9
million, to $112.9 million, over the 1994 levels of $53.0 million and 1993
sales of $49.1 million. The FOREM acquisition in 1995 accounted for $39 million
of the increase in sales. In December 1994, the Company acquired a 40% interest
in FOREM and subsequently increased its ownership to 80% in early 1995.
Beginning February 1, 1995, the Company consolidated the results of operations
of FOREM; accordingly, results of operations include those of FOREM for the
nine months ended October 31, 1995. FOREM's results of operations are included
on a two-month lag basis in order to facilitate the timely preparation of
financial statements. (Also, see Note 9 of Notes to Consolidated Financial
Statements.) The inclusion of FOREM is expected to expand the overall
international market share as the Allen Telecom Group companies share marketing
and product strategies. In 1994, sales of site management products increased
$3.9 million (8%) over 1993. While the Company achieved some success with new
customers, sales were negatively impacted by price reductions taken on certain
of its filter products in 1994.
Sales of the mobile and base station antennas product line increased
$5.1 million (7%) to $73.8 million in 1995, which increase was to a lesser
degree than 1994, where sales grew $11.5 million to $68.7 million (20%) over
1993's level of $57.2 million. The base station antenna business performed well
in 1995 as a result of the upgrading of base stations from analog to digital
technology, which was often accompanied by upgraded new antennas, and
penetration of new export markets, China in particular.
The frequency planning, systems design and related services product
line grew significantly in 1995 as sales increased $9.1 million (58%) to $24.8
million. This is as compared to a $.8 million (5%) increase in 1994 to $15.7
million. Sales in 1993 were $14.9 million. The 1995 sales increase reflects the
high demand for engineering and consulting services for personal communication
systems ("PCS"). This business, operated by the Company's Comsearch division,
does consulting work with nearly all major PCS operators. As a result, this
business should
32
20
Management's Discussion and Analysis of
Financial Condition and Results
of Operations
continue to see excellent sales growth throughout 1996. The modest increase
in sales in 1994 was related primarily to higher frequency planning
services pertaining to the build-out of digital cellular systems.
During 1995, international sales of the Company's Mobile
Communications segment increased substantially and is now more than 50% of
total sales. The Company's export sales from the U.S. are primarily to major
wireless telephony companies, and are typically payable in U.S. dollars.
FOREM's sales are primarily in Europe to major European OEMs and cellular or
PCS operators in local currencies. The Company sees no significantly greater
risk as a result of the greater proportion of international business.
Operating income of the Mobile Communications segment increased to $55.9
million in 1995 as compared with $39.9 and $34.6 million in 1994 and 1993,
respectively. The increase in operating income in 1995 is primarily due to the
acquisition of FOREM, which contributed $15.3 million to operating income.
Domestic operating income was adversely affected by significantly higher
research and development, new product and software development costs for new
PCS products and the next generation of SmartCell products, as well as lower
margins on systems products. The increase in operating income in 1994, compared
with 1993, reflects the growth in sales and would have been higher except that
this segment incurred charges of $2.0 million relating to certain
telecommunication venture investments.
The minority interests as set forth in the Consolidated Statements of
Income of $3.0, $.5 and $.5 million for 1995, 1994 and 1993, respectively,
relate entirely to the Mobile Communications segment. The substantial increase
in 1995 relates to the outstanding 20% minority ownership interest in FOR.E.M.
S.p.A. and a 38% minority interest in its subsidiary, Mikom G.m.b.H.
Centralized Automotive Emissions Inspections
(In millions) 1995 1994 1993
Sales $ 8.8 $ 2.8 $ 2.7
Operating loss (2.9) (1.2) (1.0)
Identifiable assets 47.3 14.8 9.1
Capital expenditures 7.7 5.9 .7
Depreciation .6 .6 .5
====================================================
This business segment is operated by the Company's MARTA Technologies, Inc.
("MARTA") subsidiary. In 1994 and 1993, MARTA's sole source of revenue was its
Jacksonville, Florida emissions testing program. In 1993, MARTA was awarded
emissions testing contracts for the State of Maryland and the El Paso region of
Texas, and in 1994, was awarded programs for the Cincinnati region of Ohio and
in Northern Kentucky.
The Maryland program, originally scheduled to begin operations on
January 1, 1995, was delayed and revenue generating operations began on May 1,
1995. This program accounted for the increase in sales in 1995 over 1994.
MARTA's contract with the State of Texas was, as discussed more fully below,
officially terminated in January 1996. On February 1, 1995, this program had
been suspended prior to start-up (along with similar programs for another
contractor in Dallas and Houston). The Cincinnati program officially began full
revenue generating operations on January 1, 1996 and should begin to favorably
affect operating results in 1996 with revenues anticipated to be in the range
of $10-$11 million. The Northern Kentucky program, also originally scheduled to
begin operations on January 1, 1996, was delayed by the State in early 1995 and
continues to remain uncertain as the State reviews its options for
implementation of an emissions inspection program. In the latter part of 1995,
Kentucky and MARTA re-initiated negotiations for a nine to ten year program;
these negotiations are continuing.
As indicated above, MARTA's contract with the State of Texas was
terminated, which allows the Company to formally proceed with the settlement
and damage provisions set forth in its contract with the State. The Company
continues to believe that its contract provides for appropriate compensation,
and anticipates filing a claim with the State early in 1996. The recorded
carrying value of its investment in the El Paso program is approximately $7.9
million at December 31, 1995. Although MARTA continues to incur certain costs
(in particular, interest on the carrying value of its investment), these costs
are, for financial reporting purposes, being expensed as incurred and will be
included in the claim filed with the State. MARTA will pursue all remedies
available to protect its interest regarding its investment in the program;
however, it is not possible at this time to predict the ultimate outcome of the
settlement process or the timing of the receipt of any funds related thereto
which would be subject to appropriation by the State of Texas. It is possible
that this process would continue into fiscal year 1997 before a resolution is
reached.
Programs for emissions testing as mandated by the Federal Environmental
Protection Agency ("EPA") pursuant to the 1990 amendments to the Federal Clean
Air Act continue to be hampered by an unsettled political climate and various
implementation problems which have delayed programs previously awarded and the
bidding and awarding of new programs. Even with respect to MARTA's existing
operations in Jacksonville, Maryland and Cincinnati, there exists proposed
legislation, or the discussion of legislation, to change, amend or cancel
programs. Given recent history, both for MARTA and other industry contract
operators, there is no certainty that the future might not bring substantial
changes in this business. However, several states, such as California, Georgia
and New Jersey, appear to be moving forward with the bidding of new emissions
test programs. MARTA believes it is well positioned, both in terms of
experience and financial viability, to be a significant competitor in the
centralized emissions testing industry.
MARTA's operating losses reflect the incurrence of bidding costs and the
build-up in organization structure for future programs. Results for 1995 were
also adversely affected by start-up problems in Maryland and Texas. In 1994,
the loss is offset, in part, by a $1.1 million gain from the construction phase
of the Maryland program, relating primarily to the interest savings from
financing the design and construction of facilities.
The increase in identifiable assets in 1995 relates principally to
the cost of equipment and the capitalization of the leased facilities, pursuant
to a capitalized lease obligation for the Cincinnati, Ohio program.
21
Management's Discussion and Analysis of
Financial Condition and Results
of Operations
Financing Costs
(In millions) 1995 1994 1993
Interest and financing expense:
Interest expense $ (3.2) $ (2.5) $ (3.2)
Interest income 1.4 1.2 1.1
========================================================
Interest expense increased in 1995, compared with 1994, due primarily to the
acquisition and inclusion of FOREM. Higher interest income relates to the
investment of funds generated late in 1994 and invested throughout 1995 and
interest income of FOREM offset, in part, by the elimination of interest income
on the note received in the sale of the Company's automotive diagnostic
equipment business in 1993.
Interest expense declined in 1994, compared with 1993, due to the
conversion of the Company's convertible subordinated debentures into common
stock during the third quarter of 1993 and lower interest rates. The increase
in interest income in 1994 reflects an increase in investment income pertaining
to the generation of cash from operations offset, in part, by lower interest
income earned on the proceeds of a note received in the sale of the Company's
automotive diagnostic equipment business in 1993. This note (which was prepaid
in May 1994) bore interest at a higher rate than subsequent investment
yields.
During 1995 and 1994, a majority of the Company's domestic cash was
invested in tax-exempt securities, which has the impact of lowering the net
interest yield as compared with comparable pre-tax instruments.
General Corporate
(In millions) 1995 1994 1993
General corporate expenses, net $ (3.4) $ (6.7) $ (6.8)
Corporate identifiable assets 38.4 73.5 55.9
============================================================
Lower general corporate expenses in 1995, as compared with 1994, reflects
principally significantly lower amortization of unearned compensation relating
to restricted stock plans, which amounted to $.4 million in 1995 as compared
with $3.1 and $1.3 million in 1994 and 1993, respectively, as well as lower
general corporate insurance costs. In 1996, the amortization of unearned
compensation is expected to more closely approximate the 1995 amount. General
corporate expenses are net of income from a non-competition agreement in the
amount of $1.6, $1.8 and $.8 million in 1995, 1994 and 1993, respectively. The
agreement pursuant to which these payments are made expires in June 1996.
The slight decline in general corporate expenses in 1994, as compared
with 1993, reflects generally lower corporate office expenses and the higher
aforementioned non-competition payments, offset, in part, by the increased
amortization of unearned compensation on restricted stock.
Corporate identifiable assets consist of cash, unliquidated assets
remaining from the sale of businesses and other general corporate assets. The
decline in Corporate assets in 1995 from 1994 relates primarily to the
reduction in cash utilized to finance the growth of the business. The increase
in assets in 1994, compared with 1993, related principally to increased cash
generated from profitable operations and the collection of an outstanding $19.7
million note received from the sale of the automotive diagnostic equipment
business in 1993.
Income Taxes
($ millions) 1995 1994 1993
Provision for income taxes $ 19.3 $ 11.0 $ .7
Effective tax rate 40.3% 35.7% 2.7%
======================================================
The effective tax rate in 1995 is higher than 1994 due in large measure to the
inclusion of FOREM, which carries a tax burden of approximately 55%, offset, in
part, by the tax benefits attributable to the Company's foreign sales
corporation. In 1994, the Company began accruing U.S. Federal income taxes at
the full statutory rate as a result of having recognized all of its remaining
tax loss carryforwards in 1993. The lower tax rate in 1993 reflects the benefit
of utilizing such U.S. net operating loss carryforwards to reduce U.S. income
tax expense, offset, in part, by the impact of state and local taxes. The 1993
tax provision was further reduced by approximately $1.1 million ($.04 per
common share), representing the tax benefit of the Company's remaining U.S. net
operating loss carryforwards. Such benefit was subsequently realized in 1994.
In addition, the Company has recorded certain other deferred tax
assets which were offset against the excess of cost over the net assets of
businesses acquired ($1.3 million in 1994 and $6.2 million in 1993) and other
deferred tax assets relating to the bargain purchase element of employee stock
option exercises which were credited to stockholders' equity of approximately
$.5, $.1 and $1.6 million in 1995, 1994 and 1993, respectively.
With the inclusion of FOREM for the full year 1996, which carries a
high tax rate on income, it is quite possible the effective tax rate in 1996
could exceed that of 1995. See Note 7 of Notes to Consolidated Financial
Statements for additional information.
Other Information
Spin-off of TransPro Inc.
On September 29, 1995, the Company completed the spin-off of its automotive and
truck products business (including its GO/DAN Industries joint venture) to a
newly formed public company, TransPro, Inc. (the "Spin-off"). The primary
purpose of the Spin-off was to enable both the Company and TransPro to
independently pursue their own strategies and objectives. The Company
recognized that no significant synergies existed between the Company and
TransPro in terms of their respective operations, customer base or distribution
networks.
The Company is currently employing a business strategy that involves,
among other things, the expansion of its telecommunications equipment business,
through both strategic acquisitions and capital expenditure programs. In its
pursuit of strategic acquisitions, the Company believes that the Spin-off will
enable it to use its common stock as an acquisition currency, thereby
effectively reducing the cost of such acquisitions to the Company.
The Spin-off also will enable TransPro to independently pursue its
own business strategies and objectives, and establish its own criteria for
making capital investments and/or strategic acquisitions. In addition, TransPro
will gain an independent, direct access to the capital markets.
22
Management's Discussion and Analysis of
Financial Condition and Results
of Operations
This transaction was accounted for as a discontinued operation in the
Company's Consolidated Statement of Income. See Note 9 of Notes to
Consolidated Financial Statements.
Inflation
The overall impact of the low rate of inflation in recent years has had no
significant impact on the Company.
Environmental
The Company is subject to federal, state and local laws designed to protect the
environment and believes that, as a general matter, its policies, practices and
procedures are properly designed to prevent unreasonable risk of environmental
damage and financial liability to the Company. See Note 5 of Notes to
Consolidated Financial Statements for additional information.
Liquidity and Capital Resources
($ millions) 1995 1994 1993
Total Debt $ 55.8 $ 45.1 $ 52.6
Stockholders' equity 210.4 224.2 195.2
Debt to equity ratio .3:1 .2:1 .3:1
==================================================
In 1995, the Company had a net cash utilization of $.6 million from continuing
operations as compared with a cash generation of $46.6 and $6.0 million in 1994
and 1993, respectively. The decline in cash generation in 1995 as compared with
1994, despite an increase in income from continuing operations to $25.5 million
from $19.2 million, reflects a $42 million investment in working capital to
support sales growth, particularly in Europe and international markets, as well
as approximately $19 million in income tax payments. In 1995, the Company also
invested nearly $36 million in capital expenditures (Mobile Communications and
Centralized Emissions Testing segments) and software development costs for new
products, particularly in the PCS area. All of these were financed through the
use of internally generated funds and available cash investments.
The significant cash generation in 1994, as compared with 1993,
reflects the strength of earnings, as well as the one-time cash savings
attributable to the utilization of remaining U.S. net operating loss
carryforwards to reduce cash tax payments. These loss carryforwards contributed
approximately $15.5 million to cash flow. Further, the Company received $19.7
million of proceeds from a note received in connection with the sale of a
business in 1993.
While the Truck Products business was a positive contributor to cash
flow, the Company does not anticipate that the Spin-off will have any affect on
liquidity or capital resources. The Spin-off was accounted for as a dividend
($50.7 million) and is the reason for the decline in stockholders' equity from
1994 to 1995.
With respect to strategic acquisitions, the Company believes the
Spin-off will enable it to use its common stock as an acquisition currency.
Further, the Board of Directors has decided to discontinue cash dividends on
common stock for the foreseeable future after payment of the September 1995
dividend, in order to retain cash for investments to support growth in the
Mobile Communications segment.
As described in Note 2 of Notes to Consolidated Financial Statements,
the Company entered into a new revolving credit agreement which provides for
borrowings of up to $75 million for the Company and $60 million for MARTA, none
of which were utilized at December 31, 1995. The agreement expires in December
1999 and provides for continued financial flexibility to fund growth and
expansion.
The future capital needs of the Company will be directed toward
continued penetration and expansion in the wireless communications industry,
both internally and through strategic alliances and acquisitions. Capital
expenditures in 1995 for the Mobile Communications segment aggregated $16.8
million and are estimated to approximate $18 million in 1996, of which $2.5
million was committed at December 31, 1995. The significant increase in capital
expenditures in 1995 reflects the increase in productive capacity necessitated
by the increase in sales volume, both domestically and at FOREM.
The potential capital requirements with regard to MARTA are dependent
upon the successful award of programs, and their scheduled start-up dates. In
1995, MARTA substantially completed the Cincinnati, Ohio program and all but
two of the thirteen test facilities were brought on-line by December 31, 1995;
MARTA expects to incur approximately $1.0 million to complete the start-up of
these facilities. The land and building for the Cincinnati program were
acquired, constructed and financed by an independent third party developer.
MARTA has leased the facilities from the developer under a ten-year capital
lease in the amount of $16.4 million, which accounts for the Company's
increased debt level over 1994. MARTA is presently considering the use of low
cost (approximately 7%) bond financing in the amount of approximately $11
million to finance its equipment and start-up cost investment for the
Cincinnati program to be repaid over the remaining program life. At December
31, 1995 MARTA had no other significant commitments with respect to program
expenditures. The Company has $60 million of credit lines available for MARTA
and may seek third party asset based financing in respect to future programs.
The Company believes that continued profitability and available unused
credit lines provide sufficient liquidity to fund future growth, expansion and
acquisitions.
23
SHAREHOLDER INFORMATION
Exchange Listings
Common Stock
(Ticker Symbol - ALN)
New York Stock Exchange
Pacific Stock Exchange
Transfer Agent and Registrar
Harris Trust Company of New York
P.O. Box A3504
Chicago, Illinois 60690
Stock
Price
Range
(dollars per share)
1991 $ 4.50 $10.00
1992 $ 9.44 $15.00
1993 $12.94 $29.19
1994 $13.50 $25.63
1995 $21.25 $39.38
Market Price Range of Common Stock
1995 1994 1993
High Low High Low High Low
1st Quarter 25 1/2 21 1/4 18 3/4 13 1/2 17 1/16 12 15/16
2nd Quarter 29 5/8 22 0/0 18 3/8 14 0/0 23 1/16 16 0/0
3rd Quarter 39 3/8 29 1/8 22 1/4 15 3/4 29 3/16 20 3/4
4th Quarter 35 21 7/8 25 5/8 19 3/8 29 15 1/4
----------------------------------------------------------------
Auditors
Coopers & Lybrand L.L.P.
Cleveland, Ohio
Form 10-K or additional
information about the Company
Stockholders and others interested in obtaining additional information about
the Company may do so by writing or calling The Allen Group Inc., 25101 Chagrin
Blvd., Beachwood, Ohio, 44122-5619, (216)765- 5822. The Form 10-K Annual
Report, including financial statements and schedules, will be furnished without
charge. Information concerning the Company can also be found on the Internet
at http://www.allengroup.com.
Affirmative Action Policy
It is the policy of The Allen Group Inc. that all employees will be judged on
the basis of qualifications and ability, without regard to age, sex, race,
creed, color or national origin, in all personnel actions. No employee or
applicant for employment will receive discriminatory treatment because of
physical or mental handicap in nagard to any position for which the employee or
applicant for employment is qualified.
Stockholders
As of March 1, 1996, The Allen Group Inc. had outstanding 26,577,795
shares of Common Stock owned by 2,139 holders of record.
Aronnal Stockholders' Meeting
The Annual Meeting of Stockholders will be held at the Cleveland
Marriott Society Center, 127 Public Square, Cleveland, Ohio on Tuesday, April
23, 1996 at 9:30 a.m.
Dividends Declared On Common Stock
1995 1994 1993 1992 1991
1st Quarter $.05 $.04 $.03 $.025 -
23d Quarter $.05 $.04 $.03 $.025 -
3rd Quarter $.05 $.04 $.03 $.025 $.023
4th Quarter - $.05 $.04 $ .03 $023
- -----------------------------------------------------------
24
Board of Directors
GEORGE A. CHANDLER ALBERT H. GORDON JOHN F. MCNIFF
Business Consultant Advisory Director Vice President - Finance
Princeton, New Jersey Investment Banking Division Dover Corporation,
of PaineWebber Incorporated, New York, New York
PHILIP WM. COLBURN New York, New York
Chairman of the Board ROBERT G. PAUL
The Allen Group Inc. WILLIAM O. HUNT President and
Chairman of the Board Chief Executive Officer,
JILL K. CONWAY Chief Executive Officer The Allen Group Inc.
Visiting Scholar, and President, Intellicall Inc.
Program in Science, and Vice Chairman of the Board, CHARLES W. ROBINSON
Technology and Society, Hogan Systems, Inc., Chairman,
Massachusetts Institute of Technology, Dallas, Texas Robinson & Associates Inc.,
Cambridge, Massachusetts Sante Fe, New Mexico
J. CHISHOLM LYONS
Vice Chairman of the Board, WILLIAM M. WEAVER, JR.
The Allen Group Inc., Limited Partner Emeritus
Counsel to Smith Lyons, Alex, Brown & Sons Incorporated,
Toronto, Ontario, Canada New York, New York
The Company and its Board of Directors note with sadness the untimely passing in 1995,
of its long time director, colleague and friend Richard S. Vokey. He served on the Board of Directors for 18 years.
We shall miss him.
MANAGEMENT
PHILIP WM. COLBURN ROBERT A. CAMERON PETER MAILANDT
Chairman of the Board President, President,
Site Products Division Decibel Products Division
ROBERT G. PAUL
President and JERRY W. CARTER GOFFREDO MODENA
Chief Executive Officer President, Managing Director
MARTA Technologies, Inc. FOR.E.M.S.p.A.
ROBERT A. YOUDELMAN
Senior Vice President- Finance TERRY N. GARNER MICHAEL K. MORIN
Chief Financial Officer President, President,
Grayson Electronics Company Comsearch
MCDARA P. FOLAN, III
Vice President, Secretary F. KIM GORYANCE CHRISTOPHER H. MORTON
and General Counsel President, President,
Antenna Specialists Division Allen Telecom Systems Division
JAMES L. LEPORTE, III
Vice President, Treasurer and Controller JOHN P. KEPPLE KARL-HEINZ SCHMIDT
Chief Operating Officer Managing Director,
ERIK H. VAN DER KAAY and Executive Vice President Mikom G.m.b.H.
Vice President and President of Allen Telecom Group, Inc.
of Allen Telecom Group, Inc.